MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
FROM: Tiffany Rosenthal, Calderwood & Harkness LLP
TO: Helena Byrne, EVP, Corporate Development & Strategy, Solstice Biomedical Devices Ltd. Patrick Lennox, General Counsel & Company Secretary, Solstice Biomedical Devices Ltd. Conor Muldoon, CFO, Solstice Biomedical Devices Ltd.
CC: Beatrice Holloway, Partner, Calderwood & Harkness LLP James Prentice, Partner, Calderwood & Harkness LLP Andrew Fitzpatrick, Associate, Calderwood & Harkness LLP
DATE: July 22, 2024
RE: Summary and Analysis of Commitment Letter from Tidewater Atlantic Bank, N.A. Dated July 15, 2024 — Financing for Proposed Acquisition of Meridian Surgical Technologies, Inc.
MATTER NO.: 1037-00006
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I. Executive Summary
The purpose of this memorandum is to summarize and analyze the commitment letter dated July 15, 2024 (the "Commitment Letter") from Tidewater Atlantic Bank, N.A. ("Tidewater") addressed to Solstice Biomedical, Inc. ("SBI"), the wholly owned Delaware subsidiary of Solstice Biomedical Devices Ltd. ("Solstice" or "SBD"), in connection with the proposed acquisition of 100% of the outstanding common stock and all vested options of Meridian Surgical Technologies, Inc. ("Meridian" or the "Target") for a base purchase price of $220,000,000 (the "Acquisition"). This memorandum is intended to assist Solstice's executive team and General Counsel in evaluating the material terms of the Commitment Letter and in formulating a negotiation strategy for the definitive credit documentation.
Under the Commitment Letter, Tidewater has agreed to act as sole lead arranger and administrative agent for two credit facilities to be made available to SBI on and subject to the terms and conditions set forth therein. The committed facilities consist of: (1) a $130,000,000 senior secured term loan facility ("Term Loan A") and (2) a $50,000,000 revolving credit facility (the "Revolver" and, together with Term Loan A, the "Facilities"). The total committed financing under the Commitment Letter is therefore $180,000,000.
The Commitment Letter was delivered together with a Summary of Terms and Conditions (the "Term Sheet") and a Fee Letter (the "Fee Letter"), each dated as of July 15, 2024 and each executed by Margaret Chu, Managing Director, Healthcare Lending Group at Tidewater. Ms. Chu serves as the key contact at Tidewater for purposes of this financing and has indicated her availability for a term sheet review call during the week of July 22.
Based on our review, the Commitment Letter satisfies the financing condition contemplated in the draft Stock Purchase Agreement (the "SPA") between SBI (as Buyer) and the stockholders of Meridian (collectively, the "Sellers"), with Dr. Marcus Ellsworth acting as Sellers' Representative. We recommend that Solstice proceed to negotiate definitive credit documentation substantially on the terms described in the Term Sheet, subject to resolution of certain key issues identified in this memorandum.
Key Recommendations. While the Commitment Letter is generally in line with market practice for senior secured acquisition financings in the healthcare sector, several provisions require focused attention before the SPA is signed. In particular, we highlight the following:
• Flex Provisions. The Fee Letter contains "market flex" provisions (including pricing flex, OID flex, and structure flex) that could reduce net proceeds and post-closing liquidity. We recommend negotiating caps and a sunset mechanism.
• "SunGard" Certain-Funds Conditionality. The Commitment Letter includes a certain-funds construct limiting the conditions to initial funding, which is critical to the integrity of the financing commitment. We recommend confirming alignment between the SPA representations and the "Specified Acquisition Agreement Representations" referenced in the Commitment Letter to eliminate conditionality gaps.
• Representations Mirroring. The representations in the definitive credit agreement should be no more onerous than those in the SPA, and appropriate carve-outs must be included for known matters (particularly the pending Hartwell Orthopedic Solutions litigation and the pre-clearance status of the ArthroNav surgical navigation platform).
• Financial Covenant Testing Level. It is critical to clarify whether financial covenants are tested at the consolidated SBI level (which would include only Meridian's standalone EBITDA) or at the consolidated Solstice group level. If covenants are tested on an SBI-only basis, Meridian's standalone EBITDA of approximately $14.2 million would imply opening leverage of approximately 9.2x — well in excess of the 4.50:1.00 maximum Total Net Leverage Ratio.
• FDA / Regulatory Event of Default. The Commitment Letter includes an unusual event of default triggered by loss of material FDA clearances. This provision must be carefully tailored to avoid creating default risk in connection with the ArthroNav platform, which has not yet received FDA clearance.
These issues are discussed in detail in Sections VI, VIII, IX, X, and XIV below.
II. Overview of Committed Facilities
A. Term Loan A Facility
The Term Loan A facility constitutes the primary source of debt financing for the Acquisition. The principal terms are summarized below.
Borrower. The borrower under the Term Loan A facility is Solstice Biomedical, Inc., a Delaware corporation (Delaware File Number 7203841; EIN 93-4017625). SBI was formed on April 22, 2024, as the designated acquisition vehicle and U.S. borrower for the Acquisition. SBI is a wholly owned subsidiary of Solstice Biomedical Devices Ltd.
Guarantor. Solstice Biomedical Devices Ltd. (Irish parent; CRO Number 648217) will provide an upstream guaranty of all obligations of SBI under the credit facilities, as further described in Section III below.
Facility Amount. $130,000,000.
Type. Senior secured term loan.
Maturity. Five (5) years from the closing date of the credit facility. The expected closing date is October 31, 2024, which would result in a maturity date of October 31, 2029. The closing of the credit facility is expected to occur simultaneously with the closing of the Acquisition under the SPA.
