PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
MEMORANDUM
From: Gabrielle Moss, Associate, Calderwood & Harkness LLP
Reviewed by: Bernard Crawford, Partner, Calderwood & Harkness LLP
To: Martin G. Cross, General Counsel, Vantage Mobility Systems Corp.
Date: August 15, 2023
Re: Credit Facility Covenant Compliance — Material Contract Notification Requirements Under Section 6.12 in Connection with MESLSA Dormancy
Matter No.: C&H Matter No. 1007-00008
Calderwood & Harkness LLP
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I. Executive Summary
This memorandum analyzes whether Vantage Mobility Systems Corp.'s ("VMS" or the "Company") placement of the Master Embedded Software License and Services Agreement dated June 21, 2022 (the "MESLSA") with Meridian Code Technologies, Inc. ("MeridianCode") into Dormancy Status triggers notification obligations under VMS's $175,000,000 Senior Secured Revolving Credit Facility (the "Credit Facility") with Pinnacle National Bank, N.A., as administrative agent ("Pinnacle"). Specifically, we examine Section 6.12 of the Credit Facility, which imposes ongoing informational covenants relating to material contract modifications, terminations, and disputes.
Our core conclusion is that the MESLSA dormancy triggers the material contract notification covenant contained in Section 6.12 of the Credit Facility. The MESLSA has a total deal value of $20,000,000 — well in excess of the $5,000,000 materiality threshold set forth in Section 6.12. The entry into Dormancy Status constitutes a qualifying triggering event under Section 6.12 because it effects a modification of the parties' contractual rights and obligations, may foreshadow a termination of the MESLSA, and is accompanied by an active dispute regarding the Year 2 Annual Maintenance and Support Fee.
VMS sent its notification to Pinnacle National Bank, N.A. (attention Howard Segal, Key Relationship Manager) on August 10, 2023, which was seven calendar days after MeridianCode's formal acknowledgment of Dormancy Status on August 3, 2023. Based on our review of the Credit Facility's notification provisions, we assess that VMS's August 10, 2023 notice was both timely and substantively sufficient under the terms of Section 6.12. The notice was transmitted within the "prompt" notification window contemplated by the Credit Facility, and its content addressed all material facts necessary to satisfy VMS's informational covenant obligations.
We recommend that VMS continue to provide supplemental notices to Pinnacle as dormancy-related developments unfold. In particular, VMS should notify the administrative agent of any resolution of the Year 2 Maintenance and Support Fee dispute, any amendments to the MESLSA, any escalation of the derivative works ownership dispute, any exercise of termination rights (whether for convenience or otherwise), any mandatory renegotiation proceedings triggered by expiration of the 12-month dormancy cap on August 3, 2024, and any reactivation of the MESLSA.
We note that VMS currently has $92,000,000 in outstanding borrowings under the $175,000,000 Credit Facility, representing approximately 52.6% utilization. The importance of maintaining strict compliance with all informational and affirmative covenants under the Credit Facility cannot be overstated; a covenant breach could jeopardize VMS's borrowing capacity, trigger acceleration of outstanding indebtedness, and have cascading effects on the Company's operations and relationship with its lending syndicate. For these reasons, we recommend VMS adopt a formalized notification protocol, as further described in Section VIII below.
II. Background
A. The Credit Facility
VMS entered into a $175,000,000 Senior Secured Revolving Credit Facility on September 12, 2019. The Credit Facility was arranged in connection with the leveraged acquisition of VMS by Kestrel Capital Partners, LP ("Ashgrove Equity Partners"), which closed in 2019 at an enterprise value of approximately $380,000,000. The key terms of the Credit Facility, and certain relevant contextual facts, are set forth below.
Facility Type and Size. The Credit Facility is a senior secured revolving credit facility with an aggregate commitment of $175,000,000. The facility is available for working capital, capital expenditure, and general corporate purposes, subject to customary conditions to borrowing including the absence of any continuing event of default.
Date of Execution. The Credit Facility was executed and delivered on September 12, 2019. Since its inception, the Credit Facility has not been formally amended, though certain administrative waivers have been obtained from time to time in the ordinary course.
Borrower. The borrower under the Credit Facility is Vantage Mobility Systems Corp., a corporation organized under the laws of the State of Delaware, with its principal executive offices and headquarters located at 4100 Industrial Parkway, Sterling Heights, Michigan 48312. VMS is a leading designer and manufacturer of adaptive vehicle systems, aftermarket mobility solutions, and associated embedded software platforms for the North American market.
Administrative Agent. Pinnacle National Bank, N.A. serves as the administrative agent under the Credit Facility. Pinnacle's principal offices for purposes of the Credit Facility are located at 150 Federal Street, Boston, Massachusetts 02110. The Key Relationship Manager at Pinnacle assigned to the VMS account is Howard Segal, who has served in that capacity since the Credit Facility's inception.
Outstanding Borrowings. As of July 31, 2023, VMS had $92,000,000 in outstanding borrowings under the Credit Facility, representing approximately 52.6% of the aggregate commitment. VMS has not requested any additional draws since March 2023, though the Company has maintained access to the remaining $83,000,000 of undrawn commitments.
Sponsor Context. VMS is a portfolio company of Kestrel Capital Partners, LP, a private equity fund organized as a Delaware limited partnership. Ashgrove Equity Partners's general partner is Cobalt Ridge Partners GP, LLC, also a Delaware entity. Ashgrove Equity Partners's headquarters are located at 200 Park Avenue South, 22nd Floor, New York, New York 10003. Ashgrove Equity Partners acquired VMS in 2019 for approximately $380,000,000 in a transaction that was financed, in part, through the Credit Facility and separate term loan facilities. Katherine "Kate" Drummond, Partner in Ashgrove Equity Partners's Portfolio Operations group, serves as a board observer on VMS's Board of Directors. Victor Salerno serves as Ashgrove Equity Partners's Managing Partner.
