PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work product doctrine. It has been prepared by Calderwood & Harkness LLP at the direction of and for the sole use of Harrowgate Private Equity Fund IV LP in connection with Project Velocity. Distribution of this memorandum, in whole or in part, to any person or entity other than the intended recipient(s) without the prior written consent of Calderwood & Harkness LLP may constitute a waiver of applicable privileges. Do not copy or distribute.
CALDERWOOD & HARKNESS LLP 787 Seventh Avenue, 38th Floor New York, New York 10019
MEMORANDUM
TO: Sandra Tung, Responsible Partner, Mergers & Acquisitions
FROM: Megan Chu, Lead Associate, M&A; Derek Okonkwo, Working Associate, M&A
DATE: March 10, 2025
RE: Legal Due Diligence Summary — VeloPay Systems, Inc. (Project Velocity)
MATTER NO.: 1003-00003
CLIENT: Harrowgate Private Equity Fund IV LP
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I. EXECUTIVE SUMMARY
A. Purpose and Scope
This memorandum summarizes the key legal findings from the due diligence investigation of VeloPay Systems, Inc. ("VeloPay" or the "Company") and its wholly-owned subsidiaries (collectively with VeloPay, the "VeloPay Group"), conducted by Calderwood & Harkness LLP ("C&H") in connection with the proposed acquisition of VeloPay by Harrowgate Private Equity Fund IV LP ("HPE Fund IV" or the "Buyer") for aggregate merger consideration of approximately $1.9 billion (the "Transaction"). The Transaction is structured as a reverse triangular merger under Section 251 of the Delaware General Corporation Law (the "DGCL"), pursuant to which Harrowgate Velocity Merger Sub Inc. ("Merger Sub"), a newly formed Delaware corporation and wholly-owned subsidiary of HPE Fund IV, will merge with and into VeloPay, with VeloPay surviving as a wholly-owned subsidiary of HPE Fund IV. Merger Sub will cease to exist at the effective time of the merger.
The legal due diligence investigation has covered the following principal workstreams:
1. Corporate Organization and Capitalization;
2. Material Contracts;
3. Intellectual Property;
4. Litigation and Contingent Liabilities;
5. Regulatory and Licensing;
6. Employment and Benefits;
7. Tax; and
8. Real Property.
The scope of our review has included documents and information made available in VeloPay's virtual data room (the "Data Room"), which was hosted on Thackeray Solutions and to which C&H was granted access on December 12, 2024. As of the date of this memorandum, the Data Room contains approximately 4,800 documents organized across 23 primary folders and numerous subfolders. Our diligence is ongoing, and certain items remain outstanding as described in Section X of this memorandum.
In addition to our review of Data Room materials, we have conducted interviews with VeloPay management (including Nathan Aldridge, CEO and Co-Founder; Sonia Reyes-Watkins, CTO and Co-Founder; Marcus Langford, CFO; and Danielle Moreau, General Counsel and Secretary), participated in management presentations, reviewed publicly available records and filings (including state corporate registrations, UCC filings, intellectual property registrations, litigation dockets, and regulatory filings), and consulted with VeloPay's outside counsel at Whitford Jessup & Crane LLP (Rebecca Thornton-Hayes, lead partner).
Separate, detailed memoranda have been or are being prepared by C&H and members of the deal team on the following specific topics: (i) intellectual Property; (ii) Regulatory and Licensing; (iii) Change of Control Consents; (iv) Material Contracts; (v) Litigation and Contingent Liabilities; (vi) Employment and Benefits; (vii) Tax (including Section 280G analysis, FIRPTA/withholding analysis, and state and local tax considerations); and (viii) HSR Filing Strategy. This memorandum synthesizes the principal findings from each of these workstreams and flags matters requiring attention in the drafting and negotiation of the definitive merger agreement (the "Merger Agreement"), the related disclosure schedules, ancillary agreements, and closing conditions. A complete list of related detailed memoranda is provided in Appendix G.
B. Transaction Overview
The following is a summary of the key terms and participants in the Transaction, as reflected in the current draft term sheet dated November 15, 2024, and subsequent discussions between the parties and their respective counsel:
Buyer. Harrowgate Private Equity Fund IV LP, a Delaware limited partnership. HPE Fund IV is a $6.8 billion fund (2022 vintage) managed by Harrowgate Capital Management IV LLC, a Delaware limited liability company and the general partner of HPE Fund IV. Harrowgate Capital Management is a leading private equity firm with significant experience in financial services and financial technology investments.
Target. VeloPay Systems, Inc., a Delaware corporation headquartered at 1455 Innovation Parkway, Suite 800, Austin, Texas 78759. VeloPay operates a cloud-native payments processing and merchant acquiring platform serving approximately 14,000 merchants across the United States and Canada. The Company processes approximately $87 billion in annualized gross payment volume ("GPV") and generated total revenue of approximately $412.3 million for fiscal year 2024 (unaudited). VeloPay's core product offerings include payment processing, payment gateway services, a fraud detection and analytics SaaS suite, and a merchant analytics dashboard.
Structure. The Transaction is structured as a reverse triangular merger under Section 251 of the DGCL. Merger Sub (a newly formed Delaware corporation and wholly-owned subsidiary of HPE Fund IV) will merge with and into VeloPay. At the effective time, (a) VeloPay will survive as a wholly-owned subsidiary of HPE Fund IV, (b) Merger Sub will cease to exist, (c) each outstanding share of VeloPay common stock (other than shares held by dissenting stockholders and shares to be cancelled) will be converted into the right to receive $20.00 per share in cash, (d) each outstanding stock option, restricted stock unit, and warrant will be treated as described in Section II.C below, and (e) VeloPay's certificate of incorporation and bylaws will be amended and restated.
Merger Consideration. The aggregate merger consideration is $1,900,000,000, representing $20.00 per share on a fully diluted, as-converted basis across 95,000,000 fully diluted shares (comprising 82,400,000 shares of common stock outstanding, 7,600,000 shares subject to outstanding stock options, 3,200,000 shares subject to outstanding RSUs, and 1,800,000 shares subject to outstanding warrants).
