1009-00001 · Skybridge Fintech Ltd · Analysis & Strategy

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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

TO: Arjun Mehta, CEO & Co-Founder, Skybridge Fintech Ltd. David Lindstrom, CFO, Skybridge Fintech Ltd. Priya Ramanathan, General Counsel, Skybridge Fintech Ltd.

FROM: Leonard Ashford, Of Counsel, Emerging Companies & Venture Capital, Calderwood & Harkness LLP Nina Reyes, Senior Associate, Emerging Companies & Venture Capital, Calderwood & Harkness LLP

DATE: November 28, 2023

RE: Analysis of Existing Kelvantis Lending Corp. Venture Debt Covenants and Consent Requirements in Connection with Proposed $60,000,000 Convertible Note Bridge Financing

MATTER NO.: 1009-00001

I. Executive Summary

The purpose of this memorandum is to analyze the existing venture debt facility between Skybridge Fintech Ltd. and Kelvantis Lending Corp. to identify the covenant restrictions, consent and waiver requirements, and subordination obligations that are implicated by the Company's proposed issuance of $60,000,000 in aggregate principal amount of convertible promissory notes to an investor syndicate led by Ridgeline Ventures Fund IV, L.P. This memorandum is intended to provide Skybridge's management and legal team with a comprehensive roadmap for navigating the consent process with Kelvantis and to highlight key negotiation points and risks associated with that process.

Key Conclusion. The Loan and Security Agreement dated August 15, 2022 (the "LSA"), by and between Kelvantis Lending Corp. ("Kelvantis") and Skybridge Fintech Ltd. ("Skybridge" or the "Company"), contains negative covenants that restrict the incurrence of additional indebtedness beyond enumerated "Permitted Indebtedness" categories. The proposed convertible note issuance falls squarely within the LSA's broad definition of "Indebtedness" and does not qualify under any existing carve-out or exception. Accordingly, Kelvantis's prior written consent is required before Skybridge may issue the proposed convertible notes. In addition, both the LSA and the proposed term sheet contemplate the execution of a subordination agreement that will formally subordinate the convertible notes to Kelvantis's senior secured facility.

As of the date of this memorandum, the outstanding principal balance under the Kelvantis facility is $15,000,000, with a stated maturity date of August 15, 2025. The facility is secured by a first-priority lien on substantially all assets of the Company.

The proposed convertible notes bear interest at a rate of 6.00% per annum (600 basis points), simple interest, and provide for automatic conversion upon a Qualified Financing (defined as a Series D equity round raising at least $80,000,000 in new equity capital) at the lower of (a) 80% of the Series D price per share (representing a 20% conversion discount) or (b) the price per share implied by a $750,000,000 pre-money valuation cap (approximately $15.46 per share based on approximately 48,500,000 fully diluted shares outstanding). The notes also include a Change of Control provision entitling holders to receive the greater of 2.0x outstanding principal plus accrued interest or the amount payable upon conversion at the valuation cap. These notes will constitute "Indebtedness" under the LSA and will require both affirmative consent from Kelvantis and the execution and delivery of a formal subordination agreement.

Recommendation. We recommend that Skybridge promptly engage with Theodore "Ted" Marsh, Relationship Manager at Kelvantis, to seek consent and negotiate the terms of a subordination agreement. The target timeline for receiving Kelvantis's executed consent and waiver letter is mid-January 2024, aligning with the anticipated signing and closing of the Note Purchase Agreement on or about January 15, 2024. Informal discussions with Kelvantis should commence immediately, and Calderwood & Harkness LLP will prepare a formal consent request letter and initial draft subordination agreement for circulation by mid-December 2023.

II. Background

A. The Kelvantis Venture Debt Facility

On August 15, 2022, Skybridge Fintech Ltd. entered into a Loan and Security Agreement with Kelvantis Lending Corp. (the "LSA"), pursuant to which Kelvantis extended a term loan facility to the Company in the aggregate principal amount of $15,000,000. The LSA is the primary debt instrument governing Skybridge's outstanding senior secured indebtedness and establishes the covenants, representations, warranties, and other contractual obligations that are the subject of this analysis.

Kelvantis Lending Corp. Kelvantis is a Delaware corporation with its principal office located at 350 Park Avenue, 18th Floor, New York, New York 10022. Kelvantis is a specialty lender focused on providing venture debt and growth capital to technology and life sciences companies at various stages of development. Kelvantis's venture lending platform is well-established in the growth-stage fintech sector, and the Kelvantis facility was entered into following Skybridge's Series C equity financing round.

Skybridge Fintech Ltd. The Company is a Delaware corporation (C-corporation structure), with Employer Identification Number 83-2147605 and Delaware Division of Corporations File Number 6384291. The Company's principal executive offices are located at 1400 Market Street, Suite 2200, Wilmington, Delaware 19801. Skybridge is a growth-stage financial technology company engaged in the development and commercialization of its proprietary payments and treasury management platform for enterprise customers.

Key Terms of the Facility. The material terms of the Kelvantis facility are summarized as follows:

• Facility Amount: $15,000,000 (fully drawn as of the date hereof).

• Maturity Date: August 15, 2025.

• Relationship Manager: Theodore "Ted" Marsh, Kelvantis Lending Corp.

• Security: The LSA is secured by a first-priority perfected security interest and lien on substantially all assets of Skybridge, including, without limitation, the Company's intellectual property (patents, trademarks, copyrights, trade secrets, and related rights), accounts receivable, equipment, deposit accounts, investment property, and general intangibles. UCC-1 financing statements have been filed with the Delaware Secretary of State to perfect Kelvantis's security interest in the Company's personal property, and intellectual property security agreements have been filed with the United States Patent and Trademark Office and the United States Copyright Office, as applicable.

• Nature of Facility: The Kelvantis facility is structured as a senior secured term loan, which is a customary venture debt structure for growth-stage technology and fintech companies. The facility was designed to complement the Company's equity capital and provide additional runway and operational flexibility without the immediate dilutive impact of an equity financing round.

The LSA contains a comprehensive set of affirmative covenants, negative covenants, representations and warranties, events of default, and related provisions that are typical of venture lending arrangements. The negative covenants, in particular, impose significant restrictions on the Company's ability to incur additional indebtedness, grant liens, make investments and distributions, enter into fundamental transactions, and take certain other actions, in each case without the prior written consent of Kelvantis. These covenants and their implications for the proposed convertible note bridge financing are analyzed in detail in Section III of this memorandum.

B. The Proposed Convertible Note Bridge Financing

Skybridge is proposing to raise $60,000,000 in aggregate principal amount through the issuance of convertible promissory notes (the "Convertible Notes" or the "Notes") to a syndicate of institutional investors. The bridge financing is intended to provide the Company with additional capital to fund operations, product development, and market expansion activities in advance of a contemplated Series D equity financing round. The material terms of the proposed convertible note bridge financing, as reflected in the executed term sheet dated November 10, 2023, are summarized below.

Principal Amount and Allocation. The aggregate principal amount of the Convertible Notes will be $60,000,000, allocated among the following purchasers (collectively, the "Purchasers"):

Interest Rate. The Convertible Notes will bear simple interest at a rate of 6.00% per annum (600 basis points), calculated on a 365-day year basis. At the full aggregate principal amount of $60,000,000, the annual interest accrual on the Notes will be $3,600,000. Interest will accrue from the date of issuance and will not be payable in cash on a current basis; rather, accrued and unpaid interest will be added to principal upon conversion or will be payable at maturity.

Maturity. The Convertible Notes will mature 24 months from the closing date. Based on an anticipated closing date of January 15, 2024, the maturity date of the Notes would be January 15, 2026.

Conversion. The Notes will automatically convert into shares of the Company's preferred stock upon the occurrence of a "Qualified Financing," defined as a Series D equity financing in which the Company raises at least $80,000,000 in new equity capital. The conversion price will be the lower of:

(a) 80% of the price per share paid by investors in the Qualified Financing (representing a 20% conversion discount); or

(b) the price per share implied by a pre-money valuation cap of $750,000,000 (approximately $15.46 per share based on approximately 48,500,000 fully diluted shares outstanding as of the date hereof).

If the Notes have not been converted prior to the maturity date, the Notes will convert at maturity at the price per share implied by the $750,000,000 valuation cap, or, at the election of the holders of a majority-in-interest of the outstanding Notes, the outstanding principal and accrued interest will become due and payable in cash.

Change of Control. Upon a Change of Control (as defined in the term sheet to include a merger, acquisition, sale of all or substantially all assets, or other change of control transaction), each holder of Notes will be entitled to receive the greater of:

(a) 2.0x the outstanding principal amount of such holder's Notes, plus all accrued and unpaid interest thereon (representing a maximum aggregate payment of $120,000,000 based on the full principal amount of $60,000,000, plus accrued interest); or

(b) the amount such holder would have received had its Notes been converted at the valuation cap price immediately prior to the Change of Control.

Subordination. The Convertible Notes are intended to be subordinated in right of payment and priority to the existing Kelvantis venture debt facility. The term sheet contemplates the execution and delivery of a subordination agreement among Kelvantis, the Purchasers, and the Company as a condition to closing.

Investor Counsel. The investor syndicate led by Ridgeline Ventures Fund IV, L.P. is represented by Whitfield, Pratt & Soo LLP, with Graham Whitfield serving as lead partner and Danielle Kwon as the associate on the transaction. Calderwood & Harkness LLP represents Skybridge Fintech Ltd. in connection with the proposed financing and all related matters, including the Kelvantis consent and subordination process.

Transaction Documents. The proposed financing will be documented through a Note Purchase Agreement (the "NPA"), a form of Convertible Promissory Note, a Subordination Agreement, and amendments to the existing Amended and Restated Investors' Rights Agreement and Right of First Refusal and Co-Sale Agreement (collectively, the "Transaction Documents").

III. Analysis of Key LSA Covenants

We have conducted a comprehensive review of the LSA and its schedules, exhibits, and related ancillary documents. Set forth below is our analysis of the key covenants and provisions of the LSA that are implicated by the proposed convertible note bridge financing.

A. Negative Covenant — Restrictions on Additional Indebtedness

The most directly implicated provision of the LSA is the negative covenant restricting the Company from incurring additional indebtedness. Section 7.1 of the LSA provides, in relevant part, that Skybridge shall not, directly or indirectly, incur, create, assume, guarantee, or permit to exist any Indebtedness other than "Permitted Indebtedness," without the prior written consent of Kelvantis.

Definition of "Indebtedness." The LSA defines "Indebtedness" broadly. As set forth in Section 1.1 of the LSA, "Indebtedness" means, with respect to any Person, without duplication:

(i) all obligations of such Person for borrowed money;

(ii) all obligations of such Person evidenced by bonds, debentures, notes, or other similar instruments;

(iii) all obligations of such Person in respect of letters of credit, bankers' acceptances, or similar credit transactions;

(iv) all obligations of such Person under capital leases (as determined in accordance with GAAP);

(v) all guarantees by such Person of Indebtedness of any other Person; and

(vi) all obligations, contingent or otherwise, of such Person in respect of acceptances, swap agreements, interest rate agreements, currency exchange agreements, or other hedging contracts.

Application to the Proposed Convertible Notes. The proposed Convertible Notes constitute "Indebtedness" under at least two independent clauses of this definition. First, the Notes represent obligations of Skybridge for borrowed money — the Purchasers are lending $60,000,000 to the Company in exchange for the Company's promise to repay or convert such amounts under specified conditions. This squarely falls within clause (i) of the definition. Second, the Notes are obligations evidenced by notes — specifically, convertible promissory notes in the form to be attached to the Note Purchase Agreement — which falls within clause (ii) of the definition. There is no ambiguity in the application of this definition to the proposed transaction.

