If Icarus had made toilet paper instead of wax wings, he could have been Jeff Schoen.
Schoen formerly ran Orchids Paper Products, an Oklahoma-based manufacturer of “value and extreme value” toilet paper, sold through bargain retailers like Dollar General and Family Dollar. But Schoen and the rest of the company’s management had other ideas for the business — big dreams — that ended with Orchids becoming insolvent and filing for bankruptcy.
Earlier this week, a trustee overseeing what was left of the company filed a lawsuit against Schoen and other former officers and directors, alleging that they “embarked on an overly ambitious and ill-conceived expansion of the debtor’s operations” in attempting to turn Orchids into “a national manufacturer of premium and ultra-premium tissue products by, among other things, building a state-of-the-art paper manufacturing facility with a high-end, untested paper machine.”
Usually company executives looking to expand their businesses and cultivate new markets is a good thing. But the trustee, Buchwald Capital Advisors, whose job is to recover or sell off assets and pay creditors, framed the plan as a complete disaster. Buchwald accuses Schoen and his former associates of breaching their fiduciary duty, and is demanding damages as well as an order clawing back their compensation from as far back as 2002.
“Despite their ambition, [management] failed at every turn to comprehend the complexities of undertaking a bicoastal expansion, and failed to plan sufficiently or hire experienced individuals to assist them in this endeavor,” the trustee said in its complaint.
“Meanwhile, [Orchids’] financial records were so fraught with problems that they were largely unreliable,” Buchwald continued. “And the expansion, coupled with reckless and grossly negligent actions, caused the debtor’s insolvency and substantially increased the amounts due to the debtor’s creditors.”
Arising from the ashes of a previous failed tissue paper company in 1998, Orchids, which also made napkins and paper towels, started plotting bigger things for itself in 2014. According to Buchwald’s complaint, the initiative began with construction of a new plant in Barnwell, South Carolina — an endeavor that ended up running months behind schedule and tens of millions of dollars over budget.
Instead of going with an industry standard Atmos machine, which was included in the plant’s original plans, Schoen and other executives instead acquired a state-of-the-art Advantage QRT from Finnish paper technology firm Valmet Oyj. On its website, Valmet describes the Advantage QRT as meeting “the increasing market demands of products with high absorption, bulk and softness.” The QRT also “provides a sustainable process and low energy consumption,” according to Valmet.
In 2015, however, the machine “was Valmet’s newest offering, and had no track record at the time,” Buchwald said in its complaint. The QRT ended up costing $16 million above the initial quote, broke down frequently, and required millions of dollars more to maintain. The Barnwell facility encountered other problems, including difficulties sourcing appropriate pulp, according to Buchwald.
Meanwhile, the company was expanding on the West Coast by purchasing a stake in a Mexicali, Mexico plant just south of the California border. Orchids paid $36.7 million in the deal, $7.5 million over the value of the assets, on the hope that the new foothold would significantly increase Orchids’ customer base. The arrangement was doomed, however, Buchwald alleged.
Servicing customers was more complicated than expected, and Orchids failed to negotiate clauses that would have allowed it to recoup its investment in the event of a sale, according to the trustee. The deal was also “fraught with complications” because one of the Orchids’ directors was president of the Mexican manufacturer.
As the problems snowballed, Orchids started defaulting on debt. In an apparent Hail Mary in 2017 and 2018, dubbed “Project Odyssey,” the toilet paper company hired a series of consultants and advisors to help with a capital raise, obtain replacement financing, or prepare the company for a sale. That didn’t go well, either, according to Buchwald.
“Over the course of 16 months, [Orchids] spent over $10 million on these professionals and the only thing it was able to accomplish was additional amendments to the credit agreement,” the trustee said. (White Diamond Research called the company’s predicament a “train wreck” in a December 2018 post to Seeking Alpha.)
In April 2019, Orchids called it quits, filing for Chapter 11 bankruptcy protection and later liquidating itself. The company, which listed $271 million in debt, blamed issues with the $165 million South Carolina factory and raw materials costs for its failure. Most of the company’s assets were sold at auction to Ontario-based Cascades for $207 million in July 2019.
Schoen did not respond to a request for comment sent to his LinkedIn account.
One can only speculate whether the story would have ended differently if Orchids could have hung on until the pandemic, when toilet paper suddenly became one of America’s hottest commodities. Perhaps, somehow, Icarus might have landed safely after all.