CALDERWOOD & HARKNESS LLP Counselors at Law 590 Lexington Avenue, 35th Floor New York, NY 10022 Telephone: (212) 554-7200 Facsimile: (212) 554-7201 www.calderwoodharkness.com
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
November 5, 2024
TO:
Patrick Lennox, General Counsel & Company Secretary, Solstice Biomedical Devices Ltd.
Helena Byrne, EVP, Corporate Development & Strategy, Solstice Biomedical Devices Ltd.
Dr. Niamh Cassidy, VP, Regulatory Affairs, Solstice Biomedical Devices Ltd.
FROM:
Beatrice Holloway, Partner — Calderwood & Harkness LLP
Tiffany Rosenthal, Lead Associate — Calderwood & Harkness LLP
RE:
Earnout Compliance Obligations and Milestone Tracking — Acquisition of Meridian Surgical Technologies, Inc. (Stock Purchase Agreement dated August 20, 2024; Closing Date October 31, 2024)
Matter No.: 1037-00006
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I. Executive Summary and Purpose
This memorandum provides internal legal guidance to Solstice Biomedical Devices Ltd. ("Solstice" or "SBD") and its wholly owned subsidiary Solstice Biomedical, Inc. ("SBI" or "Buyer") regarding the earnout covenant obligations assumed under the Stock Purchase Agreement dated August 20, 2024 (the "SPA") in connection with SBI's acquisition of 100% of the outstanding common stock and vested options of Meridian Surgical Technologies, Inc. ("Meridian" or "MST") for a base purchase price of Two Hundred Twenty Million Dollars ($220,000,000). The closing of the transaction occurred on October 31, 2024 (the "Closing Date"), and Meridian is now a wholly owned subsidiary of SBI. As previously discussed with the Solstice deal team and board, the SPA provides for additional earnout consideration of up to Thirty-Five Million Dollars ($35,000,000) in cash, contingent upon the achievement of two FDA regulatory milestones relating to Meridian's ArthroNav Robotic-Assisted Arthroscopy platform (the "ArthroNav Platform" or "ArthroNav"). The maximum aggregate consideration payable under the SPA, inclusive of the base purchase price and the full earnout, is therefore Two Hundred Fifty-Five Million Dollars ($255,000,000).
The purpose of this memorandum is fivefold:
1. To identify and explain each earnout-related covenant obligation imposed on the Buyer under the SPA, including the commercially reasonable efforts standard, the minimum R&D budget requirement, restrictions on key personnel, and the prohibition on discontinuation or abandonment of the ArthroNav program;
2. To recommend compliance procedures and internal governance mechanisms designed to ensure that Solstice and SBI satisfy their earnout covenant obligations in full and create a contemporaneous record of compliance;
3. To summarize the milestone definitions, deadlines, and payment mechanics governing the earnout consideration;
4. To explain the Earnout Escrow Reserve mechanics, including the structure, release conditions, and investment provisions of the escrow; and
5. To outline the dispute resolution framework applicable to earnout-related disagreements between the Buyer and the Sellers' Representative.
We note that Dr. Marcus Ellsworth, the former co-founder and Chief Executive Officer of Meridian, serves as the Sellers' Representative under the SPA. In that capacity, Dr. Ellsworth has authority to act on behalf of all Sellers with respect to earnout determinations, indemnification claims, escrow release matters, and all post-closing matters under the SPA requiring Sellers' Representative involvement. All communications with Dr. Ellsworth in his capacity as Sellers' Representative should be coordinated through Patrick Lennox's office, with a copy to Calderwood & Harkness, to ensure consistency and privilege protections.
This memorandum should be treated as privileged and confidential attorney-client communication and should not be distributed outside of the Solstice internal legal and management team without prior consultation with Calderwood & Harkness LLP.
II. Overview of the Earnout Structure
A. Earnout Milestones and Payment Amounts
The SPA establishes two discrete earnout milestones, each tied to a specific FDA regulatory clearance event relating to the ArthroNav Platform. The milestones and corresponding payment amounts are as follows:
Milestone 1: ArthroNav Generation 1.0 — FDA 510(k) Clearance
Milestone 1 is achieved upon the receipt of FDA 510(k) clearance of the ArthroNav Robotic-Assisted Arthroscopy System (Generation 1.0) on or before December 31, 2026. Upon achievement of Milestone 1, Buyer is obligated to pay an earnout amount of Twenty Million Dollars ($20,000,000) to the Sellers (allocated pro rata among all Sellers based on their respective percentage interests in the aggregate closing consideration).
Milestone 2: ArthroNav Generation 2.0 Software Module — FDA 510(k) Clearance
Milestone 2 is achieved upon the receipt of FDA 510(k) clearance of the ArthroNav Software Module for Real-Time Cartilage Mapping (Generation 2.0 upgrade) on or before June 30, 2027. Upon achievement of Milestone 2, Buyer is obligated to pay an additional earnout amount of Fifteen Million Dollars ($15,000,000) to the Sellers (allocated pro rata among all Sellers on the same basis as Milestone 1).
The total potential earnout consideration under the SPA is therefore Thirty-Five Million Dollars ($35,000,000), resulting in maximum aggregate consideration (base purchase price plus full earnout) of Two Hundred Fifty-Five Million Dollars ($255,000,000).