VMS Financial Profile. For the fiscal year ended December 31, 2022 ("FY2022"), VMS reported revenue of approximately $485,000,000 and EBITDA of approximately $61,000,000, reflecting an EBITDA margin of approximately 12.6%. The Company employed approximately 2,200 individuals at fiscal year-end, with the majority based at its Sterling Heights headquarters and manufacturing facility. VMS's financial performance in FY2022 was modestly below Ashgrove Equity Partners's original investment case projections, primarily due to semiconductor supply chain disruptions and the deferral of certain product launches.
B. The MESLSA and Dormancy
The MESLSA was executed on June 21, 2022, between VMS, as licensee, and Meridian Code Technologies, Inc. ("MeridianCode"), as licensor. MeridianCode is a publicly traded California corporation (Nasdaq: MCDT) headquartered at 2750 Orchard Blvd., Suite 400, Santa Clara, California 95054. MeridianCode is a provider of embedded software platforms, real-time operating systems, and related integration services for the automotive, industrial automation, and aerospace and defense sectors.
Licensed Product. Under the MESLSA, MeridianCode granted VMS a license to use the ATLAS-RT™ embedded real-time operating system, Version 4.2 (subsequently updated to Version 4.2.3 through maintenance releases), for integration into VMS's next-generation adaptive vehicle platform, internally designated as "Project Argonaut." The ATLAS-RT™ platform is an AUTOSAR-compliant, POSIX-based, hard-real-time operating system designed for safety-critical automotive embedded applications and is central to VMS's product development roadmap for the 2024–2027 model years.
Total Deal Value. The MESLSA has a total deal value of $20,000,000, comprised of the following fee components:
• Upfront License Fee: $8,000,000, paid in full on the Effective Date (June 21, 2022);
• Year 1 Annual Maintenance & Support Fee: $2,400,000, paid on July 15, 2022;
• Year 2 Annual Maintenance & Support Fee: $2,400,000, invoiced by MeridianCode on July 1, 2023, and currently disputed and deferred by VMS (as discussed in Section II.C below);
• Integration Services Fee: $3,200,000, payable on a milestone basis across five defined integration milestones (Milestones 1 through 5); as of the date of dormancy, VMS had paid $1,920,000 in respect of Milestones 1 through 3, with Milestones 4 and 5 (totaling $1,280,000) not yet earned and deferred; and
• Per-Unit Runtime Royalties: subject to an aggregate cap of $4,000,000, calculated at $80 per unit for up to 50,000 units deployed in production vehicles; as of the date of this memorandum, no per-unit royalties have been incurred, as Project Argonaut has not reached production deployment.
Total Fees Paid by VMS as of Dormancy. VMS has paid a total of $12,320,000 under the MESLSA, consisting of $8,000,000 (upfront license fee), $2,400,000 (Year 1 maintenance and support), and $1,920,000 (integration services through Milestone 3).
Total Remaining Contractual Commitment. VMS's remaining contractual commitment under the MESLSA is $7,680,000, consisting of $2,400,000 (Year 2 maintenance and support), $1,280,000 (integration services for Milestones 4 and 5), and $4,000,000 (per-unit runtime royalty cap).
Project Argonaut Rescoping. On March 14, 2023, VMS's Board of Directors adopted a resolution to rescope Project Argonaut from five vehicle platform configurations (designated Argonaut-A through Argonaut-E) to two configurations (Argonaut-A and Argonaut-C only), deferring the electrification integration components originally planned for Argonaut-B, Argonaut-D, and Argonaut-E. The rescoping decision was driven by two principal factors: (1) ongoing supply-chain semiconductor delays that had affected the availability of certain application-specific integrated circuits critical to the Argonaut-B and Argonaut-D configurations, and (2) a portfolio-wide capital expenditure reduction directive issued by Kestrel Capital Partners, LP in February 2023 in response to macroeconomic uncertainty and rising interest rates.
Suspension of Integration Work. Following the Board resolution, VMS directed its engineering team to suspend all integration work under the MESLSA effective March 22, 2023. No integration milestones have been pursued, and no integration services have been performed by MeridianCode, since that date.
Dormancy Trigger. Section 9.4 of the MESLSA provides that if integration work under the agreement is suspended for a continuous period of 120 days, the licensee may invoke Dormancy Status by providing written notice to the licensor prior to the expiration of the 120-day suspension period. The 120-day period, measured from March 22, 2023, expired on July 20, 2023.
VMS Dormancy Notice. On July 14, 2023 — six calendar days before the expiration of the 120-day trigger period — Martin G. Cross, VMS's General Counsel, delivered a formal written notice to Priya Ramaswamy, MeridianCode's General Counsel and Corporate Secretary, invoking Dormancy Status under Section 9.4 of the MESLSA. The notice was transmitted by overnight courier with a courtesy copy sent via email.
MeridianCode Acknowledgment. MeridianCode formally acknowledged VMS's invocation of Dormancy Status on August 3, 2023, through a letter from Ms. Ramaswamy to Mr. Cross. The acknowledgment confirmed the effective date of Dormancy Status as August 3, 2023, and noted MeridianCode's reservation of rights with respect to ongoing fee obligations.
12-Month Dormancy Cap. Under Section 9.4, Dormancy Status may not exceed 12 months. If the MESLSA has not been reactivated by the expiration of the 12-month dormancy period — August 3, 2024 — the parties are required to enter into mandatory renegotiation of the MESLSA's terms, failing which either party may terminate the agreement. This mandatory renegotiation or termination deadline is a significant upcoming milestone for purposes of the Credit Facility notification analysis.
C. Related Disputes and Open Issues
The dormancy of the MESLSA is accompanied by several related disputes and open issues between VMS and MeridianCode, each of which has potential implications for VMS's Credit Facility covenant compliance obligations.
Year 2 Maintenance & Support Fee Dispute. MeridianCode invoiced VMS for the Year 2 Annual Maintenance and Support Fee of $2,400,000 on July 1, 2023. VMS disputes this invoice and has deferred payment, taking the position that entry into Dormancy Status under Section 9.4 reduces MeridianCode's support obligations to a "critical-security-patch-only" level, which does not justify the full annual maintenance and support fee. VMS has communicated this position to MeridianCode in writing, and MeridianCode has responded through its outside counsel, Redstone Whitaker LLP, asserting that the full Year 2 fee remains due regardless of dormancy status. This dispute remains unresolved as of the date of this memorandum.
