PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Sandra Tung, Responsible Partner, M&A Oliver Mackenzie, Billing Partner, M&A
FROM: Andrew Fitzpatrick, Lead Associate, M&A
DATE: December 15, 2022
RE: Status Assessment — Proposed Acquisition of CleanLeaf and PureHaven Product Lines by Meridian Consumer Brands LLC from Briarwood Home Essentials, Inc.
MATTER NO.: 1011-00005
CC: Naomi Petersen, Working Associate, M&A
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I. Executive Summary
This memorandum provides an internal assessment of the current state of the proposed acquisition by our client, Meridian Consumer Brands LLC ("Meridian" or the "Buyer"), of the "CleanLeaf" and "PureHaven" branded product lines from Briarwood Home Essentials, Inc. ("Briarwood" or the "Seller") as of December 15, 2022. The transaction, structured as an asset purchase at a proposed purchase price of $95,000,000, has been effectively dormant since the last substantive negotiation call between the parties on November 18, 2022. This memorandum is intended to provide the deal team with a comprehensive picture of where the transaction stands, to identify the principal open issues and time-sensitive deadlines requiring urgent client attention, and to set forth recommendations for next steps.
Meridian is a Delaware limited liability company and portfolio company of Lakepoint Capital Partners, LP, a private equity sponsor (Managing Partner: Thomas Liang). The key client contacts at Meridian are Gareth Holloway (CEO & Managing Member), Priya Anand (CFO), and Diana Ressler (General Counsel). The Seller, Briarwood Home Essentials, Inc., is an Ohio corporation controlled by its President and Sole Shareholder, Malcolm Greer, with Janet Tsao serving as Vice President of Operations. Briarwood is represented by Caldwell, Pruitt & Shaw LLP ("CPS"), with Rachel Underwood serving as lead partner and David Soo as the working associate on the transaction.
Since the November 18, 2022 call, the only communication between the parties was an email from Naomi Petersen to David Soo on December 9, 2022 proposing dates for a resumed negotiation call. No response has been received from Soo or anyone else at CPS. No formal termination of the Letter of Intent ("LOI") or Asset Purchase Agreement ("APA") negotiations has occurred, and the transaction remains in an indeterminate state of dormancy.
This memorandum identifies six principal categories of open issues: (1) the unresolved inventory valuation dispute representing a $2,500,000 variance; (2) an incomplete Phase II environmental investigation at the Marysville manufacturing facility; (3) the absence of landlord consent from Buckeye Industrial Properties LLC for the Marysville lease assignment; (4) outstanding customer contract consents; (5) a gap in state product registrations for certain CleanLeaf and PureHaven SKUs; and (6) incomplete disclosure schedules from the Seller. In addition, the memorandum addresses two critical time-sensitive deadlines: the expiration of the Harborview National Bank, N.A. debt commitment letter on February 5, 2023 (approximately 52 days from this memorandum), and the expiration of the LOI exclusivity period on March 28, 2023 (approximately 103 days from this memorandum). The ongoing accrual of ticking fees under the debt commitment, the staleness of all diligence materials, and the stale status of the representations and warranties ("R&W") insurance underwriting process compound the urgency of the situation.
It is our recommendation that Calderwood & Harkness LLP ("C&H") communicate promptly with the client to advise on the foregoing matters and to request a definitive decision on whether to reactivate negotiations, formally terminate the transaction, or maintain the current dormant posture with full awareness of the associated risks and costs.
II. Transaction Overview
A. Deal Structure and Economics
The proposed transaction is structured as an asset purchase, pursuant to which Meridian would acquire substantially all of the assets comprising the CleanLeaf and PureHaven product lines from Briarwood. The principal economic terms, as reflected in the LOI executed March 28, 2022 and the draft APA negotiations, are as follows:
• Purchase Price: $95,000,000.
• Cash Payable at Closing: $87,000,000, representing the total purchase price less the earnout component described below.
• Earnout Component: $8,000,000, contingent upon Year 1 post-closing revenue of the acquired product lines meeting or exceeding $72,000,000. The specific methodology for calculating earnout revenue, including treatment of returns, allowances, and intercompany sales, remains an open negotiation point as discussed further in Section VIII of this memorandum.
• Escrow Holdback: $9,500,000, representing 10% of the total purchase price, to be deposited with Atlantic Fiduciary Trust Company (officer: Gregory Fenn) at closing and held for a period of 24 months post-closing to secure Seller's indemnification obligations. The escrow agreement has been drafted but not finalized.
• Indemnification Cap: $33,250,000, representing 35% of the total purchase price. This reflects Buyer's position; Seller has proposed a cap of 20% of the purchase price ($19,000,000), and this remains an open issue.
• Indemnification Basket (Tipping): $950,000, representing 1% of the total purchase price. Once the aggregate amount of indemnifiable losses exceeds the basket amount, the Seller would be liable for the full amount of such losses from the first dollar (i.e., a tipping basket, not a deductible).
• Survival Period: General representations and warranties would survive for 24 months following the closing date. Fundamental representations (organization, authority, capitalization, title to assets, tax matters, and brokers) would survive indefinitely. Seller has proposed an 18-month survival period for general representations and warranties, which remains unresolved.
• Governing Law: The State of New York.
B. Acquired Assets
The assets to be acquired by Meridian in the transaction (the "Acquired Assets") encompass the following:
• Brands and SKUs: The CleanLeaf brand (home cleaning products) and the PureHaven brand (personal care products), together comprising approximately 142 active stock-keeping units ("SKUs") across both product lines.
