1002-00004 · Pinnacle Venture Fund II LP · Diligence

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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

FROM: Naomi Petersen, Associate, Calderwood & Harkness LLP

TO: Andrew Fitzpatrick, Lead Associate; Harrison Wexford, Responsible Partner

DATE: June 28, 2022

RE: Review of Verdana Software, Inc. — Revolving Credit Facility with Pacific Summit Bank, N.A.

MATTER NUMBER: 1002-00004

CLIENT: Pinnacle Venture Fund II LP (Billing Client No. PIN-0042)

I. Executive Summary

This memorandum reviews the existing revolving credit facility (the "Credit Facility" or the "Facility") between Verdana Software, Inc. ("Verdana" or the "Company"), a Delaware C-corporation (EIN 93-1485726) headquartered at 1175 NW Couch Street, Suite 800, Portland, OR 97209, and Pacific Summit Bank, N.A. ("Pacific Summit" or the "Lender"), headquartered at 350 California Street, San Francisco, CA 94104. This review is conducted in connection with the proposed $60,000,000 Series D Preferred Stock investment (the "Series D Transaction" or the "Proposed Investment") by our client, Pinnacle Venture Fund II LP ("Pinnacle"), in Verdana.

The purpose of this memorandum is to identify and analyze issues arising from the Credit Facility that are relevant to the structuring, negotiation, and closing of the Series D Transaction. In particular, we focus on the negative covenants, financial covenants, change of control provisions, and consent requirements contained in the Credit Facility, and their implications for Pinnacle as a prospective investor.

Key Finding. Based on our review of the materials produced to date, the Credit Facility contains negative covenants that likely require Pacific Summit Bank's prior written consent (or a formal waiver) before Verdana may issue the Series D Preferred Stock. The issuance of preferred equity with a liquidation preference (whether structured at 1.0x or 1.5x), cumulative dividends, anti-dilution protections, and redemption rights is the type of capital structure modification that standard revolving credit facilities restrict absent affirmative lender consent. Obtaining lender consent should be a hard condition to closing the Series D Transaction.

Additional Concerns Flagged. We have also identified the following additional areas of concern:

• Financial Covenants. The Credit Facility includes a minimum liquidity covenant of $10,000,000 and an annualized recurring revenue ("ARR")-based coverage ratio. While Verdana appears to be in current compliance with both covenants, the Company's ongoing negative EBITDA and cash burn trajectory require careful monitoring, particularly in a downside scenario where the Series D does not close. Post-closing, the financial covenants should remain manageable given the $60,000,000 equity infusion, but cumulative preferred dividend obligations may affect long-term compliance.

• Structural Subordination. The Series D Preferred Stock, including its liquidation preference, would be structurally junior to Pacific Summit Bank's secured claims. However, the growing "preference stack" across all preferred series may raise concerns from the Lender's perspective regarding recovery analysis and the Company's decision-making in distress scenarios.

Each of these issues is discussed in greater detail below.

II. Overview of the Credit Facility

A. Key Commercial Terms

The following table summarizes the key commercial terms of the Credit Facility based on the documentation produced to date in response to our diligence request list transmitted on May 14, 2022:

The Credit Facility is structured as a traditional revolving credit facility under which Verdana may draw, repay, and re-borrow amounts up to the total commitment of $10,000,000, subject to compliance with borrowing conditions, representations, and covenants. Interest accrues on outstanding drawn amounts at a floating rate equal to SOFR plus a margin of 350 basis points (3.50%). The Facility matures on June 30, 2024, at which time all outstanding amounts become due and payable in full.

The Facility is secured by a first-priority blanket lien on substantially all personal property assets of Verdana, including but not limited to the Company's intellectual property portfolio (software code, patents, trademarks, and copyrights), accounts receivable, deposit accounts, equipment, inventory (if any), and general intangibles. This comprehensive security package is typical for technology lending transactions in which the borrower's primary asset base consists of intellectual property and receivables rather than hard assets. The breadth of the lien is relevant to several of the issues discussed in this memorandum, particularly the analysis of anti-lien covenants and structural subordination considerations set forth in Sections IV.D and V below.

B. Background on the Facility

The Credit Facility was entered into prior to the proposed Series D round and is believed to have been established in connection with Verdana's working capital needs as the Company scales its enterprise software platform. The timing of the Facility's origination is consistent with standard practice among growth-stage SaaS companies, which frequently establish revolving credit facilities or venture debt lines to supplement equity capital, manage cash flow timing mismatches, and provide liquidity cushions during periods of rapid growth and associated cash burn.

As of the March 31, 2022 diligence cut-off date (the most recent balance sheet date for which financial data has been produced), the Company reported the following relevant financial metrics:

• Cash on balance sheet: $22,400,000

• Amount drawn on the Credit Facility: $6,200,000

• Trailing twelve-month ("TTM") EBITDA (as of March 2022): Negative $11,600,000

The negative EBITDA figure indicates that Verdana is operating at a significant cash burn rate, which is not atypical for a high-growth enterprise SaaS company at Verdana's stage. The Company's operations are being funded by a combination of prior equity rounds (Series A through Series C), the revolving credit facility, and operating revenues. The interplay between the Company's cash burn rate, existing liquidity, and the financial covenants in the Credit Facility is discussed in detail in Section III below.

We note that the diligence materials produced to date include the executed credit agreement and first amendment thereto, but we have not yet confirmed whether there are additional amendments, side letters, fee letters, intercreditor agreements, or other ancillary documents. Confirmation of the completeness of the document production is identified as an open item in Section VIII.

III. Financial Covenants Analysis

The Credit Facility includes two principal financial covenants: (1) a minimum liquidity covenant and (2) an ARR-based coverage ratio. Each is analyzed below with reference to Verdana's current financial position and the anticipated impact of the Series D Transaction.

A. Minimum Liquidity Covenant

Requirement. The Credit Facility requires Verdana to maintain minimum liquidity of at least $10,000,000 at all times. We note that the precise testing methodology for this covenant — including whether liquidity is tested continuously (i.e., at all times) or at periodic compliance dates (e.g., monthly, quarterly), and whether "liquidity" is defined to include only unrestricted cash or also includes undrawn availability under the Facility — needs to be confirmed against the specific defined terms in the credit agreement. This is identified as an open item in Section VIII.

Current Compliance. As of March 31, 2022, Verdana reported $22,400,000 in unrestricted cash on its balance sheet. Even excluding the $3,800,000 in undrawn availability under the Credit Facility, the Company's cash position of $22,400,000 is well above the $10,000,000 minimum liquidity threshold, providing a liquidity cushion of $12,400,000 (or approximately 124% headroom above the covenant floor). On this basis, Verdana appears to be in full compliance with the minimum liquidity covenant as of the most recent testing date.

Post-Close Implications. The $60,000,000 equity infusion from the Series D Transaction would substantially bolster Verdana's liquidity position. Assuming the Series D net proceeds (after transaction expenses) are deposited into Verdana's operating accounts, the Company's post-closing cash position would be expected to exceed $80,000,000 on a pro forma basis (approximately $22,400,000 existing cash plus approximately $58,000,000 to $59,000,000 in net proceeds, depending on the final amount of transaction expenses). This would provide very substantial headroom above the $10,000,000 minimum liquidity covenant floor.

However, we flag two points of concern for Pinnacle's consideration:

First, Verdana's ongoing negative EBITDA of approximately negative $11,600,000 on a trailing twelve-month basis indicates a sustained cash burn rate that should be carefully monitored. Without the Series D capital, the Company's existing cash runway is limited. Specifically, at a cash balance of $22,400,000 and an approximate annual cash burn rate of $11,600,000, the Company has approximately 23 months of cash runway before depleting its cash reserves entirely — and, critically, would approach the $10,000,000 minimum liquidity covenant threshold within approximately 12 to 13 months absent significant changes to the Company's revenue trajectory or cost structure. If the Series D Transaction does not close, Verdana could face a covenant breach under the Credit Facility as early as Q2 or Q3 of 2023, which could trigger an event of default and the cascading consequences described in Section VI.C below.

Second, even assuming the Series D closes as contemplated, Pinnacle should consider the impact of the cumulative preferred dividend on Verdana's forward cash burn rate. Under the proposed terms, the Series D Preferred Stock would carry a cumulative dividend of 8%, which equates to $4,800,000 per year on a $60,000,000 investment. While these dividends may accrue rather than be paid in cash, if Verdana elects (or is required) to pay dividends in cash, the effective cash burn rate would increase, thereby reducing the post-investment cash runway and narrowing the liquidity covenant headroom over time. This interaction between the cumulative dividend and the minimum liquidity covenant should be factored into Pinnacle's financial modeling of the investment.

Concern. As noted above, if the Series D Transaction does not close and Verdana continues burning cash at approximately $11,600,000 annually, the Company could breach the $10,000,000 minimum liquidity covenant within approximately 12 months, potentially triggering an event of default under the Credit Facility. This scenario underscores the urgency of the Series D capital raise from Verdana's perspective and may provide Pinnacle with leverage in the ongoing commercial negotiations regarding pre-money valuation and liquidation preference.

B. ARR-Based Coverage Ratio

Requirement. The Credit Facility includes a financial covenant based on Verdana's annualized recurring revenue ("ARR"). Based on our initial review, this covenant appears to be expressed as a ratio of ARR to outstanding drawn amounts or total debt obligations, although the specific covenant definition and calculation methodology should be confirmed against the credit agreement terms. ARR-based covenants are increasingly common in credit facilities extended to SaaS borrowers, reflecting the lender community's recognition that recurring revenue metrics are more meaningful indicators of creditworthiness for software companies than traditional EBITDA-based leverage ratios.

Current ARR (Q1 2022). Verdana reported ARR of $47,300,000 as of the first quarter of 2022. This represents an increase from $28,900,000 in ARR as of Q1 2021, reflecting year-over-year growth of approximately 63.7%. This robust growth rate is a positive indicator for ongoing covenant compliance and suggests that the Company's core business is performing well notwithstanding the negative EBITDA profile.

Current Ratio (Estimated). Assuming a simple ARR-to-debt ratio (ARR divided by outstanding drawn amounts under the Credit Facility), the Company's estimated current coverage ratio is approximately:

$47,300,000 (ARR) ÷ $6,200,000 (drawn debt) = approximately 7.6x

While we do not yet have the specific covenant threshold, ARR coverage covenants in comparable SaaS credit facilities typically require ratios in the range of 3.0x to 5.0x. If the threshold under Verdana's Credit Facility falls within this range, the Company would have substantial headroom.

Assessment. Verdana appears comfortably in compliance with the ARR-based coverage ratio given its strong revenue growth trajectory. The Series D Transaction is not expected to adversely affect ARR (which is a top-line revenue metric rather than a balance sheet or capital structure metric), so the issuance of the Series D Preferred Stock should not, in and of itself, impair compliance with this covenant.

Open Items. We note the following items that require further confirmation:

• The specific ARR coverage ratio formula as defined in the credit agreement, including whether the denominator includes total committed debt (the full $10,000,000 commitment) or only drawn amounts ($6,200,000 as of March 31, 2022), and whether the denominator also captures other indebtedness (including, potentially, redeemable preferred stock, as discussed in Section IV.C);

• Whether the covenant includes step-down provisions (i.e., decreasing thresholds as the Company matures or the Facility approaches maturity) or step-up provisions that would tighten the required ratio over time; and

• The specific testing dates and compliance certification requirements applicable to this covenant.

These items are identified in the open items list in Section VIII.

IV. Negative Covenants Relevant to the Series D Transaction

The Credit Facility is expected to contain a suite of negative covenants that restrict certain actions by the borrower without the prior written consent of the Lender. Such covenants are standard in revolving credit facilities and serve to protect the Lender's interests by limiting the borrower's ability to modify its capital structure, encumber its assets, incur additional indebtedness, or undertake fundamental transactions. The following negative covenants are directly relevant to the proposed Series D Transaction.

A. Restriction on Equity Issuances / Capital Structure Changes

The Credit Facility is expected to contain negative covenants restricting the borrower from issuing new equity securities — particularly preferred equity with liquidation preferences, dividend rights, and other economic terms that are senior to or pari passu with common equity — without the prior written consent of Pacific Summit Bank. Such restrictions are standard in technology lending facilities, reflecting the lender's interest in maintaining oversight over changes to the borrower's capital structure that could affect the lender's relative priority position or recovery analysis.

The issuance of Series D Preferred Stock to Pinnacle constitutes precisely the type of capital structure change that these negative covenants are designed to regulate. The Series D Preferred Stock would carry:

• A liquidation preference of either 1.0x (as proposed by Verdana) or 1.5x (as proposed by Pinnacle), representing a claim of $60,000,000 or $90,000,000, respectively, on the Company's assets in a liquidation or deemed liquidation event;

• Cumulative dividends at a rate of 8% per annum, equaling $4,800,000 per year on the $60,000,000 investment, which accrue whether or not declared by the Board;

• Anti-dilution protections (the specific type and scope of which are currently under negotiation between the parties); and

• Redemption rights exercisable at Pinnacle's option after five years, which effectively give the preferred stock a debt-like mandatory return feature.

The combination of these economic features — particularly the liquidation preference and cumulative dividends — could be viewed by Pacific Summit Bank as materially increasing the priority claims on the Company's assets and cash flows ahead of unsecured creditors, or as structurally modifying the borrower's equity capitalization in a manner that is restricted by the Credit Facility's negative covenants.

Moreover, from the Lender's perspective, the cumulative dividend obligation of $4,800,000 per year represents a recurring cash flow claim that, while technically an equity feature, has the practical economic effect of a fixed obligation that competes with debt service capacity. For a company already operating at negative EBITDA, the addition of a $4,800,000 annual dividend accrual (or cash payment obligation, if dividends are paid currently) is a meaningful consideration in the Lender's credit analysis.

Recommendation. We expect that the issuance of the Series D Preferred Stock will require Pacific Summit Bank's prior written consent under this negative covenant. The specific language of the restriction should be reviewed against the credit agreement once the complete documentation is confirmed.

B. Change of Control Provisions

The Credit Facility likely contains a "Change of Control" definition that could be triggered if the Series D issuance results in a shift of voting control or beneficial ownership above specified thresholds. Change of control provisions in credit agreements typically function as either (i) events of default, which give the lender the right to accelerate outstanding obligations, or (ii) mandatory prepayment triggers, which require the borrower to repay the facility upon the occurrence of a change of control. In either case, triggering a change of control would have severe consequences for Verdana and for Pinnacle's investment.

The analysis of whether the Series D issuance triggers a Change of Control depends on (a) the specific definition of "Change of Control" in the credit agreement and (b) the post-investment ownership percentages. We analyze the ownership implications under both the Pinnacle-proposed and Verdana-proposed term sheet scenarios:

Under Pinnacle's Proposed Terms ($260,000,000 Pre-Money Valuation at $3.25/Share):

Pinnacle would acquire approximately 18,461,538 shares of Series D Preferred Stock ($60,000,000 ÷ $3.25 per share). On a fully diluted basis, Pinnacle would hold approximately 18.75% of the Company's outstanding equity (18,461,538 shares out of approximately 98,461,538 total fully diluted shares).

Under Verdana's Proposed Terms ($320,000,000 Pre-Money Valuation at $4.00/Share):

Pinnacle would acquire 15,000,000 shares of Series D Preferred Stock ($60,000,000 ÷ $4.00 per share). On a fully diluted basis, Pinnacle would hold approximately 15.79% of the Company's outstanding equity (15,000,000 shares out of approximately 95,000,000 total fully diluted shares). If the employee stock option pool ("ESOP") is expanded by 5,000,000 shares to 17,000,000 shares (as has been discussed), Pinnacle's ownership would be approximately 15.00% (15,000,000 shares out of 100,000,000 total fully diluted shares).

In either scenario, Pinnacle would become a significant but minority holder. A Change of Control trigger is possible, however, depending on how the credit agreement defines the term. Common formulations include:

• Any person or group acquiring beneficial ownership of more than 10%, 15%, 20%, 25%, or 35% of the voting power of the borrower;

• The existing founders or management team ceasing to hold a majority (greater than 50%) of the outstanding voting equity; or

• Any person or group other than the existing shareholders acquiring the largest block of voting equity.

The 10% or 15% thresholds are particularly relevant here, as Pinnacle's ownership under either scenario would exceed those levels. Additionally, we note that under the existing capitalization table, the founders (Raj Anand, CEO, and Lena Kovac, CTO) collectively hold 28,000,000 shares, representing approximately 35.0% of the 80,000,000 fully diluted pre-investment shares. Post-investment, the founders would hold between approximately 28.0% (in the scenario with 100,000,000 total shares) and approximately 29.5% (in the scenario with 95,000,000 total shares). In all cases, the founders' aggregate ownership is already below 50% of the fully diluted capitalization.

This means that if the Change of Control definition includes a threshold based on the founders maintaining majority ownership, that threshold has likely already been exceeded prior to the Series D Transaction (as a result of dilution from the Series A, B, and C rounds and the existing ESOP). However, whether the Series D specifically "triggers" a Change of Control depends on whether the credit agreement looks at the incremental change in ownership (i.e., the event of the Series D issuance itself) or the absolute ownership levels. If the founders were already below a majority threshold, the question becomes whether the existing capitalization structure already constitutes a Change of Control that was either waived or carved out when the Facility was originally established.

Recommendation. We strongly recommend that the specific Change of Control definition in the Credit Facility be reviewed in detail to confirm whether the Series D issuance triggers this provision. This review should consider not only Pinnacle's post-investment ownership percentage but also the aggregate ownership positions of the existing preferred stock investors (Ridgeline Capital, Northgate Growth Partners, and Brindoval Innovation Fund) and the founders.

C. Restrictions on Incurrence of Additional Indebtedness

While the Series D Preferred Stock is structured as an equity issuance rather than a debt instrument, certain features of the preferred stock — specifically the cumulative dividend of 8% and the redemption rights exercisable after five years — give the instrument debt-like characteristics that may bring it within the scope of the Credit Facility's negative covenant restricting the incurrence of additional "Indebtedness."

Many credit agreements define "Indebtedness" broadly to include not only traditional borrowed money obligations but also redeemable preferred stock, capitalized lease obligations, and other obligations that are required to be classified as liabilities (rather than equity) under generally accepted accounting principles ("GAAP"). Under current GAAP (ASC 480), preferred stock with a mandatory redemption feature is generally classified as a liability rather than equity on the issuer's balance sheet, because the mandatory redemption creates an unconditional obligation to transfer assets at a specified or determinable date.

If the credit agreement's definition of "Indebtedness" includes redeemable preferred stock — and particularly if it captures preferred stock that is redeemable at the holder's option (as opposed to only mandatory or unconditional redemption) — then the issuance of the Series D Preferred Stock with Pinnacle's proposed 5-year redemption right could be characterized as an incurrence of additional Indebtedness, subject to the covenant restrictions and potentially requiring lender consent on that independent basis.

Additionally, we note that Pinnacle's proposed protective provisions include a consent right over any new indebtedness exceeding $5,000,000. While this proposed investor protection is relevant to understanding the interplay between the Credit Facility's negative covenants and Pinnacle's investor rights framework, it does not directly affect the lender consent analysis. However, we flag this for awareness, as it means that post-closing, both Pacific Summit Bank and Pinnacle would have overlapping consent rights over Verdana's ability to incur new debt — a dynamic that should be clearly understood and coordinated.

Open Item. We need to confirm whether the credit agreement treats preferred stock with mandatory or optional redemption features as "Indebtedness" under the Facility's definition section. This determination will affect both the negative covenant analysis and the ARR-based coverage ratio calculation (if the coverage ratio denominator includes all "Indebtedness" as defined in the credit agreement).

D. Restrictions on Liens and Security Interests

The Credit Facility is secured by a first-priority blanket lien on substantially all personal property assets of Verdana, as described in Section II.A above. Consistent with the comprehensive nature of this security package, the credit agreement is expected to contain a negative covenant restricting the Company's ability to grant additional liens or security interests on its assets (an "anti-lien" or "negative pledge" covenant). Such covenants typically permit only specified categories of liens (e.g., purchase money liens, tax liens, and other customary carve-outs), with all other liens requiring the Lender's prior consent.

The Series D Transaction itself does not contemplate the granting of any new liens or security interests on Verdana's assets. The preferred stock investment is a pure equity transaction, and the Series D Preferred Stock would be unsecured. Accordingly, the anti-lien covenant is not directly implicated by the issuance of the Series D Preferred Stock.

However, we note that any escrow or holdback mechanisms that may be implemented in connection with the Series D Transaction could potentially implicate the anti-lien covenant. In particular, discussions have occurred regarding a possible customer retention escrow in connection with Verdana's revenue concentration risk with respect to Meridian Logistics (which we understand represents a significant portion of the Company's ARR). If such an escrow were structured in a manner that effectively pledges or encumbers Verdana's assets — for example, by requiring the deposit of Company funds into a restricted account subject to conditions on release — the arrangement could constitute a "lien" under the broad definitions typically used in credit agreements.

Recommendation. If any escrow or holdback mechanism is ultimately incorporated into the Series D Transaction documents, the structure should be reviewed against the anti-lien covenant in the Credit Facility to ensure compliance. To the extent such a structure would constitute a prohibited lien, Pacific Summit Bank's consent should be sought concurrently with the broader consent discussed in Section VI.

E. Restrictions on Fundamental Transactions

The Credit Facility likely restricts Verdana from engaging in mergers, acquisitions, dispositions of substantially all assets, and similar fundamental transactions without the Lender's prior written consent. Such restrictions are standard in credit agreements and are designed to prevent the borrower from materially altering its business or corporate structure in a manner that could impair the Lender's collateral position or recovery prospects.

The Series D investment itself is not a fundamental transaction — it is an issuance of preferred equity in a primary capital raise, not a merger, acquisition, or asset sale. Accordingly, the fundamental transaction covenant is not expected to be directly triggered by the closing of the Series D Transaction.

However, we flag for further review the following governance-related provisions proposed in connection with the Series D that could, depending on the breadth of the credit agreement's fundamental transaction restrictions, be viewed by the Lender as warranting review or consent:

• Drag-Along Provision. The proposed drag-along provision, which would give specified holders (likely the Board or a majority-in-interest of preferred stockholders) the right to compel all stockholders to participate in a sale of the Company, could be viewed by the Lender as a governance modification that facilitates future fundamental transactions (i.e., an acquisition or merger) without the individual consent of all stockholders. While the drag-along provision does not itself constitute a fundamental transaction, it changes the governance framework in a manner that the Lender may wish to understand.

