PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 200 Park Avenue, 42nd Floor New York, NY 10166
MEMORANDUM
May 18, 2024
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I. Executive Summary
This memorandum summarizes the findings of our litigation and contingent liabilities due diligence review of Veridian Biosciences, Inc. ("Veridian" or the "Company"), a privately held corporation organized under the laws of the State of Delaware and headquartered at 550 Gateway Drive, Cambridge, Massachusetts 02142, conducted in connection with the proposed acquisition of one hundred percent (100%) of the outstanding capital stock of Veridian by Penterra Pharmaceuticals Corp. ("Penterra" or "PPC") for an aggregate cash purchase price of Nine Hundred Million Dollars ($900,000,000) (the "Transaction"). The Transaction is structured as a stock purchase pursuant to a Stock Purchase Agreement (the "SPA") to be entered into among PPC, Veridian, the stockholders of Veridian, and the Stockholders' Representative.
The scope of our review encompassed all pending and threatened litigation, arbitration, and other dispute resolution proceedings; administrative proceedings and complaints; governmental investigations and regulatory enforcement actions; and other contingent liabilities of the Company. In conducting this review, we examined materials provided by the Company in the electronic data room (the "Data Room"), management representations made to the Company's independent auditors and to our firm, the Company's responses to our Preliminary Due Diligence Request List dated March 6, 2024 (specifically Section XII — Litigation, Claims, and Proceedings), and conducted interviews and written inquiries with key personnel, including Rachel Stein-Goldberg, General Counsel of Veridian, and Rebecca Whitmore and Jonathan Pratt of Zalcourt Archer & Cole LLP, the Company's principal outside litigation counsel.
High-Level Conclusion. Based on our review, Veridian has no pending material litigation or governmental investigations that would individually or in the aggregate present a significant financial or operational risk to the Company or to Penterra as the acquiror. Two minor pending matters — an employment discrimination administrative complaint before the Massachusetts Commission Against Discrimination and a commercial payment dispute with a former clinical research organization vendor — were identified as described in detail in Section III below. Neither matter, individually or in the aggregate, is material in the context of the Transaction. One prior patent-related inquiry letter, which appears to have been satisfactorily resolved, is described in Section IV. No matters were identified that would, individually or in the aggregate, rise to the level of a Material Adverse Effect (as that term is expected to be defined in the SPA) on the business, results of operations, financial condition, properties, or assets of the Company, taken as a whole.
Certain contingent liabilities are noted below for purposes of Disclosure Schedule review and preparation, and for the drafting of representations, warranties, and indemnification provisions in the SPA. We have identified specific recommendations relating to each matter.
This memorandum should be read in conjunction with the following companion due diligence memoranda prepared by the Calderwood & Harkness LLP deal team, which address litigation and dispute matters that fall within their respective subject-matter areas in greater detail:
•  Regulatory and FDA Compliance Due Diligence Memorandum (dated May 20, 2024, prepared by Sarah Lin and Thomas Park), which addresses FDA regulatory compliance, clinical trial regulatory matters, and any related enforcement actions;
•  intellectual Property Due Diligence Memorandum (dated May 14, 2024, prepared by Nadia Vasquez and James Thornton), which addresses patent, trademark, trade secret, and other IP-related litigation and disputes, including the third-party patent inquiry discussed in Section IV.B below;
•  Employment and Benefits Due Diligence Memorandum (dated May 22, 2024, prepared by Karen Whitfield and Andrew Sato), which addresses employment litigation, labor relations, wage and hour compliance, and benefits-related claims in greater detail; and
•  Environmental Due Diligence Memorandum (dated May 15, 2024, prepared by Robert Chen), which addresses environmental compliance, remediation obligations, and related enforcement matters.
Additionally, certain matters referenced herein, particularly the Company's insurance coverage and tax positions, are addressed in the Insurance Due Diligence Memorandum (dated May 16, 2024, prepared by Megan Chu) and the Tax Due Diligence Memorandum (targeted for May 28, 2024, prepared by Leonard Cross), respectively.
II. Scope of Review and Materials Examined
The following sets forth the materials reviewed, interviews conducted, and public records searches performed in connection with this memorandum. Our review and analysis is limited to the materials and information made available to us as described below. We have not independently verified the accuracy or completeness of the information provided by the Company, its management, or its advisors, except to the extent of the public records searches described in Section II.C below. We have assumed, for purposes of this memorandum, that all materials provided to us are authentic and complete and that all representations made to us by management are truthful and accurate. To the extent that additional information becomes available prior to the closing of the Transaction, this memorandum should be supplemented accordingly.
A. Data Room Materials Reviewed
We reviewed the following categories of documents and materials maintained in the electronic Data Room (hosted on Thackeray Solutions, Project Cascade):
1.  Litigation Docket and Case Summary Spreadsheet. The Company's legal department maintains an internal litigation tracker spreadsheet (Data Room Document No. 12.01.001, last updated April 28, 2024) summarizing all pending, threatened, and recently closed legal matters involving the Company as a party, potential party, or interested party. The spreadsheet includes matter descriptions, status designations, retention of outside counsel, estimated exposure ranges, and insurance coverage applicability. As of the most recent update, the tracker reflected two open matters (the MCAD complaint and the CRO vendor payment dispute described in Section III below) and five closed matters (all resolved prior to 2023 with no continuing obligations or liabilities).
2.  Correspondence Files for All Pending and Threatened Claims. We reviewed the complete correspondence files for the two pending matters and the one threatened/inquiry matter described in Sections III and IV below, including internal memoranda, demand letters, response letters, counsel communications, and negotiation correspondence. These files were maintained in Data Room Folders 12.02 through 12.04.
3.  Insurance Coverage Correspondence. We reviewed correspondence between the Company and its insurance carriers and brokers relating to any claims or potential claims that may implicate the Company's insurance coverage, including notice letters, reservation of rights correspondence, and coverage position letters. This review was conducted in coordination with the insurance due diligence workstream. Cross-reference to the Insurance Due Diligence Memorandum (dated May 16, 2024) for a comprehensive analysis of the Company's insurance program, including policy limits, retentions, exclusions, and claims history.
