1002-00004 · Pinnacle Venture Fund II LP · Diligence

lender-consent-analysis-memo.docx DOCUMENT Finance & Banking

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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION

June 30, 2022

To: Marcus Trejo, Partner, Head of Growth Equity, Pinnacle Capital Management LLC

From: Andrew Fitzpatrick, Lead Associate, Calderwood & Harkness LLP

Re: Lender Consent Requirements Under Verdana Software, Inc. Revolving Credit Facility with Pacific Summit Bank, N.A. — Analysis of Consent Triggers in Connection with Proposed Series D Preferred Stock Issuance

Matter No.: 1002-00004

Client No.: PIN-0042

I. Executive Summary

This memorandum sets forth our analysis of specific provisions in the existing revolving credit facility (the "Credit Facility") of Verdana Software, Inc. ("Verdana" or the "Company") with Pacific Summit Bank, N.A. ("Pacific Summit" or the "Bank") that may require lender consent or waiver in connection with the proposed issuance of Series D Preferred Stock (the "Series D") to Pinnacle Venture Fund II LP ("Pinnacle" or the "Fund") for an aggregate purchase price of Sixty Million Dollars ($60,000,000) (the "Proposed Transaction"). This memorandum is based on our review of the credit agreement and related loan documents made available through the Verdana data room, supplemented by publicly available records and our communications with Verdana's outside counsel, Langford Price & Associates LLP.

Key Conclusion. Based on our review, multiple provisions in the credit agreement governing the Credit Facility are likely triggered by the Series D issuance. In particular, we have identified the following areas of concern: (a) the Change of Control provision, which may be triggered by the dilution of founder voting control and the reconstitution of the board of directors; (b) the negative covenant restricting equity issuances, which almost certainly requires the Bank's prior written consent before Verdana may issue preferred stock carrying liquidation preferences and protective provisions of the type contemplated by the Series D; and (c) potential structural subordination concerns arising from the liquidation preference, cumulative dividend, and redemption features of the Series D. Additionally, we have identified an outstanding diligence question regarding whether Pacific Summit holds any warrants or equity instruments of Verdana that would be subject to anti-dilution adjustments upon the Series D issuance.

Recommendation. Calderwood & Harkness recommends that Pinnacle require, as a non-waivable condition to closing of the Proposed Transaction, an affirmative written consent letter from Pacific Summit Bank, N.A. expressly approving the Proposed Transaction and confirming that the issuance of the Series D does not constitute a Change of Control, event of default, or breach of any covenant under the Credit Facility. We further recommend initiating the consent process promptly in light of the current exclusivity timeline.

Summary of the Credit Facility. Verdana's existing Credit Facility is a Ten Million Dollar ($10,000,000) revolving credit facility with Pacific Summit. As of March 31, 2022, Six Million Two Hundred Thousand Dollars ($6,200,000) was drawn under the facility. The Credit Facility matures on June 30, 2024, is secured by all assets of Verdana, and bears interest at a rate of SOFR plus 3.50% per annum. The Credit Facility contains financial covenants requiring Verdana to maintain minimum liquidity of Ten Million Dollars ($10,000,000) at all times and to satisfy an annual recurring revenue ("ARR")-based coverage ratio, the specific parameters of which are set forth in the credit agreement.

II. Background

A. The Proposed Transaction

Pinnacle Venture Fund II LP, a Delaware limited partnership whose general partner is Pinnacle Capital Management LLC, headquartered at 2400 Sand Hill Road, Suite 310, Menlo Park, California 94025 (the "Fund"), proposes to invest Sixty Million Dollars ($60,000,000) in Verdana Software, Inc., a Delaware C-corporation, headquartered at 1175 NW Couch Street, Suite 800, Portland, Oregon 97209 (EIN: 93-1485726; Delaware Secretary of State File No.: 6274913), in exchange for newly issued shares of Series D Preferred Stock. The transaction is expected to be documented through a Series D Preferred Stock Purchase Agreement, together with an Amended and Restated Certificate of Incorporation, an Amended and Restated Investors' Rights Agreement, a Voting Agreement, and a Right of First Refusal and Co-Sale Agreement (collectively, the "Transaction Documents").

Depending on the final valuation agreed upon by the parties, the Series D would constitute a significant minority position in Verdana. Two scenarios are currently under discussion:

Verdana's Proposed Valuation. At Verdana's proposed pre-money valuation of $320,000,000, the price per share would be $4.00. At this price, Pinnacle would receive 15,000,000 shares of Series D Preferred Stock, representing approximately 15.79% of the Company's fully diluted shares outstanding on a post-close basis (calculated on the basis of 95,000,000 fully diluted shares). If the proposed expansion of the employee stock option pool by 5,000,000 shares is implemented prior to closing, Pinnacle's post-close ownership would be approximately 15.00% (calculated on the basis of 100,000,000 fully diluted shares).

Pinnacle's Proposed Valuation. At Pinnacle's proposed pre-money valuation of $260,000,000, the price per share would be $3.25. At this price, Pinnacle would receive approximately 18,461,538 shares of Series D Preferred Stock, representing approximately 18.75% of the Company's fully diluted shares outstanding on a post-close basis (calculated on the basis of approximately 98,461,538 fully diluted shares, or a moderately higher percentage if the ESOP expansion is excluded from the pre-money calculation).

The Proposed Transaction contemplates that Pinnacle will receive one seat on a seven-member board of directors. The board seat would be occupied by Marcus Trejo or his designee. The remaining six seats would be allocated as follows: two seats designated by the founders (Raj Anand and Lena Kovac); one seat designated by Ridgeline Ventures Fund III LP (currently occupied by Priya Dasgupta); one seat designated by Northgate Growth Partners Fund II LP (currently occupied by Elliott Margolis); one seat designated by Brindoval Capital Group LLC (currently occupied by Diana Chen); and one seat to be filled by a mutually agreed-upon independent director.

In addition to the board seat, the Proposed Transaction contemplates that Pinnacle will receive certain protective provisions customary for a Series D preferred stock investor in a growth-stage software company, including, among other things, consent rights over the incurrence of new debt exceeding $5,000,000 and consent rights over deviations from the Company's approved annual operating budget in excess of 15%. The Series D Preferred Stock is also expected to carry a liquidation preference (either 1.0x non-participating or 1.5x non-participating, subject to ongoing negotiation), an 8% cumulative dividend payable when and if declared by the board of directors, and, as proposed by Pinnacle, a redemption right exercisable after five years from the closing date.

B. Verdana's Existing Capitalization

As of the date of this memorandum, Verdana's fully diluted capitalization consists of 80,000,000 shares, allocated as follows:

The foregoing capitalization is based on information provided in Verdana's data room and confirmed through our review of the Company's certificate of incorporation, as most recently amended and restated in connection with the Series C financing in 2021. We note that the founders currently hold 35.0% of the fully diluted shares, a figure that is relevant to the Change of Control analysis set forth in Section III.A below.

C. The Credit Facility

The key terms of Verdana's existing revolving credit facility with Pacific Summit Bank, N.A. are summarized below. This summary is based on our review of the credit agreement, security agreement, and related loan documents made available through the Verdana data room on May 16, 2022, together with supplemental documents requested through Langford Price & Associates LLP (attention: Jonathan Hale and Rebecca Thornton), Verdana's outside legal counsel.

Lender: Pacific Summit Bank, N.A., a national banking association, with its principal office located at 350 California Street, San Francisco, California 94104.

Type: Revolving credit facility.

Facility Size: Ten Million Dollars ($10,000,000).

Amount Outstanding: As of March 31, 2022, Six Million Two Hundred Thousand Dollars ($6,200,000) was drawn and outstanding under the Credit Facility, leaving Three Million Eight Hundred Thousand Dollars ($3,800,000) of unused borrowing capacity.

Interest Rate: SOFR plus 3.50% per annum.

Maturity Date: June 30, 2024.

Security: All assets of Verdana Software, Inc., pursuant to a blanket security agreement executed concurrently with the credit agreement. Pacific Summit has perfected its security interest through the filing of UCC financing statements with the Delaware Secretary of State and the Oregon Secretary of State.

Key Financial Covenants:

(i) Minimum Liquidity. Verdana is required to maintain unrestricted cash, cash equivalents, and short-term investments in an aggregate amount equal to or greater than Ten Million Dollars ($10,000,000) at all times. For purposes of this covenant, "liquidity" is measured on a monthly basis based on bank statements and quarterly financial reports delivered to the Bank.

(ii) ARR-Based Coverage Ratio. Verdana is required to maintain a ratio of annual recurring revenue to outstanding funded debt (the "ARR Coverage Ratio") at or above a specified threshold, as set forth in the credit agreement. The specific threshold and calculation methodology are defined in the credit agreement; based on our review, the covenant requires Verdana to maintain an ARR Coverage Ratio of not less than a specified minimum that is designed to ensure that Verdana's recurring revenue base provides adequate coverage for its funded debt obligations.

Source of Diligence Information: The credit agreement, security agreement, UCC financing statements, compliance certificate templates, and related loan documentation were accessed through Verdana's data room (hosted on Pemberton Systems), to which Calderwood & Harkness was granted access on May 16, 2022. Certain supplemental documents, including the most recent compliance certificate and any side letters or amendments, were requested through Langford Price & Associates LLP on June 3, 2022. As of the date of this memorandum, we are awaiting confirmation from Langford Price regarding the existence of any warrant coverage or equity instruments issued to Pacific Summit in connection with the Credit Facility.

III. Analysis of Consent-Triggering Provisions

We have identified five categories of provisions in the credit agreement that may be triggered by the Proposed Transaction. Each is analyzed in detail below.

A. Change of Control Provision

The credit agreement contains a defined term for "Change of Control" and provides that the occurrence of a Change of Control constitutes an immediate Event of Default, entitling Pacific Summit to accelerate the outstanding obligations under the Credit Facility, declare all amounts immediately due and payable, and exercise remedies against the collateral. The consequences of an unwaived Change of Control are therefore severe and must be carefully evaluated.

Definition. While the exact language of the Change of Control definition varies across credit agreements, the definition in the Verdana credit agreement, consistent with customary venture lending practice, is expected to include the following triggers:

(i) Ownership Threshold. A Change of Control occurs when any "person" or "group" (as such terms are used in Section 13(d) of the Securities Exchange Act of 1934, as amended) acquires beneficial ownership of more than a specified percentage of the outstanding voting securities of Verdana. In our experience, the threshold in venture lending credit agreements typically ranges from 30% to 50%, though we have seen thresholds as low as 25% in certain facilities.