• Marysville Manufacturing Facility: The manufacturing facility located at 2800 Industrial Parkway, Marysville, OH 43040. This facility is leased by Briarwood from Buckeye Industrial Properties LLC, and the acquisition would require assignment of the lease with landlord consent. The status of the landlord consent request is discussed in Section IV.C below.
• West Jefferson Distribution Center: The distribution center located at 500 Commerce Boulevard, West Jefferson, OH 43162. This property is owned by Briarwood in fee simple and is included among the Acquired Assets. A deed conveying title to Meridian would be delivered at closing.
• Inventory: All inventory related to the CleanLeaf and PureHaven product lines. The book value of such inventory was $14,300,000 as of the June 30, 2022 reference date, although this valuation is the subject of the dispute described in Section IV.A below.
• Accounts Receivable: Approximately $9,700,000 in accounts receivable as of the June 30, 2022 reference date.
• Customer Contracts: Twenty-three (23) customer contracts to be assigned to Meridian. Seven of these contracts contain change-of-control or assignment consent provisions requiring third-party consent, as discussed in Section IV.D below.
• intellectual Property: All intellectual property related to the CleanLeaf and PureHaven product lines, including trademarks, trade names, trade dress, product formulations, domain names, and related goodwill. An IP Assignment Agreement has been drafted in first-draft form.
• Equipment: All manufacturing, packaging, and distribution equipment used in connection with the CleanLeaf and PureHaven product lines at both the Marysville and West Jefferson facilities.
• Employees: One hundred eighty-six (186) employees currently employed by Briarwood in connection with the CleanLeaf and PureHaven product lines are expected to transfer to Meridian. Offer letters would be required. No employee census has been updated since the initial headcount was established during the summer 2022 diligence period, and there may have been attrition in the interim.
Briarwood would retain all assets and operations related to its Commercial Janitorial Services Division, which is not part of the proposed transaction.
C. Assumed Liabilities
Under the terms of the draft APA, Meridian would assume the following liabilities in connection with the Acquired Assets:
• Trade Payables: Approximately $4,200,000 in outstanding trade payables related to the CleanLeaf and PureHaven product lines as of the reference date.
• Accrued Product Warranty Obligations: Approximately $620,000 in accrued product warranty obligations associated with CleanLeaf and PureHaven products sold prior to closing.
• Post-Closing Contractual Obligations: All obligations arising under the assigned customer contracts, the assigned Marysville lease, and other assumed contracts from and after the closing date.
All other liabilities of Briarwood, including all pre-closing liabilities not expressly assumed, litigation liabilities, tax liabilities, and environmental liabilities arising prior to closing, would be retained by the Seller. The allocation of environmental liabilities at the Marysville facility between pre-closing and post-closing periods, and between tenant and landlord, remains a significant open issue in light of the incomplete Phase II environmental investigation.
D. Financial Metrics
The CleanLeaf and PureHaven product lines generated the following financial results for fiscal year 2021, as reported by Briarwood and subject to the diligence qualifications noted in this memorandum:
• FY2021 Product Line Revenue: $68,000,000.
• FY2021 Product Line EBITDA (per Seller): $11,200,000. This figure was provided by Briarwood and has been subject to preliminary review by Whitfield Ames LLP. Certain adjustments may be warranted based on the financial diligence findings, but a final adjusted EBITDA figure has not been agreed upon.
• Implied EV/EBITDA Multiple: Approximately 8.48x, based on the $95,000,000 enterprise value and the Seller-reported EBITDA of $11,200,000. This multiple is within the range of precedent consumer products transactions identified by Wavecrest Partners LLC during the preliminary valuation phase.
E. Key Advisors
The following advisors have been engaged in connection with the transaction:
Buyer's Advisors:
• Legal Counsel: Calderwood & Harkness LLP (Sandra Tung, Responsible Partner; Oliver Mackenzie, Billing Partner; Andrew Fitzpatrick, Lead Associate; Naomi Petersen, Working Associate).
• Financial Advisor: Wavecrest Partners LLC (Steven Marchetti, Managing Director; Lena Kowalski, Vice President), 375 Hudson Street, 12th Floor, New York, NY 10014.
• Accounting / Diligence Advisor: Whitfield Ames LLP (Susan Clearwater, Engagement Partner), 1290 Avenue of the Americas, 20th Floor, New York, NY 10104.
• Environmental Consultant: Terrapoint Environmental Group, Inc. (Keith Novak, Project Manager), 33 Arch Street, Suite 1400, Boston, MA 02110.
• R&W Insurance Broker: Northbridge Risk Advisors LLC (Alison Chu, Senior Vice President), 1 World Financial Center, Suite 2500, New York, NY 10281.
• Proposed R&W Carrier: Sentinel Specialty Insurance Company (Mark Ellison, Underwriter), 500 West Monroe Street, Suite 3300, Chicago, IL 60661. Policy was never bound.
Seller's Advisors:
• Legal Counsel: Caldwell, Pruitt & Shaw LLP (Rachel Underwood, Lead Partner; David Soo, Associate), 41 South High Street, Suite 2800, Columbus, OH 43215.
• Financial Advisor: Greystone Hobbs & Co. (Philip Tran), representing the Seller in connection with the transaction.