4.  Board Minutes and Audit Committee Minutes. We reviewed the minutes of all meetings of the Board of Directors and the Audit Committee of the Board of Directors for fiscal years 2021 through 2024 year-to-date (Data Room Folder 1.03), with particular attention to any references to pending or threatened litigation, governmental investigations, enforcement actions, or contingent liabilities. We noted that litigation matters were discussed at Audit Committee meetings on a quarterly basis, and that the General Counsel provided written litigation status reports to the Audit Committee. No material litigation matters were reported during the review period, and the discussion of litigation matters in the board and committee minutes was consistent with the information provided to us through the other channels described herein.
5.  Reserves and Accruals Schedules. We reviewed the Company's internal litigation reserves and accruals schedules for fiscal years 2021 through 2024 year-to-date, as maintained by the Company's finance department and provided to us in Data Room Folder 12.05. These schedules were cross-referenced to the audited financial statements of the Company prepared in accordance with U.S. GAAP and audited by Northbridge Accounting Group LLP (engagement partner: Patrick Calloway, CPA). As of the most recent balance sheet date (December 31, 2023), no reserves or accruals for litigation matters or contingent liabilities were recorded in the Company's financial statements. The Company's CFO, Steven R. Kessler, confirmed in our April 15, 2024 interview that no such reserves were deemed necessary under ASC 450 (Contingencies) based on the Company's assessment that no loss was probable and estimable with respect to any pending or threatened matter.
6.  Responses to Preliminary Due Diligence Request List. We reviewed the Company's detailed written responses (dated March 28, 2024, supplemented April 22, 2024) to Section XII (Litigation, Claims, and Proceedings) of our Preliminary Due Diligence Request List dated March 6, 2024. The Company's responses were prepared by the General Counsel's office and were reviewed by Zalcourt Archer & Cole LLP prior to submission. The responses addressed 24 specific items requested, including pending and threatened claims, governmental investigations, consent orders, regulatory enforcement actions, and related matters.
7.  Management Representation Letters. We reviewed the management representation letters provided by Veridian's management (signed by the CEO and CFO) to Northbridge Accounting Group LLP in connection with the audits of the Company's financial statements for fiscal years 2021, 2022, and 2023. Each representation letter included standard representations regarding pending and threatened litigation, unasserted claims, and contingent liabilities, as required under AU-C Section 580 (Written Representations). The content of these representation letters was consistent with the information provided to us during our due diligence review.
B. Interviews and Inquiries
We conducted the following interviews and written inquiries with Company personnel and outside advisors:
1.  Rachel Stein-Goldberg, General Counsel, Veridian Biosciences, Inc. We conducted two in-person interviews with Ms. Stein-Goldberg: the first on April 12, 2024, at the Company's Cambridge headquarters, and the second on May 3, 2024, by videoconference. Ms. Stein-Goldberg provided an overview of the Company's current litigation posture, discussed the specific pending and threatened matters described herein, and confirmed that she was not aware of any additional pending, threatened, or anticipated litigation, claims, arbitration, or governmental proceedings not previously disclosed to us. Ms. Stein-Goldberg further confirmed that the Company had not received any subpoenas, civil investigative demands, or similar compulsory process during the preceding five-year period, and that no officer, director, or employee of the Company was the subject of any personal litigation or governmental investigation that could affect the Company's business or operations. Notes from these interviews are summarized in Appendix C.
2.  Zalcourt Archer & Cole LLP (Jonathan Pratt, Partner; Rebecca Whitmore, Partner). We submitted written due diligence questionnaires to Zalcourt Archer & Cole LLP, the Company's principal outside litigation counsel, and received detailed written responses dated April 30, 2024 and May 10, 2024 from Jonathan Pratt. These responses confirmed the status and assessment of the pending matters, provided Zalcourt Archer & Cole's independent evaluation of the merits and probable outcome of each matter, and confirmed that no additional matters had been referred to Zalcourt Archer & Cole that were not disclosed in the Data Room materials. Ms. Whitmore, who serves as the Company's primary outside patent litigation counsel, provided supplemental responses regarding the patent inquiry matter described in Section IV.B below, and confirmed her assessment that no patent infringement claim had been asserted and that no infringement exists with respect to the VeriTCE platform.
3.  Steven R. Kessler, Chief Financial Officer, Veridian Biosciences, Inc. We conducted a telephone interview with Mr. Kessler on April 15, 2024, focusing on the Company's accounting treatment of contingent liabilities, the process for evaluating litigation reserves under ASC 450, and the Company's coordination with its auditors on litigation-related disclosures. Mr. Kessler confirmed that no litigation reserves or accruals were recorded as of December 31, 2023, and that the Company's assessment was that no pending or threatened matter met the "probable and estimable" threshold for accrual under ASC 450. Mr. Kessler also confirmed the Company's position that the CRO vendor payment dispute described in Section III.B.2 below was being addressed as a commercial matter and that the disputed amount had been partially accrued as an accounts payable item rather than as a litigation reserve.
4.  Dr. Anne-Marie Fontaine, Vice President of Regulatory Affairs, Veridian Biosciences, Inc. We submitted a written inquiry to Dr. Fontaine on April 18, 2024, requesting confirmation of whether Veridian or any of its officers, directors, employees, or contractors had been the subject of any FDA warning letters, untitled letters, Form 483 observations, consent decrees, debarment proceedings, clinical holds, or other FDA enforcement actions. Dr. Fontaine responded in writing on April 23, 2024, confirming that no such enforcement actions had been issued or threatened and that the Company's ongoing IND (No. 154832) for VRD-4187 and the Marlowe Asset Management-2 Phase II clinical trial (NCT05837291) were proceeding in compliance with all applicable FDA regulations.
C. Public Records Searches
We commissioned and reviewed the following public records searches, which were conducted by LegalSearch Associates LLC between April 8, 2024 and May 6, 2024. All searches were run under the Company's full legal name ("Veridian Biosciences, Inc.") and all known trade names and former names (none identified). The search results are summarized in Appendix B.