Each milestone is independent. Achievement of Milestone 2 is not conditioned on prior achievement of Milestone 1, although from a practical and regulatory standpoint, the Generation 2.0 Software Module is designed to operate in conjunction with the Generation 1.0 hardware platform. As discussed further below, the Buyer's regulatory team should assess whether a separate 510(k) submission or a supplement to the Generation 1.0 clearance is the appropriate regulatory pathway for Milestone 2.
B. Earnout Period
The Earnout Period commences on the Closing Date (October 31, 2024) and expires on June 30, 2027 (the "Earnout Expiration Date"). All earnout-related obligations of the Buyer, including the covenant obligations described in Section III below, are operative during the Earnout Period. Following the Earnout Expiration Date, Buyer's earnout obligations terminate, and any unachieved milestones are forfeited by the Sellers.
It is important to note that Milestone 1 has an earlier sub-deadline of December 31, 2026 within the broader Earnout Period. This means the Buyer has approximately twenty-six (26) months from the Closing Date to achieve Milestone 1, but the full Earnout Period of approximately thirty-two (32) months applies to Milestone 2. The difference of six months between the Milestone 1 sub-deadline and the Earnout Expiration Date is significant from a regulatory planning standpoint, as it creates a compressed window for completing the Generation 1.0 510(k) clearance process. Given that the typical FDA 510(k) review cycle is ninety (90) days from acceptance of the submission (and frequently longer when additional information requests are issued), the Buyer's internal regulatory timeline should build in appropriate contingency periods.
C. Nature of Milestones — Regulatory, Not Financial
A critical feature of the earnout structure under the SPA is that both milestones are tied exclusively to FDA 510(k) clearance decisions. Unlike many acquisition earnout structures, which condition contingent payments on the achievement of financial performance metrics (e.g., revenue targets, EBITDA thresholds, or sales volume benchmarks), the milestones here are regulatory in nature. This has several implications for compliance planning:
First, the determination of milestone achievement is binary — either the FDA issues a 510(k) clearance letter for the applicable ArthroNav product on or before the applicable deadline, or it does not. There is no partial achievement or graduated payment scale.
Second, because the milestones depend on FDA action, achievement is subject to inherent regulatory uncertainty. The Buyer cannot control the pace or outcome of FDA review, and adverse FDA actions (e.g., additional information requests, clinical data requirements, or not-substantially-equivalent determinations) could delay or prevent milestone achievement regardless of the Buyer's efforts.
Third, the commercially reasonable efforts standard (discussed in Section III.A below) takes on particular significance in the regulatory context, as it requires the Buyer to diligently pursue the 510(k) submissions while recognizing the limits of what any applicant can control in the FDA clearance process.
The predicate device identified for the ArthroNav Platform's 510(k) pathway is the Marlowe Asset Management Robotic Surgical Assist System (K203847), which received FDA 510(k) clearance in 2021. Meridian's regulatory team conducted a pre-submission (Q-Sub) meeting with the FDA's Center for Devices and Radiological Health (CDRH) in March 2024, at which the FDA provided preliminary feedback on the proposed substantial equivalence argument and testing requirements for the ArthroNav Generation 1.0 device. Based on the outcome of that Q-Sub meeting, Meridian's 510(k) submission for Milestone 1 was targeted for the second quarter of 2025. This timeline remains the baseline for internal planning purposes, and any material deviation should be promptly communicated to General Counsel and Calderwood & Harkness.
The relevant technical and regulatory expertise resides principally with Dr. Niamh Cassidy (Solstice VP, Regulatory Affairs), who will oversee the regulatory strategy and FDA interactions from the Buyer's side, and Dr. Raj Subramanian (CTO and architect of the ArthroNav Platform, now SVP, ArthroNav Development under his employment agreement with SBI), who leads the engineering and development work underlying both the Generation 1.0 and Generation 2.0 products. The collaboration between Dr. Cassidy and Dr. Subramanian will be essential to the Buyer's earnout compliance efforts.
III. Buyer's Affirmative Earnout Covenants Under the SPA
The SPA imposes four principal categories of affirmative earnout covenants on the Buyer during the Earnout Period. Each covenant is described in detail below, together with our compliance recommendations. Failure to satisfy these covenants could expose the Buyer to a claim by the Sellers' Representative that the Buyer breached its earnout obligations, potentially triggering the dispute resolution mechanism described in Section VII and, in a worst-case scenario, liability for the earnout amounts irrespective of whether the milestones were actually achieved.
A. Commercially Reasonable Efforts to Pursue 510(k) Submissions
The SPA requires the Buyer to use "commercially reasonable efforts" to pursue 510(k) submissions for both Generation 1.0 and Generation 2.0 of the ArthroNav Platform during the Earnout Period. This is the central and most broadly applicable covenant in the earnout framework.
The SPA defines "commercially reasonable efforts" as:
efforts consistent with those a similarly situated company in the medical device industry would use to advance a product through the FDA 510(k) regulatory pathway, taking into account scientific, regulatory, commercial, and other relevant considerations, but not requiring Buyer to take any action that would be commercially unreasonable or to incur expenditures materially in excess of the minimum R&D budget covenant.