Financing. The Transaction will be financed through the following sources:
(a) Equity Contribution: $1,140,000,000 equity contribution from HPE Fund IV, funded from committed capital of HPE Fund IV;
(b) Senior Secured Term Loan: $500,000,000 senior secured term loan facility, with Tralvendo National Bank as lead arranger and administrative agent; commitment letter delivered on January 28, 2025; customary conditions to funding;
(c) Senior Secured Revolving Credit Facility: $260,000,000 senior secured revolving credit facility, with Prairie State Bank, N.A. as co-arranger; commitment letter delivered contemporaneously with the term loan commitment; customary conditions to funding; and
(d) Rollover Equity: $23,900,000 in rollover equity to be contributed by Nathan Aldridge ($14,200,000) and Sonia Reyes-Watkins ($9,700,000) into Harrowgate Velocity Co-Invest LP (a co-investment vehicle established for this purpose).
The existing credit facility between VeloPay and Meridian Commercial Credit Corp. ($112,000,000 outstanding principal amount) will be repaid in full at closing (estimated payoff of approximately $113,230,000, inclusive of accrued and unpaid interest through an assumed closing date).
C. Overall Risk Assessment
Based on the due diligence conducted through the date of this memorandum, no issues have been identified that would, individually or in the aggregate, reasonably be expected to constitute a "Material Adverse Effect" (as such term is expected to be defined in the Merger Agreement) on the business, financial condition, or results of operations of VeloPay and its subsidiaries taken as a whole. The VeloPay Group appears to be a well-managed fintech business with a strong revenue base, a defensible technology platform, an experienced management team, and a generally clean legal and regulatory profile.
That said, several matters have been identified that warrant specific attention in the Merger Agreement representations and warranties, disclosure schedules, pre-closing covenants, closing conditions, and, where appropriate, indemnification provisions. The key areas of focus are summarized below and discussed in detail throughout this memorandum:
(i) Change of Control Consents — Customer Contracts. Fourteen (14) material customer contracts contain change of control provisions that will be triggered by the reverse triangular merger. These contracts collectively represent approximately 38% of VeloPay's FY2024 revenue. Failure to obtain required consents could result in termination rights exercisable by the counterparties.
(ii) Money Transmitter Licensing. VeloPay holds money transmitter licenses in 47 states plus Washington, D.C. Thirty-one (31) of these licensing jurisdictions require either prior approval of or advance notification regarding a change of control of the licensee. Applications and notifications must be filed promptly after signing and substantially completed prior to closing.
(iii) Open-Source Software. Review has identified the use of certain copyleft-licensed open-source components (GPL v2 and LGPL) in the payment gateway module (originally from the PayStream Gateway LLC acquisition). While VeloPay's engineering team believes the manner of use does not trigger copyleft obligations for the proprietary codebase, further technical confirmation is pending and warranted.
(iv) Pending Litigation. Two litigation matters are pending or threatened: (a) Pinnacle Merchant Solutions LLC v. VeloPay Systems, Inc. (breach of contract; $8.1 million claimed; risk assessed as low), and (b) a threatened wage and hour class action related to the Denver, Colorado office (potential exposure of $1.5 million to $4.0 million).
(v) Section 280G Parachute Payment Exposure. The Transaction will constitute a "change of control" for purposes of Section 280G of the Internal Revenue Code. Preliminary analysis indicates that four key executives may receive "excess parachute payments" in an aggregate estimated amount of approximately $8.5 million, potentially triggering excise tax liability under Section 4999 and loss of deductibility under Section 280G.
(vi) Transfer Pricing — Canadian and Portuguese Subsidiaries. Intercompany pricing arrangements between VeloPay and its Canadian and Portuguese subsidiaries appear generally compliant with applicable transfer pricing rules but should be reviewed and potentially optimized post-closing by HPE Fund IV.
Each of these matters is addressed in detail in the relevant section of this memorandum, and our specific recommendations for the Merger Agreement are set forth in Section XI.
II. CORPORATE ORGANIZATION AND CAPITALIZATION
A. VeloPay Systems, Inc.
VeloPay Systems, Inc. is a corporation organized and existing under the laws of the State of Delaware. The Company was incorporated on June 17, 2014, and is registered with the Delaware Secretary of State under File Number 5748392. The Company's Employer Identification Number is 82-3019478.
We have reviewed VeloPay's Amended and Restated Certificate of Incorporation (as most recently amended on August 15, 2021, in connection with the Series D financing), together with all prior certificates of amendment, certificates of designation, and certificates of merger, as well as the Company's Amended and Restated Bylaws (as most recently amended on March 18, 2022). The authorized capital stock of VeloPay consists of 150,000,000 shares of common stock, par value $0.001 per share, and 25,000,000 shares of preferred stock, par value $0.001 per share. No shares of preferred stock are currently outstanding; all previously outstanding shares of Series B, Series C, and Series D preferred stock were converted to common stock in connection with the Company's most recent financing round and subsequent corporate actions, and the certificates of designation for each series have been effectively retired. We note that the Company's certificate of incorporation should be reviewed to confirm that these series remain authorized but unissued, or that the relevant certificates of designation have been formally cancelled.
We have confirmed that VeloPay is in good standing with the Delaware Secretary of State as of a good standing certificate dated February 28, 2025. The Company is qualified to do business as a foreign corporation in the State of Texas (where its headquarters is located), the State of Colorado (where it maintains a Denver office), and ten additional states where the nature and scope of its operations require foreign qualification. We have obtained and reviewed certificates of good standing or certificates of authority (or their functional equivalents) from the following twelve (12) states: Texas, Colorado, California, New York, Florida, Illinois, Georgia, Ohio, Pennsylvania, New Jersey, Virginia, and Massachusetts. No deficiencies or lapses in qualification status were identified.
Board of Directors. The VeloPay Board of Directors currently consists of six (6) members, as follows:
• Nathan Aldridge — Chair, Chief Executive Officer, and Co-Founder
• Sonia Reyes-Watkins — Chief Technology Officer and Co-Founder
• Janet Gould — Independent Director
• Kwame Asante — Ridgeline Ventures representative (designated pursuant to the Stockholders' Agreement)
• Catherine Lindström — Apex Growth Partners representative (designated pursuant to the Stockholders' Agreement)
• Philip Rosenthal — Independent Director
The Board has established two standing committees: an Audit Committee (chaired by Janet Gould, with Philip Rosenthal and Kwame Asante as members) and a Compensation Committee (chaired by Philip Rosenthal, with Janet Gould and Catherine Lindström as members). There is no separate nominating or governance committee; nomination functions are handled by the full Board.
