Group Owning ~36% of Company Outlines Serious
Concerns Pertaining to CEO Conduct, Capital Allocation and
Governance Issues, Strategic Missteps and Value Destruction
Calls on Company to Answer Questions Pertaining
to CEO Share Pledging, Related-Party Transactions and Other
Material Issues Involving Insiders
Outlines Clear Steps for Enhancing Governance,
Improving Executive Leadership and Pursuing a Refined Strategy that
can Enhance Shareholder Value
Elliot Cooperstone, Lewis Gold and Barry Sternlicht
(collectively with certain of their affiliates, the “Group” or
“we”), who recently resigned as members of the Board of Directors
(the “Board”) of Cano Health, Inc. (“Cano” or the “Company”) (NYSE:
CANO), today issued the below letter to fellow shareholders.
***
Fellow Shareholders,
We are writing to convey our serious concerns regarding the
management and trajectory of Cano. We collectively own Class A and
Class B common shares with aggregate voting power of approximately
36% of all the shares outstanding, making our group the Company’s
single largest shareholder. The three of us recently made the
difficult decision to resign from Cano’s Board after it became
apparent that our persistent calls for enhanced corporate
governance, improved capital allocation and financial controls and
a more sustainable long-term strategy were being ignored. Our
efforts were brushed aside despite the rapid deterioration of
Cano’s balance sheet and market capitalization over the past 20
months. In our view, Dr. Marlow Hernandez, Cano’s Chief Executive
Officer, and his close associates on the Board left us with no
choice other than to resign as directors and start advocating for
shareholders’ best long-term interests from outside the boardroom.
Unfortunately, instead of responding to our concerns, Cano seems
intent on muzzling us with ill-informed and meritless threats of
litigation.
It is important to underscore that we are not “activist
investors”, and we have no history of running public proxy
contests. We have spent our careers establishing credibility across
the financial markets and various corporate sectors, including
healthcare services, based on our focus on the long-term. Each of
us has served on public and private company boards of directors.
Each of us has served as stewards of large amounts of capital and
placed the highest priority on that responsibility. In addition,
two of us have successfully grown and led healthcare services
businesses. Given our backgrounds, as well as our sizable
investment, we hope it is clear that we are squarely aligned with
all Cano shareholders. In contrast, half of the remaining directors
collectively own a paltry amount of Company stock – less than 1% –
substantially all of which was awarded to them and not
purchased.
In the subsequent sections of this letter, we provide an
overview of our concerns and ideas, including:
- The urgent need for C-suite and boardroom changes at Cano.
- The path to establishing the right corporate governance and the
right, value-enhancing strategy for Cano.
- How you, as fellow shareholders, can provide feedback to a
seemingly insular Board.
We are not soliciting any support in connection with a future
meeting of shareholders at this time. We simply want to ensure you
understand key facts about Cano, including the reasons behind our
recent resignations and the opportunities we see for a
value-enhancing turnaround. Should you want to contact the Board or
engage in a standard shareholder-to-shareholder conversation with
us, please refer to the details included at the end of this
letter.
The Urgent Need for
Change
In our view, Cano has lost all credibility with its shareholders
and the market due primarily to a majority of the Board being
unwilling to effectively and objectively supervise Dr. Hernandez.
The Board’s committee chairs and remaining members all appear to be
either beholden to Dr. Hernandez or inappropriately deferential to
him. The consequences associated with this brand of insular
governance have been significant:
- Sustained Shareholder Value Destruction and
Underperformance: Cano’s total shareholder returns are a
shocking -83% over the past 12 months and -92.5% since going public
in 2021.1 This represents staggering underperformance relative to
the S&P 500 Index, S&P Healthcare Sector Index, Russell
2000 and practically every possible peer.
- Reckless Capital Allocation: Cano has burned through all
of the roughly $535 million of capital it had on its balance sheet
when its de-SPAC transaction closed in June 2021. In addition, the
Company has burned through most of the approximately $1 billion of
debt capital raised since then. We believe Dr. Hernandez was able
to utilize his outsized influence over a majority of the Board to
push through ill-conceived acquisitions that have significantly
underperformed expectations and were predicated on assumptions
prepared by or at the direction of Dr. Hernandez that were so
materially incorrect that they did not provide a proper basis for
Board consideration and decision-making.
- A Misguided Strategy: Rather than remain focused on the
Florida Medicare Advantage market, where there is significant
growth and margin enhancement potential, Cano aggressively expanded
to many other states and business lines. This gambit has proved
ineffective, as evidenced by Cano’s inability to effectively manage
a more sprawling operation, poor financial forecasting, failure to
hit stated guidance and consistently poor results. Now that the
public markets are no longer rewarding growth at any cost, we
believe the Company needs to divest unprofitable operations to
achieve positive free cash flow as quickly as possible.
- Poor Human Capital Management: Cano has experienced –
and continues to experience – concerning turnover and morale
issues. This outflow of talent appears to validate our concerns and
signal a lack of confidence in the way Cano is being run under Dr.
Hernandez. The Company’s seeming inability to attract and/or retain
experienced executives and directors is a threat to stability and,
in turn, long-term value creation.
- Delayed Financials: Cano was unable to file its 10-K on
time for both fiscal year 2021 and fiscal year 2022, raising
questions about the Company’s ability to meet public market
requirements and eroding Cano’s credibility with investors.
- Insufficient Data Transparency: In our view, the Company
has not reported data in a manner that allows public investors to
fully understand the underlying performance of the business. What
have been the capital expenditures and operating costs associated
with expansion outside of Florida? What is the true profit
potential of the Florida Medicare Advantage business? If presented
properly, we believe this data would further support the proposed
strategy we summarize below.
- Questionable Conduct on the Part of Dr. Hernandez: We
believe Cano needs to clearly address the recent disclosure
involving Dr. Hernandez’s troubling history of share pledging and
material loan transactions with Cano executives.
- Dr. Hernandez recently disclosed for the first time in a
Schedule 13D amendment that he was materially indebted to the
Company’s Chief Operating Officer, Robert Camerlinck, under a
previously undisclosed promissory note. To repay this, Dr.
Hernandez, together with other Cano executives, Dr. Richard Aguilar
(Chief Clinical Officer), Jason Conger (Chief Growth Officer) and
Rick Sanchez, who were named as guarantors, transferred 20,000,000
shares to Mr. Camerlinck on April 5, 2023, pursuant to a loan
repayment agreement.
- This raises numerous significant governance issues, including:
how could Dr. Hernandez effectively carry out his role of
overseeing the C-suite when he was indebted to his own COO? How
could this information not have been previously disclosed to the
Board and the market?
- We also question why Dr. Hernandez and the Cano executives who
are parties to the April 5th Stock Purchase and Repayment Agreement
have not filed a joint Schedule 13D as “group” members.
- A True “Family Affair”: The extent of the Hernandez
family’s involvement at Cano is deeply troubling. While Cano’s
shareholders have long suffered from the Company’s
underperformance, many of Dr. Hernandez’s family members appear to
have benefited from their ongoing relationships with the Company.
For example, over the past three years:
- The Company paid more than $23 million to a company controlled
by Dr. Hernandez’s father for general contractor work at Cano
facilities.
- The Company paid $8.5 million to a dental services provider
owned by Dr. Hernandez’s wife, Dental Excellence Partners, for
providing dental services for managed care members of the
Company.
Dr. Hernandez’s wife is now a minority
shareholder of Onsite Dental which purchased Dental Excellence
Partners in April 2022 and provides dental services to Cano. Dr.
Hernandez’s wife remains a member of its Board of Directors and Dr.
Hernandez’s brother and mother are employed as dentists at Onsite
Dental.
How can Cano shareholders be sure that these
Hernandez family arrangements are negotiated at arm’s-length, at
market rates and have been fully disclosed to shareholders?
The SEC filings made late last week by Cano and Dr. Hernandez
validate the concerns voiced in this letter and made previously by
members of our Group. In fact, we question whether the Company
would have made these disclosures had they not been subject to
outside pressure. Troubling conflicts of interest, related-party
transactions and insider loans have been allowed to persist at Cano
for too long, and to the extent these are not immediately addressed
and explained by Cano to our satisfaction, then we will submit a
books and records request under Section 220 of Delaware law so that
we can fully investigate and explore all of these arrangements and
dealings for ourselves. Based on this information we have every
intention of holding directors personally responsible for what
appears to be clear breaches of fiduciary duties, including the
duty of loyalty.
As a first step towards addressing shareholders’ concerns, we
urge Cano to immediately address the following questions through
additional public disclosures:
- Have any senior executives departed the Company since our
resignations as directors, or have any given notice that they plan
to depart? If so, who are these executives?
- Which senior executives have departed the Company in the past
twelve months, and have these departures, if they exist, been
disclosed?
- Amid the current tumult, what is Cano’s plan to retain senior
talent other than those beholden to Dr. Hernandez through
compromising transactions?
- Do any other specific arrangements exist with regard to Dr.
Hernandez’s potential pledging of his shares beyond what has been
disclosed in his Schedule 13D, Company filings or otherwise?
- What leeway, if any, has the Board granted for pledging of Dr.
Hernadez’s stock?
- What loan arrangements exist on Dr. Hernandez’s part, aside
from what has already been disclosed, and who are the
counterparties? Do any of these violate Board or Company
policies?
- What other business arrangements does Dr. Hernandez’s father –
or other friends or family members – have with the Company,
including marketing involvements?
While not an exhaustive list of our questions and concerns,
these issues and open questions are alarming and represent serious
threats to shareholder value. We firmly believe there are changes
that can be made to reverse Cano’s current trajectory and that Cano
can once again be a significant source of value creation for its
shareholders, partners, employees and broader stakeholder
constituencies.
The Right Path Forward for
Cano
Turning around Cano begins with putting the right people in the
right positions. First and foremost, it is crystal clear to us that
Cano needs to replace Dr. Hernandez with a credible, high-integrity
leader who possesses experience operating healthcare services
companies. The Company is fortunate to have individuals within the
organization who fit this profile. We are ready and willing to
apply our strong recruiting and succession planning experience to
help the Board select an interim Chief Executive Officer in the
immediate term as well as a permanent replacement once the
organization is stabilized.
A second priority of ours is helping to reconstitute the Board
in a manner that adds necessary experience and independence while
reducing interlocks and potential conflicts of interest. The Board
needs a significant overhaul of its membership and leadership. Too
many of the current directors lack prior experience in the
healthcare services industry and do not possess skillsets critical
to their roles. We are prepared to engage with the Board on a
logical refresh and submit candidates with experience in corporate
governance, capital allocation, M&A, finance and audit matters,
as well as the healthcare sector. We are open to a Board
reconstitution that contemplates continuity as part of a
much-needed overhaul.
We believe the Company needs to immediately begin the process of
selling all non-core businesses in an orderly manner. We are
confident that an objective and unbiased Board would quickly see
the merit in re-focusing Cano’s strategy on the high-potential
Florida market, which we have noted can likely drive strong growth
with attractive margins. This should be accompanied by an
assessment of all strategic alternatives available, including a
subsequent complete sale of the Company under the supervision of a
more experienced and qualified Board. Our group can support the
Company’s efforts to explore all potential strategic opportunities
based on our significant transaction experience and
relationships.
Lastly, we also believe that new leadership will see the wisdom
in revising the Company’s corporate governance policies and bylaws
to be more shareholder friendly. Natural steps include
de-classifying the Board, allowing shareholders to call special
meetings and act by written consent and increasing transparency and
disclosure around director interlocks and possible related-party
transactions. It is clear to us that Cano needs to evolve from
being a founder-dominated business to a mature, well-governed
company.
Making Your Views Known
Since forming our group, the feedback we have received from
other shareholders is highly encouraging and corroborates the
efforts we have undertaken to resurrect Cano. We encourage all Cano
shareholders and other stakeholders to make their views known, as
this is the only way for the Board to understand that there is a
clear and widespread desire for change. Dr. Hernandez and the other
directors would be acting irresponsibly if they dismissed
unambiguous feedback from a critical mass of shareholders and
instead prioritized their own self-preservation.
You can privately contact the Company and request that your
feedback be shared with the full Board by emailing
investors@canohealth.com.
To the extent you want to share your views with us or have a
normal shareholder-to-shareholder conversation with our group, we
can be reached at CanoInvestorGroup@longacresquare.com. We are
eager to hear if other shareholders share our views on the best
path forward for Cano, as outlined in this letter. We understand
that your email does not indicate any interest in being part of our
group. We will keep all conversations confidential, unless
otherwise instructed.
Thank you, and we look forward to remaining aligned with you and
advancing our collective goal of turning around Cano.
Sincerely,
Elliot Cooperstone
Lewis Gold
Barry Sternlicht
***
1 As of market close on March 30, 2023.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20230409005022/en/
Investors:
HKL & Co., LLC Peter Harkins, Jr. / Jordan Kovler Toll-Free:
(800) 326-5997 CANO@hklco.com Media: Longacre Square Partners Greg
Marose / Joe Germani gmarose@longacresquare.com /
jgermani@longacresquare.com
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