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March 5 Bankruptcy Hearing Report - Updated
Saturday, March 06 2010 @ 11:45 AM EST

Here is Groklaw member RFD's report from the bankruptcy hearing from Friday March 5. His initial notes come first, followed by a more detailed report by another witness, pbk.

Update:PJ: I have had a chance now to listen to the CD, and I've taken notes to share with you. I've added them at the end. My overview: this is money they want to pay themselves, Blank Rome and the other professionals. I take it they are worried they might get stiffed. And it turns out there are 12 to 14 lenders, and we don't have all their names. It's farcical.

********************************************

10:40 - Arrived an empty courtroom 3

10:48 - Bonnie Fatell, Edward Cahn and others arrived.

11:08 - Judge Gross entered and Bonnie Fatell opened, introducing Edward Cahn

11:09 - Mr. Cahn gave a status report—SCO is closing some foreign subsidiaries and reducing others. He received expressions of interest from several hedge funds, but the conditions they proposed were so onerous that he dismissed them out of hand.

11:13 - Bonnie Fatell calls Mark Fisler as a witness. He works for OPA financial advisers. Apart from the litigation, he said SCO had four assets: a patent, excess equipment, ME, and the operating business. The first three they are trying to sell. He has visited some of the European subsidiaries and believes with serious trimming, there can be a viable business. (He may be right, but it is a dying one.)

SCO was in crisis mode when they arrived. They could survive two payroll cycles. They started cutting costs in two phases. Phase 1, which they could do quickly, consisted of RIF's which were “top heavy,” moving to smaller and cheaper quarters, and eliminating any non-essential expenses.

Phase 2, involved downsizing the overseas operations. This can take time because of foreign laws on severance pay.

In searching for financing, they had discussions with a hedge fund, Mr. Yarro, and 10 or 12 others. Eight signed NDA's and examined the books. Mr. Yarro's offer was the best.

Ms. Fatell handed the lawyers and Judge Gross Exhibit 1 and Mr. Fisler explained how the money would be used--$1 million for operations, and $1 million for litigation, including getting up to date with overdue professional fees.

11:52 - Adam Lewis (Novell) by phone. Could this wait 3 weeks? Mr. Fisler didn't say it couldn't wait, but that it be wise to do it as soon as possible.

11:57 - Al Petrofsky by phone clarified a few details.

12:00 - In response to a question from Ms. Fatell, Mr. Fisler confirmed the they planed to close the deal Monday morning.

12:07 - Mr. Lewis asked if Mr. Fisler had concluded that SCO, under the DIP, had not made a robust offer to sell. Mr. Fisler declined to go that far, but he clearly was not impressed by what SCO had done.

12:13 - Argument by Ms. Fatell.

12:19 - Closing argument by Mr. Lewis — This proposal does not satisfy the requirements for such an extraordinary loan.

12:23 - Mr. Petrofsky — most of his questions had been answered but he did question if Mr. Yarro's LLC legally existed.

12:28 - Ms. Burton, attorney for Mr. Yarro, spoke up by phone and assured the court that that the LLC is in existence under Utah law.

12:29 - Ms. Fatell closed and urged the court to grant the motion.

12:35 - Judge Gross. He found Mr. Fisler to be a credible witness (I tend to agree). He found the terms to be “fair, reasonable, and adequate.” He granted the motion and signed the order.

12:40 - Adjourned

********************************************
********************************************

Okay, just got back to Philly and I'm writing up my report on the trial. There was another representative from Groklaw there, who I assume will also be sending in a report.

First, a couple of impressions of some of the people. These are completely subjective, of course, and in most cases they are probably colored by my previous non-visual perceptions of the players.

Judge Gross: Seems like a very kind and friendly man. Obviously very happy about getting some nice weather for the weekend, as we've had a February here in the mid Atlantic like I haven't ever seen. On the other hand, he rather gave the impression of a father who is too kind to effectively discipline his unruly children.

