This is Judge Jones. The time is 1 30 central. Today is June the 29th, 2023.
It's the docket for Houston, Texas. On the 1 30 docket, we have the jointly
administered cases under case number 22-90341, Core Scientific Ink. Folks,
please don't forget to record your electronic appearance. That's a quick
trip to the website. A couple of mouse clicks. You can do that at any time
prior to the conclusion of this afternoon's hearing. First time that you
speak, if you would please state your name and who you represent. That really
does help the court reporters in the event that a transcript request is made.
For those parties who are in the courtroom, if you choose to speak, you
would please come to the lectern so that everyone can both see you and hear you.
For those folks who are on go-to meeting, I have activated the hand-raising feature.
If you haven't already done so, know you're going to be speaking. If you'd give
me a five-star, I'll get you unmuted. If you change your mind during the hearing,
you can again hit five-star at any time. Finally, we are recording this afternoon
using CourtSpeak. We'll get the audio up on the docket shortly after the
conclusion of the hearing this afternoon. So we've got a couple of people that raised their hands.
All right. Mr. Schrock, are you starting this off this afternoon? Excuse me.
I am, Your Honor. Ray Schrock, Wild-Gashel, Counsel for the Debtors. I'll be kicking it off then.
Good afternoon. First of all, Your Honor, thanks for allowing us to appear electronically.
It was a very strange thing. I've never had this happen, but we actually couldn't get flights,
you know, Wednesday or Thursday. You know, it was a bizarre thing that was occurring with,
you know, cancellation. So we appreciate the accommodation. We get it, you know,
coordinated with the other parties on the Zoom appearance as well.
So, Your Honor, I'm going to start off. We did file a demonstrative that we'd like to…
If it helps you, I've looked at the PowerPoint. I've also read the plan and disclosure statement.
Okay, perfect. Would you like me to put it up, Your Honor, for others or I'm happy not to?
No. Are you going to do it yourself?
No, Your Honor. I was going to ask my colleague, Austin Crabtree, to put it up.
Of course. I was going to say, yes, I want to see… I want everyone to see
the PowerPoint. I was just going to be amazed if you were going to ask for control.
No, no, Your Honor. I wouldn't do that.
And Mr. Crabtree, you should have control at this point.
Great. Austin, if you could put up the presentation.
Okay. He's got control. I just checked again.
Okay. We have a backup plan just in case if Cliff has to do it. Okay. There we go.
There we go.
Perfect. Okay. If you could flip to the next page, please, Austin. Okay. So here's what we're going
to cover today. It's an update on plan negotiations, a summary of the plan and treatment,
a liquidity update, as well as next steps, Your Honor. So Austin, please flip one more.
So overall, I'd say we've had a busy last several weeks since we were last in front of Your Honor.
We did present on the business plan, have gotten feedback from all the major
constituent groups. As you know, we had the exclusivity hearing. And following that,
we did submit the Consensual Plan Framework to the key stakeholder groups. We first met with the
advisors, and then later we were able to meet with all of the principals as well. And we did
have those parties restricted at this point. There was a lot of back and forth among the advisors.
But on June 16th, we did receive some feedback prior to that point. But June 16th, we submitted
a draft of the plan to the key stakeholder groups, advisors. We filed the plan and disclosure
statement on the 20th consistent with the goal with the Your Honor headset, and that we appreciate,
frankly, for just keeping the cases moving. That plan and disclosure statement does reflect
as you notice, there's two options with regard to the convertible load holders. There's a cram up
plan, and there's a consensual plan. Why did we file that, I guess, is one consistent or one
question that people may have. We're going to try really, really hard to get to a consensual
plan, Your Honor, and I want to emphasize that we did reserve a lot of the information that we
had time with Judge Lidsbury for later in July in the event that we can't get there. But unless
somebody else is aware of how to handle when you believe there's equity value at a company and
you've got secured creditors that aren't on board, it's really your option. And we are in a unique
situation where we're coming out of a period of great turmoil for Bitcoin and for this particular
company. We're going to see how open the capital markets are for this company. PJT is already out
there putting together capital raise efforts that's in process. But overall, our fundamental
belief is that there's equity value, and that with the rise in the Bitcoin price, where the company
has come compared to where it started and will take you through some of that, we think there's
very little doubt, listen, there is equity value here. We're going to have to find a way, frankly,
to get all of the constituents to accept some compromises around how are we going to, we want,
very much like the company be leveraged so it doesn't end up in this situation again if it
doesn't, you know, if it doesn't have, if the Bitcoin price goes down, there's some other adverse
event. But fundamentally, we have to get the parties to focus on it and get in a room. So we've
gotten responses back so far from the equity committee. We've gotten response back from the
UCC. I'm relatively optimistic that at the end of the day, we're going to have consensus with
those two groups. The equipment lenders, there is a good dialogue and a back and forth. I think that
relatively optimistic we could find a solution there as well. The convertible shareholders are
probably going to be the most challenging party for us to reach consensus with. But I do think,
you know, we're being very creative in terms of what we're thinking about. I know that, you know,
I have great respect for my friend Mr. Hanson and I know that he's reasonable to end of the day.
