RISK FACTORS

The combined company will be faced with a market environment that cannot be predicted and that involves significant risks, many of which will be beyond its control. In addition to the other information contained in this joint proxy and consent solicitation statement/prospectus, you should carefully consider the material risks described below before you, as an RTI stockholder decide how to vote your shares of stock, or you, as a PS Spine unitholder, decide if you will provide written consent. You should also read and consider the other information in this joint proxy and consent solicitation statement/prospectus and the other documents incorporated by reference into this joint proxy and consent solicitation statement/prospectus, including the matters addressed in the section entitled “Cautionary Statement Concerning Forward -Looking Statements ”, beginning on page 1. See also “ Where You Can Find More Information ”, beginning on page 187.

Risks Relating to the Transaction and the Combined Company

The announcement and pendency of the Transaction may adversely affect the business, financial condition and results of operations of RTI, Paradigm and, consequently, if the Transaction is consummated, the combined company.

Uncertainty about the effect of the Transaction on employees, customers, suppliers, third-party distributors and other parties, may have an adverse effect on each of the respective businesses, financial conditions and results of operations of RTI and Paradigm, regardless of whether the Transaction is completed, and may have an adverse effect on the business, financial condition and results of operations of the combined company if the Transaction is completed. These risks include the following, all of which could be exacerbated by a delay in the completion of the Transaction:

 

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the impairment of RTI’s and Paradigm’s ability to attract, retain and motivate current and prospective employees, including key personnel;

 

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the diversion of significant time and resources of RTI’s and Paradigm’s management;

 

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difficulties maintaining relationships with RTI’s and Paradigm’s customers, suppliers, third-party distributors and other business partners;

 

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delays or deferments of certain business decisions by RTI’s and Paradigm’s customers, suppliers, third-party distributors and other business partners;

 

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RTI’s and Paradigm’s inability to pursue alternative business opportunities or make appropriate changes to their respective businesses because of requirements in the Master Transaction Agreement that they conduct their businesses in all material respects in the ordinary course of business consistent with past practice and not engage in certain activities prior to the completion of the Transaction;

 

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any litigation relating to the Transaction and the costs related thereto; and

 

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the incurrence of significant costs, expenses and fees for professional services and other transaction costs in connection with the Transaction.

Failure to consummate the Transaction within the expected timeframe or at all could have a material adverse impact on the business, financial condition and results of operations of RTI, Paradigm and consequently, if the Transaction is consummated, the combined company.

There can be no assurance that the Transaction will occur within the expected timeframe or at all. Consummation of the Transaction is subject to specified conditions, including:

 

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the accuracy of the representations and warranties of the parties and compliance by the parties with their respective obligations under the Master Transaction Agreement, in each case subject to certain materiality qualifiers;

 

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the written consent of PS Spine’s unitholders approving the Master Transaction Agreement and the transactions contemplated thereby, including the Contribution;

 

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the receipt of RTI stockholder approval;

 

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the expiration or termination of the applicable waiting periods (and any extension thereof) under the HSR Act;

 

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the absence of any law or order in effect that prevents, makes unlawful or prohibits the consummation of the Transaction;

 

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the absence of any material adverse effect on the business, condition (financial or otherwise) or results of operations of RTI and its subsidiaries, taken as a whole, or Paradigm and its subsidiaries, taken as a whole, in each case subject to certain exceptions, since November 1, 2018, the date of the Master Transaction Agreement;

 

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the Cash Consideration Amount being equal to or greater than $0;

 

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the shares of Holdco common stock issuable pursuant to the Merger and shares of Holdco common stock representing the Stock Consideration Amount being approved for listing on the Nasdaq Global Market, subject to official notice of issuance;

 

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the registration statement on Form S-4, of which this joint proxy and consent solicitation statement/prospectus forms a part, becoming effective under the Securities Act;

 

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the receipt of representation letters from officers of RTI, Holdco and PS Spine regarding the intended tax treatment of the Transaction (provided this condition will be deemed not to be satisfied if (i) Sidley Austin or Dorsey & Whitney, as the case may be, delivers an opinion that, as a result of a change in law occurring after November 1, 2018, it is unable to provide an opinion to the effect that the Merger and the Contribution, taken together, will qualify as a transaction described in Section 351 of the Code (and, in the case of Sidley Austin, that the Merger will not qualify as a “reorganization” within the meaning of Section 368(a) of the Code) and (ii) RTI or PS Spine, as the case may be, is unable to obtain such opinion from an alternative tax counsel);

 

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neither Marc Viscogliosi nor Francis Magee rescinding his obligations under his applicable consulting agreement with RTI, and RTI not rescinding its obligations under those consulting agreements;

 

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none of Viscogliosi Brothers, LLC, HealthCor Paradigm Blocker Company Two, Inc. and HealthCor AIV, L.P. rescinding its obligations under its applicable Non-Competition Agreement with Holdco; and

 

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none of the parties to the Settlement Agreement rescinding their obligations under the Settlement Agreement, the Settlement Agreement being in full force and effect and not having been amended in any manner adverse to Holdco, RTI or Merger Sub and the transactions contemplated by the Settlement Agreement having been performed in accordance with the terms of the Settlement Agreement.

For additional information regarding the specified conditions to the closing of the Transaction, see the section entitled “The Master Transaction Agreement—Conditions to the Closing”.

We cannot provide any assurances that these conditions will be satisfied in a timely manner or at all or that the Transaction will occur.

In addition, the Master Transaction Agreement contains certain termination rights, including (i) for RTI and PS Spine if the Transaction is not consummated on or prior to January 31, 2019 (which such deadline may be extended by RTI under certain circumstances to March 31, 2019 and which extensions RTI intends to exercise, as necessary), (ii) for RTI and PS Spine if the Required Merger Proposal Vote is not obtained at the RTI special meeting, or any adjournment or postponement thereof, (iii) for RTI if the PS Spine written consent is not provided to RTI within five business days following the effectiveness of the registration statement on Form S-4, of which this joint proxy and consent solicitation statement/prospectus forms a part and (iv) for PS Spine if the RTI board changes its recommendation that the RTI stockholders vote to approve the Merger Proposal, Share Issuance Proposal and the Meeting Adjournment Proposal, provided that PS Spine may not terminate pursuant to this clause if the Required Merger Proposal Vote has been obtained. For additional information regarding the circumstances under which RTI and PS Spine are able to terminate the Master Transaction Agreement, see the section entitled “The Master Transaction Agreement—Termination”.

 

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In addition, satisfying the conditions to the Transaction may take longer, and could cost more, than RTI and Paradigm expect. The occurrence of any of these events individually or in combination may adversely affect the benefits RTI and Paradigm expect to achieve from the Transaction and the trading prices of, prior to the consummation of the Transaction, RTI shares and, following the consummation of the Transaction, Holdco shares. In addition, if the Transaction does not close, the attention of RTI’s management and Paradigm’s management will have been diverted to the consummation of the Transaction, rather than their respective operations and pursuit of other opportunities, in certain circumstances RTI would be required to pay a reverse termination fee equal to $4.5 million or $9.0 million to PS Spine and RTI and Paradigm may suffer reputational or other harm due to the adverse perception of any failure to successfully complete the Transaction.

Competition authorities may take certain actions in connection with the Transaction under applicable antitrust laws, including enjoining consummation of the Transaction.

Under the HSR Act and the rules that have been promulgated thereunder by the FTC, certain transactions may not be consummated unless information has been furnished to the Antitrust Division and the FTC and certain waiting period requirements have been satisfied. The Transaction is subject to these requirements and may not be completed until the expiration of a 30-day waiting period following the filing of the required Notification and Report Forms with the Antitrust Division and the FTC or until early termination is granted. On November 13, 2018, Holdco and PS Spine filed the required forms under the HSR Act with the Antitrust Division and the FTC and requested early termination, which was granted on November 26, 2018. Even though early termination has been granted under the HSR Act, at any time before or after consummation of the Transaction, notwithstanding such termination, the applicable competition authorities could take such action under applicable antitrust laws as each deems necessary or desirable in the public interest, including seeking to enjoin the consummation of the Transaction. For additional information regarding the regulatory approvals required for closing of the Transaction, see the section entitled “The Transaction—Regulatory Approvals”.

If the Merger and the Contribution, taken together, do not qualify as a transaction described in Section 351 of the Code (or, in the case of the RTI stockholders, if the Merger does not qualify as a reorganization within the meaning of Section 368(a) of the Code), RTI stockholders may recognize substantial gain as a result of the Merger or the Contribution and may be required to pay substantial incremental U.S. federal income taxes, and PS Spine may recognize substantial additional gain as a result of the Contribution, in the taxable year in which the Merger and Contribution occur.

The obligations of PS Spine and RTI to consummate the Contribution and the Merger are conditioned on the receipt of certain representations and covenants in certificates of officers of RTI, PS Spine, and Holdco, which representations and covenants are intended to support the ability of each of PS Spine and RTI to take the position that the Merger and/or the Contribution will qualify for the Intended Tax Treatment. The positions of RTI and PS Spine are not binding on the Internal Revenue Service (the “ IRS ”) or the courts, and the parties do not intend to request a ruling from the IRS with respect to the Merger and/or the Contribution. Accordingly, there can be no assurance that the IRS will not challenge the qualification of the Merger and the Contribution, taken together, as a transaction described in Section 351 of the Code (or, in the case of RTI, the qualification of the Merger as a reorganization within the meaning of Section 368(a) of the Code) or that a court will not sustain such a challenge. If the IRS were to be successful in any such contention, or if for any other reason the Merger and the Contribution, taken together, were not treated as a transaction described in Section 351 of the Code (and, in the case of the RTI stockholders, if the Merger did not qualify as a reorganization within the meaning of Section 368(a) of the Code), then the RTI stockholders and/or PS Spine, as the case may be, would not be entitled to defer any portion of the gain realized as a result of receiving Holdco shares in the Merger or the Contribution and may be required to pay substantial incremental U.S. federal income taxes with respect to the taxable year in which the Merger and Contribution occur. For additional information regarding the U.S. federal income tax consequences of the Merger and the Contribution, see the section entitled “The Transaction—Material U.S. Federal Income Tax Consequences”, beginning on page 109.

The U.S. federal income tax treatment of the Earnout Consideration is not entirely clear under current law.

RTI and PS Spine intend to take the position that the recognition of gain upon receipt of the Holdco common stock component of the Earnout Consideration will be deferred pursuant to Section 351(a) of the Code. The U.S. federal income tax treatment of the receipt, after the close of the taxable year in which the Contribution occurs, of Holdco common stock as contingent consideration in a transaction that otherwise qualifies as a transaction described in

 

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Section 351 of the Code is not entirely clear under current law, and there is no direct authority with respect to the tax treatment of the Earnout Consideration. If the recognition of gain upon the receipt of the Holdco common stock component of the Earnout Consideration is not eligible for deferral under Section 351 of the Code, then the value of such Holdco common stock would be treated in the same manner as the cash component of the Earnout Consideration. In that case, PS Spine would recognize gain (but not loss) as a result of the receipt of such Holdco common stock. Such gain may be eligible to be reported under the installment method in accordance with the rules (including the imposition of an interest charge), described in the section entitled “The Transaction—Material U.S. Federal Income Tax Consequences—Treatment of the Earnout Consideration”, beginning on page 112. Regardless of whether Section 351(a) applies to the Holdco common stock component of the Earnout Consideration, a portion of Holdco common stock received as Earnout Consideration may be recharacterized as imputed interest under the rules described in the section entitled “The Transaction—Material U.S. Federal Income Tax Consequences—Imputed Interest”, beginning on page 113.

RTI and PS Spine may be the target of securities class action and derivative lawsuits which could result in substantial costs and may delay or prevent the Transaction from being completed.

Securities class action lawsuits and derivative lawsuits are often brought against companies that have entered into merger agreements or other business combinations. Even if the lawsuits are without merit, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on RTI’s or PS Spine’s liquidity and financial condition. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting the closing of the Transaction, then that injunction may delay or prevent the Transaction from being consummated, which may adversely affect RTI’s and Paradigm’s respective business, financial position and results of operation. As of the date of this joint proxy and consent solicitation statement/prospectus, neither RTI nor Paradigm is aware of any securities class action lawsuits or derivative lawsuits having been filed in connection with the Transaction.

RTI stockholders and PS Spine unitholders will have a reduced ownership and voting interest after the Transaction and will each exercise less influence over management.

The Holdco shares that each RTI stockholder receives in the Transaction in exchange for shares of RTI will represent a percentage ownership of Holdco that is smaller than such RTI stockholder’s percentage ownership of RTI. Similarly, the Holdco shares that PS Spine receives in the Transaction in exchange for equity interests in Paradigm will represent a percentage ownership of Holdco that is significantly smaller than PS Spine’s percentage ownership of Paradigm. If the Transaction occurs, 10,729,614 shares of common stock of Holdco will be issued at closing as partial consideration for the Contribution. A significant portion of these shares will be used, along with cash that would otherwise be paid at closing, to pay the amounts outstanding under Paradigm’s existing senior secured credit agreement. Assuming (i) the closing occurs on March 15, 2019, (ii) 62,245,112 shares of RTI common stock (based on the number of shares outstanding as of January 15, 2019) and 50,000 shares of RTI preferred stock are issued and outstanding immediately prior to the effective time and (iii) the amount of cash paid to the lenders under Paradigm’s existing senior secured credit agreement at closing does not exceed $95.0 million, and taking into account the $3.0 million Paradigm borrowed from the lenders under its existing senior secured credit agreement on December 6, 2018, approximately 85.30% of the issued and outstanding Holdco common stock and 100% of the issued and outstanding Holdco preferred stock immediately following the closing will be held by former RTI stockholders, approximately 6.42% of the issued and outstanding Holdco common stock immediately following the closing will be held by PS Spine and approximately 8.28% of the issued and outstanding Holdco common stock immediately following the closing will be held by the lenders under Paradigm’s existing senior secured credit agreement and their affiliates. Using the same assumptions set forth above and assuming the conversion of the RTI preferred stock, immediately following the closing, former holders of RTI common stock and RTI preferred stock will collectively hold 87.37% of the voting power of Holdco, PS Spine will hold 5.51% of the voting power of Holdco and the lenders under Paradigm’s existing senior secured credit agreement and their affiliates will hold 7.12% of the voting power of Holdco. As a result of this reduced ownership percentage, former RTI stockholders will have less influence on the management and policies of Holdco than they now have with respect to RTI and PS Spine unitholders will have less influence on the management and policies of Holdco than they now have with respect to Paradigm. As described in the section entitled “The Transaction—Interests of PS Spine’s and Paradigm’s Managers and Executive Officers in the Transaction—The Settlement Agreement”, the lenders under Paradigm’s existing senior secured credit agreement and their affiliates may receive a smaller or larger portion of the Stock Consideration Amount than as assumed for purposes of this example. If the lenders under Paradigm’s