This definition is noteworthy in several respects. It is calibrated to the medical device industry, which provides a relevant benchmark for assessing reasonableness. It incorporates a multi-factor balancing test (scientific, regulatory, commercial, and "other relevant considerations"), which affords the Buyer some flexibility in making strategic decisions about the regulatory pathway. Importantly, however, it expressly states that the Buyer is not required to incur expenditures "materially in excess" of the minimum R&D budget covenant (discussed in Section III.B below), which effectively creates a ceiling on the Buyer's spending obligation. The word "materially" introduces a margin of ambiguity — the Buyer is not strictly limited to the $6,000,000 annual minimum, but neither is it required to devote unlimited resources.
Compliance Recommendation: We strongly recommend that the Solstice and SBI teams document all regulatory strategy decisions, correspondence with the FDA, internal R&D milestone reviews, and resource allocation decisions related to the ArthroNav Platform in order to create a contemporaneous record of commercially reasonable efforts compliance. In the event of a dispute, the existence of a well-documented paper trail demonstrating the Buyer's good-faith pursuit of the 510(k) submissions will be critical to defending against a claim of covenant breach. Specific documentation practices should include:
• Maintaining written records of all FDA correspondence, including pre-submission meeting minutes, formal deficiency responses, and informal communications with FDA reviewers;
• Preparing written summaries of internal regulatory strategy meetings, including attendees, decisions made, and rationale for any changes in regulatory approach;
• Documenting any decisions to modify the scope, design, or testing plan for the ArthroNav products, together with the scientific, regulatory, or commercial justifications for such decisions;
• Retaining copies of internal budget approvals and resource allocation decisions related to ArthroNav R&D; and
• Tracking key personnel assignments and time commitments to the ArthroNav program.
B. Minimum Annual ArthroNav R&D Budget
Covenant: The SPA requires the Buyer to maintain a dedicated R&D budget of no less than Six Million Dollars ($6,000,000) per year for the ArthroNav Platform during the Earnout Period.
This covenant establishes a concrete, quantifiable floor for the Buyer's financial commitment to ArthroNav development. It complements the commercially reasonable efforts obligation by ensuring that the Buyer cannot satisfy the efforts standard while simultaneously starving the program of resources. The minimum budget is measured on a calendar-year basis.
Stub Period Proration: Because the Closing Date occurred on October 31, 2024, the initial period from closing through December 31, 2024 represents a partial year (approximately two months). The SPA does not expressly address whether the $6,000,000 annual minimum applies on a prorated basis for this stub period or whether it is a full-year minimum that applies only to each of calendar years 2025, 2026, and the partial year 2027 (through June 30, 2027). Calderwood & Harkness recommends that the Buyer confirm with the Sellers' Representative whether proration applies for the November–December 2024 period. Until this question is resolved, we recommend that the Buyer budget conservatively on the assumption that the $6,000,000 minimum applies to each full calendar year (2025 and 2026) and that proportional application (i.e., $3,000,000 for the six-month period January 1–June 30, 2027) applies to the final partial year of the Earnout Period. For the November–December 2024 stub, a prorated amount of approximately $1,000,000 would be a reasonable conservative assumption pending clarification.
Internal Budget Tracking: We recommend that Conor Muldoon, Chief Financial Officer, establish a discrete cost center for ArthroNav R&D expenditures within SBI's books and records. This cost center should capture all expenditures directly attributable to the ArthroNav program, with monthly internal reporting to General Counsel. The establishment of a separate cost center serves two purposes: it ensures that the Buyer can readily demonstrate compliance with the minimum budget covenant at any point during the Earnout Period, and it facilitates internal management oversight of the ArthroNav program.
Qualifying Budget Items: The following categories of expenditures should be treated as qualifying ArthroNav R&D expenditures for purposes of the minimum budget covenant:
• Personnel costs: Salaries, benefits, and related compensation for members of the ArthroNav development team, including Dr. Subramanian and his direct reports, to the extent their time is dedicated to the ArthroNav program;
• Contract research and testing: Costs incurred for third-party testing services, including bench testing, verification and validation studies, biocompatibility testing, electrical safety testing, and any clinical evaluation studies required by the FDA;
• FDA submission preparation costs: Costs of regulatory consultants engaged to assist with 510(k) submission preparation, FDA filing fees, and related regulatory expenses;
• Prototyping and engineering: Costs of materials, components, and engineering resources used in the design, development, and iteration of ArthroNav hardware and software;
• Clinical evaluation costs: Costs of any clinical studies, human factors studies, or clinical data collection activities required to support the 510(k) submissions; and
• Related overhead: Overhead costs directly attributable to ArthroNav development, including allocated facility costs for dedicated ArthroNav lab and development space, equipment depreciation, and similar items.
The Buyer should maintain records sufficient to demonstrate compliance with the minimum budget covenant at any point during the Earnout Period. If the Sellers' Representative requests information regarding R&D budget compliance, the Buyer should consult with Calderwood & Harkness before providing any documentation or making any representations, to ensure that responses are consistent with the Buyer's obligations under the SPA and do not inadvertently create additional obligations or admissions.
