PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP
INTERNAL MEMORANDUM — NOT FOR DISTRIBUTION
To: File — Matter No. 1042-00001
From: Sophie Tremblay and Daniel Obi
Reviewed by: Ian Blackwood, Responsible Partner
Date: July 29, 2022
Re: Brightfield Cloud Services Inc. — $35,000,000 Senior Secured Term Loan from Pinnacle National Bank, N.A. — Deal Summary and Key Terms
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I. Executive Summary
This memorandum summarizes the material terms and key negotiation points of the $35,000,000 senior secured term loan (the "Term Loan") to be provided by Pinnacle National Bank, N.A. ("Pinnacle" or the "Lender"), as sole lender and administrative agent, to Brightfield Cloud Services Inc. ("BCS" or the "Borrower"), a Delaware corporation headquartered at 4200 Lone Star Parkway, Suite 800, Austin, TX 78731. Calderwood & Harkness LLP ("C&H") represents BCS in connection with this transaction.
BCS is a portfolio company of Solara Capital Partners Fund III, LP ("Solara Fund III"), a private equity fund with approximately $1.2 billion of committed capital (vintage 2019). BCS is held through Solara Holdings Group LLC ("Solara Holdings"), a Delaware limited liability company that serves as the direct parent and 100% equity holder of BCS. Solara Capital Partners acquired BCS in October 2020 at an enterprise value of approximately $95,000,000.
BCS operates in the enterprise cloud infrastructure software and proprietary hardware sectors. The company's business comprises two principal lines: (i) a software-as-a-service ("SaaS") platform for enterprise cloud infrastructure management, and (ii) the manufacture, deployment, and maintenance of proprietary server appliances. For fiscal year 2021, BCS reported total revenue of $48.3 million, consisting of $31.4 million attributable to its SaaS platform and $16.9 million from hardware sales and services. BCS's fiscal year 2021 EBITDA was $12.8 million. The company currently employs approximately 310 persons across its Austin headquarters and satellite offices.
The proceeds of the Term Loan will be used to: (a) fund the build-out of two new regional cloud data centers located in Dallas, Texas and Phoenix, Arizona; (b) procure proprietary server hardware for deployment across the company's data center footprint; (c) refinance and repay in full the outstanding balance under BCS's existing $15,000,000 senior secured revolving credit facility with Ridgeline Commercial Bank; and (d) provide working capital for general corporate purposes.
The Term Loan Agreement (the "Agreement") was executed by the parties on July 28, 2022. Closing and initial funding of the Term Loan are expected to occur on August 12, 2022. The closing date was delayed from the originally anticipated date of July 28, 2022 (which was intended to coincide with the signing date) in order to allow for the satisfaction of certain remaining conditions precedent, principally the finalization of deposit account control agreements and insurance endorsements. Between signing and the anticipated closing date, BCS must maintain compliance with all representations and warranties contained in the Agreement.
Lender's counsel in the transaction is Wainwright & Pryor LLP ("W&P"), with Gregory Fontaine serving as lead partner and Rachel Subramaniam as lead associate (W&P Matter No. 1042-00001). The BCS engagement team at C&H consists of Ian Blackwood (Responsible Partner), Stephanie Okafor (Billing Partner), Sophie Tremblay (Lead Associate), and Daniel Obi (Working Associate). Pinnacle's internal credit approval reference number for the facility is TLG-2022-05118.
II. Transaction Parties
A. Borrower
The Borrower is Brightfield Cloud Services Inc., a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware. BCS's Employer Identification Number is 84-3291057. The company maintains its principal executive offices and headquarters at 4200 Lone Star Parkway, Suite 800, Austin, TX 78731. BCS's Delaware registered agent is Capitol Registered Agents LLC, located at 1209 Orange Street, Wilmington, DE 19801.
BCS is qualified to do business and in good standing in the following jurisdictions: Delaware (state of incorporation), Texas, Arizona, California, and Virginia. The company's principal executive officers are as follows:
• Chief Executive Officer: Marcus Elliston
• Chief Financial Officer: Priya Ramanathan
• General Counsel and Secretary: Jerome Hartwell
BCS was founded in 2018 and was subsequently acquired by Solara Capital Partners in October 2020 as part of Solara Fund III's investment program. Since the acquisition, BCS has continued to operate as an independent portfolio company under the oversight of Solara Capital Partners, with the existing management team remaining in place.
B. Lender and Administrative Agent
The Lender and Administrative Agent is Pinnacle National Bank, National Association, a national banking association duly chartered and validly existing under the laws of the United States. Pinnacle's principal office is located at 600 Lexington Avenue, 35th Floor, New York, NY 10022. The primary relationship contacts at Pinnacle for this transaction are:
• Relationship Manager: Thomas Whitford, Senior Vice President, Technology Lending Group
• Credit Officer: Angela Morreau, Vice President, Credit Risk
Pinnacle serves as the sole lender under the Term Loan Agreement and has also been appointed as administrative agent with respect to the administration of the facility. No syndication of the Term Loan is currently contemplated, though the Agreement contains customary assignment and participation provisions that would permit Pinnacle to assign or sell participations in the Term Loan to eligible assignees in the future, subject to BCS's consent right (not to be unreasonably withheld, conditioned, or delayed), which consent right is suspended during the continuance of an Event of Default.