• Auditor: Hargrove & Linton, P.C. (Daniel Yee), Seller's independent auditor.
Other Key Counterparties:
• Debt Lender: Harborview National Bank, N.A. (Carolyn Dubois, Relationship Manager), One Harborview Plaza, Charlotte, NC 28202.
• Syndicate Participant: Pinnacle Credit Partners, LP (Rajan Mehta), 600 Lexington Avenue, Suite 2100, New York, NY 10022.
• Escrow Agent: Atlantic Fiduciary Trust Company (Gregory Fenn), 100 Federal Street, Suite 1500, Boston, MA 02110.
III. Timeline of Key Events
The following table summarizes the key milestones and events in the transaction to date, together with the current status of each item:
IV. Open Issues — Detailed Analysis
A. Inventory Valuation Dispute ($2,500,000 Variance)
Core Issue. The most significant commercial impediment to deal progression is the unresolved dispute regarding inventory valuation. Briarwood has represented that the book value of inventory related to the CleanLeaf and PureHaven product lines, as of the June 30, 2022 reference date, is $14,300,000. Whitfield Ames LLP's preliminary financial diligence analysis, delivered on October 14, 2022 under the direction of engagement partner Susan Clearwater, determined that the net realizable value ("NRV") of the same inventory is $11,800,000 — a negative variance of $2,500,000, or approximately 17.5% of Briarwood's stated book value.
The Whitfield Ames analysis identified several categories of inventory for which NRV adjustments were deemed appropriate, including slow-moving SKUs with limited sell-through history, excess raw materials for discontinued or reformulated products, and finished goods approaching or past their recommended shelf-life dates. The methodology employed by Whitfield Ames is consistent with standard financial diligence practice for consumer products transactions and with the applicable provisions of ASC 330 (Inventory).
Nature of Disagreement. Meridian raised the inventory valuation issue with Briarwood on October 21, 2022, via an email from this office (Fitzpatrick) to David Soo at CPS. Briarwood's initial response, communicated verbally during subsequent calls and in brief email exchanges, disputed the Whitfield Ames NRV methodology. Briarwood contends that its book value accurately reflects market-saleable inventory and that the NRV adjustments applied by Whitfield Ames are overly conservative and not reflective of actual market demand for the products in question. Briarwood has not, however, provided any detailed written rebuttal or supporting analysis from its own auditor. Seller's auditor, Hargrove & Linton, P.C. (Daniel Yee), has not provided a written response to the Whitfield Ames analysis, despite Meridian's request that Briarwood arrange for its auditor to engage directly with Whitfield Ames on the methodology question.
Impact on APA. The second draft APA (circulated September 15, 2022) contemplated an inventory adjustment mechanism at closing, pursuant to which the purchase price would be adjusted upward or downward based on the difference between estimated inventory value and actual inventory value as determined by a closing inventory count. However, the parties had not reached agreement on the fundamental question of which valuation methodology — FIFO cost or NRV — would govern the inventory adjustment. This methodological disagreement is at the heart of the $2,500,000 variance and is the single largest commercial impediment to deal progression. If the NRV methodology prevails, the effective purchase price would be reduced by $2,500,000, which Seller has indicated is unacceptable. If the FIFO cost methodology prevails, Buyer bears the risk of overpaying for inventory that may not be fully realizable.
Status. Unresolved. No substantive discussion of the inventory issue has occurred since the November 18, 2022 negotiation call, during which the topic was raised but not advanced.
Recommendation. If the transaction is reactivated, resolution of the inventory valuation dispute will require either (a) agreement between the parties on a compromise valuation methodology, (b) engagement of a mutually acceptable third-party inventory appraiser to conduct a joint inventory audit and provide an independent valuation, or (c) a commercial compromise on the purchase price that accounts for the disputed variance. We note that the staleness of the June 30, 2022 reference date further complicates resolution — any reactivated transaction would almost certainly require a fresh physical inventory count and updated valuation as of a more recent date, adding both time and cost to the closing process.
B. Incomplete Phase II Environmental Investigation — Marysville Facility
Phase I ESA Findings. The Phase I Environmental Site Assessment (Report No. TEG-2022-0441), completed on September 2, 2022 by Terrapoint Environmental Group, Inc. (project manager: Keith Novak), covered the Marysville manufacturing facility located at 2800 Industrial Parkway, Marysville, OH 43040. The Phase I ESA was conducted in accordance with ASTM Standard E1527-21. The report identified a recognized environmental condition ("REC") at the Marysville facility, specifically potential soil contamination in the vicinity of a former underground storage tank area on the northwestern portion of the property. The historical records reviewed by Terrapoint indicated that underground storage tanks were present at the facility during prior industrial use of the site (pre-Briarwood tenancy) and were removed at an unspecified date. However, no documentation of tank closure sampling or soil remediation was located in available regulatory databases or in records provided by Briarwood or the landlord.
Phase II Recommendation. Both Terrapoint's Phase I ESA report and C&H's environmental diligence memo (dated September 8, 2022, prepared by this office) recommended that a Phase II Environmental Site Assessment be conducted to investigate the REC through subsurface soil and groundwater sampling. The Phase II investigation would be necessary to determine whether contamination is present, and if so, to characterize the nature, extent, and potential cost of remediation.