C. Restriction on Diverting Key Personnel — Dr. Raj Subramanian
Covenant: The SPA provides that the Buyer may not divert Dr. Raj Subramanian from the ArthroNav program without the prior written consent of the Sellers' Representative (Dr. Marcus Ellsworth).
This covenant reflects the parties' recognition that Dr. Subramanian's continued leadership of the ArthroNav development program is critical to the likelihood of achieving the FDA clearance milestones. Dr. Subramanian is the original architect of the ArthroNav Platform and possesses deep institutional knowledge of the device's design, engineering, regulatory history, and development roadmap. Dr. Subramanian now serves as SVP, ArthroNav Development under a three-year employment agreement with SBI (base salary of $410,000 per year), executed at the Closing on October 31, 2024. That employment agreement includes specific provisions regarding continuity of ArthroNav R&D program leadership, consistent with the earnout covenants in the SPA.
The term "divert" is not expressly defined in the SPA. In the absence of a contractual definition, Calderwood & Harkness recommends that the Buyer interpret the term broadly to include any of the following actions:
• Reassigning Dr. Subramanian to a different project, product line, or business unit within Solstice or SBI;
• Materially reducing Dr. Subramanian's role, responsibilities, or time commitment to the ArthroNav program (e.g., requiring him to spend a significant portion of his time on non-ArthroNav matters);
• Changing Dr. Subramanian's reporting structure in a manner that diminishes his authority over ArthroNav development decisions;
• Terminating Dr. Subramanian's employment without the prior written consent of the Sellers' Representative (except as noted below for voluntary resignation or for-cause termination); or
• Taking any other action that has the practical effect of removing Dr. Subramanian from day-to-day leadership of the ArthroNav program.
Compliance Recommendation: Any proposed change to Dr. Subramanian's role, reporting structure, allocation of responsibilities, or employment status should be vetted by legal counsel before implementation. If the proposed change could reasonably be characterized as a "diversion" under the SPA, the Buyer should seek written consent from Dr. Ellsworth (in his capacity as Sellers' Representative) with adequate lead time. The request for consent should be delivered in writing in accordance with the SPA's notice provisions, and the Sellers' Representative's response (whether consent, conditional consent, or refusal) should be documented in writing and retained in the earnout compliance file.
Exceptions — Voluntary Resignation and For-Cause Termination: If Dr. Subramanian voluntarily resigns from his position at SBI, or if Dr. Subramanian is terminated for cause under the terms of his employment agreement, the non-diversion covenant is not triggered. However, even in these circumstances, the Buyer should carefully document the facts and circumstances surrounding Dr. Subramanian's departure to protect against a later claim by the Sellers' Representative that the Buyer constructively diverted Dr. Subramanian (e.g., by creating a hostile work environment, materially reducing his responsibilities, or otherwise engineering his departure). We recommend that General Counsel consult with Calderwood & Harkness at the earliest sign of any dispute or dissatisfaction involving Dr. Subramanian's role or employment status.
D. Prohibition on discontinuation or Abandonment of ArthroNav Program
Covenant: The SPA provides that the Buyer may not discontinue or abandon the ArthroNav program without providing ninety (90) days' prior written notice to the Sellers' Representative.
This covenant is structured as a notice requirement, not a consent requirement. The SPA permits discontinuation of the ArthroNav program after the expiration of the 90-day notice period, provided the Buyer has complied with the notice obligation. However, the Sellers' Representative retains the right to invoke the dispute resolution process described in Section VII if the Sellers' Representative believes that the decision to discontinue the program constitutes a breach of the Buyer's other earnout covenants — specifically, the commercially reasonable efforts obligation or the minimum R&D budget covenant. In practical terms, a decision to discontinue the ArthroNav program before the milestones are achieved would likely be treated by the Sellers' Representative as a breach of the commercially reasonable efforts standard, and the Buyer should expect a dispute if such a decision is made.
Compliance Recommendation: Before any decision to scale back, pause, suspend, or discontinue ArthroNav development, the Buyer should conduct a thorough internal review with legal counsel to assess the following:
(a) Whether the proposed action triggers the 90-day notice obligation. The terms "Discontinue" and "abandon" are not precisely defined in the SPA, and the line between a temporary pause, a strategic redirection, and an outright discontinuation may not always be clear. Actions short of outright termination of the program — such as significant budget cuts, reassignment of key personnel, or indefinite deferral of the 510(k) submission — could potentially be characterized as constructive discontinuation by the Sellers' Representative.
(b) Whether the proposed action could be characterized as a breach of the commercially reasonable efforts standard, even if the 90-day notice is provided. The notice obligation does not insulate the Buyer from liability if the underlying decision to discontinue the program is itself unreasonable.
(c) Whether there are alternative actions — such as restructuring the development plan, engaging additional resources, or modifying the regulatory strategy — that would address the Buyer's concerns without triggering the notice obligation or creating breach risk.
If the Buyer determines that it must provide the 90-day discontinuation notice, the notice must be delivered in writing in accordance with the notice provisions of the SPA. The notice must be sent to Dr. Marcus Ellsworth at his designated address for notices, with a copy to Whitmore Crane & Pfeiffer LLP, One Liberty Place, 1650 Market Street, Suite 3600, Philadelphia, PA 19103, Attn: Jonathan Whitmore. The method of delivery should comply with the SPA's requirements (typically personal delivery, nationally recognized overnight courier, or certified mail, return receipt requested).
