finalomersattardeclaration

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. LAS V E G A S Fennemore Craig, P.C. Laurel E. Davis (NV Bar No. 3005) Daniel W. Glasser (Nv Bar No. 6990) Jon T. Pearson (NV Bar No. 10182) 300 South Fourth Street, Suite 1400 Las Vegas, Nevada 89101 Telephone: (702) 692-8000 Email: ldavis@fclaw.com [Proposed] Counsel for Debtor and Debtor in Possession Efiled February 8, 2008 UNITED STATES BANKRUPTCY COURT DISTRICT OF NEVADA In re XYIENCE INCORPORATED, a Nevada corporation, Debtor. Chapter 11 No. BK-S-08-10474-MKN DECLARATION OF OMER SATTAR IN SUPPORT OF REPLY POINTS AND AUTHORITIES Date: February 12, 2008 Time: 9:30 a.m. I, OMER SATTAR, under penalty of perjury, hereby declare as follows: 1. I am the President of Xyience, Inc. (“Xyience” or “Debtor”). Xyience is a Nevada corporation with its principal place of business located at 4572 Hacienda Avenue, Las Vegas, Nevada. I am an adult and competent to testify in court. This declaration is made based upon my personal knowledge, or upon my consultation with others on the Xyience staff with direct responsibility for the specific topics addressed in this declaration. If called upon to testify regarding these matters, I could and would do so. 2. I am the designated representative of the Debtor pursuant to Bankruptcy Rule 9001(5). 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS 3. This Declaration is filed in support of the Debtor’s Reply Points and Authorities in support of: (1) Emergency Motion to Approve Stipulation (“Zyen Stipulation” or “DIP Financing”) for: (A) Use of Cash Collateral by Debtor Pursuant to 11 U.S.C. § 363(c)(2); (B) Granting Adequate Protection Pursuant to 11 U.S.C. §§ 361 and 363(e); and (C) Authorizing Post-Petition Financing on a Secured Basis Pursuant to 11 U.S.C. § 364(d)(1) (“DIP Motion”); and (2) Emergency Motion to Approve Nonexclusive License Agreement With Zuffa Marketing, LLC (“Zuffa Agreement”) to Condition Use, Sale or Lease of Property; Granting Adequate Protection Pursuant to 11 U.S.C. §§ 361 and 363(e); and Authorizing Post-Petition Financing on a Secured Basis Pursuant to 11 U.S.C. §§ 364(c)(2) and 364(c)(3) (“Zuffa Motion”). OFFICERS, DIRECTORS AND SHAREHOLDERS 4. During the week of January 28, 2008, Adam Frank, Kirk Sanford, Lanis O’Steen and Jerry Kramer resigned from the Debtor’s Board of Directors. Michael Levy and I are the remaining members of the Debtor’s Board of Directors. 5. On the Petition Date, the books and records of Xyience reflect that 432 persons and entities own stock in Xyience. See Petition, Docket 1, List of Equity Security Holders. Based upon the 2005 and 2006 conduct of Russell Pike and then management of Xyience which resulted in entry of a September 10, 2007 Desist and Refrain Order by the California Department of Corporations, Exhibit A, regarding the improper solicitation and sale of 1,541,667 shares at a cost of $2.1 million to California residents, Xyience has serious questions and concerns about the accuracy of its books and records with respect to the issuance of stock and the identity of its existing shareholders, as well as persons or entities who claim to own stock in Xyience. 6. In November of 2007, certain shareholders submitted a request for information to Xyience through their legal counsel, Daniel Newman of Broad & Cassel of Miami, Florida. On November 29, 2007, Xyience provided Mr. Newman with -2- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS documents responsive to his request for information. The documents provided to Mr. Newman contained financial data, including budgets, projections and historical financial documents; detailed records regarding the issuance of stock, identity of shareholders, stock and options; and corporate books and records, including documents filed with the Nevada Secretary of State, articles, bylaws and corporate minutes. RELEVANT FINANCIAL HISTORY 7. Xyience has historically made significant efforts to raise capital, with mixed results. Although Xyience’s efforts have attracted sporadic investment, it has not been able to achieve the financial backing needed to meet the demands of its business. The nutritional supplements and energy drink markets are both highly competitive and substantial investments in marketing and distribution are required to penetrate those markets. 