Derivative Works Ownership Dispute. During the integration phase of the MESLSA (prior to the March 22, 2023 suspension), VMS's engineering team developed three software modules designated DW-001, DW-002, and DW-003. These modules comprise approximately 47,000 lines of code and were designed to interface between the ATLAS-RT™ platform and VMS's proprietary vehicle control architecture. Hargrove Technical Consulting, LLC has assessed the commercial value of these derivative works at approximately $1,800,000 to $2,500,000.
VMS asserts sole ownership of the derivative works modules, contending that they were developed independently by VMS personnel using VMS resources and without incorporation of MeridianCode's proprietary source code (beyond the licensed ATLAS-RT™ APIs). MeridianCode disputes this characterization and claims joint ownership under Section 7.2 of the MESLSA, which provides MeridianCode with a perpetual, royalty-free license-back to any derivative works that incorporate or are based upon the ATLAS-RT™ platform. This dispute has been addressed in preliminary correspondence between counsel but has not yet been submitted to any dispute resolution forum.
Section 4.3 "Use-It-or-Lose-It" Deadline. Section 4.3 of the MESLSA requires VMS to commence integration testing on at least two vehicle platforms within 18 months of the Effective Date (June 21, 2022). This produces a deadline of December 21, 2023. VMS contends that entry into Dormancy Status under Section 9.4 tolls this deadline for the duration of the dormancy period, an interpretation that MeridianCode has not yet formally accepted or rejected. If the Section 4.3 deadline is not tolled and VMS fails to commence integration testing on at least two platforms by December 21, 2023, MeridianCode may assert that VMS has triggered a contractual default that could result in modification or termination of the MESLSA.
Fee Forfeiture Risk. Section 9.1 of the MESLSA provides that if VMS exercises a termination for convenience prior to the 24-month anniversary of the Effective Date — June 21, 2024 — all prepaid fees ($12,320,000) are forfeited to MeridianCode without right of refund or credit. This provision creates a significant financial incentive for VMS to maintain the MESLSA through at least June 21, 2024, even if the Company ultimately determines not to proceed with Project Argonaut in its current form.
MeridianCode's Outside Counsel. MeridianCode is represented in connection with the MESLSA dormancy, fee dispute, and derivative works dispute by Redstone Whitaker LLP, a law firm located at 555 Mission Street, Suite 2800, San Francisco, California 94105. The lead partner on the MeridianCode engagement is Alan M. Briscoe, and the senior associate is Natasha C. Ferraro.
III. Analysis of Section 6.12 — Material Contract Notification Covenant
A. Text and Scope of Section 6.12
Section 6.12 of the Credit Facility is an affirmative informational covenant that imposes an ongoing obligation on VMS, as borrower, to notify the administrative agent (Pinnacle National Bank, N.A.) of certain developments affecting material contracts to which VMS is a party. The covenant is situated within Article VI of the Credit Facility, which contains VMS's affirmative covenants, and should be read in conjunction with the defined terms set forth in Article I and the events of default set forth in Article VIII.
Specifically, Section 6.12 requires VMS to notify the administrative agent of any "material contract modification, termination, or dispute involving commitments exceeding $5,000,000." This covenant creates three distinct categories of triggering events, each of which operates independently:
1. Modification. VMS must notify Pinnacle of any modification to a material contract. The term "modification" is not separately defined in the Credit Facility but should be construed broadly to encompass amendments, restatements, supplements, waivers, and other changes to the terms of a material contract, including changes to the operative status of the contract (such as entry into dormancy or suspension).
2. Termination. VMS must notify Pinnacle of any termination of a material contract, whether by expiration, mutual agreement, exercise of a termination right, or default. The covenant encompasses both actual terminations and events that make termination reasonably foreseeable or probable.
3. Dispute. VMS must notify Pinnacle of any dispute involving a material contract where the commitments at issue exceed $5,000,000. The term "dispute" should be read to include formal litigation, arbitration, and mediation proceedings, as well as pre-litigation disputes and claims communicated between the parties in writing.
The term "material contract" is defined broadly in the Credit Facility to include any contract, agreement, or arrangement that is "material to the business, operations, assets, or financial condition of the Borrower." This is a functional, fact-specific definition that encompasses agreements with significant financial magnitude, strategic importance, or operational impact. The $5,000,000 threshold operates as a quantitative screen, but the definition does not preclude treating contracts below that threshold as material if they are otherwise significant to VMS's business.
Regarding the timing of notification, Section 6.12 requires that notice be provided to the administrative agent "promptly" after the occurrence of the triggering event. The Credit Facility does not specify a precise number of calendar or business days for this purpose. The term "promptly" is a standard of reasonableness that, in the context of informational covenants in credit facilities of this type, is generally understood to contemplate a period of approximately 5 to 15 business days, depending on the nature and complexity of the triggering event and the borrower's ability to ascertain and confirm the relevant facts.
Notices under Section 6.12 are required to be delivered to the administrative agent in accordance with the notice provisions set forth in Section 11.1 of the Credit Facility, which specify delivery by overnight courier, certified mail, or electronic transmission to the designated notice address of Pinnacle National Bank, N.A., with attention to the Key Relationship Manager.
B. Application to the MESLSA Dormancy
1. The MESLSA as a "Material Contract". The threshold question under Section 6.12 is whether the MESLSA qualifies as a "material contract" for purposes of the covenant. Based on our review, this question admits of no reasonable doubt.
Quantitative Analysis. The MESLSA has a total deal value of $20,000,000. This amount exceeds the $5,000,000 materiality threshold set forth in Section 6.12 by a factor of four. Even if materiality were measured solely by reference to fees actually paid by VMS as of the date of dormancy ($12,320,000), the threshold would be exceeded by a factor of approximately 2.5. The MESLSA is, by any quantitative measure, a material contract under the Credit Facility.