And if there's any way to try and bridge the gap either through, you know, tool up mechanisms,
the company just doesn't want, obviously, to leave all the value and have people recover more than 100
cents. I think, you know, Mr. Hanson's perspective, I'm sure he'll give you, but, you know, they have
a different view of value and they don't want to, you know, be left with something less than 100
cents, if we believe those equity. So that's where the rub is. You know, I would prefer not to have
the novel valuation, you know, Bitcoin mining company trial, if we can avoid it. But if we have
to, we're prepared to go down that road. We are, but we're working really hard to get, you know,
consensus where we can. And I think that at the end of the day, I don't want to just run the mediation
and just have, you know, judges say, listen, here we are. I really like to try and narrow the
differences, at least, before we get in a room with them. But I think getting the parties,
frankly, in person and getting people focused, you know, at the end of next month, that's going
to be what really, you know, if there's a way to turn the corner and get people to consensus,
that's what's going to do it. But we've been busy or we are going to be prepared to file
the motion to approve the disclosure statement by the middle of this month, because we want to keep
the timing that we've set, which is to still try and emerge by the middle of, you know, by the end
of September, certainly. But we're not disillusioned in that we think that we know we still have work
to do with these parties. The good news is the company's doing well. Let me ask Mr.
Sperling. No, I was just again, because I want to be helpful to the process. Would it be helpful
to give you a hearing date for the disclosure statement? Yes, it would, Your Honor. What were
you thinking? You know, Ms. Berkovich, you want to help me out there with, you know, I know we were
planning for a mid-July filing and we did have a hold on just a second. So I asked a bad question.
Ms. Berkovich, what was Mr. Schrock thinking? Your Honor, if we can get to, you know, a fairly
good plan and be up by mid-July, I think the first week in August is the week that they're doing
again, July 31st, would be a good week for the disclosure statement hearing. Do you want the
disclosure statement hearing on July 31st? I think that's a little too early. I think if we could get,
Your Honor, like around August 3rd or certainly the week following, that would be sufficient.
And let me ask, again, disclosure statement hearings don't typically
generate that many sparks. I am happy to do it later that week. I have a Laredo docket on
Thursday the 3rd, so we could do it by video on the 3rd if that would work for everybody.
I could also do it on the 7th if that is preferable. I will just go ahead and say, Your Honor,
just give it where we are at the moment to avoid everybody else piping in and suggesting the 7th.
I'll suggest the 7th just in the event that we don't have consent. Great. Has anyone got a
scheduling conflict for the 7th that can't be managed? All right. Then why don't we do this,
Mr. Strzok? I'll go ahead and schedule a hearing on the disclosure statement that is filed as it may
be subsequently amended for August the 7th, 2023 at, you want late in the day or early in the morning?
Or lunchtime? Lunchtime would be great, Your Honor. You know, shortly after lunch.
Then if I did it at noon my time, that would be 1 o'clock for the folks on the East Coast, would that work?
That's fine for me. All right. Then go ahead and notice it for August the 7th at noon Central.
Will do, Your Honor. And thank you very much. So I'm probably going to have some comments at the end
of the status conference, Your Honor, but I wanted to hand election absent. Any more questions over to Ms. Berkovich?
All right. Thank you. Ms. Berkovich, good afternoon. Good afternoon, Your Honor.
Brittany Berkovich from Wild Gotthold for the debtor. Moving on to slide six. I know, Your Honor,
I read the plan and disclosure statement, so we don't need to delve into detail here, but really
the theory of our plan is to provide a plan that hopefully gets the consensus with everyone,
but provides a non-consensual task to emerge it if we can't reach consensus, particularly with the
secured note holders. You know, we need a way out of Chapter 11. There's two classes of note holders,
the April notes and the August notes, as we call them. They have slightly different rights.
We classify them separately. And for each of those classes, if they accept the plan, they get their
treatment 50% in equity and 50% in a new note, you know, total full pay for them. But either of those
classes rejects the plan, the plan provides for a standard cram up note for the full value of the
claim. The default treatment for everyone else or an entrance simply reflects the priorities
that the Bankruptcy Code tells us, provides a waterfall of value. Their claims are on top.
