PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 599 Lexington Avenue, 36th Floor New York, NY 10022 Tel: (212) 555-7800
DUE DILIGENCE MEMORANDUM — MATERIAL CONTRACTS
July 29, 2022
To: Sandra Tung, Partner, Mergers & Acquisitions, Calderwood & Harkness LLP
From: Naomi Petersen, Associate, Mergers & Acquisitions, Calderwood & Harkness LLP Andrew Fitzpatrick, Lead Associate, Mergers & Acquisitions, Calderwood & Harkness LLP
Re: Proposed Acquisition of CleanLeaf and PureHaven Product Lines — Material Contracts Review
Client: Meridian Consumer Brands LLC
Matter No.: 1011-00005
Target: Briarwood Home Essentials, Inc.
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I. Executive Summary
This memorandum summarizes the findings from our review of material contracts related to the CleanLeaf (home cleaning) and PureHaven (personal care) product lines of Briarwood Home Essentials, Inc. ("Briarwood," the "Company," or the "Seller"), an Ohio corporation headquartered at 1175 Creekside Drive, Suite 400, Columbus, OH 43215, in connection with the proposed acquisition of substantially all of the assets comprising those product lines by Meridian Consumer Brands LLC ("Meridian" or the "Buyer"), a Delaware limited liability company. The contemplated transaction is structured as an asset purchase with a proposed purchase price of $95,000,000, subject to customary adjustments as set forth in the draft Asset Purchase Agreement (the "APA").
The scope of our review covered customer contracts, supply agreements, co-manufacturing agreements, licensing arrangements, distribution and logistics agreements, and other material contracts to be included among the Acquired Assets as defined in the first draft APA circulated on July 19, 2022. All materials reviewed were produced by Seller's counsel, Caldwell, Pruitt & Shaw LLP (Rachel Underwood, lead partner; David Soo, associate), via the Pemberton Systems virtual data room established for this transaction under project code BHE-CleanLeaf-2022. Access to the data room was granted on June 14, 2022, and our review has been ongoing since that date. We note that the data room continues to be populated with additional documents on a rolling basis.
The key findings of our review are as follows:
• Customer Contracts. A total of 23 customer contracts are to be assigned to Meridian as part of the Acquired Assets. These contracts govern the distribution and supply of CleanLeaf and PureHaven branded products to major retail chains, regional grocery chains, mass merchandisers, online retailers, and specialty stores. Of the 23 contracts, seven (7) contain change-of-control provisions, anti-assignment clauses, or both, which require third-party consent from the respective counterparties prior to the closing of the transaction. The aggregate annual revenue attributable to these seven contracts is approximately $26,800,000, representing approximately 39.4% of the total $68,000,000 FY2021 product line revenue.
• Supply Agreements. We reviewed six (6) material supply agreements covering raw chemical materials, packaging, fragrance and specialty ingredients, and labels/printing for the CleanLeaf and PureHaven product lines. Two of these agreements contain assignment provisions that require attention, though one is expected to be addressed through an affiliate-assignment carve-out.
• Co-Manufacturing Agreement. One co-manufacturing agreement was identified and reviewed. This agreement contains a consent-to-assignment requirement that will need to be addressed prior to or concurrently with the closing.
• Licensing and Distribution Agreements. We identified and reviewed certain inbound licensing agreements and distribution agreements. Our preliminary analysis indicates that the licensing arrangements are generally assignable, subject to the observations noted in Section VII below.
• Shared Contracts. Several contracts service both the CleanLeaf/PureHaven product lines and Briarwood's retained Commercial Janitorial Services Division (the "Retained Business"). These contracts will require either partial assignment, bifurcation, or new standalone arrangements, and their treatment should be addressed in the APA and/or the anticipated Transition Services Agreement.
It is important to note that Briarwood's disclosure schedules under the APA have not yet been delivered. A partial first draft was expected to be delivered during the course of this engagement and was ultimately delivered on September 28, 2022. This memorandum is therefore based on data room documents and management responses to the due diligence request list dated June 14, 2022, and our conclusions remain subject to revision upon receipt and review of the complete disclosure schedules.
This memorandum covers only contracts attributable to the CleanLeaf and PureHaven consumer product lines being acquired. Briarwood is retaining its Commercial Janitorial Services Division, and contracts exclusively attributable to that division are outside the scope of this review, except to the extent that certain contracts are shared between the acquired product lines and the Retained Business as discussed in Section X below.
II. Scope of Review and Methodology
A. Data Room and Document Sources
All contracts reviewed for purposes of this memorandum were accessed through the Pemberton Systems virtual data room established for this transaction under project code BHE-CleanLeaf-2022. Access to the data room was granted on June 14, 2022, and has been maintained continuously since that date. The data room is organized into the following relevant categories from which we drew the materials for this review:
• "Customer Agreements" (Data Room Folder 3.1)
• "Supply Agreements" (Data Room Folder 3.2)
• "Manufacturing Agreements" (Data Room Folder 3.3)
• "Distribution/Logistics" (Data Room Folder 3.4)
• "Licensing/IP" (Data Room Folder 3.5)
In addition to the data room documents, we reviewed written responses provided by Briarwood's management to items 14 through 31 of the due diligence request list dated June 14, 2022, which covered material contracts, supplier relationships, customer relationships, and contract compliance matters. We also conducted a telephone conference on July 11, 2022, with David Soo of Caldwell, Pruitt & Shaw LLP to clarify certain aspects of the contract portfolio and to request supplemental information regarding several agreements for which only partial documentation had been uploaded to the data room.
B. Review Framework
Our review was conducted against the definitions and framework set forth in the proposed Asset Purchase Agreement, a first draft of which was circulated by our office on July 19, 2022. In particular, we evaluated each contract in relation to the following defined terms as they appear in the first draft APA:
• "Acquired Assets" — the assets to be transferred to Meridian at closing, including the Assigned Contracts.
