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CALDERWOOD & HARKNESS LLP One World Financial Center 200 Liberty Street, 40th Floor New York, NY 10281 Tel: (212) 556-4000	Fax: (212) 556-4001
Joint Memorandum with HARGROVE, SINCLAIR & DEMAREST LLP 1717 K Street NW, Suite 900 Washington, DC 20006 Tel: (202) 331-7500	Fax: (202) 331-7501

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT

March 20, 2024

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I. Executive Summary

This joint memorandum has been prepared by Hargrove, Sinclair & Demarest LLP, healthcare regulatory counsel, in coordination with Calderwood & Harkness LLP, M&A transaction counsel, to analyze the material healthcare regulatory compliance issues arising in connection with the proposed acquisition by Ardent Healthcare Acquisition Corp. (the "Purchaser"), a wholly owned subsidiary of Ardent Capital Partners III LP ("Ardent Capital" or the "Fund"), 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 "Transaction"). The Transaction is structured as an asset purchase and is expected to be documented in a definitive Asset Purchase Agreement (the "APA") with a target signing date of April 2, 2024, and a target closing date of June 20, 2024.

CPI operates a network of thirty-seven (37) outpatient rehabilitation and behavioral health clinics across seven states: Tennessee (14 locations), Georgia (8 locations), North Carolina (5 locations), South Carolina (4 locations), Alabama (3 locations), Virginia (2 locations), and Kentucky (1 location). CPI's clinical service lines include physical therapy, occupational therapy, speech-language pathology, and outpatient behavioral health counseling. The company employs approximately 2,100 individuals, including approximately 1,450 licensed clinicians and approximately 650 administrative and support staff. CPI reported last-twelve-months ("LTM") revenue for fiscal year 2023 of approximately $412,000,000 and LTM Adjusted EBITDA of approximately $74,160,000. Approximately 31% of CPI's net revenue is derived from Medicare and Medicaid combined, and its largest single commercial payor is SummitCare Health Plans, Inc., accounting for approximately 22% of net revenue.

This memorandum addresses the following key healthcare regulatory areas implicated by the Transaction:

(1) State Change-of-Ownership Filing Requirements. As an asset purchase, the Transaction triggers change-of-ownership ("CHOW") filing requirements in each of the seven states where CPI operates. CHOW applications for Tennessee, Georgia, and North Carolina were submitted on March 4, 2024. Filings for the remaining four states — South Carolina, Alabama, Virginia, and Kentucky — have not yet been made and must be completed on the timelines detailed in Section III below, with Virginia requiring the most urgent attention due to its 60-day recommended advance notice period.

(2) Federal Anti-Kickback Statute and Stark Law Analysis. The Transaction structure, including the base purchase price, the contingent earnout consideration of up to $45,000,000, and the post-closing employment arrangements for Dr. Randall J. Whitfield and Elaine Whitfield-Torres, has been analyzed under both the federal Anti-Kickback Statute (42 U.S.C. § 1320a-7b(b)) and the Physician Self-Referral Law (commonly known as the "Stark Law") (42 U.S.C. § 1395nn). The Transaction does not present material risk under either statute, subject to the proper structuring of post-closing employment agreements and clear documentation of the earnout as contingent purchase price consideration.

(3) Medicare and Medicaid Enrollment and Revalidation Implications. The asset purchase triggers Medicare CHOW requirements with applicable Medicare Administrative Contractors and Medicaid enrollment changes with each of the seven state Medicaid agencies. These filings must be made promptly following closing to ensure uninterrupted billing capability.

(4) HIPAA Business Associate Agreement Requirements. The contemplated Transition Services Agreement (the "TSA"), under which CPI will provide transitional back-office, IT, and administrative services for up to nine months post-closing, will involve CPI's access to and processing of protected health information ("PHI") on behalf of the Purchaser, thereby requiring a Business Associate Agreement ("BAA") to be executed concurrently with the TSA.

(5) State Professional Licensing and Supervision Requirements. The transition of approximately 1,450 licensed clinicians to the Purchaser's employ has been analyzed under the corporate practice of medicine and therapy doctrines applicable in each of the seven states. No material structural impediments have been identified.

Summary Conclusion. Based on our analysis, the Transaction is structurally sound from a healthcare regulatory perspective, and we do not identify any healthcare regulatory impediment that would preclude the consummation of the Transaction on the anticipated timeline. This conclusion is subject to the timely completion of all state CHOW filings, the proper structuring of post-closing employment agreements and the earnout arrangement, the prompt submission of Medicare and Medicaid enrollment changes post-closing, and the execution of a HIPAA-compliant BAA in connection with the TSA. The specific recommendations and action items set forth in Section X of this memorandum should be implemented to ensure full compliance.

II. Background and Transaction Overview

A. The Parties

The Purchaser. Ardent Healthcare Acquisition Corp. is a Delaware corporation formed on January 22, 2024, for the purpose of consummating the Transaction. The Purchaser is a wholly owned subsidiary of Ardent Capital Partners III LP ("Fund III"), a Delaware limited partnership. The general partner of Fund III is Ardent Capital Management LLC, a Delaware limited liability company (the "General Partner"). Ardent Capital Management LLC maintains its principal office at 590 Madison Avenue, 34th Floor, New York, New York 10022. Fund III is a vintage 2022 private equity fund with aggregate capital commitments of approximately $3.2 billion, focused on lower-middle-market and middle-market investments in healthcare services, specialty pharmaceuticals, and life-sciences services sectors. The Purchaser's registered agent for purposes of Delaware service of process is National Registered Services, Inc., located at 1209 Orange Street, Wilmington, Delaware 19801.

The Seller. Cardinal Peak Industries, Inc. is a Delaware corporation qualified to do business in Tennessee, Georgia, North Carolina, South Carolina, Alabama, Virginia, and Kentucky. CPI maintains its principal headquarters at 8400 Crescent Ridge Parkway, Suite 200, Nashville, Tennessee 37215. CPI was founded in 2011 by Dr. Randall J. Whitfield, M.D., who currently serves as Chief Executive Officer and is the majority shareholder of the company. Since its founding, CPI has grown through a combination of organic expansion and tuck-in acquisitions to become one of the leading independent outpatient rehabilitation and behavioral health platforms in the southeastern United States.

Key Seller Shareholders. The equity ownership of CPI is held as follows:

Ridgeline Growth Equity Fund II LP is a financial sponsor that made a growth equity investment in CPI in 2017. Ridgeline's investment was structured as a preferred equity investment with participation rights, and Ridgeline holds a board seat on CPI's five-member board of directors. The other management shareholders consist of five individuals who are current or former CPI executives who received equity grants in connection with their employment. All shareholders are expected to receive their pro rata share of the base purchase price and any earnout consideration in accordance with CPI's certificate of incorporation and any applicable shareholder agreements.

B. Transaction Structure

The Transaction is structured as an asset purchase pursuant to which the Purchaser will acquire substantially all of the assets of CPI and assume specified liabilities, as set forth in the definitive APA. The choice of an asset purchase structure, rather than a stock or equity purchase, was driven by a number of tax, liability, and operational considerations, which are addressed in Calderwood & Harkness's separate Tax and Structuring Memorandum. However, the asset purchase structure carries significant implications for healthcare regulatory analysis, as discussed throughout this memorandum.

The distinction between an asset purchase and a stock or equity purchase is particularly important in the healthcare regulatory context because many states treat these two forms of acquisition differently for purposes of change-of-ownership analysis. In a stock purchase, the operating entity — here, CPI — would remain the same legal entity, and while a change in the ultimate equity ownership might or might not trigger CHOW requirements depending on the state, the entity's licenses, permits, and provider enrollments would generally remain undisturbed. By contrast, in an asset purchase, a new legal entity (the Purchaser) becomes the operator of the healthcare facilities, and this is uniformly treated by state licensing agencies as a change of ownership requiring new licensure or license transfer applications. Similarly, the Centers for Medicare & Medicaid Services ("CMS") treats an asset purchase as a Medicare CHOW, requiring the new owner to file appropriate enrollment change forms with the applicable Medicare Administrative Contractors ("MACs").

Following closing of the Transaction, the Purchaser will serve as the operating entity for all 37 of CPI's clinic locations. Dr. Whitfield will continue to serve as Chief Executive Officer and Elaine Whitfield-Torres will continue to serve as Chief Clinical Officer under post-closing employment agreements with the Purchaser, each for initial terms of three years. These employment arrangements are discussed in further detail in connection with the Anti-Kickback Statute and Stark Law analyses set forth in Sections IV and V below.

In addition to the base purchase price of $620,000,000, the Transaction contemplates contingent earnout consideration of up to $45,000,000 in the aggregate, payable based on Adjusted EBITDA performance targets over two 12-month measurement periods ending June 30, 2025 and June 30, 2026, respectively. The earnout structure is addressed in Section IV.B in connection with the AKS analysis.

Following closing, CPI (as a continuing entity, but no longer operating the clinic businesses) will provide transitional back-office, information technology, and administrative support services to the Purchaser under a Transition Services Agreement for a period of up to nine months post-closing. The TSA implicates HIPAA business associate requirements, as discussed in Section VII below.

C. CPI's Healthcare Operations

CPI operates thirty-seven (37) outpatient rehabilitation and behavioral health facilities across seven states in the southeastern United States. The geographic distribution of CPI's clinic locations is as follows:

All thirty-seven clinic locations operate under triple-net lease arrangements. CPI does not own any real property. The leases for each location will be assigned to the Purchaser at closing, subject to landlord consent requirements that are being addressed by Calderwood & Harkness in connection with the broader APA negotiation and closing process.

CPI's revenue is derived from a diversified mix of commercial managed-care payors, Medicare, and Medicaid. The approximate revenue composition is as follows:

• SummitCare Health Plans, Inc.: Approximately 22% of net revenue (largest single commercial payor)

• Medicare (Parts A and B combined): Approximately 19% of net revenue

• Medicaid (all states combined): Approximately 12% of net revenue

• Other commercial managed-care payors (11 additional payors): Approximately 47% of net revenue (aggregate)

CPI maintains active managed-care agreements with twelve (12) major payors, including SummitCare Health Plans, Inc. The assignment and notification requirements under these payor contracts are being addressed in Calderwood & Harkness's separate Contract Review Summary. Key financial metrics for CPI are as follows:

• LTM Revenue (FY2023): $412,000,000

• LTM Adjusted EBITDA (FY2023): $74,160,000

• Adjusted EBITDA Margin: Approximately 18.0%

• Implied Transaction Multiple (base purchase price / LTM Adjusted EBITDA): Approximately 8.36x

CPI employs approximately 2,100 individuals, of whom approximately 1,450 are licensed clinicians (including physical therapists, physical therapy assistants, occupational therapists, certified occupational therapy assistants, speech-language pathologists, licensed professional counselors, licensed clinical social workers, and licensed psychologists) and approximately 650 are administrative, operational, and support staff. All employees are expected to transition to the Purchaser's employ at or promptly following closing, subject to at-will employment principles and the terms of the APA.

III. State Change-of-Ownership Filing Requirements

A. Overview of State CHOW Frameworks

In the healthcare regulatory context, a "change of ownership" (commonly referred to as a "CHOW") occurs when there is a transfer of operational control of a licensed healthcare facility or provider from one legal entity to another. State healthcare facility licensing agencies, as well as CMS for purposes of Medicare enrollment, require notification of and, in many instances, prior approval or contemporaneous filing for any such change of ownership.

As discussed in Section II.B above, the choice of an asset purchase structure for the Transaction has direct implications for CHOW analysis. Asset purchases uniformly trigger CHOW requirements in states that regulate outpatient rehabilitation and behavioral health facilities, because the result of an asset purchase is that a new legal entity — here, the Purchaser — becomes the operator and licensee of the healthcare facilities. This stands in contrast to a stock purchase, where the existing operating entity remains unchanged and the transfer occurs at the equity ownership level. While some states impose CHOW requirements even in connection with stock purchases (particularly where a controlling interest changes hands), the analysis is more straightforward in the asset purchase context: all seven states in which CPI operates will require CHOW filings.

Each of the seven states where CPI operates maintains its own distinct statutory and regulatory framework governing the licensure of outpatient rehabilitation facilities and behavioral health clinics, and each state imposes its own procedures, timelines, and requirements for processing CHOW applications. The analysis below addresses each state individually. Importantly, as summarized in Section III.I below, none of the seven states requires that pre-closing approval of the CHOW application be obtained as a condition to the Purchaser's ability to operate the facilities upon closing. In each case, the applicable state permits continued operation under the existing license during the pendency of the CHOW application, provided the application has been timely filed.

B. Tennessee (14 Locations)

Tennessee's outpatient rehabilitation clinics are licensed by the Tennessee Department of Health ("TDOH"), Division of Health Care Facilities, pursuant to the Tennessee Health Care Facilities Licensure Act, Tenn. Code Ann. § 68-11-201 et seq. CPI's behavioral health clinic locations in Tennessee are separately licensed by the Tennessee Department of Mental Health and Substance Abuse Services ("TDMHSAS") pursuant to Tenn. Code Ann. § 33-2-401 et seq. and the implementing regulations thereunder.

Under Tennessee law, an asset purchase in which the operating entity of a licensed healthcare facility changes constitutes a change of ownership that requires the new operator to submit a new license application for each facility. Tennessee, however, permits the Purchaser to continue operating under the existing license during the pendency of the application, provided the application is filed prior to or contemporaneously with the closing of the transaction. This is a significant benefit, as it avoids any gap in licensure that could disrupt clinic operations.

Filing Status: CHOW applications for transfer of license were filed on March 4, 2024, for all fourteen (14) Tennessee clinic locations — including filings with both TDOH (for outpatient rehabilitation licensure) and TDMHSAS (for behavioral health licensure, where applicable). The applications were submitted by Hargrove, Sinclair & Demarest on behalf of CPI and the Purchaser.

Estimated Processing Time: Based on our experience with TDOH and TDMHSAS, processing times for CHOW applications for facilities of this type typically range from 60 to 90 days from the date of a complete filing. Given that the filings were made on March 4, 2024, we would anticipate initial agency review and any deficiency notices to be issued by approximately mid-April 2024, with final approvals expected between early May and early June 2024.

Pre-Closing Approval Requirement: Tennessee does not require that pre-closing approval be obtained prior to the Purchaser's commencement of operations. The Purchaser may operate under the existing license during the pendency of the CHOW application, provided the application has been filed.

Recommendation: We recommend monitoring the processing status of all fourteen Tennessee filings on a biweekly basis and initiating a follow-up inquiry with TDOH and TDMHSAS no later than thirty (30) days prior to the targeted closing date of June 20, 2024, to confirm that processing is on track and to address any deficiency notices that may have been issued.

C. Georgia (8 Locations)

Georgia's outpatient rehabilitation facilities are regulated by the Georgia Department of Community Health ("DCH"), Healthcare Facility Regulation Division, pursuant to O.C.G.A. § 31-7-1 et seq. CPI's behavioral health clinic locations in Georgia are separately regulated by the Georgia Department of Behavioral Health and Developmental Disabilities ("DBHDD") pursuant to O.C.G.A. § 37-7-1 et seq. and the applicable DBHDD regulations.

Under Georgia law, an asset sale constitutes a change of ownership that requires the new operator to submit new permit and license applications with DCH and, for behavioral health facilities, with DBHDD. Georgia requires that advance notice of a change of ownership be provided to the applicable regulatory agency at least thirty (30) days prior to the closing of the transaction. Georgia permits continued operations pending CHOW approval, provided the applications have been timely filed.

Filing Status: CHOW notices and new license applications were filed on March 4, 2024, for all eight (8) Georgia clinic locations. Filings were made with DCH for all locations and, as applicable, with DBHDD for those locations providing behavioral health services. The filings were submitted by Hargrove, Sinclair & Demarest on behalf of CPI and the Purchaser.

Estimated Processing Time: Based on our experience with DCH and DBHDD, processing times for outpatient rehabilitation and behavioral health CHOW applications typically range from 45 to 75 days. We anticipate initial review to be completed by approximately mid-April 2024, with final approvals expected between late April and mid-May 2024. However, we note that DBHDD processing times can occasionally lag behind DCH processing times, particularly where behavioral health-specific site inspections or documentation requirements are involved.

Pre-Closing Approval Requirement: Georgia does not require pre-closing approval as a condition to the Purchaser's ability to operate the facilities.

Recommendation: We recommend tracking the parallel filing processes with DCH and DBHDD for each applicable Georgia location. In particular, we recommend ensuring that behavioral health-specific approvals do not lag significantly behind the DCH outpatient rehabilitation approvals, as any delay in behavioral health licensure could impact the Purchaser's ability to bill for behavioral health services at affected locations during the interim period.

D. North Carolina (5 Locations)

North Carolina's outpatient rehabilitation clinics are licensed by the North Carolina Department of Health and Human Services ("NCDHHS"), Division of Health Service Regulation, pursuant to N.C. Gen. Stat. § 131E-136 et seq. Licensed mental health facilities in North Carolina are regulated under N.C. Gen. Stat. § 122C and the implementing regulations of the NCDHHS Division of Health Service Regulation.

Under North Carolina law, an asset transfer that results in a new legal entity operating a licensed healthcare facility constitutes a change of ownership requiring the submission of a new licensure application. North Carolina requires that notification of the change of ownership be provided to the Division of Health Service Regulation no later than thirty (30) days prior to the closing of the transaction. Operational continuity is permitted during the pendency of the CHOW application, provided the application has been timely filed and no denial or objection has been issued.

Filing Status: CHOW applications were filed on March 4, 2024, for all five (5) North Carolina clinic locations. The filings were submitted by Hargrove, Sinclair & Demarest on behalf of CPI and the Purchaser.

Estimated Processing Time: Processing times for CHOW applications with NCDHHS typically range from 60 to 90 days. We anticipate that the North Carolina filings will follow a similar timeline to the Tennessee filings, with initial review and any deficiency notices expected by approximately mid-April 2024 and final approvals expected between early May and early June 2024.

Pre-Closing Approval Requirement: North Carolina does not require pre-closing approval as a condition to the Purchaser's continued operation of the facilities, provided the CHOW applications have been timely submitted.

Recommendation: We recommend confirming receipt of all five North Carolina filings with NCDHHS and monitoring for any deficiency notices. Any deficiency notices should be promptly addressed to avoid processing delays that could extend beyond the targeted closing date.

E. South Carolina (4 Locations)

South Carolina's outpatient healthcare facilities are licensed by the South Carolina Department of Health and Environmental Control ("DHEC"), Bureau of Health Facilities Licensing, pursuant to S.C. Code Ann. § 44-7-260 et seq. CPI's behavioral health facilities in South Carolina are subject to licensing requirements administered by the South Carolina Department of Mental Health pursuant to S.C. Code Ann. § 44-17-510 et seq. and the applicable implementing regulations.

Under South Carolina law, an asset sale that results in a change of the operating entity of a licensed healthcare facility constitutes a change of ownership requiring the submission of a new license application. DHEC requires at least thirty (30) days' advance notice of the change of ownership prior to the effective date of the change (i.e., the closing date). South Carolina permits continued operations under the existing license pending approval of the CHOW application, provided the proper application has been filed.

Filing Status: As of the date of this memorandum (March 20, 2024), CHOW applications for the four South Carolina locations have not yet been filed.

Recommended Filing Date: We recommend that CHOW applications for all four South Carolina locations be filed no later than April 15, 2024. This timeline provides a minimum of sixty-six (66) days between filing and the targeted closing date of June 20, 2024, which is more than adequate to satisfy DHEC's 30-day advance notice requirement and to allow for processing within DHEC's typical 30-to-60-day processing timeframe.

Estimated Processing Time: 30 to 60 days from the date of a complete filing.

Pre-Closing Approval Requirement: South Carolina does not require pre-closing approval as a condition to the Purchaser's ability to operate the facilities, provided the CHOW application is on file.

F. Alabama (3 Locations)

Alabama's outpatient rehabilitation facilities are regulated by the Alabama Department of Public Health ("ADPH"), Bureau of Health Provider Standards, pursuant to Ala. Code § 22-21-20 et seq. CPI's behavioral health facilities in Alabama are subject to separate licensing requirements administered by the Alabama Department of Mental Health.

Under Alabama law, an asset transfer that results in a change in the legal entity operating a licensed healthcare facility requires the submission of a new license application. ADPH requires at least thirty (30) days' advance written notice of the change of ownership. Alabama permits interim operation under the existing license during the pendency of the CHOW application.

Filing Status: As of the date of this memorandum, CHOW applications for the three Alabama locations have not yet been filed.

Recommended Filing Date: We recommend that CHOW applications for all three Alabama locations be filed no later than April 15, 2024. This timeline provides sixty-six (66) days between filing and the targeted closing date, which comfortably satisfies the 30-day advance notice requirement and allows adequate time for ADPH processing.

Estimated Processing Time: 45 to 60 days from the date of a complete filing.

Pre-Closing Approval Requirement: Alabama does not require pre-closing approval as a condition to the Purchaser's continued operation, provided the application is pending.

G. Virginia (2 Locations)

Virginia's outpatient rehabilitation facilities are licensed by the Virginia Department of Health ("VDH"), Office of Licensure and Certification, pursuant to Va. Code Ann. § 32.1-123 et seq. CPI's behavioral health facilities in Virginia are subject to licensing by the Virginia Department of Behavioral Health and Developmental Services ("DBHDS") pursuant to Va. Code Ann. § 37.2-403 et seq. and the implementing DBHDS licensing regulations.

Under Virginia law, an asset purchase that results in a change in the operating entity of a licensed healthcare facility constitutes a change of ownership requiring the submission of a new license application. VDH recommends that advance notice of a CHOW be provided at least sixty (60) days prior to the effective date of the change. While this is characterized as a recommendation rather than a statutory requirement, our experience with VDH is that failure to comply with the 60-day advance notice period can result in processing delays that may impact the Purchaser's ability to operate immediately upon closing.

Filing Status: As of the date of this memorandum, CHOW applications for the two Virginia locations have not yet been filed.

Recommended Filing Date: Given VDH's 60-day recommended advance notice period and the targeted closing date of June 20, 2024, we strongly recommend that CHOW applications for both Virginia locations be filed no later than April 1, 2024 — which is only twelve (12) days from the date of this memorandum. Filing by April 1, 2024 would provide eighty (80) days between filing and the targeted closing date, comfortably exceeding the 60-day recommendation. Virginia is the most time-sensitive of the remaining state filings, and any delay beyond April 1, 2024 increases the risk that VDH processing may not be completed by the closing date.

Estimated Processing Time: 60 to 90 days from the date of a complete filing.

Pre-Closing Approval Requirement: Virginia does not impose a hard statutory requirement that pre-closing approval be obtained; however, VDH is stricter than some of the other states in CPI's footprint, and a delayed filing could materially impact the Purchaser's ability to operate the Virginia locations immediately post-closing. We recommend treating the Virginia filing as functionally equivalent to a pre-closing approval requirement for purposes of deal timeline management.

H. Kentucky (1 Location)

Kentucky's outpatient rehabilitation facilities are regulated by the Kentucky Cabinet for Health and Family Services ("CHFS"), Office of Inspector General, pursuant to KRS § 216B.010 et seq. CPI's behavioral health services in Kentucky, if applicable at this single location, are subject to licensing requirements administered by the Kentucky Department for Behavioral Health, Developmental and intellectual Disabilities.

Under Kentucky law, an asset transfer that results in a new entity operating a licensed healthcare facility requires the submission of a new licensure application. CHFS requires that at least thirty (30) days' advance notification be provided prior to the effective date of the change of ownership. Kentucky permits continued operation during the pendency of the CHOW application, provided the application has been timely filed.

Filing Status: As of the date of this memorandum, the CHOW application for the single Kentucky location has not yet been filed.

Recommended Filing Date: We recommend that the CHOW application for the Kentucky location be filed no later than April 15, 2024. This timeline provides sixty-six (66) days between filing and the targeted closing date and comfortably satisfies the 30-day advance notice requirement.

Estimated Processing Time: 30 to 45 days from the date of a complete filing.

Pre-Closing Approval Requirement: Kentucky does not require pre-closing approval as a condition to the Purchaser's continued operation, provided the CHOW application has been filed.

I. Summary Table — State CHOW Filing Status

The following table summarizes the CHOW filing status for each of the seven states in which CPI operates:

J. Recommendations Regarding CHOW Filings

Based on the foregoing analysis, we make the following recommendations regarding CHOW filings:

1. Virginia filings are the most time-sensitive. The Virginia CHOW applications for CPI's two Virginia locations should be filed no later than April 1, 2024, to comply with VDH's 60-day recommended advance notice period and to avoid any risk of delay in the Purchaser's ability to operate the Virginia locations upon closing. Hargrove, Sinclair & Demarest is prepared to finalize and submit these filings upon receipt of the final application materials from CPI and the Purchaser.

2. Remaining state filings (SC, AL, KY) should be filed by April 15, 2024. The South Carolina, Alabama, and Kentucky CHOW applications should be filed no later than April 15, 2024. This timeline provides ample lead time relative to each state's advance notice requirements and estimated processing timelines.

3. Hargrove, Sinclair & Demarest will prepare and file all remaining applications. Our firm will prepare and submit all remaining CHOW applications for the four states in which filings have not yet been made, in coordination with CPI and the Purchaser.

4. APA closing condition should address CHOW filings. Calderwood & Harkness should include as a condition to closing in the APA a provision requiring that all required CHOW filings have been made and that no state regulatory agency has issued a denial of or formal objection to any such application. It is important that the closing condition be structured to require only the filing of all CHOW applications and the absence of any denial, rather than the actual receipt of new licenses, because none of the seven states requires pre-closing approval as a condition to continued operation, and conditioning closing on actual license issuance could introduce unnecessary delay and uncertainty into the closing timeline.

IV. Federal Anti-Kickback Statute Analysis

A. Overview of the Anti-Kickback Statute (AKS)

The federal Anti-Kickback Statute ("AKS"), codified at 42 U.S.C. § 1320a-7b(b), prohibits the knowing and willful offer, payment, solicitation, or receipt of any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward the referral of an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a federal healthcare program (including Medicare and Medicaid). The AKS is a criminal statute, violations of which may result in fines of up to $100,000 per violation, imprisonment for up to ten (10) years, and mandatory exclusion from participation in federal healthcare programs. The AKS also serves as a predicate for civil liability under the False Claims Act (31 U.S.C. §§ 3729–3733), as amended by the Affordable Care Act, which provides that a claim resulting from an AKS violation constitutes a false or fraudulent claim under the False Claims Act.

The AKS is broadly drafted and has been interpreted by the Office of Inspector General of the U.S. Department of Health and Human Services ("OIG") and the federal courts to reach a wide range of business arrangements in the healthcare industry. However, the statute contains a number of statutory exceptions and regulatory "safe harbors" (42 C.F.R. § 1001.952) that, if met in all respects, protect certain arrangements from prosecution. Compliance with a safe harbor is not mandatory — the failure to satisfy every element of a safe harbor does not, standing alone, render an arrangement illegal — but safe harbor compliance provides certainty that the arrangement will not be prosecuted under the AKS.

The AKS is relevant to the Transaction because CPI derives approximately 31% of its net revenue from Medicare and Medicaid combined. Accordingly, the Transaction structure, including the purchase price, the contingent earnout consideration, and the post-closing employment arrangements, must be evaluated to ensure that no aspect of the Transaction constitutes remuneration offered or paid in exchange for the referral of patients for items or services payable by federal healthcare programs.

B. Analysis of Transaction Structure

We have analyzed the following elements of the Transaction structure under the AKS:

Base Purchase Price. The base purchase price of $620,000,000 was determined through arm's-length negotiation between the Purchaser (advised by Graystone Partners LLC, led by Nathaniel Prescott, as financial advisor) and the Seller (advised by Meridian Oak Advisory Group, led by Diana Vasquez-Reid, as financial advisor). The purchase price represents an approximately 8.36x multiple of CPI's LTM Adjusted EBITDA of $74,160,000, which is consistent with publicly available market comparables for outpatient rehabilitation platform acquisitions of comparable size and scope during the 2022–2024 period. The purchase price is supported by, and will be documented through, the independent financial advisory opinions rendered by both financial advisors, as well as a third-party quality of earnings analysis performed by Firth Corvinal CPAs LLP. Because the purchase price reflects fair market value as determined through arm's-length negotiation and is paid in exchange for the acquisition of CPI's business assets (rather than as remuneration for referrals), the base purchase price does not present AKS risk.

No Referral Arrangement. The Transaction does not involve any ongoing referral arrangement between CPI's former shareholders and the Purchaser or any of the Purchaser's affiliated portfolio companies. Following the closing, CPI's former shareholders will have no obligation — and no financial incentive tied to the Transaction — to refer patients to the 37 clinic locations or to any other healthcare provider affiliated with Ardent Capital. The Transaction is a clean acquisition of CPI's business operations, not a joint venture, strategic alliance, or other ongoing business arrangement between the parties that could give rise to referral-related AKS concerns.

Post-Closing Employment Arrangements. Dr. Randall J. Whitfield will continue to serve as CEO and Elaine Whitfield-Torres will continue to serve as CCO under post-closing employment agreements with the Purchaser, each for initial terms of three (3) years. The employment agreements are currently under negotiation. From an AKS perspective, the employment arrangements must be structured to ensure that compensation paid to Dr. Whitfield and Ms. Whitfield-Torres is: (i) consistent with fair market value for the services actually rendered by each individual; (ii) not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties for which payment may be made under a federal healthcare program; and (iii) documented in written employment agreements that specify the services to be provided and the compensation to be paid. We will review the final employment agreements prior to execution to confirm AKS compliance.

Earnout Consideration. The Transaction contemplates up to $45,000,000 in aggregate contingent consideration (the "Earnout") payable to CPI's shareholders based on Adjusted EBITDA performance targets over two measurement periods (the twelve-month periods ending June 30, 2025 and June 30, 2026, respectively). The Earnout is structured as follows:

• Measurement Period 1 (July 1, 2024 – June 30, 2025): Up to $22,500,000 in contingent consideration, payable based on a linear ramp of $4.50 per $1.00 of Adjusted EBITDA above a specified threshold.

• Measurement Period 2 (July 1, 2025 – June 30, 2026): Up to $22,500,000 in contingent consideration, payable on the same linear ramp basis.

The Earnout is performance-based and tied to overall enterprise-level Adjusted EBITDA, not to referral volumes, federal healthcare program revenue, or any metric that directly or indirectly measures the volume or value of referrals for items or services covered by Medicare or Medicaid. The linear ramp structure rewards overall business growth and operational efficiency, which is a commercially reasonable metric used in a substantial majority of healthcare services platform acquisitions. Moreover, the Earnout compensates CPI's former shareholders (including Dr. Whitfield) for enterprise-level performance — effectively constituting contingent additional purchase price — rather than constituting ongoing remuneration to individuals in their capacity as employees or referral sources of the Purchaser. These structural features substantially mitigate AKS risk associated with the Earnout.

C. Safe Harbor Analysis

We have evaluated the Transaction against the following AKS regulatory safe harbors:

Investment Interest Safe Harbor (42 C.F.R. § 1001.952(a)). This safe harbor protects certain payments to investors in an entity that furnishes items or services payable under federal healthcare programs. This safe harbor is applicable to the treatment of Ridgeline Growth Equity Fund II LP's 22% equity interest in CPI, which is being cashed out as part of the Transaction. Ridgeline is a passive financial investor receiving its proportionate distribution of the sale proceeds. There is no ongoing investment relationship between Ridgeline and the Purchaser post-closing. Ridgeline's receipt of its share of the purchase price is not remuneration for referrals.

Personal Services and Management Contracts Safe Harbor (42 C.F.R. § 1001.952(d)). This safe harbor protects certain payments made by a principal to an agent under a personal services or management services arrangement. This safe harbor is applicable to the post-closing employment agreements for Dr. Whitfield and Ms. Whitfield-Torres. To satisfy this safe harbor, the employment agreements must provide that: (i) the agreements are set out in writing and signed by the parties; (ii) the agreements cover all of the services to be provided by the agent; (iii) if the agent's services are provided on a part-time basis, the agreements specify exactly the schedule of such intervals, their precise length, and the exact charge for such intervals; (iv) the term of each agreement is for not less than one year; (v) the compensation paid over the term of the agreement is set in advance, is consistent with fair market value in arms'-length transactions, and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties; and (vi) the services performed under the agreements do not involve the counseling or promotion of a business arrangement or other activity that violates any state or federal law. The three-year term of the proposed employment agreements satisfies the one-year minimum requirement. We will review the final compensation terms to confirm that compensation is set in advance and is consistent with fair market value.

Fair Market Value Safe Harbor. The purchase price reflects fair market value as determined through arm's-length negotiation between sophisticated parties, each represented by independent financial advisors. The implied transaction multiple of approximately 8.36x LTM Adjusted EBITDA is within the range of market comparables, and the purchase price is supported by independent financial advisory analysis. Accordingly, the purchase price satisfies the fair market value standard articulated in OIG guidance.

D. Conclusion on AKS

Based on our analysis, the asset purchase structure, at the negotiated purchase price of $620,000,000 (plus up to $45,000,000 in contingent earnout consideration), does not present material AKS risk. The Transaction is a bona fide arm's-length acquisition of CPI's business operations at fair market value, with no referral component.

We recommend the following measures to ensure continued AKS compliance:

(i) The post-closing employment agreements for Dr. Whitfield and Ms. Whitfield-Torres should be finalized with compensation provisions that comply with the Personal Services Safe Harbor requirements, and our firm should review the final agreements prior to execution.

(ii) The APA should include representations by the Seller regarding CPI's historical compliance with the AKS, including representations that CPI has not entered into any arrangement that constitutes a violation of the AKS and that CPI has not received any notice of investigation by the OIG or any other federal or state enforcement agency relating to the AKS.

(iii) The Earnout Agreement should include express language providing that Earnout payments constitute contingent additional purchase price for the acquired assets and do not constitute remuneration for referrals or other business generated for which payment may be made under any federal healthcare program.

V. Stark Law (Physician Self-Referral) Analysis

A. Overview of the Stark Law

The federal Physician Self-Referral Law (commonly known as the "Stark Law"), codified at 42 U.S.C. § 1395nn, prohibits a physician from making a referral for certain "designated health services" ("DHS") payable by Medicare to an entity with which the physician (or an immediate family member of the physician) has a financial relationship — either an ownership or investment interest or a compensation arrangement — unless an applicable exception is satisfied. The Stark Law also prohibits the entity furnishing the DHS from presenting or causing to be presented a claim to Medicare for DHS furnished pursuant to a prohibited referral.

Unlike the AKS, which requires proof of knowing and willful intent, the Stark Law is a strict liability statute. A violation occurs whenever a prohibited referral is made, regardless of the intent of the parties. Penalties for Stark Law violations include denial of payment for the DHS, refund of amounts collected for DHS furnished pursuant to a prohibited referral, civil monetary penalties of up to $15,000 per service, civil monetary penalties of up to $100,000 for each arrangement that the physician knew or should have known constituted a circumvention scheme, and potential exclusion from participation in federal healthcare programs.

The Stark Law's prohibition applies to a defined list of designated health services, which include, among other categories: (i) physical therapy services, (ii) occupational therapy services, and (iii) speech-language pathology services. These three service categories constitute core CPI service lines, making the Stark Law directly applicable to CPI's operations both pre-closing and post-closing.

B. Analysis of Pre-Closing Stark Compliance

Dr. Randall J. Whitfield is a licensed physician (M.D.) who holds a 52% ownership interest in CPI. To the extent that Dr. Whitfield makes referrals for physical therapy, occupational therapy, or speech-language pathology services to CPI — which CPI furnishes and for which CPI submits claims to Medicare — the Stark Law is implicated. Dr. Whitfield has a "financial relationship" with CPI by virtue of both his ownership interest and his compensation arrangement as CEO. Any referral by Dr. Whitfield for DHS furnished by CPI must fall within a Stark Law exception to avoid creating a prohibited referral.

Based on our review of CPI's internal compliance documentation and the due diligence materials produced by CPI in connection with the Transaction (see Due Diligence Summary Memorandum to be dated March 25, 2024, prepared by Calderwood & Harkness), CPI has historically relied on two Stark Law exceptions to support Dr. Whitfield's referrals:

(i) In-Office Ancillary Services Exception (42 C.F.R. § 411.355(b)). This exception permits a physician to refer for DHS that are furnished personally by the referring physician, by another physician in the same group practice, or by individuals directly supervised by the referring physician or another physician in the group practice, provided the DHS are furnished in the same building where the referring physician furnishes physician services, or in another location used by the group practice, and the DHS are billed by the physician performing or supervising the service, by the group practice, or by the entity that is wholly owned by the physician or group practice. CPI's compliance with this exception depends on the specific facts at each clinic location and the nature of Dr. Whitfield's supervisory relationship with the clinicians providing DHS.

(ii) Bona Fide Employment Exception (42 C.F.R. § 411.357(c)). This exception protects compensation paid by an employer to a physician who has a bona fide employment relationship with the employer, provided the employment is for identifiable services, the compensation is consistent with the fair market value of the services and is not determined in a manner that takes into account the volume or value of referrals (except for productivity bonuses based on personally performed services that do not directly take into account the volume or value of referrals), and the remuneration is provided pursuant to an arrangement that would be commercially reasonable even if no referrals were made.

Based on our due diligence review, CPI appears to have maintained compliance with the applicable Stark Law exceptions during the period under review. We note that the pending litigation matter styled Dawson v. Cardinal Peak Industries, Inc., Case No. 3:23-cv-01847, in the United States District Court for the Middle District of Tennessee, is a wage-and-hour action brought under the Fair Labor Standards Act ("FLSA") and does not involve allegations of Stark Law or AKS violations. No pending or historical Stark Law enforcement actions, OIG investigations, or CMS Voluntary Self-Referral Disclosure Protocol submissions were identified in our diligence review.

C. Analysis of Post-Closing Stark Compliance

Following closing, Dr. Whitfield will be employed by the Purchaser as CEO under a three-year employment agreement. He will no longer hold an ownership or investment interest in the entity operating the clinic facilities (the Purchaser), as his equity in CPI will be cashed out at closing. However, Dr. Whitfield will have a compensation arrangement with the Purchaser — his employment agreement — which constitutes a "financial relationship" under the Stark Law.

If Dr. Whitfield continues to make referrals for DHS (physical therapy, occupational therapy, speech-language pathology) to the Purchaser's clinic locations — which he may do in his capacity as CEO, particularly with respect to clinical oversight and patient triage functions — the Bona Fide Employment Exception must be satisfied. The requirements of this exception are:

(i) The employment must be for identifiable services — Dr. Whitfield's employment agreement must specify the services he is engaged to provide (CEO duties, clinical oversight, etc.).

(ii) The compensation paid to Dr. Whitfield must be consistent with fair market value for the services he actually performs and must not be determined in a manner that takes into account the volume or value of referrals by the physician, except that a productivity bonus based on services personally performed by the physician (which does not directly take into account the volume or value of referrals) is permissible.

(iii) The remuneration must be provided pursuant to an arrangement that would be commercially reasonable even if no referrals were made by the physician to the employer.

With respect to Elaine Whitfield-Torres, we note that she is not a physician. The Stark Law's prohibition on self-referrals applies only to referrals by "physicians" as defined in 42 U.S.C. § 1395x(r). Ms. Whitfield-Torres's referrals, if any, would not directly implicate the Stark Law, although they may be subject to AKS analysis (as discussed in Section IV above) and state-law analogs.

With respect to the Earnout consideration, the Earnout is structured as contingent additional purchase price payable to CPI's former shareholders, not as compensation to Dr. Whitfield in his capacity as an employee of the Purchaser. Following the closing, Dr. Whitfield's financial relationship with CPI (as the Seller entity) will terminate. His financial relationship with the Purchaser will be through his employment agreement. The Earnout payments flow to Dr. Whitfield in his capacity as a former shareholder of CPI pursuant to the terms of the APA and the Earnout Agreement, not as part of his employee compensation from the Purchaser. We recommend that the Earnout Agreement and the APA clearly document this distinction to avoid any argument that the Earnout constitutes physician compensation that must satisfy a Stark Law exception. In particular, the Earnout Agreement should state that Earnout payments are made solely as contingent additional purchase price and are not consideration for services rendered by Dr. Whitfield as an employee of the Purchaser.

D. Recommendations on Stark

Based on the foregoing analysis, we make the following recommendations:

1. Employment Agreements. The post-closing employment agreements for Dr. Whitfield (and, to the extent relevant for AKS purposes, Ms. Whitfield-Torres) must be structured to satisfy the Bona Fide Employment Exception under the Stark Law. Specifically, the agreements must: (a) identify the specific services to be performed; (b) set compensation at a level consistent with fair market value, as documented by a compensation benchmarking study or fair market value opinion; (c) provide that compensation is not determined based on the volume or value of referrals; and (d) be set forth in writing and executed by the parties prior to the commencement of services. We recommend engaging a qualified independent valuation firm to prepare a fair market value opinion supporting Dr. Whitfield's compensation, to be completed prior to the closing date.

2. APA Representations. The APA should include specific representations by the Seller regarding CPI's historical compliance with the Stark Law, including representations that: (a) CPI has not made or caused to be made any referral that violates the Stark Law; (b) all financial relationships between CPI and referring physicians satisfy applicable Stark Law exceptions; and (c) CPI has not filed, and does not have any obligation to file, a self-disclosure under the CMS Voluntary Self-Referral Disclosure Protocol.

3. Post-Closing Compliance Program. The Purchaser should implement a post-closing compliance program that includes Stark Law monitoring for all physician compensation arrangements, including Dr. Whitfield's employment agreement. The compliance program should include periodic review of referral patterns, compensation levels, and documentation to ensure ongoing compliance with applicable Stark exceptions.

4. Purchase Price Allocation. The purchase price allocation under IRC § 1060 should be reviewed to ensure that no allocation inadvertently creates an arrangement that could be construed as physician remuneration. For example, if any portion of the purchase price is allocated to a non-compete covenant or consulting agreement with Dr. Whitfield, such arrangement must independently satisfy a Stark Law exception.

VI. Medicare and Medicaid Enrollment Implications

A. Medicare Enrollment

CPI is currently enrolled as a Medicare supplier for outpatient rehabilitation and behavioral health services through the CMS-855B enrollment process. CPI holds Medicare provider transaction access numbers ("PTANs") and National Provider Identifiers ("NPIs") for its 37 clinic locations. CPI bills Medicare for outpatient physical therapy, occupational therapy, speech-language pathology, and behavioral health services furnished at its clinics.

The asset purchase constitutes a Medicare CHOW under CMS regulations. When a Medicare-enrolled provider or supplier undergoes a change of ownership — which CMS defines to include the sale of all or substantially all of the assets used in furnishing Medicare-covered services — the new owner must notify CMS by filing appropriate enrollment change forms with the applicable MACs. For an asset purchase, the Purchaser is required to file CMS-855A or CMS-855B (as applicable) change of information forms, and the MAC will process the change to update CPI's Medicare enrollment records to reflect the Purchaser as the new operator.

CMS permits continued billing under the existing Medicare provider numbers during the CHOW processing period, provided the following conditions are met: (i) the CHOW application is filed within thirty (30) days of the effective date of the change of ownership (i.e., within 30 days of closing); and (ii) the new owner certifies that it assumes all existing Medicare obligations and accepts assignment of the provider agreement. If these conditions are met, Medicare billing continuity is maintained, and the Purchaser may continue to submit claims using CPI's existing PTANs and NPIs while the enrollment change is processed.

For CPI's 37 clinic locations, CHOW filings must be made with the applicable MACs for each state, as follows:

• Tennessee, North Carolina, South Carolina, Virginia, and Kentucky: Palmetto GBA (or the applicable MAC for the relevant jurisdiction as of the date of filing)

• Georgia and Alabama: The applicable regional MAC for Jurisdiction J or Jurisdiction N, as applicable

In addition to the CMS-855 enrollment change filings, the Purchaser must complete applicable NPI updates for all 37 clinic locations. CPI's organizational NPI (Type 2) information will need to be updated with the National Plan and Provider Enumeration System ("NPPES") to reflect the Purchaser as the new organization operating the clinics. Individual NPI records for licensed clinicians (Type 1 NPIs) will not require changes, as those NPIs belong to the individual practitioners and are not affected by the change of employer.

Timing: CHOW filings with the applicable MACs should be prepared in advance of the closing and submitted promptly following the closing date — no later than thirty (30) days after the June 20, 2024 closing (i.e., by July 20, 2024). We strongly recommend that the filing packages be substantially prepared prior to closing so that they can be submitted within the first week following closing.

Risk: If Medicare CHOW filings are not submitted within 30 days of the closing date, CMS may revoke the Purchaser's billing privileges retroactively to the date of the change of ownership, which would result in the Purchaser being required to refund all Medicare payments received during the interim period. This risk underscores the importance of prompt post-closing filing.

B. Medicaid Enrollment

Each of the seven states in which CPI operates maintains its own Medicaid enrollment process, separate from the Medicare enrollment system. CPI is currently enrolled as a Medicaid provider in each of the seven states, and Medicaid revenue accounts for approximately 12% of CPI's net revenue.

An asset purchase triggers Medicaid provider enrollment changes in each state. The specific requirements vary by state, but generally each state Medicaid agency requires the filing of a new Medicaid provider enrollment application or a CHOW notification form reflecting the change in the operating entity. Some states — including Tennessee, Georgia, and North Carolina — generally permit continued Medicaid billing during the CHOW processing period, provided the enrollment change application has been timely filed. Other states may impose interim restrictions on billing until the enrollment change is processed.

We recommend filing Medicaid enrollment change applications concurrently with the Medicare CHOW filings, within thirty (30) days of closing. Hargrove, Sinclair & Demarest will coordinate the preparation and submission of Medicaid enrollment filings for all seven states.

C. Impact on Provider Numbers and Billing

CPI's existing Medicare PTANs and NPIs will need to be reassigned or updated to reflect the Purchaser as the new operator of the 37 clinic locations. During the transition period, the Purchaser will be permitted to bill under CPI's existing provider numbers, provided the Medicare CHOW filing is pending and the 30-day filing deadline has been met.

The Transition Services Agreement between CPI and the Purchaser should specifically address billing and claims submission during the TSA period. Because CPI will be providing transitional back-office and IT services — which may include billing and claims processing support — the TSA must clearly delineate: (i) which entity is responsible for submitting claims to Medicare and Medicaid during the transition period; (ii) the procedures for transitioning billing functions to the Purchaser's own systems; and (iii) compliance protocols to ensure that all claims are submitted in the name of, and on behalf of, the correct billing entity (i.e., the Purchaser, not CPI, as of the closing date).

Failure to properly manage the billing transition could result in the submission of claims by an incorrect entity, which could constitute a violation of federal and state false claims laws. Accordingly, the billing transition provisions of the TSA should be reviewed and approved by healthcare regulatory counsel prior to execution.

D. Recommendations

Based on the foregoing analysis, we recommend the following:

(i) APA Provisions. Calderwood & Harkness should include the following provisions in the APA: (a) a Seller covenant to cooperate fully with the Purchaser in connection with all Medicare and Medicaid enrollment changes post-closing, including providing all documentation and information reasonably requested by the MACs and state Medicaid agencies; and (b) Seller representations regarding the current status of CPI's Medicare and Medicaid enrollment, including representations that (1) CPI is currently enrolled in good standing with Medicare and all applicable state Medicaid programs, (2) no CPI employee, officer, director, or agent has been excluded from participation in any federal or state healthcare program, (3) CPI has not received any no

CALDERWOOD & HARKNESS LLP One World Financial Center 200 Liberty Street, 40th Floor New York, NY 10281 Tel: (212) 556-4000 | Fax: (212) 556-4001
Joint Memorandum with HARGROVE, SINCLAIR & DEMAREST LLP 1717 K Street NW, Suite 900 Washington, DC 20006 Tel: (202) 331-7500 | Fax: (202) 331-7501
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
March 20, 2024
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I. Executive Summary
This joint memorandum has been prepared by Hargrove, Sinclair & Demarest LLP, healthcare regulatory counsel, in coordination with Calderwood & Harkness LLP, M&A transaction counsel, to analyze the material healthcare regulatory compliance issues arising in connection with the proposed acquisition by Ardent Healthcare Acquisition Corp. (the "Purchaser"), a wholly owned subsidiary of Ardent Capital Partners III LP ("Ardent Capital" or the "Fund"), 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 "Transaction"). The Transaction is structured as an asset purchase and is expected to be documented in a definitive Asset Purchase Agreement (the "APA") with a target signing date of April 2, 2024, and a target closing date of June 20, 2024.
CPI operates a network of thirty-seven (37) outpatient rehabilitation and behavioral health clinics across seven states: Tennessee (14 locations), Georgia (8 locations), North Carolina (5 locations), South Carolina (4 locations), Alabama (3 locations), Virginia (2 locations), and Kentucky (1 location). CPI's clinical service lines include physical therapy, occupational therapy, speech-language pathology, and outpatient behavioral health counseling. The company employs approximately 2,100 individuals, including approximately 1,450 licensed clinicians and approximately 650 administrative and support staff. CPI reported last-twelve-months ("LTM") revenue for fiscal year 2023 of approximately $412,000,000 and LTM Adjusted EBITDA of approximately $74,160,000. Approximately 31% of CPI's net revenue is derived from Medicare and Medicaid combined, and its largest single commercial payor is SummitCare Health Plans, Inc., accounting for approximately 22% of net revenue.
This memorandum addresses the following key healthcare regulatory areas implicated by the Transaction:
(1) State Change-of-Ownership Filing Requirements. As an asset purchase, the Transaction triggers change-of-ownership ("CHOW") filing requirements in each of the seven states where CPI operates. CHOW applications for Tennessee, Georgia, and North Carolina were submitted on March 4, 2024. Filings for the remaining four states — South Carolina, Alabama, Virginia, and Kentucky — have not yet been made and must be completed on the timelines detailed in Section III below, with Virginia requiring the most urgent attention due to its 60-day recommended advance notice period.
(2) Federal Anti-Kickback Statute and Stark Law Analysis. The Transaction structure, including the base purchase price, the contingent earnout consideration of up to $45,000,000, and the post-closing employment arrangements for Dr. Randall J. Whitfield and Elaine Whitfield-Torres, has been analyzed under both the federal Anti-Kickback Statute (42 U.S.C. § 1320a-7b(b)) and the Physician Self-Referral Law (commonly known as the "Stark Law") (42 U.S.C. § 1395nn). The Transaction does not present material risk under either statute, subject to the proper structuring of post-closing employment agreements and clear documentation of the earnout as contingent purchase price consideration.
(3) Medicare and Medicaid Enrollment and Revalidation Implications. The asset purchase triggers Medicare CHOW requirements with applicable Medicare Administrative Contractors and Medicaid enrollment changes with each of the seven state Medicaid agencies. These filings must be made promptly following closing to ensure uninterrupted billing capability.
(4) HIPAA Business Associate Agreement Requirements. The contemplated Transition Services Agreement (the "TSA"), under which CPI will provide transitional back-office, IT, and administrative services for up to nine months post-closing, will involve CPI's access to and processing of protected health information ("PHI") on behalf of the Purchaser, thereby requiring a Business Associate Agreement ("BAA") to be executed concurrently with the TSA.
(5) State Professional Licensing and Supervision Requirements. The transition of approximately 1,450 licensed clinicians to the Purchaser's employ has been analyzed under the corporate practice of medicine and therapy doctrines applicable in each of the seven states. No material structural impediments have been identified.
Summary Conclusion. Based on our analysis, the Transaction is structurally sound from a healthcare regulatory perspective, and we do not identify any healthcare regulatory impediment that would preclude the consummation of the Transaction on the anticipated timeline. This conclusion is subject to the timely completion of all state CHOW filings, the proper structuring of post-closing employment agreements and the earnout arrangement, the prompt submission of Medicare and Medicaid enrollment changes post-closing, and the execution of a HIPAA-compliant BAA in connection with the TSA. The specific recommendations and action items set forth in Section X of this memorandum should be implemented to ensure full compliance.
II. Background and Transaction Overview
A. The Parties
The Purchaser. Ardent Healthcare Acquisition Corp. is a Delaware corporation formed on January 22, 2024, for the purpose of consummating the Transaction. The Purchaser is a wholly owned subsidiary of Ardent Capital Partners III LP ("Fund III"), a Delaware limited partnership. The general partner of Fund III is Ardent Capital Management LLC, a Delaware limited liability company (the "General Partner"). Ardent Capital Management LLC maintains its principal office at 590 Madison Avenue, 34th Floor, New York, New York 10022. Fund III is a vintage 2022 private equity fund with aggregate capital commitments of approximately $3.2 billion, focused on lower-middle-market and middle-market investments in healthcare services, specialty pharmaceuticals, and life-sciences services sectors. The Purchaser's registered agent for purposes of Delaware service of process is National Registered Services, Inc., located at 1209 Orange Street, Wilmington, Delaware 19801.
The Seller. Cardinal Peak Industries, Inc. is a Delaware corporation qualified to do business in Tennessee, Georgia, North Carolina, South Carolina, Alabama, Virginia, and Kentucky. CPI maintains its principal headquarters at 8400 Crescent Ridge Parkway, Suite 200, Nashville, Tennessee 37215. CPI was founded in 2011 by Dr. Randall J. Whitfield, M.D., who currently serves as Chief Executive Officer and is the majority shareholder of the company. Since its founding, CPI has grown through a combination of organic expansion and tuck-in acquisitions to become one of the leading independent outpatient rehabilitation and behavioral health platforms in the southeastern United States.
Key Seller Shareholders. The equity ownership of CPI is held as follows:
Ridgeline Growth Equity Fund II LP is a financial sponsor that made a growth equity investment in CPI in 2017. Ridgeline's investment was structured as a preferred equity investment with participation rights, and Ridgeline holds a board seat on CPI's five-member board of directors. The other management shareholders consist of five individuals who are current or former CPI executives who received equity grants in connection with their employment. All shareholders are expected to receive their pro rata share of the base purchase price and any earnout consideration in accordance with CPI's certificate of incorporation and any applicable shareholder agreements.
B. Transaction Structure
The Transaction is structured as an asset purchase pursuant to which the Purchaser will acquire substantially all of the assets of CPI and assume specified liabilities, as set forth in the definitive APA. The choice of an asset purchase structure, rather than a stock or equity purchase, was driven by a number of tax, liability, and operational considerations, which are addressed in Calderwood & Harkness's separate Tax and Structuring Memorandum. However, the asset purchase structure carries significant implications for healthcare regulatory analysis, as discussed throughout this memorandum.
The distinction between an asset purchase and a stock or equity purchase is particularly important in the healthcare regulatory context because many states treat these two forms of acquisition differently for purposes of change-of-ownership analysis. In a stock purchase, the operating entity — here, CPI — would remain the same legal entity, and while a change in the ultimate equity ownership might or might not trigger CHOW requirements depending on the state, the entity's licenses, permits, and provider enrollments would generally remain undisturbed. By contrast, in an asset purchase, a new legal entity (the Purchaser) becomes the operator of the healthcare facilities, and this is uniformly treated by state licensing agencies as a change of ownership requiring new licensure or license transfer applications. Similarly, the Centers for Medicare & Medicaid Services ("CMS") treats an asset purchase as a Medicare CHOW, requiring the new owner to file appropriate enrollment change forms with the applicable Medicare Administrative Contractors ("MACs").
Following closing of the Transaction, the Purchaser will serve as the operating entity for all 37 of CPI's clinic locations. Dr. Whitfield will continue to serve as Chief Executive Officer and Elaine Whitfield-Torres will continue to serve as Chief Clinical Officer under post-closing employment agreements with the Purchaser, each for initial terms of three years. These employment arrangements are discussed in further detail in connection with the Anti-Kickback Statute and Stark Law analyses set forth in Sections IV and V below.
In addition to the base purchase price of $620,000,000, the Transaction contemplates contingent earnout consideration of up to $45,000,000 in the aggregate, payable based on Adjusted EBITDA performance targets over two 12-month measurement periods ending June 30, 2025 and June 30, 2026, respectively. The earnout structure is addressed in Section IV.B in connection with the AKS analysis.
Following closing, CPI (as a continuing entity, but no longer operating the clinic businesses) will provide transitional back-office, information technology, and administrative support services to the Purchaser under a Transition Services Agreement for a period of up to nine months post-closing. The TSA implicates HIPAA business associate requirements, as discussed in Section VII below.
C. CPI's Healthcare Operations
CPI operates thirty-seven (37) outpatient rehabilitation and behavioral health facilities across seven states in the southeastern United States. The geographic distribution of CPI's clinic locations is as follows:
All thirty-seven clinic locations operate under triple-net lease arrangements. CPI does not own any real property. The leases for each location will be assigned to the Purchaser at closing, subject to landlord consent requirements that are being addressed by Calderwood & Harkness in connection with the broader APA negotiation and closing process.
CPI's revenue is derived from a diversified mix of commercial managed-care payors, Medicare, and Medicaid. The approximate revenue composition is as follows:
• SummitCare Health Plans, Inc.: Approximately 22% of net revenue (largest single commercial payor)
• Medicare (Parts A and B combined): Approximately 19% of net revenue
• Medicaid (all states combined): Approximately 12% of net revenue
• Other commercial managed-care payors (11 additional payors): Approximately 47% of net revenue (aggregate)
CPI maintains active managed-care agreements with twelve (12) major payors, including SummitCare Health Plans, Inc. The assignment and notification requirements under these payor contracts are being addressed in Calderwood & Harkness's separate Contract Review Summary. Key financial metrics for CPI are as follows:
• LTM Revenue (FY2023): $412,000,000
• LTM Adjusted EBITDA (FY2023): $74,160,000
• Adjusted EBITDA Margin: Approximately 18.0%
• Implied Transaction Multiple (base purchase price / LTM Adjusted EBITDA): Approximately 8.36x
CPI employs approximately 2,100 individuals, of whom approximately 1,450 are licensed clinicians (including physical therapists, physical therapy assistants, occupational therapists, certified occupational therapy assistants, speech-language pathologists, licensed professional counselors, licensed clinical social workers, and licensed psychologists) and approximately 650 are administrative, operational, and support staff. All employees are expected to transition to the Purchaser's employ at or promptly following closing, subject to at-will employment principles and the terms of the APA.
III. State Change-of-Ownership Filing Requirements
A. Overview of State CHOW Frameworks
In the healthcare regulatory context, a "change of ownership" (commonly referred to as a "CHOW") occurs when there is a transfer of operational control of a licensed healthcare facility or provider from one legal entity to another. State healthcare facility licensing agencies, as well as CMS for purposes of Medicare enrollment, require notification of and, in many instances, prior approval or contemporaneous filing for any such change of ownership.
As discussed in Section II.B above, the choice of an asset purchase structure for the Transaction has direct implications for CHOW analysis. Asset purchases uniformly trigger CHOW requirements in states that regulate outpatient rehabilitation and behavioral health facilities, because the result of an asset purchase is that a new legal entity — here, the Purchaser — becomes the operator and licensee of the healthcare facilities. This stands in contrast to a stock purchase, where the existing operating entity remains unchanged and the transfer occurs at the equity ownership level. While some states impose CHOW requirements even in connection with stock purchases (particularly where a controlling interest changes hands), the analysis is more straightforward in the asset purchase context: all seven states in which CPI operates will require CHOW filings.
Each of the seven states where CPI operates maintains its own distinct statutory and regulatory framework governing the licensure of outpatient rehabilitation facilities and behavioral health clinics, and each state imposes its own procedures, timelines, and requirements for processing CHOW applications. The analysis below addresses each state individually. Importantly, as summarized in Section III.I below, none of the seven states requires that pre-closing approval of the CHOW application be obtained as a condition to the Purchaser's ability to operate the facilities upon closing. In each case, the applicable state permits continued operation under the existing license during the pendency of the CHOW application, provided the application has been timely filed.
B. Tennessee (14 Locations)
Tennessee's outpatient rehabilitation clinics are licensed by the Tennessee Department of Health ("TDOH"), Division of Health Care Facilities, pursuant to the Tennessee Health Care Facilities Licensure Act, Tenn. Code Ann. § 68-11-201 et seq. CPI's behavioral health clinic locations in Tennessee are separately licensed by the Tennessee Department of Mental Health and Substance Abuse Services ("TDMHSAS") pursuant to Tenn. Code Ann. § 33-2-401 et seq. and the implementing regulations thereunder.
Under Tennessee law, an asset purchase in which the operating entity of a licensed healthcare facility changes constitutes a change of ownership that requires the new operator to submit a new license application for each facility. Tennessee, however, permits the Purchaser to continue operating under the existing license during the pendency of the application, provided the application is filed prior to or contemporaneously with the closing of the transaction. This is a significant benefit, as it avoids any gap in licensure that could disrupt clinic operations.
Filing Status: CHOW applications for transfer of license were filed on March 4, 2024, for all fourteen (14) Tennessee clinic locations — including filings with both TDOH (for outpatient rehabilitation licensure) and TDMHSAS (for behavioral health licensure, where applicable). The applications were submitted by Hargrove, Sinclair & Demarest on behalf of CPI and the Purchaser.
Estimated Processing Time: Based on our experience with TDOH and TDMHSAS, processing times for CHOW applications for facilities of this type typically range from 60 to 90 days from the date of a complete filing. Given that the filings were made on March 4, 2024, we would anticipate initial agency review and any deficiency notices to be issued by approximately mid-April 2024, with final approvals expected between early May and early June 2024.
Pre-Closing Approval Requirement: Tennessee does not require that pre-closing approval be obtained prior to the Purchaser's commencement of operations. The Purchaser may operate under the existing license during the pendency of the CHOW application, provided the application has been filed.
Recommendation: We recommend monitoring the processing status of all fourteen Tennessee filings on a biweekly basis and initiating a follow-up inquiry with TDOH and TDMHSAS no later than thirty (30) days prior to the targeted closing date of June 20, 2024, to confirm that processing is on track and to address any deficiency notices that may have been issued.
C. Georgia (8 Locations)
Georgia's outpatient rehabilitation facilities are regulated by the Georgia Department of Community Health ("DCH"), Healthcare Facility Regulation Division, pursuant to O.C.G.A. § 31-7-1 et seq. CPI's behavioral health clinic locations in Georgia are separately regulated by the Georgia Department of Behavioral Health and Developmental Disabilities ("DBHDD") pursuant to O.C.G.A. § 37-7-1 et seq. and the applicable DBHDD regulations.
Under Georgia law, an asset sale constitutes a change of ownership that requires the new operator to submit new permit and license applications with DCH and, for behavioral health facilities, with DBHDD. Georgia requires that advance notice of a change of ownership be provided to the applicable regulatory agency at least thirty (30) days prior to the closing of the transaction. Georgia permits continued operations pending CHOW approval, provided the applications have been timely filed.
Filing Status: CHOW notices and new license applications were filed on March 4, 2024, for all eight (8) Georgia clinic locations. Filings were made with DCH for all locations and, as applicable, with DBHDD for those locations providing behavioral health services. The filings were submitted by Hargrove, Sinclair & Demarest on behalf of CPI and the Purchaser.
Estimated Processing Time: Based on our experience with DCH and DBHDD, processing times for outpatient rehabilitation and behavioral health CHOW applications typically range from 45 to 75 days. We anticipate initial review to be completed by approximately mid-April 2024, with final approvals expected between late April and mid-May 2024. However, we note that DBHDD processing times can occasionally lag behind DCH processing times, particularly where behavioral health-specific site inspections or documentation requirements are involved.
Pre-Closing Approval Requirement: Georgia does not require pre-closing approval as a condition to the Purchaser's ability to operate the facilities.
Recommendation: We recommend tracking the parallel filing processes with DCH and DBHDD for each applicable Georgia location. In particular, we recommend ensuring that behavioral health-specific approvals do not lag significantly behind the DCH outpatient rehabilitation approvals, as any delay in behavioral health licensure could impact the Purchaser's ability to bill for behavioral health services at affected locations during the interim period.
D. North Carolina (5 Locations)
North Carolina's outpatient rehabilitation clinics are licensed by the North Carolina Department of Health and Human Services ("NCDHHS"), Division of Health Service Regulation, pursuant to N.C. Gen. Stat. § 131E-136 et seq. Licensed mental health facilities in North Carolina are regulated under N.C. Gen. Stat. § 122C and the implementing regulations of the NCDHHS Division of Health Service Regulation.
Under North Carolina law, an asset transfer that results in a new legal entity operating a licensed healthcare facility constitutes a change of ownership requiring the submission of a new licensure application. North Carolina requires that notification of the change of ownership be provided to the Division of Health Service Regulation no later than thirty (30) days prior to the closing of the transaction. Operational continuity is permitted during the pendency of the CHOW application, provided the application has been timely filed and no denial or objection has been issued.
Filing Status: CHOW applications were filed on March 4, 2024, for all five (5) North Carolina clinic locations. The filings were submitted by Hargrove, Sinclair & Demarest on behalf of CPI and the Purchaser.
Estimated Processing Time: Processing times for CHOW applications with NCDHHS typically range from 60 to 90 days. We anticipate that the North Carolina filings will follow a similar timeline to the Tennessee filings, with initial review and any deficiency notices expected by approximately mid-April 2024 and final approvals expected between early May and early June 2024.
Pre-Closing Approval Requirement: North Carolina does not require pre-closing approval as a condition to the Purchaser's continued operation of the facilities, provided the CHOW applications have been timely submitted.
Recommendation: We recommend confirming receipt of all five North Carolina filings with NCDHHS and monitoring for any deficiency notices. Any deficiency notices should be promptly addressed to avoid processing delays that could extend beyond the targeted closing date.
E. South Carolina (4 Locations)
South Carolina's outpatient healthcare facilities are licensed by the South Carolina Department of Health and Environmental Control ("DHEC"), Bureau of Health Facilities Licensing, pursuant to S.C. Code Ann. § 44-7-260 et seq. CPI's behavioral health facilities in South Carolina are subject to licensing requirements administered by the South Carolina Department of Mental Health pursuant to S.C. Code Ann. § 44-17-510 et seq. and the applicable implementing regulations.
Under South Carolina law, an asset sale that results in a change of the operating entity of a licensed healthcare facility constitutes a change of ownership requiring the submission of a new license application. DHEC requires at least thirty (30) days' advance notice of the change of ownership prior to the effective date of the change (i.e., the closing date). South Carolina permits continued operations under the existing license pending approval of the CHOW application, provided the proper application has been filed.
Filing Status: As of the date of this memorandum (March 20, 2024), CHOW applications for the four South Carolina locations have not yet been filed.
Recommended Filing Date: We recommend that CHOW applications for all four South Carolina locations be filed no later than April 15, 2024. This timeline provides a minimum of sixty-six (66) days between filing and the targeted closing date of June 20, 2024, which is more than adequate to satisfy DHEC's 30-day advance notice requirement and to allow for processing within DHEC's typical 30-to-60-day processing timeframe.
Estimated Processing Time: 30 to 60 days from the date of a complete filing.
Pre-Closing Approval Requirement: South Carolina does not require pre-closing approval as a condition to the Purchaser's ability to operate the facilities, provided the CHOW application is on file.
F. Alabama (3 Locations)
Alabama's outpatient rehabilitation facilities are regulated by the Alabama Department of Public Health ("ADPH"), Bureau of Health Provider Standards, pursuant to Ala. Code § 22-21-20 et seq. CPI's behavioral health facilities in Alabama are subject to separate licensing requirements administered by the Alabama Department of Mental Health.
Under Alabama law, an asset transfer that results in a change in the legal entity operating a licensed healthcare facility requires the submission of a new license application. ADPH requires at least thirty (30) days' advance written notice of the change of ownership. Alabama permits interim operation under the existing license during the pendency of the CHOW application.
Filing Status: As of the date of this memorandum, CHOW applications for the three Alabama locations have not yet been filed.
Recommended Filing Date: We recommend that CHOW applications for all three Alabama locations be filed no later than April 15, 2024. This timeline provides sixty-six (66) days between filing and the targeted closing date, which comfortably satisfies the 30-day advance notice requirement and allows adequate time for ADPH processing.
Estimated Processing Time: 45 to 60 days from the date of a complete filing.
Pre-Closing Approval Requirement: Alabama does not require pre-closing approval as a condition to the Purchaser's continued operation, provided the application is pending.
G. Virginia (2 Locations)
Virginia's outpatient rehabilitation facilities are licensed by the Virginia Department of Health ("VDH"), Office of Licensure and Certification, pursuant to Va. Code Ann. § 32.1-123 et seq. CPI's behavioral health facilities in Virginia are subject to licensing by the Virginia Department of Behavioral Health and Developmental Services ("DBHDS") pursuant to Va. Code Ann. § 37.2-403 et seq. and the implementing DBHDS licensing regulations.
Under Virginia law, an asset purchase that results in a change in the operating entity of a licensed healthcare facility constitutes a change of ownership requiring the submission of a new license application. VDH recommends that advance notice of a CHOW be provided at least sixty (60) days prior to the effective date of the change. While this is characterized as a recommendation rather than a statutory requirement, our experience with VDH is that failure to comply with the 60-day advance notice period can result in processing delays that may impact the Purchaser's ability to operate immediately upon closing.
Filing Status: As of the date of this memorandum, CHOW applications for the two Virginia locations have not yet been filed.
Recommended Filing Date: Given VDH's 60-day recommended advance notice period and the targeted closing date of June 20, 2024, we strongly recommend that CHOW applications for both Virginia locations be filed no later than April 1, 2024 — which is only twelve (12) days from the date of this memorandum. Filing by April 1, 2024 would provide eighty (80) days between filing and the targeted closing date, comfortably exceeding the 60-day recommendation. Virginia is the most time-sensitive of the remaining state filings, and any delay beyond April 1, 2024 increases the risk that VDH processing may not be completed by the closing date.
Estimated Processing Time: 60 to 90 days from the date of a complete filing.
Pre-Closing Approval Requirement: Virginia does not impose a hard statutory requirement that pre-closing approval be obtained; however, VDH is stricter than some of the other states in CPI's footprint, and a delayed filing could materially impact the Purchaser's ability to operate the Virginia locations immediately post-closing. We recommend treating the Virginia filing as functionally equivalent to a pre-closing approval requirement for purposes of deal timeline management.
H. Kentucky (1 Location)
Kentucky's outpatient rehabilitation facilities are regulated by the Kentucky Cabinet for Health and Family Services ("CHFS"), Office of Inspector General, pursuant to KRS § 216B.010 et seq. CPI's behavioral health services in Kentucky, if applicable at this single location, are subject to licensing requirements administered by the Kentucky Department for Behavioral Health, Developmental and intellectual Disabilities.
Under Kentucky law, an asset transfer that results in a new entity operating a licensed healthcare facility requires the submission of a new licensure application. CHFS requires that at least thirty (30) days' advance notification be provided prior to the effective date of the change of ownership. Kentucky permits continued operation during the pendency of the CHOW application, provided the application has been timely filed.
Filing Status: As of the date of this memorandum, the CHOW application for the single Kentucky location has not yet been filed.
Recommended Filing Date: We recommend that the CHOW application for the Kentucky location be filed no later than April 15, 2024. This timeline provides sixty-six (66) days between filing and the targeted closing date and comfortably satisfies the 30-day advance notice requirement.
Estimated Processing Time: 30 to 45 days from the date of a complete filing.
Pre-Closing Approval Requirement: Kentucky does not require pre-closing approval as a condition to the Purchaser's continued operation, provided the CHOW application has been filed.
I. Summary Table — State CHOW Filing Status
The following table summarizes the CHOW filing status for each of the seven states in which CPI operates:
J. Recommendations Regarding CHOW Filings
Based on the foregoing analysis, we make the following recommendations regarding CHOW filings:
1. Virginia filings are the most time-sensitive. The Virginia CHOW applications for CPI's two Virginia locations should be filed no later than April 1, 2024, to comply with VDH's 60-day recommended advance notice period and to avoid any risk of delay in the Purchaser's ability to operate the Virginia locations upon closing. Hargrove, Sinclair & Demarest is prepared to finalize and submit these filings upon receipt of the final application materials from CPI and the Purchaser.
2. Remaining state filings (SC, AL, KY) should be filed by April 15, 2024. The South Carolina, Alabama, and Kentucky CHOW applications should be filed no later than April 15, 2024. This timeline provides ample lead time relative to each state's advance notice requirements and estimated processing timelines.
3. Hargrove, Sinclair & Demarest will prepare and file all remaining applications. Our firm will prepare and submit all remaining CHOW applications for the four states in which filings have not yet been made, in coordination with CPI and the Purchaser.
4. APA closing condition should address CHOW filings. Calderwood & Harkness should include as a condition to closing in the APA a provision requiring that all required CHOW filings have been made and that no state regulatory agency has issued a denial of or formal objection to any such application. It is important that the closing condition be structured to require only the filing of all CHOW applications and the absence of any denial, rather than the actual receipt of new licenses, because none of the seven states requires pre-closing approval as a condition to continued operation, and conditioning closing on actual license issuance could introduce unnecessary delay and uncertainty into the closing timeline.
IV. Federal Anti-Kickback Statute Analysis
A. Overview of the Anti-Kickback Statute (AKS)
The federal Anti-Kickback Statute ("AKS"), codified at 42 U.S.C. § 1320a-7b(b), prohibits the knowing and willful offer, payment, solicitation, or receipt of any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward the referral of an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a federal healthcare program (including Medicare and Medicaid). The AKS is a criminal statute, violations of which may result in fines of up to $100,000 per violation, imprisonment for up to ten (10) years, and mandatory exclusion from participation in federal healthcare programs. The AKS also serves as a predicate for civil liability under the False Claims Act (31 U.S.C. §§ 3729–3733), as amended by the Affordable Care Act, which provides that a claim resulting from an AKS violation constitutes a false or fraudulent claim under the False Claims Act.
The AKS is broadly drafted and has been interpreted by the Office of Inspector General of the U.S. Department of Health and Human Services ("OIG") and the federal courts to reach a wide range of business arrangements in the healthcare industry. However, the statute contains a number of statutory exceptions and regulatory "safe harbors" (42 C.F.R. § 1001.952) that, if met in all respects, protect certain arrangements from prosecution. Compliance with a safe harbor is not mandatory — the failure to satisfy every element of a safe harbor does not, standing alone, render an arrangement illegal — but safe harbor compliance provides certainty that the arrangement will not be prosecuted under the AKS.
The AKS is relevant to the Transaction because CPI derives approximately 31% of its net revenue from Medicare and Medicaid combined. Accordingly, the Transaction structure, including the purchase price, the contingent earnout consideration, and the post-closing employment arrangements, must be evaluated to ensure that no aspect of the Transaction constitutes remuneration offered or paid in exchange for the referral of patients for items or services payable by federal healthcare programs.
B. Analysis of Transaction Structure
We have analyzed the following elements of the Transaction structure under the AKS:
Base Purchase Price. The base purchase price of $620,000,000 was determined through arm's-length negotiation between the Purchaser (advised by Graystone Partners LLC, led by Nathaniel Prescott, as financial advisor) and the Seller (advised by Meridian Oak Advisory Group, led by Diana Vasquez-Reid, as financial advisor). The purchase price represents an approximately 8.36x multiple of CPI's LTM Adjusted EBITDA of $74,160,000, which is consistent with publicly available market comparables for outpatient rehabilitation platform acquisitions of comparable size and scope during the 2022–2024 period. The purchase price is supported by, and will be documented through, the independent financial advisory opinions rendered by both financial advisors, as well as a third-party quality of earnings analysis performed by Firth Corvinal CPAs LLP. Because the purchase price reflects fair market value as determined through arm's-length negotiation and is paid in exchange for the acquisition of CPI's business assets (rather than as remuneration for referrals), the base purchase price does not present AKS risk.
No Referral Arrangement. The Transaction does not involve any ongoing referral arrangement between CPI's former shareholders and the Purchaser or any of the Purchaser's affiliated portfolio companies. Following the closing, CPI's former shareholders will have no obligation — and no financial incentive tied to the Transaction — to refer patients to the 37 clinic locations or to any other healthcare provider affiliated with Ardent Capital. The Transaction is a clean acquisition of CPI's business operations, not a joint venture, strategic alliance, or other ongoing business arrangement between the parties that could give rise to referral-related AKS concerns.
Post-Closing Employment Arrangements. Dr. Randall J. Whitfield will continue to serve as CEO and Elaine Whitfield-Torres will continue to serve as CCO under post-closing employment agreements with the Purchaser, each for initial terms of three (3) years. The employment agreements are currently under negotiation. From an AKS perspective, the employment arrangements must be structured to ensure that compensation paid to Dr. Whitfield and Ms. Whitfield-Torres is: (i) consistent with fair market value for the services actually rendered by each individual; (ii) not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties for which payment may be made under a federal healthcare program; and (iii) documented in written employment agreements that specify the services to be provided and the compensation to be paid. We will review the final employment agreements prior to execution to confirm AKS compliance.
Earnout Consideration. The Transaction contemplates up to $45,000,000 in aggregate contingent consideration (the "Earnout") payable to CPI's shareholders based on Adjusted EBITDA performance targets over two measurement periods (the twelve-month periods ending June 30, 2025 and June 30, 2026, respectively). The Earnout is structured as follows:
• Measurement Period 1 (July 1, 2024 – June 30, 2025): Up to $22,500,000 in contingent consideration, payable based on a linear ramp of $4.50 per $1.00 of Adjusted EBITDA above a specified threshold.
• Measurement Period 2 (July 1, 2025 – June 30, 2026): Up to $22,500,000 in contingent consideration, payable on the same linear ramp basis.
The Earnout is performance-based and tied to overall enterprise-level Adjusted EBITDA, not to referral volumes, federal healthcare program revenue, or any metric that directly or indirectly measures the volume or value of referrals for items or services covered by Medicare or Medicaid. The linear ramp structure rewards overall business growth and operational efficiency, which is a commercially reasonable metric used in a substantial majority of healthcare services platform acquisitions. Moreover, the Earnout compensates CPI's former shareholders (including Dr. Whitfield) for enterprise-level performance — effectively constituting contingent additional purchase price — rather than constituting ongoing remuneration to individuals in their capacity as employees or referral sources of the Purchaser. These structural features substantially mitigate AKS risk associated with the Earnout.
C. Safe Harbor Analysis
We have evaluated the Transaction against the following AKS regulatory safe harbors:
Investment Interest Safe Harbor (42 C.F.R. § 1001.952(a)). This safe harbor protects certain payments to investors in an entity that furnishes items or services payable under federal healthcare programs. This safe harbor is applicable to the treatment of Ridgeline Growth Equity Fund II LP's 22% equity interest in CPI, which is being cashed out as part of the Transaction. Ridgeline is a passive financial investor receiving its proportionate distribution of the sale proceeds. There is no ongoing investment relationship between Ridgeline and the Purchaser post-closing. Ridgeline's receipt of its share of the purchase price is not remuneration for referrals.
Personal Services and Management Contracts Safe Harbor (42 C.F.R. § 1001.952(d)). This safe harbor protects certain payments made by a principal to an agent under a personal services or management services arrangement. This safe harbor is applicable to the post-closing employment agreements for Dr. Whitfield and Ms. Whitfield-Torres. To satisfy this safe harbor, the employment agreements must provide that: (i) the agreements are set out in writing and signed by the parties; (ii) the agreements cover all of the services to be provided by the agent; (iii) if the agent's services are provided on a part-time basis, the agreements specify exactly the schedule of such intervals, their precise length, and the exact charge for such intervals; (iv) the term of each agreement is for not less than one year; (v) the compensation paid over the term of the agreement is set in advance, is consistent with fair market value in arms'-length transactions, and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties; and (vi) the services performed under the agreements do not involve the counseling or promotion of a business arrangement or other activity that violates any state or federal law. The three-year term of the proposed employment agreements satisfies the one-year minimum requirement. We will review the final compensation terms to confirm that compensation is set in advance and is consistent with fair market value.
Fair Market Value Safe Harbor. The purchase price reflects fair market value as determined through arm's-length negotiation between sophisticated parties, each represented by independent financial advisors. The implied transaction multiple of approximately 8.36x LTM Adjusted EBITDA is within the range of market comparables, and the purchase price is supported by independent financial advisory analysis. Accordingly, the purchase price satisfies the fair market value standard articulated in OIG guidance.
D. Conclusion on AKS
Based on our analysis, the asset purchase structure, at the negotiated purchase price of $620,000,000 (plus up to $45,000,000 in contingent earnout consideration), does not present material AKS risk. The Transaction is a bona fide arm's-length acquisition of CPI's business operations at fair market value, with no referral component.
We recommend the following measures to ensure continued AKS compliance:
(i) The post-closing employment agreements for Dr. Whitfield and Ms. Whitfield-Torres should be finalized with compensation provisions that comply with the Personal Services Safe Harbor requirements, and our firm should review the final agreements prior to execution.
(ii) The APA should include representations by the Seller regarding CPI's historical compliance with the AKS, including representations that CPI has not entered into any arrangement that constitutes a violation of the AKS and that CPI has not received any notice of investigation by the OIG or any other federal or state enforcement agency relating to the AKS.
(iii) The Earnout Agreement should include express language providing that Earnout payments constitute contingent additional purchase price for the acquired assets and do not constitute remuneration for referrals or other business generated for which payment may be made under any federal healthcare program.
V. Stark Law (Physician Self-Referral) Analysis
A. Overview of the Stark Law
The federal Physician Self-Referral Law (commonly known as the "Stark Law"), codified at 42 U.S.C. § 1395nn, prohibits a physician from making a referral for certain "designated health services" ("DHS") payable by Medicare to an entity with which the physician (or an immediate family member of the physician) has a financial relationship — either an ownership or investment interest or a compensation arrangement — unless an applicable exception is satisfied. The Stark Law also prohibits the entity furnishing the DHS from presenting or causing to be presented a claim to Medicare for DHS furnished pursuant to a prohibited referral.
Unlike the AKS, which requires proof of knowing and willful intent, the Stark Law is a strict liability statute. A violation occurs whenever a prohibited referral is made, regardless of the intent of the parties. Penalties for Stark Law violations include denial of payment for the DHS, refund of amounts collected for DHS furnished pursuant to a prohibited referral, civil monetary penalties of up to $15,000 per service, civil monetary penalties of up to $100,000 for each arrangement that the physician knew or should have known constituted a circumvention scheme, and potential exclusion from participation in federal healthcare programs.
The Stark Law's prohibition applies to a defined list of designated health services, which include, among other categories: (i) physical therapy services, (ii) occupational therapy services, and (iii) speech-language pathology services. These three service categories constitute core CPI service lines, making the Stark Law directly applicable to CPI's operations both pre-closing and post-closing.
B. Analysis of Pre-Closing Stark Compliance
Dr. Randall J. Whitfield is a licensed physician (M.D.) who holds a 52% ownership interest in CPI. To the extent that Dr. Whitfield makes referrals for physical therapy, occupational therapy, or speech-language pathology services to CPI — which CPI furnishes and for which CPI submits claims to Medicare — the Stark Law is implicated. Dr. Whitfield has a "financial relationship" with CPI by virtue of both his ownership interest and his compensation arrangement as CEO. Any referral by Dr. Whitfield for DHS furnished by CPI must fall within a Stark Law exception to avoid creating a prohibited referral.
Based on our review of CPI's internal compliance documentation and the due diligence materials produced by CPI in connection with the Transaction (see Due Diligence Summary Memorandum to be dated March 25, 2024, prepared by Calderwood & Harkness), CPI has historically relied on two Stark Law exceptions to support Dr. Whitfield's referrals:
(i) In-Office Ancillary Services Exception (42 C.F.R. § 411.355(b)). This exception permits a physician to refer for DHS that are furnished personally by the referring physician, by another physician in the same group practice, or by individuals directly supervised by the referring physician or another physician in the group practice, provided the DHS are furnished in the same building where the referring physician furnishes physician services, or in another location used by the group practice, and the DHS are billed by the physician performing or supervising the service, by the group practice, or by the entity that is wholly owned by the physician or group practice. CPI's compliance with this exception depends on the specific facts at each clinic location and the nature of Dr. Whitfield's supervisory relationship with the clinicians providing DHS.
(ii) Bona Fide Employment Exception (42 C.F.R. § 411.357(c)). This exception protects compensation paid by an employer to a physician who has a bona fide employment relationship with the employer, provided the employment is for identifiable services, the compensation is consistent with the fair market value of the services and is not determined in a manner that takes into account the volume or value of referrals (except for productivity bonuses based on personally performed services that do not directly take into account the volume or value of referrals), and the remuneration is provided pursuant to an arrangement that would be commercially reasonable even if no referrals were made.
Based on our due diligence review, CPI appears to have maintained compliance with the applicable Stark Law exceptions during the period under review. We note that the pending litigation matter styled Dawson v. Cardinal Peak Industries, Inc., Case No. 3:23-cv-01847, in the United States District Court for the Middle District of Tennessee, is a wage-and-hour action brought under the Fair Labor Standards Act ("FLSA") and does not involve allegations of Stark Law or AKS violations. No pending or historical Stark Law enforcement actions, OIG investigations, or CMS Voluntary Self-Referral Disclosure Protocol submissions were identified in our diligence review.
C. Analysis of Post-Closing Stark Compliance
Following closing, Dr. Whitfield will be employed by the Purchaser as CEO under a three-year employment agreement. He will no longer hold an ownership or investment interest in the entity operating the clinic facilities (the Purchaser), as his equity in CPI will be cashed out at closing. However, Dr. Whitfield will have a compensation arrangement with the Purchaser — his employment agreement — which constitutes a "financial relationship" under the Stark Law.
If Dr. Whitfield continues to make referrals for DHS (physical therapy, occupational therapy, speech-language pathology) to the Purchaser's clinic locations — which he may do in his capacity as CEO, particularly with respect to clinical oversight and patient triage functions — the Bona Fide Employment Exception must be satisfied. The requirements of this exception are:
(i) The employment must be for identifiable services — Dr. Whitfield's employment agreement must specify the services he is engaged to provide (CEO duties, clinical oversight, etc.).
(ii) The compensation paid to Dr. Whitfield must be consistent with fair market value for the services he actually performs and must not be determined in a manner that takes into account the volume or value of referrals by the physician, except that a productivity bonus based on services personally performed by the physician (which does not directly take into account the volume or value of referrals) is permissible.
(iii) The remuneration must be provided pursuant to an arrangement that would be commercially reasonable even if no referrals were made by the physician to the employer.
With respect to Elaine Whitfield-Torres, we note that she is not a physician. The Stark Law's prohibition on self-referrals applies only to referrals by "physicians" as defined in 42 U.S.C. § 1395x(r). Ms. Whitfield-Torres's referrals, if any, would not directly implicate the Stark Law, although they may be subject to AKS analysis (as discussed in Section IV above) and state-law analogs.
With respect to the Earnout consideration, the Earnout is structured as contingent additional purchase price payable to CPI's former shareholders, not as compensation to Dr. Whitfield in his capacity as an employee of the Purchaser. Following the closing, Dr. Whitfield's financial relationship with CPI (as the Seller entity) will terminate. His financial relationship with the Purchaser will be through his employment agreement. The Earnout payments flow to Dr. Whitfield in his capacity as a former shareholder of CPI pursuant to the terms of the APA and the Earnout Agreement, not as part of his employee compensation from the Purchaser. We recommend that the Earnout Agreement and the APA clearly document this distinction to avoid any argument that the Earnout constitutes physician compensation that must satisfy a Stark Law exception. In particular, the Earnout Agreement should state that Earnout payments are made solely as contingent additional purchase price and are not consideration for services rendered by Dr. Whitfield as an employee of the Purchaser.
D. Recommendations on Stark
Based on the foregoing analysis, we make the following recommendations:
1. Employment Agreements. The post-closing employment agreements for Dr. Whitfield (and, to the extent relevant for AKS purposes, Ms. Whitfield-Torres) must be structured to satisfy the Bona Fide Employment Exception under the Stark Law. Specifically, the agreements must: (a) identify the specific services to be performed; (b) set compensation at a level consistent with fair market value, as documented by a compensation benchmarking study or fair market value opinion; (c) provide that compensation is not determined based on the volume or value of referrals; and (d) be set forth in writing and executed by the parties prior to the commencement of services. We recommend engaging a qualified independent valuation firm to prepare a fair market value opinion supporting Dr. Whitfield's compensation, to be completed prior to the closing date.
2. APA Representations. The APA should include specific representations by the Seller regarding CPI's historical compliance with the Stark Law, including representations that: (a) CPI has not made or caused to be made any referral that violates the Stark Law; (b) all financial relationships between CPI and referring physicians satisfy applicable Stark Law exceptions; and (c) CPI has not filed, and does not have any obligation to file, a self-disclosure under the CMS Voluntary Self-Referral Disclosure Protocol.
3. Post-Closing Compliance Program. The Purchaser should implement a post-closing compliance program that includes Stark Law monitoring for all physician compensation arrangements, including Dr. Whitfield's employment agreement. The compliance program should include periodic review of referral patterns, compensation levels, and documentation to ensure ongoing compliance with applicable Stark exceptions.
4. Purchase Price Allocation. The purchase price allocation under IRC § 1060 should be reviewed to ensure that no allocation inadvertently creates an arrangement that could be construed as physician remuneration. For example, if any portion of the purchase price is allocated to a non-compete covenant or consulting agreement with Dr. Whitfield, such arrangement must independently satisfy a Stark Law exception.
VI. Medicare and Medicaid Enrollment Implications
A. Medicare Enrollment
CPI is currently enrolled as a Medicare supplier for outpatient rehabilitation and behavioral health services through the CMS-855B enrollment process. CPI holds Medicare provider transaction access numbers ("PTANs") and National Provider Identifiers ("NPIs") for its 37 clinic locations. CPI bills Medicare for outpatient physical therapy, occupational therapy, speech-language pathology, and behavioral health services furnished at its clinics.
The asset purchase constitutes a Medicare CHOW under CMS regulations. When a Medicare-enrolled provider or supplier undergoes a change of ownership — which CMS defines to include the sale of all or substantially all of the assets used in furnishing Medicare-covered services — the new owner must notify CMS by filing appropriate enrollment change forms with the applicable MACs. For an asset purchase, the Purchaser is required to file CMS-855A or CMS-855B (as applicable) change of information forms, and the MAC will process the change to update CPI's Medicare enrollment records to reflect the Purchaser as the new operator.
CMS permits continued billing under the existing Medicare provider numbers during the CHOW processing period, provided the following conditions are met: (i) the CHOW application is filed within thirty (30) days of the effective date of the change of ownership (i.e., within 30 days of closing); and (ii) the new owner certifies that it assumes all existing Medicare obligations and accepts assignment of the provider agreement. If these conditions are met, Medicare billing continuity is maintained, and the Purchaser may continue to submit claims using CPI's existing PTANs and NPIs while the enrollment change is processed.
For CPI's 37 clinic locations, CHOW filings must be made with the applicable MACs for each state, as follows:
• Tennessee, North Carolina, South Carolina, Virginia, and Kentucky: Palmetto GBA (or the applicable MAC for the relevant jurisdiction as of the date of filing)
• Georgia and Alabama: The applicable regional MAC for Jurisdiction J or Jurisdiction N, as applicable
In addition to the CMS-855 enrollment change filings, the Purchaser must complete applicable NPI updates for all 37 clinic locations. CPI's organizational NPI (Type 2) information will need to be updated with the National Plan and Provider Enumeration System ("NPPES") to reflect the Purchaser as the new organization operating the clinics. Individual NPI records for licensed clinicians (Type 1 NPIs) will not require changes, as those NPIs belong to the individual practitioners and are not affected by the change of employer.
Timing: CHOW filings with the applicable MACs should be prepared in advance of the closing and submitted promptly following the closing date — no later than thirty (30) days after the June 20, 2024 closing (i.e., by July 20, 2024). We strongly recommend that the filing packages be substantially prepared prior to closing so that they can be submitted within the first week following closing.
Risk: If Medicare CHOW filings are not submitted within 30 days of the closing date, CMS may revoke the Purchaser's billing privileges retroactively to the date of the change of ownership, which would result in the Purchaser being required to refund all Medicare payments received during the interim period. This risk underscores the importance of prompt post-closing filing.
B. Medicaid Enrollment
Each of the seven states in which CPI operates maintains its own Medicaid enrollment process, separate from the Medicare enrollment system. CPI is currently enrolled as a Medicaid provider in each of the seven states, and Medicaid revenue accounts for approximately 12% of CPI's net revenue.
An asset purchase triggers Medicaid provider enrollment changes in each state. The specific requirements vary by state, but generally each state Medicaid agency requires the filing of a new Medicaid provider enrollment application or a CHOW notification form reflecting the change in the operating entity. Some states — including Tennessee, Georgia, and North Carolina — generally permit continued Medicaid billing during the CHOW processing period, provided the enrollment change application has been timely filed. Other states may impose interim restrictions on billing until the enrollment change is processed.
We recommend filing Medicaid enrollment change applications concurrently with the Medicare CHOW filings, within thirty (30) days of closing. Hargrove, Sinclair & Demarest will coordinate the preparation and submission of Medicaid enrollment filings for all seven states.
C. Impact on Provider Numbers and Billing
CPI's existing Medicare PTANs and NPIs will need to be reassigned or updated to reflect the Purchaser as the new operator of the 37 clinic locations. During the transition period, the Purchaser will be permitted to bill under CPI's existing provider numbers, provided the Medicare CHOW filing is pending and the 30-day filing deadline has been met.
The Transition Services Agreement between CPI and the Purchaser should specifically address billing and claims submission during the TSA period. Because CPI will be providing transitional back-office and IT services — which may include billing and claims processing support — the TSA must clearly delineate: (i) which entity is responsible for submitting claims to Medicare and Medicaid during the transition period; (ii) the procedures for transitioning billing functions to the Purchaser's own systems; and (iii) compliance protocols to ensure that all claims are submitted in the name of, and on behalf of, the correct billing entity (i.e., the Purchaser, not CPI, as of the closing date).
Failure to properly manage the billing transition could result in the submission of claims by an incorrect entity, which could constitute a violation of federal and state false claims laws. Accordingly, the billing transition provisions of the TSA should be reviewed and approved by healthcare regulatory counsel prior to execution.
D. Recommendations
Based on the foregoing analysis, we recommend the following:
(i) APA Provisions. Calderwood & Harkness should include the following provisions in the APA: (a) a Seller covenant to cooperate fully with the Purchaser in connection with all Medicare and Medicaid enrollment changes post-closing, including providing all documentation and information reasonably requested by the MACs and state Medicaid agencies; and (b) Seller representations regarding the current status of CPI's Medicare and Medicaid enrollment, including representations that (1) CPI is currently enrolled in good standing with Medicare and all applicable state Medicaid programs, (2) no CPI employee, officer, director, or agent has been excluded from participation in any federal or state healthcare program, (3) CPI has not received any no

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