• Voting Agreement Modifications. Changes to the existing voting agreement, including the composition of the Board and the allocation of board seats to Pinnacle or other investors, could be viewed as altering the borrower's governance structure. To the extent the credit agreement's Change of Control or fundamental transaction definitions encompass governance changes (as opposed to solely ownership changes), these modifications could be implicated.

Assessment. While we view the risk of the fundamental transaction covenant being triggered as low, we recommend that the relevant provisions be reviewed against the credit agreement once the complete documentation is confirmed, and that any ambiguity be addressed through the consent process described in Section VI.

V. Structural Subordination Considerations

Pacific Summit Bank holds a senior secured position with a first-priority blanket lien on substantially all personal property assets of Verdana. In the event of a liquidation, foreclosure, or other enforcement action, Pacific Summit Bank's secured claims would be satisfied first from the collateral, ahead of all unsecured creditors and equity holders, including holders of preferred stock.

The Series D Preferred Stock, notwithstanding its liquidation preference (whether 1.0x or 1.5x), would be structurally junior to Pacific Summit Bank's secured claims in any liquidation or enforcement scenario. This structural subordination is inherent in the capital structure and is not, in itself, a legal impediment to the Series D Transaction. However, it is an important consideration for Pinnacle's investment analysis, and it also informs the Lender's likely perspective on the consent request.

From the Lender's standpoint, the growing "preference stack" across Verdana's multiple series of preferred stock may raise concerns. Following the Series D Transaction, the total liquidation preferences across all outstanding preferred series would be as follows:

Under the 1.0x scenario, the aggregate preference stack would total $137,600,000. Under Pinnacle's proposed 1.5x liquidation preference, the aggregate preference stack would increase to $167,600,000. While all of these preferred stock claims are structurally junior to Pacific Summit Bank's secured debt (currently $6,200,000 outstanding, with a maximum commitment of $10,000,000), the size of the preference stack relative to the Company's enterprise value and asset base is a consideration that the Lender may factor into its consent analysis.

Specifically, in a distress scenario, the existence of a large preference stack may influence the Company's and its Board's decision-making in ways that could be adverse to the Lender's interests. For example, if the Company's total asset value falls below the aggregate preference stack, the common stockholders (including the founders and employees) may have reduced incentives to preserve or maximize going-concern value, as any recovery would flow first to the preferred stockholders and the Lender. This dynamic — sometimes referred to as the "zone of insolvency" problem — is well understood by institutional lenders and may inform Pacific Summit Bank's approach to the consent process, including any conditions or amendments the Lender may seek.

Additionally, the cumulative dividend accrual on the Series D Preferred Stock ($4,800,000 per year) adds a compounding element to the preference stack. Over a five-year period (i.e., through the earliest date on which Pinnacle could exercise its proposed redemption right), the cumulative accrued dividends on the Series D alone would total $24,000,000, increasing the effective Series D preference claim to $84,000,000 (at 1.0x) or $114,000,000 (at 1.5x, plus accrued dividends), and the aggregate preference stack across all series to $161,600,000 or $191,600,000, respectively.

Assessment. While the structural subordination of the preferred stock to the Lender's secured claims is favorable to Pacific Summit Bank's recovery position, the overall size and complexity of the preference stack may be a subject of discussion during the consent process. Pinnacle should be prepared for the possibility that the Lender may seek additional protections or covenant modifications as a condition to consenting to the Series D issuance.

VI. Consent / Waiver Requirements and Process

A. Form of Consent Required

Based on the foregoing analysis, Calderwood & Harkness recommends that Pinnacle require, as a condition to closing the Series D Transaction, that Verdana obtain an affirmative written consent or waiver from Pacific Summit Bank, N.A. authorizing the issuance of the Series D Preferred Stock on the terms contemplated by the parties.

The consent should be structured as a formal written instrument executed by an authorized representative of Pacific Summit Bank, and should specifically address the following matters:

(i) Authorization of the Series D Issuance. The consent should authorize the issuance of up to 18,461,538 shares of Series D Preferred Stock (using the maximum number of shares that would be issued under Pinnacle's $260,000,000 pre-money valuation scenario, to provide a sufficient authorization regardless of the final negotiated valuation) at a price per share to be determined, for aggregate gross proceeds of $60,000,000;

(ii) Acknowledgment of Series D Terms. The consent should specifically acknowledge the material economic terms of the Series D Preferred Stock, including the liquidation preference (whether 1.0x or 1.5x), cumulative dividend rate (8%), anti-dilution protections, conversion rights, and redemption rights exercisable at the holder's option after five years, so that the Lender cannot later claim that it was not aware of these terms when granting consent;

(iii) Confirmation Regarding Change of Control. The consent should include a specific confirmation that the issuance of the Series D Preferred Stock does not constitute a "Change of Control" or an event of default under the Credit Facility, and that the Lender waives any Change of Control provision that would otherwise be triggered by the transaction; and

(iv) Confirmation Regarding Financial Covenants. The consent should confirm that all financial covenants under the Credit Facility remain in full force and effect following the closing of the Series D Transaction, and that the issuance of the Series D Preferred Stock does not, in and of itself, constitute a breach of any financial covenant.

The consent should be unconditional and irrevocable, and should be in form and substance reasonably satisfactory to Pinnacle and its counsel. We recommend that Pinnacle have the right to review and approve the form of the lender consent prior to closing.

B. Process and Timeline

Verdana should initiate the consent request with Pacific Summit Bank as promptly as practicable. The request should be made by an appropriate officer of the Company — most likely the Chief Financial Officer, Thomas Brightwell, or the General Counsel, Sandra Mikkelsen — or through Verdana's outside counsel, Langford Price & Associates LLP (specifically Jonathan Hale, partner, or Rebecca Thornton, associate). The consent request should be accompanied by a description of the proposed Series D Transaction, a summary of the material terms of the Series D Preferred Stock, and pro forma financial statements demonstrating the Company's post-closing compliance with the financial covenants.

Based on our market experience with similar consent processes in venture-backed company credit facilities, the lender consent process typically takes approximately two to four weeks from the date of the initial request to the delivery of an executed consent. However, the timeline can vary depending on a number of factors, including:

• The complexity of the transaction and the number of provisions implicated;

• The Lender's internal credit approval processes (Pacific Summit Bank, as a national bank, may require multiple levels of internal approval);

• Whether the Lender seeks to impose conditions on the consent, such as amendments to the Credit Facility terms;

• Whether the Lender retains outside counsel to review the consent request; and

• The responsiveness of the parties in providing information and negotiating the consent terms.

The parties should factor this timeline into their overall closing schedule for the Series D Transaction. If the parties are targeting a closing in late July or August 2022, the consent request should be initiated no later than early July.

We also flag the possibility that Pacific Summit Bank may seek to extract concessions in connection with the consent process. It is not uncommon for lenders to use the consent request as an opportunity to renegotiate certain terms of the credit facility or to impose additional requirements. Potential Lender requests could include:

• A consent fee payable to Pacific Summit Bank (typically in the range of 10 to 25 basis points of the facility commitment, or a flat fee);

• An increase in the minimum liquidity covenant (e.g., from $10,000,000 to $15,000,000 or $20,000,000), reflecting the Lender's view that the growing preference stack warrants a larger liquidity cushion;

• Additional reporting requirements regarding the preferred stock, including notice of any preferred dividend declarations or payments, and notice of any conversion or redemption events;

• A requirement to maintain a specified percentage of Series D proceeds on deposit with Pacific Summit Bank; or

• Amendments to the negative covenants to address the post-Series D capital structure more specifically.

Pinnacle should instruct Verdana to keep Pinnacle and its counsel informed of all communications with Pacific Summit Bank regarding the consent process, and Pinnacle should retain the right to approve any amendments to the Credit Facility that the Lender may seek as a condition to granting consent.

C. Risk if Consent Is Not Obtained

If Verdana issues the Series D Preferred Stock without obtaining the required lender consent, the issuance could constitute an event of default under the Credit Facility. The consequences of an event of default under a revolving credit facility are severe and could include the following:

• Acceleration. Pacific Summit Bank could declare all outstanding borrowings immediately due and payable. As of March 31, 2022, the outstanding drawn amount was $6,200,000. If the Facility is further drawn between now and the Series D closing, the accelerated amount could be higher.

• Termination of Commitment. Pacific Summit Bank could terminate the $10,000,000 revolving commitment, eliminating Verdana's access to the $3,800,000 in currently undrawn availability and its ability to draw on the Facility in the future.

• Enforcement of Security Interest. Pacific Summit Bank could exercise its rights under the security agreement to foreclose on or otherwise realize upon the collateral, which includes substantially all of Verdana's personal property assets — including the Company's intellectual property, accounts receivable, and equipment. Enforcement against the Company's intellectual property could be catastrophic, as the Company's enterprise software platform is its core asset.

• Cross-Default. An event of default under the Credit Facility could trigger cross-default provisions in other material agreements to which Verdana is a party, potentially cascading into defaults under customer contracts, vendor agreements, or lease arrangements.

• Default Interest. Pacific Summit Bank would likely be entitled to charge default interest on the outstanding borrowings (typically an additional 200 basis points above the otherwise applicable rate), increasing the Company's debt service costs.

These consequences would be extremely adverse to both Verdana and Pinnacle's investment. An acceleration of the Credit Facility immediately following the closing of the Series D Transaction would consume $6,200,000 or more of the newly invested capital to repay the Lender, and the loss of the revolving commitment could impair the Company's working capital flexibility. Enforcement against the Company's intellectual property could fundamentally undermine the value of Pinnacle's investment.

Accordingly, lender consent from Pacific Summit Bank must be a hard condition precedent to closing the Series D Transaction. This point is non-negotiable from Pinnacle's perspective.

VII. Impact on Series D Transaction Documents

The issues identified in this memorandum have direct implications for the drafting and negotiation of the Series D Transaction documents. The following recommendations should be incorporated into the relevant agreements.

A. Stock Purchase Agreement

The draft Series D Preferred Stock Purchase Agreement (initial draft of which was delivered by Calderwood & Harkness to Langford Price & Associates LLP on June 8, 2022) should include the following provisions related to the Credit Facility:

Closing Condition. Section [__] of the Stock Purchase Agreement (Conditions to Closing) should include a specific condition requiring the delivery, at or prior to closing, of Pacific Summit Bank's written consent or waiver authorizing the issuance of the Series D Preferred Stock, in form and substance reasonably satisfactory to Pinnacle and its counsel. The consent should be unconditional and should not be subject to any conditions that would impair the effectiveness of the authorization or that would impose requirements on Pinnacle.

Representation and Warranty. The Stock Purchase Agreement should include a representation by Verdana that the issuance of the Series D Preferred Stock does not violate, conflict with, or result in a breach or default under any material agreement, instrument, or obligation to which Verdana is a party or by which it or its assets are bound, including, without limitation, the revolving credit facility with Pacific Summit Bank, N.A. In the alternative, the representation should confirm that all required consents, waivers, and approvals have been obtained prior to closing. This representation should survive the closing for the applicable survival period (typically 12 to 18 months in preferred stock financings) and should be subject to indemnification by the Company.

