MEMORANDUM
PRIVILEGED AND CONFIDENTIAL Attorney-Client Privilege / Attorney Work Product
TO: Oliver Mackenzie, Partner, Calderwood & Harkness LLP Megan Chu, Associate, Calderwood & Harkness LLP
FROM: Derek Okonkwo, Associate, Calderwood & Harkness LLP
DATE: May 10, 2024
RE: Corporate Due Diligence Review — Veridian Biosciences, Inc.
Matter No.: 1018-00008
Client: Penterra Pharmaceuticals Corp.
This memorandum is protected by the attorney-client privilege and the attorney work product doctrine. It has been prepared in connection with the provision of legal advice to our client, Penterra Pharmaceuticals Corp. This memorandum is strictly confidential and is intended solely for the use of the attorneys and professionals identified above. It should not be disclosed, distributed, or otherwise made available to any third party, including the client, without the express prior written approval of Oliver Mackenzie.
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I. Executive Summary
This memorandum summarizes the findings of our corporate due diligence review of Veridian Biosciences, Inc. ("Veridian" or the "Company") in connection with the proposed acquisition by our client, Penterra Pharmaceuticals Corp. ("Penterra" or the "Buyer"), of 100% of the outstanding capital stock of Veridian for an aggregate purchase price of $900,000,000 in cash (the "Transaction"), to be consummated pursuant to a definitive Stock Purchase Agreement (the "SPA") currently under negotiation between the parties.
The scope of this review encompasses the following categories of corporate documents and records:
(a) corporate organizational documents, including the Certificate of Incorporation, as amended and restated, and the Amended and Restated Bylaws;
(b) governance documents, including board of directors resolutions, committee charters, and delegation authorities;
(c) capitalization records, including stock ledgers, stock certificates (or evidence of uncertificated shares), equity incentive plan documents, option grant records, warrant agreements, and the fully diluted capitalization table;
(d) stockholder agreements, including the Investors' Rights Agreement, the Right of First Refusal and Co-Sale Agreement, and the Voting Agreement;
(e) minutes of all meetings and written consents of the board of directors and stockholders from 2021 through the most recent available date (April 2024);
(f) records relating to subsidiaries and organizational structure; and
(g) certificates of good standing, foreign qualification filings, and related state regulatory records.
Our review was conducted based on the following sources: (i) documents produced in the Veridian virtual data room hosted on Thackeray Solutions (the "Data Room"), to which Calderwood & Harkness was granted access on March 11, 2024; (ii) supplemental document requests fulfilled by Zalcourt Archer & Cole LLP ("LAC"), Veridian's outside transaction counsel, through the efforts of Rebecca Whitmore (Partner) and Jonathan Pratt (Associate) at LAC; and (iii) publicly available records obtained directly from the Delaware Secretary of State, the Massachusetts Secretary of the Commonwealth, the California Secretary of State, and the Maryland State Department of Assessments and Taxation.
Overall Assessment. Based on our review, Veridian's corporate organization is generally in good order. The Company is validly existing and in good standing in its state of incorporation (Delaware) and in each jurisdiction in which it is qualified to do business as a foreign corporation (Massachusetts, California, and Maryland). The Company's capitalization is complex, reflecting four series of preferred stock issued across multiple venture capital financing rounds, a meaningful employee stock option pool, and significant founder equity. However, the capitalization records reviewed are internally consistent and reconcile, in all material respects, to the draft Disclosure Schedules prepared in connection with the SPA. The Company's corporate governance practices appear sound; we identified no material irregularities in the board or stockholder minutes, and all material corporate actions reviewed were properly authorized.
We note the following key findings that require attention in the definitive agreement and the transaction process:
1. Capitalization Complexity. Veridian has issued four series of preferred stock (Series A, Series B, Series C, and Series D) with varying liquidation preferences, conversion ratios, anti-dilution protections, and voting rights. The purchase price allocation among stockholders in the funds flow must account for these differing rights with precision.
2. Existing Investor Rights Obligations. The Investors' Rights Agreement, the ROFR/Co-Sale Agreement, and the Voting Agreement each contain provisions that will be triggered by or are otherwise relevant to the Transaction. Waivers and consents from the holders party to these agreements will be required, and the voting provisions should facilitate the delivery of the stockholder written consent necessary to approve the Transaction.
3. Section 382 Ownership Change. The Series C preferred stock financing round that closed in Q3 2020 triggered a Section 382 ownership change, subjecting approximately $148 million in pre-change net operating losses to an annual limitation of approximately $5.9 million per year. This finding is discussed in detail in the Tax Due Diligence Memorandum prepared by Leonard Cross, dated May 28, 2024 (to be issued), and has implications for the valuation of Veridian's tax attributes and the structure of the purchase price.
4. Change-of-Control Provisions. The equity incentive plan contains change-of-control acceleration provisions that must be accurately reflected in the purchase price allocation, the treatment of outstanding equity awards, and the funds flow analysis.
No impediments to proceeding with the Transaction have been identified from a corporate organizational standpoint, subject to the open items and follow-up actions described in Section X below.
II. Formation and Good Standing
A. Certificate of Incorporation
Veridian Biosciences, Inc. was incorporated in the State of Delaware on September 14, 2016, by the filing of an original Certificate of Incorporation with the Delaware Secretary of State. The Company was originally incorporated under the name "Veridian Therapeutics, Inc." and subsequently changed its name to "Veridian Biosciences, Inc." in connection with the Series A preferred stock financing in 2017.