Joseph McMahon: Looks absurdly like I pictured him looking when listening to his initial interview with Darl immediately following the chapter 11 filing. Great posture, almost military bearing. Gives an impression of fairness, but also does not look like someone who would be easily intimidated.

Judge Cahn: Made me think of a slightly less sinister Mr. Potter from It's a Wonderful Life. Looked a little better when he smiled.

Bonnie Fatell: Didn't make a particular impression one way or the other. Clearly quite competent, not flashy. She spent most of the hearing at the lectern, so I mostly saw her from behind.

And introducing Mark Fisler of Ocean Park Advisers.

Okay, as to the hearing. There was a brief interim status update, not more than 10 minutes, followed by a lengthier discussion on the SNCP(2) loan offer. All in all the hearing was about an hour and forty-five minutes. The loan discussion consisted of an initial part where a witness from Ocean Park, Mark Fisler, spoke about the financial situation, what steps had been taken, and why the load was required and how it was arrived at. That took up about half the time, perhaps a little more. Then there was some questions from Adam Lewis (by phone) and Al Petrofsky (also by phone). Then the judge ruled for SCO.

The interim status update was given by Judge Cahn, who was admirably concise (which Judge Gross also noted). He started by noting that they had worked to curtail the operating costs, and mentioned that they were closing and consolidating some of the foreign subsidiaries, but that that was more complex because of obligations to employees that exist in some of those jurisdictions.

He stated that because of the banking crisis in the past or so it has been difficult to secure financing. He stated that the SNCP arrangement was (a) required and (b) the best they could achieve under the circumstances. He mentioned other cost cutting measure they had taken, including moving to less expensive premises, reducing head count and selling some assets (I believe he was referring to things like office equipment and such), all of which Mr. Fisler would address in more detail later.

He then went on to update the court on the recent motions in limine and Daubert motions in the Utah court. He seemed rather pleased with the results (as I guess he should), and described it as winning on all the Daubert motions and most of the limine. He certainly put a rosy picture on it, but nothing that he said was incorrect.

That was pretty much the interim status update. The judge thanked him for his clarity and indicated that he felt that he was up to date. Then attention was directed towards the proposed loan from SNCP. Bonnie Fatell started by stating that everything was now filed (of course, being SCO, it was all filed at the last possible second). Then she introduced Mark Fisler from Ocean Park Advisors as a witness. He was sworn in, and started with a rundown of his experience and role with respect to SCO.

He stated that the focus of OPA (which is how Ocean Park was referred to most frequently) is to make recommendations to the trustee. He was primarily focused on (1) preserving and restructuring what remained of the company, and (2) looking for financing. He described the assets as falling into four main buckets of which the largest was what he referred to as operations, by which I presume he meant the Unixware/OpenServer main operating system business. The other three buckets he described, which he characterized as insignificant compared to the operations, were some IP assets ("a patent", didn't seem to be referring to the litigation), some "de minimis" assets like printers, office chairs, etc, that were no longer needed, and the mobility business which he felt SCO in its current situation was not going to be able to grow into a significant revenue source. All of these were being sold off to raise capital, I believe.

He then talked about the cash position of the company when he was brought on board in September 2009 (I think that date is right), which he described as being in "crisis mode". His first concern was to determine how many payroll cycles could they expect to last, and he concluded that it was "a couple". He then described how they had "locked down" expenditures to try to bring expenses in line with revenue. He then described a two-pronged approach to cutting costs, the first prong he characterized as "quick and domestic", while the other was longer term and more focused on the foreign subsidiaries. My notes from when he was describing the domestic side say "Throwing everything overboard", and the image that came to mind is a sinking hot-air balloon where the people in the gondola are tossing everything overboard that's not nailed down, although that's obviously not the imagery he used. He did describe the RIF (Reduction in Force) as being top heavy, saying it was "Focused on the chief level as well as the indian level".