8. These historical problems in raising necessary working capital have resulted Xyience periodically in constant cash flow problems for Xyience and the Business. raised working capital through secured loan transactions due, in part, to the fact that necessary funds were not available from existing shareholders. Those secured loans consist of the following: (a) Key Management: Key Management holds the Brush Monroe, L.P. note in the original amount of $10,000,000 dated July 7, 2006, evidenced by a Revolving Loan Note (“Key Management Note”), with a non-default interest rate equal to twelve percent (12%) per annum and a default interest rate of fourteen percent (14%) and payable in full on the Maturity Date as provided for in the Note. The Key Management Note is secured by a Revolving Loan and Security Agreement dated July 7, 2006, and a UCC-1 recorded with the Secretary of State of Nevada on June 29, 2005. Pursuant to a UCC Financing Statement Amendment and letter agreement, Key Management has agreed to subordinate its security interest to that of Zyen. -3Pursuant to a February 21, 2007 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS Agreement, Key Management received 6,750,000 shares of Xyience stock, 3,500,000 Xyience Warrants and agreed to accept $5,000,000 in full satisfaction of the unpaid principal and interest. (b) Pacific and Prosperity: Pacific Investment Network, LLC and Prosperity Investment Alliance, LLC (“Pacific and Prosperity”) each hold loan agreements dated as of July 19, 2005, as amended by that certain Option to Purchase or Retire Secured Convertible Loans dated April 26, 2007. Pacific and Prosperity recorded UCC-1 with the Nevada Secretary of State asserting a security interest in Inventory November 9, 2005; however, there does not appear to be a security agreement which supports this UCC filing. Pursuant to a UCC Financing Statement Amendment and letter agreements, Pacific and Prosperity have agreed to subordinate their security interests to that of Zyen. (c) Darlis Investments: Darlis Investments holds a Senior Convertible Note dated December 20, 2006, in the original principal amount of $6,000,000. The note bears interest at the rate of 15%. The Darlis Investments Note is supported by a Security Agreement dated November 20, 2006, and a UCC-1 recorded with the Nevada Secretary of State on December 21, 2006. Pursuant to a UCC Financing Statement Amendment and letter agreements, Darlis Investments has agreed to subordinate its security interests to that of Zyen. 9. In June, 2007, Xyience faced a severe financial crisis and it needed a cash infusion of nearly $20 million. Xyience had liabilities to trade creditors of approximately $25,000,000 and obligations to noteholders of $18,000,000. Based on prior management’s plan for a nationwide rollout of the company’s energy drink, Xyience had staffed up to 88 employees, and it was operating with a breakeven sales requirement of approximately $8,500,000 per month. It was therefore necessary to reduce the number of Xyience employees from 88 to 53 and dramatically scale back the scope of the business -4- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS plan.1 Workout arrangements were negotiated with Xyience vendors and noteholders, resulting in a reduction of amounts due and establishing workable repayment plans. 10. Xyience actively sought capital support from existing shareholders as well as a number of potential financing sources including Burril, Lazard, Westcap, Wakabayshi, and Accord Financial. Shareholders were not willing to provide the necessary cash infusion and none of the potential financing sources was willing to make a financing commitment to Xyience at the time. 11. In fact, the only entity that was willing to provide the necessary working capital was an affiliate of the UFC known as Zyen, LLC. (“Zyen”). Zyen was only willing to provide a loan to Xyience if all of the other secured creditors agreed to subordinate their security interests to Zyen. As a result, Key Management, Pacific, Prosperity and Darlis Investments each executed a UCC Amendment subordinating their security interests to Zyen. 12. However, the Debtor’s financial problems were not solved by the Zyen loan, which contained covenants limiting the use of its loan proceeds for ongoing business operations. An additional $7.5 million was needed to fund the restructured obligations recently renegotiated with the Debtor’s noteholders and vendors. In fact, a group of shareholders were willing to provide the $7.5 million capital infusion. Those negotiations, however, were derailed by a campaign of intimidation and threats lead by company founder and former Xyience CEO, Mr. Pike, and shareholders Terry Cardenas, Ronald Solomon and Ric Klingenberg. 