ATTORNEY-CLIENT PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT
Calderwood & Harkness LLP 600 Renaissance Center, Suite 3200 Detroit, MI 48243
PRIVILEGED MATTER SUMMARY AND KEY DATE CALENDAR
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I. EXECUTIVE SUMMARY
Calderwood & Harkness LLP ("C&H") represents Vantage Mobility Systems Corp. ("VMS"), a Delaware corporation headquartered in Sterling Heights, Michigan, in connection with a Twenty Million Dollar ($20,000,000) Master Embedded Software License and Services Agreement (the "MESLSA") entered into with Meridian Code Technologies, Inc. ("MeridianCode" or "MCT"), a California corporation publicly traded on the Nasdaq Stock Market under the ticker symbol MCDT. This memorandum provides a comprehensive summary of the matter history, outstanding legal issues, financial exposure, negotiation posture, and critical dates for the exclusive use of the C&H engagement team.
The MESLSA, effective as of June 21, 2022, licensed MeridianCode's proprietary ATLAS-RT™ embedded real-time operating system ("RTOS"), Version 4.2 (subsequently updated to Version 4.2.3 during the engagement), for integration into VMS's next-generation adaptive vehicle platform program, internally designated "Project Argonaut." Project Argonaut was conceived as a comprehensive, multi-platform initiative to develop a unified embedded-software architecture for VMS's fleet of adaptive mobility vehicles, spanning five distinct vehicle platform configurations at its inception.
Following a strategic rescoping of Project Argonaut approved by the VMS Board of Directors on March 14, 2023, the scope of the program was reduced from five vehicle platforms to two (Argonaut-A and Argonaut-C only), and planned electrification integration was deferred to a future Phase II with no firm timetable established. The rescoping was driven by converging factors, including persistent supply-chain delays in semiconductor procurement, a portfolio-wide capital expenditure reduction directive issued by VMS's private equity sponsor, Kestrel Capital Partners, LP, and a strategic pivot to prioritize internal-combustion-engine ("ICE") platform fleet vehicles over electric vehicle ("EV") platforms in the near term.
As a direct consequence of the rescoping, integration work under the MESLSA was suspended on March 22, 2023. VMS timely delivered a dormancy notice to MeridianCode on July 14, 2023 — six days before the expiration of the 120-day dormancy trigger window under Section 9.4 of the MESLSA — and the license was placed in Dormancy Status, which was formally acknowledged by MeridianCode effective August 3, 2023. Critically, MeridianCode's dormancy acknowledgment contained several material departures from VMS's stated positions, particularly regarding the obligation to pay the Year 2 Maintenance Fee, the scope of support services to be provided during dormancy, and MeridianCode's asserted rights to derivative works created by VMS engineers.
Total fees paid by VMS to MeridianCode to date amount to $12,320,000. The total remaining contractual commitment under the MESLSA is $7,680,000, inclusive of disputed amounts.
The central legal issues presented by this matter are as follows:
(1) Fee Forfeiture Risk Under Section 9.1: If VMS terminates the MESLSA for convenience prior to the twenty-four-month anniversary of the Effective Date (June 21, 2024), all prepaid fees — $12,320,000 — are subject to forfeiture.
(2) Derivative Works Ownership Dispute Under Section 7.2: VMS engineers created three proprietary software modules (DW-001, DW-002, DW-003) during the integration process. VMS contends these are solely owned by VMS, while MeridianCode asserts joint ownership and a perpetual, royalty-free license-back under Section 7.2.
(3) Use-It-or-Lose-It Compliance Under Section 4.3: VMS must commence integration testing on at least two platforms within eighteen months of the Effective Date (December 21, 2023). Whether dormancy tolls this deadline is a contested question.
(4) Year 2 Maintenance Fee Dispute: MeridianCode invoiced VMS $2,400,000 for Year 2 Maintenance & Support on July 1, 2023. VMS disputes the obligation on the grounds that dormancy reduces support to critical-security-patch-only coverage.
(5) Dormancy Cap and Mandatory Renegotiation/Termination Deadline: The twelve-month dormancy cap under Section 9.4 expires on August 3, 2024, at which point the MESLSA requires either mandatory renegotiation or termination.
VMS's current strategic posture is to pursue a negotiated dormancy extension and fee restructuring through a proposed Amendment No. 1 to the MESLSA. A term sheet has been circulated to MeridianCode's outside counsel, Redstone Whitaker LLP, and initial counter-proposals have been received. As an alternative fallback, C&H has prepared a draft Mutual Release and Standstill Agreement. If neither negotiated path succeeds, the dispute would proceed to binding arbitration under the rules of the Midwest Arbitration Institute ("MAI"), seated in Detroit, Michigan, before a three-arbitrator panel.
MeridianCode's outside counsel of record is Redstone Whitaker LLP, with Alan M. Briscoe serving as lead partner and Natasha C. Ferraro as senior associate. Redstone Whitaker's offices are located at 555 Mission Street, Suite 2800, San Francisco, California 94105.
The period from December 21, 2023 through August 3, 2024 represents the critical window during which three major contractual deadlines converge. C&H's immediate priorities are to resolve or toll the Section 4.3 Use-It-or-Lose-It deadline, preserve VMS's position through the June 21, 2024 fee-forfeiture safe harbor, and conclude a negotiated resolution before the August 3, 2024 dormancy cap expiration.
II. ENGAGEMENT OVERVIEW
A. Client Information
Vantage Mobility Systems Corp. ("VMS") is a Delaware corporation with its principal place of business at 4100 Industrial Parkway, Sterling Heights, Michigan 48312. VMS's employer identification number is 38-4217693. Its registered agent in Delaware is Capitol Registered Agents, Inc., located at 1209 Orange Street, Wilmington, Delaware 19801.
VMS operates in the automotive manufacturing sector, specializing in the design, engineering, and production of adaptive mobility vehicles, including wheelchair-accessible vans and modified commercial fleet vehicles. VMS's products serve a range of end-users, from individual consumers with mobility needs to commercial fleet operators in the healthcare, hospitality, and transportation sectors.