The Company's charter document has been amended and restated on multiple occasions in connection with its successive financing rounds. The most recent version is the Fifth Amended and Restated Certificate of Incorporation (the "Restated Certificate"), which was filed with the Delaware Secretary of State on March 22, 2022, in connection with the closing of the Series D preferred stock financing. We have reviewed the Restated Certificate and each prior amendment and restatement in the Data Room.
Under the Restated Certificate, the Company is authorized to issue the following classes and series of capital stock:
The Restated Certificate sets forth the rights, preferences, and privileges of each series of preferred stock in customary detail, including liquidation preferences, conversion rights, anti-dilution protections, dividend rights, and voting rights. These provisions are discussed in further detail in Section IV below.
The Company's registered agent in Delaware is Tidewater Registered Agents LLC, located at 838 Walker Road, Suite 21-2, Dover, Delaware 19904. The Company's federal employer identification number (EIN) is 84-2193047.
B. Good Standing
We obtained a Certificate of Good Standing for Veridian from the Delaware Secretary of State, dated April 18, 2024, confirming that the Company is in good standing as a corporation organized under the laws of the State of Delaware. The certificate confirms that the Company's franchise tax account is not delinquent and that all required annual reports have been filed.
Veridian is qualified to transact business as a foreign corporation in the following jurisdictions:
(i) Massachusetts. Veridian is qualified to do business in the Commonwealth of Massachusetts, where it maintains its principal office at 550 Gateway Drive, Cambridge, MA 02142. We obtained a Certificate of Good Standing from the Massachusetts Secretary of the Commonwealth, dated April 22, 2024, confirming the Company's good standing in that jurisdiction.
(ii) California. Veridian is qualified to do business in the State of California, where it maintains a satellite research and business development office. We obtained a Certificate of Status from the California Secretary of State, dated April 19, 2024, confirming the Company's good standing in that jurisdiction.
(iii) Maryland. Veridian is qualified to do business in the State of Maryland, where it conducts certain regulatory affairs and clinical operations activities and employs a small number of personnel. We obtained a Certificate of Status from the Maryland State Department of Assessments and Taxation, dated April 23, 2024, confirming the Company's good standing in that jurisdiction.
We have confirmed that the Company's annual franchise taxes and annual reports are current in the State of Delaware and in each foreign qualification jurisdiction listed above. Copies of all certificates of good standing obtained have been placed in the deal closing binder and are listed in Appendix D to this memorandum.
We note that Veridian does not appear to be qualified to do business in any other state. We recommend confirming with the Company's management and LAC whether any additional foreign qualification filings may be required based on the Company's current operational footprint, employee locations, or contractual obligations.
C. Bylaws. We reviewed the Amended and Restated Bylaws of Veridian (the "Bylaws"), as most recently amended and restated on March 22, 2022, in connection with the Series D preferred stock financing. The Bylaws contain provisions that are customary for a Delaware corporation at Veridian's stage and of its character, including the following:
(a) Board Size. The Bylaws provide that the number of directors constituting the entire board of directors shall be fixed from time to time by resolution of the board, subject to the rights of the holders of preferred stock to designate directors under the Restated Certificate and the Voting Agreement.
(b) Officer Appointments. The officers of the Company shall be appointed by the board of directors and shall serve at the pleasure of the board, subject to the terms of any employment agreements.
(c) Meeting Procedures. The Bylaws set forth customary provisions regarding notice requirements, quorum, and voting procedures for meetings of the board of directors and stockholders.
(d) Quorum Requirements. A majority of the total number of authorized directors constitutes a quorum for the transaction of business at any meeting of the board. For stockholder meetings, the holders of a majority of the shares entitled to vote, present in person or represented by proxy, constitute a quorum.
(e) Indemnification. The Bylaws contain broad indemnification provisions for directors, officers, employees, and agents of the Company, to the fullest extent permitted by the Delaware General Corporation Law. These provisions are discussed further in Section IX below.
(f) Action by Written Consent. Consistent with the Restated Certificate, the Bylaws confirm that any action required or permitted to be taken at any meeting of stockholders may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action to be taken, are signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.
We note the following governance provisions in the Bylaws that are relevant to the Transaction:
(i) The Bylaws include a provision requiring the affirmative vote of holders of at least 66⅔% of the outstanding voting power to amend certain protective provisions of the Bylaws relating to director removal, board size, and indemnification. This supermajority threshold is consistent with corresponding provisions in the Restated Certificate and does not present an impediment to the Transaction.
(ii) The Bylaws grant board observation rights to certain preferred stockholders, as further detailed in the Investors' Rights Agreement. Specifically, each of Crestline Ventures, LP, Boreal Health Partners Fund III, LP, and Apex Growth Equity Fund II, LP is entitled to designate one non-voting observer to attend meetings of the board of directors.
(iii) The Bylaws contain a provision requiring board approval (and, in certain cases, the consent of holders of a majority of each series of preferred stock voting as a separate class) for certain significant corporate actions, including mergers, acquisitions, dispositions of all or substantially all of the Company's assets, and issuances of equity securities (other than pursuant to the equity incentive plan).
III. Organizational Structure
A. Subsidiaries. Based on our review of the Data Room documents, representations made by LAC in response to our due diligence request list, and our independent review of relevant state corporate records, Veridian does not have any subsidiaries, whether wholly owned or otherwise. The Company operates as a single corporate entity and does not hold any equity interests in any other entity, whether in the form of stock, membership interests, partnership interests, joint venture interests, or otherwise.
The absence of subsidiaries simplifies the stock purchase structure contemplated by the SPA, as Penterra will acquire 100% of the outstanding capital stock of a single corporate entity and will not need to address subsidiary governance, minority interest, or intercompany transaction issues. We note that the SPA representations and warranties should nonetheless include customary representations regarding the absence of subsidiaries and the Company's non-ownership of equity interests in any other person or entity, with appropriate indemnification backstop.