Analysis of "Permitted Indebtedness" Carve-Outs. The LSA defines "Permitted Indebtedness" in Section 1.1 to include a limited and enumerated set of exceptions to the general prohibition on the incurrence of additional indebtedness. Based on our review, the "Permitted Indebtedness" carve-outs in the LSA include the following categories:

(a) Indebtedness under the LSA and the other Loan Documents;

(b) trade payables, accrued expenses, and similar obligations incurred in the ordinary course of business and not past due by more than 90 days (or being contested in good faith by appropriate proceedings);

(c) purchase money indebtedness and capital lease obligations in an aggregate outstanding principal amount not to exceed $500,000 at any time;

(d) Indebtedness existing on the date of the LSA and set forth on Schedule 7.1 thereto (which includes certain pre-existing obligations and the Company's corporate credit card facility);

(e) intercompany loans from any wholly-owned subsidiary of the Company to the Company;

(f) endorsements of negotiable instruments for deposit or collection in the ordinary course of business;

(g) unsecured Indebtedness incurred in connection with any insurance premium financing arrangement in an aggregate outstanding principal amount not to exceed $250,000 at any time; and

(h) extensions, refinancings, and renewals of any of the foregoing, provided that the principal amount thereof is not increased and the terms thereof are not materially less favorable to the Company.

We have carefully reviewed each of these carve-outs and conclude that the proposed $60,000,000 convertible note issuance does not fall within any of the "Permitted Indebtedness" exceptions. The Notes are not trade payables or ordinary course obligations; they are not purchase money financing or capital leases; they are not existing indebtedness scheduled at the time of the LSA's execution; they are not intercompany loans; and they do not fall within any of the other enumerated categories. The aggregate principal amount of the proposed Notes ($60,000,000) vastly exceeds any applicable dollar thresholds in the Permitted Indebtedness definition (the largest being the $500,000 cap on purchase money indebtedness and capital leases).

Conclusion. Kelvantis's prior written consent is required before Skybridge may issue the $60,000,000 in Convertible Notes. The issuance of the Notes without such consent would constitute a direct breach of the negative covenant set forth in Section 7.1 of the LSA.

B. Negative Covenant — Restrictions on Liens

Section 7.2 of the LSA contains a negative covenant prohibiting Skybridge from creating, incurring, assuming, or permitting to exist any lien, security interest, mortgage, pledge, charge, or encumbrance on any of its assets or property, other than "Permitted Liens" as defined in the LSA.

The proposed Convertible Notes are unsecured obligations of the Company. The term sheet expressly provides that no liens, security interests, or other encumbrances on the assets of Skybridge will be granted in favor of the noteholders. Accordingly, the issuance of the Notes should not directly implicate or violate the negative covenant on liens.

Notwithstanding the foregoing, we recommend that the Subordination Agreement to be executed in connection with the transaction include an express confirmation that the noteholders do not hold, and will not acquire, any security interest, lien, or other encumbrance on any assets of Skybridge. This confirmation will reinforce the unsecured and subordinated nature of the Convertible Notes and will provide additional comfort to Kelvantis that its first-priority security interest in the Company's assets is not impaired or diluted by the bridge financing. Such a provision is standard in subordination agreements of this nature and is expected to be non-controversial.

C. Affirmative Covenant — Financial Reporting and Information Rights

The LSA contains affirmative covenants requiring Skybridge to deliver periodic financial statements, compliance certificates, and other information to Kelvantis on a regular basis. Specifically, Section 6.2 of the LSA requires the Company to deliver:

(a) within 30 days after the end of each month, unaudited monthly financial statements (balance sheet, income statement, and cash flow statement) prepared in accordance with GAAP consistently applied;

(b) within 90 days after the end of each fiscal year, audited annual financial statements prepared in accordance with GAAP and audited by a nationally or regionally recognized independent registered public accounting firm (currently Pinnacle Audit Group LLP);

(c) promptly upon request, such additional financial and other information as Kelvantis may reasonably request from time to time; and

(d) a compliance certificate, signed by the Chief Financial Officer of the Company, certifying that no Event of Default exists and that the Company is in compliance with all financial covenants, to be delivered concurrently with the monthly and annual financial statements.

The proposed convertible note bridge financing will have a material impact on the Company's balance sheet and financial condition. At closing, the Company's total liabilities will increase by $60,000,000 (reflecting the principal amount of the Convertible Notes), and the Company's cash and cash equivalents will increase by a corresponding amount (net of transaction costs and expenses). These changes will be reflected in the Company's financial statements for the period in which the closing occurs.

We recommend that Skybridge take the following steps to ensure compliance with its financial reporting and information obligations under the LSA:

(a) promptly notify Kelvantis of the proposed convertible note financing as part of the consent request process, providing a description of the material terms of the transaction and the anticipated impact on the Company's financial condition;

(b) following the closing of the bridge financing, deliver updated financial statements to Kelvantis reflecting the new indebtedness and the corresponding increase in the Company's cash position; and

(c) include disclosure of the Convertible Notes in all subsequent compliance certificates delivered under the LSA, confirming that the indebtedness was incurred with Kelvantis's prior written consent.

As part of the consent request process, Kelvantis will likely request current financial information, including the Company's audited financial statements for the fiscal year ended December 31, 2022 (audited by Pinnacle Audit Group LLP), reviewed financial statements as of September 30, 2023 (reviewed by Pinnacle Audit Group LLP), and any available management-prepared financial statements and projections. The Company should be prepared to assemble and deliver this financial information package promptly upon Kelvantis's request.

D. Negative Covenant — Restrictions on Fundamental Changes

The LSA contains a negative covenant, set forth in Section 7.3, restricting Skybridge from entering into certain fundamental transactions without the prior written consent of Kelvantis. These restrictions typically cover mergers, consolidations, and reorganizations; acquisitions of all or substantially all of the assets or equity interests of another entity; sales, transfers, or dispositions of all or substantially all of the Company's assets; and changes of control (defined to include any transaction or series of transactions resulting in a change in the identity of the Person or Persons who hold, directly or indirectly, a majority of the voting power of the Company's outstanding capital stock).

Application to the Convertible Note Issuance. The issuance of the Convertible Notes, in and of itself, does not constitute a fundamental change, merger, consolidation, asset disposition, or change of control. The transaction involves the incurrence of additional indebtedness in exchange for cash consideration — it is a debt financing, not a structural or corporate reorganization. Accordingly, the negative covenant on fundamental changes should not be directly implicated by the closing of the bridge financing.

Prospective Considerations. While the issuance of the Notes does not trigger the fundamental change restrictions, certain future events contemplated by the terms of the Notes could implicate these provisions:

(a) Conversion upon a Qualified Financing. The automatic conversion of the Notes upon a Qualified Financing (i.e., a Series D equity round raising at least $80,000,000) will result in the issuance of shares of the Company's preferred stock to the noteholders. This conversion is an equity issuance, not a fundamental change, and should not implicate Section 7.3. However, if the Series D round involves a significant change in the Company's capitalization or governance structure, separate analysis under the LSA may be warranted at that time.

(b) Change of Control. If a Change of Control transaction occurs during the term of the Notes, the noteholders' right to receive the 2.0x premium payment or the conversion amount could involve substantial cash payments by the Company that may interact with the fundamental change and indebtedness covenants, as well as the subordination provisions of the Subordination Agreement. The consent and waiver letter should, to the extent practicable, address these prospective events or, at minimum, preserve Skybridge's ability to seek separate waivers from Kelvantis as and when such events arise.

We recommend that the consent and waiver letter include appropriate carve-outs or forward-looking provisions to address these prospective scenarios, recognizing that Kelvantis may prefer to reserve its consent rights with respect to any future Change of Control transaction.

E. Negative Covenant — Restrictions on Investments and Distributions

Section 7.5 of the LSA contains restrictions on the Company's ability to make investments, loans, advances, and capital contributions, as well as restrictions on the declaration or payment of dividends and other distributions on the Company's capital stock. We have reviewed these provisions in the context of the proposed convertible note bridge financing.

The issuance of the Convertible Notes does not involve the payment of any dividend or distribution by the Company. The Company is receiving cash in exchange for the Notes, and no cash or other property is being distributed to the Company's existing stockholders in connection with the transaction. Similarly, the bridge financing does not involve the Company making any investment, loan, advance, or capital contribution to a third party.

Accordingly, the negative covenant on investments and distributions is not directly implicated by the proposed transaction, and no consent or waiver is required under this provision. We have identified no issues with respect to this covenant.

F. Events of Default

Article VIII of the LSA sets forth the events of default under the facility. The events of default are customary for a venture lending arrangement and include, among other things:

(a) failure to make any payment of principal, interest, fees, or other amounts when due under the LSA or any other Loan Document;

(b) breach of any representation or warranty made by the Company in the LSA or any other Loan Document;

(c) breach of any covenant or agreement contained in the LSA, including, without limitation, the negative covenants set forth in Article VII (subject to applicable cure periods, if any, for certain affirmative covenant breaches);

(d) the occurrence of a Material Adverse Change (as defined in the LSA);

(e) cross-default to other indebtedness of the Company in excess of a specified threshold (typically $100,000 to $250,000);

(f) the entry of one or more judgments against the Company in an aggregate amount exceeding a specified threshold;

(g) any Loan Document ceasing to be in full force and effect, or any security interest created thereunder ceasing to be a valid and perfected first-priority security interest;

(h) the occurrence of certain insolvency events, including the filing of a voluntary or involuntary petition in bankruptcy, the appointment of a receiver or trustee, or the making of an assignment for the benefit of creditors; and

(i) such other events of default as are customarily included in venture lending arrangements.

Critical Risk: Issuance Without Consent. The issuance of the $60,000,000 in Convertible Notes without first obtaining Kelvantis's prior written consent would constitute a direct and immediate breach of the negative covenant on additional indebtedness set forth in Section 7.1 of the LSA. Such a breach would trigger an Event of Default under the LSA pursuant to clause (c) above. Unlike certain affirmative covenant breaches, a breach of the negative covenant on indebtedness is typically not subject to a cure period under the LSA — it constitutes an immediate Event of Default upon the occurrence of the prohibited action.

Remedies Upon Event of Default. Upon the occurrence and continuation of an Event of Default, Kelvantis is entitled to exercise the full range of remedies available under the LSA and applicable law, including, without limitation:

(a) acceleration of all outstanding principal, accrued interest, fees, and other amounts owed under the LSA, making all such amounts immediately due and payable (the outstanding principal balance being $15,000,000 plus accrued interest and fees);

(b) exercise of remedies against the collateral securing the facility, including foreclosure on, seizure of, or other enforcement actions with respect to substantially all assets of the Company (Intellectual property, accounts receivable, equipment, deposit accounts, and general intangibles);

(c) application of the default rate of interest (typically 3.00% to 5.00% above the contract rate) to all outstanding obligations; and

(d) pursuit of all other contractual, legal, and equitable remedies available to Kelvantis.

The consequences of an Event of Default under the LSA would be severe and potentially catastrophic for the Company. Acceleration of $15,000,000 in venture debt, combined with Kelvantis's ability to enforce its security interest against substantially all Company assets (including the Company's intellectual property, which constitutes the core of the Company's business), would pose an existential threat to Skybridge's operations and viability. Moreover, a default under the Kelvantis facility could trigger cross-default provisions in other agreements to which the Company is a party and would likely have a material adverse effect on the Company's relationship with its existing investors and its ability to raise future capital.

Imperative. It is imperative that Kelvantis's written consent and waiver be obtained prior to the execution of the Note Purchase Agreement and the issuance of the Convertible Notes. Under no circumstances should the Company proceed with the closing of the bridge financing without having received Kelvantis's executed consent and waiver letter.

IV. Subordination Requirements

A. Overview

Both the LSA and the proposed term sheet for the convertible note bridge financing contemplate that the Convertible Notes will be subordinated to the existing Kelvantis venture debt facility. From Kelvantis's perspective, subordination is a condition to its consent — Kelvantis will require assurance that its senior secured position is preserved and that the noteholders' claims will rank junior to Kelvantis's claims in all respects, including in the event of the Company's insolvency or liquidation. From the Purchasers' perspective, the term sheet expressly acknowledges that the Notes will be subordinated to the existing senior secured indebtedness.

