PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED
CALDERWOOD & HARKNESS LLP Counselors at Law
590 Lexington Avenue, 35th Floor New York, New York 10022 Telephone: (212) 554-7800 Facsimile: (212) 554-7801 www.calderwoodharkness.com
MEMORANDUM PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED
November 4, 2024
DATE: November 4, 2024
TO:
Patrick Lennox, General Counsel & Company Secretary, Solstice Biomedical Devices Ltd.
Helena Byrne, EVP, Corporate Development & Strategy, Solstice Biomedical Devices Ltd.
Conor Muldoon, CFO, Solstice Biomedical Devices Ltd.
CC:
Beatrice Holloway, Partner, Calderwood & Harkness LLP
Leonard Cross, Partner, Calderwood & Harkness LLP
Victoria Shen, Counsel, Calderwood & Harkness LLP
Andrew Fitzpatrick, Associate, Calderwood & Harkness LLP
FROM: Tiffany Rosenthal, Lead Associate, Mergers & Acquisitions, Calderwood & Harkness LLP
RE: Post-Closing Obligations, Deadlines, and Integration Items — Acquisition of Meridian Surgical Technologies, Inc.
Matter No.: 1037-00006
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I. Introduction and Purpose
This memorandum is provided to the management team of Solstice Biomedical Devices Ltd. ("Solstice" or "SBD") in connection with the closing of the acquisition (the "Transaction") of one hundred percent (100%) of the outstanding shares of common stock and all vested options of Meridian Surgical Technologies, Inc. (the "Company" or "Meridian") by Solstice Biomedical, Inc. ("Buyer"), a wholly owned Delaware subsidiary of SBD, which occurred on October 31, 2024 (the "Closing Date"). The Transaction was consummated for a base cash purchase price of Two Hundred Twenty Million Dollars ($220,000,000) in cash (the "Base Purchase Price"), with maximum aggregate consideration of Two Hundred Fifty-Five Million Dollars ($255,000,000) inclusive of milestone-based earnout payments of up to Thirty-Five Million Dollars ($35,000,000), as more fully described herein.
The purpose of this memorandum is to provide Solstice's management team — and, in particular, the General Counsel, CFO, and EVP of Corporate Development — with a comprehensive, organized summary of all material post-closing obligations, covenants, deadlines, and integration items arising under the following Transaction documents:
(a) the Stock Purchase Agreement, dated as of August 20, 2024, by and among Solstice Biomedical, Inc. (as Buyer), the Sellers identified therein, and Dr. Marcus Ellsworth, as Sellers' Representative (the "SPA");
(b) the Escrow Agreement, dated as of October 31, 2024, by and among Buyer, the Sellers' Representative, and Keystone Escrow Services, Inc. (the "Escrow Agreement");
(c) the Credit Agreement, dated as of October 25, 2024, by and among Solstice Biomedical, Inc. (as Borrower), Solstice Biomedical Devices Ltd. (as Guarantor), and Tidewater Atlantic Bank, N.A. (as Administrative Agent and Lender) (the "Credit Agreement");
(d) the Employment Agreements with Dr. Marcus Ellsworth, Catherine Pryor, and Dr. Raj Subramanian, each dated as of October 31, 2024;
(e) the Representations and Warranties Insurance Policy issued by Ridgeline Mutual Insurance Company (Policy No. RMI-RWI-2024-08172) (the "RWI Policy"); and
(f) all other ancillary transaction documents, including the Transition Services Agreement, the Noncompetition Agreements, and the intellectual Property Assignment Agreements.
This memorandum is intended to serve as a practical reference guide and master tracking document. It is organized thematically, with a consolidated master deadline calendar set forth in Section II and a comprehensive summary action item matrix set forth in Section XII. We strongly recommend that Solstice designate a single internal post-closing integration coordinator — we would suggest Helena Byrne or her designee within Corporate Development & Strategy — to take ownership of tracking and managing the deadlines and obligations described herein, and to serve as the primary point of contact between the Solstice operating teams and Calderwood & Harkness LLP.
Calderwood & Harkness LLP remains fully engaged and available to assist with all post-closing matters arising from the Transaction. For questions or matters requiring immediate attention, please contact Tiffany Rosenthal (ext. 4217; trosenthal@calderwoodharkness.com) or Beatrice Holloway (ext. 4102; bholloway@calderwoodharkness.com) in the first instance. Specific subject-matter contacts are identified throughout this memorandum and consolidated in the Key Contact Information table in Section XIII.
II. Master Post-Closing Deadline Calendar
The following table sets forth a chronological summary of all key post-closing deadlines and obligations identified by Calderwood & Harkness in our review of the Transaction documents. This table is intended to be used as a master tracking calendar and should be updated on a rolling basis as obligations are satisfied, new deadlines arise, or circumstances change. We recommend that this calendar be imported into Solstice's internal project management or calendaring system.
We note that many of the foregoing deadlines are subject to acceleration, modification, or extension based on intervening events (e.g., dispute initiation, extension of a tax return filing deadline, or FDA scheduling changes). Each deadline should be independently verified against the applicable underlying document before reliance. Calderwood & Harkness will provide updated calendar entries as circumstances warrant.
III. Net Working Capital True-Up
A. Overview of the Adjustment Mechanism
Pursuant to Article II of the SPA, the Base Purchase Price is subject to a customary post-closing adjustment based on the actual Net Working Capital of Meridian as of the Closing Date (October 31, 2024), measured against a Target Net Working Capital amount agreed upon by the parties. The key parameters are as follows:
• Target Net Working Capital: $11,500,000
• Estimated Closing Net Working Capital: $12,175,000 (as set forth in the estimated Closing Statement delivered at Closing)
• Estimated NWC Surplus at Closing: +$675,000 (i.e., the amount by which the Estimated Closing NWC exceeded the Target NWC)
• Final Closing Cash Consideration Paid at Closing: $182,108,177.84 (reflecting the Base Purchase Price, adjusted for the estimated NWC surplus, indebtedness payoff, transaction expenses, and the escrow deposits)
The estimated NWC surplus of $675,000 was included in the Closing cash consideration paid to the Sellers at Closing. The post-closing true-up mechanism is designed to compare the actual Closing NWC (as determined through the process described below) against the estimated Closing NWC, and to make a dollar-for-dollar adjustment to the purchase price accordingly. This process is critically important: any discrepancy between the estimated and actual Closing NWC figures will result in a payment obligation running from one party to the other.
B. Preparation and Delivery of Closing Statement
Under Section 2.5 of the SPA, Buyer is required to prepare and deliver to the Sellers' Representative (Dr. Marcus Ellsworth) a final Closing Statement setting forth the actual Closing Net Working Capital, calculated in strict accordance with the agreed-upon accounting methodology set forth on Exhibit D to the SPA. The accounting methodology specifies that the Closing NWC shall be calculated in accordance with GAAP, applied consistently with Meridian's historical accounting practices and principles, and subject to the specific line-item inclusions and exclusions set forth on the Illustrative NWC Calculation Schedule attached to the SPA.
The SPA provides that the final determination of post-closing Net Working Capital must be completed within ninety (90) days of the Closing Date — that is, by January 29, 2025. In practice, this means that Buyer must deliver the final Closing Statement to the Sellers' Representative sufficiently in advance of that date to allow for the review and dispute procedures described below to be completed within the 90-day window. We recommend that the Closing Statement be delivered within approximately thirty (30) to forty-five (45) days of the Closing Date (i.e., by no later than mid-December 2024, and ideally by November 30, 2024) to provide adequate time.
Buyer's finance team — specifically, Conor Muldoon, in coordination with the accounting staff of Solstice Biomedical, Inc. and, as necessary, with the assistance of Meridian's former CFO David Hensley (who is serving as a transitional integration resource) — should begin preparation of the Closing Statement immediately. The preparation should be based on Meridian's books and records as of October 31, 2024, including but not limited to the closing-date trial balance, accounts receivable and accounts payable aging schedules, inventory records, and accrual schedules. It is essential that all records are preserved in their closing-date state, without post-closing adjustments, to ensure the integrity of the NWC determination.
C. Review and Dispute Period
Once the final Closing Statement is delivered to the Sellers' Representative, the following review and dispute procedures apply:
(a) Review Period. The Sellers' Representative has thirty (30) calendar days after receipt of the final Closing Statement to review the statement and all supporting documentation. During this period, Buyer is required to provide the Sellers' Representative and his advisors with reasonable access to the books, records, and work papers used in the preparation of the Closing Statement. We recommend that Buyer organize these materials into a clearly indexed package for delivery concurrently with the Closing Statement, in order to facilitate an efficient review process and minimize the risk of disputes.
(b) Notice of Disagreement. If the Sellers' Representative disagrees with any item or amount reflected in the Closing Statement, he must deliver a written notice of disagreement to Buyer within the 30-day review period, specifying in reasonable detail each item of disagreement and the Sellers' Representative's proposed alternative calculation. If no notice of disagreement is delivered within the 30-day period, the Closing Statement as delivered by Buyer becomes final, binding, and conclusive for all purposes under the SPA.
(c) Good-Faith Negotiation. If a notice of disagreement is timely delivered, the parties are required to negotiate in good faith for a period of fifteen (15) business days following receipt of the notice of disagreement to attempt to resolve the disputed items. We recommend that Conor Muldoon and/or his designee lead these negotiations on behalf of Buyer, with support from Calderwood & Harkness as needed.
(d) Independent Accounting Referee. If the parties are unable to resolve all disputed items within the 15-business-day negotiation period, any remaining unresolved disputes shall be submitted to the independent accounting referee designated in the SPA: Hargrove Bennett LLP (Margaret Chen, CPA, Partner), located at 1735 Market Street, Suite 2800, Philadelphia, PA 19103. The referee's mandate is limited to the specific unresolved items submitted, and the referee may not assign a value to any item that is outside the range bounded by Buyer's proposed value and the Sellers' Representative's proposed value. The determination of Hargrove Bennett LLP shall be final and binding on both parties, absent manifest error. The fees and costs of the referee shall be allocated between the parties based on the proximity of each party's position to the referee's final determination, as set forth in the SPA.
D. Payment Mechanics
Upon the final determination of the actual Closing Net Working Capital (whether by agreement, expiration of the review period without dispute, or determination by the accounting referee), the following payment mechanics apply:
(a) If the actual Closing NWC exceeds the estimated Closing NWC (i.e., the actual surplus over Target NWC is greater than the $675,000 initially estimated), Buyer shall pay the excess amount to the Sellers' Representative within five (5) business days of the final determination, by wire transfer of immediately available funds.
(b) If the actual Closing NWC is less than the estimated Closing NWC (i.e., the actual surplus is less than $675,000, or the actual Closing NWC is below the Target NWC), the Sellers' Representative shall pay the overage back to Buyer within five (5) business days of the final determination, by wire transfer of immediately available funds. Alternatively, at Buyer's election and with the consent of the Sellers' Representative, the amount may be deducted from the Indemnity Escrow.
Wire instructions for any true-up payment due to the Sellers are as follows:
Sellers' Representative Account: Founders National Bank, N.A. Account No.: 6654-1029-8871 ABA Routing No.: 031100209 Reference: Meridian SPA — NWC True-Up
Wire instructions for any payment due to Buyer shall be provided by Conor Muldoon's office upon request.
E. Action Items
1. Conor Muldoon to coordinate immediately with Meridian's former CFO David Hensley (currently serving as an integration resource pursuant to the Transition Services Agreement) for access to the closing-date trial balance, supporting schedules, and accounting work papers.
2. Conor Muldoon to determine whether to retain Dunfield & Associates, P.C. (Howard Dunfield, CPA) or to utilize internal Solstice accounting resources to assist with the preparation of the NWC calculation. Dunfield & Associates served as Meridian's independent auditors and has the most familiarity with the Company's accounting practices; however, their involvement may present independence considerations. Calderwood & Harkness can advise on this point if requested.
3. Calderwood & Harkness (Andrew Fitzpatrick) to review the final Closing Statement and all supporting calculations before delivery to the Sellers' Representative, to ensure compliance with the SPA's accounting methodology and to minimize the risk of a dispute.
4. Patrick Lennox to calendar the January 29, 2025, final determination deadline and all intermediate sub-deadlines (Closing Statement delivery, 30-day review period, 15-business-day negotiation period).
IV. Escrow Matters
A. Indemnity Escrow
1. Escrow Amount and Agent
At the Closing, Buyer deposited Twenty-Six Million Four Hundred Thousand Dollars ($26,400,000) — representing twelve percent (12%) of the Base Purchase Price of $220,000,000 — into an indemnity escrow account (the "Indemnity Escrow") established pursuant to the Escrow Agreement. The Indemnity Escrow is held by Keystone Escrow Services, Inc. (the "Escrow Agent"), with the primary contact being Patricia Langford, VP, Corporate Trust & Escrow Services, located at 1700 Broadway, Suite 2500, New York, NY 10019.
The Indemnity Escrow funds are held in Escrow Account No. KES-2024-IND-09183 at First Continental Trust Co., N.A. (ABA Routing No. 021000089). The Indemnity Escrow serves as the primary source of recovery for Buyer's indemnification claims under the SPA (other than claims relating to breaches of Fundamental Representations, for which Buyer has direct recourse against the Sellers, subject to the applicable cap).
2. Release Schedule
The Escrow Agreement provides for the following scheduled releases of the Indemnity Escrow funds:
(a) First Release — October 31, 2025 (twelve months after Closing): Fifty percent (50%) of the then-remaining Indemnity Escrow balance shall be released to the Sellers' Representative for distribution to the Sellers. Assuming no claims are asserted against the Indemnity Escrow in the interim, this release would be approximately $13,200,000 (plus the Sellers' share of accrued interest). However, the actual release amount will be reduced by the aggregate amount reserved for any pending and unresolved indemnification claims as of that date. Any amounts so reserved will continue to be held in escrow until the applicable claims are finally resolved.
(b) Second Release — October 31, 2026 (twenty-four months after Closing): All remaining funds in the Indemnity Escrow shall be released to the Sellers' Representative for distribution to the Sellers, less any amounts that remain reserved for unresolved pending indemnification claims. This second release date coincides with the expiration of the general representations and warranties survival period (24 months). Following the second release, the Indemnity Escrow will remain open only with respect to any amounts reserved for pending claims, which will be released as such claims are finally resolved.
Under the Escrow Agreement, Keystone will require joint written instructions signed by both Buyer and the Sellers' Representative (or their respective authorized representatives) in order to effectuate any release of escrowed funds. In the event of a dispute regarding the release of funds, Keystone will not release the disputed amount unless and until the Escrow Agent receives either (i) a mutually agreed joint instruction, (ii) a final, non-appealable court order directing release, or (iii) a final determination pursuant to the dispute resolution provisions of the SPA.
3. Investment of Escrow Funds
The Indemnity Escrow funds are invested in United States Treasury money market instruments as specified in the Escrow Agreement. Interest earned on the Indemnity Escrow is allocated fifty percent (50%) to Buyer and fifty percent (50%) to the Sellers. For tax reporting purposes, each party is responsible for reporting and paying all applicable taxes on its allocated share of interest income. The Escrow Agent will provide annual tax reporting statements (IRS Form 1099) to both Buyer and the Sellers' Representative reflecting the interest income allocable to each party.
4. Action Items
(a) Calendar the October 31, 2025, and October 31, 2026, release dates, with appropriate advance reminders (we suggest 60-day and 30-day advance reminders for each release date).
(b) Before each scheduled release date, Patrick Lennox should conduct a comprehensive review, in consultation with Calderwood & Harkness, to determine whether any pending or reasonably anticipated indemnification claims require a hold-back instruction to Keystone. This review should include consultation with Deborah Lyle at Braddock & Lyle LLP regarding the status of the Hartwell litigation (see Section VII.D below) and any other pending or threatened claims.
(c) Calderwood & Harkness (Andrew Fitzpatrick) will prepare the joint release instruction letters for execution by Buyer and the Sellers' Representative in advance of each scheduled release date. These letters should be circulated to the Sellers' Representative for review and signature no later than ten (10) business days before each release date.
(d) Maintain a current record of the Indemnity Escrow balance by requesting periodic account statements from Keystone.
B. Earnout Escrow Reserve
1. Amount and Purpose
In addition to the Indemnity Escrow, Buyer deposited Two Million Five Hundred Thousand Dollars ($2,500,000) at Closing into a separate sub-account at Keystone Escrow Services, Inc. (the "Earnout Escrow Reserve") to secure a portion of Buyer's obligation to pay the earnout consideration if and when the earnout milestones described in Section V below are achieved. The Earnout Escrow Reserve is held in Escrow Account No. KES-2024-EO-09184 at First Continental Trust Co., N.A. (ABA Routing No. 021000089).
The Earnout Escrow Reserve serves as additional assurance to the Sellers that earnout payments will be made promptly upon milestone achievement. It does not represent the full amount of any potential earnout payment; rather, it provides a readily available pool of funds to be applied toward the first earnout payment when due.
2. Release Mechanics
The Earnout Escrow Reserve is subject to the following release provisions:
(a) Upon Milestone Achievement: When an earnout milestone is achieved and the corresponding milestone payment becomes due, the Earnout Escrow Reserve (or the applicable portion thereof) will be released to the Sellers' Representative as part of the overall milestone payment. For example, if Milestone 1 is achieved and the $20,000,000 payment becomes due, the $2,500,000 Earnout Escrow Reserve will be released to the Sellers' Representative as partial satisfaction of that payment, with the remaining $17,500,000 paid by Buyer from other funds.
(b) If Milestones Are Not Achieved: If neither earnout milestone is achieved by the Earnout Expiration Date (June 30, 2027), the entire Earnout Escrow Reserve will be released to Buyer.
(c) Partial Achievement: If only one milestone is achieved, the Earnout Escrow Reserve will be applied proportionately in accordance with the terms of the Escrow Agreement.
3. Action Items
(a) Monitor earnout milestone achievement status on an ongoing basis (cross-reference Section V below for detailed earnout discussion).
(b) Upon achievement of an earnout milestone, promptly instruct Keystone to release the Earnout Escrow Reserve funds simultaneously with the balance of the milestone payment.
(c) If no milestone is achieved by the Earnout Expiration Date (June 30, 2027), promptly instruct Keystone to release the Earnout Escrow Reserve to Buyer.
V. Earnout Obligations and Covenant Compliance
A. Overview of Earnout Structure
In addition to the Base Purchase Price of $220,000,000, the SPA provides for potential earnout consideration of up to Thirty-Five Million Dollars ($35,000,000) in the aggregate, payable to the Sellers upon the achievement of two separate FDA regulatory milestones related to the ArthroNav Robotic-Assisted Arthroscopy System product line. The earnout structure is as follows:
Milestone 1: Receipt of FDA 510(k) clearance for the ArthroNav Robotic-Assisted Arthroscopy System (Generation 1.0) on or before December 31, 2026. Upon achievement of Milestone 1, Buyer shall pay to the Sellers' Representative, for distribution to the Sellers, the sum of $20,000,000 within thirty (30) business days of the clearance date.
Milestone 2: Receipt of FDA 510(k) clearance for 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 shall pay to the Sellers' Representative, for distribution to the Sellers, the sum of $15,000,000 within thirty (30) business days of the clearance date.
The aggregate maximum earnout consideration is $35,000,000. The milestones are independent: each may be achieved or missed independently of the other. The "Earnout Period" commences on the Closing Date (October 31, 2024) and expires on June 30, 2027. Any milestone not achieved by the applicable deadline is deemed not achieved and no payment is owed with respect to such milestone.
We note that the earnout is structured around discrete regulatory events — specifically, FDA 510(k) clearance decisions — rather than financial performance metrics. This structure reduces (but does not eliminate) the potential for disputes, as the occurrence or non-occurrence of a 510(k) clearance is a relatively objective determination. Nevertheless, as discussed below, the SPA imposes significant affirmative covenants on Buyer during the Earnout Period that must be carefully observed.
B. Buyer's Affirmative Covenants During the Earnout Period
The SPA imposes the following material affirmative covenants on Buyer during the Earnout Period. Compliance with these covenants is of the utmost importance, as a breach could give rise to claims by the Sellers for damages based on alleged interference with the achievement of the earnout milestones. Calderwood & Harkness has prepared a separate, more detailed Earnout Compliance Memorandum, which we commend to management's attention. The key covenants are summarized below:
(a) Commercially Reasonable Efforts. Buyer covenants to use "commercially reasonable efforts" to pursue the 510(k) submission and clearance process for both ArthroNav milestones throughout the Earnout Period. The term "commercially reasonable efforts" is defined in the SPA and generally means efforts consistent with those that a similarly situated company in the medical device industry would undertake with respect to a product of comparable market potential and development stage. Buyer is not required to take extraordinary or commercially unreasonable actions, but must diligently pursue the regulatory pathway. Buyer should be mindful that any significant delay, de-prioritization, or reduction in effort with respect to the ArthroNav program could be scrutinized by the Sellers as a potential breach of this covenant.
(b) Minimum R&D Budget. Buyer is required to maintain a dedicated ArthroNav research and development budget of no less than Six Million Dollars ($6,000,000) per year during the Earnout Period. This budget requirement is measured on an annual basis (each calendar year during the Earnout Period). Buyer's finance team should implement a tracking mechanism to monitor and document annual ArthroNav R&D expenditures, segregated from other Solstice or Meridian R&D spending, to demonstrate compliance with this covenant. We recommend that quarterly internal reports be prepared showing cumulative year-to-date ArthroNav R&D spend, with supporting detail sufficient to withstand scrutiny in the event of a dispute.
(c) Key Personnel Restriction. Buyer may not divert, reassign, terminate (other than for cause), or materially reduce the role of Dr. Raj Subramanian from ArthroNav development without the prior written consent of the Sellers' Representative (Dr. Marcus Ellsworth). This is a critically important covenant. Any proposed reassignment, significant change in role, transfer to a different project, or reduction in Dr. Subramanian's allocation of time to ArthroNav must be coordinated with, and approved by, the Sellers' Representative before it is implemented. We recommend that Solstice management treat this restriction as a hard constraint in any organizational planning or restructuring during the Earnout Period.
(d) Non-Abandonment. Buyer may not discontinue or abandon the ArthroNav program without providing at least ninety (90) days' prior written notice to the Sellers' Representative. This notice requirement applies to any decision to permanently discontinue, wind down, or substantially scale back the ArthroNav program. It is important to document any strategic decisions regarding the program, including decisions to modify the scope, timeline, or approach, even if such decisions do not rise to the level of abandonment. Contemporaneous documentation of the business rationale for any such decisions will be valuable in the event of a future dispute.
Buyer's compliance with each of the foregoing covenants should be treated as a standing agenda item for the quarterly ArthroNav milestone review meetings recommended below.
C. Dispute Resolution for Earnout
In the event of a disagreement between Buyer and the Sellers' Representative regarding whether an earnout milestone has been achieved, the SPA provides for the following dispute resolution process:
(a) The disputing party shall provide written notice to the other party setting forth the basis for the disagreement.
(b) The parties shall first attempt to resolve the dispute through good-faith negotiation.
(c) If negotiations are unsuccessful, the dispute shall be resolved by binding expert determination by an independent regulatory consultant mutually selected by Buyer and the Sellers' Representative. The regulatory consultant must have at least fifteen (15) years of experience in FDA medical device regulation, including 510(k) review processes.
(d) If the parties are unable to agree on the selection of an independent regulatory consultant within twenty (20) business days of a request by either party, the American Arbitration Association shall appoint a consultant meeting the foregoing qualifications.
(e) The determination of the independent regulatory consultant shall be final and binding on both parties, absent fraud or manifest error.
To protect Buyer's position in any potential earnout dispute, Buyer should maintain thorough, contemporaneous records of all FDA interactions, pre-submissions, submissions, requests for additional information, clearance decisions, and other regulatory communications related to ArthroNav, throughout the Earnout Period.
D. Regulatory Pathway Status and Timeline
The current status of the ArthroNav regulatory pathway, as of the date of this memorandum, is as follows:
• Pre-Submission (Q-Sub) Meeting: A pre-submission meeting with FDA (Center for Devices and Radiological Health, Office of Orthopedic Devices) was completed in March 2024. FDA provided generally favorable feedback on the proposed predicate device and testing strategy for the Generation 1.0 system.
• Predicate Device: The primary predicate device identified for the 510(k) submission is the Marlowe Asset Management Robotic Surgical Assist System (510(k) No. K203847), cleared by FDA in November 2020.
• 510(k) Submission Target (Generation 1.0): The current internal timeline targets submission of the 510(k) application for the ArthroNav Generation 1.0 system in Q2 2025, with an anticipated review cycle of approximately 6 to 12 months, depending on FDA's review timeline and any requests for additional information.
• Primary Points of Contact: Dr. Niamh Cassidy (Solstice VP, Regulatory Affairs) is the lead regulatory contact for the ArthroNav 510(k) submission, working in close coordination with Dr. Raj Subramanian (SVP, ArthroNav Development) on the clinical and technical aspects of the submission package.
• Legal and Regulatory Counsel: Victoria Shen (Calderwood & Harkness, Counsel, Regulatory & Life Sciences Practice Group) is available to provide legal and regulatory counsel as needed with respect to the FDA submission process, interactions with the Agency, and related matters.
E. Action Items
1. Helena Byrne to establish an internal ArthroNav milestone tracking dashboard, including key regulatory, technical, and financial milestones, with regular status updates accessible to all relevant Solstice stakeholders.
2. Patrick Lennox / Helena Byrne to ensure that Dr. Subramanian's employment agreement provisions — including the earnout-related cooperation obligations and the restriction on reassignment without Sellers' Representative consent — are fully understood by all relevant members of Solstice management, including HR leadership.
3. Helena Byrne to schedule quarterly internal review meetings on ArthroNav regulatory progress, commencing in January 2025. These meetings should include, at a minimum: Dr. Subramanian, Dr. Cassidy, Conor Muldoon (for R&D budget compliance), and representatives from Calderwood & Harkness (Victoria Shen and/or Tiffany Rosenthal).
4. Conor Muldoon to implement a financial tracking mechanism for documenting R&D expenditures attributable to the ArthroNav program, with a target annual minimum of $6,000,000. Quarterly internal reports should be prepared.
5. All Solstice management: Notify Calderwood & Harkness (Tiffany Rosenthal or Victoria Shen) promptly of any proposed changes to ArthroNav program scope, personnel assignments, timeline, or budget, to allow for assessment of earnout covenant compliance implications before any changes are implemented.
VI. Tax Post-Closing Obligations
A. Section 338(h)(10) Election
Pursuant to Section 6.7 of the SPA, Buyer and Sellers jointly elected under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the "Code"), to treat the stock purchase of Meridian (EIN: 84-3192057) as a deemed asset acquisition for United States federal income tax purposes and for the purposes of all applicable state income tax jurisdictions. This election has significant tax consequences for both Buyer and Sellers: for Buyer, it provides a stepped-up tax basis in Meridian's assets (resulting in increased amortization and depreciation deductions going forward); for Sellers, the transaction is treated as an asset sale, with gain or loss recognized at the corporate level, followed by a deemed liquidation.
The Section 338(h)(10) election is made by filing IRS Form 8023 (Elections Under Section 338 for Corporations Making Qualified Stock Purchases). Form 8023 must be filed by Buyer (and signed by both Buyer and the Selling Shareholder(s)) no later than the due date (including extensions) of the federal income tax return of the "old target" corporation (Meridian) for the taxable year that includes the acquisition date. In this case, the relevant return is Meridian's short-period federal income tax return for the taxable period ending on October 31, 2024. Assuming Meridian files on a calendar-year basis with the applicable short-period rules, the filing deadline is currently estimated to be on or about March 15, 2025 (or such later date as may result from extensions). This deadline should be independently confirmed by the tax advisors.
Leonard Cross (Calderwood & Harkness, Tax Partner) and Eleanor Voss (Brindoval & Albright LLP, 200 Park Avenue, Suite 4100, New York, NY 10166) are jointly coordinating the preparation and filing of Form 8023 and all related election forms. Corresponding state-level election forms must also be filed for Delaware, Pennsylvania, and any other states in which Meridian conducted business or filed income tax returns. The specific state filing requirements are being reviewed by Brindoval & Albright.
B. Allocation of Purchase Price (ADSP)
As a consequence of the Section 338(h)(10) election, it is necessary to determine the Aggregate Deemed Sale Price ("ADSP") — that is, the amount that the "old target" is deemed to have received in the hypothetical asset sale — and to allocate that amount among Meridian's assets under the residual method prescribed by Section 338(b)(5) of the Code and the applicable Treasury Regulations (specifically, Treas. Reg. § 1.338-6 and § 1.338-7).
The purchase price allocation determines the tax basis of each category of acquired assets for purposes of calculating future amortization and depreciation deductions, as well as the character and amount of gain or loss recognized by the Sellers. It is therefore a matter of significant economic importance to both parties.
Under Section 6.7(c) of the SPA, Buyer is required to prepare a proposed allocation and deliver it to the Sellers' Representative within ninety (90) days of the Closing Date. The Sellers' Representative then has thirty (30) days to review and either accept or dispute the proposed allocation. If the parties cannot agree, the allocation dispute is submitted to Hargrove Bennett LLP (the same accounting referee designated for NWC disputes) for binding resolution.
It is in Buyer's interest to maximize the allocation to amortizable and depreciable asset categories (such as identifiable intangible assets, including patents, technology, and customer relationships) and to minimize the allocation to non-amortizable goodwill. Conor Muldoon and the Solstice tax team should coordinate closely with Leonard Cross and Eleanor Voss at Brindoval & Albright in preparing the proposed allocation.
C. Meridian Pre-Closing Tax Returns
Under Section 6.8 of the SPA, Buyer is responsible for preparing, or causing to be prepared, all income tax returns of Meridian for pre-closing tax periods. The most significant of these is Meridian's short-period federal income tax return for the period from January 1, 2024, through October 31, 2024. This is the final return of the "old target" prior to the deemed asset sale resulting from the Section 338(h)(10) election.
The Sellers' Representative has the right to review and comment on Meridian's pre-closing tax returns before they are filed. Buyer must provide the Sellers' Representative with a draft of each such return at least thirty (30) days before the filing deadline, and must consider in good faith any reasonable comments provided by the Sellers' Representative.
We note that Meridian has remaining net operating loss carryforwards ("NOLs") of approximately $1,100,000 as of the most recent available information. These NOLs are subject to the limitations of Section 382 of the Code as a result of the ownership change that occurred upon the closing of the Transaction. The Section 382 limitation will significantly restrict the annual amount of pre-change NOLs that can be utilized by the post-closing entity. The interaction of the Section 382 limitation with the Section 338(h)(10) election should be carefully analyzed by Brindoval & Albright to determine the practical utility (if any) of these NOLs on a going-forward basis.
In addition to the federal income tax return, corresponding state income tax returns must be prepared and filed for all applicable jurisdictions in which Meridian had nexus during the short period.
D. Tax Indemnification and Survival
Under the SPA, all tax representations and warranties made by the Sellers survive until sixty (60) days after the expiration of the applicable statute of limitations (including any extensions or waivers thereof) for the relevant tax period. This is an extended survival period — significantly longer than the 24-month general survival period for non-Fundamental Representations — reflecting the parties' recognition that tax liabilities may not be identified until well after the closing of the Transaction.
Any pre-closing tax liabilities of Meridian that exceed the amounts accrued or reserved in the Closing Statement are subject to indemnification by the Sellers under Article VII of the SPA. Claims for pre-closing tax liabilities may be asserted against the Indemnity Escrow (during its term) or directly against the Sellers (for Fundamental Representation claims, which include tax representations).
E. Action Items
1. Leonard Cross (Calderwood & Harkness) and Eleanor Voss (Brindoval & Albright) to finalize and file IRS Form 8023 and all required state election forms on a timely basis.
2. Leonard Cross to prepare and deliver the proposed purchase price allocation to the Sellers' Representative within ninety (90) days of Closing. Coordinate with Conor Muldoon and Brindoval & Albright on the valuation analysis supporting the allocation.
3. Brindoval & Albright / Dunfield & Associates, P.C. (or Solstice's internal tax team) to be engaged for preparation of Meridian's short-period federal and state income tax returns for the period January 1, 2024, through October 31, 2024. Draft returns must be provided to the Sellers' Representative at least thirty (30) days before filing.
4. Leonard Cross to analyze the Section 382 limitation applicable to Meridian's pre-change NOLs and provide guidance on the practical availability of these losses post-closing.
5. Conor Muldoon / Patrick Lennox to calendar all tax filing deadlines, including extended deadlines, and coordinate with Calderwood & Harkness and Brindoval & Albright to ensure timely compliance.
VII. Indemnification Administration
A. Indemnification Framework Summary
Article VII of the SPA establishes the post-closing indemnification framework, which governs the allocation of risk and liability between Buyer and Sellers for breaches of representations, warranties, and covenants, as well as for specified pre-closing liabilities. The key parameters of the indemnification framework are summarized below:
• Indemnification Cap: The aggregate indemnification obligations of the Sellers under the SPA shall not exceed $61,600,000, representing twenty-eight percent (28%) of the Base Purchase Price of $220,000,000. This cap applies to the aggregate of all indemnification claims (other than claims for fraud, which are uncapped).
• De Minimis Threshold: No individual indemnification claim may be asserted by Buyer unless the losses arising from such claim equal or exceed $75,000. Claims below this threshold are disregarded for all purposes, including for purposes of satisfying the Basket (defined below).
• Basket (Tipping Deductible): Buyer may not recover indemnification for breaches of non-Fundamental Representations unless and until the aggregate amount of qualifying losses exceeds $1,650,000, representing 0.75% of the Base Purchase Price. This is a "tipping" basket: once the $1,650,000 threshold is exceeded, Buyer is entitled to recover indemnification from the first dollar of losses (i.e., indemnification is "from dollar one" once the basket is tipped, not merely for the excess over the basket amount).
• Sole and Exclusive Remedy (Non-Fundamental Claims): For indemnification claims relating to breaches of non-Fundamental Representations, the Indemnity Escrow ($26,400,000) is the sole and exclusive source of recovery for Buyer, subject to any excess coverage available under the RWI Policy (discussed below). Buyer may not pursue direct claims against the Sellers personally for non-Fundamental Representation breaches.
• Direct Recourse (Fundamental Claims): For indemnification claims relating to breaches of Fundamental Representations (specifically, the representations regarding organization, authorization, capitalization, and tax matters), Buyer has direct recourse against the Sellers, subject to the overall $61,600,000 aggregate cap.
B. Survival Periods
The representations and warranties made by the Sellers in the SPA survive the Closing for the following periods, after which they expire and no further claims may be asserted with respect thereto:
• General Representations and Warranties: Twenty-four (24) months from the Closing Date, expiring October 31, 2026.
• Fundamental Representations (organization, authorization, capitalization, tax): Sixty (60) days after the expiration of the applicable statute of limitations (including any extensions or waivers).
• Tax Representations: Sixty (60) days after the expiration of the applicable statute of limitations (including any extensions or waivers). This period runs concurrently with the Fundamental Representations survival period for tax-related representations.
• Environmental Representations: Thirty-six (36) months from the Closing Date, expiring October 31, 2027.
It is critically important that any indemnification claim be formally asserted by Buyer — through delivery of a written claim notice to the Sellers' Representative in accordance with Section 7.4 of the SPA — before the expiration of the applicable survival period. Failure to deliver a timely claim notice will result in the permanent waiver of such claim. We recommend that Patrick Lennox, in coordination with Calderwood & Harkness, conduct a comprehensive review of all potential claims at least sixty (60) days before each survival period expiration date to ensure that no claims are inadvertently time-barred.
C. RWI Policy Interplay
Buyer procured a buy-side representations and warranties insurance policy (the "RWI Policy") in connection with the Transaction, which provides an additional layer of protection beyond the indemnification obligations of the Sellers. The key terms of the RWI Policy are as follows:
• Insurer: Ridgeline Mutual Insurance Company
• Policy Number: RMI-RWI-2024-08172
• Coverage Limit: $40,000,000 in the aggregate
• Retention (Self-Insured Retention): $4,400,000, representing 2.0% of the deal value. The retention is split equally between Buyer and Sellers:
• Sellers' share of the retention: $2,200,000, which is satisfied from the Indemnity Escrow (i.e., the first $2,200,000 of qualifying losses is deducted from the Indemnity Escrow before any claim is made under the RWI Policy)
• Buyer's share of the retention: $2,200,000, which is borne by Buyer directly (i.e., Buyer absorbs the first $2,200,000 of its share of losses before claiming under the RWI Policy)
• Premium: $1,232,000, paid by Buyer at Closing
• Claim Process: In the event of a potential claim, Buyer must first exhaust the retention (both the Sellers' share, satisfied from the Indemnity Escrow, and Buyer's own share) before making a claim under the RWI Policy. Claims under the RWI Policy must be submitted in accordance with the policy's notice requirements, which generally require written notice to the insurer within thirty (30) days of Buyer becoming aware of facts or circumstances that could reasonably give rise to a claim.
• Key Contact: Dennis Hargrave, SVP, Transactional Risk, Ridgeline Mutual Insurance Company
We have prepared a separate RWI Policy Summary Memorandum that provides a detailed analysis of the RWI Policy's coverage terms, exclusions, notice requirements, and claim procedures. We commend that memorandum to Patrick Lennox's attention and recommend that it be maintained alongside this memorandum as a reference document.
It is essential that any potential indemnification claim be coordinated with the RWI Policy notice requirements. In particular, Buyer should notify Ridgeline Mutual promptly upon becoming aware of any facts or circumstances that could give rise to a claim under the RWI Policy, even if such facts are preliminary or uncertain. Late notice could jeopardize coverage under the policy.
D. Pending Litigation: Hartwell v. Meridian
One item of particular note is the pending patent infringement litigation captioned:
*Hartwell Orthopedic Solutions, Inc. v. Meridian Surgical Technologies, Inc.*, Civil Action No. 2:23-cv-04817 (United States District Court, Eastern District of Pennsylvania)
This action was brought by Hartwell Orthopedic Solutions, Inc. ("Hartwell") against Meridian in 2023, alleging that certain of Meridian's powered shaver system products infringe one or more Hartwell patents. The damages exposure in this litigation has been estimated at $2,500,000 to $5,000,000, based on the analysis of litigation counsel. This matter was disclosed in the SPA Disclosure Schedules and is subject to specific indemnification by the Sellers under the SPA.
Outside litigation counsel for Meridian in this matter is Braddock & Lyle LLP (Deborah Lyle, Partner), located at 1600 Arch Street, Suite 2000, Philadelphia, PA 19103. At the time of the signing of the SPA, Meridian had filed a motion for summary judgment, which was pending before the court. Buyer should monitor the litigation closely for a ruling on the summary judgment motion, which could significantly affect the potential exposure and the likelihood of indemnification claims.
Buyer should coordinate with the Sellers' Representative regarding any indemnification claims arising from this litigation, and should ensure that all applicable notice requirements (both under the SPA and under the RWI Policy) are satisfied in connection with any developments in the case that could give rise to a loss.
E. Action Items
1. Patrick Lennox to establish and maintain a running log or tracker of all identified or potential breaches of representations and warranties, and all circumstances that could give rise to indemnification claims. This tracker should be reviewed and updated at least monthly.
2. Before each scheduled Indemnity Escrow release date (October 31, 2025, and October 31, 2026), Patrick Lennox and Calderwood & Harkness (Tiffany Rosenthal / Andrew Fitzpatrick) should compile a comprehensive summary of all pending or anticipated indemnification claims and issue appropriate hold-back instructions to Keystone Escrow Services if necessary.
3. Patrick Lennox to establish an internal protocol for promptly notifying Calderwood & Harkness upon discovery of any facts or circumstances that could give rise to a potential indemnification claim. We recommend that this protocol be communicated to all Solstice and Meridian personnel with relevant responsibilities.
4. Calendar all survival period expiration dates (October 31, 2026, for general representations; October 31, 2027, for environmental representations; ongoing for Fundamental and Tax Representations) with 60-day and 30-day advance reminders.
5. Ensure compliance with RWI Policy notice requirements. Any potential claim must be reported to Ridgeline Mutual Insurance Company (Dennis Hargrave) within thirty (30) days of becoming aware of the claim or the underlying circumstances. Coordinate with Calderwood & Harkness before submitting any notice to Ridgeline.
6. Monitor the *Hartwell* litigation and coordinate with Deborah Lyle at Braddock & Lyle LLP for regular status updates. Promptly notify Calderwood & Harkness and the Sellers' Representative of any material developments, including any ruling on the pending summary judgment motion.
VIII. Employment, Retention, and Non-Competition Matters
A. Employment Agreements
In connection with the Transaction, three key employees of Meridian entered into new employment agreements with Buyer (or its designee), each effective as of the Closing Date (October 31, 2024). These employment agreements were a condition to closing under the SPA and are integral to the post-closing integration and ongoing operation of the Meridian business. The key terms are summarized below:
Each employment agreement is governed by the laws of the State of Delaware and includes standard provisions regarding base salary, bonus eligibility, benefits, termination for cause and without cause, severance, and post-termination restrictive covenants (non-competition and non-solicitation of employees and customers). The non-competition and non-solicitation covenants run for two (2) years following the termination of the executive's employment, regardless of the reason for termination (subject to applicable law).
Of particular importance, Dr. Subramanian's employment agreement includes specific earnout-related cooperation obligations, requiring Dr. Subramanian to devote his full professional efforts to the ArthroNav program during the Earnout Period and to cooperate with Buyer in pursuing the 510(k) submissions for both ArthroNav milestones. As noted in Section V.B above, Dr. Subramanian's reassignment, material change in role, or transfer to a different project requires the prior written consent of the Sellers' Representative (Dr. Marcus Ellsworth) during the Earnout Period. Solstice management should treat this restriction as a binding obligation and should consult with Calderwood & Harkness before taking any action that could implicate this provision.
B. Retention Bonus Pool
In connection with the Transaction, Buyer funded a retention bonus pool of Three Million Five Hundred Thousand Dollars ($3,500,000) for the benefit of key Meridian employees. The retention bonus pool is structured as follows: