PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
MEMORANDUM
To: Victoria Chambers, Responsible Partner Leonard Ashford, Of Counsel Emerson, Chambers, Voss & Crane LLP ("ECVC")
From: Nina Reyes, Senior Associate, ECVC
Date: December 19, 2023
Re: Skybridge Fintech Ltd. — Litigation & Threatened Claims Due Diligence Summary (Matter No. 1009-00001)
Subject: Summary of all pending, threatened, and recently resolved litigation, arbitration, and regulatory proceedings involving Skybridge Fintech Ltd., with risk assessment and recommendations for Company Disclosure Schedule in connection with the $60,000,000 Convertible Note Bridge Financing
This memorandum is protected by the attorney-client privilege and constitutes attorney work product. It is intended solely for the use of the addressees and authorized personnel of ECVC in connection with the above-referenced matter. Distribution, copying, or disclosure of any portion of this memorandum without the prior written consent of ECVC is strictly prohibited.
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I. Introduction and Scope
A. Purpose
The purpose of this memorandum is to summarize the litigation and claims due diligence findings for Skybridge Fintech Ltd. ("Skybridge" or the "Company"), a Delaware corporation headquartered at 1400 Market Street, Suite 2200, Wilmington, DE 19801, in connection with the proposed $60,000,000 convertible promissory note bridge financing (the "Bridge Financing") led by Ridgeline Ventures Fund IV, L.P. ("Ridgeline" or the "Lead Investor"). This memorandum is prepared by ECVC, serving as outside due diligence counsel to the Lead Investor and the purchaser syndicate (collectively, the "Purchasers"), and is intended to assist the deal team in evaluating the Company's litigation risk profile as part of the broader legal due diligence process.
The Bridge Financing is expected to close in one or more tranches, with an initial closing currently targeted for January 15, 2024, and a final closing anticipated in late January 2024. The convertible promissory notes to be issued (the "Notes") will be governed by a Note Purchase Agreement (the "NPA") currently being negotiated between Calderwood & Harkness LLP ("C&H"), representing Skybridge as issuer counsel, and Whitfield, Pratt & Soo LLP ("WPS"), representing the Lead Investor and the purchaser syndicate.
B. Scope of Review
The scope of our review encompassed the following categories of matters involving the Company:
1. All pending litigation, arbitration, and administrative proceedings in which the Company is a named party, whether as plaintiff, defendant, counterclaimant, third-party defendant, or intervenor;
2. All threatened claims, including demand letters, pre-litigation correspondence, cease-and-desist letters, and other communications reasonably indicating the potential for future litigation or adversarial proceedings;
3. All litigation, arbitration, and administrative proceedings resolved or settled within the prior three years (i.e., from December 2020 through the date of this memorandum);
4. All regulatory investigations, inquiries, enforcement actions, or similar proceedings, whether formal or informal, pending or resolved, involving the Company or any of its officers or directors in their capacity as such;
5. All material indemnification obligations arising from or in connection with prior disputes, settlements, consent orders, or similar arrangements; and
6. A high-level assessment of insurance coverage relevant to the identified litigation matters and potential claims exposure.
C. Sources Reviewed
In preparing this memorandum, we reviewed and relied upon the following sources of information:
• The Company's responses to C&H's Due Diligence Request List dated November 13, 2023 (the "Initial Request List"), including all documents produced in response to Items 7.1 through 7.14 thereof (litigation, claims, and regulatory matters);
• The Company's responses to C&H's Supplemental Due Diligence Request List dated December 6, 2023 (the "Supplemental Request List"), including additional documents and clarifications requested by ECVC following our initial review;
• Telephonic interviews conducted with Priya Ramanathan, General Counsel of Skybridge, on November 30, 2023 and December 11, 2023, and with Marcus Tillman, Vice President of Corporate Development, on December 4, 2023;
• Review of Company records, including internal litigation files, demand letters, settlement agreements, correspondence with regulators, indemnification provisions in material contracts, and insurance policies;
• Docket searches conducted in the United States District Court for the District of Delaware, the Delaware Superior Court (New Castle County), the Delaware Court of Chancery, and other publicly available court databases, current as of December 18, 2023; and
• Publicly available filings, press releases, and other information regarding the Company and its competitors relevant to the identified matters.
