UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
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Preliminary Proxy Statement

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Definitive Proxy Statement

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Soliciting Material under §240.14a-12
AdaptHealth Corp.
(Name of Registrant as Specified In Its Charter)
N/A
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Notice of Special Meeting of Stockholders of AdaptHealth Corp.
to be held on            , 2021
Dear Stockholders of AdaptHealth Corp.:
You are cordially invited to attend a Special Meeting (the “Special Meeting”) of stockholders of AdaptHealth Corp. (“AdaptHealth,” “we,” “our” or “us”). The Special Meeting will be held on [•], 2021 at [•] Eastern Time and will be a completely virtual meeting of stockholders conducted via live audio webcast. You will be able to attend the Special Meeting by visiting [].
At the Special Meeting, AdaptHealth stockholders will be asked to consider and vote on a proposal (the “Proposal”) to approve, for purposes of complying with Nasdaq Listing Rule 5635, the issuance of shares of the Company’s Class A Common Stock, par value $0.0001 per share (“Class A Common Stock”), representing equal to or greater than 20% of the outstanding common stock or voting power of the Company issuable upon conversion of a new series of preferred stock of the Company, designated “Series C Convertible Preferred Stock,” par value $0.0001 per share (“Series C Preferred Stock”), to be issued by the Company to equityholders of AeroCare (as defined below) pursuant to an Agreement and Plan of Merger entered into on December 1, 2020 (the “Merger Agreement”) by and among the Company, AH Apollo Merger Sub Inc., a Delaware corporation and a wholly-owned direct subsidiary of the Company (“Merger Sub”), AH Apollo Merger Sub II Inc., a Delaware corporation and wholly-owned direct subsidiary of the Company (“Merger Sub II”), AeroCare Holdings, Inc., a Delaware corporation (“AeroCare”), and Peloton Equity, LLC, a Delaware limited liability company, solely in its capacity as the representative, agent and attorney-in-fact of the AeroCare equityholders (the “Stockholder Representative”), by removal of the conversion restriction that prohibits such conversion of Series C Preferred Stock.
The Proposal is more fully described in this proxy statement, which each of our stockholders is encouraged to review carefully. Approval of the Proposal requires the affirmative vote of the holders of a majority of the outstanding shares of Class A Common Stock and Class B Common Stock, par value $0.0001 per share (“Class B Common Stock” and, collectively with the Class A Common Stock, “Common Stock”), entitled to vote and actually cast thereon at the Special Meeting.
The record date for the Special Meeting is January 4, 2021. Only stockholders of record at the close of business on that date may vote at the meeting or any adjournment thereof. This proxy statement and form of proxy are being mailed or otherwise distributed to our stockholders on or about [•], 2021.
Your vote is very important. Whether or not you expect to attend the Special Meeting, please vote at your earliest convenience by following the instructions in your proxy materials.
Sincerely,
Luke McGee
Chief Executive Officer and Director
AdaptHealth Corp.
 
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TABLE OF CONTENTS
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SUMMARY TERM SHEET
This summary highlights selected information from this Proxy Statement. It might not contain all of the information that is important to you. You are urged to read carefully the entire proxy statement and the other documents referred to in this Proxy Statement that are incorporated by reference into this Proxy Statement in order to fully understand the Merger Agreement, the Acquisition, and the matters to be considered and voted upon at the Special Meeting.
Proposal (page 8)
Background (page 8)
We are filing this proxy statement (the “Proxy Statement”) to submit a proposal (the “Proposal”) to be voted on by our stockholders at the Special Meeting asking our stockholders to approve, for purposes of complying with Nasdaq Listing Rule 5635, the issuance of shares of the Company’s Class A Common Stock, representing equal to or in excess of 20% of the issued and outstanding common stock or voting power of the Company, issuable upon conversion of the Series C Preferred Stock issued by the Company to the AeroCare equityholders in the Acquisition, by removal of the conversion restriction that prohibits such conversion of Series C Preferred Stock. The key terms of the agreements relating to this proposal are summarized in this Proxy Statement.
Merger Agreement (page 8)
On December 1, 2020, the Company, AeroCare, Merger Sub, Merger Sub II and the Stockholder Representative, entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which the Company agreed to acquire AeroCare through (a) the merger of Merger Sub with and into AeroCare, with AeroCare continuing as the surviving corporation of such merger (the “First Merger”), and (b) the merger of AeroCare with and into Merger Sub II, with Merger Sub II continuing as the surviving corporation of such merger (the “Second Merger” and, collectively with the First Merger, the “Acquisition”), subject to the satisfaction or waiver of certain conditions, as further described below under the heading “Information About the Acquisition.”
The purchase price for the Acquisition consists of $1.1 billion in cash plus shares (the “Common Shares”) of Class A Common Stock and shares (the “Preferred Shares” and, collectively with the Common Shares, the “Shares”) of Series C Preferred Stock, such Common Shares and Preferred Shares (on an as-converted basis) representing, in the aggregate, the economic equivalent of 31,000,000 shares of Class A Common Stock, which would have amounted to 43.4% of the outstanding shares of Class A Common Stock as of December 16, 2020 subject to customary adjustments to the cash portion of such consideration for cash, indebtedness, transaction expenses and net working capital (as compared to an agreed target net working capital amount) and certain other adjustments and subject to escrows to fund certain potential indemnification matters and potential amounts owed by AeroCare equityholders with respect to post-closing purchase price adjustments, if any. For certain optionholders of AeroCare, some of the Common Shares issuable in respect of AeroCare options may take the form of options to purchase Class A Common Stock (the “Class A Options”). Based on the closing share price of $29.86 of the Company on November 30, 2020, the total consideration payable to AeroCare stockholders in the Acquisition is valued at approximately $2.03 billion, subject to the aforementioned adjustments. By comparison, with respect to AdaptHealth, applying such closing share price to (x) the 66,201,898 shares of Class A Common Stock, (y) the 23,590,620 shares of Class A Common Stock for which the outstanding shares of Class B Common Stock could be exchanged and (z) the 18,356,002 shares of Class A Common Stock issuable upon conversion of the Series B-1 Preferred Stock, in each case, as of November 30, 2020, results in a value of approximately $3.23 billion.
Series C Certificate of Designations (pages 8-9)
The rights and preferences of the Series C Preferred Stock will be designated by the Company’s board of directors in a Certificate of Designation, Preferences and Rights of Series C Convertible Preferred Stock, par value $0.0001 per share (the “Series C Certificate of Designations”), which Series C Certificate of Designations will be filed prior to the closing of the Acquisition with the Delaware Secretary of State in the
 
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form attached to this Proxy Statement as Annex A, and you are encouraged to review the full text of the Series C Certificate of Designations.
Amendment to Registration Rights Agreement (page 9)
In connection with the entry into the Merger Agreement, the Company entered into an amendment (the “Amendment to the Registration Rights Agreement”) to that certain Amended and Restated Registration Rights Agreement, dated as of July 1, 2020 (as amended, the “Registration Rights Agreement”), by and among the Company, AdaptHealth Holdings LLC, a Delaware limited liability company and direct subsidiary of the Company (“AdaptHealth Holdings”), and certain other holders of the Company’s capital stock, pursuant to which, among other things, the stockholders of AeroCare receiving Class A Common Stock and Series C Preferred Stock pursuant to the Merger Agreement and that deliver a joinder to the Registration Rights Agreement to the Company, effective as of the closing of the Acquisition, will be provided with certain registration rights with respect to the shares of Class A Common Stock and the shares of Class A Common Stock issuable upon conversion (subject to the terms and conditions of the Series C Certificate of Designations) of the Series C Preferred Stock to be issued pursuant to the Merger Agreement. A copy of the Amendment to the Registration Rights Agreement has been filed as Exhibit 4.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on December 7, 2020, and you are encouraged to review the full text of such Current Report and such agreement.
Debt Commitment Letter (page 9)
In connection with the entry into the Merger Agreement, AdaptHealth LLC, a Delaware limited liability company and indirect subsidiary of the Company, entered into a debt commitment letter (the “Commitment Letter”), dated as of December 1, 2020, with Jefferies Finance LLC (“Jefferies Finance”) pursuant to which Jefferies Finance (together with any additional commitment parties party thereto) committed to provide to AdaptHealth LLC (i) a senior secured term loan B facility in an aggregate principal amount of up to $900,000,000 (the “Term B Facility”) and (ii) a senior unsecured bridge facility in an aggregate principal amount of up to $450,000,000 (the “Bridge Facility”); however, with respect to the Bridge Facility, AdaptHealth LLC expects to obtain long-term financing to fund the Acquisition in the debt capital markets on or before the consummation of the Acquisition contemplated by the Merger Agreement in lieu of drawing under the Bridge Facility. On or prior to the consummation of the Acquisition contemplated by the Merger Agreement, the commitments in respect of the Term B Facility will be automatically reduced by certain debt incurrences and equity issuances by AdaptHealth LLC, its parent entities or any of their respective subsidiaries.
Voting Agreements (pages 9-10)
In connection with the Merger Agreement, on or after December 1, 2020, certain stockholders of the Company entered into agreements with the Stockholder Representative to vote all shares of common stock of the Company owned by such persons as of the applicable record date over which such persons have voting power (i) in favor of the Stockholder Approval (as defined below) for the removal of the conversion restrictions applicable to the Series C Preferred Stock and (ii) against matters which would reasonably be expected to impede the Stockholder Approval (collectively, the “Parent Voting Agreements”). Stockholders of the Company having voting power amounting to, in the aggregate, greater than 50% of the then-current voting power of the Company have entered into Parent Voting Agreements.
In connection with the Merger Agreement, on December 1, 2020, certain stockholders of AeroCare entered into agreements with the Company to vote all shares of common stock of the Company owned by such persons over which such persons have voting power (i) in favor of the Mergers and (ii) against matters which would reasonably be expected to impede the transactions contemplated by the Merger Agreement (the “Company Voting Agreements, and collectively with the Parent Voting Agreements, the “Voting Agreements”).
Reasons for Stockholder Approval (page 10)
The Company’s Class A Common Stock is listed on the Nasdaq Capital Market and, as a result, the Company is subject to Nasdaq’s Listing Rules, including Nasdaq Listing Rules 5635(a), 5635(b) and 5635(d). Such rules require stockholder approval for certain issuances of securities.
 
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The Company is not required to, nor is it seeking, stockholder approval of the Acquisition, the Merger Agreement, the Amendment to the Registration Rights Agreement, the Commitment Letter, the Series C Certificate of Designations or the Voting Agreements. Rather, we are seeking stockholder approval for purposes of complying with the Nasdaq Listing Rules relating to the issuance of Class A Common Stock upon the conversion of Series C Preferred Stock. The Company and AeroCare discussed various transaction structures and, due to the desire of both parties to consummate the Acquisition as soon as possible, the Board approved the transaction structure whereby the approval of the stockholders of the Company is not necessary to be obtained prior to the closing of the Acquisition. This structure was utilized given AeroCare's and the Company's desire to close the Acquisition as soon as possible and, had the Acquisition been structured in a manner that required stockholder approval prior to the closing of the Acquisition, the Merger Agreement may not have been entered into by the parties and Acquisition may not have occurred. In addition, the support of the Company's shareholders is evidenced by the existence of the Parent Voting Agreements representing greater than 50% of the voting power of the Company as of entry into the Merger Agreement; therefore, holding a shareholder vote prior to the closing of the Acquisition would have been extremely unlikely to result in disapproval of the Acquisition.
Potential Effects of the Proposal (page 11)
If the Proposal is approved, our existing stockholders will suffer additional dilution in voting rights upon the issuance of Class A Common Stock upon conversion of shares of Series C Preferred Stock, and the sale into the public market of these newly-issued shares of Class A Common Stock could adversely affect the market price of our Class A Common Stock.
Vote Required for Approval (page 11)
Approval of the Proposal requires the affirmative vote (in person or by proxy) of holders of a majority of the outstanding shares of the Company’s Class A Common Stock and Class B Common Stock, par value $0.0001 per share (“Class B Common Stock” and, collectively with the Class A Common Stock, “Common Stock”), voting as a single class, entitled to vote and actually cast thereon at the Special Meeting. Failure to vote at the Special Meeting or an abstention from voting will have no effect on the adoption of the proposal.
AeroCare (page 14)
AeroCare is a leading technology-enabled respiratory therapy distribution platform that serves U.S. patients with chronic conditions in their homes. AeroCare provides equipment and services for home oxygen, nebulized respiratory medications and sleep therapy for over 995,000 patients across over 300 locations in 30 states. AeroCare’s principal executive offices are located at 3325 Bartlett Blvd, Orlando, FL 32811, and its telephone number is (866) 727-0202. AeroCare’s website is https://aerocaredirect.com.
Financial Information about AeroCare; Pro Forma Financial Information
For the historical consolidated financial statements of AeroCare and the unaudited pro forma condensed combined financial information of the Company giving effect to the Acquisition, see Exhibits 99.3, 99.4 and 99.6 to our Current Report on Form 8-K filed with the SEC on December 14, 2020, which is incorporated herein by reference.
 
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this Proxy Statement within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for our business. These statements may be preceded by, followed by or include the words “may,” “might,” “will,” “will likely result,” “should,” “estimate,” “plan,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,” “continue,” “target” or similar expressions.
These forward-looking statements are based on information available to us as of the date they were made, and involve a number of risks and uncertainties which may cause them to turn out to be wrong. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include:

competition and the ability of our business to grow and manage growth profitably;

changes in applicable laws or regulations;

fluctuations in the U.S. and/or global stock markets;

the possibility that we may be adversely affected by other economic, business, and/or competitive factors;

the impact of the recent coronavirus (COVID-19) pandemic and our response to it;

failure to consummate or realize the expected benefits of the acquisition of AeroCare Holdings, Inc.; and

other risks and uncertainties set forth in this Proxy Statement, as well as the documents incorporated by reference herein.
 
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QUESTIONS AND ANSWERS ABOUT THE PROXY MATERIALS AND THE SPECIAL MEETING
How can I attend and participate in the Special Meeting?
The Special Meeting will be a completely virtual meeting of stockholders conducted exclusively via live audio webcast. You will be able to attend the Special Meeting by visiting []. To participate in the Special Meeting, you will need the 16-digit control number included on your proxy card or voting instruction card. The Special Meeting will begin promptly at [•] Eastern Time on [•], 2021. We encourage you to access the virtual meeting website prior to the start time.
What if I have technical difficulties or trouble accessing the virtual meeting website?
Technicians will be available to assist you if you experience technical difficulties accessing the virtual meeting website. If you encounter any difficulties accessing the virtual meeting during the check-in or meeting time, please call the technical support number that will be posted on the virtual meeting website login page.
Who is entitled to vote?
The record date for the Special Meeting is January 4, 2021. This means that holders of our Class A Common Stock or our Class B Common Stock on such date are entitled to vote at the Special Meeting. On January 4, 2021, there were [•] shares of our Common Stock outstanding and entitled to vote at the Special Meeting, consisting of [•] shares of Class A Common Stock and no shares of Class B Common Stock.
How many votes do I have?
Each share of our Class A Common Stock and Class B Common Stock is entitled to one vote on each matter properly submitted for stockholder action at the Special Meeting, except as noted above.
What am I voting on?
You will be voting on the following proposal:

To approve, for purposes of complying with Nasdaq Listing Rule 5635, the issuance of shares of the Company’s Class A Common Stock, representing equal to or greater than 20% of the outstanding common stock or voting power of the Company issuable upon conversion of shares of the Company’s Series C Preferred Stock to be issued by the Company to the AeroCare equityholders pursuant to the Merger Agreement, by removal of the conversion restriction that prohibits such conversion of Series C Preferred Stock.
The Company’s board of directors recommends that our stockholders vote “FOR” the Proposal.
How do I vote?
You may vote in the following ways:

At the Special Meeting: You may vote your shares electronically at the Special Meeting by using the control number on your proxy card or voting instruction form and following the instructions at []. If you have already voted previously by
 
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telephone or Internet, there is no need to vote again at the Special Meeting unless you wish to revoke and change your vote.

By Telephone or Internet: If you hold your shares in street name or in an account at a brokerage firm or bank, you may be able to vote your shares by telephone or over the Internet. Please follow the instructions on your proxy or voting instruction card.

By Mail: If you requested to receive printed proxy materials, you may vote by marking, dating and signing your proxy card and promptly returning it by mail in the enclosed envelope.
What if I return my proxy or voting instruction card but do not mark it to show how I am voting?
Your shares will be voted according to the instructions you have indicated on your proxy or voting instruction card. If no direction is indicated, your shares will be voted “FOR” the Proposal.
How do I change or revoke my proxy?
Any person signing a proxy in the form accompanying this Proxy Statement has the power to revoke it prior to the Special Meeting or at the Special Meeting prior to the vote pursuant to the proxy. A proxy may be revoked by a writing delivered to us stating that the proxy is revoked, by a subsequent proxy that is signed by the person who signed the earlier proxy and is delivered before or at the Special Meeting, by voting again on a later date on the Internet or by telephone (only your latest Internet or telephone proxy submitted prior to the Special Meeting will be counted), or by attendance at the Special Meeting and voting electronically.
What does it mean if I receive more than one proxy or voting instruction card?
It means you have multiple accounts at the transfer agent and/or with banks and stockbrokers. Please vote all of your shares.
What constitutes a quorum?
Any number of stockholders, together holding at least a majority in voting power of the capital stock of the Company issued and outstanding and generally entitled to vote in the election of directors, present or represented by proxy at any meeting duly called, shall constitute a quorum for the transaction of all business. Abstentions and “broker non-votes” are counted as shares “present” at the meeting for purposes of determining whether a quorum exists. A “broker non-vote” occurs when shares held of record by a bank, broker or other holder of record for a beneficial owner are deemed present at the meeting for purposes of a quorum but are not voted on a particular proposal because that record holder does not have discretionary voting power for that particular matter under the applicable rules of the Nasdaq Stock Market (“Nasdaq”) and has not received voting instructions from the beneficial owner.
 
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What vote is required in order to approve the Proposal?
The Proposal requires the affirmative vote (in person or by proxy) of the holders of a majority of the outstanding shares of Common Stock entitled to vote and actually cast thereon. Abstentions and “broker non-votes,” if any, will not have any effect on the adoption of the proposal.
May my broker vote my shares?
Brokers may no longer use discretionary authority to vote shares on the election of directors or non-routine matters if they have not received instructions from their clients. It is important, therefore, that you cast your vote if you want it to count in the approval of the Proposal.
How will voting on any other business be conducted?
We do not know of any business or proposals to be considered at the Special Meeting other than those set forth in this Proxy Statement. If any other business is properly presented at the Special Meeting, the proxies received from our stockholders give the proxy holders the authority to vote on the matter in their sole discretion.
Who will count the votes?
Broadridge Financial Solutions, Inc. will act as the inspector of elections and will tabulate the votes.
What will happen if the Proposal is not approved by the stockholders?
If our stockholders do not approve the Proposal at the Special Meeting, the conversion restrictions applicable to the Series C Preferred Stock will remain in effect and the holder thereof shall not be entitled to convert the Series C Preferred Stock into shares of Class A Common Stock.
Important Notice Regarding the Availability of Proxy Materials
For the Stockholder Meeting to be Held on [], 2021
This Proxy Statement and the enclosed proxy card are first being mailed or otherwise distributed to our stockholders on or about [], 2021 and are also available at: https://www.adapthealth.com/investor-relations.
 
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PROPOSAL  — APPROVAL, FOR PURPOSES OF COMPLYING WITH NASDAQ LISTING RULE 5635, OF THE ISSUANCE OF CLASS A COMMON STOCK UPON CONVERSION OF SERIES C PREFERRED STOCK, BY REMOVAL OF THE CONVERSION RESTRICTION THAT PROHIBITS SUCH CONVERSION OF SERIES C PREFERRED STOCK
Background
Our board is proposing for approval by our stockholders, for purposes of complying with Nasdaq Listing Rule 5635, the issuance of shares of Class A Common Stock representing equal to or in excess of 20% of the outstanding common stock or voting power of the Company issuable upon conversion of Series C Preferred Stock issued by the Company to the AeroCare’s equityholders pursuant to the Merger Agreement, by removal of the conversion restriction that prohibits such conversion of Series C Preferred Stock. The key terms of the agreements relating to the Proposal are summarized below. A copy of the Series C Certificate of Designations is attached to this Proxy Statement as Annex B and is incorporated herein by reference. A copy of the Commitment Letter is attached to this Proxy Statement as Annex C and is incorporated herein by reference. Copies of the Merger Agreement and Amendment to the Registration Rights Agreement have been filed as Exhibits 10.1 and 4.1, respectively, to our Current Report on Form 8-K filed with the SEC on December 7, 2020, and you are encouraged to review the full text of such Current Reports and such agreements. The below summaries of such agreements and the transactions contemplated thereby do not purport to be complete and is subject to, and is qualified in its entirety by, the full text of such agreements.
Merger Agreement
On December 1, 2020, the Company, AeroCare, Merger Sub, Merger Sub II and the Stockholder Representative, entered into the Merger Agreement pursuant to which the Company agreed to acquire AeroCare through (a) the merger of Merger Sub with and into AeroCare, with AeroCare continuing as the surviving corporation of such merger and (b) the merger of AeroCare with and into Merger Sub II, with Merger Sub II continuing as the surviving corporation of such merger, subject to the satisfaction or waiver of certain conditions, as further described below under the heading “Information About the Acquisition.” The Company will be the acquiring entity for accounting purposes in the Acquisition.
The purchase price for the Acquisition consists of $1.1 billion in cash plus Common Shares and Preferred Shares, representing, in the aggregate, on an as-converted basis, the economic equivalent of 31,000,000 shares of Class A Common Stock, subject to customary adjustments to the cash portion of such consideration for cash, indebtedness, transaction expenses and net working capital (as compared to an agreed target net working capital amount) and certain other adjustments and subject to escrows to fund certain potential indemnification matters and potential amounts owed by AeroCare equityholders with respect to post-closing purchase price adjustments, if any. For certain optionholders of AeroCare, some of the Common Shares issuable in respect of AeroCare options may take the form of Class A Options.
Pursuant to the Merger Agreement, the Company agreed to hold a meeting of stockholders at which a proposal will be considered with respect to the Stockholder Approval and to prepare and file a preliminary proxy statement relating to such meeting as promptly as reasonably practicable and in any event no later than the 60th day following the closing of the Acquisition (the “Closing Date”). In addition, as further described below, on December 1, 2020, certain stockholders of the Company entered into agreements with the Stockholder Representative to vote all shares of common stock of the Company owned by such persons as of the applicable record date in favor of the Stockholder Approval.
Series C Certificate of Designations
The rights and preferences of the Series C Preferred Stock will be designated by the Company’s board of directors in the Series C Certificate of Designations forming part of the Company’s second amended and restated certificate of incorporation, which Series C Certificate of Designations will be filed prior to the closing of the Acquisition with the Delaware Secretary of State in the form attached to this Proxy Statement as Annex B.
The Series C Preferred Stock will rank senior to the Class A Common Stock with respect to rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the
 