Key financial metrics for the client are as follows: VMS reported approximately $485 million in revenue for fiscal year 2022, with adjusted EBITDA of approximately $61 million for the same period. VMS employs approximately 2,200 individuals across its manufacturing, engineering, and corporate operations.
B. Ownership Structure
VMS is a portfolio company of Kestrel Capital Partners, LP, a Delaware limited partnership with its principal offices at 200 Park Avenue South, 22nd Floor, New York, New York 10003. Kestrel Capital Partners, LP is managed by its general partner, Cobalt Ridge Partners GP, LLC. Ashgrove Equity Partners manages approximately $4.8 billion in assets under management across its active fund vehicles. Ashgrove Equity Partners acquired VMS in 2019 for approximately $380 million in a leveraged buyout transaction. The specific acquisition date has not been material to the analysis in this engagement, and C&H's files reflect the year of acquisition only.
C. Key VMS Personnel
The following VMS personnel have been identified as key contacts for this engagement:
D. Key Ashgrove Equity Partners Personnel
E. C&H Engagement Team
The C&H engagement team for Matter No. 1007-00008 is composed as follows:
The engagement was opened in June 2022, contemporaneous with the negotiation and execution of the MESLSA. C&H was retained by VMS to advise on the structuring, negotiation, and execution of the MESLSA and to provide ongoing counsel with respect to all matters arising under the agreement, including the current dormancy, fee dispute, derivative works controversy, and related negotiations.
III. COUNTERPARTY PROFILE
Meridian Code Technologies, Inc. ("MeridianCode" or "MCT") is a California corporation with its principal offices at 2750 Orchard Blvd., Suite 400, Santa Clara, California 95054. MeridianCode's employer identification number is 94-3856012. MeridianCode is publicly traded on the Nasdaq Stock Market under the ticker symbol MCDT.
MeridianCode operates in the embedded software and real-time operating systems market, developing and licensing RTOS solutions for automotive, aerospace, and industrial applications. Its flagship product line includes the ATLAS-RT™ family of embedded real-time operating systems, which is the subject software licensed under the MESLSA. MeridianCode reported approximately $310 million in revenue for fiscal year 2022 and employs approximately 1,400 individuals.
A. Key MeridianCode Personnel
B. Opposing Counsel
MeridianCode is represented by Redstone Whitaker LLP, located at 555 Mission Street, Suite 2800, San Francisco, California 94105. The engagement team at Redstone Whitaker consists of:
• Alan M. Briscoe — Lead Partner, Technology Transactions Practice. Mr. Briscoe has been the primary point of contact for all substantive negotiations and correspondence with C&H on this matter.
• Natasha C. Ferraro — Senior Associate. Ms. Ferraro has handled the preparation and review of redline documents and has participated in several negotiation calls alongside Mr. Briscoe.
All substantive written correspondence from C&H on this matter has been directed to Mr. Briscoe, with copies to Ms. Ferraro.
IV. MATTER NARRATIVE HISTORY
A. MESLSA Execution (June 2022)
The Master Embedded Software License and Services Agreement between VMS (as licensee) and MeridianCode (as licensor) was executed on June 21, 2022 (the "Effective Date"). The MESLSA was the product of approximately four months of negotiation, during which C&H represented VMS in structuring the commercial and legal terms of the arrangement.
The total deal value of the MESLSA is $20,000,000, structured across five categories of fees and payments as follows:
Fee Structure:
The reconciliation of the total deal value is as follows: $8,000,000 (upfront license) + $2,400,000 (Year 1 maintenance) + $2,400,000 (Year 2 maintenance) + $3,200,000 (integration services) + $4,000,000 (runtime royalty cap) = $20,000,000.
The licensed product is the ATLAS-RT™ embedded real-time operating system, Version 4.2, as subsequently updated to Version 4.2.3 during the course of the engagement. ATLAS-RT is MeridianCode's proprietary RTOS platform designed for safety-critical automotive and industrial applications. The licensed version includes the core RTOS kernel, hardware abstraction layer, communications stack, and diagnostic interface modules.
The license scope under the MESLSA is as follows:
• Term: Perpetual license, subject to a five-year contractual term running from June 21, 2022 through June 20, 2027.
• Scope of Use: Integration into up to five (5) designated vehicle platform configurations under VMS's Project Argonaut program, as specified in Exhibit A to the MESLSA.
• Territory: Worldwide, without geographic restriction.
• Governing Law: The MESLSA is governed by the laws of the State of Michigan, without regard to its conflict of laws provisions.
• Dispute Resolution: All disputes arising under or relating to the MESLSA are subject to binding arbitration under the rules of the Midwest Arbitration Institute ("MAI"), seated in Detroit, Michigan. For disputes with an amount in controversy exceeding $1,000,000, a three-arbitrator panel is required. For disputes at or below that threshold, a single arbitrator is designated.
B. Key Restrictive Provisions
The MESLSA contains several restrictive provisions that are central to the current dispute and strategic analysis. C&H has prepared separate legal memoranda analyzing each of the following provisions in detail. The summaries below are provided for reference purposes.
Section 4.3 — Use-It-or-Lose-It Provision. Section 4.3 of the MESLSA requires the licensee to "commence integration testing on at least two (2) of the designated platform configurations" within eighteen (18) months of the Effective Date. The eighteen-month deadline falls on December 21, 2023. Failure to satisfy this condition could, depending on the interpretation of the provision, result in a narrowing of the license scope, the imposition of additional fees, or, in the worst case, a material breach entitling MeridianCode to remedies under the agreement. The question of whether this provision constitutes a "milestone deadline" subject to tolling under Section 9.4 is a central point of dispute, as discussed in greater detail in Section V.B below.
Section 7.2 — Derivative Works. Section 7.2 provides that any "[m]odifications, adaptations, or extensions to ATLAS-RT source code created by [VMS] engineers during integration" shall become "jointly owned" by VMS and MeridianCode. In addition, MeridianCode retains "a perpetual, royalty-free license to such derivative works" for its own use, without restriction as to field of use or application. C&H has challenged the enforceability and scope of this provision as applied to the three software modules (DW-001, DW-002, DW-003) created by VMS's integration engineering team, as discussed in Section V.D below.