They get paid on full. Every secured creditor gets the present value in their secured claims,
and they get to keep their collateral. We have many different classes of security creditors here.
We all need convertible note holders. We have our mining and payment lenders. We have our non-mining
and payment lenders. We have credit and mechanics claim holders. And we have mortgage claims. So all
of them get their Bankruptcy Code and native treatment. Then unsecured creditors receive a 100%
recovery in the form of new equity. And only after all non-priority creditors, or I should say,
all non-subordinated creditors are paid in full, the residual value flows to equity holders.
And if there are any subordinated creditors, as Mr. Schrock said, we do expect there to be value.
And so equity does get a recovery here. In addition, as Mr. Schrock said, we try to be
creative here. And we understand that creditors may have different interests in terms of what
type of consideration they receive. So some of the classes have options to choose different
treatments. There's a default treatment mandated by the Bankruptcy Code. But there's also options
to let maybe a different form of consideration for slightly lesser claims and the like. We really
are trying to please as many people as possible here, while still satisfying the Bankruptcy Code
requirements. I appreciate the approach. It was an enjoyable read.
The next couple slides get into very much detail about the plan treatment. Your Honor,
about the plan, I'm sure that everyone was called and about the plan. I don't know that we need to
get into each one, but I'm happy to give those a corporate like. I think that you've given everybody,
if people want to know more, again, the documents are there. We're early on in the process. If you
want to go through it, I'm happy for you to do that for folks, but I don't need it.
Okay. No, I don't think it's necessary. Again, we've been having lots of conversations with
all of the major stakeholders. We've also had smaller creditors reach out to us and we're
taking all calls. I just wanted to ask a question about the plan to steal, freeze, and call.
Mr. Schrock, me, Mr. Carlson, who's on the line too, we're happy to talk to you.
And again, for those folks who are on the video, if you want a copy of the PowerPoint,
it can be found at docket entry number 1009. Sorry for the interruption.
No, we can also email it. Next we go to slide 10. There are different ways of showing that the
business is doing well, as Mr. Schrock said. Here we show just really the company's cash position.
And this slide is an update from something we showed the court previously that really
shows that we are doing well as compared to our initial forecast in December. Not only that, but
we've updated the budget periodically and we've exceeded all of our budgets from a cash position.
So throughout September, even though the expected case duration has been extended by four months,
our projected engine liquidity is forecast to be $48 million greater than our initial budget,
when excluding the impact of dip draws and payments. And we used to report that we have not
had to draw on the dip any further in support of the role of the workplace in dip in early February.
So we've actually been repaying the dip in the last few months because of the excess cash.
And Mr. Eric?
So here to me.
Yeah.
No, my apologies. I was just going to say the improvements, or the improvement that has occurred,
is it solely due to rise in price of the commodity or have there been structural changes that the
expense structure is now much better? Or both?
It's primarily as a result of increased, you know, resistance to self-binding through the factors we
discussed last time that impact how much we get from our mining of the bitcoin, as well as,
very importantly, the decrease in empowered enforcement. We've had favorable energy pricing
since the beginning of the case, as well as obviously always good management of the company,
but there haven't been many structural changes to the business. There have been a few. We mentioned
some in our disclosure statement, some changes in the way we contract, for example, with our
existing customers. But overall, there have been a few factors.
Thank you.
And let's go to the next step to sum up our presentation on page 12. Again, we're going to
continue with our daily conversations with all of our major stakeholders and minor stakeholders.
If necessary, we'll go to mediations for the remaining dispute. We hope not to get there.
We've got a date there. You know, having a date, just like your honor gave us a date to file a plan
that was very helpful. And having those couple nights around the clock to get the plan on file,
and I think having a date for mediation will cause people to work hard to try to get to the date
before then. Then you will file or disclose your statement and be back before your honor on August
7th for approval. That brings us to confirmation, you know, early to mid-September with a full exit
by the end of the third quarter. Thank you.
That concludes my presentation unless your honor has any further questions.
I don't, but thank you.
Other parties want to talk to you or have the honor, so we're happy to turn over the podium.
No, of course. Thank you. I just didn't know if there were, if there was anything else the debtors
wanted to address. Let me ask, let's see, somebody raise their hands. Mr. Wilkie.
Oh, had you hit five star on your phone or do you have me double safety?
It's become my standard. Can you hear me now? I can, thank you.
I always wanted to make sure. Okay, Brett Miller.