(ii) Minimum Founder/Control Group Threshold. A Change of Control occurs when the existing founders or a specified control group (often defined by reference to named individuals and their affiliates) ceases to beneficially own, directly or indirectly, at least a specified minimum percentage of the outstanding voting securities of Verdana. This threshold is intended to ensure that the individuals who were the primary operators and equity holders at the time the credit facility was underwritten continue to maintain a meaningful ownership stake in the Company.

(iii) Board Composition. A Change of Control occurs when a majority of the seats on the board of directors are no longer occupied by "Incumbent Directors," defined as directors who were serving on the board as of the date of the credit agreement or who were nominated or approved by a majority of the then-serving Incumbent Directors. This provision is designed to prevent a hostile takeover or significant shift in governance without the lender's knowledge or consent.

Application to the Series D Issuance. We analyze each prong of the Change of Control definition as applied to the Proposed Transaction:

Ownership Threshold (Individual Holder). Pinnacle's post-close ownership would range from approximately 15.00% to 18.75% of Verdana's fully diluted shares, depending on the final valuation and whether the ESOP expansion is implemented prior to closing. This range falls well below the typical single-holder Change of Control threshold of 30% to 50%. Accordingly, we believe it is unlikely that Pinnacle's individual ownership stake, standing alone, would trigger the ownership prong of the Change of Control definition. However, we note that if the credit agreement defines "group" broadly, and if Pacific Summit were to take the position that Pinnacle and one or more of the existing preferred stockholders constitute a "group" by virtue of the Voting Agreement or other Transaction Documents, the aggregate ownership of such a group could exceed the applicable threshold. We consider this interpretation aggressive but not implausible, and it underscores the importance of obtaining an express confirmation from Pacific Summit that the Proposed Transaction does not constitute a Change of Control.

Minimum Founder/Control Group Threshold. This prong presents a more significant concern. The founders (Raj Anand and Lena Kovac) currently hold 28,000,000 shares, representing 35.0% of the Company's 80,000,000 fully diluted shares. Following the Series D issuance, the founders' percentage ownership will be diluted as follows:

• At Verdana's proposed $320,000,000 pre-money valuation (15,000,000 new shares issued to Pinnacle), the fully diluted share count increases to 95,000,000 (or 100,000,000 with the ESOP expansion), and the founders' percentage declines to approximately 29.5% (or 28.0% with the ESOP expansion).

• At Pinnacle's proposed $260,000,000 pre-money valuation (approximately 18,461,538 new shares issued to Pinnacle), the fully diluted share count increases to approximately 98,461,538, and the founders' percentage declines to approximately 28.4%.

In either scenario, the founders' ownership drops from 35.0% to a range of approximately 28.0% to 29.5%. If the credit agreement specifies a minimum founder ownership threshold at or above 30%, or even at 35% (which would represent the founders' ownership at the time the Credit Facility was originated), this prong could be triggered. We have not been able to confirm the exact threshold from the documents currently available in the data room, and we have requested clarification from Langford Price. This is a matter requiring prompt resolution.

Board Composition. The Proposed Transaction contemplates expanding the board of directors to seven members, with Pinnacle receiving one newly created board seat. If the credit agreement's Change of Control definition includes an "Incumbent Director" concept, the addition of a new Pinnacle designee to the board could raise questions. However, in most formulations of this provision, the Change of Control is triggered only when a majority of the board ceases to consist of Incumbent Directors. Assuming that the current directors (or their approved successors) continue to occupy six of the seven seats, with only the Pinnacle designee being new, a majority of the board would continue to be Incumbent Directors. We therefore consider the board composition prong unlikely to be triggered, though the analysis depends on the exact drafting of the credit agreement.

Conclusion. The Change of Control provision presents a moderate risk of being triggered by the Proposed Transaction, primarily due to the dilution of founder ownership from 35.0% to approximately 28.0%–29.5%. The exact risk level depends on the specific threshold percentages set forth in the credit agreement, which we are working to confirm. Given the severity of the consequences (an Event of Default permitting acceleration of the entire facility), we recommend obtaining an express waiver and confirmation from Pacific Summit that the Proposed Transaction does not constitute a Change of Control.

B. Negative Covenant Restricting Equity Issuances

The credit agreement contains a negative covenant that restricts Verdana from issuing equity securities, including preferred stock, without the prior written consent of Pacific Summit. This covenant is common in venture lending credit agreements and is designed to give the lender visibility into, and control over, material changes to the borrower's capital structure.

Scope of the Restriction. Based on our review, the negative covenant is broadly drafted and covers the issuance of any equity securities, including but not limited to preferred stock carrying liquidation preferences that are senior to or pari passu with common equity, particularly where such preferred stock carries rights, preferences, or privileges that could affect the lender's recovery position in a liquidation or enforcement scenario. The covenant does not appear to contain an express exception for preferred stock issuances in a bona fide equity financing round, though certain credit agreements in the venture lending market do include such exceptions subject to advance notice or dollar-amount thresholds. We have not identified any such exception in the Verdana credit agreement.

Application to the Series D Issuance. The issuance of Series D Preferred Stock to Pinnacle falls squarely within the scope of this negative covenant for several reasons:

First, the Series D Preferred Stock would carry a liquidation preference — either 1.0x or 1.5x on the $60,000,000 aggregate purchase price, resulting in a liquidation preference of $60,000,000 to $90,000,000 — that is structurally senior to common equity in a liquidation scenario. While the bank's secured claim has legal priority over all equity holders, the creation of a significant new layer of preferred equity with liquidation preferences ahead of common stockholders alters the capital structure in a manner that the negative covenant is specifically designed to address.

Second, the Series D Preferred Stock would carry protective provisions that grant Pinnacle significant governance rights over corporate actions. In particular, Pinnacle's proposed consent right over the incurrence of new debt exceeding $5,000,000 could directly affect Verdana's ability to draw on or refinance the Credit Facility. Additionally, Pinnacle's proposed consent right over deviations from the approved annual operating budget in excess of 15% could constrain management's operational flexibility in ways that affect the Bank's credit analysis. These protective provisions may also trigger a separate concern under the credit agreement's restrictions on granting consent rights to third parties that could impair the lender's position.

Third, the cumulative dividend feature (8% per annum on a $60,000,000 investment, or $4,800,000 per year) and the proposed redemption right (exercisable after five years) introduce quasi-debt-like characteristics to the Series D Preferred Stock. Even though the dividend is payable only "when and if declared" by the board and is therefore not a mandatory cash obligation, the cumulative nature of the dividend creates an accruing obligation that could become a significant cash demand on the Company over time. Similarly, the redemption right, if exercised, would require Verdana to repurchase the Series D Preferred Stock at a price that could be substantial. These features are likely to be viewed by Pacific Summit as material to its credit analysis.

Conclusion. The negative covenant restricting equity issuances is very likely triggered by the Proposed Transaction. We believe that Pacific Summit's prior written consent is required before Verdana may issue the Series D Preferred Stock. This represents the clearest and most straightforward consent requirement among the provisions analyzed in this memorandum.

C. Anti-Dilution and Preemptive Rights Considerations

We have also analyzed whether the credit agreement or any related loan documents grant Pacific Summit any anti-dilution protections, equity kickers, warrant coverage, or conversion rights that would be affected by the issuance of the Series D Preferred Stock.

Warrant Coverage. It is common practice in the venture lending market for banks and other lenders to receive warrants to purchase common stock or preferred stock of the borrower as additional consideration for extending credit. Such warrants typically carry anti-dilution protections (either broad-based weighted average or full ratchet) that adjust the exercise price and/or the number of shares issuable upon exercise in the event of subsequent equity issuances at a price per share below the warrant exercise price. If Pacific Summit received warrants in connection with the Credit Facility, the issuance of the Series D at a particular price per share could trigger anti-dilution adjustments to such warrants, potentially increasing the number of shares issuable to the Bank upon exercise.

Diligence Status. Based on our review of the documents currently available in the Verdana data room, we have not been able to confirm definitively whether any warrants or equity instruments were issued to Pacific Summit in connection with the Credit Facility. The data room index references a "Warrant Agreement" in a subfolder that appears to be incomplete, and the document itself was not available for download as of the date of this memorandum. We have submitted a request to Langford Price & Associates LLP (attention: Jonathan Hale and Rebecca Thornton) for confirmation of whether any warrants exist and, if so, copies of the warrant agreements and any related documents. This diligence item remains outstanding.

Potential Impact. If Pacific Summit holds warrants exercisable for common stock at a price per share above the Series D price (for example, if the warrants were issued at an exercise price corresponding to the Series C price of $3.00 per share, and the Series D is ultimately priced at Pinnacle's proposed $3.25 per share), the anti-dilution adjustment may be minimal. However, if the warrants were issued at a higher exercise price, or if they carry full-ratchet anti-dilution protection, the issuance of the Series D could result in a more significant adjustment. In either case, the existence of bank warrants would add a layer of complexity to the consent process and would need to be addressed in the consent letter or any amendment to the credit agreement.

Conclusion. This issue requires confirmation from Langford Price as to whether Pacific Summit holds any warrants or equity instruments of Verdana. If such instruments exist, the anti-dilution mechanics must be analyzed and addressed as part of the consent process. We flag this as a priority diligence item.

D. Structural Subordination Concerns

Although the Proposed Transaction does not directly subordinate Pacific Summit's secured claim from a legal priority standpoint, the structural features of the Series D Preferred Stock introduce complexity into the Company's capital structure that warrants careful consideration from the Bank's perspective.

Priority of Claims. Pacific Summit's revolving credit facility is secured by a blanket lien on all assets of Verdana. In a liquidation or wind-down scenario, Pacific Summit's secured claim would have priority over all equity holders, including holders of preferred stock with liquidation preferences. The Series D liquidation preference does not, therefore, directly subordinate the Bank's claim in a bankruptcy or enforcement context. However, the addition of $60,000,000 to $90,000,000 in liquidation preferences (depending on whether a 1.0x or 1.5x preference is agreed upon) ahead of common stock changes the dynamics of the equity waterfall in ways that may affect the Bank's underwriting analysis.

Redemption Rights. Of particular concern from the Bank's perspective is the proposed redemption right. If the Series D includes a redemption right exercisable by Pinnacle after five years from the closing date (i.e., potentially as early as mid-2027), Verdana would face a contingent cash obligation of $60,000,000 (or more, if the redemption price includes accrued and unpaid cumulative dividends) that would compete with debt service obligations. While the Credit Facility matures on June 30, 2024, well before the earliest possible redemption date, any successor facility or refinancing would need to account for this contingent obligation. Pacific Summit may wish to understand and evaluate this feature as part of its consent analysis, particularly if it is contemplating a renewal or extension of the Credit Facility.