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affairs of the Company, having a liquidation preference equal to its par value of $0.0001 per share. The Series C Preferred Stock will participate equally and ratably on an as-converted basis with the holders of Class A Common Stock in all cash dividends paid on the Class A Common Stock.
The conversion of Series C Preferred Stock issued to the AeroCare equityholders in the Acquisition into Class A Common Stock is subject to the approval of the stockholders of the Company (the “Stockholder Approval”), which approval is being sought pursuant to the Proposal; provided that, subject to certain exceptions in connection with a change of control, the holder thereof may elect to exchange the Series C Preferred Stock following the one-year anniversary of the issuance thereof for the cash value of such shares as calculated based on the volume-weighted average price per share of Class A Common Stock on the day immediately prior to the date of conversion, in lieu of delivery of shares of Class A Common Stock (if the shares deliverable upon conversion would otherwise violate the Nasdaq Listing Rules (the “Nasdaq Rules”)). After the Stockholder Approval has been obtained, the Company or the holder thereof may convert the Series C Preferred Stock into 100 shares of Class A Common Stock (subject to certain anti-dilution adjustments) at its election. The Series C Preferred Stock is non-voting.
Amendment to the Registration Rights Agreement
In connection with the entry into the Merger Agreement, the Company entered into the Amendment to that certain Amended and Restated Registration Rights Agreement, dated as of July 1, 2020, by and among the Company, AdaptHealth Holdings and certain other holders of the Company’s capital stock, pursuant to which, among other things, the stockholders of AeroCare that receive Class A Common Stock and Series C Preferred Stock pursuant to the Merger Agreement and that deliver a joinder to the Registration Rights Agreement to the Company, effective as of the closing of the Acquisition, will be provided with certain registration rights with respect to the shares of Class A Common Stock and the shares of Class A Common Stock issuable upon conversion (subject to the terms and conditions of the Series C Certificate of Designations) of the Series C Preferred Stock to be issued pursuant to the Merger Agreement.
Debt Commitment Letter
In connection with the entry into the Merger Agreement, AdaptHealth LLC, a Delaware limited liability company and indirect subsidiary of the Company, entered into the Commitment Letter pursuant to which Jefferies Finance (together with any additional commitment parties party thereto) committed to provide to AdaptHealth LLC (i) a senior secured term loan B facility in an aggregate principal amount of up to $900,000,000 and (ii) a senior unsecured bridge facility in an aggregate principal amount of up to $450,000,000; however, with respect to the Bridge Facility, AdaptHealth LLC expects to obtain long-term financing to fund the Acquisition in the debt capital markets on or before the consummation of the Acquisition contemplated by the Merger Agreement in lieu of drawing under the Bridge Facility. On or prior to the consummation of the Acquisition contemplated by the Merger Agreement, the commitments in respect of the Term B Facility will be automatically reduced by certain debt incurrences and equity issuances by AdaptHealth LLC, its parent entities or any of their respective subsidiaries.
The Term B Facility and the Bridge Facility are available to (i) to finance the Acquisition in part, (ii) to refinance certain indebtedness of AdaptHealth LLC and AeroCare and (iii) to pay fees and expenses incurred in connection therewith. The funding of the Term B Facility and the Bridge Facility provided for in the Commitment Letter is contingent on the satisfaction of customary conditions, including, among other things, (i) the execution and delivery of definitive documentation in accordance with the terms sets forth in the Commitment Letter and (ii) the consummation of the Acquisition in accordance with the terms of the Merger Agreement. The definitive documentation governing such debt financing has not been finalized, and, accordingly, the actual terms may differ from the description of such terms in the Commitment Letter.
Voting Agreements
In connection with the Merger Agreement, on or after December 1, 2020, certain stockholders of the Company entered into agreements with the Stockholder Representative to vote all shares of common stock of the Company owned by such persons as of the applicable record date over which such persons have voting power (i) in favor of the Stockholder Approval for the removal of the conversion restrictions applicable to the Series C Preferred Stock and (ii) against matters which would reasonably be expected to impede the
 
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Stockholder Approval. Stockholders of the Company having voting power amounting to, in the aggregate, greater than 50% of the current voting power of the Company have entered into Parent Voting Agreements.
In connection with the Merger Agreement, on December 1, 2020, certain stockholders of AeroCare entered into agreements with the Company to vote all shares of common stock of the Company owned by such persons over which such persons have voting power (i) in favor of the Mergers and (ii) against matters which would reasonably be expected to impede the transactions contemplated by the Merger Agreement.
Pursuant to the Company Voting Agreements, certain of AeroCare’s equityholders and their respective affiliates are subject to certain standstill restrictions, including that they are restricted from acquiring additional shares of Class A Common Stock for as long as such persons hold beneficial ownership of at least 25% of the shares of Class A Common Stock and Series C Preferred Stock issued pursuant to the Merger Agreement on an as-converted basis.
Reasons for Requesting Stockholder Approval
The Class A Common Stock is listed on the Nasdaq Capital Market and, as a result, we are subject to Nasdaq’s Listing Rules, including Nasdaq Listing Rules 5635(a), 5635(b) and 5635(d):

NASDAQ Listing Rule 5635(a) requires stockholder approval prior to the issuance of securities in connection with the acquisition of another company if such securities are not issued in a public offering and (i) have, or will have upon issuance, voting power equal to or in excess of 20% of the voting power outstanding before the issuance of such securities (or securities convertible into or exercisable for common stock); or (ii) the number of shares of common stock to be issued is or will be equal to or in excess of 20% of the number of shares of common stock outstanding before the issuance of the stock or securities.

NASDAQ Listing Rule 5635(b) requires stockholder approval prior to the issuance of securities when the issuance or potential issuance will result in a change of control of the registrant. A change of control may be deemed to occur under the Nasdaq Listing Rules upon the issuance of common stock or securities convertible into or exercisable for common stock by a listed company to an investor or a group who would own, or have the right to acquire, 20% or more of the outstanding shares of common stock or voting power and such ownership or voting power would be the largest ownership position following the transaction.

NASDAQ Listing Rule 5635(d) requires stockholder approval prior to a transaction, other than a public offering, involving the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable for common stock), which equals 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance at a price less than the “Minimum Price,” defined as the lower of the closing price immediately prior to the execution of the binding agreement or the average closing price of the common stock for the five trading days immediately preceding the execution of the binding agreement.
Consequently, we have provided in the forms of certificates of designations relating to the Series C Preferred Stock that the Series C Preferred Stock is not convertible into Class A Common Stock until the Stockholder Approval is obtained.
Additionally, as described above, to induce AeroCare to enter into the Merger Agreement, we agreed in the Merger Agreement to submit a proposal approving the issuance of Class A Common Stock upon conversion of the Series C Preferred Stock to a vote of our stockholders at a meeting.
It is important to understand that the Company is not required to, nor is it seeking, stockholder approval of the Acquisition, the Merger Agreement, the Amendment to the Registration Rights Agreement, the Commitment Letter, the Series C Certificate of Designations or the Voting Agreements. Rather, we are seeking stockholder approval for the purposes described above and for purposes of complying with the Nasdaq Listing Rules relating to the issuance of Class A Common Stock upon the conversion of Series C Preferred Stock.
 
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Potential Effects of the Proposal
If the Proposal is approved, our existing stockholders will suffer additional dilution in voting rights upon the issuance of Class A Common Stock upon conversion of shares of Series C Preferred Stock. As described above, if the Proposal is approved, the Series C Preferred Stock issued in the Acquisition will be convertible into approximately 13,041,498 shares of Class A Common Stock (subject to anti-dilution adjustments). The sale into the public market of these newly-issued shares of Class A Common Stock could adversely affect the market price of our Class A Common Stock.
If the Proposal is approved and the AeroCare equityholders convert all of the Series C Preferred Stock into Class A Common Stock and exercise their rights to purchase all of the Class A Common issuable in respect of the Class A Options, the AeroCare equityholders will own 31,000,000 shares of Class A Common Stock, on an as-converted basis, which would have amounted to 43.4% of the outstanding shares of Class A Common Stock as of December 16, 2020.
The rights and privileges associated with all shares of Class A Common Stock issuable upon conversion of Series C Preferred Stock are identical to the rights and privileges associated with the Class A Common Stock held by our existing stockholders, and will not include preemptive, conversion or other rights to subscribe for additional shares of Class A Common Stock.
If our stockholders do not approve the Proposal at the Special Meeting, the conversion restrictions applicable to the Series C Preferred Stock will remain in effect and neither the Company nor the holder thereof shall be entitled to convert the Series C Preferred Stock into Class A Common Stock; provided that, subject to certain exceptions in connection with a change of control, the holder thereof may elect to exchange the Series C Preferred Stock following the one-year anniversary of the issuance thereof for the cash value of such shares as calculated based on the volume-weighted average price per share of Class A Common Stock on the day immediately prior to the date of conversion, in lieu of delivery of shares of Class A Common Stock (if the issuance of the shares deliverable upon conversion would otherwise violate the Nasdaq Listing Rules). Your approval of the Proposal will assist us in meeting our obligations under the Merger Agreement.
Vote Required for Approval
Approval of the Proposal requires the affirmative vote (in person or by proxy) of holders of a majority of the outstanding shares of Common Stock entitled to vote and actually cast thereon at the Special Meeting. Failure to vote at the Special Meeting or an abstention from voting will have no effect on the adoption of the proposal.
OUR BOARD OF DIRECTORS RECOMMENDS THAT OUR STOCKHOLDERS VOTE “FOR”
THE PROPOSAL.
 
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INFORMATION ABOUT THE ACQUISITION AND AEROCARE
Background of the Acquisition
The terms of the Merger Agreement are the result of arm’s-length negotiations between representatives of AdaptHealth and AeroCare. The following is a brief discussion of the background of these negotiations, the Merger Agreement and the Acquisition.
As part of AdaptHealth’s ongoing consideration and evaluation of its long-term prospects and strategies, AdaptHealth’s board and management regularly review strategic opportunities involving potential acquisition opportunities. In addition, AdaptHealth’s management regularly participates in industry conferences and roundtables and keeps abreast of best practices and technological developments in the industry. In this regard, Luke McGee, the chief executive officer of AdaptHealth, and Steve Griggs, the chief executive officer of AeroCare, have spoken on multiple occasions over the last seven years about HME industry dynamics, deployment of new fulfillment and customer satisfaction technology and the possible benefits of mutually beneficial commercial arrangements or the combination of the two companies.
On June 11, 2018, in connection with such discussions between Messrs. McGee and Griggs, AdaptHealth LLC (formerly QMES LLC) and AeroCare entered into a mutual nondisclosure agreement. Notwithstanding the execution of the non-disclosure agreement and the exchange of a limited amount of information, the discussions between AdaptHealth and AeroCare did not lead to a definitive agreement and were terminated prior to September 2018.
In August 2019, Messrs. McGee and Griggs again discussed the benefits to both organizations of combining AdaptHealth and AeroCare. These discussions included possible valuation, earnout and management roles and responsibilities, but such discussions terminated in September 2019 without a definitive agreement.
In late August 2020, over several phone conversations, Messrs. McGee and Griggs again discussed the mutual benefit to AdaptHealth’s and AeroCare’s patients, referrers and investors of a strategic combination of the two companies. On September 14, 2020, following a discussion primarily focused on acceptable valuations and the potential management of the combined company, Mr. McGee emailed Mr. Griggs and proposed an exchange of limited operating data to permit the companies and their respective Boards of Directors to consider the opportunity to combine companies.
From September 14, 2020 through November 5, 2020, AdaptHealth and AeroCare exchanged financial and operating data, and Messrs. McGee and Griggs began to discuss the preliminary valuation of AeroCare and potential business terms of the combination. In connection with these discussions, Mr. McGee also spoke with a representative of AeroCare’s significant investors regarding acceptable terms of a possible business combination, and Mr. Griggs attended meetings with Mr. McGee and senior management of AdaptHealth and members of AdaptHealth’s board of directors.
In late September 2020, the Company proposed a valuation range for AeroCare between $1.2 billion and $1.3 billion. AeroCare provided a range of $2 billion to $2.5 billion in response. Thereafter, AeroCare provided updated financial information in support of its proposed price range.
In mid October 2020, the Company proposed to engage in additional valuation work and diligence based on a valuation for AeroCare of $1.55 billion.
On or about October 14, 2020, AdaptHealth engaged in discussions with Jefferies regarding its engagement as financial adviser to AdaptHealth in connection with the acquisition of AeroCare. Following these discussions, representatives of Jefferies and senior management of AdaptHealth conducted meetings to prepare financial models regarding the combination.
On or about October 15, 2020, AdaptHealth engaged Willkie Farr & Gallagher LLP, which we refer to as Willkie, to provide legal advice with respect to a potential transaction with AeroCare and requested that Willkie aid in the diligence process with respect to AdaptHealth and to advise on the potential transaction.
On or about October 20, 2020, AeroCare retained Goodwin Procter LLP, which we refer to as Goodwin, to provide legal advice with respect to a potential transaction with AdaptHealth. AeroCare continued its review of AdaptHealth’s public filings and requested Goodwin to advise on the potential transaction.
 
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On October 31, 2020, senior management of AdaptHealth shared, for discussion purposes, a draft term sheet with AeroCare containing indicative terms of a potential business combination between AdaptHealth and AeroCare.
The term sheet proposed a transaction structured as a stock purchase pursuant to which AdaptHealth would acquire AeroCare for an aggregate purchase price of $1.1 billion in cash and 31 million shares of Class A Common Stock (with nonvoting preferred issued at closing in lieu of any shares of Class A Common Stock that would require AdaptHealth’s shareholders’ approval under Nasdaq’s Listing Rules), an increase of the AdaptHealth board by two members to be designated by AeroCare shareholders, and a closing of the transaction as early as December 31, 2020. The term sheet contemplated customary representations, warranties and covenants, with AdaptHealth subject to indemnification for certain representations and warranties, covenant breaches, and certain other items, including matters uncovered in diligence or excluded from coverage under a representation and warranties insurance policy contemplated to be obtained. The term sheet also set forth certain proposed closing conditions, and customary termination provisions, including a customary reverse termination fee (with no amount specified) upon a failure by AdaptHealth to consummate the transaction when required by the definitive agreement.
On November 2, 2020, the AdaptHealth board held a special telephonic board meeting to discuss strategic opportunities, including the status of discussions with AeroCare. At this meeting, management reviewed the strategic rationale of a business combination transaction with AeroCare and Jefferies presented draft financial analysis and valuation modeling, preliminary synergies and value creation for AdaptHealth shareholders.
On November 4, 2020, Goodwin provided Willkie with a revised term sheet. The revised term sheet contemplated a transaction structured as a merger and in a manner that would qualify as a tax free reorganization for U.S. federal income tax purposes, and that holders of AeroCare stock options that are vested as of the closing would be entitled to receive the same mix of stock and cash consideration as the AeroCare shareholders. The revised term sheet further contemplated that material shareholders of AdaptHealth would enter into a voting agreement to support and vote in favor of the proposal under Nasdaq’s Listing Rules to issue Class A Common Stock upon conversion of the nonvoting preferred stock contemplated to be issued at closing. Goodwin’s term sheet further proposed an increase of the AdaptHealth board by three members to be designated by AeroCare shareholders and proposed that each AeroCare shareholder would receive customary shareholder rights commensurate with their level of ownership. Additionally, the revised term sheet contemplated that the transaction would be a “public-style” merger with the AeroCare shareholders retaining no postclosing indemnification obligations, and proposed a reverse termination fee in an amount equal to 5% of the aggregate purchase price in the event of a termination of the definitive agreement for a breach by AdaptHealth.
Also, on November 4, 2020, AdaptHealth engaged AlixPartners, LLP, which we refer to as AlixPartners, to review and provide analysis on potential synergies and integration matters with respect to a combination between the two companies. During the three weeks that followed, AdaptHealth senior management, with the assistance of Jefferies and AlixPartners, evaluated AeroCare’s business and operations and the potential business and financial implications of a combination with AeroCare.
Between November 4, 2020 and November 30, 2020, each of AdaptHealth and AeroCare and their respective senior management and advisors continued to conduct business, legal and financial diligence (including calls among AdaptHealth’s and AeroCare’s senior management) on the respective parties and Messrs. McGee and Griggs discussed, among other things, governance, social issues in combining the two companies and the roles of executives of each of AdaptHealth and AeroCare in the combined company, including co-CEO roles for both Mr. McGee and Mr. Griggs.
On November 5, 2020, Willkie and Goodwin discussed via teleconference the terms of Goodwin’s revised term sheet.
On November 9, 2020, Willkie sent a revised term sheet to Goodwin which, among other things, (i) provided for an increase in board size by two members, with an additional representative of the AeroCare shareholders entitled to be a non-voting board observer, and limited shareholder rights to holders of a material percentage of Class A Common Stock, (ii) contemplated indemnification for fundamental
 
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representations, covenant breaches, and other liabilities consistent with its original proposal and (iii) proposed a reverse termination fee in the amount of 3% of the aggregate purchase price. Goodwin responded on November 11, 2020 with a further revised term sheet which, among other things, proposed more detailed terms with respect to the non-voting preferred stock that would be delivered at closing as a portion of the equity consideration, and removed the indemnification obligations in favor of AdaptHealth.
On November 12, 2020, the AdaptHealth board held a special board meeting via teleconference to discuss strategic opportunities, including the status of discussions with AeroCare. At this meeting, management reviewed the strategic rationale of a business combination transaction with AeroCare and financial analysis, preliminary synergies and value creation for AdaptHealth shareholders.
On November 15, 2020, Willkie provided a revised term sheet to Goodwin which, among other things, accepted Goodwin’s proposed approach with respect to indemnification matters other than for liabilities uncovered during AdaptHealth’s due diligence review and specified that it anticipated that holders of at least 45% of the outstanding common stock of AdaptHealth entitled to vote on the proposal under Nasdaq’s Listing Rules to approve the issuance of Class A Common Stock upon the conversion of the non-voting preferred stock would enter into voting agreements to support and vote in favor of such proposal. Goodwin responded with a revised draft of the term sheet on November 16, 2020 which, in addition to certain other revisions, contemplated indemnification by the AeroCare shareholders for mutually agreed items.
On November 18, 2020, representatives of AdaptHealth delivered to AeroCare an initial draft of the merger agreement. The draft merger agreement included, among other things, customary representations and warranties, customary closing conditions and a mutual termination fee of 3% of the enterprise value, payable if the merger agreement were terminated in certain circumstances.
On November 25, 2020, Goodwin sent to Willkie a revised draft of the merger agreement. During the period between November 25, 2020 and November 30, 2020, Willkie, on the one hand, and Goodwin, on the other hand, at the direction and with the guidance and input of their respective clients, exchanged several drafts of the merger agreement and related agreements and documents and engaged in negotiations regarding the terms and conditions of the merger agreement. During such period, members of senior management of AdaptHealth, on the one hand, and AeroCare, on the other hand, also engaged in negotiations regarding the terms and conditions of the merger agreement, including net working capital and indemnification for certain specified matters.
On November 27, 2020, the board of directors of AdaptHealth held a special meeting via teleconference, at which the board reviewed the financial analysis of a business combination transaction with AeroCare and received an update on the status of the negotiation and the transaction documents from AdaptHealth’s senior management and its outside advisors.
On November 29, 2020, the board of directors of AdaptHealth held a meeting via teleconference, at which the board unanimously approved the Merger Agreement and the Acquisition, among other things.
Over the course of the afternoon of November 29 and through the morning of December 1, 2020, representatives of each of Willkie and Goodwin continued to negotiate the draft merger agreement, including the parties’ confidential disclosure schedules to the merger agreement.
On December 1, 2020, AdaptHealth, AeroCare, Merger Sub, Merger Sub II and the Stockholder Representative executed and delivered the Merger Agreement, providing for the acquisition of all of the equity interests in AeroCare for an aggregate purchase price of $1.1 billion in cash and 31,000,000 shares of AdaptHealth Class A Common Stock (with a portion of such share consideration in the form of nonvoting preferred stock that would become convertible into Class A Common Stock after AdaptHealth’s shareholders approve the issuance of such shares of Class A Common Stock under Nasdaq’s Listing Rules). On December 1, 2020, AdaptHealth also executed a debt commitment letter with Jefferies Finance LLC providing for a senior secured term loan B facility in an aggregate principal amount of up to $900,000,000 and a senior unsecured bridge facility in an aggregate principal amount of up to $450,000,000.
On December 1, 2020, the transaction was announced before the market open in New York.
 
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Overview of AeroCare
AeroCare is a leading technology-enabled respiratory therapy distribution platform that serves U.S. patients with chronic conditions in their homes. AeroCare provides equipment and services for home oxygen, nebulized respiratory medications and sleep therapy for over 995,000 patients across over 300 locations in 30 states. AeroCare was founded in 2000 and is currently headquartered in Orlando, FL.
AeroCare’s principal executive offices are located at 3325 Bartlett Blvd, Orlando, FL 32811, and its telephone number is (866) 727-0202. AroCare’s website is https://aerocaredirect.com.
Reasons for the Acquisition
We believe the Acquisition is in the best interests of the Company and its stockholders because we believe that the combination of AdaptHealth and AeroCare brings together industry-leading technology platforms and strengthens AdaptHealth’s position as a leading independent HME provider, creating significantly enhanced scale and geographic reach across the United States. The combined company will be a provider of home healthcare equipment, medical supplies to the home, and related services and will operate in 47 out of the 48 U.S. continental states, offering greater managed care access, broader product availability, and enhanced customer service to approximately 2.8 million patients.
Effect of the Acquisition on the Company’s Stockholders
As further described below, 31,000,000 shares of Class A Common Stock of the Company, on an as-converted basis (subject to the terms and conditions of the Series C Certificate of Designations), are being issued as partial consideration in the Acquisition, which issuance will dilute the ownership interests and voting power of our other stockholders.
Regulatory Matters
The Acquisition is subject to the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (as amended, the “HSR Act”), which prevents the parties from completing the Acquisition until required information and materials are furnished to the Antitrust Division of the DOJ and the FTC and specified waiting period requirements have been satisfied. On December 1, 2020, AdaptHealth filed a Premerger Notification and Report Form pursuant to the HSR Act with the DOJ and FTC.
In addition, in connection with the transfer of certain permits in the Acquisition, the parties were required to obtain approvals or consents from, or otherwise make filings with, certain state regulatory authorities.
Vote Required for Approval
The approval of our stockholders is not required for the Acquisition. As discussed above, the Company is not seeking stockholder approval of, and you are not being asked to vote on, the Acquisition.
INFORMATION ABOUT THE MERGER AGREEMENT
The following is a summary of the material provisions of the Merger Agreement, but does not purport to describe all of the terms thereof and may not contain all of the information about the Merger Agreement that is important to you. The following summary is qualified in its entirety by reference to the complete text of the Merger Agreement, which is attached as Annex A to this Proxy Statement. You should refer to the full text of the Merger Agreement for details about the transaction and the terms and conditions of the Merger Agreement.
On December 1, 2020, the Company, AeroCare, Merger Sub, Merger Sub II and the Stockholder Representative, entered into the Merger Agreement, pursuant to which the Company agreed to acquire AeroCare through (a) the merger of Merger Sub with and into AeroCare, with AeroCare continuing as the surviving corporation of such merger and (b) the merger of AeroCare with and into Merger Sub II, with Merger Sub II continuing as the surviving corporation of such merger, subject to the satisfaction or waiver of certain conditions, as further described below.
 
