After more than a 30-year career rescuing failing businesses for others, Los Angeles turnaround specialist Adam Michelin decided three years ago to strike out on his own and restructure companies that he’d want to keep.
Thus was born Redux Holdings Inc., which uses its penny stock to acquire assets of underperforming and distressed companies on a non-cash basis. He then leverages debt financing from investment banks and other sources to pay off creditors and rebuild the company, often employing bits and pieces of other acquisitions.
“Usually what you see in the turnaround market is people with a lot of money who would hire someone else to do the turnaround; it’s a pure financial play for them,” said Michelin, most recently a partner at Santa Monica-based restructuring firm Kibel Green Inc.
“What I wanted to do is combine the capital with the operational expertise of people who know how to turn it around, so in the end we’d have the equity.”
Michelin’s current focus is re-establishing Anaheim-based Naturade Inc., a venerable Orange County nutritional supplement maker that fell on hard times, according to regulatory filings, following mismanagement by a new owner earlier in the decade.
In addition to Redux, Michelin and some partners formed a Los Angeles consulting firm, Enterprise Solutions Group, which performs due diligence on potential Redux acquisitions as well for outside clients.
“Nutritional supplements is an interesting business,” Michelin said. “If you understand the land mines, have a good business head, a science officer with a good sense of what the market wants, and you produce products that really work, you can make a ton of money. But you have to have all of those elements.”
While some other turnaround shops employ non-cash means as part of their restructuring tool kit, Redux is considered somewhat unusual in its reliance on its thinly traded stock which was trading last week around $1.25 to fund the acquisition.
“If you have a lot of talent and not a lot of cash, leveraging the talent in the form of stock, and saving your cash for the things that count like paying off creditors and investing in the company can make a lot of sense,” said Colin Cross, immediate past chairman of the Turnaround Management Association, who declined specifically comment about Redux’s business model.
Bankruptcy veteran
It was through Enterprise Solutions that Michelin got his first exposure to the nutritional supplement industry.
In late 2005 he came on as chief executive officer to restructure Yorba Linda-based nutritional supplement maker Window Rock Enterprises Inc. after it was hit with $4.5 million in fines by the Federal Trade Commission over marketing claims for its weight-loss supplement CortiSlim.
Michelin took Window Rock through Chapter 11 to stabilize the company for other owners. So when the Naturade opportunity came along in the summer of 2006, he figured he knew how to avoid the pitfalls that had gotten CortiSlim’s original promoters into trouble.
“Naturade is a company that’s been around since 1926, had established products being sold in several channels and no history of FTC complaints against it,” said Chief Operations Officer Rick Robinette, who came on board in January 2007.
After acquiring Naturade in August 2006, Redux began acquiring complimentary businesses that could build up Naturade’s back office, such as a Studio City-based phone sales and IT operation. It also acquired a 40 percent stake in a credit card processing company and a 30 percent stake in a Studio City-based online search engine, Webmenu Inc., to beef up the company’s ecommerce and targeted search marketing.
But further progress was hindered by Chapter 11 complications. “It should have been a quick, 90-day bankruptcy,” Michelin said. “The problem was creditors who thought there were some big pockets somewhere able to write them a big check. They misread the value of the company.”
Administrative and attorney fees that should have only run a couple hundred thousand dollars ballooned to $1.5 million by the summer of 2007, which prompted the financier that Redux had lined up to pay off creditors to back out of the deal.
“It was a disaster,” said Michelin. “In retrospect we could have picked up the brand name for a lot less after the company hit the brick wall. But we wanted to save the company and maintain continuity.”
Redux eventually was able to line up $1.2 million in new capital that was raised privately through Menlo Park-based Ventana Group and Los Angeles-based Lawrence Financial Group.
Consumer focus
After exiting Chapter 11 last November, Michelin took over as Naturade’s chief executive and added two partners who have equity stakes as well as executive roles. One was Robinette, who also recruited as chief science officer Milos Sarcev, a former Mr. Universe who earned an advanced degree in nutritional science in Yugoslavia.
Robinette and Sarcev are partners in Anaheim-based Koloseum Nutritional Sciences, which caters to competitive body builders. Redux took a 30 percent stake in Koloseum as part of the deal.
Naturade’s new management then used new credit lines to beef up inventory and get its soy-based nutritional shakes back on the shelves of retailers like Sam’s Club, where it has been one of the warehouse chain’s top-performing products. This month, Naturade stock began trading on the over-the-counter bulletin board, currently priced at 3 cents a share.
Despite Redux’s stake in Koloseum, the company plans to continue having Naturade cater to the general consumer, with its line of protein powders, herbal cold remedies and anti-aging supplements.
“You have a whole audience that is looking for natural alternatives to pharmaceutical medicines, which have side effects that are bigger health problem these days than street drugs,” Sarcev said.