B. Principal Office and Facilities
Veridian's principal executive office is located at 550 Gateway Drive, Cambridge, Massachusetts 02142. This facility houses the Company's corporate headquarters, laboratory facilities, and the majority of its research and development operations. The Company also maintains operations in California and Maryland, consistent with its foreign qualification filings and the locations of its employee base. A review of the Company's real property leases and facility arrangements is addressed in the Material Contracts Review Memorandum (dated May 17, 2024).
An organizational chart reflecting the Company's corporate structure (confirming the absence of subsidiaries) and its principal office and operational locations is attached as Appendix C to this memorandum.
IV. Capitalization
A. Authorized and Outstanding Capital Stock
As described in Section II.A above, the Restated Certificate authorizes the Company to issue an aggregate of 172,250,000 shares of capital stock, consisting of 100,000,000 shares of Common Stock and 72,250,000 shares of Preferred Stock (designated across four series). The following table summarizes the authorized and outstanding shares of each class and series as of the date of the most recent capitalization table provided in the Data Room (dated as of March 31, 2024):
The foregoing table reflects shares on an as-converted and fully diluted basis, assuming the conversion of all outstanding shares of preferred stock into common stock at the applicable conversion ratios and the exercise of all outstanding vested and unvested stock options. We have reviewed the fully diluted capitalization table provided by the Company (prepared by the Company's outside counsel, LAC, in consultation with the Company's CFO, Steven R. Kessler) and have cross-referenced it against the draft Disclosure Schedules to the SPA. Subject to the reconciliation items described in Section X below, the capitalization table and the Disclosure Schedules are materially consistent.
B. Series A Preferred Stock
The Company issued 17,250,000 shares of Series A Preferred Stock in its Series A financing round, which closed on June 9, 2017, at a price per share of $1.45 for aggregate gross proceeds of approximately $25.0 million. The lead investor in the Series A round was Crestline Ventures, LP (the "Crestline" or "Crestline Ventures"), a Delaware limited partnership with a principal office in San Francisco, California. David Ng serves as the Managing Partner of Crestline Capital Management LLC, the general partner of Crestline Ventures.
Crestline Ventures holds approximately 13,200,000 shares of Series A Preferred Stock (on an as-converted basis), representing the substantial majority of the Series A round allocation. Taking into account Crestline's holdings across all classes and series (including its Series B holdings described below), Crestline Ventures holds approximately 28.3% of Veridian's fully diluted equity, making it the Company's single largest stockholder.
The key terms of the Series A Preferred Stock, as set forth in the Restated Certificate, include the following:
(i) Liquidation Preference. The Series A Preferred Stock carries a non-participating liquidation preference equal to 1x the original issue price per share ($1.45), plus any declared but unpaid dividends. In the event of a liquidation, dissolution, or winding up of the Company (including a deemed liquidation event such as a merger, acquisition, or sale of substantially all assets), holders of Series A Preferred Stock are entitled to receive, prior to and in preference to holders of common stock, an amount per share equal to the greater of (a) the applicable liquidation preference or (b) the amount such holder would receive on an as-converted-to-common-stock basis.
(ii) Conversion Rights. Each share of Series A Preferred Stock is convertible, at the option of the holder, into one share of Common Stock (subject to adjustment for stock splits, stock dividends, and similar events). All shares of Series A Preferred Stock will automatically convert into Common Stock upon the earlier of (a) the closing of a firmly underwritten public offering yielding aggregate gross proceeds of not less than $75,000,000 at a per-share price of not less than 3x the original issue price, or (b) the written consent of holders of at least 60% of the then-outstanding shares of Series A Preferred Stock.
(iii) Anti-Dilution Protections. The Series A Preferred Stock benefits from broad-based weighted average anti-dilution protection in the event of issuances of additional shares of equity securities below the then-applicable conversion price (subject to customary carve-outs for option pool grants, strategic partnerships, and similar issuances).
(iv) Voting Rights. Holders of Series A Preferred Stock are entitled to vote, on an as-converted basis, together with holders of Common Stock and other series of Preferred Stock on all matters submitted to a vote of the stockholders. In addition, certain protective provisions in the Restated Certificate require the affirmative vote or consent of holders of at least a majority of the outstanding shares of Series A Preferred Stock, voting as a separate class, to authorize certain corporate actions, including amendments to the charter that adversely affect the Series A Preferred Stock, incurrence of indebtedness above specified thresholds, and changes to the authorized number of shares of Series A Preferred Stock.
C. Series B Preferred Stock
The Company issued 12,800,000 shares of Series B Preferred Stock in its Series B financing round, which closed on November 15, 2018, at a price per share of $3.75 for aggregate gross proceeds of approximately $48.0 million. Crestline Ventures, LP again served as the lead investor in the Series B round, underscoring its position as the Company's anchor institutional backer. Additional investors in the Series B round included several existing Series A investors as well as new institutional investors, whose identities are set forth in the stock ledger and in the cap table attached as Appendix B.
The terms of the Series B Preferred Stock are substantially similar to those of the Series A Preferred Stock, with the principal differences relating to the original issue price ($3.75 per share, reflecting the Company's increased valuation at the time of the Series B closing), the corresponding liquidation preference amount, and the anti-dilution adjustment baseline. The Series B Preferred Stock carries a non-participating 1x liquidation preference, the same conversion mechanics, and substantially identical voting and protective provision rights as the Series A Preferred Stock (with such rights exercised by holders of Series B Preferred Stock voting as a separate class where applicable).