Accordingly, a formal Subordination Agreement (the "Subordination Agreement") will need to be negotiated and executed among three parties: Kelvantis Lending Corp. (as senior lender), the Purchasers/noteholders (as subordinated creditors), and Skybridge Fintech Ltd. (as borrower/issuer). The Subordination Agreement will establish the terms and conditions governing the relative priority and rights of Kelvantis and the noteholders with respect to the Company's obligations under the LSA and the Convertible Notes, respectively.

The drafting, negotiation, and execution of the Subordination Agreement is a critical path item for the proposed bridge financing. Calderwood & Harkness LLP anticipates preparing the initial draft of the Subordination Agreement for circulation to Kelvantis (and its counsel, if applicable) and to Whitfield, Pratt & Soo LLP on behalf of the investor syndicate led by Ridgeline Ventures Fund IV, L.P. We expect that the Subordination Agreement will be the subject of negotiation among all three parties and their respective counsel, and we have identified the key terms and potential negotiation points below.

B. Key Terms to Be Addressed in the Subordination Agreement

The following is a summary of the principal terms and provisions that we anticipate will be addressed in the Subordination Agreement, together with our preliminary views on expected positions and negotiation dynamics.

Payment Subordination. The core provision of the Subordination Agreement will establish that all payments on the Convertible Notes — including payments of principal, accrued interest, premiums, fees, and any conversion-related payments — are subordinated in right of payment to all amounts owed by Skybridge to Kelvantis under the LSA and the related Loan Documents. This means that, in the event of the Company's insolvency, liquidation, dissolution, reorganization, or similar proceeding, Kelvantis's claims must be satisfied in full before any payment is made on account of the Convertible Notes. This is the fundamental economic term of the subordination arrangement and is expected to be non-controversial among the parties.

Standstill Provisions. The Subordination Agreement will include standstill provisions pursuant to which the noteholders agree not to take any enforcement action with respect to the Convertible Notes — including, without limitation, acceleration of the Notes, demand for repayment, institution of legal proceedings, or exercise of any other remedies — during the pendency of any default or enforcement period under the Kelvantis facility. The standstill period is typically defined as the period commencing upon the occurrence of an Event of Default under the LSA and continuing for a specified number of days (commonly 120 to 180 days), during which the noteholders must refrain from taking any action that could interfere with Kelvantis's enforcement rights. The duration and scope of the standstill period are likely to be a point of negotiation between Kelvantis and the investor syndicate, with Kelvantis seeking a longer standstill period and the noteholders seeking a shorter one with appropriate carve-outs (e.g., for the right to participate in bankruptcy proceedings after the expiration of the standstill period).

Lien Subordination (Confirmation of Unsecured Status). The Subordination Agreement should include an express confirmation that the Convertible Notes are unsecured obligations of the Company and that the noteholders do not hold, and will not acquire, any security interest, lien, mortgage, pledge, charge, or other encumbrance on any assets or property of Skybridge. This confirmation reinforces Kelvantis's position as the sole secured creditor with a first-priority lien on the Company's assets and eliminates any potential dispute regarding the relative priority of liens. This provision is standard in subordination agreements involving unsecured subordinated debt and is expected to be non-controversial.

Permitted Payments. The Subordination Agreement should address the circumstances under which Skybridge may make payments on the Convertible Notes during the term of the Kelvantis facility. This provision will define the types of payments that are permitted (and the conditions to making such payments) and the types of payments that are prohibited absent Kelvantis's consent or full repayment of the senior debt.

In the case of the proposed Convertible Notes, this analysis is somewhat simplified by the structure of the Notes. The Notes accrue simple interest at 6.00% per annum, but no scheduled cash interest payments are due during the term of the Notes prior to maturity or conversion. Accrued interest is added to the principal amount upon conversion and converts together with principal into equity. Accordingly, there are no periodic cash interest payments that would need to be addressed under a "permitted payments" framework during the ordinary course of the Notes' term. The primary payment events are (a) conversion upon a Qualified Financing (which involves the issuance of equity, not a cash payment), (b) repayment at maturity (if the Notes are not converted), and (c) the Change of Control premium payment. Each of these is addressed separately below.

Conversion Mechanics. The Subordination Agreement should expressly permit the conversion of the Convertible Notes into equity securities of the Company upon the occurrence of a Qualified Financing (or at maturity), without requiring Kelvantis's further consent or constituting a violation of the subordination terms. Conversion of the Notes extinguishes the subordinated indebtedness and replaces it with equity — a result that benefits Kelvantis by eliminating a competing creditor claim and reducing the Company's aggregate debt burden. Because conversion involves the issuance of equity rather than a cash payment to the noteholders at the expense of Kelvantis, this provision should be non-controversial and is expected to be readily agreed upon by Kelvantis. The Subordination Agreement should include a mechanism for notifying Kelvantis of any conversion event, but should not condition such conversion on Kelvantis's further approval.

Change of Control Payments. The treatment of the Change of Control premium payment under the Subordination Agreement is likely to be the single most significant negotiation point among the parties. Under the terms of the Convertible Notes, upon a Change of Control, the noteholders are entitled to receive the greater of (a) 2.0x the outstanding principal amount of their Notes, plus all accrued and unpaid interest (representing a maximum aggregate payment of approximately $120,000,000 based on the full principal amount of $60,000,000, plus accrued interest), or (b) the amount such holder would have received upon conversion at the valuation cap.

From Kelvantis's perspective, any cash payment to the noteholders upon a Change of Control should be conditioned upon the prior repayment in full of all amounts owed to Kelvantis under the LSA. Kelvantis will argue that permitting a $120,000,000 cash payment to subordinated creditors before Kelvantis has been satisfied in full would fundamentally undermine the purpose of the subordination arrangement. From the noteholders' perspective, the Change of Control premium is a key economic term of the investment, and the noteholders will seek assurance that the premium will be payable in practice, particularly in the context of an acquisition where the transaction consideration is sufficient to satisfy all creditor claims.

We anticipate that the resolution of this issue will involve a framework in which (a) the Change of Control payment to the noteholders is expressly subordinated to the prior payment in full of all amounts owed to Kelvantis, (b) the payment is permitted only from the net proceeds of the Change of Control transaction remaining after Kelvantis has been paid in full, and (c) if the Change of Control transaction involves the conversion of the Notes into equity (rather than a cash payment), such conversion is permitted without restriction. Calderwood & Harkness LLP will work to negotiate a framework that protects both Kelvantis's senior position and the noteholders' economic expectations.

Amendments and Modifications. The Subordination Agreement should provide that neither Skybridge nor the noteholders may amend, modify, supplement, or waive any term or provision of the Convertible Notes or the Note Purchase Agreement in a manner that would be materially adverse to Kelvantis without Kelvantis's prior written consent. Examples of amendments that would require Kelvantis's consent include, without limitation, (a) any increase in the aggregate principal amount of the Notes, (b) any acceleration of the maturity date, (c) any increase in the interest rate, (d) any addition of security or collateral for the Notes, (e) any change to the conversion terms that would result in the Notes being repaid in cash rather than converted into equity, and (f) any change to the subordination provisions. This restriction protects Kelvantis from having its senior position eroded by post-closing modifications to the subordinated debt terms without its knowledge or consent.

Notices. The Subordination Agreement should require that Kelvantis receive copies of any default notices, acceleration notices, conversion notices, and material amendments or modifications related to the Convertible Notes. Similarly, the noteholders should receive copies of any default notices and acceleration notices under the Kelvantis facility that affect the noteholders' rights under the Subordination Agreement (e.g., triggering the standstill provisions). This notice framework ensures that all parties have contemporaneous knowledge of material developments affecting their respective rights and obligations.

Rights in Bankruptcy/Insolvency. The Subordination Agreement should include standard "turnover" provisions providing that, in the event of the Company's insolvency, bankruptcy, liquidation, dissolution, or similar proceeding, any amounts received by the noteholders in violation of the subordination terms must be held in trust for, and promptly turned over to, Kelvantis for application against the senior debt. These provisions are standard in subordination agreements and serve to enforce the subordination in practice, ensuring that Kelvantis receives the benefit of its senior position even if distributions are inadvertently or improperly made to the noteholders during an insolvency proceeding. The turnover provisions should apply broadly to any payment, distribution, or other value received by the noteholders on account of the Convertible Notes in violation of the Subordination Agreement, whether received through judicial proceedings, setoff, or otherwise.

C. Interaction with Note Purchase Agreement

The Subordination Agreement is a critical transaction document and should be closely integrated with the Note Purchase Agreement and the other definitive documentation for the convertible note bridge financing. Specifically:

Closing Condition. The Note Purchase Agreement should include the execution and delivery of the Subordination Agreement as a condition precedent to the Purchasers' obligation to consummate the purchase of the Convertible Notes. This ensures that the subordination framework is in place before the Notes are issued and that Kelvantis's consent and the subordination terms have been finalized prior to the closing of the bridge financing. Similarly, the receipt of Kelvantis's written consent and waiver letter should be a separate condition to closing under the NPA.

Exhibit to Note Purchase Agreement. The form of the Subordination Agreement should be attached as an exhibit to the Note Purchase Agreement or, alternatively, cross-referenced in the NPA with a summary of the material terms. Attaching the form as an exhibit provides transparency to all parties and ensures that the Purchasers have reviewed and approved the subordination terms prior to signing the NPA. We recommend attaching the final agreed form as an exhibit rather than merely cross-referencing the document, to minimize the risk of disputes regarding the subordination terms between signing and closing.

Drafting Responsibility. Calderwood & Harkness LLP anticipates preparing the initial draft of the Subordination Agreement for review by Kelvantis (and its counsel, if applicable) and by Whitfield, Pratt & Soo LLP on behalf of the investor syndicate. As Company counsel, Calderwood & Harkness occupies a unique position in this negotiation, as we represent the party that is obligated under both the senior and subordinated instruments. Our drafting approach will aim to produce a balanced document that protects Kelvantis's senior position while preserving the noteholders' economic expectations and the Company's operational flexibility, consistent with market-standard subordination terms for venture debt arrangements of this nature.

V. Form and Scope of Required Lender Consent

A. Form of Consent

Kelvantis's consent to the proposed convertible note bridge financing should be documented in a formal written consent and waiver letter (the "Consent Letter") executed by a duly authorized officer of Kelvantis Lending Corp. The Consent Letter should be a standalone document, separate from (but cross-referenced in) the Subordination Agreement, and should clearly set forth the scope and terms of Kelvantis's consent. Based on our experience with similar consent processes involving venture lenders, we anticipate that the Consent Letter will include the following key elements:

(a) Consent to Additional Indebtedness. An express consent by Kelvantis to the incurrence by Skybridge of $60,000,000 in additional indebtedness in the form of convertible promissory notes, as described in the Consent Letter and the attached or referenced term sheet or summary of the proposed transaction.

(b) Waiver of Event of Default. A waiver by Kelvantis of any Event of Default that would otherwise be triggered under the LSA by the issuance of the Convertible Notes and the execution and delivery of the related Transaction Documents, including the Note Purchase Agreement, the form of Convertible Promissory Note, the Subordination Agreement, and the amendments to the existing Investors' Rights Agreement and Right of First Refusal and Co-Sale Agreement.

(c) Acknowledgment of Subordination Agreement. An acknowledgment by Kelvantis of the execution and delivery of the Subordination Agreement and a confirmation that the Convertible Notes are subordinated to the Kelvantis facility in accordance with the terms of the Subordination Agreement.

(d) No Additional Consents Required. A confirmation by Kelvantis that no other consents, waivers, or amendments to the LSA are required in connection with the proposed transaction, or, if additional requirements exist, a clear identification of such requirements and the conditions to their satisfaction.

