PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
LEGAL DUE DILIGENCE REPORT
Proposed Acquisition of Meridian Surgical Technologies, Inc.
MEMORANDUM
FROM: Calderwood & Harkness LLP 590 Lexington Avenue, 35th Floor New York, NY 10022
TO: Solstice Biomedical Devices Ltd. Solstice House, 14 Fitzwilliam Place Dublin 2, D02 YF82, Ireland
Attention:
Helena Byrne, Executive Vice President, Corporate Development & Strategy
Patrick Lennox, General Counsel & Company Secretary
DATE: August 12, 2024
RE: Legal Due Diligence Report — Proposed Acquisition of Meridian Surgical Technologies, Inc.
MATTER NO.: 1037-00006
PREPARED BY: Tiffany Rosenthal (Lead Associate, Mergers & Acquisitions) and Andrew Fitzpatrick (Working Associate, Mergers & Acquisitions), with contributing sections from Victoria Shen (Counsel, Regulatory & Life Sciences), Robert Wainwright (Associate, Employment & Benefits), and Leonard Cross (Specialist Partner, Tax)
SUPERVISING PARTNER: Beatrice Holloway (Responsible Partner, Mergers & Acquisitions)
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I. EXECUTIVE SUMMARY
Calderwood & Harkness LLP ("Calderwood & Harkness" or "we") has prepared this Legal Due Diligence Report (this "Report") in connection with the proposed acquisition (the "Transaction") by Solstice Biomedical, Inc., a Delaware corporation and wholly owned subsidiary of Solstice Biomedical Devices Ltd., an Irish public limited company (together, the "Buyer" or "Solstice"), of one hundred percent (100%) of the outstanding shares of common stock and all vested stock options of Meridian Surgical Technologies, Inc., a Delaware corporation ("Meridian" or the "Company"), for a base purchase price of Two Hundred Twenty Million Dollars ($220,000,000) in cash (the "Base Purchase Price"), plus a potential earnout of up to Thirty-Five Million Dollars ($35,000,000) (the "Earnout Consideration") tied to FDA 510(k) clearance milestones for the ArthroNav robotic-assisted arthroscopy platform (the "ArthroNav Platform"). The aggregate maximum transaction value, inclusive of the Earnout Consideration, is Two Hundred Fifty-Five Million Dollars ($255,000,000).
The Transaction is structured as a stock purchase, governed by and to be construed in accordance with the laws of the State of Delaware. In connection with the closing of the Transaction, the parties intend to make a joint election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the "Code"), and the applicable Treasury Regulations thereunder, to treat the stock purchase as a deemed asset acquisition for U.S. federal income tax purposes. The definitive Stock Purchase Agreement (the "SPA") is being negotiated concurrently with the preparation of this Report by Calderwood & Harkness (on behalf of Buyer) and Whitmore Crane & Pfeiffer LLP (on behalf of the Sellers), with Jonathan Whitmore serving as lead partner for Sellers' counsel.
Scope of Review. Our due diligence review encompassed documents and information furnished by Meridian management and Whitmore Crane & Pfeiffer LLP in the Crestline Solutions virtual data room (the "Data Room"), indexed under project name "Project Pinnacle," which was made available to our team beginning May 13, 2024. The Data Room contained approximately 2,340 documents organized across 48 folders and subfolders. In addition to the Data Room materials, our review was supplemented by: (i) public records searches conducted in the State of Delaware and the Commonwealth of Pennsylvania; (ii) UCC lien searches in Delaware (Secretary of State) and Pennsylvania (Department of State); (iii) intellectual property database searches conducted through the United States Patent and Trademark Office ("USPTO") and the European Patent Office ("EPO"); (iv) federal and state court litigation searches; and (v) in-person and telephonic management interviews with Dr. Marcus Ellsworth (CEO), Catherine Pryor (President & COO), Dr. Raj Subramanian (CTO), and Gretchen Howell (VP, Regulatory Affairs & Quality). The diligence period ran from May 13, 2024, through August 9, 2024.
Overall Assessment. Based on our review, Meridian is a well-organized Delaware corporation with a clean regulatory record, a strong and growing intellectual property portfolio, and manageable contractual obligations. The Company's corporate governance practices are consistent with those of a well-run private company in the medical device sector, and its quality management systems and FDA compliance posture are strong. We have identified six key risk areas that warrant specific attention in the definitive agreement and related transaction documents:
(a) Hartwell Patent Infringement Litigation. Meridian is the defendant in a pending patent infringement action (Civil Action No. 2:23-cv-04817, E.D. Pa.) brought by Hartwell Orthopedic Solutions, Inc. The damages exposure is estimated at $2.5 million to $5.0 million. While Meridian's defenses are strong and a motion for summary judgment is pending, this matter requires specific indemnification treatment in the SPA.
(b) Titanium Precision Components Supply Agreement — Change-of-Control Consent. Section 11.3 of the exclusive supply agreement with Titanium Precision Components, Inc. required prior written consent for any change of control of Meridian. We are pleased to report that consent was obtained on August 5, 2024, and the consent letter has been reviewed and confirmed. The consent letter should be included as a closing deliverable.
(c) Section 382 NOL Limitations. The stock purchase will constitute an "ownership change" under Section 382 of the Code. Meridian's remaining federal net operating loss carryforwards of approximately $1.1 million will be subject to annual limitation post-closing. However, given the relatively small quantum of the remaining NOLs, the practical impact on Transaction economics is immaterial.
(d) ISO 13485:2016 Certification Expiration. Meridian's ISO 13485:2016 certification for its Exton, PA manufacturing facility expires in April 2025. Failure to renew the certification on a timely basis could have adverse consequences for FDA compliance posture and customer and distributor relationships. We recommend immediate attention to the recertification process as part of Buyer's post-closing integration plan.