• "Assigned Contracts" — the contracts listed on Schedule 2.1(f) of the APA that are to be assigned to and assumed by Meridian at closing.
• "Assumed Liabilities" — the liabilities arising under the Assigned Contracts that Meridian will assume at closing, as defined in Section 2.3 of the APA.
• "Excluded Assets" — assets retained by Briarwood, including contracts exclusively related to the Retained Business.
• "Material Contracts" — defined for purposes of the representations and warranties in Section 4.12 of the APA.
C. Reference Date and Financial Data
The reference date for all financial data associated with the contracts reviewed in this memorandum is June 30, 2022. Revenue figures cited herein are based on FY2021 actual results (fiscal year ending December 31, 2021), as reported by Briarwood's management in response to our due diligence request list, and are supplemented by the year-to-date revenue data through June 30, 2022, where available.
We note that Whitfield Ames LLP (Susan Clearwater, Engagement Partner) is conducting the financial due diligence for Meridian in this transaction. We have cross-referenced our findings regarding revenue concentration with the preliminary financial diligence work product of Whitfield Ames LLP, which reported accounts receivable related to the CleanLeaf and PureHaven product lines of approximately $9,700,000 as of June 30, 2022. We have coordinated with Ms. Clearwater's team on matters of revenue concentration and customer-level financial data to ensure consistency between the legal and financial diligence workstreams.
D. Limitations
As noted above, Briarwood's disclosure schedules under the APA have not yet been delivered, and accordingly certain representations regarding the contracts — including representations regarding compliance, absence of defaults, and completeness of disclosed agreements — cannot be fully verified at this time. Our analysis is based on the documents made available in the data room and the management responses received to date. We have identified certain information gaps in Section XI.C below and have recommended follow-up requests to Seller's counsel.
III. Customer Contracts — Overview
A. Summary of the 23 Assigned Customer Contracts
Our review identified a total of 23 customer contracts that are to be assigned from Briarwood to Meridian at closing as part of the Acquired Assets. These contracts collectively govern the distribution and supply of CleanLeaf and PureHaven branded products — encompassing approximately 142 active SKUs across both product lines — to major retail chains, regional grocery chains, mass merchandisers, online retailers, and specialty stores throughout the United States and, in limited cases, Canada.
The combined revenue attributable to these 23 contracts represents the substantial majority of the $68,000,000 in FY2021 product line revenue reported by Briarwood's management. Individual contract terms range from one (1) to five (5) years, with range renewal provisions including auto-renewal (with advance notice opt-out), option-to-renew (at the counterparty's election), and fixed-term arrangements with renegotiation provisions at expiration.
The following table provides a summary listing of each of the 23 customer contracts to be assigned:
Note: The aggregate revenue figure of approximately $68,500,000 reflects rounding and minor variances from the $68,000,000 reported by management. We are coordinating with Whitfield Ames LLP to reconcile these figures as part of the financial diligence workstream.
A detailed schedule of the 23 Assigned Customer Contracts is attached hereto as Appendix A.
B. Contracts Requiring Third-Party Consent (7 of 23)
Seven (7) of the 23 customer contracts to be assigned to Meridian contain provisions that restrict or condition assignment of the contract, either through (i) change-of-control provisions, (ii) anti-assignment clauses requiring the counterparty's consent to assignment, or (iii) both. These seven contracts are analyzed in detail below.
1. Veltrano Retail Holdings, Inc.
Date of Agreement: March 15, 2019 Remaining Term: Approximately 20 months (expires March 14, 2024) Approximate Annual Revenue: $11,200,000
Nature of Restrictive Clause: Section 14.3 of the Master Supply Agreement contains both an anti-assignment clause and a change-of-control provision. The anti-assignment clause provides that "[n]either party may assign this Agreement or any rights hereunder without the prior written consent of the other party." The change-of-control provision in Section 14.4 separately provides that a "Change of Control" of the supplier (defined to include the sale of all or substantially all of the assets used in connection with the products supplied under the agreement) shall constitute an event entitling Veltrano to terminate the agreement upon sixty (60) days' written notice.
Consent Standard: Consent to assignment under Section 14.3 is at Veltrano's "sole and absolute discretion." There is no express requirement that consent be commercially reasonable or not unreasonably withheld.
Consequences of Assignment Without Consent: If assignment is effected without obtaining Veltrano's prior written consent, the assignment is deemed void and of no force and effect. Additionally, the attempted assignment without consent constitutes a material breach entitling Veltrano to terminate the agreement immediately upon written notice. The change-of-control termination right under Section 14.4 is a separate right that may be exercised regardless of whether assignment consent is obtained.
Revenue at Risk: $11,200,000 annually (approximately 16.5% of FY2021 product line revenue). This is the single largest customer contract in the portfolio. Loss of this contract would have a material adverse effect on the value of the Acquired Assets.
Assessment and Recommendation: Given the magnitude of revenue at risk and the absence of a "commercially reasonable" consent standard, this contract should be designated as a "Required Consent" for purposes of the APA closing conditions. We recommend early engagement with Veltrano to begin consent discussions. The change-of-control termination right in Section 14.4 is an independent right that survives the granting of assignment consent, and Veltrano should be asked to waive this right as part of the consent process. We note that Briarwood has represented informally that its commercial relationship with Veltrano is strong and that management expects consent to be obtainable.
2. GreenTree Grocers, LLC
Date of Agreement: January 8, 2021 Remaining Term: Approximately 18 months (expires January 7, 2024) Approximate Annual Revenue: $8,400,000
Nature of Restrictive Clause: Section 11.2 of the Vendor Supply Agreement contains an anti-assignment clause providing that the agreement "shall not be assigned by Vendor without the prior written consent of GreenTree Grocers, which consent shall not be unreasonably withheld, conditioned, or delayed." There is no separate change-of-control provision.
