PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED WORK PRODUCT
MEMORANDUM
TO: Oliver Mackenzie, Responsible Partner, Mergers & Acquisitions, Calderwood & Harkness LLP Jonah Whitfield, Principal, Harrowgate Capital Partners LLC Rebecca Talmadge, Partner, Harrowgate Capital Partners LLC
FROM: Ryan Kowalski, Lead Associate, Mergers & Acquisitions, Calderwood & Harkness LLP
DATE: March 27, 2025
RE: Litigation & Contingent Liabilities Summary — Pennfield Holdings, Inc. (Project Summit)
MATTER NO.: 1003-00004
This memorandum is a privileged and confidential attorney-client communication and attorney work product prepared by Calderwood & Harkness LLP in connection with the representation of Harrowgate Capital Partners LLC and Harrowgate Private Equity Fund IV LP in connection with Project Summit. This memorandum is not intended for distribution to, or reliance by, any third party without the prior written consent of Calderwood & Harkness LLP.
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I. Executive Summary and Purpose
This memorandum summarizes the results of Calderwood & Harkness LLP's review of pending and threatened litigation, governmental investigations, and contingent liabilities of Pennfield Holdings, Inc. ("Pennfield," the "Company," or the "Target"; Nasdaq: PNFD; CUSIP 708234109) and its subsidiaries, in connection with the proposed $980,000,000 take-private acquisition of Pennfield by Harrowgate Private Equity Fund IV LP ("Harrowgate," "HPE Fund IV," or the "Buyer"). The acquisition is being conducted under the internal project code name "Project Summit."
This review was conducted as a component of the legal due diligence process undertaken in connection with the proposed transaction. The virtual data room, hosted on Thackeray Solutions under the project code name "Project Summit," was opened on February 10, 2025, and our review of the litigation and contingent liability materials commenced on that date. We have continued to review supplemental materials posted to the data room through the date of this memorandum.
Sources Reviewed. Our analysis is based on the following principal sources:
• Data room materials, including folders specifically designated for litigation (Data Room Folder 7.1 — Litigation), regulatory and governmental matters (Folder 7.2 — Regulatory/Government), insurance (Folder 7.3 — Insurance), and compliance (Folder 7.4 — Compliance);
• Pennfield's Annual Report on Form 10-K for the fiscal year ended January 31, 2025 ("FY 2024 10-K"), the most recent Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2024, and prior Current Reports on Form 8-K, all as filed with the Securities and Exchange Commission ("SEC");
• SEC EDGAR searches for Pennfield Holdings, Inc.;
• Federal and state court docket searches, including PACER searches and targeted state court docket searches in relevant jurisdictions;
• Two interview sessions with Patricia Okafor, General Counsel and Corporate Secretary of Pennfield Holdings, Inc., conducted on March 18 and March 24, 2025; and
• A separate session with Pennfield's outside litigation counsel, as retained by Pennfield for specific matters discussed below.
The foregoing review was supplemented by reference to Pennfield's audited consolidated financial statements for fiscal year 2024, prepared by Pemberton & Associates LLP (lead audit partner: Kevin Tarrant Corporation), and by drafts of the disclosure letter and associated schedules being prepared by Pennfield's transaction counsel, Calloway, Briggs & Harmon LLP (Janet Alcorn, Steven Devereux, and Linda Chiang).
Overall Assessment. Based on our review, the aggregate disclosed litigation and contingent liability exposure of Pennfield and its subsidiaries is manageable relative to the size of the proposed transaction. No single matter identified in our review poses a material threat to the consummation of the merger or to the ongoing business operations of the Company. As set forth in the aggregate exposure summary table in Section VI below, the estimated aggregate net exposure across all identified matters ranges from approximately $8.9 million at the low end to approximately $32.3 million at the high end. Even at the high end, this represents approximately 3.3% of the $980,000,000 aggregate merger consideration.
Relevance to the Transaction. The matters identified herein inform several critical components of the transaction documentation and risk allocation framework:
• Representations and Warranties: The scope and specificity of Pennfield's representations and warranties in the Agreement and Plan of Merger (the "Merger Agreement"), for which the target execution date is April 7, 2025, should be calibrated to address the identified litigation and contingent liability matters, with appropriate qualifications by the disclosure schedules.
• Disclosure Schedules: Each matter identified herein should be disclosed on the applicable Pennfield disclosure schedule, and buyer-side disclosure schedules should cross-reference known matters as appropriate.
• Indemnification Provisions: The negotiated indemnification provisions in the Merger Agreement include a cap equal to 12% of the aggregate merger consideration, or $117,600,000. The aggregate exposure identified herein falls well within this cap.
• Representations and Warranties Insurance: Harrowgate intends to obtain a buyer-side representations and warranties insurance ("R&W Insurance") policy with a $100,000,000 limit and a $9,800,000 retention (equal to 1% of enterprise value), to be issued by Meridian Specialty Insurance Company and brokered by Lockwood Risk Advisors LLC (James Fielding). The identified matters inform the scope of potential "known matter" exclusions under the R&W policy, as discussed further in Section VII.B below.
II. Scope and Methodology
A. Data Room Materials Reviewed
We reviewed the following categories of materials made available in the Thackeray Solutions virtual data room established for Project Summit:
• Litigation Docket Summaries and Pleadings (Data Room Folder 7.1 — Litigation): This folder contained copies or summaries of pleadings, complaints, answers, motions, and court orders for all pending litigation matters involving Pennfield and its subsidiaries. The folder was organized by matter, with sub-folders for each pending case. In total, the folder contained approximately 340 documents.
• Regulatory Correspondence and Investigation Files (Folder 7.2 — Regulatory/Government): This folder contained correspondence with governmental agencies, including the California Attorney General's office, the U.S. Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, the Consumer Product Safety Commission, and the North Carolina Department of Revenue. The folder also included internal memoranda summarizing the status of governmental inquiries and investigations.