No Action Taken. A Phase II investigation was never commenced. No engagement letter for Phase II work was executed with Terrapoint or any other environmental consultant. No soil borings, monitoring wells, or laboratory analyses have been performed. The reasons for the delay are multifold: the inventory valuation dispute consumed the parties' attention in October and November 2022, and the broader stalling of negotiations overtook the environmental workstream before Phase II could be initiated.
Significance. Without Phase II results, Meridian cannot quantify its potential environmental remediation liability at the Marysville facility. This is particularly significant because the Marysville facility is a leased site, and the allocation of environmental liability between the tenant (Briarwood, and post-closing, Meridian as assignee) and the landlord (Buckeye Industrial Properties LLC) remains unresolved. The existing lease terms regarding environmental liability allocation have not been fully analyzed in the absence of Phase II data, though our preliminary review of the lease indicated that the tenant bears responsibility for contamination arising from tenant operations and the landlord bears responsibility for pre-existing contamination. The historical nature of the potential contamination (related to pre-Briarwood underground storage tanks) suggests that landlord liability may be implicated, but this cannot be confirmed without further investigation.
Impact on R&W Insurance. Sentinel Specialty Insurance Company (underwriter: Mark Ellison), through Northbridge Risk Advisors LLC (broker: Alison Chu), indicated during the preliminary underwriting process that the Phase I ESA findings would likely result in a specific environmental exclusion from the proposed R&W policy unless a Phase II Environmental Site Assessment was completed and the results were satisfactory. In the absence of Phase II completion, the R&W policy, if bound, would exclude coverage for environmental liabilities at the Marysville facility, leaving Meridian exposed to unquantified environmental risk without insurance protection. The R&W policy was never bound, and the underwriting process is now stale, as discussed further in Section VII below.
Status. No action has been taken on the Phase II investigation since September 2022. If the transaction is reactivated, the Phase II must be ordered promptly. Based on prior experience and Terrapoint's estimated timeline, a Phase II investigation would require approximately 4 to 8 weeks from engagement to delivery of a final report, depending on laboratory turnaround times and the scope of sampling required.
C. Landlord Consent — Buckeye Industrial Properties LLC
Requirement. The lease for the Marysville manufacturing facility (2800 Industrial Parkway, Marysville, OH 43040) between Briarwood, as tenant, and Buckeye Industrial Properties LLC, as landlord (77 East Nationwide Boulevard, Suite 200, Columbus, OH 43215), contains a provision requiring landlord consent for any assignment or transfer of the leasehold interest. The proposed acquisition, which would result in the assignment of the Marysville lease from Briarwood to Meridian, triggers this consent requirement.
Consent Request. A formal consent request letter was sent by this office (Andrew Fitzpatrick) on behalf of Meridian to Buckeye Industrial Properties LLC on October 7, 2022. The letter described the proposed transaction, provided background information on Meridian and its financial capacity, and requested the landlord's consent to the assignment of the lease. As of the date of this memorandum, more than two months have elapsed since the consent request was sent, and no response of any kind has been received from Buckeye Industrial Properties LLC.
Criticality. The Marysville manufacturing facility is the sole manufacturing site for the CleanLeaf and PureHaven product lines. It is essential to the ongoing operations of the acquired business. Failure to obtain landlord consent is a closing condition under each of the APA drafts exchanged to date. Without landlord consent, the transaction cannot close as currently structured. Alternative arrangements — such as a sublease, a management arrangement, or relocation of manufacturing — would be significantly more complex, time-consuming, and costly, and would fundamentally alter the economics and risk profile of the deal.
Risk Assessment. The prolonged silence from Buckeye Industrial Properties LLC may indicate substantive resistance to the assignment, dissatisfaction with the proposed assignee, a desire to renegotiate lease terms as a condition of consent, or simply a lack of prioritization or follow-up on the landlord's end. We note that the consent request was sent by Buyer's counsel directly to the landlord, which is somewhat unusual — typically, the existing tenant (Briarwood) would be expected to facilitate engagement with its own landlord. Seller's counsel (CPS) was expected to coordinate with Briarwood to encourage the landlord's cooperation, but it is unclear whether CPS or Briarwood took any independent steps to engage with Buckeye Industrial Properties on this matter.
Recommendation. If the transaction is reactivated, a follow-up communication to Buckeye Industrial Properties LLC should be sent immediately, and Briarwood should be pressed — through CPS — to engage its landlord directly. It may also be appropriate for Meridian or its representatives to seek a direct meeting with the landlord to discuss the proposed assignment and address any concerns.
D. Outstanding Customer Contract Consents
Requirement. Of the 23 customer contracts included among the Acquired Assets, 7 contain change-of-control or assignment consent provisions that require the counterparty's written consent prior to assignment. These provisions were identified in the due diligence memorandum on material contracts, dated July 29, 2022, prepared by Naomi Petersen and this office. The specific contracts requiring consent were listed in an exhibit to that memorandum, which has been maintained in the deal team's internal files.
Consent Request Letters. Template form consent request letters were prepared by C&H on October 12, 2022 for use in soliciting the required customer consents. However, it is unclear how many of these letters, if any, were actually sent to the relevant customer counterparties. Under the working arrangement between the parties, Briarwood was to facilitate customer consent solicitation, as Briarwood maintains the existing customer relationships. We have no record of confirmed delivery of consent requests to any of the seven affected customers, and no consents have been received or confirmed as of this date.