Consent Standard: Consent is subject to a "not unreasonably withheld, conditioned, or delayed" standard. This is a more favorable standard from the Buyer's perspective than the Veltrano provision.
Consequences of Assignment Without Consent: Any purported assignment without the required consent is "voidable at the option of GreenTree Grocers." GreenTree may elect to either (a) void the assignment and continue performing under the agreement with the original party, or (b) terminate the agreement upon thirty (30) days' written notice.
Revenue at Risk: $8,400,000 annually (approximately 12.4% of FY2021 product line revenue).
Assessment and Recommendation: The "not unreasonably withheld" standard provides a degree of protection, and a refusal to consent by GreenTree Grocers would likely need to be supported by a commercially reasonable basis. Nonetheless, we recommend that a consent solicitation letter be sent promptly and that this contract be designated as a "Required Consent" given the materiality of the revenue involved. We note that the agreement expires on January 7, 2024, and renewal negotiations may present an opportunity to negotiate more favorable assignment provisions.
3. NorthStar Mass Merchants, Inc.
Date of Agreement: June 1, 2020 Remaining Term: Approximately 11 months (expires May 31, 2023) Approximate Annual Revenue: $7,200,000
Nature of Restrictive Clause: Section 16.1 of the Product Supply and Distribution Agreement provides that "[t]his Agreement may not be assigned by either party without the prior written consent of the other party, which consent may be granted or withheld in such party's sole discretion." Section 16.2 contains a change-of-control clause that defines "Change of Control" broadly to include "the sale, transfer, or other disposition of all or substantially all of the assets of [Briarwood] relating to the Products." Upon a Change of Control, NorthStar has the right to terminate the agreement upon ninety (90) days' written notice.
Consent Standard: Sole discretion of NorthStar.
Consequences of Assignment Without Consent: An assignment without consent is "null and void ab initio." Additionally, NorthStar has a separate termination right upon a Change of Control regardless of whether assignment consent is obtained.
Revenue at Risk: $7,200,000 annually (approximately 10.6% of FY2021 product line revenue).
Assessment and Recommendation: The combination of the sole discretion consent standard and the independent change-of-control termination right makes this a high-risk contract. We recommend designating this as a "Required Consent" and initiating consent discussions early. The contract expires in approximately 11 months, which may limit the practical risk if consent negotiations are protracted — Meridian could potentially negotiate a new agreement directly with NorthStar post-closing. However, any gap in supply during the consent/negotiation process could affect transitional revenue.
4. Brindoval SuperStores, LP
Date of Agreement: April 1, 2021 Remaining Term: Approximately 9 months (expires March 31, 2023) Approximate Annual Revenue: $4,800,000
Nature of Restrictive Clause: Section 9.4 of the Supplier Agreement provides that the agreement "may not be assigned by Supplier without the prior written consent of Brindoval, which consent shall not be unreasonably withheld." There is no separate change-of-control provision.
Consent Standard: "Not unreasonably withheld."
Consequences of Assignment Without Consent: Assignment without consent is voidable at Brindoval's option, and Brindoval may terminate the agreement upon sixty (60) days' notice if assignment is effected without consent.
Revenue at Risk: $4,800,000 annually (approximately 7.1% of FY2021 product line revenue).
Assessment and Recommendation: The "not unreasonably withheld" standard is favorable, and the relatively short remaining term (approximately 9 months) reduces the long-term risk. We recommend designating this as a "Best Efforts Consent" rather than a "Required Consent," subject to discussion with the deal team. Consent solicitation should nonetheless be initiated promptly.
5. Evergreen Digital Commerce, LLC
Date of Agreement: May 15, 2021 Remaining Term: Approximately 10 months (expires May 14, 2023) Approximate Annual Revenue: $3,600,000
Nature of Restrictive Clause: Section 12.1 of the Online Marketplace Agreement contains a broad anti-assignment clause: "This Agreement is personal to the parties and may not be assigned, delegated, or transferred by either party without the prior written consent of the other party." Section 12.2 contains a change-of-control provision that defines a Change of Control to include, among other events, "a sale of all or substantially all assets of a party." Upon a Change of Control, Evergreen may terminate the agreement immediately upon written notice.
Consent Standard: The consent provision does not specify a standard (i.e., it does not include "not unreasonably withheld" or "sole discretion" language). Under applicable Ohio law, this is generally construed to require that consent not be unreasonably withheld, but the absence of express language creates some ambiguity.
Consequences of Assignment Without Consent: The agreement is silent on the specific consequences of an assignment without consent, which under Ohio law would likely render the assignment a breach entitling the non-breaching party to damages and potential termination. The change-of-control termination right in Section 12.2 provides for immediate termination upon written notice.
Revenue at Risk: $3,600,000 annually (approximately 5.3% of FY2021 product line revenue).
Assessment and Recommendation: The "personal to the parties" language and the absence of a specified consent standard, combined with the immediate-termination change-of-control provision, make this a moderately high-risk contract. We recommend that this contract be designated as a "Best Efforts Consent" given the relatively modest revenue and the short remaining term, but consent solicitation should be prioritized. We note that this agreement grants Evergreen online marketplace exclusivity for the PureHaven brand, and Meridian should consider the strategic implications of this exclusivity provision in any renewal or replacement negotiations.
6. Lakewood Wholesale Distributors
Date of Agreement: October 15, 2019 Remaining Term: Approximately 3 months (expires October 14, 2022) Approximate Annual Revenue: $2,800,000
Nature of Restrictive Clause: Section 8.6 of the Wholesale Distribution Agreement provides that the agreement "shall not be assigned by either party without the prior written consent of the other party, which consent may be withheld in such party's sole discretion." There is no separate change-of-control provision.