Then he talked about what they've been doing since November 2009. He talked about the two core pieces of value being the litigation and the operations. He avoided discussing the litigation as he was focused on the operating revenue and expenditures. This is where he said they've started looking at the foreign subsidiaries, but he asserted that because of the complexity of multiple legal environments and employer obligations it was a complicated business. He also referred to one-time costs associated with consolidating/closing the foreign subsidiaries, which, he said, was part of why they needed the loan. Once these one-time costs were addressed, then he expected profitability in run-rate expenses. Ms. Fatell asked him at this point why they needed the loan then, and he stated that the run-rate does not include litigation expenses. He stated that one half of the SNCP financing would go towards operations, and the other half would go towards litigation expenses.

He then began to address the circumstances of the SNCP loan and the general financing situation. They approached many people about unsecured financing, but apparently none were interested (can you believe it?). He stated that they approached 14 parties, including an unnamed hedge fund which was not the right size, and mentioned a proposal from Ralph Yarro which exceeded expenses? My notes here get a little rough. Financial mumbo-jumbo is not my strong suite. The Yarro offer seems from what I could tell to be some kind of predecessor to the SNCP offer that was approved today. Of those 14 parties they had "robust discussions" with 12 of them, got to the point of signing NDAs (presumably not as onerous as the ones SCO wanted developers to sign before seeing their magic evidence) with 8 of them, and considered proposals from 2, one of them being Yarro's.

He then described the rationale for going with the Yarro/SNCP offer instead of the competing offer. The Yarro offer has an interest rate of 14% quarterly compound rate, the other was apparently higher. The Yarro offer had no up-front fees, whereas there were up-front fees with the other, and if the litigation is successful then the Yarro offer entitles SNCP to 6.6% of the bee-lions, whereas the other offer wanted 10%. He stated that it (the SNCP loan) is secured by assets. There was something about being able to sell the assets or the company, but I didn't quite follow it. Ms. Fatell then asked about Yarro's involvement. Was it arms-length? Absolutely. Reasonable? Yes. Transparent? Yes. He says he dealt "95%" with Yarro, and had a few conversations with some of the other investors. They were lined up by Yarro, who did the negotiating for all of them. He described them as being made up of both insiders (including shareholders) and people not involved with the company (yet, heh heh heh).

The testimony then turned to what the financing would be used for, at which point he submitted a two-page exhibit that forecast the budget for 13 weeks, which we in the gallery did not see. Page one apparently involved the operations, while page two concerned the litigation budget. He ran down the first page, which sounded like the kind of budget that any business would have. He did reiterate that they needed some financing for one-time up-front expenses that would lead to profitability (if not actual profit) by the end of the 13 weeks, at least according to his budget projections. Then he discussed the litigation expenses, expert witnesses (not covered by contingency of course), and stated that without the SNCP financing the money would have to come from operations and it just ain't there (again that's my phrasing). He mentioned the need for a "buffer" for the litigation expenses, and (significantly to my mind) said that there was nothing in the budget for post-trial expenses (e.g. appeals or, presumably, the SUSE arbitration and the IBM hurdle that still stand between SCO and the big brass ring).

Finally one of the major themes was introduced, which is why not just sell what they've got now. Bonnie Fatell asked why SCO hasn't just shut down, and he likened the situation to putting a "For Sale" sign outside a house while the roof is on fire. He essentially stated that he wanted to get SCO into a more advantageous position to bargain before selling. The selling a burning house metaphor came up frequently after this. (He also made a less striking analogy about selling a (melting) ice cube on a hot summer day, but it didn't have the legs that the burning house one did). The other image that came up a lot was that of "creating a runway"; all I could think is you can have the best runway in the world but it's still the plane that's gotta fly.

At this point Ms. Fatell rested and Mr. Lewis (for Novell), who was there by phone, got to ask some questions. His first question (which he would return to several times) was whether the financing could wait until after the Utah litigation. Mr. Fisler asserted that they would need the financing no matter what the results of the litigation were. Which would be true if SCO would have any reason to exist beyond the litigation, which I doubt. Mr. Lewis then asked if he had analyzed the financial situation of the debtors if they lose, at which point Mr. Fisler started to become a lot less specific and informative. He said that they were aware of the unsecured creditors, and when asked if they would be able to pay he replied that they had not done any detailed analysis, but he believed that they would be able to pay. Mr Lewis brought up the burning house analogy and Mr. Fisler asserted that the fire was out. Finally he asked about the incorporation and it moving from DE to UT, which Mr. Fisler said he didn't know why. This point came up again later, mostly with Mr. Petrofsky's questions, which started next.