Significance. Customer consent is a closing condition under the APA drafts. Failure to obtain consent for material customer contracts could result in several adverse consequences. First, non-consenting customers could assert that their contracts are not validly assigned and could terminate their relationships with the acquired business. Second, loss of customer revenue streams could jeopardize Meridian's ability to meet the earnout revenue threshold of $72,000,000 in Year 1 post-closing, thereby affecting the earnout component of the purchase price. Third, the absence of customer consents would likely be flagged by Harborview National Bank, N.A. as a condition precedent to funding under the debt commitment letter, potentially delaying or preventing closing.
Status. No confirmed consents have been received as of this date. The status of consent solicitation efforts, if any, is unknown. This issue requires immediate attention if the transaction is reactivated.
E. Regulatory Filing Gap
Identification of Issue. The due diligence memorandum on litigation and regulatory matters, dated September 12, 2022 and prepared by Naomi Petersen, identified a gap in state product registrations for certain CleanLeaf and PureHaven SKUs. Certain states require product-level registrations for household cleaning products and personal care products sold within their jurisdictions. These requirements vary by state and may include registration of the product, its active ingredients, its manufacturing facility, or its distributor. Briarwood's compliance with these registration requirements appears incomplete — specific states and SKUs affected were flagged in the diligence memorandum, but Briarwood has not provided a complete set of filing records or a remediation plan.
HSR Filing. We note that a Hart-Scott-Rodino Act pre-merger notification filing is not required for this transaction. The transaction value falls below the applicable reporting threshold as adjusted for 2022, and the size-of-person test is not met by Briarwood. Accordingly, there is no federal antitrust filing impediment to closing.
Post-Closing Risk. The state regulatory filing gap could expose Meridian to post-closing compliance risk, including potential enforcement actions, product recalls, fines, or injunctions in affected states. While the magnitude of this risk is difficult to quantify without a complete understanding of which states and SKUs are affected, it is a matter that would need to be addressed in the disclosure schedules and could give rise to indemnification claims against the Seller for breaches of regulatory compliance representations and warranties.
Status. The partial disclosure schedules delivered by Briarwood on September 28, 2022 did not fully address the regulatory compliance issues identified in the diligence memorandum. Updated or supplemental disclosure schedules have not been received. This issue remains unresolved and must be addressed in any final disclosure schedule negotiation.
F. Disclosure Schedules — Incomplete
Briarwood delivered partial, first-draft disclosure schedules on September 28, 2022. These schedules were expressly described by CPS as preliminary and subject to supplementation. As received, the disclosure schedules were incomplete as to several key schedules, including but not limited to: the regulatory compliance schedule (related to the state product registration gap discussed in Section IV.E above), the environmental matters schedule (relevant to the Phase I ESA findings discussed in Section IV.B above), the material contracts schedule (requiring updating to reflect current contract status), and the employee benefits schedule.
No updated, supplemental, or final disclosure schedules have been received from Briarwood or CPS since September 28, 2022. The incomplete state of the disclosure schedules prevents finalization of the APA and prevents a full assessment of the scope and adequacy of the Seller's representations and warranties. In a typical M&A transaction, final disclosure schedules are negotiated in parallel with the APA and are delivered on or prior to signing. The current state of the disclosure schedules is consistent with a transaction that had not yet progressed to a near-signing posture before negotiations stalled.
If the transaction is reactivated, obtaining complete and updated disclosure schedules from Briarwood will be a threshold requirement for advancing APA negotiations. The staleness of the partial schedules delivered in September 2022 will necessitate a comprehensive update covering events and developments in the intervening months.
V. Financing Status — Critical Deadlines
A. Debt Commitment — Harborview National Bank, N.A.
Meridian secured a debt commitment letter dated August 5, 2022 from Harborview National Bank, N.A. for a $60,000,000 senior secured term loan facility to fund a substantial portion of the cash purchase price at closing. The key terms and current status of the debt commitment are as follows:
• Administrative Agent: Harborview National Bank, N.A. (relationship manager: Carolyn Dubois), One Harborview Plaza, Charlotte, NC 28202.
• Syndicate Participant: Pinnacle Credit Partners, LP (Rajan Mehta), 600 Lexington Avenue, Suite 2100, New York, NY 10022. Pinnacle has committed to participate in the term loan facility as a co-lender.
• Facility Amount: $60,000,000, structured as a senior secured term loan.
• Interest Rate: Secured Overnight Financing Rate ("SOFR") plus 375 basis points.
• Commitment Fee: 50 basis points per annum on undrawn committed amounts, payable quarterly in arrears.
• Ticking Fee: 25 basis points per annum on the total committed amount, commencing 90 days after the date of the commitment letter. The ticking fee began accruing on November 3, 2022 (i.e., 90 days after the August 5, 2022 commitment date). As of December 15, 2022, the ticking fee has been accruing for approximately 42 days. The estimated accrued ticking fee as of this date is approximately $17,260, calculated as follows: $60,000,000 × 0.0025 × (42/365) = $17,260 (rounded). This fee will continue to accrue daily until the commitment is drawn, extended, or terminated. The daily accrual rate is approximately $411 per day.
• Expiration: The commitment letter expires by its terms on February 5, 2023, which is six months from the date of execution. This expiration date is approximately 52 days from the date of this memorandum. If the transaction does not close or the commitment is not extended before that date, Meridian will lose the committed debt financing. Securing replacement financing in the current rate environment would involve additional time, cost, and execution risk, and there can be no assurance that comparable terms would be available.
