omersattardeclaration

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 January 19, 2008 UNITED STATES BANKRUPTCY COURT DISTRICT OF NEVADA In re XYIENCE INCORPORATED, a Nevada corporation, Debtor. Chapter 11 No. BK-S-08-10474-MKN OMNIBUS DECLARATION OF OMER SATTAR Date: January 23, 2008 Time: 3:00 p.m. I, OMER SATTAR, under penalty of perjury, hereby declare as follows: 1. I am the President of Xyience, Inc. (“Xyience”). 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 make this Omnibus Declaration in support of various “first day” motions and applications submitted in the above-captioned Chapter 11 bankruptcy case. 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. 3. Xyience Overview Xyience is in the business of marketing and distributing a unique line of nutrition related products targeted to active life style enthusiasts, including nutritional supplements listed on Exhibit 1 and the energy drink, Xenergy™ (“Business”). The company, its logo and the names of its products are registered trademarks of Xyience. 4. Since its formation, Xyience has associated its brand with health, fitness, mixed martial arts1 (“MMA”), and other forms of extreme sports. Among other things, Xyience has been a longtime sponsor of the ULTIMATE FIGHTING CHAMPIONSHIP® (the “UFC”), a U.S. based MMA organization. The UFC is currently recognized as the largest MMA promotion in the world and it has become the second most popular sporting event for 18-34 year old males, behind the National Football League. 5. From its inception, Xyience experienced brisk growth in sales, up from $109,474 in 2004 to $20,368,338 in 2006. One challenge, however, has been finding the capital to support the company’s expansion and to fully exploit the growing nutritional supplements and energy drink markets. 6. 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 MMA is a full contact combat sport in which a wide variety of fighting techniques are used, including striking and grappling. 1 -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 substantial investments in marketing and distribution are required to penetrate those markets. 7. Xyience initially hired TLC Consulting, LLC to assist in raising capital. Those initial efforts, however, netted little financial benefit for Xyience. 8. By May of 2006, however, Xyience had secured an equity investment of $21 million through the Brush Monroe Fund, a private equity fund operated by AA Capital Partners, Inc. (“AA Capital”). Shortly thereafter, the Brush Monroe Fund infused an additional $10 million in the form of convertible debt. 9. From May 2006 through the end of that year, Xyience raised additional capital, among other things, through private placements and the fundraising efforts of the company’s founder and then CEO, Russell Craig Pike.2 10. During the fourth quarter of 2006, Xyience retained ARC Investments to assist in raising capital, resulting in a $5 million secured convertible loan from Darlis Investments. Shortly thereafter, Mr. Pike resigned as CEO and Adam Roseman, the principal of ARC Investments, assumed management. Unfortunately, Mr. Pike’s efforts to sell Xyience stock in the State of California resulted in the entry of a September 10, 2007 Desist and Refrain Order against Xyience and Mr. Pike by the State of California, Department of Corporations, a copy of which is attached as Exhibit 2. 2 Mr. Pike is a Petitioning Creditor in the Involuntary Case filed against Xyience on January 3, 2008 as Case No. BK-S-10049-MKN wherein he alleges that the sum of $2,157,515.75 is owed to him by Xyience for a promissory note. Although the financial records of Xyience do reflect a contested unsecured claim due Mr. Pike in the amount of $1,800,011.08, see Schedule F, there is no documentation in Xyience’s books and records to support this claim. -3- 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 11. Under Mr. Roseman’s leadership, Xyience entered into a $15 million sponsorship agreement with the UFC for the year 2007. The company continued to explore financing options and presented the investment opportunity to numerous investment banks and private equity funds including Cowan & Co., Lazard, Deutsche Bank, Piper-Jaffray, JP Morgan, Lehman Brothers, Canacord Adams, CSFB, Merriman, Och-Ziff and Curhan and Ford. None of those prospects agreed to invest. 12. In February 2007 a receiver, previously appointed by the Securities and Exchange Commission to take control of AA Capital’s assets, liquidated AA Capital’s investment in Xyience. That investment was ultimately acquired by Key Management. 