1.  Federal Court Litigation Searches. We conducted searches of all United States District Court and Bankruptcy Court dockets through the PACER system, covering all federal judicial districts. No pending federal court cases involving Veridian as a party were identified. No closed federal court cases involving Veridian were identified.
2.  Delaware Court of Chancery Docket Search. Given Veridian's Delaware incorporation, we conducted a targeted search of the Delaware Court of Chancery docket. No pending or closed cases involving Veridian were identified.
3.  Massachusetts State Court Docket Search. We conducted searches of the dockets of the Suffolk County Superior Court, Middlesex County Superior Court, and the Massachusetts Land Court. No pending or closed cases involving Veridian were identified. We note that the MCAD administrative complaint described in Section III.B.1 would not appear in the state court dockets, as it remains at the administrative agency level.
4.  California State Court Docket Search. Reflecting the Company's employee presence and state tax nexus in California, we conducted searches of the San Francisco County Superior Court and San Mateo County Superior Court dockets, as well as the California Division of Labor Standards Enforcement (DLSE) complaint database. No pending or closed cases or complaints involving Veridian were identified.
5.  Maryland State Court Docket Search. Reflecting the Company's operations and employee presence in Maryland, we conducted searches of the circuit court dockets for Baltimore City, Baltimore County, and Montgomery County. No pending or closed cases involving Veridian were identified.
6.  USPTO Trademark Trial and Appeal Board (TTAB) and Patent Litigation Searches. We conducted searches of the TTAB docket and cross-referenced patent litigation search results with the IP due diligence workstream. No TTAB proceedings or patent litigation involving Veridian were identified. This is addressed in greater detail in the intellectual Property Due Diligence Memorandum (dated May 14, 2024).
7.  SEC EDGAR Search. Not applicable. Veridian is a privately held company and has not filed any registration statements, periodic reports, or other documents with the U.S. Securities and Exchange Commission. No SEC filings were identified.
8.  FDA Enforcement Database Searches. We searched the FDA's public databases, including the Warning Letters database, the Debarment List (under 21 U.S.C. § 335a), the Consent Decrees database, and the Clinical Trials database (ClinicalTrials.gov). No warning letters, untitled letters, consent decrees, or debarment actions involving Veridian or any of its officers, directors, employees, or contractors were identified. The Marlowe Asset Management-2 trial (NCT05837291) was confirmed as active with no clinical holds noted.
9.  OSHA Inspection and Citation Database Search. We searched the Occupational Safety and Health Administration's inspection and citation database for any inspections or citations involving Veridian's facilities. No OSHA inspections or citations were identified.
10.  EPA and State Environmental Enforcement Searches. We searched the U.S. Environmental Protection Agency's Enforcement and Compliance History Online (ECHO) database and applicable state environmental enforcement databases for Massachusetts, California, and Maryland. No enforcement actions, notices of violation, or compliance orders involving Veridian were identified. This matter is addressed in greater detail in the Environmental Due Diligence Memorandum (dated May 15, 2024).
III. Pending Litigation
A. Summary
At the time of this review, Veridian has no pending material litigation, whether as a defendant, plaintiff, cross-claimant, third-party defendant, or intervenor, in any federal court, state court, arbitral forum, or administrative tribunal. Two minor matters are identified below. Neither matter, individually or in the aggregate, is material in the context of the Transaction. Based on our review of the Company's litigation docket, public records searches, management representations, and outside counsel confirmations, we are satisfied that the matters described below represent the totality of pending claims and proceedings involving the Company as of the date of this memorandum.
B. Minor Pending Matters
1. Employment Dispute — Former Employee Wrongful Termination Claim
Parties: Jennifer M. Dalton (Complainant) v. Veridian Biosciences, Inc. (Respondent)
Forum: Massachusetts Commission Against Discrimination (MCAD), Docket No. 23-BEM-03847
Date Filed: November 14, 2023
Description: Ms. Dalton, a former Research Associate II in the Company's Immunology Research division at the Cambridge facility, filed an administrative complaint with the MCAD alleging that her termination of employment on September 22, 2023 constituted wrongful termination in violation of Massachusetts General Laws Chapter 151B, § 4(16) (disability discrimination). According to the complaint, Ms. Dalton alleges that she was terminated on the basis of a physical disability (a diagnosed repetitive strain injury affecting her hands and wrists) and that the Company failed to provide a reasonable accommodation for her condition prior to termination. The Company terminated Ms. Dalton's employment for cause, citing multiple violations of the Company's Standard Operating Procedures for laboratory safety and documentation, including a documented pattern of incomplete and inaccurate laboratory notebook entries that were identified through a routine internal quality audit. According to the Company's General Counsel, the termination decision was based solely on the documented policy violations and was not related to Ms. Dalton's medical condition.
Status: The MCAD investigation is ongoing. The Company filed its Position Statement with the MCAD on January 19, 2024, denying all allegations and asserting that the termination was for legitimate, non-discriminatory business reasons supported by contemporaneous documentation. The MCAD has assigned an investigator to the matter, and the Company has provided responsive documents. No probable cause finding has been issued, and no formal lawsuit has been filed in state or federal court. The Company's General Counsel reports that the claim is being handled by Zalcourt Archer & Cole LLP (Jonathan Pratt), and that the Company considers the claim to be without merit based on the strength of the contemporaneous documentation supporting the for-cause termination. Ms. Stein-Goldberg indicated that the Company would be willing to engage in the MCAD's voluntary conciliation process if a probable cause finding were to be issued, but expressed confidence that the investigation would likely result in a lack-of-probable-cause finding.
Financial Exposure: Veridian management has estimated the maximum financial exposure associated with this matter at less than One Hundred Fifty Thousand Dollars ($150,000), inclusive of potential settlement costs, back pay (calculated from the date of termination through the estimated date of resolution), front pay, emotional distress damages, attorney's fees, and defense costs. This estimate was confirmed by Jonathan Pratt of Zalcourt Archer & Cole LLP in his written response dated April 30, 2024. No litigation reserve has been recorded in the Company's financial statements, as management has assessed that a loss is neither probable nor reasonably estimable at this stage. The matter is covered under the Company's Employment Practices Liability Insurance ("EPLI") policy (Carrier: Westmark Mutual Insurance; Policy No. NUF-EPLI-2023-41927; aggregate limit: $5,000,000; self-insured retention: $50,000). Notice of the claim has been provided to the insurer, and coverage has been acknowledged without reservation.