Pinnacle's ABA Routing Number is 021-405-887. Wire transfer instructions for the funding of the Term Loan are set forth in the funds flow memorandum agreed upon by the parties.
C. Collateral Agent
The Collateral Agent is Meridian Whitcomb LLC, a Delaware limited liability company with its principal office at 100 Wall Street, 18th Floor, New York, NY 10005. The primary contact at Meridian Whitcomb for this transaction is Laura Desmond, Vice President, Agency Services. Meridian Whitcomb has been engaged by Pinnacle to hold and administer all perfected security interests in the collateral on behalf of Pinnacle in its capacity as the secured party. The Collateral Agent's rights, duties, and obligations are set forth in the Security Agreement and the related provisions of the Term Loan Agreement.
D. Guarantor
The Guarantor is Solara Holdings Group LLC, a Delaware limited liability company with Employer Identification Number 83-2047619. Solara Holdings maintains its principal office at 200 Park Avenue South, 22nd Floor, New York, NY 10003. Solara Holdings is the direct parent entity and sole member/100% equity holder of BCS.
The sole manager of Solara Holdings Group LLC is Solara Capital Partners Fund III, LP, whose general partner is Solara Capital GP III LLC. The authorized representative of Solara Holdings for purposes of the Guaranty and all other transaction documents is David Kessler, Managing Director of Solara Capital Partners. Solara Holdings's Delaware registered agent is Capitol Registered Agents LLC, located at 1209 Orange Street, Wilmington, DE 19801.
E. Existing Lender (Payoff)
The existing lender to be refinanced in connection with the Term Loan is Ridgeline Commercial Bank, a Texas state-chartered bank with its principal office at 1500 Congress Avenue, Suite 600, Austin, TX 78701. The payoff contact at Ridgeline is Renata Vasquez, Vice President, Commercial Lending.
BCS maintains an existing $15,000,000 senior secured revolving credit facility with Ridgeline, dated as of October 15, 2020, which was entered into in connection with the Solara Capital Partners acquisition. As of the anticipated closing date of August 12, 2022, the outstanding principal balance under the Ridgeline facility is $8,200,000, with estimated accrued and unpaid interest of approximately $37,422, for a total payoff amount of $8,237,422. The payoff of the Ridgeline facility and the release of all associated liens are conditions precedent to the closing and funding of the Term Loan.
F. Counsel
Borrower's Counsel: Calderwood & Harkness LLP, operating through its New York office (principal) and Austin office. C&H has represented BCS in all aspects of the negotiation, documentation, and closing of the Term Loan, including the delivery of a legal opinion at closing.
Lender's Counsel: Wainwright & Pryor LLP, 51 West 52nd Street, New York, NY 10019. W&P has represented Pinnacle in connection with the structuring, documentation, and closing of the Term Loan. The lead partner at W&P is Gregory Fontaine, and the lead associate is Rachel Subramaniam (W&P Matter No. 1042-00001).
G. Other Third Parties
The following additional third parties have been involved in or are referenced in connection with the transaction:
• Auditor: Hartfield & Associates CPAs, PLLC, located in Austin, Texas. Engagement Partner: Neil Calderon, CPA. Hartfield & Associates has provided audited financial statements for BCS for fiscal years 2020 and 2021, which have been delivered to Pinnacle as a condition precedent to closing.
• Insurance Broker: Ashford & Crane Insurance Brokerage LLC, located in Houston, Texas. Ashford & Crane has coordinated the placement and endorsement of all insurance policies required under the Term Loan Agreement.
• Property/Casualty and Cyber Liability Insurer: Northbrook Indemnity Insurance Co. Northbrook provides BCS's property/casualty coverage and cyber liability coverage in the amounts and with the endorsements required under the Agreement.
• Directors and Officers Liability Insurer: Crosshaven Specialty Underwriters, Inc. Crosshaven provides BCS's directors and officers liability insurance policy in the amount and with the terms required under the Agreement.
III. Transaction Structure and Key Economic Terms
A. Facility
The Term Loan is structured as a senior secured term loan in the principal amount of $35,000,000. The facility is to be fully funded at closing in a single advance; there is no delayed draw feature and no revolving component. The Term Loan is the sole credit facility under the Agreement. The Agreement, together with all ancillary transaction documents, is governed by and construed in accordance with the laws of the State of New York (without regard to conflicts of law principles that would result in the application of any other law).
B. Interest Rate
Interest on the outstanding principal balance of the Term Loan accrues at a rate per annum equal to the Secured Overnight Financing Rate ("SOFR") plus a spread of 350 basis points (3.50%). The Agreement includes a SOFR floor of 0.50%, which provides that in no event shall the reference rate used to calculate interest be less than 0.50% per annum, irrespective of the actual published SOFR rate.
As of the anticipated closing date, the applicable reference rate is 1-month SOFR, which is currently approximately 2.29%. Accordingly, the all-in initial interest rate on the Term Loan is estimated at approximately 5.79% per annum (calculated as 2.29% + 3.50%). The applicable SOFR rate will reset periodically in accordance with the terms of the Agreement.