13. In early 2007, following the resignation of Mr. Pike, Xyience brought in new management, with a focus on maximizing top-line revenue. Respected restaurant entrepreneur, Bill Underhill, became CEO and former Coca-Cola executive, Jan Hall, served as President and Chief Operating Officer. Under the leadership of Mr. Underhill and Ms. Hall, Xyience embarked on an effort to roll out the company’s new energy drink, Xenergy™, on a national basis. The anticipated cost of the company’s marketing plan was approximately $29 million. 14. In order to finance the national rollout of Xenergy™, Mr. Underhill and Ms. Hall worked to secure capital investment from a variety of investment banks and private equity funds. Unfortunately, their efforts were not successful. In May 2007, Mr. Underhill and Ms. Hall resigned. 15. On June 1, 2007, Adam Frank and Kirk Sanford were appointed to lead the company, Mr. Frank as Interim General Manager, and Mr. Sanford as Special Advisor to Management. At that point, 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 was operating with a breakeven sales requirement of -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 approximately $8,500,000 per month. 16. Mr. Frank and Mr. Sanford acted quickly to address the financial crises they were faced with. They immediately reduced the number of Xyience employees from 88 to 53 and dramatically scaled back the scope of the previous business plan. In addition, they succeeded in restructuring Xyience’s existing trade debt and amounts due noteholders by negotiating workout arrangements with Xyience vendors and noteholders, resulting in a reduction of amounts due and establishing workable repayment plans. 17. Additionally, Mr. Frank and Mr. Sanford actively sought capital support from a number of potential financial partners including Burril, Lazard, Westcap, Wakabayshi, and Accord Financial, none of whom was ultimately willing to provide a financing commitment to Xyience at the time. In fact, the only entity willing to lend funds to Xyience at the time 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. 18. On October 4, 2007, Zyen provided $12,000,000 in exchange for a senior secured convertible note and warrants for 10% of the company. The transaction was approved unanimously by the board of directors and by over 60% of Xyience shareholders. 19. A key covenant of the Zyen loan required Xyience to remain current on the repayment plans that it had negotiated with its noteholders and vendors. In addition, the proceeds of the Zyen loan could only be used to finance ongoing business as opposed to meeting the company’s commitments to noteholders and vendors. II. 20. Financial Difficulties and “Strong Arm” Tactics Having secured the funding required to meet ongoing business expenses, Xyience management moved forward to seek an additional $7.5 million in subordinate financing. They needed those funds to satisfy the negotiated repayment obligations to -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 Xyience noteholders and vendors. 21. At that time, Xyience was in the final stages of negotiations with a group of Those negotiations, shareholders who had agreed to provide the required financing. however, were derailed by a campaign of intimidation and threats lead by company founder and former Xyience CEO, Mr. Pike, Terry Cardenas, Ronald Solomon and Ric Klingenberg. Associates of Mr. Pike and Mr. Klingenberg made threats of physical violence against Xyience management and board members and, on at least one occasion, showed up uninvited to the home of one member of management. Litigation between Xyience and Mr. Pike soon followed. 22. Because of the turmoil generated by this campaign of intimidation and threats – as well as the resulting litigation – Xyience was not able to secure the necessary $7.5 million investment to fund the restructuring, resulting in significant adverse consequences to Xyience. Although Xyience had successfully negotiated a substantial reduction of amounts due its trade creditors, Xyience was not able to make the payments that it agreed to make as part of the workout arrangement. As a result, Xyience’s accounts payable reverted back to the full amounts due prior to the workout negotiations and immediately went into default. In addition, because payment of the restructured obligations owed by Xyience to noteholders and vendors was also a covenant of the loan from Zyen, this situation triggered a cross-default of the Zyen obligation. 23. collect. Some creditors have recently resorted to brute force in their efforts to On December 19, 2007, Mr. Klingenberg and his brother David Bergstrom stormed into the Xyience office, cornering CFO, Michael Levy in an office and refusing to allow Mr. Levy to depart until their demands were met. Mr. Klingenberg and Mr. Bergstrom engaged in criminal coercion and made threats to Levy that if “their mother Sharon Miligan3 didn’t get paid, somebody was going to [expletive] get killed.” 