Contract analysis

From: Harrison Wexford <hwexford@calderwoodharkness.com> To: Marcus Trejo <mtrejo@pinnaclecap.com> Cc: Beatrice Holloway <bholloway@calderwoodharkness.com> Date: Thu, 20 Oct 2022 06:47:00 -0000 Subject: Verdana Software — Negotiation Status and Recommendation [Matter No. 1002-00004 / PIN-0042]

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION

I wanted to provide you with a candid assessment of where we stand on the proposed $60,000,000 Series D Preferred Stock investment in Verdana Software, Inc. and offer our recommendation on the path forward. Our engagement team has been in ongoing discussions with Jonathan Hale and Rebecca Thornton at Langford Price & Associates LLP (Verdana's counsel) and with Nathan Callister at Hargrove Securities LLC (Verdana's pl

As you know, the exclusivity agreement originally executed on May 12, 2022 provided for a 60-day term, which the parties extended twice — first to August 15, 2022, and then to September 30, 2022. Exclusivity expired on September 30, and the parties agreed to continue discussions on a non-exclusive basis. The practical significance of this is straightforward: Verdana is now free to solicit and negotiate with competing

No transaction documents have been executed. All drafts — the Stock Purchase Agreement, Amended and Restated Investors' Rights Agreement, Voting Agreement, Right of First Refusal and Co-Sale Agreement, and Amended and Restated Certificate of Incorporation — remain in partially negotiated form. For context on the drafting timeline: we delivered the initial SPA on June 8; Langford Price returned a markup on June 22; we

The one area of substantive agreement is board composition. On September 6, the parties reached agreement on a seven-member board: two Founder designees, one Ridgeline Ventures designee, one Northgate Growth Partners designee, one Brindoval Capital Group designee, one Pinnacle designee (you or your designee), and one mutually agreed independent director. All other material terms remain open.

There are four issues that continue to separate the parties. I'll walk through each.

This remains the most significant gap. Pinnacle's position, formally communicated to Verdana on September 19, is a $260,000,000 pre-money valuation, implying a per-share price of $3.25 for the Series D, approximately 18,461,538 shares issued to Pinnacle, and approximately 18.75% post-close ownership on a fully diluted basis.

Verdana has maintained since the May 3 counter-term sheet (delivered through Hargrove Securities) a $320,000,000 pre-money valuation — $4.00 per share, 15,000,000 shares to Pinnacle. At that price, Pinnacle would hold only 15.79% (15,000,000 out of 95,000,000 total fully diluted shares). That figure drops to approximately 15.00% if Verdana's proposed 5,000,000-share ESOP expansion (from 12,000,000 to 17,000,000 share

Verdana promptly rejected the $260,000,000 position when we communicated it on September 19. The $60,000,000 gap between the two pre-money positions remains unbridged.

I will note that Verdana's financial profile — ARR of $47.3 million as of Q1 2022, 63.7% year-over-year ARR growth, and 128% net revenue retention — supports a range of defensible valuations depending on comparable multiples. The customer concentration risk (which I discuss below in Section III) weighs against the higher end, but reasonable minds can differ on where in the range the "right" number falls.

Pinnacle has proposed a 1.5x non-participating liquidation preference, meaning Pinnacle would receive $90,000,000 ($60,000,000 × 1.5) before any distributions to common stockholders. Verdana's position is 1.0x non-participating — a straight return of the $60,000,000 investment amount.

Verdana and the existing investors have pointed out that all prior rounds — Series A (Ridgeline Ventures), Series B (Northgate Growth Partners), and Series C (Brindoval Capital Group) — carry 1.0x non-participating preferences. Their argument, which is not unreasonable, is that granting structural seniority to Series D through a higher multiple would be inconsistent with the historical capital structure and would dis

Pinnacle has requested full-ratchet anti-dilution protection. Verdana insists on broad-based weighted average anti-dilution, consistent with the terms governing Series A, B, and C.

Brindoval Capital Group has been particularly vocal on this point — Diana Chen has objected on the basis that full-ratchet protection for Series D would disproportionately dilute existing preferred holders in a down-round scenario. As you may recall, Andrew Fitzpatrick's August 4 analysis memorandum modeled the impact at several hypothetical down-round prices and confirmed the significant divergence between the two m

Pinnacle proposed a drag-along provision requiring all stockholders to consent to a sale or IPO supported by holders of a majority of the then-outstanding preferred stock. Founders Raj Anand and Lena Kovac (who collectively hold 28,000,000 shares, representing 35% of common) formally objected on August 10, insisting on a $500,000,000 enterprise value floor below which no drag-along sale can be forced.