D. Series C Preferred Stock
The Company issued 21,500,000 shares of Series C Preferred Stock in its Series C financing round, which closed in Q3 2020 (specifically, the initial closing occurred on August 28, 2020, with a subsequent closing on September 15, 2020), at a price per share of $7.90 for aggregate gross proceeds of approximately $169.9 million. The Series C round represented a significant step-up in Veridian's valuation and was the Company's largest single financing round.
The lead investor in the Series C round was Boreal Health Partners Fund III, LP ("Boreal" or "Boreal Health Partners"), a Delaware limited partnership focused on life sciences investments. Sarah Dalmqvist serves as the Managing Director of Boreal Capital Advisors LLC, the general partner of Boreal Health Partners Fund III. Boreal Health Partners holds approximately 19.7% of Veridian's fully diluted equity, making it the Company's second-largest stockholder after Crestline Ventures.
The terms of the Series C Preferred Stock include a non-participating 1x liquidation preference ($7.90 per share), standard conversion rights, broad-based weighted average anti-dilution protections, and voting and protective provision rights consistent with the earlier series. We note that the Series C Preferred Stock has a senior liquidation preference relative to the Series A and Series B Preferred Stock — that is, in a liquidation or deemed liquidation event, the Series C holders receive their liquidation preference prior to and in preference to the Series A and Series B holders (with the Series D holders ranking pari passu with or senior to Series C, as described below). This liquidation preference waterfall has significant implications for the purchase price allocation among the various stockholder classes and must be carefully modeled in the funds flow.
Section 382 Ownership Change. The Series C financing round resulted in a significant shift in Veridian's ownership structure, triggering a "change of ownership" under Section 382 of the Internal Revenue Code of 1986, as amended. As identified in the Tax Due Diligence Memorandum being prepared by Leonard Cross of our Tax Department (expected date of circulation: May 28, 2024), approximately $148 million in pre-change net operating losses (NOLs) are subject to an annual limitation of approximately $5.9 million per year as a result of this ownership change. This annual limitation will affect the rate at which Penterra can utilize Veridian's pre-acquisition NOLs following the closing of the Transaction. We recommend that the deal team coordinate closely with Mr. Cross and the Penterra tax team to ensure that the Section 382 limitation is appropriately reflected in the purchase price and the SPA representations and warranties.
E. Series D Preferred Stock
The Company issued 15,100,000 shares of Series D Preferred Stock in its Series D financing round, which closed on March 22, 2022, at a price per share of $11.72 for aggregate gross proceeds of approximately $176.97 million. The Series D round was the Company's most recent and most highly valued financing round, reflecting the advancement of Veridian's clinical pipeline and the initiation of the Phase II Marlowe Asset Management-2 trial for VRD-4187.
The lead investor in the Series D round was Apex Growth Equity Fund II, LP ("Apex" or "Apex Growth Equity"), a Delaware limited partnership specializing in growth-stage life sciences investments. Marcus Doyle serves as a Partner at Apex Capital Partners LLC, the general partner of Apex Growth Equity Fund II. Apex Growth Equity holds approximately 14.1% of Veridian's fully diluted equity, making it the Company's third-largest institutional investor.
The terms of the Series D Preferred Stock include a non-participating 1x liquidation preference ($11.72 per share), standard conversion rights, broad-based weighted average anti-dilution protections, and voting and protective provision rights. The Series D Preferred Stock ranks senior in the liquidation preference waterfall to all prior series of preferred stock and to the common stock. As with the Series C terms, the Series D liquidation preference will be a key input in the purchase price allocation and funds flow.
F. Founders and Management Equity
The Company's two co-founders hold significant equity positions:
(i) Dr. Julian Marek (Chief Executive Officer & Co-Founder) holds shares of Common Stock (and/or vested stock options exercisable for Common Stock) representing approximately 8.4% of Veridian's fully diluted equity.
(ii) Dr. Priya Chandrasekaran (Chief Scientific Officer & Co-Founder) holds shares of Common Stock (and/or vested stock options exercisable for Common Stock) representing approximately 6.2% of Veridian's fully diluted equity.
In addition, the Company maintains an Employee Stock Option Plan (the "ESOP" or the "Plan"), the 2017 Equity Incentive Plan, as amended and restated (most recently in 2022 in connection with the Series D financing). The ESOP pool accounts for approximately 9.8% of Veridian's fully diluted equity. The key terms of the ESOP are as follows:
(a) Total Shares Reserved. A total of 9,500,000 shares of Common Stock have been reserved for issuance under the Plan.
(b) Shares Granted and Outstanding. As of the most recent Data Room snapshot (March 31, 2024), a total of 2,985,000 stock options are outstanding under the Plan. Of these, approximately 1,820,000 options are vested and approximately 1,165,000 options remain unvested.
(c) Available for Future Grant. Approximately 1,535,000 shares remain available for future grant under the Plan (after accounting for outstanding options and previously exercised options that resulted in the issuance of Common Stock, and shares that have been returned to the pool due to forfeitures or cancellations).
(d) Vesting Schedules. Options granted under the Plan are generally subject to a four-year vesting schedule, with 25% of the shares subject to each option vesting on the first anniversary of the vesting commencement date and the remaining 75% vesting in equal monthly installments over the subsequent 36 months, subject to the holder's continued service with the Company.
(e) Exercise Prices. The weighted average exercise price of outstanding options is approximately $4.87 per share. Exercise prices range from $1.10 per share (for early grants made shortly after the Series A round) to $8.50 per share (for more recent grants made following the Series D round). Exercise prices were set based on the fair market value of the Common Stock at the time of each grant as determined by periodic independent 409A valuations.