Pre-Closing Covenant. The Stock Purchase Agreement should include a covenant requiring Verdana to use commercially reasonable efforts to obtain the lender consent from Pacific Summit Bank prior to closing. This covenant should require Verdana to (i) submit a consent request to Pacific Summit Bank promptly following the execution of the Stock Purchase Agreement, (ii) diligently pursue the consent and cooperate with Pacific Summit Bank in connection therewith, (iii) keep Pinnacle and its counsel reasonably informed of the status of the consent process, and (iv) not agree to any amendments to the Credit Facility in connection with the consent without Pinnacle's prior written approval.

B. Amended and Restated Investors' Rights Agreement

The Amended and Restated Investors' Rights Agreement (the "IRA") that will be entered into in connection with the Series D closing should address the following matters related to the Credit Facility:

Coordination of Consent Rights. Pinnacle's proposed protective provisions include a consent right over the incurrence of new indebtedness by the Company in excess of $5,000,000. This protective provision should be coordinated with the existing Credit Facility terms to avoid conflicting or overlapping consent requirements that could create administrative confusion or, in a worst case, prevent the Company from taking necessary actions in a timely manner. For example, if the Company wishes to draw additional amounts under the Credit Facility (up to the $10,000,000 commitment), it should be clear that such draws do not require Pinnacle's consent under the protective provisions, as the Credit Facility was in existence prior to the Series D and is a permitted pre-existing indebtedness. The protective provisions should include a carve-out for draws under, and refinancings of, the existing Credit Facility (up to the existing commitment amount) to avoid unnecessary friction.

Information Rights. The IRA should require the Company to deliver to Pinnacle (in addition to standard quarterly and annual financial statements and monthly management reports) copies of all covenant compliance certificates delivered to Pacific Summit Bank in connection with the Credit Facility. This will ensure that Pinnacle has real-time visibility into the Company's ongoing compliance with the financial covenants and can identify potential covenant issues before they escalate into events of default. The IRA should also require the Company to promptly notify Pinnacle of (i) any event of default or potential event of default under the Credit Facility, (ii) any amendment, modification, or waiver of the Credit Facility terms, and (iii) any acceleration, enforcement, or termination of the Credit Facility.

C. Disclosure Schedules

The disclosure schedule template delivered by Calderwood & Harkness to Langford Price & Associates LLP on June 8, 2022 should require Verdana to fully and accurately disclose the Pacific Summit Bank Credit Facility on the applicable schedules. Specifically:

• The schedule of Indebtedness should list the Credit Facility, including the total commitment ($10,000,000), the amount outstanding as of the most recent practicable date, the interest rate (SOFR + 3.50%), and the maturity date (June 30, 2024);

• The schedule of Material Contracts should include the credit agreement and all related ancillary documents (amendments, side letters, fee letters, security agreements, UCC financing statements, intellectual property security agreements, and any intercreditor agreements);

• The schedule of Liens and Encumbrances should disclose Pacific Summit Bank's blanket lien on all personal property of the Company;

• The schedule of Financial Covenants (or, if no separate schedule exists, the Indebtedness schedule) should describe the minimum liquidity covenant ($10,000,000) and the ARR-based coverage ratio, including testing dates and current compliance status; and

• The schedule of Required Consents should identify the lender consent from Pacific Summit Bank as a required third-party consent in connection with the Series D Transaction.

Verdana should also be required to disclose any existing or anticipated covenant breaches, any instances in which the Company has received notices of default or potential default from Pacific Summit Bank, and any prior waivers or amendments obtained from the Lender.

VIII. Open Items and Next Steps

The following items require further action and should be addressed promptly:

1. Obtain Full Copy of the Pacific Summit Bank Credit Agreement. We need to confirm that we have received a complete copy of the executed credit agreement, including all amendments, side letters, fee letters, security agreements, intellectual property security agreements, intercreditor agreements, and any other ancillary documentation. The diligence request list transmitted to Langford Price & Associates LLP on May 14, 2022 included this request. We should confirm receipt and completeness of all documents produced. If any documents are outstanding, a follow-up request should be made to Jonathan Hale and Rebecca Thornton at Langford Price immediately.

2. Confirm Specific Financial Covenant Definitions. The exact terms of the financial covenants need to be confirmed against the credit agreement, including:

(a) The ARR coverage ratio formula, including the definition of "ARR" (e.g., whether it includes only contracted recurring revenue or also includes expansion/Upsell pipeline), the denominator (total committed debt vs. drawn amounts vs. all Indebtedness), and the required minimum ratio;

(b) The minimum liquidity covenant, including the definition of "liquidity" (unrestricted cash only, or cash plus undrawn availability), the testing methodology (continuous vs. periodic), and the testing dates; and

(c) Whether there are any step-down or step-up provisions that adjust the covenant levels over the remaining term of the Facility.

3. Review Change of Control Definition. The specific Change of Control definition in the credit agreement must be reviewed in detail to determine the exact ownership thresholds and triggering events, and to assess whether the Series D issuance triggers a Change of Control event of default or mandatory prepayment obligation. This analysis should consider both Pinnacle's individual post-investment ownership percentage and the aggregate ownership positions of all preferred stockholders.

4. Confirm Whether Redeemable Preferred Stock Is Classified as "Indebtedness." The credit agreement's definition of "Indebtedness" should be reviewed to determine whether it captures preferred stock with mandatory or optional redemption features. This is directly relevant given Pinnacle's proposed 5-year redemption right and could affect both the negative covenant analysis (restrictions on incurrence of additional Indebtedness) and the financial covenant analysis (if the ARR coverage ratio denominator includes all Indebtedness).

5. Coordinate with Langford Price on Lender Consent Process. We should schedule a call with Jonathan Hale and Rebecca Thornton at Langford Price & Associates LLP to discuss Verdana's plan for obtaining Pacific Summit Bank's consent, including the anticipated timeline for submitting the consent request, the identity of the relationship manager at Pacific Summit Bank, any prior interactions between the Company and the Lender regarding the Series D Transaction, and any conditions or amendments that the Lender has previously indicated it may seek.

6. Prepare Separate Lender Consent Analysis Memorandum. A follow-on memorandum with detailed recommendations regarding the form and substance of the lender consent, and the strategy for the consent negotiation process, should be prepared for Andrew Fitzpatrick and Marcus Trejo. This memorandum is anticipated to be delivered on or about June 30, 2022.

7. Flag for Marcus Trejo (Pinnacle). The Credit Facility has a maturity date of June 30, 2024, which is approximately two years after the proposed closing of the Series D Transaction. Pinnacle should consider whether Verdana will need to refinance this Facility at or prior to maturity and, if so, whether the Series D closing should be conditioned on or coordinated with any refinancing discussions. In particular, Pinnacle should assess (a) whether the Facility will need to be increased to support the Company's growth plans, (b) whether the terms of a replacement facility could be more or less favorable than the current terms, and (c) whether Pacific Summit Bank is likely to extend or renew the Facility given the post-Series D capital structure.

IX. Conclusion

The Pacific Summit Bank revolving credit facility presents a meaningful closing condition for the proposed Series D Transaction. Based on our analysis of the materials produced to date, the negative covenants in the Credit Facility almost certainly require Pacific Summit Bank's prior written consent for the issuance of preferred stock with the economic terms contemplated by either Pinnacle's or Verdana's proposed term sheet. The Series D Preferred Stock's liquidation preference, cumulative dividends, anti-dilution protections, and redemption rights are precisely the types of capital structure modifications that credit facility negative covenants are designed to restrict.

Failure to obtain the required lender consent could constitute an event of default under the Credit Facility, potentially allowing Pacific Summit Bank to accelerate the outstanding $6,200,000 in borrowings, terminate the revolving commitment, and enforce its security interest against substantially all of Verdana's assets — including the Company's intellectual property portfolio, which is the foundation of its enterprise value. Such an outcome would be catastrophic for both Verdana and Pinnacle's investment.

We recommend the following:

1. Lender consent from Pacific Summit Bank should be included as a hard condition precedent to closing in the Series D Preferred Stock Purchase Agreement, and Pinnacle should retain the right to review and approve the form and substance of the consent.

2. Verdana should be required to initiate the consent process promptly, and the pre-closing covenant in the Stock Purchase Agreement should obligate the Company to use commercially reasonable efforts to obtain the consent, keep Pinnacle informed, and refrain from agreeing to Credit Facility amendments without Pinnacle's approval.

3. The parties should factor the consent timeline (approximately 2–4 weeks) into the closing schedule and should coordinate with Langford Price & Associates LLP to ensure that the consent request is submitted as early as practicable.

4. The open items identified in Section VIII should be addressed as a priority, with particular urgency on items 1 (completeness of credit agreement documentation), 3 (Change of Control definition), and 4 (classification of redeemable preferred stock as Indebtedness).

This memorandum should be read in conjunction with the forthcoming lender consent analysis memorandum (anticipated June 30, 2022) and the comprehensive legal due diligence summary memorandum (anticipated mid-July 2022). We will continue to update our analysis as additional diligence materials are received and as the commercial terms of the Series D Transaction are finalized.

Please do not hesitate to contact me with any questions or to discuss the matters addressed herein.

Calderwood & Harkness LLP 101 Montgomery Street, Suite 3500 San Francisco, CA 94104

Matter No. 1002-00004

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

This memorandum has been prepared by Calderwood & Harkness LLP for the exclusive use of Pinnacle Venture Fund II LP and its authorized representatives. It is protected by the attorney-client privilege and the attorney work product doctrine. Any disclosure, distribution, or copying of this memorandum, or the information contained herein, without the prior written consent of Calderwood & Harkness LLP, is strictly prohibited.

