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Hercules Capital, Inc. v. Gittleman

United States District Court, S.D. Florida

January 12, 2018

HERCULES CAPITAL, INC., Plaintiff,
v.
DANIEL GITTLEMAN, DAVID BARCLAY, and HOWARD A. KWON, Defendants.

          OPINION AND ORDER

          DONALD M. MIDDLEBROOKS, UNITED STATES DISTRICT JUDGE

         I. INTRODUCTION

         Sometimes at trial the allegations of a complaint fall far short of their promise. It happened here. The accusations of fraud, misrepresentation, and violations of generally accepted accounting principles (GAAP) made against three individual officers of a bankrupt technology start-up turned out to be post-hoc rationalizations for a bad loan. The lender knew the risks of the loans and its own actions and internal documents disprove its claims.

         This is an action for fraudulent misrepresentation, negligent misrepresentation, and civil conspiracy brought by Plaintiff Hercules Capital, Inc. ("Hercules") against Defendants Daniel Gittleman ("Gittleman"), David Barclay ("Barclay"), and Howard A. Kwon ("Kwon") (collectively, "Defendants"). Hercules alleges that Defendants, individually and as employees of non-party OpenPeak, a software company, conspired to intentionally or negligently make false misrepresentations to Hercules, a venture debt lender, as to the financial state of OpenPeak and the viability of its products between January and October 2014. Hercules alleges that it relied on these material misrepresentations in deciding to take certain actions with regard to its loan to OpenPeak. On November 13, 15-17, and 27-29, and December 1, 1 held a bench trial. Based on the documentary and testimonial evidence presented, I make the following findings of fact and conclusions of law.

         II. FINDINGS OF FACT

         a. Hercules Capital. Inc.. A Venture Debt Lender

         Plaintiff Hercules Capital, Inc. ("Hercules") is a citizen of Maryland and California, a business development company ("BDC"), and self-described "venture debt lender" that specializes in loans to high-growth, innovative venture-backed companies in the technology and life-science industries. (Henriquez Testimony).

         Manuel Henriquez ("Henriquez") is the Chairman and Chief Executive Officer ("CEO") of Hercules. (Henriquez Testimony). Scott Bluestein ("Bluestein") was the Chief Credit Officer ("CCO") and became the Chief Investment Officer ("CIO") of Hercules during the period relevant to this matter. (Bluestein Testimony). April Young ("Young") was the Managing Director for Hercules' Mid-Atlantic Practice, and was responsible for identifying and initially reviewing investment opportunities, including with OpenPeak. (Young Testimony). Mark Roesler ("Roesler") was a Portfolio Credit Manager at Hercules from October 2013 through June or July of 2016. (Roesler Testimony). Mr. Roesler worked on the OpenPeak account from 2013 through 2015. (Id.). John Eggbeer ("Eggbeer") was a Principal at Hercules, where he has worked from October 2011 to the present. Mr. Eggbeer worked to source, evaluate, structure, and close venture debt opportunities, and he worked on the OpenPeak account between 2014 and 2016. (Eggbeer Testimony).

         Hercules primarily lends money to "development-stage companies" that are not generating revenue and are "burning cash" by consuming working capital as they try to increase sales. (Henriquez Testimony; Young Testimony). When Hercules decides to invest in a development-stage company, the company is generally 3-5 years away from generating any meaningful revenue, and 4-7 years from generating any meaningful Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA"). (Henriquez Testimony). The typical company that Hercules invests in has been in existence for 2-3 years, and has gone through approximately 2 rounds of capital equity fundraising. (Id.). A borrower's historical revenue figures or projected revenues are not Hercules' focus in deciding whether to make a loan or in how Hercules calculates a borrower's value. (Henriquez Testimony; Young Testimony). In order to account for differences in risk among borrowers, Hercules adjusts interest rates and the fee structure of the loan. (Henriquez Testimony). Interest payments and fees are the biggest sources of Hercules' income. (Id.). When everything goes well, Hercules' business is lucrative; the loans in this case had interest rates of 12% and the fees were quite high. (Id.; Tr. Exs. 5, 6, 168, 180).