He's been long dead, but I'm here in his place today. Brett Miller, Wilkie Farr and Gallagher.
I'm not quite sure why I automatically popped up as Wilkie in the box, but for the official
committee of unsecured creditors, we've been working with the debtors regarding negotiations,
regarding the business plan. We provided comments to the plan. Some of our comments made it into
the file draft. Others remain on an open list. And we absolutely agree with the comments that
creditors should be paid in full. I mean, I support Mr. Schrock and Ms. Bergen, which completely
that it's a hundred cent case, but the devil's in the details and getting there is going to be
interesting regarding valuation, regarding currency. We did make a counter proposal regarding
the proposed no fit in the draft plan, which, you know, we're happy to sit down further and
work out the details on that one. But the community does see the value here.
Your honor is correct. The Bitcoin pricing itself and as Ms. Berkowitz said,
the other factors make this a real solid case for a hundred cents creditors and
something left over for equity. I'll let Mr. Hansen speak for his clients, but we also have to
open up the dialogue with them and as well as with the equity committee and the equipment lenders.
So the creditors committee is open for business and speaking with everyone and hope to facilitate
getting a deal done as quickly as possible. I really appreciate the comments. I, because
everyone's going to have to figure out how to manage uncertainty in this because it can just move
really far, really quick. And so I appreciate everybody being flexible and creative and trying
to figure out how to deal with that uncertainty. But thank you. Mr. Autry, you raised your hands.
Thank you. Your honor, I was just demonstrating my technical, lack of technical skills. I apologize.
No, you should have said I was just testing in case I had something important to say. I would have,
I would have, I would have enjoyed that. Anyone else have comments they want to make? Mr. Hansen
or Mr. Lohan, I'll come back to you. Mr. Hansen. Yes, go ahead, please. Good afternoon.
Good afternoon, your honor. Can you hear me okay? Loud and clear. Thank you for checking.
Thanks. Chris Hansen with Paul Hastings on behalf of the committee of convertible
note holders, your honor. Your honor, I just say that we want to echo the debtor's sentiments.
We want nothing more than an agreeable deal where we all come back to you and present a plan that
everybody's on board with, what most people are on board with, and we can proceed to confirmation.
The problem that we're having is we're struggling a little bit. The valuation, the business plan,
the valuation that flows in the business plan that's in the plan of realization that was filed
has equity in the money. And if you look at the plan, right, it's equity in the money.
Right? It basically sets up a everybody can sense to it, and if you don't, we'll cram you down.
And on the cram down side, especially when you think about what the debtor purports as a solvent
entity cramming down, effectively having 1129B compliant debt from a convertible note perspective
is one very interesting aspect. Another angle that is interesting is that the plan contemplates
raising new capital in order to at least partially pay debt to this. So in the context of that, it
really raises some interesting questions around the business plan value, and the business plan
itself is really only applicable in the consensual sense. If there's a cram down here, and those
debt service costs rise dramatically across the capital structure, there kind of needs to be a
business plan. And so that's something that we need to evaluate too. And as I said, Your Honor,
one of the struggles that we're having in terms of responding to the debtor, and again, just trying
to be really open with you, Your Honor, is that we're struggling because it's not as easy as saying,
oh, well, why don't we just adjust a little bit here or there on our treatment. As you can tell,
there are an awful lot of secured classes of creditors around this capital structure.
As Mr. Miller just pointed out, the debtor is saying, hey, we're going to pay everybody in full,
and it just doesn't appear that that's possible. And so we're struggling a little bit with how
we're going to respond because we're trying in our own head to think, well, if we pull level A,
does that basically make the entirety of the process move? And how does that look? So it's
been a little bit difficult for us to get there. We also obviously don't want to wind up in bankruptcy
again anytime soon if we're taking back material not to debt based upon the volatile currency,
which is probably the most important thing here. We all know how power goes up and down pretty
regularly. We've got a curve and we can look out there and we can actually plan for it as opposed
to Bitcoin, which seems to be a little bit difficult to guess where it's going. So we just want to
make sure the court understands that. We understand the judges are ahead of time at the end of the
month. That's fine. We're always happy to go talk to judges. If we need to, we'll see if we can work
out on our own between here and then. But if we don't get there, then obviously we know, Your
Honor, it's always open to giving everybody their day in court. We'll go through the evidence and
the legal issues and then we'll agree on stuff. I just wanted to give you a little bit of a feel
for where we are, Your Honor. Got it. No, thank you. And again, it all gets back, I think. I think
we're just saying the same thing. You don't know how to manage the uncertainty. There are a couple
of things that pop into my head. And again, I'm not a party. I'm not an advocate. I'm not a lawyer.
