PRIVILEGED AND CONFIDENTIAL

PRIVILEGED AND CONFIDENTIAL
PRELIMINARY UNDERWRITING SUBMISSION
REPRESENTATIONS AND WARRANTIES INSURANCE
Proposed Acquisition of CleanLeaf and PureHaven Product Lines from Briarwood Home Essentials, Inc. by Meridian Consumer Brands LLC
Prepared by:
Calderwood & Harkness LLP 599 Lexington Avenue, 36th Floor New York, NY 10022
Submitted to:
Northbridge Risk Advisors LLC
Attention: Alison Chu
1 World Financial Center, Suite 2500 New York, NY 10281
For Submission to:
Sentinel Specialty Insurance Company Underwriter: Mark Ellison 500 West Monroe Street, Suite 3300 Chicago, IL 60661
Date: October 1, 2022
Matter No.: 1011-00005
This document has been prepared at the direction of buyer's counsel and is subject to attorney-client privilege and work product protections. This submission is subject to review and approval by the insured. Submission of this document does not constitute a waiver of any applicable privilege.
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I. COVER LETTER / TRANSMITTAL SUMMARY
October 1, 2022
Alison Chu Northbridge Risk Advisors LLC 1 World Financial Center, Suite 2500 New York, NY 10281
Re: Preliminary Underwriting Submission — Representations and Warranties Insurance Proposed Acquisition of CleanLeaf and PureHaven Product Lines from Briarwood Home Essentials, Inc. by Meridian Consumer Brands LLC Calderwood & Harkness LLP Matter No.: 1011-00005
Dear Alison:
Calderwood & Harkness LLP represents Meridian Consumer Brands LLC (the "Buyer") in connection with the proposed asset purchase of the "CleanLeaf" and "PureHaven" consumer product lines from Briarwood Home Essentials, Inc. (the "Seller"). We are pleased to submit this preliminary underwriting package for the purpose of obtaining preliminary indications from the representations and warranties insurance market for a buy-side representations and warranties insurance policy in connection with the proposed transaction.
We respectfully request that Northbridge Risk Advisors LLC submit this preliminary underwriting package to Sentinel Specialty Insurance Company (attention: Mark Ellison) and to any additional insurance carriers that Northbridge deems appropriate to canvass in order to obtain competitive indications for the proposed coverage.
The enclosed submission sets forth the principal terms of the proposed transaction, an overview of the due diligence process conducted to date, a description of the indemnification structure under the draft Asset Purchase Agreement (the "APA"), known issues and risk items that we believe are relevant to the underwriting process, and a summary of the key representations and warranties contained in the APA. We have endeavored to present a comprehensive and candid summary of the transaction and diligence status as of the date hereof; however, we note that the APA remains subject to ongoing negotiation and that certain diligence workstreams are not yet complete. We will supplement this submission as material developments occur.
All diligence materials referenced herein, including the second draft of the APA (circulated September 15, 2022), partial disclosure schedules (first draft, September 28, 2022), and underlying diligence memoranda, are available for review via the Pemberton Systems virtual data room established for this transaction under Project Code: BHE-CleanLeaf-2022. We will arrange data room access for the underwriter promptly upon request.
We and the Meridian deal team are available for an underwriter call at the underwriter's convenience and welcome any questions that the underwriting team may have regarding the transaction, the diligence process, or the information set forth herein.
Please do not hesitate to contact any of the individuals listed below with questions or to coordinate next steps.
Primary Contacts at Calderwood & Harkness LLP:
We look forward to receiving preliminary indications from the market and to working with Northbridge and the selected carrier to finalize coverage terms in coordination with the execution of the APA.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Sandra Tung Partner
Enclosures: Preliminary Underwriting Submission (Sections II–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 (EIN: 83-2947106). The Buyer's management team includes Gareth Holloway, Chief Executive Officer and Managing Member; Priya Anand, Chief Financial Officer; and Diana Ressler, General Counsel.
Meridian is a portfolio company of Lakepoint Capital Partners, LP, a Delaware limited partnership (EIN: 04-3821567), with offices at 200 Clarendon Street, Suite 3200, Boston, MA 02116. The Managing Partner of Lakepoint Capital Partners is Thomas Liang. Meridian was formed in 2017 as an acquisition vehicle within the Lakepoint portfolio and has since been established as a branded consumer products platform. The company currently owns and operates five consumer brands spanning the household cleaning, laundry, and personal care segments, with combined annual revenues of approximately $620 million. Since its formation, Meridian has completed three prior bolt-on acquisitions, each structured as an asset purchase, and has maintained a successful track record of integrating acquired product lines into its existing distribution and operational infrastructure.
Seller:
Briarwood Home Essentials, Inc. is an Ohio corporation headquartered at 1175 Creekside Drive, Suite 400, Columbus, OH 43215 (EIN: 31-1684239). The company is privately held; Malcolm Greer serves as President and is the sole shareholder of the corporation. Janet Tsao serves as Vice President of Operations.
Briarwood was founded in 2004 and manufactures and distributes eco-friendly home cleaning products and personal care items. The company operates two primary consumer-facing product lines—"CleanLeaf" (home cleaning) and "PureHaven" (personal care)—as well as a Commercial Janitorial Services Division (the "Retained Business"), which will not be part of the proposed transaction. Briarwood's products are distributed through a combination of national retail chains, regional grocery and pharmacy chains, and direct-to-consumer e-commerce channels.
Seller's Advisors:
Legal Counsel: Caldwell, Pruitt & Shaw LLP, 41 South High Street, Suite 2800, Columbus, OH 43215 (Lead Partner: Rachel Underwood; Associate: David Soo).
Auditor: Hargrove & Linton, P.C., 250 Civic Center Drive, Suite 700, Columbus, OH 43215 (Engagement Partner: Daniel Yee). Hargrove & Linton has served as Briarwood's independent auditor since 2012 and has issued unqualified opinions on Briarwood's annual financial statements for each of the past five fiscal years.