(f) Change-of-Control Acceleration. The Plan contains a "double-trigger" change-of-control acceleration provision. Under this provision, if a change of control occurs (which would include the Transaction) and the option holder's employment is terminated by the Company (or its successor) without cause or by the option holder for good reason within twelve (12) months following the change of control, then 100% of the holder's unvested options will accelerate and become immediately exercisable. Certain senior executive employment agreements (specifically, the agreements with Dr. Marek, Dr. Chandrasekaran, and Mr. Kessler) contain supplemental "single-trigger" acceleration provisions that accelerate a portion of unvested equity upon the closing of a change-of-control transaction, regardless of whether a termination of employment occurs. The specific acceleration terms for each named executive officer are discussed in the Employment and Benefits Due Diligence Memorandum.
The change-of-control acceleration provisions must be accurately reflected in the SPA's treatment of Company equity awards, the purchase price allocation, the funds flow memorandum, and any letter agreements or retention arrangements that Penterra may negotiate with Veridian's key management personnel. We recommend that the deal team confirm the precise acceleration mechanics with LAC and with each individual employment agreement.
G. Other Institutional Investors
In addition to Crestline Ventures (28.3%), Boreal Health Partners (19.7%), and Apex Growth Equity (14.1%), the remaining approximately 13.5% of Veridian's fully diluted equity is held by a group of other institutional investors who participated in the various financing rounds. Based on the stock ledger and investor schedules in the Data Room, these include, among others:
• Redwood Life Sciences Partners, LLC — participated in Series B and Series C rounds
• Pacifica BioVentures Fund IV, LP — participated in the Series C round
• Meridian Capital Health Opportunities, LP — participated in the Series D round
• Certain individual angel investors who participated in the seed and Series A rounds
No single holder in this group holds more than 4% of the Company's fully diluted equity. A complete list of stockholders is set forth in the stock ledger and in the capitalization table attached as Appendix B.
H. Total Venture Capital Raised
Since its incorporation, Veridian has raised a total of approximately $420 million in equity financing across its Series A through Series D preferred stock rounds:
Veridian is a clinical-stage biopharmaceutical company and has not generated any product revenue to date. The Company reported total revenue of $0 and a net loss of approximately $87.3 million for the fiscal year ended December 31, 2023. As of March 31, 2024, the Company reported cash and cash equivalents of approximately $112.4 million. The Company employs approximately 148 employees as of the date of this review, with personnel distributed across its facilities in Massachusetts, California, and Maryland.
I. Outstanding Warrants, Options, and Convertible Securities
In addition to the stock options outstanding under the ESOP described in Section IV.F above, we have reviewed the Data Room for evidence of any other outstanding warrants, convertible notes, simple agreements for future equity (SAFEs), or other convertible securities. Our findings are as follows:
(i) Warrants. The Company issued a warrant to purchase 150,000 shares of Common Stock to Pacific West Bank in connection with a venture debt facility entered into in 2019. The warrant has an exercise price of $3.20 per share and an expiration date of November 30, 2029. The warrant was fully vested upon issuance. No other outstanding warrants have been identified.
(ii) Stock Options. As described in Section IV.F above, a total of 2,985,000 stock options are outstanding under the 2017 Equity Incentive Plan, with a weighted average exercise price of approximately $4.87 per share.
(iii) Convertible Notes and SAFEs. Based on our review of the Data Room and confirmations received from LAC, the Company does not have any outstanding convertible promissory notes, SAFEs, or other convertible debt instruments. All pre-Series A bridge financing instruments (if any) were converted into Series A Preferred Stock at the time of the Series A closing in 2017.
We have reconciled the foregoing outstanding equity instruments against the fully diluted capitalization table and the draft Disclosure Schedules. Subject to the reconciliation items identified in Section X.B below, the records are materially consistent. The SPA should include customary representations and warranties regarding the completeness and accuracy of the capitalization disclosure, with appropriate bring-down at closing.
J. Capitalization Issues / Observations
Based on our review, we note the following observations regarding Veridian's capitalization:
(i) No Unauthorized Issuances. We have not identified any issuances of shares of capital stock, options, warrants, or other equity securities that were not properly authorized by the board of directors and, where required, by the stockholders. All issuances reviewed appear to have been made in accordance with the Restated Certificate, the applicable stock purchase agreements, and the equity incentive plan.
(ii) Properly Issued, Fully Paid, and Nonassessable. Based on our review of the stock purchase agreements, option exercise records, and related documentation, all outstanding shares of capital stock appear to have been properly issued, are fully paid, and are nonassessable.
(iii) 409A Valuation. The Company has obtained periodic independent 409A valuations for the purpose of setting the exercise prices of stock option grants under the equity incentive plan. The most recent 409A valuation report in the Data Room is dated September 2023 and was prepared by Paradigm Valuation Advisors, LLC. We recommend verifying that 409A valuations were obtained and relied upon for all option grants, including any grants made between September 2023 and the present date, to mitigate potential Section 409A penalty tax exposure. See Open Item No. 5 in Section X.B below.
(iv) IP Assignment Agreements. In connection with the capitalization review, we cross-reference the intellectual Property Due Diligence Memorandum (to be prepared by the IP team) regarding the status of proprietary information and inventions assignment agreements executed by the founders (Dr. Marek and Dr. Chandrasekaran) and other key employees. Confirmation that all relevant intellectual property was properly assigned to the Company at or around the time of incorporation and initial equity issuance is critical to the value of the equity being acquired.
