PRIVILEGED AND CONFIDENTIAL
ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP MEMORANDUM
FROM: Derek Okonkwo and Tiffany Rosenthal, Calderwood & Harkness LLP
TO: Beatrice Holloway, Calderwood & Harkness LLP; Priya Mehta-Sullivan, Connor Briggs, and Marcus Ainsworth, Ardent Capital Management LLC
DATE: March 25, 2024
RE: Due Diligence Summary Memorandum — Proposed Acquisition of Substantially All Assets of Cardinal Peak Industries, Inc.
MATTER NO.: 2024-M&A-0142
This memorandum is a privileged and confidential attorney-client communication and constitutes attorney work product prepared in anticipation of litigation and in connection with the rendering of legal advice. This memorandum is not intended for distribution to, or use by, any person or entity other than the named addressees and their authorized representatives. Any unauthorized disclosure, copying, or distribution of this memorandum or its contents is strictly prohibited.
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I. EXECUTIVE SUMMARY
This memorandum summarizes the principal legal due diligence findings of Calderwood & Harkness LLP ("C&H" or "we") in connection with the proposed asset purchase (the "Transaction") by Ardent Healthcare Acquisition Corp. (the "Purchaser"), a newly formed, wholly owned subsidiary of Ardent Capital Partners III LP ("Ardent Capital" or the "Buyer"), of substantially all of the assets of Cardinal Peak Industries, Inc. ("CPI" or the "Seller") for a base purchase price of Six Hundred Twenty Million Dollars ($620,000,000) (the "Base Purchase Price"). The Transaction is structured as an asset purchase, pursuant to which the Purchaser will acquire substantially all of the operating assets of CPI and will assume certain specified liabilities, as set forth in the definitive Asset Purchase Agreement (the "APA") currently under negotiation.
Ardent Healthcare Acquisition Corp. is a Delaware corporation formed on January 22, 2024, solely for the purpose of consummating this Transaction. The Purchaser has no prior operating history, and its sole member is Ardent Capital Partners III LP, a Delaware limited partnership, the general partner of which is Ardent Capital Management LLC.
CPI is a Delaware corporation founded in 2011 by Dr. Randall J. Whitfield. CPI owns and operates a network of thirty-seven (37) outpatient rehabilitation and behavioral health facilities across seven states: Tennessee, Georgia, North Carolina, South Carolina, Alabama, Virginia, and Kentucky. CPI employs approximately 2,100 individuals, consisting of approximately 1,450 licensed clinicians (including physical therapists, occupational therapists, speech-language pathologists, and behavioral health counselors) and approximately 650 administrative and support staff.
For the fiscal year ended December 31, 2023 ("FY2023"), CPI reported last-twelve-months ("LTM") revenue of approximately $412,000,000 and LTM Adjusted EBITDA of approximately $74,160,000, reflecting an Adjusted EBITDA margin of approximately 18.0%. At the Base Purchase Price of $620,000,000, the Transaction implies a purchase price multiple of approximately 8.36x LTM Adjusted EBITDA.
Our legal due diligence commenced on February 5, 2024. The first draft of the APA was circulated by C&H to Seller's counsel on February 12, 2024, and negotiations are ongoing. This memorandum consolidates our diligence findings as of March 25, 2024, and will be supplemented as additional information is received and our analysis is completed.
Key Deal Terms Under Negotiation. The principal economic and structural terms of the Transaction, as reflected in the current draft of the APA, include the following:
• Base Purchase Price: $620,000,000, payable in cash at closing, subject to customary net working capital, cash, debt, and transaction expense adjustments.
• Indemnification Cap: 20% of the Base Purchase Price ($124,000,000).
• General R&W Survival Period: Eighteen (18) months from the closing date.
• Escrow Holdback: 10% of the Base Purchase Price ($62,000,000), deposited with an escrow agent at closing.
• EBITDA-Based Earnout: Up to $45,000,000 in aggregate additional purchase price, payable in two tranches based on the achievement of specified Adjusted EBITDA thresholds during two successive twelve-month periods following the closing.
• Net Working Capital Target: $28,000,000, subject to customary true-up mechanism.
Overall Diligence Risk Profile. Based on the due diligence conducted to date, we assess the overall risk profile of the Transaction as moderate. We have not identified any issues that, in our judgment, would warrant termination of the Transaction or a fundamental restructuring of its terms. The key areas of focus that require continued attention and appropriate contractual protections in the APA include:
(a) Lease Consent Requirements: Twenty-nine (29) of thirty-seven (37) facility leases require landlord consent for the assignment triggered by the asset purchase structure. As of the date of this memorandum, seven (7) consents have been obtained, fourteen (14) are in process, and eight (8) have not yet been requested.
(b) Dawson Wage-and-Hour Class Action: A putative class action under the Fair Labor Standards Act is pending in the Middle District of Tennessee, with estimated exposure of $2.8 million to $5.1 million.
(c) Payor Concentration Risk: SummitCare Health Plans, Inc. represents approximately 22% of CPI's net revenue, and the SummitCare managed-care agreement contains a change of control consent provision. Medicare and Medicaid collectively represent approximately 31% of net revenue, and the asset purchase will require re-enrollment and change-of-information filings with CMS and state Medicaid agencies.
(d) Change of Control Provisions in Material Contracts: Forty-one (41) material contracts contain change of control, anti-assignment, or consent-to-assignment provisions potentially triggered by the Transaction.
Advisory Team. In addition to our firm's work, the following advisors are conducting due diligence on behalf of the Buyer:
• Financial and Accounting Due Diligence: Ashford & Creighton LLP (Gregory Nolan, Partner).
• Healthcare Regulatory Due Diligence: Hargrove, Sinclair & Demarest LLP (Angela Demarest, Partner) (supplementing C&H's analysis).
• Environmental Due Diligence: Whitmore Environmental Sciences Inc.