3 Sharon Milligan is a Petitioning Creditor in the Involuntary Case filed against Xyience -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 Additionally, Mr. Klingenberg and Mr. Bergstrom demanded payment of $20,000, or else they would return the next day with “guys who had a 100% collection rate.” 24. The disruption and employee concerns resulting from the December 19, 2007 incident required Xyience to close its offices until it could provide greater security for employees. Additionally, the accounting staff immediately resigned, leaving Mr. Levy as the sole person in the accounting department. 25. Due to negative blogs and adverse information posted about Xyience on the internet, Xyience has also suffered a public relations backlash within the beverage industry resulting in new challenges with suppliers and distributors. Employee morale is not good, and some Xyience critics have emerged among the UFC community. As a result, Xyience has experienced a slump in existing sales. III. 26. Current Operations There are three core components of the Business that are critical to its continued operations: (a) product production; (b) marketing; and (c) distribution. 27. Xyience does not own manufacturing facilities or operate a production line. Rather, Xyience outsources manufacturing. For the Xenergy™ beverage, Xyience obtains syrups from Allan Flavors and provides those syrups to bottlers, such as Cott Corporation, to be processed and packaged as a final product (i.e., the company’s energy drink). 28. With respect to marketing, Xyience’s relationship with the UFC is vital. By maintaining its longstanding sponsorship of the UFC, Xyience can preserve its visibility with extreme sport enthusiasts. This close affiliation with the MMA community gives Xyience a unique position in the market and distinguishes the Xenergy™ brand from similar products in an otherwise crowded industry (e.g., Red Bull, Monster, RockStar, Adrenaline, Full Throttle, etc.). 29. Xyience has maintained valuable distributor relations throughout the United on January 3, 2008 as Case No. BK-S-10049-MKN. -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 States and Canada. It is essential that these distributors continue to carry and promote Xyience products. IV. 30. Industry And Market Trends Xyience’s supplements business has deteriorated from a high of $14.2 million in sales in 2006 to $6.1 million in 2007. This segment of the business is, again, highly competitive and requires substantial investment in research, development and marketing. Nevertheless, Xyience owns valuable trademarks and goodwill in the supplements industry and it will continue to service this segment of the market. 31. Xyience’s energy drink business has shown signs of moderate and sporadic strength in certain markets, but it has never had the opportunity to operate in an environment where management could focus on operating the Business. The energy drink business; however, is a critical component of Xyience’s success because the energy drink industry is rapidly expanding and it is projected to increase from sales of approximately 3.8 billion in 2006 to sales of over 7.6 billion in by 2011. V. Secured Creditors A. Zyen, LLC 32. Zyen, LLC (“Zyen”) made a secured loan (“Zyen Loan”) to Xyience in a principal sum not to exceed $12,000,000 on October 4, 2007, evidenced by a Convertible Senior Secured Note (“Zyen Note”), with a non-default interest rate equal to fifteen percent (15%) per annum and a default interest rate of eighteen percent (18%) (“Default Rate”) and payable in full on the Maturity Date as provided for in the Note. loan documents are attached as Exhibit 3. 33. Repayment of the Zyen Note is secured by a Security Agreement dated as of The Zyen October 4, 2007, perfected by: (a) a UCC-1 recorded with the Secretary of State of Nevada on October 16, 2007; (b) a Restricted Account and Securities Account Control Agreement (“Control Agreement”), a copy of which is attached as Exhibit 4; and (c) a -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 United States Patent and Trademark Office Notice of Recordation of Assignment Document recorded October 31, 2007 (“Trademark Assignment”), as a result of which Zyen maintains a first priority lien against all of the assets of the Debtor’s Business, including but not limited to, goods, equipment, inventory, accounts, other personal property, development rights, cash funds, deposit accounts, general intangibles, leases, licenses, trademarks, including those related to Xenergy™, concessions, contracts, accounts receivable, instruments, accounts, and all accessions to, substitutions for, and replacements, products, and proceeds thereof. B. Key Management 34. 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. Pursuant to a February 21, 2007 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. 