Interest Rate. The applicable interest rate for borrowings under Term Loan A is the Secured Overnight Financing Rate ("SOFR") plus 2.25% per annum. The SOFR rate is subject to the following additional provisions:
• SOFR Floor: 0.00% (i.e., no floor). This is favorable to the Borrower, as many comparable facilities include a SOFR floor of 0.50% or higher.
• SOFR Credit Spread Adjustment: A credit spread adjustment ("CSA") of 0.10% applies to one-month SOFR and a CSA of 0.15% applies to three-month SOFR. These adjustments reflect the transition from LIBOR-based conventions and are consistent with current market practice, although the trend in recent transactions has been to eliminate CSAs entirely. We may seek removal of these adjustments during credit agreement negotiations.
• Default Rate: Upon the occurrence and during the continuance of an event of default, interest on all outstanding obligations accrues at an additional 2.00% per annum above the otherwise applicable rate (i.e., SOFR + 4.25%).
Amortization. Term Loan A amortizes in equal quarterly installments of 1.25% of the original principal amount (i.e., $1,625,000 per quarter), commencing on the last business day of the first full fiscal quarter after the closing date. The aggregate annual amortization is 5.0% per year ($6,500,000). All remaining outstanding principal is due and payable in a single balloon payment at maturity. The amortization schedule is summarized as follows:
Prepayment. Term Loan A is voluntarily prepayable at par, in whole or in part, at any time without premium or penalty, subject to customary breakage costs for SOFR-based borrowings. In addition, the Commitment Letter contemplates mandatory prepayments from the following sources:
(a) Asset Sales. Net cash proceeds from asset sales or other dispositions outside the ordinary course of business, subject to customary reinvestment rights (reinvestment period to be negotiated, expected 12–18 months) and a de minimis threshold (to be negotiated).
(b) Excess Cash Flow Sweep. 50% of Excess Cash Flow above a threshold to be negotiated in the definitive credit agreement. The definition of "Excess Cash Flow" will be a key drafting point; we recommend that it include customary deductions for capital expenditures, scheduled debt service, permitted acquisitions funded with internal cash, and earnout payments made under the SPA.
(c) Insurance and Condemnation Proceeds. Net cash proceeds from insurance recoveries or condemnation awards in excess of amounts applied to repair or replace the affected assets, subject to customary reinvestment rights.
(d) Debt Incurrence. Net cash proceeds from the incurrence of indebtedness not permitted under the credit agreement.
Funding. Term Loan A will be funded in a single draw at closing. No re-borrowing of repaid or prepaid amounts is permitted.
Use of Proceeds. The proceeds of Term Loan A will be used to finance, in part, the Acquisition consideration, including the base purchase price of $220,000,000, escrow deposits, and related transaction costs, as further described in the Sources and Uses summary in Section II.C below.
B. Revolving Credit Facility
The Revolver provides SBI with post-closing liquidity for working capital, general corporate purposes, and permitted acquisitions. The principal terms are as follows:
Borrower. Solstice Biomedical, Inc.
Guarantor. Solstice Biomedical Devices Ltd.
Facility Amount. $50,000,000.
Maturity. Five (5) years from the closing date, co-terminus with Term Loan A.
Interest Rate. SOFR plus 2.00% per annum. The same SOFR credit spread adjustment provisions and default rate provisions applicable to Term Loan A also apply to borrowings under the Revolver. We note that the Revolver carries a spread that is 0.25% lower than Term Loan A, which is consistent with market convention for revolving facilities that have a commitment fee component.
Commitment Fee. A commitment fee of 0.375% per annum on undrawn and uncanceled commitments under the Revolver, payable quarterly in arrears. The commitment fee is subject to a step-down to 0.25% per annum upon the achievement and maintenance of a Total Net Leverage Ratio below 2.50:1.00. Given the expected opening leverage (discussed in Section VIII below), the step-down is not expected to be triggered for several years.
Letters of Credit Sub-Facility. Up to $10,000,000 of the Revolver may be utilized for the issuance of standby and commercial letters of credit by Tidewater (as issuing bank). Letters of credit issued under this sub-facility reduce availability under the Revolver on a dollar-for-dollar basis.
Swingline Sub-Facility. Up to $5,000,000 of the Revolver may be utilized for same-day borrowings ("swingline loans") made by Tidewater. Swingline loans reduce availability under the Revolver on a dollar-for-dollar basis and bear interest at a base rate to be specified in the definitive credit agreement.
Status at Closing. The Revolver will be undrawn at closing and will be available for borrowing immediately following the closing of the Acquisition. The full $50,000,000 of Revolver capacity will be available to SBI and its subsidiaries (including Meridian, post-acquisition) for working capital, general corporate purposes, and permitted acquisitions, subject to the terms of the definitive credit agreement.
Use of Proceeds. Working capital needs, general corporate purposes, and permitted acquisitions, in each case of SBI and its subsidiaries.
C. Sources and Uses Summary
The following table sets forth the anticipated sources and uses of funds for the Acquisition, based on the terms of the Commitment Letter and the current draft of the SPA. All amounts are subject to final adjustment at closing based on the working capital adjustment, payoff amounts, and finalized transaction costs.
Sources of Funds
Uses of Funds
The closing cash consideration to Sellers of approximately $182,108,177.84 is derived as follows: the base purchase price of $220,000,000, minus the $26,400,000 indemnity escrow holdback, minus the $7,341,822.16 payoff of Meridian's existing credit facility with Ironclad Commercial Lending, LLC, minus $4,825,000 in Sellers' transaction expenses to be deducted at closing, plus $675,000 in estimated net working capital surplus (reflecting the estimated excess of Meridian's closing net working capital over the target net working capital as specified in the SPA).