Term	Detail
Facility Type	Revolving credit facility
Lender	Pacific Summit Bank, N.A.
Borrower	Verdana Software, Inc.
Total Commitment	$10,000,000
Amount Drawn (as of March 31, 2022)	$6,200,000
Available Undrawn Capacity	$3,800,000
Interest Rate	Secured Overnight Financing Rate ("SOFR") + 3.50%
Maturity Date	June 30, 2024
Security	Blanket lien on all personal property of Verdana, including intellectual property, accounts receivable, equipment, and general intangibles
Series	Holder	Investment Amount	Liquidation Preference Multiple	Liquidation Preference Amount
Series A	Ridgeline Capital	$9,600,000	1.0x	$9,600,000
Series B	Northgate Growth Partners	$32,000,000	1.0x	$32,000,000
Series C	Brindoval Innovation Fund	$36,000,000	1.0x	$36,000,000
Series D (at 1.0x)	Pinnacle Venture Fund II LP	$60,000,000	1.0x	$60,000,000
Total (at 1.0x)	$137,600,000
Series	Holder	Investment Amount	Liquidation Preference Multiple	Liquidation Preference Amount
Series A	Ridgeline Capital	$9,600,000	1.0x	$9,600,000
Series B	Northgate Growth Partners	$32,000,000	1.0x	$32,000,000
Series C	Brindoval Innovation Fund	$36,000,000	1.0x	$36,000,000
Series D (at 1.5x)	Pinnacle Venture Fund II LP	$60,000,000	1.5x	$90,000,000
Total (at 1.5x)	$167,600,000