Assessment: This matter is immaterial in the context of the Transaction. An MCAD administrative complaint of this nature is a routine occurrence for a company of Veridian's size (148 employees), particularly one with operations in Massachusetts, which has an active state anti-discrimination enforcement regime. The maximum exposure is well below any reasonable materiality threshold for a $900,000,000 transaction, and the Company has adequate insurance coverage to address any resolution. We recommend that this matter be disclosed in the Disclosure Schedules under the litigation representation (anticipated SPA Schedule 3.17 or equivalent). No further action is recommended at this time beyond continued monitoring.
2. Vendor Payment Dispute
Parties: Meridian Clinical Research Associates, LLC ("Meridian") v. Veridian Biosciences, Inc.
Forum: No litigation filed. Informal commercial dispute.
Date of Dispute: January 2024 (initial invoice dispute communication dated January 11, 2024)
Description: Meridian Clinical Research Associates, LLC, a clinical research organization ("CRO") headquartered in Raleigh, North Carolina, was engaged by Veridian pursuant to a Master Services Agreement dated March 15, 2021 (the "Meridian MSA") and a related Statement of Work dated April 2, 2021 ("SOW No. 1") to provide Phase I clinical trial monitoring and data management services in connection with Veridian's pipeline candidate VRD-2055 (a bispecific T-cell engager for the treatment of certain hematological malignancies). The Phase I trial for VRD-2055 was completed in Q2 2023, and the engagement with Meridian was effectively concluded upon completion of database lock and final study report delivery.
In January 2024, Meridian submitted a final reconciliation invoice and a series of change-order invoices totaling approximately Three Hundred Forty Thousand Dollars ($340,000), asserting that certain services were performed outside the original scope of SOW No. 1 and that change orders were verbally authorized by Veridian's clinical operations team without formal written amendments to the SOW. Veridian has acknowledged and does not dispute approximately One Hundred Thirty Thousand Dollars ($130,000) of the invoiced amount, representing fees for services that were clearly within scope and supported by adequate documentation. Veridian disputes approximately Two Hundred Ten Thousand Dollars ($210,000) of the invoiced amount, contending that (i) certain services described in the disputed invoices were not actually performed or were performed deficiently, (ii) certain change orders were never formally authorized in writing as required by Section 4.3 of the Meridian MSA, and (iii) certain charges represent duplicative billing for services already compensated under the base SOW fees.
Status: The parties have been engaged in informal negotiations since January 2024. No demand letter threatening litigation has been received, and no lawsuit, arbitration demand, or other formal dispute proceeding has been initiated. The Company's General Counsel is handling the matter directly (without outside litigation counsel) and reports that the parties have had two telephonic negotiation sessions (in February and April 2024) and exchanged several rounds of correspondence. Ms. Stein-Goldberg has indicated that the Company expects the matter to be resolved through negotiation for an additional payment in the range of approximately One Hundred Thousand Dollars ($100,000) to One Hundred Fifty Thousand Dollars ($150,000) above the undisputed amount, which would bring the total payment to approximately $230,000 to $280,000. We note that the Meridian MSA contains a mandatory arbitration clause (Section 12.1, requiring binding arbitration under the AAA Commercial Arbitration Rules in New York, New York), which would govern any formal dispute if the parties are unable to reach a negotiated resolution.
Financial Exposure: The maximum financial exposure is approximately Three Hundred Forty Thousand Dollars ($340,000), representing the full amount of Meridian's claimed invoices. Based on the Company's assessment and the trajectory of negotiations, the likely resolution is well below that amount. No formal litigation reserve has been recorded. The Company has accrued approximately $130,000 as an accounts payable liability on its balance sheet, representing the undisputed portion of the invoice.
Assessment: This matter is immaterial in the context of the Transaction. The dispute involves a routine commercial disagreement over the scope and pricing of services under a completed CRO engagement and is of the type commonly encountered in the pharmaceutical and biotechnology industry. The maximum exposure is approximately $340,000, and the likely resolution is significantly less. We recommend that this matter be disclosed in the Disclosure Schedules under the litigation representation. No further action is recommended at this time beyond continued monitoring and encouraging the Company to pursue a negotiated resolution prior to the anticipated closing date.
IV. Threatened Litigation
A. Summary
No material threatened litigation has been identified against the Company as of the date of this memorandum. We define "threatened litigation" for purposes of this review to include matters where a potential adverse party has communicated, directly or through counsel, a claim, demand, or threat of legal action, or where the Company has reason to believe that such a claim may be asserted. Our review of the Company's correspondence files, management representations, outside counsel confirmations, and public records searches did not reveal any threatened litigation beyond the single patent-related inquiry described below, which has been assessed as not constituting a present threat.
B. Patent-Related Inquiry
Parties: Velundrix Therapeutics Holdings, LLC (through its outside patent counsel, Finnegan Marsh & Dougherty LLP) to Veridian Biosciences, Inc.
Date of Inquiry: March 17, 2023
Description: In March 2023, Veridian received a letter from Finnegan Marsh & Dougherty LLP, acting on behalf of Velundrix Therapeutics Holdings, LLC ("Solaris"), a privately held biotechnology company based in San Diego, California. The letter referenced three U.S. patents owned by Solaris (U.S. Patent Nos. 10,XXX,412; 10,XXX,758; and 11,XXX,094) relating to certain antibody engineering methods, specifically techniques for the optimization of bispecific antibody constructs through directed evolution of complementarity-determining regions. The letter stated that Solaris had "become aware" that Veridian's proprietary VeriTCE (Veridian T-Cell Engager) bispecific antibody platform may "utilize methods that are within the scope of" the referenced Solaris patents. The letter did not expressly assert that Veridian's VeriTCE platform infringed the Solaris patents, nor did it threaten litigation. Rather, the letter requested that Veridian "provide information regarding the methods employed in the VeriTCE platform to enable Solaris to evaluate whether any licensing arrangement may be appropriate."