• Insurance Claims History and Coverage Summaries (Folder 7.3 — Insurance): This folder contained summaries of Pennfield's insurance programs, including commercial general liability, employment practices liability, directors and officers liability, and workers' compensation policies, as well as claims history reports for the preceding five policy years. The folder also included broker-prepared insurance program summaries and schedule of coverage documents.
• Pennfield General Counsel's Litigation Hold Notices: We reviewed copies of litigation hold notices issued by Patricia Okafor's office in connection with active and threatened matters, which provided useful context for the scope and timing of the Company's preservation obligations.
• Board Minutes Referencing Litigation and Contingent Liabilities: We reviewed minutes of meetings of the Board of Directors of Pennfield Holdings, Inc. and the Audit Committee of the Board for the period from January 2023 through February 2025, to the extent such minutes contained discussion of litigation, investigations, or contingent liabilities.
• Management Representation Letters Provided to Pemberton & Associates LLP: We reviewed copies of management representation letters provided by Pennfield's management to Pemberton & Associates LLP in connection with the FY 2023 and FY 2024 annual audits, including representations regarding the completeness of litigation disclosures and the adequacy of reserves for contingent liabilities.
B. External Searches Conducted
In addition to reviewing the data room materials, we conducted the following independent external searches:
• Federal Court PACER Searches: We conducted PACER searches for Pennfield Holdings, Inc. and each of its known subsidiaries (including Pennfield Retail, Inc., Pennfield E-Commerce LLC, Pennfield Canada ULC, and Pennfield Distribution Services, Inc.) as parties in all federal district courts and bankruptcy courts. These searches were conducted on March 15, 2025 and updated on March 25, 2025.
• State Court Docket Searches: We conducted state court docket searches in the following jurisdictions: (i) North Carolina (Mecklenburg County Superior Court and the North Carolina Business Court), as the jurisdiction of Pennfield's principal executive offices and headquarters; (ii) Delaware (Court of Chancery and Superior Court), as the state of Pennfield's incorporation; and (iii) selected key retail market jurisdictions, including New York, California, Texas, Georgia, Colorado, and Virginia.
• SEC EDGAR Review: We conducted a comprehensive review of Pennfield's SEC filings, including the FY 2024 10-K, recent 10-Q filings, and 8-K filings, with particular attention to disclosures in "Legal Proceedings" sections, risk factors related to litigation and regulatory matters, and footnotes to the financial statements addressing contingent liabilities.
• OSHA, EPA, and State Regulatory Database Searches: We conducted searches of the Occupational Safety and Health Administration's inspection and citation databases, the Environmental Protection Agency's Enforcement and Compliance History Online ("ECHO") database, and selected state regulatory databases. The results of the EPA and state environmental database searches are addressed in greater detail in the Environmental Diligence Summary prepared by Megan Chu and dated March 26, 2025, which is cross-referenced in Appendix C.
C. Interviews
We conducted the following interviews in connection with our review:
• Patricia Okafor, General Counsel and Corporate Secretary, Pennfield Holdings, Inc.: We conducted two interview sessions with Ms. Okafor. The first session, on March 18, 2025, covered an overview of all pending and threatened litigation, governmental investigations, and material contingent liabilities. The second session, on March 24, 2025, was a follow-up session in which we obtained additional detail on certain specific matters, including the Ramirez class action, the product recall MDL, and the California Attorney General inquiry. Ms. Okafor was cooperative and responsive to our questions throughout both sessions.
• Pennfield's Outside Litigation Counsel: We conducted one session with Pennfield's outside litigation counsel retained for certain specific matters discussed below. This session provided supplemental detail on the posture and outlook for the product recall MDL and the Ramirez wage and hour class action.
D. Limitations
The following limitations apply to this memorandum and should be taken into account by the recipients:
• Scope of Information. Our review has been limited to information made available to us in the virtual data room and through management interviews. We have not conducted an independent factual investigation of any of the matters discussed herein. Our analysis is based on the information provided to us, and we have assumed the accuracy and completeness of such information.
• Privileged Information. Certain matters may be subject to attorney-client privilege or work product protection on the target side and were disclosed to us in summary form only. We did not receive, and did not request, access to privileged communications between Pennfield and its litigation counsel regarding litigation strategy, settlement evaluations, or legal opinions.
• Threatened Claims. Threatened claims have been identified through management interviews and review of demand letters and pre-litigation correspondence in the data room. We can provide no assurance that all threatened or potential claims have been identified, as some threatened claims may not have been communicated to the General Counsel's office or may not have been included in the data room materials.
• Exposure Estimates. The exposure estimates set forth herein are based on a combination of Pennfield management's estimates, comparable case analysis, and our own judgment. These estimates are inherently uncertain and are subject to change as matters develop. Actual outcomes could differ materially from the estimates presented.
III. Pending Litigation
A. Employment and Labor Matters
1. Ramirez v. Pennfield Holdings, Inc. (Wage and Hour Class Action)
Court: United States District Court, Western District of North Carolina
Case No.: 3:24-cv-01187
Filed: June 2024
Plaintiffs: Maria Ramirez, individually and on behalf of all others similarly situated. The named plaintiff is a former hourly store associate who worked at a Pennfield retail location in Charlotte, North Carolina. Ms. Ramirez brings this action on behalf of a putative class of current and former non-exempt retail employees employed by Pennfield across approximately 12 states in which the Company operates brick-and-mortar retail locations.
Claims: The complaint alleges violations of the Fair Labor Standards Act ("FLSA"), 29 U.S.C. § 201 et seq., and analogous state wage and hour statutes. The principal allegations include: (a) failure to compensate hourly retail employees for pre-shift and post-shift activities, including opening and closing procedures, security checks, and mandatory team meetings, which the plaintiff contends constitute compensable work time; (b) systematic underreporting of overtime hours, resulting in unpaid overtime compensation; and (c) misclassification of certain assistant store manager positions as exempt from overtime requirements under the FLSA's executive exemption, when the actual duties of those positions allegedly did not meet the requirements for exempt status.
Putative Class Size: Based on discovery exchanged to date and Pennfield management's internal employee records, the putative class is estimated to include between 2,000 and 3,500 current and former employees who were employed in non-exempt hourly positions during the applicable limitations period. If the assistant store manager misclassification claim is included in a certified class, the putative class could increase by an additional 300 to 500 individuals.
Status: The case is currently in the class certification phase. The plaintiff filed a motion for conditional certification under the FLSA collective action provisions (29 U.S.C. § 216(b)) in November 2024, and a separate motion for class certification of the state-law claims under Federal Rule of Civil Procedure 23. Briefing on both motions is pending. Merits discovery is ongoing, with fact discovery scheduled to close on July 15, 2025. No class has been certified as of the date of this memorandum.
Pennfield's Position: The Company denies all material allegations in the complaint. Pennfield's principal defenses include: (i) the pre-shift and post-shift activities at issue are de minimis and not compensable under the FLSA; (ii) the Company's timekeeping systems accurately record hours worked and overtime is compensated in accordance with applicable law; and (iii) the assistant store manager positions satisfy the duties test for the FLSA executive exemption. With respect to class certification, Pennfield has filed an opposition arguing that individualized inquiries regarding the nature and duration of pre-shift and post-shift activities at each retail location predominate over common questions of law and fact, rendering class treatment inappropriate under Rule 23(b)(3). Pennfield's outside employment counsel represents the Company in this matter.
Estimated Exposure: Based on Pennfield management's estimates and our review of comparable wage and hour class action settlements in the specialty retail sector, the estimated exposure for this matter ranges from $5,000,000 to $12,000,000. This range includes potential back pay, liquidated damages (which may be awarded at up to 100% of back pay under the FLSA for willful violations), and plaintiff's attorneys' fees (which are statutorily recoverable under the FLSA and most analogous state statutes). The high end of the range assumes class certification is granted and the case settles on a class-wide basis; the low end assumes either that class certification is denied (resulting in a more limited collective action or individual settlement) or that the case settles on favorable terms prior to certification.
Insurance Coverage: Pennfield maintains an employment practices liability insurance ("EPLI") policy. The EPLI policy may cover defense costs incurred in connection with this matter, but wage and hour claims are typically excluded from indemnity coverage under standard EPLI policy forms. We are in the process of confirming the scope of coverage under the applicable policy with Pennfield's insurance broker. If the EPLI policy covers defense costs only, the offset to total exposure is limited (estimated at approximately $500,000 in defense cost savings).
Transaction Impact: This matter should be disclosed on Pennfield's litigation disclosure schedules under the Merger Agreement. The estimated exposure falls well within the negotiated indemnification cap of $117,600,000. However, given the potential for a material adverse change in the exposure profile if class certification is granted, the following additional measures should be considered: (a) a specific indemnity or disclosure schedule carve-out addressing this matter, depending on the class certification outcome prior to closing; (b) inclusion of this matter as a specifically identified item in discussions with the R&W insurance underwriter; and (c) a covenant requiring Pennfield to provide Harrowgate with prompt notice of any class certification ruling and to refrain from settling the matter above a specified threshold without Harrowgate's prior written consent during the interim period between signing and closing. The class certification ruling timeline should be closely monitored relative to the anticipated closing date of June 30, 2025.
2. EEOC Charge — Charlotte Distribution Center
Agency: U.S. Equal Employment Opportunity Commission ("EEOC"), Charlotte District Office
Charge No.: 430-2024-02847
Filed: September 2024
Nature of Charge: A former warehouse supervisor at Pennfield's Charlotte, North Carolina distribution center filed a charge of discrimination with the EEOC, alleging disability discrimination in the form of failure to provide a reasonable accommodation under the Americans with Disabilities Act ("ADA"), 42 U.S.C. § 12101 et seq., and retaliatory termination following the charging party's request for an accommodation. The charging party alleges that he requested a modified work schedule to accommodate a chronic medical condition and that Pennfield failed to engage in the interactive process required under the ADA. The charging party further alleges that he was terminated approximately six weeks after submitting his accommodation request, and that the termination was motivated by his protected activity.
Status: The EEOC investigation is ongoing. Pennfield submitted its position statement in response to the charge in November 2024. As of the date of this memorandum, the EEOC has not issued a determination of reasonable cause or a right-to-sue letter. No federal lawsuit has been filed.
Pennfield's Position: The Company maintains that the charge is without merit. According to management, the charging party was terminated for legitimate, non-discriminatory reasons, including documented attendance and performance issues that predated the accommodation request. Pennfield further asserts that it engaged in the interactive process in good faith and offered a reasonable accommodation that the charging party rejected.
Estimated Exposure: If the matter proceeds to litigation (either through an EEOC enforcement action or a private lawsuit following issuance of a right-to-sue letter), the estimated exposure ranges from $150,000 to $500,000, inclusive of potential settlement value, back pay, compensatory damages for emotional distress, and attorney's fees. The ADA caps compensatory and punitive damages based on employer size; for an employer of Pennfield's size (over 500 employees), the cap is $300,000.
Transaction Impact: This is a low-materiality matter representing a routine single-claimant employment charge. It should be disclosed on the litigation schedule in the Pennfield disclosure letter, but it does not warrant any special treatment in the Merger Agreement or the indemnification framework.
3. Thompson v. Pennfield Holdings, Inc. (Individual Wrongful Termination)
Court: Superior Court, Mecklenburg County, North Carolina
Case No.: 24-CVS-8341
Filed: October 2024
Plaintiff: Derek Thompson, a former Regional Sales Director for Pennfield's Southeast region.
Claims: The complaint asserts claims for: (a) wrongful termination in violation of public policy, alleging that the plaintiff was terminated in retaliation for reporting alleged irregularities in the Company's sales incentive program to his supervisor; (b) breach of an implied employment contract, alleging that Pennfield's employee handbook and course of conduct created an implied promise that employees would only be terminated for cause following progressive discipline; and (c) defamation, alleging that a Pennfield executive made false and defamatory statements regarding the reasons for the plaintiff's termination to other employees and industry contacts.