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The purchase price for the Acquisition consists of $1.1 billion in cash plus Common Shares and Preferred Shares, representing, in the aggregate, on an as-converted basis, the economic equivalent of 31,000,000 shares of Class A Common Stock, subject to customary adjustments to the cash portion of such consideration for cash, indebtedness, transaction expenses and net working capital (as compared to an agreed target net working capital amount) and certain other adjustments and subject to escrows to fund certain potential indemnification matters and potential amounts owed by AeroCare equityholders with respect to post-closing purchase price adjustments, if any. For certain optionholders of AeroCare, some of the Common Shares issuable in respect of AeroCare options may take the form of Class A Options.
Pursuant to the Merger Agreement, the Company agreed to hold a meeting of stockholders at which a proposal will be considered with respect to the Stockholder Approval and to prepare and file a preliminary proxy statement relating to such meeting as promptly as reasonably practicable and in any event no later than the 60th day following the Closing Date. In addition, as further described below, on December 1, 2020, certain stockholders of the Company entered into agreements with the Stockholder Representative to vote all shares of common stock of the Company owned by such persons as of the applicable record date in favor of the Stockholder Approval.
Pursuant to the Merger Agreement, the Company agreed to increase the size of its board of directors by two members in order to elect to the board of directors, promptly following and in any event within five business days following the Closing Date, Ted Lundberg as a Class II director (and as the initial appointee of the Rights Holders as described below) and Stephen Griggs, the current President and Chief Executive Officer of AeroCare, as a Class I director. For as long as Peloton Equity AeroCare SPV I, L.P. and SkyKnight Aero Holdings, LLC (the “Rights Holders”) and their respective affiliates collectively among them hold beneficial ownership of at least 35% of the shares of Class A Common Stock and Series C Preferred Stock, on an as-converted basis, issued to the Rights Holders pursuant to the Merger Agreement, the Rights Holders will have the right to designate for nomination one director for election to the Company’s board of directors. In addition to the foregoing director designation right, for as long as the Rights Holders or their respective affiliates collectively among them hold beneficial ownership of at least 35% of the shares of Class A Common Stock and Series C Preferred Stock, on an as-converted basis, issued to the Rights Holders pursuant to the Merger Agreement, the Rights Holders will have the right to designate a non-voting observer to the board of directors of the Company.
The obligations of the Company and AeroCare to consummate the transactions contemplated by the Merger Agreement are subject to the satisfaction or waiver of, among other closing conditions, the accuracy of the representations and warranties in the Merger Agreement, the compliance by the parties with the covenants in the Merger Agreement, the absence of any legal order barring the Acquisition, the termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of certain regulatory approvals. The obligation of the Company to effect the closing is also subject to the satisfaction or waiver of the condition that no more than 3.5% of the shares of common stock of AeroCare issued and outstanding as of immediately prior to the closing have properly demanded appraisal for such shares pursuant to Section 262 of the General Corporation Law of the State of Delaware.
The Merger Agreement contains customary representations and warranties given by AeroCare, the Company, Merger Sub and Merger Sub II, in each case generally subject to customary materiality qualifiers. The Company and AeroCare have also each made customary covenants in the Merger Agreement, including covenants by each of the parties relating to conduct of their respective businesses prior to the closing of the Acquisition. The Merger Agreement also contains a covenant by AeroCare not to, and to cause its affiliates, subsidiaries, officers, directors, employees and representatives not to, solicit, initiate or encourage the initiation of, participate in any discussions or negotiations regarding, or agree to any acquisition proposal by a third party.
Pursuant to the Merger Agreement, the parties are provided with customary termination rights, including the right of either party to terminate the Merger Agreement if the consummation of the Acquisition has not occurred on or prior to May 31, 2021 unless the party electing to terminate the Merger Agreement is in breach of its representations or obligations under the Merger Agreement and such breach caused the failure of a condition to closing or was the primary cause of the failure to consummate the closing prior to outside date. The Company will be required to pay a termination fee to AeroCare equal to $60 million if
 
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the Merger Agreement is terminated for breach by the Company that primarily gives rise to the failure of certain conditions to closing of AeroCare or for failure of the Company to close when required. The Acquisition is expected to close in the first quarter of 2021 subject to the satisfaction of the closing conditions as described above.
The representations, warranties and pre-closing covenants of AeroCare under the Merger Agreement do not survive the closing of the Acquisition, and the Company disclaims any remedies for any such matters following the closing; however, the Company and the surviving company following the Acquisition will be entitled to recovery with respect to certain losses as a result of, or in connection with, a specified matter solely out of an indemnity escrow account established pursuant to the Merger Agreement. The Company intends to bind a representations and warranties insurance policy in connection with the Acquisition.
The Company intends to fund the cash portion of the consideration for the Acquisition and associated costs through cash on hand and incremental debt and has entered into a debt commitment letter with Jefferies Finance, as further described below.
Pursuant to the Merger Agreement, subject to certain exceptions, each equityholder of AeroCare receiving shares of Class A Common Stock and Series C Preferred Stock or Company options at the closing of the Acquisition is prohibited from transferring such consideration, or any Company securities issued on conversion or exercise of such consideration, (i) for a period of six months following the Closing Date and, (ii) solely with respect to two-thirds of such consideration, for a period of one year following the Closing Date.
 
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RISK FACTORS
Investment in our securities involves a high degree of risk. You should consider carefully the following risks and the risks and uncertainties described under the heading “Risk Factors” in any applicable prospectus supplement, our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as updated by our subsequent Quarterly Reports on Form 10-Q, and our other filings with the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), which are incorporated herein by reference, before you decide whether to purchase any of our securities. These risks could materially adversely affect our business, financial condition, results of operations and cash flows, and you may lose part or all of your investment. For more information, see “Where You Can Find More Information.”
We may experience difficulties in integrating the operations of AeroCare into our business and in realizing the expected benefits of the Acquisition.
The success of the Acquisition will depend in part on our ability to realize the anticipated business opportunities from combining the operations of AeroCare with our business in an efficient and effective manner. The integration process could take longer than anticipated and could result in the loss of key employees, the disruption of each company’s ongoing businesses, tax costs or inefficiencies, or inconsistencies in standards, controls, information technology systems, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers, employees or other third parties, or our ability to achieve the anticipated benefits of the Acquisition, and could harm our financial performance. If we are unable to successfully or timely integrate the operations of AeroCare with our business, we may incur unanticipated liabilities and be unable to realize the revenue growth, synergies and other anticipated benefits resulting from the Acquisition, and our business, results of operations and financial condition could be materially and adversely affected.
We have incurred significant costs in connection with the Acquisition. The substantial majority of these costs are non-recurring expenses related to the Acquisition. These non-recurring costs and expenses are not reflected in the unaudited pro forma condensed combined financial information incorporated by reference in this Proxy Statement. We may incur additional costs in the integration of AeroCare’s business, and may not achieve cost synergies and other benefits sufficient to offset the incremental costs of the Acquisition.
FINANCIAL INFORMATION ABOUT AEROCARE
For information about AeroCare’s operations and financial condition, see (i) the audited consolidated financial statements of AeroCare Holdings, Inc. as of December 31, 2019 and 2018 and for the years then ended and the related notes thereto, (ii) the unaudited consolidated interim financial statements of AeroCare Holdings, Inc. as of September 30, 2020 and December 31, 2019 and for the nine months ended September 30, 2020 and 2019, and the related notes thereto, and (iii) the unaudited pro forma condensed combined financial information, and the related notes thereto, of AdaptHealth Corp. as of and for the nine months ended September 30, 2020 and for the nine months ended September 30, 2019 and the year ended December 31, 2019, which are attached as Exhibits 99.3, 99.4 and 99.6, respectively, to our Current Report on Form 8-K filed with the SEC on December 14, 2020 and are incorporated herein by reference.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF AEROCARE
The following discussion should be read in conjunction with AeroCare’s consolidated financial statements and the accompanying notes incorporated by reference into this Proxy Statement. All amounts presented are in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), except as noted. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed below and elsewhere in this Proxy Statement, including “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.”
 
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Results of Operations
Comparison of Nine Months Ended September 30, 2020 and Nine Months Ended September 30, 2019
The following table summarizes AeroCare’s consolidated results of operations for the nine months ended September 30, 2020 and 2019:
Nine Months Ended September 30,
Increase / (Decrease)
(in thousands, except percentages)
2020
2019
Dollars
Percentage
Net revenue
$ 497,664 $ 379,245 $ 118,419 31%
Costs and expenses:
Cost of net revenue
201,907 152,675 49,232 32%
Selling, general, and administrative expenses
228,807 187,932 40,875 22%
Depreciation and amortization expense
6,055 4,846 1,209 25%
Total costs and expenses
436,769 345,453 91,316 26%
Operating income
60,895 33,792 27,103 80%
Other income (expense):
Other income
2,705 2,208 497 23%
Interest expense
(11,486) (9,766) (1,720) 18%
Loss on early extinguishment of debt
(1,509) 1,509 -100%
Total other expense
(8,781) (9,067) 286 -3%
Income before provision for income taxes
52,114 24,725 27,389 111%
Provision for income taxes
8,179 2,694 5,485 204%
Net Income
$ 43,935 $ 22,031 $ 21,904 99%
Net Revenue.   Net revenue for the nine months ended September 30, 2020 was $497.7 million compared to $379.3 million for the nine months ended September 30, 2019, an increase of $118.4 million or 31%. The increase is primarily related to acquisition growth resulting in increased sales of AeroCare’s oxygen, respiratory therapy services, medications, and other home medical equipment products.
Cost of Net Revenue.   Cost of net revenue for the nine months ended September 30, 2020 was $201.9 million compared to $152.7 million for the nine months ended September 30, 2019, an increase of $49.2 million or 23%. The increase is primarily attributable to the increase in net revenue as a result of acquisition growth, resulting in higher purchases of products and supplies, and an increase in depreciation expense from patient medical equipment. Cost of net revenue was 41% of net revenue for the nine months ended September 30, 2020, compared to 40% for the nine months ended September 30, 2019.
Selling, General and Administrative Expenses.   Selling, general and administrative expenses for the nine months ended September 30, 2020 were $228.8 million compared to $187.9 million for the nine months ended September 30, 2019, an increase of $40.9 million or 22%. The increase is primarily related to acquisition growth, resulting in higher employee related expenses, and to a lesser extent, increases in other expenses such as legal, revenue cycle management and other operating expenses.
Depreciation and Amortization Expenses.   Depreciation and amortization expense for the nine months ended September 30, 2020 was $6.0 million compared to $4.8 million for the nine months ended September 30, 2019, an increase of $1.2 million or 25%. The increase is primarily related to higher expense from increased purchases of capital expenditures as a result of acquisition growth.
Interest Expense.   Interest expense for the nine months ended September 30, 2020 was $11.5 million compared to $9.8 million for the nine months ended September 30, 2019, an increase of $1.7 million or 18%. The increase in interest expense was driven by higher long-term debt obligations outstanding during the 2020 period compared to the 2019 period.
 
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Comparison of Year Ended December 31, 2019 and Year Ended December 31, 2018
The following table summarizes AeroCare’s consolidated results of operations for the years ended December 31, 2019 and December 31, 2018:
Year Ended December 31,
Increase / (Decrease)
(in thousands, except percentages)
2019
2018
Dollars
Percentage
Net revenue
$ 533,649 $ 393,418 $ 140,231 36%
Costs and expenses:
Cost of net revenue
218,369 158,187 60,182 38%
Selling, general, and administrative expenses
261,213 204,270 56,943 28%
Depreciation and amortization expense
6,868 5,406 1,462 27%
Total costs and expenses
486,450 367,863 118,587 32%
Operating income
47,199 25,555 21,644 85%
Other income (expense):
Other income
3,103 2,207 896 41%
Interest expense
(14,370) (7,610) (6,760) 89%
Loss on early extinguishment of debt
(1,509) (1,227) (282) 23%
Total other expense
(12,776) (6,630) (6,146) 93%
Income before provision for income taxes
34,423 18,925 15,498 82%
Provision for income taxes
4,001 3,036 965 32%
Net Income
$ 30,422 $ 15,889 $ 14,533 91%
Net Revenue.   Net revenue for the year ended December 31, 2019 was $533.6 million compared to $393.4 million for the year ended December 31, 2018, an increase of $140.2 million or 36%. The increase is primarily related to acquisition growth resulting in increased sales of AeroCare’s oxygen, respiratory therapy services, medications, and other home medical equipment products.
Cost of Net Revenue.   Cost of net revenue for the year ended December 31, 2019 was $218.4 million compared to $158.2 million for the year ended December 31, 2018, an increase of $60.2 million or 38%. The increase is primarily attributable to the increase in net revenue as a result of acquisition growth, resulting in higher purchases of products and supplies, and an increase in depreciation expense from patient medical equipment. Cost of net revenue was 41% of net revenue for the year ended December 31, 2019, compared to 40% for the year ended December 31, 2018.
Selling, General and Administrative Expenses.   Selling, general and administrative expenses for the year ended December 31, 2019 were $261.2 million compared to $204.3 million for the year ended December 31, 2018, an increase of $56.9 million or 28%. The increase is primarily related to acquisition growth, resulting in higher employee related expenses, and to a lesser extent, increases in other expenses such as legal, revenue cycle management and other operating expenses.
Depreciation and Amortization Expenses.   Depreciation and amortization expense for the year ended December 31, 2019 was $6.9 million compared to $5.4 million for the year ended December 31, 2018, an increase of $1.5 million or 27%. The increase is primarily related to higher expense from increased purchases of capital expenditures as a result of acquisition growth.
Interest Expense.   Interest expense for the year ended December 31, 2019 was $14.4 million compared to $7.6 million for the year ended December 31, 2018, an increase of $6.8 million or 89%. The increase in interest expense was driven by higher long-term debt obligations outstanding during the 2019 period compared to the 2018 period.
 
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Liquidity and Capital Resources
The principal source of liquidity is AeroCare’s operating cash flow and borrowings under its credit agreement. AeroCare has historically met its working capital and capital expenditure requirements by using its operating cash flows, and has used borrowings under its credit agreement primarily to fund acquisitions. AeroCare has historically generated positive operating cash flow on an annual basis.
Comparison of Nine Months Ended September 30, 2020 and Nine Months Ended September 30, 2019
Cash Flows from Operating Activities.   Net cash provided by operating activities for the nine months ended September 30, 2020 was $125.0 million compared to $78.1 million for the nine months ended September 30, 2019, an increase of $46.9 million. The increase was the result of a $21.9 million increase in net income as a result of acquisition growth, a net increase of $11.8 million in non-cash charges primarily from depreciation and amortization and stock-based compensation expense, a decrease of $6.0 million in deferred tax liability, and a $19.2 million net increase in cash resulting from the change in operating assets and liabilities, primarily resulting from the change in accounts receivable, inventory, accounts payable, accrued expenses and other current liabilities for the period.
Cash Flows from Investing Activities.   Net cash used in investing activities for the nine months ended September 30, 2020 was $128.1 million compared to $83.7 million for the nine months ended September 30, 2019. The use of funds in the 2020 period consisted of $50.5 million for business acquisitions and $77.6 million for the purchase of property and equipment. The use of funds in the 2019 period consisted of $15.3 million for business acquisitions and $68.4 million for the purchase of property and equipment.
Cash Flows from Financing Activities.   Net cash provided by financing activities for the nine months ended September 30, 2020 was $18.8 million compared to cash used in financing activities of $4.2 million for the nine months ended September 30, 2019. Net cash provided by financing activities for the 2020 period consisted of $34.9 million of borrowings from notes payable and lines of credit, $3.0 million from the issuance of common stock, and $0.2 million of proceeds from the exercise of stock options, offset by total repayments of $13.0 million on notes payable and lines of credit, payments of $2.6 million on capital lease obligations, $3.5 million of deferred payments to sellers in connection with business acquisitions, and $0.2 million of payments for deferred financing costs. Net cash used in financing activities for the 2019 period consisted of $344.7 million of borrowings from notes payable and lines of credit, offset by total repayments of $239.7 million on notes payable and lines of credit, payments of $2.4 million on capital lease obligations, payments of $105.0 million for a dividend distribution, and $1.8 million of payments for deferred financing costs.
Comparison of Year Ended December 31, 2019 and Year Ended December 31, 2018
Cash Flows from Operating Activities.   Net cash provided by operating activities for the year ended December 31, 2019 was $111.0 million compared to $91.2 million for the year ended December 31, 2018, an increase of $19.8 million. The increase was the result of a $14.5 million increase in net income as a result of acquisition growth, a net increase of $15.2 million in non-cash charges primarily from depreciation and amortization and stock-based compensation expense, an increase of $1.0 million in deferred tax liability, and a $10.9 million net decrease in cash resulting from the change in operating assets and liabilities, primarily resulting from the change in accounts receivable, inventory, accounts payable, accrued expenses and other current liabilities for the period.
Cash Flows from Investing Activities.   Net cash used in investing activities for the year ended December 31, 2019 was $134.1 million compared to $109.8 million for the year ended December 31, 2018. The use of funds in the 2019 period consisted of $40.5 million for business acquisitions and $93.6 million for the purchase of property and equipment. The use of funds in the 2018 period consisted of $39.3 million for business acquisitions and $70.5 million for the purchase of property and equipment.
Cash Flows from Financing Activities.   Net cash provided by financing activities for the year ended December 31, 2019 was $13.9 million compared to $32.2 million for the year ended December 31, 2018. Net cash provided by financing activities for the 2019 period consisted of $378.0 million of borrowings from notes payable and lines of credit, $100.0 million from the issuance of preferred stock, and $0.4 million of
 
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proceeds from the exercise of stock options, offset by total repayments of $244.0 million on notes payable and lines of credit, $8.9 million of deferred payments to sellers in connection with business acquisitions, payments of $205.0 million for a dividend distribution, $2.0 million of payments for deferred financing costs, and $4.6 million of payments for preferred stock issuance costs. Net cash provided by financing activities for the 2018 period consisted of $276.4 million of borrowings from notes payable and lines of credit, offset by total repayments of $161.4 million on notes payable and lines of credit, payments of $0.1 million on capital lease obligations, payments of $75.0 million for a dividend distribution, $5.9 million of deferred payments to sellers in connection with business acquisitions, and $1.8 million of payments for deferred financing costs.
Off-Balance Sheet Arrangements
As of September 30, 2020, AeroCare did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
INFORMATION ABOUT ADAPTHEALTH
General
AdaptHealth is a leading provider of home healthcare equipment, medical supplies to the home and related services in the United States. AdaptHealth focuses primarily on providing (i) sleep therapy equipment, supplies and related services (including continuous positive airway pressure (“CPAP”) and bilevel positive airway pressure (“bi-PAP”) services) to individuals suffering from obstructive sleep apnea (“OSA”), (ii) medical devices and supplies to patients for the treatment of diabetes (including continuous glucose monitors and insulin pumps), (iii) home medical equipment (“HME”) to patients discharged from acute care and other facilities, (iv) oxygen and related chronic therapy services in the home and (v) other HME medical devices and supplies on behalf of chronically ill patients with wound care, urological, incontinence, ostomy and nutritional supply needs. AdaptHealth services beneficiaries of Medicare, Medicaid and commercial insurance payors. As of September 30, 2020, AdaptHealth serviced approximately 1.8 million patients annually in all 50 states through its network of 269 locations in 41 states. Following the consummation of the Acquisition, AdaptHealth expects to service approximately 2.8 million patients annually. AdaptHealth’s principal executive offices are located at 220 West Germantown Pike, Suite 250, Plymouth Meeting, Pennsylvania 19462.
Industry Overview
The HME industry provides critical medical products and recurring supply services, designed to improve quality of life, to patients in their homes. The HME industry allows patients with complex and chronic conditions to transition to their homes and achieve a greater level of independence, which is often lost in facility-based settings. While the industry has traditionally treated outpatient and lower acuity ailments, recent technological improvements have helped make higher acuity treatment more affordable and, in turn, have allowed the industry to shift to the treatment of more advanced acute ailments. The equipment and supplies that HME providers deliver can include respiratory products, mobility, diabetes management, nutritional and other general home needs (bathroom needs, nutritional needs, hospital beds, etc.).
According to CMS, the HME industry has grown from $40 billion in 2010 to $56 billion in 2018 (representing a 4.3% CAGR), of which AdaptHealth estimates its total addressable market for its sleep therapy, oxygen services, mobility products and hospice HME business lines to be approximately $12 billion to $15 billion in 2018. During that time Medicaid data shows a continued shift of long-term services and supports spending into the home, with 57% of that spending going to home and community-based services in 2016. According to CMS, the HME market is projected to continue to grow at a 6.1% CAGR over the next nine years. As a result of the acquisition of the diabetic, wound care, ostomy and urological supplies business of PCS in January 2020, AdaptHealth believes it has more than doubled its addressable market to more than $25 billion. Primary drivers of continued market growth include:

Aging U.S. Population:   The population of adults aged 65 and older in the United States, a significant group of end users of AdaptHealth’s products and services, is expected to continue to grow and thus grow AdaptHealth’s market opportunity. According to CMS, in the United States, the population of adults between the ages of 65 and 84 is expected to grow at a 2.5% CAGR through 2030, while
 
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the population of adults over 85 is projected to grow at a 2.9% CAGR during that same time period. Not only is the elderly population expected to grow, but it is also expected to make up a larger percentage of the total U.S. population. According to the U.S. Census Bureau, the U.S. geriatric population was approximately 15% of the total population in 2014 and is expected to grow to approximately 24% of the total population by 2060. This growth emphasizes the need for companies, such as AdaptHealth, to provide efficient and effective equipment to a patient’s home, shortening the amount of time that the patient population spends in an inpatient setting.

Increasing Prevalence of Chronic Conditions:   HME is necessary to help treat significant health issues affecting millions of Americans. For example, chronic obstructive pulmonary disease was the third leading cause of death in the United States in 2014 with over 15 million reported diagnoses, according to the Centers for Disease Control and Prevention (“CDC”). Congestive heart failure, another condition where HME plays a role in successful treatment, impacts more than five million Americans, according to the CDC. The CDC also estimates that more than 9% of the U.S. population suffers from diabetes. AdaptHealth believes that CGM and diabetes represent a $16 billion market segment. AdaptHealth believes that the CGM market could grow by 18% to $3.4 billion by 2022, and the insulin pump market could grow by 12% to $2.2 billion by 2022. Finally, according to the American Sleep Apnea Association, obstructive sleep apnea affects 20 million people across the nation, with 15 million undiagnosed, including many individuals younger than 65 years old. As these conditions continue to increase in prevalence, AdaptHealth expects that the demand within the HME industry for suppliers, such as AdaptHealth, will grow with it, positioning AdaptHealth to be able to expand its market reach and penetration.

Advancements in Technology:   Continuing development of technology and supply logistics has enabled more efficient and effective delivery of care in the home along with the collection of data that can be used for ongoing treatment. This, in turn, has helped grow AdaptHealth’s total addressable market. With improvements in technology, physicians are often able to monitor patients’ adherence to prescribed therapy, which previously required admission to a facility. With the advancement of technology, physicians are more confident in shifting care to a patient’s home and patients are more comfortable receiving care in this setting.

Increasing Prevalence of and Preference for In-Home Treatments:   The number of conditions that can be treated in the home continues to grow, with recent additions including chronic wound care, sleep testing, dialysis and chemotherapy. In-home care is also increasingly becoming the preferred method of treatment, particularly for the elderly population. According to the AARP Public Policy Institute, 90% of patients over age 55 have indicated a preference to receive care in the home rather than in an institutional setting. Patient preference is supported by data that has shown that the efficacy of home care is often equivalent to that of facility-based care. The home setting provides comfort and convenience for a population that often faces barriers to receiving effective traditional treatment, such as transportation and adherence. By bringing the care to them, the elderly population can maintain a higher quality of life while still receiving high-quality care and equipment. As a result, more companies within the healthcare industry that are primarily facility-based are beginning to shift towards in-home offerings. AdaptHealth believes that medical supplies to the home represents a $10 billion segment.

Home Care is the Lowest Cost Setting:   Not only can in-home care be just as effective as care delivered in a facility-based setting, but it has also proven to be more cost effective. The cost effectiveness of in-home care is particularly important within the context of government pressures to lower the cost of care, pushing payors, such as Medicare and Medicaid, and clinicians to seek care settings that are less costly than hospitals and inpatient facilities. On a daily basis, home healthcare has been estimated by Cain Brothers & Company, LLC to be approximately seven times less expensive than care provided in skilled nursing facilities, the closest acuity site of care. Home care generally offers a significant cost reduction opportunity relative to facility-based care without sacrificing quality.
Business Strategy
AdaptHealth aims to grow its revenue while expanding margins through targeted strategies for organic growth as well as opportunistic acquisitions that take advantage of AdaptHealth’s scalable, integrated technology platform.
 
