Bubs’s China distributor Alpha Group seeking $20m in refunds and credit after failing to sell stock

More than 9.5 million Bubs shares have been transferred to Hong Kong-listed Alpha Holdings, despite the distributor failing to meet infant formula sales targets.

Sacked Bubs chief executive Kristy Carr and former executive chairman Dennis Lin oversaw a deal that led to the transfer of more than 9.5 million of the company’s shares to Hong Kong-listed Alpha Group, despite the China distributor failing to meet sales targets.

Further, it appears Alpha is seeking more than $20m in refunds and credits from Bubs under an equity and sales agreement signed in March last year.

Bubs’s board, led by Katrina Rathie, has accused Alpha of accepting Bubs shares despite the partnership failing to deliver the benefits promised.

Alpha – which also owes Bubs more than $5.6m via its subsidiaries Willis Trading and Alice Trading – is now using its shareholding in Bubs in an attempt to oust its board – a coup that Ms Carr and Mr Lin have orchestrated.

Alpha is holding about five years worth of Bubs’s infant formula, which it has failed to sell, and is seeking a $7.5m refund from Bubs in addition to refusing to pay the $5.6m debt. It is also seeking a $12.9m credit from Bubs for stock it is holding that is near expiry.

Despite the failure to move stock, more than 9.5 million Bubs shares were transferred to Alpha from Willis last Thursday. Ms Carr and Mr Lin said they were “not aware of the issues” and were transparent with the Bubs board – which included Ms Rathie who was then a non-executive director – “at all times”.

Sacked Bubs boss Kristy Carr and former executive chairman Dennis Lin. Picture: Asanka Ratnayake/Getty Images

In a statement to the ASX on Monday, Bubs said that Alice and Willis have “alleged for the first time” that Bubs’s previous management made them a host of promises, including Alice and Willis could “unconditionally return any stock” that they could not sell without any liability; and could seek a credit for any stock that is close to expiring.

Alpha is now seeking to return $5.65m worth of stock to Bubs rather than repaying the debt, and says it is entitled to $12.9m “due to Bubs’s failure” to replenish near expiry stock with fresh products.

Ms Rathie said: “The Board is determined to fully investigate these allegations and will take whatever action is necessary to protect the Company and our shareholders’ interests”.

In the ASX statement, Bubs said “no such promises were communicated to the non-executive directors on the Bubs board at the time by the “previous Bubs management team”.

“The sales agreements with the Alpha Group do not provide for the return of stock, sale on consignment nor do they provide for refund of the goods by reason of Alice and Willis’ failure or inability to sell those goods,” the company said.

“The alleged claims would be contrary to the unconditional purchases made by the Alpha Group under the sale and purchase agreements, the Willis Share subscription agreement, and the representations made by the former Bubs executive chairman and former CEO to the Board and our auditors.”

The allegations from Alpha prompted a flurry of communication between Australia and China over the weekend, after Bubs “urgently requested further information from Alice and Willis, including who in the previous Bubs management team they allege made these promises and evidence of their claims”.

Willis responded that it will “endeavour to provide that information by July 28 2023” – a day after shareholders will vote on the board spill.

In March last year, Bubs announced the partnership with Alpha, which involved Bubs issuing 29.5 million of its shares to Willis Trading – its then lead daigou or reseller distributor.

The deal was conditional on Alpha buying at least $50m worth of Bubs’ products this financial year and $80m-$120m in the 2023 financial year.

But instead of prospering, Bubs’ China revenue has collapsed, with the company expecting to deliver full year sales “at the lower end” of its previous guidance of $13.5m to $13.8m. This compares with $53.6m in 2022.

The company has blamed the distribution deal with Alpha, saying it has failed to sell Bubs’s products to Chinese customers.

“Dennis Lin and Kristy Carr were previously collectively responsible for the Bubs China strategy and execution and managed the relationship with the Alpha Group,” Bubs said in an ASX statement.

“It appears that Willis’s 9,541,620 Bubs shares were transferred to Alpha Group on June 29, 2023.”

In a joint statement, Ms Carr and Mr Lin said Ms Rathie should be familiar with the agreement’s details.

“We are not aware of the issues raised in the Bubs ASX announcement today,” Ms Carr and Mr Lin said.

“Ms Rathie was a member of the Board that approved the equity alliance on March 2022 and its subsequent amendment in Jul 2022, made in order to facilitate (US President Joe Biden’s) Operation Fly Formula and should be familiar with its details.

Up until the date of our departure from Bubs, we had at all times been transparent with the Board regarding our communication and payment plan negotiated with Willis Trading / Alpha. The Board was provided with monthly updates on Alpha revenue, stock on hand, as well as paid and outstanding payments.”