Martin,
I am writing to provide a comprehensive update on the status of the MeridianCode MESLSA dormancy matter and to recommend a path forward as we approach several critical deadlines. We are now approximately six weeks into the formal dormancy period — MeridianCode acknowledged Dormancy Status on August 3, 2023 — and there are several interconnected issues that require coordinated action in the near term. I want to make sure you have a complete picture of where things stand and what we believe is the right strategy going forward.
**1. Current Dormancy Status**
To frame the discussion, let me briefly recap the key timeline:
- Integration work on Project Argonaut was suspended on March 22, 2023, following the Board's March 14, 2023 resolution to rescope from five platforms (Argonaut-A through Argonaut-E) to two (Argonaut-A and Argonaut-C). As you know, that decision was driven by the ongoing semiconductor supply-chain delays and Ashgrove Equity Partners's portfolio-wide capital expenditure reduction directive. - VMS sent the formal dormancy notice to MeridianCode on July 14, 2023 — six days before the 120-day trigger would have lapsed on July 20, 2023. - MeridianCode, through its counsel at Redstone Whitaker LLP (specifically Alan Briscoe), acknowledged Dormancy Status on August 3, 2023. - Under Section 9.4 of the MESLSA, Dormancy Status reduces MeridianCode's support obligations to a critical-security-patch-only level and tolls milestone deadlines. The 12-month dormancy cap means the mandatory renegotiation or termination deadline falls on August 3, 2024.
On the lending side, VMS provided the required notification to Pinnacle National Bank, N.A. under Section 6.12 of the credit facility on August 10, 2023 (material contract notification for commitments exceeding $5,000,000). We have not received any adverse response from Howard Segal or the Pinnacle team to date. Outstanding borrowings under the $175,000,000 facility stand at approximately $92,000,000, so there is ample headroom, and the dormancy itself should not trigger any covenant concerns.
**2. Correspondence with Redstone Whitaker LLP**
We have had three substantive exchanges with Alan Briscoe and the Redstone Whitaker team since the dormancy acknowledgment, and I want to summarize the positions on both sides.
First, in August we sent an initial position letter setting forth VMS's view of its rights and obligations under the dormancy framework and disputing the Year 2 Maintenance & Support Fee.
Second, we sent a separate, more detailed response specifically addressing MeridianCode's demand for payment of the $2,400,000 Year 2 Maintenance & Support Fee that was invoiced on July 1, 2023. Our position, as you and I have discussed, is that the fee should be abated or prorated during the dormancy period. The logic is straightforward: Section 9.4 reduces MeridianCode's support obligations to critical-security-patch-only, and VMS should not be required to pay the full annual maintenance fee for a drastically reduced level of service.
Third, we sent a derivative works ownership position letter asserting that DW-001, DW-002, and DW-003 — approximately 47,000 lines of code created by VMS engineers — are solely VMS-originated works. As detailed in the Hargrove Technical Consulting assessment prepared by Dr. Samuel Beecroft (transmitted separately), the estimated commercial value of these derivative works is $1,800,000 to $2,500,000. Our letter disputed MeridianCode's claimed perpetual royalty-free license-back under Section 7.2's joint-ownership language.
Redstone Whitaker's responses, paraphrased, have maintained three core positions: (a) the Year 2 Maintenance Fee is contractually due regardless of dormancy status; (b) Section 7.2 unambiguously provides joint ownership and a perpetual, royalty-free license-back for all derivative works; and (c) VMS should be mindful of the Section 4.3 "Use-It-or-Lose-It" deadline of December 21, 2023, which requires commencement of integration testing on at least two platforms within 18 months of the June 21, 2022 Effective Date.
I will note that Briscoe's tone has been firm but not hostile. There appears to be room for a negotiated resolution, which aligns with the strategy I am recommending below.
**3. Key Open Legal Issues — Current Assessment**
Let me walk through the four principal issues and our assessment of each.
*a. Year 2 Maintenance Fee ($2,400,000)*
Gabrielle Moss's analysis supports VMS's position that the maintenance fee should be abated or prorated during dormancy, given the reduced support level under Section 9.4. However, I want to be candid: the contractual language is not perfectly clear on this point, and MeridianCode has a colorable argument that the fee is an annual obligation independent of service level. The fee schedule in Exhibit B does not expressly condition the Year 2 fee on any particular service tier. Our recommendation is to continue disputing the full fee but to signal willingness to negotiate a credit or deferral arrangement rather than refuse payment outright. An outright refusal creates a breach risk that we do not need.