Financial Advisor: Greystone Hobbs & Co., 127 East Ashbury Asset Advisors, Suite 900, Columbus, OH 43215 (Managing Director: Philip Tran). Greystone Hobbs was retained by Briarwood to advise on the sale process and has been responsible for coordinating the Seller's management of the data room and response to diligence inquiries.
B. Transaction Structure
The proposed transaction is structured as an asset purchase. Pursuant to the draft APA, the Buyer will acquire the consumer product lines operated under the "CleanLeaf" and "PureHaven" brand names, together with certain related assets described in Section II.C below. The Seller will retain its Commercial Janitorial Services Division (the Retained Business), its corporate headquarters lease, cash and cash equivalents, and tax refunds attributable to pre-closing periods. The Seller will continue to operate the Retained Business following the closing as a going concern.
The first draft of the Asset Purchase Agreement was circulated on July 19, 2022. The Seller's markup was received on August 22, 2022. A second draft of the APA, reflecting the Buyer's responses to the Seller's markup, was circulated on September 15, 2022. Negotiations are ongoing, and several material terms remain open as of the date of this submission, as described in greater detail below.
The APA is governed by the laws of the State of New York, without regard to conflict-of-laws principles.
C. Acquired Assets
The Acquired Assets under the draft APA include the following:
(a) Brand Assets. The "CleanLeaf" brand name, trademarks, trade dress, and associated intellectual property used in the home cleaning product line, and the "PureHaven" brand name, trademarks, trade dress, and associated intellectual property used in the personal care product line.
(b) Product Portfolio. Approximately 142 active stock-keeping units ("SKUs") across both product lines, including all related formulations, packaging designs, product specifications, and marketing materials.
(c) Manufacturing Facility. The leasehold interest in the manufacturing facility located at 2800 Industrial Parkway, Marysville, OH 43040, which is leased from Buckeye Industrial Properties LLC. Assignment of the lease is subject to landlord consent, which was formally requested on October 7, 2022. As of the date of this submission, no response has been received from the landlord. This item is discussed further in Section VII.C below.
(d) Warehouse and Distribution Center. The fee simple interest in the warehouse and distribution center located at 500 Commerce Boulevard, West Jefferson, OH 43162, which is owned by Briarwood and will be conveyed to the Buyer as part of the Acquired Assets.
(e) Inventory. All inventory of finished goods, work-in-process, and raw materials related to the CleanLeaf and PureHaven product lines. The inventory is carried on Briarwood's books at a value of $14,300,000 as of June 30, 2022. The Buyer's financial diligence advisor, Whitfield Ames LLP, has assessed the net realizable value of the inventory at $11,800,000 as of the same date, reflecting a variance of approximately $2,500,000. This variance is currently the subject of a dispute between the Buyer and the Seller, as discussed in Section VII.A below.
(f) Accounts Receivable. Trade accounts receivable related to the CleanLeaf and PureHaven product lines, totaling approximately $9,700,000 as of June 30, 2022.
(g) Customer Contracts. Twenty-three (23) customer contracts with major retail accounts, to be assigned to the Buyer at closing. Seven (7) of the twenty-three (23) contracts contain change-of-control or assignment consent provisions that will require the prior written consent of the applicable counterparty. This item is discussed in Section VII.D below.
(h) Employees. One hundred eighty-six (186) employees are expected to transfer in connection with the transaction. The Buyer will be required to issue offer letters to the transferring employees; the APA does not contemplate an automatic transfer of employment.
(i) intellectual Property. All trademarks, service marks, trade dress, domain names, formulation trade secrets, know-how, and related intellectual property associated with the CleanLeaf and PureHaven product lines, as further described in the intellectual property diligence memorandum dated August 18, 2022.
D. Excluded Assets
The following assets are expressly excluded from the transaction and will be retained by the Seller:
(a) The Commercial Janitorial Services Division, including all contracts, assets, employees, and liabilities associated with that division (the "Retained Business").
(b) The corporate headquarters lease at 1175 Creekside Drive, Suite 400, Columbus, OH 43215.
(c) All cash and cash equivalents of Briarwood Home Essentials, Inc. as of the closing date.
(d) All tax refunds attributable to pre-closing periods.
E. Assumed Liabilities
Under the draft APA, the Buyer will assume the following liabilities in connection with the acquisition of the product lines:
(a) Trade Payables. Trade payables related to the CleanLeaf and PureHaven product lines, estimated at approximately $4,200,000 as of June 30, 2022.
(b) Accrued Product Warranty Obligations. Accrued product warranty obligations in an estimated amount of $620,000 as of June 30, 2022.
(c) Post-Closing Contractual Obligations. All obligations arising under assigned contracts to the extent such obligations arise after the closing date.
All other liabilities of Briarwood, including liabilities related to the Retained Business, pre-closing tax obligations, and any liabilities arising from Briarwood's operations prior to the closing, will be retained by the Seller.
F. Purchase Price and Economics
The principal economic terms of the proposed transaction are as follows:
Total Purchase Price: $95,000,000
Cash at Closing: $87,000,000 (representing the total purchase price of $95,000,000 less the $8,000,000 earnout holdback described below)
Earnout Component: $8,000,000 of the total purchase price is subject to a post-closing earnout. The earnout payment will be payable to the Seller if the acquired product lines achieve combined revenue of at least $72,000,000 during the first twelve (12) months following the closing (the "Year 1 Revenue Milestone"). The earnout calculation methodology remains subject to negotiation between the parties. Additional details regarding the earnout structure are set forth in Section VII.G below.
Implied Valuation Multiple: The total purchase price of $95,000,000 implies an enterprise value-to-EBITDA multiple of approximately 8.48x, based on the product lines' fiscal year 2021 EBITDA of $11,200,000 on revenue of $68,000,000, as reflected in Briarwood's audited financial statements prepared by Hargrove & Linton, P.C.
III. TRANSACTION FINANCING
The proposed acquisition will be financed through a combination of senior secured debt and equity contributions from the Buyer's sponsor, as summarized below.
Debt Financing:
The Buyer has obtained a commitment for a $60,000,000 senior secured term loan facility from Harborview National Bank, N.A. (One Harborview Plaza, Charlotte, NC 28202; Relationship Manager: Carolyn Dubois). The commitment letter was executed on August 5, 2022 and is subject to customary conditions precedent, including the absence of a material adverse effect, the accuracy of representations and warranties, the execution of definitive loan documents, and the satisfaction of conditions specified in the APA.