35. 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. C. Pacific Investment Network, LLC and Prosperity Investment Alliance, LLC 36. Pacific Investment Network, LLC and Prosperity Investment Alliance, LLC4 (“Pacific and Prosperity”) each hold loan agreements dated as of July 19, 2005, as 4 Pacific, Prosperity and their principal, Brent Hucks, each signed the Involuntary Petition. -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 amended by that certain Option to Purchase or Retire Secured Convertible Loans dated April 26, 2007. 37. 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. D. Darlis Investments 38. 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%. 39. 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. V. 40. Critical Operational Issues There are several critical operational issues that must be resolved by Bankruptcy Court on an emergency basis in order to preserve the Business. They include both prepetition and postpetition operational matters. A. Employee Payroll And Benefits 41. As of the Petition Date, Xyience employed 39 full time, salaried employees. Prior to the commencement of this case, those employees were owed or had accrued in their favor salaries, commissions, vacation accrual and Benefit Contributions (the “Prepetition Compensation”). Based on the company’s books and records, I estimate that the total Prepetition Compensation accrued before filing this case is $96,399.57. The - 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 various categories of Prepetition Compensation that comprise this total are: (1) salaries; (2) sales commissions; (3) health care and workers compensation insurance premiums; (4) accrued vacation; and (5) employee expense reimbursements. Each category is discussed in detail below. 42. Xyience has historically paid employee salaries5 on a bi-monthly basis. The last regular payroll paid by Xyience to its employees was for the pay period ending Friday, January 11, 2008, and it was paid the same day. Thus, since Monday, January 13, 2008, four days of unpaid wages have accrued prior to the commencement of this case. 43. As part of its payroll procedures, Xyience withholds funds sufficient to pay the employee portion of the payroll taxes and other withholdings from the employee’s checks. Employees are then paid by check or through direct deposit into their personal bank accounts. 44. As of the Petition Date, it is estimated that the amount of employee salaries due (including all required withholdings) is $46,035.84. 45. In addition to their salaries, Debtor’s sales staff is paid quarterly Commissions of commissions ranging from $.05 to $.25 per case of product sold. $5,400.00 remained unpaid from the final quarter of 2007. It is difficult to calculate the precise amount of commissions accrued during the first 17 days of 2008, however, because we cannot presently determine exactly how many sales occurred during that period. Based on the average commissions paid in previous quarters and assuming roughly $90,000.00 in first-quarter sales, I estimate that the prepetition accrued commissions (including all required withholdings) total $2,750.00. When combined with the unpaid commissions due from 2007, the total accrued and/or outstanding commissions due prepetition are approximately $8,150.00. The salary paid to company sales staff includes either a $500 or $1,000 per month vehicle allowance. These amounts are, therefore, included in the calculation of employee salaries. 5 - 11 - 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 46. In the ordinary course of its business, Xyience has also accrued amounts necessary to provide health insurance and workers compensation benefits to its employees. These accrued employee benefit contributions are an integral part of the compensation Debtor’s employees are paid. Debtor provides health insurance and COBRA coverage through Health Plan of Nevada. Debtor’s premium for the employee health insurance plan for January 2008 is $14,857.42 and it must be paid on or before January 31, 2008. Should Xyience fail to make this employee benefit contribution, the employee health insurance benefit plan will be canceled effective January 1, 2008. Workers compensation insurance is provided through The Hartford and the current outstanding premium is $7,365.17. Debtor requests authority to make the future monthly premium payments that are owed for health insurance, COBRA and workers compensation insurance consistent with prepetition practice, even if a portion of the next invoiced premiums will cover prepetition as well as postpetition benefits. 