Officers. The Company's current officers are as follows:
• Nathan Aldridge — Chief Executive Officer
• Sonia Reyes-Watkins — Chief Technology Officer
• Marcus Langford — Chief Financial Officer
• Danielle Moreau — General Counsel and Secretary
We have reviewed minutes and written consents of the Board of Directors and its committees from January 2019 through January 2025. The minutes reflect proper authorization of all significant corporate actions during this period, including (a) the Series C and Series D preferred stock financings, (b) the acquisition of PayStream Gateway LLC in 2021, (c) entry into the credit facility with Meridian Commercial Credit Corp., (d) annual approval of executive compensation arrangements, (e) adoption and amendment of the equity incentive plans, and (f) appointment and resignation of officers and directors. No material irregularities, failures of proper corporate governance procedures, or unauthorized actions were identified in our review of these records.
B. Subsidiaries. VeloPay has five (5) wholly-owned subsidiaries, each of which is described below. No joint ventures, minority equity investments, unconsolidated variable interest entities, or other off-balance sheet entities or arrangements were identified. The corporate organizational chart is attached as Appendix A.
1. VeloPay Processing LLC. VeloPay Processing LLC is a Delaware limited liability company formed on September 4, 2015. Its sole member is VeloPay Systems, Inc. The entity operates VeloPay's core payment processing infrastructure, including its connections to the major card networks and the ACH system. The limited liability company agreement (as amended and restated on January 12, 2020) was reviewed; it reflects VeloPay's status as sole member, contains standard governance provisions providing that VeloPay (acting through its officers) manages the entity, and does not grant any third party minority interests, profit interests, or other economic or governance rights. The entity is treated as a disregarded entity for U.S. federal income tax purposes.
2. VeloPay Canada Inc. VeloPay Canada Inc. is a corporation incorporated under the laws of the Province of Ontario, Canada, on March 22, 2018. The entity is wholly owned by VeloPay Systems, Inc. and conducts VeloPay's Canadian operations, including Canadian merchant onboarding, transaction processing for Canadian merchants, customer support, and certain software development activities. VeloPay Canada Inc. employs approximately 85 individuals at its offices in Toronto, Ontario. We have confirmed that VeloPay Canada Inc. is in good standing with the Ontario Ministry of Government and Consumer Services as of a certificate dated February 20, 2025. Articles of incorporation, bylaws, organizational resolutions, and shareholder resolutions were reviewed; no material irregularities identified.
3. VeloPay Europe, Unipessoal Lda. VeloPay Europe, Unipessoal Lda. is a Portuguese sociedade unipessoal por quotas de responsabilidade limitada (a single-member limited liability company) formed on January 15, 2020, under the laws of Portugal. The entity is wholly owned by VeloPay Systems, Inc. and operates as VeloPay's European research and development center and European operational support hub, located in Lisbon, Portugal. The entity employs approximately 60 individuals, primarily software engineers, data scientists, and support personnel. We have reviewed the entity's commercial registration certificate (certidão permanente) from the Portuguese Commercial Registry and the formation documents (articles of association and related documents), which were provided in Portuguese with English translations obtained by VeloPay. We note that the English translations are unofficial and have not been certified; we recommend obtaining certified translations for the closing files. The entity does not directly hold a payment institution license or any other regulated financial services license in the European Union.
4. VeloPay Fraud intelligence Inc. VeloPay Fraud intelligence Inc. is a Delaware corporation incorporated on July 11, 2019. The entity is wholly owned by VeloPay Systems, Inc. and operates VeloPay's fraud detection and analytics SaaS product line, which is marketed to VeloPay's merchant customers and, on a standalone basis, to certain third-party merchants and financial institutions. Good standing has been confirmed with the Delaware Secretary of State as of February 28, 2025. Certificate of incorporation, bylaws, and board and stockholder resolutions reviewed; no material irregularities identified.
5. PayStream Gateway LLC. PayStream Gateway LLC is a Delaware limited liability company originally formed on April 3, 2016, by third parties. VeloPay acquired 100% of the membership interests of PayStream Gateway LLC on June 30, 2021, pursuant to a Membership Interest Purchase Agreement (the "PayStream Acquisition Agreement") for a purchase price of $45,000,000 in cash. The acquisition was treated as an asset purchase for U.S. federal income tax purposes (the parties made a joint election under Section 754/Section 743(b) of the Internal Revenue Code). We have reviewed the PayStream Acquisition Agreement and all related ancillary documents, including IP assignment agreements, employment offer letters for retained employees, non-competition agreements, escrow agreement, and the allocation schedule. All intellectual property of PayStream Gateway LLC was properly assigned to VeloPay or confirmed as owned by PayStream in connection with the acquisition. No earn-out, contingent consideration, deferred purchase price, or holdback obligations remain outstanding. The escrow period expired on June 30, 2023, and all funds were released to the sellers. PayStream Gateway LLC is currently treated as a disregarded entity for U.S. federal income tax purposes (sole member is VeloPay).
Intercompany Agreements. The following intercompany agreements were identified and reviewed:
(i) Intercompany Services Agreement, dated April 1, 2018, between VeloPay Systems, Inc. (as service provider) and VeloPay Canada Inc. (as service recipient), as amended on January 1, 2022, pursuant to which VeloPay provides technology, management, and support services to VeloPay Canada in exchange for fees calculated on a cost-plus-15% basis;
(ii) Intercompany Services and Cost-Sharing Agreement, dated February 1, 2020, between VeloPay Systems, Inc. and VeloPay Europe, Unipessoal Lda., pursuant to which the parties share certain research and development costs and VeloPay Europe is compensated on a cost-plus-12% basis for services and R&D activities performed for the benefit of VeloPay; and
(iii) Intercompany intellectual Property License Agreements, dated as of various dates, pursuant to which VeloPay Systems, Inc. grants each subsidiary a non-exclusive, non-transferable license to use VeloPay's proprietary technology, trademarks, and other intellectual property in the conduct of such subsidiary's business, in exchange for royalty payments.