The principal terms of the debt financing commitment are as follows:
•  Facility Amount: $60,000,000 senior secured term loan
•  Interest Rate: SOFR + 375 basis points
•  Commitment Fee: 50 basis points per annum on undrawn amounts
•  Ticking Fee: 25 basis points per annum, commencing 90 days after the commitment date (i.e., November 3, 2022)
•  Commitment Expiration Date: February 5, 2023
•  Syndicate Participant: Pinnacle Credit Partners, LP, 600 Lexington Avenue, Suite 2100, New York, NY 10022 (Contact: Rajan Mehta). Pinnacle Credit Partners has agreed to participate in a portion of the term loan facility, subject to the terms of a syndication agreement with Harborview National Bank.
The ticking fee provision is noteworthy in the context of transaction timing. Assuming the commitment date of August 5, 2022, the ticking fee commences on November 3, 2022, creating incremental cost pressure if closing is delayed beyond that date. The commitment letter expires on February 5, 2023, which establishes the outer boundary for the Buyer's debt financing availability.
Equity Financing:
The equity component of the acquisition financing will be provided by Meridian Consumer Brands LLC and its sponsor, Lakepoint Capital Partners, LP. An equity commitment letter in the amount of $35,000,000 was executed by Lakepoint Capital Partners on August 12, 2022. The equity commitment is subject to customary conditions, including the satisfaction of conditions precedent under the APA and the concurrent funding of the debt financing described above.
Buyer's Financial Advisor:
Wavecrest Partners LLC is serving as the Buyer's financial advisor in connection with the proposed transaction. Wavecrest's offices are located at 375 Hudson Street, 12th Floor, New York, NY 10014. The engagement is led by Steven Marchetti, Managing Director, and Lena Kowalski, Vice President.
IV. INDEMNIFICATION STRUCTURE UNDER THE APA
The following summarizes the indemnification structure as set forth in the second draft of the APA (circulated September 15, 2022). We note that several indemnification-related provisions remain the subject of ongoing negotiations between the Buyer and the Seller, and the final agreed-upon terms may differ from those described below. We will promptly update the underwriter as negotiations are concluded on these points.
A. Indemnification Cap
The Seller's aggregate indemnification obligation under the APA for breaches of representations and warranties is capped at 35% of the total purchase price, which equals $33,250,000.
The Seller has proposed in its August 22, 2022 markup of the APA that the indemnification cap be reduced to 20% of the total purchase price ($19,000,000). The Buyer has maintained its position at 35% in the second draft APA circulated on September 15, 2022. This remains an open negotiation item. The parties' respective positions on the indemnification cap may have implications for the sizing of the proposed R&W insurance coverage and the level of retention, and we will advise the underwriter promptly once this item is resolved.
B. Indemnification Basket / Deductible
The APA provides for a tipping basket equal to 1% of the total purchase price, or $950,000. The tipping basket operates such that the Seller has no indemnification obligation for breaches of representations and warranties unless and until the aggregate amount of qualifying losses exceeds the $950,000 threshold, at which point the Seller is liable for the full amount of losses from the first dollar (i.e., including the amount within the basket).
This structure is consistent with market conventions for transactions of this size and type. Neither the Buyer nor the Seller has proposed any modification to the basket structure in the course of negotiations to date.
C. Survival Period
The survival periods for the Seller's representations and warranties under the second draft of the APA are as follows:
General Representations and Warranties: 24 months from the date of closing.
Fundamental Representations: Survive indefinitely. Fundamental representations include the Seller's representations regarding organization and good standing, authority and enforceability, title to the Acquired Assets and absence of encumbrances, and tax matters.
The Seller proposed in its August 22, 2022 markup that the survival period for general representations and warranties be shortened from 24 months to 18 months. The Buyer is maintaining its position at 24 months in the second draft APA, and this remains an open negotiation item. The ultimate resolution of the survival period will have a direct bearing on the duration of the proposed R&W insurance policy period.
D. Escrow Arrangement
The APA provides for an escrow holdback of $9,500,000, representing 10% of the total purchase price, to be held for a period of 24 months following the closing date as security for the Seller's indemnification obligations. The escrow funds will be available to satisfy indemnification claims by the Buyer for breaches of the Seller's representations and warranties, subject to the basket and cap described above.
The escrow agent is Atlantic Fiduciary Trust Company, located at 100 Federal Street, Suite 1500, Boston, MA 02110 (Officer: Gregory Fenn). A draft escrow agreement was circulated on September 15, 2022 and is currently subject to review by all parties and the escrow agent. The escrow agreement provides for customary release mechanics, including a full release of the remaining escrow balance (net of any pending claims) at the end of the 24-month escrow period.
The escrow holdback amount is relevant to the structuring of the R&W insurance policy retention, as discussed in Section V.B below.
V. PROPOSED R&W INSURANCE COVERAGE
A. Policy Type
The Buyer is seeking a buy-side representations and warranties insurance policy to provide coverage for losses arising from breaches of the Seller's representations and warranties in the APA. The policy is intended to supplement, and not replace, the Seller's indemnification obligations under the APA. The Buyer views the R&W insurance policy as an important component of the transaction structure, both as a means of enhancing the Buyer's recovery options in the event of a breach and as a tool for facilitating the negotiation of the indemnification cap and survival period with the Seller.
B. Proposed Coverage Amount
The Buyer anticipates seeking a coverage amount of up to $33,250,000, corresponding to the indemnification cap under the second draft of the APA (35% of the total purchase price). As noted in Section IV.A above, the indemnification cap remains subject to negotiation, and the final coverage amount may need to be adjusted accordingly.
The Buyer anticipates that the policy retention will be set at an amount equal to the escrow holdback of $9,500,000, or as otherwise negotiated with the underwriter. The retention structure is intended to ensure that the R&W policy attaches above the escrow, such that the Buyer will first seek recovery from the escrow and will then have access to the R&W policy for losses in excess of the retention amount, up to the policy limit.