(e) Fee and Cost Acknowledgment. A representation by Kelvantis that it has received all fees, costs, expenses, or other consideration required in connection with the issuance of the consent, or a specification of the amounts due and the timing of payment. Consent fees are customary in venture debt arrangements and should be anticipated and budgeted by the Company (discussed further in Section V.C below).

The Consent Letter should be executed by an authorized officer of Kelvantis and should reference the specific sections of the LSA that are being consented to or waived. Calderwood & Harkness LLP will prepare the initial draft of the Consent Letter for Kelvantis's review and approval.

B. Scope of Consent

The scope of the Consent Letter should be carefully defined to cover the specific transaction contemplated by the proposed bridge financing while avoiding unnecessary breadth that could raise concerns on Kelvantis's part. The consent should address the following:

Specific Transaction. The consent should be specific to the convertible note bridge financing as described — namely, the issuance of Convertible Notes in the aggregate principal amount of up to $60,000,000, bearing interest at 6.00% per annum (simple interest), maturing 24 months from closing, and convertible into equity securities of the Company upon a Qualified Financing or at maturity, on the terms described in the Consent Letter and the attached or referenced term sheet.

Authorization of Transaction Documents. The consent should expressly authorize Skybridge to enter into and perform its obligations under the Transaction Documents, including:

(a) the Note Purchase Agreement;

(b) the Convertible Promissory Notes issued thereunder;

(d) amendments to the Amended and Restated Investors' Rights Agreement dated as of the date of the Company's Series C financing; and

(e) amendments to the Amended and Restated Right of First Refusal and Co-Sale Agreement dated as of the date of the Company's Series C financing.

Confirmation of No Breach or Default. The consent should include a confirmation by Kelvantis that the execution, delivery, and performance of the Transaction Documents by Skybridge does not constitute a breach of, or an event of default under, the LSA or any other Loan Document, and that Kelvantis waives any right to declare such a breach or event of default in connection with the consented-to transaction.

C. Potential Kelvantis Requirements and Negotiation Points

Based on our experience with consent processes involving venture lenders and our familiarity with Kelvantis's practices, we anticipate that Kelvantis may raise the following requirements and negotiation points in connection with granting its consent:

Consent Fee. Kelvantis may require the payment of a consent fee as a condition to issuing the Consent Letter. Consent fees are customary in venture debt facilities and are typically structured as a flat fee or a percentage of the outstanding principal balance. In our experience, consent fees for transactions of this nature range from 0.25% to 1.00% of the outstanding principal balance of the senior facility (i.e., $37,500 to $150,000 based on the $15,000,000 outstanding balance), although the specific amount will depend on Kelvantis's standard practices and the scope of the consent being requested. The Company should anticipate and budget for this cost, and it may be appropriate to discuss the consent fee with Ted Marsh early in the process to avoid surprises.

Updated Financial Information. Kelvantis will almost certainly request current financial information and projections before issuing its consent. The Company should be prepared to provide the following materials:

(a) audited financial statements for the fiscal year ended December 31, 2022, as audited by Pinnacle Audit Group LLP;

(b) reviewed (unaudited) financial statements for the nine-month period ended September 30, 2023, as reviewed by Pinnacle Audit Group LLP;

(d) the Company's current operating budget and financial projections, including revenue forecasts, cash burn analysis, and runway projections (both with and without the proposed bridge financing proceeds); and

(e) a capitalization table reflecting the Company's current equity structure and the pro forma impact of the convertible note issuance and potential conversion.

We recommend that David Lindstrom, CFO, begin assembling this financial information package immediately so that it can be included with the formal consent request letter or delivered promptly upon Kelvantis's request.

Compliance Certificate. Kelvantis may require the Company to deliver a compliance certificate, signed by the Chief Financial Officer, confirming that no Event of Default currently exists under the LSA and that the Company is in compliance with all covenants, representations, and warranties thereunder as of the date of the consent request. This requirement is standard and should not present any issues, provided that the Company is in fact in compliance with all provisions of the LSA as of the date of the certificate.

Subordination Agreement Terms. As discussed in Section IV above, Kelvantis will have specific views on the terms of the Subordination Agreement, and several provisions are likely to be the subject of negotiation. In particular, Kelvantis is expected to focus on (a) the scope and duration of the standstill provisions, (b) the treatment of Change of Control payments and the conditions under which such payments are permitted, (c) the permitted payments framework, and (d) the restrictions on amendments and modifications to the Convertible Notes. Calderwood & Harkness LLP will prepare the initial draft of the Subordination Agreement and will seek to align the terms with market-standard practices for venture debt subordination arrangements, while remaining responsive to Kelvantis's concerns and requirements.

Additional Covenants or Reporting. Kelvantis may request additional reporting obligations or informational covenants as a condition to granting consent. For example, Kelvantis may require (a) prompt notice of any conversion of the Convertible Notes, (b) updated capitalization tables following any conversion event, (c) copies of all material correspondence with the noteholders, or (d) periodic certifications that no default exists under the Convertible Notes. These requirements are typically reasonable and should be manageable for the Company.

No-Impairment Confirmation. Kelvantis may require the Company to represent and confirm that the convertible note financing does not impair, diminish, or otherwise adversely affect Kelvantis's first-priority perfected security interest in the Company's assets. Because the Convertible Notes are unsecured, and because no liens will be granted in favor of the noteholders, this confirmation should be straightforward to provide. The Subordination Agreement will also include an express confirmation of the noteholders' unsecured status, which will further reinforce this point.

VI. Timeline and Process Recommendations

Based on the anticipated closing date of the bridge financing on or about January 15, 2024, and allowing for the time required to negotiate and finalize the consent and subordination documentation, we recommend the following timeline and process for obtaining Kelvantis's consent.

Immediate Next Steps

1. Informal Discussions with Kelvantis. We recommend that Skybridge management — specifically, David Lindstrom (CFO) — initiate informal discussions with Theodore "Ted" Marsh, Relationship Manager at Kelvantis, as soon as practicable following receipt of this memorandum. The purpose of these preliminary discussions is to preview the proposed convertible note bridge financing for Kelvantis, gauge Kelvantis's general receptiveness to granting consent, and identify any threshold concerns or requirements that may affect the timeline or structure of the consent process. Informal engagement at the relationship manager level is an important first step in setting a constructive tone for the consent process and reducing the likelihood of surprises during the formal review period.

2. Preparation of Formal Consent Request Letter. Calderwood & Harkness LLP will prepare a formal consent request letter to Kelvantis, addressed to Ted Marsh (with copies to Kelvantis's legal department and outside counsel, if applicable). The consent request letter will include (a) a description of the proposed convertible note bridge financing, including the principal amount, interest rate, maturity, conversion terms, and identity of the Purchasers; (b) a summary of the LSA provisions implicated by the proposed transaction and the specific consents and waivers being requested; (c) a request for Kelvantis's consent and waiver in the form of the attached draft Consent Letter; and (d) draft subordination agreement terms for Kelvantis's review and comment. Target date for sending the consent request letter: approximately December 15, 2023.

3. Assembly of Financial Information Package. Skybridge should assemble a comprehensive financial information package for Kelvantis's review, including the audited and reviewed financial statements, management-prepared financials, and projections described in Section V.C above. This package should be ready for delivery concurrently with or shortly after the formal consent request letter.

Target Timeline

We note that the targeted timeline is ambitious, particularly given the holiday period in late December and early January. Early engagement with Kelvantis is therefore critical to ensure that the consent process does not delay the anticipated closing of the bridge financing. If Kelvantis's review extends beyond mid-January, the Company may need to adjust the closing timeline for the Note Purchase Agreement accordingly.

Coordination with Investor Counsel

Whitfield, Pratt & Soo LLP, as counsel to the investor syndicate led by Ridgeline Ventures Fund IV, L.P., will need to review and approve the Subordination Agreement on behalf of the Purchasers. The noteholders are a party to the Subordination Agreement and will be bound by its terms, so their counsel's input is essential. Calderwood & Harkness LLP will circulate the draft Subordination Agreement to Whitfield, Pratt & Soo LLP concurrently with or shortly after sending it to Kelvantis, to enable parallel review and to minimize delay. We anticipate that the primary negotiation on the subordination terms will be between Kelvantis and the noteholders (through their respective counsel), with Calderwood & Harkness facilitating the discussions on behalf of the Company.

Closing Condition

The Note Purchase Agreement will include receipt of Kelvantis's executed consent and waiver letter and the execution and delivery of the Subordination Agreement as express conditions precedent to the obligation of the Purchasers to consummate the purchase of the Convertible Notes. This closing condition ensures that the bridge financing cannot be consummated without the required lender consent and subordination arrangements in place, thereby protecting both the Company and the Purchasers from the risk of an unconsented issuance triggering an Event of Default under the LSA.

VII. Risk Assessment

We have identified and assessed the following key risks associated with the Kelvantis consent process:

Risk of Consent Refusal: Low. We assess the risk that Kelvantis will refuse to grant consent as low. The proposed convertible note bridge financing, viewed from Kelvantis's perspective as a senior secured lender, is a transaction that enhances, rather than impairs, Kelvantis's credit position. Several factors support this assessment:

(a) Subordination. The Convertible Notes will be expressly subordinated to the Kelvantis facility, meaning that Kelvantis's claims rank senior to the noteholders' claims in all respects. Kelvantis is not being asked to accept a pari passu or senior competing creditor.

(b) Unsecured Status. The Convertible Notes are unsecured, and no liens will be granted to the noteholders. Kelvantis's first-priority security interest in substantially all Company assets is unimpaired.

(c) Improved Cash Position. The bridge financing will significantly improve Skybridge's liquidity and cash position, from approximately $18,500,000 pre-bridge to approximately $78,500,000 post-bridge (a more than four-fold increase). This dramatically reduces the near-term credit risk to Kelvantis by extending the Company's cash runway and reducing the likelihood that the Company will be unable to service or repay the Kelvantis facility at maturity.

(d) Venture Debt Market Practice. Consent requests of this nature are common and expected in the venture lending market. Venture lenders routinely consent to subordinated bridge financings by their portfolio companies, subject to the execution of appropriate subordination agreements, because such transactions support the company's growth trajectory and ultimately improve the lender's recovery prospects.

While refusal is unlikely, Kelvantis may condition its consent on specific subordination terms, additional covenants, or the payment of a consent fee, as discussed in Section V.C above.

Risk of Delay: Moderate. We assess the risk of delay in the consent process as moderate. Consent processes with venture lenders typically take three to six weeks from the submission of the formal consent request to the receipt of the executed consent letter. Several factors contribute to the risk of delay in this case:

(a) Holiday Period. The consent process will span the late December and early January holiday period, during which key decision-makers at Kelvantis and their outside counsel may have limited availability. This is a significant practical consideration that could extend the timeline.

(b) Subordination Negotiation. The negotiation of the Subordination Agreement involves three parties (Kelvantis, the Purchasers, and the Company) and their respective counsel. Multi-party negotiations inherently take longer than bilateral negotiations, and the Change of Control payment provisions and standstill terms are likely to require multiple rounds of negotiation.

(c) Financial Review. Kelvantis may require time to review and analyze the Company's financial information and to conduct internal credit review and approval processes. Depending on Kelvantis's internal procedures, this process may involve multiple levels of review and sign-off.

Early engagement with Kelvantis is critical to mitigating the risk of delay. By initiating informal discussions in early December and submitting the formal consent request by mid-December, the Company maximizes the available time for Kelvantis's review and reduces the likelihood that the consent process will delay the anticipated closing date.