D. Relevance to the Transaction
The findings set forth in this memorandum are directly relevant to the Bridge Financing in several respects. First, the NPA is anticipated to contain customary litigation representations and warranties, requiring the Company to disclose all pending or, to the Company's knowledge, threatened actions, suits, proceedings, investigations, or claims that could reasonably be expected to have a material adverse effect on the Company or that, regardless of materiality, involve any governmental or regulatory body. The Company will be required to deliver a Disclosure Schedule in connection with the NPA that identifies all matters responsive to these representations and warranties.
Second, the aggregate litigation risk profile of the Company is relevant to the Purchasers' overall assessment of the investment opportunity and the risk-adjusted valuation of the Notes. Third, certain types of pending litigation or regulatory proceedings—particularly those involving intellectual property claims, regulatory enforcement actions, or matters that could result in injunctive relief impacting the Company's core business operations—may warrant specific negotiation of protective provisions in the NPA, such as special indemnities, bring-down conditions, or closing conditions tied to the resolution or non-escalation of particular matters.
This memorandum should be read in conjunction with the following related memoranda being prepared as part of the broader due diligence exercise:
• IP Diligence Memorandum dated December 20, 2023 (addressing intellectual property ownership, freedom to operate, and the merits of the Meridian patent infringement claims);
• Material Contracts Diligence Summary dated December 18, 2023 (addressing key commercial agreements, including indemnification provisions);
• Regulatory & Compliance Diligence Memorandum dated December 22, 2023 (addressing money transmission licensing, state regulatory compliance, and related regulatory matters in greater detail); and
• Insurance Coverage Review Memorandum dated December 23, 2023 (providing a comprehensive review of the Company's insurance program).
II. Executive Summary
Based on the review conducted in accordance with the scope described in Section I above, we provide the following executive summary of our findings.
A. Overall Assessment
Skybridge has a relatively modest litigation profile for a fintech company of its scale. As of the date of this memorandum, the Company has approximately 310 full-time equivalent employees, generates approximately $78 million in annual recurring revenue ("ARR") as of Q3 2023, and processes approximately $4.2 billion in annualized gross payment volume ("GPV") across its payments orchestration platform. Companies at this stage and in this industry vertical typically have a somewhat more active litigation docket, particularly with respect to patent infringement claims, regulatory matters, and commercial disputes. The Company's litigation profile compares favorably against this benchmark.
B. Categories of Identified Matters
Our review identified matters falling into three principal categories:
(A) Pending Litigation Matters. Two active cases were identified:
(i) Meridian Commerce Solutions, Inc. v. Skybridge Fintech Ltd., No. 1:23-cv-00847 (D. Del.), a patent infringement action filed by a competitor alleging infringement of two U.S. utility patents related to dynamic payment gateway selection algorithms; and
(ii) Marlowe Commerce Bank v. Skybridge Fintech Ltd., No. N23C-09-XXX (DE Super. Ct.), a former employee wage and hour claim alleging misclassification and unpaid overtime.
(B) Threatened or Pre-Litigation Claims. One demand letter was identified:
(i) A demand from Brindoval Data Analytics, LLC, alleging breach of a services agreement and claiming approximately $340,000 in early termination fees.
(C) Recently Resolved Matters. Two matters resolved within the prior three years were identified:
(i) A contract dispute with Pinnacle Payments Corp., settled in March 2022 for $275,000; and
(ii) An informal regulatory inquiry by the New York Department of Financial Services, closed without action in September 2022.
C. Arbitrations
No pending or threatened arbitrations were identified. The Company confirmed that it is not currently a party to, and has not within the last three years been a party to, any arbitration proceedings.
D. Regulatory Matters
One prior regulatory inquiry was identified, which has been resolved as described in Section V.B below. No currently pending regulatory enforcement actions, formal investigations, or consent orders were identified. We note that the separate Regulatory & Compliance Diligence Memorandum dated December 22, 2023 addresses the Company's money transmission licensing posture and state regulatory compliance in substantially greater detail. That memorandum should be consulted for a comprehensive assessment of the Company's regulatory risk profile.
E. Aggregate Risk Assessment
Our overall risk assessment is that the Company's aggregate litigation risk is low-to-moderate. None of the identified matters, individually or in the aggregate, would be expected to have a material adverse effect on the Company's business, financial condition, results of operations, or prospects. The most significant matter from a potential financial exposure standpoint is the Meridian patent infringement action, where damages (if liability were established, which the Company does not expect) could range into the low single-digit millions. However, the Company and its IP counsel have identified what they believe are strong non-infringement and invalidity defenses, and the risk of injunctive relief is assessed as low.
