PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT This memorandum was prepared by Calderwood & Harkness LLP at the direction of, and for the exclusive use of, its client Meridian Consumer Brands LLC and the other named recipients. This memorandum contains attorney-client privileged communications and attorney work product. Any disclosure, copying, distribution, or use of the contents of this memorandum by any person other than the named recipients without the prior written consent of Calderwood & Harkness LLP is strictly prohibited. If you have received this memorandum in error, please notify Calderwood & Harkness LLP immediately.
MEMORANDUM
TO:
Gareth Holloway, Chief Executive Officer & Managing Member, Meridian Consumer Brands LLC
Priya Anand, Chief Financial Officer, Meridian Consumer Brands LLC
Diana Ressler, General Counsel, Meridian Consumer Brands LLC
Thomas Liang, Managing Partner, Lakepoint Capital Partners, LP
FROM:
Andrew Fitzpatrick, Lead Associate, Calderwood & Harkness LLP
Reviewed by Sandra Tung, Responsible Partner, Calderwood & Harkness LLP
DATE: October 3, 2022
RE: Consolidated Due Diligence Summary — Proposed Acquisition by Meridian Consumer Brands LLC of CleanLeaf and PureHaven Product Lines from Briarwood Home Essentials, Inc.
Matter No.: 1011-00005
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I. Executive Summary
The purpose of this memorandum is to consolidate and synthesize the findings from all due diligence workstreams conducted in connection with Meridian Consumer Brands LLC's ("Meridian" or the "Buyer") proposed acquisition of the consumer product lines known as CleanLeaf (home cleaning) and PureHaven (personal care) (collectively, the "Product Lines" or the "Acquired Business") from Briarwood Home Essentials, Inc. ("Briarwood" or the "Seller"), an Ohio corporation headquartered at 1175 Creekside Drive, Suite 400, Columbus, OH 43215. The proposed transaction is structured as an asset purchase for an aggregate purchase price of $95,000,000 (the "Transaction").
Transaction Structure. The Transaction is structured as an asset purchase comprising $87,000,000 in cash payable at closing, plus an $8,000,000 contingent earnout payment tied to the Acquired Business achieving Year 1 revenue meeting or exceeding $72,000,000. The parties have agreed to a $9,500,000 escrow holdback (representing 10% of the aggregate purchase price), to be held for a period of twenty-four (24) months by Atlantic Fiduciary Trust Company as escrow agent, to secure the Seller's indemnification obligations under the Asset Purchase Agreement (the "APA"). Based on FY2021 EBITDA of $11,200,000, the Transaction implies an enterprise value-to-EBITDA multiple of approximately 8.48x.
Due Diligence Process. Due diligence was formally opened on June 14, 2022. Briarwood and its counsel, Caldwell, Pruitt & Shaw LLP (lead partner Rachel Underwood; associate David Soo), have made materials available through a virtual data room hosted on the Pemberton Systems platform under project code BHE-CleanLeaf-2022. The diligence process has been conducted by a multi-disciplinary team of advisors, including:
• Legal Diligence: Calderwood & Harkness LLP (Sandra Tung, responsible partner; Andrew Fitzpatrick, lead associate; Naomi Petersen, associate; Oliver Mackenzie, associate)
• Financial and Accounting Diligence: Whitfield Ames LLP (Susan Clearwater, engagement partner)
• Environmental Diligence: Terrapoint Environmental Group, Inc. (Keith Novak, project manager)
• Financial Advisory: Wavecrest Partners LLC (Steven Marchetti and Lena Kowalski)
The Seller's independent auditor is Hargrove & Linton, P.C. (Daniel Yee, engagement partner), and the Seller has engaged Greystone Hobbs & Co. (Philip Tran) as its financial advisor.
Summary of Key Risk Areas. As described in detail throughout this memorandum and summarized in the Risk Matrix at Section XIV, the diligence process has identified several areas of concern that require resolution prior to signing and closing:
1. Inventory Valuation Variance ($2,500,000). Whitfield Ames LLP's preliminary net realizable value analysis indicates that the Seller's book value of inventory ($14,300,000) exceeds estimated net realizable value ($11,800,000) by approximately $2,500,000. This is the most significant financial diligence finding and a primary area of negotiation between the parties.
2. Recognized Environmental Condition — Marysville Manufacturing Facility. The Phase I Environmental Site Assessment identified a recognized environmental condition ("REC") involving potential soil contamination at the Marysville manufacturing facility. A Phase II Environmental Site Assessment has not been commenced.
3. Unresolved Landlord Consent — Marysville Lease. The assignment of the Marysville manufacturing facility lease requires the prior written consent of the landlord, Buckeye Industrial Properties LLC. A consent request was sent on October 7, 2022, but no response has been received as of the date of this memorandum.
4. Customer Contract Assignment Consents. Seven (7) of the twenty-three (23) customer contracts to be assigned to Meridian contain change-of-control or assignment consent provisions requiring third-party consent prior to closing.
5. Regulatory Filing Gap — State Product Registrations. Calderwood & Harkness has identified that certain state product registration filings for CleanLeaf cleaning products are incomplete or lapsed in multiple states.