Interest on the Term Loan is payable quarterly in arrears. There is no SOFR credit spread adjustment ("CSA") included in the rate calculation, which is consistent with current market practice for newly originated SOFR-based loans (as opposed to legacy LIBOR-to-SOFR transition facilities where a CSA was commonly included to account for the historical basis differential between LIBOR and SOFR).
C. Term and Maturity
The Term Loan has a five-year term commencing on the closing date. Based on the anticipated closing date of August 12, 2022, the stated maturity date of the Term Loan is August 12, 2027, at which time all outstanding principal, accrued and unpaid interest, and all other amounts due under the Agreement are payable in full.
D. Amortization
The Term Loan amortizes at a rate of 1.00% per annum of the original principal amount of $35,000,000, resulting in annual amortization of $350,000. Amortization payments are due quarterly in equal installments of $87,500 each. The first quarterly amortization payment is due on November 12, 2022, which is the first quarterly payment date following the closing date. The remaining outstanding principal balance, together with all accrued and unpaid interest and fees, will be due and payable as a balloon payment on the maturity date.
The nominal amortization schedule reflects the typical structure for a sponsor-backed term loan of this type, in which the substantial majority of the principal is expected to be repaid at maturity (or upon a refinancing, recapitalization, or exit event), with minimal scheduled amortization during the term.
E. Fees
The following fees are payable in connection with the Term Loan:
• Upfront Fee: A one-time upfront fee equal to 1.00% of the total commitment amount, or $350,000, payable to Pinnacle at closing. The upfront fee is fully earned and non-refundable upon payment.
• Administrative Agent Fee: An annual administrative agent fee of $25,000, payable to Pinnacle in its capacity as administrative agent, due at closing for the first year and on each anniversary of the closing date thereafter during the term of the facility.
• Unused Commitment Fee: None. As the Term Loan is a fully funded term loan with no revolving or delayed draw component, no unused commitment fee applies.
F. Prepayment Premium
The Agreement includes a prepayment premium (commonly referred to as a "call protection" provision) applicable to voluntary prepayments of principal as follows:
• Year 1 (closing date through the first anniversary of the closing date): 2.00% of the principal amount prepaid
• Year 2 (first anniversary through the second anniversary of the closing date): 1.00% of the principal amount prepaid
• Year 3 and thereafter (from and after the second anniversary of the closing date): No prepayment premium
Mandatory prepayments of principal may be triggered under the Agreement by certain specified events, including asset dispositions (to the extent net cash proceeds exceed the thresholds specified in the Agreement) and extraordinary receipts (including, without limitation, insurance proceeds and condemnation awards not reinvested in the business). Mandatory prepayments triggered by asset dispositions are subject to customary reinvestment rights, which permit BCS to reinvest the net cash proceeds in replacement assets or capital expenditures within a period of 365 days (or, if BCS has entered into a binding commitment to reinvest within such 365-day period, within 180 days thereafter) before being required to apply such proceeds to prepay the Term Loan.
IV. Use of Proceeds
The proceeds of the $35,000,000 Term Loan are to be applied as follows:
The working capital residual of $1,612,578 will be deposited into BCS's primary operating account at Pinnacle (Account No. 7841-0029-3356). This account, along with all other BCS deposit accounts, will be subject to deposit account control agreements as required under the Security Agreement.
Upon receipt of the payoff proceeds from Pinnacle on the closing date, Ridgeline Commercial Bank will deliver a payoff letter confirming the full satisfaction and discharge of all obligations under the existing revolving credit facility and will file UCC-3 termination statements in Delaware and Texas to release all existing liens on BCS's assets held in favor of Ridgeline. The delivery of the payoff letter and evidence of the filing of UCC-3 termination statements (or the arrangement for the same) is a condition precedent to the closing and funding of the Term Loan.
The Dallas and Phoenix data center build-out costs represent the principal strategic investment funded by the Term Loan. The Dallas facility, located at 2700 Stemmons Freeway, Building C, Dallas, TX 75207, is expected to serve as a regional hub for BCS's expanding customer base in the south-central United States, while the Phoenix facility, located at 1850 West Buckeye Road, Suite 100, Phoenix, AZ 85009, will support BCS's growing presence in the western United States and provide additional redundancy for disaster recovery and business continuity. The proprietary server hardware procurement budget of $3,500,000 covers the acquisition and deployment of BCS's proprietary server appliances across both new data centers and existing facilities.
V. Financial Covenants
A. Maximum Total Leverage Ratio
BCS is required to maintain a Maximum Total Leverage Ratio (defined as Total Funded Debt divided by Trailing Twelve-Month EBITDA) of not more than 3.50 to 1.00 (3.50x). This covenant is tested quarterly based on BCS's trailing twelve-month financial results delivered in connection with BCS's quarterly compliance certificates.