Status: Pennfield filed its answer in December 2024, denying all material allegations. The case is in early discovery. No dispositive motions have been filed.
Pennfield's Position: The Company maintains that the plaintiff was an at-will employee who was terminated for well-documented performance deficiencies, including failure to meet sales targets for three consecutive quarters and failure to comply with Company travel and expense policies. Pennfield denies that any retaliation occurred and asserts that the plaintiff's alleged "report" of irregularities was not protected activity. Pennfield further denies the defamation claim and asserts that any statements made regarding the plaintiff's termination were truthful and made on a privileged basis.
Estimated Exposure: $250,000 to $750,000, taking into account the plaintiff's compensation level, potential lost wages, and the limited viability of the implied contract and defamation claims under North Carolina law (which is an at-will employment state with narrow exceptions).
Transaction Impact: This is a low-materiality matter representing a standard individual employment dispute. It should be disclosed on the litigation schedule but does not require special treatment in the transaction documents.
B. Consumer and Product Liability Matters
4. In re Pennfield Product Recall Litigation (Consolidated Consumer Claims)
Court: United States District Court, District of South Carolina (MDL transfer)
MDL No.: MDL No. 3:24-md-3044
Consolidated: November 2024
Background: In the second quarter of fiscal year 2024 (i.e., May through July 2024), Pennfield initiated a voluntary recall of approximately 45,000 units of a branded portable camping stove sold under the Company's "TrailForge" product line. The recall was undertaken after the Company identified a defect in a fuel line component that posed a risk of fuel leakage and fire. The recall was coordinated with the U.S. Consumer Product Safety Commission ("CPSC"), which issued a public recall notice on June 14, 2024. Pennfield offered a full refund or replacement unit to all affected consumers and established a dedicated recall hotline and online portal.
Following the announcement of the recall, a total of 14 individual personal injury and product liability claims and 3 putative consumer class actions were filed in various federal and state courts across multiple jurisdictions. The personal injury claims allege burns, smoke inhalation, and property damage resulting from the fuel line defect. The putative class actions allege economic loss on behalf of all purchasers of the affected product, including claims for diminished product value, out-of-pocket costs, and breach of warranty.
In November 2024, the Judicial Panel on Multidistrict Litigation transferred and consolidated all pending federal actions to the United States District Court for the District of South Carolina for coordinated pretrial proceedings. State court actions have been removed to federal court where possible, and certain plaintiffs' counsel have filed notices of related cases.
Plaintiffs: The personal injury plaintiffs include consumers in seven states who allege varying degrees of burn injuries and property damage. The most significant individual claim involves a plaintiff in South Carolina who alleges second-degree burns to the hands and arms and property damage to a recreational vehicle. The class action plaintiffs seek to represent all purchasers of the affected product nationwide (approximately 45,000 units sold), alleging economic loss and diminished value even in the absence of physical injury.
Status: The MDL court has appointed lead plaintiff's counsel and established a bellwether discovery track. The personal injury claims are in active discovery, with bellwether case selection expected in Q2 2025. A motion to dismiss the economic loss class claims on the grounds that the voluntary recall and full refund offer mooted the class plaintiffs' claims is pending before the court.
Pennfield's Position: The Company cooperated fully with the CPSC in connection with the recall and has complied with all regulatory requirements. Pennfield maintains that the fuel line defect originated in a third-party component manufactured by Apex Precision Components, LLC ("Apex"), which supplied the fuel line assembly under a supply agreement dated September 12, 2019 (the "Apex Supply Agreement"). Pennfield asserts that it exercised reasonable quality control and incoming inspection procedures and that the defect was latent and not reasonably detectable through standard quality assurance processes.
Third-Party Indemnity: The Apex Supply Agreement contains an indemnification provision requiring Apex to defend, indemnify, and hold harmless Pennfield against claims arising from defects in supplied components. Pennfield tendered defense and indemnity to Apex in July 2024. Apex has accepted the defense tender, subject to a reservation of rights relating to the scope of the indemnification obligation and Pennfield's own negligence. Apex is a solvent company with adequate insurance coverage, based on representations made by Apex to Pennfield; however, we have not independently verified Apex's financial condition or insurance coverage limits.
Estimated Exposure (Net of Insurance and Indemnity): On a gross basis, the aggregate exposure across all personal injury claims, economic loss class claims, and defense costs is estimated to range from $8,000,000 to $20,000,000. However, after giving effect to Pennfield's commercial general liability insurance coverage (with a $25,000,000 aggregate policy limit and a $500,000 per-occurrence self-insured retention) and the third-party indemnification from Apex, the estimated net exposure to Pennfield ranges from $3,000,000 to $8,000,000. Defense costs incurred to date are approximately $1,200,000 and remain within the self-insured retention.
Transaction Impact: This matter is of moderate materiality and warrants specific attention in the transaction documentation. The following steps are recommended:
(a) The product recall and related MDL litigation should be specifically addressed in the Merger Agreement representations regarding product liability, product recalls, and compliance with consumer product safety laws.
(b) The Apex Supply Agreement, including the indemnification provisions, is a material contract for purposes of the material contracts review and should be disclosed on the material contracts schedule. The Material Contracts Review Memo prepared by Megan Chu (March 25, 2025) addresses this agreement in detail.
(c) The adequacy of the $6,500,000 product recall reserve on Pennfield's FY 2024 balance sheet should be verified, and any potential for reserve inadequacy should be assessed in connection with the working capital adjustment mechanism in the Merger Agreement.
(d) Developments in the bellwether case selection and the motion to dismiss the economic loss class claims should be monitored through closing.