Mr. Petrofsky asked some questions, mostly about the minutiae of incorporation paperwork, whether everything was signed and delivered (no, but it was all done but for the signing), if it fell through at the last minute was SCO liable for any payments to SNCP (no), could the lenders suddenly reduce the loan amount (no), and something about filing with Utah tax authorities instead of commerce authorities, but I didn't really follow it. Eventually Ralph Yarro's lawyer (a Mona Burton(?) who was, unbeknown to anyone, on the phone) chimed in that everything was legit, which satisfied Judge Gross.

At this point there were a lot of questions and answers about the loan, but for the sake of brevity I will try to consolidate and hit the high points. Basically Novell (in the form of Mr. Lewis) reiterated several times the idea that the financing should wait until after the Utah litigation, which after all is starting Monday and is a jury trial so we won't have to wait months for a judges decision. I though this was his strongest point. There was a bit about whether there was any money set aside for Novell if they lose, which there is, some $655,000 (I think that's the number) in escrow, which is less than the total owed. Mr. Lewis did make a point of asking Mr. Fisler if he had testified that they had made no robust efforts to sell assets in two years, which he more or less confirmed. Again, he stated that he wanted to put out the fire before putting the house on the market. Whenever Mr. Lewis asked for specifics regarding if (when?) SCO loses the litigation lottery the reply was more or less "we haven't done the analysis, but I believe that the creditors will be taken care of".

There was an interesting exchange where Mr. Lewis asked what sale price would be required for the unsecured creditors to get paid if SCO loses in litigation. Mr. Fisler replied that that analysis was very complex, partly because the loan would have been only partially realized by that point (i.e. the whole two million would not have been loaned yet, apparently it's coming in pieces), though he mentioned (a couple of times) a figure of $5.5 million as an estimate of what the estate might bring in. Mr. Lewis then asked about how much money was ahead of the unsecured creditors, and Mr. Fisler replied that there was whatever from the SNCP loan had been loaned at that point, plus "3-4 million", and them come the creditors. After he was done with the questioning Ms. Fatell got up to "clarify" the question and (as far as I can tell) asked the same question again, but this time got an estimate of "a half million". Not sure what was going on there.

Mr. Lewis then asked the Judge (Gross) to disregard the trustee's assessment of their prospects in litigation, and he replied that he would, making an analogy to what a judge asks during a trial versus what he rules. He also reiterated his opinion that there there's no need to do the financing until the Utah trial is concluded, saying (a) the needs and prospects of SCO will be clearer then, (b) it's only 3-4 weeks before it will be resolved, and (c ) nothing that he's heard suggests that SCO can't last that long, although perhaps not much longer, without the influx of capital. Also reiterated his concern that the unsecured creditors were "in the balance".

Finally Judge Gross concluded by reiterating his confidence in Judge Cahn (a confidence which I can't help but believe is misplaced) to make judgments on the merits of the litigation, commended his efforts to cut costs and praised the credibility of his testimony. Finally he ruled, allowing the loan to proceed. He also stated that this was the time for the financing because it will he harder to get financing should the Utah litigation not go SCO's way, which seems to beg the question of why incur more debt then.

I just want to add some final thoughts and observations. SCO did a very good job and spent most of the hearing conducting themselves as if they were a legitimate company. If I wasn't familiar with the case I would probably have sided with SCO. They focused on the "operations" and barely mentioned the litigation unless they couldn't help it. When they did mention the litigation it was all in the context of the Novell litigation, but of course that's only step one before they make any money, and I think probably the easiest. As they have done so well for the better part of the past decade, they again managed to focus the discussion on anything but the facts of the alleged infringement. IBM barely came up if at all (although they had a lawyer there, she (along with Mr. McMahon) was a silent observer). Mr. Lewis was not as active as I would have hoped, but he's probably more focused on the Utah litigation at the moment (I hope so, anyway), and may well be distracted by the recent takeover attempt. By the end of it I was not surprised by the judge's decision.