The pro forma Total Leverage Ratio at closing is 2.73x, calculated as follows:
$35,000,000 (Total Funded Debt at closing) ÷ $12,800,000 (FY 2021 EBITDA) = 2.73x
This provides headroom to the covenant ceiling of approximately $9,800,000 in additional funded debt capacity, calculated as follows:
Maximum permitted debt at current EBITDA: 3.50 × $12,800,000 = $44,800,000
Headroom: $44,800,000 – $35,000,000 = $9,800,000
It should be noted, however, that BCS does not currently have the ability to incur $9,800,000 of additional funded debt under the Agreement, as the negative covenant on indebtedness limits additional debt to $2,000,000 (excluding specified categories of permitted indebtedness). The leverage ratio headroom is relevant primarily as a measure of the cushion available to absorb EBITDA decline before a covenant breach would occur.
B. Minimum Interest Coverage Ratio
BCS is required to maintain a Minimum Interest Coverage Ratio (defined as Trailing Twelve-Month EBITDA divided by Trailing Twelve-Month Interest Expense) of not less than 3.00 to 1.00 (3.00x). This covenant is tested quarterly.
The pro forma Interest Coverage Ratio at closing is estimated at approximately 6.32x, calculated as follows:
Estimated Year 1 interest expense: $35,000,000 × 5.79% ≈ $2,026,500
Pro forma coverage: $12,800,000 ÷ $2,026,500 ≈ 6.32x
This provides substantial headroom to the 3.00x covenant floor. However, it is important to note the risk factor posed by rising interest rates. Because the Term Loan bears interest at a floating rate (SOFR + 3.50%), increases in SOFR will directly increase BCS's interest expense and compress the coverage ratio. Assuming constant EBITDA of $12,800,000, the all-in interest rate would need to reach approximately 11.67% (i.e., SOFR of approximately 8.17% plus the 3.50% spread) before the Interest Coverage Ratio would approach the 3.00x covenant floor. While this scenario may seem unlikely at present, the rapid rate increases observed throughout 2022 warrant close monitoring of this covenant.
C. Minimum Liquidity
BCS is required to maintain minimum unrestricted cash and cash equivalents of $5,000,000 at all times. Unlike the leverage ratio and interest coverage ratio, the minimum liquidity covenant is a continuous covenant and is not tested solely on a quarterly basis. Any breach of this covenant at any time, including on an intra-quarter basis, would constitute an Event of Default (subject to applicable cure periods).
This covenant will require BCS's treasury function to maintain careful cash management practices, particularly during periods of significant capital expenditure associated with the data center build-outs. Given that the working capital residual deposited into BCS's operating account at closing is $1,612,578, BCS will need to ensure that its existing cash reserves, when combined with the closing deposit, comfortably exceed the $5,000,000 threshold at all times.
D. Maximum Capital Expenditures
BCS's aggregate capital expenditures are limited to $18,000,000 per fiscal year. Unused amounts under this basket may be carried forward to the immediately succeeding fiscal year, subject to a maximum carryforward amount of $3,000,000.
This covenant is of particular significance given BCS's planned data center build-outs. The total planned capital expenditures funded by the Term Loan for the Dallas and Phoenix data centers and proprietary server hardware procurement amount to $24,800,000 (calculated as $11,500,000 + $9,800,000 + $3,500,000). If all of these expenditures were incurred in a single fiscal year, they would exceed the $18,000,000 annual cap by $6,800,000, which exceeds the $3,000,000 maximum carryforward from any prior year. Accordingly, BCS will need to carefully manage the phasing of capital expenditures across fiscal years 2022 and 2023, and must also account for maintenance capital expenditures and other corporate capital expenditures that must fit within the same annual basket. This issue is discussed further in Section XIII.E below.
E. Equity Cure Mechanism (Key Negotiation Point)
The Agreement includes an equity cure mechanism that permits BCS's sponsor, Solara Holdings Group LLC, to make cash equity contributions to BCS in order to cure financial covenant breaches. This mechanism was the subject of significant negotiation between the parties, as discussed in detail in Section XIII.A below.
The key terms of the equity cure mechanism are as follows:
(i) Frequency: The equity cure mechanism may be exercised a maximum of two (2) times during the five-year term of the Term Loan.
(ii) Timing: The equity cure must be effected within thirty (30) days of the delivery of the quarterly compliance certificate that reflects the financial covenant breach.
(iii) Form of Cure: Cure contributions must be in the form of common equity contributions from Solara Holdings Group LLC to BCS. Debt contributions, subordinated loans, and preferred equity do not qualify as cure contributions.
(iv) Treatment of Cure Amounts: Cure contributions are added to EBITDA for purposes of calculating the Total Leverage Ratio and Interest Coverage Ratio for the applicable fiscal quarter and for subsequent rolling four-quarter periods in which the cured quarter is included.
(v) Maximum Cure Amount: The maximum cure amount per exercise is the lesser of (a) the amount required to cure the applicable breach plus $500,000, and (b) $5,000,000.
(vi) Consecutive Quarters: There is no prohibition on exercising the equity cure in consecutive quarters, though consecutive cures cannot be applied to the same covenant in the same testing period. Given the two-cure lifetime cap, the practical implication is that BCS has very limited flexibility; each cure exercise should be viewed as a significant and non-renewable resource.