• Extension Discussions: No discussions have been initiated with Harborview National Bank, N.A. or Pinnacle Credit Partners, LP regarding a potential extension of the commitment letter beyond February 5, 2023. The commitment letter does not contain an automatic extension provision; any extension would need to be negotiated and would likely involve additional fees or modified terms.
• Ongoing Cost Exposure: Ticking fees will continue to accrue at a rate of approximately $411 per day ($150,000 annualized) until the commitment expires or is terminated. Assuming no action is taken, total ticking fees from November 3, 2022 through the February 5, 2023 expiration date would be approximately $38,630. The commitment fee on undrawn amounts adds further cost exposure, although this fee is subordinate in significance to the ticking fee and the loss of the commitment itself.
The February 5, 2023 debt commitment expiration is the most time-critical deadline facing this transaction. If Meridian determines to proceed with the acquisition, the deal team will need to assess immediately whether the transaction can be closed before February 5, 2023 (which appears extremely unlikely given the volume of unresolved issues) or whether an extension of the commitment letter can be negotiated. If Meridian determines to terminate the transaction, the commitment letter should be formally terminated to stop ticking fee accrual.
B. Equity Commitment — Lakepoint Capital Partners, LP
Lakepoint Capital Partners, LP executed an equity commitment letter on August 12, 2022, committing $35,000,000 in equity funding for the transaction. This amount, together with the $60,000,000 debt commitment from Harborview National Bank, N.A., constitutes the total sources of funding for the $95,000,000 purchase price.
The terms of the equity commitment letter, including any expiration date, conditions to funding, and termination provisions, should be reviewed carefully in connection with the debt commitment expiration analysis. If the debt commitment lapses on February 5, 2023, the total funding plan for the transaction will be disrupted, and the equity commitment alone would be insufficient to fund the purchase price. A lapse in debt financing could also trigger a termination right or material adverse change provision under the equity commitment letter itself.
We have received no indication that Lakepoint Capital Partners (Managing Partner: Thomas Liang) has withdrawn its support for the transaction. However, no affirmative reconfirmation of the equity commitment has been sought since the commitment letter was executed in August 2022, and it would be prudent to seek such reconfirmation — particularly in light of the transaction's dormant status and the approaching debt commitment expiration. PE sponsor engagement will be essential to any decision regarding the path forward.
VI. LOI Exclusivity Status
The Letter of Intent executed on March 28, 2022 between Meridian and Briarwood contains a binding 12-month exclusivity provision. Under this provision, Briarwood is contractually prohibited from soliciting, encouraging, or engaging in discussions or negotiations with any third party regarding a potential acquisition of the CleanLeaf and PureHaven product lines during the exclusivity period. The exclusivity period runs through March 28, 2023.
As of the date of this memorandum, approximately 3.5 months (103 days) of the exclusivity period remain. The key features of the LOI exclusivity and related provisions are as follows:
• No Break Fee: The LOI does not include a break-up fee or termination fee payable by either party in the event the transaction is not consummated. Accordingly, if Meridian elects to terminate the transaction, it will have no obligation to compensate Briarwood for time, expense, or lost opportunity, and vice versa.
• Binding Provisions: The LOI contains the following binding provisions, which remain in full force and effect through the exclusivity period: (a) exclusivity (as described above); (b) confidentiality obligations, requiring each party to maintain the confidentiality of proprietary information disclosed in connection with the transaction; (c) governing law (State of New York); and (d) dispute resolution (any disputes arising under the LOI to be resolved in accordance with the dispute resolution provisions set forth therein).
• Non-Binding Provisions: The substantive commercial terms set forth in the LOI — including purchase price, deal structure, closing conditions, and related matters — are expressly non-binding. The LOI recites that it is not intended to create a binding obligation to consummate the proposed transaction and that any binding obligations would arise only upon the execution of a definitive Asset Purchase Agreement.
• Confidentiality Survival: The confidentiality obligations under the LOI survive the expiration or termination of the exclusivity period. Both parties remain bound by their confidentiality obligations regardless of whether the transaction is consummated.
Risk Assessment. If the exclusivity period expires on March 28, 2023 without either reactivation of negotiations and execution of a definitive agreement or formal extension of exclusivity, Briarwood will be free to shop the CleanLeaf and PureHaven product lines to other potential acquirers. Given the current dormant state of negotiations and the absence of any communication from Briarwood or CPS since November 18, 2022, there is a meaningful risk that Briarwood may already be contemplating alternative transactions or may begin doing so as the exclusivity expiration approaches. We have no evidence that Briarwood has breached its exclusivity obligations, but the lack of engagement from the Seller's side is notable.
From a competitive standpoint, if Briarwood enters the market with the CleanLeaf and PureHaven product lines after March 28, 2023, Meridian could face competition from other strategic or financial buyers, potentially driving up the acquisition price or resulting in Meridian losing the opportunity altogether. The confidentiality provisions of the LOI would survive and would prohibit Briarwood from disclosing Meridian's confidential information to competing bidders, but this provides limited practical protection in a competitive process.
VII. R&W Insurance Status
Calderwood & Harkness LLP prepared a preliminary underwriting submission for a representations and warranties insurance policy and submitted it to Northbridge Risk Advisors LLC (Alison Chu, Senior Vice President) on October 1, 2022. The submission was directed to Sentinel Specialty Insurance Company (underwriter: Mark Ellison), located at 500 West Monroe Street, Suite 3300, Chicago, IL 60661.