47. Xyience also permits its employees to accrue vacation time each year (“Vacation Accrual”). If an employee does not use his or her Vacation Accrual, that employee can elect to be paid for the unused portion at the end of the year or upon the termination of employment with the company. The total amount of Vacation Accrual owed as of the Petition Date (including all required withholdings) is $4,991.98. 48. As part of their employment with Debtor, certain authorized employees often use personal credit cards or expend personal funds to cover business expenses for the benefit of Xyience (“Reimbursable Business Expenses”). On a weekly basis, Xyience pays approximately $10,000 to $15,000 to employees in Reimbursable Business Expenses. As of the Petition Date, some employees have not been reimbursed for these Reimbursable Business Expenses. I estimate that at least one week of Reimbursable Business Expenses has accrued prior to the Petition Date (i.e., approximately $15,000.00). 49. The petition in this case was filed during our normal cycle for paying - 12 - 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 employee salaries, making benefit contributions and reimbursing business expenses. As a result, Xyience employees have rendered services and incurred expenses for which, as of the Petition Date, those employees are unpaid and unreimbursed. If Xyience is not able to ensure that prepetition employee wages, taxes, benefits and reimbursements are paid – and that these expenses will continue to be paid postpetition – I believe there is a significant risk that large numbers of essential employees will resign. Even if they were willing to continue working without payment of their prepetition claims, however, our employees would be demoralized and the business would undoubtedly suffer. 50. No employee will receive payment in excess of the $10,000 per employee Because these claims are ultimately limitation contained in the Bankruptcy Code.6 priority claims that must be paid, and retention and payment of employees is so critically important to Xyience, it is in the best interest of Xyience to pay these claims now, when regular payroll would be paid, thereby preserving employee morale and ensuring Xyience’s ability to continue its business operations postpetition. B. 51. Essential Contract Employees In addition to the salaried employees referenced above, Xyience also relies upon the services of two vitally important contract employees. Because of the incident involving the unlawful imprisonment of Mr. Levy in December of 2007, Xyience was forced to retain an accounting temp (the “Contract Accountant”) to replace the employees who quit out of fear for their safety. In addition, Debtor hired a security guard (the “Guard”) to protect all of the company’s remaining employees. The agencies providing the Contract Accountant and the Guard are owed for prepetition work. 52. The agency providing the Contract Accountant is Robert Half. It is particularly important that Robert Half be paid in full so as to ensure continued service Should the Court require a breakdown of the amounts paid to each individual employee, that information is readily available and Debtor can submit it under seal as a supplement to this Omnibus Declaration. 6 - 13 - 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 from the Contract Accountant. Among other things, the Contract Accountant has become familiar with the company’s accounting procedures and is the only employee supporting the CFO. This is particularly significant given the financial data required to file and maintain a Chapter 11 bankruptcy case, not to mention the reporting requirements imposed upon a debtor-in-possession. If we are unable to secure the continued service of the Contract Accountant, the company will not be able to meet its financial reporting duties. 53. As of the Petition Date, Robert Half was owed $6,916.00. Of that amount, $2,432.00 represents charges incurred for the Contract Accountant since she started with the company on January 4, 2008. The remaining $4,484.00 is owed Robert Half for the prior services of a temporary IT employee. It is my understanding that Robert Half will pull its Contract Accountant unless all outstanding invoices are paid in full. 54. The agency providing the Guard is Positive Protection. In light of threats that have been made against Debtor’s employees, the security services Positive Protection provides are critically important. Unless Debtor can offer its employees a reasonable measure of security in the workplace, many of them will likely resign. Indeed, at least two employees did exactly that before Debtor retained Positive Protection to provide the Guard. 