Cumulative Dividends. The Series D Preferred Stock is expected to carry an 8% cumulative dividend on the $60,000,000 aggregate purchase price, equating to $4,800,000 per year. This dividend is payable "when and if declared" by the board of directors and is therefore not a mandatory cash obligation. However, the cumulative nature of the dividend means that unpaid dividends accrue and accumulate, creating an increasing claim on the Company's resources over time. If the board declares and pays the dividend, the resulting cash outflow of $4,800,000 per year would represent a meaningful percentage of Verdana's current annual cash consumption (approximately 41% of the Company's trailing twelve-month negative EBITDA of $11,600,000) and would compete with debt service obligations under the Credit Facility.

Favorable Aspects. Notwithstanding the structural concerns described above, we note that the Proposed Transaction is, on balance, financially favorable from the Bank's perspective. The $60,000,000 equity investment would substantially increase Verdana's cash position, from approximately $22,400,000 as of March 31, 2022 to approximately $82,400,000, providing significant headroom against the minimum liquidity covenant of $10,000,000. The investment would also reduce the Company's near-term liquidity risk and extend its cash runway, thereby improving the Bank's overall credit position. We expect Pacific Summit to weigh these favorable considerations against the structural concerns when evaluating the consent request.

Conclusion. While the Series D investment itself is cash-positive for Verdana and beneficial from a liquidity covenant standpoint, the structural terms of the Series D — including the liquidation preference, cumulative dividends, and potential redemption rights — introduce structural complexity that Pacific Summit will need to evaluate. We recommend that these features be addressed explicitly in the consent letter to avoid any ambiguity regarding the Bank's approval of the full terms of the Series D.

E. Restrictions on Granting Liens or Security Interests

For completeness, we have also analyzed whether the Proposed Transaction could trigger any restrictions in the credit agreement related to the granting of liens or security interests.

Analysis. The credit agreement contains customary negative covenants restricting Verdana from granting liens, security interests, or encumbrances on its assets without the prior written consent of Pacific Summit, subject to customary permitted liens exceptions. Pacific Summit holds a blanket first-priority lien on all assets of Verdana, and any additional lien or security interest granted to a third party would violate this covenant unless expressly permitted.

Application. The current transaction structure does not contemplate granting Pinnacle any security interests, liens, or encumbrances on Verdana's assets. The Series D investment is a pure equity investment, and Pinnacle's rights will be limited to those of a preferred stockholder (voting rights, liquidation preference, protective provisions, information rights, etc.). Accordingly, the negative covenant restricting liens is not directly triggered by the Proposed Transaction.

Conclusion. No issue arises under the current deal structure. However, we flag this provision as a watchpoint. If the transaction structure were to change during negotiations — for example, if Pinnacle were to request a security interest in specific assets as collateral for the redemption obligation — the lien restriction would become directly relevant and would require immediate attention.

IV. Impact of Outstanding Draw and Covenant Compliance

In assessing the likelihood that Pacific Summit will grant its consent to the Proposed Transaction, it is useful to consider the current status of the Credit Facility and Verdana's compliance with its financial covenants. A transaction that improves the borrower's financial position and enhances covenant compliance is, in our experience, significantly more likely to receive prompt lender consent.

Outstanding Draw. As of March 31, 2022, Verdana had drawn $6,200,000 against the $10,000,000 Credit Facility, leaving $3,800,000 of unused borrowing capacity. The outstanding draw represents 62% of the total facility size.

Minimum Liquidity Covenant. Verdana's cash position as of March 31, 2022 was approximately $22,400,000, comfortably exceeding the $10,000,000 minimum liquidity covenant by a margin of $12,400,000. However, the Company's trailing twelve-month EBITDA of negative $11,600,000 indicates that Verdana is consuming cash at a rate that, absent additional capital, would erode the liquidity cushion over the next twelve to eighteen months. At the current burn rate, Verdana would approach the minimum liquidity threshold within approximately twelve months (i.e., by approximately mid-2023), assuming no change in revenue growth trajectory or expense structure and no additional capital raises.

Post-Investment Liquidity. Following the closing of the Proposed Transaction, assuming $60,000,000 of Series D proceeds are received by Verdana (net of any transaction expenses, which we estimate at approximately $1,500,000 to $2,000,000 in aggregate for legal fees, accounting fees, and other closing costs), Verdana's cash position would increase to approximately $80,400,000 to $80,900,000 on a pro forma basis (or approximately $82,400,000 on a gross basis before transaction expenses). This represents a dramatic improvement in headroom against the minimum liquidity covenant and would extend the Company's cash runway to well beyond the June 30, 2024 maturity date of the Credit Facility, even assuming no improvement in the burn rate.

ARR-Based Coverage Ratio. Verdana's first quarter 2022 annual recurring revenue ("ARR") was $47,300,000, reflecting year-over-year growth of 63.7% from $28,900,000 in Q1 2021. The Company's net revenue retention ("NRR") of 128% and gross margin of 74.2% are strong indicators of the quality and durability of the revenue base. While we do not have the exact parameters of the ARR-based coverage ratio covenant, a $47,300,000 ARR against $6,200,000 of funded debt yields a ratio of approximately 7.6x, which we believe comfortably exceeds any reasonable minimum threshold.

Conclusion. The Series D investment is financially beneficial from Pacific Summit's perspective. The substantial cash infusion significantly improves Verdana's liquidity position, extends its cash runway, and reduces the near-term risk of covenant default. These favorable dynamics should facilitate the consent negotiation and may give Pacific Summit a commercial incentive to grant consent promptly. We recommend that Verdana present the investment to Pacific Summit as a credit-positive event when initiating the consent process.

V. Recommended Approach to Obtaining Consent

A. Timing. We recommend initiating the consent process with Pacific Summit promptly, ideally within the next two to four weeks. This recommendation is driven by the current exclusivity timeline: per the First Amendment to the Exclusivity Agreement dated July 8, 2022, the exclusivity period between Pinnacle and Verdana has been extended to August 15, 2022. While the parties may agree to further extensions, it is prudent to assume that all material conditions to closing, including lender consent, should be substantially addressed prior to the expiration of the current exclusivity period.

Based on our experience with Pacific Summit and comparable venture lending institutions, the consent process typically takes two to four weeks from the date of initial contact to the receipt of a fully executed written consent letter. This timeline assumes that (i) Verdana is proactive in providing the Bank with the information and documentation necessary to evaluate the consent request, (ii) no significant issues arise that require negotiation of an amendment to the credit agreement (as opposed to a simple consent letter), and (iii) the Bank's internal credit approval process does not require escalation to a regional or executive-level credit committee.

We recommend that Verdana's Chief Financial Officer, Thomas Brightwell, and General Counsel, Sandra Mikkelsen, take the lead in approaching Pacific Summit, with support from Langford Price & Associates LLP as Verdana's outside counsel and the party with the direct relationship to the borrower. It is important that the initial outreach come from Verdana, as the borrower, rather than from Pinnacle or Calderwood & Harkness, in order to maintain the customary relationship dynamics and avoid any perception that the transaction is being imposed on Verdana by a new investor.

B. Form of Consent

We recommend that Pinnacle require, as a closing condition in the Series D Preferred Stock Purchase Agreement, delivery of an affirmative written consent letter from Pacific Summit Bank, N.A., in form and substance reasonably satisfactory to Pinnacle and its counsel, specifically approving the following:

(i) The issuance of the Series D Preferred Stock to Pinnacle Venture Fund II LP and the related amendments to Verdana's Amended and Restated Certificate of Incorporation, including the creation of the Series D Preferred Stock and the designation of the rights, preferences, privileges, and restrictions thereof;

(ii) The execution and delivery by Verdana of the Transaction Documents, including the Amended and Restated Investors' Rights Agreement, the Voting Agreement, and the Right of First Refusal and Co-Sale Agreement, and the grant to Pinnacle of the protective provisions, consent rights, and governance rights contemplated thereby;

(iii) An express confirmation that the consummation of the Proposed Transaction, including the issuance of the Series D Preferred Stock and the execution and delivery of the Transaction Documents, does not constitute a "Change of Control" or an "Event of Default" (or any event that, with the giving of notice or the passage of time, would constitute an Event of Default) under the credit agreement; and

(iv) A waiver of any negative covenant restriction on the issuance of equity securities to the extent that such restriction would otherwise prohibit or restrict the Proposed Transaction.

In addition to the foregoing specific approvals, the consent letter should contain a confirmation that the Credit Facility remains in full force and effect following the closing of the Proposed Transaction, that no default or Event of Default exists as of the date of the consent letter or would result from the consummation of the Proposed Transaction, and that Pacific Summit has not received any notice of default or taken any action to accelerate the obligations under the Credit Facility.

C. Potential Bank Conditions

Based on our experience with similar consent processes, Pacific Summit may condition its consent on one or more of the following:

Updated Financial Information. Pacific Summit will likely require delivery of updated financial statements, a pro forma capitalization table reflecting the Series D issuance, and a summary of the key terms of the Series D (including the liquidation preference, dividend rate, protective provisions, and any redemption rights). This information should be prepared by Verdana's finance team and reviewed by Langford Price before delivery to the Bank.

Credit Agreement Amendment. In lieu of, or in addition to, a simple consent letter, Pacific Summit may require an amendment to the credit agreement to incorporate provisions acknowledging the Series D and the related Transaction Documents. For example, the Bank may wish to amend the negative covenants to expressly permit the protective provisions granted to Pinnacle (particularly the consent right over new debt exceeding $5,000,000) and to update the Change of Control definition to reflect the post-closing capitalization and board composition. A formal amendment would require additional negotiation time and legal costs, and we recommend that Pinnacle budget for this possibility.

Consent Fee. It is customary for banks to charge a consent fee in connection with the review and approval of transactions that require lender consent. Based on our experience with Pacific Summit and comparable institutions, we estimate that the consent fee could range from $25,000 to $50,000. This fee is typically borne by the borrower (Verdana) but may be allocated differently by agreement of the parties.

Warrant Anti-Dilution Adjustments. If Pacific Summit holds warrants to purchase equity securities of Verdana, the Bank may condition its consent on confirmation of the anti-dilution adjustment mechanics applicable to such warrants in connection with the Series D issuance. This could involve the delivery of a certificate from Verdana confirming the adjusted exercise price and number of shares issuable upon exercise, as well as an acknowledgment by Pinnacle and the other preferred stockholders that the adjusted warrant shares are not subject to any right of first refusal, co-sale obligation, or other restriction under the Transaction Documents.

We recommend that Pinnacle budget for the possibility that Pacific Summit may require a formal credit agreement amendment rather than a simple consent letter. A formal amendment would add complexity and cost to the transaction (estimated incremental legal fees of $15,000 to $30,000 for Verdana's outside counsel, plus any fees charged by the Bank's counsel), and would require additional time for negotiation and execution.