These intercompany agreements are discussed further in Section VIII (Tax) in the context of transfer pricing compliance.
C. Capitalization. Based on VeloPay's corporate records (including the stock ledger, option grant records, RSU award records, and warrant certificates), the Company's fully diluted capitalization as of March 1, 2025, is as follows. A preliminary capitalization table is attached as Appendix B, subject to final reconciliation pending receipt of updated vesting schedules (see Section X).
At the per-share merger consideration of $20.00, the aggregate merger consideration on a fully diluted basis is $1,900,000,000. The in-the-money value of the outstanding options (net spread) is approximately $54,416,000 (7,600,000 × ($20.00 − $12.84)). The cash payout for RSUs is $64,000,000 (3,200,000 × $20.00). The cash payout for warrants is $20,700,000 (1,800,000 × ($20.00 − $8.50)).
Key Stockholders. The principal stockholders of VeloPay, based on our review of the stock ledger and the Company's 2020 Amended and Restated Stockholders' Agreement, are set forth below. A detailed stockholder summary is attached as Appendix C.
Equity Incentive Plans. VeloPay has two equity incentive plans: the 2014 Stock Incentive Plan (the "2014 Plan") and the 2020 Equity Incentive Plan (the "2020 Plan," and together with the 2014 Plan, the "Plans"). Both Plans and their amendments, as well as the form award agreements (including stock option agreements, RSU award agreements, and the form warrant agreement), have been reviewed. The Plans collectively authorize the issuance of up to 15,000,000 shares of common stock.
The change of control provisions in the Plans are as follows:
• RSUs: Single-trigger acceleration. Upon a "Change of Control" (as defined in the applicable Plan), all outstanding RSUs immediately vest and become payable. Under the proposed Merger Agreement, RSUs will fully accelerate at closing and convert to the right to receive cash at $20.00 per underlying share.
• Stock Options: Double-trigger acceleration. Options do not automatically accelerate upon a Change of Control; instead, acceleration occurs only if the option holder's employment is terminated without "Cause" or the holder resigns for "Good Reason" within 12 months following the Change of Control. The Board retains discretion to accelerate vesting at any time. Under the proposed Merger Agreement, vested options (including any options accelerated by the Board) will be cancelled for the net spread ($20.00 minus the applicable exercise price). With respect to unvested options: 50% will be accelerated at closing and cancelled for the net spread, and the remaining 50% will be converted into replacement awards in respect of HPE Fund IV limited partnership interests, vesting ratably over 24 months following the closing.
• Warrants: Governed by separate warrant agreements (not the Plans). The warrant agreements provide that upon a Change of Control, each warrant may be exercised or, at the Company's election, cancelled for a cash payment equal to the excess of the per-share merger consideration over the exercise price ($20.00 − $8.50 = $11.50 per warrant). Total warrant cash payout: 1,800,000 × $11.50 = $20,700,000.
We recommend that the treatment of all outstanding equity awards be clearly documented in the Merger Agreement, and that the award holder communications and letter of transmittal documents be prepared and reviewed by C&H prior to signing.
Stockholders' Agreement. The Company is party to a 2020 Amended and Restated Stockholders' Agreement (the "Stockholders' Agreement") among VeloPay, its founders, and the institutional investors. The Stockholders' Agreement contains the following material provisions:
(i) Board Designation Rights. Ridgeline Ventures has the right to designate one member of the Board so long as it holds at least 15% of the outstanding shares; Apex Growth Partners has the right to designate one member of the Board so long as it holds at least 10% of the outstanding shares. These rights will terminate at closing.
(ii) Drag-Along Rights. Holders of a majority of the outstanding shares may require all other stockholders to participate in a sale of the Company on the same terms. This provision will be satisfied by the Stockholder Support Agreement (discussed below).
(iii) Tag-Along Rights. Stockholders holding at least 5% of outstanding shares have the right to participate in any transfer of shares by a Major Stockholder. This provision will be rendered moot by the merger structure.
(iv) Right of First Refusal. The Company and, secondarily, the other stockholders have a right of first refusal on any proposed transfer of shares by a stockholder. This provision will terminate at closing.
A Stockholder Support Agreement (the "Support Agreement") has been negotiated, pursuant to which Ridgeline Ventures, Apex Growth Partners, Nathan Aldridge, Sonia Reyes-Watkins, and Broadleaf Capital Partners (collectively holding approximately 69.2% of the outstanding common stock, but at least 63.1% on a committed basis after accounting for rollover shares) will agree to vote their shares in favor of the merger and execute a written consent approving the merger promptly after signing. The Support Agreement also includes customary covenants restricting transfers and prohibiting solicitation of competing proposals. This level of stockholder support exceeds the majority threshold required for approval of the merger under the DGCL and satisfies the drag-along threshold under the Stockholders' Agreement.
Anti-Dilution. We have reviewed the Company's certificate of incorporation, the Stockholders' Agreement, the equity incentive plans, the warrant agreements, and all related documents and have confirmed that no anti-dilution provisions, adjustment mechanisms, or other contractual terms exist that would increase the number of fully diluted shares beyond 95,000,000 or otherwise modify the per-share merger consideration in connection with the Transaction.
D. Prior Transactions
Our review of VeloPay's corporate records has identified the following significant prior corporate transactions:
(i) Series B Financing (2017). Ridgeline Ventures Fund III LP led a Series B preferred stock financing; total proceeds raised of approximately $40 million; all Series B shares subsequently converted to common stock.
(ii) Series C Financing (2019). Apex Growth Partners II LP and Ridgeline Ventures Fund III LP co-led a Series C preferred stock financing; total proceeds raised of approximately $75 million; all Series C shares subsequently converted to common stock.
(iii) Series D Financing (2021). Broadleaf Capital Partners LP led a Series D preferred stock financing; total proceeds raised of approximately $110 million; all Series D shares subsequently converted to common stock.
