NewAge, Inc – U.S. Trustee and Creditors’ Committee Take Aim at Sale Process; Want Clarity on Proposed Stalking Horse, Extended Timetable & Elimination of Bidder Protections and Credit Bidding Rights

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September 19, 2022 – The U.S. Trustee assigned to the Debtors’ cases and the Debtors’ Official Committee of Unsecured Creditors (the “Committee”) have objected to the Debtors' proposed bidding procedures [Docket Nos. 87 and 93 respectively].

The U.S. Trustee argues that (i) "the proposed timetable is insufficient to allow the Debtors to reach all potential purchasers and for potential purchasers to adequately perform due diligence," (ii) that the Debtors' stalking horse should be treated as an insider and (iii) that proposed bidder protections are inappropriate given that insider status.

Like the U.S. Trustee, the Committee takes issue with an accellerated timetable and wants more information about the stalking horse's historical relationship with the Debtors (see more on the stalking horse's principal John Wadsworth just below). The Committee also takes issue with the stalking horse's ability to credit bid recently acquired prepetition debt which it argues is "more than fully collateralized" by cash sitting in a non-debtor bank account (and in doing so "artificially inflate the baseline bid")  and further pushes for "customary committee protections" relating to investigation and consultation rights.

Case Status

On August 30, 2022, NewAge, Inc. and three affiliated Debtors (Nasdaq: NBEV; “NewAge” or the “Debtors”) filed for Chapter 11 protection noting estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn (Petition lists $310.9mn in total assets and $149.4mn in total debts as of December 31, 2021). At filing, the Debtors, a Utah-based direct-to-consumer organic and healthy products company, cited "the global COVID-19 pandemic and supply chain issues, uncertainty related to business operations in China, issues in fully integrating numerous brands, changes in management, and expense related to an investigation and defense of a potential violation of the Foreign Corrupt Practices Act (‘FCPA’)" as compelling them to seek bankruptcy protection

On August 31st, the Debtors filed a motion seeking approval of (i) bidding procedures for the sale of substantially all of the their assets and (ii) authority to enter into stalking horse arrangements with DIP Financing, LLC ($28.0mn cash and credit bid). Proposed bid protections included reimbursement of up to $375,000 of the stalking horse’s reasonable expenses and a 2.5% break-up fee.

On September 1st, the Court hearing the NewAge, Inc cases issued an order authorising the Debtors to access $9.0mn in new money, debtor-in-possession (“DIP”) financing on an interim basis with the $7.0mn balance (of what is in total of $16.0mn of requested new money DIP financing being provided by stalking horse DIP Financing, LLC) to be made available on issuance of a final DIP order, with consideration of that order now scheduled for September 29th.

Stalking Horse Arrangements

The Perkins Declaration {docket No. 12]  provides: "As part of the Debtors’ marketing efforts to sell substantially all of their assets, they began negotiations with John Wadsworth, who has worked as an independent sales representative of the Enterprise since 1998—Mr. Wadsworth has never been a director or officer of any Debtor and has less than 0.4% of the outstanding shares of NA, Inc. Mr. Wadsworth is a principal of DIP Financing, LLC (the 'Stalking Horse').

Importantly, the Stalking Horse has agreed to enter into a Senior Secured Debtor-in-Possession Term Loan Agreement and extend $16,000,000 in debtor-in-possession financing (the 'DIP Facility') as well as purchase the EWB Credit Facility to help the Debtors conserve value as they run a sale process in the Chapter 11 Cases. Moreover, the Stalking Horse intends to credit bid the full amount of the DIP Facility and EWB Credit Facility and serve as the stalking horse for the sale for substantially all of the Debtors’ assets."

On the Debtors' characterization of their relationship with John Wadsworth, the Committee (in a position to be more forceful than the U.S. Trustee) heartily disagrees, commenting: "The Debtors downplay Mr. Wadsworth’s relationship with the company, describing him as a mere 0.4% equity owner and 'independent sales representative of the Debtors. Other sources, however, including Mr. Wadsworth’s own LinkedIn profile, suggest that he has been heavily involved in both the Morinda and Ariix businesses from inception."