V. Stockholder Agreements
A. Investors' Rights Agreement
We reviewed the Fourth Amended and Restated Investors' Rights Agreement, dated as of March 22, 2022 (the "IRA"), among Veridian, Crestline Ventures, LP, Boreal Health Partners Fund III, LP, Apex Growth Equity Fund II, LP, and the other institutional investors listed on the schedule of investors attached thereto (collectively, the "Investors"). The IRA was most recently amended and restated in connection with the Series D financing closing. The key provisions of the IRA are as follows:
(a) Information Rights. Major Investors (defined as holders of at least 500,000 shares of Preferred Stock, as adjusted) are entitled to receive certain periodic financial and operational information, including annual audited financial statements, unaudited quarterly financial statements, and annual operating budgets. These information rights are subject to customary confidentiality obligations.
(b) Registration Rights. The IRA provides for both demand and piggyback registration rights in connection with a future initial public offering or subsequent registered offerings of the Company's securities. Specifically:
• Demand Registration Rights. Holders of at least 30% of the Registrable Securities (as defined) may demand that the Company file a registration statement on Form S-1 (or any successor form) to register the resale of their Registrable Securities. The Company is obligated to effect up to two demand registrations.
• Piggyback Registration Rights. If the Company proposes to file a registration statement for its own account or the account of any other stockholder, the Investors are entitled to include their Registrable Securities in such registration, subject to customary cutback provisions.
• Form S-3 Registration Rights. When the Company becomes eligible to use Form S-3, holders of Registrable Securities may request that the Company file a registration statement on Form S-3 to register the resale of their shares, subject to certain aggregate value thresholds and frequency limitations.
We note that the registration rights provisions are not directly relevant to the Transaction, given that Penterra is acquiring the Company's outstanding capital stock in an all-cash transaction and is not issuing any registered securities as consideration. However, certain provisions of the IRA may create obligations or restrictions that must be addressed prior to or at the closing of the Transaction. Specifically, the IRA includes a provision (Section 3.7) that requires the Company to notify the Investors of any proposed "Deemed Liquidation Event" (which term includes a merger, acquisition, or sale of substantially all of the Company's assets) at least ten (10) business days prior to the consummation of such event. We recommend that the deal team confirm compliance with this notice obligation.
(c) Board Observation Rights. As noted in Section II.C above, each of Crestline Ventures, Boreal Health Partners, and Apex Growth Equity is entitled to designate one non-voting observer to attend all meetings of the board of directors. Board observers are subject to the Company's standard confidentiality obligations.
(d) Pro Rata Participation Rights (Preemptive Rights / Rights of First Refusal). Major Investors have a right of first refusal to participate in future issuances of equity securities by the Company, on a pro rata basis, in order to maintain their percentage ownership interest. This right is subject to customary exceptions for issuances under the equity incentive plan, issuances in connection with strategic transactions, and other standard carve-outs. These pro rata participation rights will be rendered moot by the consummation of the Transaction but should be addressed in the Disclosure Schedules and waived to the extent they could be argued to apply to the Transaction itself.
(e) Termination. The IRA provides that the rights set forth therein will terminate upon the earlier of (i) the closing of a Qualified IPO, (ii) a Deemed Liquidation Event (as defined in the Restated Certificate), or (iii) the written agreement of the Company and holders of a majority of the Registrable Securities. The closing of the Transaction will constitute a Deemed Liquidation Event and will therefore result in the termination of the IRA by its terms.
B. Right of First Refusal and Co-Sale Agreement (ROFR/Co-Sale)
We reviewed the Fourth Amended and Restated Right of First Refusal and Co-Sale Agreement, dated as of March 22, 2022 (the "ROFR/Co-Sale Agreement"), among Veridian, the Investors, and the Key Holders (defined to include the founders and certain management stockholders, including Dr. Julian Marek, Dr. Priya Chandrasekaran, and Steven R. Kessler).
The ROFR/Co-Sale Agreement contains the following key provisions:
(a) Right of First Refusal. If any Key Holder proposes to transfer any shares of Common Stock (or securities convertible into or exercisable for Common Stock), the Company and the Investors have a right of first refusal to purchase such shares on the same terms and conditions as the proposed transfer.
(b) Co-Sale Right. If the Company and the Investors do not exercise their right of first refusal in full, the Investors have a right to participate in the proposed transfer on a pro rata basis (i.e., a co-sale or "tag-along" right).
(c) Exemptions. The ROFR and co-sale provisions are subject to customary exemptions for permitted transfers, including transfers to family members, trusts, and affiliates, and transfers in connection with a Deemed Liquidation Event approved by the board and the requisite stockholder vote.
The Transaction, which involves the sale of 100% of the outstanding capital stock of Veridian, must be structured to comply with or obtain waivers of the ROFR and co-sale provisions. Because the Transaction is structured as a stock purchase in which all stockholders will sell their shares to Penterra, and assuming the Transaction is approved as a Deemed Liquidation Event under the Restated Certificate, the ROFR/Co-Sale Agreement should terminate by its terms upon the closing of the Transaction. Nonetheless, to ensure a clean execution, we recommend obtaining express waivers of the ROFR and co-sale provisions from each of the holders party to the ROFR/Co-Sale Agreement, either as part of the Stockholder Written Consent and Joinder Agreement or by separate waiver letter delivered at or prior to signing. The status of these waivers is identified as an open item in Section X.B below.