*********************************
*********************************

PJ's notes:

Cahn's status report: They are in the process of closing or consolidating those foreign subsidiaries. After the 10th circuit decision, he thought it would be easy to get a loan, but because of the bank crises, it was not possible.

Their terms were too onerous.

They are marketing to some IP not germane to litigation.

He will attend the first and third week of the trial. The jury is not to know who he is so he won't be at counsel table.

He still believes the Novell and IBM should be pursued vigorously. He prevailed on all Daubert and most of the motions in limine, so he feels things are well established favorably for the debtor.

[Mark Fisler called to the stand.]

Mark Fisler of Ocean Park Advisors: Since Sept 2009 Primary focus: initially crisis mode so needed to preserve cash capital and restructure. Looked at financing,

Asset sales: 4 buckets, core asset the operating business.

Non core:IP= patent not core to the business, de minimis assets, like equipment, and finally noncore mobility products. Has traction in the market place the company doesn't have the assets to support that business.

How many payrolls could we last ? A couple and then out of cash.

Put a lockdown on all expenditures and took approvals to a low level, examining every expense, then asked execs what was the plan? Determined that there were two phases: an affordable one we could do fast domestically, and two more expensive in the EU jurisdiction. Couldn't do two because expenses in employee payments.

So needed to do phase 1, so RIF employees, reducing from 10.9 to 7.2 million by changing leases, etc.

RIF = reduction in force

Since November, he and a partner travelled to Europe to see about phase two. They want to preserve value, and they believe the operating business has value, if the restructure well. Spent time with head of foreign operations in Germany and UK. Lots of time on phone with other subs in Asia. Talked about what is the right size for the foreign subs. There will be cuts. Eliminate certain inefficient operations and do things out of fewer offices, that will save money.

Broad brush number of $3 to $400 thousands. Dollars they don't have, and that is what they need the loan for. Annualized saving of 2.1 savings so down to 6 million in run rate expenses after the phase two. So it will quickly pay for itself.

So why need the loan? Litigation as an expense bucket is outside of core operation. So divided that off. They have their own expenses, so half of the loan goes to litigation. Professional, employees that are full time on that, experts. There is also a need to have a cushion so the company can get up to date on paying professionals.

No unsecured financing was available. Contacted 14 parties. And buttressed that list with those they thought might be interested in a company like SCO, and SCO had some discussions going. But one was inappropriately sized, so the hedge fund dropped off. The second was from Ralph Yarro, so they started a discussion. It was too expensive but willing to entertain further discussion.

12 had robust discussions. 8 signed NDAs, some back and forth. Ultimately two, Yarro and second written proposal from the NE.

The determining factor was economics. Lined up loan amounts, up front fees, interest rate, and both wanted equity or direct participation.

Yarro's was better offer. No up front fees, but there is a loan fee, an equity like fee. The other had a higher interest rate, upfront fees, and fees to part with before we had a signed commitment.

Legal fees were not capped. 10% from litigation.

So Yarro proposal was superior. 6.6% at 2 million. Secured by all assets but SCO is not precluded from selling the assets or the company in toto. So some flexibility. So if we can sell some assets, we can use them for the estate. So more breathing room.

If core assets are sold, they are shared 50-50, with cap at loan amount.

The 6.6 percent is only on a successful litigation. If fail, they just get their loan paid back.

If settlement 10 M he gets 660,000

Is Yarro getting more stock? No.

Yarro is a minority lender. 20 percent. Rest is 13 to 14 lenders will be funding. Ranging from 10,000 to 650,000. Yarro lined them up.

Some were former board members or had an employee-consultant role. Some had no former relationship with SCO.

Then showed a 13-week budget. First for SCO's business, second for litigation.

Independent contractors provide help to company. Most are past, but they might have them come back a day or two.

Other vendors, like Etrade. It is eliminated that cost.

Data processing. Significant IT function.

Premises is NJ office and Lindon.

Financial costs would be bank fees and taxes.

Office would be selling T & E, sales, communication for internet connectivity.

Disbursements to foreign subs: debtors makes contributions for their expenses. Has a separate source of funds. They collect from the foreign subs, so then they pay out from the revenue stream.

The company has always operated in that manner.

OPS estimates they can save $100,000 a month.

The goal was to stop the bleeding of cash. Believe successful. Slight cash positive.

Why then a request for loan?

It's a forecast. But they can't use the current cushion for phase two, and they are behind in paying bankruptcy professionals fees through the end of January. Loan is not revolving.

Need a buffer. There will be ongoing expenses. Loan helps them.

Next page is the litigation budget.

Out of pocket expenses of upcoming trial or future expenses associated with the court. Travel. The page is 13-slice of a projected year's budget. Professional fees like Blank Rome that need to be paid out of litigation budget also.

Right now, without debtor loan, SCO has nothing to go forward with the litigation.

Budget for $500,000 or so for the rest of the year.

If litigation is resolved at the end of March, there will be surplus funds for the estate.

Appeals? No the budget doesn't take that into account.

Why not just shut the company down? His view is you can't sell a house with a burning roof.

SCO is distressed. You can't sell in these circumstances. It's like trying to sell an ice cube that is melting.

So OPA said triage. Allow us to go forward in an orderly sales process. They'll then can invite people in to sell.

LEWIS: Have a few questions. First, the trial is about to begin and will last three weeks. Is there a reason this financing can't wait until the trial over?

Fisler: time is of the essence. Debtor needs money. We have to assume perhaps the litigation doesn't go SCO's way, and we need to handle the rest.

LEWIS: What if SCO loses. Did you analyze that?

Fisler; We're aware of unsecured obligations.

Lewis: Will there be funds to pay the unsecured creditors?

My view it we will have some.

Lewis: You have that view but you have not done any analysis.

Fisler: Correct.

Lewis: Were you trying for financing for a house on fire?

Fisler: We had already made significant cuts, so the fire was out by the time we did the financing.

Lewis: So the company is not is distress.

Fisler: We've put the fire out.

Lewis: Why the lender fee indicates the lender was a Del. co. and now it's a Utah company?

Fisler: I don't know.

Al: Have any of the lenders signed any agreements yet?

Fisler: Ask Fatell. As far as I know, no.

Al: Why not signed on the dotted line before filing?

Fisler: The contracts are now signed.

Al: Date is March 8 for closing. Why?

Fisler: We wanted to close just prior to at the start of the trial. That was our deadline.

Fatell: Closing is Monday. It's a condition of closing. All those lending have said they are committed. Can they reduce the loan? No. How much is committed? All of it up to 2 million. Do you have some sense in the market as to what the assets might bring in the beginning or since?

Fisler: Yes: there was 5 1/2 million offer. Interest is high. They've been approached by another party new to this. So there is a competing offer. There are discussions. As to value. We are talking with prior people. Our belief that we should be able to come in in the range of prior offers.

Fatell: You will be able to pay this loan back? Yes. And there will be money to pay off all the creditors?

Fisler: Yes. We feel the company hadn't considered all its options to sell. We didn't see a call list or a backup bidder. So felt the offer was potentially low negotiated under duress. So felt we could get a better offer. If the trial if favorable, it clears up an issue. All the key IP was stripped out and couldn't be sold. Some willing to buy without IP, but if we clear that up, the interest level has to go up.

Fatell: Novell's claim is unsecured?

Fisler: Yes, but we have some set aside, but not in full.

Judge: Novell's objection is the size of the fee. Is that a possibility it could be that large a number?

Fisler: Yes.

Lewis: Are you saying there wasn't a robust effort to sell?

Fisler: Can't say no efforts, but fell short of what we'd do.