The Buyer transaction cost estimate of approximately $3,500,000 includes, among other items, Calderwood & Harkness LLP legal fees, the Bancroft Sloane & Co. advisory fee (financial advisor to Solstice), the Brindoval & Albright LLP accounting advisory fee, and other customary closing costs.
Important Note: The Revolver ($50,000,000) remains undrawn at closing and is not included in the closing sources and uses. The Revolver will be available for post-closing working capital and general corporate purposes.
III. Security and Guaranty Package
A. Guaranty
The Commitment Letter requires the following guaranty structure to support the obligations of SBI under the Facilities:
upstream Guaranty. Solstice Biomedical Devices Ltd. (as the Irish parent of SBI) will provide an upstream guaranty of all obligations of SBI under the credit facilities, including principal, interest, fees, expenses, and all other amounts owing under the definitive credit agreement, the related security documents, and any interest rate hedging agreements entered into with Tidewater or its affiliates.
Downstream Guaranty. Meridian Surgical Technologies, Inc. (post-closing, as a wholly owned subsidiary of SBI) will provide a downstream guaranty of all obligations of SBI under the credit facilities. This guaranty will be delivered on the closing date, contemporaneous with the closing of the Acquisition.
Terms of Guaranty. Each guaranty is to be full, absolute, and unconditional, and the obligations of the guarantors are to be joint and several. The guaranties will be in form and substance satisfactory to Tidewater and will contain customary waivers of suretyship defenses, rights of subrogation (until all obligations are paid in full), and contribution rights (among co-guarantors).
B. Security / Collateral
The Commitment Letter requires a first-priority perfected security interest in substantially all assets of SBI and Meridian (post-closing), as well as certain equity pledges. The collateral package is summarized below:
Personal Property. SBI and Meridian (post-closing) are required to grant to Tidewater (as administrative agent for the benefit of the lenders) a first-priority perfected security interest in all of their respective personal property, including without limitation:
(a) All accounts receivable;
(b) All inventory;
(c) All equipment;
(d) All general intangibles, including intellectual property (patents, trademarks, copyrights, trade secrets, and associated goodwill);
(e) All investment property;
(f) All deposit accounts;
(g) All instruments and documents;
(h) All chattel paper (whether tangible or electronic); and
(i) All other personal property of every kind and description, together with all proceeds and products thereof.
Equity Pledges. The collateral package includes the following equity interest pledges:
(a) Pledge by SBI of 100% of the equity interests in Meridian Surgical Technologies, Inc. (to be delivered at closing upon completion of the Acquisition);
(b) Pledge by Solstice Biomedical Devices Ltd. of 100% of the equity interests in SBI, provided, however, that the pledge of equity interests in any foreign subsidiary (i.e., any subsidiary organized under the laws of a jurisdiction outside the United States) is limited to 65% of the voting stock of such foreign subsidiary for U.S. federal income tax efficiency purposes (avoidance of deemed repatriation of CFC earnings). Given that SBI is a Delaware corporation, this 65% limitation does not apply to the pledge of SBI equity by Solstice; rather, the limitation is relevant to any future non-U.S. subsidiaries that SBI or Meridian may form or acquire.
Real Property. The Commitment Letter contemplates that Tidewater may require a mortgage on the Meridian manufacturing facility located at 45 Forge Creek Road, Exton, Pennsylvania 19341, if such facility is owned by Meridian or any of its subsidiaries. Our diligence to date indicates that this facility is leased by Meridian pursuant to a commercial lease agreement, rather than owned. We recommend seeking clarification from Tidewater on this point and, if the facility is confirmed to be leased, requesting removal of the mortgage requirement. In lieu of a mortgage, Tidewater may require a landlord waiver or consent, which is addressed in the post-closing covenants described in Section VII.A below.
Exclusions. The collateral package is subject to customary exclusions for: (i) assets where the cost of perfection would be disproportionate to the value and benefit to the lenders (e.g., motor vehicles, letter-of-credit rights, certain commercial tort claims under a de minimis threshold); (ii) deposit accounts with balances under $100,000; and (iii) equity interests in certain immaterial subsidiaries (to be defined in the definitive credit agreement, typically based on a revenue or asset threshold).
Analysis and Recommendation. We recommend the following actions with respect to the security package:
First, confirm through the diligence process whether the Exton manufacturing facility is owned or leased by Meridian. As noted, our preliminary review suggests a lease arrangement. If the facility is leased, a landlord waiver or consent from the landlord will likely be required to permit Tidewater's security interest in Meridian's leasehold improvements, equipment, and other assets located at the premises. The post-closing covenant currently provides 90 days for delivery of landlord waivers.
Second, the pledge of intellectual property as collateral will implicate the license agreement between Meridian and Polytechnic Innovations, Ltd. (the "Polytechnic License"), pursuant to which Meridian holds an exclusive license to certain navigation and imaging software technologies used in the ArthroNav surgical navigation platform. We need to confirm whether the Polytechnic License contains any anti-assignment provisions, change-of-control restrictions, or prohibitions on granting liens or security interests in the licensed intellectual property. If such restrictions exist, granting a security interest in the licensed IP to Tidewater could constitute a breach of the Polytechnic License. Andrew Fitzpatrick is reviewing the Polytechnic License for these provisions, and we expect to report our findings separately.