         The primary thing that Hercules considers when deciding whether to make a loan is the company's enterprise value, which is what the company is projected to be worth over time and what the company could be sold for in the future. (Young Testimony). Hercules prioritizes a company's enterprise value because that is how Hercules gets repaid on its loan. (Id.). For repayment, Hercules relies on its borrowers acquiring subsequent infusions of equity or junior debt, or the occurrence of an "exit event, " meaning an acquisition by another company or a public offering. (Id; Bluestein Testimony). The vast majority of companies that Hercules invests in are refinanced or acquired. (Young Testimony).

         In making or restructuring a loan, Hercules relies on the information included in a "New Deal Request Memorandum" ("New Deal Memo"), an internal Hercules document prepared by the "Deal Team" and "Credit Team" at Hercules for review by the "Investment Committee." (Henriquez Testimony; Bluestein Testimony). The Investment Committee decides to approve or deny a loan based on the information contained in the New Deal Memo. (Henriquez Testimony; Bluestein Testimony). In drafting the New Deal Memo, Hercules conducts due diligence and relies on factual information provided by the borrower. (Bluestein Testimony; Eggbeer Testimony; Henriquez Testimony). Hercules considers information from interviews and representations of management, historical and projected financial information, key investors and partners, and the composition of the borrower's Board of Directors. (Bluestein Testimony; Eggbeer Testimony; Henriquez Testimony). New Deal Memos outline the terms of the proposed loan, give a "background and situation overview" of the company and its financial situation, analyze the potential returns for Hercules, discuss factors in support and risks of the loan, and detail key income statement drivers. (See Trial Exhibit 168) (hereinafter, "Tr. Ex."). The memos contain historical and projected financial information provided by the prospective borrower, including the balance sheet and cash flows, which Hercules calls the "Management Case." (See Tr. Exs. 168, 180; Young Testimony).

         Hercules also calculates its own projections for the financial performance of the borrower, called the "HTGC Case." (See Tr. Exs. 168, 180; Young Testimony). The HTGC Case is based on the borrower's financial history and projections, but Hercules "sensitizes" the financial projections to show what the financials of the company would be given "ordinary-course delays." (Eggbeer Testimony). Hercules changes certain assumptions underlying the Management Case and attempts to take into account the borrower's financial track record, ability to accurately project future revenue and growth, the borrower's customers, types of revenue, and factors outside of the company's control. (Eggbeer Testimony). Hercules also considers what will likely happen to the borrower based on its experience with development-stage companies. (Bluestein Testimony).

         b. OpenPeak, the borrower

         OpenPeak is a now-bankrupt software company. Defendant Daniel J. Gittleman, a citizen of Florida, was the Chairman and CEO of OpenPeak during all times relevant to this dispute. (Gittleman Testimony). Defendant Howard A. Kwon, a citizen of Florida, was Vice President and General Counsel of OpenPeak during all times relevant to this dispute. (Kwon Testimony). Defendant David Barclay, a citizen of Washington, was an Executive Vice President of OpenPeak, and led OpenPeak's finance department beginning in 2013, but did not hold the title of CFO. (Pretrial Stip. at 7).

         Other individuals who held roles in OpenPeak's finance department testified at trial. Glen Farmer ("Farmer") was OpenPeak's Finance Director from July 2014 through August 2015. (Farmer Testimony). Mr. Barclay was Mr. Farmer's supervisor. (Id.). Mr. Farmer was involved in preparing the financial statements for OpenPeak and in discussions about how to recognize revenue pursuant to OpenPeak's agreements. (Id.). Steven Richards ("Richards") was the Vice President of Corporate Development and Finance at OpenPeak and worked there from July 2011 through May 2014. (Richards Testimony). Mr. Richards supervised Brian Hronsky and Trish Pikus, and he reported to Mr. Barclay. Mr. Richards did operational finance at OpenPeak, including managing the books and building financial forecast models. (Id.). Brian Hronsky ("Hronsky") was a Controller in the Finance and Accounting Department at OpenPeak from January through June, 2014. (Hronsky Testimony). Mr. Hronsky is a CPA (Certified Public Accountant) and was supervised by Mr. Richards. (Id.).