(iv) PayStream Gateway LLC Acquisition (2021). VeloPay acquired 100% of the membership interests of PayStream Gateway LLC for $45 million in cash, treated as an asset purchase for U.S. federal income tax purposes. No earn-out, contingent consideration, or deferred purchase price obligations remain outstanding.
No other acquisitions, dispositions, spin-offs, recapitalizations, or corporate restructurings were identified. The Company has not filed for bankruptcy or been the subject of any receivership, liquidation, or similar proceedings.
III. MATERIAL CONTRACTS
A. Overview. A comprehensive review of VeloPay's material contracts was conducted as part of the legal due diligence investigation. A separate, detailed Material Contracts Summary Memorandum has been prepared by Derek Okonkwo and is referenced herein. This section provides a high-level summary of the principal findings.
The scope of our review encompassed VeloPay's top 25 customer agreements (ranked by revenue contribution for FY2024), key vendor and technology licensing contracts, partnership and strategic alliance agreements, the existing credit facility, and intercompany agreements among the VeloPay Group entities. Documents were identified through the Data Room, supplemented by management interviews and specific document requests submitted to VeloPay's General Counsel, Danielle Moreau, and outside counsel at Whitford Jessup & Crane LLP.
VeloPay's revenue model is principally comprised of three components: (a) interchange-plus processing fees charged on each transaction processed through VeloPay's platform; (b) SaaS subscription fees for VeloPay's merchant analytics dashboard and fraud detection suite (marketed under the "VeloPay Fraud intelligence" brand); and (c) per-transaction gateway fees for payment gateway services (utilizing the technology acquired through PayStream Gateway LLC). The Company also derives a modest portion of revenue from setup and implementation fees for enterprise customers and from referral commissions paid under its strategic partnership arrangements.
B. Customer Agreements — Key Findings
VeloPay utilizes a standard form Merchant Processing Agreement ("MPA") for its mid-market customers, which constitute the majority of its approximately 14,000 merchant relationships. Enterprise customers — generally those processing more than $50 million in annualized GPV — negotiate bespoke agreements that depart from the standard form in various respects, including pricing, service level commitments, liability limitations, data handling requirements, and termination provisions.
The typical terms of VeloPay's customer agreements are as follows:
• Term: Initial term of three (3) years, with automatic renewal for successive one-year periods unless either party provides written notice of non-renewal at least ninety (90) days prior to the expiration of the then-current term.
• Termination for Convenience: Either party may terminate the agreement upon ninety (90) days' prior written notice to the other party, subject in some enterprise agreements to payment of an early termination fee equal to the lesser of (x) the remaining contractual fees through the end of the then-current term and (y) a specified dollar cap.
• Termination for Cause: Either party may terminate the agreement upon thirty (30) days' written notice if the other party commits a material breach and fails to cure such breach within the thirty-day notice period.
• Processing Reserves: VeloPay maintains the right to establish and hold reserve accounts for merchants with elevated chargeback rates, as specified in the agreement and the applicable risk management policies. These reserves are a significant aspect of VeloPay's risk management framework and have been the subject of the Pinnacle Merchant Solutions litigation discussed in Section V.
Change of Control Provisions. Fourteen (14) material customer contracts have been identified as containing change of control provisions that require either (a) VeloPay to obtain the prior written consent of the customer before consummating a change of control, or (b) VeloPay to provide advance notification to the customer of a change of control (with the customer having the right to terminate the agreement within a specified period following notification). These fourteen contracts collectively represent approximately 38% of VeloPay's FY2024 revenue of $412.3 million — i.e., approximately $156.7 million in annual revenue.
The "change of control" definition varies across these contracts, but each of the fourteen contracts defines the term broadly enough to encompass the reverse triangular merger (in which the ultimate controlling equity holder of VeloPay will change from the existing stockholder group to HPE Fund IV). We have prepared a detailed analysis of each contract's specific change of control provisions, the applicable consent or notification requirements, and the consequences of non-compliance (generally, a termination right exercisable by the customer). This analysis is contained in the separate Change of Control Consent Tracker and Analysis Memorandum (Derek Okonkwo), which is being maintained as a living document and updated as consent solicitation efforts progress. A summary listing of the fourteen contracts is provided in Appendix D.
Exclusivity and MFN Provisions. Three enterprise customer contracts contain provisions that will survive the merger and may constrain VeloPay's post-closing pricing flexibility:
(i) Two contracts include "most-favored-nation" (MFN) pricing clauses, which require VeloPay to provide the applicable customer with pricing terms no less favorable than those offered to any similarly situated customer. The scope and practical impact of these clauses should be assessed by HPE Fund IV in connection with any post-closing pricing strategy changes.
(ii) One contract includes an exclusivity provision prohibiting VeloPay from entering into processing agreements with any direct competitor of the applicable customer within a specified geographic market. The scope of this exclusivity is relatively narrow and is not expected to materially restrict VeloPay's business operations.
Data Localization Requirements. Two enterprise customer agreements contain data localization requirements mandating that certain Canadian transaction data be processed and stored within Canada. These requirements are currently satisfied through VeloPay Canada Inc.'s operations in Toronto, Ontario, and VeloPay's cloud infrastructure deployed in Canadian data centers. No changes to VeloPay's infrastructure are needed to maintain compliance with these provisions post-closing.
C. Change of Control Provisions — Summary
The change of control landscape across VeloPay's contractual relationships is summarized below:
Customer Contracts (14 contracts). As described above, fourteen material customer contracts require consent or notification upon a change of control. The definitions of "change of control" vary but all would be triggered by the merger. We recommend that the Merger Agreement require VeloPay to use commercially reasonable efforts to obtain all fourteen consents prior to closing, with a specified subset of the most critical contracts (measured by revenue contribution and strategic importance) constituting a closing condition for the Buyer. Consents not obtained prior to closing should be pursued promptly post-closing, and the Merger Agreement should provide for cooperation between the parties in this regard.