U.S. Trustee’s Objection

The U.S. Trustee's objection [Docket No. 87] states, “The bidding procedures motion seeks approval of a hurried sale of substantially all the Debtors’ assets to DIP Financing, LLC (‘Lender’), which is both (i) holder of the Debtors’ prepetition secured debt and (ii) the Debtors’ DIP lender, for a credit bid of that secured debt. Upon information and belief, the principal of the Lender is an insider of the Debtors – thus, heightened scrutiny is required in considering the reasonableness of the terms of the proposed bidding procedures and their implications on all other creditors, including unsecured creditors of the estates. The Bidding Procedures Motion should not be approved absent additional disclosures and a full understanding of the relationship between Lender and the Debtors.

The U.S. Trustee objects to the time allotted for the marketing and auction process in this case. The contemplated sale timeline should be denied as, among other things, fostering a sale process that runs afoul of the Bankruptcy Code’s primary goal of maximizing value for the debtors’ estates and the entirety of the creditor body. The hearing on the bid procedures is scheduled for September 20, 2022. The Debtors are seeking a bid deadline of October 4, which is a mere 14 days later. More confounding, the proposed sale objection deadline is September 13, 2022. The fact that the proposed deadline to object to the sale is 7 days prior to the hearing on the Bidding Procedures Motion is indicative of the hasty process. The proposed timetable is insufficient to allow the Debtors to reach all potential purchasers and for potential purchasers to adequately perform due diligence. The net result will be little to no competition to Lender’s bid.

The hearing on the Bidding Procedures Motion is set on shortened notice. The Committee was recently appointed and retained counsel on September 16, 2022. The Committee and all parties in interest must have sufficient time to adequately consider and investigate the prepetition activity and contemplated sale process. Likewise, the Lender should not be permitted to credit bid the prepetition debt absent allowance of suitable time to investigate the prepetition liens and claims.

The U.S. Trustee also specifically objects to those portions of the Bidding Procedures Motion seeking to pay Lender an expense reimbursement of up to $375,000 and a 2.5% break-up fee. Break-up fees and expense reimbursements are intended to be incentives for a party to invest time and money to do the due diligence necessary to make a stalking horse bid, knowing it might be outbid at the auction and therefore out-of-pocket for its expenses. As the holder of the prepetition debt and with a principal that has worked for the Debtors since 1998 and appears to be an insider, Lender needed minimal due diligence to make a bid, did not need an incentive to make a bid, and does not need to be compensated if it is not the winning bidder at the auction, because, regardless of the outcome of the auction, Lender will benefit. Either Lender will be the winning bidder, or, if it is outbid, the additional proceeds of the sale will be used to pay down Lender’s secured claim. Given that Lender purchased the prepetition debt to credit bid as the stalking horse, Lender needed no extra incentive to make the stalking horse bid. Further, there is no disclosure in the Bidding Procedures Motion regarding what amount, if any, of Lender’s transaction-related costs have been reimbursed (or will sought to be reimbursed) as financing-related costs. The proposed break-up fee and expense reimbursement therefore are not ‘actually necessary to preserve the value of the estate,’ as required under Third Circuit law.”

Creditors Committee’s Objection

The Committee's objection [Docket No. 93] states, “Since retaining advisors on the afternoon of Friday, September 16th, – less than one business day ago – the Committee has worked around the clock to prepare this objection in advance of today’s Noon objection deadline. Those efforts begot more questions than answers. Certain of the representations made in the Debtors’ pleadings, public SEC filings, and objections to the Motion filed by the Debtors’ former counsel and management raise serious red flags that must be addressed before any stalking horse bid or bid procedures are approved by this Court.