Consent Standard: Sole discretion.
Consequences of Assignment Without Consent: An assignment without consent is a material breach entitling the non-breaching party to terminate the agreement upon fifteen (15) days' written notice and to pursue all available remedies at law and in equity.
Revenue at Risk: $2,800,000 annually (approximately 4.1% of FY2021 product line revenue).
Assessment and Recommendation: This contract is approaching expiration (October 14, 2022), and if the transaction does not close before that date, the consent issue becomes moot with respect to the existing agreement. However, the territory exclusivity provisions (covering Ohio, Pennsylvania, and West Virginia) may be relevant to post-closing distribution strategy. We recommend designating this as a "Best Efforts Consent" and, in parallel, beginning discussions with Lakewood regarding a new agreement to be entered into directly by Meridian post-closing.
7. Ironwood Club Stores, LLC
Date of Agreement: December 1, 2020 Remaining Term: Approximately 4 months (expires November 30, 2022) Approximate Annual Revenue: $1,600,000
Nature of Restrictive Clause: Section 10.2 of the Club Store Supply Agreement provides that "neither party may assign, transfer, or sublicense this Agreement or any rights hereunder without the prior written consent of the other party." Section 10.3 contains a change-of-control provision providing that a sale of all or substantially all of the assets of the supplier relating to the products covered by the agreement shall constitute a "Transfer Event" entitling Ironwood to terminate the agreement upon thirty (30) days' written notice.
Consent Standard: The provision does not specify a standard. Under Ohio law, this is generally construed as requiring that consent not be unreasonably withheld.
Consequences of Assignment Without Consent: Assignment without consent is a breach of the agreement, and Ironwood may terminate on thirty (30) days' notice. The change-of-control termination right is separately exercisable.
Revenue at Risk: $1,600,000 annually (approximately 2.4% of FY2021 product line revenue). We note that Ironwood also has private label co-branding rights under the agreement, the treatment of which should be coordinated with the IP diligence workstream.
Assessment and Recommendation: The relatively modest revenue and the short remaining term suggest that this contract should be designated as a "Best Efforts Consent." The private label co-branding provision should be flagged for further analysis in the forthcoming IP due diligence memorandum.
Summary of Revenue at Risk
The aggregate annual revenue attributable to the seven contracts requiring third-party consent is approximately $39,600,000 (based on FY2021 figures). However, it is important to note that the likelihood of all seven counterparties denying consent is assessed as low, particularly given the favorable consent standards applicable to certain of these contracts. The following table summarizes the revenue at risk:
Risk level adjusted downward due to near-term expiration.
Consent Solicitation Process. We recommend that consent solicitation letters be prepared and distributed promptly to each of the seven counterparties. A form of customer contract consent request letter is being developed and was ultimately finalized on October 12, 2022. The consent solicitation process should be coordinated with Briarwood's management and its counsel at Caldwell, Pruitt & Shaw LLP, as Briarwood maintains the primary commercial relationships with these counterparties and its involvement in the consent solicitation process will be critical to a successful outcome.
Interaction with APA Closing Conditions. The first draft APA includes, as a condition to closing in Section 7.2(e), a requirement that "all consents, approvals, and waivers identified on Schedule 7.2(e) as 'Required Consents' shall have been obtained." We recommend that the Veltrano Retail Holdings and GreenTree Grocers contracts be designated as "Required Consents" given the magnitude of revenue at risk, and that the remaining five contracts be designated as "Best Efforts Consents" with the Buyer agreeing to use commercially reasonable efforts to obtain such consents prior to or after closing. The specific designation of each consent should be the subject of negotiation with Seller's counsel.
C. Contracts Not Requiring Consent (16 of 23)
The remaining sixteen (16) of the 23 customer contracts are freely assignable or contain assignment provisions that do not restrict the contemplated transaction. Specifically:
• Freely assignable (11 contracts): Eleven contracts contain no anti-assignment or change-of-control provisions and are freely assignable by their terms. These include the contracts with Broadleaf Marketplace Corp., Pinecrest Organic Market, Inc., Heartland Home & Garden Co., Sycamore Drug Stores, Inc., Cascade Valley Markets, LP, Redwood Health & Wellness Corp., Summit Convenience Stores, Inc., Aspen Valley Natural Foods, Inc., Prairie Sun Markets, LP, Cedarbrook General Stores, Inc., and Foxglove Specialty Retailers, LP.
• Assignment permitted for affiliates/successors (3 contracts): Three contracts contain anti-assignment clauses that are triggered only by mergers or consolidations (not applicable to an asset purchase) or that expressly permit assignment to affiliates or successors in interest. These include the contracts with Timberline Regional Grocers, LLC, Birchwood Pharmacy Chain, Inc., and Willowbrook Natural Products Co. We have confirmed that the proposed asset purchase transaction does not trigger the restrictive provisions in these contracts.
• Assignment permitted with notice (2 contracts): Two contracts — with Magnolia Home Goods, LLC and Elderberry Imports & Exports, Inc. — require only written notice to the counterparty prior to assignment and do not require consent. We recommend that notice letters be prepared and sent in connection with the closing.
We do not identify any material impediment to the assignment of these sixteen contracts. However, we note the following provisions in certain of these contracts that may be affected by the change in ownership and should be brought to Meridian's attention:
• Most-Favored-Nation Pricing. The Broadleaf Marketplace Corp. agreement contains a most-favored-nation pricing clause (Section 6.3) providing that Broadleaf shall receive pricing no less favorable than that offered to any other customer of comparable size and volume. Meridian should evaluate whether its existing pricing structures for comparable products would trigger any MFN adjustment obligations under this clause.
• Exclusivity. The Pinecrest Organic Market, Inc. agreement contains a limited exclusivity provision (Section 5.1) granting Pinecrest the exclusive right to distribute certain PureHaven organic product SKUs within a defined geographic territory (Greater Portland, Oregon metropolitan area). Meridian should confirm that this exclusivity does not conflict with any existing distribution arrangements.
• Minimum Purchase Obligations. The Heartland Home & Garden Co. agreement contains minimum purchase obligations (Section 4.2) requiring Heartland to purchase a minimum of $3,200,000 of CleanLeaf and PureHaven products annually. Briarwood has represented that Heartland has met or exceeded these minimums in each year of the agreement. Meridian should monitor compliance with these obligations post-closing.
D. Revenue Concentration Analysis
As the following table illustrates, the top five customer contracts by annual revenue account for a significant concentration of the total product line revenue:
Notably, four of the top five customer contracts are among the seven requiring third-party consent. The concentration of consent-required contracts among the highest-revenue relationships is a significant risk factor that should be carefully managed in the consent solicitation process.
This revenue concentration is also directly relevant to the earnout component of the purchase price structure. The first draft APA provides for an earnout payment based on the achievement of a Year 1 revenue threshold of $72,000,000 for the CleanLeaf and PureHaven product lines during the twelve-month period following the closing. The loss of any one of the top five customer contracts due to a failure to obtain consent — or due to the exercise of a change-of-control termination right — could reduce annual revenue by as much as $11,200,000, which would almost certainly jeopardize achievement of the $72,000,000 earnout threshold. We recommend that this risk be addressed in the APA through appropriate risk-allocation mechanisms, including indemnification for consent-related revenue losses and a potential adjustment to the earnout threshold in the event that specified consents are not obtained.
The financial due diligence team at Whitfield Ames LLP has independently identified this revenue concentration as a risk factor and has recommended in its preliminary report that Meridian develop a customer diversification strategy for the product lines post-closing.
IV. Supply Agreements
A. Overview
We reviewed six (6) material supply agreements that support the manufacturing and production operations for the CleanLeaf and PureHaven product lines. These agreements cover the procurement of raw chemical materials, packaging components, fragrance and specialty ingredients, and labels/printing for the products manufactured at Briarwood's facility located at 2800 Industrial Parkway, Marysville, OH 43040 (the "Marysville Facility"). The supply chain for the CleanLeaf and PureHaven product lines is well-established, with most supplier relationships spanning three years or more.
The supply agreements reviewed can be categorized as follows:
• Chemical Raw Materials (2 agreements): Agreements covering the supply of surfactants, solvents, cleaning agents, and other chemical raw materials used in the formulation of CleanLeaf cleaning products and PureHaven personal care products.
• Packaging (2 agreements): Agreements covering the supply of bottles, containers, caps, pumps, and other packaging components for both product lines.
• Fragrance and Specialty Ingredients (1 agreement): An agreement covering the supply of proprietary fragrance blends and specialty botanical ingredients used in PureHaven personal care products.
• Labels and Printing (1 agreement): An agreement covering the supply of product labels, shrink-wrap sleeves, and printed packaging materials for both product lines.
A detailed schedule of the material supply agreements is attached hereto as Appendix B.
B. Key Supply Agreements — Detailed Analysis
1. Ashford Chemical Supply Co. — Raw Materials
Counterparty: Ashford Chemical Supply Co. Contract Date: February 1, 2019 Term/Expiration: 5 years, expiring January 31, 2024 Subject Matter: Supply of surfactants, solvents, citric acid, and other chemical raw materials for CleanLeaf products Volume Commitments: Minimum annual purchase obligation of $3,800,000; Briarwood has consistently exceeded this minimum Pricing Terms: Fixed pricing for the first two years; indexed to the ICIS North American Chemical Index for years three through five, with an annual cap on price increases of 5% Exclusivity: Non-exclusive; Briarwood may source from alternative suppliers Assignment/Change-of-Control: Section 15.1 provides that the agreement may be assigned by either party to an "Affiliate or successor in interest" without consent. Assignment to any other party requires prior written consent, not to be unreasonably withheld. There is no change-of-control provision.
Assessment: The assignment to Meridian, as a purchaser of the assets (and therefore arguably a "successor in interest"), may fall within the permitted assignment carve-out. However, the term "successor in interest" is not defined in the agreement, and there is some risk that Ashford could argue that an asset purchaser is not a "successor in interest" within the meaning of this provision. We recommend seeking a brief confirmation from Ashford that the assignment to Meridian is a permitted assignment under Section 15.1, or alternatively obtaining a formal consent to assignment.
2. Pinnacle Polymer Packaging, Inc. — Packaging Components
Counterparty: Pinnacle Polymer Packaging, Inc. Contract Date: September 1, 2020 Term/Expiration: 3 years, expiring August 31, 2023 Subject Matter: Supply of HDPE bottles, PP caps, pumps, and trigger sprayers for CleanLeaf and PureHaven products Volume Commitments: Minimum annual purchase obligation of $2,200,000 Pricing Terms: Fixed pricing, subject to renegotiation upon renewal Exclusivity: Non-exclusive Assignment/Change-of-Control: Section 12.4 provides that the agreement may not be assigned without the prior written consent of the other party. There is no "not unreasonably withheld" qualifier and no change-of-control provision.
Assessment: Consent to assignment will be required. We recommend including this agreement in the consent solicitation process. The absence of a reasonableness qualifier means Pinnacle's consent is effectively at its discretion, though under Ohio law there may be an implied obligation of good faith.