This memorandum should be read in conjunction with the underlying detailed diligence memoranda and reports listed in Section XVI and the comprehensive Risk Matrix set forth in Section XIV.
II. Transaction Overview
A. Parties
Buyer. Meridian Consumer Brands LLC is a Delaware limited liability company headquartered at 440 Park Avenue South, 18th Floor, New York, NY 10016. Meridian's registered agent is Ashgrove Services Inc., located at 28 Liberty Street, New York, NY 10005. Its employer identification number is 83-2947106. Meridian owns and operates five consumer brands across the household cleaning, laundry, and personal care product categories, with combined annual revenues of approximately $620,000,000. Meridian was formed in 2017 as an acquisition vehicle and has completed three prior bolt-on acquisitions since its formation.
PE Sponsor. Meridian is a portfolio company of Lakepoint Capital Partners, LP ("Lakepoint"), a Delaware limited partnership with offices at 200 Clarendon Street, Suite 3200, Boston, MA 02116 (EIN: 04-3821567). Thomas Liang serves as Managing Partner of Lakepoint. Lakepoint's involvement in the Transaction is principally through its equity commitment and its oversight of Meridian's acquisition strategy and integration planning.
Seller. Briarwood Home Essentials, Inc. is an Ohio corporation (EIN: 31-1684239) founded in 2004. Malcolm Greer serves as President and is the sole shareholder and sole director of the corporation. Janet Tsao serves as Vice President of Operations. Briarwood currently operates two distinct business divisions: (i) the Consumer Product Lines division (encompassing the CleanLeaf and PureHaven brands that are the subject of this Transaction) and (ii) the Commercial Janitorial Services Division, which Briarwood will retain following the closing.
Seller's Advisors. Briarwood is represented by Caldwell, Pruitt & Shaw LLP (Rachel Underwood, lead partner; David Soo, associate) as legal counsel. Briarwood's financial advisor is Greystone Hobbs & Co. (Philip Tran). Briarwood's independent auditor is Hargrove & Linton, P.C. (Daniel Yee, engagement partner).
B. Acquired Assets
The Transaction contemplates the acquisition of substantially all of the assets used in or relating to the CleanLeaf and PureHaven consumer product lines, including without limitation:
• Product Lines. The CleanLeaf home cleaning product line and the PureHaven personal care product line, comprising approximately 142 active stock-keeping units ("SKUs") across both brands.
• Manufacturing Facility. The manufacturing facility located at 2800 Industrial Parkway, Marysville, OH 43040, which is leased by Briarwood from Buckeye Industrial Properties LLC. The lease will be assigned to Meridian at closing, subject to obtaining the landlord's prior written consent (as discussed in Section V.A below).
• Distribution Center. The warehouse and distribution center located at 500 Commerce Boulevard, West Jefferson, OH 43162, which is owned by Briarwood in fee simple and will be conveyed to Meridian as part of the Acquired Assets.
• Inventory. All inventory associated with the Product Lines, carried at a book value of $14,300,000 as of the June 30, 2022 reference date (subject to the valuation variance discussed in Section X.D below).
• Accounts Receivable. All accounts receivable associated with the Product Lines, totaling $9,700,000 as of the June 30, 2022 reference date.
• Customer Contracts. Twenty-three (23) customer contracts with major national and regional retailers, to be assigned to Meridian at closing.
• intellectual Property. All trademarks, service marks, trade dress, domain names, trade secrets, proprietary product formulations, and other intellectual property rights associated with the CleanLeaf and PureHaven brands.
• Employees. One hundred eighty-six (186) employees currently engaged in the operation of the Product Lines, who will receive offer letters from Meridian. Because the Transaction is structured as an asset purchase, there is no automatic transfer of employment; each employee must accept a new offer of employment from Meridian.
C. Excluded Assets
The following assets of Briarwood are expressly excluded from the Transaction:
• Briarwood's Commercial Janitorial Services Division (the "Retained Business"), including all assets, contracts, employees, liabilities, and operations related thereto.
• Briarwood's corporate headquarters lease at 1175 Creekside Drive, Suite 400, Columbus, OH 43215.
• All cash and cash equivalents of Briarwood.
• All tax refunds and tax credits attributable to pre-closing periods.
D. Assumed Liabilities
Meridian will assume at closing certain specified liabilities related to the Acquired Business, including:
• Trade Payables. Trade payables related to the Product Lines, estimated at $4,200,000 as of June 30, 2022.
• Warranty Obligations. Accrued product warranty obligations in the amount of $620,000.
• Post-Closing Contractual Obligations. All post-closing obligations arising under the assigned customer contracts, supply agreements, and the Marysville facility lease.
All other liabilities of Briarwood, including pre-closing tax liabilities, litigation liabilities, environmental liabilities arising from pre-closing conditions (subject to the APA's indemnification provisions), and liabilities of the Retained Business, are retained by Briarwood.
E. Purchase Price and Key Commercial Terms
The aggregate purchase price for the Transaction is $95,000,000, structured as follows:
• Cash at Closing: $87,000,000, payable in immediately available funds at closing, less the escrow holdback amount described below.
• Earnout Payment: $8,000,000, contingent upon the Acquired Business achieving Year 1 product line revenue meeting or exceeding $72,000,000 following closing.