(e) ArthroNav Earnout Regulatory Risk. The 510(k) clearance milestones underlying the Earnout Consideration are inherently subject to FDA review timelines and discretion. Milestone 2 — clearance of the Real-Time Cartilage Mapping software module by June 30, 2027 — presents a particularly aggressive timeline. Careful drafting of the earnout covenants in the SPA is essential.
(f) Key Person Dependency. Dr. Raj Subramanian, the Company's CTO and the primary architect of the ArthroNav Platform, is critical to both the protection of Meridian's trade secrets and the achievement of the earnout milestones. His retention is addressed through a new three-year employment agreement to be executed at closing.
Recommendation. Subject to the specific risk-mitigation measures and SPA protections identified in each section of this Report, and in particular the recommendations set forth in Section XIV below, we recommend that Solstice proceed with the Transaction.
The remainder of this Report sets forth our detailed findings, organized by subject matter, together with our risk assessments and recommendations for each area reviewed.
II. CORPORATE ORGANIZATION AND GOOD STANDING
II.A. Incorporation and Organizational Documents
Meridian Surgical Technologies, Inc. was incorporated in the State of Delaware on September 14, 2018, under Delaware File Number 5819734. The Company's Employer Identification Number is 84-3192057.
We have reviewed the Company's Certificate of Incorporation, as originally filed with the Delaware Secretary of State, together with all amendments thereto through the date of this Report. The Certificate of Incorporation, as amended, authorizes the issuance of 10,000,000 shares of common stock, par value $0.001 per share. The Company is not authorized to issue preferred stock. The Certificate of Incorporation contains standard provisions for a private Delaware corporation, including exculpation of directors from monetary liability for breach of fiduciary duty to the fullest extent permitted under Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL"), and indemnification provisions consistent with Section 145 of the DGCL.
We have also reviewed the Company's Bylaws, as amended through November 2021. The Bylaws contain standard provisions governing meetings of stockholders, the board of directors, officers, stock certificates, and indemnification. No unusual or non-standard provisions were identified. The Bylaws designate the Company's registered agent in Delaware as Pemberton Industries, 251 Little Falls Drive, Wilmington, DE 19808, which we have confirmed through the Delaware Secretary of State's records is current and in good standing as a registered agent.
The Company's principal executive offices and corporate headquarters are located at 780 Keystone Boulevard, Suite 200, King of Prussia, Pennsylvania 19406. The Company's manufacturing operations are conducted at its facility located at 45 Forge Creek Road, Exton, Pennsylvania 19341. These are the Company's only two physical locations.
II.B. Good Standing
We obtained a Certificate of Good Standing from the Delaware Secretary of State confirming that Meridian is in good standing and that all franchise taxes have been paid through the current period. The certificate is current as of July 29, 2024.
We also obtained a Certificate of Good Standing from the Pennsylvania Department of State confirming that Meridian is authorized to transact business in the Commonwealth of Pennsylvania and is in good standing. The certificate is current as of July 31, 2024.
Our review of the Company's foreign qualification records indicates that Meridian is qualified to do business in the Commonwealth of Pennsylvania and the State of New Jersey. We did not identify any other states in which the Company is required to qualify as a foreign corporation based on its operations, employees, and physical presence. The Company does not maintain offices, employees, or physical assets in any state other than Pennsylvania.
II.C. Board of Directors
The Company's Board of Directors currently consists of five directors and one non-voting board observer. The current composition of the Board is as follows:
1. Dr. Marcus Ellsworth — Director and Chairman of the Board. Dr. Ellsworth is the founder of the Company and currently serves as its Chief Executive Officer. He has served on the Board since the Company's incorporation in 2018.
2. Catherine Pryor — Director. Ms. Pryor serves as the Company's President and Chief Operating Officer. She has served on the Board since 2019.
3. Gregory Ashford — Director. Mr. Ashford serves as a designee of Pennfield Growth Partners, LP ("Pennfield") pursuant to the Stockholders' Agreement (discussed in Section III.D below). He is a Partner at Pennfield and has served on the Board since 2020.
4. Diana Whitfield — Director. Ms. Whitfield serves as the second designee of Pennfield pursuant to the Stockholders' Agreement. She is a Principal at Pennfield and has served on the Board since 2020.
5. Dr. Eleanor Vickers — Independent Director. Dr. Vickers is the former Chief Medical Officer of Westbrook Health Systems and was appointed to the Board in 2021. She serves as the sole independent director and chairs the Board's Compensation Committee.
6. Samuel Nakamura — Board Observer (non-voting). Mr. Nakamura serves as the designee of Arch Hill Ventures Fund II, LLC ("Arch Hill") pursuant to the Stockholders' Agreement. He is a Managing Director at Arch Hill Ventures.
We have reviewed the minutes of all meetings of the Board of Directors and all written consents in lieu of meetings from January 2021 through August 2024. All material corporate actions reflected in the minutes — including the approval of annual budgets, the entry into material contracts, the authorization of equity grants, and the authorization of the proposed Transaction — appear to have been properly authorized in accordance with the Company's Certificate of Incorporation, Bylaws, and the DGCL. The Board's approval of the Transaction was unanimous and was adopted by written consent dated July 15, 2024, following a presentation by Whitmore Crane & Pfeiffer LLP and a fairness presentation by the Company's financial advisor, Graypoint Capital Partners LLC.
II.D. Subsidiaries and Affiliates
Based on the representations of Meridian management and our review of the Data Room materials, Meridian has no subsidiaries, joint ventures, partnerships, or minority equity interests in any other entity. The Company conducts all of its operations directly and does not utilize any special purpose vehicles or affiliated entities.
III. CAPITALIZATION
III.A. Outstanding Equity
The Company's Certificate of Incorporation, as amended, authorizes the issuance of 10,000,000 shares of common stock, par value $0.001 per share. No class of preferred stock is authorized.