F. Disclosure Recommendations
We recommend that all five identified matters be disclosed on the Company Disclosure Schedule to be delivered in connection with the NPA. The two pending litigation matters and the one threatened claim should be disclosed to ensure full compliance with the NPA's litigation representations. The two resolved matters should be disclosed for completeness, particularly given that the NPA's litigation representations are expected to include a look-back period extending to at least three years prior to the Closing Date. A summary of our specific disclosure recommendations is set forth in Section VIII below.
III. Pending Litigation
A. Meridian Commerce Solutions, Inc. v. Skybridge Fintech Ltd.
1. Case Overview
2. Parties and Background
Meridian is a Delaware corporation and competitor of Skybridge in the payments orchestration and gateway management space. Meridian offers a suite of payment processing solutions, including a payment routing optimization product that competes with Skybridge's Dynamic Routing Engine ("DRE"), a core component of Skybridge's payments orchestration platform. Based on publicly available information, Meridian has raised approximately $45 million in venture capital funding through its Series B round and has approximately 150 employees. The competitive dynamic between the two companies provides relevant context for this action, as patent infringement claims between competitors in the fintech space are not uncommon and may be motivated in part by strategic considerations.
3. Nature of Claims
Meridian alleges that Skybridge's DRE module infringes two of Meridian's U.S. utility patents:
• U.S. Patent No. 10,XXX,312 (the "'312 Patent"), titled "System and Method for Dynamic Payment Gateway Selection Based on Transaction Attributes," issued on March 17, 2020; and
• U.S. Patent No. 10,XXX,479 (the "'479 Patent"), titled "Apparatus and Method for Real-Time Optimization of Payment Processing Routes," issued on June 2, 2020.
The Complaint alleges that both patents are part of the same patent family and relate generally to algorithms and systems for dynamically selecting among multiple payment gateways or processors based on range transaction-specific attributes, including transaction amount, currency, geographic location of the merchant and cardholder, historical success rates across gateways, and real-time performance metrics. Meridian alleges that Skybridge's DRE practices the claimed methods and systems by performing substantially similar routing optimization functions.
The Complaint further alleges that Skybridge's infringement is willful, asserting that Skybridge was aware of Meridian's patents at least as of January 2023, when Meridian's CEO allegedly discussed the patents with Skybridge's CTO, Elena Vasquez, at a fintech industry conference. The Company disputes this characterization, as discussed below.
4. Relief Sought
Meridian seeks the following relief:
(a) A permanent injunction prohibiting Skybridge from making, using, selling, offering for sale, or importing any products or services that infringe the '312 and '479 Patents;
(b) Compensatory damages in an amount to be determined at trial, including lost profits and/or reasonable royalties;
(c) Enhanced damages (up to treble damages) under 35 U.S.C. § 284 for alleged willful infringement;
(d) An award of attorneys' fees and costs under 35 U.S.C. § 285; and
(e) Pre-judgment and post-judgment interest.
The Complaint does not specify a damages figure, stating only that damages are "in an amount to be determined at trial, but believed to be substantial."
5. Current Status of Proceedings
Skybridge filed its Answer and Counterclaims on August 28, 2023. In its Answer, the Company denied all allegations of infringement and asserted the following affirmative defenses:
(a) Non-infringement — the Company's DRE does not practice any claim of the '312 or '479 Patents, either literally or under the doctrine of equivalents;
(b) Invalidity — the asserted patent claims are invalid under 35 U.S.C. §§ 102 and 103 in light of prior art, including prior art references predating the asserted patents' priority dates;
(c) Invalidity under 35 U.S.C. § 101 — the asserted claims are directed to abstract ideas (mathematical algorithms and conventional computer operations) and are therefore patent-ineligible;
(d) No willful infringement — Skybridge did not have knowledge of the asserted patents prior to service of the Complaint, or alternatively, Skybridge's conduct was objectively reasonable; and
(e) Laches, estoppel, and unclean hands.
Skybridge also asserted a Counterclaim for declaratory judgment of non-infringement and invalidity of both asserted patents.
As of the date of this memorandum, discovery is in its early stages. The parties have exchanged initial disclosures pursuant to Fed. R. Civ. P. 26(a)(1), and Meridian has served its infringement contentions pursuant to the Court's Local Patent Rules. A Markman hearing (claim construction hearing) has not yet been scheduled. No dispositive motions are pending. The current scheduling order contemplates completion of fact discovery by August 2024 and expert discovery by November 2024, with a trial date not yet set.