D. Interaction with Pinnacle's Proposed Debt Consent Right

An important practical consideration in the consent process is the interaction between Pinnacle's proposed protective provision — a consent right over any new indebtedness of Verdana exceeding $5,000,000 — and Verdana's existing Credit Facility with Pacific Summit.

The existing Credit Facility, with a total commitment of $10,000,000 and $6,200,000 currently drawn, predates the Proposed Transaction and would be "grandfathered" as existing indebtedness under the Transaction Documents. However, the treatment of future draws under the Credit Facility presents a nuanced question: if Verdana were to draw an additional $3,800,000 under the existing facility (bringing the total outstanding to $10,000,000), could this be characterized as the incurrence of "new" indebtedness in excess of $5,000,000 from the pre-close baseline of $6,200,000? The answer depends on how "indebtedness" is defined and measured in the Transaction Documents — whether the relevant metric is the total facility commitment, the outstanding principal balance, or incremental draws above the closing-date balance.

We recommend that the Transaction Documents be drafted to address this issue clearly, ideally by defining "Permitted Indebtedness" to include the existing Credit Facility up to the full $10,000,000 commitment amount (rather than limiting the grandfathered amount to the $6,200,000 outstanding at closing). This approach would avoid the impractical result of Pinnacle having a consent right over routine draws under an existing, pre-approved facility.

Additionally, the Credit Facility matures on June 30, 2024 — approximately two years after the expected closing of the Proposed Transaction. Any refinancing, renewal, or replacement of the Credit Facility at maturity would constitute new indebtedness (or, at minimum, a material amendment to existing indebtedness) and would likely require Pinnacle's consent under the proposed protective provisions if Pinnacle's terms are accepted. The Transaction Documents should address the treatment of refinancings of existing indebtedness, including whether Pinnacle's consent is required for a renewal of the Credit Facility on substantially similar terms, a renewal on modified terms, or a replacement facility with a different lender.

We recommend that these issues be raised with Verdana's counsel during the negotiation of the Transaction Documents and that clear, workable definitions be adopted to avoid disputes between Pinnacle and Verdana (or future investors) regarding the scope of the debt consent right.

VI. Risk Assessment Summary

The following table summarizes the key risk factors identified in this memorandum, together with our assessment of the likelihood that each provision is triggered by the Proposed Transaction, the severity of the consequences, and our recommended course of action.

VII. Recommendations

Based on the foregoing analysis, we make the following recommendations:

1. Closing Condition. The Series D Preferred Stock Purchase Agreement should include, as a condition precedent to closing that is not subject to waiver by Pinnacle, the delivery of an affirmative consent letter from Pacific Summit Bank, N.A., in form and substance reasonably satisfactory to Pinnacle and its counsel, confirming that (a) the Proposed Transaction does not constitute a Change of Control or Event of Default under the credit agreement, (b) Pacific Summit waives any negative covenant restriction that would otherwise prohibit the issuance of the Series D Preferred Stock and the execution and delivery of the Transaction Documents, and (c) the Credit Facility remains in full force and effect and no default or Event of Default exists or would result from the Proposed Transaction.

2. Verdana Responsibility. The obligation to obtain the consent from Pacific Summit should rest with Verdana, as the borrower under the Credit Facility. The Series D Preferred Stock Purchase Agreement should include a representation and warranty by Verdana that it has obtained all necessary third-party consents, including but not limited to lender consents, as of the closing date, and that no consent, approval, authorization, or waiver that has not been obtained is required in connection with the consummation of the Proposed Transaction. Verdana should also provide an indemnification obligation covering any losses arising from a breach of this representation.

3. Timing of Engagement. We recommend that Calderwood & Harkness, through the undersigned, contact Rebecca Thornton at Langford Price & Associates LLP promptly to coordinate the consent process and request that Verdana initiate contact with Pacific Summit as soon as practicable. Given the current exclusivity deadline of August 15, 2022, and the estimated two-to-four-week consent timeline, the consent process should be initiated no later than July 15, 2022 to provide adequate time for review, negotiation, and execution of the consent letter (or, if required, a formal credit agreement amendment).

4. Due Diligence Follow-Up. As a priority diligence item, we must confirm whether Pacific Summit holds any warrants or other equity instruments of Verdana issued in connection with the Credit Facility. If such instruments exist, we must obtain copies of the warrant agreements, analyze the anti-dilution adjustment mechanics, and ensure that the anti-dilution consequences of the Series D issuance are addressed in the consent letter and, if applicable, in the Transaction Documents (including the Amended and Restated Investors' Rights Agreement and the capitalization representations). We have submitted this request to Langford Price and are awaiting a response.

5. Transaction Document Drafting — Debt Consent Interaction. In drafting the Transaction Documents, we recommend that the definition of "Permitted Indebtedness" and the scope of Pinnacle's consent right over new indebtedness exceeding $5,000,000 be carefully crafted to address the interplay with the existing Credit Facility. Specifically, the Transaction Documents should: (a) grandfather the existing Credit Facility up to the full $10,000,000 commitment amount (not limited to the $6,200,000 currently outstanding); (b) address the treatment of refinancings, renewals, and replacements of the Credit Facility upon its June 30, 2024 maturity; and (c) provide clear definitions and measurement methodologies to avoid disputes regarding the scope of the consent right.

VIII. Conclusion

The proposed issuance of Series D Preferred Stock to Pinnacle Venture Fund II LP very likely triggers consent requirements under Verdana Software, Inc.'s existing revolving credit facility with Pacific Summit Bank, N.A. The primary triggers are the negative covenant restricting equity issuances — which is almost certainly implicated by the issuance of preferred stock carrying a significant liquidation preference, cumulative dividends, protective provisions, and potential redemption rights — and the Change of Control provision, which may be triggered by the dilution of founder ownership from 35.0% to approximately 28.0%–29.5% of fully diluted shares. The structural features of the Series D, while not directly subordinating the Bank's secured claim, add complexity to the capital structure that Pacific Summit will need to evaluate.

On the favorable side, the $60,000,000 investment represents a substantial cash infusion to a company that is currently cash-burning at a rate of approximately $11,600,000 per year. The investment would more than triple Verdana's current cash position, dramatically improve headroom against the minimum liquidity covenant, and extend the Company's cash runway well beyond the Credit Facility's June 30, 2024 maturity date. From a credit perspective, the investment is unambiguously positive for Pacific Summit, and we believe this fact should be prominently featured in Verdana's outreach to the Bank.

Calderwood & Harkness recommends that Pinnacle require an affirmative written consent letter from Pacific Summit as a non-waivable closing condition in the Series D Preferred Stock Purchase Agreement and that the consent process be initiated immediately. We further recommend resolving the outstanding diligence question regarding bank warrants and addressing the interaction between Pinnacle's proposed debt consent right and the existing Credit Facility in the Transaction Documents.

We are prepared to assist in coordinating the consent process, reviewing and negotiating the consent letter or any required credit agreement amendment, and addressing the diligence and drafting issues identified in this memorandum.

IX. Contact Information and Next Steps

The undersigned is available to discuss this memorandum and next steps at the convenience of the Pinnacle deal team.

Contact Information:

Andrew Fitzpatrick, Lead Associate Calderwood & Harkness LLP 101 Montgomery Street, Suite 3500 San Francisco, California 94104 Telephone: (415) 392-4871

Email: afitzpatrick@calderwoodharkness.com

Proposed Next Steps:

1. Andrew Fitzpatrick to contact Rebecca Thornton at Langford Price & Associates LLP to coordinate the consent process, request confirmation regarding the existence of any Pacific Summit warrants, and request that Verdana's CFO Thomas Brightwell initiate outreach to Pacific Summit's relationship manager.

2. Calderwood & Harkness to prepare a draft consent letter for Pacific Summit Bank, N.A. reflecting the approvals and confirmations described in Section V.B of this memorandum, to be provided to Langford Price for use in the consent negotiation.

3. Calderwood & Harkness to incorporate the lender consent closing condition into the draft Series D Preferred Stock Purchase Agreement and to address the debt consent right / Credit Facility interaction issues in the Transaction Document drafts.

4. Andrew Fitzpatrick to circulate an updated diligence tracker to the Pinnacle deal team reflecting the outstanding items identified in this memorandum.

Escalation Contacts:

Harrison Wexford, Responsible Partner — (415) 392-4802 / hwexford@calderwoodharkness.com Beatrice Holloway, Billing Partner — (415) 392-4819 / bholloway@calderwoodharkness.com

File Reference: Matter No. 1002-00004; Billing Client No. PIN-0042

This memorandum is a privileged and confidential attorney-client communication prepared by Calderwood & Harkness LLP for the exclusive use of Pinnacle Capital Management LLC and its affiliates. This memorandum is protected by the attorney-client privilege and the work product doctrine. No portion of this memorandum may be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP. This memorandum does not constitute legal advice to any person or entity other than the addressee.

CALDERWOOD & HARKNESS LLP 101 Montgomery Street, Suite 3500 San Francisco, California 94104

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION

Shareholder / Category	Shares	Percentage (Fully Diluted)	Notes
Founders (Raj Anand & Lena Kovac)	28,000,000 common shares	35.0%	Co-founders; currently hold majority of common stock
Series A Preferred (Ridgeline Ventures Fund III LP)	12,000,000 preferred shares	15.0%	$0.80/share; invested 2018
Series B Preferred (Northgate Growth Partners Fund II LP)	16,000,000 preferred shares	20.0%	$2.00/share; invested 2019
Series C Preferred (Brindoval Capital Group LLC)	12,000,000 preferred shares	15.0%	$3.00/share; invested 2021
ESOP (issued and unissued)	12,000,000 shares	15.0%	Includes vested, unvested, and unissued options
Total	80,000,000	100.0%
Risk Factor	Likelihood of Trigger	Severity	Recommended Action
Change of Control (founder dilution below threshold)	Moderate	High — constitutes an Event of Default permitting acceleration of the Credit Facility	Confirm exact threshold percentages in credit agreement; obtain express waiver in consent letter
Negative covenant — equity issuance restriction	High	High — constitutes a covenant breach and potential Event of Default	Obtain affirmative written consent from Pacific Summit prior to closing
Structural subordination (liquidation preference, cumulative dividends, redemption rights)	Moderate	Medium — may affect Bank's credit analysis and willingness to maintain facility on current terms	Address explicitly in consent letter; provide Bank with summary of Series D terms
Bank warrant anti-dilution adjustment	Unknown — pending diligence confirmation	Medium — could result in issuance of additional shares to Bank	Confirm existence of warrants; if any, analyze anti-dilution mechanics and address in consent letter
Minimum liquidity covenant	Low — investment substantially improves compliance	Low — investment is credit-positive	Monitor post-close; no action required at this time
Lien restriction (granting security to Pinnacle)	Low — no security interest for Pinnacle under current deal structure	Low — not triggered under current structure	No action required; flagged as watchpoint in case deal structure changes