Response and Current Status: Upon receipt of the letter, Veridian retained Rebecca Whitmore of Zalcourt Archer & Cole LLP to conduct an analysis of the referenced Solaris patents in relation to the VeriTCE platform. Ms. Whitmore's analysis, completed in April 2023, concluded that the VeriTCE platform does not employ the specific antibody engineering methods claimed in the Solaris patents and that the technical approach used in the VeriTCE platform is materially distinct from the methods described in the Solaris patent claims. Based on this analysis, Veridian (through Ms. Whitmore) sent a response letter to Finnegan Marsh & Dougherty LLP on May 8, 2023, stating that Veridian had reviewed the referenced patents and concluded that the VeriTCE platform does not infringe the identified patents, and declining the request for further information or licensing discussions.
As of the date of this memorandum, more than twelve months have elapsed since the response letter was sent, and no further correspondence has been received from Solaris, Finnegan Marsh & Dougherty LLP, or any other party relating to this matter. No lawsuit, arbitration demand, or other proceeding has been initiated. Ms. Whitmore confirmed in her May 10, 2024 written response that she considers the matter to be inactive and that there is no present threat of patent infringement litigation relating to the Solaris patents.
Assessment: This matter does not present a current threat of litigation. The initial inquiry letter was narrowly worded as an information request rather than an infringement assertion, and the absence of any follow-up correspondence over a period of more than twelve months strongly suggests that Solaris has not pursued the matter further. The Company's outside patent counsel has rendered a non-infringement opinion with respect to the VeriTCE platform, which provides additional comfort. This matter is addressed in greater detail in the intellectual Property Due Diligence Memorandum (dated May 14, 2024), including an analysis of the specific Solaris patents and the basis for the non-infringement conclusion. We recommend continued monitoring and suggest that this matter may warrant disclosure in the Disclosure Schedules depending on the negotiated scope of the intellectual property representation in the SPA. Given the potential significance of the VeriTCE platform to the Transaction (as the Company's core technology platform), a conservative approach to disclosure is advisable.
V. Governmental Investigations and Regulatory Proceedings
A. Summary
No pending or threatened governmental investigations, enforcement actions, or regulatory proceedings have been identified against Veridian, any of its subsidiaries (none), or any of its current or former officers, directors, employees, or agents in their capacity as such, as of the date of this memorandum. Our review encompassed federal and state regulatory agencies with jurisdiction over the Company's operations, including the U.S. Food and Drug Administration, the U.S. Securities and Exchange Commission (not applicable, as noted below), the U.S. Department of Justice, the Internal Revenue Service, the Occupational Safety and Health Administration, the U.S. Environmental Protection Agency, applicable state attorneys general, and state regulatory agencies in Massachusetts, California, and Maryland.
B. FDA Matters
Veridian is a clinical-stage biopharmaceutical company with one active Investigational New Drug application (IND No. 154832) for its lead product candidate, VRD-4187, a bispecific T-cell engager for the treatment of relapsed/refractory diffuse large B-cell lymphoma (DLBCL). The Company's pivotal Phase II clinical trial, designated Marlowe Asset Management-2 (ClinicalTrials.gov Identifier: NCT05837291), is currently ongoing across forty-two (42) clinical sites in the United States and the European Union, with three hundred eighty-seven (387) patients enrolled as of the data cutoff for this review.
As of the date of this memorandum, no FDA warning letters, untitled letters, Form 483 observations, consent decrees, injunctions, clinical holds, partial clinical holds, or other enforcement actions have been issued with respect to any Veridian product candidate, manufacturing facility, clinical trial site (to the extent within the Company's knowledge), or any other aspect of the Company's operations. This finding was confirmed through our review of the FDA enforcement databases (described in Section II.C.8 above), the written confirmation provided by Dr. Anne-Marie Fontaine (VP, Regulatory Affairs) on April 23, 2024, and the confirmations provided by the Company's General Counsel.
We note that FDA regulatory compliance matters are addressed in substantially greater detail in the Regulatory and FDA Compliance Due Diligence Memorandum (dated May 20, 2024), which includes a comprehensive analysis of the Company's IND, the Marlowe Asset Management-2 trial design and regulatory status, Good Clinical Practice (GCP) compliance, Good Manufacturing Practice (GMP) compliance for the Company's contract manufacturing arrangements, and the Company's regulatory strategy for a potential Biologics License Application (BLA) filing. The ongoing Marlowe Asset Management-2 trial represents inherent clinical development risk — including the risk of adverse safety signals, efficacy failures, clinical holds, and regulatory delays — that is being separately evaluated in the clinical and scientific due diligence being performed by Broadleaf Scientific Consulting LLC (engagement lead: Dr. Raymond Kapoor).
Additionally, we confirmed that no current or former officer, director, employee, or contractor of Veridian has been debarred under 21 U.S.C. § 335a (debarment from involvement in abbreviated drug applications) or excluded from participation in federal healthcare programs under 42 U.S.C. § 1320a-7 (OIG exclusion list). This confirmation was based on our review of the Company's internal compliance certifications and our independent search of the FDA Debarment List and the OIG List of Excluded Individuals/Entities (LEIE).
C. Tax Audits and Investigations
No pending federal or state tax audits, examinations, or investigations involving Veridian have been identified as of the date of this memorandum. The Company's federal income tax returns for fiscal years 2021, 2022, and 2023 have not been selected for examination by the Internal Revenue Service. No state income or franchise tax audits are pending in Massachusetts (the Company's principal state of operations), California (where the Company has employee presence and state tax nexus), or Maryland (where the Company has operational activities). The Company has not received any Notices of Proposed Adjustment, Statutory Notices of Deficiency, or similar communications from the IRS or any state taxing authority during the relevant period.