55. As of the Petition Date, Positive Protection was owed $1,690.00 for the week of January 13, 2008 through January 18, 2008. In addition, Debtor must pay Positive Protection $1,690.00 in advance for Guard services the following week. Unless these amounts are paid immediately, it is my understanding that Positive Protection will withdraw the Guard from Debtor’s premises. If that happens, Debtor will suffer further employee attrition and/or loss of morale. - 14 - 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 C. 56. Bank Accounts and Business Forms Xyience currently maintains the following bank accounts at Wells Fargo Bank, 4425 W. Russell Road, Las Vegas, NV 89128: (a) Merchant Account: The Debtor’s Merchant Processing Account is This account is used to receive payments via credit card Account Ending 0207. transactions. It is critical to the Debtor’s operations not to disrupt the flow of income into this account, and a substantial portion of that income comes via credit card transactions. The Debtor’s accounting staff will keep clear records of prepetition and postpetition transactions to ensure that they are properly reported in the Debtor’s records. (b) General Account: The Debtor’s general operating account is Account Ending 9613. This account also receives payments via credit card transactions, and the same considerations as noted in (a) above apply here. (c) Second General and Deposit Account: The Xyience has a second general account and deposit account which is Account Ending 8799. This account also receives payments via credit card transactions, and the same considerations as noted in (a) above apply here. (d) Canada Account. The Xyience has a separate account established This account also receives payments via credit card for product sales in Canada. transactions, and the same considerations as noted in (a) above apply here. (e) Expense Payment Account. The Debtor has a separate account for employee expense reimbursements which is Account Ending 0004. The delay caused by - 15 - 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 changing accounts would be disruptive to employees. (f) Payroll Account. The Xyience has a separate account for payroll which is Account Ending 6003. This account is important to maintain because currently payroll and related taxes are pulled from this account by the third party vendor that handles the Xyience payroll. It would be time consuming and disruptive to the Business to be required to establish a replacement account for these purposes. 57. Additionally, all of the Debtor’s bank accounts are subject to the Restricted Account and Securities Account Control Agreement (“Control Agreement”) entered into with senior secured creditor, Zyen, Inc. See, Exhibit 4. Xyience therefore needs to maintain these bank accounts in order to comply with the Control Agreement. 58. In order to minimize expenses to the estate, Xyience also requests that it be authorized to continue to use all correspondence, business forms (including, but not limited to, letterhead, purchase orders, invoices, etc.), and checks existing immediately prior to the Petition Date (collectively, “Business Forms”), without reference to its status as debtor in possession. 59. Replacing all of Debtor’s Business Forms would be expensive and burdensome to Debtor’s estate and disruptive to Debtor’s business operations. For these reasons, Xyience requests that it be authorized to use its existing Business Forms without being required to place the label “debtor in possession” on each. - 16 - 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 D. Utility Deposits 60. In connection with the operation of its business, Xyience obtains service from various utilities for, among other things, water, sewage, natural gas, electricity, telecommunications and similar utility services (collectively, the “Utility Services”) from several utility companies (collectively, the “Utility Companies”). A non-exhaustive list of the names and addresses of all or substantially all of the Utility Companies that were providing services to Xyience as of the Petition Date is attached as Exhibit 5. 61. Uninterrupted Utility Services are crucial to Xyience’s ability to sustain its current operations and preserve the value of its assets for the benefit of creditors. If the Utility Companies are permitted to terminate Utility Services, even for a short time, Xyience’s operations will suffer severe disruptions, and Xyience will either be forced to shut down its operations entirely or pay any amounts demanded by the Utility Companies to avoid the cessation of necessary and critical Utility Services. This result is inconsistent with the rehabilitative goals of the Bankruptcy Code. 62. I understand that in a Chapter 11 case, following a stay period, utilities may discontinue service to the debtor if the debtor does not provide adequate assurance of future performance in a form that is satisfactory to the utility, subject to the Court’s discretion to modify the amount of adequate assurance. 