Existing Credit Facility. VeloPay's existing credit facility with Meridian Commercial Credit Corp. (the "Meridian Facility") has an outstanding principal balance of approximately $112,000,000 and an aggregate commitment of $125,000,000. The credit agreement governing the Meridian Facility defines a "Change of Control" to include the acquisition of beneficial ownership of more than 50% of the Company's voting equity by any person or group that did not hold such beneficial ownership immediately prior to such acquisition. The merger will trigger this definition, resulting in an event of default and a mandatory prepayment obligation. VeloPay and the Buyer have agreed that the Meridian Facility will be repaid in full at closing from the Transaction proceeds and the new debt financing. The estimated payoff amount, inclusive of accrued and unpaid interest through an assumed closing date, is approximately $113,230,000. We have reviewed the payoff procedures under the Meridian credit agreement and will coordinate with Meridian's counsel on delivery of payoff letters and UCC termination statements at closing.
Executive Employment Agreements. The employment agreements of each of the four key executives (Aldridge, Reyes-Watkins, Langford, and Moreau) contain change of control provisions triggering enhanced severance and equity acceleration rights. These provisions are discussed in detail in Section VII (Employment and Benefits).
Cloud Infrastructure Agreement. VeloPay's key cloud services agreement requires the consent of the cloud services provider upon a change of control, but includes an exception for mergers and acquisitions in which the surviving entity assumes the contract. Based on our review, this exception should be applicable to the reverse triangular merger (VeloPay survives and assumes all contractual obligations). We recommend that VeloPay confirm this interpretation with the cloud services provider and obtain written confirmation to the extent possible.
D. Vendor and Technology Contracts
The following key vendor and technology contracts were reviewed:
Cloud Infrastructure Agreement. VeloPay is party to a cloud services agreement with a major cloud services provider (the "Cloud Agreement"), with a five-year term expiring in 2027. Under the Cloud Agreement, VeloPay has committed to minimum annual spend levels of approximately $18,000,000. The Cloud Agreement includes standard assignment and change of control provisions requiring consent of the cloud services provider, subject to the merger exception described above. The Cloud Agreement is critical to VeloPay's operations, as substantially all of VeloPay's payment processing infrastructure and merchant-facing applications are hosted on this provider's cloud platform.
Payment Network Agreements. VeloPay is party to four separate agreements with the major card brands and payment networks authorizing VeloPay to act as a payment processor/facilitator and to access the respective networks for transaction authorization, clearing, and settlement. These agreements are governed by the standard terms and operating regulations of the applicable card brands. Our review did not identify any change of control consent requirements in these network agreements. The agreements require VeloPay to maintain compliance with PCI-DSS and the applicable card brand operating rules at all times, which VeloPay represents that it does (see Section VI.B regarding PCI-DSS compliance).
Fraud Detection Data Feed Agreements. VeloPay is party to three contracts with third-party data providers for the supply of data feeds used in VeloPay's fraud detection and scoring algorithms. These contracts contain standard assignment and change of control provisions requiring notification to (but not consent from) the data providers. Notifications should be provided promptly after signing.
E. Partnership and Strategic Agreements
VeloPay has entered into two strategic partnership agreements with banking-as-a-service ("BaaS") platforms, pursuant to which VeloPay provides payment processing services to the BaaS platforms' end-user customers. These agreements include revenue sharing arrangements, with VeloPay receiving a percentage of the processing fees generated through the platform. Both agreements have three-year initial terms. One of these two agreements contains a change of control consent requirement and is included in the fourteen material contracts identified above.
In addition, VeloPay is party to a referral agreement with a major enterprise software company, pursuant to which the software company refers its customers to VeloPay for payment processing services in exchange for referral fees. This agreement does not contain a change of control provision and is not expected to be affected by the Transaction.
F. Intercompany Agreements
The intercompany agreements among the VeloPay Group entities — specifically, the Intercompany Services Agreement (VeloPay → VeloPay Canada Inc.), the Intercompany Services and Cost-Sharing Agreement (VeloPay → VeloPay Europe), and the Intercompany IP License Agreements (VeloPay to each subsidiary) — were reviewed in the context of both the material contracts analysis and the tax due diligence workstream. From a contractual standpoint, the agreements contain standard terms, are properly executed, and do not present any material issues. The transfer pricing aspects of these agreements are discussed in Section VIII.D.
IV. INTELLECTUAL PROPERTY
A. Overview. A separate, detailed IP Due Diligence Memorandum has been prepared by Derek Okonkwo and is referenced herein. This section provides a high-level summary of the principal findings from the intellectual property due diligence review.
VeloPay's intellectual property portfolio is central to the Company's competitive position and value proposition. The Company's core IP assets include: (a) its proprietary cloud-native payments processing platform, including all associated source code, architecture, algorithms, and technical documentation; (b) fraud detection and scoring algorithms and machine learning models (operated through the VeloPay Fraud intelligence subsidiary); (c) payment gateway technology originally developed by PayStream Gateway LLC and acquired by VeloPay in the 2021 acquisition; and (d) related trademarks, trade names, domain names, and copyrights.
B. Patents. VeloPay holds eleven (11) issued U.S. utility patents and has four (4) pending U.S. patent applications. The issued patents relate to the following technology areas:
• Payment tokenization methods and systems (4 patents)
• Real-time fraud scoring and risk assessment algorithms (3 patents)
• Transaction routing optimization and intelligent processing (2 patents)
• Payment gateway architecture and data handling (2 patents — originally from PayStream Gateway LLC)
In addition, PayStream Gateway LLC contributed three (3) of the above-referenced issued U.S. patents relating to payment gateway technology. All PayStream patents were properly assigned to VeloPay and/or are held by PayStream Gateway LLC (a wholly-owned subsidiary of VeloPay) as confirmed in the IP assignment agreements executed in connection with the 2021 acquisition.
The four pending patent applications relate to advanced fraud detection methodologies incorporating machine learning techniques and to enhancements to VeloPay's transaction routing algorithms. All pending applications are in active prosecution before the U.S. Patent and Trademark Office.
VeloPay has not pursued international patent protection in any jurisdiction outside the United States. No corresponding patents or patent applications have been filed in Canada, the European Union, Portugal, or elsewhere. Given the Company's growing international presence (particularly through VeloPay Canada Inc. and VeloPay Europe, Unipessoal Lda.), HPE Fund IV may wish to evaluate the desirability and cost-effectiveness of filing international patent applications for key technologies post-closing.