Risk of Event of Default: High (if consent is not obtained). The risk of an Event of Default under the LSA is high if the Company proceeds with the issuance of the Convertible Notes without first obtaining Kelva

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
TO: Arjun Mehta, CEO & Co-Founder, Skybridge Fintech Ltd. David Lindstrom, CFO, Skybridge Fintech Ltd. Priya Ramanathan, General Counsel, Skybridge Fintech Ltd.
FROM: Leonard Ashford, Of Counsel, Emerging Companies & Venture Capital, Calderwood & Harkness LLP Nina Reyes, Senior Associate, Emerging Companies & Venture Capital, Calderwood & Harkness LLP
DATE: November 28, 2023
RE: Analysis of Existing Kelvantis Lending Corp. Venture Debt Covenants and Consent Requirements in Connection with Proposed $60,000,000 Convertible Note Bridge Financing
MATTER NO.: 1009-00001
I. Executive Summary
The purpose of this memorandum is to analyze the existing venture debt facility between Skybridge Fintech Ltd. and Kelvantis Lending Corp. to identify the covenant restrictions, consent and waiver requirements, and subordination obligations that are implicated by the Company's proposed issuance of $60,000,000 in aggregate principal amount of convertible promissory notes to an investor syndicate led by Ridgeline Ventures Fund IV, L.P. This memorandum is intended to provide Skybridge's management and legal team with a comprehensive roadmap for navigating the consent process with Kelvantis and to highlight key negotiation points and risks associated with that process.
Key Conclusion. The Loan and Security Agreement dated August 15, 2022 (the "LSA"), by and between Kelvantis Lending Corp. ("Kelvantis") and Skybridge Fintech Ltd. ("Skybridge" or the "Company"), contains negative covenants that restrict the incurrence of additional indebtedness beyond enumerated "Permitted Indebtedness" categories. The proposed convertible note issuance falls squarely within the LSA's broad definition of "Indebtedness" and does not qualify under any existing carve-out or exception. Accordingly, Kelvantis's prior written consent is required before Skybridge may issue the proposed convertible notes. In addition, both the LSA and the proposed term sheet contemplate the execution of a subordination agreement that will formally subordinate the convertible notes to Kelvantis's senior secured facility.
As of the date of this memorandum, the outstanding principal balance under the Kelvantis facility is $15,000,000, with a stated maturity date of August 15, 2025. The facility is secured by a first-priority lien on substantially all assets of the Company.
The proposed convertible notes bear interest at a rate of 6.00% per annum (600 basis points), simple interest, and provide for automatic conversion upon a Qualified Financing (defined as a Series D equity round raising at least $80,000,000 in new equity capital) at the lower of (a) 80% of the Series D price per share (representing a 20% conversion discount) or (b) the price per share implied by a $750,000,000 pre-money valuation cap (approximately $15.46 per share based on approximately 48,500,000 fully diluted shares outstanding). The notes also include a Change of Control provision entitling holders to receive the greater of 2.0x outstanding principal plus accrued interest or the amount payable upon conversion at the valuation cap. These notes will constitute "Indebtedness" under the LSA and will require both affirmative consent from Kelvantis and the execution and delivery of a formal subordination agreement.
Recommendation. We recommend that Skybridge promptly engage with Theodore "Ted" Marsh, Relationship Manager at Kelvantis, to seek consent and negotiate the terms of a subordination agreement. The target timeline for receiving Kelvantis's executed consent and waiver letter is mid-January 2024, aligning with the anticipated signing and closing of the Note Purchase Agreement on or about January 15, 2024. Informal discussions with Kelvantis should commence immediately, and Calderwood & Harkness LLP will prepare a formal consent request letter and initial draft subordination agreement for circulation by mid-December 2023.
II. Background
A. The Kelvantis Venture Debt Facility
On August 15, 2022, Skybridge Fintech Ltd. entered into a Loan and Security Agreement with Kelvantis Lending Corp. (the "LSA"), pursuant to which Kelvantis extended a term loan facility to the Company in the aggregate principal amount of $15,000,000. The LSA is the primary debt instrument governing Skybridge's outstanding senior secured indebtedness and establishes the covenants, representations, warranties, and other contractual obligations that are the subject of this analysis.
Kelvantis Lending Corp. Kelvantis is a Delaware corporation with its principal office located at 350 Park Avenue, 18th Floor, New York, New York 10022. Kelvantis is a specialty lender focused on providing venture debt and growth capital to technology and life sciences companies at various stages of development. Kelvantis's venture lending platform is well-established in the growth-stage fintech sector, and the Kelvantis facility was entered into following Skybridge's Series C equity financing round.
Skybridge Fintech Ltd. The Company is a Delaware corporation (C-corporation structure), with Employer Identification Number 83-2147605 and Delaware Division of Corporations File Number 6384291. The Company's principal executive offices are located at 1400 Market Street, Suite 2200, Wilmington, Delaware 19801. Skybridge is a growth-stage financial technology company engaged in the development and commercialization of its proprietary payments and treasury management platform for enterprise customers.
Key Terms of the Facility. The material terms of the Kelvantis facility are summarized as follows:
• Facility Amount: $15,000,000 (fully drawn as of the date hereof).
• Maturity Date: August 15, 2025.
• Relationship Manager: Theodore "Ted" Marsh, Kelvantis Lending Corp.
• Security: The LSA is secured by a first-priority perfected security interest and lien on substantially all assets of Skybridge, including, without limitation, the Company's intellectual property (patents, trademarks, copyrights, trade secrets, and related rights), accounts receivable, equipment, deposit accounts, investment property, and general intangibles. UCC-1 financing statements have been filed with the Delaware Secretary of State to perfect Kelvantis's security interest in the Company's personal property, and intellectual property security agreements have been filed with the United States Patent and Trademark Office and the United States Copyright Office, as applicable.
• Nature of Facility: The Kelvantis facility is structured as a senior secured term loan, which is a customary venture debt structure for growth-stage technology and fintech companies. The facility was designed to complement the Company's equity capital and provide additional runway and operational flexibility without the immediate dilutive impact of an equity financing round.
The LSA contains a comprehensive set of affirmative covenants, negative covenants, representations and warranties, events of default, and related provisions that are typical of venture lending arrangements. The negative covenants, in particular, impose significant restrictions on the Company's ability to incur additional indebtedness, grant liens, make investments and distributions, enter into fundamental transactions, and take certain other actions, in each case without the prior written consent of Kelvantis. These covenants and their implications for the proposed convertible note bridge financing are analyzed in detail in Section III of this memorandum.
B. The Proposed Convertible Note Bridge Financing
Skybridge is proposing to raise $60,000,000 in aggregate principal amount through the issuance of convertible promissory notes (the "Convertible Notes" or the "Notes") to a syndicate of institutional investors. The bridge financing is intended to provide the Company with additional capital to fund operations, product development, and market expansion activities in advance of a contemplated Series D equity financing round. The material terms of the proposed convertible note bridge financing, as reflected in the executed term sheet dated November 10, 2023, are summarized below.
Principal Amount and Allocation. The aggregate principal amount of the Convertible Notes will be $60,000,000, allocated among the following purchasers (collectively, the "Purchasers"):
Interest Rate. The Convertible Notes will bear simple interest at a rate of 6.00% per annum (600 basis points), calculated on a 365-day year basis. At the full aggregate principal amount of $60,000,000, the annual interest accrual on the Notes will be $3,600,000. Interest will accrue from the date of issuance and will not be payable in cash on a current basis; rather, accrued and unpaid interest will be added to principal upon conversion or will be payable at maturity.
Maturity. The Convertible Notes will mature 24 months from the closing date. Based on an anticipated closing date of January 15, 2024, the maturity date of the Notes would be January 15, 2026.
Conversion. The Notes will automatically convert into shares of the Company's preferred stock upon the occurrence of a "Qualified Financing," defined as a Series D equity financing in which the Company raises at least $80,000,000 in new equity capital. The conversion price will be the lower of:
(a) 80% of the price per share paid by investors in the Qualified Financing (representing a 20% conversion discount); or
(b) the price per share implied by a pre-money valuation cap of $750,000,000 (approximately $15.46 per share based on approximately 48,500,000 fully diluted shares outstanding as of the date hereof).
If the Notes have not been converted prior to the maturity date, the Notes will convert at maturity at the price per share implied by the $750,000,000 valuation cap, or, at the election of the holders of a majority-in-interest of the outstanding Notes, the outstanding principal and accrued interest will become due and payable in cash.
Change of Control. Upon a Change of Control (as defined in the term sheet to include a merger, acquisition, sale of all or substantially all assets, or other change of control transaction), each holder of Notes will be entitled to receive the greater of:
(a) 2.0x the outstanding principal amount of such holder's Notes, plus all accrued and unpaid interest thereon (representing a maximum aggregate payment of $120,000,000 based on the full principal amount of $60,000,000, plus accrued interest); or
(b) the amount such holder would have received had its Notes been converted at the valuation cap price immediately prior to the Change of Control.
Subordination. The Convertible Notes are intended to be subordinated in right of payment and priority to the existing Kelvantis venture debt facility. The term sheet contemplates the execution and delivery of a subordination agreement among Kelvantis, the Purchasers, and the Company as a condition to closing.
Investor Counsel. The investor syndicate led by Ridgeline Ventures Fund IV, L.P. is represented by Whitfield, Pratt & Soo LLP, with Graham Whitfield serving as lead partner and Danielle Kwon as the associate on the transaction. Calderwood & Harkness LLP represents Skybridge Fintech Ltd. in connection with the proposed financing and all related matters, including the Kelvantis consent and subordination process.
Transaction Documents. The proposed financing will be documented through a Note Purchase Agreement (the "NPA"), a form of Convertible Promissory Note, a Subordination Agreement, and amendments to the existing Amended and Restated Investors' Rights Agreement and Right of First Refusal and Co-Sale Agreement (collectively, the "Transaction Documents").
III. Analysis of Key LSA Covenants
We have conducted a comprehensive review of the LSA and its schedules, exhibits, and related ancillary documents. Set forth below is our analysis of the key covenants and provisions of the LSA that are implicated by the proposed convertible note bridge financing.
A. Negative Covenant — Restrictions on Additional Indebtedness
The most directly implicated provision of the LSA is the negative covenant restricting the Company from incurring additional indebtedness. Section 7.1 of the LSA provides, in relevant part, that Skybridge shall not, directly or indirectly, incur, create, assume, guarantee, or permit to exist any Indebtedness other than "Permitted Indebtedness," without the prior written consent of Kelvantis.
Definition of "Indebtedness." The LSA defines "Indebtedness" broadly. As set forth in Section 1.1 of the LSA, "Indebtedness" means, with respect to any Person, without duplication:
(i) all obligations of such Person for borrowed money;
(ii) all obligations of such Person evidenced by bonds, debentures, notes, or other similar instruments;
(iii) all obligations of such Person in respect of letters of credit, bankers' acceptances, or similar credit transactions;
(iv) all obligations of such Person under capital leases (as determined in accordance with GAAP);
(v) all guarantees by such Person of Indebtedness of any other Person; and
(vi) all obligations, contingent or otherwise, of such Person in respect of acceptances, swap agreements, interest rate agreements, currency exchange agreements, or other hedging contracts.
Application to the Proposed Convertible Notes. The proposed Convertible Notes constitute "Indebtedness" under at least two independent clauses of this definition. First, the Notes represent obligations of Skybridge for borrowed money — the Purchasers are lending $60,000,000 to the Company in exchange for the Company's promise to repay or convert such amounts under specified conditions. This squarely falls within clause (i) of the definition. Second, the Notes are obligations evidenced by notes — specifically, convertible promissory notes in the form to be attached to the Note Purchase Agreement — which falls within clause (ii) of the definition. There is no ambiguity in the application of this definition to the proposed transaction.
Analysis of "Permitted Indebtedness" Carve-Outs. The LSA defines "Permitted Indebtedness" in Section 1.1 to include a limited and enumerated set of exceptions to the general prohibition on the incurrence of additional indebtedness. Based on our review, the "Permitted Indebtedness" carve-outs in the LSA include the following categories:
(a) Indebtedness under the LSA and the other Loan Documents;
(b) trade payables, accrued expenses, and similar obligations incurred in the ordinary course of business and not past due by more than 90 days (or being contested in good faith by appropriate proceedings);
(c) purchase money indebtedness and capital lease obligations in an aggregate outstanding principal amount not to exceed $500,000 at any time;
(d) Indebtedness existing on the date of the LSA and set forth on Schedule 7.1 thereto (which includes certain pre-existing obligations and the Company's corporate credit card facility);