63. Xyience is not delinquent on the payments due to the Utility Companies, but the most current invoices are due, and next month’s invoices will include amounts due for prepetition portions of January 2008. The outstanding invoices for Utility Companies are - 17 - 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 listed on attached Exhibit 5. In connection with adequately assuring payment for future Utility Services, Xyience requests that it be allowed to pay the current invoiced amounts due to Utility Companies, and pay the prepetition portion of next month’s invoices along with the postpetition portion when the invoices are received. 64. Payment of current invoices would prevent the Utility Companies from arguing that Debtor is in default and it must bear the burden of delinquencies to justify any request for a substantial security deposit or bond. E. CRITICAL NEED FOR PRODUCT INVENTORY 65. In its United States and Canadian markets, Xyience is facing a critical inventory shortage of Xenergy™ beverages. It is vitally essential that Xyience obtain products to place in stores before each store completely runs out of product. Otherwise, Xyience will lose its current shelf placement to competitors, and it would be difficult, costly, and may be impossible to regain that shelf placement once Xenergy™ drink products are replaced with a competitor’s drink products. 66. Cott is the company that manufactures Xenergy™ beverages. Although Cott presently has 169,599 cases of product in its warehouses, Xyience has not been able to purchase any of this inventory due to cash flow shortages. Xyience therefore needs an emergency approval of the proposed DIP financing in order to avoid irreparable harm to the Business resulting from this critical need for inventory, and to permit Xyience to purchase the inventory available from Cott. 67. Additionally, Xyience requires immediate production of additional - 18 - 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 beverages for its Canadian Market. Allen Flavors is the company that manufactures the flavor base for the Xenergy™ drink products, and those flavor bases are then used as a primary component of the different Xenergy™ drink products which are manufactured by Cott. Xyience therefore has a similarly critical need for emergency approval of the DIP loan to provide funds to pay Allen Flavors for the production of flavor bases for the Xenergy™ drink products to be manufactured by Cott for the Canadian market. 68. Finally, funds are immediately required to pay product distributors and trucking companies to make sure that the Xyience products reach their consumers and maintain the current shelf placement of Xenergy™ drink products on store shelves. VI. DIP FINANCING, CASH COLLATERAL AND USE OF PROPERTY A. Zyen 69. Xyience has determined that it must explore over the next several months efforts to either recapitalize the Business or sell the Business. In order to accomplish this, Xyience must maintain and preserve the Business. Xyience has therefore prepared and developed an operational budget for the six months following the Petition Date (“Budget”), a copy of which is attached as Exhibit 6. The Budget provides for both operational and reorganizational expenses, and it requires an influx of cash in addition to the use of Cash Collateral. 70. Xyience needs to use the cash generated by the Business, the cash in its bank accounts and a loan of additional cash in order to continue the operation of the Business. If Xyience is unable to continue its Business, pay its employees, landlord and - 19 - 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 vendors, Xyience would be in default under its other obligations and the Business would falter and fail. 71. I understand that the cash on hand and in Xyience’s bank accounts, as well as all cash generated from the Business, including the proceeds of all accounts receivable both existing on the Petition Date and generated subsequent to the Petition Date, is Cash Collateral as defined by the Bankruptcy Code. 72. Xyience has requested authorization from Zyen to use the Cash Collateral in the operation of the Business. Zyen has required Xyience to enter into a Stipulation 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 PostPetition Financing on a Secured Basis Pursuant to 11 U.S.C. § 364(d)(1) (“Zyen Stipulation”), a copy of which is attached as Exhibit 7, and includes a summary of principal terms, commitment letter, and promissory note. Additionally, Zyen will require the entry of an initial order approving the interim use of Cash Collateral (“Initial Order”) and a final order of the Court after notice and hearing approving this Stipulation in its entirety (“Final Order”). Absent the Zyen Stipulation, Initial Order and Final Order, Zyen would not consent, and would object, to Xyience’s use of Cash Collateral. 