Chapter 6
Costa Materna financed operations through a $28 million asset-based revolving credit facility with Hudson Commonwealth Bank.
The structure was ordinary.
The company borrowed against eligible inventory and eligible customer receivables.
Healthy inventory supported more borrowing.
Defective, quarantined, expired, or unsalable inventory did not.
Each month Adrian signed a certificate listing:
Eligible inventory.
Eligible receivables.
Reserves.
Net borrowing availability.
As COO, he did not prepare every number.
He certified them.
Victor co-signed quarterly.
The H7 contamination created a problem much larger than a few thousand bottles.
Once quality placed the affected materials on hold, all derived inventory was supposed to be excluded from the borrowing base until released through documented quality procedures.
That would have reduced eligible inventory by about $8.7 million.
Then associated receivables could become questionable if customers returned product.
The company was already highly drawn on the revolver because it had recently expanded a manufacturing plant.
Had Adrian excluded the inventory correctly, Costa Materna would have faced an immediate borrowing deficiency.
Not necessarily bankruptcy.
But the bank could demand:
Cash repayment.
Additional collateral.
An equity injection.
Or tighter control.
Victor personally guaranteed up to $6 million if a borrowing-base deficiency resulted from defined misrepresentation.
That clause suddenly mattered.
Lucia read the loan summary from her hospital bed.
“So Dad’s right. This is about money.”
Salvatore shook his head.
“No.”
She looked at him.
“It’s about control of money.”
Victor had options.
Costa Materna owned valuable real estate.
A private equity investor had offered $15 million in preferred equity six months earlier.
The price was two board seats and veto rights over major acquisitions.
Victor refused.
He hated outside directors.
Adrian supported him.
Then the H7 test failed.
Quality wanted quarantine.
Quarantine meant the borrowing base shrank.
The bank would gain leverage.
So Adrian moved the inventory from quarantine to rework, then to noncommercial sample, while continuing to count much of its raw and finished value in internal inventory schedules.
That alone was serious.
Then some product shipped.
As free samples, those units produced no receivables.
So why bother?
The accountants did not know yet.
Until they found the second movement.
4,800 units of affected finished product were transferred from executive sample stock to a third-party distributor called Northcrest Medical Supply.
Invoice:
$1.16 million.
Payment terms:
120 days.
Northcrest had never purchased Costa Materna products before.
The receivable entered the borrowing base.
Investigators looked up Northcrest.
Its president was Victor’s longtime friend.
The company had three employees.
One warehouse unit.
And almost no maternal-health business.
Then the bank statement showed Northcrest had paid only $50,000.
Yet Costa Materna continued carrying almost the entire invoice as eligible receivable.
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The rejected vitamins were no longer just inventory.
Someone had turned them into collateral twice.