Seller's Advisors. CPI is represented in the Transaction by Barrow, Kensington & Pratt LLP ("BKP"), with Catherine "Kit" Barrow serving as lead partner and Samuel Otieno serving as lead associate. CPI's auditor is Linden Hayes & Co., P.C. (Roberta Chen, Audit Partner), which has issued audited financial statements for FY2021, FY2022, and FY2023, all of which have been reviewed in connection with this diligence.
II. SCOPE AND METHODOLOGY
Data Room Review. CPI established a virtual data room (the "Data Room") hosted by Glenrock Data Systems, to which C&H was granted access on February 4, 2024. As of the date of this memorandum, the Data Room contains approximately 4,200 documents organized across twenty-three (23) folders corresponding to the principal areas of the Seller's business and operations. Our team has reviewed all documents posted to the Data Room that are material to the legal diligence workstreams described below, with particular focus on documents that bear on the allocation of risk in the APA, the identification of liabilities to be assumed or excluded, and the conditions to closing.
Supplemental Information Requests. In the course of our review, we identified a number of areas in which the documents posted to the Data Room were incomplete or required clarification. We issued four (4) supplemental information requests to Seller's counsel (BKP), dated February 8, 2024, February 12, 2024, February 19, 2024, and March 6, 2024. BKP has been generally responsive to our requests, although certain items remain outstanding as noted in Section XIV below. We have also conducted interviews with CPI senior management and certain members of CPI's in-house legal and compliance team.
Diligence Workstreams. Our legal due diligence has been organized into the following ten (10) workstreams:
1. Corporate and Organizational Matters
2. Material Contracts
3. Real Estate and Leases
4. Intellectual Property
5. Employment and Benefits
6. Healthcare Regulatory Compliance
7. Litigation and Regulatory Proceedings
8. Environmental
9. Insurance
10. Tax
Financial and accounting due diligence has been handled separately by Ashford & Creighton LLP, and we have coordinated closely with the Ashford & Creighton team to ensure consistency between the legal and financial workstreams. Environmental due diligence (Phase I ESA scope) has been conducted by Whitmore Environmental Sciences Inc. Healthcare regulatory due diligence has been conducted jointly by C&H and Hargrove, Sinclair & Demarest LLP.
Cross-References to Separate Memoranda. This memorandum is intended to provide a consolidated summary of our diligence findings across all workstreams. Certain topics are addressed in greater detail in separate memoranda and deliverables, which are referenced throughout this memorandum and listed in the appendices. These include:
• Tax Structure Memorandum — prepared by Sylvia Hartwell (C&H, Tax Group), dated February 8, 2024, addressing the federal and state tax implications of the asset purchase structure, purchase price allocation, and earnout tax treatment. See Appendix D.
• Litigation and Regulatory Review Memorandum — prepared by Derek Okonkwo (C&H), dated March 12, 2024, providing a detailed analysis of the Dawson litigation, other pending and threatened claims, and regulatory proceedings. See Appendix C.
• Healthcare Regulatory Compliance Memorandum — jointly prepared by C&H and Hargrove, Sinclair & Demarest LLP; forthcoming (expected completion in early April 2024).
• Contract Review Summary — a detailed spreadsheet listing all material contracts reviewed, key terms, change of control and consent provisions, and risk assessments. See Appendix A.
• Lease Consent Tracker — a spreadsheet maintained by Tiffany Rosenthal, tracking the status of landlord consent solicitations for all 37 leased locations. Updated weekly. See Appendix B.
Limitations. Our diligence has been conducted in reliance on the documents and information provided to us by CPI and its advisors. We have not independently verified the accuracy or completeness of the information provided, except as expressly noted herein. This memorandum does not constitute a legal opinion and should not be relied upon as such. Our analysis is limited to matters of law in the United States, and we have not opined on the laws of any foreign jurisdiction.
III. CORPORATE AND ORGANIZATIONAL MATTERS
A. Seller's Corporate Structure
Cardinal Peak Industries, Inc. is a corporation duly organized and existing under the laws of the State of Delaware. CPI was incorporated on March 14, 2011 (Delaware File No. 5487231; Federal Employer Identification Number 82-3947561). CPI was founded by Dr. Randall J. Whitfield, who continues to serve as Chairman of the Board of Directors and Chief Executive Officer.
CPI's corporate headquarters are located at 8400 Crescent Ridge Parkway, Suite 200, Nashville, Tennessee 37215. We have reviewed CPI's Certificate of Incorporation (as amended through December 2018) and its current Amended and Restated Bylaws.
CPI is qualified to do business as a foreign corporation and is in good standing in each of the seven states in which it operates facilities: Tennessee, Georgia, North Carolina, South Carolina, Alabama, Virginia, and Kentucky. We have reviewed good standing certificates from the Secretary of State (or equivalent office) in all seven states, as well as Delaware, each dated within thirty (30) days of the date of this memorandum. No material deficiencies or delinquencies were identified with respect to CPI's corporate status or foreign qualifications.
CPI has one subsidiary: Cardinal Peak Labs, Inc. ("CP Labs"), a Delaware corporation. CP Labs is a dormant entity with no assets, no employees, and no current operations. Based on our review, CP Labs was originally formed in 2017 in connection with CPI's exploration of an in-house clinical laboratory initiative, which was subsequently abandoned. CP Labs has filed its required Delaware annual reports and remains in good standing, but it has had no operating activity since 2018. Under the terms of the APA as currently drafted, CP Labs equity is an excluded asset and will not be acquired by the Purchaser. We note that, because CP Labs has no assets or operations, its exclusion from the Transaction does not give rise to any material risk.
B. Capitalization and Ownership
We have reviewed CPI's Certificate of Incorporation, its stock ledger, and all relevant stockholder agreements. CPI's authorized share capital consists of 10,000,000 shares of Common Stock, par value $0.001 per share, of which 5,000,000 shares are issued and outstanding. The outstanding shares are held as follows:
Ridgeline Growth Equity Fund II LP ("Ridgeline") is a Delaware limited partnership managed by its general partner, Ridgeline Growth Equity Advisors LLC, based in Atlanta, Georgia. Ridgeline made its minority equity investment in CPI in 2018 in connection with CPI's expansion into the behavioral health market.
We have reviewed the Stockholders' Agreement dated November 15, 2018, by and among CPI, Dr. Whitfield, Whitfield-Torres, and Ridgeline (the "Stockholders' Agreement"), as well as a related side letter between CPI and Ridgeline of the same date. The Stockholders' Agreement contains the following provisions relevant to the Transaction:
• Drag-Along Rights: The holder of a majority of the outstanding shares (currently Dr. Whitfield, at 52%) has the right to require all other stockholders to participate in a sale of the company (or substantially all of its assets) on the same terms. This provision is sufficient to compel all stockholders to support the proposed asset sale.
• Tag-Along Rights: Minority stockholders (including Ridgeline) have the right to participate pro rata in any sale of shares by the majority holder. This provision is not directly implicated by the asset purchase structure but would be relevant in the event of any pre-closing equity transfer.
• Board Observer Rights: Ridgeline is entitled to appoint one non-voting board observer. We understand that Ridgeline has exercised this right.
• Right of First Refusal (ROFR): Ridgeline holds a right of first refusal with respect to any proposed transfer of equity interests by the other stockholders. Critically, this ROFR applies only to equity transfers and does not extend to asset sales. Accordingly, the ROFR is not triggered by the proposed Transaction, and no waiver is required.
We have confirmed that there are no outstanding options, warrants, convertible instruments, stock appreciation rights, or other equity-linked securities of CPI. There are no preemptive rights, subscription rights, or other anti-dilution protections that would impede or complicate the asset sale. Ridgeline has confirmed its support for the Transaction in a side letter dated January 25, 2024, addressed to Dr. Whitfield and CPI.
C. Board and Shareholder Approvals
The sale of substantially all of CPI's assets requires approval under Section 271 of the Delaware General Corporation Law ("DGCL"), which mandates (i) adoption of a resolution by the board of directors recommending the sale and (ii) approval by the holders of a majority of the outstanding shares of common stock entitled to vote thereon.
Dr. Whitfield's 52% ownership stake is sufficient to satisfy the stockholder approval requirement. Moreover, as noted above, Ridgeline (22%) has confirmed its support for the Transaction. Accordingly, we do not anticipate any impediment to obtaining the required stockholder approval.
Recommendation: The APA should require the Seller to deliver, at or prior to signing, (a) a certified copy of the resolutions of the Board of Directors of CPI authorizing the execution, delivery, and performance of the APA and the consummation of the transactions contemplated thereby, and (b) a written consent of stockholders (or evidence of stockholder approval by other lawful means) sufficient to satisfy the requirements of DGCL § 271. These should be conditions to the Purchaser's obligation to close.
D. Buyer's Organizational Structure
Ardent Healthcare Acquisition Corp. was incorporated in the State of Delaware on January 22, 2024 (Delaware File No. 7129384; Federal Employer Identification Number 93-2184720). Its registered agent is National Registered Services, Inc., located at 1209 Orange Street, Wilmington, Delaware 19801. The Purchaser is a newly formed special purpose entity with no prior operating history, formed solely for the purpose of consummating this Transaction.
The Purchaser is wholly owned by Ardent Capital Partners III LP, a Delaware limited partnership (Federal Employer Identification Number 87-6543210). The general partner of Ardent Capital Partners III LP is Ardent Capital Management LLC, a Delaware limited liability company. We have reviewed the Purchaser's Certificate of Incorporation and Bylaws, which are in customary form and contain no unusual provisions.
IV. MATERIAL CONTRACTS
A. Overview
CPI is party to approximately one hundred eighty (180) contracts that have been identified as potentially material to the business. Our review has focused on all contracts with an annual value exceeding $250,000 and all contracts containing change of control, anti-assignment, consent-to-assignment, or other provisions that could be triggered by or otherwise relevant to the proposed asset purchase. Each contract reviewed has been catalogued in the separately circulated Contract Review Summary spreadsheet (Appendix A), which includes a summary of key terms, expiration dates, renewal provisions, change of control and consent requirements, and our risk assessment.
The following sections summarize our findings with respect to the most significant categories of material contracts.
B. Managed-Care / Payor Agreements
CPI maintains managed-care agreements with twelve (12) major commercial payors, which collectively represent the substantial majority of CPI's commercial revenue. We have reviewed all twelve agreements and summarize the key findings below.
SummitCare Health Plans, Inc. The single most significant payor relationship is with SummitCare Health Plans, Inc. ("SummitCare"), which represents approximately 22% of CPI's net revenue. The SummitCare agreement has a three-year term, was last renewed in July 2022, and includes an auto-renewal provision for successive one-year terms unless either party provides written notice of non-renewal at least ninety (90) days prior to the expiration of the then-current term.
Critically, the SummitCare agreement contains a change of control provision requiring CPI to provide sixty (60) days' prior written notice to SummitCare and to obtain SummitCare's affirmative consent upon any "change in ownership or control" of CPI. The agreement defines "change in ownership or control" broadly to include, among other things, any transaction resulting in a change in the person or entity that controls the day-to-day operations of the CPI facilities. The proposed asset purchase clearly triggers this provision. If CPI fails to obtain SummitCare's consent, SummitCare has the right to terminate the agreement upon thirty (30) days' written notice.