Negotiation Note: Pinnacle initially proposed limiting the equity cure mechanism to a single exercise during the term and prohibiting the exercise of the cure for two consecutive fiscal quarters. C&H negotiated the expansion to two cure exercises and the elimination of the consecutive-quarter prohibition, which provides BCS and Solara with additional flexibility in the event of a temporary financial covenant breach. However, the remaining limitation to two exercises over a five-year term means that the cure mechanism should be viewed as an emergency measure rather than a routine tool for covenant management. Pinnacle also initially proposed that cure contributions be treated as debt (rather than equity) for purposes of the financial covenant calculations, which would have significantly diminished the utility of the mechanism. C&H successfully negotiated the treatment of cure contributions as additions to EBITDA, which is the market-standard approach for equity cure provisions.
VI. Collateral and Security
A. Collateral Package
The Term Loan is secured by a first-priority perfected security interest in substantially all of the assets of BCS. The collateral package, as set forth in the Security Agreement dated July 28, 2022, includes the following categories of assets:
(a) All accounts receivable, whether now existing or hereafter arising;
(b) All inventory and equipment, including, without limitation, all server hardware, data center equipment, networking equipment, and other tangible personal property;
(c) All intellectual property, including, without limitation, all software (including BCS's proprietary cloud infrastructure platform), patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, trade secrets, and all licenses and rights related thereto;
(d) All deposit accounts maintained by BCS, subject to deposit account control agreements ("DACAs") in favor of the Collateral Agent;
(e) All equity interests in subsidiaries of BCS, provided that the pledge of equity interests in any foreign subsidiary is limited to 65% of the voting stock of such foreign subsidiary (consistent with customary tax-efficient structuring to avoid deemed repatriation of earnings under Section 956 of the Internal Revenue Code);
(f) All general intangibles, chattel paper, letter-of-credit rights, commercial tort claims, instruments, investment property, and supporting obligations; and
(g) All proceeds and products of any and all of the foregoing collateral.
The security interest in the foregoing collateral is granted pursuant to the Security Agreement dated July 28, 2022, executed by BCS in favor of Meridian Whitcomb LLC, as Collateral Agent for the benefit of Pinnacle.
B. Perfection
Perfection of the security interests in the collateral will be accomplished through the following mechanisms:
(a) UCC-1 Financing Statements: UCC-1 financing statements will be filed with the Delaware Secretary of State (BCS's state of organization) and the Texas Secretary of State (the state in which BCS's chief executive office is located). The filing of these financing statements is a condition precedent to closing.
(b) Deposit Account Control Agreements: DACAs will be executed for all BCS operating and deposit accounts, granting the Collateral Agent "control" over such accounts within the meaning of Article 9 of the Uniform Commercial Code. The finalization of certain DACAs was a contributing factor in the delay of the closing date from July 28, 2022 to August 12, 2022.
(c) intellectual Property Filings: Security interest filings and assignments will be made with the United States Patent and Trademark Office ("USPTO") and the United States Copyright Office, as applicable, with respect to BCS's registered patents, trademarks, and copyrights. These filings are necessary to perfect the security interest in federally registered intellectual property, which is governed by federal recording statutes rather than the UCC.
C. Collateral Agent
Meridian Whitcomb LLC serves as Collateral Agent and holds and administers all security interests in the collateral for the benefit of Pinnacle as the sole secured party under the Term Loan. The Collateral Agent's duties are limited to those expressly set forth in the Security Agreement and related provisions of the Term Loan Agreement, and the Collateral Agent is entitled to customary exculpation and indemnification protections.
VII. Guaranty
The obligations of BCS under the Term Loan Agreement are supported by an unconditional, irrevocable guaranty of payment (as distinguished from a guaranty of collection) executed by Solara Holdings Group LLC, the direct parent and 100% equity holder of BCS. The Guaranty Agreement was executed on July 28, 2022 and will become effective upon the closing and funding of the Term Loan.
The key terms of the Guaranty are as follows:
(a) Scope: The Guaranty covers all obligations of BCS under the Term Loan Agreement, including the full $35,000,000 principal amount, all accrued and unpaid interest, all fees (including the upfront fee and administrative agent fees), and all costs, expenses, and other amounts payable by BCS under the Agreement and ancillary transaction documents.
(b) Cap: There is no cap or limitation on the Guarantor's maximum exposure under the Guaranty. The Guaranty is unlimited in amount and covers the full extent of the guaranteed obligations.
(c) Nature of Guaranty: The Guaranty is a guaranty of payment and not merely a guaranty of collection, meaning that Pinnacle may proceed directly against Solara Holdings without first pursuing remedies against BCS or the collateral.
(d) Waivers: The Guaranty includes comprehensive waivers of suretyship defenses, including, without limitation, waivers of presentment, demand for payment, protest, notice of dishonor, notice of acceptance of the Guaranty, notice of any modification of the guaranteed obligations, and any right to require Pinnacle to marshal assets, proceed against BCS first, or pursue any other remedy before enforcing the Guaranty.
(e) Execution: The Guaranty was executed by David Kessler, Managing Director of Solara Capital Partners, in his capacity as authorized representative of Solara Holdings Group LLC.