The policy period is expected to correspond with the 24-month general survival period for representations and warranties under the APA, with a possible extended reporting period for claims arising from breaches of fundamental representations (which survive indefinitely under the APA). The Buyer would welcome the underwriter's input on structuring the policy period to align with the fundamental representation survival provisions.
C. Named Insured
The proposed named insured is Meridian Consumer Brands LLC. The Buyer anticipates requesting the following entities be included as additional insureds under the policy:
(a) Lakepoint Capital Partners, LP — as the equity sponsor of the Buyer.
(b) Harborview National Bank, N.A. — as the senior secured lender under the term loan facility. Harborview's inclusion as an additional insured is expected to be a condition of the debt financing commitment and is customary in leveraged acquisition transactions.
D. Anticipated Exclusions
Specific policy exclusions will be subject to the underwriter's review and diligence. Based on market convention and the circumstances of this transaction, the Buyer anticipates that the following categories of exclusions may be proposed by the underwriter:
(a) Known matters disclosed in the disclosure schedules delivered in connection with the APA, to the extent constituting matters of which the Buyer had actual knowledge at the time of binding.
(b) Forward-looking statements, projections, estimates, and other statements that do not constitute representations of historical or current fact.
(c) Purchase price adjustments, including any adjustment arising from the inventory valuation dispute described in Section VII.A or the earnout structure described in Section VII.G.
(d) Environmental matters, to the extent not adequately covered by the environmental representations in the APA and the underlying diligence, and particularly with respect to the incomplete Phase II investigation at the Marysville facility described in Section VII.B.
(e) Covenant breaches and other obligations arising under the APA that are not representations and warranties of the Seller.
The Buyer will work with the underwriter and Northbridge to negotiate the scope of any exclusions and to minimize the impact of carve-outs on the breadth of coverage. We note in particular that the treatment of environmental matters will be a priority area for discussion, given the status of the Phase II investigation.
VI. SUMMARY OF DUE DILIGENCE CONDUCTED
A. Due Diligence Process Overview
Formal due diligence commenced on June 14, 2022, when the Buyer was granted access to the Pemberton Systems virtual data room established by the Seller's financial advisor, Greystone Hobbs & Co., under Project Code: BHE-CleanLeaf-2022. A comprehensive due diligence request list was transmitted by Calderwood & Harkness LLP to the Seller's counsel, Caldwell, Pruitt & Shaw LLP, on the same date. The Seller and its advisors have been generally responsive to diligence requests, although certain categories of documents have been produced on a rolling basis and some requested items remain outstanding as of the date of this submission.
The Buyer has engaged the following advisors to conduct due diligence in their respective areas of expertise:
Legal Due Diligence: Calderwood & Harkness LLP (this firm), responsible for all legal diligence workstreams, including corporate and organizational, material contracts, real property, intellectual property, employment, litigation, and regulatory matters.
Financial Due Diligence: Whitfield Ames LLP, 1290 Avenue of the Americas, 20th Floor, New York, NY 10104 (Engagement Partner: Susan Clearwater). Whitfield Ames has been engaged to conduct quality of earnings analysis, assess the accuracy of historical financial statements, and evaluate inventory valuation, accounts receivable collectibility, and other financial matters.
Environmental Due Diligence: Terrapoint Environmental Group, Inc., 33 Arch Street, Suite 1400, Boston, MA 02110 (Project Manager: Keith Novak). Terrapoint was engaged to conduct Phase I Environmental Site Assessments of the Acquired Assets and to evaluate environmental compliance.
A consolidated due diligence summary memorandum and risk matrix was prepared by Calderwood & Harkness LLP and circulated to the Meridian deal team on October 3, 2022. The following subsections summarize the key findings and conclusions from each diligence workstream.
B. Corporate & Organizational
Calderwood & Harkness LLP reviewed Briarwood's corporate formation and organizational documents, including its Articles of Incorporation, bylaws, and shareholder records. Briarwood Home Essentials, Inc. is an Ohio corporation in good standing with the Ohio Secretary of State. Malcolm Greer is confirmed as the sole shareholder of the corporation. Briarwood has no subsidiaries.
The Retained Business (Commercial Janitorial Services Division) is operated as an internal division of Briarwood and is not a separate legal entity. The asset purchase structure is designed to cleanly separate the Acquired Assets from the Retained Business.
Our review confirmed that Briarwood has adequate corporate authority to consummate the proposed transaction. Board resolutions authorizing the sale have been prepared in draft form by Caldwell, Pruitt & Shaw LLP, and the sole shareholder's written consent is anticipated to be obtained prior to closing.
The corporate and organizational diligence memorandum was finalized on July 8, 2022 and is available in the data room.
C. Material Contracts
Calderwood & Harkness LLP reviewed the twenty-three (23) customer contracts that are to be assigned to the Buyer at closing. These contracts govern Briarwood's relationships with its principal retail distribution partners for the CleanLeaf and PureHaven product lines. The contracts range in duration from one (1) to five (5) years and include a mix of master supply agreements, vendor agreements, and purchase order frameworks.
Seven (7) of the twenty-three (23) contracts contain change-of-control or assignment consent provisions that will require the prior written consent of the applicable counterparty in connection with the proposed transaction. These seven contracts represent, in the aggregate, a significant portion of the product lines' annual revenue, and the failure to obtain any required consents presents a material risk, as discussed in Section VII.D below.
Key supply agreements between Briarwood and its raw material and packaging suppliers were also reviewed. No material concerns were identified with respect to the supply agreements, and all such agreements are expected to be assignable to the Buyer without consent or with consent provisions that are not expected to present impediments.
The material contracts diligence memorandum was finalized on July 29, 2022 and is available in the data room.
D. Real Property & Leases
Two real property assets are associated with the CleanLeaf and PureHaven product lines:
Marysville Manufacturing Facility (2800 Industrial Parkway, Marysville, OH 43040): This facility is leased by Briarwood from Buckeye Industrial Properties LLC (77 East Nationwide Boulevard, Suite 200, Columbus, OH 43215). The lease has a remaining term of approximately six (6) years with two (2) five-year renewal options. The lease requires the landlord's prior written consent for any assignment or change of control. A formal consent request was transmitted to Buckeye Industrial Properties LLC on October 7, 2022, and no response has been received as of the date of this submission. The status of the landlord consent is discussed further in Section VII.C below.