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
June 30, 2022
To: Marcus Trejo, Partner, Head of Growth Equity, Pinnacle Capital Management LLC
From: Andrew Fitzpatrick, Lead Associate, Calderwood & Harkness LLP
Re: Lender Consent Requirements Under Verdana Software, Inc. Revolving Credit Facility with Pacific Summit Bank, N.A. — Analysis of Consent Triggers in Connection with Proposed Series D Preferred Stock Issuance
Matter No.: 1002-00004
Client No.: PIN-0042
I. Executive Summary
This memorandum sets forth our analysis of specific provisions in the existing revolving credit facility (the "Credit Facility") of Verdana Software, Inc. ("Verdana" or the "Company") with Pacific Summit Bank, N.A. ("Pacific Summit" or the "Bank") that may require lender consent or waiver in connection with the proposed issuance of Series D Preferred Stock (the "Series D") to Pinnacle Venture Fund II LP ("Pinnacle" or the "Fund") for an aggregate purchase price of Sixty Million Dollars ($60,000,000) (the "Proposed Transaction"). This memorandum is based on our review of the credit agreement and related loan documents made available through the Verdana data room, supplemented by publicly available records and our communications with Verdana's outside counsel, Langford Price & Associates LLP.
Key Conclusion. Based on our review, multiple provisions in the credit agreement governing the Credit Facility are likely triggered by the Series D issuance. In particular, we have identified the following areas of concern: (a) the Change of Control provision, which may be triggered by the dilution of founder voting control and the reconstitution of the board of directors; (b) the negative covenant restricting equity issuances, which almost certainly requires the Bank's prior written consent before Verdana may issue preferred stock carrying liquidation preferences and protective provisions of the type contemplated by the Series D; and (c) potential structural subordination concerns arising from the liquidation preference, cumulative dividend, and redemption features of the Series D. Additionally, we have identified an outstanding diligence question regarding whether Pacific Summit holds any warrants or equity instruments of Verdana that would be subject to anti-dilution adjustments upon the Series D issuance.
Recommendation. Calderwood & Harkness recommends that Pinnacle require, as a non-waivable condition to closing of the Proposed Transaction, an affirmative written consent letter from Pacific Summit Bank, N.A. expressly approving the Proposed Transaction and confirming that the issuance of the Series D does not constitute a Change of Control, event of default, or breach of any covenant under the Credit Facility. We further recommend initiating the consent process promptly in light of the current exclusivity timeline.
Summary of the Credit Facility. Verdana's existing Credit Facility is a Ten Million Dollar ($10,000,000) revolving credit facility with Pacific Summit. As of March 31, 2022, Six Million Two Hundred Thousand Dollars ($6,200,000) was drawn under the facility. The Credit Facility matures on June 30, 2024, is secured by all assets of Verdana, and bears interest at a rate of SOFR plus 3.50% per annum. The Credit Facility contains financial covenants requiring Verdana to maintain minimum liquidity of Ten Million Dollars ($10,000,000) at all times and to satisfy an annual recurring revenue ("ARR")-based coverage ratio, the specific parameters of which are set forth in the credit agreement.
II. Background
A. The Proposed Transaction
Pinnacle Venture Fund II LP, a Delaware limited partnership whose general partner is Pinnacle Capital Management LLC, headquartered at 2400 Sand Hill Road, Suite 310, Menlo Park, California 94025 (the "Fund"), proposes to invest Sixty Million Dollars ($60,000,000) in Verdana Software, Inc., a Delaware C-corporation, headquartered at 1175 NW Couch Street, Suite 800, Portland, Oregon 97209 (EIN: 93-1485726; Delaware Secretary of State File No.: 6274913), in exchange for newly issued shares of Series D Preferred Stock. The transaction is expected to be documented through a Series D Preferred Stock Purchase Agreement, together with an Amended and Restated Certificate of Incorporation, an Amended and Restated Investors' Rights Agreement, a Voting Agreement, and a Right of First Refusal and Co-Sale Agreement (collectively, the "Transaction Documents").
Depending on the final valuation agreed upon by the parties, the Series D would constitute a significant minority position in Verdana. Two scenarios are currently under discussion:
Verdana's Proposed Valuation. At Verdana's proposed pre-money valuation of $320,000,000, the price per share would be $4.00. At this price, Pinnacle would receive 15,000,000 shares of Series D Preferred Stock, representing approximately 15.79% of the Company's fully diluted shares outstanding on a post-close basis (calculated on the basis of 95,000,000 fully diluted shares). If the proposed expansion of the employee stock option pool by 5,000,000 shares is implemented prior to closing, Pinnacle's post-close ownership would be approximately 15.00% (calculated on the basis of 100,000,000 fully diluted shares).
Pinnacle's Proposed Valuation. At Pinnacle's proposed pre-money valuation of $260,000,000, the price per share would be $3.25. At this price, Pinnacle would receive approximately 18,461,538 shares of Series D Preferred Stock, representing approximately 18.75% of the Company's fully diluted shares outstanding on a post-close basis (calculated on the basis of approximately 98,461,538 fully diluted shares, or a moderately higher percentage if the ESOP expansion is excluded from the pre-money calculation).
The Proposed Transaction contemplates that Pinnacle will receive one seat on a seven-member board of directors. The board seat would be occupied by Marcus Trejo or his designee. The remaining six seats would be allocated as follows: two seats designated by the founders (Raj Anand and Lena Kovac); one seat designated by Ridgeline Ventures Fund III LP (currently occupied by Priya Dasgupta); one seat designated by Northgate Growth Partners Fund II LP (currently occupied by Elliott Margolis); one seat designated by Brindoval Capital Group LLC (currently occupied by Diana Chen); and one seat to be filled by a mutually agreed-upon independent director.
In addition to the board seat, the Proposed Transaction contemplates that Pinnacle will receive certain protective provisions customary for a Series D preferred stock investor in a growth-stage software company, including, among other things, consent rights over the incurrence of new debt exceeding $5,000,000 and consent rights over deviations from the Company's approved annual operating budget in excess of 15%. The Series D Preferred Stock is also expected to carry a liquidation preference (either 1.0x non-participating or 1.5x non-participating, subject to ongoing negotiation), an 8% cumulative dividend payable when and if declared by the board of directors, and, as proposed by Pinnacle, a redemption right exercisable after five years from the closing date.
B. Verdana's Existing Capitalization
As of the date of this memorandum, Verdana's fully diluted capitalization consists of 80,000,000 shares, allocated as follows:
The foregoing capitalization is based on information provided in Verdana's data room and confirmed through our review of the Company's certificate of incorporation, as most recently amended and restated in connection with the Series C financing in 2021. We note that the founders currently hold 35.0% of the fully diluted shares, a figure that is relevant to the Change of Control analysis set forth in Section III.A below.
C. The Credit Facility
The key terms of Verdana's existing revolving credit facility with Pacific Summit Bank, N.A. are summarized below. This summary is based on our review of the credit agreement, security agreement, and related loan documents made available through the Verdana data room on May 16, 2022, together with supplemental documents requested through Langford Price & Associates LLP (attention: Jonathan Hale and Rebecca Thornton), Verdana's outside legal counsel.
Lender: Pacific Summit Bank, N.A., a national banking association, with its principal office located at 350 California Street, San Francisco, California 94104.
Type: Revolving credit facility.
Facility Size: Ten Million Dollars ($10,000,000).
Amount Outstanding: As of March 31, 2022, Six Million Two Hundred Thousand Dollars ($6,200,000) was drawn and outstanding under the Credit Facility, leaving Three Million Eight Hundred Thousand Dollars ($3,800,000) of unused borrowing capacity.
Interest Rate: SOFR plus 3.50% per annum.
Maturity Date: June 30, 2024.
Security: All assets of Verdana Software, Inc., pursuant to a blanket security agreement executed concurrently with the credit agreement. Pacific Summit has perfected its security interest through the filing of UCC financing statements with the Delaware Secretary of State and the Oregon Secretary of State.
Key Financial Covenants:
(i) Minimum Liquidity. Verdana is required to maintain unrestricted cash, cash equivalents, and short-term investments in an aggregate amount equal to or greater than Ten Million Dollars ($10,000,000) at all times. For purposes of this covenant, "liquidity" is measured on a monthly basis based on bank statements and quarterly financial reports delivered to the Bank.
(ii) ARR-Based Coverage Ratio. Verdana is required to maintain a ratio of annual recurring revenue to outstanding funded debt (the "ARR Coverage Ratio") at or above a specified threshold, as set forth in the credit agreement. The specific threshold and calculation methodology are defined in the credit agreement; based on our review, the covenant requires Verdana to maintain an ARR Coverage Ratio of not less than a specified minimum that is designed to ensure that Verdana's recurring revenue base provides adequate coverage for its funded debt obligations.
Source of Diligence Information: The credit agreement, security agreement, UCC financing statements, compliance certificate templates, and related loan documentation were accessed through Verdana's data room (hosted on Pemberton Systems), to which Calderwood & Harkness was granted access on May 16, 2022. Certain supplemental documents, including the most recent compliance certificate and any side letters or amendments, were requested through Langford Price & Associates LLP on June 3, 2022. As of the date of this memorandum, we are awaiting confirmation from Langford Price regarding the existence of any warrant coverage or equity instruments issued to Pacific Summit in connection with the Credit Facility.
III. Analysis of Consent-Triggering Provisions
We have identified five categories of provisions in the credit agreement that may be triggered by the Proposed Transaction. Each is analyzed in detail below.
A. Change of Control Provision
The credit agreement contains a defined term for "Change of Control" and provides that the occurrence of a Change of Control constitutes an immediate Event of Default, entitling Pacific Summit to accelerate the outstanding obligations under the Credit Facility, declare all amounts immediately due and payable, and exercise remedies against the collateral. The consequences of an unwaived Change of Control are therefore severe and must be carefully evaluated.
Definition. While the exact language of the Change of Control definition varies across credit agreements, the definition in the Verdana credit agreement, consistent with customary venture lending practice, is expected to include the following triggers:
(i) Ownership Threshold. A Change of Control occurs when any "person" or "group" (as such terms are used in Section 13(d) of the Securities Exchange Act of 1934, as amended) acquires beneficial ownership of more than a specified percentage of the outstanding voting securities of Verdana. In our experience, the threshold in venture lending credit agreements typically ranges from 30% to 50%, though we have seen thresholds as low as 25% in certain facilities.
(ii) Minimum Founder/Control Group Threshold. A Change of Control occurs when the existing founders or a specified control group (often defined by reference to named individuals and their affiliates) ceases to beneficially own, directly or indirectly, at least a specified minimum percentage of the outstanding voting securities of Verdana. This threshold is intended to ensure that the individuals who were the primary operators and equity holders at the time the credit facility was underwritten continue to maintain a meaningful ownership stake in the Company.
(iii) Board Composition. A Change of Control occurs when a majority of the seats on the board of directors are no longer occupied by "Incumbent Directors," defined as directors who were serving on the board as of the date of the credit agreement or who were nominated or approved by a majority of the then-serving Incumbent Directors. This provision is designed to prevent a hostile takeover or significant shift in governance without the lender's knowledge or consent.