We note that the Company's tax position involves significant complexity, particularly with respect to its substantial federal net operating loss ("NOL") carryforward of approximately $312 million and the application of Section 382 of the Internal Revenue Code (limitation on NOL utilization following ownership changes). The Company experienced a prior Section 382 ownership change in connection with its Series C preferred stock financing in Q3 2020, which imposed an annual limitation of approximately $5.9 million per year on the utilization of approximately $148 million in pre-change NOLs. The proposed acquisition would constitute an additional Section 382 ownership change, further limiting the availability of the Company's NOLs to Penterra post-closing. A detailed analysis of these tax matters, including modeling of the post-closing NOL utilization under various scenarios, is contained in the Tax Due Diligence Memorandum being prepared by Leonard Cross (targeted for completion on May 28, 2024).
D. Environmental and OSHA Matters
No pending environmental enforcement actions, notices of violation, remediation orders, consent agreements, or Superfund (CERCLA) liability designations involving Veridian or any property owned, leased, or operated by the Company have been identified. The Company's principal facility at 550 Gateway Drive, Cambridge, Massachusetts is a leased laboratory and office space within a multi-tenant life sciences building, and the Company's environmental footprint is consistent with typical clinical-stage biotechnology operations (primarily involving the use and disposal of small quantities of biological materials, solvents, and laboratory chemicals under applicable hazardous waste regulations). No OSHA inspections, citations, or enforcement proceedings involving the Company's facilities have been identified.
These matters are addressed in greater detail in the Environmental Due Diligence Memorandum (dated May 15, 2024), which includes an analysis of the Company's environmental permits, hazardous waste handling practices, and compliance with applicable federal, state, and local environmental laws and regulations.
E. Securities Law Matters
Not applicable. Veridian is a privately held company that has not issued any publicly traded securities. The Company has not filed any registration statements, periodic reports, or other filings with the U.S. Securities and Exchange Commission. No SEC investigations, inquiries, or enforcement actions have been identified. The Company has conducted its prior private placement transactions (Seed, Series A, Series B, and Series C preferred stock financings) in reliance on exemptions from registration under Section 4(a)(2) of the Securities Act of 1933 and Regulation D promulgated thereunder. We have not identified any Blue Sky law violations or state securities law enforcement actions relating to any of the Company's prior securities offerings.
VI. Contingent Liabilities
This section addresses contingent liabilities that, while not constituting pending or threatened litigation, represent categories of potential exposure that should be considered in connection with the Transaction, including for purposes of drafting the SPA's representations, warranties, covenants, and indemnification provisions.
A. Clinical Trial Liability
As a clinical-stage biopharmaceutical company conducting an active Phase II clinical trial with 387 enrolled patients across 42 sites, Veridian carries inherent exposure to clinical trial-related liability. Such liability may arise from claims by trial participants (or their families) alleging injury, serious adverse events, or death resulting from the administration of the investigational product (VRD-4187), trial procedures, or the conduct of the clinical trial. Clinical trial liability claims may be asserted under state tort law theories, including negligence, strict liability, failure to obtain informed consent, and battery, as well as under federal and state regulatory frameworks governing the protection of human research subjects (including the Common Rule, 45 C.F.R. Part 46, and applicable ICH-GCP guidelines).
Veridian maintains clinical trial liability insurance coverage, which is reviewed in detail in the Insurance Due Diligence Memorandum (dated May 16, 2024). As of the date of our review, no claims have been filed or threatened under this policy, and no clinical trial participant lawsuits, demand letters, or pre-litigation communications arising from the Marlowe Asset Management-2 trial or any prior clinical trial conducted by the Company (including the Phase I trial for VRD-2055) have been identified. The Company's General Counsel confirmed that the Company has not received any communications from trial participants, their attorneys, institutional review boards, or data safety monitoring boards suggesting the likelihood of any such claims.
Assessment: Clinical trial liability represents a standard and inherent contingent risk for a company at Veridian's stage of development. The risk is not unique to Veridian and is common to all companies conducting clinical trials of investigational biologic products. The Company's insurance coverage appears adequate based on the assessment in the Insurance Due Diligence Memorandum, and the Marlowe Asset Management-2 trial is being conducted in accordance with applicable regulatory requirements (as assessed in the Regulatory and FDA Compliance Due Diligence Memorandum). This risk should be addressed through the representations and warranties of the SPA, including the MAE definition (which should include appropriate carve-outs for industry-wide clinical trial risks), clinical and regulatory representations, and the indemnification provisions. We also recommend that Penterra evaluate the continuation of clinical trial liability insurance coverage post-closing, including any tail coverage requirements for pre-closing trial activities.
B. Product Liability (Pre-Commercial)
Veridian has no marketed or commercialized products. The Company is a pre-revenue, clinical-stage biopharmaceutical company, and its total revenue for fiscal year 2023 was zero ($0). Product liability exposure is therefore limited to the clinical trial activities described in Section VI.A above, as the Company's investigational product candidates (VRD-4187 and VRD-2055) are not available to the public outside of the clinical trial setting. No product liability claims have been asserted against the Company, and no product liability insurance claims have been filed. The Company's clinical trial liability insurance (described above) provides the relevant coverage for any claims arising from the administration of investigational products in the clinical trial context.
C. Employee-Related Contingent Liabilities
Beyond the MCAD administrative complaint described in Section III.B.1 above, no additional employee-related claims, charges, complaints, or grievances have been identified. Our review encompassed claims filed with the Equal Employment Opportunity Commission (EEOC), state fair employment practices agencies (including the MCAD, the California Department of Fair Employment and Housing (now the Civil Rights Department), and the Maryland Commission on Civil Rights), the U.S. Department of Labor, state departments of labor, and any internal employee complaints or grievances.