(e) intercompany loans from any wholly-owned subsidiary of the Company to the Company;
(f) endorsements of negotiable instruments for deposit or collection in the ordinary course of business;
(g) unsecured Indebtedness incurred in connection with any insurance premium financing arrangement in an aggregate outstanding principal amount not to exceed $250,000 at any time; and
(h) extensions, refinancings, and renewals of any of the foregoing, provided that the principal amount thereof is not increased and the terms thereof are not materially less favorable to the Company.
We have carefully reviewed each of these carve-outs and conclude that the proposed $60,000,000 convertible note issuance does not fall within any of the "Permitted Indebtedness" exceptions. The Notes are not trade payables or ordinary course obligations; they are not purchase money financing or capital leases; they are not existing indebtedness scheduled at the time of the LSA's execution; they are not intercompany loans; and they do not fall within any of the other enumerated categories. The aggregate principal amount of the proposed Notes ($60,000,000) vastly exceeds any applicable dollar thresholds in the Permitted Indebtedness definition (the largest being the $500,000 cap on purchase money indebtedness and capital leases).
Conclusion. Kelvantis's prior written consent is required before Skybridge may issue the $60,000,000 in Convertible Notes. The issuance of the Notes without such consent would constitute a direct breach of the negative covenant set forth in Section 7.1 of the LSA.
B. Negative Covenant — Restrictions on Liens
Section 7.2 of the LSA contains a negative covenant prohibiting Skybridge from creating, incurring, assuming, or permitting to exist any lien, security interest, mortgage, pledge, charge, or encumbrance on any of its assets or property, other than "Permitted Liens" as defined in the LSA.
The proposed Convertible Notes are unsecured obligations of the Company. The term sheet expressly provides that no liens, security interests, or other encumbrances on the assets of Skybridge will be granted in favor of the noteholders. Accordingly, the issuance of the Notes should not directly implicate or violate the negative covenant on liens.
Notwithstanding the foregoing, we recommend that the Subordination Agreement to be executed in connection with the transaction include an express confirmation that the noteholders do not hold, and will not acquire, any security interest, lien, or other encumbrance on any assets of Skybridge. This confirmation will reinforce the unsecured and subordinated nature of the Convertible Notes and will provide additional comfort to Kelvantis that its first-priority security interest in the Company's assets is not impaired or diluted by the bridge financing. Such a provision is standard in subordination agreements of this nature and is expected to be non-controversial.
C. Affirmative Covenant — Financial Reporting and Information Rights
The LSA contains affirmative covenants requiring Skybridge to deliver periodic financial statements, compliance certificates, and other information to Kelvantis on a regular basis. Specifically, Section 6.2 of the LSA requires the Company to deliver:
(a) within 30 days after the end of each month, unaudited monthly financial statements (balance sheet, income statement, and cash flow statement) prepared in accordance with GAAP consistently applied;
(b) within 90 days after the end of each fiscal year, audited annual financial statements prepared in accordance with GAAP and audited by a nationally or regionally recognized independent registered public accounting firm (currently Pinnacle Audit Group LLP);
(c) promptly upon request, such additional financial and other information as Kelvantis may reasonably request from time to time; and
(d) a compliance certificate, signed by the Chief Financial Officer of the Company, certifying that no Event of Default exists and that the Company is in compliance with all financial covenants, to be delivered concurrently with the monthly and annual financial statements.
The proposed convertible note bridge financing will have a material impact on the Company's balance sheet and financial condition. At closing, the Company's total liabilities will increase by $60,000,000 (reflecting the principal amount of the Convertible Notes), and the Company's cash and cash equivalents will increase by a corresponding amount (net of transaction costs and expenses). These changes will be reflected in the Company's financial statements for the period in which the closing occurs.
We recommend that Skybridge take the following steps to ensure compliance with its financial reporting and information obligations under the LSA:
(a) promptly notify Kelvantis of the proposed convertible note financing as part of the consent request process, providing a description of the material terms of the transaction and the anticipated impact on the Company's financial condition;
(b) following the closing of the bridge financing, deliver updated financial statements to Kelvantis reflecting the new indebtedness and the corresponding increase in the Company's cash position; and
(c) include disclosure of the Convertible Notes in all subsequent compliance certificates delivered under the LSA, confirming that the indebtedness was incurred with Kelvantis's prior written consent.
As part of the consent request process, Kelvantis will likely request current financial information, including the Company's audited financial statements for the fiscal year ended December 31, 2022 (audited by Pinnacle Audit Group LLP), reviewed financial statements as of September 30, 2023 (reviewed by Pinnacle Audit Group LLP), and any available management-prepared financial statements and projections. The Company should be prepared to assemble and deliver this financial information package promptly upon Kelvantis's request.
D. Negative Covenant — Restrictions on Fundamental Changes
The LSA contains a negative covenant, set forth in Section 7.3, restricting Skybridge from entering into certain fundamental transactions without the prior written consent of Kelvantis. These restrictions typically cover mergers, consolidations, and reorganizations; acquisitions of all or substantially all of the assets or equity interests of another entity; sales, transfers, or dispositions of all or substantially all of the Company's assets; and changes of control (defined to include any transaction or series of transactions resulting in a change in the identity of the Person or Persons who hold, directly or indirectly, a majority of the voting power of the Company's outstanding capital stock).
Application to the Convertible Note Issuance. The issuance of the Convertible Notes, in and of itself, does not constitute a fundamental change, merger, consolidation, asset disposition, or change of control. The transaction involves the incurrence of additional indebtedness in exchange for cash consideration — it is a debt financing, not a structural or corporate reorganization. Accordingly, the negative covenant on fundamental changes should not be directly implicated by the closing of the bridge financing.
Prospective Considerations. While the issuance of the Notes does not trigger the fundamental change restrictions, certain future events contemplated by the terms of the Notes could implicate these provisions:
(a) Conversion upon a Qualified Financing. The automatic conversion of the Notes upon a Qualified Financing (i.e., a Series D equity round raising at least $80,000,000) will result in the issuance of shares of the Company's preferred stock to the noteholders. This conversion is an equity issuance, not a fundamental change, and should not implicate Section 7.3. However, if the Series D round involves a significant change in the Company's capitalization or governance structure, separate analysis under the LSA may be warranted at that time.
(b) Change of Control. If a Change of Control transaction occurs during the term of the Notes, the noteholders' right to receive the 2.0x premium payment or the conversion amount could involve substantial cash payments by the Company that may interact with the fundamental change and indebtedness covenants, as well as the subordination provisions of the Subordination Agreement. The consent and waiver letter should, to the extent practicable, address these prospective events or, at minimum, preserve Skybridge's ability to seek separate waivers from Kelvantis as and when such events arise.
We recommend that the consent and waiver letter include appropriate carve-outs or forward-looking provisions to address these prospective scenarios, recognizing that Kelvantis may prefer to reserve its consent rights with respect to any future Change of Control transaction.
E. Negative Covenant — Restrictions on Investments and Distributions
Section 7.5 of the LSA contains restrictions on the Company's ability to make investments, loans, advances, and capital contributions, as well as restrictions on the declaration or payment of dividends and other distributions on the Company's capital stock. We have reviewed these provisions in the context of the proposed convertible note bridge financing.
The issuance of the Convertible Notes does not involve the payment of any dividend or distribution by the Company. The Company is receiving cash in exchange for the Notes, and no cash or other property is being distributed to the Company's existing stockholders in connection with the transaction. Similarly, the bridge financing does not involve the Company making any investment, loan, advance, or capital contribution to a third party.
Accordingly, the negative covenant on investments and distributions is not directly implicated by the proposed transaction, and no consent or waiver is required under this provision. We have identified no issues with respect to this covenant.
F. Events of Default
Article VIII of the LSA sets forth the events of default under the facility. The events of default are customary for a venture lending arrangement and include, among other things:
(a) failure to make any payment of principal, interest, fees, or other amounts when due under the LSA or any other Loan Document;
(b) breach of any representation or warranty made by the Company in the LSA or any other Loan Document;
(c) breach of any covenant or agreement contained in the LSA, including, without limitation, the negative covenants set forth in Article VII (subject to applicable cure periods, if any, for certain affirmative covenant breaches);
(d) the occurrence of a Material Adverse Change (as defined in the LSA);
(e) cross-default to other indebtedness of the Company in excess of a specified threshold (typically $100,000 to $250,000);
(f) the entry of one or more judgments against the Company in an aggregate amount exceeding a specified threshold;
(g) any Loan Document ceasing to be in full force and effect, or any security interest created thereunder ceasing to be a valid and perfected first-priority security interest;
(h) the occurrence of certain insolvency events, including the filing of a voluntary or involuntary petition in bankruptcy, the appointment of a receiver or trustee, or the making of an assignment for the benefit of creditors; and
(i) such other events of default as are customarily included in venture lending arrangements.
Critical Risk: Issuance Without Consent. The issuance of the $60,000,000 in Convertible Notes without first obtaining Kelvantis's prior written consent would constitute a direct and immediate breach of the negative covenant on additional indebtedness set forth in Section 7.1 of the LSA. Such a breach would trigger an Event of Default under the LSA pursuant to clause (c) above. Unlike certain affirmative covenant breaches, a breach of the negative covenant on indebtedness is typically not subject to a cure period under the LSA — it constitutes an immediate Event of Default upon the occurrence of the prohibited action.
Remedies Upon Event of Default. Upon the occurrence and continuation of an Event of Default, Kelvantis is entitled to exercise the full range of remedies available under the LSA and applicable law, including, without limitation:
(a) acceleration of all outstanding principal, accrued interest, fees, and other amounts owed under the LSA, making all such amounts immediately due and payable (the outstanding principal balance being $15,000,000 plus accrued interest and fees);
(b) exercise of remedies against the collateral securing the facility, including foreclosure on, seizure of, or other enforcement actions with respect to substantially all assets of the Company (Intellectual property, accounts receivable, equipment, deposit accounts, and general intangibles);
(c) application of the default rate of interest (typically 3.00% to 5.00% above the contract rate) to all outstanding obligations; and
(d) pursuit of all other contractual, legal, and equitable remedies available to Kelvantis.
The consequences of an Event of Default under the LSA would be severe and potentially catastrophic for the Company. Acceleration of $15,000,000 in venture debt, combined with Kelvantis's ability to enforce its security interest against substantially all Company assets (including the Company's intellectual property, which constitutes the core of the Company's business), would pose an existential threat to Skybridge's operations and viability. Moreover, a default under the Kelvantis facility could trigger cross-default provisions in other agreements to which the Company is a party and would likely have a material adverse effect on the Company's relationship with its existing investors and its ability to raise future capital.
Imperative. It is imperative that Kelvantis's written consent and waiver be obtained prior to the execution of the Note Purchase Agreement and the issuance of the Convertible Notes. Under no circumstances should the Company proceed with the closing of the bridge financing without having received Kelvantis's executed consent and waiver letter.
IV. Subordination Requirements
A. Overview
Both the LSA and the proposed term sheet for the convertible note bridge financing contemplate that the Convertible Notes will be subordinated to the existing Kelvantis venture debt facility. From Kelvantis's perspective, subordination is a condition to its consent — Kelvantis will require assurance that its senior secured position is preserved and that the noteholders' claims will rank junior to Kelvantis's claims in all respects, including in the event of the Company's insolvency or liquidation. From the Purchasers' perspective, the term sheet expressly acknowledges that the Notes will be subordinated to the existing senior secured indebtedness.