6. Company's Position and Merits Assessment
Skybridge and its IP counsel at C&H believe the claims are without merit. The Company's position rests on several grounds. First, Skybridge's DRE technology was independently developed by the Company's engineering team, led by Elena Vasquez, CTO and Co-Founder, beginning in 2018, well before Meridian's patents were issued. The Company has represented that it maintains contemporaneous development records, including internal design documents, source code repositories with commit histories, and engineering team communications, that corroborate independent development.
Second, the Company and its IP counsel have identified multiple prior art references that they believe predate the priority dates of the asserted Meridian patents and render the asserted claims anticipated or obvious. These references include both published patent applications and academic publications in the field of payment routing optimization. The specific prior art references and the detailed invalidity analysis are addressed in the IP Diligence Memorandum dated December 20, 2023 prepared by Peter Vassiliev and Wendy Schultz at C&H, which should be consulted for a comprehensive assessment of the IP merits.
Third, with respect to the claim of willful infringement, the Company disputes Meridian's allegation that Elena Vasquez was made aware of Meridian's patents at an industry conference in January 2023. Ms. Vasquez has stated that while she recalls a brief conversation with Meridian's CEO at the referenced conference, the conversation pertained to industry trends generally and did not include any specific reference to Meridian's patent portfolio. Even if such a reference were made, the Company contends that mere awareness of a patent does not establish willfulness where the accused infringer has an objectively reasonable basis for believing that it does not infringe.
7. Financial Exposure Assessment
Given the early stage of the proceedings, a precise quantification of potential damages exposure is difficult. However, based on our review of comparable patent infringement cases in the payments technology space, and taking into account the following factors—(i) the size of the Company's DRE-related revenue as a component of total ARR, (ii) typical reasonable royalty rates applied in comparable cases, and (iii) the availability of non-infringing alternatives—we estimate that potential damages, if liability were established (which the Company does not expect), could range in the low single-digit millions of dollars. This estimate is necessarily preliminary and subject to substantial revision as discovery progresses, claim construction is resolved, and damages theories are developed.
The risk of injunctive relief is assessed as low. Post-Northgate Group v. MercExchange, L.L.C., 547 U.S. 388 (2006), injunctive relief is not automatic upon a finding of patent infringement; a plaintiff must satisfy the traditional four-factor test. Given the availability of monetary damages, the competitive landscape (multiple payment routing solutions are available in the market), and the absence of evidence that Meridian practices the patents-in-suit, we believe the likelihood of a permanent injunction is low.
8. Insurance Coverage
The Company's directors' and officers' ("D&O") insurance and technology errors and omissions ("E&O") / professional liability insurance policies have been reviewed in connection with this matter. Patent infringement claims may trigger coverage under the Company's technology E&O policy, which includes a "media and intellectual property" coverage component, subject to applicable policy exclusions (including an exclusion for claims arising from the Company's knowing infringement of third-party IP rights) and a deductible. The detailed insurance coverage analysis is set forth in the Insurance Coverage Review Memorandum dated December 23, 2023.
9. Risk Rating and Disclosure Recommendation
Risk Rating: Low-to-Moderate.
Disclosure Recommendation: This matter must be disclosed on the Company Disclosure Schedule. It is a pending litigation matter in which the Company is a named defendant, involves claims that could theoretically result in a damages award or injunctive relief affecting a core component of the Company's product offering, and is the type of matter that any reasonable investor would expect to see disclosed. The disclosure should include the case caption, forum, nature of claims, relief sought, current status, and a summary of the Company's position and defenses.
B. Former Employee Wage & Hour Claim — Takeshi Marlowe Commerce Bank v. Skybridge Fintech Ltd.
1. Case Overview
2. Parties and Background
Takeshi Marlowe Commerce Bank is a former senior software engineer who was employed by Skybridge from approximately March 2020 to June 2023. According to Company records, Mr. Marlowe Commerce Bank was hired as a Senior Software Engineer at an initial annual salary of $115,000, which was subsequently increased to $125,000 effective January 2022. His position was classified as exempt from overtime under the Fair Labor Standards Act ("FLSA") and applicable Delaware state law, based on the Company's determination that he met the requirements of the computer professional exemption under 29 U.S.C. § 213(a)(17) and corresponding state law provisions.