Veridian has one hundred forty-eight (148) employees as of the anticipated signing date, with the majority based at the Company's Cambridge, Massachusetts headquarters. The Company also has employees in California (primarily in the San Francisco Bay Area) and Maryland (primarily in the Baltimore metropolitan area). As a multi-state employer, the Company is subject to range federal and state employment laws, including, without limitation, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Age Discrimination in Employment Act, the Fair Labor Standards Act, the Family and Medical Leave Act, the Massachusetts Fair Employment Practices Act (M.G.L. c. 151B), the California Fair Employment and Housing Act (Cal. Gov. Code § 12940 et seq.), the California Labor Code, the Maryland Fair Employment Practices Act (Md. Code Ann., State Gov't § 20-606), and other applicable statutes and regulations. Compliance with these statutes and the associated contingent liabilities is addressed in greater detail in the Employment and Benefits Due Diligence Memorandum (dated May 22, 2024), including an analysis of the Company's employee classification practices, wage and hour compliance (particularly under California law), and employee benefit plan administration.
D. Indemnification Obligations
Veridian's Amended and Restated Certificate of Incorporation (as most recently amended and restated on October 7, 2020, in connection with the Series C financing) and its Amended and Restated Bylaws (as most recently amended and restated on the same date) include standard director and officer indemnification and advancement provisions consistent with the Delaware General Corporation Law ("DGCL"). Specifically, Article VIII of the Certificate of Incorporation provides for elimination of director personal liability for monetary damages to the fullest extent permitted under DGCL § 102(b)(7), and Article VI of the Bylaws provides for mandatory indemnification and advancement of expenses to directors and officers to the fullest extent permitted under DGCL § 145. These provisions are standard for a Delaware corporation and are consistent with market practice in the biotechnology industry.
As of the date of this memorandum, no indemnification claims have been made by any current or former director or officer of the Company. No events or circumstances have been identified that would be reasonably likely to give rise to such a claim. The Company maintains directors' and officers' liability insurance ("D&O Insurance"), which is reviewed in the Insurance Due Diligence Memorandum (dated May 16, 2024). We note that the SPA should include customary provisions requiring Penterra to maintain the Company's D&O indemnification and insurance obligations for a specified tail period following the closing (typically six years), and the Company's selling stockholders and their counsel may negotiate for the procurement of a D&O tail insurance policy as a condition to closing.
Additionally, the Company's Third Amended and Restated Investor Rights Agreement, dated October 7, 2020 (the "IRA"), entered into among the Company and its principal stockholders — Crestline Ventures, LP (holding approximately 28.3% of the Company's outstanding equity on an as-converted basis), Boreal Health Partners Fund III, LP (holding approximately 19.7%), and Apex Growth Equity Fund II, LP (holding approximately 14.1%) — contains customary registration rights (including demand and piggyback registration rights, which would become relevant if the Company were to conduct an initial public offering, but which are not applicable in the context of the proposed stock sale transaction), information rights, and related investor protections. The IRA does not contain unusual indemnification obligations running from the Company to its investors beyond standard provisions relating to indemnification in connection with any future securities registration process. No indemnification claims have been made under the IRA.
E. Contractual Indemnification and Guarantees
In the ordinary course of its business operations, Veridian has provided standard contractual indemnification to various counterparties, including:
(i) Clinical Research Organizations. The Company's master services agreements with its CROs, including the Meridian MSA described in Section III.B.2 above and the Company's current CRO engagement with Avante Clinical Services, Inc. (for the Marlowe Asset Management-2 trial), contain customary mutual indemnification provisions under which the Company indemnifies the CRO against claims arising from the Company's negligence, willful misconduct, breach of representations and warranties, and the investigational product itself, subject to standard exceptions and limitations.
(ii) Contract Manufacturers. The Company's manufacturing agreements with its contract development and manufacturing organizations ("CDMOs"), including Penmark Partners LLC and Crestline & Co., contain customary indemnification provisions under which the Company indemnifies the CDMO against claims arising from the Company's product and intellectual property, subject to standard exceptions for the CDMO's own negligence and breach.
(iii) Landlord. The Company's lease agreement for its principal facility at 550 Gateway Drive, Cambridge, Massachusetts (with ARE-MA Region No. 66, LLC, an affiliate of Larkspur & Co.) contains a standard tenant indemnification provision under which the Company indemnifies the landlord against claims arising from the Company's use and occupancy of the premises, subject to exceptions for the landlord's negligence and willful misconduct.
(iv) Other Commercial Counterparties. Various other commercial agreements (including software licenses, equipment leases, and consulting agreements) contain standard indemnification provisions typical for their respective transaction types.
None of the foregoing indemnification obligations have been triggered as of the date of this memorandum, and we have not identified any circumstances that would be reasonably likely to result in an indemnification claim under any of these agreements.
No guarantees of third-party obligations, letters of credit (other than a $250,000 letter of credit posted as a security deposit under the Cambridge lease), surety bonds, or off-balance-sheet arrangements have been identified. The Company has not entered into any guarantees, "keep-well" agreements, or similar credit support arrangements for the benefit of any third party.
F. Tax Contingencies
As a clinical-stage company that has not yet generated product revenue, Veridian's primary tax contingency relates to the potential disallowance or limitation of its federal and state net operating loss carryforwards. As of December 31, 2023, the Company had accumulated approximately $312 million in federal NOL carryforwards and approximately $287 million in state NOL carryforwards (primarily in Massachusetts and California). The availability of these NOLs is subject to limitations under Section 382 of the Internal Revenue Code, which imposes an annual limitation on NOL utilization following an "ownership change" (generally, a more-than-50-percentage-point increase in stock ownership by 5% shareholders over a rolling three-year period).
The Company experienced a Section 382 ownership change in connection with its Series C preferred stock financing in Q3 2020. Based on the Company's analysis (prepared by its tax advisors at Northbridge Accounting Group LLP), the annual Section 382 limitation resulting from this ownership change is approximately $5.9 million per year, applicable to the approximately $148 million in pre-change NOLs that existed at the time of the ownership change. NOLs generated after the Q3 2020 ownership change (approximately $164 million) are not subject to this limitation unless and until a subsequent ownership change occurs.