And so I'm going to keep those thoughts to myself. The only reason I bring that up is that we all know
who made me what I am. That's why so many people hate him. And it might be worth having a conversation
with Isger sooner rather than later, because my guess is we'll probably tell you pretty close to
the same thing. But again, you guys do what you want to do. Again, I agree with everything you said
and I'll just wait to see what happens. Thank you, Your Honor. Mr. Lohan, I think you raised
your hand. Did you opt to pull it back? No, Your Honor, I just took down. But I appreciate
just one second of your time. Again, for the record, Brian Lowen, our own boarder on behalf
of Fairing is one of the equipment lenders. And we agree with Mr. Schrock and Ms. Berkowitz that
this company needs to lay out a bankruptcy. And we appreciate that the plan that filed is definitely
the means to push this case forward. Now, we disagree with our treatment that was proposed
under the plan. But like Mr. Miller, we have sent the debtors a counterproposal and we appreciate
that the debtors have been constructive in their engagement. And we hope that the debtors and the
court understand that we tried to work together, the equipment lenders as a group, and we did ban
together six equipment lenders to create the counterproposal to try to streamline the discussion.
Hopefully, we don't need to. But of course, we're always happy to participate in plan mediation.
We certainly appreciate Judge Isgar's time and guidance in the process.
I'm just trying to keep him busy when he has idle time. He's a pain to deal with. So no, it's...
I'm thinking you guys.
He's going to get bored. He had his last big confirmation hearing yesterday, he told us. So
he's going to need some stuff to pull up this summer.
See, what you heard, you got on video. I get the other 23 hours a day in person. So no, he's again...
Quite frankly, for this, I encourage that conversation sooner rather than later,
because I'm going to guess that he'll probably tell you something close to what I would say,
and then none of you will like it, and then you'll go tweak it, and then you'll find common ground. So
I encourage that sooner rather than later, in all seriousness. I do think that he would be really
helpful. But again, you folks, as I say before, you're the best there are. So I trust your
judgment. You do what you think is right for your constituents. Anyone else want to weigh in on any of this?
All right. So Mr. Schroeder... Mr. Meyer.
Apologies, Your Honor. David Meyer, Vincent Elkins on behalf of the Equity Committee. Just a few brief
comments. I think no one can dispute here that all the market trends are working in the debtor's favor.
And I think Mr. Schrock, Ms. Berkovich today... Mr. Schrock and Ms. Berkovich have highlighted that well.
But we too, we believe this is a solvent debtor case. We believe that equity holders should
receive significant and meaningful recoveries. If anything, Your Honor, our client has the
need to have the why is the company here type attitude in the first instance. But we are, we are.
And we too would welcome a conversation with Judge Isgerich if it comes to that,
and would eagerly participate in mediations, except we're not able to reach a constructive
resolution in the upcoming weeks. But I echo Mr. Schrock's comments that we're here and we'll
continue to work with the company and all its stakeholders. Thank you. I expect nothing less,
because you are who you are. Mr. Schrock, let me ask you. I've given you
hearing date for a disclosure statement. Is there anything else that you believe that I can do to
help move the process forward? I don't think so at this time, Your Honor. I think setting the date,
you know, for filing the plan, giving us a disclosure statement hearing is really what we needed.
I will say that we take to heart, you know, your comments around getting judges involved.
If we need to get them involved sooner, we won't wait. We do have some ideas about how to bridge
the gap. I do want to note that, you know, the senior management team, I think, will have with
us in court the next time we're together. So if we need to talk a little bit more about the business,
you know, questions around the business, how it's performing, what are some of the issues that we're
dealing with, we're going to be prepared to do that. I do think also that the fact that this company,
you know, we do intend this company, it's going to be a public company when we emerge.
And so when you have that kind of public market that will be there for the company post-emergence,
it does provide, I think, compared to at least for the private company, it provides a basis upon
which you can start to see how can I solve for value? Are people going to be right? Are they
going to be people wrong? You know, you can think of true love mechanisms and the like, and especially
if people think that, if the value is there, you know, the proof will be in the pudding. So we're
very cognizant of that. And at the same time, you know, we're trying to do the right thing by
everybody here. So we really appreciate the time and we're going to continue working hard.
I got it. Thank you. Anyone else have any requests or any comments they want to make?
All right. Then everyone, please have a wonderful and safe holiday. Don't fly. Joking. Sort of.
But anyway, please have a wonderful holiday and I'll see everybody soon. Thank you. We'll be
adjourned until 2 30. Thanks, Ron. Thank you.