Section 9.1 — Termination for Convenience; Fee Forfeiture. Either party may terminate the MESLSA upon one hundred eighty (180) days' prior written notice. However, if the licensee exercises its termination right prior to the twenty-four-month anniversary of the Effective Date (June 21, 2024), the licensee "shall forfeit all prepaid fees, including without limitation the Upfront License Fee and any Annual Maintenance and Support Fees previously remitted." Given that VMS has paid $12,320,000 to date, early termination before June 21, 2024 would expose VMS to the forfeiture of the entire sum. This provision is the primary driver of VMS's strategy to maintain dormancy status and avoid termination until after the twenty-four-month anniversary.
Section 9.4 — Dormancy. Section 9.4 addresses the consequences of a licensee's suspension of active integration work. If the licensee suspends integration for more than one hundred twenty (120) consecutive days without providing written notice to the licensor, the licensor may unilaterally convert the license to "Dormancy Status." Dormancy Status has several consequences: (a) support is reduced to critical-security-patch-only coverage; (b) all milestone deadlines under the integration services schedule are tolled for the duration of dormancy; and (c) dormancy may not exceed twelve (12) months before triggering a mandatory renegotiation or, in the absence of agreement on revised terms, termination of the MESLSA. VMS timely provided notice under this section, as described in Section IV.E below.
Section 12.6 — Change of Control. The MESLSA requires the licensor's prior written consent for any assignment of the agreement by VMS in connection with a change of control of VMS. Such consent is stated to be "not unreasonably withheld." While a change of control is not currently contemplated, this provision is relevant to the extent that Ashgrove Equity Partners's eventual exit from its investment in VMS could trigger the consent requirement. C&H has flagged this provision for ongoing monitoring.
C. Project Argonaut — Original Scope and Integration Progress
Project Argonaut was conceived by VMS as a comprehensive initiative to develop a unified embedded-software architecture for VMS's next-generation adaptive vehicle platforms, with MeridianCode's ATLAS-RT serving as the core RTOS layer. The project was sponsored internally by Dennis J. Whitfield, VMS's Chief Technology Officer, and the integration engineering team was led by Lena Petrova, Director of Software Integration Engineering.
The original scope of Project Argonaut, as documented in the MESLSA and its accompanying Statement of Work No. 1, encompassed five designated vehicle platform configurations:
• Argonaut-A: Full-size wheelchair-accessible van platform (primary commercial priority)
• Argonaut-B: Mid-size fleet vehicle platform (commercial fleet segment)
• Argonaut-C: Compact adaptive vehicle platform (consumer segment)
• Argonaut-D: Electric vehicle adaptation platform (EV-specific; Phase II)
• Argonaut-E: Heavy-duty commercial chassis platform (specialized applications)
Integration work commenced promptly following the Effective Date and proceeded through the fall and winter of 2022-2023. At the time of the Project Argonaut rescoping in March 2023, the integration status across the five platforms was as follows:
VMS engineering hours invested in Project Argonaut through the date of suspension totaled approximately 14,200 hours across VMS's internal software integration, systems engineering, and quality assurance teams. This investment represents a significant sunk cost that is not recoverable under the MESLSA and is separate from the contractual fees paid to MeridianCode.
Integration services fees paid to MeridianCode through the completion of Milestone 3 on the Argonaut-A platform totaled $1,920,000 of the $3,200,000 total integration services fee budgeted under the MESLSA. The remaining $1,280,000 corresponds to Milestones 4 and 5, which have not been commenced.
D. Rescoping of Project Argonaut (March 2023)
On March 14, 2023, the VMS Board of Directors adopted a resolution formally rescoping Project Argonaut from five vehicle platform configurations to two: Argonaut-A and Argonaut-C only. All work on Argonaut-B, Argonaut-D, and Argonaut-E was indefinitely suspended. In addition, the electrification integration component that had been contemplated for Argonaut-D was deferred to a future "Phase II" of the project, with no firm implementation date established.
The rescoping decision was driven by a combination of three principal factors:
(1) Supply-chain disruptions in semiconductor procurement. VMS continued to experience significant delays in the procurement of automotive-grade semiconductors and microcontrollers essential to the hardware platforms on which ATLAS-RT was to be deployed. These delays, which had persisted throughout 2022 and into early 2023, rendered the original five-platform deployment timeline untenable.
(2) Ashgrove Equity Partners portfolio-wide capital expenditure reduction directive. In the first quarter of 2023, Kestrel Capital Partners, LP issued a portfolio-wide directive to its operating companies to reduce capital expenditures in response to macroeconomic conditions, including rising interest rates and tightening credit markets. VMS's compliance with this directive necessitated a reassessment of the scope and pace of Project Argonaut.
(3) Strategic pivot to ICE-platform fleet vehicles. Based on revised market analysis and customer demand projections, VMS's executive team concluded that near-term commercial opportunities were more favorably concentrated in ICE-platform fleet vehicles (Argonaut-A and Argonaut-C) rather than in the EV-specific and heavy-duty platforms that comprised the balance of the original project scope.
As a direct result of the rescoping resolution, all integration work under the MESLSA was suspended effective March 22, 2023. VMS's internal integration engineering team was reassigned to other priorities, and no further work on the ATLAS-RT deployment has been performed since that date.
E. Dormancy Period and Notice
The suspension of integration work on March 22, 2023 triggered the running of the one-hundred-twenty-day dormancy clock under Section 9.4 of the MESLSA. The 120-day trigger date — the date on which MeridianCode would have been entitled to unilaterally convert the license to Dormancy Status — was July 20, 2023 (calculated as March 22, 2023 plus 120 calendar days).