Furthermore, the individual fee components of the MESLSA, when considered in isolation, also support the materiality determination. The upfront license fee alone ($8,000,000) exceeds the $5,000,000 threshold by 60%. The remaining contractual commitment ($7,680,000) exceeds the threshold by approximately 54%. The aggregate at-risk fees (including the $12,320,000 already paid, which are subject to forfeiture under certain termination scenarios pursuant to Section 9.1) significantly exceed the threshold.
Qualitative Analysis. Beyond its financial magnitude, the MESLSA is integral to Project Argonaut, which represents VMS's next-generation adaptive vehicle platform program and is central to the Company's product development roadmap and strategic growth plan for the 2024–2027 period. The rescoping and potential deferral of Project Argonaut has broader implications for VMS's competitive positioning, revenue trajectory, and relationship with its key OEM customers. A material contract determination under Section 6.12 is therefore also supported on qualitative grounds, as the MESLSA is material to the "business, operations, assets, [and] financial condition" of VMS within the meaning of the Credit Facility's defined terms.
Conclusion. The MESLSA unambiguously qualifies as a "material contract" under Section 6.12 of the Credit Facility. There is no colorable argument that it falls below the materiality threshold.
2. Dormancy as a Triggering Event. Having established that the MESLSA is a material contract, the next question is whether VMS's entry into Dormancy Status constitutes a triggering event under Section 6.12. We analyze this question under each of the three prongs of the covenant — modification, termination, and dispute — and conclude that the dormancy is a triggering event under all three.
Modification. The conversion of the MESLSA from active license status to Dormancy Status under Section 9.4 constitutes a modification of the agreement within the meaning of Section 6.12. Dormancy Status effects a significant change in the parties' rights and obligations under the MESLSA. Specifically, upon entry into Dormancy Status: (a) MeridianCode's maintenance and support obligations are reduced from full-scope support to critical-security-patch-only support; (b) all integration milestone deadlines are tolled for the duration of the dormancy period (per VMS's position, though this interpretation has not been formally accepted by MeridianCode); (c) a 12-month cap is imposed on the duration of dormancy, after which the parties must either renegotiate the MESLSA or terminate it; and (d) VMS's rights to deploy and use the ATLAS-RT™ platform are suspended pending reactivation. These changes are substantial and go to the core of the parties' contractual relationship. Entry into Dormancy Status is not a mere administrative formality; it reflects a fundamental change in the operative status and commercial expectations of the agreement.
Even under a narrow construction of "modification," the dormancy satisfies the covenant requirement. The conversion from active to dormant status alters the scope of services, the timing of performance obligations, and the economic terms of the agreement. It is functionally equivalent to an amendment that suspends multiple provisions of the MESLSA for an indefinite period (up to 12 months), and any such amendment would clearly constitute a "modification" requiring notification under Section 6.12.
Dispute. The dormancy is accompanied by an active dispute between VMS and MeridianCode regarding the Year 2 Annual Maintenance and Support Fee of $2,400,000. VMS has taken the position that the fee is not owed during dormancy (or, alternatively, should be reduced to reflect MeridianCode's reduced critical-security-patch-only support obligations), while MeridianCode has asserted through its outside counsel, Redstone Whitaker LLP, that the full amount remains due and payable.
We note that the individual disputed invoice ($2,400,000) is below the $5,000,000 threshold in Section 6.12. However, the covenant refers to a "dispute involving commitments exceeding $5,000,000," and we interpret this language to encompass disputes that arise in connection with a contract whose total commitments exceed the threshold, rather than requiring that each individual claim independently exceed $5,000,000. The total remaining contractual commitment under the MESLSA is $7,680,000 — which exceeds the $5,000,000 threshold — and the aggregate at-risk fees of $12,320,000 (subject to forfeiture upon certain termination events) vastly exceed the threshold. Additionally, the derivative works ownership dispute involves works valued at $1,800,000 to $2,500,000 by Hargrove Technical Consulting, LLC, which, when aggregated with the Year 2 maintenance fee dispute and the broader contractual commitments, further supports the conclusion that the disputes "involve commitments exceeding $5,000,000."
Even under a more restrictive reading that would require the individual disputed amount to approach or exceed $5,000,000, the prudent course is to notify the administrative agent, particularly given the potential for the fee dispute to escalate (for example, through formal arbitration), the possibility that MeridianCode may assert additional claims related to the Section 4.3 "Use-It-or-Lose-It" deadline or the derivative works, and the interconnected nature of the dormancy-related disputes.
Termination. The dormancy creates a foreseeable path to termination of the MESLSA. Under Section 9.4, if the MESLSA has not been reactivated by the expiration of the 12-month dormancy period on August 3, 2024, the parties must enter into mandatory renegotiation, failing which either party may terminate the agreement. Separately, VMS retains the right to exercise a termination for convenience under Section 9.1, although exercising this right before June 21, 2024, would trigger forfeiture of all prepaid fees ($12,320,000). The potential for termination — through dormancy cap expiration, failure to renegotiate, or exercise of termination rights — is sufficiently foreseeable that it supports notification under the termination prong of Section 6.12, even though termination has not yet occurred. Prudent credit facility compliance practice counsels in favor of early notification when a material contract is on a path that may result in termination, rather than waiting until termination is consummated.
Conclusion. The entry into Dormancy Status under the MESLSA constitutes a triggering event under all three prongs of Section 6.12 of the Credit Facility: it is a modification of a material contract, it is accompanied by disputes involving commitments exceeding $5,000,000, and it creates a foreseeable path to termination. VMS was therefore obligated to notify the administrative agent of the dormancy event.
3. Timeliness of VMS's August 10, 2023 Notification. VMS delivered its notification to Pinnacle National Bank, N.A. (attention Howard Segal) on August 10, 2023. The key question is whether this notification was timely under the "promptly" or "reasonable time" standard of Section 6.12.