(f) Governing Law: The Guaranty is governed by and construed in accordance with the laws of the State of New York.
VIII. Representations and Warranties (Summary of Key Representations)
The Term Loan Agreement contains extensive representations and warranties made by BCS, which are customary for a transaction of this nature. BCS has represented and warranted, among other things, the following (as of the signing date and to be reaffirmed at closing):
(a) Organization and Good Standing. BCS is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware. BCS is qualified to do business and in good standing in each of the states of Texas, Arizona, California, and Virginia, and in each other jurisdiction where the nature of its business or the ownership of its properties requires such qualification.
(b) Authorization and Enforceability. The execution, delivery, and performance of the Term Loan Agreement and all other transaction documents have been duly authorized by all necessary corporate action of BCS, and the Agreement and each other transaction document constitute the legal, valid, and binding obligations of BCS, enforceable against BCS in accordance with their respective terms, subject to customary enforceability exceptions (bankruptcy, insolvency, reorganization, moratorium, and other similar laws affecting creditors' rights generally and principles of equity).
(c) No Conflicts. The execution and delivery of the transaction documents and the performance of the obligations contemplated thereby do not violate BCS's organizational documents, any applicable law, or any material agreement to which BCS is a party.
(d) Litigation. There is no material litigation, arbitration, or governmental proceeding pending against or, to the knowledge of BCS, threatened against BCS that could reasonably be expected to result in a Material Adverse Effect.
(e) ERISA. BCS has no material liability under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the Internal Revenue Code with respect to any employee benefit plan.
(f) Compliance with Laws. BCS is in compliance with all applicable federal, state, and local laws, rules, and regulations, including, without limitation, data privacy laws and regulations applicable to its SaaS platform and data center operations. BCS maintains SOC 2 Type II certification, which was confirmed as part of the due diligence process.
(g) No Material Adverse Change. Since December 31, 2021, there has been no material adverse change in the business, operations, financial condition, or prospects of BCS, taken as a whole.
(h) intellectual Property. BCS owns or holds valid licenses to all intellectual property necessary for the conduct of its business as currently conducted. There are no pending or, to the knowledge of BCS, threatened claims of infringement, misappropriation, or other violation of the intellectual property rights of any third party.
(i) Tax Matters. BCS has timely filed all required federal, state, and local tax returns and has paid all taxes due and payable. There are no material tax disputes, audits, or proceedings pending or, to the knowledge of BCS, threatened against BCS.
(j) Financial Statements. The audited financial statements of BCS for fiscal years 2020 and 2021, prepared by Hartfield & Associates CPAs, PLLC in accordance with generally accepted accounting principles ("GAAP"), fairly present in all material respects the financial condition, results of operations, and cash flows of BCS as of the dates and for the periods covered thereby.
(k) Solvency. Each of BCS and Solara Holdings Group LLC is, and after giving effect to the consummation of the transactions contemplated by the Agreement will be, solvent on a consolidated basis. As used in the Agreement, solvency is defined to require that (i) the fair value of assets exceeds the total amount of liabilities, (ii) the present fair saleable value of assets is sufficient to pay probable liabilities on existing debts as they become absolute and matured, and (iii) the entity is able to pay its debts and other liabilities as they mature in the ordinary course.
IX. Affirmative Covenants (Summary)
The Agreement contains the following principal affirmative covenants, which are customary for a senior secured term loan to a sponsor-backed borrower:
(a) Financial Reporting. BCS shall deliver to Pinnacle (i) unaudited quarterly financial statements within forty-five (45) days after the end of each fiscal quarter, and (ii) audited annual financial statements (audited by Hartfield & Associates CPAs, PLLC, or another nationally or regionally recognized independent public accounting firm reasonably acceptable to Pinnacle) within one hundred twenty (120) days after the end of each fiscal year.
(b) Compliance Certificates. BCS shall deliver quarterly compliance certificates, signed by the CFO (Priya Ramanathan) or the CEO (Marcus Elliston), within forty-five (45) days after the end of each fiscal quarter, certifying compliance with all financial covenants and setting forth detailed calculations of the leverage ratio, interest coverage ratio, liquidity, and capital expenditures for the applicable period.
(c) Insurance. BCS shall maintain insurance coverage meeting specified minimums, including: (i) property and casualty insurance with coverage of not less than $50,000,000 per occurrence; (ii) cyber liability insurance with coverage of not less than $10,000,000 per occurrence; and (iii) directors and officers liability insurance with coverage of not less than $15,000,000 in the aggregate. Pinnacle shall be named as loss payee and additional insured on all applicable policies, and BCS shall deliver evidence of insurance and renewal certificates to Pinnacle on an annual basis and promptly upon any material change in coverage.
(d) Maintenance of Corporate Existence. BCS shall maintain its corporate existence and good standing under the laws of the State of Delaware and shall maintain its qualifications to do business in each other jurisdiction where such qualification is required.
(e) Compliance with Laws. BCS shall comply in all material respects with all applicable laws, rules, and regulations, including, without limitation, environmental laws and data privacy regulations.