No patent infringement claims are currently pending or, to VeloPay's knowledge, threatened against the Company. Similarly, VeloPay has not asserted any patent infringement claims against third parties. We note that a freedom-to-operate analysis was not conducted as part of this due diligence investigation. Given the competitive nature of the payments technology industry and the volume of patents held by competitors and non-practicing entities in this space, the Buyer may wish to commission a targeted freedom-to-operate analysis post-closing with respect to VeloPay's key technology areas.
C. Trademarks. VeloPay holds six (6) registered U.S. trademarks with the U.S. Patent and Trademark Office (the "USPTO"), including registrations for the following marks: "VeloPay" (word mark and design mark), "PayStream," "VeloPay Fraud intelligence," "VeloPay Gateway," and "PayStream Gateway." All registrations are current, and all required maintenance filings (Section 8 and Section 15 declarations, Section 9 renewal applications) have been timely made. No oppositions, cancellation proceedings, or other challenges to VeloPay's trademark registrations are currently pending before the Trademark Trial and Appeal Board or any court.
VeloPay Canada Inc. holds two (2) registered trademarks with the Canadian intellectual Property Office ("CIPO"), covering the "VeloPay" word mark and design mark in Canada. These registrations are current.
We did not identify any trademark registrations filed by VeloPay or VeloPay Europe with the European Union intellectual Property Office ("EUIPO") or the Portuguese Instituto Nacional da Propriedade Industrial ("INPI"). Given VeloPay Europe's operational presence in Lisbon and the Company's growing European activities, we recommend that HPE Fund IV consider pursuing EU trademark registrations for the "VeloPay" brand and key product names post-closing to protect against unauthorized third-party use in the EU market.
D. Trade Secrets and Proprietary Technology
VeloPay's fraud detection algorithms, machine learning models, risk scoring methodologies, and proprietary data sets constitute significant and valuable trade secrets. The Company has implemented reasonable measures to protect these assets, including:
• Employee Invention Assignment and Confidentiality Agreements ("PIIAs"): Reviewed for all current employees. All current employees of VeloPay (U.S.) have executed PIIAs containing (a) assignment of all work product and inventions to VeloPay, (b) confidentiality obligations covering proprietary information, and (c) post-employment obligations regarding return of company property and continued confidentiality. Employees of VeloPay Canada Inc. and VeloPay Europe have executed comparable agreements under the laws of their respective jurisdictions.
• Contractor and Vendor NDAs: Non-disclosure agreements and, where applicable, work-for-hire/IP assignment agreements are in place with current independent contractors and vendors who have access to proprietary information or who contribute to the development of VeloPay's technology.
• Internal Controls: VeloPay maintains role-based access controls to its source code repositories, trade secret databases, and production systems. The CTO (Sonia Reyes-Watkins) oversees the Company's information security and trade secret protection program.
Early-Stage Contractor Agreements. Our review of the Data Room identified a small number of contractor agreements from VeloPay's early-stage period (2014–2016) that lack explicit intellectual property assignment language. Specifically, we identified seven (7) contractor engagement letters from this period that contain confidentiality provisions but do not include a clear assignment of intellectual property rights to VeloPay. VeloPay's General Counsel, Danielle Moreau, confirmed that (a) the individuals engaged under these agreements no longer have any relationship with VeloPay, (b) the work product created by these individuals has been substantially superseded by subsequent development efforts, and (c) VeloPay believes it has a strong work-for-hire argument under applicable law for the work product created under these engagements. Notwithstanding these mitigating factors, we recommend that the Merger Agreement include a specific representation and warranty regarding VeloPay's ownership of all intellectual property used in the business, together with an indemnification obligation covering any losses arising from third-party IP ownership claims related to the early-stage period.
E. Open-Source Software
VeloPay's payments processing platform, like virtually all modern software platforms, incorporates numerous open-source software ("OSS") components. VeloPay maintains a formal open-source compliance program, overseen by the CTO (Sonia Reyes-Watkins), which includes (a) an internal policy governing the evaluation, approval, and use of open-source components, (b) a software bill of materials ("SBOM") tracking all open-source components incorporated into VeloPay's products, and (c) periodic license compliance reviews.
Our review of the SBOM and related documentation identified the use of certain copyleft-licensed open-source components within the payment gateway module of VeloPay's platform. Specifically, portions of the gateway codebase (originally from the PayStream Gateway LLC acquisition) incorporate components licensed under the GNU General Public License, Version 2 ("GPL v2") and the GNU Lesser General Public License ("LGPL"). The potential concern with copyleft licenses — particularly GPL v2 — is that incorporation of GPL-licensed code into a proprietary software product may, depending on the manner of integration, trigger an obligation to release the source code of the entire combined work under the GPL (the "copyleft" or "viral" effect).
VeloPay's engineering team, through CTO Sonia Reyes-Watkins, has confirmed that the GPL-licensed code in the gateway module is used in a manner that VeloPay believes does not trigger copyleft obligations with respect to VeloPay's proprietary codebase. Specifically, VeloPay represents that the GPL-licensed components are (a) dynamically linked (not statically linked) to the proprietary code, (b) executed as separate processes communicating through standard interfaces, and (c) not distributed to end users (the software runs on VeloPay's servers as a service, rather than being distributed as installable software). Under these circumstances, VeloPay's position is that the copyleft obligations are not triggered.
While VeloPay's position appears reasonable based on the representations provided, we recommend the following:
(a) Obtain written confirmation from VeloPay's engineering team (ideally supported by a technical architecture review or third-party audit) regarding the specific manner of integration of GPL-licensed components in the gateway module. This confirmation has been requested and is expected by March 15, 2025 (see Section X).
(b) Include specific representations and warranties in the Merger Agreement regarding VeloPay's open-source software usage, compliance with applicable open-source licenses, and absence of any obligations to disclose or license proprietary source code.
(c) Consider including specific indemnification coverage for losses arising from open-source license non-compliance.
No known open-source license violations or third-party claims relating to open-source software have been identified.
F. Domain Names
VeloPay owns approximately forty-five (45) domain names, including the following primary domains:
• velopay.com
• velopay.ca
• velopay.pt
• velopay.io
• velopay.co
• paystream.com
• paystream.io
• velopayfraudintelligence.com
All domain name registrations are current, and renewal reminders are managed through VeloPay's IT department. No domain name disputes (UDRP proceedings or otherwise) are currently pending.