As of the date of this Report, 7,450,000 shares of common stock are issued and outstanding. The shares are fully paid and non-assessable. We have reviewed the Company's stock ledger, maintained by its transfer agent, Precision Stock Transfer, Inc., and have confirmed that the stock ledger reconciles with the capitalization representations provided by the Company in the Data Room.
III.B. Stockholder Breakdown
The 7,450,000 outstanding shares of common stock are held by the following stockholders:
We have confirmed through review of the stock ledger and related transfer documents that each of the foregoing holders acquired their shares in compliance with applicable federal and state securities laws, including exemptions under Regulation D of the Securities Act of 1933, as amended, and applicable state "blue sky" exemptions. Restrictive legends appear on all stock certificates.
III.C. Options and Equity Incentive Plan
We have reviewed the Meridian Surgical Technologies, Inc. 2019 Equity Incentive Plan (the "Plan"), together with all individual option grant agreements issued thereunder. The material terms of the outstanding options are summarized below:
• Shares reserved for issuance under outstanding options: 550,000 shares of common stock.
• Vesting status: All 550,000 options are fully vested as of the date of this Report. No unvested options remain outstanding.
• Weighted-average exercise price: $4.80 per share.
• Per-share merger consideration: The per-share merger consideration is calculated as $220,000,000 (Base Purchase Price) divided by 8,000,000 (total outstanding shares plus total outstanding vested options), yielding $27.50 per share.
• Net per-option cancellation consideration: $27.50 (per-share merger consideration) minus $4.80 (weighted-average exercise price) equals $22.70 per option.
• Aggregate option cancellation payments: 550,000 options multiplied by $22.70 equals $12,485,000.
• Aggregate consideration to common stockholders: $220,000,000 minus $12,485,000 equals $207,515,000. On a per-share basis, the common stockholders will receive approximately $27.8545 per share ($207,515,000 divided by 7,450,000 shares).
Under the terms of the SPA, the Plan will be terminated at the closing, and all outstanding vested options will be cancelled in exchange for the net per-option cancellation consideration of $22.70 per option, payable in cash, less applicable withholding taxes.
We have confirmed that the Plan and all option grants comply with the requirements of Section 409A of the Code (all options were granted with an exercise price equal to or greater than the fair market value of the underlying shares on the date of grant, as determined by independent 409A valuations). We have reviewed the three most recent 409A valuation reports, each prepared by Harborview Valuation Advisory LLC, and have confirmed that the valuation methodologies employed are consistent with IRS guidance.
III.D. Stockholders' Agreement and Related Agreements
We have reviewed the Stockholders' Agreement dated March 18, 2020, among Dr. Marcus Ellsworth, Pennfield Growth Partners, LP, Arch Hill Ventures Fund II, LLC, and the Company (the "Stockholders' Agreement"), together with a First Amendment thereto dated September 12, 2021 (the "First Amendment"). The material provisions of the Stockholders' Agreement are as follows:
(a) Drag-Along Rights. Section 4.1 of the Stockholders' Agreement provides that if holders of sixty-five percent (65%) or more of the outstanding shares of common stock approve a sale of the Company (whether structured as a merger, stock sale, or asset sale), all other stockholders are obligated to participate in such sale on the same terms and conditions. In the context of the proposed Transaction, the drag-along threshold is met by the combined holdings of Dr. Ellsworth (38.2%) and Pennfield (30.0%), which together represent 68.2% of the outstanding shares of common stock. Accordingly, all remaining stockholders, including Arch Hill, Ms. Pryor, and the other management and employee holders, can be compelled to sell their shares pursuant to the drag-along provisions.
(b) Right of First Refusal. Section 3.1 provides the Company and then the other stockholders with a right of first refusal on any proposed transfer of shares by any stockholder. This provision is not triggered by the proposed Transaction, as the drag-along provisions supersede the right of first refusal in the context of a Company sale.
(c) Board Composition. Section 5.1 provides Pennfield with the right to designate two members of the Board of Directors for so long as Pennfield holds at least twenty percent (20%) of the outstanding shares. Section 5.2 provides Arch Hill with the right to designate one non-voting board observer for so long as Arch Hill holds at least ten percent (10%) of the outstanding shares. These rights will terminate at the closing of the Transaction.
(d) Information Rights. Section 6.1 provides the institutional investors (Pennfield and Arch Hill) with customary information rights, including access to monthly financial statements and annual audited financial statements. These rights terminate upon a change of control of the Company.
We have also reviewed the Investors' Rights Agreement dated March 18, 2020, among the Company, Pennfield, and Arch Hill. This agreement provides Pennfield and Arch Hill with customary registration rights, including demand registration rights (exercisable by Pennfield) and piggyback registration rights. These provisions are not relevant to a cash stock purchase but are noted for completeness. The information rights contained in the Investors' Rights Agreement are substantially identical to those in the Stockholders' Agreement and similarly terminate upon a change of control.
III.E. Anti-Dilution and Preemptive Rights
No anti-dilution protections apply to the Company's common stock. The Company has not issued preferred stock or any other equity securities with anti-dilution adjustment mechanisms.
Section 7.1 of the Stockholders' Agreement grants Pennfield and Arch Hill preemptive rights with respect to any new issuances of equity securities by the Company. In connection with the proposed Transaction, each of Pennfield and Arch Hill executed waiver letters, each dated July 22, 2024, expressly waiving their respective preemptive rights with respect to the Transaction. We have reviewed both waiver letters and confirmed that they are properly executed and unconditional.
III.F. Observation
The Company's capitalization is clean and straightforward. There are no outstanding warrants, convertible instruments, convertible notes, SAFEs, or other equity-linked securities beyond the fully vested stock options described above. The stock ledger is well-maintained, and all equity issuances appear to have been properly authorized and documented. No fractional shares or unusual equity arrangements were identified.
IV. MATERIAL CONTRACTS
IV.A. Summary of Approach
We have reviewed all material contracts identified in the Data Room, including all contracts specifically requested in Calderwood & Harkness's Preliminary Diligence Request List dated May 13, 2024, and Supplemental Diligence Request Lists dated June 7, 2024, and July 12, 2024. Our review focused on: (i) change-of-control provisions and consent requirements; (ii) assignability and successors and assigns clauses; (iii) termination rights, including termination for convenience and termination for cause; (iv) exclusivity arrangements; (v) minimum purchase commitments and revenue guarantees; (vi) most-favored-nation and pricing provisions; (vii) restrictive covenants, including non-competition and non-solicitation provisions; (viii) limitation of liability and indemnification provisions; and (ix) intellectual property ownership and license-back provisions. Set forth below are our findings with respect to the material contracts identified as requiring specific discussion.
IV.B. Exclusive Supply Agreement — Titanium Precision Components, Inc.
We have reviewed the Exclusive Supply Agreement dated March 15, 2022 (the "TPC Agreement"), by and between Meridian (as buyer) and Titanium Precision Components, Inc. ("TPC"), a Pennsylvania corporation with its principal offices at 215 Industrial Park Drive, Lancaster, Pennsylvania 17601 (as supplier). TPC is the exclusive supplier of titanium instrument housings used in Meridian's PrecisionBlade single-use arthroscopic blade product line and its powered shaver systems. The material terms of the TPC Agreement are as follows:
• Term: Five (5) years, commencing March 15, 2022, and expiring March 14, 2027, with an option to renew for successive one-year terms upon mutual written agreement.
• Exclusivity: TPC is the exclusive supplier of titanium instrument housings for the PrecisionBlade and powered shaver product lines. The exclusivity is reciprocal — TPC is also prohibited from supplying substantially similar titanium instrument housings to any competitor of Meridian identified in Exhibit B to the TPC Agreement for the duration of the term.
• Minimum Annual Purchase Commitment: Meridian is committed to purchase a minimum of $3,200,000 per year of titanium instrument housings from TPC. Meridian has exceeded this threshold in each full year of the agreement (FY2022: $3.4M; FY2023: $3.9M).
• Pricing: Prices are fixed for the first two years of the term and subject to annual adjustment thereafter based on the Producer Price Index for titanium mill shapes, not to exceed 4.5% per year.
• Quality Standards: TPC is required to maintain ISO 9001:2015 certification and to comply with Meridian's Supplier Quality Agreement, attached as Exhibit C to the TPC Agreement.
Change-of-Control Provision. Section 11.3 of the TPC Agreement provides that "[n]either party may assign this Agreement or any rights or obligations hereunder without the prior written consent of the other party, except that either party may assign this Agreement to an affiliate. Any change of control of Buyer shall require the prior written consent of Supplier, such consent not to be unreasonably withheld, conditioned, or delayed. For purposes of this Section, 'change of control' means a transaction or series of related transactions resulting in a change in the ownership of more than fifty percent (50%) of the voting securities of Buyer." Failure to obtain the required consent gives TPC the right to terminate the TPC Agreement upon sixty (60) days' prior written notice.
Status of Consent. Following discussions between Meridian management and TPC, and a meeting between Dr. Ellsworth and Thomas Reedy, President of TPC, on July 29, 2024, TPC executed a written consent letter dated August 5, 2024, consenting to the change of control of Meridian contemplated by the Transaction. We have reviewed the consent letter and confirmed that it is (i) executed by an authorized officer of TPC, (ii) unconditional, and (iii) specifically references the TPC Agreement and the proposed Transaction.
Recommendation. The executed TPC consent letter should be included as a condition to closing and as a closing deliverable under the SPA. The TPC Agreement and the consent letter should be referenced in the Disclosure Schedules. We further recommend that Buyer evaluate the strategic importance of the TPC relationship and the terms of any renewal negotiations following the expiration of the current term in March 2027 as part of post-closing integration planning.
IV.C. Distribution Agreement — OrthoLink Distribution, LLC
We have reviewed the Distribution Agreement dated January 1, 2023 (the "OrthoLink Agreement"), by and between Meridian (as supplier) and OrthoLink Distribution, LLC ("OrthoLink"), a Maryland limited liability company with its principal offices at 9400 Snowden River Parkway, Suite 300, Columbia, Maryland 21045 (as exclusive distributor). Under the OrthoLink Agreement, OrthoLink has been granted exclusive distribution rights for the PrecisionBlade product line in the eastern United States (defined in the agreement as the states east of the Mississippi River, excluding Florida). The material terms of the OrthoLink Agreement are as follows:
• Term: Three (3) years, commencing January 1, 2023, and expiring December 31, 2025, with an option to renew for one additional two-year term upon mutual written agreement, provided OrthoLink has met minimum annual sales targets.
• Exclusivity: OrthoLink is the exclusive distributor for PrecisionBlade products in the defined territory. Meridian retains the right to sell directly to national group purchasing organizations (GPOs) and integrated delivery networks (IDNs) that operate across multiple territories.
• Commission Structure: OrthoLink receives a commission of 22% of net sales within the territory, payable monthly in arrears.
• Minimum Annual Sales Target: $4,500,000 in net sales of PrecisionBlade products in the territory for the renewal option to become exercisable.
Change-of-Control Provision. Section 9.1 of the OrthoLink Agreement requires that Meridian provide written notice to OrthoLink within thirty (30) days of any change of control of Meridian. Critically, the OrthoLink Agreement requires only notice, not consent. No termination right is triggered by a change of control of Meridian. The agreement may be terminated by either party for cause (material breach with a 30-day cure period) or by either party for convenience upon 90 days' prior written notice.
Status of Notice. Written notice was provided to OrthoLink on August 12, 2024, in accordance with Section 9.1 of the OrthoLink Agreement. An acknowledgment of receipt was confirmed by email from Sarah Caldwell, General Counsel of OrthoLink, on the same date.
Observation. The OrthoLink Agreement expires on December 31, 2025, approximately six months after the anticipated closing of the Transaction. We recommend that Buyer evaluate whether to exercise the renewal option (assuming OrthoLink meets its minimum annual sales target) or to restructure its distribution strategy for the PrecisionBlade product line in the eastern United States as part of post-closing integration planning. The OrthoLink commission rate of 22% is within market range for orthopedic device distribution agreements but is at the higher end, and Buyer may wish to explore renegotiation of terms in connection with any renewal.
IV.D. License Agreement — Polytechnic Innovations, Ltd.
We have reviewed the License Agreement dated June 8, 2020 (the "Polytechnic License"), by and between Meridian (as licensee) and Polytechnic Innovations, Ltd. ("Polytechnic"), a United Kingdom private limited company with its principal offices at Innovation Centre, 12 Banbury Road, Oxford, OX2 6NN, United Kingdom (as licensor). The Polytechnic License grants Meridian a non-exclusive, worldwide license under Polytechnic's background intellectual property in robotic surgical navigation technology, which serves as foundational technology for the ArthroNav Platform. The material terms of the Polytechnic License are as follows:
• Licensed Technology: The Polytechnic License covers a portfolio of four issued patents and related know-how in robotic surgical navigation algorithms, sensor fusion techniques, and real-time instrument tracking methodology. The licensed technology provides the foundational navigation framework upon which Meridian has developed its proprietary ArthroNav system architecture.
• Scope: The license is non-exclusive and worldwide, with a field-of-use limitation to arthroscopic and orthopedic surgical applications.
• Royalty: Meridian is obligated to pay Polytechnic a running royalty of 2.5% of net sales of ArthroNav products. "Net sales" is defined in the agreement in a customary manner (gross sales less returns, rebates, discounts, and shipping costs).
• Term: The license is co-extensive with the life of the underlying licensed patents. Based on our review, the last-to-expire patent in the Polytechnic portfolio has a projected expiration date of approximately 2038, although extensions may apply depending on future regulatory approvals.
• Minimum Royalties: The Polytechnic License does not contain minimum royalty provisions. Royalties are payable only on actual net sales.
No Change-of-Control Provision. The Polytechnic License contains no change-of-control provision and is freely assignable by Meridian without the consent of Polytechnic. Section 14.2 of the Polytechnic License provides that the agreement "shall be binding upon and inure to the benefit of the parties and their respective successors and assigns" and that "either party may assign this Agreement in connection with a merger, acquisition, or sale of all or substantially all of its assets without the consent of the other party." Accordingly, no consent or notice is required in connection with the Transaction.
Significance. The Polytechnic License is critical to the ArthroNav development program and, by extension, to the Earnout Consideration milestones. The license provides the background intellectual property rights necessary for Meridian to develop, manufacture, and commercialize the ArthroNav Platform. Meridian's own proprietary patents and trade secrets cover the Company's unique implementation, system architecture, and user interface, but the Polytechnic background IP remains an essential component.
Observation. The 2.5% royalty obligation on ArthroNav net sales will continue post-closing and should be factored into the ArthroNav product economics and the achievability of the Earnout Consideration milestones. Over the projected life of the ArthroNav product line, the aggregate royalty payments to Polytechnic could be substantial. We note, however, that the royalty rate is within market range for foundational technology licenses in the medical device sector.
IV.E. Ironclad Revolving Credit Facility
We have reviewed the Loan and Security Agreement dated November 12, 2021 (the "Credit Facility"), by and between Meridian (as borrower) and Ironclad Commercial Lending, LLC ("Ironclad"), a Texas limited liability company with its principal offices at 600 Travis Street, Suite 2200, Houston, Texas 77002 (as lender). The Credit Facility provides Meridian with a $12,000,000 revolving line of credit secured by a blanket lien on all assets of the Company, including accounts receivable, inventory, equipment, intellectual property, and general intangibles.
• Facility Size: $12,000,000 revolving credit facility.
• Outstanding Balance: As of the most recent monthly borrowing certificate (dated July 31, 2024), the outstanding principal balance was approximately $7,300,000. The precise payoff amount, including accrued interest and any prepayment premiums, will be confirmed by a payoff letter to be obtained from Ironclad in advance of or at the closing.
• Interest Rate: SOFR plus 325 basis points, with a SOFR floor of 1.00%.
• Maturity: November 12, 2026.
• Financial Covenants: Minimum Debt Service Coverage Ratio of 1.25x, tested quarterly; minimum liquidity covenant of $1,500,000 in unrestricted cash and cash equivalents.
• Security Interest: Ironclad holds a first-priority, perfected security interest in substantially all assets of the Company, including intellectual property. A UCC-1 Financing Statement was filed with the Delaware Secretary of State on November 15, 2021 (Filing No. 2021-7842319), which we have confirmed through a UCC search. No other UCC-1 filings were identified.
Change-of-Control Provision. Section 8.1(f) of the Credit Facility provides that a "Change of Control" (as defined therein) constitutes an Event of Default. The definition of "Change of Control" includes any transaction resulting in the acquisition by any person or group of more than fifty percent (50%) of the voting equity interests of the Company. The proposed Transaction will trigger this Event of Default, and upon such triggering, Ironclad has the right to accelerate all outstanding obligations and exercise remedies against the collateral.
Requirement at Closing. The Credit Facility is to be paid off in full and terminated at the closing of the Transaction. A payoff letter from Ironclad, together with a UCC-3 Termination Statement, must be obtained prior to or contemporaneously with the closing. The payoff of the Credit Facility will be funded from the Base Purchase Price and reflected as a reduction in the aggregate consideration payable to the Sellers at closing.
IV.F. Other Contracts Reviewed
In addition to the contracts described above, we reviewed the following categories of contracts:
Customer Contracts. We reviewed Meridian's top twenty (20) customer agreements by revenue, which collectively represent approximately 78% of the Company's total revenue for FY2023. These agreements consist of standard purchase orders, master supply agreements, and group purchasing organization contracts. None of the top twenty customer contracts contains change-of-control consent requirements or unusual termination rights that would be triggered by the Transaction. Standard termination-for-convenience provisions (typically requiring 60 to 90 days' notice) are present in most agreements, which is customary for the medical device industry.
Office Lease — King of Prussia, PA. We reviewed the Office Lease Agreement dated April 1, 2021, between Meridian (as tenant) and Keystone Commercial Properties, LLC (as landlord) for approximately 12,500 square feet of office space at 780 Keystone Boulevard, Suite 200, King of Prussia, Pennsylvania 19406. The lease has a seven-year term expiring March 31, 2028, with one five-year renewal option. Annual base rent is approximately $420,000 ($33.60 per square foot), escalating at 2.5% per year. The lease contains standard assignment provisions. Notably, Section 17.2 of the lease provides that landlord consent is not required for a transfer of indirect ownership of the tenant (i.e., a stock sale), and the proposed Transaction, structured as a stock purchase, does not constitute an "assignment" under the lease. No action is required with respect to this lease in connection with the closing.
Manufacturing Facility — Exton, PA. The Exton manufacturing facility at 45 Forge Creek Road, Exton, Pennsylvania 19341 is owned by Meridian in fee simple. We confirmed ownership through a title search conducted by Ridgeline Indemnity Co. (see Section XI below). There is no mortgage encumbrance on the property. The only lien on the property is the Ironclad blanket UCC-1 lien, which will be released at closing upon payoff of the revolving credit facility. The property is properly zoned for light industrial and manufacturing use.
Insurance Contracts. We reviewed Meridian's commercial general liability, product liability, property, and directors & officers liability insurance policies. All policies are in force and provide coverage limits appropriate for a company of Meridian's size and in its industry. No assignment or change-of-control provisions were identified that would be triggered by the Transaction. Detailed discussion of the insurance program is set forth in Section XII below.
V. INTELLECTUAL PROPERTY
V.A. Patents
Meridian maintains a robust patent portfolio covering the core technologies underlying its PrecisionBlade, powered shaver, and ArthroNav product lines. Our review of the patent portfolio yielded the following:
Issued U.S. Utility Patents. Meridian holds fourteen (14) issued U.S. utility patents covering various aspects of minimally invasive surgical instrument design, powered shaver blade configurations and actuation mechanisms, robotic navigation technology for arthroscopic procedures, and related sensor and imaging technologies. We have confirmed through USPTO records that each issued patent is properly assigned to Meridian, that the maintenance fees are current, and that no liens, security interests, or encumbrances are recorded against any patent with the USPTO (other than the Ironclad blanket lien, which encumbers all assets of the Company including intellectual property, and which will be released at closing).
Pending U.S. Patent Applications. Three (3) U.S. patent applications are currently pending before the USPTO. We have reviewed the prosecution files for each application. All three applications are in active prosecution, and no final rejections or office action rejections are currently outstanding. Two of the three applications relate to refinements of the ArthroNav Platform technology, and one relates to a next-generation powered shaver blade design.
European Patents. Meridian holds six (6) issued European patents obtained through the European Patent Office (EPO). These patents provide protection in the major European markets, including Germany, France, the United Kingdom, Italy, and Spain. All European patents are properly maintained, and annuity fees are current.
Key Patent — U.S. Patent No. 11,432,887. We highlight in particular U.S. Patent No. 11,432,887, entitled "Robotic-Assisted Arthroscopic Navigation System and Method," which was issued on August 16, 2022, and is assigned to Meridian. This patent covers the core system architecture and methodology of the ArthroNav Platform and is central to both Earnout Consideration milestones. The patent has a projected expiration date of 2041 (based on a twenty-year term from the earliest filing date). This patent, together with Meridian's proprietary trade secrets (discussed in Section V.C below), represents the most strategically significant intellectual property assets of the Company.
IP Assignment Records. We have confirmed through USPTO assignment records that all U.S. patents and patent applications are properly assigned to Meridian by their respective inventors. Each inventor executed an assignment agreement assigning all right, title, and interest in the inventions and resulting patents to the Company. Copies of the executed assignments were reviewed in the Data Room and cross-referenced with the USPTO Assignment Database.
Polytechnic Background IP. As discussed in Section IV.D above, the Polytechnic License provides Meridian with the right to use certain background intellectual property in robotic surgical navigation technology. Meridian's own patents cover the Company's proprietary implementation, system design, and user interface for the ArthroNav Platform, while the Polytechnic background IP provides foundational navigation algorithms and sensor fusion methodologies.
V.B. Trademarks
Meridian holds three active trademark registrations with the USPTO, each of which is material to the Company's business:
1. "Meridian Surgical" — Registered with the USPTO; Registration No. 5,891,442; registered in International Class 10 (surgical instruments and apparatus). The mark is in active use in commerce and is current. No opposition or cancellation proceedings are pending.
2. "ArthroNav" — Registered with the USPTO; Registration No. 6,234,107; registered in International Class 10 (robotic surgical navigation systems). This mark is essential to the ArthroNav product line and the Earnout Consideration milestones. The mark is in active use in commerce (primarily in pre-market materials and regulatory submissions at this stage) and is current. No opposition or cancellation proceedings are pending.