E. Summary Table of Key Earnout Covenant Obligations
The following table summarizes the Buyer's principal earnout covenant obligations for quick reference:
IV. Earnout Milestone Tracking — Recommended Internal Procedures
A. Regulatory Timeline and Critical Path
As noted in Section II.C above, the ArthroNav Platform's regulatory pathway is based on the FDA 510(k) premarket notification process, with the Marlowe Asset Management Robotic Surgical Assist System (K203847) as the predicate device. The current status of the regulatory program and the critical path milestones are as follows:
Current Status:
• A pre-submission (Q-Sub) meeting with FDA's CDRH was completed in March 2024. The FDA provided preliminary feedback on the proposed substantial equivalence argument, the applicable testing standards, and the type and extent of performance data expected in the 510(k) submission.
• Based on the Q-Sub feedback, the ArthroNav development team has been conducting bench testing, verification and validation activities, and software documentation in preparation for the Generation 1.0 510(k) submission.
• The 510(k) submission for the ArthroNav Generation 1.0 System is currently targeted for Q2 2025 (April–June 2025).
Key Internal Milestones to Track:
The following regulatory and development milestones represent the critical path items that the Buyer should track on an ongoing basis to monitor progress toward earnout milestone achievement:
1. Completion of bench testing and verification/validation (V&V) studies — including mechanical performance testing, electrical safety testing (IEC 60601-1 series), biocompatibility assessments (if applicable to patient-contacting components), software verification and validation (IEC 62304), and usability/human factors studies (IEC 62366-1);
2. Preparation and internal review of the 510(k) submission package — including the summary of substantial equivalence, device description, performance data, labeling, and all supporting documentation;
3. Pre-submission correspondence with FDA — if any additional Q-Sub meetings are warranted (e.g., to address questions arising from V&V results or to confirm the FDA's expectations regarding specific testing requirements);
4. Formal 510(k) filing date — the date on which the 510(k) submission is submitted to FDA via the electronic Submission Template and Resource (eSTAR) system;
5. FDA review clock start (acceptance/acknowledgment date) — the date on which FDA acknowledges receipt and acceptance of the 510(k) submission, which starts the statutory review clock;
6. FDA Additional Information (AI) requests and response deadlines — any AI requests issued by the FDA during the review process, together with the deadlines for Buyer's responses (which pause the FDA review clock);
7. 510(k) clearance decision — the issuance of a 510(k) clearance letter (or, alternatively, a not-substantially-equivalent determination or other adverse action) by FDA; and
8. Post-clearance actions — any conditions of clearance, post-market requirements, or labeling commitments imposed by FDA.
Milestone 2 — Generation 2.0 Software Module: The ArthroNav Software Module for Real-Time Cartilage Mapping (Generation 2.0 upgrade) is likely to require a separate 510(k) submission or, potentially, a supplement to the Generation 1.0 clearance, depending on the nature and extent of the software modifications. The proprietary cartilage mapping algorithms constitute trade secrets of Meridian that the Buyer now owns as a result of the acquisition. The regulatory pathway for a software-focused submission should be assessed by the Solstice regulatory team (Dr. Cassidy) in consultation with Dr. Subramanian, taking into account the FDA's guidance on software as a medical device (SaMD) and the applicable provisions of IEC 62304. We recommend that this assessment be completed no later than Q3 2025, to ensure adequate time for Generation 2.0 submission preparation within the Milestone 2 deadline of June 30, 2027.
B. Internal Reporting Cadence
To ensure that senior management and legal counsel have timely visibility into the status of earnout milestone progress, Calderwood & Harkness recommends the following internal reporting cadence:
Quarterly Status Reports: Dr. Raj Subramanian (or his designee within the ArthroNav development team) should prepare and distribute quarterly written status reports to Patrick Lennox, Helena Byrne, and Dr. Niamh Cassidy. Each quarterly report should summarize:
• R&D progress, including the status of V&V studies, design activities, and software development;
• Regulatory submission status, including any changes to the anticipated 510(k) filing timeline;
• Budget expenditures against the $6,000,000 annual minimum, broken down by major expenditure category;
• Any interactions with the FDA, including Q-Sub meetings, AI requests, or informal communications;
• Any potential risks to achieving the earnout milestones, including technical challenges, regulatory uncertainties, resource constraints, or personnel issues; and
• Recommended actions or decisions requiring management or legal counsel input.
Mid-Year and Year-End Reviews: In addition to the quarterly reports, we recommend a formal mid-year review (annually in June) and a year-end review (annually in December) with SBI leadership, including Patrick Lennox, Helena Byrne, Dr. Cassidy, Conor Muldoon, and Dr. Subramanian, to assess the earnout milestone trajectory and address any strategic or compliance issues. These reviews should be documented with written minutes and action items.