Mr. Marlowe Commerce Bank voluntarily resigned from Skybridge effective June 30, 2023. The Company has represented that his departure was amicable and that no performance issues were documented at the time of his resignation.
3. Nature of Claims
The Complaint alleges two causes of action:
(a) Violation of the Fair Labor Standards Act, 29 U.S.C. § 207. Mr. Marlowe Commerce Bank alleges that he was misclassified as an exempt employee and that he regularly worked in excess of 40 hours per week without receiving overtime compensation at one and one-half times his regular rate of pay. He alleges that his actual job duties did not satisfy the requirements of the computer professional exemption because a significant portion of his work involved routine testing, debugging, and quality assurance tasks that do not require the exercise of independent judgment and discretion characteristic of exempt work.
(b) Violation of the Delaware Wage Payment and Collection Act, 19 Del. C. § 1101 et seq. Mr. Marlowe Commerce Bank alleges that the Company's failure to pay overtime wages constitutes a violation of Delaware's wage payment statute, entitling him to recovery of unpaid wages and liquidated damages.
Mr. Marlowe Commerce Bank alleges that he is owed back pay for approximately 18 months of unpaid overtime, covering the period from approximately January 2022 through June 2023. He estimates his average weekly overtime at approximately 8 to 10 hours per week during this period.
4. Relief Sought
Mr. Marlowe Commerce Bank seeks the following relief:
(a) Back wages estimated by the plaintiff at approximately $87,000 (based on his calculation of approximately 18 months of overtime at an average of 8–10 hours per week);
(b) Liquidated damages in an equal amount (approximately $87,000) under both the FLSA and Delaware law;
(c) Attorneys' fees and costs; and
(d) Pre-judgment interest.
5. Current Status of Proceedings
The Company filed its Answer on October 20, 2023, denying the material allegations and asserting the affirmative defense that Mr. Marlowe Commerce Bank was properly classified as exempt under the computer professional exemption. An initial case scheduling conference was held on November 15, 2023, at which the Court established a discovery schedule. Discovery is currently ongoing. No mediation has been scheduled, although the Company is evaluating its settlement posture, as discussed below.
6. Company's Position
Skybridge maintains that Mr. Marlowe Commerce Bank was properly classified as an exempt employee under the computer professional exemption. The Company's position is supported by the following factors:
(a) Mr. Marlowe Commerce Bank's annual salary at all relevant times exceeded $110,000 (the threshold for the highly compensated employee exemption) and exceeded the minimum salary threshold for the computer professional exemption;
(b) Mr. Marlowe Commerce Bank's job description and performance reviews indicate that his primary duties involved the design, development, documentation, analysis, creation, testing, and modification of computer systems and programs, including systems related to the Company's payment processing infrastructure;
(c) Mr. Marlowe Commerce Bank's work required the consistent exercise of discretion and independent judgment with respect to matters of significance, including architectural decisions regarding the Company's microservices infrastructure; and
(d) The Company's classification of Mr. Marlowe Commerce Bank was consistent with its classification of other similarly situated senior software engineers.
Notwithstanding its belief that the classification was proper, the Company's General Counsel, Priya Ramanathan, indicated during our December 11, 2023 interview that the Company is evaluating whether a pre-mediation settlement might be advisable given the relatively low dollar amounts at issue and the desire to avoid protracted litigation that could serve as a distraction for management during the Bridge Financing process.
7. Financial Exposure Assessment
We assess the maximum financial exposure in this matter as follows:
• Back wages claimed: approximately $87,000
• Liquidated damages (equal amount): approximately $87,000
• Estimated attorneys' fees and costs: approximately $50,000–$75,000
• Total maximum exposure: approximately $200,000–$250,000
We note that the potential nuisance settlement value of this matter is estimated at approximately $50,000 to $75,000, which would include a modest payment to the plaintiff in exchange for a full release of all claims and mutual non-disparagement provisions. Given the cost of litigation and the management distraction factor, a settlement in this range may be economically rational regardless of the merits of the Company's defenses.
8. Insurance Coverage
The Company maintains an employment practices liability insurance ("EPLI") policy that is expected to apply to claims of this nature, subject to a self-insured retention (deductible). The EPLI policy covers claims arising from alleged wrongful employment practices, including wage and hour misclassification claims. The specific coverage terms, retention amount, and policy limits are addressed in the Insurance Coverage Review Memorandum dated December 23, 2023.