13. On December 7, 2007, a group of Xyience shareholders, including the Kingenberg Children’s Education Trust; William Pike, Jr. (Russell Pike’s brother); and Ronald Solomon, filed Case No. A553116 in Clark County District Court, entitled “Individual and Verified Derivative Complaint” against Key Management, its principal 1 Xyience presently has 27 employees on its payroll. -5- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS Patrick Brauckmann, five former Directors of the Debtors and others (“State Court Complaint”). A copy of the State Court Complaint is attached as Exhibit 1 to the Opposition to the DIP Motion and the Zuffa Motion. 14. Based upon the filing of the Derivative Lawsuit and the other actions of Mr. Pike and the above-referenced shareholders, Xyience was not able to secure the $7.5 million needed to fund the restructuring, resulting in significant adverse consequences to Xyience that ultimately drove it into bankruptcy. Xyience’s accounts payable reverted back to their original amounts because Xyience was not able to pay the renegotiated amounts, and each debt immediately went into default. This triggered a cross-default of the Zyen obligation, resulting in the Notice of Foreclosure received from Zyen. Cash flow shortages continued, creating the need for the Emergency DIP Financing that was approved by the Bankruptcy Court on January 23, 2008. RELEVANT OPERATIONS ISSUES 15. Cott is the company that manufactures Xenergy™ beverages, and the “UFC” logo is printed on each Xenergy™ drink product manufactured by Cott. On the Petition Date, Cott had 169,599 cases of Xenergy™ beverages in its warehouses. With the DIP Financing, the Debtor will be able to purchase these 169,599 cases of beverages. When the Debtor is able to purchase all 169,599 cases of beverages and distribute them for sale, the Debtor will receive gross revenue from sales in the approximate amount of $3,816,000. See Budget, Exhibit B. Cott has also manufactured 9.4 million drink cans which contain the “UFC” logo, and those drink cans have an estimated value of $1.1 million. 16. Additionally, based upon the Court’s interim approval of the DIP Loan, Xyience is presently obtaining additional Xenergy™ drink products for its Canadian Market. This will result in the production of 26,700 additional cases of drink products which will ultimately result in additional gross revenue in the approximate amount of -6- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS $800,000. 17. The Zuffa Agreement was and is absolutely essential to the continued success of the Debtor’s business because the prior Zuffa Marketing Agreements had expired, prepetition, and the “UFC” logo appears on the Debtor’s current inventory of products and energy drinks, Debtor’s products already on the shelves in retail outlets for sale to the public, and the standing inventory of energy drinks in the possession of Cott and cans manufactured by Cott. Absent a new agreement with Zuffa Marketing, the Debtor had no right to use the “UFC” logo on its products. This would have forced the Debtor to destroy valuable estate assets and manufacture new products without the logo, resulting in associated business losses caused by losing the Debtor’s shelf placement to its competitors when it removed existing products and could not immediately replace them with new products. Destruction of the existing products combined with the critical, immediate need for inventory to keep store shelves stocked with Debtor’s drink products would put the Debtor out of business. 