West Jefferson Distribution Center (500 Commerce Boulevard, West Jefferson, OH 43162): This facility is owned in fee simple by Briarwood and is included in the Acquired Assets. A preliminary title search has been completed, and no material title concerns or encumbrances have been identified. A title insurance commitment is expected to be obtained prior to closing.
The real property and leases diligence memorandum was finalized on August 15, 2022 and is available in the data room.
E. Intellectual Property
Calderwood & Harkness LLP conducted a comprehensive review of the intellectual property assets associated with the CleanLeaf and PureHaven product lines. The review encompassed federal and state trademark registrations, trade dress protections, domain name registrations, and formulation trade secrets.
The "CleanLeaf" and "PureHaven" trademarks are registered with the United States Patent and Trademark Office, and state-level registrations are in place in all material jurisdictions where the products are sold. Domain name ownership for the principal brand-related domains (including cleanleaf.com and purehavenproducts.com) was confirmed. Formulation trade secrets for the product lines' key formulations have been identified and are documented in Briarwood's internal records; these trade secrets will be assigned to the Buyer pursuant to the intellectual Property Assignment Agreement.
No material intellectual property encumbrances, liens, or third-party claims were identified in the course of the review. However, we note that our review flagged certain incomplete trademark renewal filings as a minor item requiring remediation. Specifically, renewal filings for two (2) state-level trademark registrations appear to have been filed late or are pending late-filing fees. These registrations are not at immediate risk of cancellation, and the remediation is expected to be completed prior to or promptly following the closing. This item is not considered material but is noted for completeness.
The intellectual property diligence memorandum was finalized on August 18, 2022 and is available in the data room.
F. Employment & Benefits
A total of 186 employees are expected to transfer from Briarwood to the Buyer in connection with the proposed transaction. The APA does not provide for an automatic transfer of employment; rather, the Buyer will be required to issue offer letters to each transferring employee with terms and conditions substantially comparable to their current employment with Briarwood. The offer letter template is currently being drafted by Calderwood & Harkness LLP and is expected to be finalized prior to closing.
Briarwood maintains a 401(k) retirement plan for its employees. Because the Buyer is not assuming Briarwood's existing benefit plans, the transferring employees will not be able to continue participation in Briarwood's 401(k) plan following the closing. The Buyer will need to either enroll the transferring employees in an existing Meridian benefit plan or establish a new plan, and arrangements will need to be made for the rollover of the transferring employees' existing 401(k) balances.
A WARN Act analysis was completed by Calderwood & Harkness LLP. Based on the structure of the transaction (asset purchase with the Buyer extending offer letters to substantially all affected employees), no triggering event under the federal Worker Adjustment and Retraining Notification Act or applicable Ohio WARN Act counterpart is anticipated.
Ohio-specific employment law considerations, including Ohio's employment discrimination statutes, workers' compensation requirements, and wage-and-hour laws, were reviewed. No material compliance concerns were identified.
The employment and benefits diligence memorandum was finalized on August 25, 2022 and is available in the data room.
G. Environmental
Terrapoint Environmental Group, Inc. was engaged by the Buyer to conduct Phase I Environmental Site Assessments of the real property assets associated with the CleanLeaf and PureHaven product lines.
Marysville Manufacturing Facility: A Phase I ESA was completed on September 2, 2022 (Report No. TEG-2022-0441). The Phase I assessment identified a recognized environmental condition ("REC") at the Marysville facility, specifically a potential soil contamination condition in the vicinity of a former chemical storage area on the property. The Phase I report noted historical use of the property for light industrial manufacturing dating back to the 1970s, prior to Briarwood's occupancy, and identified the REC based on a combination of historical records, visual inspection, and regulatory database review.
Terrapoint has recommended that a Phase II subsurface investigation be conducted to further evaluate the nature and extent of the potential contamination. As of the date of this submission, the Phase II investigation has not been commenced. The Buyer is currently evaluating whether to proceed with the Phase II investigation prior to closing or to address the issue through contractual protections in the APA and/or specific treatment in the R&W insurance policy. This matter is discussed further in Section VII.B below.
West Jefferson Distribution Center: No material environmental concerns were identified at the West Jefferson facility. The Phase I ESA for this property did not identify any recognized environmental conditions, controlled recognized environmental conditions, or historical recognized environmental conditions.
The environmental diligence memorandum, inclusive of the Terrapoint Phase I ESA Report No. TEG-2022-0441, was finalized on September 8, 2022 and is available in the data room.
Note to Underwriter: The incomplete Phase II investigation at the Marysville facility represents a gap in the Buyer's environmental diligence. The absence of a Phase II assessment means that the nature and extent of any potential soil contamination at the facility have not been characterized, and the potential remediation costs, if any, remain unknown. This gap may affect the scope of environmental representations that can be backstopped by the R&W policy, and the underwriter may wish to address this matter through a specific exclusion, a requirement that the Phase II be completed prior to binding, or other appropriate measures.
H. Litigation & Regulatory
Calderwood & Harkness LLP reviewed Briarwood's litigation history and pending regulatory matters. No material pending litigation was identified against Briarwood or involving the CleanLeaf and PureHaven product lines. The review encompassed federal and state court dockets, administrative proceedings, and arbitration records.
The Buyer also reviewed Briarwood's product liability claims history. The CleanLeaf and PureHaven product lines have experienced a modest volume of individual product liability claims over the past five years, which is consistent with industry norms for consumer cleaning and personal care products. No systemic patterns of product defect or consumer injury were identified, and no claims have resulted in material judgments, settlements, or reserves.
HSR Filing Status: An analysis of the Hart-Scott-Rodino Antitrust Improvements Act filing requirements was conducted. Based on the transaction value (which falls below the applicable notification threshold as of 2022) and the fact that the size-of-person test is not met by Briarwood, no HSR filing is required in connection with the proposed transaction.