5. Individual Slip-and-Fall Claims (Premises Liability)
Nature: Pennfield and its retail subsidiary are defendants in four separate individual premises liability actions pending in various state courts, each alleging slip-and-fall injuries at Pennfield retail locations. The four pending claims are as follows:
(a) Henderson v. Pennfield Retail, Inc., State Court of Fulton County, Georgia (filed March 2024) — Plaintiff alleges injuries from a fall on a wet floor at a Pennfield store in Atlanta, Georgia.
(b) Castillo v. Pennfield Retail, Inc., District Court, Harris County, Texas (filed May 2024) — Plaintiff alleges injuries from a fall on a loose floor mat at a Pennfield store in Houston, Texas.
(c) Park v. Pennfield Retail, Inc., District Court, Denver County, Colorado (filed July 2024) — Plaintiff alleges injuries from a fall on accumulated ice in the parking lot of a Pennfield store in Denver, Colorado.
(d) Morales v. Pennfield Retail, Inc., Circuit Court, Fairfax County, Virginia (filed August 2024) — Plaintiff alleges injuries from a fall on a broken display fixture at a Pennfield store in Fairfax, Virginia.
Status: All four claims are in various stages of discovery or pre-trial mediation. The Henderson and Castillo matters are scheduled for mediation in Q2 2025. The Park and Morales matters are in written discovery.
Combined Estimated Exposure: $400,000 to $1,200,000 across all four claims. All claims are covered under Pennfield's commercial general liability insurance policy and fall within the aggregate policy limits. The Company's $500,000 self-insured retention applies on a per-occurrence basis, and Pennfield expects that some or all of the claims will be resolved within the retention.
Transaction Impact: These are routine retail operations premises liability claims that are individually and collectively immaterial. They should be disclosed on the litigation schedule as a matter of completeness.
C. Commercial and Contract Disputes
6. Pennfield Holdings, Inc. v. Ridgeway Logistics Corp. (Breach of Contract)
Court: Superior Court, Mecklenburg County, North Carolina
Case No.: 24-CVS-5628
Filed by Pennfield (as Plaintiff): April 2024
Nature of Dispute: This action arises from a warehousing and distribution services agreement (the "Ridgeway Services Agreement") entered into between Pennfield and Ridgeway Logistics Corp. ("Ridgeway"), a third-party logistics provider, dated January 15, 2022. Pennfield filed this action as plaintiff, alleging that Ridgeway materially breached the Ridgeway Services Agreement by failing to meet contractually specified service-level commitments during the third quarter of fiscal year 2024 (August through October 2024). The alleged service failures included delayed order processing, inventory mishandling, and shipping errors that caused significant supply chain disruptions during the peak back-to-school selling season.
Relief Sought by Pennfield: Pennfield seeks damages of approximately $4,200,000, representing: (i) approximately $2,100,000 in excess freight and expedited shipping costs incurred to mitigate the impact of Ridgeway's service failures; (ii) approximately $1,300,000 in inventory write-downs attributable to damaged or misdirected inventory; and (iii) approximately $800,000 in estimated lost margin from delayed deliveries and stockouts.
Counterclaim by Ridgeway: Ridgeway filed a counterclaim in July 2024 seeking $1,800,000 in early termination fees, alleging that Pennfield's termination of the Ridgeway Services Agreement in November 2023 was without cause and triggered the early termination fee provisions of the agreement.
Status: discovery is ongoing. A mediation session has been scheduled for the second quarter of 2025, and both parties have indicated a willingness to engage in settlement discussions at that time.
Pennfield's Position (on Counterclaim): The Company maintains that its termination of the Ridgeway Services Agreement was for cause, triggered by Ridgeway's material and repeated breach of the service-level commitments. Under the terms of the agreement, a termination for cause following an uncured material breach does not give rise to an obligation to pay early termination fees. Pennfield is confident in this position based on the documented history of service failures and the notice-and-cure correspondence exchanged between the parties.
Estimated Net Exposure on Counterclaim: $0 to $1,800,000. If the court or a mediator determines that Pennfield's termination was not validly "for cause," the full early termination fee of $1,800,000 could be payable. However, based on our review of the termination correspondence and the pattern of service failures documented in the data room, we believe Pennfield has a reasonable basis for its "for cause" termination position.
Transaction Impact: Pennfield is primarily a plaintiff in this matter and has affirmative recovery potential of up to $4,200,000. The counterclaim exposure is modest. This matter should be disclosed on the litigation schedule. The Ridgeway Services Agreement and the transition to Pennfield's current logistics provider should be cross-referenced to the Material Contracts Review Memo (Megan Chu, March 25, 2025). The potential recovery is a modest positive for the transaction valuation.
7. Landlord Dispute — Former Flagship Store (Fifth Avenue, New York)
Nature of Dispute: Pennfield is involved in a pre-litigation dispute with the landlord of a former Pennfield flagship retail location at 648 Fifth Avenue, New York, New York. The lease for this location expired on December 31, 2024, and Pennfield vacated the premises at the end of the lease term. In January 2025, the landlord, Fifth Avenue Realty Partners LLC, sent a demand letter to Pennfield asserting that Pennfield failed to restore the premises to their original condition upon lease expiration, in alleged violation of the surrender and restoration provisions of the lease agreement. The landlord's demand seeks approximately $2,300,000 in restoration costs, which the landlord asserts are required to remove Pennfield's leasehold improvements and return the space to shell condition.
Status: No lawsuit has been filed as of the date of this memorandum. The parties are engaged in informal discussions regarding the scope of Pennfield's restoration obligations and the reasonableness of the landlord's cost estimates.
Pennfield's Position: The Company disputes both the scope and the cost of the restoration obligations asserted by the landlord. Pennfield's position is that: (i) certain of the leasehold improvements were installed by the landlord as tenant inducements and are not subject to the restoration obligation; (ii) the lease's restoration provisions are subject to a "reasonable wear and tear" exception that reduces the scope of required work; and (iii) the landlord's cost estimates are inflated and do not reflect commercially reasonable restoration costs for a comparable retail space in the Fifth Avenue corridor. Pennfield has offered to negotiate a settlement in the range of $600,000 to $900,000, representing the Company's good-faith estimate of its actual restoration obligation.