Triggering Date. The relevant triggering date for purposes of measuring VMS's notification obligation is August 3, 2023 — the date on which MeridianCode formally acknowledged Dormancy Status and confirmed it as effective. Although VMS initiated the dormancy process by delivering its notice to MeridianCode on July 14, 2023, and although the 120-day suspension period expired on July 20, 2023, Dormancy Status did not formally take effect until MeridianCode's August 3, 2023 acknowledgment. Prior to that acknowledgment, it was uncertain whether MeridianCode would challenge VMS's invocation of Section 9.4, seek to contest the dormancy notice, or raise procedural objections. The appropriate date from which to measure the notification obligation is therefore August 3, 2023, when the triggering event — entry into Dormancy Status — was confirmed and finalized.
Notification Date. VMS's notification to Pinnacle was sent on August 10, 2023, which is seven calendar days (five business days) after the August 3, 2023 triggering date.
Timeliness Analysis. The seven-day period between the triggering event and VMS's notification is well within the customary range for informational covenant notices under credit facilities of this type. As noted above, the term "promptly" in the context of Section 6.12 is generally understood to contemplate a period of approximately 5 to 15 business days. A five-business-day response period reflects diligent and timely compliance, particularly considering that: (a) VMS needed to confirm that MeridianCode's acknowledgment was unconditional and did not contain reservations or conditions that might affect the characterization of the triggering event; (b) VMS coordinated with Calderwood & Harkness to prepare a notification letter that was factually accurate and appropriately scoped; and (c) VMS's internal legal and financial teams needed to review and approve the notification prior to dispatch.
We also note that VMS acted proactively throughout the dormancy process. VMS delivered its dormancy notice to MeridianCode on July 14, 2023 — six days before the 120-day trigger deadline of July 20, 2023 — demonstrating that VMS was attentive to contractual deadlines and compliance obligations. The subsequent seven-day period to notify Pinnacle after formal dormancy confirmation is consistent with VMS's overall pattern of diligent compliance.
Conclusion. VMS's August 10, 2023 notification to Pinnacle National Bank, N.A. was timely under the "promptly" standard of Section 6.12 of the Credit Facility. No cure or supplemental notice is required to remedy any timing deficiency, as there was no timing deficiency.
C. Sufficiency of Notice Content
In addition to being timely, a notification under Section 6.12 must be substantively sufficient — that is, it must convey enough factual information to apprise the administrative agent of the nature and significance of the triggering event.
Recommended Content. Based on our review of Section 6.12 and customary practice for informational covenant notices, we recommended that the notification letter include the following elements:
(a) identification of the MESLSA by title, effective date, and parties (Vantage Mobility Systems Corp. and Meridian Code Technologies, Inc.);
(b) a description of Dormancy Status, including the effective date (August 3, 2023) and the basis for invocation (120-day suspension of integration work under Section 9.4);
(c) a summary of the total deal value of the MESLSA ($20,000,000) and the fees paid by VMS to date ($12,320,000), to establish that the materiality threshold is satisfied;
(d) identification of the disputed Year 2 Annual Maintenance and Support Fee ($2,400,000) and a summary of VMS's position;
(e) a summary of the remaining contractual commitments ($7,680,000) and VMS's exposure under the fee forfeiture provision;
(f) a statement that VMS is preserving all of its rights under the MESLSA and will provide supplemental notices as warranted; and
(g) contact information for VMS's general counsel and outside counsel for further inquiries.
Assessment of VMS's August 10, 2023 Letter. Calderwood & Harkness prepared and dispatched the August 10, 2023 notification letter to Pinnacle on behalf of VMS. We have reviewed the letter and confirm that it included all of the substantive elements described above. The letter was addressed to Howard Segal at Pinnacle's Federal Street offices in Boston, delivered by overnight courier with a courtesy copy sent via email, and formatted in accordance with the notice requirements of Section 11.1 of the Credit Facility.
Scope of Disclosure. We note that the notification letter was appropriately limited to factual information and did not include privileged legal analysis, litigation strategy, or detailed negotiation positions regarding the Year 2 maintenance fee dispute or the derivative works ownership dispute. The purpose of a Section 6.12 notification is to inform the administrative agent of the existence and general nature of a material contract event — it is not a vehicle for disclosing the borrower's litigation strategy or privileged assessments. The notification letter struck the appropriate balance between providing sufficient factual detail to satisfy the covenant and preserving VMS's attorney-client privilege and work product protections.
A copy of the August 10, 2023 notification letter is attached to this memorandum as Attachment A.
IV. Risk Assessment: Consequences of Non-Compliance
Although we have concluded that VMS's August 10, 2023 notification was both timely and substantively sufficient, it is important to set forth the consequences that would have followed from a failure to comply with Section 6.12, in order to underscore the significance of ongoing compliance as the dormancy period progresses and new triggering events may arise.
Event of Default or Informational Covenant Breach. A failure to provide timely and adequate notification under Section 6.12 could constitute a breach of VMS's affirmative covenants under Article VI of the Credit Facility. Depending on the nature and severity of the breach, and the administrative agent's and lenders' response, such a breach could ripen into an Event of Default under Article VIII of the Credit Facility.
Cure Provisions. The Credit Facility contains certain cure provisions that may afford VMS an opportunity to remedy an informational covenant breach before it escalates to a full Event of Default. However, cure rights are typically limited in scope and duration. A borrower that has failed to provide timely notice of a material contract event may find that its cure rights are narrower than anticipated, particularly if the administrative agent or required lenders take the position that the breach was willful or that the delay in notification materially prejudiced the lenders' ability to assess the borrower's creditworthiness.
Acceleration and Termination. Upon the occurrence of an Event of Default, the administrative agent, acting at the direction of the required lenders, may exercise a range of remedies, including: (a) acceleration of all outstanding borrowings under the Credit Facility ($92,000,000 as of July 2023); (b) termination of the lenders' remaining commitments under the $175,000,000 facility, eliminating VMS's access to the $83,000,000 of undrawn capacity; and (c) enforcement of the security interest granted to the lenders under the Credit Facility's collateral documents.