C. Voting Agreement
We reviewed the Fourth Amended and Restated Voting Agreement, dated as of March 22, 2022 (the "Voting Agreement"), among Veridian, the Investors, and the Key Holders. The Voting Agreement contains the following key provisions:
(a) Board Composition. The Voting Agreement establishes the composition of the Company's board of directors by requiring the parties to vote their shares (or execute written consents) in favor of the following board designees:
• One (1) member designated by Crestline Ventures, LP, as the holder of the largest number of shares of Series A and Series B Preferred Stock (currently David Ng);
• One (1) member designated by Boreal Health Partners Fund III, LP, as the lead investor in the Series C round (currently Sarah Dalmqvist);
• One (1) member designated by Apex Growth Equity Fund II, LP, as the lead investor in the Series D round (currently Marcus Doyle);
• Two (2) members designated by the holders of a majority of the Common Stock, including the CEO (currently Dr. Julian Marek serves in one of these seats); and
• One (1) independent director mutually agreed upon by the holders of a majority of the Preferred Stock and the holders of a majority of the Common Stock (currently Dr. Helen Voss, a former FDA official).
(b) Drag-Along Provision. The Voting Agreement includes a drag-along provision (Section 5) that requires all parties to the agreement to vote in favor of, and not oppose, any merger, acquisition, or sale of all or substantially all of the assets of the Company that has been (i) approved by the board of directors, (ii) approved by the holders of at least a majority of the outstanding shares of Preferred Stock (voting together as a single class on an as-converted basis), and (iii) approved by the holders of at least a majority of the outstanding shares of Common Stock. This drag-along provision is directly relevant to the Transaction.
(c) Stockholder Actions. The Voting Agreement further provides that the parties thereto will vote their shares (or execute written consents) in accordance with the terms of the agreement on all matters submitted to a vote of the stockholders, including the election of directors, amendments to the charter and bylaws, and approval of significant corporate transactions.
The Voting Agreement is highly relevant to the stockholder approval process for the Transaction. Because the parties to the Voting Agreement collectively hold well in excess of a majority of the outstanding voting power (as described in Section V.D below), the drag-along provision should ensure that the requisite stockholder consents are obtained in a timely and efficient manner.
D. Stockholder Written Consent Requirement
Under Section 228 of the Delaware General Corporation Law ("DGCL"), any action required or permitted to be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken, are signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.
The Restated Certificate does not contain any provision limiting or eliminating the right of stockholders to act by written consent in lieu of a meeting. Accordingly, the stockholders of Veridian may approve the Transaction by written consent.
The Transaction, structured as a sale of 100% of the outstanding capital stock, does not itself require a formal stockholder vote under the DGCL (as opposed to a merger, which would require a stockholder vote under DGCL § 251). However, the SPA contemplates that the Company will deliver, as a condition to closing, a written consent executed by holders of a sufficient number of shares of each class and series of capital stock as may be required under the Restated Certificate, the Voting Agreement, and applicable law to approve the Transaction, waive any applicable rights of first refusal and co-sale rights, and acknowledge and agree to certain other matters. In addition, the protective provisions in the Restated Certificate applicable to each series of preferred stock may require separate class or series approvals for certain aspects of the Transaction.
Given the combined holdings of the key stockholders, the expected delivery of written consents is as follows:
Holders of well over 80% of the outstanding voting power are expected to deliver written consents approving the Transaction. This figure significantly exceeds the majority threshold required under the DGCL and should also satisfy any supermajority thresholds applicable under the Restated Certificate's protective provisions. The drag-along provision of the Voting Agreement provides additional assurance that the requisite consents will be obtained.
The form of Stockholder Written Consent and Joinder Agreement has been prepared by our office and is under review by LAC. A separate memorandum regarding the stockholder written consent process, including the mechanics of consent solicitation, information statement requirements (if any), and DGCL § 228(e) notice requirements, will be prepared closer to the anticipated signing date. See Calderwood & Harkness Memorandum re: Stockholder Written Consent Process, dated June 11, 2024 (to be prepared).
VI. Board of Directors and Governance
A. Board Composition
As of the date of this memorandum, the board of directors of Veridian consists of six (6) members, as follows:
The board composition is consistent with the terms of the Voting Agreement described in Section V.C above. In addition to the six voting directors, each of Crestline Ventures, Boreal Health Partners, and Apex Growth Equity is entitled to designate one non-voting board observer under the IRA, as described in Section V.A above.
The board has established the following standing committees:
(a) Audit Committee. The Audit Committee consists of Dr. Helen Voss (Chair), David Ng, and Marcus Doyle. The committee is responsible for overseeing the Company's financial reporting, internal controls, and relationship with the independent auditor.
(b) Compensation Committee. The Compensation Committee consists of Sarah Dalmqvist (Chair), David Ng, and Dr. Helen Voss. The committee is responsible for overseeing executive compensation, equity incentive plan administration, and related matters.
No other standing committees of the board have been identified in the governance documents reviewed.
B. Board Meeting Minutes Review
We have reviewed the minutes of all meetings of the board of directors from January 2021 through the most recent meeting for which minutes were available in the Data Room (April 9, 2024). The minutes were reviewed for evidence of proper authorization of material corporate actions, compliance with governance procedures, and any irregularities or matters of concern. Our findings are summarized as follows:
(i) Series D Financing. The board minutes reflect extensive deliberation and proper authorization of the Series D financing, including approval of the Series D Stock Purchase Agreement, the Fifth Amended and Restated Certificate of Incorporation, and the amended and restated stockholder agreements. The board received and considered a presentation from the Company's financial advisor regarding the terms of the Series D round.
(ii) Equity Incentive Plan Amendments. The board authorized amendments to the 2017 Equity Incentive Plan, including an increase in the share reserve to 9,500,000 shares, in connection with the Series D financing in 2022. The amendment was subsequently approved by the requisite stockholder vote.
(iii) Clinical Trial Expenditures. The board authorized the initiation and funding of the Marlowe Asset Management-2 clinical trial, a Phase II trial of VRD-4187 (ClinicalTrials.gov Identifier: NCT05837291), Veridian's lead product candidate. The board reviewed and approved the clinical development budget associated with Marlowe Asset Management-2 and other pipeline programs.
