Contract analysis

From: Stephanie Okafor <sokafor@calderwoodharkness.com> To: Raymond Chu <rchu@meridiancb.com> Cc: Patricia Delgado <pdelgado@meridiancb.com> Date: Mon, 18 Apr 2022 05:47:00 -0000 Subject: Ridgeline ABL — Summary of Today's Call and Negotiation Status

I wanted to follow up promptly with a summary of today's multi-party call regarding the proposed $40,000,000 asset-based revolving credit facility with Ridgeline National Bank, N.A. (C&H Matter No. 1011-00001). As you know, participants on the call were you and me, Catherine Royce of Whitfield Ames LLP (lender's counsel), and Jonathan Kershaw (SVP, Asset-Based Lending, Ridgeline).

Unfortunately, the call did not result in resolution of the outstanding borrowing base and collateral eligibility disputes. I want to lay out where things stand, what we should expect next, and how I recommend we proceed.

**1. Ridgeline's Position on Collateral Eligibility**

Ridgeline's stance has hardened on several fronts since our last exchange:

*Inventory Eligibility.* Ridgeline remains firm on excluding approximately $12 million in seasonal and slow-moving SKUs from eligible inventory, consistent with the findings of Bellweather Appraisal Group LLC's preliminary field examination delivered March 21, 2022. This reduces eligible inventory from approximately $54 million to approximately $42 million at cost.

*Net Orderly Liquidation Value (NOLV).* Bellweather's preliminary NOLV estimate remains at 70% of cost, yielding a revised NOLV of approximately $29,400,000 on the reduced inventory pool ($42M × 70%).

*Inventory Advance Rate.* Ridgeline maintains its position at 65% of NOLV. Our counter-proposal of 75% of NOLV was not accepted. Kershaw indicated that this reflects the direction of Sandra Petrova, Managing Director, Credit Risk, and that Ridgeline's credit committee is firm on this point.

*Receivables Aging.* Ridgeline insists on tightening the receivables aging threshold from >90 days past invoice to >60 days past invoice. This change alone reduces eligible receivables from approximately $38 million to approximately $31 million.

*Receivables Advance Rate.* The 85% advance rate on eligible receivables remains unchanged across all term sheet iterations. No dispute here.

Under Ridgeline's current eligibility criteria, the revised borrowing base calculates as follows:

- Receivables component: $31,000,000 × 85% = **$26,350,000** - Inventory component: $42,000,000 × 70% NOLV × 65% = **$19,110,000** - **Total revised borrowing base: approximately $45,460,000**

While this technically supports the $40 million commitment, it leaves only approximately $5,460,000 of excess availability — roughly a 13.7% cushion. Kershaw made clear on the call that Ridgeline views this as insufficient headroom. You will recall that our detailed borrowing base analysis and sensitivity tables, which we delivered to you and transmitted to Whitfield Ames on April 8, 2022, anticipated this outcome un

**3. Ridgeline's Anticipated Next Proposal**

Kershaw indicated on the call that Ridgeline is considering two alternatives to address the thin availability cushion:

(a) **Reduction of the facility commitment** from $40,000,000 to $35,000,000; or

(b) **Imposition of a $5,000,000 availability reserve**, effectively blocking $5 million from the borrowing base.

Either alternative would materially reduce the liquidity available to Meridian under the facility. Kershaw stated he expects to circulate a formal revised proposal in the next week to ten days. Royce confirmed that her team at Whitfield Ames would transmit the proposal once finalized.

**4. Meridian's Position Communicated on the Call**

You and I reiterated Meridian's position that the $40 million commitment without an availability block is essential to fund working capital and seasonal inventory build-outs. We challenged the Bellweather inventory exclusions as overly conservative for a consumer products company with predictable seasonal demand cycles, and we argued that 90-day receivables aging is market standard for consumer products borrowers — t

I also noted on the call that the counter-markup and collateral eligibility counter-proposal transmitted by Daniel Obi to Whitfield Ames on April 11, 2022, remains Meridian's formal position. Neither Kershaw nor Royce indicated that a substantive response to that counter-proposal had been prepared, which is somewhat frustrating but not entirely surprising given the credit committee dynamics Kershaw described.

I want to flag that intercreditor discussions with Greystone Capital Finance LLC — the existing $75,000,000 first lien term loan lender (outstanding balance approximately $61,500,000, maturing December 2025, loan reference GCF-MCB-2019-1215) — have not formally commenced. Alan Fitzpatrick's informal email confirmation of Greystone's willingness to negotiate an intercreditor arrangement, dated February 8, 2022, remain

As you will recall, the proposed intercreditor structure — a split-collateral arrangement with ABL first-priority lien on receivables, inventory, and deposit accounts, and term loan first-priority lien on all other assets — was outlined in our memorandum of March 4, 2022.

My recommendation is that Meridian hold off on formally engaging Greystone on intercreditor terms until there is greater clarity on whether the ABL term sheet will proceed. Initiating intercreditor negotiations prematurely could signal to Greystone that the ABL is further along than it currently is, and could also incur unnecessary legal and advisory costs. I am happy to discuss this further if you or Patricia have a

1. **Await Ridgeline's formal revised proposal** (expected within approximately 10 days). 2. **Once received, we will analyze the proposal** and prepare a detailed comparison against the current term sheet, including borrowing base impact under both the commitment reduction and availability reserve scenarios. 3. **Schedule a follow-up strategy call** with the full Meridian team, including Patricia, once the revised p

Raymond, I want to be candid: I am not yet concerned that this deal falls apart, but the trajectory of the last two weeks has been less constructive than I would like. The credit committee's rigidity on the advance rate and the proposed tightening of receivables aging are both points we should be prepared to escalate, potentially including a direct conversation between Patricia and Sandra Petrova if the next round do

I am available to discuss by phone at your convenience — feel free to call my cell anytime this evening or tomorrow. Daniel and Lisa are continuing to refine the borrowing base sensitivity analysis in anticipation of the next round so that we are fully prepared to respond quickly once Ridgeline's revised proposal arrives.

Stephanie Okafor Partner, Banking & Finance Calderwood & Harkness LLP One Liberty Plaza, 45th Floor New York, NY 10006 T: (212) 555-4718 M: (917) 555-0293 sokafor@calderwoodharkness.com