9. Risk Rating and Disclosure Recommendation
Risk Rating: Low. This matter is financially immaterial to the Company. Even at maximum exposure, the potential liability represents a negligible fraction of the Company's annual revenue and would not constitute a material adverse effect under any reasonable definition of that term.
Disclosure Recommendation: We recommend disclosure on the Company Disclosure Schedule notwithstanding the low financial materiality of this matter. The NPA's litigation representation is expected to require disclosure of all pending actions, suits, or proceedings, without a materiality qualifier for the threshold disclosure obligation (materiality may serve only as a qualifier for the "material adverse effect" bring-down). Disclosing this matter ensures full compliance with the representation and avoids any risk of a breach claim based on a technical omission. The disclosure should be brief, describing the nature of the claim, the relief sought, the Company's position, and the current status.
IV. Threatened Claims
A. Demand Letter from Brindoval Data Analytics, LLC
1. Overview.
2. Background and Nature of Claim
Brindoval Data is a Delaware limited liability company that provides data analytics and fraud detection services to companies in the financial technology and e-commerce sectors. Skybridge entered into a Services Agreement with Brindoval Data dated February 1, 2022 (the "Brindoval Agreement"), pursuant to which Brindoval Data agreed to provide fraud detection analytics services to Skybridge for an initial term of 24 months (i.e., through January 31, 2024). The Brindoval Agreement included monthly service fees of approximately $22,000 and contained an early termination provision requiring payment of a termination fee equal to the aggregate remaining monthly fees if the agreement were terminated without cause prior to the expiration of the initial term.
Skybridge terminated the Brindoval Agreement effective August 31, 2023, approximately five months prior to the end of the initial 24-month term. Skybridge sent a written termination notice to Brindoval Data on August 1, 2023, asserting that Brindoval Data had failed to meet the service level commitments set forth in Schedule B to the Brindoval Agreement, specifically:
(a) Brindoval Data's platform uptime fell below the contractual commitment of 99.5% in three of the six months preceding the termination notice, with uptime levels of 97.8% in April 2023, 98.1% in June 2023, and 96.9% in July 2023; and
(b) Brindoval Data's average response times for fraud scoring API calls consistently exceeded the contractual maximum of 200 milliseconds, averaging approximately 340 milliseconds over the three-month period preceding the termination notice.
Skybridge asserted that these failures constituted material breaches of the Brindoval Agreement, entitling Skybridge to terminate the agreement for cause pursuant to Section 8.2(b) thereof. The Brindoval Agreement provides that termination for cause does not trigger the early termination fee obligation, which applies only to terminations without cause under Section 8.3.
3. The Demand and Subsequent Correspondence
On October 10, 2023, Skybridge received a demand letter from Crestline Growth Partners, Rowe & Farris LLP, counsel to Brindoval Data. The demand letter asserts that Skybridge's purported termination for cause was improper and that the cited SLA failures did not constitute "material breaches" within the meaning of the Brindoval Agreement. Specifically, Brindoval Data's position is that:
(a) The SLA commitments in Schedule B are subject to a cure period under Section 8.2(b), which requires 30 days' written notice and an opportunity to cure before a for-cause termination may be exercised, and Skybridge did not provide a separate cure notice prior to issuing its termination notice;
(b) The uptime deficiencies were caused by third-party infrastructure issues (specifically, outages at a cloud hosting provider used by Brindoval Data) that constitute force majeure events excusable under Section 12.1 of the Brindoval Agreement; and
(c) The response time exceedances were within the margin of tolerance that is customary in the industry and did not materially impair Skybridge's use of the fraud detection services.
Brindoval Data demands payment of approximately $340,000, representing the early termination fee calculated as the aggregate of the remaining monthly service fees from September 2023 through January 2024 (five months at approximately $22,000 per month), plus additional charges for data migration and transition services, plus interest accrued from the date of termination.
Priya Ramanathan, Skybridge's General Counsel, prepared and sent a detailed response letter dated October 30, 2023, rejecting Brindoval Data's demand in its entirety. The response letter asserts that:
(a) The termination notice itself constituted sufficient notice under Section 8.2(b), as the SLA failures had been ongoing for months and Skybridge had previously communicated its concerns regarding performance issues to Brindoval Data on multiple occasions (including emails dated April 15, 2023 and July 3, 2023, which are documented in the Company's files);
(b) The force majeure defense is unavailing because the Brindoval Agreement's force majeure clause (Section 12.1) expressly excludes failures attributable to the acts or omissions of a party's subcontractors, vendors, or service providers, and the cloud hosting provider in question is Brindoval Data's vendor, not a third-party force majeure event;
(c) The response time exceedances were not within any reasonable margin of tolerance and materially impacted Skybridge's real-time fraud detection capabilities; and
(d) Even if the termination were deemed to be without cause, the early termination fee calculation set forth in the demand letter is incorrect, as it includes items not contemplated by the early termination fee provision in the Brindoval Agreement.