(iv) Key Hires. The board approved the hiring and compensation packages for several key executives, including the appointment of Steven R. Kessler as Chief Financial Officer (appointed 2021) and Dr. Anne-Marie Fontaine as Vice President, Regulatory Affairs (appointed 2022).
(v) Material Contracts. The board authorized the execution of certain material contracts, including the Company's lease for the Cambridge headquarters facility, a clinical research organization ("CRO") master services agreement, and a manufacturing and supply agreement with a contract development and manufacturing organization ("CDMO"). These contracts are discussed in detail in the Material Contracts Review Memorandum.
(vi) Engagement of Financial Advisor. The board authorized the engagement of Ridgeway Partners LLC (Laura Beckett, Managing Director) as the Company's financial advisor in connection with a potential strategic transaction or sale process. The engagement letter was approved by the board at a meeting held in January 2024.
(vii) Engagement of Outside Transaction Counsel. The board authorized the engagement of Zalcourt Archer & Cole LLP (Rebecca Whitmore, Partner) as the Company's outside legal counsel for the contemplated transaction.
(viii) Authorization of Transaction Negotiations. The board discussed and authorized management (in consultation with Ridgeway Partners and LAC) to enter into negotiations with potential acquirors, including Penterra. The board subsequently discussed Penterra's non-binding indication of interest and authorized the execution of the Confidentiality Agreement with Penterra (executed March 4, 2024) and the continuation of negotiations toward a definitive Stock Purchase Agreement. The minutes reflect that the board received regular updates from management, Ridgeway Partners, and LAC regarding the status of the sale process and negotiations with Penterra.
We have not identified any irregularities, gaps, or missing minutes in the board records reviewed. All material corporate actions appear to have been properly authorized by a duly constituted quorum of the board, with appropriate recusals noted where a director had a conflict of interest.
C. Stockholder Meeting / Consent Minutes
We have reviewed records of all stockholder actions — including annual meetings, special meetings, and written consents in lieu of meetings — from the date of the Company's incorporation through the present. Key stockholder actions include:
(i) Approval of the original Certificate of Incorporation and initial Bylaws (September 2016);
(ii) Approval of the Amended and Restated Certificate of Incorporation in connection with each financing round (Series A through D), including the creation of each new series of preferred stock and the authorization of additional shares;
(iii) Approval of the 2017 Equity Incentive Plan and subsequent amendments thereto;
(iv) Election of directors in accordance with the Voting Agreement; and
(v) Approval of the amended and restated stockholder agreements (IRA, ROFR/Co-Sale Agreement, and Voting Agreement) in connection with each financing round.
We have confirmed that all required stockholder approvals were properly obtained for each of the foregoing corporate actions. In each case, the requisite number of shares (by class and series, where applicable) was voted or consented in favor of the action. We have not identified any stockholder disputes, contested actions, dissenter's rights proceedings, or appraisal claims in the stockholder records reviewed.
D. Officer Appointments
Based on our review of the board minutes and related corporate records, the current officer roster of Veridian is as follows:
We have confirmed that each officer was duly elected or appointed by the board of directors in accordance with the Bylaws. The board minutes reflect the appointment of each officer by a resolution adopted at a properly noticed meeting of the board at which a quorum was present.
We have reviewed the employment agreements for each of the named executive officers listed above. The key terms of these agreements, including compensation, severance provisions, restrictive covenants (non-competition and non-solicitation), and change-of-control provisions, are discussed in detail in the Employment and Benefits Due Diligence Memorandum. We note that the SPA should address the treatment of these employment agreements and any related obligations (including change-of-control payments and accelerated vesting) as part of the transaction closing mechanics.
VII. Material Corporate Actions and Transactions
A. Prior Financing Rounds
As described in Section IV above, Veridian has completed four rounds of preferred stock financing:
(i) Series A (June 2017; $25.0 million): Led by Crestline Ventures, LP.
(ii) Series B (November 2018; $48.0 million): Led by Crestline Ventures, LP, with participation from existing and new investors.
(iii) Series C (Q3 2020; $169.9 million): Led by Boreal Health Partners Fund III, LP. This round triggered a Section 382 ownership change, as discussed in Section IV.D above and in the Tax Due Diligence Memorandum.
(iv) Series D (March 2022; $177.0 million): Led by Apex Growth Equity Fund II, LP.
Total venture capital raised across these four rounds is approximately $420 million.
We have confirmed that each financing round was properly authorized by the board of directors and, where required, by the stockholders. In each case, the board approved the applicable stock purchase agreement, the amended and restated charter, and the amended and restated stockholder agreements, and the requisite stockholder vote or written consent was obtained.
We have further confirmed that each issuance of preferred stock was made in compliance with applicable federal and state securities laws. Each round relied upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder. We reviewed the Form D filings made with the Securities and Exchange Commission in connection with each round and confirmed that such filings were timely made. We also reviewed evidence of state "blue sky" notice filings in applicable jurisdictions.
B. Material Contracts Authorization
We have confirmed that the material contracts identified in the Data Room — including the Company's facility lease, CRO master services agreement, CDMO manufacturing and supply agreement, license agreements, and certain consulting and collaboration arrangements — were properly authorized by the board of directors where board approval was required under the Bylaws or the Restated Certificate. A detailed review of these material contracts is set forth in the Material Contracts Review Memorandum, dated May 17, 2024.
C. Pending or Contemplated Transactions
Based on our review of the Data Room, the board minutes, and representations made by LAC and Veridian's management, no other pending acquisition proposals, merger discussions, or material strategic transactions have been identified other than the proposed Transaction with Penterra.