Estimated Exposure: $600,000 to $2,300,000. The low end represents a negotiated settlement on terms favorable to Pennfield; the high end represents the full demand amount if the landlord prevails on all points.
Transaction Impact: This is a low-to-moderate materiality matter. It may be resolved through negotiation prior to the anticipated closing date. The dispute should be flagged in the Real Estate & Lease Portfolio Summary prepared by Megan Chu (March 25, 2025) and disclosed on the litigation and contingent liability schedule in the Pennfield disclosure letter.
D. Intellectual Property Matters
8. Summit Trail Brands LLC v. Pennfield Holdings, Inc. (Trademark Infringement)
Court: United States District Court, Southern District of New York
Case No.: 1:24-cv-09012
Filed: August 2024
Plaintiff's Claims: Summit Trail Brands LLC ("Summit Trail Brands"), a smaller outdoor apparel and accessories brand, filed this action alleging that Pennfield's "Summit Trail" private-label product line infringes Summit Trail Brands' federally registered trademark for "SUMMIT TRAIL" (U.S. Trademark Reg. No. 5,432,891, registered December 15, 2018) used in connection with outdoor apparel and accessories. The complaint asserts claims for: (a) trademark infringement under Section 32 of the Lanham Act, 15 U.S.C. § 1114; (b) unfair competition and false designation of origin under Section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a); and (c) common-law trademark infringement and unfair competition under New York law. Summit Trail Brands seeks injunctive relief prohibiting Pennfield from using the "Summit Trail" mark in connection with its private-label product line, as well as unspecified compensatory damages, disgorgement of profits, and attorneys' fees.
Status: Pennfield filed a motion to dismiss the complaint for failure to state a claim upon which relief can be granted under Federal Rule of Civil Procedure 12(b)(6), invoking the Iqbal/Twombly plausibility standard. The motion argues that the complaint fails to plausibly allege a likelihood of consumer confusion between the parties' marks, given the differences in the marks' presentation, trade dress, channels of trade, and consumer sophistication. Pennfield's motion is fully briefed and pending decision. The court has stayed limited discovery pending resolution of the motion.
Pennfield's Position: The "Summit Trail" private-label product line was launched in the spring of 2021 following a comprehensive trademark clearance search and opinion conducted by outside intellectual property counsel. Pennfield maintains that its mark and trade dress are sufficiently dissimilar from Summit Trail Brands' mark and that the parties operate in different channels of trade (Pennfield sells through its own retail and e-commerce channels, while Summit Trail Brands distributes primarily through specialty outdoor retailers and direct-to-consumer online sales). Pennfield's outside IP counsel has expressed confidence in the likelihood of prevailing on the motion to dismiss or, alternatively, at the summary judgment stage.
Estimated Exposure: The exposure for this matter is dependent on the outcome of the pending motion to dismiss:
(a) If the motion to dismiss is granted, Pennfield's exposure is limited to defense costs incurred to date, estimated at approximately $250,000.
(b) If the motion to dismiss is denied and the case proceeds through discovery and trial or settlement, the estimated exposure ranges from $500,000 to $3,000,000. This range includes potential settlement payments, damages, and — importantly — the cost of rebranding the "Summit Trail" product line if Pennfield were required to do so as a result of an injunction or a negotiated resolution. The "Summit Trail" product line generated approximately $14,000,000 in revenue during FY 2024, and the estimated cost of a complete rebranding (including packaging redesign, marketing materials, and inventory relabeling) is approximately $1,500,000 to $2,500,000.
Transaction Impact: This matter is of moderate materiality due to the potential impact on Pennfield's intellectual property portfolio and a revenue-generating private-label product line. The IP Diligence Memo prepared by Megan Chu (March 24, 2025) addresses the Summit Trail trademark portfolio in detail and should be cross-referenced. The following additional measures should be considered:
(a) The original trademark clearance opinion obtained by Pennfield prior to launching the Summit Trail product line should be obtained and reviewed.
(b) The matter should be specifically disclosed on the intellectual property and litigation disclosure schedules.
(c) Although the probability of a preliminary injunction requiring cessation of the Summit Trail product line is assessed as low at this stage, the financial impact of such an injunction should be modeled as a contingency. If a preliminary injunction were sought and granted pre-closing, an evaluation of potential MAC/MAE implications would be warranted, although such an outcome is unlikely to rise to the level of a Material Adverse Effect as defined in the Merger Agreement given the product line's contribution to overall revenue.
(d) The motion to dismiss ruling should be monitored closely, as it will significantly impact the exposure profile for this matter.
IV. Governmental and Regulatory Investigations
A. State Attorney General Consumer Protection Inquiry — California
Agency: California Department of Justice, Consumer Protection Section
Nature of Inquiry: In November 2024, Pennfield received a Civil Investigative Demand ("CID") from the Office of the California Attorney General, Consumer Protection Section, regarding advertising and pricing practices employed by Pennfield in connection with certain promotional campaigns at its California retail locations during the 2023–2024 period. The CID requests documents and information relating to Pennfield's practices for establishing and displaying "original" or "regular" prices used as reference prices in comparison pricing and sale advertising. The inquiry relates to allegations that certain of Pennfield's promotional campaigns may have featured deceptive "original price" comparisons — i.e., that the purported "original" or "regular" prices displayed alongside discounted sale prices may not have reflected actual prices at which the merchandise was offered for sale for a reasonably substantial period of time prior to the promotion. Such practices, if substantiated, could constitute violations of California's Unfair Competition Law ("UCL"), California Business and Professions Code § 17200 et seq., and the California False Advertising Law, California Business and Professions Code § 17500 et seq.
Status: Pennfield is cooperating with the CID. The Company has produced responsive documents in two tranches (January 2025 and March 2025) and has responded to interrogatories propounded by the Attorney General's office. As of the date of this memorandum, no civil enforcement action has been filed, no consent order or assurance of voluntary compliance has been proposed by the Attorney General, and no closing letter has been issued. The Company has engaged outside regulatory counsel to manage the CID response and to interface with the Attorney General's office.