Regulatory Filing Gap: The review identified a compliance gap with respect to certain state product registrations for CleanLeaf and PureHaven product lines. Specifically, certain product registrations required under state-level consumer product safety or labeling regulations were found to be incomplete or to have lapsed in several jurisdictions. This issue is flagged as a compliance item requiring remediation either pre-closing or post-closing and may be relevant to the regulatory compliance representations in the APA. Additional detail is provided in Section VII.E below.
The litigation and regulatory diligence memorandum was finalized on September 12, 2022 and is available in the data room.
I. Financial Diligence
Whitfield Ames LLP delivered its preliminary financial diligence memorandum on October 14, 2022. The key findings are summarized below.
Revenue and EBITDA: The CleanLeaf and PureHaven product lines generated combined revenue of $68,000,000 and combined EBITDA of $11,200,000 for fiscal year 2021, as reflected in the product line financial statements audited by Hargrove & Linton, P.C. Whitfield Ames's preliminary quality-of-earnings analysis is consistent with these figures, subject to certain adjustments that are detailed in the financial diligence memorandum.
Inventory Valuation: Whitfield Ames identified a material variance between Briarwood's book value of inventory and its assessed net realizable value. Briarwood carries inventory at a book value of $14,300,000 as of June 30, 2022. Whitfield Ames's preliminary assessment determined the net realizable value of the inventory to be $11,800,000 as of the same date, reflecting a $2,500,000 variance. The variance is primarily attributable to slow-moving and potentially obsolete inventory items within the CleanLeaf product line. This item is discussed further in Section VII.A below.
Accounts Receivable: Trade accounts receivable were reported at $9,700,000 as of June 30, 2022. Whitfield Ames's review of the aging schedule and collection history did not identify material concerns regarding collectibility, and the accounts receivable balance is considered fairly stated.
The Whitfield Ames preliminary financial diligence memorandum is available in the data room and will be supplemented as additional financial information is received from the Seller.
VII. KNOWN ISSUES AND RISK ITEMS FOR UNDERWRITER CONSIDERATION
The following matters are flagged for the underwriter's attention. Each represents either an identified risk factor, an open diligence item, or a negotiation point that may be relevant to the structuring and pricing of the R&W insurance policy. We have endeavored to present each item candidly and in sufficient detail to enable the underwriter to make an informed assessment.
A. Inventory Valuation Dispute ($2,500,000)
As described in Section VI.I above, the Buyer's financial diligence advisor, Whitfield Ames LLP, has identified a $2,500,000 variance between Briarwood's book value of inventory ($14,300,000 as of June 30, 2022) and the assessed net realizable value ($11,800,000 as of the same date). The variance is primarily driven by slow-moving and potentially obsolete inventory items within the CleanLeaf product line, which Whitfield Ames believes are overvalued on Briarwood's books.
The Buyer raised this issue with the Seller on October 21, 2022. Briarwood disputes the methodology used by Whitfield Ames in assessing net realizable value, contending that Whitfield Ames applied overly conservative assumptions regarding the marketability of certain SKUs and did not adequately account for planned promotional activity that Briarwood asserts would accelerate the sell-through of the inventory items in question.
The draft APA contains an inventory adjustment provision that would provide for a post-closing true-up based on a physical inventory count and agreed-upon valuation methodology. However, the specific terms of the inventory adjustment provision remain an open negotiation item, and the parties have not yet agreed on the methodology that will govern the adjustment.
This item should be noted by the underwriter as a known matter and may require specific treatment or exclusion in the R&W insurance policy. To the extent the inventory valuation dispute is ultimately resolved through the purchase price adjustment mechanism in the APA, any resulting adjustment would likely fall within a customary purchase price adjustment exclusion under the policy. However, to the extent the dispute implicates the accuracy of the Seller's inventory condition and valuation representations, it may be relevant to the policy's treatment of known matters.
B. Environmental Diligence Gap — Phase II Not Completed
As described in Section VI.G above, the Phase I ESA conducted by Terrapoint Environmental Group, Inc. at the Marysville manufacturing facility identified a recognized environmental condition consisting of potential soil contamination in the vicinity of a former chemical storage area. Terrapoint has recommended a Phase II subsurface investigation to characterize the nature and extent of the potential contamination.
As of the date of this submission, the Phase II investigation has not been commenced. The Buyer is currently evaluating the timing and scope of a Phase II investigation and is considering whether to (a) complete the Phase II prior to the closing and prior to binding the R&W policy, (b) negotiate specific environmental protections in the APA (such as a special indemnity from the Seller for environmental liabilities at the Marysville facility), or (c) accept a potential exclusion from the R&W policy for environmental conditions at the Marysville facility.
The underwriter should be aware that the absence of a Phase II investigation means that the potential remediation costs associated with the recognized environmental condition are currently unknown and unquantified. The scope of environmental representations in the APA that may be covered under the R&W policy may be materially affected by this diligence gap. The underwriter may wish to (a) require completion of the Phase II investigation as a condition to providing coverage for environmental representations, (b) exclude environmental matters at the Marysville facility from coverage, or (c) propose other appropriate treatment.
The Buyer is prepared to discuss this matter further with the underwriter and to provide the underwriter with a copy of the Terrapoint Phase I ESA report (Report No. TEG-2022-0441) upon request.
C. Landlord Consent — Marysville Facility
The lease for the Marysville manufacturing facility (2800 Industrial Parkway, Marysville, OH 43040) requires the prior written consent of the landlord, Buckeye Industrial Properties LLC, for any assignment of the lease. A formal consent request was transmitted to Buckeye Industrial Properties on October 7, 2022, and no response has been received as of the date of this submission.
If the landlord's consent is not obtained prior to the closing, the Marysville facility lease will not be assignable to the Buyer, which would create a material operational risk for the acquired product lines. The Marysville facility is the sole manufacturing site for the CleanLeaf and PureHaven product lines, and the inability to operate from this facility post-closing would have a significant adverse impact on the Buyer's ability to maintain production continuity.