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
FROM: Naomi Petersen, Associate, Calderwood & Harkness LLP
TO: Andrew Fitzpatrick, Lead Associate; Harrison Wexford, Responsible Partner
DATE: June 28, 2022
RE: Review of Verdana Software, Inc. — Revolving Credit Facility with Pacific Summit Bank, N.A.
MATTER NUMBER: 1002-00004
CLIENT: Pinnacle Venture Fund II LP (Billing Client No. PIN-0042)
I. Executive Summary
This memorandum reviews the existing revolving credit facility (the "Credit Facility" or the "Facility") between Verdana Software, Inc. ("Verdana" or the "Company"), a Delaware C-corporation (EIN 93-1485726) headquartered at 1175 NW Couch Street, Suite 800, Portland, OR 97209, and Pacific Summit Bank, N.A. ("Pacific Summit" or the "Lender"), headquartered at 350 California Street, San Francisco, CA 94104. This review is conducted in connection with the proposed $60,000,000 Series D Preferred Stock investment (the "Series D Transaction" or the "Proposed Investment") by our client, Pinnacle Venture Fund II LP ("Pinnacle"), in Verdana.
The purpose of this memorandum is to identify and analyze issues arising from the Credit Facility that are relevant to the structuring, negotiation, and closing of the Series D Transaction. In particular, we focus on the negative covenants, financial covenants, change of control provisions, and consent requirements contained in the Credit Facility, and their implications for Pinnacle as a prospective investor.
Key Finding. Based on our review of the materials produced to date, the Credit Facility contains negative covenants that likely require Pacific Summit Bank's prior written consent (or a formal waiver) before Verdana may issue the Series D Preferred Stock. The issuance of preferred equity with a liquidation preference (whether structured at 1.0x or 1.5x), cumulative dividends, anti-dilution protections, and redemption rights is the type of capital structure modification that standard revolving credit facilities restrict absent affirmative lender consent. Obtaining lender consent should be a hard condition to closing the Series D Transaction.
Additional Concerns Flagged. We have also identified the following additional areas of concern:
• Financial Covenants. The Credit Facility includes a minimum liquidity covenant of $10,000,000 and an annualized recurring revenue ("ARR")-based coverage ratio. While Verdana appears to be in current compliance with both covenants, the Company's ongoing negative EBITDA and cash burn trajectory require careful monitoring, particularly in a downside scenario where the Series D does not close. Post-closing, the financial covenants should remain manageable given the $60,000,000 equity infusion, but cumulative preferred dividend obligations may affect long-term compliance.
• Structural Subordination. The Series D Preferred Stock, including its liquidation preference, would be structurally junior to Pacific Summit Bank's secured claims. However, the growing "preference stack" across all preferred series may raise concerns from the Lender's perspective regarding recovery analysis and the Company's decision-making in distress scenarios.
Each of these issues is discussed in greater detail below.
II. Overview of the Credit Facility
A. Key Commercial Terms
The following table summarizes the key commercial terms of the Credit Facility based on the documentation produced to date in response to our diligence request list transmitted on May 14, 2022:
The Credit Facility is structured as a traditional revolving credit facility under which Verdana may draw, repay, and re-borrow amounts up to the total commitment of $10,000,000, subject to compliance with borrowing conditions, representations, and covenants. Interest accrues on outstanding drawn amounts at a floating rate equal to SOFR plus a margin of 350 basis points (3.50%). The Facility matures on June 30, 2024, at which time all outstanding amounts become due and payable in full.
The Facility is secured by a first-priority blanket lien on substantially all personal property assets of Verdana, including but not limited to the Company's intellectual property portfolio (software code, patents, trademarks, and copyrights), accounts receivable, deposit accounts, equipment, inventory (if any), and general intangibles. This comprehensive security package is typical for technology lending transactions in which the borrower's primary asset base consists of intellectual property and receivables rather than hard assets. The breadth of the lien is relevant to several of the issues discussed in this memorandum, particularly the analysis of anti-lien covenants and structural subordination considerations set forth in Sections IV.D and V below.
B. Background on the Facility
The Credit Facility was entered into prior to the proposed Series D round and is believed to have been established in connection with Verdana's working capital needs as the Company scales its enterprise software platform. The timing of the Facility's origination is consistent with standard practice among growth-stage SaaS companies, which frequently establish revolving credit facilities or venture debt lines to supplement equity capital, manage cash flow timing mismatches, and provide liquidity cushions during periods of rapid growth and associated cash burn.
As of the March 31, 2022 diligence cut-off date (the most recent balance sheet date for which financial data has been produced), the Company reported the following relevant financial metrics:
• Cash on balance sheet: $22,400,000
• Amount drawn on the Credit Facility: $6,200,000
• Trailing twelve-month ("TTM") EBITDA (as of March 2022): Negative $11,600,000
The negative EBITDA figure indicates that Verdana is operating at a significant cash burn rate, which is not atypical for a high-growth enterprise SaaS company at Verdana's stage. The Company's operations are being funded by a combination of prior equity rounds (Series A through Series C), the revolving credit facility, and operating revenues. The interplay between the Company's cash burn rate, existing liquidity, and the financial covenants in the Credit Facility is discussed in detail in Section III below.
We note that the diligence materials produced to date include the executed credit agreement and first amendment thereto, but we have not yet confirmed whether there are additional amendments, side letters, fee letters, intercreditor agreements, or other ancillary documents. Confirmation of the completeness of the document production is identified as an open item in Section VIII.
III. Financial Covenants Analysis
The Credit Facility includes two principal financial covenants: (1) a minimum liquidity covenant and (2) an ARR-based coverage ratio. Each is analyzed below with reference to Verdana's current financial position and the anticipated impact of the Series D Transaction.
A. Minimum Liquidity Covenant
Requirement. The Credit Facility requires Verdana to maintain minimum liquidity of at least $10,000,000 at all times. We note that the precise testing methodology for this covenant — including whether liquidity is tested continuously (i.e., at all times) or at periodic compliance dates (e.g., monthly, quarterly), and whether "liquidity" is defined to include only unrestricted cash or also includes undrawn availability under the Facility — needs to be confirmed against the specific defined terms in the credit agreement. This is identified as an open item in Section VIII.
Current Compliance. As of March 31, 2022, Verdana reported $22,400,000 in unrestricted cash on its balance sheet. Even excluding the $3,800,000 in undrawn availability under the Credit Facility, the Company's cash position of $22,400,000 is well above the $10,000,000 minimum liquidity threshold, providing a liquidity cushion of $12,400,000 (or approximately 124% headroom above the covenant floor). On this basis, Verdana appears to be in full compliance with the minimum liquidity covenant as of the most recent testing date.
Post-Close Implications. The $60,000,000 equity infusion from the Series D Transaction would substantially bolster Verdana's liquidity position. Assuming the Series D net proceeds (after transaction expenses) are deposited into Verdana's operating accounts, the Company's post-closing cash position would be expected to exceed $80,000,000 on a pro forma basis (approximately $22,400,000 existing cash plus approximately $58,000,000 to $59,000,000 in net proceeds, depending on the final amount of transaction expenses). This would provide very substantial headroom above the $10,000,000 minimum liquidity covenant floor.
However, we flag two points of concern for Pinnacle's consideration:
First, Verdana's ongoing negative EBITDA of approximately negative $11,600,000 on a trailing twelve-month basis indicates a sustained cash burn rate that should be carefully monitored. Without the Series D capital, the Company's existing cash runway is limited. Specifically, at a cash balance of $22,400,000 and an approximate annual cash burn rate of $11,600,000, the Company has approximately 23 months of cash runway before depleting its cash reserves entirely — and, critically, would approach the $10,000,000 minimum liquidity covenant threshold within approximately 12 to 13 months absent significant changes to the Company's revenue trajectory or cost structure. If the Series D Transaction does not close, Verdana could face a covenant breach under the Credit Facility as early as Q2 or Q3 of 2023, which could trigger an event of default and the cascading consequences described in Section VI.C below.
Second, even assuming the Series D closes as contemplated, Pinnacle should consider the impact of the cumulative preferred dividend on Verdana's forward cash burn rate. Under the proposed terms, the Series D Preferred Stock would carry a cumulative dividend of 8%, which equates to $4,800,000 per year on a $60,000,000 investment. While these dividends may accrue rather than be paid in cash, if Verdana elects (or is required) to pay dividends in cash, the effective cash burn rate would increase, thereby reducing the post-investment cash runway and narrowing the liquidity covenant headroom over time. This interaction between the cumulative dividend and the minimum liquidity covenant should be factored into Pinnacle's financial modeling of the investment.
Concern. As noted above, if the Series D Transaction does not close and Verdana continues burning cash at approximately $11,600,000 annually, the Company could breach the $10,000,000 minimum liquidity covenant within approximately 12 months, potentially triggering an event of default under the Credit Facility. This scenario underscores the urgency of the Series D capital raise from Verdana's perspective and may provide Pinnacle with leverage in the ongoing commercial negotiations regarding pre-money valuation and liquidation preference.
B. ARR-Based Coverage Ratio
Requirement. The Credit Facility includes a financial covenant based on Verdana's annualized recurring revenue ("ARR"). Based on our initial review, this covenant appears to be expressed as a ratio of ARR to outstanding drawn amounts or total debt obligations, although the specific covenant definition and calculation methodology should be confirmed against the credit agreement terms. ARR-based covenants are increasingly common in credit facilities extended to SaaS borrowers, reflecting the lender community's recognition that recurring revenue metrics are more meaningful indicators of creditworthiness for software companies than traditional EBITDA-based leverage ratios.
Current ARR (Q1 2022). Verdana reported ARR of $47,300,000 as of the first quarter of 2022. This represents an increase from $28,900,000 in ARR as of Q1 2021, reflecting year-over-year growth of approximately 63.7%. This robust growth rate is a positive indicator for ongoing covenant compliance and suggests that the Company's core business is performing well notwithstanding the negative EBITDA profile.
Current Ratio (Estimated). Assuming a simple ARR-to-debt ratio (ARR divided by outstanding drawn amounts under the Credit Facility), the Company's estimated current coverage ratio is approximately:
$47,300,000 (ARR) ÷ $6,200,000 (drawn debt) = approximately 7.6x
While we do not yet have the specific covenant threshold, ARR coverage covenants in comparable SaaS credit facilities typically require ratios in the range of 3.0x to 5.0x. If the threshold under Verdana's Credit Facility falls within this range, the Company would have substantial headroom.
Assessment. Verdana appears comfortably in compliance with the ARR-based coverage ratio given its strong revenue growth trajectory. The Series D Transaction is not expected to adversely affect ARR (which is a top-line revenue metric rather than a balance sheet or capital structure metric), so the issuance of the Series D Preferred Stock should not, in and of itself, impair compliance with this covenant.
Open Items. We note the following items that require further confirmation:
• The specific ARR coverage ratio formula as defined in the credit agreement, including whether the denominator includes total committed debt (the full $10,000,000 commitment) or only drawn amounts ($6,200,000 as of March 31, 2022), and whether the denominator also captures other indebtedness (including, potentially, redeemable preferred stock, as discussed in Section IV.C);
• Whether the covenant includes step-down provisions (i.e., decreasing thresholds as the Company matures or the Facility approaches maturity) or step-up provisions that would tighten the required ratio over time; and
• The specific testing dates and compliance certification requirements applicable to this covenant.
These items are identified in the open items list in Section VIII.
IV. Negative Covenants Relevant to the Series D Transaction
The Credit Facility is expected to contain a suite of negative covenants that restrict certain actions by the borrower without the prior written consent of the Lender. Such covenants are standard in revolving credit facilities and serve to protect the Lender's interests by limiting the borrower's ability to modify its capital structure, encumber its assets, incur additional indebtedness, or undertake fundamental transactions. The following negative covenants are directly relevant to the proposed Series D Transaction.
A. Restriction on Equity Issuances / Capital Structure Changes
The Credit Facility is expected to contain negative covenants restricting the borrower from issuing new equity securities — particularly preferred equity with liquidation preferences, dividend rights, and other economic terms that are senior to or pari passu with common equity — without the prior written consent of Pacific Summit Bank. Such restrictions are standard in technology lending facilities, reflecting the lender's interest in maintaining oversight over changes to the borrower's capital structure that could affect the lender's relative priority position or recovery analysis.
The issuance of Series D Preferred Stock to Pinnacle constitutes precisely the type of capital structure change that these negative covenants are designed to regulate. The Series D Preferred Stock would carry:
• A liquidation preference of either 1.0x (as proposed by Verdana) or 1.5x (as proposed by Pinnacle), representing a claim of $60,000,000 or $90,000,000, respectively, on the Company's assets in a liquidation or deemed liquidation event;
• Cumulative dividends at a rate of 8% per annum, equaling $4,800,000 per year on the $60,000,000 investment, which accrue whether or not declared by the Board;
• Anti-dilution protections (the specific type and scope of which are currently under negotiation between the parties); and
• Redemption rights exercisable at Pinnacle's option after five years, which effectively give the preferred stock a debt-like mandatory return feature.
The combination of these economic features — particularly the liquidation preference and cumulative dividends — could be viewed by Pacific Summit Bank as materially increasing the priority claims on the Company's assets and cash flows ahead of unsecured creditors, or as structurally modifying the borrower's equity capitalization in a manner that is restricted by the Credit Facility's negative covenants.
Moreover, from the Lender's perspective, the cumulative dividend obligation of $4,800,000 per year represents a recurring cash flow claim that, while technically an equity feature, has the practical economic effect of a fixed obligation that competes with debt service capacity. For a company already operating at negative EBITDA, the addition of a $4,800,000 annual dividend accrual (or cash payment obligation, if dividends are paid currently) is a meaningful consideration in the Lender's credit analysis.
Recommendation. We expect that the issuance of the Series D Preferred Stock will require Pacific Summit Bank's prior written consent under this negative covenant. The specific language of the restriction should be reviewed against the credit agreement once the complete documentation is confirmed.
B. Change of Control Provisions
The Credit Facility likely contains a "Change of Control" definition that could be triggered if the Series D issuance results in a shift of voting control or beneficial ownership above specified thresholds. Change of control provisions in credit agreements typically function as either (i) events of default, which give the lender the right to accelerate outstanding obligations, or (ii) mandatory prepayment triggers, which require the borrower to repay the facility upon the occurrence of a change of control. In either case, triggering a change of control would have severe consequences for Verdana and for Pinnacle's investment.
The analysis of whether the Series D issuance triggers a Change of Control depends on (a) the specific definition of "Change of Control" in the credit agreement and (b) the post-investment ownership percentages. We analyze the ownership implications under both the Pinnacle-proposed and Verdana-proposed term sheet scenarios:
Under Pinnacle's Proposed Terms ($260,000,000 Pre-Money Valuation at $3.25/Share):
Pinnacle would acquire approximately 18,461,538 shares of Series D Preferred Stock ($60,000,000 ÷ $3.25 per share). On a fully diluted basis, Pinnacle would hold approximately 18.75% of the Company's outstanding equity (18,461,538 shares out of approximately 98,461,538 total fully diluted shares).
Under Verdana's Proposed Terms ($320,000,000 Pre-Money Valuation at $4.00/Share):
