Contract analysis

From: Carlos Espinoza <cespinoza@calderwoodharkness.com> To: Priya Nandakumar <pnandakumar@vantagemobility.com> Cc: Samuel Eklund <seklund@calderwoodharkness.com> Date: Fri, 13 May 2022 08:47:00 -0000 Subject: Meridian Warranty-Chargeback Dispute — Update Following May 12 Meet-and-Confer [Matter No. 1007-00005]

I wanted to get you a summary of yesterday's first meet-and-confer session while it's fresh. The meeting was held at Pratt, Givens & Lowell's offices in Chicago. Sam Eklund and I attended on behalf of Vantage, and Hannah Brinkley from our team was also present and assisted with the technical portion of our presentation. On Meridian's side, the room included Rachel Drummond (lead partner, PG&L), Victor Saldana (associ

Below is a structured recap covering their position, our presentation, and recommended next steps.

Rachel Drummond opened by reaffirming Meridian's position that all three warranty chargeback notices are valid and fully recoverable under Section 9 of the LTSA (Ref. No. LTSA-MPT-2020-0315):

- **WCN-2021-1247** (December 6, 2021): 3,842 units / $1,583,654.60 - **WCN-2022-0103** (January 18, 2022): 4,260 units / $1,756,398.00 - **WCN-2022-0289** (February 7, 2022): 3,712 units / $1,530,497.60

Meridian continues to maintain that the root cause of the field failures in the MPT-8AT transmission modules is micro-porosity in Vantage's valve body housings (Part Nos. VMS-4400A through VMS-4400F) exceeding acceptable thresholds, which they claim caused hydraulic fluid bypass, erratic shift behavior, and limp-mode activation in end-user vehicles.

They assert the aggregate chargebacks of **$4,870,550.20** across **11,814 units** are contractually supported, with the following per-unit chargeback breakdown of $412.30:

- $78.50 — replacement part - $218.00 — OEM dealer labor - $67.80 — Meridian internal failure-analysis/logistics - $48.00 — administrative fee

No surprises there — this tracks their pre-session correspondence almost verbatim.

**2. Meridian's Concessions / Acknowledgments — This Is Important**

The most notable development of the session: Drummond acknowledged — while carefully stating she was not conceding legal significance — that there were **procedural issues with the first chargeback notice (WCN-2021-1247)**. Specifically:

- Returned parts were **not made available to Vantage for inspection within the 30-day deadline** required by LTSA Section 9.4(b). Parts were not tendered until **52 days** after the notice date. - **2,108 of the 3,842 units** referenced in that WCN were **never tendered for inspection at all**.

Drummond characterized this as an "administrative delay" driven by return volume and Meridian's internal logistics constraints. She did not, however, offer to withdraw or reduce the first WCN.

This is a significant concession, even with the qualifications she put around it. It goes directly to the enforceability of WCN-2021-1247 under the LTSA's inspection-and-cure provisions, and we should leverage it aggressively in our formal counter-position.

James Okoro presented Meridian's internal failure-analysis data. The key points:

- Meridian contends its data shows casting porosity exceeding ASTM E505 Level 2 in a "substantial percentage" of returned valve body housings (he did not specify an exact percentage, which I noted). - Okoro's presentation focused on porosity near the **solenoid bore region** and asserted a direct causal link between that porosity and the solenoid-circuit malfunctions reported by Meridian's OEM customers beginning Oct

What Okoro **did not address** — and actively deflected when questioned — was **Meridian's August 2021 change to its torque-wrench calibration protocol at the Schaumburg assembly plant**, which Thomas Reinhardt had previously flagged as a potential contributing cause. When Sam pressed on this directly, Drummond stepped in and stated that Meridian's position is that the calibration change was "unrelated" to the field

The deflection on the torque issue was telling. They clearly do not want to engage on this point, which reinforces our view that it's a real vulnerability for them.

**4. Our Presentation on Behalf of Vantage**

We presented a high-level summary of **Dr. Stefan Vorhaus's** (Apex Metallurgical Consulting, Inc.) preliminary failure-analysis findings, issued April 22, 2022, based on his examination of 87 returned units. We were careful to present the mixed-causation findings at a summary level without disclosing or tendering the full expert report. Here's what we shared:

- **34 of 87 units (39.1%)** exhibited porosity exceeding ASTM E505 Level 2 in localized regions near the solenoid bore. We acknowledged some Vantage exposure on these units. - **41 of 87 units (47.1%)** showed physical evidence of **insufficient solenoid-pack bolt torque** — specifically, bolt-head witness marks and gasket compression patterns inconsistent with Meridian's specified 12 Nm torque value. This points sq

We emphasized that these findings demonstrate mixed causation and that a significant portion of the field failures are attributable to Meridian's assembly process, not Vantage's castings. This landed — you could see Karen Whitford and Okoro exchange a look during the bolt-torque portion. Drummond maintained her composure but didn't attempt a substantive rebuttal on the spot.

