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PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
Daniel and Lisa,
Thank you for the prompt direction, Daniel. I have reached out to Joanna Whitmore at Whitmore & Falk LLP to schedule a final principal-level negotiation call for Thursday, September 14, 2023, at 2:00 PM ET. I am waiting on her confirmation but expect to hear back today. On the Brightfield side, I would recommend that attendees include Daniel, Lisa, and me, with Wendy Schultz available on standby for support if needed. I expect Nexilis will have Rebekah Tran, Nathan Woolsey, and Joanna Whitmore on their end.
I want to outline the strategy I recommend for the September 14 call so we are aligned going in.
First, we should open by reiterating Brightfield's core commercial rationale clearly and without ambiguity. Stratos is an industry-agnostic platform. Restricting DeltaSync deployment to financial services (SIC codes 6000–6799) and healthcare (SIC codes 8000–8099) caps Brightfield's addressable ARR at approximately $38 million — roughly 26.8% of Brightfield's approximately $142 million FY2022 ARR. An $8 million investment under the original deal structure, or even the $10 million total under our tiered-unlock proposal, simply cannot be justified against such a limited revenue opportunity. We need Nexilis to understand that this is not a negotiating posture — it is a fundamental economic constraint.
Second, we should probe the Ridgeline Ventures exclusivity issue directly. Specifically, we need to understand whether Nexilis's exclusivity commitments to Ridgeline Ventures-backed portfolio companies are contractual — i.e., written into Ridgeline Ventures' investment documents or side letters — or whether they are merely commercial understandings or informal arrangements. This distinction matters. If the commitments are contractual, we should request that Nexilis identify the specific verticals and portfolio companies subject to exclusivity so that Brightfield can assess whether a carve-out structure is feasible. There may be verticals outside financial services and healthcare that are not subject to any exclusivity obligation, in which case a modified field of use could potentially be constructed.
Third, and I want to be candid about this: if Nexilis is unwilling to disclose the scope of its exclusivity commitments or to offer any path toward a broader field of use, I recommend that Brightfield be prepared to terminate negotiations on the call itself rather than continue to invest management time and legal spend in a transaction that does not meet Brightfield's commercial requirements.
To put a finer point on it: if the field-of-use impasse cannot be resolved on the September 14 call, Calderwood & Harkness's firm recommendation is that Brightfield formally terminate the transaction. Should we reach that point, please be aware that the mutual NDA dated June 19, 2023 contains standard return-and-destroy obligations with respect to confidential information exchanged during the negotiation. We will prepare a closing letter and coordinate the confidential-information return-and-destroy procedures promptly.
In addition, we will prepare a brief board update memorandum for Priya Chandrasekaran and Graham Hollister at Vantage Summit Capital Partners summarizing the negotiation history and the basis for termination. We will circulate a draft of that memorandum to you in advance of the September 14 call so that it is ready to go if needed.
On the topic of fees, I want to provide a brief update for your awareness. Through the current billing period, Calderwood & Harkness's professional fees on this matter total approximately $197,450, which is within the original estimate range of $180,000–$250,000. In addition, we have incurred $42,500 in disbursements for the Crestline Patent Analytics engagement, bringing the total to approximately $239,950. We are mindful of the budget, and a termination would, of course, avoid further accrual.
Please confirm that you are both available for the September 14 call at 2:00 PM ET. If it would be helpful, I am happy to do a prep call on September 13 to walk through the approach and make sure we are fully aligned.
Catherine
Catherine Bloom Partner Calderwood & Harkness LLP 700 Louisiana Street, Suite 3400 Houston, TX 77002 Phone: (713) 555-0184 Email: cbloom@calderwoodharkness.com
——— Original Message ——— From: Daniel Oshiro To: Wendy Schultz Cc: Catherine Bloom ; Lisa Redmond ; Alan Ngo ; Omar Siddiqui Date: Monday, September 11, 2023 4:42 PM CDT Subject: RE: Nexilis Rejection of Tiered-Unlock Proposal — Next Steps
Wendy,
Thank you for the prompt summary and for flagging the Ridgeline Ventures issue. This is disappointing, though I will say it is not entirely unexpected given the signals we received from the August 28 term-sheet exchange, where Nexilis held firm on the narrow field of use without offering any meaningful counter.