         Some OpenPeak officers involved in the technical operations of OpenPeak's software also testified at trial. Lloyd Silvern ("Silvern") worked at OpenPeak from February 2010 until approximately November 2015, and during the relevant time period he was responsible for monitoring the Toggle license provisioning process with AT&T. (Silvern Testimony). Andy Aiello ("Aiello") was the Chief Operations Officer ("COO") of OpenPeak, and was employed by OpenPeak from 2005 through 2016. (Aiello Testimony). Mr. Aiello was responsible for driving the engineering of OpenPeak's software products, including the software architecture and building, code reviews, and quality testing. (Id.). He supervised OpenPeak's software engineers and reported to Mr. Gittleman. (Id.).

         i. Hercules' Initial Loan to OpenPeak: 2012 MLSA- the Cisco Tablet

         On March 30, 2012, OpenPeak entered into a $15 million secured credit facility with Hercules through a Master Loan and Security Agreement (the "2012 MLSA") with a maturity date of June 30, 2015. (Tr. Ex. 1). The 2012 Senior Term Debt was collateralized by all the assets of OpenPeak, excluding OpenPeak's intellectual property assets but including any proceeds from the sale of any intellectual property assets. (Pretrial Stip. at 5-6).

         Under the 2012 MLSA, OpenPeak covenanted, represented and warranted to Hercules (collectively, the "Warranties") that:

No event has had or would reasonably be expected to have a Material Adverse Effect has occurred and is continuing ....
No information, report, or Advance Request, [or] financial statement. . . furnished by or on behalf of Borrower to Lender. . . contained or contains any material misstatement of fact or omitted or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading at the time such statement was made or deemed made. Additionally, any and all financial or business projections provided by Borrower to Lender were prepared in good faith based upon assumptions to be reasonable at the time ....
[U]naudited interim and year-to-date financial statements as of the end of such month[, quarter, and year] . . . have been prepared in accordance with GAAP ....

(Tr. Ex. 1 at 13, 16-17). OpenPeak was also required to provide Hercules with monthly, quarterly, and annual "Compliance Certificates" signed by OpenPeak's CEO or CFO certifying that OpenPeak's accompanying financial statements complied with the Warranties, including that they were prepared in accordance with Generally Accepted Accounting Principles (GAAP). (Tr. Ex. 1 at 16-17; Young Testimony). "Advance Request" Forms submitted by OpenPeak to Hercules to obtain funds pursuant to the loan agreement also reaffirmed the Warranties. (Pretrial Stip. at 6). Upon receipt of monthly, quarterly, and annual financial statements, Hercules inputted the financial information into its own system, PMR, to monitor and track the financial condition of all of its portfolio companies, including OpenPeak. (Roesler Testimony).

         Hercules entered into the 2012 MLSA with OpenPeak in large part due to OpenPeak's strong relationship with Cisco Systems ("Cisco") and development of the CIUS Tablet for Cisco. (Young Testimony; Tr. Ex. 168 at 1). However, within six weeks of loaning the $15 million to OpenPeak, Cisco ended the relationship and cancelled the CIUS Tablet. (Young Testimony; Tr. Ex. 168 at 1). Ms. Young testified that as a result of Cisco's decision to "end-of-life" the CIUS tablet, "the company that [Hercules] had invested in initially was really no longer the company that we had invested in." (Young Testimony). Hercules' other motivations for entering into the 2012 MLSA included Mr. Gittleman's prior business success and the strength of OpenPeak's Board of Directors, which included former Apple CEO John Scully, and other prominent businessmen Mort Topfer and Tom Hill. (Eggbeer Testimony; Bluestein Testimony). Hercules does not contend or allege that there was any wrongdoing in connection with the 2012 MLSA.