Lewis: What if SCO loses, what will it take to provide enough funds to pay unsecured creditors?

Fisler: It depends on timing. If they lose in next 3 weeks, the loan is still there. If they've used half a million, then the loan pays itself somewhat, and then if we sell the company, we can pay the loan off and the rest would be available for creditors. Expect would have 3-4 million range.

Lewis: Do you know who the members are?

Fisler: Yes, names on a list.

Lewis: Do you know anything about the LLC?

Fisler: It's Ralph Yarro's entity.

Lewis: Do you know if the names on the exhibit are lending from personal funds?

Fisler: There isn't somebody else behind those names.

Fatell clarifies: what would be ahead of unsecured creditors, there'd still be a secured loan left over, so you would have a half a million ahead of creditors.

Al: If the funds are not wired, what recourse would there be?

Fisler: No commitments if it doesn't close.

Al: What about legal fees?

Fisler: No. If it doesn't close, we have no obligations.

Fatell's closing argument: there is a need for financing. Belt tightening but not enough to satisfy all its obligations, including professional fees. The market has been tested. Up to 12 people showed interest. Even though with an insider, there has been a transparent process to get the best deal. It is an unusual loan, small loan, with a contingent piece and they are lending and in some respects hoping for a benefit. We have been unable to get unsecured credit. It's necessary. Terms are fair and commercially reasonable. This is a unique type of loan, but the trustee is appreciative that Yarro was able to get lenders together.

Two objections. This is not a subordination of creditors to equity. The litigation is a valuable asset and should be pursued. It doesn't pay for prepetition claims. I think we've addressed all Novell's objections.

As to Al, it's not like a breakup fee they get no matter what.

History: we have no history with this company.

Lewis: The key issue is whether it needs to be done today. Why not wait for trial? It's only 3 or 4 weeks away, and then we'll have a verdict. In the meantime, we haven't heard anything that the company can't make it that far. And we heard nothing that says the creditors won't be sacrificed if the litigation goes wrong. No one has calculated that, including Mr. Fisler. We still don't really know who the lender is. In one document, it's a Delaware LLC and in another it is now a Utah LLC. And curiously the filing was only the first page, so we don't know anything about the lender itself.

Al: This motion was on very short notice. Most of my questions have been answered. There is still a strangeness about the entity. According to the websites, neither entity is formed. It seems clear that this is related to the trial.

Fatell: When they filed the notice, the only thing provided us was a scanned copy of the tax document. She now has the complete filing. [Hands it to the judge.] Yarro is the manager and represented by Holland & Hart, a reputable firm.

Mona Burton, of Holland & Hart: I am Yarro's attorney, and the tax office is the appropriate place to file the articles. The filing won't be on the website for a while, and that is normal. But the company was formed by filing the articles.

Fatell: The estate needs this money, quite aside from the litigation. It's not week to week cash flow positive. There is a significant amount that needs to be paid and it comes ahead of creditors anyway. They need the money to do the European phase two. And it will better position it for sale.

There could be appeals after the trial, so to hold this in abeyance would be a great detriment to the estate. We believe there is interest in buying these assets, but we don't think we can get best value today.

Lewis: The test isn't a best business judgment. This is not ordinary course. The test is the creditors' protection. Counsel noted that if the trial doesn't do well, they won't be in such a great situation to sell. Everybody knows there will be appeals, but the trial itself will also have an impact, and when we know what that situation is, we'll know if this runway funding is even needed.

Al: May I ask Yarro's lawyer a question? [Quotes: Utah code indicating that a company is not formed by tax office filing ] Judge: I accept Burton's representation. She is a lawyer. This has been a difficult case. I am pleased with Cahn's report that he is active in restructuring and cut costs dramatically. I have heard credible testimony from Mr. Fisler and I will grant the motion based upon that testimony that the requirements have been met, that there is a need for the financing now. I agree that at the conclusion of the trial, there may be different conditions, so the time is now. I wait with bated breath the trial outcome. 13 or 14 lenders. Yarro is 20% of the total. Some are insiders; some not.


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