The existing investor base is divided on this issue. Ridgeline Ventures (Priya Dasgupta) and Brindoval Capital Group (Diana Chen) support the founder threshold. Northgate Growth Partners (Elliott Margolis) sides with Pinnacle. This split among the existing investors complicates resolution and makes it difficult to build consensus on either approach.

**III. The Brindoval Compromise Proposal**

On October 14, Diana Chen proposed what she characterized as a "bridge" compromise: a $290,000,000 pre-money valuation (implying a per-share price of $3.625, approximately 16,551,724 shares issued to Pinnacle, and approximately 17.14% post-close ownership), paired with a 1.0x non-participating liquidation preference. The proposal also implicitly retained broad-based weighted average anti-dilution consistent with prio

As you and I discussed briefly, Pinnacle declined this proposal. I understand the reasoning — while the $290,000,000 pre-money moves in Pinnacle's direction, it still falls $30,000,000 above Pinnacle's $260,000,000 position and does not address the liquidation preference differential (Pinnacle's 1.5x versus the proposed 1.0x) or the anti-dilution mechanism. The resulting 17.14% ownership also falls short of Pinnacle'

That said, I want to be direct with you: the Brindoval proposal may represent something close to the zone of possible agreement, and I think it is worth carefully considering whether a revised approach from Pinnacle's side could use the Brindoval framework as a starting point.

**IV. Assessment of Verdana's Position and Alternatives**

With exclusivity expired, Verdana has optionality. That said, its position is not without pressure.

On the urgency side, the company is burning cash. EBITDA was negative $11.6 million on a trailing twelve-month basis as of March 2022. As of the same date, Verdana had $22.4 million of cash on hand and $6.2 million drawn on its $10.0 million revolving credit facility with Pacific Summit Bank, N.A. That facility matures June 30, 2024 and includes a minimum liquidity covenant of $10.0 million. The company needs capital

On the other hand, Verdana's growth metrics — 63.7% year-over-year ARR growth, 128% NRR, 74.2% gross margin — are strong enough to attract competing term sheets, potentially at valuations closer to Verdana's $320,000,000 ask or above. The current market environment has cooled from peak 2021 levels, but a company with Verdana's profile will have options.

The principal vulnerability, as you know, is customer concentration. Meridian Logistics Corp. contributes $11.8 million, or 24.9%, of ARR. The top five customers account for $27.2 million, or 57.5%. The Meridian situation is particularly concerning: the three-year enterprise license expires December 31, 2023, Meridian recently changed CEOs, and Meridian has issued a competitive RFP. But I want to be candid — this ris

One additional procedural point: our analysis identified that the issuance of Series D Preferred Stock likely requires lender consent from Pacific Summit Bank under the negative covenants in the revolving credit facility. This remains unaddressed and would need to be resolved as a condition to closing in any scenario.

I see two paths forward, and I think this is a decision that needs to be made relatively soon.

**Option A — Final Counter-Proposal.** Pinnacle could make a revised offer that moves toward the Brindoval compromise range — for example, a pre-money valuation in the $270,000,000 to $290,000,000 range — while seeking concessions on at least one of the liquidation preference or anti-dilution issues. This is fundamentally a commercial judgment call about how much Pinnacle is willing to concede to get this deal done.

If Pinnacle elects this path, I would recommend moving quickly. Every week that passes without exclusivity increases the probability that Verdana fields a competing term sheet.

**Option B — Place the Matter on Hold.** If Pinnacle is unwilling to bridge the remaining gap on the terms currently under discussion, I recommend formally placing this matter in a dormant/hold status. This would preserve Pinnacle's ability to re-engage if Verdana's fundraising process stalls, the Meridian situation clarifies (one way or another), or market conditions shift. It would also manage ongoing legal costs,

My recommendation, if Pinnacle does not intend to make a final counter-proposal in the near term, is that Option B is the prudent course.

I want to flag that total billings on this matter are approaching the upper end of the $350,000–$450,000 estimated range communicated in the engagement letter. Ongoing negotiations without a clear path to closing will result in additional fees beyond that range. A hold would limit further accrual to any periodic monitoring or re-engagement work, which would be minimal.

I would like to schedule a call with you to discuss the above at your earliest convenience. If Elaine Whitford and/or Derek Sung wish to participate, they are of course welcome. Early next week would work well on our end — Andrew and I are flexible. If it would be helpful, Andrew can prepare a concise issues matrix consolidating all open points (building on the open issues list he circulated to Rebecca Thornton on Se

Harrison Wexford Partner, Mergers & Acquisitions Calderwood & Harkness LLP 101 Montgomery Street, Suite 3500 San Francisco, CA 94104 Direct: (415) 555-2840 hwexford@calderwoodharkness.com

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