• Escrow Holdback: $9,500,000 (representing 10% of the aggregate purchase price), to be deposited at closing into an escrow account maintained by Atlantic Fiduciary Trust Company (Gregory Fenn, officer) and held for twenty-four (24) months to secure the Seller's indemnification obligations.
The key indemnification provisions, as reflected in the current draft of the APA (subject to ongoing negotiation), include:
• Indemnification Cap: $33,250,000, representing 35% of the aggregate purchase price. (Note: Briarwood has proposed a reduced cap of 20% of the purchase price, or $19,000,000. This remains an open negotiation point.)
• Indemnification Basket (Tipping): $950,000, representing 1% of the aggregate purchase price. Once the aggregate amount of indemnifiable losses exceeds the basket threshold, the Seller is liable for all losses from the first dollar (tipping basket structure), not merely the excess over the basket amount.
• Survival Period: General representations and warranties survive for twenty-four (24) months following closing. Fundamental representations (including organization, authority, title to assets, and tax matters) survive indefinitely. (Note: Briarwood has proposed an eighteen (18) month survival period for general representations. This remains an open negotiation point.)
• Governing Law: The APA is governed by the laws of the State of New York, without regard to conflict of laws principles.
F. Financing
The Transaction will be financed through a combination of debt and equity:
Debt Financing. Harborview National Bank, N.A. has issued a commitment letter dated August 5, 2022, committing to provide a $60,000,000 senior secured term loan to Meridian. Key terms of the debt commitment include:
• Interest Rate: Secured Overnight Financing Rate (SOFR) plus 375 basis points.
• Commitment Fee: 50 basis points per annum on the undrawn commitment amount.
• Ticking Fee: 25 basis points per annum, commencing November 3, 2022 (ninety (90) days following the date of the commitment letter).
• Syndicate Participant: Pinnacle Credit Partners, LP (Rajan Mehta), which will participate in the term loan facility.
• Commitment Expiration: The commitment letter expires on February 5, 2023 (six (6) months following the date of issuance). If the Transaction has not closed by that date, the commitment will lapse, and Meridian will need to seek an extension or alternative financing.
Equity Financing. Meridian and Lakepoint Capital Partners have executed an equity commitment letter dated August 12, 2022, pursuant to which Lakepoint has committed to contribute $35,000,000 in equity capital to Meridian for the purpose of funding the Transaction.
G. Key Dates and Timeline
The following summarizes the key dates and milestones in the Transaction to date:
III. Corporate and Organizational Diligence
This section summarizes the findings of the corporate and organizational diligence workstream, which is the subject of a detailed memorandum dated July 8, 2022, prepared by Naomi Petersen and reviewed by Andrew Fitzpatrick.
Entity Status and Good Standing. Briarwood Home Essentials, Inc. is an Ohio corporation in good standing with the Ohio Secretary of State. Calderwood & Harkness obtained and reviewed a certificate of good standing issued by the Ohio Secretary of State confirming Briarwood's active status and good standing.
Capitalization and Ownership. Malcolm Greer is the sole shareholder, President, and sole director of Briarwood. There are no other equity holders, no outstanding options, warrants, convertible notes, or other securities convertible into or exercisable for equity interests in Briarwood. The capitalization structure is clean and straightforward.
Authority to Transact. Because Mr. Greer is the sole shareholder and sole director, he has full authority to approve and consummate the Transaction without the need for any additional shareholder votes, board resolutions, or third-party consents at the corporate level. We reviewed resolutions adopted by Mr. Greer in his capacity as sole director authorizing the execution and delivery of the APA and the consummation of the Transaction, and we are satisfied that such resolutions, when adopted, will be sufficient to authorize the Transaction.
Corporate Officers. In addition to Mr. Greer (President), Janet Tsao serves as Vice President of Operations. No other officers have been identified.
Subsidiaries and Affiliates. Briarwood does not have any subsidiaries, and it has no interests in any joint ventures or partnerships. The Seller operates solely through a single corporate entity.
Organizational Documents Reviewed. Calderwood & Harkness reviewed the following organizational documents provided in the data room:
• Articles of Incorporation (as filed with the Ohio Secretary of State)
• Code of Regulations (the Ohio equivalent of corporate bylaws)
• Shareholder resolutions and written consents
• Officer appointment records
The organizational documents are consistent with a closely held, single-shareholder Ohio corporation and do not contain any unusual restrictions on the transfer or sale of assets.
Divisional Structure. Briarwood operates two distinct divisions: (i) the Consumer Product Lines division (CleanLeaf and PureHaven), which constitutes the Acquired Business, and (ii) the Commercial Janitorial Services Division, which Briarwood will retain. The two divisions share certain corporate overhead functions (e.g., accounting, human resources, and IT), and appropriate transition services arrangements will need to be addressed in the APA or a related transition services agreement.
Finding. No material corporate or organizational issues have been identified. The Seller has clean capitalization and clear authority to sell the Acquired Assets. This workstream does not present any impediment to the Transaction.
IV. Material Contracts Diligence
This section summarizes the findings of the material contracts diligence workstream, which is the subject of a detailed memorandum dated July 29, 2022, prepared by Naomi Petersen and Andrew Fitzpatrick.