The proposed acquisition by Penterra would constitute an additional Section 382 ownership change with respect to Veridian, which would impose a new annual Section 382 limitation on the utilization of all of the Company's pre-change NOLs (approximately $312 million) by Penterra and its consolidated group post-closing. The amount of this new annual limitation will depend on the value of the Company's stock at the time of the ownership change and the applicable long-term tax-exempt rate, and is being modeled in detail in the Tax Due Diligence Memorandum (Leonard Cross, targeted for May 28, 2024).
No uncertain tax positions have been recorded in the Company's financial statements under ASC 740 (Income Taxes). The Company's management has assessed that all of its tax return positions are more likely than not to be sustained upon examination by the relevant taxing authorities. We note, however, that the valuation and availability of the NOL carryforwards post-closing is a significant consideration in the economic analysis of the Transaction, and we defer to the Tax Due Diligence Memorandum for a comprehensive analysis of these matters.
VII. Auditor Confirmation
Northbridge Accounting Group LLP (engagement partner: Patrick Calloway, CPA) has served as Veridian's independent registered public accounting firm since 2019 and has audited the Company's financial statements for fiscal years 2021, 2022, and 2023. In connection with each annual audit, Veridian's management provided written representation letters to Northbridge in accordance with AU-C Section 580 (Written Representations) and AU-C Section 501 (Audit Evidence — Specific Considerations for Selected Items), which included representations regarding pending and threatened litigation, unasserted claims, and contingent liabilities.
We reviewed the management representation letters for all three fiscal years and confirmed the following:
(a) For fiscal years 2021 and 2022, management represented that there were no pending or threatened litigation matters, unasserted claims, or contingent liabilities that would require disclosure, accrual, or adjustment in the Company's financial statements under ASC 450 (Contingencies). Northbridge's audit reports for these years were issued without qualification or modification, and the accompanying financial statement notes did not include any litigation or contingent liability disclosures.
(b) For fiscal year 2023, management's representation letter disclosed the MCAD administrative complaint described in Section III.B.1 above (filed in November 2023) as a pending claim. Management represented that the claim was considered by management and the Company's legal counsel to be without merit and that no loss was probable or reasonably estimable in connection with the claim. Accordingly, no accrual was recorded, and the matter was disclosed in the notes to the financial statements as a subsequent event (having arisen after the date of certain interim financial statements but prior to the issuance of the audit report). Northbridge's audit report for fiscal year 2023 was issued without qualification or modification.
No audit adjustments related to litigation reserves or contingent liabilities were proposed or recorded in any of the three fiscal years under review. No management letter comments or internal control deficiency findings related to the Company's processes for identifying, evaluating, or reporting litigation matters or contingent liabilities were issued by Northbridge. The Company's General Counsel confirmed that she was not aware of any disagreements between the Company and its auditors regarding the accounting treatment or disclosure of any litigation or contingent liability matter.
We also note that Northbridge issued a standard AU-C Section 9501 inquiry letter to the Company's outside counsel (Zalcourt Archer & Cole LLP) in connection with the fiscal year 2023 audit, requesting confirmation of pending and threatened litigation matters. The response letter from Zalcourt Archer & Cole, dated February 21, 2024, confirmed the existence of the MCAD complaint and the CRO vendor payment dispute and stated that no other pending or threatened matters were known to the firm. This response was consistent with the information provided to us during our due diligence review.
VIII. Disclosure Schedule Implications
A. Recommended Disclosures
Based on our review, the following matters should be listed on the applicable Disclosure Schedule to the Stock Purchase Agreement. We anticipate that the relevant schedule will be Schedule 3.17 (or equivalent section number, corresponding to the Sellers' representation regarding litigation and proceedings):
1.  MCAD Employment Complaint. The administrative complaint filed by Jennifer M. Dalton before the Massachusetts Commission Against Discrimination (Docket No. 23-BEM-03847), as described in Section III.B.1 of this memorandum. The disclosure should include a brief description of the nature of the claim, the forum, the date filed, the current status, and the Company's assessment that the claim is without merit. We recommend that the estimated maximum financial exposure ($150,000) be noted in the disclosure.
2.  CRO Vendor Payment Dispute. The invoice dispute with Meridian Clinical Research Associates, LLC, as described in Section III.B.2 of this memorandum. The disclosure should include a brief description of the nature of the dispute, the amount in controversy ($340,000), the Company's assessment of the likely resolution range ($100,000–$150,000 in additional payments), and the current status (informal negotiations; no litigation filed).
3.  Third-Party Patent Inquiry Letter. The March 2023 inquiry letter from Velundrix Therapeutics Holdings, LLC (through Finnegan Marsh & Dougherty LLP) regarding certain antibody engineering patents in relation to the VeriTCE platform, as described in Section IV.B of this memorandum. Whether this matter is disclosed under the litigation schedule, the intellectual property schedule, or both will depend on the final scope and structure of the applicable representations. Given the potential sensitivity of the VeriTCE platform to the Transaction, we recommend disclosure under both the litigation and intellectual property schedules, with cross-references, to ensure comprehensive coverage. The disclosure should note that the Company's outside patent counsel concluded that the VeriTCE platform does not infringe the identified patents, that a response letter was sent in May 2023, and that no further correspondence has been received.
These disclosures will serve as scheduled exceptions to the Sellers' representation that there is no pending or, to the knowledge of the Company, threatened litigation, arbitration, proceeding, claim, or governmental investigation against the Company that would reasonably be expected to result in a liability in excess of the applicable threshold or that would otherwise be material to the business, operations, or financial condition of the Company. We recommend that the disclosure be drafted to include sufficient detail to put the buyer on notice of the relevant facts but not so detailed as to constitute an admission or waiver of any privilege or defense.
B. Representations and Warranties Considerations
In light of the findings described in this memorandum, we offer the following recommendations regarding the litigation-related representations and warranties to be included in the SPA:
1.  Materiality Qualifier. We recommend that the litigation representation include a standard materiality qualifier, requiring disclosure of claims that would reasonably be expected to result in a liability in excess of Two Hundred Fifty Thousand Dollars ($250,000) individually or Five Hundred Thousand Dollars ($500,000) in the aggregate. This threshold is appropriate given the size of the Transaction and is consistent with market practice for acquisitions of this magn