Given the significance of the SummitCare relationship to CPI's revenue base, we view the failure to obtain SummitCare's consent as a material risk. Preliminary discussions with SummitCare (conducted by CPI's management) suggest that SummitCare is open to consenting to the Transaction, but formal consent has not yet been obtained. We understand that SummitCare's standard practice is to conduct its own diligence on the acquiring entity before granting consent, which may include a review of the Buyer's financial condition, operational plan, and proposed clinical leadership.
Government Payors. Medicare and Medicaid programs collectively represent approximately 31% of CPI's net revenue (approximately 19% Medicare, approximately 12% Medicaid). CPI is enrolled as a Medicare provider for each of its thirty-seven (37) facilities and participates in Medicaid programs in all seven states in which it operates. The asset purchase structure constitutes a "change of ownership" under applicable CMS regulations and state Medicaid rules, triggering re-enrollment and change-of-information filing requirements. These requirements are discussed in detail in Section IX (Healthcare Regulatory Compliance) below.
Other Commercial Payors. Seven (7) additional commercial payor agreements contain change of control notice or consent provisions of varying types. In most cases, these provisions require written notice within a specified period (typically thirty to sixty days) and some form of acknowledgment or consent from the payor. Two (2) of these agreements contain anti-assignment clauses that, while not expressly referencing change of control, are drafted broadly enough that they arguably extend to asset purchase transactions of the type contemplated here. We have assessed the risk associated with these provisions as moderate. The affected agreements represent, in the aggregate, approximately 18% of CPI's net revenue (in addition to the SummitCare and government payor revenues discussed above).
Recommendation: We recommend that the APA condition closing on the receipt of consents from payors representing at least 85% of CPI's net revenue. Specifically, the SummitCare consent should be a hard condition to closing — that is, if SummitCare consent is not obtained, the Buyer should not be obligated to close. Consents for other payor agreements should be obtained pre-closing to the extent practicable, with remaining consents addressed through post-closing covenants requiring the Seller's continued cooperation. The APA should include comprehensive representations regarding the status of all payor agreements, the absence of disputes, and compliance with all payor contract terms, with appropriate risk allocation through the indemnification framework.
C. Vendor and Service Agreements
We have reviewed CPI's material vendor and service agreements, including the following:
• Medical Supply Agreements: CPI maintains agreements with three primary medical supply vendors. These agreements are generally on standard commercial terms, with annual values ranging from approximately $300,000 to $1.2 million. None contains change of control provisions or anti-assignment clauses that would be triggered by the Transaction.
• EMR/Practice Management Software License (Vertex Health Systems, Inc.): CPI licenses its electronic medical records ("EMR") and practice management software platform from Vertex Health Systems, Inc. ("Vertex"). The Vertex license agreement has a remaining term of approximately four (4) years and an annual license fee of approximately $1.8 million. The agreement contains an anti-assignment clause that prohibits assignment of the license without Vertex's prior written consent. This consent is required in connection with the asset purchase. CPI has contacted Vertex, and preliminary indications are that Vertex is willing to consent to the assignment, subject to a standard credit review of the Purchaser. We are monitoring this matter and will coordinate the formal consent request with BKP.
• Billing and Collections Outsourcing Agreement: CPI outsources a portion of its billing and collections function to MedRevenue Solutions, LLC, under an agreement with an annual value of approximately $2.4 million. The agreement does not contain a change of control consent provision but does include a termination-for-convenience clause with ninety (90) days' notice. We do not view this agreement as presenting any material risk in connection with the Transaction.
• Janitorial and Facility Maintenance Contracts: CPI maintains facility maintenance contracts with local vendors at each of its thirty-seven (37) locations. These contracts are generally month-to-month or short-term arrangements that can be easily transitioned or replaced post-closing.
No material issues have been identified with respect to the remaining vendor and service agreements reviewed.
D. Change of Control and Consent Requirements — Summary
In total, of the approximately 180 material contracts reviewed, forty-one (41) contain change of control, anti-assignment, or consent-to-assignment provisions that are potentially triggered by the asset purchase. These break down as follows:
The real estate lease consent requirements are discussed in detail in Section V below.
Recommendation: The APA should be structured to address these consent requirements through a combination of (i) conditions to closing for the most critical consents (SummitCare payor agreement; landlord consents for at least 33 of 37 locations), (ii) pre-closing covenants requiring the Seller to use commercially reasonable efforts to obtain all required consents, (iii) post-closing cooperation obligations of the Seller for consents not obtained at closing, and (iv) comprehensive representations, warranties, and indemnification to allocate the risk of any failure to obtain consents. The Buyer should also consider whether any of the contracts with anti-assignment provisions should be excluded from the assigned contracts and handled through alternative arrangements (e.g., entering into new agreements with the counterparties directly).
V. REAL ESTATE AND LEASES
A. Overview
CPI does not own any real property. All thirty-seven (37) clinic locations operate under triple-net lease arrangements with third-party landlords. CPI's facilities are commercial medical office spaces, ranging in size from approximately 3,500 square feet to approximately 12,000 square feet. The average remaining lease term across all thirty-seven (37) locations is approximately 4.2 years.
The geographic distribution of CPI's leased facilities is as follows:
We have reviewed all thirty-seven (37) leases, including all amendments, addenda, and guaranties. Detailed findings for each lease are recorded in the Contract Review Summary spreadsheet (Appendix A) and the Lease Consent Tracker (Appendix B).
B. Landlord Consent Requirements
Twenty-nine (29) of the thirty-seven (37) leases contain provisions requiring the landlord's prior written consent to any assignment or transfer of the lease, including transfers resulting from a change of control of the tenant entity. Because the asset purchase structure contemplates that Ardent Healthcare Acquisition Corp. will assume the leases as part of the acquired assets, the Transaction constitutes an "assignment" within the meaning of these lease provisions, thereby triggering the consent requirements.
The remaining eight (8) leases either (a) do not contain consent-to-assignment provisions, or (b) contain provisions that expressly permit assignment to a purchaser of all or substantially all of the assets of the tenant without landlord consent. In several of the latter cases, the lease requires that notice be provided to the landlord within a specified period following the assignment, which we will ensure is provided on a timely basis.
The current status of landlord consent solicitations, as of March 25, 2024, is as follows:
The Lease Consent Tracker (Appendix B), maintained by Tiffany Rosenthal, provides location-by-location detail on each consent solicitation, including the date of the request, the landlord's contact information, the status of negotiations (if any), and the anticipated timeline for resolution. The Lease Consent Tracker is updated on a weekly basis.
Recommendation: We recommend that the APA include a condition to closing requiring that landlord consents for at least thirty-three (33) of thirty-seven (37) leased locations have been obtained at or prior to closing, or alternatively, that the locations for which consents have not been obtained represent less than 10% of the aggregate revenue attributable to leased premises. The APA should also include a covenant requiring the Seller to use commercially reasonable efforts to obtain all landlord consents prior to closing and to continue to cooperate with the Purchaser's efforts to obtain any outstanding consents following closing. For any locations where consents are not obtained prior to closing, the parties should consider appropriate interim arrangements (e.g., subleasing or management agreements) to permit continued operations pending resolution.
C. Lease Terms and Risks
Several lease-specific issues warrant attention:
Short Remaining Terms. Five (5) locations — three in Tennessee and two in Georgia — have remaining lease terms of less than two (2) years, creating renewal risk. These five locations collectively represent approximately 8% of CPI's annual revenue. In each case, the lease contains a renewal option (typically one or two additional five-year terms), but the exercise of such options is at the tenant's election and, in some cases, subject to fair market value rent adjustments. We recommend that the Buyer's operational team evaluate whether these locations should be renewed, relocated, or consolidated, and that the APA include representations regarding the status of any renewal negotiations.
Above-Market Rents. Ashford & Creighton LLP has identified in its financial diligence that two leases — one at CPI's flagship Nashville, Tennessee location and one at a high-volume Atlanta, Georgia facility — appear to carry rents that are above prevailing market rates for comparable medical office space in those markets. These above-market rents have a modest negative impact on the profitability of these locations, though both remain profitable on a facility-level basis. The Buyer may wish to explore renegotiation opportunities with the landlords post-closing, particularly if landlord consent is a prerequisite to the lease assignment and can be leveraged as part of the negotiation.
Title and Survey. Title review for all thirty-seven (37) leased locations has been handled by Cornerstone Land Title Company. Because CPI is a tenant rather than an owner, the scope of the title review has been limited to confirming the landlord's ownership of the underlying real property and the absence of liens, encumbrances, or other title defects that would materially impair CPI's leasehold interests. No material title, survey, or environmental issues have been identified. Environmental diligence is discussed separately in Section X below.
VI. INTELLECTUAL PROPERTY
A. PeakConnect Platform
CPI's most significant intangible asset is its proprietary patient-engagement software platform, known as "PeakConnect." PeakConnect was developed in-house by CPI's technology team beginning in 2016 and has been deployed across all thirty-seven (37) clinic locations. The platform provides functionality for patient scheduling, telehealth integration, clinical outcomes tracking, and patient communications (including automated appointment reminders, patient surveys, and secure messaging).
PeakConnect is a material asset of the business and is integral to CPI's operations and competitive positioning. The platform is being acquired as part of the Transaction and should be specifically identified as a material acquired asset in the APA schedules.
We have reviewed the development history of PeakConnect and confirmed the following:
• PeakConnect was developed primarily by CPI's in-house software development team, all members of which were full-time employees of CPI and subject to standard employment agreements containing invention assignment provisions.
• CPI engaged two (2) external contract developers to perform supplementary development work on PeakConnect in 2017 and 2019, respectively. We have reviewed the development agreements with both contractors and have confirmed that each agreement contains valid work-for-hire provisions (or, in the alternative, outright assignment provisions) transferring all intellectual property rights in the work product to CPI. Both engagements have been completed, and neither contractor has any ongoing relationship with CPI or any residual rights in the PeakConnect platform.
• No third-party intellectual property infringement claims or disputes have been asserted against CPI in connection with PeakConnect or any other proprietary technology.
CPI does not hold any patents related to PeakConnect or any other technology. CPI has not filed any patent applications. We understand that CPI's management made a deliberate decision not to pursue patent protection, relying instead on trade secret protection and the continuous evolution of the platform.
B. Trademarks
CPI holds the following registered trademarks:
• "PeakConnect" — U.S. Registration No. 5,412,887, registered with the United States Patent and Trademark Office ("USPTO"). The registration is current, in good standing, and all required maintenance filings have been timely made. The mark is registered in International Class 42 (software as a service) and International Class 44 (medical and healthcare services).
• "Cardinal Peak Industries" name and logo — registered trademarks with the USPTO. These marks are associated with CPI's corporate identity and branding across its facility network.
Under the terms of the Transaction as currently contemplated, the CPI corporate name and logo are excluded assets and will be retained by the Seller. However, a twelve (12)-month license-back to the Purchaser is contemplated for transitional use of the "Cardinal Peak Industries" name and logo during the post-closing transition period. This license-back arrangement will be documented in a Transition Services Agreement and/or IP Assignment Agreement to be executed at closing. The "PeakConnect" mark, by contrast, is a fully acquired asset.
We have also reviewed common-law trademarks and trade names associated with individual clinic locations (e.g., local d/b/a names used in certain markets). No material issues have been identified, although the Buyer should ensure that all such names are properly transferred and that any state-level trade name registrations are updated post-closing.