The Buyer is actively pursuing the landlord consent and will provide the underwriter with an update as soon as a response is received. The draft APA currently contemplates that obtaining the landlord's consent for the Marysville facility lease will be a condition precedent to the Buyer's obligation to close, although this condition remains subject to negotiation.
D. Customer Contract Consents
Seven (7) of the twenty-three (23) customer contracts to be assigned to the Buyer at closing contain change-of-control or assignment consent provisions that require the prior written consent of the applicable counterparty. These seven contracts represent a material portion of the product lines' revenue base and include agreements with several of the Buyer's largest retail distribution partners.
As of the date of this submission, consent requests have not yet been sent to the affected counterparties. A template form consent request letter was prepared by Calderwood & Harkness LLP on October 12, 2022 and is under review by the Buyer's management team. The Buyer intends to begin transmitting consent requests in the near term but has been awaiting finalization of the letter format and coordination with Briarwood on the timing of counterparty communications.
The failure to obtain one or more of the required customer consents could result in the loss of key customer relationships or, at a minimum, the need to renegotiate contract terms with the affected counterparties. This risk is particularly significant given the concentration of revenue among the affected contracts. The underwriter should note this item as a potential risk factor that may be relevant to the Buyer's recovery for breaches of the Seller's material contracts representations.
E. Regulatory Filing Gap
As described in Section VI.H above, Calderwood & Harkness LLP's review identified certain state product registrations for CleanLeaf and PureHaven product lines that are incomplete or have lapsed. Specifically, product registrations in several states appear to have expired or were never completed in accordance with applicable state consumer product safety or labeling regulations.
This compliance gap is flagged as an item requiring remediation either before or after the closing. Depending on the scope and materiality of the lapsed registrations, the issue may give rise to regulatory enforcement risk, product recall risk, or liability under the Seller's regulatory compliance representations in the APA. The Buyer is working with Briarwood to compile a complete inventory of affected registrations and to develop a remediation plan.
This item may be relevant to the underwriter's assessment of the scope and risk associated with the Seller's compliance-with-laws representations and should be considered in connection with the policy's treatment of known regulatory matters.
F. Incomplete Disclosure Schedules
Briarwood delivered partial, first-draft disclosure schedules to the Buyer on September 28, 2022. As of the date of this submission, the disclosure schedules remain materially incomplete. Several sections of the schedules are in draft form, contain placeholder language, or have not been delivered at all. Final, complete disclosure schedules have not been provided by the Seller.
The underwriter should be aware that the scope of scheduled disclosures — and therefore the scope of any "known matters" exclusion under the R&W policy — may change materially as the disclosure schedules are finalized. The items currently disclosed in the draft schedules include, among other things: scheduled contracts, known litigation matters (none of which are material), permitted encumbrances, the employee list, and intellectual property registrations. The Buyer anticipates that additional disclosures will be made as the schedules are completed and that these additional disclosures may expand the scope of matters known to the Buyer as of the time of binding.
Underwriting of the proposed R&W policy should be conditioned on the underwriter's review and approval of the final, complete disclosure schedules.
G. Earnout Structure
As described in Section II.F above, $8,000,000 of the total purchase price is subject to a post-closing earnout. The earnout payment is contingent upon the acquired product lines achieving combined revenue of at least $72,000,000 during the first twelve (12) months following the closing (the Year 1 Revenue Milestone).
The earnout calculation methodology — including the definition of revenue for purposes of the milestone, the treatment of returns, allowances, and intercompany transactions, and the dispute resolution mechanism — remains subject to negotiation between the Buyer and the Seller. These issues are typically contentious and may give rise to post-closing disputes.
The R&W insurance policy is not expected to cover earnout disputes, which are typically excluded from R&W coverage as a matter of market practice. However, the underwriter should note the earnout structure in its assessment of the overall transaction economics and risk profile.
VIII. KEY REPRESENTATIONS AND WARRANTIES IN THE APA
A. Seller's Representations (Summary of Material Categories)
The second draft of the APA (circulated September 15, 2022) contains the following material categories of representations and warranties made by the Seller. These representations form the basis of the coverage sought under the proposed R&W insurance policy.
1.  Organization, Good Standing, and Qualification (fundamental) — The Seller represents that it is a corporation duly organized, validly existing, and in good standing under the laws of the State of Ohio, and is qualified to do business in each jurisdiction where the nature of its business or the ownership of its assets requires such qualification.
2.  Authority and Enforceability (fundamental) — The Seller represents that it has full corporate power and authority to enter into and perform its obligations under the APA and the ancillary agreements, and that the APA constitutes the legal, valid, and binding obligation of the Seller, enforceable against the Seller in accordance with its terms.
3.  Title to Acquired Assets; No Encumbrances (fundamental) — The Seller represents that it has good and marketable title to the Acquired Assets, free and clear of all liens, pledges, security interests, claims, charges, and encumbrances, other than permitted encumbrances.
4.  Financial Statements; Accuracy of Books and Records — The Seller represents that the financial statements delivered to the Buyer are true, correct, and complete in all material respects and have been prepared in accordance with GAAP, consistently applied.
5.  Absence of Undisclosed Liabilities — The Seller represents that there are no liabilities or obligations of or relating to the Acquired Assets, whether accrued, absolute, contingent, or otherwise, except as reflected in the financial statements or disclosed in the schedules.
6.  Absence of Certain Changes — The Seller represents that, since the reference date of June 30, 2022, there has been no material adverse change in the business, operations, financial condition, or results of operations of the Acquired Assets, and the Seller has conducted the business in the ordinary course consistent with past practice.
7.  Compliance with Laws; Permits and Licenses — The Seller represents that the business of the Acquired Assets has been conducted in compliance with all applicable laws, regulations, and orders, and that all permits and licenses required for the operation of the business are valid and in full force and effect.
8.  Material Contracts; No Defaults — The Seller represents that all material contracts are in full force and effect, that the Seller is not in breach or default under any material contract, and that no counterparty has notified the Seller of any claimed breach or default.
9.  intellectual Property Ownership and Non-Infringement — The Seller represents that it owns or has the right to use all intellectual property necessary for the conduct of the business, that no third party is infringing the Seller's intellectual property, and that the Seller's products and operations do not infringe the intellectual property rights of any third party.