Customer Contracts. Briarwood is party to twenty-three (23) customer contracts with major national and regional retailers for the sale and distribution of CleanLeaf and PureHaven products. These contracts constitute a material portion of the revenue base of the Acquired Business and are essential to the continued operation of the Product Lines following closing.
Calderwood & Harkness reviewed each of the twenty-three customer contracts for assignment provisions, change-of-control clauses, termination rights, pricing provisions, volume commitments, exclusivity arrangements, and other material terms. The review identified the following:
• Assignment Consent Requirements. Seven (7) of the twenty-three (23) customer contracts contain change-of-control or assignment consent provisions that require the prior written consent of the contract counterparty before the contract may be assigned to Meridian. These provisions vary in form — some require consent of the counterparty (which may not be unreasonably withheld), while others grant the counterparty broader discretion to withhold consent or include anti-assignment provisions that could trigger termination rights in the counterparty upon an unconsented assignment.
• Consent Request Status. A form consent request letter has been prepared (dated October 12, 2022) for distribution to the seven counterparties requiring consent. However, as of the date of this memorandum, these letters have not yet been sent. Briarwood has indicated that it prefers to coordinate the timing and approach of customer outreach to minimize disruption to ongoing commercial relationships, and Calderwood & Harkness agrees that a coordinated approach is advisable.
• Volume Commitments and Pricing Protections. Several customer contracts include volume commitment obligations and pricing protections (including most-favored-nation pricing clauses and annual price adjustment mechanisms) that may be affected by the change in ownership. Meridian should evaluate the financial implications of these provisions in the context of its post-closing operational plans.
Supply Agreements. Calderwood & Harkness reviewed the material supply agreements related to the Product Lines, including agreements for the procurement of raw materials, packaging, and chemical inputs used in the manufacture of CleanLeaf and PureHaven products. No material adverse terms were identified. The supply agreements are generally on standard commercial terms, with pricing subject to periodic renegotiation.
Other Material Contracts. We also reviewed co-manufacturing agreements, logistics and transportation agreements, and distribution agreements related to the Product Lines. No material issues were identified in these contracts that would impede the Transaction. Certain of these agreements contain standard assignment provisions that will need to be addressed in the ordinary course.
Key Risk. The failure to obtain the seven (7) required assignment consents prior to or at closing presents a meaningful risk to the Transaction. If consent is refused or delayed by any of the seven counterparties, Meridian may be unable to step into the rights and obligations of the applicable customer contract, potentially triggering a counterparty's termination right and resulting in the loss of a customer relationship. Given that these seven contracts collectively represent a significant portion of the Product Lines' revenue, the inability to assign these contracts could have a material adverse effect on the Acquired Business.
Recommendation. We recommend that Meridian and Briarwood coordinate to commence outreach to the seven customer counterparties as promptly as practicable. In the event that consent is refused or materially delayed for any contract, the parties should consider alternative arrangements, including subcontracting, novation, or other contractual mechanisms that would allow Meridian to receive the economic benefit of the contract without a formal assignment. The APA should also include appropriate representations and covenants from Briarwood regarding the assignment of customer contracts, as well as a defined process for obtaining required consents between signing and closing.
V. Real Property and Leases Diligence
This section summarizes the findings of the real property and leases diligence workstream, which is the subject of a detailed memorandum dated August 15, 2022, prepared by Naomi Petersen.
A. Marysville Manufacturing Facility
Location. 2800 Industrial Parkway, Marysville, OH 43040.
Ownership and Lease Structure. The Marysville manufacturing facility is leased by Briarwood from Buckeye Industrial Properties LLC, an Ohio limited liability company with its principal office at 77 East Nationwide Boulevard, Suite 200, Columbus, OH 43215. The facility serves as the primary manufacturing location for the CleanLeaf and PureHaven product lines and is therefore critical to the ongoing operations of the Acquired Business.
Lease Terms. Calderwood & Harkness reviewed the executed lease agreement (including all amendments and supplements) between Briarwood and Buckeye Industrial Properties LLC. Key terms include the remaining lease term, base rent and escalation provisions, renewal options, maintenance and capital expenditure obligations, permitted use restrictions, insurance requirements, and assignment and subletting restrictions. The lease is generally on commercially reasonable terms, and the facility appears adequate for the current scale of operations.
Assignment Consent Requirement. The lease contains a provision requiring the prior written consent of the landlord for any assignment, sublease, or transfer of the leasehold interest. This consent requirement is triggered by the proposed assignment of the lease to Meridian in connection with the Transaction. The lease does not include a "reasonableness" standard qualifying the landlord's right to withhold consent; accordingly, Buckeye Industrial Properties LLC may exercise its discretion in determining whether to grant or withhold consent.
Consent Request Status. A formal consent request letter was sent to Buckeye Industrial Properties LLC on October 7, 2022, by Calderwood & Harkness LLP (transmitted by Andrew Fitzpatrick). As of the date of this memorandum, no response has been received from the landlord.