VMS, acting on the advice of C&H, preemptively invoked Dormancy Status by delivering a dormancy notice to MeridianCode on July 14, 2023, six days before the expiration of the 120-day trigger period. The notice was prepared by C&H and sent in the form of a letter from Martin G. Cross, VMS's General Counsel, to Priya Ramaswamy, MeridianCode's General Counsel and Corporate Secretary. The notice formally invoked VMS's rights under Section 9.4 of the MESLSA and set forth VMS's position regarding the consequences of dormancy, including the tolling of milestone deadlines, the reduction of support obligations to critical-security-patch-only coverage, and the commencement of the twelve-month dormancy cap.
MeridianCode formally acknowledged Dormancy Status on August 3, 2023, through a letter from Priya Ramaswamy to Martin G. Cross. However, the acknowledgment letter contained several material departures from VMS's stated positions, including the following:
(a) Year 2 Maintenance Fee: MeridianCode asserted that the Year 2 Maintenance & Support Fee of $2,400,000, invoiced on July 1, 2023, remained due and payable in full notwithstanding the invocation of Dormancy Status, on the grounds that the invoice was issued prior to the commencement of the dormancy period and that the maintenance fee obligation is a separate contractual commitment not subject to dormancy-related abatement.
(b) Scope of Support During Dormancy: MeridianCode took the position that the reduction of support during dormancy to "critical-security-patch-only" coverage does not relieve VMS of the obligation to pay the full maintenance fee, arguing that the fee is structured as an annual license maintenance charge rather than a fee-for-services arrangement.
(c) Derivative Works License-Back: MeridianCode expressly reserved its rights under Section 7.2 with respect to all derivative works created during the integration period, including DW-001, DW-002, and DW-003, and stated that its perpetual, royalty-free license to such works "survives any dormancy period and any ultimate termination or expiration of the MESLSA."
The twelve-month dormancy cap under Section 9.4 commenced running from the date of MeridianCode's acknowledgment, August 3, 2023. Accordingly, the mandatory renegotiation or termination deadline falls on August 3, 2024.
F. Year 2 Maintenance Fee Dispute
On July 1, 2023, MeridianCode issued Invoice No. MCT-2023-07894 to VMS in the amount of $2,400,000 for Year 2 Maintenance & Support under the MESLSA, covering the period from July 15, 2023 through July 14, 2024. The invoice was issued pursuant to the standard annual invoicing schedule established under the MESLSA.
VMS has disputed the invoice and deferred payment. VMS's position, as communicated to MeridianCode's outside counsel, Redstone Whitaker LLP, in a letter from C&H dated August 18, 2023, is as follows:
(a) Under Section 9.4 of the MESLSA, Dormancy Status reduces MeridianCode's support obligations to critical-security-patch-only coverage. The full Annual Maintenance & Support Fee of $2,400,000 was negotiated and set at a level commensurate with the comprehensive suite of support services (including technical support, software updates, compatibility testing, and integration assistance) that MeridianCode is obligated to provide during active periods. It would be inequitable and inconsistent with the structure of the agreement to require VMS to pay the full maintenance fee for a materially reduced scope of services during dormancy.
(b) VMS has proposed two alternative resolutions: (i) a prorated payment based on the reduced scope of services actually provided during dormancy; or (ii) a credit of the full $2,400,000 against future integration services fees that would become payable upon reactivation of the project.
As of the date of this memorandum, MeridianCode has rejected both proposed alternatives, maintaining its position that the full fee is owed. Redstone Whitaker's response, received September 5, 2023, asserted that the Annual Maintenance & Support Fee is a fixed annual obligation that is not subject to proration or abatement based on the level of services utilized or provided. This dispute remains unresolved and is one of the principal subjects of the ongoing Amendment No. 1 negotiations.
G. Derivative Works Dispute
During the integration period from June 2022 through March 2023, VMS's software integration engineering team, under the direction of Lena Petrova, created three discrete software modules in connection with the adaptation and integration of ATLAS-RT into the Argonaut platform architecture. These modules are identified as follows:
C&H retained Hargrove Technical Consulting, LLC to conduct an independent assessment of the commercial value and technical character of these three modules. Hargrove's principal offices are located at 8200 Greensboro Drive, Suite 600, McLean, Virginia 22102, and the assessment was performed under the direction of Dr. Samuel Beecroft, Ph.D. (Embedded Systems), Hargrove's lead consultant for automotive software matters. Dr. Beecroft's assessment, delivered to C&H on August 25, 2023, concluded that the estimated commercial value of the three derivative works modules, in the aggregate, is between $1,800,000 and $2,500,000.
The dispute between VMS and MeridianCode regarding the ownership of these modules is summarized as follows:
VMS Position: VMS contends that DW-001, DW-002, and DW-003 are independently developed works created by VMS engineers using VMS proprietary know-how, VMS hardware specifications, and VMS-originated algorithms. While these modules interface with the ATLAS-RT platform, VMS asserts that they do not constitute "modifications, adaptations, or extensions to ATLAS-RT source code" within the meaning of Section 7.2. Rather, they are original VMS works that operate in conjunction with, but are separable from, the ATLAS-RT codebase. VMS therefore asserts sole ownership of all three modules.
MeridianCode Position: MeridianCode contends that the three modules fall squarely within the definition of "derivative works" under Section 7.2 of the MESLSA, on the grounds that they were created "during integration" of ATLAS-RT, that they interact directly with ATLAS-RT application programming interfaces ("APIs") and data structures, and that they could not function independently of the ATLAS-RT runtime environment. MeridianCode accordingly asserts joint ownership under Section 7.2, together with a perpetual, royalty-free license to use, sublicense, and exploit such derivative works without restriction.
C&H communicated VMS's position to Redstone Whitaker LLP in a detailed letter dated September 8, 2023, arguing that MeridianCode's perpetual royalty-free license-back is unenforceable as applied to independently developed VMS code. The letter set forth C&H's analysis under Michigan contract interpretation principles and relevant intellectual property law, contending that the broad language of Section 7.2, if applied as MeridianCode proposes, would constitute an impermissible overreach that extends beyond the reasonable scope of the derivative works provision.