Third, we note that the security interest in intellectual property will require filings with the United States Patent and Trademark Office ("USPTO") and, potentially, the United States Copyright Office, in addition to UCC-1 financing statement filings with the applicable state Secretaries of State. The post-closing covenant provides 30 days for completion of these filings.
IV. Conditions Precedent to Funding
The Commitment Letter sets forth a number of conditions that must be satisfied (or waived by Tidewater) prior to the initial funding of Term Loan A and the availability of the Revolver. These conditions are organized below into four categories: documentation conditions, financial and diligence conditions, insurance and regulatory conditions, and other conditions.
A. Documentation Conditions
The following documentation must be delivered to Tidewater as conditions precedent to funding:
1. Definitive Loan Documents. Execution and delivery of the definitive credit agreement and all related loan documents, including security agreements (personal property), pledge agreements (equity interests), the guaranty agreement, and any intercreditor agreement if required, all in form and substance satisfactory to Tidewater (as administrative agent).
2. Stock Purchase Agreement. Delivery of the executed Stock Purchase Agreement for the Acquisition, in form and substance consistent with the draft of the SPA previously provided to Tidewater in connection with the commitment process. The SPA must not have been amended, waived, or modified in any manner that is material and adverse to the interests of Tidewater, without Tidewater's prior consent.
3. Escrow Agreement. Delivery of the fully executed Escrow Agreement among SBI (as Buyer), Dr. Marcus Ellsworth (as Sellers' Representative), and Keystone Escrow Services, Inc. (as Escrow Agent), establishing the Indemnity Escrow and the Earnout Escrow Reserve in the amounts described in the Sources and Uses summary.
4. Organizational Documents. Certified copies of the organizational documents (certificates of incorporation/formation, bylaws, operating agreements, and all amendments thereto) of SBI, Solstice Biomedical Devices Ltd., and Meridian (post-Acquisition). Good standing certificates (or equivalent) for each such entity from their respective jurisdictions of organization and each jurisdiction where they are qualified to do business. In the case of Solstice Biomedical Devices Ltd., this would include a certificate of good standing or equivalent status from the Companies Registration Office in Ireland.
5. Authorizing Resolutions. Certified copies of board resolutions (and, if required, shareholder resolutions) of SBI, Solstice Biomedical Devices Ltd., and Meridian (post-Acquisition) authorizing the execution, delivery, and performance of the loan documents and the consummation of the transactions contemplated thereby.
6. Incumbency Certificates. Officer incumbency certificates for SBI, Solstice Biomedical Devices Ltd., and Meridian, identifying the officers authorized to execute the loan documents and deliver notices and certifications on behalf of the respective entities.
7. Solvency Certificate. A solvency certificate executed by the Chief Financial Officer of SBI (or, if acceptable to Tidewater, by Conor Muldoon in his capacity as CFO of Solstice Biomedical Devices Ltd.) confirming the solvency of SBI and its subsidiaries (including Meridian) on a consolidated basis after giving effect to the Acquisition, the incurrence of the credit facilities, and the payment of all transaction costs.
8. Legal Opinions. Legal opinions from (a) Calderwood & Harkness LLP, as counsel to SBI (the borrower), addressing customary matters including due authorization, enforceability, no conflicts, and perfection of security interests under the Uniform Commercial Code, and (b) Irish counsel to Solstice Biomedical Devices Ltd. (as guarantor), addressing due authorization, enforceability under Irish law, and such other matters as Tidewater and its counsel may reasonably request.
B. Financial and Diligence Conditions
1. Financial Statements. Receipt by Tidewater of: (a) the audited financial statements of Meridian for fiscal years 2021, 2022, and 2023, each audited by Dunfield & Associates, P.C. and prepared in accordance with U.S. generally accepted accounting principles ("GAAP"); and (b) unaudited interim financial statements of Meridian for the most recent fiscal quarter ending at least 45 days prior to the closing date (which, based on an expected closing date of October 31, 2024, would be the fiscal quarter ended June 30, 2024, with statements due no later than August 14, 2024).
2. No Material Adverse Effect. Absence of any Material Adverse Effect ("MAE") with respect to Meridian between the signing of the SPA and the closing date. The definition of "Material Adverse Effect" for purposes of the Commitment Letter is expected to track the MAE definition in the SPA, subject to customary carve-outs.
3. Representations and Warranties. The representations and warranties contained in the definitive credit agreement must be substantially consistent with (and "no worse than") the representations and warranties in the SPA. At closing, only the "Specified Representations" (as defined in the Commitment Letter and discussed in detail in Section VI below) must be accurate — this is the "SunGard" or "certain funds" construct.
4. Simultaneous Closing. Confirmation that the Acquisition is consummated simultaneously with the initial funding under the credit facilities, in accordance with the terms of the SPA, without any amendment, waiver, or modification that is material and adverse to the interests of Tidewater.
5. Payoff of Existing Debt. Receipt by Tidewater of a payoff letter from Ironclad Commercial Lending, LLC with respect to Meridian's existing $12,000,000 revolving credit facility (current outstanding balance approximately $7,341,822.16), together with evidence of the termination of such facility and the release of all liens securing the obligations thereunder. The payoff letter must include a commitment by Ironclad Commercial Lending, LLC to file UCC-3 termination statements promptly following receipt of the payoff amount.
C. Insurance and Regulatory Conditions
1. Representations and Warranties Insurance. Evidence that Buyer has obtained the representations and warranties insurance ("RWI") policy from Ridgeline Mutual Insurance Company (Policy No. RMI-RWI-2024-08172) with aggregate coverage of $40,000,000, consistent with the terms described in the draft SPA. The RWI policy must name Tidewater (as administrative agent) as an additional insured or loss payee to the extent of the lenders' interests in the collateral.