         ii. OpenPeak's Business Changes

         Until March 2012, OpenPeak's business was to develop and sell end-to-end telecommunications and data services for hardware-based systems. (Pretrial Stip. at 5). After the cancellation of the Cisco tablet, OpenPeak shifted its focus to Advanced Device Application Management ("ADAM") software for mobile telecommunications devices. ADAM incorporated multiple software components that allowed companies to securely permit employees to use their own mobile devices in the workplace. (Pretrial Stip. at 5). This was called "Bring Your Own Device" ("BYOD") software. (Gittleman Testimony). The ADAM software had three components, including (1) applications that ran on an end-user's mobile device, like an email application, (2) security software for the applications on the mobile device, and (3) a server that had an administrative console and device interface. (Aiello Testimony). Using OpenPeak's software, an individual, or "end user, " would be able to use their own mobile phone to download an OpenPeak-created mail application through which they could securely send and receive their work-related email. (Id.). OpenPeak was a "white-label" company in that it did not sell its products under its own brand name, but customized its product to its customers' brand and to fit its customers' needs. (Barclay Testimony; Tr. Ex. 26 at 14). OpenPeak's major customers included RIM ("Blackberry") and AT&T. (Tr. Exs. 25, 168, 180).

         iii. OpenPeak's Master Resale Agreement with AT&T

         On April 3, 2012, OpenPeak entered into a Master Resale Agreement ("2012 MRA") with AT&T for an ADAM product that AT&T referred to as "Toggle." (Pretrial Stip. at 5; Tr. Ex. 13). Pursuant to the 2012 MRA and subsequent agreements between AT&T and OpenPeak, AT&T would buy permissions or "licenses" from OpenPeak to use the Toggle software. (Aiello Testimony). AT&T distributed some of the Toggle licenses internally, but would primarily sell or otherwise distribute the Toggle licenses to its enterprise customers. (Id.). Enterprise customers were typically large companies to which AT&T provided other services. (Id.). When AT&T sold Toggle licenses to an enterprise customer, AT&T would make a request for those licenses to be provisioned to that enterprise customer through the Toggle server. (Id.). The Toggle server processed Toggle license provisioning requests to AT&T's enterprise customers. (Id.). If the process worked as intended, AT&T's order would automatically be sent to the Toggle server, which would then automatically process the request and ensure that the enterprise customer's administrator had access to the newly provisioned licenses. (Id.). In this scenario, OpenPeak played no role in provisioning the licenses. (Id.).

         If the Toggle server was unable to understand the AT&T order for licenses, OpenPeak would work with AT&T to manually input the order into the Toggle server. (Id.). The Toggle software that accepted orders and provisioned licenses was located, at different times, on AT&T's cloud-based offering, Silver Lining, or on Amazon's servers. (Id.). Once the enterprise customer had access to the provisioned Toggle licenses, the enterprise customer's administrator could determine exactly which employees, or end users, at the enterprise customer would receive an invitation to use the license. (Id.). OpenPeak did not have any control over which employees or "end users" got the Toggle license or whether the end user chose to activate the Toggle license. (Id.). An end user who received a Toggle license would then be able to use Toggle applications on their own mobile devices, downloaded from App Stores on Apple, Android, or Blackberry. (Id.).

         OpenPeak's software products, including ADAM, were subject to rigorous internal testing, including by AT&T. (Id.). At one point, AT&T sent Accenture to OpenPeak to assess the rigorousness of OpenPeak's software testing. Accenture rated OpenPeak's testing as a 3.5 on a scale between 1 (worst) to 5 (best), which means that OpenPeak had a reliable, repeatable testing process. (Id.). A rating of 2 or 2.5 would be good for a start-up company similar to OpenPeak. (Aiello Testimony). In addition, AT&T did scalability tests of OpenPeak's software at regular intervals, with three or four rounds of scalability testing over a few years. (Id.). Mr. Aiello was not aware of any scalability concerns among AT&T's enterprise customers using the Toggle product. (Id.). OpenPeak's software consistently passed all of AT&T's scalability tests. (Id.).

         c. The 2012 MLSA Restructuring

         As of Q3 2013, Hercules rated OpenPeak a "3" on its scale for monitoring the credit risks of its loans to borrowers. (Tr. Ex. 161 at 1). The scale assigned a value between 1 and 5 to the credit risk of a borrower, with 5 being the riskiest credit. (Roesler Testimony). A credit rating of "3" meant that OpenPeak was a "watch-rated credit." (Tr. Ex. 161 at 1; Roesler Testimony). The rating also meant that Hercules projected OpenPeak would either need to raise capital or have a liquidity event within three to six months for the company to survive. (Roesler Testimony). Hercules monitored companies with a credit rating of 3 or higher more closely than it did its other portfolio companies with better credit ratings. (Id.).