3. "PrecisionBlade" — Registered with the USPTO; Registration No. 5,672,891; registered in International Class 10 (single-use arthroscopic surgical blades). The mark is in active use in commerce on the Company's commercially marketed products and is current. No opposition or cancellation proceedings are pending.
We have confirmed through the USPTO Trademark Electronic Search System (TESS) that no third-party applications or registrations for confusingly similar marks are pending or registered in the relevant international classes.
V.C. Trade Secrets
In addition to its patent portfolio, Meridian possesses significant trade secret assets, most notably its proprietary algorithms for real-time cartilage thickness mapping. These algorithms constitute the core technology underlying Earnout Milestone 2 — the FDA 510(k) clearance of the ArthroNav Software Module for Real-Time Cartilage Mapping (Generation 2.0). The real-time cartilage mapping technology was developed by Dr. Raj Subramanian, the Company's CTO, in collaboration with a small team of software engineers and biomedical researchers at the Exton facility.
We have reviewed the Company's trade secret protection measures and believe they are reasonable and consistent with industry standards. The following measures are in place:
• All employees with access to proprietary technology have executed confidentiality and invention assignment agreements. We reviewed a sample of these agreements and confirmed that they contain customary provisions regarding non-disclosure, non-use, and assignment of inventions.
• Access to the ArthroNav software codebase and the cartilage mapping algorithms is restricted on a need-to-know basis, with multi-factor authentication and role-based access controls on the Company's R&D servers and development environment.
• Physical access to the R&D laboratories at the Exton facility is controlled by badge access, and visitor access is subject to sign-in protocols and escorted access requirements.
• The Company's Employee Handbook contains a comprehensive confidentiality policy, and annual training on trade secret protection is conducted for all employees with access to proprietary technology.
Key Person Risk. Dr. Raj Subramanian is the primary architect and custodian of the real-time cartilage mapping technology and the broader ArthroNav Platform intellectual property. His knowledge and expertise are critical to both the protection of these trade secrets and the achievement of the Earnout Consideration milestones. We note that Dr. Subramanian will execute a new three-year employment agreement at closing (see Section X.B below), which includes a two-year post-termination non-competition and non-solicitation covenant. While these contractual protections mitigate the key person risk to some extent, they do not eliminate it. We recommend that Buyer implement additional knowledge transfer and documentation initiatives as part of post-closing integration to reduce the Company's dependence on Dr. Subramanian.
V.D. Freedom-to-Operate Considerations
The principal freedom-to-operate concern relates to the pending Hartwell Orthopedic Solutions patent infringement claim, which is discussed in detail in Section VI.A below. The Hartwell claim alleges that certain of Meridian's powered shaver blade products infringe Hartwell's U.S. Patent No. 10,891,224. The claim relates specifically to the PrecisionBlade powered shaver product line and does not implicate the ArthroNav Platform or its associated intellectual property.
Other than the Hartwell matter, we did not identify any third-party intellectual property infringement claims, cease-and-desist letters, or demands in the Data Room or through our interviews with Meridian management. We note, however, that our review was limited to the materials made available to us and does not constitute a formal freedom-to-operate analysis. We recommend continued monitoring of the Hartwell litigation outcome for any potential adverse impact on the PrecisionBlade powered shaver product line, and we further recommend that Buyer consider commissioning a formal freedom-to-operate analysis for the ArthroNav Platform prior to its commercial launch.
VI. LITIGATION
VI.A. Pending Litigation — Hartwell Orthopedic Solutions, Inc. v. Meridian Surgical Technologies, Inc.
Case Information.
• Case Name: Hartwell Orthopedic Solutions, Inc. v. Meridian Surgical Technologies, Inc.
• Court: United States District Court for the Eastern District of Pennsylvania
• Civil Action No.: 2:23-cv-04817
• Presiding Judge: The Honorable Margaret A. Donnelly
• Filed: October 18, 2023
• Plaintiff: Hartwell Orthopedic Solutions, Inc. ("Hartwell"), a Delaware corporation with its principal offices at 850 North Michigan Avenue, Suite 1400, Chicago, Illinois 60611
• Defendant: Meridian Surgical Technologies, Inc.
• Outside Litigation Counsel for Meridian: Braddock & Lyle LLP, 1600 Arch Street, Suite 2000, Philadelphia, Pennsylvania 19103; lead counsel: Deborah Lyle, Partner
Nature of Claims. Hartwell alleges that certain of Meridian's powered shaver blade products infringe U.S. Patent No. 10,891,224 (the "Hartwell Patent"), entitled "Oscillating Surgical Shaver Blade with Integrated Aspiration Channel." The Hartwell Patent claims a specific blade geometry incorporating an integrated aspiration channel design for powered surgical shavers used in arthroscopic procedures. Hartwell seeks damages in the form of a reasonable royalty and/or lost profits, together with injunctive relief.
Procedural Status. Meridian filed its Answer and Affirmative Defenses on December 15, 2023, asserting non-infringement and invalidity of the Hartwell Patent on multiple grounds, including anticipation and obviousness in light of prior art. Fact discovery was completed on May 31, 2024. Expert reports were exchanged on July 15, 2024. On July 22, 2024, Meridian filed a Motion for Summary Judgment on the grounds of non-infringement and invalidity, supported by the expert declaration of Dr. Raymond K. Foster, Ph.D., a mechanical engineering professor at the University of Pennsylvania and a recognized expert in surgical instrument design. The motion is fully briefed and is currently pending before the court. No ruling date has been set as of the date of this Report.
Damages Exposure. Based on our review of the complaint, the summary judgment briefing, and a privileged litigation assessment memorandum prepared by Deborah Lyle at Braddock & Lyle LLP (provided to us under a common interest agreement executed between Calderwood & Harkness and Braddock & Lyle on June 3, 2024), we assess the damages exposure as follows:
• Low-end estimate: Approximately $2,500,000, based on a reasonable royalty methodology applied to Meridian's powered shaver blade sales during the relevant damages period.