Key Risk. The unresolved landlord consent is a significant closing risk. The assignment of the Marysville lease is a closing condition under the current draft of the APA, and the inability to obtain consent could jeopardize the Transaction or require Meridian to identify and secure alternative manufacturing arrangements — a process that would be both costly and time-consuming, with the potential to delay closing and disrupt production. Furthermore, any attempt to occupy and operate the Marysville facility without landlord consent could expose Meridian to lease default claims and potential eviction.
Recommendation. We recommend that Meridian follow up with Buckeye Industrial Properties LLC promptly, and that Briarwood and its counsel at Caldwell, Pruitt & Shaw LLP be engaged to facilitate the landlord relationship, as Briarwood has an existing and presumably constructive relationship with the landlord arising from its years of tenancy. In parallel, Meridian should begin evaluating alternative manufacturing facility options as a contingency, including the potential for contract manufacturing arrangements with third-party manufacturers. The APA should include a pre-closing covenant requiring Briarwood to use commercially reasonable (or best) efforts to obtain the landlord's consent prior to closing.
B. West Jefferson Distribution Center
Location. 500 Commerce Boulevard, West Jefferson, OH 43162.
Ownership. The West Jefferson distribution center is owned by Briarwood in fee simple and is included in the Acquired Assets. At closing, Briarwood will convey title to the facility to Meridian by general warranty deed.
Title Review. A preliminary title review has been conducted. No material title defects, liens, encumbrances, or adverse claims have been identified in the preliminary review. A full title commitment and title insurance policy should be obtained prior to closing to confirm clear and marketable title.
Zoning. The property's current zoning designation appears consistent with its use as a warehousing and distribution facility. No zoning variances or conditional use permits appear to be required for the continued operation of the facility in its current capacity.
Environmental. As discussed in Section VIII.B below, the Phase I Environmental Site Assessment for the West Jefferson facility identified no recognized environmental conditions and only de minimis findings relating to standard commercial operations.
Finding. No material concerns have been identified with respect to the West Jefferson distribution center. This property is suitable for inclusion in the Acquired Assets, and the conveyance should proceed on standard terms.
VI. Intellectual Property Diligence
This section summarizes the findings of the intellectual property diligence workstream, which is the subject of a detailed memorandum dated August 18, 2022, prepared by Naomi Petersen.
CleanLeaf Brand. The CleanLeaf brand is protected by federal trademark registrations with the United States Patent and Trademark Office ("USPTO"), covering the primary brand name, logo, and tagline for use in connection with household cleaning products. Trade dress protections are in place for the distinctive product packaging and labeling of the CleanLeaf product line. Briarwood also owns several domain names related to the CleanLeaf brand (including cleanleafhome.com and related variations), all of which are included in the Acquired Assets.
PureHaven Brand. The PureHaven brand is protected by a combination of federal trademark registrations with the USPTO and state trademark registrations in key markets. Trade dress protections are in place for PureHaven product packaging and labeling. Several domain names related to the PureHaven brand are also included in the Acquired Assets.
SKU Coverage. The intellectual property portfolio covers the full range of approximately 142 active SKUs sold under the CleanLeaf and PureHaven brand names.
Trade Secrets and Formulations. The diligence review identified proprietary product formulations and trade secrets used in the manufacture of CleanLeaf and PureHaven products. Calderwood & Harkness reviewed the measures taken by Briarwood to protect these trade secrets, including non-disclosure agreements executed by employees and vendors with access to formulation data, physical and electronic access controls at the Marysville manufacturing facility, and restricted access protocols within Briarwood's internal systems. These protections appear generally adequate, although Meridian should evaluate whether additional safeguards may be warranted following the transition.
Encumbrances and Liens. No material intellectual property encumbrances, liens, or security interests were identified. The intellectual property associated with the Product Lines appears to be owned by Briarwood free and clear of any third-party claims.
Third-Party Infringement. No third-party infringement claims, oppositions, or cancellation proceedings are currently pending against any of the CleanLeaf or PureHaven trademarks or trade dress. No cease-and-desist letters or similar correspondence have been identified in the data room materials.
Finding of Note — Incomplete Trademark Renewal Filings. The diligence review identified that certain PureHaven trademark registrations have incomplete or overdue renewal filings. Several registrations are approaching their renewal deadlines, and if these filings are not completed in a timely manner, the registrations could lapse, potentially exposing the PureHaven brand to loss of registered trademark protection in certain jurisdictions. While common law trademark rights may survive in the event of a lapse, the loss of federal registration would diminish the scope and enforceability of Meridian's trademark rights post-closing.
IP Assignment Agreement. A draft IP Assignment Agreement has been prepared as an exhibit to the APA. This agreement will effectuate the transfer of all trademarks, service marks, trade dress, domain names, formulation trade secrets, and other intellectual property rights from Briarwood to Meridian at closing. The IP Assignment Agreement is in substantially final form, subject to completion of the intellectual property schedules in the disclosure schedules (which remain outstanding, as discussed in Section XII).
Recommendation. We strongly recommend that all pending trademark renewal filings for the PureHaven and CleanLeaf marks be completed prior to or promptly following closing to preserve the full scope of registered trademark protection. This should be included as either a pre-closing covenant of the Seller (requiring Briarwood to complete all renewal filings prior to closing) or as a closing deliverable. Meridian's intellectual property counsel should also conduct a comprehensive post-closing audit of the entire trademark portfolio to confirm the status and scope of all registrations.