Cross-Default Provisions. An Event of Default under the Credit Facility could trigger cross-default provisions in other VMS obligations, including any outstanding term loan facilities, equipment financing arrangements, interest rate hedging agreements, or other material contracts that contain cross-default or cross-acceleration clauses. The cascading effect of a cross-default could significantly compound VMS's financial distress.
Reputational Risk. Beyond the legal consequences, a covenant breach — even one that does not result in acceleration — could damage VMS's relationship with Pinnacle and the broader lending syndicate. Borrowers that develop a reputation for late or inadequate covenant compliance may face increased scrutiny, tighter covenant packages, and less favorable pricing on future borrowings. For a portfolio company such as VMS, reputational damage with lenders could also affect Ashgrove Equity Partners's ability to arrange financing for other portfolio companies or future transactions.
Current Assessment. Based on the analysis set forth in this memorandum, VMS's timely August 10, 2023 notification eliminates these risks with respect to the initial dormancy event. VMS is in compliance with Section 6.12, and no cure, supplemental notice, or remedial action is required at this time. However, as discussed in Section V below, VMS must remain vigilant about future notification obligations as the dormancy period progresses and related disputes evolve.
V. Ongoing and Future Notification Obligations
A. Supplemental Notifications to Consider
VMS's August 10, 2023 notification addressed the initial entry into Dormancy Status under the MESLSA. However, the dormancy period is expected to give rise to multiple subsequent events that may independently trigger the notification obligation under Section 6.12. VMS should be prepared to provide supplemental notifications to Pinnacle in connection with any of the following developments:
Year 2 Maintenance & Support Fee Resolution. Any resolution of the Year 2 Maintenance and Support Fee dispute ($2,400,000) — whether through payment of the full invoice, negotiated abatement or reduction, application of a credit against future fees, or escalation to a formal dispute resolution proceeding — should be reported to Pinnacle. A resolution that results in VMS paying additional amounts, or conversely, that results in a material credit or offset, may affect the total deal value or remaining commitment figures disclosed in the August 10, 2023 notification.
MESLSA Amendments. If VMS and MeridianCode enter into any amendment to the MESLSA — including, for example, a Draft Amendment No. 1 or a successor amendment contemplating a scope reduction, fee restructuring, dormancy extension, or modification of the Section 4.3 integration testing requirement — such an amendment would constitute a "modification" of a material contract and would require notification under Section 6.12. VMS should provide advance notice to Pinnacle when any such amendment is under negotiation, and should provide formal notice promptly upon execution.
Derivative Works Dispute Escalation. If the derivative works ownership dispute (regarding modules DW-001, DW-002, and DW-003) escalates to formal dispute resolution — including arbitration before the Midwest Arbitration Institute, which provides for a three-arbitrator panel for disputes exceeding $1,000,000 — VMS should notify Pinnacle of the initiation of proceedings, the scope of the claims asserted, and the estimated financial exposure. Even if the derivative works dispute is resolved informally, VMS should consider providing notice of the resolution if it involves material financial terms.
Termination for Convenience. If VMS determines to exercise its right to terminate the MESLSA for convenience under Section 9.1, VMS must notify Pinnacle of the termination. If the termination occurs prior to the 24-month anniversary (June 21, 2024), triggering forfeiture of the $12,320,000 in prepaid fees, the financial impact of the forfeiture would itself constitute a material event requiring disclosure. If the termination occurs after June 21, 2024, the notification should address the terms of termination and any outstanding financial obligations.
12-Month Dormancy Cap Expiration. The 12-month dormancy cap under Section 9.4 expires on August 3, 2024. If VMS has not reactivated the MESLSA by that date, the parties will be required to enter into mandatory renegotiation, and if renegotiation fails, either party may terminate the agreement. VMS should provide Pinnacle with advance notice as the August 3, 2024 deadline approaches, and should provide prompt notice of the outcome of any renegotiation or termination that follows.
MESLSA Reactivation. If VMS elects to reactivate the MESLSA and resume integration work under Project Argonaut, VMS should notify Pinnacle of the reactivation, including any modified terms or financial commitments associated with the resumption of the agreement.
B. Section 4.3 "Use-It-or-Lose-It" Deadline (December 21, 2023)
Section 4.3 of the MESLSA requires VMS to commence integration testing on at least two vehicle platforms within 18 months of the Effective Date. Measuring from June 21, 2022, this produces a deadline of December 21, 2023. If MeridianCode asserts that VMS has failed to comply with the Section 4.3 requirement and that this failure constitutes a breach of the MESLSA — and if such assertion results in a contract modification or termination claim — this would constitute a separate triggering event requiring additional notice to Pinnacle under Section 6.12.
VMS's position, as communicated to MeridianCode, is that entry into Dormancy Status under Section 9.4 tolls the Section 4.3 deadline for the duration of the dormancy period. This interpretation is based on the language of Section 9.4, which provides that "all performance deadlines and milestone schedules shall be suspended and tolled during the Dormancy Period." However, MeridianCode has not yet formally accepted or rejected this tolling argument, and Redstone Whitaker LLP has reserved MeridianCode's position on the issue. If MeridianCode disputes the tolling interpretation, the resulting dispute could escalate into a material contract dispute requiring notification to Pinnacle.
We recommend that VMS calendar December 21, 2023, as a notification trigger date. If, as of that date, MeridianCode has asserted (or appears likely to assert) that VMS has breached the Section 4.3 requirement, VMS should provide prompt notice to Pinnacle.
C. Section 12.6 Change of Control Considerations
Although not directly implicated by the current dormancy situation, Section 12.6 of the MESLSA contains a change-of-control consent requirement that warrants mention in this analysis. Under Section 12.6, VMS may not assign the MESLSA without MeridianCode's prior written consent, which may not be unreasonably withheld, conditioned, or delayed. A change of control of VMS — including a sale by Kestrel Capital Partners, LP or a recapitalization transaction — would constitute an assignment requiring MeridianCode's consent under Section 12.6.