Pennfield's Position: Pennfield maintains that its pricing practices comply with applicable California and federal law. The Company asserts that its reference prices are based on genuine prior offering prices and that its advertising practices are consistent with industry standards for comparison pricing in the specialty retail sector. Pennfield has implemented enhanced pricing compliance procedures in the interim, including revised guidelines for establishing and documenting reference prices.
Estimated Exposure: The estimated exposure depends on the outcome of the investigation:
(a) If the California Attorney General pursues a civil enforcement action under the UCL and/or the False Advertising Law, the estimated exposure ranges from $1,000,000 to $5,000,000. This range includes potential civil penalties (which may be assessed at up to $2,500 per violation under the UCL), restitution to affected consumers, injunctive relief requiring modification of advertising practices, compliance monitoring costs, and the Attorney General's investigative costs and attorney's fees.
(b) If the matter is resolved through voluntary compliance, an informal closing, or the issuance of a closing letter without formal enforcement action, the exposure is limited to legal fees and compliance costs incurred, estimated at $300,000 to $500,000 to date.
Transaction Impact: This matter should be specifically disclosed in the Merger Agreement, including in the representations relating to compliance with consumer protection laws and absence of undisclosed governmental investigations. The following additional considerations apply:
(a) The public announcement of the proposed take-private acquisition could attract heightened attention from the California Attorney General and other state attorneys general, particularly if the transaction is perceived as an attempt to take the Company private before the investigation is resolved.
(b) Harrowgate should consider whether to include a specific indemnity or disclosure schedule carve-out addressing this matter, and whether the interim operating covenants in the Merger Agreement should include a specific covenant requiring Pennfield to continue to cooperate with the investigation and to keep Harrowgate informed of material developments.
(c) There is a risk that the California inquiry could expand to other states or evolve into a multi-state investigation coordinated through the National Association of Attorneys General ("NAAG") or an informal multi-state working group. We are not aware of any pending inquiries from other state attorneys general at this time, but this risk should be monitored.
(d) This matter is among those most likely to be treated as a "known matter" exclusion under the R&W insurance policy. Discussions with Meridian Specialty Insurance Company and Lockwood Risk Advisors LLC regarding the scope of any known-matter exclusion should address this matter specifically.
B. OSHA Workplace Safety Citations — Distribution Facilities
Agency: Occupational Safety and Health Administration ("OSHA"), U.S. Department of Labor
Nature of Citations: In the third quarter of 2024, OSHA conducted a routine programmed inspection of Pennfield's distribution center located in Atlanta, Georgia. Following the inspection, OSHA issued citations to Pennfield alleging violations of federal workplace safety standards, specifically:
(a) Failure to ensure that forklift operators were properly trained and certified in accordance with 29 C.F.R. § 1910.178(l) (Powered Industrial Trucks);
(b) Inadequate maintenance of emergency egress routes, including partial obstruction of exit pathways with stored inventory, in violation of 29 C.F.R. § 1910.37 (Maintenance, Safeguards, and Operational Features for Exit Routes); and
(c) Deficiencies in the hazard communication program, including incomplete Safety Data Sheets for certain chemicals used in the facility, in violation of 29 C.F.R. § 1910.1200 (Hazard Communication).
All three citations were classified as "Serious" violations. Notably, none of the citations was classified as "Willful" or "Repeat," which would carry significantly higher penalty amounts and greater regulatory scrutiny.
Proposed Penalties: The aggregate proposed penalties for the three citations total approximately $87,500.
Status: Pennfield filed a timely notice of contest with the Occupational Safety and Health Review Commission. An informal settlement conference was held with the OSHA Area Director's office in February 2025. Based on the discussions at the informal conference, Pennfield expects to resolve the citations through an informal settlement agreement for a reduced penalty amount in the range of $50,000 to $65,000, together with implementation of agreed-upon abatement measures (including enhanced forklift training, clearance of egress obstructions, and completion of the hazard communication program).
Transaction Impact: This is a low-materiality matter. OSHA citations of this nature are routine for companies operating distribution and warehouse facilities. The matter should be disclosed on the regulatory schedule in the Pennfield disclosure letter. Compliance with the agreed-upon abatement measures should be confirmed through closing to ensure that no follow-up inspections or "failure to abate" penalties are triggered.
C. State Tax Audit — North Carolina
Agency: North Carolina Department of Revenue
Nature of Audit: In September 2024, the North Carolina Department of Revenue commenced a routine sales and use tax audit of Pennfield's North Carolina retail operations for the tax years 2021 through 2023. The audit encompasses sales tax collection and remittance practices, use tax accrual on taxable purchases, and exemption certificate documentation.
Status: The audit is in progress. Pennfield's tax advisor, Crestline Tax Advisors LLC (engagement partner: Alan Fitzgerald), is coordinating the Company's response to the audit and managing the document production and information request process. No preliminary assessment or proposed deficiency notice has been issued by the Department of Revenue as of the date of this memorandum.
Estimated Exposure: Based on a preliminary analysis by Crestline Tax Advisors, the estimated range of potential additional sales and use tax liability, inclusive of penalties and interest, is $500,000 to $2,000,000. The primary areas of potential exposure include: (i) sales tax exemption certificate documentation for certain wholesale and resale transactions; (ii) use tax on certain capital expenditures and fixed asset purchases; and (iii) taxability of certain bundled product/service offerings in Pennfield's retail stores.
Pennfield has accrued $1,200,000 as a contingent liability on its FY 2024 balance sheet in connection with this audit, which represents management's best estimate of the probable outcome. Pemberton & Associates LLP reviewed and concurred with the adequacy of this accrual in connection with the FY 2024 audit.