2. Property, Casualty, and Liability Insurance. Evidence of property, casualty, and comprehensive general liability insurance covering SBI, Meridian (post-closing), and the collateral, in amounts and with carriers satisfactory to Tidewater (acting reasonably). All property insurance policies must include a standard lender's loss payable endorsement naming Tidewater as loss payee, and all liability policies must name Tidewater as an additional insured.
3. No Legal Impediment. Confirmation that no legal impediment exists to the consummation of the Acquisition, including the absence of any injunction, restraining order, or other court or regulatory order or prohibition that would prevent or materially delay the closing of the Acquisition or the funding of the credit facilities.
4. HSR Act Compliance. With respect to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), it has been determined that the Acquisition does not require an HSR Act notification filing based on the applicable size-of-person test at the time of signing. No further action is required on this point.
D. Other Conditions
1. Fees and Expenses. Payment of all fees and expenses owing to Tidewater under the Commitment Letter and Fee Letter as of the closing date, including the commitment fee, the administrative agent fee, ticking fees (if any), and reimbursement of Tidewater's reasonable and documented out-of-pocket expenses (including the fees and disbursements of Harrington & Locke LLP, as Tidewater's legal counsel).
2. Funds Flow Memorandum. Delivery of a funds flow memorandum, in form and substance approved by Tidewater, detailing the disbursement of Term Loan A proceeds and equity contribution funds on the closing date, including wire transfer instructions for each payee.
3. Lien Searches. Delivery of lien search results (UCC, federal and state tax lien, and judgment lien searches) in all relevant jurisdictions for SBI and Meridian, confirming that no liens exist on the assets of Meridian other than: (a) permitted liens to be defined in the definitive credit agreement, or (b) liens that will be released and terminated at or prior to closing (including all liens securing Meridian's existing Ironclad Commercial Lending facility).
Analysis and Recommendation. The conditions precedent are generally consistent with market practice for healthcare M&A acquisition financings of this size and type. We offer the following specific recommendations:
First, we recommend confirming that the MAE definition in the Commitment Letter is backstopped by — and does not expand upon — the MAE definition in the SPA. Any gap between the two definitions could create a conditionality risk: Tidewater could argue that an event constituting an MAE under the Commitment Letter (but not under the SPA) excuses its obligation to fund, even though Buyer remains obligated to close the Acquisition. The MAE definitions should be precisely aligned.
Second, the documentation condition requiring loan documents "in form and substance satisfactory to Tidewater" must be carefully circumscribed to prevent Tidewater from exercising an effective veto over the credit agreement through objections to non-material terms. The "certain funds" principle, as discussed in Section VI below, should limit Tidewater's ability to invoke documentation impasses as a basis for declining to fund. We recommend including an express provision in the Commitment Letter (or a side letter) stating that, so long as the definitive credit agreement is consistent with the Term Sheet and customary for transactions of this type, Tidewater may not decline to fund based on documentation disagreements on matters not addressed in the Term Sheet.
Third, the 45-day lookback for interim financial statements should be confirmed as sufficient given the expected closing timeline. If closing slips beyond October 31, 2024, updated interim financials may be required, which could create logistical delays. We recommend building in flexibility by specifying that the most recent available interim financials as of the closing date (prepared on a basis consistent with past practice) will satisfy this condition.
V. Representations and Warranties in the Credit Agreement
The Commitment Letter specifies that the definitive credit agreement will contain representations and warranties customary for senior secured acquisition financings. Based on the Term Sheet, the anticipated representations include the following:
(a) Organization, good standing, and qualification to do business in each jurisdiction where the nature of the business or ownership of property requires such qualification;
(b) Due authorization, execution, delivery, and enforceability of the loan documents, and absence of conflicts with organizational documents, material contracts, or applicable law;
(c) Accuracy and completeness of financial statements delivered to Tidewater, and preparation thereof in accordance with GAAP (consistently applied);
(d) Absence of any Material Adverse Effect since the date of the most recent audited financial statements of Meridian;
(e) Compliance with applicable laws, including specifically FDA regulations and other healthcare regulatory requirements — this is of particular relevance given that Meridian's products (arthroscopic blades, powered shaver systems, and the ArthroNav surgical navigation platform under development) are subject to extensive FDA regulation under the Federal Food, Drug, and Cosmetic Act;
(f) Environmental matters, including compliance with Environmental Laws (as to be defined) and absence of material environmental liabilities;
(g) ERISA compliance, including the absence of underfunded pension plans or material ERISA liabilities;
(h) Tax matters, including the filing of all required tax returns and payment of all taxes, with appropriate exceptions for taxes being contested in good faith;
(i) intellectual property, including ownership of, or valid licenses to, all material intellectual property necessary to operate the business and the absence of material infringement claims — note: this representation must include a carve-out for the pending Hartwell litigation described below;
(j) Title to properties and assets, and absence of liens other than permitted liens;
(k) Maintenance of adequate insurance coverage;
(l) Labor and employment matters, including the absence of material labor disputes;
(m) Solvency of SBI and its subsidiaries (including Meridian) on a consolidated basis, after giving effect to the Acquisition and the incurrence of the credit facilities;
(n) Compliance with anti-corruption laws (including the U.S. Foreign Corrupt Practices Act and the Irish Criminal Justice (Corruption Offences) Act 2018), anti-money-laundering laws, and applicable sanctions programs administered by OFAC, the European Union, and the United Nations;
(o) Use of proceeds consistent with the terms of the credit agreement and not in violation of Regulation U or Regulation X of the Board of Governors of the Federal Reserve System.