The Committee has identified four major issues that warrant denial of the Motion at this time:

  1. Lack of Transparency Regarding Identity of Stalking Horse and Released/Purchased Claims Under APA: The Debtors fail to disclose the full nature of their past and present relationships with DIP Financing, LLC, the proposed Stalking Horse Bidder/DIP Lender (the ‘DIP Lender’), and one of its principals, John Wadsworth, as well the full extent of claims to be released or sold under the Stalking Horse Agreement. Based on filed objections to the Motion and the Committee’s own diligence, it is clear that the estates may possess valuable litigation claims against an unknown universe of individuals and entities in connection with NewAge’s leveraged buyout of Ariix in December 2020, through which it also acquired the assets of Zennoa – John Wadsworth’s company (a fact omitted in the Debtors’ filings). The Stalking Horse Bid should not be approved absent complete transparency regarding the DIP Lender’s connections to the Debtors and a guarantee that no valuable litigation claims will be released or sold thereunder.
  2. Improper Credit Bid of Prepetition Debt: The DIP Lender should not be permitted to credit bid the $12 million of prepetition secured debt it acquired before the Petition Date. That debt is more than fully collateralized by over $13 million of cash on deposit in a non-debtor subsidiary bank account with East West Bank’s (the prior holder of the prepetition secured debt) sibling Chinese bank. The Debtors have not offered any explanation or evidence as to why these funds cannot be used to retire the debt. The DIP Lender should not be permitted to artificially inflate the baseline bid for the Debtors’ assets by credit bidding debt while simultaneously purchasing the equity in the subsidiary holding cash pledged as collateral for the debt.
  3. Unreasonable Sale Timeline: The proposed timeline, which contemplates only 38 days from the Petition Date to sale closing, is unreasonable and must be extended to afford all parties-in-interest due process and allow for full transparency. Of the 36 days between the Petition Date and the Bid Deadline, two fall on Rosh Hashanah (September 26th and 27th), and the auction itself is scheduled for Yom Kippur on October 5th – details that cause the Committee to question whether the Debtors ever seriously entertained the idea of an auction in the first place.
  4. Lack of Customary Committee Protections in Bid Procedures: The Bid Procedures fail to provide certain customary and standard protections, including (i) requiring that any credit bid be made expressly subject to the Committee’s investigation rights in the DIP financing order, and (ii) granting the Committee routine consultation rights over certain aspects of the sale process and conduct of the auction.

Taken together, these aspects of the Bid Procedures promote an opaque and unfair process that may swiftly deliver this company (and potentially backdoor releases of valuable litigation claims) to the DIP Lender for bottom dollar consideration.:

Drilling down on John Wandworth, the Committee adds: "As a preliminary matter, under no circumstance should the Court approve the Stalking Horse Bid until the Debtors clarify their relationship with the DIP Lender and its members. The Debtors downplay Mr. Wadsworth’s relationship with the company, describing him as a mere 0.4% equity owner and “independent sales representative” of the Debtors. Other sources, however, including Mr. Wadsworth’s own LinkedIn profile, suggest that he has been heavily involved in both the Morinda and Ariix businesses from inception. Mr. Wadsworth allegedly founded or co-founded the Morinda business in 1996, where he developed Tahitian Noni (the flagship product of Debtor Morinda, Inc.) and remained active until 2015. He also appears to have founded, and currently operates, Zennoa, LLC, a company whose assets were acquired by Ariix in November 2019. Zennoa’s assets were subsequently acquired by NewAge through its disastrous merger with Ariix in December 2020 – a transaction that will be at the forefront of the Committee’s investigation. The estates likely possess valuable claims arising from the Ariix merger, including indemnification claims against the Ariix Sellers…for costs advanced in connection with NewAge’s investigation into Ariix’s potential violation of the Foreign Corrupt Practices Act, as well as breach of duty and avoidance claims related to the leveraged buyout and the Debtors’ conduct and governance both prior and subsequent thereto. 

The Court should not approve the Stalking Horse Bid unless and until the Debtors disclose all relevant connections with the DIP Lender, Mr. Wadsworth, and any other related parties, and represent that no valuable litigation claims (including any avoidance actions) will be released or sold under the Stalking Horse Agreement."

The Bidding Procedures Motion

The Debtors' motion [Docket No. 13] states, “Faced with numerous financial and operational challenges, on April 26, 2022, the Company retained SierraConstellation Partners, LLC, ('SCP') as a financial and restructuring advisor to assist with managing cash flow and pursue other strategic challenges. At this point the Company and SCP began exploring financial and strategic alternatives to maximize value. Accordingly, on May 26, 2022, the Company retained Houlihan Lokey Capital, Inc. ('Houlihan') to provide investment banking services.

Among those efforts, the Debtors, SCP, and Houlihan began exploring a sale process for  the Company’s assets, and SCP and Houlihan assisted the Company in taking additional steps to reduce costs and preserve capital…Using its extensive network, along with the Debtors’ and SCP’s contacts, in June 2022, Houlihan contacted eighteen (18) parties in its buyer outreach initiative. Of this initiative, fifteen (15) parties signed the non-disclosure agreements. All parties that executed non-disclosure agreements were provided with diligence information and access to a data room to facilitate more detailed diligence.

Houlihan and the Debtors negotiated on terms of potential transactions with several parties. Despite these efforts, the Stalking Horse Agreement with the Stalking Horse Bidder is the best bid submitted under the circumstances and provides for the satisfaction of the secured debt of the Debtors, funding for the restructuring process and an auction process to enable the Debtors to solicit higher and better offers for the Debtors’ assets.

Before the commencement of these Chapter 11 Cases, the Debtors, with the assistance of Houlihan, negotiated the Stalking Horse Agreement with the Stalking Horse Bidder, whose principal is John Wadsworth, who has worked as an independent sales representative of the Company since 1998 — Mr. Wadsworth has never been a director of officer of any Debtor and has less than 0.4% of the outstanding shares of NewAge, Inc. As a condition to entering the Stalking Horse Agreement, the Stalking Horse Bidder also required the Bid Protections, as are customary in these situations.

Therefore, given the available options placed before the Company, it decided, in its business judgment, that entering the Stalking Horse Agreement was in the best interest of all parties in interest to these Chapter 11 Cases.

As explained above, the Company determined that, given its deteriorating liquidity position, the best available option to maximize value and/or reasonably execute a strategic transaction was through an in-court sale seeking approval pursuant to section 363 of Bankruptcy Code with the Stalking Horse Agreement subject to higher and better offers. Accordingly, the Debtors commenced these Chapter 11 Cases to run a competitive sale process for their assets under the aegis of chapter 11 to maximize value for the benefit of their estates and creditors.

Furthermore, to ensure that the Stalking Horse Agreement is the best available option, the Debtors — with the assistance of Houlihan — are continuing with their marketing efforts with some or all of the Assets to be sold, subject to the Bid Procedures, to the highest or otherwise best bidder(s) at the conclusion of this sale process. Negotiations with interested transaction parties seeking to acquire certain assets of the Debtors remain ongoing.

An auction process, subject to higher and better offers, will stimulate competitive bidding among potential purchasers for the Debtors’ assets and maximize the value of those assets — whether sold as a whole or separately — for the benefit of the Debtors’ estates and their creditors."

Key Terms of the Stalking Horse APA:

  • Sellers: The Debtors
  • Purchaser: DIP Financing, LLC, a Wyoming limited liability company
  • Purchase Price: $28.0mn. In consideration for the Acquired Assets, the Stalking Horse Bidder shall:
  • assume certain liabilities as set forth in the Stalking Horse Agreement;
  • pay all Cure Costs;
  • credit bid pursuant to section 363(k) of the Bankruptcy Code up to the full outstanding amount of the Prepetition Credit Agreement Indebtedness, which, for the avoidance of doubt, may include any aggregate outstanding principal balance, including any accrued but unpaid interest or payment-in-kind interest with respect thereto;
  • credit bid pursuant to section 363(k) of the Bankruptcy Code up to the full outstanding amount of the DIP Credit Agreement Indebtedness, which, for the avoidance of doubt, may include any aggregate outstanding principal balance, including any accrued but unpaid interest or payment-in-kind interest with respect thereto; and
  • pay closing cash consideration in an amount equal to (i) $16 million, less (ii) the amount of outstanding DIP Credit Agreement Indebtedness. 
  • Bidder Protections: Reimbursement of up to $375,000 of the Stalking Horse Bidder’s reasonable expenses and a 2.5% break-up fee.

Proposed Key Dates

  • Sale Objection Deadline: September 13, 2022
  • Bid Procedure Hearing: September 20, 2022
  • Bid Deadline: October 4, 2022
  • Deadline to Select Qualified Bidder: October 4, 2022
  • Auction (if necessary): October 5, 2022
  • Deadline to File Notice Designating Successful Bidder: October 5, 2022
  • Post-Auction Sale Objection Deadline: October 6, 2022
  • Sale Hearing: October 7, 2022

Prepetition Indebtedness

  • Secured Claims. On March 9, 2022, NA Inc. entered into a Loan and Security Agreement with EWB (the “Loan Agreement”) which provides for a $12.0 million revolving loan facility (the “EWB Credit Facility”). Shortly after entering into the Loan Agreement, NA Inc. borrowed the entire $12.0 million of funding under the EWB Credit Facility.
  • Unsecured Claims. General unsecured claims against each Debtor as of the Petition Date is summarized as follows: a. NA Inc. had estimated debt in excess of $1.0mn, consisting primarily of notes payable, accounts payables to trade creditors and professionals, and a lease liability.
  • Holdings had estimated debt in excess of $18.0mn, consisting primarily of intercompany debt, payroll and employee benefits and taxes payable.
  • Morinda had estimated debt in excess of $34.0mn, consisting primarily of intercompany debt, accounts payable, commissions payable, payroll and employee benefits and other current liabilities.
  • Ariix had estimated debt in excess of $235.0mn, consisting primarily of intercompany debt, accounts payable and notes payable.
  • Equity. As of August 10, 2022, there were 244 holders of record of NA Inc. common stock and 168,213,761 shares outstanding. Because NA Inc.’s common stock is held through several brokerage firms, the number of beneficial stockholders is far greater than the number of holders of record.

About the Debtors

According to the Debtors: “NewAge is a purpose-driven firm dedicated to inspiring the planet to Live Healthy™. The Utah-based Company commercializes a portfolio of organic and healthy products worldwide primarily through a direct-to-consumer (D2C) route to market distribution system across more than 50 countries. The company competes in three major category platforms including health and wellness, inner and outer beauty, and nutritional performance and weight management — through a network of exclusive independent Brand Partners, empowered with the leading social selling tools and technology available worldwide."

The Perkins Declaration adds: "The Debtors and their non-debtor affiliates (the 'NewAge Enterprise' or the 'Enterprise') develop, sell, and distribute health and nutritional products, including through a robust direct sales distribution network across more than 50 countries, primarily in North America, Japan, China, and Europe. Products are predominantly sold through an extensive direct sales network, utilizing a team of over 400,000 brand partners (the 'Brand Partners'). The Enterprise also includes an e-commerce sales platform and a store distribution business—one of the largest in Colorado—that provides beverages and snacks to grocers, big box retailers, and convenience stores.

NewAge Enterprise’s health and nutritional products are in the following areas: (i) health and wellness; (ii) health appearance; and (iii) nutritional performance. Its largest brand is known as Tahitian Noni®, which includes products focused on reducing inflammation and strengthening the body’s protection against viruses, primarily through a consumable beverage derived from the Noni plant, an antioxidant-rich, natural resource found in French Polynesia (the 'Noni Plant')."

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