Redstone Whitaker's response, received September 22, 2023, rejected VMS's position in its entirety and asserted that the plain language of Section 7.2 unambiguously covers all three modules. This dispute remains unresolved and is a subject of the ongoing Amendment No. 1 negotiations.
H. Credit Facility Notification
VMS is a borrower under a $175,000,000 Senior Secured Revolving Credit Facility, dated as of September 12, 2019, with Pinnacle National Bank, N.A. serving as administrative agent. Pinnacle National Bank, N.A. is headquartered at 150 Federal Street, Boston, Massachusetts 02110; VMS's relationship manager at Pinnacle is Howard Segal.
Section 6.12 of the credit facility agreement requires VMS to notify the administrative agent of any material contract modification, termination, or dispute involving commitments or exposure exceeding $5,000,000. Given the total MESLSA deal value of $20,000,000, the invocation of dormancy status and the associated disputes clearly exceed this materiality threshold.
C&H prepared a notification letter on behalf of VMS, which was delivered to Pinnacle National Bank on August 10, 2023. The letter summarized the dormancy status of the MESLSA, the outstanding disputes regarding the Year 2 Maintenance Fee and derivative works ownership, and VMS's pursuit of a negotiated resolution. As of the date of this memorandum, Pinnacle has not taken any adverse action in response to the notification, and the credit facility remains in good standing.
As of July 2023, VMS had $92,000,000 in outstanding borrowings under the revolving credit facility.
I. Insurance Considerations
VMS maintains a Technology Errors & Omissions insurance policy, Policy No. TEO-2022-7891, issued by Commonwealth Surety & Insurance Co. The policy provides coverage as follows:
• Per Occurrence Limit: $10,000,000
• Aggregate Limit: $20,000,000
• Retention (Self-Insured): $500,000
The policy is potentially implicated to the extent that the derivative works dispute with MeridianCode gives rise to losses attributable to third-party intellectual property claims related to embedded software. Specifically, if MeridianCode were to assert its claimed joint-ownership rights and license the derivative works modules (particularly DW-001 and DW-003) to third parties — including, potentially, to competitors of VMS in the adaptive mobility space — VMS could suffer competitive harm that may fall within the scope of the policy's coverage for technology-related losses.
C&H has conducted a preliminary analysis of the potential coverage available under the Commonwealth policy. The analysis concludes that coverage is uncertain, principally because the derivative works dispute arises under a contractual provision (Section 7.2) rather than as a result of a traditional third-party intellectual property infringement claim. The policy's coverage grant for "wrongful acts in the performance of or failure to perform technology services" may provide a basis for coverage, but the applicability of several exclusions — including the contractual liability exclusion and the known-loss exclusion — remains to be fully analyzed.
C&H recommends that VMS provide early notice to Commonwealth Surety & Insurance Co. regarding the derivative works dispute, in order to preserve VMS's coverage rights and avoid any potential prejudice arising from late notice. As of the date of this memorandum, no notice has been filed with Commonwealth.
V. SUMMARY OF OUTSTANDING LEGAL ISSUES
A. Fee Forfeiture Risk Under Section 9.1
Section 9.1 of the MESLSA permits either party to terminate the agreement for convenience upon one hundred eighty (180) days' prior written notice. However, the provision contains a critical forfeiture mechanism: if VMS, as licensee, exercises its termination right prior to the twenty-four-month anniversary of the Effective Date — i.e., prior to June 21, 2024 — VMS forfeits all prepaid fees, which currently total $12,320,000.
This forfeiture provision is the single most significant financial risk facing VMS in the current posture of this matter. VMS has paid $12,320,000 to MeridianCode to date, and the loss of that entire sum upon early termination would represent a substantial write-down for VMS and its sponsor, Ashgrove Equity Partners.
Strategy: VMS's primary strategy with respect to the fee forfeiture risk is straightforward: maintain dormancy status under Section 9.4 until after the twenty-four-month anniversary (June 21, 2024), at which point VMS can evaluate its options — including termination for convenience — without exposure to the forfeiture penalty.
Interplay with Dormancy Cap: The twelve-month dormancy cap expires on August 3, 2024, which is only approximately forty-three (43) days after the June 21, 2024 twenty-four-month anniversary. This creates a narrow but critical window during which VMS will have cleared the fee forfeiture safe harbor but will still be operating under the dormancy regime. If a negotiated amendment or standstill is not in place by August 3, 2024, VMS may need to exercise its termination right within this forty-three-day window — or face the consequences of the mandatory renegotiation/termination provision. The strategic implications of this narrow window are discussed further in Section IX below (Critical Window Analysis).
B. Use-It-or-Lose-It Compliance (Section 4.3)
Section 4.3 of the MESLSA requires VMS to "commence integration testing on at least two (2) of the designated platform configurations" within eighteen (18) months of the Effective Date. The eighteen-month deadline is December 21, 2023, which is the most imminent of the three critical dates identified in this memorandum.
Current Compliance Status:
The status of integration testing across the two remaining active platforms is as follows:
• Argonaut-A: Reached Milestone 3 of 5 on February 28, 2023 (alpha integration testing passed). Milestone 3 constitutes the formal commencement — and indeed, the initial completion — of integration testing on the Argonaut-A platform. There is no dispute that Argonaut-A satisfies the Section 4.3 requirement with respect to at least one platform.
• Argonaut-C: Reached Milestone 2 of 5 on January 15, 2023 (source-code customization delivered). However, Milestone 2 involves the delivery and customization of source code; it does not constitute "integration testing" in the technical sense. Milestone 3 (alpha integration testing) has not been commenced on the Argonaut-C platform.
Key Legal Questions:
Two legal questions are presented by the Section 4.3 analysis:
First: Does Dormancy Status under Section 9.4 toll the Section 4.3 deadline? C&H's position is that it should. Section 9.4 provides that dormancy results in the "tolling [of] all milestone deadlines" under the MESLSA. C&H contends that the Section 4.3 deadline is a "milestone deadline" within the meaning of Section 9.4, and that the eighteen-month clock should therefore be tolled for the duration of the dormancy period. If this position is accepted, the December 21, 2023 deadline would be extended by the duration of dormancy, potentially to December 2024 or later depending on when dormancy terminates.