If Ashgrove Equity Partners pursues a sale or recapitalization of VMS, the MESLSA's change-of-control consent requirement could become a material issue. The need to obtain MeridianCode's consent (or the risk that consent might be withheld or conditioned) could affect the value, timing, or structure of the transaction. Any such event would independently trigger notification obligations under the Credit Facility — both under Section 6.12 (as a material contract modification or potential termination) and potentially under other covenant provisions relating to changes in ownership or control of the borrower.
We raise this consideration for completeness and recommend that VMS and Ashgrove Equity Partners bear it in mind in any future strategic planning processes.
VI. Coordination with VMS Auditor
VMS's independent auditor is Ashford & Greer, P.C., with engagement partner Patricia Noonan, CPA. The dormancy of the MESLSA, the associated fee disputes, and the potential for fee forfeiture under Section 9.1 may have financial reporting implications that require coordination between VMS's legal and financial teams and its external auditors.
Financial Statement Disclosure. Ashford & Greer may require disclosure of the dormancy status and related fee disputes in VMS's financial statements, particularly in the notes to the financial statements or in management's discussion and analysis. The $12,320,000 in fees paid by VMS under the MESLSA are likely reflected on VMS's balance sheet as prepaid expenses, intangible assets, or capitalized software costs. The entry into Dormancy Status, combined with the uncertainty regarding reactivation and the risk of fee forfeiture under Section 9.1, may require Ashford & Greer to evaluate the classification, carrying value, and recoverability of these assets. An impairment assessment may be warranted under ASC 360 (long-lived assets) or ASC 350 (intangibles), depending on VMS's accounting treatment of the MESLSA fees.
Consistency of Disclosures. We recommend that Martin G. Cross (General Counsel) coordinate with Sandra M. Okafor (Chief Financial Officer) to ensure that any disclosures made to Pinnacle in connection with the Credit Facility notification are consistent with any disclosures made to Ashford & Greer for financial reporting purposes. Inconsistencies between credit facility notifications and financial statement disclosures could create complications if the administrative agent or lenders subsequently review VMS's audited financial statements and identify discrepancies.
Financial Reporting Covenants. The Credit Facility likely contains financial reporting covenants that require VMS to deliver audited annual financial statements and unaudited quarterly financial statements to the administrative agent. If any material write-down of prepaid MESLSA fees is recorded — whether as an impairment charge, a reserve for contingent liabilities, or an expense — such a write-down could affect VMS's EBITDA calculation, leverage ratios, interest coverage ratios, or other financial covenant metrics. VMS should model the potential impact of any MESLSA-related write-down on its financial covenant compliance before recording any adjustments, and should consult with Calderwood & Harkness if there is any risk that a write-down could trigger a financial covenant breach.
VII. Insurance Considerations
VMS maintains a Technology Errors & Omissions Policy (the "E&O Policy") bearing Policy No. TEO-2022-7891, issued by Commonwealth Surety & Insurance Co. The E&O Policy provides coverage limits of $10,000,000 per occurrence and $20,000,000 in the aggregate, subject to a $500,000 self-insured retention.
Potential Insurance Notification. If the derivative works ownership dispute, the Year 2 Maintenance and Support Fee dispute, or any other MESLSA-related claim escalates to formal arbitration or litigation, VMS may need to evaluate whether a notice of claim or notice of circumstances should be submitted to Commonwealth under the E&O Policy. The E&O Policy likely contains a notice condition requiring VMS to notify the insurer of any claim or potential claim "as soon as practicable" or within a specified number of days. A failure to provide timely notice to Commonwealth could jeopardize VMS's coverage under the E&O Policy.
Interplay with Credit Facility Notification. If VMS submits a claim or notice of circumstances to Commonwealth, and if the underlying claim involves amounts or potential exposure exceeding $5,000,000, the submission of the insurance notice could itself constitute a reportable event under Section 6.12 of the Credit Facility. Additionally, other provisions of the Credit Facility — such as covenants requiring notice of material litigation or claims, or covenants regarding maintenance of insurance — may be implicated by the insurance notification process.
Recommendation. We recommend that VMS monitor the evolution of the MESLSA-related disputes and, in coordination with Calderwood & Harkness, evaluate on an ongoing basis whether an insurance notification is warranted. If an insurance notification is submitted, VMS should simultaneously consider whether a supplemental notification to Pinnacle is required under the Credit Facility. VMS's risk management team should be alerted to the potential interplay between the E&O Policy and the Credit Facility covenant requirements.
VIII. Recommendations
Based on the foregoing analysis, we respectfully submit the following recommendations:
1. No Further Action Required on Initial Notification. VMS's August 10, 2023 notification to Pinnacle National Bank, N.A. (attention Howard Segal) was timely and substantively sufficient under Section 6.12 of the Credit Facility. No cure, supplemental filing, or remedial action is required at this time with respect to the initial dormancy event. VMS is in full compliance with its informational covenant obligations arising from the entry into Dormancy Status under the MESLSA.
2. Establish a Notification Protocol. VMS should establish a formal internal protocol to ensure timely identification of MESLSA-related developments that trigger notification obligations under Section 6.12 and to ensure prompt transmission of notices to Pinnacle. We recommend that this protocol be coordinated among the following individuals:
• Martin G. Cross, General Counsel, VMS (primary legal responsibility for MESLSA and Credit Facility covenant compliance);
• Sandra M. Okafor, Chief Financial Officer, VMS (responsibility for financial reporting covenants, EBITDA and leverage ratio calculations, and coordination with Ashford & Greer);
• The Calderwood & Harkness engagement team (Bernard Crawford, Partner, and Gabrielle Moss, Associate) (external legal counsel for Credit Facility covenant analysis, preparation and review of notification letters, and strategic advice).
The protocol should include a standing weekly check-in among these stakeholders during the pendency of the dormancy period, and should provide for immediate escalation upon the occurrence of any triggering event.