10.  Real Property; Leases — The Seller represents that it has good and marketable title to the owned real property and valid leasehold interests in the leased real property, and that all leases are in full force and effect with no defaults.
11.  Environmental Compliance; No Hazardous Materials — The Seller represents that the business has been conducted in compliance with all applicable environmental laws, that no hazardous materials have been released on or from the properties in violation of applicable law, and that there are no pending or threatened environmental claims.
12.  Employment Matters; Labor Relations; Benefit Plans — The Seller represents that it is in compliance with all applicable employment laws, that there are no pending or threatened employment claims, and that all employee benefit plans have been maintained in compliance with ERISA and applicable law.
13.  Tax Matters (fundamental) — The Seller represents that all tax returns have been timely filed and all taxes have been timely paid, and that there are no pending tax audits, assessments, or claims.
14.  Product Liability and Warranty Claims — The Seller represents that there are no pending or threatened product liability or warranty claims, and that the products conform to applicable product specifications and regulatory requirements.
15.  Inventory Condition and Valuation — The Seller represents that the inventory consists of items that are of merchantable quality, are not obsolete or defective, and are valued on the Seller's books in accordance with GAAP.
16.  Accounts Receivable Collectibility — The Seller represents that the accounts receivable are bona fide, arose in the ordinary course of business, and are collectible in the ordinary course.
17.  Litigation and Proceedings — The Seller represents that there are no pending or threatened claims, actions, suits, or proceedings against the Seller or involving the Acquired Assets.
18.  Brokers' Fees — The Seller represents that no broker, finder, or investment banker is entitled to any fee or commission in connection with the transaction other than as disclosed.
19.  Full Disclosure / No Material Misstatement — The Seller represents that no representation or warranty made by the Seller in the APA contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements made not misleading.
B. Buyer's Representations (Summary)
The Buyer has made the following categories of representations and warranties in the APA:
1.  Organization and Good Standing — The Buyer represents that it is a limited liability company duly organized, validly existing, and in good standing under the laws of the State of Delaware.
2.  Authority and Enforceability — The Buyer represents that it has full power and authority to enter into and perform its obligations under the APA.
3.  Sufficient Funds; Financing Commitments — The Buyer represents that it has, or at the closing will have, sufficient funds to consummate the transactions contemplated by the APA, including through the debt and equity financing commitments described in Section III.
4.  No Conflicts — The Buyer represents that the execution, delivery, and performance of the APA will not conflict with or result in a violation of the Buyer's organizational documents, any applicable law, or any contract to which the Buyer is a party.
5.  Brokers' Fees — The Buyer represents that no broker, finder, or investment banker is entitled to any fee or commission from the Buyer in connection with the transaction other than as disclosed.
C. Knowledge Qualifiers
The scope of the knowledge qualifier applicable to the Seller's representations and warranties remains an open negotiation item between the parties.
The Seller has proposed, in its August 22, 2022 markup of the APA, expanding the knowledge qualifier to a constructive knowledge standard limited to the actual knowledge of Malcolm Greer (as sole shareholder and President) and Janet Tsao (as Vice President of Operations), without a "due inquiry" component.
The Buyer is maintaining a narrower knowledge qualifier in the second draft of the APA: actual knowledge of the Seller's officers and directors, after due inquiry. The "after due inquiry" component is intended to impose an obligation on the relevant individuals to make reasonable inquiries of their direct reports and to review relevant records before qualifying any representation with a knowledge limitation.
The final scope of the knowledge qualifier will directly affect the breadth of R&W coverage under the proposed policy. A broader knowledge qualifier (i.e., without a due inquiry requirement) could narrow the effective scope of the Seller's representations and, by extension, limit the circumstances in which a breach could be established for purposes of a policy claim. The underwriter should note this open point and may wish to address it in the underwriting process.
IX. DISCLOSURE SCHEDULES STATUS
Briarwood Home Essentials, Inc. delivered partial, first-draft disclosure schedules to the Buyer on September 28, 2022. As of the date of this submission, the disclosure schedules remain incomplete, and several significant sections are in draft form or have not been delivered. Final, complete disclosure schedules have not been provided.
The items currently disclosed in the draft schedules include the following:
•  Scheduled Contracts: A list of the material contracts to be assigned to the Buyer, including the twenty-three (23) customer contracts and key supply agreements.
•  Known Litigation Matters: None identified as material. The schedules reflect a small number of routine product liability inquiries and customer complaints, none of which have resulted in formal litigation or material reserves.
•  Permitted Encumbrances: A list of permitted encumbrances on the Acquired Assets, including customary items such as statutory liens for taxes not yet due, utility easements, and minor zoning restrictions.
•  Employee List: A list of the 186 employees expected to transfer, including position, compensation, hire date, and location.
•  IP Registrations: A list of trademark registrations, domain name registrations, and trade secret inventories associated with the CleanLeaf and PureHaven brands.
The Buyer expects that the final disclosure schedules will contain additional disclosures as Briarwood completes its internal review. The final schedules may expand the scope of matters known to the Buyer as of the time of binding and may, accordingly, affect the scope of any "known matters" exclusion under the R&W policy.
Underwriting of the proposed R&W policy should be expressly conditioned on the underwriter's review of the final, complete disclosure schedules. Calderwood & Harkness LLP will provide the final schedules to the underwriter promptly upon receipt.
X. ANCILLARY AGREEMENTS
The following ancillary agreements are contemplated in connection with the proposed transaction. Draft forms of each agreement have been prepared and are available for underwriter review in the data room or upon request.
(a) Bill of Sale. A draft form Bill of Sale is attached as an exhibit to the APA and will be executed and delivered at closing to convey the Seller's right, title, and interest in and to the personal property included in the Acquired Assets.
(b) Assignment and Assumption Agreement. A draft form Assignment and Assumption Agreement is attached as an exhibit to the APA and will be executed and delivered at closing to effect the assignment of contracts, leases, and other assumed obligations from the Seller to the Buyer.
(c) intellectual Property Assignment Agreement. A draft form intellectual Property Assignment Agreement has been prepared to effect the