C&H completed a coverage analysis memorandum on October 10, 2022, reviewing the proposed R&W policy terms and identifying key coverage issues. The principal concern identified in the coverage analysis was the likely environmental exclusion resulting from the incomplete Phase II Environmental Site Assessment at the Marysville facility. As discussed in Section IV.B above, Sentinel indicated through Northbridge that the Phase I ESA findings would result in a specific exclusion for environmental liabilities at the Marysville facility unless a Phase II was completed and the results were satisfactory to the underwriter.
The R&W policy was never bound. The underwriting process stalled in parallel with the broader transaction negotiations. As of this date, the preliminary underwriting submission is now more than two months old, and the underlying diligence materials on which the submission was based are stale.
If the transaction is reactivated, the R&W insurance underwriting process would need to be either restarted entirely or substantially refreshed. This would require, at a minimum:
• Updated diligence disclosures reflecting any new information or developments since the original submission;
• Completion of the Phase II Environmental Site Assessment, which is a prerequisite for removing the environmental exclusion from the policy;
• Updated financial diligence, including resolution of the inventory valuation dispute;
• Re-engagement with Northbridge and Sentinel, including potential re-bidding of the policy to confirm pricing, terms, and availability of coverage; and
• An updated underwriting timeline, which typically requires 2 to 4 weeks from submission to binding, assuming all diligence is complete.
The absence of R&W insurance coverage would leave Meridian more exposed to losses arising from breaches of the Seller's representations and warranties, with recourse limited to the contractual indemnification provisions of the APA (subject to the indemnification cap, basket, and survival period) and the escrow holdback.
VIII. APA Negotiation Status
The following is a summary of the current state of APA negotiations between the parties:
First Draft APA. The first draft of the Asset Purchase Agreement was circulated by C&H to CPS on July 19, 2022. This draft reflected Buyer's initial positions on all material terms, including asset definitions, representations and warranties, indemnification, closing conditions, and ancillary agreements.
Seller's Markup. CPS returned a markup of the APA on August 22, 2022. The Seller's markup contained significant changes across multiple provisions, including:
• Acquired Assets Definition: Narrowing the definition of Acquired Assets to exclude certain categories of assets that Buyer had proposed to include;
• Indemnification Cap: Reducing the indemnification cap from Buyer's proposed 35% of the purchase price ($33,250,000) to 20% ($19,000,000);
• Survival Period: Shortening the general representations and warranties survival period from Buyer's proposed 24 months to 18 months;
• Knowledge Qualifiers: Expanding the use of Seller knowledge qualifiers across multiple representations and warranties, thereby narrowing the scope of Seller's strict liability exposure;
• Earnout Calculation Methodology: Modifying the methodology for calculating Year 1 revenue for purposes of the earnout, including proposed adjustments for returns, allowances, and certain excluded revenue categories that could reduce the measured revenue below the $72,000,000 threshold.
Second Draft APA. C&H circulated a second draft of the APA on September 15, 2022, together with a cover letter identifying the principal areas of agreement and disagreement. In the second draft, Buyer maintained its positions on the following key terms:
• Indemnification cap at 35% of the purchase price ($33,250,000);
• General representations and warranties survival period of 24 months;
• Earnout structure of $8,000,000 tied to a Year 1 revenue threshold of $72,000,000.
Certain compromises were reflected in the second draft, including modest concessions on the scope of the Acquired Assets definition and acceptance of limited additional knowledge qualifiers in non-fundamental representations.
Open Issues. The APA Issues List, prepared on September 20, 2022 and circulated internally within the C&H deal team, identified the following principal open issues:
1. Inventory valuation adjustment mechanism (FIFO vs. NRV; methodology and dispute resolution);
2. Indemnification cap (Buyer at 35% / $33,250,000 vs. Seller at 20% / $19,000,000);
3. General representations and warranties survival period (Buyer at 24 months vs. Seller at 18 months);
4. Earnout revenue threshold and calculation methodology;
5. Scope of Acquired Assets definition (certain categories still in dispute);
6. Breadth of Seller knowledge qualifiers;
7. Environmental liability allocation (pre-closing vs. post-closing; tenant vs. landlord);
8. Employee transfer mechanics and offer letter terms;
9. Transition Services Agreement term and pricing; and
10. Non-competition covenant scope (geographic and product-line limitations).
None of these open issues have been resolved. No third draft APA has been prepared or exchanged.
Ancillary Agreements. The following ancillary agreements have been prepared in first-draft form by C&H but have not been finalized or negotiated:
• Bill of Sale;
• Assignment and Assumption Agreement;
• intellectual Property Assignment Agreement;
• Transition Services Agreement (proposed 12-month term, pursuant to which Briarwood would provide certain transitional services to Meridian post-closing);
• Escrow Agreement ($9,500,000 escrow with Atlantic Fiduciary Trust Company, Gregory Fenn);
• Non-Competition and Non-Solicitation Agreement (to be executed by Malcolm Greer individually, proposed 4-year term, limited to consumer products sector).
None of these ancillary agreements have been marked up by CPS or reviewed by the Seller. They remain in first-draft form as prepared by C&H.
IX. Staleness of Diligence
All due diligence memoranda and analyses prepared in connection with the transaction were completed between July and October 2022 based on data, documents, and conditions as of that period. The financial data reference date is June 30, 2022 — now approximately 5.5 months stale. The passage of time since the diligence period presents a significant risk that the information upon which the transaction was predicated may no longer be accurate, complete, or reflective of current conditions.