Pinnacle would acquire 15,000,000 shares of Series D Preferred Stock ($60,000,000 ÷ $4.00 per share). On a fully diluted basis, Pinnacle would hold approximately 15.79% of the Company's outstanding equity (15,000,000 shares out of approximately 95,000,000 total fully diluted shares). If the employee stock option pool ("ESOP") is expanded by 5,000,000 shares to 17,000,000 shares (as has been discussed), Pinnacle's ownership would be approximately 15.00% (15,000,000 shares out of 100,000,000 total fully diluted shares).
In either scenario, Pinnacle would become a significant but minority holder. A Change of Control trigger is possible, however, depending on how the credit agreement defines the term. Common formulations include:
• Any person or group acquiring beneficial ownership of more than 10%, 15%, 20%, 25%, or 35% of the voting power of the borrower;
• The existing founders or management team ceasing to hold a majority (greater than 50%) of the outstanding voting equity; or
• Any person or group other than the existing shareholders acquiring the largest block of voting equity.
The 10% or 15% thresholds are particularly relevant here, as Pinnacle's ownership under either scenario would exceed those levels. Additionally, we note that under the existing capitalization table, the founders (Raj Anand, CEO, and Lena Kovac, CTO) collectively hold 28,000,000 shares, representing approximately 35.0% of the 80,000,000 fully diluted pre-investment shares. Post-investment, the founders would hold between approximately 28.0% (in the scenario with 100,000,000 total shares) and approximately 29.5% (in the scenario with 95,000,000 total shares). In all cases, the founders' aggregate ownership is already below 50% of the fully diluted capitalization.
This means that if the Change of Control definition includes a threshold based on the founders maintaining majority ownership, that threshold has likely already been exceeded prior to the Series D Transaction (as a result of dilution from the Series A, B, and C rounds and the existing ESOP). However, whether the Series D specifically "triggers" a Change of Control depends on whether the credit agreement looks at the incremental change in ownership (i.e., the event of the Series D issuance itself) or the absolute ownership levels. If the founders were already below a majority threshold, the question becomes whether the existing capitalization structure already constitutes a Change of Control that was either waived or carved out when the Facility was originally established.
Recommendation. We strongly recommend that the specific Change of Control definition in the Credit Facility be reviewed in detail to confirm whether the Series D issuance triggers this provision. This review should consider not only Pinnacle's post-investment ownership percentage but also the aggregate ownership positions of the existing preferred stock investors (Ridgeline Capital, Northgate Growth Partners, and Brindoval Innovation Fund) and the founders.
C. Restrictions on Incurrence of Additional Indebtedness
While the Series D Preferred Stock is structured as an equity issuance rather than a debt instrument, certain features of the preferred stock — specifically the cumulative dividend of 8% and the redemption rights exercisable after five years — give the instrument debt-like characteristics that may bring it within the scope of the Credit Facility's negative covenant restricting the incurrence of additional "Indebtedness."
Many credit agreements define "Indebtedness" broadly to include not only traditional borrowed money obligations but also redeemable preferred stock, capitalized lease obligations, and other obligations that are required to be classified as liabilities (rather than equity) under generally accepted accounting principles ("GAAP"). Under current GAAP (ASC 480), preferred stock with a mandatory redemption feature is generally classified as a liability rather than equity on the issuer's balance sheet, because the mandatory redemption creates an unconditional obligation to transfer assets at a specified or determinable date.
If the credit agreement's definition of "Indebtedness" includes redeemable preferred stock — and particularly if it captures preferred stock that is redeemable at the holder's option (as opposed to only mandatory or unconditional redemption) — then the issuance of the Series D Preferred Stock with Pinnacle's proposed 5-year redemption right could be characterized as an incurrence of additional Indebtedness, subject to the covenant restrictions and potentially requiring lender consent on that independent basis.
Additionally, we note that Pinnacle's proposed protective provisions include a consent right over any new indebtedness exceeding $5,000,000. While this proposed investor protection is relevant to understanding the interplay between the Credit Facility's negative covenants and Pinnacle's investor rights framework, it does not directly affect the lender consent analysis. However, we flag this for awareness, as it means that post-closing, both Pacific Summit Bank and Pinnacle would have overlapping consent rights over Verdana's ability to incur new debt — a dynamic that should be clearly understood and coordinated.
Open Item. We need to confirm whether the credit agreement treats preferred stock with mandatory or optional redemption features as "Indebtedness" under the Facility's definition section. This determination will affect both the negative covenant analysis and the ARR-based coverage ratio calculation (if the coverage ratio denominator includes all "Indebtedness" as defined in the credit agreement).
D. Restrictions on Liens and Security Interests
The Credit Facility is secured by a first-priority blanket lien on substantially all personal property assets of Verdana, as described in Section II.A above. Consistent with the comprehensive nature of this security package, the credit agreement is expected to contain a negative covenant restricting the Company's ability to grant additional liens or security interests on its assets (an "anti-lien" or "negative pledge" covenant). Such covenants typically permit only specified categories of liens (e.g., purchase money liens, tax liens, and other customary carve-outs), with all other liens requiring the Lender's prior consent.
The Series D Transaction itself does not contemplate the granting of any new liens or security interests on Verdana's assets. The preferred stock investment is a pure equity transaction, and the Series D Preferred Stock would be unsecured. Accordingly, the anti-lien covenant is not directly implicated by the issuance of the Series D Preferred Stock.
However, we note that any escrow or holdback mechanisms that may be implemented in connection with the Series D Transaction could potentially implicate the anti-lien covenant. In particular, discussions have occurred regarding a possible customer retention escrow in connection with Verdana's revenue concentration risk with respect to Meridian Logistics (which we understand represents a significant portion of the Company's ARR). If such an escrow were structured in a manner that effectively pledges or encumbers Verdana's assets — for example, by requiring the deposit of Company funds into a restricted account subject to conditions on release — the arrangement could constitute a "lien" under the broad definitions typically used in credit agreements.
Recommendation. If any escrow or holdback mechanism is ultimately incorporated into the Series D Transaction documents, the structure should be reviewed against the anti-lien covenant in the Credit Facility to ensure compliance. To the extent such a structure would constitute a prohibited lien, Pacific Summit Bank's consent should be sought concurrently with the broader consent discussed in Section VI.
E. Restrictions on Fundamental Transactions
The Credit Facility likely restricts Verdana from engaging in mergers, acquisitions, dispositions of substantially all assets, and similar fundamental transactions without the Lender's prior written consent. Such restrictions are standard in credit agreements and are designed to prevent the borrower from materially altering its business or corporate structure in a manner that could impair the Lender's collateral position or recovery prospects.
The Series D investment itself is not a fundamental transaction — it is an issuance of preferred equity in a primary capital raise, not a merger, acquisition, or asset sale. Accordingly, the fundamental transaction covenant is not expected to be directly triggered by the closing of the Series D Transaction.
However, we flag for further review the following governance-related provisions proposed in connection with the Series D that could, depending on the breadth of the credit agreement's fundamental transaction restrictions, be viewed by the Lender as warranting review or consent:
• Drag-Along Provision. The proposed drag-along provision, which would give specified holders (likely the Board or a majority-in-interest of preferred stockholders) the right to compel all stockholders to participate in a sale of the Company, could be viewed by the Lender as a governance modification that facilitates future fundamental transactions (i.e., an acquisition or merger) without the individual consent of all stockholders. While the drag-along provision does not itself constitute a fundamental transaction, it changes the governance framework in a manner that the Lender may wish to understand.
• Voting Agreement Modifications. Changes to the existing voting agreement, including the composition of the Board and the allocation of board seats to Pinnacle or other investors, could be viewed as altering the borrower's governance structure. To the extent the credit agreement's Change of Control or fundamental transaction definitions encompass governance changes (as opposed to solely ownership changes), these modifications could be implicated.
Assessment. While we view the risk of the fundamental transaction covenant being triggered as low, we recommend that the relevant provisions be reviewed against the credit agreement once the complete documentation is confirmed, and that any ambiguity be addressed through the consent process described in Section VI.
V. Structural Subordination Considerations
Pacific Summit Bank holds a senior secured position with a first-priority blanket lien on substantially all personal property assets of Verdana. In the event of a liquidation, foreclosure, or other enforcement action, Pacific Summit Bank's secured claims would be satisfied first from the collateral, ahead of all unsecured creditors and equity holders, including holders of preferred stock.
The Series D Preferred Stock, notwithstanding its liquidation preference (whether 1.0x or 1.5x), would be structurally junior to Pacific Summit Bank's secured claims in any liquidation or enforcement scenario. This structural subordination is inherent in the capital structure and is not, in itself, a legal impediment to the Series D Transaction. However, it is an important consideration for Pinnacle's investment analysis, and it also informs the Lender's likely perspective on the consent request.
From the Lender's standpoint, the growing "preference stack" across Verdana's multiple series of preferred stock may raise concerns. Following the Series D Transaction, the total liquidation preferences across all outstanding preferred series would be as follows:
Under the 1.0x scenario, the aggregate preference stack would total $137,600,000. Under Pinnacle's proposed 1.5x liquidation preference, the aggregate preference stack would increase to $167,600,000. While all of these preferred stock claims are structurally junior to Pacific Summit Bank's secured debt (currently $6,200,000 outstanding, with a maximum commitment of $10,000,000), the size of the preference stack relative to the Company's enterprise value and asset base is a consideration that the Lender may factor into its consent analysis.
Specifically, in a distress scenario, the existence of a large preference stack may influence the Company's and its Board's decision-making in ways that could be adverse to the Lender's interests. For example, if the Company's total asset value falls below the aggregate preference stack, the common stockholders (including the founders and employees) may have reduced incentives to preserve or maximize going-concern value, as any recovery would flow first to the preferred stockholders and the Lender. This dynamic — sometimes referred to as the "zone of insolvency" problem — is well understood by institutional lenders and may inform Pacific Summit Bank's approach to the consent process, including any conditions or amendments the Lender may seek.
Additionally, the cumulative dividend accrual on the Series D Preferred Stock ($4,800,000 per year) adds a compounding element to the preference stack. Over a five-year period (i.e., through the earliest date on which Pinnacle could exercise its proposed redemption right), the cumulative accrued dividends on the Series D alone would total $24,000,000, increasing the effective Series D preference claim to $84,000,000 (at 1.0x) or $114,000,000 (at 1.5x, plus accrued dividends), and the aggregate preference stack across all series to $161,600,000 or $191,600,000, respectively.
Assessment. While the structural subordination of the preferred stock to the Lender's secured claims is favorable to Pacific Summit Bank's recovery position, the overall size and complexity of the preference stack may be a subject of discussion during the consent process. Pinnacle should be prepared for the possibility that the Lender may seek additional protections or covenant modifications as a condition to consenting to the Series D issuance.
VI. Consent / Waiver Requirements and Process
A. Form of Consent Required
Based on the foregoing analysis, Calderwood & Harkness recommends that Pinnacle require, as a condition to closing the Series D Transaction, that Verdana obtain an affirmative written consent or waiver from Pacific Summit Bank, N.A. authorizing the issuance of the Series D Preferred Stock on the terms contemplated by the parties.
The consent should be structured as a formal written instrument executed by an authorized representative of Pacific Summit Bank, and should specifically address the following matters:
(i) Authorization of the Series D Issuance. The consent should authorize the issuance of up to 18,461,538 shares of Series D Preferred Stock (using the maximum number of shares that would be issued under Pinnacle's $260,000,000 pre-money valuation scenario, to provide a sufficient authorization regardless of the final negotiated valuation) at a price per share to be determined, for aggregate gross proceeds of $60,000,000;
(ii) Acknowledgment of Series D Terms. The consent should specifically acknowledge the material economic terms of the Series D Preferred Stock, including the liquidation preference (whether 1.0x or 1.5x), cumulative dividend rate (8%), anti-dilution protections, conversion rights, and redemption rights exercisable at the holder's option after five years, so that the Lender cannot later claim that it was not aware of these terms when granting consent;
(iii) Confirmation Regarding Change of Control. The consent should include a specific confirmation that the issuance of the Series D Preferred Stock does not constitute a "Change of Control" or an event of default under the Credit Facility, and that the Lender waives any Change of Control provision that would otherwise be triggered by the transaction; and
(iv) Confirmation Regarding Financial Covenants. The consent should confirm that all financial covenants under the Credit Facility remain in full force and effect following the closing of the Series D Transaction, and that the issuance of the Series D Preferred Stock does not, in and of itself, constitute a breach of any financial covenant.
The consent should be unconditional and irrevocable, and should be in form and substance reasonably satisfactory to Pinnacle and its counsel. We recommend that Pinnacle have the right to review and approve the form of the lender consent prior to closing.
B. Process and Timeline
Verdana should initiate the consent request with Pacific Summit Bank as promptly as practicable. The request should be made by an appropriate officer of the Company — most likely the Chief Financial Officer, Thomas Brightwell, or the General Counsel, Sandra Mikkelsen — or through Verdana's outside counsel, Langford Price & Associates LLP (specifically Jonathan Hale, partner, or Rebecca Thornton, associate). The consent request should be accompanied by a description of the proposed Series D Transaction, a summary of the material terms of the Series D Preferred Stock, and pro forma financial statements demonstrating the Company's post-closing compliance with the financial covenants.
Based on our market experience with similar consent processes in venture-backed company credit facilities, the lender consent process typically takes approximately two to four weeks from the date of the initial request to the delivery of an executed consent. However, the timeline can vary depending on a number of factors, including:
• The complexity of the transaction and the number of provisions implicated;
• The Lender's internal credit approval processes (Pacific Summit Bank, as a national bank, may require multiple levels of internal approval);
• Whether the Lender seeks to impose conditions on the consent, such as amendments to the Credit Facility terms;
• Whether the Lender retains outside counsel to review the consent request; and
• The responsiveness of the parties in providing information and negotiating the consent terms.
The parties should factor this timeline into their overall closing schedule for the Series D Transaction. If the parties are targeting a closing in late July or August 2022, the consent request should be initiated no later than early July.
We also flag the possibility that Pacific Summit Bank may seek to extract concessions in connection with the consent process. It is not uncommon for lenders to use the consent request as an opportunity to renegotiate certain terms of the credit facility or to impose additional requirements. Potential Lender requests could include:
• A consent fee payable to Pacific Summit Bank (typically in the range of 10 to 25 basis points of the facility commitment, or a flat fee);