Application to the Series D Issuance. We analyze each prong of the Change of Control definition as applied to the Proposed Transaction:
Ownership Threshold (Individual Holder). Pinnacle's post-close ownership would range from approximately 15.00% to 18.75% of Verdana's fully diluted shares, depending on the final valuation and whether the ESOP expansion is implemented prior to closing. This range falls well below the typical single-holder Change of Control threshold of 30% to 50%. Accordingly, we believe it is unlikely that Pinnacle's individual ownership stake, standing alone, would trigger the ownership prong of the Change of Control definition. However, we note that if the credit agreement defines "group" broadly, and if Pacific Summit were to take the position that Pinnacle and one or more of the existing preferred stockholders constitute a "group" by virtue of the Voting Agreement or other Transaction Documents, the aggregate ownership of such a group could exceed the applicable threshold. We consider this interpretation aggressive but not implausible, and it underscores the importance of obtaining an express confirmation from Pacific Summit that the Proposed Transaction does not constitute a Change of Control.
Minimum Founder/Control Group Threshold. This prong presents a more significant concern. The founders (Raj Anand and Lena Kovac) currently hold 28,000,000 shares, representing 35.0% of the Company's 80,000,000 fully diluted shares. Following the Series D issuance, the founders' percentage ownership will be diluted as follows:
•  At Verdana's proposed $320,000,000 pre-money valuation (15,000,000 new shares issued to Pinnacle), the fully diluted share count increases to 95,000,000 (or 100,000,000 with the ESOP expansion), and the founders' percentage declines to approximately 29.5% (or 28.0% with the ESOP expansion).
•  At Pinnacle's proposed $260,000,000 pre-money valuation (approximately 18,461,538 new shares issued to Pinnacle), the fully diluted share count increases to approximately 98,461,538, and the founders' percentage declines to approximately 28.4%.
In either scenario, the founders' ownership drops from 35.0% to a range of approximately 28.0% to 29.5%. If the credit agreement specifies a minimum founder ownership threshold at or above 30%, or even at 35% (which would represent the founders' ownership at the time the Credit Facility was originated), this prong could be triggered. We have not been able to confirm the exact threshold from the documents currently available in the data room, and we have requested clarification from Langford Price. This is a matter requiring prompt resolution.
Board Composition. The Proposed Transaction contemplates expanding the board of directors to seven members, with Pinnacle receiving one newly created board seat. If the credit agreement's Change of Control definition includes an "Incumbent Director" concept, the addition of a new Pinnacle designee to the board could raise questions. However, in most formulations of this provision, the Change of Control is triggered only when a majority of the board ceases to consist of Incumbent Directors. Assuming that the current directors (or their approved successors) continue to occupy six of the seven seats, with only the Pinnacle designee being new, a majority of the board would continue to be Incumbent Directors. We therefore consider the board composition prong unlikely to be triggered, though the analysis depends on the exact drafting of the credit agreement.
Conclusion. The Change of Control provision presents a moderate risk of being triggered by the Proposed Transaction, primarily due to the dilution of founder ownership from 35.0% to approximately 28.0%–29.5%. The exact risk level depends on the specific threshold percentages set forth in the credit agreement, which we are working to confirm. Given the severity of the consequences (an Event of Default permitting acceleration of the entire facility), we recommend obtaining an express waiver and confirmation from Pacific Summit that the Proposed Transaction does not constitute a Change of Control.
B. Negative Covenant Restricting Equity Issuances
The credit agreement contains a negative covenant that restricts Verdana from issuing equity securities, including preferred stock, without the prior written consent of Pacific Summit. This covenant is common in venture lending credit agreements and is designed to give the lender visibility into, and control over, material changes to the borrower's capital structure.
Scope of the Restriction. Based on our review, the negative covenant is broadly drafted and covers the issuance of any equity securities, including but not limited to preferred stock carrying liquidation preferences that are senior to or pari passu with common equity, particularly where such preferred stock carries rights, preferences, or privileges that could affect the lender's recovery position in a liquidation or enforcement scenario. The covenant does not appear to contain an express exception for preferred stock issuances in a bona fide equity financing round, though certain credit agreements in the venture lending market do include such exceptions subject to advance notice or dollar-amount thresholds. We have not identified any such exception in the Verdana credit agreement.
Application to the Series D Issuance. The issuance of Series D Preferred Stock to Pinnacle falls squarely within the scope of this negative covenant for several reasons:
First, the Series D Preferred Stock would carry a liquidation preference — either 1.0x or 1.5x on the $60,000,000 aggregate purchase price, resulting in a liquidation preference of $60,000,000 to $90,000,000 — that is structurally senior to common equity in a liquidation scenario. While the bank's secured claim has legal priority over all equity holders, the creation of a significant new layer of preferred equity with liquidation preferences ahead of common stockholders alters the capital structure in a manner that the negative covenant is specifically designed to address.
Second, the Series D Preferred Stock would carry protective provisions that grant Pinnacle significant governance rights over corporate actions. In particular, Pinnacle's proposed consent right over the incurrence of new debt exceeding $5,000,000 could directly affect Verdana's ability to draw on or refinance the Credit Facility. Additionally, Pinnacle's proposed consent right over deviations from the approved annual operating budget in excess of 15% could constrain management's operational flexibility in ways that affect the Bank's credit analysis. These protective provisions may also trigger a separate concern under the credit agreement's restrictions on granting consent rights to third parties that could impair the lender's position.
Third, the cumulative dividend feature (8% per annum on a $60,000,000 investment, or $4,800,000 per year) and the proposed redemption right (exercisable after five years) introduce quasi-debt-like characteristics to the Series D Preferred Stock. Even though the dividend is payable only "when and if declared" by the board and is therefore not a mandatory cash obligation, the cumulative nature of the dividend creates an accruing obligation that could become a significant cash demand on the Company over time. Similarly, the redemption right, if exercised, would require Verdana to repurchase the Series D Preferred Stock at a price that could be substantial. These features are likely to be viewed by Pacific Summit as material to its credit analysis.
Conclusion. The negative covenant restricting equity issuances is very likely triggered by the Proposed Transaction. We believe that Pacific Summit's prior written consent is required before Verdana may issue the Series D Preferred Stock. This represents the clearest and most straightforward consent requirement among the provisions analyzed in this memorandum.
C. Anti-Dilution and Preemptive Rights Considerations
We have also analyzed whether the credit agreement or any related loan documents grant Pacific Summit any anti-dilution protections, equity kickers, warrant coverage, or conversion rights that would be affected by the issuance of the Series D Preferred Stock.
Warrant Coverage. It is common practice in the venture lending market for banks and other lenders to receive warrants to purchase common stock or preferred stock of the borrower as additional consideration for extending credit. Such warrants typically carry anti-dilution protections (either broad-based weighted average or full ratchet) that adjust the exercise price and/or the number of shares issuable upon exercise in the event of subsequent equity issuances at a price per share below the warrant exercise price. If Pacific Summit received warrants in connection with the Credit Facility, the issuance of the Series D at a particular price per share could trigger anti-dilution adjustments to such warrants, potentially increasing the number of shares issuable to the Bank upon exercise.
Diligence Status. Based on our review of the documents currently available in the Verdana data room, we have not been able to confirm definitively whether any warrants or equity instruments were issued to Pacific Summit in connection with the Credit Facility. The data room index references a "Warrant Agreement" in a subfolder that appears to be incomplete, and the document itself was not available for download as of the date of this memorandum. We have submitted a request to Langford Price & Associates LLP (attention: Jonathan Hale and Rebecca Thornton) for confirmation of whether any warrants exist and, if so, copies of the warrant agreements and any related documents. This diligence item remains outstanding.
Potential Impact. If Pacific Summit holds warrants exercisable for common stock at a price per share above the Series D price (for example, if the warrants were issued at an exercise price corresponding to the Series C price of $3.00 per share, and the Series D is ultimately priced at Pinnacle's proposed $3.25 per share), the anti-dilution adjustment may be minimal. However, if the warrants were issued at a higher exercise price, or if they carry full-ratchet anti-dilution protection, the issuance of the Series D could result in a more significant adjustment. In either case, the existence of bank warrants would add a layer of complexity to the consent process and would need to be addressed in the consent letter or any amendment to the credit agreement.
Conclusion. This issue requires confirmation from Langford Price as to whether Pacific Summit holds any warrants or equity instruments of Verdana. If such instruments exist, the anti-dilution mechanics must be analyzed and addressed as part of the consent process. We flag this as a priority diligence item.
D. Structural Subordination Concerns
Although the Proposed Transaction does not directly subordinate Pacific Summit's secured claim from a legal priority standpoint, the structural features of the Series D Preferred Stock introduce complexity into the Company's capital structure that warrants careful consideration from the Bank's perspective.
Priority of Claims. Pacific Summit's revolving credit facility is secured by a blanket lien on all assets of Verdana. In a liquidation or wind-down scenario, Pacific Summit's secured claim would have priority over all equity holders, including holders of preferred stock with liquidation preferences. The Series D liquidation preference does not, therefore, directly subordinate the Bank's claim in a bankruptcy or enforcement context. However, the addition of $60,000,000 to $90,000,000 in liquidation preferences (depending on whether a 1.0x or 1.5x preference is agreed upon) ahead of common stock changes the dynamics of the equity waterfall in ways that may affect the Bank's underwriting analysis.
Redemption Rights. Of particular concern from the Bank's perspective is the proposed redemption right. If the Series D includes a redemption right exercisable by Pinnacle after five years from the closing date (i.e., potentially as early as mid-2027), Verdana would face a contingent cash obligation of $60,000,000 (or more, if the redemption price includes accrued and unpaid cumulative dividends) that would compete with debt service obligations. While the Credit Facility matures on June 30, 2024, well before the earliest possible redemption date, any successor facility or refinancing would need to account for this contingent obligation. Pacific Summit may wish to understand and evaluate this feature as part of its consent analysis, particularly if it is contemplating a renewal or extension of the Credit Facility.
Cumulative Dividends. The Series D Preferred Stock is expected to carry an 8% cumulative dividend on the $60,000,000 aggregate purchase price, equating to $4,800,000 per year. This dividend is payable "when and if declared" by the board of directors and is therefore not a mandatory cash obligation. However, the cumulative nature of the dividend means that unpaid dividends accrue and accumulate, creating an increasing claim on the Company's resources over time. If the board declares and pays the dividend, the resulting cash outflow of $4,800,000 per year would represent a meaningful percentage of Verdana's current annual cash consumption (approximately 41% of the Company's trailing twelve-month negative EBITDA of $11,600,000) and would compete with debt service obligations under the Credit Facility.
Favorable Aspects. Notwithstanding the structural concerns described above, we note that the Proposed Transaction is, on balance, financially favorable from the Bank's perspective. The $60,000,000 equity investment would substantially increase Verdana's cash position, from approximately $22,400,000 as of March 31, 2022 to approximately $82,400,000, providing significant headroom against the minimum liquidity covenant of $10,000,000. The investment would also reduce the Company's near-term liquidity risk and extend its cash runway, thereby improving the Bank's overall credit position. We expect Pacific Summit to weigh these favorable considerations against the structural concerns when evaluating the consent request.
Conclusion. While the Series D investment itself is cash-positive for Verdana and beneficial from a liquidity covenant standpoint, the structural terms of the Series D — including the liquidation preference, cumulative dividends, and potential redemption rights — introduce structural complexity that Pacific Summit will need to evaluate. We recommend that these features be addressed explicitly in the consent letter to avoid any ambiguity regarding the Bank's approval of the full terms of the Series D.
E. Restrictions on Granting Liens or Security Interests
For completeness, we have also analyzed whether the Proposed Transaction could trigger any restrictions in the credit agreement related to the granting of liens or security interests.
Analysis. The credit agreement contains customary negative covenants restricting Verdana from granting liens, security interests, or encumbrances on its assets without the prior written consent of Pacific Summit, subject to customary permitted liens exceptions. Pacific Summit holds a blanket first-priority lien on all assets of Verdana, and any additional lien or security interest granted to a third party would violate this covenant unless expressly permitted.
Application. The current transaction structure does not contemplate granting Pinnacle any security interests, liens, or encumbrances on Verdana's assets. The Series D investment is a pure equity investment, and Pinnacle's rights will be limited to those of a preferred stockholder (voting rights, liquidation preference, protective provisions, information rights, etc.). Accordingly, the negative covenant restricting liens is not directly triggered by the Proposed Transaction.
Conclusion. No issue arises under the current deal structure. However, we flag this provision as a watchpoint. If the transaction structure were to change during negotiations — for example, if Pinnacle were to request a security interest in specific assets as collateral for the redemption obligation — the lien restriction would become directly relevant and would require immediate attention.
IV. Impact of Outstanding Draw and Covenant Compliance
In assessing the likelihood that Pacific Summit will grant its consent to the Proposed Transaction, it is useful to consider the current status of the Credit Facility and Verdana's compliance with its financial covenants. A transaction that improves the borrower's financial position and enhances covenant compliance is, in our experience, significantly more likely to receive prompt lender consent.
Outstanding Draw. As of March 31, 2022, Verdana had drawn $6,200,000 against the $10,000,000 Credit Facility, leaving $3,800,000 of unused borrowing capacity. The outstanding draw represents 62% of the total facility size.
Minimum Liquidity Covenant. Verdana's cash position as of March 31, 2022 was approximately $22,400,000, comfortably exceeding the $10,000,000 minimum liquidity covenant by a margin of $12,400,000. However, the Company's trailing twelve-month EBITDA of negative $11,600,000 indicates that Verdana is consuming cash at a rate that, absent additional capital, would erode the liquidity cushion over the next twelve to eighteen months. At the current burn rate, Verdana would approach the minimum liquidity threshold within approximately twelve months (i.e., by approximately mid-2023), assuming no change in revenue growth trajectory or expense structure and no additional capital raises.
Post-Investment Liquidity. Following the closing of the Proposed Transaction, assuming $60,000,000 of Series D proceeds are received by Verdana (net of any transaction expenses, which we estimate at approximately $1,500,000 to $2,000,000 in aggregate for legal fees, accounting fees, and other closing costs), Verdana's cash position would increase to approximately $80,400,000 to $80,900,000 on a pro forma basis (or approximately $82,400,000 on a gross basis before transaction expenses). This represents a dramatic improvement in headroom against the minimum liquidity covenant and would extend the Company's cash runway to well beyond the June 30, 2024 maturity date of the Credit Facility, even assuming no improvement in the burn rate.
ARR-Based Coverage Ratio. Verdana's first quarter 2022 annual recurring revenue ("ARR") was $47,300,000, reflecting year-over-year growth of 63.7% from $28,900,000 in Q1 2021. The Company's net revenue retention ("NRR") of 128% and gross margin of 74.2% are strong indicators of the quality and durability of the revenue base. While we do not have the exact parameters of the ARR-based coverage ratio covenant, a $47,300,000 ARR against $6,200,000 of funded debt yields a ratio of approximately 7.6x, which we believe comfortably exceeds any reasonable minimum threshold.
Conclusion. The Series D investment is financially beneficial from Pacific Summit's perspective. The substantial cash infusion significantly improves Verdana's liquidity position, extends its cash runway, and reduces the near-term risk of covenant default. These favorable dynamics should facilitate the consent negotiation and may give Pacific Summit a commercial incentive to grant consent promptly. We recommend that Verdana present the investment to Pacific Summit as a credit-positive event when initiating the consent process.
V. Recommended Approach to Obtaining Consent
A. Timing.  We recommend initiating the consent process with Pacific Summit promptly, ideally within the next two to four weeks. This recommendation is driven by the current exclusivity timeline: per the First Amendment to the Exclusivity Agreement dated July 8, 2022, the exclusivity period between Pinnacle and Verdana has been extended to August 15, 2022. While the parties may agree to further extensions, it is prudent to assume that all material conditions to closing, including lender consent, should be substantially addressed prior to the expiration of the current exclusivity period.
Based on our experience with Pacific Summit and comparable venture lending institutions, the consent process typically takes two to four weeks from the date of initial contact to the receipt of a fully executed written consent letter. This timeline assumes that (i) Verdana is proactive in providing the Bank with the information and documentation necessary to evaluate the consent request, (ii) no significant issues arise that require negotiation of an amendment to the credit agreement (as opposed to a simple consent letter), and (iii) the Bank's internal credit approval process does not require escalation to a regional or executive-level credit committee.
We recommend that Verdana's Chief Financial Officer, Thomas Brightwell, and General Counsel, Sandra Mikkelsen, take the lead in approaching Pacific Summit, with support from Langford Price & Associates LLP as Verdana's outside counsel and the party with the direct relationship to the borrower. It is important that the initial outreach come from Verdana, as the borrower, rather than from Pinnacle or Calderwood & Harkness, in order to maintain the customary relationship dynamics and avoid any perception that the transaction is being imposed on Verdana by a new investor.
B. Form of Consent
We recommend that Pinnacle require, as a closing condition in the Series D Preferred Stock Purchase Agreement, delivery of an affirmative written consent letter from Pacific Summit Bank, N.A., in form and substance reasonably satisfactory to Pinnacle and its counsel, specifically approving the following:
(i) The issuance of the Series D Preferred Stock to Pinnacle Venture Fund II LP and the related amendments to Verdana's Amended and Restated Certificate of Incorporation, including the creation of the Series D Preferred Stock and the designation of the rights, preferences, privileges, and restrictions thereof;
(ii) The execution and delivery by Verdana of the Transaction Documents, including the Amended and Restated Investors' Rights Agreement, the Voting Agreement, and the Right of First Refusal and Co-Sale Agreement, and the grant to Pinnacle of the protective provisions, consent rights, and governance rights contemplated thereby;
(iii) An express confirmation that the consummation of the Proposed Transaction, including the issuance of the Series D Preferred Stock and the execution and delivery of the Transaction Documents, does not constitute a "Change of Control" or an "Event of Default" (or any event that, with the giving of notice or the passage of time, would constitute an Event of Default) under the credit agreement; and
(iv) A waiver of any negative covenant restriction on the issuance of equity securities to the extent that such restriction would otherwise prohibit or restrict the Proposed Transaction.
In addition to the foregoing specific approvals, the consent letter should contain a confirmation that the Credit Facility remains in full force and effect following the closing of the Proposed Transaction, that no default or Event of Default exists as of the date of the consent letter or would result from the consummation of the Proposed Transaction, and that Pacific Summit has not received any notice of default or taken any action to accelerate the obligations under the Credit Facility.
C. Potential Bank Conditions
Based on our experience with similar consent processes, Pacific Summit may condition its consent on one or more of the following:
Updated Financial Information. Pacific Summit will likely require delivery of updated financial statements, a pro forma capitalization table reflecting the Series D issuance, and a summary of the key terms of the Series D (including the liquidation preference, dividend rate, protective provisions, and any redemption rights). This information should be prepared by Verdana's finance team and reviewed by Langford Price before delivery to the Bank.
Credit Agreement Amendment. In lieu of, or in addition to, a simple consent letter, Pacific Summit may require an amendment to the credit agreement to incorporate provisions acknowledging the Series D and the related Transaction Documents. For example, the Bank may wish to amend the negative covenants to expressly permit the protective provisions granted to Pinnacle (particularly the consent right over new debt exceeding $5,000,000) and to update the Change of Control definition to reflect the post-closing capitalization and board composition. A formal amendment would require additional negotiation time and legal costs, and we recommend that Pinnacle budget for this possibility.
Consent Fee. It is customary for banks to charge a consent fee in connection with the review and approval of transactions that require lender consent. Based on our experience with Pacific Summit and comparable institutions, we estimate that the consent fee could range from $25,000 to $50,000. This fee is typically borne by the borrower (Verdana) but may be allocated differently by agreement of the parties.
Warrant Anti-Dilution Adjustments. If Pacific Summit holds warrants to purchase equity securities of Verdana, the Bank may condition its consent on confirmation of the anti-dilution adjustment mechanics applicable to such warrants in connection with the Series D issuance. This could involve the delivery of a certificate from Verdana confirming the adjusted exercise price and number of shares issuable upon exercise, as well as an acknowledgment by Pinnacle and the other preferred stockholders that the adjusted warrant shares are not subject to any right of first refusal, co-sale obligation, or other restriction under the Transaction Documents.
We recommend that Pinnacle budget for the possibility that Pacific Summit may require a formal credit agreement amendment rather than a simple consent letter. A formal amendment would add complexity and cost to the transaction (estimated incremental legal fees of $15,000 to $30,000 for Verdana's outside counsel, plus any fees charged by the Bank's counsel), and would require additional time for negotiation and execution.