If the transaction is reactivated, a comprehensive diligence refresh will be required. The scope of the diligence refresh would include, at a minimum, the following workstreams:
• Updated Financial Statements: Briarwood's full-year FY2022 financial statements should be obtained and reviewed. The FY2021 data that formed the basis for the transaction valuation ($68,000,000 revenue; $11,200,000 EBITDA) is now a full fiscal year old, and interim developments — including changes in revenue trends, cost structure, and profitability — could materially affect the transaction's economics and valuation.
• New Inventory Counts and Valuation: A fresh physical inventory count and valuation will be required, given both the staleness of the June 30, 2022 reference date and the unresolved valuation dispute. Any updated inventory analysis should resolve the FIFO/NRV methodology question before the count is conducted.
• Refreshed Accounts Receivable Aging: The $9,700,000 accounts receivable balance as of June 30, 2022 should be updated and an aging analysis performed to assess collectibility.
• Updated Litigation and Regulatory Search: New searches of litigation databases and regulatory filings should be conducted to identify any new claims, investigations, or enforcement actions involving Briarwood, the CleanLeaf product line, or the PureHaven product line since the September 2022 diligence memorandum.
• Updated Environmental Assessment: The Phase II Environmental Site Assessment recommended in September 2022 should be conducted. Additionally, any changes in environmental conditions at the Marysville or West Jefferson facilities since the Phase I ESA should be investigated.
• Updated Employee Census: The 186-employee headcount identified during the summer 2022 diligence period should be refreshed. There may have been attrition, new hires, or organizational changes in the intervening months that could affect the scope and cost of the employee transfer.
• Updated Customer Contract Status: The status of all 23 customer contracts, including any renewals, terminations, amendments, or changes in counterparty creditworthiness, should be confirmed. The 7 contracts requiring assignment consent should be prioritized for consent solicitation.
Cost Implications. A diligence refresh would require re-engagement of Whitfield Ames LLP for updated financial and accounting diligence, Terrapoint Environmental Group, Inc. for the Phase II ESA and any updated environmental assessment, and potentially additional advisors depending on the scope of issues identified. These re-engagements would involve additional professional fees and expenses that should be discussed with the client before being incurred.
X. Risk Assessment Summary
The following table summarizes the principal risks facing the transaction, categorized by issue, assessed likelihood and severity, and recommended action:
The cumulative effect of these risks is substantial. Even if each issue could be resolved individually, the aggregate volume of unresolved matters, the staleness of the diligence record, and the approaching financing and exclusivity deadlines create a challenging path to closing. A realistic assessment of the timeline to closing, assuming full reactivation, suggests that a minimum of 3 to 4 months of concentrated effort would be required — a timeline that extends well beyond the February 5, 2023 debt commitment expiration and potentially beyond the March 28, 2023 exclusivity expiration.
XI. Recommendations
A. Immediate Client Communication
We recommend that C&H send a formal letter to Diana Ressler, General Counsel of Meridian Consumer Brands LLC, promptly and no later than early January 2023, advising on the following matters:
1. Debt Commitment Expiration. The Harborview National Bank, N.A. debt commitment letter expires on February 5, 2023 — approximately 52 days from this memorandum. The ticking fee continues to accrue at a rate of approximately $411 per day. If no action is taken, Meridian will lose its committed debt financing and will have incurred aggregate ticking fees of approximately $38,630 from November 3, 2022 through the expiration date.
2. LOI Exclusivity Expiration. The exclusivity period under the LOI expires on March 28, 2023 — approximately 103 days from this memorandum. Upon expiration, Briarwood will be free to engage with other potential acquirers of the CleanLeaf and PureHaven product lines.
3. Open Issues. The six principal open issues described in Section IV of this memorandum (inventory valuation dispute, incomplete Phase II environmental investigation, landlord consent, customer consents, regulatory filing gap, and incomplete disclosure schedules) remain unresolved and present significant obstacles to closing.
4. Strategic Options. The client should be advised of the three strategic options available:
(a) Reactivate negotiations and seek to close. This option would require Meridian to re-engage with Briarwood and CPS, address the outstanding debt commitment expiration (through extension or replacement financing), commission the Phase II ESA, refresh all diligence, resolve the inventory valuation dispute, and advance APA negotiations to signing and closing. This is the most resource-intensive option and carries significant execution risk, but it preserves the investment opportunity.
(b) Formally terminate the transaction. This option would involve sending a formal termination notice to Briarwood and CPS, closing the data room, winding down advisor engagements, and terminating the debt and equity commitment letters. Confidentiality obligations would survive. This option eliminates ongoing costs (including ticking fees) and provides certainty, but forecloses the investment opportunity.
(c) Maintain current dormant posture with understanding of associated risks and costs. This option involves taking no immediate action while continuing to monitor the situation. This option preserves optionality in the near term but exposes Meridian to continued ticking fee accrual, risk of debt commitment lapse, risk of exclusivity expiration, and further staleness of diligence — all without advancing toward closing.
B. Decision Requested from Client
We recommend that Meridian be asked to make a definitive decision by mid-February 2023 — prior to the debt commitment expiration — on whether to proceed with reactivation, formally terminate the transaction, or consciously extend the dormancy period.