73. Among other potential lenders, Xyience has contacted Standard General, a number of Xyience note holders, Anthos Capital, Wells Fargo Business Credit, Chase Business Credit, First City Crestone, Greenfield Commercial Credit, Stearns Bank and Bibby Financial Services seeking DIP financing. None of these proposed lenders is - 20 - 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 willing to grant an unsecured loan, administrative priority unsecured loan, super-priority administrative loan or a secured loan subordinate to the Zyen loan. Additionally, Xyience does not own any property which is not subject to the security interest of Zyen that is available to secure a lien as provided for in Section 364(c)(2). 74. Based upon the terms and conditions of the Zyen Stipulation, Zyen is willing to lend to Xyience emergency secured postpetition financing in an amount of $1,000,000 (the “Initial Postpetition Financing”) and upon further proceedings at the Final Hearing and the entry of the Final Order, an aggregate principal amount not to exceed $2,690,620.14 (the “Final Postpetition Financing” and collectively with the Initial Postpetition Financing, the “DIP Loan”), and for the Debtor to adopt and execute the Commitment Letter (and attached Term Sheet) and DIP Note attached to the Emergency Motion (including the Budget attached thereto dated January 18, 2008), which shall evidence the terms and condition of the Initial Postpetition Financing and the Final Postpetition Financing (“DIP Loan Documents”). 75. Xyience must immediately resolve the Critical Operations Issues identified above, otherwise Xyience will not be able to obtain the manufacture of additional product, pay employees and other expenses essential to maintain operation of the Business. The initial approval of the Zyen Stipulation is therefore an emergency because the interruption of Xyience’s ability to use Cash Collateral and obtain the Initial Postpetition Financing pending entry of the Final Order and the Final Postpetition Financing will impair Debtor’s ability to sustain the Business. - 21 - 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 76. The Zyen Stipulation attached as Exhibit 7 contains the particular terms and conditions of the DIP Loan and Cash Collateral Agreement entered into with Zyen. 77. Although a valuation of the Business is currently under way, Xyience does not believe that the value of the Business will exceed the dollar amount of the Zyen secured claim and the priming lien granted to Zyen in order to obtain the DIP loan. Consequently, Xyience did not contact Key Management, Prosperity Investments Alliance, Pacific Investment Network, LLC or Darlis Investments to request their permission or consent to use of Cash Collateral. B. Zuffa Marketing, LLC 78. Zuffa Marketing, LLC (“Zuffa Marketing”) promotes, sponsors and presents a variety of mixed martial arts events, centered around live ULTIMATE FIGHTING CHAMPIONSHIP® (“UFC”) productions of mixed martial arts competitions and exhibitions. Zuffa Marketing owns a variety of trademarks used in connection with those events. 79. Xyience has previously entered into a January 3, 2007 and October 3, 2007 Sponsorship Agreements with Zuffa Marketing, both of which have now terminated. In conjunction with the Zuffa Marketing Sponsorship Agreements, Xyience was permitted to place the UFC a label on each can of Xenergy™ drink. Xyience presently has existing inventory of Xenergy™ drinks which contains the UFC logo on each label, and in order to maintain the Business, Xyience requires the manufacture of additional inventory of Xenergy™ drinks. - 22 - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 14698.4 80. Additionally, the Zuffa Marketing agreements also provided Xyience with certain advertising and promotional rights in conjunction with UFC events. Among other advertising and promotional items, Xyience was entitled to have its logo placed on the center of the UFC canvas and on two banners placed on bumpers around the UFC canvas. 81. Zuffa Marketing and Xyience are presently concluding and documenting an agreement for a postpetition nonexclusive limited licensing agreement between the Debtor and Zuffa Marketing, pursuant to which Xenergy™ will continue its status as the official energy drink of the UFC. Xyience will file a separate motion and declaration in conjunction with its request for approval of the postpetition agreement with Zuffa as soon as it is possible to do so. I declare under penalty of perjury that these facts are true to the best of my knowledge and belief. DATED: this 18th day of January, 2008. /s/ Omer Sattar _______________________________ OMER SATTAR 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS - 23 -