David,
I hope this note finds you well. I am writing in connection with the ongoing negotiation of the Asset Purchase Agreement by and between our client, Meridian Consumer Brands LLC, and Briarwood Home Essentials, Inc. for the acquisition of the CleanLeaf and PureHaven product lines. I want to bring to your attention a significant finding from our financial diligence review regarding the inventory included in the Acquired Assets that we believe requires prompt attention and resolution before the parties can advance the transaction toward closing.
**Inventory Valuation Variance**
As you may be aware, Meridian's financial diligence advisor, Whitfield Ames LLP (engagement partner Susan Clearwater), delivered a preliminary financial diligence memorandum to the deal team on October 14, 2022. That memorandum identified a material variance between the inventory values as reported by Briarwood and Whitfield Ames's independent assessment of those same inventories. Specifically:
- Briarwood's reported inventory book value as of the June 30, 2022 reference date is **$14,300,000**. - Whitfield Ames's assessment of the net realizable value (NRV) of the same inventory as of the same reference date is **$11,800,000**.
This results in a variance of approximately **$2,500,000**, representing roughly 17.5% of the reported book value — a gap that we view as material and one that warrants careful examination.
Based on Whitfield Ames's preliminary analysis, the variance appears to be driven by differences in valuation methodology, including the treatment of slow-moving and obsolete SKUs, reserve assumptions, and potentially the valuation of certain raw materials and work-in-process inventory held at the Marysville manufacturing facility (2800 Industrial Parkway, Marysville, OH 43040) and the West Jefferson distribution center (500 Commerce Boulevard, West Jefferson, OH 43162). The product lines encompass approximately 142 active SKUs, and the variance analysis suggests the discrepancy is concentrated in a subset of those SKUs rather than spread uniformly across the portfolio.
**Significance to the Transaction**
As you know, the inventory constitutes a material component of the Acquired Assets. The purchase price of $95,000,000 was established based in part on Briarwood's represented financial metrics for the product lines, including FY2021 revenue of $68,000,000 and EBITDA of $11,200,000. A $2,500,000 inventory overstatement, if confirmed, would be significant and would need to be addressed — whether through a purchase price adjustment mechanism in the APA, revised inventory representations and warranties, an agreed-upon closing inventory true-up procedure, or some combination of these approaches.
I would also note that while the second draft of the APA circulated on September 15, 2022 contemplates an inventory adjustment mechanism, the parties have not yet reached agreement on the valuation methodology to be applied at closing, and this remains an open item on the issues list. The variance identified by Whitfield Ames underscores the importance of resolving the methodology question promptly.
**Request for Supporting Documentation**
To facilitate a productive dialogue and enable the parties to reconcile the variance, we respectfully request that Briarwood and its auditor, Hargrove & Linton, P.C. (engagement partner Daniel Yee), provide the following supporting documentation for Briarwood's inventory valuation methodology:
1. Detailed inventory aging schedules as of June 30, 2022; 2. Reserve methodology and underlying assumptions for slow-moving and obsolete inventory; 3. A SKU-level breakdown of book values for the CleanLeaf and PureHaven product lines; 4. Any internal or third-party inventory valuation analyses prepared by or on behalf of Briarwood; and 5. Documentation of any inventory write-downs or adjustments taken since the June 30, 2022 reference date.
We would ask that these materials be uploaded to the Pemberton Systems data room under project code BHE-CleanLeaf-2022, or alternatively provided directly to me and the Whitfield Ames team. We are happy to coordinate with Rachel on the logistics.
**Proposed Joint Review Process**
In the interest of resolving this issue efficiently and collaboratively, we would propose that Whitfield Ames (Susan Clearwater) and Hargrove & Linton (Daniel Yee) conduct a joint review of the inventory valuation to reconcile the variance and, ideally, agree on a methodology that can be incorporated into the APA's closing adjustment mechanism. We believe this would be a constructive approach and would help avoid a prolonged dispute over what may ultimately be a reconcilable difference in methodology and assumptions.
To that end, I would suggest we schedule a call among the financial advisors and counsel — perhaps early next week — to discuss the path forward and agree on a timetable for the joint review. I want to be candid that resolution of the inventory valuation variance is, from Meridian's perspective, a gating issue: we will need to reach alignment on this point before the APA can be finalized and the parties can proceed toward closing.
**Next Steps**
I am available to discuss any of the foregoing at your convenience and would welcome your and Rachel's thoughts on timing and the proposed approach. We remain committed to working constructively with you and the Briarwood team toward a resolution that works for both sides, and I appreciate your attention to this matter.
Best regards,
**Andrew Fitzpatrick** Partner Calderwood & Harkness LLP 599 Lexington Avenue, 36th Floor New York, NY 10022 T: (212) 558-4400 E: afitzpatrick@calderwoodharkness.com
Matter No. 1011-00005
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