Transaction Impact: This matter is of relatively low materiality. It should be disclosed on the tax schedule in the Pennfield disclosure letter and tracked through closing. The state and local tax implications of this audit should be coordinated with the State & Local Tax Considerations Memo being prepared by Sylvia Hartwell of Calderwood & Harkness's Tax Department (expected completion date: March 30, 2025). Any final assessment issued prior to closing should be reflected in the closing balance sheet and working capital adjustment calculations.
V. Contingent Liabilities and Off-Balance-Sheet Obligations
In addition to the pending litigation and governmental investigations discussed in Sections III and IV above, our review identified the following contingent liabilities and off-balance-sheet obligations of Pennfield and its subsidiaries that are relevant to the transaction.
A. Product Recall Reserve
Pennfield has established a reserve of $6,500,000 on its FY 2024 balance sheet (fiscal year ended January 31, 2025) in connection with the portable camping stove recall discussed in Section III.B.4 above. This reserve is intended to cover the Company's estimated remaining recall costs (including consumer refunds and replacement units), warranty claims, and a portion of litigation defense costs associated with the MDL proceedings. The reserve was established in the second quarter of FY 2024 and has been adjusted in subsequent quarters based on updated information regarding recall participation rates, claims experience, and litigation developments.
The adequacy of the $6,500,000 reserve has been assessed by Pennfield management and reviewed by Pemberton & Associates LLP in connection with the FY 2024 audit. Pemberton & Associates concurred that the reserve amount is reasonable based on currently available information. However, we note that the reserve does not fully cover the high end of the estimated gross litigation exposure ($20,000,000), as it is net of expected insurance recoveries and third-party indemnification from Apex Precision Components, LLC. If insurance coverage or the Apex indemnity is disputed or proves inadequate, additional reserves may be required.
B. Self-Insurance Programs
Pennfield maintains the following self-insurance programs:
Workers' Compensation Self-Insurance. Pennfield self-insures for workers' compensation claims in certain states up to specified per-occurrence retention levels, with excess coverage placed through commercial carriers. The specific retention levels vary by state, ranging from $250,000 to $500,000 per occurrence. As of the end of FY 2024, outstanding self-insured workers' compensation reserves totaled approximately $3,200,000, reflecting incurred but not yet paid claims and estimates of claims that have been incurred but not yet reported ("IBNR"). The workers' compensation reserves are actuarially determined and reviewed annually by an independent actuary retained by the Company.
Employee Health Benefits Self-Insurance. Pennfield self-insures for employee health benefits under a self-funded health plan, with stop-loss coverage to cap the Company's exposure for catastrophic individual claims (specific stop-loss attachment point: $250,000 per individual) and aggregate claims exceeding a specified corridor (aggregate stop-loss attachment point: 125% of expected claims). As of the end of FY 2024, the accrued but unpaid health claims reserve was approximately $4,800,000, representing claims that have been submitted but not yet processed, as well as IBNR estimates. This reserve is reviewed monthly and adjusted based on claims experience data.
These self-insurance obligations represent ongoing liabilities of the Company that will transfer to the buyer upon consummation of the merger. Harrowgate should confirm that these reserves are appropriately reflected in the net working capital target and the working capital adjustment mechanism in the Merger Agreement.
C. Letters of Credit
Pennfield has $7,500,000 in outstanding standby letters of credit issued under its existing revolving credit facility with North Atlantic Bank, N.A. These letters of credit support the following obligations:
(a) Lease security deposits for certain retail locations: approximately $4,200,000;
(b) Workers' compensation self-insurance collateral requirements in certain states: approximately $2,100,000; and
(c) Utility and other operating deposits: approximately $1,200,000.
These letters of credit will need to be addressed in connection with the refinancing of Pennfield's existing credit facility at closing. The existing revolving credit facility will be repaid and terminated at closing, and the outstanding letters of credit will need to be either replaced, cash collateralized, or backstopped under the new $150,000,000 revolving credit facility being arranged by Falconer National Bank, N.A. as lead arranger. Falconer National Bank should confirm its capacity and willingness to issue replacement or backstop letters of credit in the required amounts as part of the commitment letter process.
D. Environmental Contingencies
A detailed analysis of environmental matters is set forth in the Environmental Diligence Summary prepared by Megan Chu and dated March 26, 2025, which is cross-referenced in Appendix C of this memorandum. Based on that analysis, no material environmental liabilities have been identified in connection with Pennfield's current or former operations.
One legacy environmental matter warrants brief mention here for completeness. A former distribution facility in Edison, New Jersey (vacated by Pennfield in 2019) has a known minor contamination issue resulting from a historical petroleum release from an underground storage tank. Remediation activities have been ongoing under the supervision of the New Jersey Department of Environmental Protection, and remediation is substantially complete. The estimated remaining remediation cost is $150,000 to $300,000. Pennfield received contractual indemnification from the prior property owner under the purchase agreement for the facility, and the prior owner has been responsive to reimbursement requests to date.
No Superfund or state equivalent listed site involvement has been identified for any current or former Pennfield facility.
E. Lease Guarantees and Surety Bonds
Lease Guarantees. Pennfield Holdings, Inc. has provided corporate parent guarantees on leases for 22 outlet retail locations operated through a subsidiary, Pennfield Outlet Stores, Inc. The aggregate guaranteed rent obligation over the remaining lease terms for these 22 locations is approximately $18,400,000. The guarantees provide that if the subsidiary lessee defaults on its lease obligations, Pennfield Holdings, Inc. as guarantor will be liable for the unpaid rent and related lease obligations. The weighted average remaining lease term for the guaranteed leases is approximately 4.3 years.
These guarantees are standard in the retail industry and represent a routine contingent obligation. However, they should be factored into the overall assessment of Pennfield's contingent liabilities and disclosed on the applicable disclosure schedule.
Surety Bonds. Pennfield maintains approximately $2,100,000 in surety bonds related to various state regulatory requirements, including unclaimed property compliance, retail licenses, and other regulatory filings. These surety bonds are issued by Continental Surety Company and are renewed annually. The bonds may need to be replaced or reassigned in connection with the change of control at closing.