3. Calendar Key Dates. VMS should ensure that the following dates are calendared for Credit Facility notification purposes, with appropriate lead-time reminders:
• December 21, 2023 — Section 4.3 "Use-It-or-Lose-It" deadline (18 months from the MESLSA Effective Date; requires commencement of integration testing on at least two vehicle platforms);
• June 21, 2024 — 24-month anniversary of the MESLSA Effective Date (after which termination for convenience no longer triggers forfeiture of the $12,320,000 in prepaid fees under Section 9.1);
• August 3, 2024 — 12-month dormancy cap expiration (mandatory renegotiation or termination deadline under Section 9.4); and
• June 20, 2027 — MESLSA expiration (end of the initial 5-year term).
Each of these dates may give rise to events requiring supplemental notification to Pinnacle, and VMS should be prepared to provide notice promptly upon the occurrence of any triggering event associated with these milestones.
4. Proactive Communication with Pinnacle. We recommend that VMS consider scheduling an informal call between VMS management and Howard Segal (Pinnacle Relationship Manager) to discuss the dormancy status, VMS's approach to the MESLSA-related disputes, and the Company's overall financial and operational outlook. The purpose of this call would be to maintain and strengthen the lending relationship, demonstrate VMS's commitment to transparency and covenant compliance, and preempt any concerns that Pinnacle or the lending syndicate may have regarding the dormancy or the Project Argonaut rescoping. Suggested VMS participants for this call include Sandra M. Okafor (CFO) and/or Martin G. Cross (General Counsel). Calderwood & Harkness can assist in preparing talking points and advising on the scope of permissible disclosure.
5. Coordinate with Ashgrove Equity Partners. Katherine "Kate" Drummond (Partner, Portfolio Operations, Kestrel Capital Partners, LP, and VMS board observer) should be briefed on the Credit Facility notification and any ongoing or planned communications with Pinnacle. Ms. Drummond is positioned to provide context regarding Ashgrove Equity Partners's portfolio-wide capital expenditure strategy and any potential future changes to VMS's ownership structure that could affect MESLSA or Credit Facility compliance. Victor Salerno (Managing Partner, Ashgrove Equity Partners) should be informed if there is any risk — however remote — of a covenant default or lender dispute arising from the dormancy or related matters.
6. Coordinate with Auditors. VMS should ensure that Ashford & Greer, P.C. (engagement partner Patricia Noonan, CPA) is apprised of the MESLSA dormancy status and the related fee disputes, and that any accounting treatment of the $12,320,000 in prepaid fees is consistent with the representations and disclosures made to Pinnacle in the Credit Facility notification. Early coordination with the auditors will help to avoid inconsistencies in financial reporting that could create complications in VMS's covenant compliance posture.
IX. Conclusion
Based on our analysis, we reach the following conclusions:
VMS has satisfied its notification obligation under Section 6.12 of the $175,000,000 Senior Secured Revolving Credit Facility with Pinnacle National Bank, N.A. The MESLSA, with its total deal value of $20,000,000 and $12,320,000 in fees paid to date, clearly exceeds the $5,000,000 materiality threshold established by Section 6.12. The MESLSA is, by both quantitative and qualitative measures, a material contract within the meaning of the Credit Facility.
The entry into Dormancy Status constitutes a triggering event under Section 6.12 on all three prongs of the covenant: it is a modification of the MESLSA's terms and operative status; it is accompanied by active disputes involving commitments exceeding $5,000,000 (including the Year 2 Maintenance and Support Fee dispute and the derivative works ownership dispute); and it creates a foreseeable path to potential termination through the 12-month dormancy cap or VMS's termination-for-convenience right.
VMS's August 10, 2023 notification to Pinnacle was timely, having been sent seven calendar days (five business days) after MeridianCode's formal acknowledgment of Dormancy Status on August 3, 2023. The notification was substantively adequate, addressing all material facts necessary to satisfy VMS's informational covenant obligations while appropriately limiting disclosure to factual information and preserving VMS's attorney-client privilege.
Ongoing vigilance will be required as the dormancy period progresses, fee disputes are resolved, and key contractual deadlines approach. VMS should establish the notification protocol recommended in Section VIII of this memorandum, calendar the critical dates identified herein, and maintain proactive communication with Pinnacle, Ashgrove Equity Partners, and Ashford & Greer throughout the dormancy period.
Calderwood & Harkness will continue to monitor the matter and advise VMS on supplemental notifications as warranted by new developments. We are available to discuss this memorandum and its recommendations at your convenience.
This memorandum is protected by the attorney-client privilege and the attorney work product doctrine. It is prepared for the exclusive use of the client and should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Gabrielle Moss Associate
Reviewed by: ________ Bernard Crawford Partner
Date: August 15, 2023
Attachments (Referenced)
Attachment A: Copy of VMS's August 10, 2023 notification letter to Pinnacle National Bank, N.A. (attention Howard Segal)
Attachment B: Section 6.12 of the Senior Secured Revolving Credit Facility (September 12, 2019) (excerpted)
Attachment C: Key dates calendar — Credit Facility notification triggers
Attachment D: Summary financial table — MESLSA fee structure and payment status
Attachment D — Summary Financial Table: MESLSA Fee Structure and Payment Status
Prepared by Calderwood & Harkness LLP based on information provided by VMS. Subject to verification and reconciliation with VMS's books and records.
| Fee Component | Amount | Status |
| Upfront License Fee | $8,000,000 | Paid (June 21, 2022) |
| Year 1 Maintenance & Support | $2,400,000 | Paid (July 15, 2022) |
| Year 2 Maintenance & Support | $2,400,000 | Invoiced July 1, 2023; disputed/deferred |
| Integration Services (M1–M3) | $1,920,000 | Paid |
| Integration Services (M4–M5) | $1,280,000 | Not yet earned; deferred |
| Per-Unit Runtime Royalties | $4,000,000 (cap) | $0 incurred |
| Total Deal Value | $20,000,000 | |
| Total Paid | $12,320,000 | |
| Total Remaining Commitment | $7,680,000 |