(f) Notices. BCS shall promptly notify Pinnacle of (i) the occurrence of any Event of Default or any event that, with the giving of notice or the passage of time or both, would constitute an Event of Default; (ii) the commencement of any material litigation or governmental proceeding; and (iii) any event or circumstance that has resulted in, or could reasonably be expected to result in, a Material Adverse Effect.
(g) Inspection and Audit Rights. BCS shall permit Pinnacle and its representatives to inspect BCS's properties, books, and records and to conduct audits of BCS's financial condition and operations during normal business hours upon reasonable prior notice, subject to customary limitations (including limitations on frequency during non-default periods).
(h) Books and Records. BCS shall maintain books and records in accordance with GAAP, consistently applied.
(i) Payment of Taxes and Obligations. BCS shall timely pay all taxes, assessments, and other governmental charges and all other material obligations as they become due, subject to good faith contest provisions.
(j) Further Assurances. BCS shall execute and deliver such additional agreements, instruments, and documents as may be reasonably requested by Pinnacle or the Collateral Agent to carry out the purposes of the transaction documents, including, without limitation, additional security agreements, financing statements, and other documents necessary to create, perfect, or maintain the security interests in the collateral.
X. Negative Covenants (Summary)
The Agreement contains the following principal negative covenants:
A. Indebtedness
BCS shall not create, incur, assume, or suffer to exist any additional indebtedness in excess of $2,000,000 in aggregate principal amount, excluding permitted indebtedness. Permitted indebtedness includes, without limitation, (i) purchase money obligations and capital lease obligations in an aggregate amount not to exceed $2,000,000 at any time outstanding, (ii) intercompany loans between BCS and its wholly owned subsidiaries, and (iii) other customary carve-outs for trade payables, surety bonds, and similar obligations incurred in the ordinary course of business.
B. Liens
BCS shall not create, incur, assume, or suffer to exist any lien on any of its assets, other than permitted liens. Permitted liens include, without limitation, (i) liens existing as of the closing date and disclosed to Pinnacle on a schedule to the Agreement (principally the liens securing the Term Loan itself), (ii) purchase money security interests securing permitted purchase money obligations, (iii) statutory liens (including tax liens, mechanic's liens, and materialmen's liens) arising in the ordinary course of business and not yet delinquent, and (iv) liens securing permitted indebtedness.
C. Asset Dispositions
BCS shall not sell, transfer, lease, or otherwise dispose of any assets (other than in the ordinary course of business) having a value in excess of $1,500,000 in any single transaction or series of related transactions, or in excess of $5,000,000 in the aggregate during any fiscal year. Dispositions within these thresholds are permitted without Pinnacle's consent; dispositions exceeding these thresholds require Pinnacle's prior written consent.
D. Restricted Payments (Key Negotiation Point)
BCS shall not make any dividends, distributions, or other restricted payments to its equity holders unless, on a pro forma basis after giving effect to such payment, the Total Leverage Ratio is equal to or less than 2.50 to 1.00 (2.50x).
Negotiation Note: The restricted payment covenant was a point of significant negotiation. BCS and Solara initially requested that the pro forma leverage test be set at 3.00x, which would have provided the sponsor with the ability to extract distributions at leverage levels closer to the financial covenant ceiling. Pinnacle, however, held firm at a 2.50x threshold, and C&H ultimately agreed to this level. As a practical matter, at the closing pro forma leverage of 2.73x, no restricted payments are currently permitted under this covenant.
In exchange for the 2.50x threshold, C&H successfully negotiated the inclusion of two important carve-outs from the definition of restricted payments:
(i) Tax Distributions. BCS is permitted to make distributions to Solara Holdings Group LLC in an amount sufficient to cover the actual federal, state, and local income tax liability of BCS, calculated on a standalone basis as if BCS were a separate taxpayer. These tax distributions are not subject to the 2.50x pro forma leverage test and are available to BCS at all times, irrespective of the prevailing leverage ratio. This carve-out is critical for Solara Holdings, as BCS is a disregarded entity for federal income tax purposes and its income flows through to Solara Holdings (and ultimately to Solara Fund III and its limited partners).
(ii) Management Fee Payments. BCS is permitted to make management fee payments to Solara Capital Partners in an amount not to exceed $500,000 per annum. These payments are also not subject to the 2.50x pro forma leverage test.
E. Change of Control (Key Negotiation Point)
A "Change of Control" is defined in the Agreement as any event or series of events resulting in Solara Holdings Group LLC ceasing to own, directly or indirectly, at least 51% of the outstanding voting equity interests of BCS. The occurrence of a Change of Control constitutes an Event of Default under the Agreement, with no cure period.
Negotiation Note: The Change of Control definition was among the most extensively negotiated provisions in the Agreement. C&H successfully negotiated several important clarifications and carve-outs:
(i) Ownership Threshold. Pinnacle initially proposed a 65% minimum ownership threshold for Solara Holdings. C&H negotiated this down to 51%, which is more favorable to BCS and Solara and provides greater flexibility for potential co-investment arrangements, minority equity sales, or partial exits.