Analysis and Recommendation. We offer the following guidance on the negotiation of the credit agreement representations:
First, as a general principle, the representations in the credit agreement should be no more onerous than those in the SPA. Where the SPA representations are qualified by knowledge, materiality, or dollar thresholds, the corresponding credit agreement representations should contain equivalent qualifications. This principle is a cornerstone of the "certain funds" construct and ensures that the Borrower is not placed in a worse position under the credit agreement than under the acquisition agreement.
Second, the intellectual property representation must expressly carve out the disclosed litigation involving Hartwell Orthopedic Solutions, Inc. (Civil Action No. 2:23-cv-04817, United States District Court for the Eastern District of Pennsylvania). This lawsuit, in which Hartwell alleges that certain Meridian arthroscopic blade designs infringe two of Hartwell's utility patents, has been fully disclosed in Meridian's disclosure schedules to the SPA. An unqualified representation of no IP infringement in the credit agreement could be immediately breached at closing, creating a potential event of default.
Third, the FDA compliance representations should be negotiated to be limited to material compliance with applicable FDA regulations. A flat representation of full compliance with all FDA requirements is impractical for any medical device manufacturer and would create unnecessary default risk. We recommend that the representation be formulated as: "SBI and its subsidiaries are in compliance in all material respects with all applicable rules, regulations, and orders of the FDA and any comparable state or foreign regulatory authority, except where the failure to be in compliance would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect."
Fourth, with respect to any representations concerning the ArthroNav surgical navigation platform, the representations should acknowledge that ArthroNav is a product under development that has not yet received FDA 510(k) clearance (with submission targeted for Q2 2025). No representation should be made as to the receipt or timing of FDA clearance for ArthroNav, as this is inherently uncertain and outside the Borrower's control.
VI. "SunGard" Certain-Funds Conditionality
The Commitment Letter contains a "certain funds" provision modeled on market precedent established in the SunGard transaction and subsequent acquisition financing practice. This provision is a critical borrower protection that limits the conditions to initial funding at closing, thereby ensuring that the financing commitment is robust and reliable.
Under the certain-funds construct, only the following representations (the "Specified Representations") must be true and correct at the time of initial funding:
(a) Organization, good standing, and power of SBI and the guarantors;
(b) Due authorization and enforceability of the loan documents;
(c) Compliance with Federal Reserve margin regulations (Regulations T, U, and X);
(d) Non-status as an "investment company" under the Investment Company Act of 1940;
(e) Solvency of SBI and its subsidiaries on a pro forma basis, after giving effect to the Acquisition and the incurrence of the credit facilities;
(f) Use of proceeds as described in the credit agreement;
(g) Compliance with anti-corruption laws, anti-money-laundering laws, and OFAC sanctions requirements; and
(h) Accuracy of the "Specified Acquisition Agreement Representations" — i.e., those representations and warranties in the SPA whose inaccuracy would give Buyer the right not to close the Acquisition under the bring-down condition in the SPA. These representations are brought down at closing only to the level of accuracy required by the SPA's closing conditions (typically, accuracy in all material respects, with representations already qualified by materiality required to be accurate in all respects).
The "full" representations — that is, all other representations and warranties contained in the definitive credit agreement beyond the Specified Representations — need only be true and correct in all material respects (or, where already qualified by a materiality qualifier or Material Adverse Effect qualifier, true and correct in all respects) at the time of initial funding. However, and this is the key feature of the certain-funds construct, a breach of such "full" representations at the time of initial funding does not constitute a failure of a condition precedent to funding. A breach of a "full" representation may only give rise to an Event of Default after closing, entitling the lenders to exercise their post-closing remedies, but Tidewater may not decline to fund on the basis of such a breach.
Analysis and Recommendation. The certain-funds construct is the single most important borrower protection in the Commitment Letter. It ensures that the financing commitment cannot be used as a back-door excuse not to fund, which would leave Solstice exposed to liability under the SPA (which does not contain a financing condition) without the cash resources needed to close. The current formulation appears generally consistent with market practice, but we recommend the following refinements:
(i) Alignment of Specified Acquisition Agreement Representations. We must confirm that the "Specified Acquisition Agreement Representations" in the credit agreement reference only those SPA representations whose failure to be true and correct would excuse Buyer from its obligation to close the Acquisition under the bring-down condition set forth in Section 7.2(a) of the draft SPA. If Tidewater attempts to include a broader set of SPA representations as "Specified Acquisition Agreement Representations," this would undermine the certain-funds construct by giving Tidewater the ability to decline to fund based on SPA representation breaches that would not excuse Buyer from closing. This alignment must be precise and unambiguous.
(ii) Known Matters. We recommend negotiating a provision that expressly states Tidewater may not decline to fund based on a breach of any "full" representation relating to a matter that was known to Tidewater (or disclosed to Tidewater) at the time of the Commitment Letter or during the due diligence process. This prevents a "reps refresher" for matters already in Tidewater's possession and ensures that the commitment is genuinely firm.
(iii) No Additional Conditions. We should confirm that the definitive credit agreement does not add conditions to initial funding beyond those specified in the Commitment Letter. The Term Sheet should include a provision expressly prohibiting the addition of new conditions precedent not contemplated by the Commitment Letter.
VII. Affirmative and Negative Covenants
A. Affirmative Covenants (Key Provisions)
The Commitment Letter contemplates that the definitive credit agreement will include affirmative covenants customary for senior secured acquisition financings. The key affirmative covenants are summarized below.