3. Meridian Botanicals, LLC — Fragrance and Specialty Ingredients
Counterparty: Meridian Botanicals, LLC (no relation to the Buyer) Contract Date: April 15, 2020 Term/Expiration: 3 years, expiring April 14, 2023 Subject Matter: Supply of proprietary fragrance blends and specialty botanical extracts (lavender, tea tree, eucalyptus, chamomile) for PureHaven personal care products Volume Commitments: Minimum annual purchase obligation of $900,000 Pricing Terms: Fixed pricing with annual CPI adjustment Exclusivity: Semi-exclusive; Meridian Botanicals has agreed not to supply substantially similar fragrance blends to direct competitors of Briarwood in the Ohio market Assignment/Change-of-Control: Section 11.2 provides that the agreement may be assigned by either party with prior written notice to the other party (no consent required). However, Section 11.3 provides that the semi-exclusivity provision in Section 7.1 shall terminate automatically upon any assignment of the agreement.
Assessment: While consent is not required for assignment, the automatic termination of the semi-exclusivity provision upon assignment is a notable consequence. Meridian should evaluate the strategic importance of the semi-exclusivity arrangement and consider negotiating a new exclusivity arrangement with Meridian Botanicals directly.
4. Great Lakes Label Corporation — Labels and Printing
Counterparty: Great Lakes Label Corporation Contract Date: January 15, 2021 Term/Expiration: 2 years, expiring January 14, 2023 Subject Matter: Product labels, shrink-wrap sleeves, and printed packaging materials Volume Commitments: No minimum purchase obligation; pricing based on volume tiers Pricing Terms: Tiered pricing based on annual order volume Exclusivity: Non-exclusive Assignment/Change-of-Control: Section 8.1 provides that the agreement may be assigned by either party to an affiliate, successor, or acquirer of all or substantially all of the party's assets, upon written notice. No consent is required for such an assignment.
Assessment: No consent is required. Written notice of assignment should be provided to Great Lakes Label Corporation at or prior to closing.
5. Hawthorne Container Solutions, LP — Packaging
Counterparty: Hawthorne Container Solutions, LP Contract Date: March 10, 2021 Term/Expiration: 2 years, expiring March 9, 2023 Subject Matter: Supply of glass bottles and specialty containers for PureHaven premium product line Volume Commitments: Minimum annual purchase obligation of $600,000 Pricing Terms: Fixed pricing Exclusivity: Non-exclusive Assignment/Change-of-Control: Section 9.3 permits assignment by either party upon written notice. No consent required.
Assessment: No consent is required. Written notice should be provided at or prior to closing.
6. Midwest Industrial Chemicals, Inc. — Raw Materials
Counterparty: Midwest Industrial Chemicals, Inc. Contract Date: June 1, 2021 Term/Expiration: 2 years, expiring May 31, 2023 Subject Matter: Supply of sodium lauryl sulfate, glycerin, and other base chemicals for PureHaven personal care products Volume Commitments: Minimum annual purchase obligation of $1,400,000 Pricing Terms: Fixed pricing for year one; indexed to ICIS pricing for year two Exclusivity: Non-exclusive Assignment/Change-of-Control: Section 10.1 permits free assignment by either party. No consent or notice required.
Assessment: No consent or notice is required.
C. Supply Agreement Risks
Based on our review of the six material supply agreements, we have identified the following risk factors that should be brought to Meridian's attention:
Unfavorable Termination Provisions. The Pinnacle Polymer Packaging, Inc. agreement contains a termination-for-convenience provision (Section 13.2) permitting either party to terminate the agreement upon sixty (60) days' written notice. While this provision is reciprocal, it means that Pinnacle could terminate the supply relationship on relatively short notice post-closing. Meridian should evaluate alternative packaging suppliers and consider negotiating a longer notice period or minimum remaining term in connection with the assignment or a replacement agreement.
Contracts Approaching Expiration. Three of the six supply agreements expire within approximately six to nine months of the anticipated closing date. Specifically, the Pinnacle Polymer Packaging agreement (August 31, 2023), the Hawthorne Container Solutions agreement (March 9, 2023), and the Midwest Industrial Chemicals agreement (May 31, 2023) all expire within this period. Meridian should begin renewal discussions with these suppliers promptly following closing, or earlier if feasible through coordination with Briarwood.
Single-Source Supplier Risk. Meridian Botanicals, LLC is the sole supplier of the proprietary fragrance blends used in the PureHaven product line. While the PureHaven formulations could theoretically be produced using alternative fragrance suppliers, the specific blends are proprietary to Meridian Botanicals and would require reformulation and potentially re-testing if an alternative supplier were engaged. This represents a meaningful supply chain concentration risk.
Related-Party Elements. Our review did not identify any supply agreements with entities that are affiliates of Malcolm Greer, the founder and majority shareholder of Briarwood, or with any entity in which Mr. Greer holds a direct or indirect ownership interest. However, we note that the due diligence request list (Item 26) requested disclosure of all related-party transactions, and Briarwood's management response stated that "all related-party transactions are disclosed in the Company's financial statements." We recommend that this representation be confirmed in the APA disclosure schedules and that independent verification be undertaken as part of the financial diligence workstream.
V. Co-Manufacturing and Toll Manufacturing Agreements
Our review identified one (1) co-manufacturing agreement related to the CleanLeaf and PureHaven product lines:
Counterparty: Oakridge Manufacturing Solutions, Inc. Contract Date: October 1, 2020 Term/Expiration: 3 years, expiring September 30, 2023 Subject Matter: Co-manufacturing agreement under which Oakridge manufactures certain CleanLeaf cleaning product SKUs (specifically, the CleanLeaf All-Purpose Spray and CleanLeaf Glass Cleaner in the 32 oz. format) at its facility in Findlay, Ohio. Briarwood supplies the formulations and proprietary ingredients; Oakridge provides manufacturing capacity, labor, and certain commodity raw materials. Volume: Approximately 2.4 million units per year; approximately $4,100,000 in annual cost of goods associated with Oakridge-manufactured products.