*b. Derivative Works Dispute (DW-001, DW-002, DW-003)*
This is potentially the most commercially significant issue apart from fee recovery, and it warrants careful handling.
VMS's engineers, under Lena Petrova's direction, created approximately 47,000 lines of code during the integration process. Our position is that these are VMS-originated works that should be solely owned by VMS. MeridianCode's position is that they are jointly owned under Section 7.2, with MeridianCode retaining a perpetual, royalty-free license to use such derivative works.
Gabrielle and Aaron Liu have analyzed the issue under Michigan IP law and believe VMS has reasonable arguments, though I should note that Section 7.2's language is broad and was negotiated at signing — this is not a case where VMS can claim it was surprised by the provision. The strength of our position turns significantly on the factual record showing that VMS engineers originated these works independently, using MeridianCode's platform as a base but contributing all of the novel functionality.
I also want to flag that VMS's Technology E&O policy with Commonwealth Surety & Insurance Co. (Policy No. TEO-2022-7891, $10,000,000 per occurrence / $20,000,000 aggregate, $500,000 retention) may provide coverage for losses arising from IP disputes related to embedded software. Coverage is uncertain at this stage, but we recommend providing early notice to Commonwealth as a protective measure. Gabrielle can coordinate with your insurance team on the notification if you agree.
*c. Section 4.3 "Use-It-or-Lose-It" Deadline — December 21, 2023*
This is the most time-sensitive issue. Section 4.3 requires VMS to have commenced integration testing on at least two platforms within 18 months of the Effective Date. That deadline falls on December 21, 2023 — roughly three months from now.
VMS's strongest argument is that dormancy status under Section 9.4 tolls all milestone deadlines, which should include the Section 4.3 deadline. Gabrielle's memorandum on this point is thorough and, I believe, persuasive. As a secondary argument, VMS has already achieved Milestone 3 on Argonaut-A (alpha integration testing passed on February 28, 2023) and Milestone 2 on Argonaut-C (source-code customization delivered on January 15, 2023). There is a reasonable case that this constitutes substantial compliance with Section 4.3's "commencement" requirement, even without tolling.
That said, MeridianCode may argue that Section 4.3 is a standalone condition precedent not subject to dormancy tolling under Section 9.4. The cross-references between the two sections are ambiguous, and this is a point of real risk. If MeridianCode prevails on this interpretation, VMS could lose significant rights under the MESLSA. We strongly recommend addressing this directly in the negotiated amendment discussed below to eliminate the ambiguity.
*d. Fee Forfeiture Risk Under Section 9.1*
I want to underscore a point that is critical to VMS's strategic calculus: if VMS terminates the MESLSA for convenience before the 24-month anniversary of the Effective Date — that is, before June 21, 2024 — all $12,320,000 in prepaid fees are forfeited under Section 9.1. This is the single most important reason not to terminate before that date, regardless of what happens with the other issues.
**4. Financial Exposure Summary**
For your reference, here is a consolidated view of VMS's financial position under the MESLSA:
*Fees paid to date: $12,320,000* - Upfront License Fee: $8,000,000 - Year 1 Maintenance & Support: $2,400,000 - Integration Services (Milestones 1–3): $1,920,000
*Total remaining contractual commitment: $7,680,000* - Year 2 Maintenance & Support (disputed): $2,400,000 - Integration Services (Milestones 4–5): $1,280,000 - Per-unit Runtime Royalties (cap): $4,000,000 ($80/unit × up to 50,000 units; $0 incurred to date)
In addition, VMS has invested approximately 14,200 engineering hours on Project Argonaut integration work, over and above the MESLSA fees.
In a worst-case termination scenario before June 21, 2024, VMS could lose the full $12,320,000 paid to date plus the value of the derivative works if MeridianCode's Section 7.2 position prevails. That is an exposure in the range of $14,000,000 to $15,000,000, not counting the sunk engineering investment.
