The judge overseeing the Celsius Network
Lawyers representing the exchange said it had potential lenders to provide bankruptcy financing, although it did not identify them. They also said Celsius wants to invest in its increasing crypto mining operation as a way to expand itself out of trouble, explaining why it has budgeted elevated capital spending even as it burns through its cash.
Celsius amended its proposal to specify that proceeds of sales of bitcoins generated by its mining rigs will be kept separate from the company’s cash management system, satisfying the creditors, many of whom are individual investors whose assets are tied up in the bankruptcy. Before approving the motion, Judge Martin Glenn expressed concern that the mining business is not profitable, and Shara Cornell, the US Trustee representing DOJ interests, objected to the motion arguing that there is not enough clarity on the operation to approve it.
“What we’re really concerned with in this case is transparency and we don’t have that type of visibility into the mining operations,” Cornell said. “For example, we have no understanding at this point in time what the debtors’ utility-related costs are for running these mining rigs.”
As of its bankruptcy filing on July 13, the company’s Celsius Mining unit owned 43,623 operational rigs, generating around 14.2 bitcoin – about $339,919 at the current price – a day. That bitcoin was sold to fund business operations and pay off an intercompany loan to parent Celsius Network. Before the filing, Celsius Mining planned to expand to 120,000 rigs. The bitcoin sales will be used to complete the expansion plan and fund operations.
“We’re getting the business stood up,” said Ross Kwasteniet of Kirkland & Ellis, which represents Celsius. “We still have a lot of capital expenditure, but there is a plan that once the capital expenditures are done and the mining rigs are all operational that the company becomes very accretive.”
In 2021, Celsius Network mined 3,114 bitcoin worth $74 million at current prices. If the expansion plan goes to plan, Celsius expects to generate 15,000 bitcoin for 2023 worth $357 million today. Mining businesses are subject to bitcoin’s price volatility and there is no guarantee of profitability after making the investment.
Judge Glenn seemed particularly concerned with the $180 million of funds in custody accounts, which belong to users who did not agree to have their funds lent out with the promise of high returns, as opposed to Celsius earn account holders. Judge Glenn noted that many of the customer letters submitted to the court are from custody account holders, adding that he wants a resolution to the issue “sooner rather than later.”
The judge expressed concern that the custody accounts were created as recently as April of this year. He wants to be assured that Celsius employees and insiders with knowledge of the declining state of the business did not have an exclusive opportunity to transfer their funds from earn accounts to custody accounts.
The motion came in the second-day hearing of the case, the first chance lawyers for the company and its creditors had to square off in court. Josh Sussberg of Kirkland & Ellis said Celsius urgently needed funding to operate beyond October. He said multiple lenders are willing to provide debtor-in-possession financing, which would help the company navigate the bankruptcy process but would create a new creditor class senior to those that already exist.
“We are very focused on making sure we have liquidity, and I am pleased to report that we have multiple outstanding offers with several more likely coming in,” Sussberg said. “This will be a function of working with the [unsecured creditors] committee and coordinating with them to figure out the best way to finance the resolution of this case.”
Sussberg would not identify the potential lenders. A budget circulated earlier this week projected that the company will have spent its $130 million cash on hand plus $34 million more by the end of October. Celsius Network will have to come to an agreement on financing with the unsecured creditors before any actions can be taken.
The judge also took questions from individual unsecured creditors who expressed outrage and confusion over the loss of their funds. The court has received around 300 letters from Celsius customers affected by the bankruptcy proceedings.
“I feel very misled by this company who continuously told us that they had enough money in case there was a run on the bank and that they were more than liquid,” Steven Bralver, a customer who stated he has $50,000 USDC
Sussberg stated that Celsius Network’s priority is returning funds to customers. He pointed to a jump in bitcoin and etheruem’s respective prices since Celsius filed for bankruptcy in early July. Bitcoin
“I want to be crystal clear, Sussberg said, “the business plan and transactions we are contemplating would put all the value associated with the rise of crypto over the last several weeks directly back in our customers’ pockets.”
Tension sparked around a motion filed by Celsius requesting the company be able to sell “de minimis” assets valued between $300,000 and $4 million without prior court approval. The aim of the asset dispositions would be to provide liquidity for general operations, similar to the goal of the bitcoin sales. Cornell, the US trustee, said Celsius Network was looking to sell up to $210 million worth of equities, which were not outlined in the request. “I don’t believe there has been transparency to what the debtors true intentions are with respect to what they’re deeming to be ‘de minimis’ assets,” Cornell said. Judge Glenn ordered Celsius Network to confer with the Trustee’s office and did not resolve the motion.
Cornell added that her office is considering the appointment of an examiner to explore “rampant transparency issues” in the Celsius case. Ultimately, Judge Glenn ruled in favor of the revised bitcoin sale motion because it is a business decision of the company.