Copies of the October 10, 2023 demand letter and the October 30, 2023 response letter are attached hereto as Exhibits C and D, respectively.
4. Current Status
No litigation has been filed as of the date of this memorandum. On November 20, 2023, Brindoval Data's counsel sent a follow-up letter reiterating the demand and reserving Brindoval Data's right to pursue all available legal remedies, including the filing of a breach of contract action. No further communications have been received from Brindoval Data or its counsel since that date. The Company's General Counsel is monitoring the matter and has indicated that Skybridge does not intend to make any payment in response to the demand.
5. Financial Exposure Assessment
The maximum financial exposure is approximately $340,000, representing the full amount of the claimed early termination fee and associated charges. However, we believe the Company has strong defenses based on its for-cause termination right under the Brindoval Agreement, as described above. In our assessment, the likelihood that Brindoval Data would prevail on its claim in full is low, and even in a worst-case scenario, any damages award would likely be limited to the contractual early termination fee (approximately $110,000, representing five months of service fees at approximately $22,000 per month), without the additional charges included in Brindoval Data's demand.
6. Risk Rating and Disclosure Recommendation
Risk Rating: Low.
Disclosure Recommendation: We recommend disclosure on the Company Disclosure Schedule as a threatened claim. Although no litigation has been filed, the demand letter and follow-up correspondence are sufficient to establish that this is a "threatened" claim that should be disclosed under the NPA's litigation representation, which typically extends to threatened as well as pending actions. We also recommend that the Company continue to monitor this matter for escalation and promptly notify ECVC and WPS if litigation is filed prior to closing.
V. Recently Resolved Matters (Past Three Years)
A. Settlement with Pinnacle Payments Corp.
1. Background. Pinnacle Payments Corp. ("Pinnacle") is a payment processing company that previously served as a strategic vendor partner to Skybridge. On or about April 1, 2020, Skybridge and Pinnacle entered into a Joint Development Agreement (the "JDA") pursuant to which the parties agreed to collaborate on the co-development of an integrated payment acceptance solution combining Pinnacle's point-of-sale processing capabilities with Skybridge's payment orchestration technology. The JDA contemplated a series of development milestones over a 12-month period, with each party bearing responsibility for specific deliverables and contributing engineering resources.
In approximately Q3 2021, a dispute arose between the parties regarding Skybridge's compliance with certain co-development milestones under the JDA. Pinnacle alleged that Skybridge had failed to deliver its portion of the integrated API layer by the agreed-upon milestone dates, resulting in delays that caused Pinnacle to incur additional development costs and miss anticipated launch windows for the co-developed product. Skybridge's position was that the delays were attributable to changes in Pinnacle's technical specifications that required Skybridge to redesign portions of its deliverables, and that these specification changes constituted a material modification of the JDA's scope that warranted a corresponding extension of the milestone schedule.
2. Resolution. The dispute was resolved pursuant to a confidential settlement agreement executed by both parties in March 2022. Under the terms of the settlement:
(a) Skybridge paid Pinnacle $275,000 in full and final settlement of all claims, counterclaims, and disputes arising out of or relating to the JDA;
(b) The parties exchanged mutual general releases of all claims arising out of or relating to the JDA and their business relationship;
(c) Neither party admitted liability or wrongdoing;
(d) The JDA was terminated by mutual agreement, with each party retaining ownership of its respective pre-existing intellectual property and any intellectual property independently developed by that party during the JDA term; and
(e) The settlement agreement contains mutual confidentiality provisions restricting disclosure of the terms of the settlement, subject to exceptions for disclosure required by law, regulation, or legal process, and disclosure to professional advisors on a need-to-know basis.
3. Ongoing Obligations
Other than the standard confidentiality provisions in the settlement agreement, there are no ongoing obligations, restrictive covenants, non-compete provisions, non-solicitation provisions, or other continuing restrictions arising from the settlement. The JDA has been fully terminated, and the parties have no further commercial relationship.