V. LITIGATION AND CONTINGENT LIABILITIES
A. Pending Litigation
A separate, detailed Litigation and Contingent Liabilities Memorandum has been prepared by Megan Chu and is referenced herein. This section provides a summary of the two matters currently pending or threatened against VeloPay.
1. Pinnacle Merchant Solutions LLC v. VeloPay Systems, Inc.
Court: United States District Court for the Western District of Texas, Austin Division.
Case No.: 1:24-cv-01147-JRN.
Filed: September 18, 2024.
Parties: Pinnacle Merchant Solutions LLC ("Pinnacle"), an online retail merchant, as plaintiff; VeloPay Systems, Inc. as defendant.
Claims: Breach of contract and breach of the implied covenant of good faith and fair dealing. Pinnacle alleges that VeloPay improperly terminated its Merchant Processing Agreement and wrongfully withheld approximately $2.3 million in funds held in a merchant reserve account. Pinnacle further alleges that VeloPay's termination was pretextual and designed to seize the reserve funds.
VeloPay's Position: VeloPay maintains that the termination was proper and authorized under the express terms of the Merchant Processing Agreement. Specifically, VeloPay contends that Pinnacle's chargeback rate exceeded the contractual threshold for three consecutive months, triggering VeloPay's right to terminate the agreement immediately and to retain the merchant reserve to cover anticipated chargebacks and potential losses. VeloPay has filed a Motion to Dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6), arguing that the complaint fails to state a plausible claim for breach of contract because VeloPay acted within its express contractual rights.
Damages Claimed: $2,300,000 (return of the reserve) plus $5,800,000 in alleged consequential damages (lost business, reputational harm), for a total of $8,100,000.
Status: Motion to Dismiss pending; no hearing date set as of the date of this memorandum. Discovery has not commenced.
Assessment: VeloPay's outside counsel (Whitford Jessup & Crane LLP, with Helen Marquez as the lead litigation partner handling this matter) assesses the risk of a material adverse outcome as low. VeloPay's contractual position appears strong, and the consequential damages claim faces significant hurdles given the limitation of liability and consequential damages waiver provisions in the MPA. VeloPay has accrued $1,200,000 in reserves for this matter, which appears reasonable based on the current stage of the litigation and the risk assessment.
2. Threatened Wage and Hour Class Action — Denver Customer Support Employees.
Status: Pre-litigation demand letter received November 14, 2024, from the law firm of Canfield Ross & Burke P.C. (Denver, Colorado), on behalf of a putative class of approximately 120 current and former customer support employees in VeloPay's Denver, Colorado office.
Allegations: The demand letter alleges that VeloPay misclassified the customer support employees as exempt from overtime under the Fair Labor Standards Act ("FLSA") and the Colorado Overtime and Minimum Pay Standards Order ("COMPS Order"). Specifically, the letter alleges that the employees do not satisfy the duties test for the administrative or professional exemptions and that VeloPay failed to pay overtime compensation for hours worked in excess of 40 hours per week (FLSA) and 12 hours per day (COMPS Order).
VeloPay's Position: VeloPay is evaluating the claims with its outside counsel (Whitford Jessup & Crane LLP, employment group). VeloPay's preliminary position is that the classifications were appropriate, but management has acknowledged that the classification analysis for this group of employees has not been formally reviewed since the Denver office was expanded in 2021. Whitford Jessup has recommended that VeloPay undertake a comprehensive classification review.
Potential Exposure: If a class action is filed, certified, and the claims are successful, the estimated exposure is in the range of $1,500,000 to $4,000,000, depending on the class size, the applicable look-back period (two years under FLSA; three years for willful violations; variable under COMPS Order), and whether liquidated damages are awarded. VeloPay has accrued $2,000,000 in reserves for this matter, which falls within the range of estimated exposure and appears reasonable.
Status: No lawsuit has been filed as of the date of this memorandum. VeloPay's outside counsel has engaged in preliminary discussions with Canfield Ross & Burke regarding a potential resolution, but no agreement has been reached.
B. Regulatory Inquiries
No pending regulatory enforcement actions, investigations, or formal proceedings against VeloPay or any of its subsidiaries were identified in our review.
VeloPay disclosed that it received an informal inquiry from the Texas Department of Banking in June 2024 relating to documentation submitted in connection with VeloPay's money transmitter license renewal in Texas. The inquiry requested supplemental information regarding VeloPay's surety bond coverage and its agent reporting procedures. VeloPay responded to the inquiry promptly, providing the requested documentation, and the matter was resolved with no further action required by the Texas Department of Banking. No formal examination, enforcement action, or consent order resulted from this inquiry.
No investigations, inquiries, or enforcement actions by the Consumer Financial Protection Bureau ("CFPB"), the Federal Trade Commission ("FTC"), or any state attorney general were identified. VeloPay's General Counsel confirmed that the Company has not received any civil investigative demands, subpoenas, or similar compulsory process from any federal or state regulatory agency.
C. Assessment. Based on our review and the assessments of VeloPay's outside litigation counsel at Whitford Jessup & Crane LLP, neither the Pinnacle litigation nor the threatened Denver wage and hour class action, individually or in the aggregate, would reasonably be expected to constitute a Material Adverse Effect on the business, financial condition, or results of operations of VeloPay and its subsidiaries taken as a whole. The combined maximum exposure across both matters (approximately $12.1 million at the high end of the estimated ranges) represents less than 3% of VeloPay's FY2024 revenue and a fraction of the Transaction's enterprise value.
Both matters should be fully disclosed on the litigation disclosure schedule to the Merger Agreement. The existing accruals ($1,200,000 for Pinnacle; $2,000,000 for the Denver matter) appear reasonable based on current information and should be maintained through closing. We recommend standard indemnification coverage for pre-closing litigation matters in the Merger Agreement. Based on our assessment, no special escrow, holdback, or purchase price adjustment mechanism is warranted for these matters at this time. Should circumstances change — for example, if the Denver wage and hour matter is filed as a class action with a larger putative class or broader claims than currently anticipated — we will reassess this recommendation.