         In November 2013, AT&T invested $15 million dollars in OpenPeak. (Gittleman Testimony). As of December 31, 2013, OpenPeak had approximately $10.8 million in cash and receivables. (Pretrial Stip. at 6). At that time, the outstanding balance due to Hercules on the 2012 Senior Term Debt was approximately $9.3 million, not including a $1, 125 million end-of-term fee. (Id.).

         i. OpenPeak's Interest in Restructuring

         At the beginning of 2014, OpenPeak sought to restructure 2012 MLSA to gain additional capital from Hercules, extend the interest-only payment period, and extend the maturity date on the loan. (Bluestein Testimony). It is not uncommon for Hercules to work with a borrowing company to amend, modify, or restructure a loan to give the borrower an opportunity to succeed. (Id.).

         In advance of the potential restructuring, Mr. Barclay updated Ms. Young and Mr. Eggbeer at Hercules on the status of OpenPeak's products, its relationship with AT&T, actual financial statements for Q4 2013, and financial projections for 2014. (See Tr. Exs. 25-27). On January 13, 2014, Mr. Barclay stated in an email to Hercules that OpenPeak's "major partners have now completed their full launch of the products in late [2013] ¶ 4." (Tr. Ex. 25; Pretrial Stip. at 7). On or before January 20, 2014, Mr. Barclay asked for and received projections from AT&T as to AT&T's forecasted license sales for Toggle in 2014. (Barclay Testimony; Tr. Ex. 283). In an email sent to Mr. Barclay, AT&T projected Toggle license sales of 50, 500 in Ql 2014, 221, 000 in Q2 2014, 293, 500 in Q3 2014, and 297, 500 in Q4 2014, for a total of 850, 000 projected Toggle license sales in 2014. (Tr. Ex. 283).

         On January 22, 2014, Mr. Barclay sent Ms. Young and Mr. Eggbeer an email, attaching a spreadsheet with OpenPeak's revenue forecast for 2014. (Tr. Ex. 26). The spreadsheet represented OpenPeak's projected financial metrics, including license sales and revenue derived therefrom. (Pretrial Stip. at 7-8; Tr. Ex. 26). Mr. Barclay relied on AT&T's projected license sales for 2014 in formulating the financial projections that he sent to Hercules. (Barclay Testimony; Tr. Ex. 283, 26 at 3). OpenPeak's financial projections forecasted that OpenPeak would sell AT&T 861, 467 Toggle licenses by the end of 2014. (Tr. Ex. 26 at 3; Barclay Testimony). The January 22 email also attached a PowerPoint presentation which stated that the "AT&T internal sales quota" is "860, 000 licenses in 2014." (Tr. Ex. 26 at 15). The PowerPoint also represents that Toggle "[l]aunched in Q4 2014" at AT&T, and that "AT&T has already rolled [Toggle] out to over 40k of 100k targeted internal users." (Id.).

         Hercules relied on these sales and financial projections in evaluating whether to restructure the 2012 MLS A by including them in its "Management Case" section of the March 2014 New Deal Request Memo ("March 2014 NDRM"). (Eggbeer Testimony; Bluestein Testimony; Tr. Ex. 168; Tr. Ex. 26 at 2-6). These financial statements directly tied OpenPeak's forecast revenue from AT&T Toggle sales to its projected number of Toggle license sales to AT&T. (Pretrial Stip. at 8).

         un January zy, zuih, ivir. oarciay emanea ivir. tggoeer ana ms. Young witn a lew more slides" that OpenPeak had been working on. (Tr. Ex. 27 at 1). The attached PowerPoint presentation includes a slide that reiterated OpenPeak's earlier representation that AT&T's Toggle license sales quota was 860, 000 licenses for 2014. (Tr. Ex. 27 at 20). The slides also represented to Hercules that beginning February 6th, AT&T would offer Toggle to its customers for free pursuant to AT&T's "Golden Ticket" program. (Tr. Ex. 27 at 19; Eggbeer Testimony). The Golden Ticket method was an AT&T promotion whereby AT&T subsidized Toggle and gave it to customers at no cost in order to promote the sale of other AT&T services. (Gittleman Testimony; Young Testimony). By selling licenses to its enterprise customers, AT&T sought to tighten its relationship with those enterprise customers by providing them with a new service. (Gittleman Testimony; Young Testimony; Eggbeer Testimony).

         On February 11, 2014, Mr. Gittleman and Mr. Barclay met with Hercules' CEO Manuel Henriquez, CIO Scott Bluestein, John Eggbeer, and April Young at Hercules' office in Palo Alto, California to discuss a potential restructuring of the 2012 MLSA. (Pretrial Stip. at 8; Tr. Ex. 28, 29). The next day, Mr. Henriquez entered his notes from the meeting into a Hercules database. (Tr. Ex. 29 at 3-4). Mr. Henriquez recounted that Mr. Gittleman and Mr. Barclay "outline[d] their request for Hercules to consider extending both a new interest only period as well as re-upsize additional capital to the company." (Id. at 3). Mr. Henriquez also wrote that the "AT&T annual sale quote for new sub[scriptions] ¶ 864, 000 at $50/sub which equates to an annual forecast of approximately $43 million in revenues. As incredible as that sounds, this company has yet to deliver on its many prior sales forecasts." (Id.). Mr. Henriquez did not rely on Mr. Barclay and Mr. Gittleman's representations and required the Deal Team at Hercules to verify the statements. (Henriquez Testimony). Mr. Henriquez described AT&T's expected sales ramp up of Toggle licenses to 864, 000 licenses, which closely tracks the projections that AT&T provided to OpenPeak (Tr. Ex. 283; Barclay Testimony), and the resulting increase in OpenPeak's projected revenue. (Tr. Ex. 29 at 3; Henriquez Testimony; Eggbeer Testimony). Mr. Henriquez noted that Mr. Barclay and Mr. Gittleman expressed interest in a new credit facility from Hercules that included interest-only payment periods and new capital, and that he replied that he would be happy to consider it if OpenPeak demonstrated "traction" with their product. (Tr. Ex. 29 at 4). Mr. Henriquez also stated his belief that despite Mr. Barclay and Mr. Gittleman's rosy projections, (1) OpenPeak would run out of cash by late April or early May, (2) OpenPeak's uncertain outlook depends on gradual increases in license sales, and (3) "the next 60 days are critical for the company." (Id.).

         Later on February 12, 2014, Mr. Bluestein proposed a deal structure that would require injecting a small amount of additional capital in OpenPeak, but would enable OpenPeak to refinance all its existing obligations under the 2012 MLS A (including the back-end fee), extend OpenPeak's repayment terms, lower its monthly loan payments, and give it the opportunity for interest-only payment periods. (Tr. Ex. 29 at 3; Bluestein Testimony). This proposal provided the general structure of the March 24, 2014 loan restructuring ("2014 ARMLSA"). (Tr. Ex. 5; Bluestein Testimony; see Tr. Ex. 168).

         ii. Hercules' Motivations to Restructure

         At the same time that Mr. Gittleman and Mr. Barclay were inquiring about restructuring the 2012 MLS A, Hercules was evaluating its borrowers as loan restructuring candidates so that it could generate fee income to raise earnings for its Ql 2014 financial statements. (Henriquez Testimony; Tr. Exs. 166, 167).

         On February 14, 2014, Mr. Henriquez sent an email to Mr. Gittleman following up on OpenPeak's request for a new loan, and stating that he has "a strong incentive to make this offer BUT it must close before March 15th, thereafter less interested." (Tr. Ex. 72). Two days later, Mr. Henriquez sent an email to senior members of Hercules with the subject line: "time to harvest some earnings for Ql 2014 - guys no reason to hide behind the facts, we are in deep crap for Ql 2014 earnings given our new originations and fundings so far in Ql 2014." Mr. Henriquez goes on to mention OpenPeak as a "Major restructuring potential candidate." (Tr. Ex. 166). In the same email, Mr. Henriquez stated that he is "looking for a minimum of $2 to $3 million in fee or interest income by the end of March." Mr. Henriquez continued, "Guys, we can't miss earnings i [sic] need all hands on deck to ensure that we are not going to miss earnings. It will kill what we have all worked so hard to build. Dig through your portfolios, scrub every deal, turn over every rock. ... So honestly, i [sic] need everyone's help. We need earnings, find some pennies for me please." (Id.).

         On March 4, 2014, Mr. Henriquez followed-up on his request for major restructuring candidates when he sent an email to Mr. Bluestein and other members of Hercules' senior management with the subject line: "Any updates on the major restructuring or material modifications." In the body of the email, Mr. Henriquez asked "Where are we on . . . Open peak [sic]" and continued "Please send an update and the potential dollars being generated by the restructure." (Tr. Ex. 167 at 5). Jessica Barron, Hercules' Chief Financial Officer, responded to the email and included a chart that listed the amount of income that would be generated from each restructuring deal or material modification, along with the corresponding increase on a per share earnings basis. (Id. at 4). OpenPeak was listed on the chart. (Id.). The chart stated that a projected OpenPeak restructuring would generate $396, 119 in income for Hercules, amounting to an earnings increase of $0, 007 per share. (Id. at 4).

         iii. March 2014 New Deal Request Memo

         In light of both OpenPeak's and Hercules' desire to restructure the 2012 MLSA, Hercules began its internal process for approving the loan restructuring. On March 10, 2014, Hercules and OpenPeak, through Mr. Kwon, signed a Term Sheet that outlined the essential terms of the restructuring agreement. (Tr. Ex. 4). On March 11, 2014, Mr. Bluestein sent an email to the Hercules Investment Committee, copying other members of the OpenPeak Deal Team at Hercules and attaching the New Deal Memo to restructure the 2012 MLS A ("March 2014 NDRM"). (Tr. Ex. 168). In the email, Mr. Bluestein wrote that the March 2014 NDRM reflects "an effort to get a restructuring / new debt facility in place that makes sense for the Company while at the same time protects and compensates [Hercules] appropriately. ... [I] am obviously supportive of this proposal." (Tr. Ex. 168 at 1).

         Mr. Bluestein outlined a proposal whereby Hercules would commit a new $15 million loan to OpenPeak, divided into two tranches. (Tr. Ex. 168 at 1). In the First Tranche, due upon signing, Hercules would loan OpenPeak $10.5 million that included (1) satisfying all remaining principle and interest due and the $1, 125 million back-end fee of the 2012 MLS A, (2) a $200, 000 "new facility fee" to Hercules for the new loan, and (3) approximately $518, 000 in new capital investment. (Id.). The restructured loan would be repaid on a new 36-month term, and contained a financial covenant whereby OpenPeak was required to raise at least $15 million in new equity by the end of May, with at least $5 million coming no later than April, or else there would be an automatic event of default. (Id.). The Second Tranche was a $4.5 million loan that would only become available if OpenPeak met certain performance milestones. (Id. at 1, 9).

         The March 2014 NDRM attached to Mr. Bluestein's email outlined the terms of the proposed restructuring and made several observations regarding the state of OpenPeak. (Id. at 3-20). In the Background and Situation Overview section, Hercules recognized that "Since funding, the Company has struggled to grow revenues following the cancellation of the Cisco CIUS tablet." (Id. at 3). That section also noted the "significant strain" on OpenPeak's liquidity from the 2012 MLSA's current amortization rate, and the ...


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