Assignment and Consent Requirements. Section 14.1 of the Co-Manufacturing Agreement provides that the agreement "shall not be assigned by either party without the prior written consent of the other party, which consent shall not be unreasonably withheld, conditioned, or delayed." This agreement should be added to the list of contracts requiring consent solicitation. Given the "not unreasonably withheld" standard, we assess the consent risk as moderate to low.
Quality Standards and Liability Allocation. Section 6 of the agreement sets forth detailed quality standards and specifications for the manufactured products, including raw material testing, in-process quality control, finished goods testing, and compliance with all applicable FDA regulations (for products regulated as cosmetics) and EPA regulations (for products registered as pesticides under FIFRA, if applicable). The agreement provides for product liability allocation as follows: (i) Oakridge is responsible for defects arising from manufacturing errors, contamination during the manufacturing process, and failure to comply with the agreed specifications; and (ii) Briarwood is responsible for defects arising from the formulations, ingredient specifications, and product design. This liability allocation framework is standard for co-manufacturing arrangements and should transfer to Meridian upon assignment. Meridian should review the adequacy of Oakridge's product liability insurance coverage, which is currently required to be maintained at a minimum of $5,000,000 per occurrence under Section 8.3 of the agreement.
Interaction with Transition Services. Briarwood and Meridian are expected to enter into a Transition Services Agreement (the "TSA") to facilitate the post-closing transition of the acquired product lines. To the extent that Oakridge co-manufactures products using Briarwood's facility, equipment, or personnel for any purpose, the transition arrangements should be coordinated with the Oakridge agreement. Based on our review, the Oakridge co-manufacturing arrangement is self-contained at Oakridge's Findlay facility and does not depend on the Marysville Facility or Briarwood personnel, which should simplify the transition.
We did not identify any toll manufacturing agreements under which Briarwood manufactures products on behalf of third parties using the CleanLeaf or PureHaven formulations or brands. Briarwood's management has confirmed in its response to the due diligence request list that no such arrangements exist with respect to the acquired product lines.
VI. Distribution and Logistics Agreements
Our review identified three (3) distribution and logistics agreements related to the CleanLeaf and PureHaven product lines:
1. Keystone Freight Services, Inc. — Third-Party Logistics
Counterparty: Keystone Freight Services, Inc. Contract Date: July 1, 2019 Term/Expiration: 3 years, auto-renewed July 1, 2022 for an additional 2-year term (expiring June 30, 2024) Subject Matter: Third-party logistics services, including outbound freight management, carrier procurement, and shipment tracking for CleanLeaf and PureHaven products shipped from the West Jefferson distribution center and the Marysville Facility. Annual Contract Value: Approximately $2,600,000 in freight management fees and carrier costs. Assignment: Section 11.1 permits assignment by either party to a successor or affiliate upon written notice. No consent required.
Assessment: No consent is required. Written notice of assignment should be provided at or prior to closing.
2. Cardinal Warehousing, LLC — Overflow Warehousing
Counterparty: Cardinal Warehousing, LLC Contract Date: November 15, 2021 Term/Expiration: 1 year, auto-renewing (60-day opt-out), currently in initial term through November 14, 2022 Subject Matter: Overflow warehousing services for finished goods inventory at Cardinal's facility in Springfield, Ohio, utilized during peak seasonal periods (primarily Q4). Annual Contract Value: Approximately $380,000. Assignment: Section 7.2 permits free assignment without consent or notice.
Assessment: No consent is required. The short term and auto-renewal provision provide flexibility.
3. Riverfront Cold Chain Solutions, Inc. — Temperature-Controlled Storage
Counterparty: Riverfront Cold Chain Solutions, Inc. Contract Date: March 1, 2022 Term/Expiration: 2 years, expiring February 28, 2024 Subject Matter: Temperature-controlled storage for certain PureHaven products containing temperature-sensitive botanical ingredients. Storage is provided at Riverfront's facility in Columbus, Ohio. Annual Contract Value: Approximately $210,000. Assignment: Section 9.1 provides that the agreement may not be assigned without the prior written consent of the other party. No reasonableness qualifier.
Assessment: Consent will be required. We recommend including this agreement in the consent solicitation process. The relatively modest contract value suggests that this should be designated as a "Best Efforts Consent."
West Jefferson Distribution Center. The West Jefferson distribution center (500 Commerce Boulevard, West Jefferson, OH 43162) is owned by Briarwood and is included in the Acquired Assets as part of the real property being conveyed. The facility serves as the primary distribution hub for the CleanLeaf and PureHaven product lines. The Keystone Freight Services agreement and a portion of the Cardinal Warehousing arrangement are operationally linked to the West Jefferson facility. The real property aspects of the West Jefferson facility, including any title matters, environmental conditions, and property-level agreements, will be addressed in the forthcoming Real Property & Leases memorandum.
VII. Licensing Agreements
Our review identified two (2) licensing agreements related to the CleanLeaf and PureHaven brands:
1. Inbound License — GreenGuard Certification Mark License
Licensor: GreenGuard Environmental Institute Licensee: Briarwood Home Essentials, Inc. Contract Date: May 1, 2020 Term/Expiration: 3 years, expiring April 30, 2023 Subject Matter: License to use the GreenGuard Certified mark on qualifying CleanLeaf cleaning products that meet the GreenGuard standard for low chemical emissions and environmental safety. Currently applied to seven (7) CleanLeaf SKUs. License Fee: Annual fee of $35,000, plus per-unit royalty of $0.02 per unit sold bearing the mark. Assignment: Section 8.2 provides that the license may not be assigned without the prior written consent of the licensor, which consent shall not be unreasonably withheld, provided that the assignee meets all applicable GreenGuard certification requirements.