VII. Employment and Benefits Diligence
This section summarizes the findings of the employment and benefits diligence workstream, which is the subject of a detailed memorandum dated August 25, 2022, prepared by Naomi Petersen.
Transferring Employees. One hundred eighty-six (186) employees currently engaged in the operation of the CleanLeaf and PureHaven product lines are expected to transfer to Meridian in connection with the Transaction. Because the Transaction is structured as an asset purchase rather than a stock acquisition or merger, there is no automatic transfer of employment relationships. Each of the 186 employees must receive and accept a new offer of employment from Meridian. Offer letters will need to be prepared and distributed to all transferring employees in advance of or contemporaneously with the closing.
Employee Categories. The 186 transferring employees are distributed across the following functional categories:
• Manufacturing (Marysville facility)
• Warehousing and Distribution (West Jefferson facility)
• Sales
• Marketing
• Research and Development
• Administrative and Support
Employee Benefit Plans. Calderwood & Harkness reviewed Briarwood's employee benefit plans applicable to employees of the Acquired Business. Key findings include:
• 401(k) Plan. Briarwood maintains a 401(k) retirement savings plan for its employees. This plan cannot be assumed by Meridian, as it is a Briarwood-sponsored plan that covers employees across both the Acquired Business and the Retained Business. Transferring employees will need to roll over their 401(k) account balances into a new Meridian-sponsored plan or individual retirement accounts, or take taxable distributions. Meridian's benefits team should coordinate the establishment of a new 401(k) plan (or the onboarding of transferring employees into Meridian's existing plan) well in advance of closing to minimize any gap in retirement plan participation.
• Health, Dental, and Vision Plans. Briarwood provides group health, dental, and vision insurance coverage to its employees. Transition planning will be required to ensure continuity of coverage for transferring employees. Meridian should coordinate with its insurance carriers to arrange coverage effective as of the closing date, and appropriate COBRA notices should be issued to any employees who decline Meridian's offer of employment.
• Other Welfare Benefits. Life insurance, disability insurance, and other welfare benefit plans were reviewed. No material compliance issues were identified, and standard transition procedures should be sufficient to manage the changeover.
Collective Bargaining and Union Representation. None of the 186 transferring employees are covered by a collective bargaining agreement. There is no union representation at either the Marysville or West Jefferson facility, and no union organizing activity has been reported.
WARN Act Analysis. The Worker Adjustment and Retraining Notification Act ("WARN Act") and its Ohio state-law equivalent were analyzed in the context of the Transaction. The WARN Act requires sixty (60) days' advance notice of plant closings or mass layoffs affecting fifty (50) or more employees at a single site. The current transaction plan contemplates the continuation of all 186 positions, with each transferring employee receiving an offer of employment from Meridian on substantially comparable terms. Accordingly, the WARN Act should not be triggered absent changes to the current plan. However, if Meridian's post-closing integration plans involve any workforce reductions or facility consolidations, the WARN Act implications should be reassessed at that time.
Ohio Employment Law Considerations. All transferring employees are employed on an at-will basis under Ohio law. Calderwood & Harkness reviewed the enforceability of non-compete, non-solicitation, and confidentiality covenants under Ohio law and confirmed that such covenants are generally enforceable in Ohio, subject to reasonableness requirements as to scope, duration, and geographic limitation. Wage and hour compliance was also reviewed, and no material issues were identified.
Key Personnel — Janet Tsao. Janet Tsao, Vice President of Operations, has an employment agreement with Briarwood that includes non-compete provisions. Because Ms. Tsao plays a critical role in the day-to-day operations of the Product Lines, her continued employment post-closing is important to the success of the Transaction. The non-compete provisions in her existing agreement will need to be reviewed to determine whether they could restrict her ability to work for Meridian post-closing, and appropriate amendments, waivers, or new employment arrangements should be negotiated. Malcolm Greer does not have a separate employment agreement with respect to the Consumer Product Lines division.
Finding. No material employment or benefits issues have been identified that would impede the closing of the Transaction. However, significant administrative effort will be required for the preparation and distribution of offer letters, the transition of employee benefit plans, and the integration of transferring employees into Meridian's human resources systems. Meridian's human resources and benefits teams should begin planning for these activities well in advance of the anticipated closing date to ensure a smooth transition and minimize employee attrition.
VIII. Environmental Diligence
This section summarizes the findings of the environmental diligence workstream, which is the subject of a detailed memorandum dated September 8, 2022, prepared by Andrew Fitzpatrick. The environmental diligence was conducted by Terrapoint Environmental Group, Inc. (Keith Novak, project manager), which completed Phase I Environmental Site Assessments for both the Marysville manufacturing facility and the West Jefferson distribution center.
A. Marysville Manufacturing Facility
Phase I ESA. Terrapoint Environmental Group, Inc. completed a Phase I Environmental Site Assessment of the Marysville manufacturing facility on September 2, 2022 (Report No. TEG-2022-0441). The Phase I ESA was conducted in accordance with ASTM Standard E1527-21, Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process.