4. Disclosure Recommendation
We recommend disclosure of this settlement on the Company Disclosure Schedule for completeness. The settlement occurred within the three-year look-back period likely to be covered by the NPA's litigation representation. Although the matter has been fully resolved and the settlement amount ($275,000) is financially immaterial, disclosing the settlement demonstrates the Company's commitment to full transparency with the Purchasers. We note that the settlement agreement contains a confidentiality provision, but we believe that disclosure in a confidential disclosure schedule that is itself subject to the NPA's confidentiality provisions should be permissible under the settlement agreement's exceptions for disclosure required in connection with financing transactions and to professional advisors. The Company's General Counsel has confirmed that she shares this view.
B. Regulatory Inquiry — State of New York Department of Financial Services
1. Background. In Q2 2022, the New York Department of Financial Services ("NYDFS") initiated an informal inquiry regarding Skybridge's money transmission activities in the State of New York and the scope of the Company's licensing obligations under the New York Banking Law. At the time of the inquiry, Skybridge was in the process of applying for a New York money transmitter license but had not yet received the license. The NYDFS inquiry was triggered by a routine review of fintech companies operating in New York that the NYDFS identified as potentially engaging in money transmission activities without the requisite license.
The inquiry was informal in nature—it did not involve the issuance of a subpoena, formal investigative demand, consent order, or cease-and-desist order. The NYDFS communicated its inquiries through informal correspondence and a telephonic meeting with the Company's outside regulatory counsel and compliance team.
2. Resolution. Skybridge cooperated fully with the NYDFS throughout the inquiry process. The Company provided the NYDFS with detailed information regarding its business model, the nature of its payment processing activities, its reliance on licensed payment processor partners for settlement and funds transmission, and the status of its pending license application. The Company's outside regulatory counsel engaged in several rounds of correspondence with the NYDFS, explaining the Company's position that its activities were conducted through licensed partners and that the Company was proactively pursuing its own state money transmitter licenses to ensure full compliance as its business model evolved.
The NYDFS closed the inquiry without taking any formal or informal enforcement action in September 2022. The NYDFS's closure letter (a copy of which is referenced in the attached Exhibit F) indicated that the matter was being closed based on the information provided by the Company and the Company's pending license application.
Subsequently, Skybridge obtained its New York money transmitter license in December 2022. The Company is now authorized to engage in money transmission activities in the State of New York, subject to the conditions of the license.
3. Ongoing Obligations
As a licensed money transmitter in New York, the Company is subject to ongoing regulatory obligations, including:
(a) Periodic reporting requirements (quarterly and annual reports);
(b) Maintenance of minimum net worth and surety bond requirements;
(c) Examination rights — the NYDFS retains the right to examine the Company's books, records, and operations;
(d) Compliance with the NYDFS's cybersecurity regulations (23 NYCRR Part 500); and
(e) Prior approval requirements for certain changes in control, material changes in business plan, or expansion of permissible activities.
These ongoing regulatory obligations are addressed in substantially greater detail in the Regulatory & Compliance Diligence Memorandum dated December 22, 2023, which provides a comprehensive assessment of the Company's money transmission licensing posture across all applicable jurisdictions.
4. Disclosure Recommendation
We recommend disclosure of this matter on the Company Disclosure Schedule for transparency. Although the inquiry was informal and was closed without any enforcement action, the NPA's litigation representations may encompass regulatory inquiries, investigations, or proceedings, and a conservative approach to disclosure is warranted. Disclosing this matter—together with the fact that it was resolved favorably and that the Company subsequently obtained its New York license—presents a complete picture for the Purchasers and avoids any risk of a breach claim based on an undisclosed regulatory matter. The Company's General Counsel concurs with this recommendation.
VI. Indemnification Obligations
As part of our litigation and claims diligence review, we examined the Company's material indemnification obligations arising from contractual arrangements and corporate governance documents. This section provides a summary of our findings; a more detailed analysis of the Company's contractual indemnification provisions is set forth in the Material Contracts Diligence Summary dated December 18, 2023.
A. Customer and Vendor Agreements
The Company's standard form customer agreements and vendor agreements contain mutual indemnification provisions that are customary for the payments technology industry. Under these provisions, each party typically agrees to indemnify, defend, and hold harmless the other party from and against third-party claims arising from:
(a) The indemnifying party's breach of its representations, warranties, or obligations under the agreement;
(b) The indemnifying party's infringement or misappropriation of third-party intellectual property rights;