Accordingly, a formal Subordination Agreement (the "Subordination Agreement") will need to be negotiated and executed among three parties: Kelvantis Lending Corp. (as senior lender), the Purchasers/noteholders (as subordinated creditors), and Skybridge Fintech Ltd. (as borrower/issuer). The Subordination Agreement will establish the terms and conditions governing the relative priority and rights of Kelvantis and the noteholders with respect to the Company's obligations under the LSA and the Convertible Notes, respectively.
The drafting, negotiation, and execution of the Subordination Agreement is a critical path item for the proposed bridge financing. Calderwood & Harkness LLP anticipates preparing the initial draft of the Subordination Agreement for circulation to Kelvantis (and its counsel, if applicable) and to Whitfield, Pratt & Soo LLP on behalf of the investor syndicate led by Ridgeline Ventures Fund IV, L.P. We expect that the Subordination Agreement will be the subject of negotiation among all three parties and their respective counsel, and we have identified the key terms and potential negotiation points below.
B. Key Terms to Be Addressed in the Subordination Agreement
The following is a summary of the principal terms and provisions that we anticipate will be addressed in the Subordination Agreement, together with our preliminary views on expected positions and negotiation dynamics.
Payment Subordination. The core provision of the Subordination Agreement will establish that all payments on the Convertible Notes — including payments of principal, accrued interest, premiums, fees, and any conversion-related payments — are subordinated in right of payment to all amounts owed by Skybridge to Kelvantis under the LSA and the related Loan Documents. This means that, in the event of the Company's insolvency, liquidation, dissolution, reorganization, or similar proceeding, Kelvantis's claims must be satisfied in full before any payment is made on account of the Convertible Notes. This is the fundamental economic term of the subordination arrangement and is expected to be non-controversial among the parties.
Standstill Provisions. The Subordination Agreement will include standstill provisions pursuant to which the noteholders agree not to take any enforcement action with respect to the Convertible Notes — including, without limitation, acceleration of the Notes, demand for repayment, institution of legal proceedings, or exercise of any other remedies — during the pendency of any default or enforcement period under the Kelvantis facility. The standstill period is typically defined as the period commencing upon the occurrence of an Event of Default under the LSA and continuing for a specified number of days (commonly 120 to 180 days), during which the noteholders must refrain from taking any action that could interfere with Kelvantis's enforcement rights. The duration and scope of the standstill period are likely to be a point of negotiation between Kelvantis and the investor syndicate, with Kelvantis seeking a longer standstill period and the noteholders seeking a shorter one with appropriate carve-outs (e.g., for the right to participate in bankruptcy proceedings after the expiration of the standstill period).
Lien Subordination (Confirmation of Unsecured Status). The Subordination Agreement should include an express confirmation that the Convertible Notes are unsecured obligations of the Company and that the noteholders do not hold, and will not acquire, any security interest, lien, mortgage, pledge, charge, or other encumbrance on any assets or property of Skybridge. This confirmation reinforces Kelvantis's position as the sole secured creditor with a first-priority lien on the Company's assets and eliminates any potential dispute regarding the relative priority of liens. This provision is standard in subordination agreements involving unsecured subordinated debt and is expected to be non-controversial.
Permitted Payments. The Subordination Agreement should address the circumstances under which Skybridge may make payments on the Convertible Notes during the term of the Kelvantis facility. This provision will define the types of payments that are permitted (and the conditions to making such payments) and the types of payments that are prohibited absent Kelvantis's consent or full repayment of the senior debt.
In the case of the proposed Convertible Notes, this analysis is somewhat simplified by the structure of the Notes. The Notes accrue simple interest at 6.00% per annum, but no scheduled cash interest payments are due during the term of the Notes prior to maturity or conversion. Accrued interest is added to the principal amount upon conversion and converts together with principal into equity. Accordingly, there are no periodic cash interest payments that would need to be addressed under a "permitted payments" framework during the ordinary course of the Notes' term. The primary payment events are (a) conversion upon a Qualified Financing (which involves the issuance of equity, not a cash payment), (b) repayment at maturity (if the Notes are not converted), and (c) the Change of Control premium payment. Each of these is addressed separately below.
Conversion Mechanics. The Subordination Agreement should expressly permit the conversion of the Convertible Notes into equity securities of the Company upon the occurrence of a Qualified Financing (or at maturity), without requiring Kelvantis's further consent or constituting a violation of the subordination terms. Conversion of the Notes extinguishes the subordinated indebtedness and replaces it with equity — a result that benefits Kelvantis by eliminating a competing creditor claim and reducing the Company's aggregate debt burden. Because conversion involves the issuance of equity rather than a cash payment to the noteholders at the expense of Kelvantis, this provision should be non-controversial and is expected to be readily agreed upon by Kelvantis. The Subordination Agreement should include a mechanism for notifying Kelvantis of any conversion event, but should not condition such conversion on Kelvantis's further approval.
Change of Control Payments. The treatment of the Change of Control premium payment under the Subordination Agreement is likely to be the single most significant negotiation point among the parties. Under the terms of the Convertible Notes, upon a Change of Control, the noteholders are entitled to receive the greater of (a) 2.0x the outstanding principal amount of their Notes, plus all accrued and unpaid interest (representing a maximum aggregate payment of approximately $120,000,000 based on the full principal amount of $60,000,000, plus accrued interest), or (b) the amount such holder would have received upon conversion at the valuation cap.
From Kelvantis's perspective, any cash payment to the noteholders upon a Change of Control should be conditioned upon the prior repayment in full of all amounts owed to Kelvantis under the LSA. Kelvantis will argue that permitting a $120,000,000 cash payment to subordinated creditors before Kelvantis has been satisfied in full would fundamentally undermine the purpose of the subordination arrangement. From the noteholders' perspective, the Change of Control premium is a key economic term of the investment, and the noteholders will seek assurance that the premium will be payable in practice, particularly in the context of an acquisition where the transaction consideration is sufficient to satisfy all creditor claims.
We anticipate that the resolution of this issue will involve a framework in which (a) the Change of Control payment to the noteholders is expressly subordinated to the prior payment in full of all amounts owed to Kelvantis, (b) the payment is permitted only from the net proceeds of the Change of Control transaction remaining after Kelvantis has been paid in full, and (c) if the Change of Control transaction involves the conversion of the Notes into equity (rather than a cash payment), such conversion is permitted without restriction. Calderwood & Harkness LLP will work to negotiate a framework that protects both Kelvantis's senior position and the noteholders' economic expectations.
Amendments and Modifications. The Subordination Agreement should provide that neither Skybridge nor the noteholders may amend, modify, supplement, or waive any term or provision of the Convertible Notes or the Note Purchase Agreement in a manner that would be materially adverse to Kelvantis without Kelvantis's prior written consent. Examples of amendments that would require Kelvantis's consent include, without limitation, (a) any increase in the aggregate principal amount of the Notes, (b) any acceleration of the maturity date, (c) any increase in the interest rate, (d) any addition of security or collateral for the Notes, (e) any change to the conversion terms that would result in the Notes being repaid in cash rather than converted into equity, and (f) any change to the subordination provisions. This restriction protects Kelvantis from having its senior position eroded by post-closing modifications to the subordinated debt terms without its knowledge or consent.
Notices. The Subordination Agreement should require that Kelvantis receive copies of any default notices, acceleration notices, conversion notices, and material amendments or modifications related to the Convertible Notes. Similarly, the noteholders should receive copies of any default notices and acceleration notices under the Kelvantis facility that affect the noteholders' rights under the Subordination Agreement (e.g., triggering the standstill provisions). This notice framework ensures that all parties have contemporaneous knowledge of material developments affecting their respective rights and obligations.
Rights in Bankruptcy/Insolvency. The Subordination Agreement should include standard "turnover" provisions providing that, in the event of the Company's insolvency, bankruptcy, liquidation, dissolution, or similar proceeding, any amounts received by the noteholders in violation of the subordination terms must be held in trust for, and promptly turned over to, Kelvantis for application against the senior debt. These provisions are standard in subordination agreements and serve to enforce the subordination in practice, ensuring that Kelvantis receives the benefit of its senior position even if distributions are inadvertently or improperly made to the noteholders during an insolvency proceeding. The turnover provisions should apply broadly to any payment, distribution, or other value received by the noteholders on account of the Convertible Notes in violation of the Subordination Agreement, whether received through judicial proceedings, setoff, or otherwise.
C. Interaction with Note Purchase Agreement
The Subordination Agreement is a critical transaction document and should be closely integrated with the Note Purchase Agreement and the other definitive documentation for the convertible note bridge financing. Specifically:
Closing Condition. The Note Purchase Agreement should include the execution and delivery of the Subordination Agreement as a condition precedent to the Purchasers' obligation to consummate the purchase of the Convertible Notes. This ensures that the subordination framework is in place before the Notes are issued and that Kelvantis's consent and the subordination terms have been finalized prior to the closing of the bridge financing. Similarly, the receipt of Kelvantis's written consent and waiver letter should be a separate condition to closing under the NPA.
Exhibit to Note Purchase Agreement. The form of the Subordination Agreement should be attached as an exhibit to the Note Purchase Agreement or, alternatively, cross-referenced in the NPA with a summary of the material terms. Attaching the form as an exhibit provides transparency to all parties and ensures that the Purchasers have reviewed and approved the subordination terms prior to signing the NPA. We recommend attaching the final agreed form as an exhibit rather than merely cross-referencing the document, to minimize the risk of disputes regarding the subordination terms between signing and closing.
Drafting Responsibility. Calderwood & Harkness LLP anticipates preparing the initial draft of the Subordination Agreement for review by Kelvantis (and its counsel, if applicable) and by Whitfield, Pratt & Soo LLP on behalf of the investor syndicate. As Company counsel, Calderwood & Harkness occupies a unique position in this negotiation, as we represent the party that is obligated under both the senior and subordinated instruments. Our drafting approach will aim to produce a balanced document that protects Kelvantis's senior position while preserving the noteholders' economic expectations and the Company's operational flexibility, consistent with market-standard subordination terms for venture debt arrangements of this nature.
V. Form and Scope of Required Lender Consent
A. Form of Consent
Kelvantis's consent to the proposed convertible note bridge financing should be documented in a formal written consent and waiver letter (the "Consent Letter") executed by a duly authorized officer of Kelvantis Lending Corp. The Consent Letter should be a standalone document, separate from (but cross-referenced in) the Subordination Agreement, and should clearly set forth the scope and terms of Kelvantis's consent. Based on our experience with similar consent processes involving venture lenders, we anticipate that the Consent Letter will include the following key elements:
(a) Consent to Additional Indebtedness. An express consent by Kelvantis to the incurrence by Skybridge of $60,000,000 in additional indebtedness in the form of convertible promissory notes, as described in the Consent Letter and the attached or referenced term sheet or summary of the proposed transaction.
(b) Waiver of Event of Default. A waiver by Kelvantis of any Event of Default that would otherwise be triggered under the LSA by the issuance of the Convertible Notes and the execution and delivery of the related Transaction Documents, including the Note Purchase Agreement, the form of Convertible Promissory Note, the Subordination Agreement, and the amendments to the existing Investors' Rights Agreement and Right of First Refusal and Co-Sale Agreement.
(c) Acknowledgment of Subordination Agreement. An acknowledgment by Kelvantis of the execution and delivery of the Subordination Agreement and a confirmation that the Convertible Notes are subordinated to the Kelvantis facility in accordance with the terms of the Subordination Agreement.
(d) No Additional Consents Required. A confirmation by Kelvantis that no other consents, waivers, or amendments to the LSA are required in connection with the proposed transaction, or, if additional requirements exist, a clear identification of such requirements and the conditions to their satisfaction.
(e) Fee and Cost Acknowledgment. A representation by Kelvantis that it has received all fees, costs, expenses, or other consideration required in connection with the issuance of the consent, or a specification of the amounts due and the timing of payment. Consent fees are customary in venture debt arrangements and should be anticipated and budgeted by the Company (discussed further in Section V.C below).