MeridianCode, however, may argue that Section 4.3 establishes a license condition — a prerequisite to the continuation of the full license scope — rather than a "milestone deadline" in the sense contemplated by Section 9.4's tolling language. Under this reading, the December 21, 2023 deadline would remain operative notwithstanding dormancy. C&H has prepared a memorandum analyzing this question under Michigan contract interpretation principles and concludes that the better reading of the MESLSA supports VMS's tolling position, but acknowledges that the argument is not free from doubt.
Second: Does Argonaut-C's achievement of Milestone 2 (source-code customization) constitute "commencement" of integration testing on a second platform, even though formal integration testing (Milestone 3) has not been initiated? This is a fact-intensive question that turns on the definition of "commence integration testing" as used in Section 4.3. C&H's analysis suggests that a reasonable argument can be made that the delivery and acceptance of customized source code represents a necessary precursor step that is part of the broader integration testing process, and that "commencement" should be interpreted to encompass the initiation of any phase of the integration workflow, not solely the execution of formal test protocols. However, this argument carries some risk, particularly given that the MESLSA defines integration milestones with specificity and that Milestone 3 is expressly denominated as the "alpha integration testing" milestone.
Recommended Action: C&H recommends that VMS seek MeridianCode's written agreement — either as part of the Amendment No. 1 negotiations or through a separate exchange of correspondence — that dormancy tolls the Section 4.3 deadline. In the absence of such agreement, C&H is developing a litigation-ready position to defend VMS's compliance with Section 4.3 in the event of an arbitration.
C. Year 2 Maintenance Fee Dispute
As described in Section IV.F above, MeridianCode invoiced VMS $2,400,000 for the Year 2 Maintenance & Support Fee on July 1, 2023 (Invoice No. MCT-2023-07894). VMS has disputed the invoice and deferred payment.
VMS Argument: Dormancy Status under Section 9.4 reduces MeridianCode's support obligations to critical-security-patch-only coverage. The full Annual Maintenance & Support Fee was set at a level that reflects the comprehensive support services that MeridianCode is obligated to provide during active periods. The reduction in services during dormancy warrants a corresponding reduction in fees, either through proration or through crediting the maintenance fee against future obligations under the agreement.
MeridianCode Argument: The Annual Maintenance & Support Fee is a fixed annual contractual obligation that is not contingent upon the scope of services actually utilized or provided. The dormancy provisions of Section 9.4 address the scope of services but do not modify or abate the fee obligations of the licensee.
Proposed Resolution: As part of the Amendment No. 1 negotiations, C&H has proposed crediting the $2,400,000 against future integration services fees that would become payable upon reactivation. MeridianCode has counter-proposed a partial payment of $1,200,000 (representing 50% of the invoiced amount) with the remaining $1,200,000 to be credited. This counter-proposal is under review.
D. Derivative Works Ownership
The derivative works dispute is described in detail in Section IV.G above. The three software modules at issue — DW-001, DW-002, and DW-003 — represent approximately 47,000 lines of code with an estimated aggregate commercial value of $1,800,000 to $2,500,000 (per the Hargrove Technical Consulting assessment).
VMS Position: VMS contends that the three modules are independently developed VMS works that should be solely owned by VMS. VMS argues that MeridianCode's assertion of joint ownership and a perpetual royalty-free license-back under Section 7.2 is unenforceable as applied to code that was originated by VMS engineers using VMS proprietary know-how and that is functionally separable from the ATLAS-RT codebase.
MeridianCode Position: MeridianCode contends that the modules are derivative works under Section 7.2 and that MeridianCode is entitled to joint ownership and a perpetual, royalty-free, unrestricted license-back.
C&H Analysis: C&H has analyzed the derivative works question under Michigan intellectual property and contract law. The analysis focuses on several factors, including: (a) the degree to which the modules incorporate or depend upon ATLAS-RT proprietary code, APIs, or data structures; (b) whether the modules are "separable" from the ATLAS-RT platform in a functional and commercial sense; (c) the interpretation of the phrase "modifications, adaptations, or extensions to ATLAS-RT source code" in Section 7.2; and (d) general principles of authorship and ownership under federal copyright law, to the extent relevant. C&H's analysis concludes that VMS has a colorable but not unassailable claim to sole ownership of the three modules, particularly with respect to DW-001 and DW-002, which rely more heavily on VMS-originated algorithms and hardware specifications. DW-003, the diagnostic telemetry module, presents a closer question due to its deeper integration with ATLAS-RT's communications stack.
Proposed Resolution: C&H has proposed a side letter to be executed concurrently with Amendment No. 1, under which the three derivative works modules would be carved out for sole VMS ownership, subject to a limited, non-exclusive license-back to MeridianCode for use in non-automotive applications only. MeridianCode has rejected this proposal, insisting on retention of its full Section 7.2 rights, including the right to use, sublicense, and exploit the derivative works in automotive applications. This remains a significant point of contention in the negotiations.
E. Dormancy Cap and Mandatory Renegotiation
The twelve-month dormancy cap under Section 9.4 commenced running on August 3, 2023, and expires on August 3, 2024. Upon the expiration of the dormancy cap, the MESLSA requires the parties to engage in mandatory renegotiation of the agreement terms. If the parties are unable to reach agreement on revised terms within a reasonable period (which the MESLSA does not define with specificity), either party may terminate the agreement.
C&H is pursuing a negotiated extension of the dormancy cap by an additional twelve (12) months — from August 3, 2024 to August 3, 2025 — as a central element of the proposed Amendment No. 1. An extended dormancy period would provide VMS with additional time to reassess the viability of Project Argonaut, evaluate market conditions, and determine whether and when to reactivate integration work, all without being forced into an immediate termination decision.
If the Amendment No. 1 negotiations are not concluded before August 3, 2024, the fallback Mutual Release and Standstill Agreement described in Section VI.B below is designed to provide a temporary bridge, including a six-month standstill period during which neither party may initiate arbitration and VMS's reactivation rights are preserved.