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Drive Market Share Gains in the HME Market:   AdaptHealth plans to leverage its technological and clinical advantages as well as its relationships with key constituents across the HME supply chain to deepen its presence in the HME market. AdaptHealth has built a strong network of highly diversified referral relationships that its sales force will continue to grow to help expand market penetration in certain geographies. Primary referral sources include acute care hospitals, sleep laboratories, pulmonologist offices, skilled nursing facilities and hospice operators, with no one source accounting for a material portion of its revenue as of September 30, 2020. AdaptHealth believes that maintaining and broadening these relationships will drive organic growth. AdaptHealth’s ability to provide many products across its contracted payors is particularly valuable, especially to providers and facilities that discharge patients with a variety of product needs and insurance coverages. While some of AdaptHealth’s HME competitors focus on certain specific product lines, AdaptHealth is able to offer a wide array of products to its customers. AdaptHealth believes that its strong referral relationships and broad product portfolio will help drive market share growth.

Grow through Acquisitions:   The HME industry is highly fragmented, with more than 6,000 unique suppliers. AdaptHealth believes that ongoing reimbursement changes will continue the consolidation trend in the HME industry that has accelerated in recent years. AdaptHealth believes that, in the current environment, companies with the ability to scale operations possess competitive advantages that can drive volume to their platforms. As one of a limited number of national HME companies, AdaptHealth plans to continue to evaluate acquisitions and execute upon attractive opportunities to help drive growth.

Improve Profitability with Technology-Enabled Platform:   AdaptHealth plans to leverage its combined integrated technology system (based upon third-party applications and proprietary software products) to reduce costs and improve operational efficiency in its current business and the businesses it acquires. Through the third quarter of 2020, AdaptHealth has deployed its technology solutions with respect to the majority of its acquisitions and has worked to establish the ability to improve logistics performance and operating margins. The Acquisition combines two of the industry’s leading technology platforms, which AdaptHealth intends to continue to improve to enhance its communications with referral sources and provide better patient service. Further, AdaptHealth believes both platforms are leaders in tech-enabled devices and are positioned to lead the shift to connected healthcare through AdaptHealth’s offerings of various connected devices designed to drive early interventions, reduce hospitalizations and improve outcomes, making AdaptHealth a value-add partner to payors, providers and patients.

Expand Product Portfolio:   In addition to its other growth initiatives, AdaptHealth also plans to augment its product portfolio to help drive growth. While AdaptHealth offers a suite of products to its referrers and patients, AdaptHealth has identified several key expansion opportunities, including products in the respiratory device, respiratory medicine, diabetes management, orthotic bracing and hospice HME markets. AdaptHealth believes that the Acquisition greatly enhances the depth of its product offering in respiratory devices and medicine, allowing it to further address key clinical conditions which, in turn, is expected to help drive growth across its customer base. AdaptHealth’s scale has helped it be successful in the past when bidding on Medicare contracts.

Utilize Value-Based Reimbursement Arrangements:   AdaptHealth’s broad HME service offerings and technology-enabled infrastructure provide it with the opportunity to enter into value-based reimbursement arrangements with its payors and referrers (including large multi-specialty physician groups, hospital systems, and accountable care organizations) pursuant to which AdaptHealth provides certain HME services on a per-patient, per-month basis or shares in reduction of HME service costs over baseline periods. Such arrangements are attractive to risk-bearing providers (such as capitated medical groups) and payors wishing to reduce administrative costs related to HME services.
Competitive Strengths
AdaptHealth believes that the following strengths will continue to enable it to provide high-quality products and services to its customers and to create value for stockholders:

Differentiated Technology-Enabled Platform:   Over the last five years, AdaptHealth has developed an integrated technology system (based upon leading third-party applications and proprietary software
 
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products) which AdaptHealth believes provides a competitive advantage within the HME industry. AdaptHealth’s integrated platform distinguishes itself from other industry participants by automating processes that can be complex, prone to mistakes and inefficient. AdaptHealth believes that its platform’s ease of use, improved compliance and automated, integrated workflow for delivery of care appeals to physicians and payors. Additionally, AdaptHealth believes its adoption of e-prescribing solutions enhances transparency and reduces clinical errors and delays. AdaptHealth believes such systems provide better patient service by reducing the time between an order’s receipt and the delivery of the products to the patient. AdaptHealth believes its model is scalable, supporting future organic growth while also allowing for timely on-boarding of acquisitions. AdaptHealth believes that this differentiated technology platform will help generate business from new clients, as other competitors either lack the resources to modernize their infrastructure or utilize systems which do not easily allow for changes from traditional, less automated models.

National Scale and Operational Excellence:   AdaptHealth has relationships with national healthcare distribution companies to drop ship certain HME products directly to patients’ homes in one to two days. AdaptHealth believes that its scale makes AdaptHealth attractive to payors as it is able to service its patients across the nation. As of September 30, 2020, AdaptHealth has been able to build a network of more than 1,000 payors, including 10 national insurers. AdaptHealth’s payor network allows its organization to provide in-network rates for most prospective patients, unlike many of its competitors. AdaptHealth believes that this, in turn, promotes access to its services among patients, providers and facilities, which helps to support and grow its business. AdaptHealth has a broad distribution network to leverage with respect to timely and efficient delivery of products. AdaptHealth has strategically located small depots across the country based upon equipment volume and drive times to support its delivery fleet and help enhance operational success.

Experienced Management Team:   AdaptHealth is led by a proven management team with significant experience in the HME and healthcare services industries. The team has domain knowledge within the industry having been employed at various healthcare organizations throughout their careers. Multiple members of the management team have also built independent HME companies and have the proven ability to scale a business within the HME industry. Additionally, several members of the management team have experience within their specific roles in both private and public company settings. Given the complexity of the highly regulated industry in which AdaptHealth operates, AdaptHealth believes that management’s experience is a meaningful differentiator relative to its competitors.

Proven M&A Success:   AdaptHealth’s integrated technology platform includes scalable and centralized front-end and back office processes that facilitate the effective onboarding of potential acquisitions and help achieve cost synergies. AdaptHealth and AeroCare have demonstrated their ability to execute upon acquisitions, completing over 230 transactions on a pro forma basis from their respective dates of founding through November 30, 2020. As AdaptHealth continues to grow, it expects to deploy incrementally more capital and integrate substantially larger targets over time, which in turn AdaptHealth expects will be a source of continued growth for AdaptHealth.
Company Operations
Product Offering.   AdaptHealth delivers home medical equipment and supplies directly to a patient’s home upon discharge from a hospital and/or receipt of referral. The breadth of AdaptHealth’s products is particularly valuable to acute care hospitals, sleep laboratories and long-term care facilities that discharge patients with complex conditions and multiple product needs.
AdaptHealth is often paid a fixed monthly amount for certain HME products as designated by the Centers for Medicare and Medicaid Services (“CMS”) or commercial payors, such as CPAP equipment, wheelchairs, hospital beds, oxygen concentrators, continuous glucose monitors (“CGM”) and other similar products. These sales accounted for approximately 32% of AdaptHealth’s revenue for the twelve months ended September 30, 2020.
For resupply sale and one-time sale products, which include those deemed to be consumables, AdaptHealth receives a single payment upon shipment of the product. These products, which include
 
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CPAP masks and related supplies, diabetes management supplies, wound care supplies, wheelchair cushions accessories, orthopedic bracing, breast pumps and supplies, walkers, commodes and canes, nutritional supplies and incontinence supplies, accounted for approximately 68% of AdaptHealth’s revenue for the twelve months ended September 30, 2020.
Supply Chain.   AdaptHealth plays an important role in delivering HME products to patients in their homes. Manufacturers of home medical equipment sell and ship their products to AdaptHealth directly. AdaptHealth also contracts with national healthcare distribution companies to ship certain HME products directly to patients’ homes. These distributors invoice AdaptHealth for the cost of shipped products at the time of sale. AdaptHealth receives referrals from a variety of sources, such as acute care hospitals, sleep laboratories, pulmonologist offices, skilled nursing facilities and hospice operators. AdaptHealth’s products are either shipped to patients’ homes by AdaptHealth-operated or contracted delivery trucks or shipped using proprietary or third-party distribution services. AdaptHealth bills payors and patients directly for the products that are delivered and for the services that are provided.
The following chart illustrates AdaptHealth’s HME supply chain. AdaptHealth buys or leases products directly from leading HME manufacturers and then delivers products directly to patients.
[MISSING IMAGE: TM2039015D1-FC_ADAPT4CLR.JPG]
Operating Structure
Management.   AdaptHealth is led by a proven management team with experience in the HME industry across a variety of healthcare organizations. AdaptHealth adopts a centralized approach for key business processes, including M&A activity, revenue cycle management, strategic purchases, payor contracting, finance, compliance, legal, human resources, IT and sales management. In addition, AdaptHealth has centralized many of the functions relating to its CPAP and other resupply businesses. However, AdaptHealth believes that the personalized nature of customer requirements and referral relationships, characteristic of the home healthcare business, mandates that it emphasize a localized operating structure as well. AdaptHealth focuses on regional management to respond promptly and effectively to local market demands and opportunities. AdaptHealth’s regional managers are responsible and accountable for maintaining and developing relationships with referral sources, customer service for non-CPAP supply product lines and logistics for non-drop-shipped products.
Following the closing of the Acquisition, Stephen Griggs will join Luke McGee as co-Chief Executive Officer of AdaptHealth.
IT.   AdaptHealth has established an integrated, technology-enabled, centralized platform, distinguishing itself from many of its competitors who traditionally use less automated processes that are typically complex, can be prone to mistakes and are inefficient. AdaptHealth’s technology enables automated, compliant, and integrated workflow into patients’ delivery of care. AdaptHealth believes that this advanced technology platform provides it with a competitive advantage through its unique components that cater to patients and physicians. AdaptHealth believes that its technology platform has several characteristics that appeal to physicians, including its ease of use, the improved compliance it enables through its integrated systems and the
 
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automated, integrated workflow it provides for patients’ delivery of care. Additionally, AdaptHealth’s e-prescribing capabilities enhance transparency and reduce transcription and other errors. AdaptHealth believes that patients are also better served due to the efficiency from time of order to delivery and the seamless integration across points of care enabled by AdaptHealth’s platform. The integrated system also provides AdaptHealth management with critical information in a timely manner, allowing them to track performance levels company-wide.
AdaptHealth has formed close relationships with its third-party software providers, including Apacheta Corporation, Brightree, Parachute Health and SnapWorx, LLC, to optimize its HME workflow. An example of this optimization is AdaptHealth’s automated point-of-delivery technology, which tracks AdaptHealth’s drivers and produces paperless, secure delivery tickets which are uploaded directly to the patient’s file and available immediately on an enterprise-wide basis. In addition, to address ongoing and growing threats related to cyberattacks, AdaptHealth continues to deploy market leading defense tools to protect and secure its networks and data.
Revenue Cycle Management.   AdaptHealth’s revenue cycle management and billing processes have both manual and computerized elements that are designed to maintain the integrity of revenue and accounts receivable. Third-party payors that can accommodate electronic claims submission, such as Medicare, certain state Medicaid payors and many commercial payors, are billed electronically on a daily basis. For other payors who are unable to accept electronic submissions, AdaptHealth generates paper claims and invoices.
AdaptHealth contracts with several business process outsourcing providers to provide certain billing and administrative functions related to revenue cycle management. These providers are based in the Philippines, India and Central America and provide AdaptHealth with the ability to scale its workforce in a cost-effective manner. As of September 30, 2020, approximately 1,500 full-time equivalent personnel were provided to AdaptHealth under such arrangements.
Sales and Marketing
Sales activities are generally carried out by AdaptHealth’s full-time sales representatives with assistance from on-site liaisons in certain markets who interact directly with hospital discharge coordinators and patients. AdaptHealth’s sales team works closely with AdaptHealth’s trained respiratory therapists in carrying out their daily sales activities. AdaptHealth primarily acquires new patients through referrals. Sources of referrals include acute care hospitals, sleep laboratories, pulmonologist offices, skilled nursing facilities and hospice operators, among others. AdaptHealth’s sales representatives maintain continual contact with medical professionals across these facilities. AdaptHealth believes that its relationships with its referral sources are strong and that these entities will continue to be a source of organic growth through new patients. While AdaptHealth views its referral sources as fundamental to its business, no single referral source accounted for more than a material portion of its revenue as of September 30, 2020.
Acquisitions
Continuing to grow through accretive acquisitions is a key element of AdaptHealth’s growth strategy, and AdaptHealth continuously reviews its pipeline of potential acquisition candidates. AdaptHealth maintains a dedicated M&A integration team and leverages its scalable front-end and back-office technology platform to facilitate acquisition integration to help realize short-term cost saving synergies and longer term revenue growth synergies.
For the nine months ended September 30, 2020, AdaptHealth completed acquisitions involving 16 companies for total purchase consideration of approximately $712.7 million (excluding amounts related to contingent consideration). During the year ended December 31, 2019, AdaptHealth completed acquisitions involving 18 companies for total purchase consideration of approximately $67.0 million (excluding amounts related to contingent consideration).
 
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Suppliers
AdaptHealth purchases medical equipment from a variety of suppliers. AdaptHealth’s sleep therapy equipment and supplies are primarily provided by two suppliers, and its mobility and home services products (such as hospital beds, wheelchairs, walkers and commodes) are principally supplied by a single supplier. Notwithstanding its significant supply relationships with these vendors, AdaptHealth believes that it is not dependent upon any single supplier and that its product needs can be met by an adequate number of qualified manufacturers.
Facilities
AdaptHealth does not own any properties and leases its headquarters facility located at 220 West Germantown Pike, Suite 250, Plymouth Meeting, PA. As of September 30, 2020, AdaptHealth serviced approximately 1.8 million patients annually in all 50 states through its network of 269 locations in 41 states. Following the consummation of the Acquisition, AdaptHealth expects to service approximately 2.8 million patients annually. Full service locations are typically between 300 and 5,000 square feet, and are usually a combination office and warehouse space. Many of these facilities are accredited to provide patient services, and their adjacent warehouse space is used for storage of adequate supplies of equipment and accessories for such patient services. AdaptHealth believes that these facilities are adequate to meet its current needs, and expects to add additional facilities in connection with its growth strategies. AdaptHealth believes that such additional space, when required, will be available on commercially reasonable terms, consistent with historical cost trends.
Employees
As of September 30, 2020, AdaptHealth had approximately 3,700 employees. AdaptHealth believes that relations between its management and employees are good.
Competition
The HME market is fragmented and highly competitive. AdaptHealth competes with other large national providers, including AeroCare, Apria Healthcare, Lincare and Rotech; regional providers, including DASCO Home Medical Equipment, Binson’s Medical Equipment, Inc., Norco, Inc. and Protech Home Medical Corp.; and product-specific providers, including Breg, Inc., Byram Healthcare Centers, Inc., Inogen, Inc. and Acelity L.P., as well as over 6,000 local organizations. In addition, non-HME providers, including CVS, Amazon and certain manufacturers of HME equipment are considering entering or expanding their presence in the HME market.
Consolidation of the HME market is a continuing trend, as required technology investments and reduced reimbursements put financial pressure on smaller providers. Larger HME providers with integrated technology and automated processes are generally better positioned to gain market share and more attractive vendor pricing. Competitive bidding also emphasizes the importance of relationships with both the payors and referral sources. Because payors typically select a limited number of exclusive suppliers and physicians typically refer based on timely delivery and consistency, relationships with both are critical to the success of competitors in the market.
AdaptHealth believes that the most important competitive factors in the regional and local markets are:

Reputation with referral sources, including local physicians and hospital-based professionals;

Service quality and efficient, responsive referral process;

Differentiated technology platform that provides a superior physician and patient experience;

Comprehensive offering across the home medical equipment space;

Broad network of payor contracts and regional insurers;

Overall ease of doing business; and

Quality of patient care, including clinical expertise.
 
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The following chart represents AdaptHealth’s revenue type, product mix and payor mix for the twelve months ended September 30, 2020.
[MISSING IMAGE: TM2039015D1-PC_REVENUE4CLR.JPG]
AdaptHealth believes that it competes favorably with competitors on the basis of these and other factors.
Legal Proceedings
AdaptHealth is involved in investigations, claims, lawsuits and other proceedings arising in the ordinary course of its business. These matters involve patient complaints, personnel and employment issues, regulatory matters, personal injury, contract and other proceedings arising in the ordinary course of business, which have not resulted in any material losses to date. Although AdaptHealth does not expect the outcome of these proceedings will have a material adverse effect on its financial condition or results of operations, such matters are inherently unpredictable. Therefore, AdaptHealth could incur judgments or enter into settlements or claims that could materially impact its financial condition or results of operations.
In addition, on July 25, 2017, AdaptHealth Holdings was served with a subpoena by the U.S. Attorney’s Office for the United States District Court for the Eastern District of Pennsylvania (“EDPA”) pursuant to 18 U.S.C. §3486 (investigation of a federal health care offense) to produce certain audit records and internal communications regarding ventilator billing. The investigation appears to be focused on billing practices regarding one payor that contracted for bundled payments for certain ventilators. AdaptHealth has cooperated with investigators and, through agreement with the EDPA, has submitted all information requested. An independent third party was retained by AdaptHealth that identified overpayments and underpayments for ventilator billings related to the payor, and a remittance was sent to reconcile that account. On October 3, 2019, AdaptHealth received a follow-up civil investigative demand from the EDPA regarding a document previously produced to the EDPA and patients included in the review by the independent third party. AdaptHealth has responded to the EDPA and supplemented its production as requested. On November 9, 2020, the EDPA indicated to AdaptHealth that the investigation remained ongoing and confirmed that a qui tam complaint had been filed in connection with the matter. The EDPA also requested additional information regarding certain patient services and claims refunds processed by AdaptHealth in 2017. AdaptHealth is compiling this information and will supplement its production in early January 2021. While AdaptHealth cannot provide any assurance as to whether the EDPA will seek additional information or pursue this matter further, AdaptHealth does not believe that the investigation will have a material adverse effect on it.
 
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Government Regulation
The federal government and all states in which AdaptHealth currently operates regulate various aspects of AdaptHealth’s business. In particular, AdaptHealth’s operations are subject to federal laws that regulate the reimbursement of its products and services under various government programs and that are designed to prevent fraud and abuse. AdaptHealth’s operations are also subject to state laws governing, among other things, pharmacies, nursing services, medical equipment suppliers and certain types of home health activities. State regulators may also determine that telephone marketing of AdaptHealth products and services to patients fall within state regulation of telemarketing. Certain of AdaptHealth’s employees are subject to state laws and regulations governing the licensure and professional practice of respiratory therapy, pharmacy and nursing.
AdaptHealth maintains a Compliance Program that is designed to meet the guidelines set forth by HHS, and provides ongoing compliance training designed to keep AdaptHealth’s officers, directors and employees well-educated and up-to-date regarding developments on relevant topics and to emphasize AdaptHealth’s policy of strict compliance. Federal and state laws require that AdaptHealth obtain facility and other regulatory licenses and accreditation and that AdaptHealth enroll as a supplier with federal and state health programs.
As a healthcare provider, AdaptHealth is subject to extensive regulation to prevent fraud and abuse and laws regulating reimbursement under various government programs. The marketing, billing, documenting and other practices of healthcare companies are all subject to government scrutiny. To ensure compliance with Medicare, Medicaid and other regulations, regional health insurance carriers and state agencies often conduct audits and request customer records and other documents to support AdaptHealth’s claims submitted for payment of services rendered to customers. Similarly, government agencies and their contractors periodically open investigations and obtain information from healthcare providers pursuant to the legal process. Violations of federal and state regulations can result in severe criminal, civil and administrative penalties and sanctions, including disqualification from Medicare and other reimbursement programs, which could have a material adverse effect on AdaptHealth’s financial condition and results of operations.
Numerous federal and state laws and regulations, including HIPAA and the HITECH Act, govern the collection, dissemination, security, use and confidentiality of patient-identifiable health information or personal information. As part of AdaptHealth’s provision of, and billing for, healthcare equipment and services, AdaptHealth is required to collect and maintain patient-identifiable health information. In addition, various federal and state legislative and regulatory bodies, or self-regulatory organizations, may expand current laws or regulations, enact new laws or regulations or issue revised rules or guidance regarding privacy, data protection and consumer protection. For instance, the CCPA became effective on January 1, 2020. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used by requiring covered companies to provide new disclosures to California consumers (as that term is broadly defined) and provide such consumers new ways to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. Although there are limited exemptions for protected health information and the CCPA’s implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future, the CCPA may increase AdaptHealth’s compliance costs and potential liability. Many similar privacy laws have been proposed at the federal level and in other states. New health information standards, whether implemented pursuant to HIPAA, the HITECH Act, congressional action or otherwise, could have a significant effect on the manner in which AdaptHealth handles healthcare-related data and communicates with payers, and the cost of complying with these standards could be significant. If AdaptHealth does not comply with existing or new laws and regulations related to patient health information, it could be subject to criminal or civil sanctions.
Additionally, the FTC and many state attorneys general are interpreting existing federal and state consumer protection laws to impose evolving standards for the online collection, use, dissemination and security of health-related and other personal information. Courts may also adopt the standards for fair information practices promulgated by the FTC, which concern consumer notice, choice, security and access. Consumer protection laws require AdaptHealth to publish statements that describe how it handles personal information and choices individuals may have about the way AdaptHealth handles their personal information.
 