We also reiterated two additional points:

- Vantage's **PPAP documentation and ongoing SPC data** demonstrate that **97.3%** of sampled parts met ASTM E505 Level 1 and **100%** met Level 2 — the maximum porosity threshold specified in Meridian Drawing Set MER-DWG-4400, Rev. C. In other words, Vantage's own production data does not support a systemic porosity problem. - We challenged the **$48.00 per-unit administrative fee**, which aggregates to **$567,072.0

**5. Discussion of Commercial Resolution**

Following the technical presentations, Drummond indicated that Meridian is **"open to exploring a commercial resolution"** to avoid the cost and disruption of formal proceedings. She was careful not to commit to any specific framework or numbers, and no settlement figures were exchanged by either side.

The tone throughout the session was professional but firm on both sides. The commercial relationship between Vantage and Meridian — approximately **$38.6 million in annual revenue** to Vantage, representing **27.1%** of Vantage's 2021 revenues of $142.3 million — was acknowledged as a factor both parties wish to preserve.

My read: Meridian's willingness to discuss resolution, combined with their tacit acknowledgment of procedural deficiencies on the first WCN and their reluctance to engage on the torque-calibration issue, suggests there is a **viable path to a negotiated outcome**. They know their position has holes, but they're not going to make this easy or cheap.

The parties agreed to schedule a **second meet-and-confer session for July 8, 2022**, in Chicago. In advance of that session:

- Both sides will **exchange additional technical data**, including Meridian's torque-audit records and Vantage's supplemental SPC data. - C&H will prepare a **formal written counter-position and settlement framework** for presentation at or in advance of the July session.

**7. Financial Urgency — EBITDA Covenant**

I want to flag the financial dimension again because it remains acute. As of Q1 2022, Vantage's trailing-twelve-month EBITDA stood at **$17.8 million** — only **$300,000 above** the **$17.5 million minimum EBITDA covenant floor** under the Dralvecen Commercial Lending Corp. credit facility (the $65 million revolver and $40 million term loan dated December 18, 2019).

Meridian has withheld approximately **$2.4 million** from Vantage's open accounts receivable through unilateral deductions since January 2022. Restoring these withheld receivables — or at least halting further deductions during negotiations — is critical to avoiding a potential covenant breach in upcoming quarterly tests.

I recommend we raise the receivables-withholding issue directly in our formal counter-position, framing Meridian's unilateral deductions as a **material breach of the LTSA's payment terms** and seeking an **interim standstill on further deductions** pending resolution. I'd also suggest keeping Derek Calloway and Douglas Brenton at Ironclad Capital Partners apprised of the timeline, given the covenant implications.

1. **Internal debrief call** — Schedule a call with you, Derek Calloway, and Thomas Reinhardt to debrief on the meet-and-confer and align on settlement parameters before the July 8 session. Early next week would be ideal.

2. **Formal discovery request to Meridian** — Through PG&L, request the torque-audit records and any additional assembly-process documentation related to the August 2021 calibration protocol change at Schaumburg.

3. **Formal counter-position and commercial resolution framework** — We will prepare this to incorporate: - The mixed-causation expert findings - The procedural non-compliance arguments (52-day delay; 2,108 uninspected units on WCN-2021-1247) - The administrative fee challenge ($567,072.00) - A proposed settlement range (to be discussed with you; as noted in our internal assessment memo of May 2, our defensible range

4. **Supplemental expert analysis** — Continue coordinating with Dr. Vorhaus at Apex Metallurgical on any additional analysis that may be needed before the second session.

5. **Dralvecen notification** — Consider whether to provide formal notice to Dralvecen regarding the dispute's potential covenant impact as a protective measure. Happy to discuss the pros and cons of timing on this.

I'm happy to set up a call at your convenience early next week to walk through any of this in more detail and get your input on settlement parameters. In the meantime, I'll circulate a more detailed internal memorandum summarizing the session for the file.

As always, please note that all communications regarding this matter are **privileged and confidential** — please do not forward outside the privilege group without checking with us first.

**Carlos Espinoza** Lead Associate Calderwood & Harkness LLP 200 South Wacker Drive, Suite 3100 Chicago, IL 60606 T: (312) 555-0194 E: cespinoza@calderwoodharkness.com

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