Recognized Environmental Condition. The Phase I ESA identified a recognized environmental condition ("REC") at the Marysville facility. Specifically, the assessment identified potential soil contamination in the area adjacent to the manufacturing building, possibly related to historical chemical storage and waste handling practices at the facility. The REC is based on the following observations and findings:
• Evidence of former above-ground chemical storage in the area adjacent to the southern wall of the manufacturing building, including staining on concrete surfaces and soil discoloration.
• Historical aerial photography and Trelwick maps indicating that the area may have been used for waste handling and temporary chemical storage prior to Briarwood's tenancy.
• Interviews with facility personnel indicating that cleaning chemical concentrates and solvents were historically stored in the area in question, and that minor spills occurred on at least two occasions within the past decade.
Phase II Recommendation. Based on the identification of the REC, Terrapoint has recommended that a Phase II Environmental Site Assessment be conducted to evaluate the nature and extent of potential contamination. The Phase II investigation would involve subsurface soil sampling, groundwater monitoring well installation, and laboratory analysis of soil and groundwater samples to determine whether contamination is present and, if so, to characterize the type and concentration of contaminants.
Phase II Status. As of the date of this memorandum, the Phase II Environmental Site Assessment has not been commenced. No scope of work has been approved, and no field investigation has been scheduled.
Key Risk. The unknown scope of potential contamination at the Marysville facility presents a significant risk to the Transaction. If contamination is confirmed through the Phase II investigation, remediation costs could be material — potentially ranging from modest costs for limited soil removal to substantial costs for extensive soil and groundwater remediation, depending on the nature and extent of contamination. The environmental liability allocation provisions of the APA must clearly address responsibility for pre-closing contamination, and the current draft of the APA includes an environmental indemnity provision, but the scope of that provision has not been finalized.
Furthermore, the environmental diligence gap is expected to be a significant concern for Sentinel Specialty Insurance Company (the proposed representations and warranties insurance carrier, with Mark Ellison serving as underwriter). Northbridge Risk Advisors LLC (Alison Chu), the insurance broker engaged by Meridian, has flagged that completion of the Phase II ESA may be a precondition to Sentinel's willingness to bind coverage under the proposed R&W insurance policy. In the absence of Phase II results, Sentinel may exclude or significantly limit environmental coverage, reducing the overall protection available to Meridian under the R&W policy.
B. West Jefferson Distribution Center
Phase I ESA. Terrapoint Environmental Group, Inc. also completed a Phase I Environmental Site Assessment of the West Jefferson distribution center. The Phase I ESA identified no recognized environmental conditions at the facility. Only de minimis findings were noted, consisting of controlled recognized environmental conditions relating to standard commercial operations (e.g., routine storage and use of cleaning products and minor quantities of petroleum products for equipment maintenance). These findings do not require further investigation and do not present a material risk.
Finding. No material environmental concerns have been identified with respect to the West Jefferson distribution center.
C. Recommendation
We strongly recommend that Meridian commission Terrapoint Environmental Group, Inc. (Keith Novak, project manager) to conduct a Phase II Environmental Site Assessment at the Marysville manufacturing facility as soon as practicable. The Phase II results are critical to three aspects of the Transaction:
(a) Understanding the nature and potential cost of any remediation liability associated with the Marysville facility;
(b) Finalizing the environmental indemnification provisions of the APA, including the allocation of responsibility for pre-closing contamination, the establishment of any environmental escrow or reserve, and the scope of any environmental representations and warranties; and
(c) Securing representations and warranties insurance coverage from Sentinel Specialty Insurance Company. Without Phase II completion, the R&W insurance underwriting process may be delayed, and the resulting policy may contain significant environmental exclusions that reduce its value to Meridian.
In addition, Meridian should consider whether to seek a separate environmental indemnification provision from Briarwood in the APA, distinct from the general indemnity, with a separate cap and survival period tailored to the environmental risk profile. Alternatively, Meridian may wish to explore the availability of standalone environmental insurance to supplement the R&W policy.
IX. Litigation and Regulatory Diligence
This section summarizes the findings of the litigation and regulatory diligence workstream, which is the subject of a detailed memorandum dated September 12, 2022, prepared by Naomi Petersen.
A. Pending and Threatened Litigation
No Material Pending Litigation. Calderwood & Harkness conducted a comprehensive review of all pending litigation involving Briarwood and the Product Lines. As of the date of this memorandum, there is no material pending litigation against Briarwood relating to the CleanLeaf or PureHaven product lines. Briarwood is not a defendant in any lawsuit or arbitration proceeding that could reasonably be expected to have a material adverse effect on the Acquired Business.
Product Liability Claims History. The product liability claims history for the CleanLeaf and PureHaven product lines was reviewed in detail. Briarwood has experienced a small number of minor product liability claims in the ordinary course of business, consistent with industry norms for consumer cleaning and personal care products. All such claims have been resolved (through settlement or dismissal) or are covered by Briarwood's product liability insurance, and no pattern or systemic issues have been identified that would suggest a recurring defect or safety concern.
No Material Threatened Litigation. Calderwood & Harkness reviewed all correspondence, demand letters, and other materials in the data room relating to threatened litigation. No material threatened litigation has been identified. Briarwood's representations in the disclosure schedules (to the extent delivered) do not disclose any threatened claims that would be material to the Acquired Business.