C. Third-Party Software Licenses
In addition to the Vertex Health Systems EMR license discussed in Section IV.C above, CPI licenses approximately fourteen (14) additional third-party software products used in its operations, including billing software, human resources information systems, data analytics tools, and general office productivity software. We have reviewed all fourteen licenses. Three (3) of these licenses contain anti-assignment provisions that would require the licensor's consent for assignment in connection with the Transaction. However, none of these three products is critical to CPI's operations, and each could be replaced with readily available off-the-shelf alternatives if consent is not obtained. The remaining eleven (11) licenses either do not contain anti-assignment provisions or expressly permit assignment in connection with a sale of all or substantially all assets.
D. Recommendations
• The IP Assignment Agreement executed at closing should include comprehensive representations from the Seller regarding (i) sole and exclusive ownership of all acquired intellectual property, (ii) the absence of liens, encumbrances, or security interests on acquired IP, (iii) the absence of pending or threatened infringement claims, and (iv) the validity and enforceability of all registered intellectual property.
• The Seller should represent that all intellectual property constituting part of the acquired assets was developed by employees under valid invention assignment agreements or by contractors under valid work-for-hire or assignment agreements, and that no third party has any ownership claim or license right in such intellectual property (other than end-user rights granted to patients and payors in the ordinary course of business).
• PeakConnect should be specifically identified as a material acquired asset in the APA schedules and should be valued as a discrete intangible asset as part of the Section 1060 purchase price allocation.
• The 12-month license-back of the "Cardinal Peak Industries" name and logo should include appropriate restrictions on the Seller's use of the name during the license period to avoid market confusion.
VII. EMPLOYMENT AND BENEFITS
A. Workforce Overview
As of the most recent employee census provided by CPI (dated March 1, 2024), CPI employs approximately 2,100 individuals across its seven-state operating footprint. The workforce is composed of approximately 1,450 licensed clinicians — including physical therapists (PTs), occupational therapists (OTs), speech-language pathologists (SLPs), and licensed behavioral health counselors — and approximately 650 administrative and support staff, including clinic managers, medical receptionists, billing specialists, human resources personnel, and corporate staff.
The geographic distribution of CPI's workforce is as follows:
CPI's workforce is entirely non-union. There are no collective bargaining agreements, and CPI is not subject to any organizing efforts or pending representation petitions. We have confirmed this through both document review and management interviews.
B. Key Employee Arrangements
Whitfield and Whitfield-Torres Employment Agreements. Dr. Randall J. Whitfield (Chairman and CEO) and Elaine Whitfield-Torres (Co-Founder and Chief Clinical Officer) each have existing employment agreements with CPI. We have reviewed both agreements in full. Each agreement contains a change of control provision that, upon a "change of control" of CPI (defined broadly to include an asset sale of substantially all of CPI's assets), triggers the following rights:
(i) Accelerated vesting of any unvested deferred compensation (Dr. Whitfield has approximately $1.1 million in unvested deferred compensation; Whitfield-Torres has approximately $475,000); and
(ii) An optional termination right, exercisable by the executive within ninety (90) days following the change of control, entitling the executive to six (6) months of base salary continuation as severance (Dr. Whitfield: approximately $375,000; Whitfield-Torres: approximately $250,000).
In connection with the Transaction, new post-closing employment agreements are being negotiated directly with Dr. Whitfield and Whitfield-Torres, each for a three-year term commencing at the closing date. These new agreements will supersede the existing CPI employment agreements and will be tailored to the parties' expectations for the post-closing operations. In addition, separate non-competition and non-solicitation agreements (with three-year restrictive covenants covering the seven operating states) will be executed at closing by both executives. These non-compete agreements are a condition to the Buyer's obligation to close.
Other Senior Management. Eight (8) additional members of CPI's senior management team — including the Chief Financial Officer, the Chief Operating Officer, regional vice presidents, and certain clinic directors — have employment agreements with CPI that contain change of control provisions. Seller's counsel has provided summaries of each agreement. Under these agreements, if any of these executives is terminated without cause (or constructively terminated) within twelve (12) months following a change of control, the executive is entitled to severance payments. The aggregate severance exposure for all eight executives, assuming all are terminated, is approximately $3.2 million. We recommend that the Buyer carefully evaluate which of these executives it intends to retain post-closing and plan the transition accordingly. For executives who will be retained, new employment agreements should be negotiated to supersede the existing change of control provisions. For executives who will not be retained, the timing of any terminations should be coordinated to minimize severance exposure and operational disruption.
C. Employee Benefit Plans
401(k) Plan. CPI maintains a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code, with approximately 1,600 active participants. The plan provides for voluntary employee deferrals and a discretionary employer match (currently 3% of compensation). We have reviewed the plan document, the most recent Form 5500 filing, and the most recent nondiscrimination testing results. No material compliance issues have been identified.
Under the terms of the APA as currently drafted, the CPI 401(k) plan is an excluded liability — the Seller will retain all obligations under the plan, and the plan will not be assumed by the Purchaser. The Buyer intends to establish a new 401(k) plan for transferred employees following the closing, with rollover rights for existing account balances.
Group Health and Welfare Benefits. CPI offers group health insurance, dental insurance, vision insurance, group life insurance, and short-term and long-term disability insurance to eligible employees through Brindoval Benefits Corp. (group policy). We have reviewed the summary plan descriptions and the relevant insurance policies. No material compliance issues have been identified under COBRA, ERISA, or the Affordable Care Act.
The Buyer will need to arrange successor group health and welfare coverage for transferred employees effective as of the closing date, or negotiate the assignment of CPI's existing group policies with Brindoval Benefits Corp. We recommend that the Buyer's benefits team begin planning for this transition promptly, as lead times for obtaining new group coverage can be significant (typically thirty to sixty days for underwriting and implementation).
Accrued Paid Time Off. Under the APA as currently drafted, accrued but unused paid time off ("PTO") for transferred employees is an assumed liability of the Purchaser. Based on the most recent data provided by CPI, aggregate accrued PTO for all employees is approximately $4.6 million. This amount is subject to adjustment as part of the net working capital true-up at closing.
COBRA, ERISA, and ACA Compliance. We have reviewed CPI's compliance with COBRA continuation coverage requirements, ERISA reporting and disclosure obligations, and ACA employer shared-responsibility provisions. No material issues have been identified. CPI timely files all required Form 5500 annual reports and has timely provided all required ACA information returns (Forms 1094-C and 1095-C).
D. Independent Contractor Classification
CPI classifies approximately eighty-five (85) individuals as independent contractors. These individuals are primarily per diem therapists engaged to provide clinical services on an as-needed basis, along with a smaller number of consultants providing specialized services (e.g., IT consulting, marketing consulting). We have reviewed a sample of the independent contractor agreements and the associated working arrangements.
Our preliminary review raises moderate risk of potential misclassification of certain per diem therapists as independent contractors rather than employees. The relevant factors — including the degree of control exercised by CPI over the manner and means of the therapists' work, the integration of the therapists into CPI's clinical operations, and the economic dependence of certain therapists on CPI — suggest that a challenge by the IRS or state labor agencies (particularly in Tennessee and Georgia, where the majority of the contractors are based) could result in reclassification and associated liability for unpaid employment taxes, overtime, and benefits. We note that this issue overlaps with the risk profile of the Dawson FLSA litigation discussed in Section VIII, insofar as both matters involve the classification and compensation of CPI's clinical workforce.
Recommendation: The APA should include a specific representation from the Seller regarding the proper classification of all independent contractors and a specific indemnification obligation for any pre-closing liabilities arising from misclassification (including back taxes, penalties, and interest). This indemnification should be outside the general basket and, ideally, outside the general indemnification cap.
E. Recommendations
• The APA should include comprehensive employment representations from the Seller covering the following: complete employee census (including compensation, title, location, and employment status); all compensation and benefit plans; compliance with all applicable employment and labor laws (including FLSA, WARN Act, Title VII, ADA, FMLA, and state equivalents); proper classification of independent contractors; disclosure of all change of control severance obligations; and disclosure of any pending or threatened employment-related claims or investigations.
• All pre-closing employment liabilities (other than assumed accrued PTO) should be excluded liabilities retained by the Seller, with specific Seller indemnification. This includes, without limitation, all liabilities arising from (i) the Dawson litigation, (ii) independent contractor misclassification, (iii) change of control severance obligations that are triggered by the Transaction, (iv) any violations of the WARN Act or comparable state laws, and (v) any pre-closing claims for unpaid wages, overtime, benefits, or discrimination.
• The Buyer should ensure that the WARN Act is addressed in the APA. Because the Transaction is an asset purchase and the Buyer intends to offer employment to substantially all of CPI's employees, a mass layoff or plant closing within the meaning of the WARN Act is not anticipated. However, if any reduction in force is contemplated at or promptly after closing, the parties should coordinate compliance with WARN Act notice requirements and allocate the associated liabilities in the APA.
VIII. LITIGATION AND REGULATORY PROCEEDINGS
A. Dawson v. Cardinal Peak Industries, Inc.
The most significant pending litigation matter involving CPI is Dawson v. Cardinal Peak Industries, Inc., Case No. 3:23-cv-01847, currently pending in the United States District Court for the Middle District of Tennessee. This action was filed in 2023 as a putative class action alleging violations of the Fair Labor Standards Act ("FLSA"). The named plaintiff, Andrea Dawson, is a former hourly clinic support staff employee who alleges that CPI systematically failed to compensate hourly clinic support staff for overtime hours worked and for "off-the-clock" work, including pre-shift and post-shift tasks such as opening/closing clinics, restocking supplies, and completing electronic charting.
The case is currently in the pre-certification phase. The plaintiff has filed a motion for class certification, which was fully briefed as of February 2024 and remains pending as of the date of this memorandum. If class certification is granted, the putative class would include all current and former hourly clinic support staff employed by CPI during the applicable limitations period (the FLSA provides a two-year statute of limitations, extended to three years for willful violations).
Seller's counsel (BKP) has provided its assessment of the potential exposure in this matter, which ranges from $2.8 million to $5.1 million, inclusive of statutory liquidated damages (which are mandatory under the FLSA for proven violations, doubling the amount of unpaid wages) and reasonable attorneys' fees and costs. We have independently assessed the exposure and believe BKP's range is reasonable, although the outcome is inherently uncertain and will depend significantly on whether class certification is granted and the scope of any certified class.
A detailed analysis of the Dawson litigation, including our assessment of the merits, the likely timeline, and the potential impact on the Transaction, is provided in the separately circulated Litigation and Regulatory Review Memorandum (Derek Okonkwo, March 12, 2024), attached as Appendix C.
Recommendation: The Dawson litigation should be treated as an excluded liability in the APA, with the Seller retaining full responsibility for all costs, liabilities, and obligations arising from this matter. The Seller should provide specific indemnification for the Dawson litigation that is uncapped (or, at a minimum, subject to a separate cap that is substantially higher than the general indemnification basket and outside the general indemnification basket). The APA should include a specific representation from the Seller disclosing the Dawson litigation and all other pre-closing employment litigation in detail. The Seller should covenant to keep the Buyer reasonably informed of material developments in the Dawson case and to consult with the Buyer before agreeing to any settlement that would impose obligations on the Purchaser or the acquired business.
B. Other Litigation and Threatened Claims
In addition to the Dawson matter, we have identified five (5) additional matters involving CPI, all of which we assess as minor:
1. Two (2) slip-and-fall personal injury claims at clinic locations (one in Knoxville, Tennessee, and one in Charlotte, North Carolina). Both claims are covered by CPI's general liability insurance policy (Brindoval Casualty & Indemnity Co.), and the aggregate exposure is estimated at less than $300,000. CPI's insurer is handling the defense of both claims.
2. One (1) vendor payment dispute with a medical equipment supplier, involving an alleged underpayment of approximately $85,000. The matter is in early-stage negotiation and is expected to be resolved without litigation.
3. Two (2) demand letters from former employees alleging wrongful termination (one in Georgia and one in Alabama). No lawsuits have been filed in either matter. CPI's in-house counsel has responded to both demand letters and believes that neither claim has merit. The estimated combined exposure is less than $200,000.
Importantly, we have confirmed — through both document review and direct representation by CPI's management and Seller's counsel — that there are no government enforcement actions currently pending against CPI. We have also confirmed that there are no pending or, to CPI's knowledge, threatened qui tam actions or False Claims Act matters involving CPI. CPI has not received any Civil Investigative Demands ("CIDs") or subpoenas from any federal or state governmental authority in connection with any fraud or abuse investigation.
C. Recommendations
• All pending litigation and known threatened claims should be fully disclosed on the litigation schedule to the APA. The schedule should include a description of each matter, the current status, the estimated exposure, and the applicable insurance coverage.
• The Dawson matter should be treated as an excluded liability with specific Seller indemnification, as described above.
• The remaining matters are individually immaterial and should be disclosed on the litigation schedule for informational purposes. They will be covered by the general representations and warranties indemnification framework (18-month survival period, $3,100,000 basket, $124,000,000 cap).
• The APA should include a broad representation from the Seller regarding the absence of any undisclosed litigation, threatened claims, or governmental investigations, with appropriate qualifiers for materiality and knowledge.
IX. HEALTHCARE REGULATORY COMPLIANCE
A. Licensing and Permits
CPI maintains state healthcare facility licenses and professional licenses in all seven (7) states in which it operates (Tennessee, Georgia, North Carolina, South Carolina, Alabama, Virginia, and Kentucky). The specific licensing requirements vary by state and by the type of services provided at each facility (outpatient rehabilitation services, behavioral health services, or both). We have reviewed the licenses for all thirty-seven (37) facilities and confirmed that all are current and in good standing.
The proposed asset purchase triggers change-of-ownership filings with certain state licensing authorities. Specifically:
• Tennessee, Georgia, and North Carolina require prior approval of a change of ownership before the new operator may begin providing services. CPI filed change-of-ownership applications with the licensing authorities in these three states on March 4, 2024. Processing times vary; Tennessee typically processes such applications in forty-five to sixty (45–60) days, while Georgia and North Carolina may require up to ninety (90) days.
• South Carolina, Alabama, Virginia, and Kentucky require post-closing notifications or new-owner applications within specified timeframes following the closing (ranging from thirty to ninety days post-closing, depending on the state). In these states, the Purchaser may generally begin operations under the existing licenses pending completion of the new-owner application process, subject to timely filing.
A detailed state-by-state analysis of licensing requirements and change-of-ownership procedures is being prepared as part of the forthcoming joint Healthcare Regulatory Compliance Memorandum (Calderwood & Harkness / Hargrove, Sinclair & Demarest LLP).
B. Medicare and Medicaid Enrollment
CPI is enrolled as a Medicare provider for each of its thirty-seven (37) facilities, holding individual CMS Certification Numbers for each location. CPI also participates in Medicaid programs in all seven states.
The asset purchase constitutes a "change of ownership" under CMS regulations (42 C.F.R. § 489.18) and analogous state Medicaid rules. This triggers the following requirements:
• CMS Form 855A change-of-information filings must be submitted for each facility to update the provider enrollment records to reflect the new ownership. The filings must be submitted within the timeframes prescribed by CMS (generally within specified periods before or after the change-of-ownership effective date).
• State Medicaid re-enrollment or change-of-ownership filings are required in all seven states. Each state has its own forms, procedures, and processing timelines.
Angela Demarest (Hargrove, Sinclair & Demarest LLP) is coordinating all Medicare and Medicaid enrollment change-of-ownership filings. Based on her preliminary assessment, there are no anticipated impediments to the enrollment transfers, but processing timelines at CMS and the state Medicaid agencies may extend sixty to one hundred twenty (60–120) days following the closing date. During this interim period, it will be necessary to maintain billing continuity to avoid disruptions to CPI's revenue cycle.
Recommendation: The Transition Services Agreement should include provisions addressing interim billing arrangements during the period between closing and the completion of the Medicare/Medicaid enrollment transfers. Depending on the applicable state rules, the Seller may need to continue submitting claims on behalf of the Purchaser during the interim period, or the parties may need to establish other compliant billing mechanisms. This is a common issue in healthcare asset acquisitions, and Hargrove, Sinclair & Demarest is well-versed in structuring appropriate interim arrangements.
C. Anti-Kickback Statute and Stark Law Analysis
We have reviewed CPI's referral patterns, physician compensation arrangements, and management agreements for compliance with the federal Anti-Kickback Statute (42 U.S.C. § 1320a-7b) and the Physician Self-Referral Law (commonly known as the "Stark Law") (42 U.S.C. § 1395nn).
CPI's outpatient rehabilitation and behavioral health services are frequently provided on the basis of referrals from physicians and other healthcare providers. To the extent that CPI has financial arrangements with referring physicians (e.g., medical director agreements, consulting agreements, space rental arrangements), such arrangements implicate the Anti-Kickback Statute and the Stark Law.
Our preliminary assessment, based on a review of the relevant agreements and CPI's compliance policies and procedures, is that CPI's physician arrangements generally appear to fall within recognized safe harbors under the Anti-Kickback Statute (particularly the personal services and management contracts safe harbor, 42 C.F.R. § 1001.952(d)) and recognized exceptions under the Stark Law (particularly the personal services arrangements exception, 42 C.F.R. § 411.357(d), and the fair market value compensation exception, 42 C.F.R. § 411.357(l)).