18. If the Court does not grant final approval of the Zuffa Agreement, then the Debtor will lose revenue of over $8 million. Xyience will be forced to destroy its existing inventory with a value of $2,360,000, destroy the 169,599 case inventory held by Cott pre-petition and lose gross revenue of $3,816,000, destroy the 9.4 million cans worth $1.1 million, and destroy the 26,400 cases of beverages presently under manufacture by Cott and lose gross revenue of about $800,000. Forcing the Debtor to destroy these valuable products and lose revenue of over $8 million is extremely detrimental to the Debtor, the estate, creditors, parties in interest and shareholders, and the Debtor’s Business would not survive such a loss. /// /// /// -7- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS I declare under penalty of perjury that these facts are true to the best of my knowledge and belief. DATED: this 8th day of February, 2008. /s/ Omer Sattar _______________________________ OMER SATTAR -8- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS CERTIFICATE OF SERVICE 1. On February 8, 2008, I served the following document(s): DECLARATION OF OMMER SATTAR IN SUPPORT OF REPLY POINTS AND AUTHORITIES IN SUPPORT OF: EMERGENCY MOTION FOR ENTRY OF AN ORDER APPROVING STIPULATION WITH ZYEN, LLC FOR: (A) USE OF CASH COLLATERAL BY DEBTOR PURSUANT TO 11 U.S.C. § 363(c)(2); (B) GRANTING ADEQUATE PROTECTION PURSUANT TO 11 U.S.C. §§ 361 & 363(e); (C) AUTHORIZING POST-PETITION FINANCING ON A SECURED BASIS PURSUANT TO 11 U.S.C. § 364(d)(1); AND (D) SETTING FINAL HEARING AND EMERGENCY MOTION TO APPROVE NONEXCLUSIVE LICENSE AGREEMENT WITH ZUFFA MARKETING, LLC TO CONDITION USE, SALE OR LEASE OF PROPERTY; GRANTING ADEQUATE PROTECTION PURSUANT TO 11 U.S.C. §§ 361 & 363(e); AND AUTHORIZING POST-PETITION FINANCING ON A SECURED BASIS PURSUANT 11 U.S.C. §§ 364(c)(2) & 364(c)(3) 2. [x] I served the above-named document(s) by the following means to the persons as listed below: a. ECF System (attach the "Notice of Electronic Filing" or list all persons and addresses): bankruptcynotices@gordonsilver.com, bknotices@gordonsilver.com USTPRegion17.lv.ecf@usdoj.gov saebig@williamskastner.com oatmoh@nevadafirm.com, bkecf@nevadafirm.com, paltstatt@nevadafirm.com, sliberio@nevadafirm.com ecfnotices@sidhulawfirm.com baxelrod@lrlaw.com; pkois@lrlaw.com tshauntee@lrlaw.com GREGORY E GARMAN: U.S. TRUSTEE - LV – 11: SHEENA R. AEBIG: OGONNA M. ATAMOH: AMBRISH S. SIDHU: BRETT A. AXELROD -9- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS [] addresses): b. United States mail, postage fully prepaid (list persons and (See attached mailing matrix) [] c. Personal Service (List persons and addresses): [] For a party represented by an attorney, delivery was made by handling the document(s) to the attorney or by leaving the document(s) at the attorney's office with a clerk or other person in charge, or if no one is in charge by leaving the document(s) in a conspicuous place in the office. For a party, delivery was made by handing the document(s) to the party or by leaving the document(s) at the person's dwelling house or usual place of abode with someone of suitable age and discretion residing there. [] [x] d. By direct email (as opposed to through the ECF system) (list persons and email addresses): Sfleming@halelane.com Augie.landis@usdoj.gov mguymon@goldguylaw.com SCOTT FLEMING AUGUST LANDIS: MARJORIE GUYMON: I did not receive, within a reasonable time after the transmission, any electronic message or other indication that the transmission was unsuccessful. [] e. By fax transmission (list persons and fax numbers): Based upon the written agreement of the parties to accept service by fax transmission or a court order, I faxed the document(s) to the persons at the fax numbers listed below. No error was reported by the fax machine that I used. A copy of the record of the fax transmission is attached. [] f. By messenger: I served the document(s) by placing them in an envelope or package addressed to the persons at the addresses listed below and - 10 - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS providing them to a messenger for service. (A declaration by the messenger must be attached to this Certificate of Service). I declare under penalty of perjury that the foregoing is true and correct. DATED this 8th day of February, 2008. /s/ Mia Hurtado An Employee of Fennemore Craig, P.C. 15665.1 - 11 -