VI. CURRENT STRATEGIC POSTURE AND NEGOTIATION STATUS
A. Preferred Path: Negotiated Amendment (Amendment No. 1)
C&H has circulated a term sheet to Redstone Whitaker LLP proposing a comprehensive amendment to the MESLSA (denominated as "Amendment No. 1 to the Master Embedded Software License and Services Agreement"). The term sheet addresses the following key elements:
(i) Dormancy Extension: Extension of the twelve-month dormancy cap by an additional twelve (12) months, from August 3, 2024 to August 3, 2025, to provide VMS with additional flexibility in determining the future course of Project Argonaut.
(ii) License Scope Reduction: Reduction of the license scope from five (5) designated vehicle platform configurations to two (2) — Argonaut-A and Argonaut-C only — to reflect the rescoped Project Argonaut. This reduction would formally eliminate VMS's obligation to pursue integration on Argonaut-B, Argonaut-D, and Argonaut-E and would appropriately narrow the license grant.
(iii) Year 2 Maintenance Fee Credit: Credit of the $2,400,000 Year 2 Maintenance & Support Fee (Invoice No. MCT-2023-07894) against future integration services fees that would become payable upon reactivation of the project.
(iv) Runtime Royalty Cap Reduction: Reduction of the per-unit runtime royalty aggregate cap from $4,000,000 to $2,000,000, to reflect the reduced scope of the deployment (two platforms instead of five) and the correspondingly lower expected unit volumes.
(v) Derivative Works Carve-Out: Carve-out of sole VMS ownership for derivative works modules DW-001, DW-002, and DW-003, with a limited, non-exclusive license-back to MeridianCode for use in non-automotive applications only.
C&H prepared a full draft of Amendment No. 1 based on the term sheet and circulated it to Redstone Whitaker LLP. Redstone Whitaker has returned a redline of the draft Amendment with MeridianCode's counter-proposals. The principal areas of disagreement in the redline are as follows:
(a) Maintenance Fee: MeridianCode insists on partial payment of the Year 2 Maintenance Fee during dormancy, proposing that VMS pay $1,200,000 (50% of the invoiced amount) immediately, with the remaining $1,200,000 to be credited against future fees. VMS's position remains that the full $2,400,000 should be credited.
(b) Derivative Works: MeridianCode has refused to fully carve out derivative works ownership, maintaining that Section 7.2 grants it joint ownership and a perpetual, royalty-free license-back covering all fields of use, including automotive. MeridianCode has proposed a compromise under which it would agree to a limited non-compete restriction (not to license the derivative works to VMS's direct competitors in the adaptive mobility segment for a period of three years), but would otherwise retain its full Section 7.2 rights.
(c) Reactivation Fee: MeridianCode has proposed a reactivation fee of $1,500,000, payable upon any resumption of active integration work following the dormancy period. This fee was not contemplated in the original MESLSA or in VMS's term sheet. MeridianCode's stated justification is the cost of re-mobilizing its technical support and integration services teams.
Negotiations are ongoing. C&H's next step is to prepare and circulate a revised counter-redline addressing the areas of disagreement, as described in the Open Action Items (Section XI below).
B. Alternative Path: Mutual Release and Standstill
In the event that a comprehensive amendment cannot be achieved through negotiation, C&H has prepared a draft Mutual Release and Standstill Agreement as a fallback mechanism. The standstill agreement is designed to provide a temporary holding arrangement that preserves VMS's position and prevents an escalation to arbitration while the parties continue to negotiate. The key terms of the draft standstill are as follows:
• Mutual Release: Each party releases all claims against the other relating to the Year 2 Maintenance Fee dispute and the derivative works ownership dispute, without prejudice to the assertion of such claims in any subsequent proceeding if the standstill expires without a definitive resolution.
• Standstill Period: Six-month standstill period during which neither party may initiate arbitration proceedings or exercise any termination rights under the MESLSA (other than termination for cause in the event of a material breach of the standstill agreement itself).
• Preservation of Reactivation Rights: VMS's rights to reactivate integration work under the MESLSA are expressly preserved during the standstill period, and the dormancy cap clock is tolled for the duration of the standstill.
This document serves as a fallback in the event that Amendment No. 1 negotiations stall before the August 3, 2024 mandatory renegotiation deadline. C&H views the standstill as a less optimal outcome than a negotiated amendment, as it does not resolve the underlying disputes and merely defers them. However, it provides critical breathing room and preserves VMS's strategic options.
C. Arbitration Readiness
In the event that neither the Amendment No. 1 nor the Mutual Release and Standstill Agreement is successfully concluded, the disputes between VMS and MeridianCode would proceed to binding arbitration under the rules of the Midwest Arbitration Institute ("MAI"), seated in Detroit, Michigan. Given that the aggregate amount in controversy exceeds $1,000,000, a three-arbitrator panel would be required.
Aaron Liu has prepared an arbitration strategy memorandum that addresses the following topics:
• Procedural Timeline: Estimated timeline from demand for arbitration through final award, including panel selection, preliminary conference, discovery, briefing, and hearing. Based on MAI rules and typical timelines for matters of this complexity, the estimated duration from demand to award is fourteen to eighteen months.
• Estimated Costs: Projected arbitration costs, including MAI filing and administration fees, arbitrator compensation, expert witness fees (including Hargrove Technical Consulting), and C&H legal fees. Total estimated cost to VMS for a full arbitration proceeding is in the range of $2,500,000 to $4,000,000.
• Strategic Considerations: Assessment of the relative strengths and weaknesses of VMS's positions on each of the disputed issues, with particular focus on the derivative works ownership dispute and the Section 4.3 Use-It-or-Lose-It tolling question. The memorandum also addresses the potential for interim or emergency relief and the enforceability of any award under the Federal Arbitration Act.
Aaron Liu has also conducted research into comparable RTOS licensing disputes for evidentiary and precedent support. While binding arbitration awards are generally not publicly reported, Mr. Liu has identified several analogous published decisions in state and federal courts addressing embedded software licensing disputes, derivative works ownership under similarly structured license agreements, and the enforcement of use-it-or-lose-it provisions in technology licensing contexts. These authorities have been compiled in a research memorandum and are available for use in any arbitration proceeding.
D. Antitrust Leverage
Aaron Liu has prepared an analysis of MeridianCode's market position in the automotive embedded RTOS sector. The analysis examines whether any of MeridianCode's license restrictions, derivative works claims, or other conduct raises concerns under federal antitrust law (specifically, Sections 1 and 2 of the Sherman Act and Section 3 of the Clayton Act) or under Michigan's Antitrust Reform Act, MCL 445.771 et seq.
The analysis considers, among other factors, MeridianCode's market share in the relevant market (estimated at 22-28% of the North American automotive embedded RTOS market, depending on market definition), the availability of competing RTOS platforms, and whether MeridianCode's insistence on retaining broad derivative works rights functions as a de facto tying arrangement or unreasonable restraint on VMS's ability to compete in the adaptive mobility segment.
While the analysis does not conclude that MeridianCode's conduct rises to the level of a standalone antitrust violation, it identifies several arguments that may provide negotiation leverage, particularly with respect to the derivative works dispute. The suggestion that MeridianCode's license-back provision, as applied, could be characterized as an anticompetitive acquisition of VMS's proprietary technology may motivate MeridianCode to accept a more limited derivative works carve-out than it has thus far been willing to concede.
E. Sponsor Communication
Conrad Ashby has provided updates to Katherine "Kate" Drummond, Partner, Portfolio Operations at Kestrel Capital Partners, LP, and a board observer at VMS, regarding the status of the MESLSA, the dormancy period, the outstanding disputes, and VMS's financial exposure. In these communications, Mr. Ashby has referenced the portfolio-wide capital expenditure reduction directive issued by Ashgrove Equity Partners as a contributing factor to the rescoping of Project Argonaut and the ensuing dormancy and disputes. Ms. Drummond has acknowledged the updates and has indicated Ashgrove Equity Partners's support for VMS's pursuit of a negotiated resolution, subject to Ashgrove Equity Partners's standard requirements regarding reporting of material exposures and contingent liabilities.
VII. FINANCIAL EXPOSURE SUMMARY
The following table summarizes VMS's financial exposure in connection with the MESLSA as of the date of this memorandum:
A. Fees Paid to Date
B. Fees Unpaid, Disputed, or At Risk
C. Aggregate Risk Exposure
The maximum aggregate financial exposure to VMS, in the worst-case scenario of an early termination with fee forfeiture (prior to June 21, 2024) combined with a loss of the derivative works dispute, is approximately $14,120,000 to $14,820,000 in direct monetary losses, plus the sunk cost of approximately 14,200 hours of internal engineering time.
VIII. THIRD-PARTY STAKEHOLDER STATUS
The following table summarizes the status of third-party stakeholders with a material interest in or connection to this matter:
IX. COMPREHENSIVE KEY DATE CALENDAR
The following calendar sets forth all material dates relevant to this matter, including completed milestones, upcoming critical deadlines, and the outer limits of the contractual term.
Critical Window Analysis
The period from December 21, 2023 through August 3, 2024 — a span of approximately seven and one-half months — represents the most sensitive and strategically consequential window in this matter. Three major contractual deadlines converge within this period, and VMS's actions and outcomes during this window will largely determine the trajectory and ultimate resolution of the matter.
The three deadlines and their strategic implications are as follows:
1. December 21, 2023 — Section 4.3 Use-It-or-Lose-It Deadline. VMS must either (a) obtain MeridianCode's written agreement that dormancy tolls this deadline, (b) demonstrate compliance with Section 4.3 based on the existing integration progress (Argonaut-A Milestone 3 completion and Argonaut-C Milestone 2 completion), or (c) develop a litigation-ready position to defend VMS's compliance or excuse non-compliance in the event of an arbitration. Failure to resolve this issue could provide MeridianCode with additional leverage — or, in the worst case, a basis for asserting a material breach of the MESLSA.
2. June 21, 2024 — 24-Month Anniversary / Fee Forfeiture Safe Harbor. After this date, VMS may terminate the MESLSA for convenience without forfeiting the $12,320,000 in prepaid fees. VMS must not terminate or be deemed to have terminated the MESLSA before this date. This requires VMS to maintain the dormancy status in good standing, avoid any conduct that could be construed as a termination or repudiation of the agreement, and resist any MeridianCode efforts to trigger or accelerate a termination before June 21, 2024.
3. August 3, 2024 — 12-Month Dormancy Cap Expiration. The mandatory renegotiation/termination trigger. VMS must have either (a) concluded Amendment No. 1 extending the dormancy period, (b) executed the Mutual Release and Standstill Agreement as a bridge, or (c) be prepared to exercise its termination right within the forty-three-day window between June 21, 2024 and August 3, 2024.
The forty-three-day gap between the June 21, 2024 fee forfeiture safe harbor date and the August 3, 2024 dormancy cap expiration is narrow but strategically significant. If Amendment No. 1 negotiations stall and the standstill is not achievable, VMS may need to exercise its termination for convenience within this window to avoid the consequences of a mandatory renegotiation that could result in terms less favorable to VMS or a licensor-initiated termination. C&H is closely monitoring the negotiation timeline to ensure that VMS is positioned to act within this window if necessary.
Calendar management across the engagement team, the client team, and the firm's central docketing system is essential. All three critical dates must be docketed with appropriate advance reminders — C&H recommends docketing alerts at 90-day, 60-day, 30-day, and 7-day intervals in advance of each date — and must be communicated to key client contacts (Martin G. Cross, Dennis J. Whitfield, and Sandra M. Okafor) and to the Ashgrove Equity Partners portfolio operations team (Kate Drummond).
X. DOCUMENT INDEX / WORK PRODUCT INVENTORY
The following is a comprehensive index of all C&H work product generated for Matter No. 1007-00008, organized by category. All documents listed below are protected by the attorney-client privilege and/or the attorney work product doctrine.
A. Core Transaction Documents