In July 2020, NewAge Inc. (a health and organic products company) announced a definitive agreement to acquire ARIIX, together with four additional companies in the e-commerce and direct selling channels, to “create a global firm with estimated pro forma revenues in excess of $500 million across more than 75 countries worldwide.”
As highlighted in this prior post, in August 2021, NewAge disclosed:
“In December 2020, the Company engaged external counsel, accountants, and other advisors to conduct an independent investigation of Ariix’s international business practices, during which the investigation team identified conduct that potentially was in violation of the FCPA. In August 2021, the Company made a voluntary self-disclosure to the U.S. Department of Justice (“DOJ”) and the SEC about these items and our investigation. Although the reporting to the DOJ and SEC is ongoing, the Company believes its investigation is substantially complete. The Company has initiated procedures to remediate such practices. These findings provide opportunity for targeted, enhanced controls and additional training and other remediation. The Company intends to fully cooperate with the DOJ and SEC, with the assistance of legal counsel, to conclude this matter.”
Last week, NewAge announced that the company and certain of its subsidiaries each filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code thereby commencing Chapter 11 cases to facilitate a value-maximizing sale process.
In a filing, the company’s Chief Restructuring Officer stated:
“[T]he Debtors faced several challenges, which, in cumulation, have necessitated the filing of the Chapter 11 Cases. The challenges include 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”).
NewAge has recently faced several challenges which in cumulation have negatively impacted its cash flow and necessitated the filing of the Chapter 11 Cases. The challenges include the global COVID-19 pandemic and supply chain issues, uncertainty related to business operations in China, issues in fully integrating new brands, changes in management, and expenses related to an investigation and defense of a potential violation of FCPA related to Ariix.
[The] acquisition of Ariix in December 2020, which was intended to complement the Enterprise’s operations to give it an advantage in a highly competitive industry, has given rise to at least two challenges. First, the Debtors have incurred expense and faced challenges integrating the new lines of business acquired. Second, after it acquired Ariix, the Debtors conducted an independent investigation of their international business practices, including engaging external counsel, accountants, and other advisors. The investigation identified potential FCPA violations and, in August 2021, a voluntary self-disclosure was made to the U.S. Department of Justice and U.S. Securities Exchange Commission. As of the Petition Date, reporting continues, and no penalties or fines have been imposed against the Debtors. In conducting its own investigation and cooperating with the governmental entities, however, the Debtors have incurred significant expenses.”
The filing identifies several challenging issues facing the company, not just expenses related to its FCPA scrutiny.
As to the FCPA scrutiny though, unless FCPA Inc. is “boiling the ocean,” it is difficult to understand how this scrutiny could facilitate – at least in part – a bankruptcy filing particularly since NewAge disclosed in August 2021 (one year prior to the bankruptcy filing) that its FCPA investigation was “substantially complete.”