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If such information that AdaptHealth publishes is considered untrue, it may be subject to government claims of unfair or deceptive trade practices, which could lead to significant liabilities and consequences. Furthermore, according to the FTC, violating consumers’ privacy rights or failing to take appropriate steps to keep consumers’ personal information secure may constitute unfair acts or practices in or affecting commerce in violation of Section 5 of the FTC Act. Communications with our patients are also subject to laws and regulations governing communications, including the TCPA, the CAN-SPAM Act, additional fax regulations under the Junk Fax Act and the Telemarketing Sales Rule and Medicare regulations.
Healthcare is an area of rapid regulatory change. Changes in the laws and regulations and new interpretations of existing laws and regulations may affect permissible activities, the relative costs associated with doing business, and reimbursement amounts paid by federal, state and other third-party payers. AdaptHealth cannot predict the future of federal, state and local regulation or legislation, including Medicare and Medicaid statutes and regulations, or possible changes in national healthcare policies. Future legislative and regulatory changes could have a material adverse effect on AdaptHealth’s financial condition and results of operations.
Implemented Regulation
As a provider of home oxygen, respiratory and other chronic therapy equipment to the home healthcare market, AdaptHealth participates in Medicare Part B, the Supplementary Medical Insurance Program, which was established by the Social Security Act of 1965. Providers of home oxygen and other respiratory therapy services and equipment have historically been heavily dependent on Medicare reimbursement due to the high proportion of elderly persons suffering from respiratory disease. Durable medical equipment, including oxygen equipment, is traditionally reimbursed by Medicare based on fixed fee schedules.
Impact of the ACA and MIPPA. The ACA, the Medicare Improvements for Patients and Providers Act of 2008 (“MIPPA”), the Medicare, Medicaid and SCHIP Extension Act of 2007 (“SCHIP Extension Act”), the Deficit Reduction Act of 2005 (“DRA”) and the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”), contain provisions that directly impacted reimbursement for the primary respiratory and other DME products provided by AdaptHealth.
In recent years, the U.S. Congress and certain state legislatures have considered and passed a large number of laws intended to result in significant change to the ACA. The law has been subject to legislative and regulatory changes and court challenges, and the current presidential administration and certain members of Congress have stated their intent to repeal or make additional significant changes to the ACA, its implementation or its interpretation. In 2017, the Tax Cuts and Jobs Acts was enacted, which, among other things, removed penalties for not complying with ACA’s individual mandate to carry health insurance. Because the penalty associated with the individual mandate was eliminated, a federal judge in Texas ruled in December 2018 that the entire ACA was unconstitutional. On December 18, 2019, the Fifth Circuit U.S. Court of Appeals upheld the lower court’s finding that the individual mandate is unconstitutional and remanded the case back to the lower court to reconsider its earlier invalidation of the full ACA. On March 2, 2020, the United States Supreme Court granted the petitions for writs of certiorari to review this case, although it remains unclear when and how the Supreme Court will rule. These and other efforts to challenge, repeal or replace the ACA could result in reduced funding state Medicaid programs, lower numbers of insured individuals, and reduced coverage for insured individuals. There is uncertainty regarding whether, when, and how the ACA will be further changed, what alternative provisions, if any, will be enacted, and the impact of alternative provisions on providers and other healthcare industry participants. Government efforts to repeal or change the ACA or to implement alternative reform measures could cause AdaptHealth’s revenues to decrease to the extent such legislation reduces Medicaid and/or Medicare reimbursement rates.
MIPPA delayed the implementation of a Medicare competitive bidding program for oxygen equipment and certain other DME items that was scheduled to begin on July 1, 2008, and instituted a 9.5% price reduction nationwide for these items as of January 1, 2009. The SCHIP Extension Act reduced Medicare reimbursement amounts for covered Part B drugs, including inhalation drugs that AdaptHealth provides, beginning April 1, 2008. DRA provisions negatively impacted reimbursement for oxygen equipment beginning in 2006 through the implementation of a capped rental arrangement. MMA changed the pricing formulas used to establish payment rates for inhalation drug therapies resulting in significantly reduced reimbursement beginning in 2005, established a competitive acquisition program for DME, established a RAC program,
 
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which implemented a new method for recovery of Medicare overpayments by utilizing private companies operating on a contingent fee basis to identify and recoup Medicare overpayments, and implemented quality standards and accreditation requirements for DME suppliers. The RACs are empowered to audit claims submitted by healthcare providers and overpayments identified by the RACs can be recouped from future payments, including in cases where the reimbursement rules are unclear or subject to differing interpretations.
This activity, as well as the activity of intermediaries and others involved in government reimbursement, may include changes in long-standing interpretations of reimbursement rules, which could adversely impact AdaptHealth’s future financial condition and results of operations. To ensure compliance with Medicare, Medicaid and other regulations, government agencies or their contractors, including Medicare Administrative Contractors, Recovery Audit Contractors (“RACs”), Unified Program Integrity Contractor (“UPICs”) and Zone Program Integrity Contractors (“ZPICs”). The ZPICs and UPICs assumed the responsibilities previously held by Medicare’s Program Safeguard Contractors. These legislative and regulatory provisions, as currently in effect have and will continue to adversely impact AdaptHealth’s financial condition and results of operations.
Impact of Competitive Bidding. In December 2003, MMA was signed into law. The MMA legislation directly impacted reimbursement for the primary respiratory and other DME products that AdaptHealth provides. Among other things, MMA established a competitive acquisition program for DME that was expected to commence in 2008, but was subsequently delayed by further legislation. MMA instructed CMS to establish and implement programs under which competitive acquisition areas would be established throughout the United States for purposes of awarding contracts for the furnishing of competitively priced items of DME, including oxygen equipment. The program was initially intended to be implemented in phases such that competition under the program would occur in nine of the largest metropolitan statistical areas (“MSAs”) in the first year and an additional 70 of the largest MSAs in a second, subsequent round of bidding. The second round was subsequently expanded to include 91 MSAs.
For each competitive acquisition area, CMS is required to conduct a competition under which providers submit bids to supply certain covered items of DME. Successful bidders are expected to meet certain program quality standards in order to be awarded a contract, and only successful bidders can supply the covered items to Medicare beneficiaries in the respective acquisition area (there are, however, regulations in place that allow non-contracted suppliers to continue to provide equipment and services to their existing customers at the new prices determined through the bidding process). Competitive bidding contracts are expected to be re-bid at least every three years. CMS is required to award contracts to multiple entities submitting bids in each area for an item or service but has the authority to limit the number of contractors in a competitive acquisition area to the number it determines to be necessary to meet projected demand. CMS concluded the bidding process for the first round of MSAs in September 2007. However, in July 2008, Congress enacted the MIPPA legislation which retroactively delayed the implementation of competitive bidding and reduced Medicare prices nationwide by 9.5% beginning in 2009 for the product categories, including oxygen, that were initially included in competitive bidding.
In 2009, CMS reinstituted the bidding process in the nine largest MSA markets. Reimbursement rates from the re-bidding process were publicly released by CMS on June 30, 2010. CMS announced projected average savings of approximately 32% compared to the current payment rates in effect for the product categories included in competitive bidding. As of January 1, 2011, these payment rates were in effect in the nine markets only.
On January 30, 2013, CMS announced new, lower Medicare pricing for the second round of competitive bidding effective July 1, 2013. CMS announced projected average savings of approximately 45% for the product categories included in Round 2. The ACA also required CMS to expand competitive bidding further to additional geographic markets or to use competitive bid pricing information to adjust the payment amounts otherwise in effect for areas that are not competitive acquisition areas by January 1, 2016.
CMS is required by law to re-compete competitive bidding contracts at least once every three years. With the Round 1 rebid contracts expiring on December 31, 2013, new Round 1 re-compete contracts and pricing went into effect on January 1, 2014. Round 1 re-compete bidding occurred in the same nine MSAs as the Round 1 rebid. CMS projected that contract prices under the Round 1 re-compete would average 37% below Medicare’s fee schedule rates for the six product categories.
 
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On March 7, 2019, CMS announced plans to consolidate the competitive bidding areas included in the Round 2 re-compete and Round 1 2017 DMEPOS Competitive Bidding Program into a single round of competition referred to as “Round 2021.” Round 2021 contracts are scheduled to become effective on January 1, 2021, and extend through December 31, 2023. CMS competed 16 product categories in the Round 2021. On April 10, 2020, CMS announced that due to the COVID-19 pandemic, it removed the non-invasive ventilators product category from the Round 2021 DMEPOS Competitive Bidding Program. On October 27, 2020, CMS announced it was not awarding competitive bidding contracts in 13 of the 15 remaining product categories due to a failure to achieve expected savings, and that contract awards would only be made for off-the-shelf (OTS) knee and back braces.
On November 20, 2020, CMS announced the Round 2021 contract suppliers for the OTS Back Braces and OTS Knee Braces product categories under the DMEPOS CBP. Round 2021 will begin on January 1, 2021, and extend through December 31, 2023. For the year ended December 31, 2019 and the nine months ended September 30, 2020, revenue generated with respect to providing OTS knee and back braces (excluding amounts generated in non-rural and rural non-bid areas) were not material. AdaptHealth expects to be able to provide OTS back braces and knee braces as permitted under competitive bidding regulations. AdaptHealth does not expect the single payment amounts for back braces imposed by CMS under such contracts to have a material impact on the Company.
The competitive bidding process has historically put pressure on the amount AdaptHealth is reimbursed in the markets in which it exists as well as in areas that are not subject to the Competitive Bidding Program. The rates required to win future competitive bids could continue to compress reimbursement rates. AdaptHealth will continue to monitor developments regarding the Competitive Bidding Program in future rounds. While AdaptHealth cannot predict the outcome of the DMEPOS Competitive Bidding Program on its business in the future nor the Medicare payment rates that will be in effect in future years for the items subjected to competitive bidding, the program may materially adversely affect its future financial condition and results of operations.
Durable Medical Equipment Medicare Administrative Contractor. In order to ensure that Medicare beneficiaries only receive medically necessary and appropriate items and services, the Medicare program has adopted a number of documentation requirements. For example, certain provisions under CMS guidance manuals, local coverage determinations, and the DME MAC Supplier Manuals provide that clinical information from the “patient’s medical record” is required to justify the initial and ongoing medical necessity for the provision of DME. Some DME MACs, CMS staff and other government contractors have recently taken the position, among other things, that the “patient’s medical record” refers not to documentation maintained by the DME supplier but instead to documentation maintained by the patient’s physician, healthcare facility or other clinician, and that clinical information created by the DME supplier’s personnel and confirmed by the patient’s physician is not sufficient to establish medical necessity. If treating physicians do not adequately document, among other things, their diagnoses and plans of care, the risks that AdaptHealth will be subject to audits and payment denials are likely to increase. Moreover, auditors’ interpretations of these policies are inconsistent and subject to individual interpretation, leading to significant increases in individual supplier and industry-wide perceived error rates. High error rates could lead to further audit activity and regulatory burdens and could result in AdaptHealth making significant refunds and other payments to Medicare and other government programs. Accordingly, AdaptHealth’s future revenues and cash flows from government healthcare programs may be reduced. Private payors also may conduct audits and may take legal action to recover alleged overpayments. AdaptHealth could be adversely affected in some of the markets in which it operates if the auditing payor alleges substantial overpayments were made to AdaptHealth due to coding errors or lack of documentation to support medical necessity determinations. AdaptHealth cannot currently predict the adverse impact these measures might have on its financial condition and results of operations, but such impact could be material.
Federal and state budgetary and other cost-containment pressures will continue to impact the home respiratory care industry. AdaptHealth cannot predict whether new federal and state budgetary proposals will be adopted or the effect, if any, such proposals would have on its financial condition and results of operations.
 
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ADAPTHEALTH
For management’s discussion and analysis of financial condition and results of operations of AdaptHealth, please refer to the section entitled “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in AdaptHealth’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 26, 2020, as updated by AdaptHealth’s subsequent Quarterly Reports on Form 10-Q, which is incorporated herein by reference.
 
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BENEFICIAL OWNERSHIP OF SECURITIES
The following table sets forth information known to us regarding the beneficial ownership of Common Stock as of January 4, 2021 by:

each person who is the beneficial owner of more than 5% of the outstanding shares of our Common Stock;

each of our named executive officers and directors; and

all of our current officers and directors, as a group.
Beneficial ownership is determined according to the rules of the SEC, which generally provide that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power over that security or has the right to acquire securities within 60 days, including options and warrants that are currently exercisable or exercisable within 60 days.
The beneficial ownership of our Common Stock as of January  4, 2021 is based on [•] shares of Class A Common Stock and no shares of Class B Common Stock issued and outstanding in the aggregate as of January  4, 2021 assuming the issuance of 472,936 restricted shares of Class A Common Stock pursuant to approved grants to certain officers and directors of the Company.
Unless otherwise indicated, the Company believes that all persons named in the table below have sole voting and investment power with respect to all shares of voting stock beneficially owned by them.
Beneficial Ownership Table
Class A
Common Stock
Name and Address of BeneficialOwner(1)
# of
Shares
% of Total
Richard Barasch(2)
872,234 1.0%
Dr. Susan Weaver
29,509 *
Alan Quasha(3)
11,886 *
Terence Connors
9,509 *
Dale Wolf(4)
20,009 *
Bradley Coppens(5)
4,509 *
David Williams III(6)
4,509 *
Luke McGee(7)
3,884,050 4.4%
Joshua Parnes
223,125 *
Christopher Joyce(8)
265,228 *
Everest Trust(9)
15,961,324 17.8%
Still Water NevadaTrust(10)
6,906,177 7.7%
The Mykonos 2019NGCG Nevada Trust(11)
5,664,954 6.4%
McLarty Capital Partners SBIC, L.P.(12)
4,526,189 5.1%
OEP AHCO Investment Holdings, LLC(13)
13,818,180 15.6%
All directors and executive officers as a group
(11 individuals)
5,309,568 5.9%
*
Less than 1%.
(1)
Unless otherwise noted, the business address of each of the listed entities or individuals is c/o AdaptHealth LLC, 220 West Germantown Pike, Suite 250, Plymouth Meeting, PA 19462.
(2)
The business address of Mr. Barasch is 780 Third Avenue, New York, NY 10017. Includes shares of Class A Common Stock underlying 527,314 warrants that are currently exercisable.
(3)
The business address of Mr. Quasha is c/o Quadrant Management, Inc., 320 Park Avenue, New York,
 
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NY 10022. Based on the Schedule 13D filed with the SEC on January 9, 2020, Mr. Quasha may be deemed to beneficially own 936,189 shares of Class A Common Stock owned by Quadrant Management, Inc.
(4)
The business address of Mr. Wolf is c/o Molina Healthcare, Inc., 200 Oceangate, Suite 100, Long Beach, CA 90802.
(5)
The business address of Mr. Coppens is c/o One Equity Partners, 510 Madison Avenue, 19th Floor, New York, New NY 10022.
(6)
The business address of Mr. Williams is 6272 Condon Ave., Los Angeles CA 90056.
(7)
Includes shares and warrants held directly by Fresh Pond Investment LLC (“Fresh Pond”), 2321 Capital LLC (“2321 Capital”) and LBM DME Holdings LLC (“LBM”), entities controlled by Mr. McGee. Fresh Pond holds 1,752,056 shares of Class A Common Stock. 2321 Capital holds 666,944 shares of Class A Common Stock 1,168,800 shares of Class A Common Stock.
(8)
Includes shares and warrants held directly by Mayaid2001 LLC, an entity controlled by Mr. Joyce. Includes shares of Class A Common Stock underlying 12,903 warrants that are currently exercisable.
(9)
Based upon information reported on the Schedule 13D filed with the SEC on January 9, 2020. Includes shares and warrants held directly by Clifton Bay Offshore Investments L.P. (“Clifton Bay Investments”) and Quadrant Management, Inc. (“QMI”). Clifton Bay Investments holds 15,025,135 shares of Class A Common Stock (including shares of Class A Common Stock underlying 665,628 warrants that are currently exercisable). QMI holds 936,189 shares of Class A Common Stock (including 41,473 shares of Class A Common Stock underlying warrants that are currently exercisable). The general partner of Clifton Bay Investments is Clifton Bay Management Ltd. (“Clifton Bay Management”), which is indirectly owned by the Trustee of the Everest Trust (“Everest”), a trust settled by Mr. Wayne Quasha. Q Management Services (PTC) Ltd., as Trustee of Everest Trust, owns all of the shares of Everest Hill Group Inc., which indirectly controls Clifton Bay Management. Vicali Services (BVI) Inc., a British Virgin Islands company (“Vicali”), is the sole director of Everest Hill Group Inc. and Q Management, and Susan V. Demers, a United States citizen, and Andrea J. Douglas, a citizen of New Zealand, are the directors of Vicali and each of them has voting power over Vicali and thus power over investment and voting determinations made by Clifton Bay Management. QMI is owned by Everest Hill Group Inc. Mr. Wayne Quasha, ultimately beneficially owns all of the shares of Everest Hill Group Inc., and as such, is in a position, indirectly, to determine the investment and voting decisions made by Everest Hill Group Inc. and Clifton Bay Management. The business address of Clifton Bay Investments and Clifton Bay Management is Tropic Isle Building, P.O. Box 3331, Road Town, Tortola, British Virgin Islands VG 1110. The business address of Mr. Wayne Quasha is c/o PFD Corporate Services (BVI) Limited, Tropic Isle Building, P.O. Box 3331, Road Town, Tortola, British Virgin Islands VG 1110. The business address of Everest Hill Group Inc. is Tropic Isle Building, P.O. Box 3331, Road Town, Tortola, British Virgin Islands VG 1110.
(10)
Includes shares and warrants held directly by Blue River NJ LLC (“Blue River”), and Quad Cap LLC (“Quad Cap”). Blue River holds 5,920,367 shares of Class A Common Stock (including 274,768 shares of Class A Common Stock underlying warrants that are currently exercisable). Quad Cap holds 985,810 shares of Class A Common Stock (including 129,221 shares of Class A Common Stock underlying warrants that are currently exercisable). The trustee of the trust is Peak Trust Company  —  NV, with a principal business address of 1840 East Warm Springs Road, Suite 105, Las Vegas, NV 89119.
(11)
Includes shares and warrants held directly by Ocean Rock NJ LLC (“Ocean Rock”) and Plains Capital LLC (“Plains Capital”). Ocean Rock holds 4,955,930 shares of Class A Common Stock (including 240,568 shares of Class A Common Stock underlying warrants that are currently exercisable). Plains Capital holds 709,024 shares of Class A Common Stock (including 31,410 shares of Class A Common Stock underlying warrants that are currently exercisable). The trustee of the trust is Peak Trust Company  —  NV, with a principal business address of 1840 East Warm Springs Road, Suite 105, Las Vegas, NV 89119.
(12)
Based upon information reported on the Schedule 13G filed with the SEC on February 13, 2020. Includes shares held directly by McLarty Capital Partners SBIC, L.P. (“McLarty Capital Partners”).
 
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The general partner of McLarty Capital Partners is McLarty Capital Partners SBIC, LLC. The business address of McLarty Capital Partners is c/o The Firmament Group, 1 Rockefeller Plaza Suite 1203, New York, NY 10020.
(13)
Based upon information reported on the Schedule 13D/A filed with the SEC on August 31, 2020. The business address of OEP AHCO Investment Holdings, LLC is c/o One Equity Partners, 510 Madison Avenue, 19th Floor, New York NY 10022.
 
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SOLICITATION OF PROXIES
We will bear the cost of soliciting proxies for the Special Meeting. In addition to solicitations by mail, we may, through our directors and officers, solicit proxies in person, by telephone or by electronic means. Such directors and officers will not receive any special remuneration for these efforts.
HOUSEHOLDING INFORMATION
Unless we have received contrary instructions, we may send a single copy of this Proxy Statement to any household at which two or more stockholders reside if we believe the stockholders are members of the same family. This process, known as “householding,” reduces the volume of duplicate information received at any one household and helps to reduce our expenses. However, if stockholders prefer to receive multiple sets of proxy materials at the same address, the stockholders should follow the instructions described below. We will promptly deliver such additional sets of proxy materials to stockholders who so request. Similarly, if an address is shared with another stockholder and together both of the stockholders would like to receive only a single set of proxy materials, the stockholders should follow these instructions:

If the shares are registered in the name of the stockholder, the stockholder should contact us at (i) (610) 630-6357 or (ii) at AdaptHealth LLC, 220 West Germantown Pike, Suite 250, Plymouth Meeting, PA 19462, Attention: Secretary, to inform us of his or her request; or

If a bank, broker or other nominee holds the shares, the stockholder should contact the bank, broker or other nominee directly.
STOCKHOLDER PROPOSALS AND NOMINATIONS
Stockholder proposals may be included in our proxy statement for an annual meeting so long as they are provided to us on a timely basis and satisfy the other conditions set forth in SEC regulations under Rule 14a-8 regarding the inclusion of stockholder proposals in company-sponsored proxy materials. For a stockholder proposal to be considered for inclusion in our proxy statement for our annual meeting of stockholders to be held in 2021, we must have received the proposal at our principal executive offices at AdaptHealth LLC, 220 West Germantown Pike, Suite 250, Plymouth Meeting, PA 19462, Attention: Secretary not later than December 30, 2020. In addition, a director nomination or a stockholder proposal of other business for consideration at our 2021 annual meeting that is not intended for inclusion in our proxy statement under Rule 14a-8 may be brought before our 2021 annual meeting so long as we receive information and notice of the nomination or proposal in compliance with the requirements set forth in our bylaws at our principal executive offices, not later than March 27, 2021 nor earlier than February 25, 2021; provided, however, that in the event that the date of the 2021 annual meeting is more than 30 days before or more than 70 days after June 25, 2021, such nomination proposal must be received at our principal executive offices not earlier than the close of business on the 120th day before the 2021 annual meeting and not later than (x) the close of business on the 90th day before the 2021 annual meeting or (y) the close of business on the 10th day following the day on which public announcement of the date of the 2021 annual meeting is first made by the Company.
COMMUNICATIONS WITH THE BOARD
Stockholders and other interested parties wishing to communicate with the board of directors or with an individual board member concerning the Company may do so by writing to the board or to the particular board member and mailing the correspondence to our principal executive offices to the attention of our Secretary. If from a stockholder, the envelope should indicate that it contains a stockholder communication. All such communication will be forwarded to the director or directors to whom the communications are addressed.
 
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WHERE YOU CAN FIND MORE INFORMATION
We are required to file annual, quarterly and current reports, proxy statements and other information with the SEC. Our filings with the SEC are available to the public through the SEC’s website at https://www.sec.gov and are also available through our website at https://www.adapthealth.com/investor-relations. You may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information on our website does not constitute part of this Proxy Statement. You may request additional copies of this Proxy Statement at no cost in writing or by telephone at the following address and phone number:
AdaptHealth LLC
220 West Germantown Pike, Suite 250
Plymouth Meeting, PA 19462
Attention: Secretary
Telephone: (610) 630-6357
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows us to incorporate by reference into the Proxy Statement information contained in documents that we file with it. This means that we can disclose important information to you by referring you to those documents. We incorporate by reference into the Proxy Statement the following documents:

Our Annual Report on Form 10-K for the year ended December 31, 2019;

Our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020, June 30, 2020 and September 30, 2020; and

Our Current Reports on Form 8-K or Form 8-K/A filed with the SEC on January 1, 2020, May 5, 2020, June 18, 2020, August 4, 2020, November 4, 2020, December 1, 2020, December 7, 2020 and December 14, 2020.
Any statement incorporated by reference in the Proxy Statement from an earlier dated document that is inconsistent with a statement contained in the Proxy Statement or in any other document filed after the date of the earlier dated document, but prior to the date hereof, which also is incorporated by reference into the Proxy Statement, shall be deemed to be modified or superseded for purposes hereof by such statement contained in the Proxy Statement or in any other document filed after the date of the earlier dated document, but prior to the date hereof, which also is incorporated by reference into the Proxy Statement.
Any person to whom the Proxy Statement is delivered may (i) request copies of this Proxy Statement and any of the documents incorporated by reference therein, without charge, by written request to AdaptHealth Corp., 220 West Germantown Pike, Suite 250, Plymouth Meeting, Pennsylvania 19462, or by calling us at (610) 630-6357 or (ii) may download copies from our website at https://www.adapthealth.com/investor-relations or from the SEC’s website at https://www.sec.gov. Documents incorporated by reference into the Proxy Statement are available without charge, excluding any exhibits to those documents unless the exhibit is specifically incorporated by reference into those documents.
Except as expressly provided above, no other information, including none of the information on our website, is incorporated by reference into the Proxy Statement.
 
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ANNEX A
Merger Agreement
 

 
EXECUTION VERSION
AGREEMENT AND PLAN OF MERGER
by and among
ADAPTHEALTH CORP.,
AH APOLLO MERGER SUB INC.,
AH APOLLO MERGER SUB II INC.,
AEROCARE HOLDINGS, INC.,
and
PELOTON EQUITY, LLC,
as Stockholder Representative
December 1, 2020
 

 
TABLE OF CONTENTS
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EXHIBITS
Exhibit A Definitions
Exhibit B [Intentionally Omitted]
Exhibit C [Intentionally Omitted]
Exhibit D [Intentionally Omitted]
Exhibit E [Intentionally Omitted]
Exhibit F Form of Stock Letter of Transmittal
Exhibit G [Intentionally Omitted]
Exhibit H Form of Stockholder Consent
Exhibit I Form of Company Voting and Support Agreement
Exhibit J Form of Accredited Investor Questionnaire
Exhibit K [Intentionally Omitted]
Exhibit L Form of Certificate of Designations
Exhibit M [Intentionally Omitted]
Exhibit N Preparation Methodology
Exhibit O Form of Parent Voting and Support Agreement
Exhibit P Schedule of Competitors
 
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GLOSSARY OF DEFINED TERMS
The location of the definition of each capitalized term used in this Agreement is set forth in this Glossary:
401(k) Plans
76
Accredited Investor
116
Accredited Investor Questionnaire
85
Accredited Investor Questionnaire Deadline
85
Acquisition Proposal
81
Adjustment Escrow Account
116
Adjustment Escrow Deposit
116
Affiliate
116
Affordable Care Act
116
Aggregate Exercise Amount
116
Aggregate Merger Consideration
116
Aggregate Parent Stock Value
116
Aggregate Shares
116
Aggregate Stimulus Funds
117
Agreement
11
AI Aggregate Shares
117
Amended and Restated Registration Rights Agreement
117
AML Laws
37
Anti-Corruption Laws
117
Antitrust Division
71
Antitrust Laws
72
Board Representatives
85
Borrowed Money Debt
117
Business
117
Business Day
117
Business IP
50
Capitalization Date
60
CARES Act
117
Cash on Hand
117
Cash Option Consideration
117
Certificate
19
Certificate of Designations
117
Certificates
19
Change in Control Payment
118
Charter Documents
118
Claim
118
Class A Common Stock
60
Class B Common Stock
60
Closing
14
Closing Cash
118
 
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Closing Consideration Schedule
24
Closing Date
15
Closing Indebtedness
118
Closing Statement
25
Code
118
Collection Costs
99
Common Per Share Amount
118
Common Per Share Cash Amount
118
Common Per Share Stock Issuance Amount
118
Common Stock
60
Common Stock Share Consideration
119
Common Stockholder
119
Company
11
Company Burdensome Condition
73
Company Capital Stock
119
Company Common Stock
119
Company Equity Plan
119
Company Equityholders
119
Company Financial Statements
40
Company Option
119
Company Optionholder
119
Company Real Property
49
Company Related Party
52
Company Releasing Related Parties
100
Company Series C Preferred Stock
119
Company Systems
119
Company Voting and Support Agreements
84
Company Written Consent
84
Company’s Counsel
89
Company’s Replacement Counsel
92
Compliant
119
Confidentiality Agreement
120
Consent
120
Continuation Period
74
Continuing Employee
74
Contract
120
Conversion Rate
120
Covered Person
120
COVID-19
120
COVID-19 Measures
120
Data Treatment
120
date hereof
11
date of this Agreement
11
Deal Communications
112
 
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Debt Financing
59
Debt Financing Commitment
59
Debt Financing Sources
120
Derivative Instruments
120
DGCL
121
Disclosure Schedule
30
Dissenting Shares
21
Dividend Recapitalization
68
DMEPOS
35
Employee Option
121
Employee Plan
121
Enforceability Exceptions
31
Environmental Laws
121
Equity Securities
121
ERISA
121
ERISA Affiliate
122
Escrow Agent
122
Escrow Agreement
122
Estimated Aggregate Merger Consideration
122
Estimated Closing Cash
23
Estimated Closing Indebtedness
23
Estimated Closing Statement
23
Estimated M&A Adjustment
23
Estimated Net Working Capital Adjustment Amount
23
Estimated Selling Expenses
23
Excess Capital Equipment
122
Excess Capital Equipment Adjustment
23
Exchange Act
57
Exchange Ratio
22
Excluded Information
122
Ex-Im Laws
122
Financing Parties
123
First Certificate of Merger
14
First Effective Time
14
First Merger
11
First Surviving Company
13
Fraud
123
FTC
71
Fundamental Representations
123
GAAP
123
Goodwin
111
Governmental Entity
123
Grant Date
33
Hazardous Substances
123
 
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Health Care Laws
123
HIPAA Laws
55
Holdings Stock Options
60
HSR Act
124
Indebtedness
124
Indemnification Agreement
87
Indemnified Parties
93
Independent Accounting Firm
27
Information Rights Holder
125
Intellectual Property
125
Interim Company Financial Statements
41
IRS
125
Joint Instruction Letter
30
Knowledge
125
Latest Audited Balance Sheet
40
Latest Balance Sheet
41
Latest Balance Sheet Date
41
Leased Real Property
49
Legal Proceeding
125
Legal Requirement
125
Liabilities
125
Licenses for Generally Commercially Available Software
125
Lien
126
Losses
126
M&A Adjustment
126
M&A Costs
126
M&A Purchase
126
M&A Target
126
Marketing Period
126
Material Adverse Effect
127
Material Contract
47
Material Payor
53
Material Permits
34
Material Referral Source
53
Material Suppliers
52
Measurement Time
128
Merger Sub
11
Merger Sub II
11
Mergers
11
Multiemployer Plan
128
NASDAQ
128
Net Working Capital
128
Net Working Capital Adjustment Amount
129
Net Working Capital Target
129
 
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Nomination Right Board Representative
85
Nomination Rights Holders
85
Non-Employee Option
129
Non-Party Affiliates
97
Notices
102
Objection Notice
26
Observer Rights Holder
86
Option Cash Amount
22
Option Consideration
129
Order
129
Ordinary Course of Business
129
Ordinary Rep
129
Other Board Representative
85
Outside Date
97
Owned Intellectual Property
50
Parachute Payment Waivers
75
Parent
11
Parent Board of Directors
85
Parent Burdensome Condition
73
Parent Indemnitees
93
Parent Material Adverse Effect
129
Parent Option
22
Parent Plans
74
Parent Related Parties
99
Parent Stock Awards
60
Parent Stock Value
129
Parent Stockholder Approval
57
Parent Stockholders’ Meeting
84
Parent’s Counsel
89
Parent’s Replacement Counsel
91
Parties
11
Party
11
Paying Agent
19
Payoff Amount
15
Payoff Letter
15
Per Share Cash Consideration
129
Per Share Mixed Consideration
129
Permit
34
Permitted Liens
129
Permitted Transfer
82
Person
130
Personal Data
130
PHI
55
Post-Closing Covenants
93
 
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Post-Closing Tax Period
130
Pre-Closing Covenants
93
Preferred Stock
60
Preferred Stock Share Consideration
130
Preparation Methodology
130
Previously Owned Real Property
49
Privacy Laws and Requirements
54
Privileged Deal Communications
112
Prohibited Shares
81
Proprietary Software
50
Provider Relief Adjustment
131
Proxy Statement
58
Purchasing Expenses
131
Real Property Leases
131
Referral Source
37
Rental Equipment
131
Representative Expense Amount
131
Representative Losses
110
Required Financial Information
131
Restricted Cash
132
Restricted Period Termination Date
82
SEC
61
SEC Reports
61
Second Certificate of Merger
14
Second Effective Time
14
Second Merger
11
Second Surviving Company
13
Section 280G Approval
76
Securities
132
Securities Act
57
Security Breach
132
Selling Expenses
132
Series C Preferred Stock
133
Series C Preferred Stockholders
133
Share Consideration
133
Share Consideration Amount
133
Shortfall Amount
28
Special Escrow Account
133
Special Escrow Deposit
133
Special Matter
133
Special Matter Termination Date
93
Special Policy
93
Stock Letter of Transmittal
19
Stock Plan
60
 
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Stockholder
133
Stockholder Notice
84
Stockholder Representative
11
Straddle Period
133
Subsidiaries
133
Subsidiary
133
Substitute Financing
77
Substitute Option Consideration
134
Surviving Companies
134
Tail Policy
69
Tangible Personal Property
50
Tax
134
Tax Representation Letters
89
Tax Return
134
Taxes
134
Taxing Authority
134
Termination Fee
99
Third Party Payor Programs
134
Third Party Payors
134
Trade Secrets
125
Trading Day
134
Transaction Documents
134, 135
Transfer
135
Transfer Taxes
88
Unaffiliated Shareholders
135
Value of the Common Per Share Stock Issuance Amount
135
VDR
13
Vested Cash-Out Options
135
Vested Company Option
135
Vested Substitute Options
136
Voting Debt
60
Waived 280G Benefits
75
Waiving Party
95
 
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AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (including the exhibits and schedules hereto, each as amended or restated from time to time in accordance with Section 10.3, this “Agreement”), dated as of December 1, 2020 (the “date hereof” or the “date of this Agreement”), is by and among (i) AdaptHealth Corp., a Delaware corporation (“Parent”); (ii) AH Apollo Merger Sub Inc., a Delaware corporation and a wholly-owned direct Subsidiary of Parent (“Merger Sub”); (iii) AH Apollo Merger Sub II Inc., a Delaware corporation and wholly-owned direct Subsidiary of Parent (“Merger Sub II”); (iv) AeroCare Holdings, Inc., a Delaware corporation (the “Company”); and (v) Peloton Equity, LLC, a Delaware limited liability company, solely in its capacity as the representative, agent and attorney-in-fact of the Company Equityholders (the “Stockholder Representative”). The foregoing parties are collectively referred to as the “Parties” and each individually is a “Party.”
RECITALS
WHEREAS, each of Parent, Merger Sub, Merger Sub II and the Company desire to effect the acquisition of the Company by Parent through (a) the merger of Merger Sub with and into the Company, with the Company continuing as the surviving corporation of such merger (the “First Merger”), immediately followed by (b) the merger of the Company, as the surviving corporation of the First Merger, with and into Merger Sub II, with Merger Sub II continuing as the surviving company of such merger (the “Second Merger”, and together with the First Merger, the “Mergers”), in each case, upon the terms and subject to the conditions set forth in this Agreement and in accordance with the applicable provisions of the DGCL. Upon consummation of the Mergers, the Company and Merger Sub will cease to exist and Merger Sub II will continue as a wholly-owned Subsidiary of Parent;
WHEREAS, the board of directors of the Company has (a) determined that it is in the best interests of the Company and the Stockholders, and declared it advisable, to enter into this Agreement, (b) approved the execution, delivery and performance of this Agreement and the consummation of the First Merger and the other transactions contemplated hereby to which the Company is a party, and (c) recommended that the Stockholders adopt this Agreement and approve the First Merger;
WHEREAS, promptly following the execution and delivery of this Agreement, it is anticipated that Stockholders holding sufficient type and number of shares of Company Capital Stock to adopt this Agreement and approve the First Merger in accordance with the DGCL and the Company’s Charter Documents will execute and deliver to the Company, and the Company shall deliver to Parent, the Company Written Consent;
WHEREAS, the board of directors of Parent has (a) determined that it is in the best interests of Parent and its stockholders, and declared it advisable, to enter into this Agreement, and (b) approved the execution, delivery and performance of this Agreement and the consummation of the Mergers and the other transactions contemplated hereby;
WHEREAS, the board of directors of Merger Sub has (a) determined that it is in the best interests of Merger Sub and its stockholder, and declared it advisable, to enter into this Agreement, (b) approved the execution, delivery and performance of this Agreement and the consummation of the First Merger and the other transactions contemplated hereby, and (c) recommended its stockholder (in its capacity as its stockholder) adopt this Agreement and approve the First Merger;
WHEREAS, the board of directors of Merger Sub II has (a) determined that it is in the best interests of Merger Sub II and its stockholder, and declared it advisable, to enter into this Agreement, (b) approved the execution, delivery and performance of this Agreement and the consummation of the Second Merger and the other transactions contemplated hereby, and (c) recommended its stockholder (in its capacity as its stockholder) adopt this Agreement and approve the Second Merger;
WHEREAS, for U.S. federal income Tax purposes, Parent, Merger Sub, Merger Sub II and the Company intend that the Mergers will be treated as an integrated plan that will qualify as a “reorganization” within the meaning of Section 368(a) of the Code and the Treasury Regulations, and this Agreement is intended to be and is adopted as a “plan of reorganization” within the meaning of Sections 354 and 361 of the Code; and
 
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WHEREAS, contemporaneously with the execution hereof, Parent has delivered to the Company Voting and Support Agreements by and between Parent and certain of its stockholders (the “Parent Voting and Support Agreements”).
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained and intending to be legally bound hereby, the Parties agree as follows:
AGREEMENTS
ARTICLE I
DEFINITIONS
1.1   Definitions.   In addition to the terms defined in the body of this Agreement, capitalized terms used herein will have the meanings given to them in Exhibit A. The Glossary of Defined Terms, which follows the Table of Contents, sets forth the location in this Agreement of the definition for each capitalized term used herein.
1.2   Construction.   All article, section, subsection, schedule and exhibit references used in this Agreement are to this Agreement unless otherwise specified. All schedules and exhibits attached to this Agreement constitute a part of this Agreement and are incorporated herein. Unless the context of this Agreement clearly requires otherwise: (a) the singular includes the plural and the plural includes the singular wherever and as often as may be appropriate, (b) the words “includes” or “including” mean “including without limitation,” (c) the word “or” is not exclusive, (d) the words “this Agreement,” “hereof,” “herein,” “hereunder” and similar terms in this Agreement refer to this Agreement as a whole and not any particular section or article in which such words appear and (e) the words “as amended” mean “as amended from time to time.” All references to Dollars or “$” are to United States dollars. All references to “days” are to calendar days. Any reference to a particular Legal Requirement means such Legal Requirement as amended, modified or supplemented (including all rules and regulations promulgated thereunder) and, unless otherwise provided, as in effect from time to time. For purposes of Article IV, with respect to any document, the words “provided”, “delivered”, “made available”, “furnished” or similar phrase shall mean that the referenced document was posted and accessible to Parent and its representatives in the Company’s electronic data room hosted and maintained by Datasite for “Project Apollo” no less than one (1) Business Day prior to the date of this Agreement and remained so posted and accessible through the date hereof (the “VDR”). When calculating the period of time before which, within which or following which any act is to be done or step taken pursuant to this Agreement, the date that is the reference date in calculating such period shall be excluded. If the last day of such period is a non-Business Day, the period in question shall end on the next succeeding Business Day.
ARTICLE II
PURCHASE AND SALE; CLOSING; CLOSING DELIVERIES
2.1   The Mergers.
(a)   Pursuant to the terms and subject to the conditions set forth in this Agreement, and in accordance with the DGCL, at the First Effective Time, Merger Sub shall be merged with and into the Company. As a result of the First Merger, the separate corporate existence of Merger Sub shall cease, and the Company shall continue as the surviving corporation of the First Merger (the “First Surviving Company”). Pursuant to the terms and subject to the conditions set forth in this Agreement, and in accordance with the DGCL, at the Second Effective Time, the First Surviving Company shall be merged with and into Merger Sub II. As a result of the Second Merger, the separate corporate existence of the First Surviving Company shall cease, and Merger Sub II shall continue as the surviving corporation of the Second Merger (the “Second Surviving Company”). The Mergers shall be effected pursuant to the DGCL and shall have the effects set forth in this Agreement and the applicable provisions of the DGCL. Without limiting the generality of the foregoing: (i) at the First Effective Time, all of the property, rights, privileges, immunities, powers and franchises of Merger Sub and the Company shall vest in the First Surviving Company, and all of the debts, liabilities and duties of Merger Sub and the Company shall become the debts, liabilities and duties of the First Surviving Company; and (ii) at the Second Effective Time, all of the property, rights, privileges, immunities, powers and franchises of
 
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the First Surviving Company and Merger Sub II shall vest in the Second Surviving Company, and all of the debts, liabilities and duties of the First Surviving Company and Merger Sub II shall become the debts, liabilities and duties of the Second Surviving Company.
(b)   At the First Effective Time, by virtue of the First Merger and without the necessity of further action by the Company or any other Person but subject to Section 6.3, (i) the certificate of incorporation of the First Surviving Company shall be amended so as to be in customary form as reasonably agreed by the Parties, and as so amended shall be the certificate of incorporation of the First Surviving Company until thereafter changed or amended as provided therein or by applicable Legal Requirement and (ii) the bylaws of the First Surviving Company shall be amended so as to be in customary form as reasonably agreed by the Parties, and as so amended shall be the bylaws of the First Surviving Company until thereafter changed or amended as provided therein or by applicable Legal Requirement. At the Second Effective Time, by virtue of the Second Merger and without the necessity of further action by the First Surviving Company or any other Person but subject to Section 6.3, (i) the certificate of incorporation of Merger Sub II as of immediately prior to the Second Effective Time shall be the certificate of incorporation of the Second Surviving Company until thereafter changed or amended as provided therein or by applicable Legal Requirement and (ii) the bylaws of Merger Sub II as of immediately prior to the Second Effective Time shall be the bylaws of the Second Surviving Company until thereafter changed or amended as provided therein or by applicable Legal Requirement.
(c)   The Company shall take all appropriate action such that, at the First Effective Time, by virtue of the First Merger and without the necessity of further action by the Company or any other Person, the officers and directors of Merger Sub immediately prior to the First Effective Time shall become the officers of the First Surviving Company. At the Second Effective Time, by virtue of the Second Merger and without the necessity of further action by Merger Sub II or any other Person, the officers of Merger Sub II immediately prior to the Second Effective Time shall be the officers of the Second Surviving Company, each to hold office, from and after the Second Effective Time, in accordance with the certificate of incorporation and bylaws of the Second Surviving Company until their respective successors shall have been duly elected, designated or qualified, or until their earlier death, resignation or removal in accordance with the certificate of incorporation and bylaws of the Second Surviving Company.
(d)   At the Closing, the Company and Merger Sub shall cause a certificate of merger in customary form as reasonably agreed by the Parties (the “First Certificate of Merger”), to be filed with the Secretary of State of the State of Delaware in accordance with the DGCL and shall make all other filings required under the DGCL. The First Merger shall become effective at the time the First Certificate of Merger shall have been duly filed with the Secretary of State of the State of Delaware or such later time as may be specified in the First Certificate of Merger as mutually agreed by Parent and the Stockholder Representative (such date and time hereinafter referred to as the “First Effective Time”). Immediately following the First Effective Time, the First Surviving Company and Merger Sub II shall cause a certificate of merger in customary form as reasonably agreed by the Parties (the “Second Certificate of Merger”), to be filed with the Secretary of State of the State of Delaware in accordance with the relevant provisions of the DGCL and shall make all other filings required under the DGCL. The Second Merger shall become effective at the time the Second Certificate of Merger shall have been duly filed with the Secretary of State of the State of Delaware or such later time as may be specified in the Second Certificate of Merger as mutually agreed by Parent and the Stockholder Representative (such date and time hereinafter referred to as the “Second Effective Time”).
2.2   Closing.   Subject to the satisfaction of the conditions set forth in this Agreement (or the waiver thereof by the Party entitled to waive any such condition), the closing of the transactions contemplated by this Agreement (the “Closing”) will take place at 10:00 a.m., New York City time, by the electronic exchange of executed documents or, if mutually agreed by the Parties, at the offices of Willkie Farr & Gallagher LLP, 787 Seventh Avenue, New York, New York 10019, in either case on the second (2nd) Business Day after the satisfaction or waiver of each condition to the Closing set forth in Article VII (other than conditions that by their nature are to be satisfied by actions taken at the Closing, but subject to the satisfaction or waiver of such conditions), unless another time or date, or both, is agreed to in writing by the Parent and Company; provided, however, that without the consent of Parent, the Closing shall not occur prior to January 31,
 
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2021. Notwithstanding the foregoing, if the Marketing Period has not ended at the time of the satisfaction or waiver of the conditions set forth in Article VII (other than conditions that by their nature are to be satisfied by actions taken at the Closing, but subject to the satisfaction or waiver of such conditions), then the Closing shall occur instead on the date following the satisfaction or waiver of such conditions that is the earlier to occur of (a) any Business Day during the Marketing Period as may be specified by Parent on no less than two (2) Business Days’ prior written notice to the Company and (b) the second (2nd) Business Day following the final day of the Marketing Period. The date on which the Closing will occur is referred to in this Agreement as the “Closing Date.”
2.3   Deliveries at Closing.
(a)   By Company.   Subject to the terms and conditions of this Agreement, at the Closing, Company shall execute and deliver, or cause to be executed and delivered, each of the following documents (where the execution or delivery of the documents is contemplated), deliver, or cause to be delivered, each of the following items (where the delivery of the items is contemplated), and will take or cause to be taken, each of the following actions (where the taking of action is contemplated), in each case, to the Parent (unless otherwise specified):
(i)   a customary payoff letter (each, a “Payoff Letter”), in form and substance reasonably satisfactory to Parent, and related release and/or termination documents from each financial institution or other lender (or the agents representing the foregoing) to which the Company or any of its Subsidiaries is obligated with respect to the repayment of Borrowed Money Debt confirming (x) the total payment required to be made as of the Closing Date to repay in full all Borrowed Money Debt, including all principal, interest, fees, prepayment premiums and penalties, if any (the aggregate of all such amounts being referred to as the “Payoff Amount”), together with pay-off instructions for making such repayment on the Closing Date, and (y) that upon payoff of such amounts, all obligations and all Liens securing such Borrowed Money Debt will be satisfied, discharged and terminated and/or released;
(ii)   final invoices or estimates with respect to the Selling Expenses (described in clause (a) of the definition thereof) and the instructions for paying the same;
(iii)   a certificate, dated as of the Closing Date, executed by an authorized officer of Company (in his or her capacity as such and not individually) certifying that the conditions set forth in Section 7.1(a), Section 7.1(b) and Section 7.1(e) have been satisfied;
(iv)   the First Certificate of Merger, duly executed by the Company;
(v)   a properly executed statement, dated as of the Closing Date, that satisfies the requirements of Treasury Regulations Section 1.1445-2(c)(3), together with the required notice to the IRS pursuant to Treasury Regulations Section 1.897-2(h) and written authorization for Parent to deliver such notice and a copy of such statement to the IRS on behalf of the Company upon the Closing;
(vi)   a certificate, dated the Closing Date, duly executed by an authorized executive officer of the Company, certifying that true and complete copies of resolutions of the Company’s board of directors authorizing the execution and delivery of this Agreement and the performance by the Company of its obligations hereunder as in effect on the Closing Date, are attached to such certificate;
(vii)   evidence with respect to the resignation or removal of the directors and officers of the Company and its Subsidiaries if and to the extent identified in writing by the Parent at least two (2) Business Days prior to the Closing Date;
(viii)   [INTENTIONALLY OMITTED];
(ix)   evidence of the valid termination of each of the Contracts listed on Section 2.3(a)(ix) of the Disclosure Schedule;
 
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(x)   a certificate of good standing of the Company, dated no more than thirty (30) days prior to the Closing, issued by the Secretary of State of the State of Delaware (or the equivalent entity); and
(xi)   the Escrow Agreement, duly executed by the Stockholder Representative.
(b)   By Parent. Subject to the terms and conditions of this Agreement, at the Closing, Parent shall execute and deliver, or cause to be executed and delivered, each of the following documents (where the execution or delivery of the documents is contemplated), deliver, or cause to be delivered, each of the following items (where the delivery of other items is contemplated) and take, or cause to be taken, each of the following actions (where the taking of action is contemplated), in each case, to the Stockholder Representative (unless otherwise specified):
(i)   a certificate, dated as of the Closing Date, executed by an authorized officer of Parent (in his or her capacity as such and not individually) certifying that the conditions set forth in Section 7.2(a), Section 7.2(b) and Section 7.2(e) have been satisfied;
(ii)   Parent or Merger Sub shall (i) deposit, or cause to be deposited, with the Paying Agent an amount of cash sufficient to pay the sum of (A) the aggregate Per Share Cash Consideration to be paid to the holders of Company Capital Stock who are not Accredited Investors pursuant to Section 2.4(a), plus (B) the aggregate Common Per Share Cash Amount payable to holders of Company Capital Stock who are Accredited Investors, plus (C) cash to be paid in lieu of fractional shares of Share Consideration pursuant to Section 2.8(c), less (D) the portion of the Adjustment Escrow Deposit attributable to holders of Company Capital Stock based on all such holders’ Pro Rata Shares, less (E) the portion of the Special Escrow Deposit attributable to holders of Company Capital Stock based on all such holders’ Pro Rata Shares, less (F) the portion of the Representative Expense Amount attributable to holders of Company Capital Stock based on all such holders’ Pro Rata Shares, (ii) deposit with, cause to be deposited with or otherwise cause the Second Surviving Company to have, an amount of cash sufficient to pay the Option Cash Amount and (iii) instruct Parent’s transfer agent to deliver to the Paying Agent a number of shares of Share Consideration equal to the aggregate Common Per Share Stock Issuance Amount payable to holders of Company Capital Stock who are Accredited Investors to pay the aggregate consideration to which holders of Company Capital Stock shall be entitled at the First Effective Time pursuant to Section 2.4 or Section 2.5 of this Agreement, as applicable;
(iii)   Parent shall pay by wire transfer of immediately available funds pursuant to instructions given by the Escrow Agent, (A) to the Adjustment Escrow Account, the Adjustment Escrow Deposit and (B) to the Special Escrow Account, the Special Escrow Deposit;
(iv)   Parent shall pay by wire transfer of immediately available funds to the Stockholder Representative, pursuant to instructions given by the Stockholder Representative, the Representative Expense Amount;
(v)   Parent shall pay by wire transfer of immediately available funds, on behalf of Company, the Selling Expenses according to instructions furnished by Company in writing by Company in the Estimated Closing Statement;
(vi)   Parent shall pay by wire transfer of immediately available funds, pursuant to instructions in the Payoff Letters, the Payoff Amount;
(vii)   a counterpart to a joinder to the Amended and Restated Registration Rights Agreement executed by Parent in favor of each Accredited Investor that has delivered an executed joinder to the Amended and Restated Registration Rights Agreement to Parent; and
(viii)   the Escrow Agreement, duly executed by Parent.
Notwithstanding anything to the contrary in the foregoing, Parent may, in lieu of certain of the payments required to be paid by Parent under this Section 2.3(b), cause the Company to pay such amounts using the Cash on Hand of the Company.
 
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(c)   By Escrow Agent.   The Parties will request that the Escrow Agent execute and deliver the Escrow Agreement to Parent and Company at the Closing.
2.4   First Merger Conversion of Securities.   At the First Effective Time, by virtue of the First Merger and without any action on the part of Parent, Merger Sub, Merger Sub II, the Company, the holders of any of the following securities or any other Person:
(a)   Conversion of Company Common Stock.   Each share of Company Common Stock issued and outstanding immediately prior to the First Effective Time but excluding any shares of Company Common Stock issuable to holders of Company Options that is held by a Person who is an Accredited Investor, other than shares of Company Common Stock to be cancelled pursuant to Section 2.4(c) or Dissenting Shares, shall be converted solely into the right to receive the Per Share Mixed Consideration (including, for the avoidance of doubt, amounts distributable to such Company Stockholder in respect of such Company Common Stock pursuant to Sections 2.9, 8.4(a) and 10.10(g)) upon surrender of such shares of Company Common Stock in accordance with Section 2.5. Each share of Company Common Stock issued and outstanding immediately prior to the First Effective Time (but excluding any shares of Company Common Stock issuable to holders of Company Options) that is held by a Person who is not an Accredited Investor, other than shares of Company Common Stock to be cancelled pursuant to Section 2.4(c) or Dissenting Shares, shall be converted solely into the right to receive the Per Share Cash Consideration (including, for the avoidance of doubt, amounts distributable to such Company Stockholder in respect of such Company Common Stock pursuant to Sections 2.9, 8.4(a) and 10.10(g)) upon surrender of such shares of Company Common Stock in accordance with Section 2.5. As of the First Effective Time, all shares of Company Common Stock but excluding any shares of Company Common Stock issuable to holders of Company Options shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and shall thereafter represent only the right to receive the Per Share Mixed Consideration or the Per Share Cash Consideration, as applicable, to be paid in accordance with Section 2.5 (other than Dissenting Shares which shall be entitled only to those rights set forth in Section 2.6(a)).
(b)   Conversion of Company Series C Preferred Stock.   Each share of Company Series C Preferred Stock issued and outstanding immediately prior to the First Effective Time that is held by an Accredited Investor, other than shares of Company Series C Preferred Stock to be cancelled pursuant to Section 2.4(c) or Dissenting Shares, shall be converted solely into the right to receive an amount equal to the product of (A) multiplied by (B), where (A) is the aggregate number of shares of Company Common Stock issuable upon the conversion of such share of Company Series C Preferred Stock outstanding as of immediately prior to the First Effective Time, and (B) is the Per Share Mixed Consideration (including, for the avoidance of doubt, amounts distributable to such Company Stockholder in respect of such Company Common Stock pursuant to Sections 2.9, 8.4(a) and 10.10(g)), in each case, upon surrender of such share of Company Series C Preferred Stock in accordance with Section 2.5. As of the First Effective Time, all shares of Company Series C Preferred Stock and all shares of Company Common Stock into which such shares of Company Series C Preferred Stock are convertible as described in the immediately preceding sentence shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and shall thereafter represent only the right to receive the foregoing consideration to be paid in accordance with Section 2.5 (other than Dissenting Shares which shall be entitled only to those rights set forth in Section 2.6(a)).
(c)   Cancellation of Certain Company Capital Stock.   Each issued and outstanding share of Company Capital Stock held by the Company as treasury stock immediately prior to the First Effective Time shall automatically be cancelled and shall cease to exist, and no consideration or payment shall be delivered in exchange therefor or in respect thereof.
(d)   Effect on Merger Sub Equity.   Each share of common stock of Merger Sub issued and outstanding immediately prior to the First Effective Time shall automatically be converted into and become one fully paid and nonassessable share of common stock, par value $0.01 per share, of the First Surviving Company and shall constitute the only outstanding shares of capital stock of the First Surviving Company.
 
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(e)   Reduction of Consideration.   Notwithstanding the foregoing, a portion of the cash consideration payable to each Stockholder pursuant to Section 2.4(a) or Section 2.4(b) shall be reduced pursuant to the escrow provisions of Section 2.7 hereof and shall be subject to adjustment as provided herein.
(f)   No Interest.   No interest will be paid or accrued, and no Stockholder shall be entitled to receive, any interest upon surrender of any Company Capital Stock.
(g)   Allocation.   The parties acknowledge and agree that the purpose and intent of this Section 2.4 is to allocate the consideration payable hereunder in accordance with the terms of the Company’s Charter Documents.
2.5   Payment for Securities.
(a)   Paying Agent. Promptly following the date hereof, Parent and the Company shall engage a reputable bank, trust or administrator company reasonably acceptable to the Parent and the Company, or Parent’s transfer agent, to act as the paying agent for purposes of effecting the payment of the cash consideration in connection with the First Merger (other than with respect to compensatory payments for Tax purposes) (the “Paying Agent”). Parent and the Company shall each be responsible for one-half of the fees and expenses of the Paying Agent.
(b)   Procedures for Surrender of Certificates.   As soon as practicable after the First Effective Time, to the extent not previously delivered, Parent shall cause the Paying Agent to mail to each Person that was, immediately prior to the First Effective Time, a holder of record of Company Capital Stock, which shares of Company Capital Stock were converted into the right to receive the consideration set forth in Section 2.4 at the First Effective Time, and who has not returned a Stock Letter of Transmittal and the physical certificates or instruments that immediately prior to the First Effective Time represented issued and outstanding Company Capital Stock (the “Certificates” and each, a “Certificate”) to the Paying Agent prior to the Closing Date: (A) a letter of transmittal substantially in the form attached hereto as Exhibit F (a “Stock Letter of Transmittal”); and (B) instructions for effecting the surrender of such holder’s Certificates (or affidavits of loss in lieu of Certificates as provided in Section 2.5(e)) in exchange for payment of the cash consideration set forth in Section 2.4. Upon surrender of a Certificate (or affidavit of loss in lieu of the Certificate as provided in Section 2.5(e)) to the Paying Agent, and upon delivery of a Stock Letter of Transmittal, in accordance with the terms of such Stock Letter of Transmittal, duly executed and in proper form, with respect to such Certificates, the holder of such Certificate shall be entitled to receive in exchange therefor the consideration set forth in Section 2.4 for each share of Company Capital Stock formerly represented by such Certificate, and any Certificate so surrendered shall forthwith be cancelled. If payment of such consideration is to be made to a Person other than the Person in whose name any surrendered Certificate is registered, it shall be a condition precedent of payment that the Certificate so surrendered shall be properly endorsed or shall be otherwise in proper form for transfer, and the Person requesting such payment shall have paid any transfer and other similar Taxes required by reason of the payment of the consideration to a Person other than the registered holder of the Certificate so surrendered and shall have established to the reasonable satisfaction of Parent that such Taxes either have been paid or are not required to be paid. Until surrendered or cancelled as contemplated hereby, each Certificate shall be deemed at any time after the First Effective Time to represent only the right to receive the consideration set forth in Section 2.4, except for Certificates representing shares of Company Capital Stock held by holders of Dissenting Shares, which shall be deemed to represent the right to receive payment of the fair value of such shares of Company Capital Stock in accordance with and to the extent provided by Section 262 of the DGCL.
(c)   Transfer Books; No Further Ownership Rights in Company Capital Stock.   At the First Effective Time, the stock transfer books of the Company shall be closed and no transfer of shares of Company Capital Stock shall thereafter be made. If, after the First Effective Time, Certificates are presented to Parent or any Surviving Company for any reason, they shall be cancelled and exchanged as provided in this Agreement. From and after the First Effective Time, each holder of shares of Company Capital Stock outstanding immediately prior to the First Effective Time shall cease to have any rights as a stockholder of the Company, except for, in the case of a holder of Company Capital Stock (other than shares to be cancelled pursuant to Section 2.4(c) or Dissenting Shares), the right to surrender
 
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such holder’s shares of Company Capital Stock in accordance with this Section 2.5 in exchange for the consideration set forth in Section 2.4, or in the case of a holder of Dissenting Shares, the right to perfect such holder’s right to receive payment pursuant to Section 262 of the DGCL.
(d)   Termination of Fund; Abandoned Property; No Liability.   Any portion of the funds (including any interest received with respect thereto) and Share Consideration made available to the Paying Agent at the Closing that remains unclaimed by the holders of Certificates on the first anniversary of the First Effective Time will be returned to Parent or an Affiliate thereof designated by Parent, upon demand, and any such holder who has not prior to such time provided a duly executed Stock Letter of Transmittal to Parent and/or has not tendered its Certificates for the consideration set forth in Section 2.4, in each case in accordance with Section 2.5(b), shall thereafter look only to Parent (subject to abandoned property, escheat or other similar Legal Requirements) for delivery of such consideration, without interest, in respect of such holder’s surrender of such holder’s Certificates in compliance with the procedures in Section 2.5(b). Any consideration remaining unclaimed by the holders of Certificates immediately prior to such time as such amounts would otherwise escheat to, or become property of, any Governmental Entity will, to the extent permitted by applicable Legal Requirements, become the property of Parent or an Affiliate thereof designated by Parent, free and clear of any claim or interest of any Person previously entitled thereto. Notwithstanding the foregoing, none of Parent, Merger Sub, Merger Sub II, the Surviving Companies, the Paying Agent or their respective Affiliates will be liable to any holder of Certificates for consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Legal Requirements. Any portion of the consideration made available to the Paying Agent to pay for shares of Company Capital Stock for which appraisal rights have been perfected shall be returned to Parent or an Affiliate thereof designated by Parent upon demand.
(e)   Lost, Stolen or Destroyed Certificates.   In the event that any Certificates shall have been lost, stolen or destroyed, the Paying Agent shall issue in exchange for such lost, stolen or destroyed Certificates, upon the making of a customary affidavit (containing customary indemnification obligations) of that fact by the holder thereof, the consideration payable in respect thereof pursuant to Section 2.4 (subject to the delivery of a Stock Letter of Transmittal in accordance with Section 2.5(b)).
2.6   Dissenting Shares.
(a)   Notwithstanding anything in this Agreement to the contrary (but subject to the provisions of this Section 2.6), shares of Company Capital Stock outstanding immediately prior to the First Effective Time and held by a holder who is entitled to demand and has properly demanded appraisal for such shares of Company Capital Stock in accordance with, and who complies in all respects with, Section 262 of the DGCL (such shares of Company Capital Stock, the “Dissenting Shares”) shall not be converted into the right to receive the consideration set forth in Section 2.4. At the First Effective Time, all Dissenting Shares shall be cancelled and cease to exist, and the holders of Dissenting Shares shall only be entitled to the rights granted to them under Section 262 of the DGCL, subject to the immediately following sentence. If any such holder fails to perfect or otherwise waives, withdraws or loses such holder’s right to appraisal under Section 262 of the DGCL, then such Dissenting Shares shall be deemed to have been converted, as of the First Effective Time, into, and shall represent only, the right to receive (upon surrender in accordance with Section 2.5) the consideration set forth in Section 2.4, without interest.
(b)   Prior to the Closing Date, the Company shall give Parent (i) prompt notice of any written demand for appraisal received by the Company pursuant to the applicable provisions of the DGCL (and of any similar demand purportedly made under other applicable Legal Requirements) and (ii) the opportunity to participate in all negotiations and proceedings with respect to such demands. Prior to the Closing Date, the Company shall not, except with the prior written consent of Parent (not to be unreasonably withheld, delayed or conditioned), make any payment with respect to any such demands or offer to settle or settle any such demands other than as required by Legal Requirements or pursuant to a final court order. Prior to the Closing Date, any written communication to be made by the Company to any holder of Company Capital Stock with respect to such demands shall be submitted to Parent in advance and the Company shall consider in good faith any input from Parent with regards to such written communication.
 
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2.7   Treatment of Company Options.
(a)   At the First Effective Time, by virtue of the First Merger and without any action on the part of Parent, Merger Sub, Merger Sub II, the Company, the Company Optionholders or any other Person, each Vested Company Option shall be converted into the right to receive the Option Consideration (as further described in Sections 2.7(b) and 2.7(c)) with respect to each such Vested Company Option (including, for the avoidance of doubt, if applicable, amounts distributable to such Company Optionholder in respect of such Vested Company Option pursuant to Sections 2.9, 8.4(a) and 10.10(g)). Each Company Option that is not a Vested Company Option shall be cancelled as of immediately prior to the First Effective Time and shall cease to exist (including for all computations required by this Agreement), and no consideration shall be delivered in exchange therefor. For the avoidance of doubt, each Company Option shall, as of the First Effective Time, cease to be outstanding and shall automatically be canceled and retired and shall cease to exist, whether or not the holder of such Company Option is entitled to any consideration under this Section 2.7.
(b)   At the First Effective Time, by virtue of the First Merger and without any action on the part of Parent, Merger Sub, Merger Sub II, the Company, the Company Optionholders or any other Person, each Vested Company Option that is a Vested Substitute Option shall be assumed by Parent and automatically substituted with a non-qualified stock option (each, a “Parent Option”) to purchase a number of shares of Class A Common Stock equal to, rounded down to the nearest whole share of Class A Common Stock, (i) the total number of shares of Company Common Stock underlying such Vested Substitute Option, multiplied by (ii) a ratio, the numerator of which is the Common Per Share Amount and the denominator of which is the Parent Stock Value (such ratio, the “Exchange Ratio”), with each Parent Option having a per share exercise price equal to, rounded up to the nearest cent, (A) the exercise price per share of Company Common Stock underlying such Vested Substitute Option, divided by(B) the Exchange Ratio. The conversion and substitution of the Vested Substitute Options hereunder is intended to comply with Section 409A of the Code and the applicable regulations thereunder (including Treas. Reg. Section 1.409A-1(b)(5)(v)(D)) and, for the avoidance of doubt, each Parent Option shall otherwise continue to have and be subject to substantially the same terms and conditions as were applicable to such Vested Substitute Option immediately before the First Effective Time (including, but not limited to, expiration date and exercise provisions). The shares of Class A Common Stock subject to the Parent Options will be granted pursuant to the Stock Plan and are intended to be exempt from shareholder approval in accordance with Nasdaq listing rule 5635(c)(3) and shall not count against the share reserve under the Stock Plan.
(c)   The Cash Option Consideration payable to the holders of Vested Cash-Out Options pursuant to Section 2.7(a) (less (x) the amount, with respect to the applicable holder, equal to such holder’s Pro Rata Share of the Adjustment Escrow Deposit, (y) the amount, with respect to the applicable holder, equal to such holder’s Pro Rata Share of the Special Escrow Deposit and (z) the amount, with respect to the applicable holder, equal to such holder’s Pro Rata Share of the Representative Expense Amount, in each case, pursuant to Section 3.1) (in the aggregate, the “Option Cash Amount”) shall be paid (i) in respect of each Vested Cash-Out Option that is an Employee Option, through the Second Surviving Company’s payroll system (or the payroll system of Parent or a Subsidiary of Parent), less any required withholding Taxes in accordance with Section 2.10, no later than the first regularly scheduled payroll date of the Company that is at least five (5) Business Days following the Second Effective Time, and (ii) in respect of each Vested Cash-Out Option that is a Non-Employee Option, directly by the Second Surviving Company (or Parent or a Subsidiary of Parent) within five (5) Business Days following the Second Effective Time.
(d)   Prior to the First Effective Time, the board of directors of the Company (or, if appropriate, any committee thereof) shall adopt appropriate resolutions and the Company shall take, or cause to be taken, all other actions reasonably necessary or appropriate, including obtaining any required consents and providing any required notices (whether under the Company Equity Plan or otherwise) to effect the transactions described in this Section 2.7, and to ensure that no holder of Company Options shall have any rights from and after the First Effective Time with respect to any Company Options to acquire any Company Capital Stock or to receive any payment, right or benefit with respect to any award previously granted under the Company Equity Plan, except the right to receive a payment with respect thereto as provided in this Section 2.7 and Section 2.9, as applicable.
 
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2.8   Excess Capital Equipment Adjustment; Estimated Aggregate Merger Consideration; Parent Stock.
(a)   Excess Capital Equipment Adjustment.   The Company shall engage a nationally-recognized or regionally-recognized independent accounting firm to conduct a physical count of all of the Excess Capital Equipment within ten (10) days prior to the Closing, which physical count may be observed by Parent and its accounting advisors if in compliance with applicable Legal Requirements (including, if applicable, by allowing the Parent and its accounting advisors to observe by electronic video means). The parties acknowledge and agree that the Excess Capital Equipment will be valued in accordance with GAAP, using a lower of cost or market methodology, which value shall be the “Excess Capital Equipment Adjustment”; provided, that in no event shall the Excess Capital Equipment Adjustment exceed $9,639,062. The Excess Capital Equipment Adjustment shall be deemed to be final and binding on the Parties and shall not be subject to adjustment pursuant to Section 2.9.
(b)   Estimated Aggregate Merger Consideration.   At least five (5) Business Days prior to the Closing Date, the Company shall deliver to Parent a statement (the “Estimated Closing Statement”) setting forth (i) the Company’s good faith estimate of (A) the Selling Expenses (the “Estimated Selling Expenses”), (B) the Closing Indebtedness (the “Estimated Closing Indebtedness”), (C) the Closing Cash (the “Estimated Closing Cash”), (D) the Net Working Capital as of the Measurement Time, (E) the Net Working Capital Adjustment Amount as of the Measurement Time (the “Estimated Net Working Capital Adjustment Amount”), (F) the M&A Costs and the M&A Adjustment (the “Estimated M&A Adjustment”), (G) the Excess Capital Equipment Adjustment determined pursuant to Section 2.8(a)and (H) the Provider Relief Adjustment, and based thereon the calculation of the Estimated Aggregate Merger Consideration, and (ii) wire instructions for repayment of the Estimated Selling Expenses described in clause (a) of the definition of Selling Expenses. The Estimated Closing Statement shall be accompanied by a schedule showing the Company’s reasonably detailed calculation of the items set forth thereon. The Company shall provide Parent with supporting documentation reasonably requested and shall afford Parent and its representatives reasonable access during normal business hours to the financials, books, and records pertaining to the Company and its Subsidiaries and to the Company’s and its Subsidiaries’ accountants (subject to the execution of any access letters that such accountants may reasonably require in connection with the review of such work papers) and employees, in each case to the extent reasonably necessary, for Parent to evaluate the Estimated Closing Statement and the calculations set forth therein; provided, that neither the Company nor any of its Subsidiaries shall have any obligation to provide information or access to information, materials or persons if doing so would reasonably be expected to (i) interfere unreasonably with the conduct of the Business, (ii) result in the waiver of any attorney-client privilege or (iii) violate any applicable Legal Requirement. The Company shall consider in good faith and update the Estimated Closing Statement to reflect any mutually agreed comments by Parent on such Estimated Closing Statement with which it agrees (acting in good faith); provided, that the Closing shall not be delayed if Parent and the Company are unable to agree on any such comments, and in the case of any such disagreement, the estimated numbers and calculations proposed by the Company shall be used for purposes of determining the Estimated Aggregate Merger Consideration (without limiting any of the provisions of this Agreement, including Section 2.9).
(c)   Share Consideration.   To determine the type of Share Consideration received hereunder, the following priority shall be used: first (A) the holders of Vested Substitute Options shall receive Parent Options to purchase Class A Common Stock, then (B) each Company Stockholder that is an Accredited Investor shall be allocated the remaining Common Stock Share Consideration pro rata based on the number of shares of shares of Company Common Stock held by each such Company Stockholder (rounded down to the nearest whole number of shares of Class A Common Stock resulting therefrom for each such Company Stockholder), then (C) each Company Stockholder shall receive its remaining Share Consideration (including the incremental portion that was rounded down in clause (B) hereof) as Series C Preferred Stock (rounded down to the nearest whole number of Class A Common Stock into which such Series C Preferred Stock is convertible (without taking into account the Share Cap (as defined in the Certificate of Designations)) for each such Company Stockholder (i.e. rounded down to the nearest one-hundredth of a share of Series C Preferred Stock)), and (D) any amounts rounded down in clause (C) shall be paid in cash in an amount equal to (x) the fraction of a share of Series C Preferred Stock that was rounded down, multiplied by (y) the Conversion Rate, multiplied by (z) the Parent Stock Value.
 
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2.9   Closing Date Estimates and Post-Closing Reconciliation.
(a)   At least five (5) Business Days prior to the Closing Date, the Company shall deliver to Parent a schedule (the “Closing Consideration Schedule”), which schedule shall be certified as complete and correct by an officer of the Company and which shall accurately set forth as of such date and based upon the Estimated Closing Statement:
(i)   the Common Per Share Amount;
(ii)   all Common Stockholders and their respective email and physical addresses (to the extent known to the Company), the number of shares of Company Common Stock held by each Common Stockholder, including their respective Certificate numbers, whether each such Common Stockholder is an Accredited Investor and the aggregate consideration to be paid to each Common Stockholder pursuant to Section 2.4 at the Closing, including the cash amount and number of shares of Share Consideration (as allocated in accordance with Section 2.8(c), together with the amount of cash to be paid in lieu of any fractional shares in accordance with Section 2.8(c)) to be delivered to each Common Stockholder who is an Accredited Investor or the cash amount to be delivered to each Common Stockholder who is not an Accredited Investor, as applicable;
(iii)   all Series C Preferred Stockholders and their respective email and physical addresses (to the extent known to the Company), the number of shares of Company Series C Preferred Stock held by each Series C Preferred Stockholder (including their respective Certificate numbers) and the aggregate consideration to be paid to each Series C Preferred Stockholder pursuant to Section 2.4 at the Closing, including the cash amount and number of shares of Share Consideration (as allocated in accordance with Section 2.8(c), together with the amount of cash to be paid in lieu of any fractional shares in accordance with Section 2.8(c)) to be delivered to each Series C Preferred Stockholder;
(iv)   all Company Optionholders and their respective email and physical addresses (to the extent known to the Company), along with (A) the number of shares of Company Common Stock underlying each Company Option held by such Company Optionholder as of the Closing (including, as applicable, whether each such Company Option is a Vested Company Option (and, if so, whether such Vested Company Option is a Vested Cash-Out Option or Vested Substitute Option) or an Employee Options or Non-Employee Option), (B) the exercise price per share of Company Common Stock underlying each such Company Option, (C) whether each such Company Optionholder is an Accredited Investor, and (D) the Company’s calculation of the applicable Option Consideration payable at the Closing, if any, to be delivered to such Company Optionholder, including the number of Parent Options to be granted to such Company Optionholder (if any) and the exchange ratio applicable to such Parent Options;
(v)   the percentage of the Adjustment Escrow Deposit contributed by each Company Equityholder based on their Pro Rata Share;
(vi)   the percentage of the Special Escrow Deposit contributed by each Company Equityholder based on their Pro Rata Share;
(vii)   the percentage of the Representative Expense Amount contributed by each Company Equityholder based on their Pro Rata Share; and
(viii)   the percentage of any amount to be paid by Parent pursuant to Section 2.9(b)(v) payable to each Company Equityholder based on their Pro Rata Share.
Parent shall be entitled to rely conclusively on the Closing Consideration Schedule, and, as between the Common Stockholders, Series C Preferred Stockholders, and Company Optionholders, on the one hand, and Parent, the First Surviving Company and the Second Surviving Company, on the other hand, any amounts delivered by Parent, the First Surviving Company or the Second Surviving Company to any Common Stockholders, Series C Preferred Stockholders, Company Optionholders or delivered by Parent to the Paying Agent for delivery in accordance with the Closing Consideration Schedule in effect from time to time shall be deemed for all purposes to have
 
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been delivered to the applicable Common Stockholders, Series C Preferred Stockholders, Company Optionholders in full satisfaction of Parent’s obligations under this Article II.
(b)   Post-Closing Reconciliation.
(i)   As promptly as practicable, but no later than ninety (90) days following the Closing Date, Parent will prepare and deliver to the Stockholder Representative a statement (the “Closing Statement”) setting forth Parent’s good faith calculation of: (i) the Selling Expenses; (ii) the Closing Indebtedness; (iii) the Closing Cash; (iv) the Net Working Capital (as of the Measurement Time); (v) the Net Working Capital Adjustment Amount (as of the Measurement Time, in a manner consistent with and using only those specific line items set forth in the Preparation Methodology); (vi) the M&A Costs and the M&A Adjustment; (vii) the Final Provider Relief Adjustment and (viii) the Excess Capital Equipment Adjustment determined pursuant Section 2.8(a), and based thereon a calculation of the Aggregate Merger Consideration.
The Closing Statement and the components thereof (and all calculations of Net Working Capital, the Net Working Capital Adjustment Amount, Closing Cash, Closing Indebtedness, Selling Expenses, M&A Costs, the M&A Adjustment, Final Provider Relief Adjustment and Aggregate Merger Consideration) shall be prepared and calculated in accordance with GAAP, the Preparation Methodology, and the definitions herein, except that the Closing Statement and the components thereof (and all calculations of Net Working Capital, the Net Working Capital Adjustment Amount, Closing Cash, Closing Indebtedness, Selling Expenses, M&A Costs, the M&A Adjustment, Final Provider Relief Adjustment and Aggregate Merger Consideration) shall: (A) not include any purchase accounting or other adjustment arising out of the consummation of the transactions contemplated by this Agreement; be based on facts and circumstances as they exist immediately prior to the Closing and shall exclude the effect of any act, decision or event occurring on or after the Closing except to the extent such act, decision or event provides information about circumstances that existed immediately prior to Closing; and (B) not reflect, directly or indirectly, any additional reserve or accrual that is not reflected on the Latest Balance Sheet, except those that (1) result from material developments occurring after the date of the Latest Balance Sheet but prior to the Closing or (2) would be required to be reflected on the face of a balance sheet prepared in accordance with GAAP, the Preparation Methodology, and the definitions herein. The Parties agree that the purpose of preparing the Closing Statement and components thereof (and all calculations of Net Working Capital, the Net Working Capital Adjustment Amount, Closing Cash, Closing Indebtedness, Selling Expenses, M&A Costs, the M&A Adjustment, Final Provider Relief Adjustment and Aggregate Merger Consideration) is solely to assess the accuracy of the amounts depicted in the Closing Statement and the calculation of the Aggregate Merger Consideration derived therefrom, and such processes are not intended to permit the introduction of different accounting methods, policies, practices, procedures, conventions, categorizations, definitions, principles, judgments, assumptions, techniques or estimation methods with respect to financial statements, their classification or presentation or otherwise (including with respect to the nature of accounts, level of reserves or level of accruals) from those used to calculate the amounts set forth in the Preparation Methodology.
(ii)   During the thirty (30) days after delivery of the Closing Statement, Parent will provide the Stockholder Representative and its accountants with reasonable supporting documentation and reasonable access, during normal business hours and upon reasonable notice, to (x) review the financial books and records of the Second Surviving Company, any of Parent’s accountants’ work papers related to the calculation of amounts related to the Closing Statement (subject to the execution of any access letters that such accountants may reasonably require in connection with the review of such work papers), and (y) the employees and other representatives of Parent who were responsible for the preparation of the Closing Statement to respond to questions relating to the preparation of the Closing Statement and the calculation of the items thereon, in each case solely to allow the Stockholder Representative to determine the accuracy of Parent’s calculation of the items set forth on the Closing Statement. Neither Parent nor any of its Subsidiaries shall have any obligation to provide information or access to information, materials or persons if doing so would reasonably be expected to (i) interfere unreasonably with the conduct of the Business, (ii) result
 
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in the waiver of any attorney-client privilege or the disclosure of any trade secrets or (iii) violate any applicable Legal Requirement. If the Stockholder Representative disagrees with any of Parent’s calculations set forth in the Closing Statement, the Stockholder Representative may, within thirty (30) days after delivery of the Closing Statement, deliver a written notice (the “Objection Notice”) to Parent disagreeing with such calculations. Any Objection Notice shall specify those items or amounts with which the Stockholder Representative disagrees, together with a reasonably detailed written explanation of the reasons for disagreement with each such item or amount, and shall set forth the Stockholder Representative’s calculation, based on such objections, of the Selling Expenses, the Closing Indebtedness, the Closing Cash, the Net Working Capital as of the Measurement Time and the Net Working Capital Adjustment Amount as of the Measurement Time, the M&A Costs and the M&A Adjustments, the Excess Capital Adjustment determined pursuant to Section 2.8(a), the Final Provider Relief Adjustment, and based thereon a calculation of the Aggregate Merger Consideration. To the extent not set forth in the Objection Notice, the Stockholder Representative shall be deemed to have agreed with Parent’s calculation of all other items and amounts contained in the Closing Statement and such amounts shall be final and binding on the parties. If the Stockholder Representative does not deliver an Objection Notice within such thirty-day period, then the amounts set forth in the Closing Statement shall be deemed to be final and binding on the parties.
(iii)   If an Objection Notice is timely delivered pursuant to Section 2.9(b)(ii), the Stockholder Representative and Parent shall, during the thirty (30) days following such delivery, use their reasonable best efforts to reach agreement on the value of the disputed items or amounts. If, during such period, the Stockholder Representative and Parent are unable to reach agreement on all disputed items, they shall promptly thereafter mutually engage and submit such dispute to a nationally-recognized or regionally-recognized independent accounting firm as is mutually agreed to by Parent and the Stockholder Representative (the “Independent Accounting Firm”) for final and binding resolution. The Independent Accounting Firm (i) shall consider only those items or amounts disputed by the Stockholder Representative in the Objection Notice which remain in dispute; (ii) shall not assign a value to any item or amount in dispute greater than the greatest value for such item or amount assigned by the Stockholder Representative, on the one hand, or Parent, on the other hand, or less than the smallest value for such item or amount assigned by the Stockholder Representative, on the one hand, or Parent, on the other hand; and (iii) shall act as an expert and not as an arbitrator. The Independent Accounting Firm’s determination will be based solely on presentations by the Stockholder Representative and Parent which are in accordance with the guidelines and procedures set forth in this Agreement (i.e., not on the basis of independent review) and the Stockholder Representative and Parent shall cause the Independent Accounting Firm to deliver to the Stockholder Representative and Parent as promptly as practicable (but in any event within thirty (30) days of its retention) a written report setting forth its determination of the amounts in dispute. Such report shall be final and binding on the parties. The cost of such review and report shall be borne (and paid) by the Stockholder Representative (solely on behalf of the Company Equityholders, in accordance with the percentages contributed to the Adjustment Escrow Amount set forth on the Closing Consideration Schedule (which may for convenience be paid by the Stockholder Representative out of the Representative Expense Amount)), on the one hand, and Parent, on the other hand, based on the percentage which the portion of the contested amount not awarded to each party bears to the amount actually contested by such party. For example, if closing accounts receivable is the only disputed item, and Parent claims that closing accounts receivable is $1,000 less than the amount determined by the Stockholder Representative, and the Stockholder Representative contests only $500 of the amount claimed by Parent, and if the independent accountant ultimately resolves the dispute by awarding Parent $300 of the $500 contested, then the cost of such review and report will be allocated 60% (i.e., 300 divided by 500) to the Stockholder Representative (solely on behalf of the Company Equityholders) and 40% (i.e., 200 divided by 500) to Parent.
(iv)   If the Aggregate Merger Consideration, as finally determined pursuant to this Section 2.9, is less than the Estimated Aggregate Merger Consideration, then, within five (5) Business Days of the final determination of the Aggregate Merger Consideration, Parent and the Stockholder Representative shall jointly instruct the Escrow Agent to deliver to Parent the
 
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amount of such difference (the “Shortfall Amount”) from the Adjustment Escrow Account. In the event that the funds available in the Adjustment Escrow Account are in excess of the Shortfall Amount (such excess, the “Escrow Excess Amount”), Parent and the Stockholder Representative shall, in the same joint written instruction described in the preceding sentence, instruct the Escrow Agent to pay the Escrow Excess Amount (i) to the Paying Agent, for further distribution to the Company Equityholders (other than holders of Vested Company Options that are Employee Options) and (ii) to the Parent for further distribution to the holders of Vested Company Options that are Employee Options on the next regularly scheduled payment date, through the payroll system of Parent or a Subsidiary of Parent subject to applicable Tax withholding, in each case based on percentages specified on the Closing Consideration Schedule. The Company Equityholders shall not have any liability for any amount due pursuant to this Section 2.9(b)(v) except to the extent of the funds available in the Adjustment Escrow Account.
(v)   If the Aggregate Merger Consideration, as finally determined pursuant to this Section 2.9, is greater than the Estimated Aggregate Merger Consideration, then (A) the amount of such excess shall be paid in cash by Parent (1) within five (5) Business Days of the final determination of the Aggregate Merger Consideration to the Paying Agent, for further distribution to the Company Equityholders (other than holders of Vested Company Options that are Employee Options) and (2) on the next regularly scheduled payment date to the holders of Vested Company Options that are Employee Options, through the payroll system of Parent or a Subsidiary of Parent subject to applicable Tax withholding, in each case, based on the Pro Rata Share of each such Company Equityholder, and (B) Parent and the Stockholder Representative shall, within five (5) Business Days of the final determination of the Aggregate Merger Consideration, instruct the Escrow Agent to pay the amount in the Adjustment Escrow Account (1) to the Paying Agent, for further distribution to the Company Equityholders (other than holders of Vested Company Options that are Employee Options) and (2) to the Parent for further distribution to the holders of Vested Company Options that are Employee Options on the next regularly scheduled payment date, through the payroll system of Parent or a Subsidiary of Parent subject to applicable Tax withholding, in each case, based on the Pro Rata Share of each such Company Equityholder. Parent shall not have any liability for any amount due pursuant to this Section 2.9(b)(v) in excess of an amount equal to the Adjustment Escrow Deposit.
(vi)   Any payment(s) made pursuant to this Section 2.9 shall be deemed, for Tax purposes, to be an adjustment to the cash consideration payable to the Company Equityholders in consideration for the First Merger.
2.10   Withholding.   Merger Sub, Parent, the First Surviving Company, the Second Surviving Company and the Paying Agent, as the case may be, shall be entitled to deduct and withhold from any amounts otherwise payable pursuant to this Agreement such amounts as are required to be deducted and withheld with respect to the making of such payment under the Code and the Treasury Regulations or under any applicable Tax Legal Requirement; provided, however, assuming the Company complies with its obligations under Section 2.3(a)(v), if either the Merger Sub, Parent, the First Surviving Company, the Second Surviving Company or the Paying Agent, as applicable, determines that it is obligated to deduct or withhold any amounts from any non-compensatory consideration payable or otherwise deliverable pursuant to this Agreement (other than in respect of backup withholding), such Person shall (i) provide such payee with prior written notice of its intent to deduct and withhold (together with information setting forth the amount and reason for such deduction or withholding), and (ii) afford such payee a reasonable opportunity to reduce or eliminate such deduction or withholding. To the extent that amounts are so withheld and timely paid over to the appropriate Governmental Entity by Merger Sub, Parent, the First Surviving Company, the Second Surviving Company or the Paying Agent, such amounts shall be treated for all purposes of this Agreement as having been paid to the Person in respect of which such deduction or withholding was made. Notwithstanding anything to the contrary, any compensatory payments for Tax purposes payable pursuant to or as contemplated by this Agreement shall be paid through the Second Surviving Company’s payroll system (or a payroll system of Parent or a Subsidiary of Parent) subject to applicable Tax withholding. For the avoidance of doubt, any such amount withheld shall reduce the cash consideration payable to such Company Equityholder regardless of whether the withholding is in respect of cash or equity consideration payable hereunder.
 
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2.11   [INTENTIONALLY OMITTED]
2.12   Second Merger Conversion of Securities.   At the Second Effective Time, by virtue of the Second Merger and without any action on the part of Parent, the First Surviving Company or Merger Sub II:
(a)   Each share of common stock of Merger Sub II issued and outstanding immediately prior to the Second Effective Time shall be cancelled and retired and shall cease to exist.
(b)   Each share of common stock of the First Surviving Company issued and outstanding immediately prior to the Second Effective Time shall be converted into one share of common stock of the Second Surviving Company.
2.13   Equitable Adjustments.   If at any time after the date of this Agreement and prior to the Closing Date any change in the outstanding shares of Class A Common Stock or Preferred Stock shall occur by reason of any reclassification, recapitalization, stock split or combination, exchange or readjustment of shares, or any stock dividend thereon with a record date during such period, any number or amount contained in this Agreement which is based on the price or the number of shares of Class A Common Stock or Preferred Stock of Parent shall be equitably adjusted to the extent necessary to provide the Parties the same economic effect with respect to such shares of capital stock as contemplated by this Agreement prior to such reclassification, recapitalization, stock split or combination, exchange or readjustment of shares, or stock dividend thereon.
ARTICLE III
ESCROW AND REPRESENTATIVE EXPENSE AMOUNT
3.1   Escrow Deposit; Disbursements.
(a)   At the Closing, pursuant to Section 2.3(b)(iii), Parent shall deliver the Adjustment Escrow Deposit and the Special Escrow Deposit to the Escrow Agent to be, in separate and segregated accounts, held, safeguarded, invested and released pursuant to the terms of this Agreement and the Escrow Agreement. Parent and the Company (as a Selling Expense) shall each be responsible for one-half of the fees and expenses of the Escrow Agent. Parent shall be deemed to have contributed the percentages of the Adjustment Escrow Deposit and the Special Escrow Deposit with respect to each Company Equityholder (including with respect to any Vested Cash-Out Options held thereby immediately prior to the Closing) as set forth on the Closing Consideration Schedule and the cash consideration payable to each Company Equityholder pursuant to Section 2.4, Section 2.5, or Section 2.7, as applicable, shall be reduced by such amounts based on each such Company Equityholder’s Pro Rata Share.
(b)   The Escrow Agreement will provide that disbursements from the Adjustment Escrow Account and the Special Escrow Account shall only be made in accordance with written instructions jointly signed by Parent and the Stockholder Representative in such form reasonably acceptable to the Escrow Agent, Parent and the Stockholder Representative (each, a “Joint Instruction Letter”) or pursuant to a final judgment rendered pursuant to Section 10.5 of this Agreement.
(c)   If either Parent or the Stockholder Representative fails to timely execute and deliver a Joint Instruction Letter when required under this Agreement, Parent or Company, as applicable, shall be entitled to seek an order (in accordance with Section 10.8) that will enable the Escrow Agent to distribute to the Paying Agent and the Company, on behalf of the Company Equityholders or the Parent, as applicable, the funds to which it is entitled.
(d)   Amounts released from the Adjustment Escrow Account and/or the Special Escrow Account to the Company Equityholders will be treated, for Tax and all other purposes, as additional consideration for the First Merger.
3.2   Deposit of Representative Expense Amount.
(a)   At the Closing, pursuant to Section 2.3(b)(iv), Parent shall deliver the Representative Expense Amount to the Stockholder Representative. Parent shall be deemed to have contributed the percentage of the Representative Expense Amount with respect to each Company Equityholder
 
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(including with respect to any Vested Cash-Out Options held thereby immediately prior to the Closing) as set forth on the Closing Consideration Schedule and the cash consideration payable to each Company Equityholder pursuant to Section 2.4, Section 2.5, or Section 2.7, as applicable, shall be reduced by such amount based on each such Company Equityholder’s Pro Rata Share.
(b)   Any portion of the Representative Expense Amount released to the Company Equityholders will be treated, for Tax and all other purposes, as additional consideration for the First Merger.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF COMPANY
Except as set forth in the disclosure schedule delivered by the Company to Parent in connection with this Agreement (the “Disclosure Schedule”), the Company hereby represents and warrants, as of the date hereof and as of the Closing Date, to Parent as follows in this ARTICLE IV.
4.1   Organization; Existence and Good Standing.   Each of the Company and each of its Material Subsidiaries (i) is a corporation or other entity duly organized, validly existing and in good standing under the laws of its state or other jurisdiction of incorporation or organization, (ii) has full corporate or other power and authority to carry on its business as it is now being conducted and to own and lease the properties and assets it now owns and leases (other than with respect to any inaccuracies that are corrected by the Company at no cost and without liability to any of Parent, Merger Sub or Merger Sub II prior to the Closing); and (iii) is in good standing and is duly qualified or licensed to do business as a foreign corporation or other entity in each jurisdiction wherein the character of the properties owned by it, or the nature of its business makes such licensing or qualification necessary, except with respect to clause (i) (in the case of the Material Subsidiaries) and with respect to clause (iii) (in the case of the Company and its Material Subsidiaries), where the failure to so qualify or be in good standing or of clause (iii) would not, individually or in the aggregate, have a Material Adverse Effect.
4.2   Authority; Enforceability.
(a)   The Company has the full corporate power and authority to execute this Agreement and the other Transaction Documents to which it is or will be a party, and, subject to receipt of the Company Written Consent, to perform its obligations under this Agreement and the other Transaction Documents to which it is a party. The execution and delivery of, and the performance of the Company’s obligations under, this Agreement and the other Transaction Documents to which the Company is a party have been duly and validly authorized by the Company’s board of directors and, except for (i) receipt of the Company Written Consent and (ii) the filing of the First Certificate of Merger and the Second Certificate of Merger with the Delaware Secretary of State, no other corporate proceedings on the part of the Company are necessary to authorize the consummation of the transactions contemplated by this Agreement or the Transaction Documents to which it is a party. On or prior to the date hereof, the Company’s board of directors has unanimously (x) resolved that this Agreement and the Transaction Documents to which it is a party and the consummation of the First Merger and the other transactions contemplated hereby and thereby are fair to and in the best interests of the Company and the Stockholders, (y) approved and declared advisable this Agreement, the Transaction Documents and the First Merger and the other transactions contemplated hereby and thereby on the terms and subject to the conditions set forth herein, in accordance with the requirements of the DGCL, and (z) has recommended that the Company’s Stockholders adopt this Agreement and approve the First Merger. Assuming the due authorization, execution and delivery by the other Parties to this Agreement and the other Transaction Documents, this Agreement and the other Transaction Documents to which the Company is a party, as the case may be, constitute the valid and binding obligations of the Company, enforceable against the Company in accordance with each of their respective terms and conditions, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other Legal Requirements relating to or affecting creditors’ rights generally or by equitable principles (regardless of whether enforcement is sought at law or in equity) (together, the “Enforceability Exceptions”).
(b)   The Company Written Consent is the only action of the Stockholders in their capacity as such required to approve (i) this Agreement and the Transaction Documents to which the Company or
 
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its equityholders are a party, (ii) the First Merger Agreement and (iii) the other transactions contemplated hereby and thereby.
4.3   No Violations.   The execution and delivery of this Agreement by the Company and the execution and delivery of the other Transaction Documents to which the Company is a party does not and will not, and the performance and compliance with the terms and conditions hereof and thereof by the Company and the consummation of the transactions contemplated hereby and thereby by the Company will not (with or without notice or passage of time, or both), except, with respect to clause (c), as would not be material to the Company:
(a)   violate, conflict with, result in a breach of or constitute a default under any of the provisions of the Charter Documents of the Company, or any of its Subsidiaries;
(b)   violate or conflict with any provision of, or cause a default under, any Legal Requirement applicable to the Company or any of its Subsidiaries; or
(c)   except as set forth on Section 4.3(c) of the Disclosure Schedule, require any notice or filing with respect to, result in a violation or breach of, or cause acceleration of any right or obligation under, or require any notice or constitute a default, or give rise to any right of termination, amendment, modification, cancellation, loss of benefit or acceleration under, any of the terms, conditions or provisions of or result in a Lien on any of the assets of the Company or its Subsidiaries pursuant to, any Material Contract or Material Permit to which the Company or any of its Subsidiaries is a party.
4.4   Consents.   No material approval, consent, waiver, authorization or other order of, and no declaration, notice, filing, registration, qualification or recording with, any Governmental Entity is or will be required to be obtained or made by or on behalf of the Company or any of its Subsidiaries in connection with the execution, delivery or performance of this Agreement and the consummation of the Closing hereunder, except for those (a) set forth in Section 4.4 of the Disclosure Schedule and (b) under the HSR Act.
4.5   Capitalization; Subsidiaries.
(a)   As of the date of this Agreement, the total number of shares of all classes of capital stock which the Company is authorized to issue is 90,087,434 shares, which consists of (i) 72,000,000 shares of Company Common Stock and (ii) 18,087,434 shares of Company Series C Preferred Stock. As of the date of this Agreement, there are 42,384,693 shares of Company Common Stock outstanding, and 18,087,434 shares of Company Series C Preferred Stock outstanding, in each case, held by the Stockholders as set forth in the attached “Capitalization Schedule.” As of the date of this Agreement, (i) 2,271,035 shares of Company Common Stock remained available for issuance pursuant to the Company Equity Plans and (ii) Company Options to purchase 8,853,750 shares of Company Common Stock pursuant to the Company Equity Plan were outstanding and held by the Company Optionholders as set forth on the Capitalization Schedule, including, with respect to each Company Option, the holder of such Company Option, the date such Company Option was granted, the expiration date, the number of shares of Company Common Stock subject to such Company Option and the applicable exercise price. All of the issued and outstanding shares of Company Common Stock and Company Series C Preferred Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive or similar rights. The Company has made available to Parent an accurate and complete copy of the Charter Documents of the Company.
(b)   The attached “Capitalization Schedule” accurately sets forth the authorized and outstanding equity interests of each of the Company’s Subsidiaries and the name and number of equity interests held by each stockholder or member. All of such issued and outstanding equity interests have been duly authorized and validly issued and are fully paid non-assessable (to the extent such concepts are applicable) and free of preemptive or similar rights. No Subsidiary of the Company has outstanding stockholder purchase rights or “poison pill” or any similar arrangement in effect.
(c)   Except as may be set forth on the attached Capitalization Schedule, there are no outstanding or authorized options, warrants, rights, contracts, pledges, calls, puts, rights to subscribe, conversion rights or other agreements or commitments to which any of the Company or any of its Subsidiaries is
 
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a party or which is binding upon the Company or any of its Subsidiaries that provides for the issuance, disposition or acquisition of any of its equity, income appreciation or any rights or interests exercisable therefor or obligating the Company or any of its Subsidiaries to provide funds to or make any investment (in the form of a loan, capital contribution, subscription or otherwise) in any other Person. Except as set forth in the Capitalization Schedule, there are no outstanding or authorized equity appreciation, profit, phantom stock or similar rights with respect to the Company or any of its Subsidiaries. Except as may be set forth on the attached Capitalization Schedule or as accrued (but not declared) on the Company Series C Preferred Stock, there are no declared or accrued and unpaid dividends on any of the equity interests in the Company or commitments to issue additional shares of capital stock. Except as set forth on Section 4.5(c) of the Disclosure Schedule, there are no outstanding equityholder or other agreements or obligations (contingent or otherwise) with respect to the voting (including voting trusts and proxies) or sale, redemption, acquisition or transfer of any equity interests of the Company or any of its Subsidiaries, other than such rights as are in favor of the Company or one of its Subsidiaries.
(d)   W