• An increase in the minimum liquidity covenant (e.g., from $10,000,000 to $15,000,000 or $20,000,000), reflecting the Lender's view that the growing preference stack warrants a larger liquidity cushion;
• Additional reporting requirements regarding the preferred stock, including notice of any preferred dividend declarations or payments, and notice of any conversion or redemption events;
• A requirement to maintain a specified percentage of Series D proceeds on deposit with Pacific Summit Bank; or
• Amendments to the negative covenants to address the post-Series D capital structure more specifically.
Pinnacle should instruct Verdana to keep Pinnacle and its counsel informed of all communications with Pacific Summit Bank regarding the consent process, and Pinnacle should retain the right to approve any amendments to the Credit Facility that the Lender may seek as a condition to granting consent.
C. Risk if Consent Is Not Obtained
If Verdana issues the Series D Preferred Stock without obtaining the required lender consent, the issuance could constitute an event of default under the Credit Facility. The consequences of an event of default under a revolving credit facility are severe and could include the following:
• Acceleration. Pacific Summit Bank could declare all outstanding borrowings immediately due and payable. As of March 31, 2022, the outstanding drawn amount was $6,200,000. If the Facility is further drawn between now and the Series D closing, the accelerated amount could be higher.
• Termination of Commitment. Pacific Summit Bank could terminate the $10,000,000 revolving commitment, eliminating Verdana's access to the $3,800,000 in currently undrawn availability and its ability to draw on the Facility in the future.
• Enforcement of Security Interest. Pacific Summit Bank could exercise its rights under the security agreement to foreclose on or otherwise realize upon the collateral, which includes substantially all of Verdana's personal property assets — including the Company's intellectual property, accounts receivable, and equipment. Enforcement against the Company's intellectual property could be catastrophic, as the Company's enterprise software platform is its core asset.
• Cross-Default. An event of default under the Credit Facility could trigger cross-default provisions in other material agreements to which Verdana is a party, potentially cascading into defaults under customer contracts, vendor agreements, or lease arrangements.
• Default Interest. Pacific Summit Bank would likely be entitled to charge default interest on the outstanding borrowings (typically an additional 200 basis points above the otherwise applicable rate), increasing the Company's debt service costs.
These consequences would be extremely adverse to both Verdana and Pinnacle's investment. An acceleration of the Credit Facility immediately following the closing of the Series D Transaction would consume $6,200,000 or more of the newly invested capital to repay the Lender, and the loss of the revolving commitment could impair the Company's working capital flexibility. Enforcement against the Company's intellectual property could fundamentally undermine the value of Pinnacle's investment.
Accordingly, lender consent from Pacific Summit Bank must be a hard condition precedent to closing the Series D Transaction. This point is non-negotiable from Pinnacle's perspective.
VII. Impact on Series D Transaction Documents
The issues identified in this memorandum have direct implications for the drafting and negotiation of the Series D Transaction documents. The following recommendations should be incorporated into the relevant agreements.
A. Stock Purchase Agreement
The draft Series D Preferred Stock Purchase Agreement (initial draft of which was delivered by Calderwood & Harkness to Langford Price & Associates LLP on June 8, 2022) should include the following provisions related to the Credit Facility:
Closing Condition. Section [__] of the Stock Purchase Agreement (Conditions to Closing) should include a specific condition requiring the delivery, at or prior to closing, of Pacific Summit Bank's written consent or waiver authorizing the issuance of the Series D Preferred Stock, in form and substance reasonably satisfactory to Pinnacle and its counsel. The consent should be unconditional and should not be subject to any conditions that would impair the effectiveness of the authorization or that would impose requirements on Pinnacle.
Representation and Warranty. The Stock Purchase Agreement should include a representation by Verdana that the issuance of the Series D Preferred Stock does not violate, conflict with, or result in a breach or default under any material agreement, instrument, or obligation to which Verdana is a party or by which it or its assets are bound, including, without limitation, the revolving credit facility with Pacific Summit Bank, N.A. In the alternative, the representation should confirm that all required consents, waivers, and approvals have been obtained prior to closing. This representation should survive the closing for the applicable survival period (typically 12 to 18 months in preferred stock financings) and should be subject to indemnification by the Company.
Pre-Closing Covenant. The Stock Purchase Agreement should include a covenant requiring Verdana to use commercially reasonable efforts to obtain the lender consent from Pacific Summit Bank prior to closing. This covenant should require Verdana to (i) submit a consent request to Pacific Summit Bank promptly following the execution of the Stock Purchase Agreement, (ii) diligently pursue the consent and cooperate with Pacific Summit Bank in connection therewith, (iii) keep Pinnacle and its counsel reasonably informed of the status of the consent process, and (iv) not agree to any amendments to the Credit Facility in connection with the consent without Pinnacle's prior written approval.
B. Amended and Restated Investors' Rights Agreement
The Amended and Restated Investors' Rights Agreement (the "IRA") that will be entered into in connection with the Series D closing should address the following matters related to the Credit Facility:
Coordination of Consent Rights. Pinnacle's proposed protective provisions include a consent right over the incurrence of new indebtedness by the Company in excess of $5,000,000. This protective provision should be coordinated with the existing Credit Facility terms to avoid conflicting or overlapping consent requirements that could create administrative confusion or, in a worst case, prevent the Company from taking necessary actions in a timely manner. For example, if the Company wishes to draw additional amounts under the Credit Facility (up to the $10,000,000 commitment), it should be clear that such draws do not require Pinnacle's consent under the protective provisions, as the Credit Facility was in existence prior to the Series D and is a permitted pre-existing indebtedness. The protective provisions should include a carve-out for draws under, and refinancings of, the existing Credit Facility (up to the existing commitment amount) to avoid unnecessary friction.
Information Rights. The IRA should require the Company to deliver to Pinnacle (in addition to standard quarterly and annual financial statements and monthly management reports) copies of all covenant compliance certificates delivered to Pacific Summit Bank in connection with the Credit Facility. This will ensure that Pinnacle has real-time visibility into the Company's ongoing compliance with the financial covenants and can identify potential covenant issues before they escalate into events of default. The IRA should also require the Company to promptly notify Pinnacle of (i) any event of default or potential event of default under the Credit Facility, (ii) any amendment, modification, or waiver of the Credit Facility terms, and (iii) any acceleration, enforcement, or termination of the Credit Facility.
C. Disclosure Schedules
The disclosure schedule template delivered by Calderwood & Harkness to Langford Price & Associates LLP on June 8, 2022 should require Verdana to fully and accurately disclose the Pacific Summit Bank Credit Facility on the applicable schedules. Specifically:
• The schedule of Indebtedness should list the Credit Facility, including the total commitment ($10,000,000), the amount outstanding as of the most recent practicable date, the interest rate (SOFR + 3.50%), and the maturity date (June 30, 2024);
• The schedule of Material Contracts should include the credit agreement and all related ancillary documents (amendments, side letters, fee letters, security agreements, UCC financing statements, intellectual property security agreements, and any intercreditor agreements);
• The schedule of Liens and Encumbrances should disclose Pacific Summit Bank's blanket lien on all personal property of the Company;
• The schedule of Financial Covenants (or, if no separate schedule exists, the Indebtedness schedule) should describe the minimum liquidity covenant ($10,000,000) and the ARR-based coverage ratio, including testing dates and current compliance status; and
• The schedule of Required Consents should identify the lender consent from Pacific Summit Bank as a required third-party consent in connection with the Series D Transaction.
Verdana should also be required to disclose any existing or anticipated covenant breaches, any instances in which the Company has received notices of default or potential default from Pacific Summit Bank, and any prior waivers or amendments obtained from the Lender.
VIII. Open Items and Next Steps
The following items require further action and should be addressed promptly:
1. Obtain Full Copy of the Pacific Summit Bank Credit Agreement. We need to confirm that we have received a complete copy of the executed credit agreement, including all amendments, side letters, fee letters, security agreements, intellectual property security agreements, intercreditor agreements, and any other ancillary documentation. The diligence request list transmitted to Langford Price & Associates LLP on May 14, 2022 included this request. We should confirm receipt and completeness of all documents produced. If any documents are outstanding, a follow-up request should be made to Jonathan Hale and Rebecca Thornton at Langford Price immediately.
2. Confirm Specific Financial Covenant Definitions. The exact terms of the financial covenants need to be confirmed against the credit agreement, including:
(a) The ARR coverage ratio formula, including the definition of "ARR" (e.g., whether it includes only contracted recurring revenue or also includes expansion/Upsell pipeline), the denominator (total committed debt vs. drawn amounts vs. all Indebtedness), and the required minimum ratio;
(b) The minimum liquidity covenant, including the definition of "liquidity" (unrestricted cash only, or cash plus undrawn availability), the testing methodology (continuous vs. periodic), and the testing dates; and
(c) Whether there are any step-down or step-up provisions that adjust the covenant levels over the remaining term of the Facility.
3. Review Change of Control Definition. The specific Change of Control definition in the credit agreement must be reviewed in detail to determine the exact ownership thresholds and triggering events, and to assess whether the Series D issuance triggers a Change of Control event of default or mandatory prepayment obligation. This analysis should consider both Pinnacle's individual post-investment ownership percentage and the aggregate ownership positions of all preferred stockholders.
4. Confirm Whether Redeemable Preferred Stock Is Classified as "Indebtedness." The credit agreement's definition of "Indebtedness" should be reviewed to determine whether it captures preferred stock with mandatory or optional redemption features. This is directly relevant given Pinnacle's proposed 5-year redemption right and could affect both the negative covenant analysis (restrictions on incurrence of additional Indebtedness) and the financial covenant analysis (if the ARR coverage ratio denominator includes all Indebtedness).
5. Coordinate with Langford Price on Lender Consent Process. We should schedule a call with Jonathan Hale and Rebecca Thornton at Langford Price & Associates LLP to discuss Verdana's plan for obtaining Pacific Summit Bank's consent, including the anticipated timeline for submitting the consent request, the identity of the relationship manager at Pacific Summit Bank, any prior interactions between the Company and the Lender regarding the Series D Transaction, and any conditions or amendments that the Lender has previously indicated it may seek.
6. Prepare Separate Lender Consent Analysis Memorandum. A follow-on memorandum with detailed recommendations regarding the form and substance of the lender consent, and the strategy for the consent negotiation process, should be prepared for Andrew Fitzpatrick and Marcus Trejo. This memorandum is anticipated to be delivered on or about June 30, 2022.
7. Flag for Marcus Trejo (Pinnacle). The Credit Facility has a maturity date of June 30, 2024, which is approximately two years after the proposed closing of the Series D Transaction. Pinnacle should consider whether Verdana will need to refinance this Facility at or prior to maturity and, if so, whether the Series D closing should be conditioned on or coordinated with any refinancing discussions. In particular, Pinnacle should assess (a) whether the Facility will need to be increased to support the Company's growth plans, (b) whether the terms of a replacement facility could be more or less favorable than the current terms, and (c) whether Pacific Summit Bank is likely to extend or renew the Facility given the post-Series D capital structure.
IX. Conclusion
The Pacific Summit Bank revolving credit facility presents a meaningful closing condition for the proposed Series D Transaction. Based on our analysis of the materials produced to date, the negative covenants in the Credit Facility almost certainly require Pacific Summit Bank's prior written consent for the issuance of preferred stock with the economic terms contemplated by either Pinnacle's or Verdana's proposed term sheet. The Series D Preferred Stock's liquidation preference, cumulative dividends, anti-dilution protections, and redemption rights are precisely the types of capital structure modifications that credit facility negative covenants are designed to restrict.
Failure to obtain the required lender consent could constitute an event of default under the Credit Facility, potentially allowing Pacific Summit Bank to accelerate the outstanding $6,200,000 in borrowings, terminate the revolving commitment, and enforce its security interest against substantially all of Verdana's assets — including the Company's intellectual property portfolio, which is the foundation of its enterprise value. Such an outcome would be catastrophic for both Verdana and Pinnacle's investment.
We recommend the following:
1. Lender consent from Pacific Summit Bank should be included as a hard condition precedent to closing in the Series D Preferred Stock Purchase Agreement, and Pinnacle should retain the right to review and approve the form and substance of the consent.
2. Verdana should be required to initiate the consent process promptly, and the pre-closing covenant in the Stock Purchase Agreement should obligate the Company to use commercially reasonable efforts to obtain the consent, keep Pinnacle informed, and refrain from agreeing to Credit Facility amendments without Pinnacle's approval.
3. The parties should factor the consent timeline (approximately 2–4 weeks) into the closing schedule and should coordinate with Langford Price & Associates LLP to ensure that the consent request is submitted as early as practicable.
4. The open items identified in Section VIII should be addressed as a priority, with particular urgency on items 1 (completeness of credit agreement documentation), 3 (Change of Control definition), and 4 (classification of redeemable preferred stock as Indebtedness).
This memorandum should be read in conjunction with the forthcoming lender consent analysis memorandum (anticipated June 30, 2022) and the comprehensive legal due diligence summary memorandum (anticipated mid-July 2022). We will continue to update our analysis as additional diligence materials are received and as the commercial terms of the Series D Transaction are finalized.
Please do not hesitate to contact me with any questions or to discuss the matters addressed herein.
Calderwood & Harkness LLP 101 Montgomery Street, Suite 3500 San Francisco, CA 94104
Matter No. 1002-00004 | Client No. PIN-0042
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
This memorandum has been prepared by Calderwood & Harkness LLP for the exclusive use of Pinnacle Venture Fund II LP and its authorized representatives. It is protected by the attorney-client privilege and the attorney work product doctrine. Any disclosure, distribution, or copying of this memorandum, or the information contained herein, without the prior written consent of Calderwood & Harkness LLP, is strictly prohibited.
Term | Detail
Facility Type | Revolving credit facility
Lender | Pacific Summit Bank, N.A.
Borrower | Verdana Software, Inc.
Total Commitment | $10,000,000
Amount Drawn (as of March 31, 2022) | $6,200,000
Available Undrawn Capacity | $3,800,000
Interest Rate | Secured Overnight Financing Rate ("SOFR") + 3.50%
Maturity Date | June 30, 2024
Security | Blanket lien on all personal property of Verdana, including intellectual property, accounts receivable, equipment, and general intangibles
Series | Holder | Investment Amount | Liquidation Preference Multiple | Liquidation Preference Amount
Series A | Ridgeline Capital | $9,600,000 | 1.0x | $9,600,000
Series B | Northgate Growth Partners | $32,000,000 | 1.0x | $32,000,000
Series C | Brindoval Innovation Fund | $36,000,000 | 1.0x | $36,000,000
Series D (at 1.0x) | Pinnacle Venture Fund II LP | $60,000,000 | 1.0x | $60,000,000
Total (at 1.0x) | $137,600,000
Series | Holder | Investment Amount | Liquidation Preference Multiple | Liquidation Preference Amount
Series A | Ridgeline Capital | $9,600,000 | 1.0x | $9,600,000
Series B | Northgate Growth Partners | $32,000,000 | 1.0x | $32,000,000
Series C | Brindoval Innovation Fund | $36,000,000 | 1.0x | $36,000,000
Series D (at 1.5x) | Pinnacle Venture Fund II LP | $60,000,000 | 1.5x | $90,000,000
Total (at 1.5x) | $167,600,000

MEMORANDUM

MATTER NUMBER: 1002-00004

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