(ii) LP Transfers. Changes in the limited partners of Solara Fund III do not constitute a Change of Control, even if such changes result in a change in the identity of the persons who ultimately hold economic or voting interests in the fund. This carve-out is critical for a private equity fund structure, where secondary market transfers of limited partnership interests are routine.
(iii) Affiliate Fund Transfers. Transfers of BCS equity interests among Solara-affiliated funds (e.g., from Solara Fund III to a continuation vehicle or a co-invest fund managed by Solara Capital Partners) are permitted and do not trigger a Change of Control, provided that Solara Holdings continues to hold at least 51% of the voting equity interests of BCS.
(iv) Qualifying IPO. An initial public offering of BCS in which Solara Holdings retains at least 51% of the voting control of BCS does not constitute a Change of Control. This carve-out preserves the IPO exit path for Solara without triggering a default under the Agreement.
F. Organizational Document Amendments
BCS shall not amend, modify, or supplement its certificate of incorporation, bylaws, or other organizational documents in any manner that is materially adverse to the interests of Pinnacle as lender, without the prior written consent of Pinnacle.
G. Lines of Business
BCS shall continue to operate in its current principal lines of business, consisting of enterprise cloud infrastructure software (SaaS) and proprietary hardware (server appliance manufacturing and deployment), and shall not engage in any materially different line of business without the prior written consent of Pinnacle.
XI. Events of Default
The Agreement provides that each of the following events constitutes an "Event of Default":
(a) Payment Default. BCS fails to pay (i) any installment of principal when due (no grace period) or (ii) any payment of interest, fees, or other amounts when due and such failure continues for a period of five (5) business days after written notice thereof.
(b) Financial Covenant Breach. BCS fails to comply with any financial covenant set forth in Article V of the Agreement and such failure continues for a period of thirty (30) days after delivery of the applicable compliance certificate (subject to the equity cure mechanism described in Section V.E above, which is limited to two (2) exercises during the term).
(c) Cross-Default. BCS or any guarantor defaults in the payment or performance of any obligation under any other agreement relating to indebtedness in excess of $1,000,000, if such default results in the acceleration or mandatory prepayment of such indebtedness or permits the holder thereof to accelerate or require the mandatory prepayment thereof.
(d) Material Judgment. One or more final judgments in an aggregate amount in excess of $2,500,000 (to the extent not covered by applicable insurance as to which the insurer has acknowledged coverage) are rendered against BCS and such judgments remain undischarged, unvacated, unbonded, or unstayed for a period of sixty (60) consecutive days.
(e) Change of Control. A Change of Control (as defined in Section X.E above) occurs.
(f) Bankruptcy/Insolvency. BCS or any guarantor (i) commences a voluntary case or proceeding under any applicable bankruptcy, insolvency, reorganization, or similar law, (ii) consents to the entry of an order for relief in an involuntary case or proceeding, (iii) makes a general assignment for the benefit of creditors, (iv) admits in writing its inability to pay its debts as they become due, or (v) is the subject of an involuntary bankruptcy petition that is not dismissed within sixty (60) days.
(g) Material Misrepresentation. Any representation or warranty made by BCS or any guarantor in the Agreement, the Guaranty, or any other transaction document proves to have been materially incorrect or misleading when made or deemed made.
(h) ERISA Event. An ERISA event occurs that results in, or could reasonably be expected to result in, liability to BCS in excess of $1,000,000.
(i) Invalidity of Transaction Documents. The Guaranty, the Security Agreement, or any other material transaction document ceases to be in full force and effect (other than in accordance with its terms), or any party thereto asserts that such document is not in full force and effect or that its obligations thereunder are not valid, binding, and enforceable.
Remedies. Upon the occurrence and during the continuance of an Event of Default, Pinnacle (as administrative agent) may, and upon the direction of the requisite lenders shall, (i) declare all outstanding obligations under the Agreement to be immediately due and payable, (ii) exercise all rights and remedies available under the transaction documents and applicable law (including under Article 9 of the UCC), and (iii) direct the Collateral Agent to foreclose upon and realize on the collateral in accordance with the terms of the Security Agreement. In the case of a bankruptcy or insolvency event, all outstanding obligations shall be automatically accelerated without any notice, demand, or other action by Pinnacle.
XII. Conditions Precedent to Funding
The obligation of Pinnacle to fund the Term Loan on the closing date is subject to the satisfaction (or waiver by Pinnacle) of the following conditions precedent:
(a) Transaction Documents. Execution and delivery of all transaction documents, including the Term Loan Agreement, the Guaranty Agreement, the Security Agreement, and all ancillary documents, each in form and substance satisfactory to Pinnacle.
(b) Ridgeline Payoff. Receipt of a payoff letter from Ridgeline Commercial Bank confirming the payoff amount of $8,237,422 (consisting of $8,200,000 in outstanding principal and $37,422 in estimated accrued interest through August 12, 2022) and evidence of the filing of UCC-3 termination statements to release all existing Ridgeline liens on the assets of BCS.
(c) UCC-1 Financing Statements. Filing of UCC-1 financing statements with the Delaware Secretary of State and the Texas Secretary of State naming BCS as debtor and Meridian Whitcomb LLC as secured party.