• High-end estimate: Approximately $5,000,000, based on a lost profits analysis advanced by Hartwell's damages expert.
• Injunctive relief risk: We assess the risk of a permanent injunction as low, given the availability of a reasonable royalty as an adequate remedy at law and the absence of evidence that Hartwell and Meridian are direct competitors in the relevant market segment.
Assessment. Meridian's defenses are strong. The non-infringement argument is well-supported by claim construction analysis and the expert testimony of Dr. Foster, who has opined that Meridian's blade design does not practice the asserted claims of the Hartwell Patent. The invalidity argument is supported by multiple prior art references, including two published patent applications that predate the Hartwell Patent's priority date and appear to disclose the key elements of the asserted claims. Ms. Lyle has expressed confidence that the summary judgment motion has a reasonable prospect of success, though she appropriately cautions that summary judgment in patent cases is inherently uncertain.
SPA Treatment. The Hartwell litigation will be disclosed in the Disclosure Schedules to the SPA. We recommend that the matter be subject to a specific indemnification provision in the SPA, carved out from the general basket and cap structure. The damages exposure at the low end ($2.5 million) exceeds the tipping basket of $1,650,000 and therefore would be subject to indemnification from the first dollar (above the $75,000 de minimis threshold per claim). If the damages reach the high end ($5.0 million), the exposure would be more significant but would remain well within the indemnification cap of $61,600,000 (28% of deal value). In the event that the ultimate resolution of the Hartwell matter exceeds the escrow/indemnification framework, the buy-side Representations and Warranties Insurance policy procured from Ridgeline Mutual Insurance Company (with $40,000,000 in aggregate coverage) would provide additional protection, subject to the policy terms and conditions.
Recommendation. We recommend (i) specific indemnification for the Hartwell matter in the SPA, (ii) continued monitoring of the summary judgment ruling, (iii) evaluation of the impact of a potential adverse ruling on the PrecisionBlade powered shaver product line and related revenue projections, and (iv) coordination with Braddock & Lyle on trial preparation in the event summary judgment is denied.
VI.B. Other Litigation
We have conducted searches of federal and state court records in the Eastern District of Pennsylvania, the Commonwealth of Pennsylvania, and the State of New Jersey, as well as the Delaware Court of Chancery and the U.S. District Court for the District of Delaware. Other than the Hartwell matter described above, no pending or threatened litigation, arbitration, or governmental proceedings involving Meridian were identified.
We have confirmed through our review of the Data Room and management interviews that:
• There are no outstanding judgments, consent decrees, or settlement agreements binding on the Company.
• No product liability claims are currently pending against the Company. The Company maintains comprehensive commercial product liability insurance through its insurance program (discussed in Section XII). We reviewed the Company's claims history and identified one historical product liability claim filed in 2020, which was settled for $85,000 without admission of liability. The claim involved an alleged defect in a PrecisionBlade single-use blade that allegedly resulted in a minor soft tissue injury during an arthroscopic procedure. No pattern of recurring product liability claims was identified.
• No class action, mass tort, or multi-district litigation involving the Company is pending or threatened.
VI.C. Governmental Investigations
We have confirmed through our review of the Data Room, management interviews, and public records searches that:
• No pending or threatened governmental investigations by the U.S. Department of Justice ("DOJ"), the Federal Trade Commission ("FTC"), the Securities and Exchange Commission ("SEC"), or any state attorney general involve the Company.
• No pending or prior actions under the False Claims Act (including qui tam actions) have been filed against the Company or, to the knowledge of management, are threatened.
• The Company has not received any subpoenas, civil investigative demands, or informal inquiries from any federal or state governmental agency, other than routine regulatory inquiries from the FDA in the ordinary course (addressed in Section VII below).
• The Company is not, and has not been, a party to any corporate integrity agreement, deferred prosecution agreement, or non-prosecution agreement with any governmental agency.
VII. REGULATORY / FDA
This Section VII was prepared by Victoria Shen, Counsel, Regulatory & Life Sciences, Calderwood & Harkness LLP.
VII.A. Existing Product Clearances
Meridian's currently commercially marketed products consist of the PrecisionBlade single-use arthroscopic blade product line and the powered shaver systems. Each of these product families has received FDA 510(k) clearance for commercial distribution in the United States. We have reviewed the 510(k) clearance letters and summaries for each cleared product and confirmed the following:
• All 510(k) clearances are current and active.
• No clearances have been suspended, withdrawn, or revoked.
• The Company is in compliance with the conditions and limitations of each clearance.
• No pending FDA warning letters have been issued to the Company.
• No consent decrees or administrative orders are in effect.
• No unresolved Form 483 observations are outstanding.
The Company's products are classified as Class II medical devices and are marketed under the substantial equivalence pathway established by Section 510(k) of the Federal Food, Drug, and Cosmetic Act. The Company has properly registered its manufacturing establishment with the FDA and lists all commercially marketed devices in the FDA's Device Listing database.
VII.B. FDA Inspection History
The FDA last inspected Meridian's Exton, Pennsylvania manufacturing facility in September 2023. The inspection was a routine surveillance inspection conducted under the Quality System Regulation (21 C.F.R. Part 820). The inspection resulted in no Form 483 observations — a result commonly referred to as a "clean" inspection. This is a positive indicator of the Company's quality system maturity and compliance culture.
We reviewed the Company's FDA inspection history going back to 2019. The prior inspection history reveals no significant findings, no warning letters, and no untitled letters. There is one prior Form 483 observation from a 2020 inspection related to a documentation gap in the Company's design transfer procedures; this observation was promptly addressed, and the corrective action was accepted by the FDA. No follow-up inspection was required.
VII.C. ArthroNav Platform — Regulatory Pathway