Assessment: Consent is required but is subject to a "not unreasonably withheld" standard conditioned on the assignee meeting certification requirements. We recommend that Meridian apply for GreenGuard certification in its own name and seek consent to the license assignment concurrently. This matter should be coordinated with the IP due diligence workstream.
2. Outbound License — PureHaven Brand License to Cedarpoint Spa Group
Licensor: Briarwood Home Essentials, Inc. Licensee: Cedarpoint Spa Group, LLC Contract Date: August 15, 2021 Term/Expiration: 2 years, expiring August 14, 2023 Subject Matter: Limited, non-exclusive license to Cedarpoint Spa Group to use the PureHaven brand name and trade dress on a co-branded line of spa products sold exclusively through Cedarpoint's network of day spas and resort properties. License Fee: Royalty of 4% of net revenues from co-branded product sales (approximately $120,000 in FY2021). Assignment: Section 12.1 provides that the license agreement "is personal to the parties and may not be assigned or transferred without the prior written consent of both parties."
Assessment: Consent from Cedarpoint Spa Group will be required. The "personal to the parties" language reinforces the non-assignability of this agreement without consent. We recommend consent solicitation and note that the relatively modest royalty revenue ($120,000) may influence the prioritization of this consent relative to the customer contract consents. This agreement should be cross-referenced with the forthcoming IP due diligence memorandum (dated August 18, 2022, to be prepared by Naomi Petersen) regarding trademarks, trade dress, and formulation IP for the PureHaven brand. The continued viability of this outbound license depends on the successful assignment of the underlying PureHaven trademark and trade dress registrations to Meridian.
We did not identify any licensing agreements that are personal to Malcolm Greer individually, as opposed to Briarwood as an entity. Briarwood's management has represented that all intellectual property related to the CleanLeaf and PureHaven brands is owned by Briarwood at the corporate level and that Mr. Greer does not hold any personal IP rights that would be relevant to the acquired product lines. This representation should be confirmed in the APA disclosure schedules.
VIII. Other Material Contracts
In addition to the customer contracts, supply agreements, co-manufacturing agreement, distribution and logistics agreements, and licensing agreements analyzed above, our review identified the following additional contracts in the data room that are material to the CleanLeaf and PureHaven product lines:
A. Marketing and Advertising Agreements
Counterparty: Whitaker-Quinn Advertising Agency, LLC Contract Date: January 1, 2022 Term/Expiration: 1 year, auto-renewing (90-day opt-out), through December 31, 2022 Subject Matter: Retained agency for brand advertising, digital marketing, social media management, and promotional campaign development for both the CleanLeaf and PureHaven brands. Annual Contract Value: Approximately $1,200,000 in agency fees and media buying. Assignment: Section 6.4 permits free assignment with 30 days' prior written notice.
Assessment: No consent required. Meridian should evaluate whether to continue the relationship with Whitaker-Quinn post-closing or transition to its own in-house marketing capabilities or preferred agency. Notice of assignment should be provided at or prior to closing.
B. Technology and Software Licenses
Counterparty: Apex Manufacturing Systems, Inc. Contract Date: March 15, 2020 Term/Expiration: 3 years, expiring March 14, 2023 Subject Matter: License for Apex's proprietary manufacturing execution system (MES) software used at the Marysville Facility for production scheduling, batch tracking, quality management, and regulatory compliance documentation. Annual License Fee: $185,000 Assignment: Section 14.2 permits assignment to a successor in interest or acquirer of the business operations. Written notice required within 30 days of assignment.
Assessment: No consent is required. This software license is material to ongoing manufacturing operations at the Marysville Facility and should be assigned promptly. We recommend that Meridian confirm that the Apex software is compatible with its existing IT infrastructure and that any integration or data migration requirements are addressed in the transition planning.
Counterparty: LogiTrack Solutions, Inc. Contract Date: September 1, 2021 Term/Expiration: 2 years, expiring August 31, 2023 Subject Matter: Warehouse management system (WMS) software license for the West Jefferson distribution center. Annual License Fee: $95,000 Assignment: Section 10.1 permits assignment upon written notice.
Assessment: No consent required. Written notice should be provided at or prior to closing.
C. Equipment Leases
Counterparty: National Equipment Leasing Corp. Contract Date: October 1, 2020 Term/Expiration: 5 years, expiring September 30, 2025 Subject Matter: Lease of two high-speed bottling and filling lines installed at the Marysville Facility, used for CleanLeaf liquid cleaning products. Annual Lease Payment: $420,000 Assignment: Section 8.3 provides that the lease may not be assigned without the prior written consent of the lessor, which consent shall not be unreasonably withheld.
Assessment: Consent to assignment is required, subject to a "not unreasonably withheld" standard. This equipment lease is operationally critical to the Marysville manufacturing operations. We recommend including this in the consent solicitation process. The residual value and buyout option at the end of the lease term should be reviewed as part of the asset valuation.
D. Insurance Contracts
Briarwood maintains various insurance policies covering the acquired product lines, including general liability, product liability, property insurance for the Marysville Facility and West Jefferson distribution center, workers' compensation, and umbrella/excess liability coverage. The insurance contracts are being reviewed as a separate diligence workstream and will be addressed in a standalone insurance diligence memorandum. For purposes of this memorandum, we note that insurance policies are typically not assignable and that Meridian will need to obtain its own insurance coverage for the acquired assets and operations effective as of the closing date.
E. Categorization of Other Material Contracts
Based on our review, we recommend the following categorization of the contracts discussed in this Section VIII:
We note that the Whitaker-Quinn advertising agreement services both the CleanLeaf/PureHaven product lines and, to a lesser extent, Briarwood's Commercial Janitorial Services Division. Briarwood's management has estimated that approximately 85% of the Whitaker-Quinn contract value is attributable to the consumer product lines. The treatment of this shared contract is discussed further in Section X below.