D. Interaction with Pinnacle's Proposed Debt Consent Right
An important practical consideration in the consent process is the interaction between Pinnacle's proposed protective provision — a consent right over any new indebtedness of Verdana exceeding $5,000,000 — and Verdana's existing Credit Facility with Pacific Summit.
The existing Credit Facility, with a total commitment of $10,000,000 and $6,200,000 currently drawn, predates the Proposed Transaction and would be "grandfathered" as existing indebtedness under the Transaction Documents. However, the treatment of future draws under the Credit Facility presents a nuanced question: if Verdana were to draw an additional $3,800,000 under the existing facility (bringing the total outstanding to $10,000,000), could this be characterized as the incurrence of "new" indebtedness in excess of $5,000,000 from the pre-close baseline of $6,200,000? The answer depends on how "indebtedness" is defined and measured in the Transaction Documents — whether the relevant metric is the total facility commitment, the outstanding principal balance, or incremental draws above the closing-date balance.
We recommend that the Transaction Documents be drafted to address this issue clearly, ideally by defining "Permitted Indebtedness" to include the existing Credit Facility up to the full $10,000,000 commitment amount (rather than limiting the grandfathered amount to the $6,200,000 outstanding at closing). This approach would avoid the impractical result of Pinnacle having a consent right over routine draws under an existing, pre-approved facility.
Additionally, the Credit Facility matures on June 30, 2024 — approximately two years after the expected closing of the Proposed Transaction. Any refinancing, renewal, or replacement of the Credit Facility at maturity would constitute new indebtedness (or, at minimum, a material amendment to existing indebtedness) and would likely require Pinnacle's consent under the proposed protective provisions if Pinnacle's terms are accepted. The Transaction Documents should address the treatment of refinancings of existing indebtedness, including whether Pinnacle's consent is required for a renewal of the Credit Facility on substantially similar terms, a renewal on modified terms, or a replacement facility with a different lender.
We recommend that these issues be raised with Verdana's counsel during the negotiation of the Transaction Documents and that clear, workable definitions be adopted to avoid disputes between Pinnacle and Verdana (or future investors) regarding the scope of the debt consent right.
VI. Risk Assessment Summary
The following table summarizes the key risk factors identified in this memorandum, together with our assessment of the likelihood that each provision is triggered by the Proposed Transaction, the severity of the consequences, and our recommended course of action.
VII. Recommendations
Based on the foregoing analysis, we make the following recommendations:
1.  Closing Condition. The Series D Preferred Stock Purchase Agreement should include, as a condition precedent to closing that is not subject to waiver by Pinnacle, the delivery of an affirmative consent letter from Pacific Summit Bank, N.A., in form and substance reasonably satisfactory to Pinnacle and its counsel, confirming that (a) the Proposed Transaction does not constitute a Change of Control or Event of Default under the credit agreement, (b) Pacific Summit waives any negative covenant restriction that would otherwise prohibit the issuance of the Series D Preferred Stock and the execution and delivery of the Transaction Documents, and (c) the Credit Facility remains in full force and effect and no default or Event of Default exists or would result from the Proposed Transaction.
2.  Verdana Responsibility. The obligation to obtain the consent from Pacific Summit should rest with Verdana, as the borrower under the Credit Facility. The Series D Preferred Stock Purchase Agreement should include a representation and warranty by Verdana that it has obtained all necessary third-party consents, including but not limited to lender consents, as of the closing date, and that no consent, approval, authorization, or waiver that has not been obtained is required in connection with the consummation of the Proposed Transaction. Verdana should also provide an indemnification obligation covering any losses arising from a breach of this representation.
3.  Timing of Engagement. We recommend that Calderwood & Harkness, through the undersigned, contact Rebecca Thornton at Langford Price & Associates LLP promptly to coordinate the consent process and request that Verdana initiate contact with Pacific Summit as soon as practicable. Given the current exclusivity deadline of August 15, 2022, and the estimated two-to-four-week consent timeline, the consent process should be initiated no later than July 15, 2022 to provide adequate time for review, negotiation, and execution of the consent letter (or, if required, a formal credit agreement amendment).
4.  Due Diligence Follow-Up. As a priority diligence item, we must confirm whether Pacific Summit holds any warrants or other equity instruments of Verdana issued in connection with the Credit Facility. If such instruments exist, we must obtain copies of the warrant agreements, analyze the anti-dilution adjustment mechanics, and ensure that the anti-dilution consequences of the Series D issuance are addressed in the consent letter and, if applicable, in the Transaction Documents (including the Amended and Restated Investors' Rights Agreement and the capitalization representations). We have submitted this request to Langford Price and are awaiting a response.
5.  Transaction Document Drafting — Debt Consent Interaction. In drafting the Transaction Documents, we recommend that the definition of "Permitted Indebtedness" and the scope of Pinnacle's consent right over new indebtedness exceeding $5,000,000 be carefully crafted to address the interplay with the existing Credit Facility. Specifically, the Transaction Documents should: (a) grandfather the existing Credit Facility up to the full $10,000,000 commitment amount (not limited to the $6,200,000 currently outstanding); (b) address the treatment of refinancings, renewals, and replacements of the Credit Facility upon its June 30, 2024 maturity; and (c) provide clear definitions and measurement methodologies to avoid disputes regarding the scope of the consent right.
VIII. Conclusion
The proposed issuance of Series D Preferred Stock to Pinnacle Venture Fund II LP very likely triggers consent requirements under Verdana Software, Inc.'s existing revolving credit facility with Pacific Summit Bank, N.A. The primary triggers are the negative covenant restricting equity issuances — which is almost certainly implicated by the issuance of preferred stock carrying a significant liquidation preference, cumulative dividends, protective provisions, and potential redemption rights — and the Change of Control provision, which may be triggered by the dilution of founder ownership from 35.0% to approximately 28.0%–29.5% of fully diluted shares. The structural features of the Series D, while not directly subordinating the Bank's secured claim, add complexity to the capital structure that Pacific Summit will need to evaluate.
On the favorable side, the $60,000,000 investment represents a substantial cash infusion to a company that is currently cash-burning at a rate of approximately $11,600,000 per year. The investment would more than triple Verdana's current cash position, dramatically improve headroom against the minimum liquidity covenant, and extend the Company's cash runway well beyond the Credit Facility's June 30, 2024 maturity date. From a credit perspective, the investment is unambiguously positive for Pacific Summit, and we believe this fact should be prominently featured in Verdana's outreach to the Bank.
Calderwood & Harkness recommends that Pinnacle require an affirmative written consent letter from Pacific Summit as a non-waivable closing condition in the Series D Preferred Stock Purchase Agreement and that the consent process be initiated immediately. We further recommend resolving the outstanding diligence question regarding bank warrants and addressing the interaction between Pinnacle's proposed debt consent right and the existing Credit Facility in the Transaction Documents.
We are prepared to assist in coordinating the consent process, reviewing and negotiating the consent letter or any required credit agreement amendment, and addressing the diligence and drafting issues identified in this memorandum.
IX. Contact Information and Next Steps
The undersigned is available to discuss this memorandum and next steps at the convenience of the Pinnacle deal team.
Contact Information:
Andrew Fitzpatrick, Lead Associate Calderwood & Harkness LLP 101 Montgomery Street, Suite 3500 San Francisco, California 94104 Telephone: (415) 392-4871
Email: afitzpatrick@calderwoodharkness.com
Proposed Next Steps:
1.  Andrew Fitzpatrick to contact Rebecca Thornton at Langford Price & Associates LLP to coordinate the consent process, request confirmation regarding the existence of any Pacific Summit warrants, and request that Verdana's CFO Thomas Brightwell initiate outreach to Pacific Summit's relationship manager.
2.  Calderwood & Harkness to prepare a draft consent letter for Pacific Summit Bank, N.A. reflecting the approvals and confirmations described in Section V.B of this memorandum, to be provided to Langford Price for use in the consent negotiation.
3.  Calderwood & Harkness to incorporate the lender consent closing condition into the draft Series D Preferred Stock Purchase Agreement and to address the debt consent right / Credit Facility interaction issues in the Transaction Document drafts.
4.  Andrew Fitzpatrick to circulate an updated diligence tracker to the Pinnacle deal team reflecting the outstanding items identified in this memorandum.
Escalation Contacts:
Harrison Wexford, Responsible Partner — (415) 392-4802 / hwexford@calderwoodharkness.com Beatrice Holloway, Billing Partner — (415) 392-4819 / bholloway@calderwoodharkness.com
File Reference: Matter No. 1002-00004; Billing Client No. PIN-0042
This memorandum is a privileged and confidential attorney-client communication prepared by Calderwood & Harkness LLP for the exclusive use of Pinnacle Capital Management LLC and its affiliates. This memorandum is protected by the attorney-client privilege and the work product doctrine. No portion of this memorandum may be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP. This memorandum does not constitute legal advice to any person or entity other than the addressee.
CALDERWOOD & HARKNESS LLP 101 Montgomery Street, Suite 3500 San Francisco, California 94104
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
Shareholder / Category | Shares | Percentage (Fully Diluted) | Notes
Founders (Raj Anand & Lena Kovac) | 28,000,000 common shares | 35.0% | Co-founders; currently hold majority of common stock
Series A Preferred (Ridgeline Ventures Fund III LP) | 12,000,000 preferred shares | 15.0% | $0.80/share; invested 2018
Series B Preferred (Northgate Growth Partners Fund II LP) | 16,000,000 preferred shares | 20.0% | $2.00/share; invested 2019
Series C Preferred (Brindoval Capital Group LLC) | 12,000,000 preferred shares | 15.0% | $3.00/share; invested 2021
ESOP (issued and unissued) | 12,000,000 shares | 15.0% | Includes vested, unvested, and unissued options
Total | 80,000,000 | 100.0%
Risk Factor | Likelihood of Trigger | Severity | Recommended Action
Change of Control (founder dilution below threshold) | Moderate | High — constitutes an Event of Default permitting acceleration of the Credit Facility | Confirm exact threshold percentages in credit agreement; obtain express waiver in consent letter
Negative covenant — equity issuance restriction | High | High — constitutes a covenant breach and potential Event of Default | Obtain affirmative written consent from Pacific Summit prior to closing
Structural subordination (liquidation preference, cumulative dividends, redemption rights) | Moderate | Medium — may affect Bank's credit analysis and willingness to maintain facility on current terms | Address explicitly in consent letter; provide Bank with summary of Series D terms
Bank warrant anti-dilution adjustment | Unknown — pending diligence confirmation | Medium — could result in issuance of additional shares to Bank | Confirm existence of warrants; if any, analyze anti-dilution mechanics and address in consent letter
Minimum liquidity covenant | Low — investment substantially improves compliance | Low — investment is credit-positive | Monitor post-close; no action required at this time
Lien restriction (granting security to Pinnacle) | Low — no security interest for Pinnacle under current deal structure | Low — not triggered under current structure | No action required; flagged as watchpoint in case deal structure changes

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