B. Regulatory Compliance
HSR Act. Calderwood & Harkness analyzed the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act") filing requirements applicable to the Transaction. Based on the Transaction value and the size-of-person test applicable as of the date of this analysis (2022 thresholds), an HSR Act filing is not required. Specifically, Briarwood does not meet the size-of-person threshold that would trigger a mandatory pre-merger notification filing, and the Transaction value falls below the applicable reporting threshold when tested against the Seller's size. Accordingly, no HSR Act filing obligation applies to this Transaction, and no waiting period must be observed.
Regulatory Filing Gap — State Product Registrations. Calderwood & Harkness identified a significant regulatory compliance issue during the course of diligence. Certain state product registration filings for CleanLeaf cleaning products are incomplete or have lapsed in multiple states. A number of states require manufacturers and distributors of cleaning products — particularly those containing certain chemical formulations, including antimicrobial agents, surfactants, and volatile organic compounds — to register their products with the relevant state regulatory agency (typically the state department of agriculture, environmental protection agency, or consumer protection division) prior to sale or distribution within the state.
Our review indicates that Briarwood has failed to maintain current product registrations in several such states, either because initial registrations were never completed for certain SKUs or because renewal filings were not timely submitted. The specific states affected and the precise scope of the lapsed or incomplete registrations have not been fully determined, because Briarwood's disclosure schedules (first draft delivered September 28, 2022) were partial and did not address this issue comprehensively.
Key Risk. The regulatory filing gap exposes Meridian to several potential post-closing risks:
• Enforcement Actions. State regulatory agencies could initiate enforcement actions, including cease-and-desist orders, fines, and penalties, against Meridian for the sale or distribution of unregistered products in the affected states.
• Distribution Interruptions. If registrations cannot be brought current promptly, Meridian may be required to cease distribution of certain CleanLeaf products in the affected states until the registrations are remedied, resulting in revenue loss.
• Earnout Impact. Any distribution interruptions in the affected states could reduce the Acquired Business's Year 1 revenue, potentially causing the revenue to fall below the $72,000,000 threshold required to trigger the $8,000,000 earnout payment. This issue should be factored into the earnout calculation methodology in the APA.
Recommendation. We recommend that Meridian request a complete inventory of all state product registrations from Briarwood and its counsel, covering each CleanLeaf and PureHaven SKU currently sold or distributed in each state. This inventory should identify the current registration status, the applicable state regulatory body, the registration expiration date, and any pending or overdue renewal filings. Once the scope of the regulatory filing gap is fully understood, Meridian can assess the cost and timeline to cure all lapsed or incomplete registrations. We further recommend that the APA include a pre-closing covenant requiring Briarwood to bring all state product registrations current before closing, or alternatively, that the parties negotiate a post-closing adjustment mechanism or escrow to cover the costs of remediation.
C. Product Regulatory (General)
EPA and State Environmental Agency Registrations. Certain CleanLeaf cleaning product formulations are subject to registration requirements under the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA") and analogous state statutes, particularly for products making antimicrobial or disinfectant claims. Calderwood & Harkness reviewed the EPA and state environmental agency registrations on file and found that, apart from the state-level filing gap discussed above, the registrations appear to be generally compliant with applicable federal requirements.
FDA Regulatory Review (PureHaven). The PureHaven personal care product line was evaluated under the FDA regulatory framework applicable to cosmetics. PureHaven products appear to be classified as "cosmetics" under the Federal Food, Drug, and Cosmetic Act, which means they are not subject to pre-market approval by the FDA. No material FDA compliance issues were identified. Briarwood has not received any FDA warning letters, consent orders, or enforcement actions related to the PureHaven product line.
No Outstanding Enforcement Actions. No outstanding warning letters, consent orders, enforcement actions, or similar regulatory proceedings from any federal, state, or local regulatory agency have been identified with respect to either the CleanLeaf or PureHaven product lines, apart from the state product registration gap discussed above.
X. Financial Diligence Summary and Inventory Valuation Dispute
This section summarizes the key findings of the financial and accounting diligence workstream, which has been conducted by Whitfield Ames LLP (Susan Clearwater, engagement partner). The preliminary financial diligence memorandum is expected to be delivered on October 14, 2022. The findings referenced in this section are based on advance communications with Susan Clearwater and the review of preliminary work papers provided by Whitfield Ames.
The Seller's audited financial statements were prepared by Hargrove & Linton, P.C. (Daniel Yee, engagement partner).
A. Revenue and EBITDA
• FY2021 Product Line Revenue: $68,000,000 (per the Seller's audited financial statements)
• FY2021 Product Line EBITDA: $11,200,000 (per the Seller's audited financial statements)
• Implied EV/EBITDA Multiple: Approximately 8.48x ($95,000,000 ÷ $11,200,000)
Whitfield Ames is currently completing its quality of earnings analysis, which involves adjustments for non-recurring items, related-party transactions, and normalization of overhead allocations between the Acquired Business and the Retained Business. Preliminary results are generally supportive of the reported EBITDA of $11,200,000, subject to the inventory valuation issue discussed below. No material quality of earnings adjustments have been identified to date beyond the inventory concern, though the final report is pending.