What does surprise me is Nexilis citing exclusivity commitments to Ridgeline Ventures-backed portfolio companies. This was not disclosed in the initial term sheet delivered by Whitmore & Falk on June 12, 2023, and I am trying to understand whether this is a new development — perhaps something that arose in connection with a more recent Ridgeline Ventures investment — or whether it was always a constraint that Nexilis simply failed to surface during the first three months of negotiations. If the latter, that raises real questions about whether Nexilis was ever in a position to grant the broad field of use that Brightfield requires, which would mean we have been negotiating against a wall from the start.
I would like Catherine to arrange one final negotiation call with Whitmore & Falk and the Nexilis principals. Before we walk away, I want to hear directly from Nexilis whether there is any remaining flexibility — whether on the exclusivity scope, the vertical restrictions, or some alternative structure we have not yet explored. I would like this call to happen within the week, ideally by September 15.
On internal alignment: I have briefed Priya Chandrasekaran and Marcus Vail. Lisa is aligned with my view that the deal does not make commercial sense if the field of use is limited to approximately $38 million in addressable ARR. Graham Hollister at Vantage Summit Capital Partners will want a formal update if we end up terminating negotiations, so we should be prepared on that front as well.
Please hold time later this week for a final call. I will defer to Catherine on the scheduling and approach.
Daniel
Daniel Oshiro General Counsel Brightfield Cloud Services Inc. 4200 Bluebonnet Parkway, Suite 1100 Austin, TX 78745
——— Original Message ——— From: Wendy Schultz To: Daniel Oshiro ; Lisa Redmond Cc: Catherine Bloom ; Alan Ngo ; Omar Siddiqui Date: Sunday, September 10, 2023 6:23 PM CDT Subject: Nexilis Rejection of Tiered-Unlock Proposal — Next Steps
PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
Daniel and Lisa,
I am writing to report that Whitmore & Falk LLP delivered Nexilis's formal response to Brightfield's tiered-unlock proposal (which we transmitted on September 5, 2023) this afternoon. Unfortunately, Nexilis has rejected the proposal.
Below is a summary of the substance of Nexilis's position.
Nexilis has declined the tiered-unlock structure under which Brightfield would acquire a base license at $5,200,000 for financial services and healthcare, with an expansion option to all enterprise SaaS verticals for an additional $4,800,000, totaling $10,000,000. The stated reason is that Nexilis has existing exclusivity commitments to portfolio companies backed by Ridgeline Ventures, Nexilis's lead Series B investor, in verticals outside financial services and healthcare. According to Nexilis, granting Brightfield an expansion option into those verticals — even on a contingent, paid-up basis — would conflict with those commitments.
Nexilis indicated that it remains willing to proceed with the original deal structure: an aggregate license fee of $8,000,000 ($3,200,000 upfront plus $1,600,000 per year for three years), on a five-year term with a two-year renewal option, but only under the narrow field of use limited to financial services (SIC codes 6000–6799) and healthcare (SIC codes 8000–8099).
My preliminary assessment is as follows. Nexilis's position on the field of use has been consistent since Whitmore & Falk's redline (Draft 2) was returned on July 31, 2023. The tiered-unlock proposal was Brightfield's best attempt at a compromise structure, and its rejection narrows the path to a deal significantly. As we have discussed, restricting the field of use to two verticals caps Brightfield's addressable ARR at approximately $38 million, which is roughly 26.8% of the $142 million total ARR reported for FY2022. That makes the $8 million investment very difficult to justify on a commercial basis.
I also want to flag that the Ridgeline Ventures exclusivity angle is new information. Nexilis had not previously disclosed that its investors' portfolio strategy constrained its licensing flexibility. This is the first time we have heard this rationale, and it raises the question of how broad and how binding those commitments actually are.
I am attaching the email from Derek Sung at Whitmore & Falk LLP conveying Nexilis's formal response for the team's reference.
Daniel, Lisa — how would you like to proceed? Catherine is available to discuss strategy at your convenience. We should decide promptly whether to request a final negotiation session or move toward termination of the transaction. For reference, this is matter number 1042-00003.
Wendy
Wendy Schultz Senior Associate Calderwood & Harkness LLP 700 Louisiana Street, Suite 3400 Houston, TX 77002 Phone: (713) 555-0291 Email: wschultz@calderwoodharkness.com
Attachment: Nexilis Response — Tiered-Unlock Proposal (9.10.2023).pdf