The Consent Letter should be executed by an authorized officer of Kelvantis and should reference the specific sections of the LSA that are being consented to or waived. Calderwood & Harkness LLP will prepare the initial draft of the Consent Letter for Kelvantis's review and approval.
B. Scope of Consent
The scope of the Consent Letter should be carefully defined to cover the specific transaction contemplated by the proposed bridge financing while avoiding unnecessary breadth that could raise concerns on Kelvantis's part. The consent should address the following:
Specific Transaction. The consent should be specific to the convertible note bridge financing as described — namely, the issuance of Convertible Notes in the aggregate principal amount of up to $60,000,000, bearing interest at 6.00% per annum (simple interest), maturing 24 months from closing, and convertible into equity securities of the Company upon a Qualified Financing or at maturity, on the terms described in the Consent Letter and the attached or referenced term sheet.
Authorization of Transaction Documents. The consent should expressly authorize Skybridge to enter into and perform its obligations under the Transaction Documents, including:
(a) the Note Purchase Agreement;
(b) the Convertible Promissory Notes issued thereunder;
(c) the Subordination Agreement among Kelvantis, the Purchasers, and Skybridge;
(d) amendments to the Amended and Restated Investors' Rights Agreement dated as of the date of the Company's Series C financing; and
(e) amendments to the Amended and Restated Right of First Refusal and Co-Sale Agreement dated as of the date of the Company's Series C financing.
Confirmation of No Breach or Default. The consent should include a confirmation by Kelvantis that the execution, delivery, and performance of the Transaction Documents by Skybridge does not constitute a breach of, or an event of default under, the LSA or any other Loan Document, and that Kelvantis waives any right to declare such a breach or event of default in connection with the consented-to transaction.
C. Potential Kelvantis Requirements and Negotiation Points
Based on our experience with consent processes involving venture lenders and our familiarity with Kelvantis's practices, we anticipate that Kelvantis may raise the following requirements and negotiation points in connection with granting its consent:
Consent Fee. Kelvantis may require the payment of a consent fee as a condition to issuing the Consent Letter. Consent fees are customary in venture debt facilities and are typically structured as a flat fee or a percentage of the outstanding principal balance. In our experience, consent fees for transactions of this nature range from 0.25% to 1.00% of the outstanding principal balance of the senior facility (i.e., $37,500 to $150,000 based on the $15,000,000 outstanding balance), although the specific amount will depend on Kelvantis's standard practices and the scope of the consent being requested. The Company should anticipate and budget for this cost, and it may be appropriate to discuss the consent fee with Ted Marsh early in the process to avoid surprises.
Updated Financial Information. Kelvantis will almost certainly request current financial information and projections before issuing its consent. The Company should be prepared to provide the following materials:
(a) audited financial statements for the fiscal year ended December 31, 2022, as audited by Pinnacle Audit Group LLP;
(b) reviewed (unaudited) financial statements for the nine-month period ended September 30, 2023, as reviewed by Pinnacle Audit Group LLP;
(c) management-prepared monthly financial statements for the most recent completed month;
(d) the Company's current operating budget and financial projections, including revenue forecasts, cash burn analysis, and runway projections (both with and without the proposed bridge financing proceeds); and
(e) a capitalization table reflecting the Company's current equity structure and the pro forma impact of the convertible note issuance and potential conversion.
We recommend that David Lindstrom, CFO, begin assembling this financial information package immediately so that it can be included with the formal consent request letter or delivered promptly upon Kelvantis's request.
Compliance Certificate. Kelvantis may require the Company to deliver a compliance certificate, signed by the Chief Financial Officer, confirming that no Event of Default currently exists under the LSA and that the Company is in compliance with all covenants, representations, and warranties thereunder as of the date of the consent request. This requirement is standard and should not present any issues, provided that the Company is in fact in compliance with all provisions of the LSA as of the date of the certificate.
Subordination Agreement Terms. As discussed in Section IV above, Kelvantis will have specific views on the terms of the Subordination Agreement, and several provisions are likely to be the subject of negotiation. In particular, Kelvantis is expected to focus on (a) the scope and duration of the standstill provisions, (b) the treatment of Change of Control payments and the conditions under which such payments are permitted, (c) the permitted payments framework, and (d) the restrictions on amendments and modifications to the Convertible Notes. Calderwood & Harkness LLP will prepare the initial draft of the Subordination Agreement and will seek to align the terms with market-standard practices for venture debt subordination arrangements, while remaining responsive to Kelvantis's concerns and requirements.
Additional Covenants or Reporting. Kelvantis may request additional reporting obligations or informational covenants as a condition to granting consent. For example, Kelvantis may require (a) prompt notice of any conversion of the Convertible Notes, (b) updated capitalization tables following any conversion event, (c) copies of all material correspondence with the noteholders, or (d) periodic certifications that no default exists under the Convertible Notes. These requirements are typically reasonable and should be manageable for the Company.
No-Impairment Confirmation. Kelvantis may require the Company to represent and confirm that the convertible note financing does not impair, diminish, or otherwise adversely affect Kelvantis's first-priority perfected security interest in the Company's assets. Because the Convertible Notes are unsecured, and because no liens will be granted in favor of the noteholders, this confirmation should be straightforward to provide. The Subordination Agreement will also include an express confirmation of the noteholders' unsecured status, which will further reinforce this point.
VI. Timeline and Process Recommendations
Based on the anticipated closing date of the bridge financing on or about January 15, 2024, and allowing for the time required to negotiate and finalize the consent and subordination documentation, we recommend the following timeline and process for obtaining Kelvantis's consent.
Immediate Next Steps
1. Informal Discussions with Kelvantis. We recommend that Skybridge management — specifically, David Lindstrom (CFO) — initiate informal discussions with Theodore "Ted" Marsh, Relationship Manager at Kelvantis, as soon as practicable following receipt of this memorandum. The purpose of these preliminary discussions is to preview the proposed convertible note bridge financing for Kelvantis, gauge Kelvantis's general receptiveness to granting consent, and identify any threshold concerns or requirements that may affect the timeline or structure of the consent process. Informal engagement at the relationship manager level is an important first step in setting a constructive tone for the consent process and reducing the likelihood of surprises during the formal review period.
2. Preparation of Formal Consent Request Letter. Calderwood & Harkness LLP will prepare a formal consent request letter to Kelvantis, addressed to Ted Marsh (with copies to Kelvantis's legal department and outside counsel, if applicable). The consent request letter will include (a) a description of the proposed convertible note bridge financing, including the principal amount, interest rate, maturity, conversion terms, and identity of the Purchasers; (b) a summary of the LSA provisions implicated by the proposed transaction and the specific consents and waivers being requested; (c) a request for Kelvantis's consent and waiver in the form of the attached draft Consent Letter; and (d) draft subordination agreement terms for Kelvantis's review and comment. Target date for sending the consent request letter: approximately December 15, 2023.
3. Assembly of Financial Information Package. Skybridge should assemble a comprehensive financial information package for Kelvantis's review, including the audited and reviewed financial statements, management-prepared financials, and projections described in Section V.C above. This package should be ready for delivery concurrently with or shortly after the formal consent request letter.
Target Timeline
We note that the targeted timeline is ambitious, particularly given the holiday period in late December and early January. Early engagement with Kelvantis is therefore critical to ensure that the consent process does not delay the anticipated closing of the bridge financing. If Kelvantis's review extends beyond mid-January, the Company may need to adjust the closing timeline for the Note Purchase Agreement accordingly.
Coordination with Investor Counsel
Whitfield, Pratt & Soo LLP, as counsel to the investor syndicate led by Ridgeline Ventures Fund IV, L.P., will need to review and approve the Subordination Agreement on behalf of the Purchasers. The noteholders are a party to the Subordination Agreement and will be bound by its terms, so their counsel's input is essential. Calderwood & Harkness LLP will circulate the draft Subordination Agreement to Whitfield, Pratt & Soo LLP concurrently with or shortly after sending it to Kelvantis, to enable parallel review and to minimize delay. We anticipate that the primary negotiation on the subordination terms will be between Kelvantis and the noteholders (through their respective counsel), with Calderwood & Harkness facilitating the discussions on behalf of the Company.
Closing Condition
The Note Purchase Agreement will include receipt of Kelvantis's executed consent and waiver letter and the execution and delivery of the Subordination Agreement as express conditions precedent to the obligation of the Purchasers to consummate the purchase of the Convertible Notes. This closing condition ensures that the bridge financing cannot be consummated without the required lender consent and subordination arrangements in place, thereby protecting both the Company and the Purchasers from the risk of an unconsented issuance triggering an Event of Default under the LSA.
VII. Risk Assessment
We have identified and assessed the following key risks associated with the Kelvantis consent process:
Risk of Consent Refusal: Low. We assess the risk that Kelvantis will refuse to grant consent as low. The proposed convertible note bridge financing, viewed from Kelvantis's perspective as a senior secured lender, is a transaction that enhances, rather than impairs, Kelvantis's credit position. Several factors support this assessment:
(a) Subordination. The Convertible Notes will be expressly subordinated to the Kelvantis facility, meaning that Kelvantis's claims rank senior to the noteholders' claims in all respects. Kelvantis is not being asked to accept a pari passu or senior competing creditor.
(b) Unsecured Status. The Convertible Notes are unsecured, and no liens will be granted to the noteholders. Kelvantis's first-priority security interest in substantially all Company assets is unimpaired.
(c) Improved Cash Position. The bridge financing will significantly improve Skybridge's liquidity and cash position, from approximately $18,500,000 pre-bridge to approximately $78,500,000 post-bridge (a more than four-fold increase). This dramatically reduces the near-term credit risk to Kelvantis by extending the Company's cash runway and reducing the likelihood that the Company will be unable to service or repay the Kelvantis facility at maturity.
(d) Venture Debt Market Practice. Consent requests of this nature are common and expected in the venture lending market. Venture lenders routinely consent to subordinated bridge financings by their portfolio companies, subject to the execution of appropriate subordination agreements, because such transactions support the company's growth trajectory and ultimately improve the lender's recovery prospects.
While refusal is unlikely, Kelvantis may condition its consent on specific subordination terms, additional covenants, or the payment of a consent fee, as discussed in Section V.C above.
Risk of Delay: Moderate. We assess the risk of delay in the consent process as moderate. Consent processes with venture lenders typically take three to six weeks from the submission of the formal consent request to the receipt of the executed consent letter. Several factors contribute to the risk of delay in this case:
(a) Holiday Period. The consent process will span the late December and early January holiday period, during which key decision-makers at Kelvantis and their outside counsel may have limited availability. This is a significant practical consideration that could extend the timeline.
(b) Subordination Negotiation. The negotiation of the Subordination Agreement involves three parties (Kelvantis, the Purchasers, and the Company) and their respective counsel. Multi-party negotiations inherently take longer than bilateral negotiations, and the Change of Control payment provisions and standstill terms are likely to require multiple rounds of negotiation.
(c) Financial Review. Kelvantis may require time to review and analyze the Company's financial information and to conduct internal credit review and approval processes. Depending on Kelvantis's internal procedures, this process may involve multiple levels of review and sign-off.
Early engagement with Kelvantis is critical to mitigating the risk of delay. By initiating informal discussions in early December and submitting the formal consent request by mid-December, the Company maximizes the available time for Kelvantis's review and reduces the likelihood that the consent process will delay the anticipated closing date.
Risk of Event of Default: High (if consent is not obtained). The risk of an Event of Default under the LSA is high if the Company proceeds with the issuance of the Convertible Notes without first obtaining Kelva

MEMORANDUM

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

MATTER NO.: 1009-00001

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