C. Document Retention
All documents, correspondence, internal memoranda, board materials, presentations, email communications, and other records related to the following topics should be retained for the duration of the Earnout Period plus an additional twenty-four (24) months (i.e., through June 30, 2029) to support any potential dispute resolution proceedings:
• ArthroNav development activities, R&D progress, and technical decisions;
• FDA submissions, correspondence, and interactions;
• Budget allocations, expenditures, and financial reporting related to the ArthroNav program;
• Employment and personnel matters relating to Dr. Subramanian, Dr. Ellsworth, Catherine Pryor, and other ArthroNav team members;
• Interactions and communications with the Sellers' Representative (Dr. Ellsworth);
• Board of directors and management committee materials referencing the ArthroNav program or the earnout; and
• Any materials generated in connection with the internal quarterly reports, mid-year reviews, and year-end reviews described above.
Patrick Lennox's office should issue a document retention directive to all relevant Solstice and SBI personnel to ensure compliance with this retention obligation. Calderwood & Harkness is available to assist with drafting the retention directive if requested.
V. Earnout Payment Mechanics
A. Determination of Milestone Achievement
Milestone achievement under the SPA is determined by the occurrence of a specific, objectively verifiable event: the issuance of an FDA 510(k) clearance letter for the applicable ArthroNav product on or before the applicable milestone deadline. Upon receipt of FDA 510(k) clearance, the Buyer is required to take the following steps:
1. Prompt Written Notification: The Buyer must promptly notify the Sellers' Representative in writing of the FDA clearance, specifying the date of clearance, the product cleared, and the applicable milestone achieved. The notice should be delivered in accordance with the SPA's notice provisions (see Section X below).
2. Copy of FDA Clearance Letter: The Buyer must provide the Sellers' Representative with a copy of the FDA 510(k) clearance letter (i.e., the "K-letter") issued by CDRH.
3. Payment: The applicable earnout payment is due within the timeframe specified in the SPA following FDA clearance. Calderwood & Harkness recommends that the Buyer confirm the exact payment window per the SPA — typically, earnout payment provisions specify a period of ten (10) to fifteen (15) business days following the clearance event. For planning purposes, the Buyer should be prepared to wire the applicable earnout amount within this window.
Payment Method: Earnout payments are made to the Sellers' Representative for distribution pro rata among the Sellers. The Buyer's obligation is satisfied upon payment to the Sellers' Representative; the allocation and distribution among individual Sellers is the responsibility of the Sellers' Representative.
B. Pro Rata Allocation Among Sellers
The earnout payments are allocated pro rata among all Sellers — including both common stockholders and option holders — based on each Seller's respective percentage interest in the aggregate closing consideration. The key Seller percentages for reference purposes are as follows:
In addition to the common stockholders identified above, holders of 550,000 vested options (with a net per-option consideration of $22.70) also participate in the earnout on a pro rata basis. The option holders' pro rata share is determined based on the aggregate net consideration received by such holders at closing relative to the total aggregate consideration paid to all Sellers.
For illustrative purposes, if Milestone 1 is achieved and the $20,000,000 earnout payment is triggered, Dr. Ellsworth would be entitled to receive approximately $7,640,000 (38.2% of $20,000,000), Pennfield Growth Partners would receive approximately $6,000,000 (30.0%), and so forth, subject to adjustments for the option holder pro rata entitlements.
VI. Earnout Escrow Reserve
A. Structure and Purpose
At the Closing, the Buyer funded a separate Earnout Escrow Reserve in the amount of Two Million Five Hundred Thousand Dollars ($2,500,000). This amount was deposited into a designated sub-account (Account No. KES-2024-EO-09184) at Keystone Escrow Services, Inc. (the "Escrow Agent"), held at First Continental Trust Co., N.A.
The purpose of the Earnout Escrow Reserve is to secure the Buyer's obligation to make the earnout payments if and when the milestones are achieved. It is important to note that the Earnout Escrow Reserve is a Buyer-funded deposit, not a holdback from the Sellers' closing consideration. The Buyer deposited this amount from its own funds as a commitment device to provide the Sellers with assurance that earnout funds will be available if the milestones are met. This structure was negotiated during the SPA negotiations as an alternative to the Sellers' Representative's initial request for the full earnout amount to be held in escrow.
B. Release Mechanics
The release of the Earnout Escrow Reserve is governed by the following mechanics:
If a milestone is achieved: Upon the Buyer's payment of the applicable earnout amount to the Sellers' Representative, the corresponding portion of the Earnout Escrow Reserve is released to the Buyer. Specifically:
• If Milestone 1 is achieved and the $20,000,000 earnout payment is made, the proportionate share of the Earnout Escrow Reserve attributable to Milestone 1 (approximately $1,428,571, representing 20/35 of $2,500,000) is released to the Buyer.
• If Milestone 2 is subsequently achieved and the $15,000,000 earnout payment is made, the remaining balance of the Earnout Escrow Reserve (approximately $1,071,429, representing 15/35 of $2,500,000) is released to the Buyer.
• If both milestones are achieved, the entire Earnout Escrow Reserve is released to the Buyer upon payment of both earnout amounts.
If milestones are not achieved by the Earnout Expiration Date: If neither milestone is achieved by June 30, 2027 (the Earnout Expiration Date), the entire remaining Earnout Escrow Reserve is released to the Buyer.
Partial achievement: If only Milestone 1 is achieved (and Milestone 2 is not achieved by June 30, 2027), the release mechanics apply separately to each milestone tranche. The Milestone 1 portion of the Earnout Escrow Reserve is released to the Buyer upon payment of the Milestone 1 earnout, and the Milestone 2 portion is released to the Buyer upon the Earnout Expiration Date.
C. Investment of Earnout Escrow Funds
Pursuant to the Escrow Agreement dated October 31, 2024, executed by the Buyer, the Sellers' Representative, and the Escrow Agent, the escrow funds (including the Earnout Escrow Reserve) are invested in U.S. Treasury money market instruments. This investment election provides capital preservation with minimal risk, consistent with the short- to medium-term holding period.
Interest earned on the Earnout Escrow Reserve is allocated fifty percent (50%) to the Buyer and fifty percent (50%) to the Sellers. This split reflects the negotiated compromise between the parties, recognizing that the Buyer funded the deposit but the escrow serves the Sellers' interest in securing earnout payment availability.
Escrow Agent Contact: The key contact for escrow administration matters at Keystone Escrow Services, Inc. is Patricia Langford, Vice President. All communications with the Escrow Agent regarding the Earnout Escrow Reserve should be coordinated through Patrick Lennox's office.
D. Distinction from Indemnity Escrow
It is important to distinguish the Earnout Escrow Reserve from the separate Indemnity Escrow Amount established under the SPA. The two escrow accounts serve fundamentally different purposes and are governed by independent release schedules:
The Indemnity Escrow Amount of $26,400,000 represents twelve percent (12%) of the $220,000,000 base purchase price and secures the Sellers' obligations under the indemnification provisions of the SPA. The Indemnity Escrow has its own release schedule — fifty percent (50%) released on the first anniversary of the Closing Date (October 31, 2025) and the remainder released on the second anniversary (October 31, 2026), in each case reduced by the amount of any pending or unresolved indemnification claims. The Indemnity Escrow release schedule is entirely independent of the earnout milestones and the Earnout Escrow Reserve.
VII. Dispute Resolution Framework for Earnout Disagreements
A. Triggering a Dispute
Disputes regarding the earnout may arise in several contexts. The most likely scenarios include:
• The Sellers' Representative disagrees with the Buyer's determination that a milestone was not achieved (e.g., the Buyer asserts that the FDA clearance was not received by the applicable deadline, or the Buyer contends that the clearance does not satisfy the specific product description in the milestone definition);
• The Sellers' Representative contends that the Buyer failed to comply with one or more of its earnout covenants (e.g., the commercially reasonable efforts obligation, the minimum R&D budget covenant, the non-diversion covenant, or the non-discontinuation covenant), and that such failure caused or contributed to the non-achievement of a milestone;
• The Buyer disputes the Sellers' Representative's characterization of a Buyer action as a covenant breach; or
• A factual disagreement arises regarding the timing, scope, or nature of an FDA regulatory action relevant to milestone achievement.
Either party — the Buyer or the Sellers' Representative — may invoke the dispute resolution mechanism set forth in the SPA upon the occurrence of any such disagreement.
B. Binding Expert Determination
The SPA provides that disagreements regarding earnout achievement are to be resolved by binding expert determination by an independent regulatory consultant. This mechanism was selected in lieu of traditional arbitration or litigation in recognition of the highly technical and regulatory nature of the earnout milestones.
The process operates as follows:
1. Selection of Expert: The independent regulatory consultant is to be mutually selected by the Buyer and the Sellers' Representative. The expert should be an individual with recognized expertise in the FDA 510(k) regulatory process, medical device regulatory affairs, and the specific device category relevant to the ArthroNav Platform (orthopedic surgical robotics).
2. Fallback Appointment: If the parties cannot agree on the identity of the regulatory consultant within the timeframe specified in the SPA (Calderwood & Harkness recommends confirming the exact period — typically thirty (30) days from the date of the dispute notice), the consultant will be appointed by the American Arbitration Association (AAA) in accordance with its applicable rules for expert determination proceedings.
3. Proceedings: The expert will conduct such proceedings as the expert deems appropriate, which may include document review, written submissions by the parties, and (at the expert's discretion) oral presentations. The procedural details are subject to the terms of the SPA and any supplemental procedural agreement between the parties and the expert.
4. Determination: The expert's determination is final and binding on both parties, absent manifest error or fraud. This means that the parties have waived their right to appeal or challenge the expert's decision in court, except in the narrow circumstances of demonstrable manifest error (i.e., a clear and obvious factual or legal mistake) or fraud.
C. Scope of Expert's Review
The expert's authority under the SPA extends to the determination of the following issues:
(i) Whether the applicable FDA 510(k) clearance was obtained within the milestone deadline;
(ii) Whether the Buyer satisfied its commercially reasonable efforts obligation during the relevant period;
(iii) Whether the Buyer complied with its other earnout covenants (minimum R&D budget, non-diversion of Dr. Subramanian, non-discontinuation); and
(iv) Any related factual or regulatory questions bearing on earnout achievement.
Importantly, the expert does not have authority to modify the terms of the SPA, rewrite the milestone definitions, extend the milestone deadlines, or award damages beyond the earnout amounts specified in the SPA. The expert's role is limited to resolving the specific factual and regulatory questions presented within the framework established by the SPA.
D. Cost Allocation
The costs of the independent regulatory consultant are allocated pursuant to the SPA's dispute resolution provisions. Calderwood & Harkness recommends confirming the specific cost allocation mechanism in the SPA. Common approaches include allocation of all costs to the non-prevailing party, allocation based on the expert's discretionary apportionment, or a 50/50 split. The Buyer should be aware of the potential cost exposure associated with the expert determination process when evaluating any decision that could give rise to an earnout dispute. In addition to the expert's fees, each party typically bears its own legal and advisory costs in connection with the expert determination proceedings.
VIII. Interplay with Other SPA Provisions
A. Earnout and Indemnification
The earnout obligations under the SPA are separate and distinct from the indemnification framework. The indemnification provisions of the SPA govern the parties' respective obligations with respect to breaches of representations and warranties, breaches of pre-closing covenants, and certain specified indemnifiable matters. The indemnification cap under the SPA is $61,600,000, which represents twenty-eight percent (28%) of the $220,000,000 base purchase price. This cap applies to indemnification claims, not to earnout payments. Accordingly, the Buyer's obligation to pay earnout consideration (if milestones are achieved) is not limited by the indemnification cap, and conversely, earnout amounts do not count toward or reduce the indemnification cap.
The Representations and Warranties Insurance (RWI) policy obtained in connection with the transaction — issued by Ridgeline Mutual Insurance Company (Policy No. RMI-RWI-2024-08172), providing $40,000,000 in aggregate coverage with a $4,400,000 retention (split 50/50 between Buyer and Sellers, i.e., $2,200,000 each) — covers losses arising from breaches of representations and warranties in the SPA. The RWI policy does not cover earnout covenant disputes. Any claim that the Buyer breached its earnout covenants (commercially reasonable efforts, minimum R&D budget, non-diversion, non-discontinuation) would not be insured under the RWI policy and would need to be addressed through the binding expert determination process described in Section VII above.
B. Earnout and Key Employee Agreements
Three key employment agreements executed at the Closing are directly relevant to the earnout structure:
Dr. Marcus Ellsworth — Division President, Orthopedic Instruments Division. Base salary: $525,000/year. Term: three (3) years from the Closing Date (through October 31, 2027). Dr. Ellsworth's employment agreement includes cooperation obligations related to the earnout, requiring him to provide reasonable assistance and information to the Buyer in connection with the ArthroNav regulatory submissions and earnout milestone determinations. In his separate capacity as Sellers' Representative, Dr. Ellsworth has adversarial interests vis-à-vis the Buyer on earnout matters, which creates a potential conflict that should be monitored. All communications with Dr. Ellsworth in his capacity as Sellers' Representative should be conducted through formal channels and documented in writing.
Dr. Raj Subramanian — SVP, ArthroNav Development. Base salary: $410,000/year. Term: three (3) years from the Closing Date (through October 31, 2027). Dr. Subramanian's employment agreement includes specific provisions regarding continuity of ArthroNav R&D program leadership, which are directly linked to the SPA's non-diversion covenant discussed in Section III.C above. Dr. Subramanian's retention and engagement are critical to earnout milestone achievement.
Catherine Pryor — SVP, Operations. Base salary: $375,000/year. Term: three (3) years from the Closing Date (through October 31, 2027). Ms. Pryor's employment agreement supports operational continuity relevant to ArthroNav manufacturing readiness and supply chain management, which, while not directly tied to the regulatory milestones, is relevant to the Buyer's overall ability to bring the ArthroNav Platform to market following FDA clearance.
Each of Dr. Ellsworth, Dr. Subramanian, and Ms. Pryor is subject to two-year post-termination non-competition and non-solicitation covenants under their respective employment agreements. These restrictive covenants provide additional protection for the Buyer's investment in the ArthroNav Platform by preventing these key individuals from competing with, or recruiting away talent from, the ArthroNav program during and after their employment.
C. Earnout and the Polytechnic License
The Buyer should be aware of the license agreement between Meridian (now owned by the Buyer) and Polytechnic Innovations, Ltd. for background intellectual property in robotic surgical navigation. This license carries a royalty of 2.5% of net sales of ArthroNav products and is co-extensive with patent life (i.e., the royalty obligation continues for as long as the licensed patents remain in force).
While the Polytechnic License does not directly affect the Buyer's earnout obligations or milestone achievement (which are based on FDA regulatory clearance, not sales), the Buyer should ensure that post-clearance commercialization plans account for the Polytechnic royalty obligation when evaluating the financial impact and return on investment associated with earnout milestone achievement. The combined effect of the $35,000,000 earnout consideration and the ongoing 2.5% royalty should be modeled in the Buyer's financial projections for the ArthroNav Platform.
D. Earnout and Supply Chain Considerations
The Exclusive Supply Agreement between Meridian (now owned by the Buyer) and Titanium Precision Components, Inc. ("TPC") is relevant to the ArthroNav Platform's manufacturing readiness and, by extension, the Buyer's ability to commercialize the ArthroNav products following FDA clearance. The key terms of the TPC Supply Agreement are:
• Term: Five (5) years, expiring March 2027;
• Scope: Exclusive supply of precision titanium components for ArthroNav surgical instruments and robotic end-effectors;
• Minimum Annual Purchase Commitment: $3,200,000 per year;