**5. Strategic Recommendation**
Based on the foregoing, our recommendation is as follows:
**We strongly recommend against termination for convenience prior to June 21, 2024.** The fee forfeiture risk under Section 9.1 is simply too large. There is no scenario in which walking away before that date makes economic sense for VMS.
**We recommend pursuing a dormancy extension and fee restructuring approach.** We are preparing a term sheet to circulate to Redstone Whitaker that would propose the following framework:
- Extension of the 12-month dormancy cap by an additional 12 months, to August 3, 2025, giving VMS additional time to assess whether Project Argonaut will be reactivated; - Formal reduction of the license scope from five platforms to two (Argonaut-A and Argonaut-C), reflecting the Board's rescoping decision; - Credit of the disputed $2,400,000 Year 2 Maintenance Fee against future integration services or runtime royalties; - Reduction of the per-unit runtime royalty cap from $4,000,000 to $2,000,000, reflecting the reduced platform scope; and - A carve-out of derivative works DW-001, DW-002, and DW-003, with sole VMS ownership and a limited, non-exclusive license back to MeridianCode for non-automotive applications only.
This approach preserves VMS's optionality. If Project Argonaut is reactivated — even in its reduced two-platform scope — VMS retains the license and the value of fees already paid. If not, VMS will be in a substantially stronger negotiating position after June 21, 2024, when the fee forfeiture risk falls away and the leverage dynamics shift.
As a fallback, if MeridianCode will not agree to a comprehensive amendment, we are also drafting a mutual release and standstill agreement that would resolve the Year 2 Maintenance Fee and derivative works disputes, impose a standstill on arbitration for six months, and preserve VMS's reactivation rights. This is a less optimal outcome but still preferable to the status quo.
I should note that the arbitration forum — Midwest Arbitration Institute, three-arbitrator panel for disputes exceeding $1,000,000, seated in Detroit — is favorable to VMS from a convenience standpoint. However, arbitration should remain a last resort given cost, timing, and the potential impact on the ongoing commercial relationship.
**6. Requested Direction and Next Steps**
Martin, I need your input on several points before we proceed:
1. **Reactivation Outlook.** Has VMS management — Thomas Keating, Sandra Okafor, or Dennis Whitfield — developed any updated view on the likelihood and timing of reactivating Project Argonaut, even in the rescoped two-platform configuration? This significantly affects our negotiation strategy and the concessions we should seek.
2. **Document preservation.** Gabrielle Moss has requested that Rachel Huang's team complete the document preservation and milestone documentation work we discussed last month. This is important both for the Section 4.3 substantial-compliance argument and for the derivative works ownership position. I would appreciate your help in ensuring this gets prioritized.
3. **Term sheet timing.** We plan to circulate the term sheet to Redstone Whitaker within the next two weeks, pending your signoff on the approach and the specific terms outlined above.
4. **Ashgrove Equity Partners.** Kate Drummond at Ashgrove Equity Partners has been updated separately by Conrad Ashby on the current status and exposure, so you should be aligned on that front.
5. **Strategy call.** I recommend we schedule a call with you, Dennis Whitfield (as CTO and Project Argonaut sponsor), and the C&H team to align on strategy before the term sheet goes out. Gabrielle and I are available most of next week — would Tuesday or Wednesday afternoon work on your end?
As a reminder, the Hargrove Technical Consulting assessment report (Dr. Beecroft) was transmitted separately. The draft term sheet is in preparation and will be circulated for your review before we send it to Redstone Whitaker. Gabrielle's memoranda on dormancy clause interpretation, fee forfeiture risk, derivative works ownership, Use-It-or-Lose-It compliance, and the Year 2 maintenance fee obligation were previously transmitted and remain available on the C&H secure client portal. Please let me know if you need any of those resent.
I am happy to discuss any of this at your convenience. Please do not hesitate to call me directly.
This communication is privileged and confidential and is intended solely for the use of the addressee. It constitutes an attorney-client communication and should not be forwarded or disclosed to any third party without the prior consent of counsel.
Best regards,
Bernard Crawford Partner Calderwood & Harkness LLP 600 Renaissance Center, Suite 3200 Detroit, MI 48243 Tel: (313) 552-4100 Email: bcrawford@calderwoodharkness.com