Financial Reporting. SBI will be required to deliver: (a) annual audited consolidated financial statements of SBI and its subsidiaries (including Meridian), audited by an accounting firm of recognized national standing, within 120 days after the end of each fiscal year; and (b) quarterly unaudited consolidated financial statements, within 45 days after the end of each of the first three fiscal quarters. All financial statements must be prepared in accordance with GAAP (consistently applied) and must include a balance sheet, income statement, and statement of cash flows.
Compliance Certificates. A compliance certificate, substantially in the form to be attached to the credit agreement, must be delivered quarterly, signed by the Chief Financial Officer of SBI (or, if the parties agree, by Conor Muldoon in his capacity as CFO of the parent, Solstice Biomedical Devices Ltd.). Each compliance certificate must set forth in reasonable detail the calculations demonstrating compliance with the financial covenants described in Section VIII below.
Annual Budgets. Delivery of an annual operating budget and business plan for SBI and its subsidiaries, within 60 days after the commencement of each fiscal year.
Maintenance Obligations. Maintenance of: (a) all material properties and assets in good working order and condition, ordinary wear and tear excepted; (b) adequate insurance coverage as required by Tidewater and the credit agreement; and (c) the corporate existence, rights, franchises, and privileges of SBI and each of its material subsidiaries.
Tax and Legal Compliance. Payment of all material taxes when due (except those being contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with GAAP), and compliance with all applicable laws, rules, and regulations, including specifically FDA regulations and other healthcare regulatory obligations applicable to the manufacture, marketing, distribution, and sale of Meridian's medical device products.
Notice of Defaults. Prompt notice (within five business days of a responsible officer obtaining knowledge thereof) of: (a) any event of default or event that, with the giving of notice or lapse of time or both, would constitute an event of default; (b) any material litigation, arbitration, or governmental investigation commenced against SBI or any of its subsidiaries; and (c) any event or condition that has had, or would reasonably be expected to have, a Material Adverse Effect.
Post-Closing Covenants. The following items are required to be delivered post-closing within the specified timeframes:
(a) Control Agreements. Delivery of deposit account control agreements for all deposit accounts of SBI and Meridian (other than excluded accounts) within 60 days of closing. These agreements grant Tidewater a perfected security interest in the deposit accounts.
(b) intellectual Property Security Filings. Delivery of executed intellectual property security agreements covering all registered patents, trademarks, and copyrights of SBI and Meridian, together with evidence of filings with the USPTO and, if applicable, the United States Copyright Office, within 30 days of closing.
(c) Landlord Waivers. Delivery of landlord waivers or consents for leased premises at which material assets of SBI or Meridian are located, including the Exton, Pennsylvania manufacturing facility (45 Forge Creek Road, Exton, PA 19341) and the King of Prussia, Pennsylvania headquarters, within 90 days of closing.
Maintenance of Certifications. The Commitment Letter requires, as part of the general affirmative covenant to maintain all material permits, licenses, and certifications, that SBI and Meridian maintain ISO 13485:2016 certification for the Exton manufacturing facility. Meridian's current ISO 13485:2016 certificate is Certificate No. PCA-2022-04819, certified by Pinnacle Conformity Assessment Services, LLC, valid through April 2025. Renewal of this certification prior to its expiration will be an affirmative obligation under the credit agreement.
B. Negative Covenants (Key Provisions)
The Commitment Letter contemplates that the definitive credit agreement will include negative covenants restricting certain activities of SBI and its subsidiaries, in each case subject to negotiated baskets, carve-outs, and exceptions. The key negative covenants are summarized and analyzed below.
Limitations on Additional Indebtedness. SBI and its subsidiaries will be prohibited from incurring additional indebtedness except as permitted by the credit agreement. The Commitment Letter proposes a general basket of $5,000,000 for additional indebtedness not otherwise specifically permitted. Additional customary carve-outs are expected for capital leases, purchase money indebtedness, intercompany indebtedness, and indebtedness assumed in permitted acquisitions.
Limitations on Liens. SBI and its subsidiaries will be prohibited from granting or permitting any lien on their assets, except for customary "permitted liens," which typically include: liens securing the credit facilities, purchase money liens, statutory liens (tax, landlord, mechanic's), liens arising in the ordinary course of business, and liens existing on assets acquired in permitted acquisitions (subject to limitations).
Limitations on Fundamental Changes. SBI and its subsidiaries will be restricted from engaging in mergers, consolidations, dissolutions, or other fundamental changes in corporate structure or identity. Note: This covenant must be drafted to accommodate any future restructuring within the Solstice group, including the potential interposition of an intermediate holding company between Solstice Biomedical Devices Ltd. and SBI, or any post-closing reorganization of the Meridian subsidiary structure.
Limitations on Asset Sales. SBI and its subsidiaries will be restricted from selling, transferring, or otherwise disposing of assets outside the ordinary course of business, subject to customary reinvestment rights and a de minimis basket. Net proceeds from asset sales not reinvested within the applicable reinvestment period will be subject to mandatory prepayment of Term Loan A.
Limitations on Investments and Acquisitions. SBI and its subsidiaries will be restricted from making investments or acquisitions except as specifically permitted. The Commitment Letter proposes a permitted acquisition basket with a threshold of $15,000,000 per individual acquisition and $25,000,000 in the aggregate, in each case without lender consent, subject to compliance with financial covenants on a pro forma basis and delivery of a compliance certificate. Acquisitions exceeding these thresholds would require Tidewater's consent.