 

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existing senior secured credit agreement and their affiliates receive a larger portion of the Stock Consideration Amount than as assumed for purposes of this example, the percentage of the issued and outstanding Holdco common stock immediately following the closing that will be held by the lenders under Paradigm’s existing senior secured credit agreement and their affiliates will be greater than set forth in this example and the percentage that will be held by PS Spine will be less than set forth in this example. If the lenders under Paradigm’s existing senior secured credit agreement and their affiliates receive a smaller portion of the Stock Consideration Amount than as assumed for purposes of this example, the percentage of the issued and outstanding Holdco common stock immediately following the closing that will be held by the lenders under Paradigm’s existing senior secured credit agreement and their affiliates will be less than set forth in this example and the percentage that will be held by PS Spine will be greater than set forth in this example. In addition, the earnout provisions of the Master Transaction Agreement provide for the possibility that PS Spine may receive additional shares of Holdco common stock, which would cause former RTI stockholders ownership of Holdco to be further diluted. For a description of the earnout provisions, including a description of the number of additional shares that may be issued, see the section entitled “The Master Transaction Agreement—Purchase Price—Contingent Consideration”.

The opinion of RTI’s financial advisor will not be updated to reflect changes in circumstances between signing of the Master Transaction Agreement in November 2018 and the completion of the Transaction.

RTI has not obtained an updated opinion from its financial advisor as of the date of this joint proxy and consent solicitation statement/prospectus, and RTI does not anticipate asking its financial advisor to update its opinion. Changes in the operations and prospects of RTI or Paradigm, general market and economic conditions and other factors that may be beyond the control of RTI or Paradigm, and on which RTI’s financial advisor’s opinions were based, may significantly alter the value of RTI or Paradigm or the trading prices of RTI shares by the time the Transaction is completed. The opinion does not speak as of the time the Transaction will be completed or as of any date other than the date on which such opinion was delivered. Because RTI’s financial advisor will not be updating its opinion, which was issued in connection with the signing of the Master Transaction Agreement on November 1, 2018, the opinion will not address the fairness of the Aggregate Consideration from a financial point of view at the time the Transaction is completed. For a description of the opinion that RTI received from its financial advisor, see the section entitled “The Transaction—Opinion of RTI’s Financial Advisor”.

The Transaction may be completed even though material adverse changes may result from the announcement of the Transaction, industry-wide changes or other causes.

In general, RTI may refuse to complete the Transaction if there is a change causing a material adverse effect on the business, condition (financial or otherwise) or results of operations of Paradigm and its subsidiaries, taken as a whole, prior to the closing. Similarly, in general, PS Spine may refuse to complete the Transaction if there is a change causing a material adverse effect on the business, condition (financial or otherwise) or results of operations of RTI and its subsidiaries, taken as a whole, prior to the closing. However, some types of changes do not permit either party to refuse to complete the Transaction, even if such changes would have a material adverse effect on RTI or Paradigm. If adverse changes occur but RTI and PS Spine must still complete the Transaction, the market price of the combined company’s stock may suffer. For a more complete discussion of what constitutes a material adverse effect on RTI or Paradigm under the Master Transaction Agreement, see the section entitled “The Master Transaction Agreement—Representations and Warranties”.

The combined company may fail to realize the anticipated benefits of the Transaction.

The success of the Transaction will depend on, among other things, the combined company’s ability to combine the RTI and Paradigm businesses in a manner that facilitates growth opportunities, including with respect to the acceleration of reimbursement of coflex ^® , and realizing anticipated cost synergies and performance improvements.

However, the combined company must successfully combine the businesses of RTI and Paradigm in a manner that permits these anticipated cost synergies and performance improvements to be realized. In addition, the combined company must achieve the anticipated synergies and improvements without adversely affecting current revenues and investments in future growth. If the combined company is not able to successfully achieve these objectives, the anticipated benefits of the Transaction may not be realized fully or at all or may take longer to realize than expected.

 

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The failure to integrate successfully certain businesses and operations of RTI and Paradigm in the expected time frame may adversely affect the combined company’s future results.

Historically, RTI and Paradigm have operated as independent companies, and they will continue to do so until the completion of the Transaction. The management of the combined company may face significant challenges in integrating and consolidating certain businesses and the functions of RTI and Paradigm, integrating their technologies, organizations, procedures, policies and operations, addressing differences in the business cultures of the two companies and retaining key personnel. The integration may also be complex and time consuming, and require substantial resources and effort. The integration process and other disruptions resulting from the Transaction may also disrupt RTI’s and Paradigm’s ongoing businesses or cause inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s relationships with employees, suppliers, customers and others with whom RTI and Paradigm have business or other dealings or limit the combined company’s ability to achieve the anticipated benefits of the Transaction. In addition, difficulties in integrating the businesses or regulatory functions of RTI and Paradigm could harm the reputation of the combined company.

Combining the businesses of RTI and Paradigm may be more difficult, costly or time-consuming than expected, which may adversely affect the combined company’s results and negatively affect the value of Holdco shares following the Transaction.

RTI and PS Spine have entered into the Master Transaction Agreement because RTI and PS Spine each believes that the Transaction will be beneficial to, in the case of RTI, its company and its stockholders, and in the case of PS Spine, Paradigm and PS Spine’s unitholders, and that combining the businesses of RTI and Paradigm will produce cost synergies and performance improvements. If the combined company is not able to successfully combine the businesses of RTI and Paradigm in an efficient, effective and timely manner, the anticipated synergies and improvements of the Transaction may not be realized fully, or at all, or may take longer to realize than expected, and the value of Holdco shares may be affected adversely.

An inability to realize the full extent of the anticipated benefits of the Transaction and the other transactions contemplated by the Master Transaction Agreement, as well as any delays encountered in the integration process, could have an adverse effect upon the revenues, level of expenses and operating results of the combined company, which may adversely affect the value of Holdco shares after the completion of the Transaction.

In addition, the actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized. Actual synergies, if achieved, may be lower than what RTI and Holdco expect and may take longer to achieve than anticipated. If the combined company is not able to adequately address integration challenges, the combined company may be unable to successfully integrate RTI’s and Paradigm’s operations or to realize the anticipated benefits of the integration of the two companies.

RTI, Holdco, PS Spine and Paradigm will incur significant transaction costs in connection with the Transaction.

RTI, Holdco, PS Spine and Paradigm have incurred and expect to incur a number of non-recurring costs associated with the Transaction. These costs and expenses include financial advisory, debt origination fees, legal, accounting, consulting and other advisory fees and expenses, reorganization and restructuring costs, severance and employee benefit-related expenses, filing fees, printing expenses and other related charges. RTI expects that its transaction expenses will equal approximately $11.7 million, and PS Spine and Paradigm expect that their collective transaction expenses will equal approximately $4.0 million. Some of these costs are payable by RTI, Holdco, PS Spine and Paradigm regardless of whether the Transaction is completed. There is also a large number of processes, policies, procedures, operations, technologies and systems that must be integrated in connection with the Transaction. While both RTI and PS Spine have assumed that a certain level of expenses would be incurred in connection with the Transaction and the other transactions contemplated by the Master Transaction Agreement, there are many factors beyond their control that could affect the total amount or the timing of the integration and implementation expenses.

There may also be additional unanticipated significant costs in connection with the Transaction that the combined company may not recoup. These costs and expenses could reduce the benefits and additional income Holdco expects to

 

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achieve from the Transaction. Although Holdco expects that these benefits will offset the transaction expenses and implementation costs over time, this expected net benefit may not be achieved in the near term or at all.

The combined company expects to have significant additional indebtedness following the Transaction and the credit ratings of the combined company or its subsidiaries may be different from current ratings and what RTI and PS Spine currently expect.

RTI expects to incur significant additional indebtedness in order to finance the Cash Consideration Amount and pay other costs and expenses incurred in connection with the Master Transaction Agreement and the transactions contemplated thereby. The receipt of financing by RTI or its affiliates, however, is not a condition to completion of the Transaction. Following completion of the Transaction, the combined company will have substantial indebtedness, which may adversely affect the business, financial condition and operating results of the combined company, including:

 

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making it more difficult for the combined company to satisfy its debt service obligations;

 

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requiring the combined company to dedicate a substantial portion of its cash flows to debt service obligations, thereby potentially reducing the availability of cash flows to pay any future cash dividends and to fund working capital, capital expenditures, acquisitions, investments and other general operating requirements;

 

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limiting the ability of the combined company to obtain additional financing to fund its working capital requirements, capital expenditures, acquisitions, investments, debt service obligations and other general operating requirements;

 

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restricting the combined company from making investments in research and development, strategic acquisitions or taking advantage of favorable business opportunities;

 

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placing the combined company at a relative competitive disadvantage compared to competitors that have less debt;

 

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limiting flexibility to plan for, or react to, changes in the businesses and industries in which the combined company operates, which may adversely affect the combined company’s operating results and ability to meet its debt service obligations;

 

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increasing the vulnerability of the combined company to adverse general economic and industry conditions, including changes in interest rates; and

 

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limiting the ability of the combined company to refinance its indebtedness or increasing the cost of such indebtedness.

If the combined company incurs additional indebtedness following the Transaction, the risks related to the substantial indebtedness of the combined company may intensify.

PS Spine and Paradigm managers and executive officers may have interests in the Transaction different from the interests of PS Spine Unitholders.

Although the PS Spine board recommends to PS Spine unitholders that they approve the Master Transaction Agreement and the transactions contemplated thereby, including the Contribution, PS Spine unitholders should be aware that certain members of the PS Spine and Paradigm boards and executive officers of PS Spine and Paradigm have interests in the transactions contemplated by the Master Transaction Agreement that may be different from, or are in addition to, the general interests of PS Spine unitholders, as described in the section entitled “The Transaction—Interests of PS Spine’s and Paradigm’s Managers and Executive Officers in the Transaction”. These interests include, among other things: arrangements that provide for severance payments to certain of Paradigm’s executive officers in certain circumstances pursuant to the terms of their respective employment agreements with Paradigm; RTI’s expected execution of an employment agreement with William L. Pfost, Paradigm’s Executive Vice President, Sales and Marketing, and RTI’s execution of consulting agreements with Marc R. Viscogliosi, the Chairman and Chief Executive

 

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Officer of PS Spine and Paradigm, and Francis Magee, Paradigm’s Chief Technology Officer; the election of Jeffrey C. Lightcap, a manager of PS Spine and Paradigm, to the Holdco board of directors upon the effective time; Paradigm’s expected execution of a consulting agreement with an entity in which certain managers and executive officers of PS Spine and Paradigm have an ownership interest; the ability of certain unitholders affiliated with certain managers of PS Spine and Holdco to receive distributions from PS Spine prior to other unitholders; a significant portion of the consideration that would otherwise be paid directly to PS Spine pursuant to the Master Transaction Agreement will be used to pay amounts owed to the lenders under Paradigm’s existing senior secured credit facility and their affiliates, and that one of PS Spine’s and Paradigm’s managers is a Managing Director at an entity related to such lenders and their affiliates; and rights to indemnification and directors’ and officers’ liability insurance that will survive the closing. PS Spine unitholders should consider whether these interests may have influenced the managers and executive officers of PS Spine and Paradigm to support or recommend the Transaction.

RTI’s share price may fluctuate prior to the completion of the Transaction, the combined company’s share price may fluctuate following the completion of the Transaction, and the monetary value of the Stock Consideration Amount and certain portions of the Earnout Consideration may change following the time of the signing of the Master Transaction Agreement or the date of this joint proxy and consent solicitation statement/prospectus due to a change in the value of Holdco common stock.

The Stock Consideration Amount and certain portions of the Earnout Consideration consist of a fixed number of shares of Holdco common stock, as set forth in the Master Transaction Agreement. Accordingly, any change in the market price of RTI common stock prior to completion of the Transaction, and any change in the market price of Holdco common stock following the completion of the Transaction, will affect the dollar value of such shares of Holdco common stock. Changes in the market price of RTI and/or Holdco common stock could result from a variety of factors, many of which are beyond RTI’s and/or the combined company’s control, including:

 

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general market and economic conditions, including market conditions in the medical device and healthcare industry;

 

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technological innovations or new products by RTI’s or the combined company’s competitors;

 

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actual or expected variations in results of operations;

 

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changes in recommendations by securities analysts;

 

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operations and stock performance of industry participants;

 

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significant acquisitions or strategic alliances by competitors;

 

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sales of RTI and/or combined company common stock, particularly as part of an underwritten offering;

 

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recruitment or departure of key personnel;

 

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loss of any strategic relationship; and

 

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failure to achieve the perceived benefits of the Transaction as rapidly as, or to the extent, expected.

The market price of the common stock of the combined company may be affected by factors different from those affecting the market price for shares of RTI common stock.

Upon the closing, holders of RTI common stock and PS Spine will become holders of Holdco common stock. Paradigm’s business differs from that of RTI, and the business of the combined company will differ from that of RTI. Accordingly, the results of operations for the combined company may be affected by factors different from those currently affecting the results of operations of RTI. For a discussion of the businesses of RTI and of certain factors to consider in connection with those businesses, see the see the section entitled “Information About RTI, Holdco and Merger Sub” and the documents incorporated by reference in this joint proxy and consent solicitation statement/prospectus and referred to in the section entitled “Where You Can Find More Information”. For a discussion of the

 

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businesses of Paradigm and of certain factors to consider in connection with those businesses, see the sections entitled “Information About PS Spine and Paradigm” and “Paradigm’s Business”. See also the section entitled “Summary—Per Share Market Price Data and Dividend Information” for additional information on the market value of shares of RTI common stock and units of Paradigm.

There has been no public market for membership units in PS Spine and the lack of a public market makes it difficult to determine the fair market value of Paradigm.

The outstanding membership units in PS Spine are privately held and not traded on any public market. The lack of a public market may make it more difficult to determine the fair market value of Paradigm than if membership units in PS Spine were traded publicly. The consideration to be paid to PS Spine pursuant to the Master Transaction Agreement was determined based on negotiations between the parties and, even though the RTI board received a fairness opinion in connection with its analysis of the Transaction, such consideration may not be indicative of the price at which PS Spine membership units may have traded if they were traded on a public market.

A significant portion of the consideration to be paid to PS Spine pursuant to the Master Transaction Agreement will be used to pay amounts owed to the lenders under Paradigm’s existing senior secured credit agreement and their affiliates.

Hayfin Services LLP is the administrative agent, and certain of its affiliates are the lenders, under Paradigm’s existing senior secured credit agreement. PS Spine and Paradigm have entered into the Settlement Agreement with the Hayfin Entities, pursuant to which:

 

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all of the Cash Consideration Amount not used to pay transaction expenses of PS Spine or Paradigm (the “ Closing Debt Cash Amount ”);

 

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5,364,807 shares of Holdco common stock to be issued as part of the Stock Consideration Amount;

 

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a number of shares of Holdco common stock, to be issued as part of the Stock Consideration Amount, equal to (a)(i) the amount of any loans made by the lenders under Paradigm’s existing senior secured credit agreement to Paradigm or any of its subsidiaries following the date of the Master Transaction Agreement and prior to the closing, plus accrued and unpaid interest thereon and any additional payments due to such lenders as a result thereof, minus (ii) the amount by which the Closing Debt Cash Amount, less any out-of-pocket fees and expenses of such lenders, exceeds $95.0 million, divided by (b) $4.66; and

 

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$10.0 million of the Earnout Consideration (which can take the form of cash, stock or a combination of both) that would otherwise be payable to PS Spine if Giants Revenue (as defined below) is equal to or exceeds $65.0 million in any LTM Period (as defined below) ending on or prior to December 31, 2020,

will be used to pay amounts outstanding under Paradigm’s existing senior secured credit agreement and other amounts due to the lenders thereunder and their affiliates. Payments of the above amounts to the lenders under Paradigm’s existing senior secured credit agreement and their affiliates will decrease the amount of consideration paid directly to PS Spine pursuant to the Master Transaction Agreement, which in turn will decrease the amount of consideration available for PS Spine to distribute to its unitholders.

A significant portion of the consideration to be paid to PS Spine pursuant to the Master Transaction Agreement is contingent on the occurrence of certain events in the future.

The payment of the Earnout Consideration, including additional shares of Holdco common stock, is contingent upon the occurrence of certain events in the future, subject to the terms and conditions set forth in the Master Transaction Agreement. For a more complete discussion of the Earnout Consideration, see the section entitled “The Master Transaction Agreement—Purchase Price”, beginning on page 126. There can be no assurance that any of the conditions to the payment of all or a portion of the Earnout Consideration will be satisfied in a timely manner or at all, or that an effect, event, development or change will not transpire that could delay or prevent these conditions from being satisfied.

 

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In addition, after the closing, the combined company will have the right to setoff certain indemnification claims against the Earnout Consideration, as further described in the section entitled “The Master Transaction Agreement—Indemnification”, beginning on page 141.

Accordingly, there can be no guarantee with respect to whether or when any of the Earnout Consideration will be paid, if at all. As a result, the exact amounts of cash and shares of Holdco common stock that PS Spine will be entitled to receive pursuant to the Master Transaction Agreement will not be determined until subsequent to the closing and could vary significantly.

Expenses that may be incurred by PS Spine will reduce the amounts otherwise available for distribution to its unitholders.

PS Spine intends to distribute the consideration that it receives pursuant to the Master Transaction Agreement (net of transaction and other expenses and amounts due to its senior lenders and their affiliates) to its unitholders in accordance with PS Spine’s organizational documents as soon as reasonably practicable following its receipt thereof. Expenses that may be incurred by PS Spine, whether in connection with the Master Transaction Agreement, in connection with the distribution of consideration PS Spine receives pursuant to the Master Transaction Agreement or otherwise, will reduce the amounts otherwise available for distribution to PS Spine unitholders, and accordingly may reduce the payments that PS Spine unitholders would otherwise receive in connection with the Transaction.

The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and may not be an indication of the combined company’s financial condition or results of operations following the completion of the Transaction.

The unaudited pro forma condensed combined financial information contained elsewhere in this joint proxy and consent solicitation statement/prospectus is presented for illustrative purposes only and may not be an indication of the combined company’s financial condition or results of operations following the completion of the Transaction for several reasons. The unaudited pro forma condensed combined financial information has been derived from the historical financial statements of RTI and Paradigm and adjustments and assumptions have been made regarding the combined company after giving effect to the Transaction. The information upon which these adjustments and assumptions have been made is preliminary, and these kinds of adjustments and assumptions are difficult to make with accuracy. Moreover, the unaudited pro forma condensed combined financial information does not reflect all costs that are expected to be incurred by the combined company in connection with the Transaction. For example, the impact of any incremental costs incurred in integrating RTI and Paradigm are not reflected in the unaudited pro forma condensed combined financial information. As a result, the actual financial condition and results of operations of the combined company following the completion of the Transaction may not be consistent with, or evident from, the unaudited pro forma condensed combined financial information. The assumptions used in preparing the unaudited pro forma condensed combined financial information may not prove to be accurate, and other factors may affect the combined company’s financial condition or results of operations following the Transaction. Any decline or potential decline in the combined company’s financial condition or results of operations may cause significant variations in the market price of the combined company’s stock.

The unaudited prospective financial information included in this joint proxy and consent solicitation statement/prospectus may not prove to be accurate and is not necessarily indicative of current values or future performance.

The unaudited prospective financial information of RTI and Paradigm contained in this joint proxy and consent solicitation statement/prospectus involves risks, uncertainties and assumptions and is not a guarantee of future performance. The assumptions used in preparing the unaudited prospective financial information may not prove to be accurate, and other factors may affect the combined company’s financial condition or results of operations following the Transaction. Neither RTI nor Paradigm can provide any assurance that the results indicated in RTI’s or Paradigm’s unaudited prospective financial information will be realized or that RTI’s or Paradigm’s future financial results will not materially vary from the unaudited prospective financial information. See “Certain Unaudited Prospective Financial Information.”

 

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If the issuance of Holdco common stock as Earnout Consideration is at a price less than the applicable conversion price of Holdco preferred stock (which is expected to be $4.39 per share immediately following the closing), there will be a downward adjustment to the conversion price of Holdco preferred stock, which would result in dilution to Holdco’s common stockholders.

The conversion price of Holdco preferred stock will be subject to adjustment in certain events. The issuance of Initial Earnout Shares or Final Earnout Shares at a price below the then-applicable conversion price of the Holdco preferred stock (which is expected to be $4.39 per share immediately following the closing) would result in a downward adjustment of the conversion price of the Holdco preferred stock. This potential reduction in conversion price would increase the number of shares of Holdco common stock that would be issued upon conversion of the Holdco preferred stock and would result in dilution to the other holders of Holdco common stock. Such dilution could adversely affect the trading price of Holdco common stock. See the section entitled “Description of Holdco Capital Stock—Preferred Stock”, beginning on page 168, for a discussion of the terms of a potential adjustment of the conversion price of the Holdco preferred stock.

Third parties may terminate or alter existing contracts or relationships with RTI or Paradigm.

Each of RTI and Paradigm has contracts with customers, suppliers, third-party distributors, vendors, landlords, licensors and other business partners which may require RTI or Paradigm, as applicable, to obtain consent from these other parties in connection with the Transaction. If these consents cannot be obtained, the combined company may suffer a loss of potential future revenue and may lose rights that are material to its business. In addition, third parties with which RTI or Paradigm currently have relationships may terminate or otherwise reduce the scope of their relationships with either or both parties in anticipation of the Transaction, or with the combined company following the Transaction. Any such disruptions could limit the combined company’s ability to achieve the anticipated benefits of the Transaction. The adverse effect of such disruptions could also be exacerbated by a delay in the anticipated completion of the Transaction or the termination of the Master Transaction Agreement.

Risks Relating to RTI

RTI is, and will continue to be, subject to the risks described in Part I, Item 1A in RTI’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC and incorporated by reference into this joint proxy and consent solicitation statement/prospectus. See the section entitled “Where You Can Find More Information”, beginning on page 187.

Risks Relating to Paradigm

Paradigm is dependent on its key personnel, including senior management.

Paradigm is highly dependent upon its senior management. The loss of services of members of Paradigm’s senior management could have a material adverse effect on Paradigm’s business, prospects, financial condition and results of operations. The employment of certain members of Paradigm’s senior management is “at will,” and any member of Paradigm’s senior management can terminate his or her employment with Paradigm at any time. In connection with the Transaction, it is expected that at closing two members of Paradigm’s senior management, Marc R. Viscogliosi, Paradigm’s Chairman and Chief Executive Officer, and Francis Magee, Paradigm’s Chief Technology Officer, will voluntarily terminate their employment with Paradigm, and commence providing services under their respective consulting agreements with RTI, which become effective at the closing. For more information on the consulting agreements, see the sections entitled “The Transaction—Consulting Agreement Between RTI and Marc. R. Viscogliosi” and “The Transaction—Consulting Agreement Between RTI and Francis Magee”, beginning on pages 121 and 121, respectively. If any member of Paradigm’s senior management should die, become disabled or otherwise cease to participate in Paradigm’s business, its ability to manage its operations could be severely impaired. There can be no assurance that any of these individuals will remain in the employ of Paradigm, or otherwise continue to be able to carry on their current duties or otherwise provide services to Paradigm.

 

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In addition, Paradigm may need to hire additional qualified management, sales, scientific, regulatory, quality assurance and control and administrative personnel as it continues to expand its business activities. It may not be able to attract and retain qualified personnel on acceptable terms given the competition for such personnel among companies that operate in its markets. The trend in the orthopedics industry of requiring sales and other personnel to enter into non-competition agreements prior to starting employment exacerbates this problem, since personnel who have made such a commitment to their current employers are more difficult to recruit. If Paradigm fails to identify, attract, retain and motivate these highly skilled personnel, or if it loses current skilled personnel, its business, prospects, financial condition and results of operations could be adversely affected.

Paradigm has a history of net losses and may never become profitable.

Paradigm has a history of incurring losses and has earned no profits as of the date of this joint proxy and consent solicitation statement/prospectus. Because of the risks and uncertainties associated with researching, developing and commercializing medical device products, it is not possible to predict with any reasonable degree of certainty the extent of any future losses or when Paradigm will become profitable, if at all. The report of Paradigm’s independent auditors on its financial statements as of December 31, 2017 and 2016 and for each of the two years in the period ended December 31, 2017, includes an explanatory paragraph relating to Paradigm’s ability to continue as a going concern. As of December 31, 2017, Paradigm had an accumulated deficit of approximately $214.4 million, primarily because of costs relating to the development, regulatory approvals, clinical studies and commercialization of its products. Paradigm expects its operating expenses relating to sales and marketing activities and product development will continue during the foreseeable future. To achieve profitability, Paradigm would need to generate substantially more revenue than it has in prior years. Paradigm’s ability to achieve significant revenue growth will depend, in large part, on its ability to achieve widespread market acceptance and third-party reimbursement for coflex ^® and successfully expand its business in the United States. Paradigm may never achieve such substantial market acceptance or realize significant revenue from the sale of its products, and therefore may never reach profitability.

The markets for Paradigm’s products are highly competitive. If competitors are better able to develop and market products that are more effective, or gain greater acceptance in the marketplace than products Paradigm markets, its commercial opportunities may be reduced or eliminated.

The orthopedic device industry, and the medical device industry, in general, are constantly evolving, and scientific advances are expected to continue at a rapid pace. This results in intense competition among companies operating in Paradigm’s industry. Other, larger companies may have, or may be developing, products that compete with Paradigm products and may significantly limit the market acceptance of its products or render them obsolete. Paradigm’s technical and/or business competitors include universities and nonprofit research institutions and foundations and large and small medical device companies, such as Smith & Nephew, plc, Wright Medical Group, Inc., Integra LifeSciences Holdings Corporation, Tornier, Inc., Ascension Orthopedics, Inc., Zimmer Holdings, Inc., Depuy Synthes, Stryker Corporation, Exactech, Inc. and Medtronic, Inc., among others. Most of these competitors have significantly greater research and development capabilities than Paradigm has, as well as substantial marketing, financial and managerial resources. These organizations also compete with Paradigm for acquisitions, joint ventures and other collaborations, as well as with respect to attracting qualified personnel.

The primary competitive factors facing Paradigm include price, quality, innovative design and technical capability, breadth of product line, scale of operations, service and distribution capabilities. Paradigm’s current and future competitors may have greater resources, more widely accepted and innovative products, less invasive therapies, greater technical capabilities and stronger name recognition than Paradigm. Paradigm’s ability to compete is affected by its ability to:

 

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develop or acquire new products and innovative technologies;

 

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obtain regulatory clearance and compliance for products;

 

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manufacture and sell products cost-effectively;

 

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meet all relevant quality standards for products in their particular markets;

 

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respond to competitive pressures specific to each geographic and product market;

 

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protect the proprietary technology of products and avoid infringement of the proprietary rights of others;

 

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market products;

 

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attract and retain skilled employees, including sales representatives; and

 

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maintain and establish distribution relationships.

Competitors could develop products that are more effective, achieve more favorable reimbursement status from third-party payors, cost less or are ready for commercial introduction before Paradigm’s products. If competitors are better able to develop and patent products earlier than Paradigm can, or develop more effective and/or less expensive products that render Paradigm’s products obsolete or non-competitive, its business will be harmed and commercial opportunities will be reduced or eliminated.

Market acceptance of proposed and existing products is vital to Paradigm’s future success.

The commercial success of Paradigm’s products is dependent upon the acceptance of its products. Its products may not gain and maintain a sufficient degree of market acceptance among surgeons, other healthcare providers and/or patients, or acceptance by third-party payors, such as private health insurance companies or federal healthcare programs, such as Medicare and Medicaid. The medical indications that Paradigm’s products treat can also be treated by other healthcare items and services, including other medical devices. The medical community widely accepts many alternative treatments for the indications that Paradigm’s products target, and certain of these other treatments have a long history of use. We cannot be certain that Paradigm’s products and the procedures in which they are used will be able to replace those established treatments or that either surgeons or the medical community in general, will accept and utilize Paradigm’s products or any other medical products that Paradigm may market.

Market acceptance will depend upon numerous factors, many of which are not under Paradigm’s control, including:

 

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the safety and efficacy of Paradigm’s products, as demonstrated in clinical trials and the acceptance of this by the medical community, patients, and payors;

 

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the timing of market introduction of products in Paradigm’s developmental pipeline as well as competitors’ products;

 

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favorable regulatory approval of medical indications and product labeling claims;

 

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the ease of use of Paradigm’s implants and any related instrumentation that accompanies those products;

 

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the availability, safety, efficacy and ease of use of alternative products or treatments;

 

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the potential and perceived advantages of Paradigm’s products over alternative treatments;

 

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the prevalence and severity of adverse side effects of Paradigm’s products and related procedures;

 

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Paradigm’s ability to effectively market and sell its products;

 

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Paradigm’s ability to educate and train surgeons and other healthcare providers on the advantages of its products;

 

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the price of Paradigm’s products relative to alternative technologies and therapies; and

 

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the availability of third-party coverage and reimbursement of Paradigm’s products.

In addition, Paradigm’s future success depends, in part, on its ability to develop and acquire new products and technologies. Even if Paradigm determines that a product candidate has medical benefits, the cost of commercializing that product candidate could be too high to justify development.

 

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Sales of Paradigm’s products are largely dependent upon third-party coverage and reimbursement and could be harmed by healthcare cost containment initiatives.

In the United States, hospitals, ambulatory surgery centers and other healthcare providers and facilities that purchase medical devices generally rely on third-party payors, such as Medicare, Medicaid, private health insurance plans and health maintenance organizations, to cover and reimburse all or a portion of the cost of the devices, as well as any related healthcare services. Coverage and reimbursement by third-party payors may depend on a number of factors, including the payor’s determination that the use of any of Paradigm’s products is clinically useful and cost-effective, medically necessary and not experimental or investigational. Payors continue to review their coverage policies carefully for existing and new therapies and can, without notice, deny coverage for treatments that include the use of Paradigm’s products. In addition, third-party payors may limit reimbursement amounts paid for medical products and services. Since coverage and reimbursement for healthcare items and services are determined on a payor-by-payor basis, ensuring coverage and reimbursement of Paradigm’s products can be a time-consuming and costly process. This can require Paradigm to provide supporting scientific, clinical and cost-effectiveness data for the use of its products to each payor separately, significantly increasing the cost of securing coverage and reimbursement.

In addition, some healthcare providers in the United States have adopted or are considering a managed care system in which the providers contract with third-party payors to provide comprehensive health care for a fixed cost per person. Third-party payors may also attempt to control costs by authorizing fewer elective surgical procedures, including spinal surgeries, or by requiring the use of the least expensive implant available. Eligibility of a procedure for reimbursement does not guarantee that reimbursement levels will be adequate to justify use of Paradigm’s products.

Moreover, if adequate levels of reimbursement from third-party payors outside of the United States are not obtained, international sales of Paradigm’s products may decline. Outside of the United States, reimbursement systems vary significantly by country. Many foreign markets have government-managed healthcare systems that govern reimbursement for medical devices and procedures. Canada, and some European Union and Asian countries, in particular France, Japan, Taiwan and Korea, have tightened reimbursement rates. Additionally, in the European Union, reference pricing systems and/or arbitrage between low-priced and high-priced European Union countries may lead to cost containment and further reduced prices. Publication of discounts by European Union third-party payors or other European Union reimbursement authorities may lead to further pressure on prices or reimbursement levels within the European Union country of publication and other European Union countries. The inability to promptly obtain coverage and profitable payment rates from both European Union government-funded and European Union private payors for Paradigm’s products could have a material adverse effect on Paradigm’s operating results, Paradigm’s ability to raise capital needed to commercialize products and Paradigm’s overall financial condition.

Third-party reimbursement coverage may not be available or adequate for any products that Paradigm owns, develops, markets or acquires. Surgeons, hospitals and other healthcare providers may not purchase Paradigm’s products if they do not believe they will receive sufficient reimbursement to cover their cost of using the products from third-party payors. Failure to consistently obtain and maintain sufficient coverage and reimbursement could materially adversely affect Paradigm’s financial performance. In addition, changes in the policies of third-party payors could materially adversely affect Paradigm’s financial performance.

Healthcare policy changes, including the 2010 Health Care Reform Laws, may have a material adverse effect on Paradigm.

In response to perceived increases in healthcare costs in recent years, there have been and continue to be proposals by the federal government, state governments, regulators and third-party payors to control these costs and, more generally, to reform the U.S. healthcare system. Certain of these proposals could limit the prices Paradigm is able to charge for its products or the amounts of reimbursement available for its products, and could limit the acceptance and availability of its products. Moreover, as discussed below, the 2010 federal legislation imposed significant new taxes on medical device makers such as Paradigm, which could have a material adverse effect on Paradigm’s financial position and results of operations.

 

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In 2010, the Patient Protection and Affordable Care Act (Public Law 111-148) (“ PPACA ”), as amended by the Health Care and Education Reconciliation Act of 2010 (Public Law 111-152) (collectively, the “ 2010 Health Care Reform Laws ”) imposed, among other things, significant new taxes on medical device makers. Although the imposition of the medical device tax has been postponed until January 1, 2020, there is no assurance that further postponements will occur. These taxes would result in a significant increase in the tax burden on the medical device industry, which could have a material adverse effect on Paradigm’s results of operations and cash flows. Other elements of the 2010 Health Care Reform Laws, such as shared savings pilots and comparative effectiveness research, may result in cost containment measures, and reforms that could meaningfully change the way healthcare is developed and delivered, and may materially impact numerous aspects of Paradigm’s business. Although it remains impossible to predict the extent of the regulation and the full impact of the 2010 Health Care Reform Laws, any changes that lower reimbursement for Paradigm’s products or reduce medical procedure volumes could adversely affect its business and results of operations.

The 2010 Health Care Reform Laws also included the so-called federal Physician Payments Sunshine Act, which requires drug and device manufacturers, among others, to report any payments or other transfers of value they make to U.S.-licensed physicians and U.S. teaching hospitals (referred to as “ Covered Recipients ”), including payments in the form of gifts, honoraria, consulting fees, travel, and ownership or investment interests held by a Covered Recipient in the applicable manufacturer. The penalties for failure to report range from $10,000 to $100,000 per violation. Further, pursuant to this law, the Secretary of the U.S. Department of Health and Human Services (“ HHS ”) created a public website, known as Open Payments, to post the payment or ownership or investment interest information in a clear and understandable manner. Certain payments Paradigm makes to Covered Recipients are subject to reporting under the Physician Payments Sunshine Act and disclosure on the Open Payments website.

Increased scrutiny, particularly at the U.S. Food and Drug Administration (“FDA”), and new regulation, may delay Paradigm’s introduction of new products and adversely affect Paradigm’s business.

The FDA has increased significantly the scrutiny applied to products that require premarket notification under Section 510(k) of the Federal Food, Drug, and Cosmetic Act (“ 510(k) ”) submissions, and it may also focus more scrutiny on other regulation within its purview. The FDA and the U.S. Congress are influenced by high profile events, injuries and cases that generate publicity and public attention, and new legislation is often generated as a result of those events. Paradigm may be required to devote substantial time and financial resources to further develop and implement policies, systems and processes to comply with enhanced legal and regulatory requirements, which may impact its business. Paradigm anticipates that governmental authorities will continue to scrutinize the medical device industry closely, and that additional regulation may increase compliance and legal costs and expose Paradigm to litigation, each of which could have an adverse effect on Paradigm’s business. In addition, there can be no assurance that new products Paradigm introduces will not be delayed by the current level of scrutiny applied to applications at the FDA or that new laws and regulations will not be adopted that negatively impact the cost of production and marketing of Paradigm’s existing products, each of which could adversely affect Paradigm’s business.

The spine and orthopedics industries are subject to extensive and complex healthcare regulation. Any determination that Paradigm has violated federal or state laws applicable to it that regulate healthcare would have a material adverse effect on its business, prospects and financial condition.

Paradigm and its products are subject to regulation by HHS, including the Centers for Medicare & Medicaid Services (“ CMS ”), the HHS Office of Inspector General (“ OIG ”), as well as comparable state and non-U.S. agencies responsible for coverage, reimbursement and fraud and abuse of healthcare companies and healthcare items and services. U.S. federal government healthcare laws apply when Paradigm submits a claim on behalf of a U.S. federal healthcare program beneficiary, or when a customer submits a claim for an item or service that is reimbursed (in whole or in part) by a U.S. federal healthcare program, such as Medicare or Medicaid. The principal U.S. federal law implicated is the federal False Claims Act, which imposes liability on any person, who among other things, knowingly presents, or causes to be presented, a false or fraudulent claim to the federal government for payment or approval. Although manufacturers like Paradigm do not typically submit claims to the government, the government and qui tam relators pursue False Claims Act claims under the theory that the manufacturer’s conduct causes providers to submit false or fraudulent claims for reimbursement to the federal healthcare programs.

 

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The federal Anti-Kickback Statute is a criminal law that prohibits the solicitation, payment, receipt or offering of any direct or indirect remuneration in return for, or as an inducement for, referrals of items or services that may be reimbursable (in whole or in part) under Medicare, Medicaid or other federal healthcare programs. Violation of the federal Anti-Kickback Statute can lead to the imposition of civil and criminal penalties upon all parties involved, including substantial monetary penalties and exclusion from participation in Medicare, Medicaid and other federally funded healthcare programs. A violation of the federal Anti-Kickback Statute can also form the basis for a claim of fraud under the federal False Claims Act. The scope of prohibited conduct under the federal Anti-Kickback Statute is broad and it extends to economic arrangements involving hospitals, physicians and their business partners, among others. Applicable state laws may also prohibit the payment of remuneration in return for referrals and may not be limited to services reimbursed by a federal healthcare program. Violation of these laws may not only result in the imposition of monetary penalties on physicians or other non-physicians involved in the arrangement, and suspension or revocation of a physician’s license, but also criminal charges against Paradigm. There can be no assurance that the regulatory authorities or other parties will not assert that Paradigm is in violation of these laws, and if such an action is taken or such a determination is made, it could materially adversely affect Paradigm’s business, prospects and financial condition.

The federal physician self-referral law, known as the Stark Law, imposes restrictions on physicians’ referrals for certain designated health services reimbursable by Medicare or Medicaid to entities with which any such physician (or an immediate family member) has a financial relationship, whether through an ownership, debt or compensation arrangement, and it prohibits an entity from billing Medicare or Medicaid, or any other federally funded health benefit program, for services rendered pursuant to a prohibited referral. Violations can result in denial and recoupment of payments for services, imposition of substantial civil monetary penalties and exclusion from Medicare and Medicaid. A violation of the federal physician-self-referral law can also form the basis for a claim of fraud under the federal False Claims Act. In addition, several states have adopted physician self-referral laws, some of which are not limited to Medicare or Medicaid reimbursed services or to certain designated health services. Violation of any such laws may result in the imposition of penalties on the physicians pursuant to applicable regulations, including fines and suspension or revocation of the physician’s license. Any such penalties on a physician due to his or her relationship with Paradigm could result in adverse media reports and public perception of Paradigm, which could result in a material adverse effect on its business, prospects and financial condition.

Most states have laws and regulations to regulate the provision of healthcare services and some states prohibit companies, such as Paradigm, from practicing medicine or otherwise providing healthcare items and services without a medical license and from exercising control over the medical judgments or decisions of physicians and licensed providers. Violation of these requirements could result in civil and criminal sanctions against Paradigm. There has also been recent increased government focus, including from the OIG, on the financial interests of doctors in medical device companies (often referred to as physician-owned distributors) and conflicts of interest that may develop as a result of such financial interests. For example, OIG issued a report in May 2018 on the overlap between physician-owned hospitals and physician-owned distributors of products such as spinal devices, finding a lack of transparency in the ownership structures. Any proposed or actual legislation addressing this issue may result in a more rigorous clinical trial review process and delay Paradigm’s requests for 510(k) clearance or future pre-market approval (“ PMA ”) of new products or new intended uses of existing products. This could, in turn, materially adversely affect Paradigm’s ability to bring any applicable products to market.

If Paradigm fails to comply with FDA regulations, its business could suffer.

The manufacture and marketing of spine medical devices are subject to extensive regulation by the FDA and foreign and state regulatory authorities. In the United States, orthopedic medical device companies must comply with laws and regulations promulgated by the FDA. These laws and regulations require various authorizations prior to a product being marketed in the United States. Manufacturing facilities and practices are also subject to FDA regulations. The FDA regulates the clinical development, manufacture, labeling, packaging, sale, distribution, advertising, promotion, import and export of medical devices in the United States. Paradigm’s failure to comply with regulatory requirements, including any future changes to those requirements, could have a material adverse effect on its business, prospects, financial condition and results of operations.

 

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