Stockholders' Equity

6 Months Ended

Jun. 30, 2020

Stockholders' Equity

Stockholders' Equity

(10)        Stockholders' Equity

The Closing of the Business Combination occurred on November 8, 2019, refer to Note 3, Significant Transactions, for additional details regarding the Business Combination.

Warrants

At the Closing of the Business Combination, the Company had 12.7 million warrants outstanding. Each warrant is exercisable into one share of common stock at a price of $11.50 per share. The exercise price and number of common stock issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a share dividend, or recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuance of common stock at a price below its exercise price. During the six months ended June 30, 2020, 3.9 million warrants were exercised in cashless transactions resulting in the issuance of 1.1 million shares of Class A Common Stock. In addition, during the six months ended June 30, 2020, 1.0 million warrants were exercised for cash proceeds of $11.9 million resulting in the issuance of 1.0 million shares of Class A Common Stock. As of June 30, 2020, the Company had 7.7 million warrants outstanding.

Contingent Consideration Shares

Pursuant to the Merger Agreement, the former owners of AdaptHealth Holdings who received Class B Common Stock in connection with the Business Combination are entitled to receive an equity classified earn-out

consideration to be paid in the form of New AdaptHealth Units (and a corresponding number of shares of Class B Common Stock) and the former owners of AdaptHealth Holdings who received Class A Common Stock in connection with the Business Combination are entitled to receive earn-out consideration to be paid in the form of Class A Common Stock, if the average price of the Company’s Class A Common Stock for the month of December prior to each measurement date equals or exceeds certain hurdles set forth in the Merger Agreement. The former owners of AdaptHealth Holdings can potentially receive up to an additional 1.0 million shares at December 31, 2020, 2021 and 2022 (each a measurement date) and such average stock price hurdles are $15, $18 and $22 at each measurement date, respectively, for a total of 3.0 million shares, as a part of the earn-out consideration.

Preferred Stock

In June 2020, the Company entered into an exchange agreement (the Exchange Agreement) with an investor pursuant to which the investor exchanged 15,810,547 shares of the Company’s Class A Common Stock for 158,105 shares of a new series of non-voting convertible preferred stock of the Company designated as “Series B-1 Convertible Preferred Stock,” par value $0.0001 per share (Series B-1 Preferred Stock). The Series B-1 Preferred Stock liquidation preference is limited to its par value of $0.0001 per share. The Series B-1 Preferred Stock will participate equally and ratably on an as-converted basis with the holders of Class A Common Stock in all cash dividends paid on the Class A Common Stock. The Series B-1 Preferred Stock is non-voting. The holder may convert each share of Series B-1 Preferred Stock into 100 shares of Class A Common Stock (subject to certain anti-dilution adjustments) at its election, except to the extent that, following such conversion, the number of shares of Class A Common Stock held by such holder and its affiliates exceed 4.9% of the outstanding Class A Common Stock of the Company.

Equity-based Compensation

On November 7, 2019, the stockholders of the Company approved the AdaptHealth Corp. 2019 Stock Incentive Plan (the 2019 Plan), effective upon closing of the Business Combination. In connection with the 2019 Plan, the Company provides equity-based compensation to attract and retain employees while also aligning employees’ interest with the interests of its stockholders. The 2019 Plan permits the grant of various equity-based awards to selected employees and directors. The 2019 Plan permits the grant of up to 8.0 million shares of Class A Common Stock, subject to certain adjustments and limitations.

During the three months ended June 30, 2020, the Company recorded equity-based compensation expense of $3.3 million, of which $1.6 and $1.7 million was included in general and administrative expenses and cost of net revenue, respectively, in the accompanying consolidated statement of operations. During the six months ended June 30, 2020, the Company recorded equity-based compensation expense of $5.5 million, of which $3.3 and $2.2 million was included in general and administrative expenses and cost of net revenue, respectively, in the accompanying consolidated statement of operations. During the three and six months ended June 30, 2019, the Company recorded equity-based compensation expense of $0.2 million and $5.4 million, respectively, which is included in general and administrative expenses in the accompanying consolidated statements of operations. The expense during the six months ended June 30, 2019 included $4.9 million in connection with the acceleration of vesting of certain of the 2018 Incentive Units and the modification of such awards discussed below. At June 30, 2020, there was $19.2 million of unrecognized compensation expense related to equity-based compensation awards, which is expected to be recognized over a weighted-average term of 2.7 years. At June 30, 2020, 2.9 million shares of the Company’s Class A Common Stock are available for issuance under the 2019 Plan.

In May 2020, the Company granted a total of 11,625 shares of Class A Common Stock to certain newly hired employees. The fair value of these immediately vested shares was $0.2 million and was recognized as compensation cost during the six months ended June 30, 2020. In addition, in May 2020, the Company granted 15,891 shares of Class A Common Stock to certain frontline patient-facing employees in connection with a Covid-19 retention bonus program. The fair value of these immediately vested shares was $0.2 million and was recognized as compensation cost during the six months ended June 30, 2020

Stock Options

In November 2019, the Company granted 3,416,666 options to purchase shares of common stock of the Company to certain executive officers that have an exercise price of $11.50 per share. The grant-date fair value of the awards, using a Black-Scholes option pricing model, was $7.2 million and is being recognized as expense on a straight-line basis over the employees’ requisite service period subject to management’s estimation of the probability of vesting of such awards. In April 2020, the Company granted 47,335 options to purchase shares of common stock of the Company to an employee that have an exercise price of $16.25 per share. The grant-date fair value of the awards, using a Black-Scholes option pricing model, was $0.3 million and is being recognized as expense on a straight-line basis over the employees’ requisite service period subject to management’s estimation of the probability of vesting of such awards. A portion of all options outstanding are eligible to vest on December 31, 2020, 2021 and 2022 based on defined performance conditions, subject to the employees’ continuous employment through the applicable vesting date. The Company has no other options outstanding as of June 30, 2020.

The assumptions used to determine the grant-date fair value of the stock options granted during the six months ended June 30, 2020 were as follows:

Expected volatility	40.7	%
Risk-free interest rate	0.4	%
Expected term	6.0	years
Dividend yield	N/A

Restricted Stock

During the three months ended June 30, 2020, the Company granted 78,536 shares of restricted stock to certain employees, which vest over the four year period following the grant date, subject to the employees’ continuous employment through the applicable vesting date. The grant-date fair value of the awards was $1.3 million and is being recognized as expense on a straight-line basis over the employees’ requisite service period.

In April 2020, the Company granted 20,656 shares of restricted stock to an employee. On each of December 31, 2020, 2021 and 2022, one-third of the shares are eligible to vest based on the cumulative annual growth rate of the Company’s stock during the ten trading days preceding the vesting date (which is considered a market condition), subject to the employee’s continuous employment with the Company through such vesting date. The grant-date fair value of the awards, using a Monte Carlo simulation analysis, was $0.3 million and is being recognized as expense on a straight-line basis over the employee’s requisite service period.

In March 2020, the Company granted 300,000 shares of restricted stock to an employee in conjunction with an acquisition. Of the total shares granted, 250,000 are eligible to vest based on certain performance conditions, subject to the employee's continuous employment through the applicable vesting date. The remaining 50,000 shares will vest 25% annually on December 31, 2020 through 2023, subject to the employee's continuous employment through the applicable vesting date. The total grant-date fair value of the award was $4.9 million and is being recognized as expense on a straight-line basis over the employee’s requisite service period subject to management’s estimation of the probability of vesting of such awards (as it relates to the performance-based awards).

In March 2020, the Company granted 341,123 shares of restricted stock to various employees. Of the total shares granted, 15,417 shares vested on the grant date, and the remaining shares will vest 25% on each anniversary of the Vesting Commencement Dates (as defined in the agreements), subject to the employees’ continuous employment through the applicable vesting date. The grant-date fair value of the awards was $5.6 million, of which $0.3 million was recognized as expense on the grant date and $5.3 million is being recognized as expense on a straight-line basis over the employees’ requisite service period.

Activity related to the Company’s non-vested restricted stock grants for the six months ended June 30, 2020 is presented below (in thousands, except per share data):

	Number of Shares of		Weighted-Average Grant Date
	Restricted Stock		Fair Value per Share
Non-vested balance at January 1, 2020	901	$	5.83
Granted	740	$	16.22
Vested	(20)	$	14.33
Forfeited	(20)	$	8.11
Non-vested balance at June 30, 2020	1,601	$	10.49

Incentive Units

AdaptHealth Holdings granted Incentive Units in June 2019 (the 2019 Incentive Units) and in April 2018 (the 2018 Incentive Units) to certain members of management. With respect to the 2019 Incentive Units, 50% of the awards vest in equal annual installments on each of the first, second, third and fourth anniversaries of the Vesting Commencement Date as defined in the agreements (May 20, 2019). The remaining 50% had vesting terms based upon a performance condition. In connection with the Business Combination, the vesting conditions for this portion of the 2019 Incentive Units was changed to vest quarterly during the one-year period subsequent to the Closing of the Business Combination. The grant date fair value of the 2019 Incentive Units, as calculated under an Option Pricing Method, was $4.5 million, and is being recognized as expense over the employees’ requisite service period based on the vesting conditions described above. In conjunction with the March 2019 Recapitalization Transactions, the vesting of certain of the 2018 Incentive Units was accelerated and all holders of the 2018 Incentive Units received an advance for future distribution, which were treated as a modification of the awards for accounting purposes. In conjunction with the Business Combination, the vesting of a majority of the unvested 2018 Incentive Units was accelerated.