Limitations on Restricted Payments. SBI and its subsidiaries will be restricted from making dividends, distributions, or other restricted payments (including share repurchases), subject to negotiated exceptions. Note: This covenant must be carefully calibrated to accommodate upstream distributions from SBI to Solstice Biomedical Devices Ltd. (the Irish parent) for tax payments, corporate overhead allocations, management fees, and similar items necessary for the operation of the Solstice group. Failure to include adequate carve-outs for these upstream payments could create operational difficulties for the broader Solstice enterprise.
Limitations on Transactions with Affiliates. SBI and its subsidiaries will be prohibited from entering into transactions with affiliates except on arm's-length terms. Note: The Polytechnic Innovations, Ltd. license agreement, which provides for payment of a royalty of 2.5% of net ArthroNav sales, should be specifically identified as a pre-existing third-party contract that is expressly permitted under the credit agreement. Although Polytechnic Innovations is not an affiliate of Solstice, the covenant should be reviewed to ensure that it does not inadvertently restrict intercompany transactions between SBI, Meridian, and the broader Solstice group that are conducted on arm's-length terms.
Limitations on Modifications to Acquisition Documents. SBI will be restricted from amending, modifying, waiving, or consenting to any change in the terms of the SPA, the earnout provisions, or the escrow arrangements with Keystone Escrow Services, Inc., without the prior consent of Tidewater.
Limitations on Changes to Fiscal Year and Accounting Practices. SBI and its subsidiaries will be prohibited from changing their fiscal year end or making material changes to accounting policies or practices, except as required by GAAP.
Analysis and Recommendation. The negative covenants present several areas requiring focused negotiation:
First, the restriction on modifications to the SPA and earnout provisions is broadly drafted and may impinge on Buyer's operational flexibility regarding the earnout. The SPA contemplates an earnout of up to $35,000,000 based on the achievement of certain milestones related to the ArthroNav platform (including FDA clearance milestones and revenue targets through June 30, 2027). The ordinary-course operation of the earnout — including milestone determinations, dispute resolution proceedings under the SPA's earnout dispute mechanism, and the actual payment of earned amounts — should not require Tidewater's consent. We recommend carving out: (i) waivers, amendments, or consents under the SPA that are not materially adverse to the interests of Tidewater; and (ii) post-closing earnout determinations, calculations, and dispute resolution proceedings contemplated by the SPA.
Second, the restricted payments covenant must be calibrated to permit necessary upstream payments from SBI to Solstice Biomedical Devices Ltd. for: (a) Irish and U.S. tax obligations of the Solstice group attributable to SBI's operations; (b) corporate overhead allocations for centralized services provided by the parent; (c) intercompany management fees pursuant to any intercompany services agreement; and (d) general cash management within the Solstice group, subject to compliance with financial covenants and the absence of any event of default.
Third, the permitted acquisition basket ($15M individual / $25M aggregate) is adequate for near-term purposes, but Solstice should consider whether the aggregate cap is sufficient for the five-year term of the facilities, given Solstice's growth strategy in the surgical navigation and orthopedic device space. We may seek a step-up in the aggregate basket upon achievement of certain deleveraging milestones.
VIII. Financial Covenants
The Commitment Letter specifies three maintenance-based financial covenants that will be tested quarterly throughout the life of the Facilities. The covenants and associated step-down schedules are as follows:
Total Net Leverage Ratio. The maximum permitted Total Net Leverage Ratio (defined as the ratio of Consolidated Total Debt minus unrestricted cash and cash equivalents to Consolidated EBITDA for the trailing four fiscal quarters) is as follows:
Interest Coverage Ratio. The minimum Interest Coverage Ratio (defined as the ratio of Consolidated EBITDA to Consolidated Interest Expense for the trailing four fiscal quarters) is 2.50:1.00 at all times, tested quarterly.
Fixed Charge Coverage Ratio. The minimum Fixed Charge Coverage Ratio (defined as the ratio of (Consolidated EBITDA minus capital expenditures minus cash taxes paid) to (scheduled debt service plus restricted payments), for the trailing four fiscal quarters) is 1.20:1.00, tested quarterly.
Equity Cure Right. The Commitment Letter permits the Borrower to exercise an equity cure right to remedy financial covenant breaches. The equity cure is subject to the following limitations:
(a) The equity cure may be exercised a maximum of two (2) times in any four consecutive fiscal quarter period;
(b) The equity cure may be exercised a maximum of four (4) times during the entire life of the Facilities;
(c) The equity cure must take the form of a cash equity contribution from Solstice Biomedical Devices Ltd. to SBI;
(d) The equity cure amount shall be treated as EBITDA for purposes of calculating financial covenants in the relevant quarter (i.e., the amount is added to EBITDA in the numerator, not applied to reduce debt in the denominator);
(e) The equity cure amount in any single quarter is subject to a cap (to be negotiated in the definitive credit agreement); and
(f) The equity cure must be funded within a specified number of business days after delivery of the compliance certificate for the applicable quarter (typically 10–15 business days).
Analysis and Recommendation — Critical Issue. The financial covenant structure presents what we view as the single most significant open issue in the Commitment Letter negotiation. The issue centers on the level at which the financial covenants are tested.
The Commitment Letter states that the financial covenants are tested on a "trailing four-quarter consolidated EBITDA basis for SBI and its subsidiaries (including Meridian post-acquisition)." On its face, this language suggests that the covenants are tested at the consolidated SBI level — that is, using only the EBITDA of SBI and Meridian, not the EBITDA of the broader Solstice group.
If this reading is correct, the implications are significant: