Cano Health investors who resigned from its board of directors last week are sharing new specifics on concerns that precipitated their departure, including allegations of conflicts of interest, related-party transactions and insider loans at the value-based medical provider.
Investors Barry Sternlicht, Elliot Cooperstone and Lewis Gold, who collectively hold 36% of Cano’s stock, penned an open letter on Monday outlining “serious concerns” regarding Cano’s management and trajectory.
The letter also calls on Cano to oust its CEO and sell non-core businesses to focus on profitability.
The group, which is collectively the largest single shareholder of Cano, said they resigned from Cano’s board after their calls for enhanced corporate governance and financial controls were ignored following the deterioration of Cano’s balance sheet and stock value.
Sternlicht, Cooperstone and Gold said they are particularly worried about Cano CEO and founder Marlow Hernandez, due to his alleged history of share pledging and material loan transactions with Cano executives.
Hernandez disclosed in a Schedule 13D announcement filed on Thursday that he is materially indebted to Cano’s chief operating officer, Robert Camerlinck. Hernandez repaid this by transferring 20 million shares to Camerlinck on April 5, with other Cano executives as guarantors.
The stock transfer raises governance issues, Sternlicht, Cooperstone and Gold said, because Hernandez’s debt to Cano’s COO was not previously disclosed to the board.
The investors also said they were concerned over business arrangements between Cano and other members of Hernandez’s family.
According to the investors, over the past three years Cano paid $23 million to a company controlled by Hernandez’s father for general contractor work. In addition, Cano paid $8.5 million to a dental services provider, Dental Excellence Partners, owned by Hernandez’s wife for providing dental care to Cano members.
“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,” the letter reads.
Hernandez’s wife is a minority shareholder in Onsite Dental, which purchased Dental Excellence Partners in April 2022. She is also a member of its board of directors, while Hernandez’s brother and mother are employed as dentists at Onsite, the letter says.
“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?” Sternlicht, Cooperstone and Gold said.
The investors petitioned Cano to address its concerns through additional public disclosures. Otherwise, the investors plan to submit a records request under Delaware law to investigate the arrangements.
In the letter, Sternlicht, Cooperstone and Gold also accused Hernandez of poor corporate governance, citing that the company has burned through $535 million after its merger with a special purpose acquisition company closed in 2021, and most of the $1 billion in debt capital raised since then. The letter accuses Hernandez of pushing through “ill-conceived acquisitions” that have underperformed expectations.
The investors also took issue with Hernandez’s decision to expand Cano to other states and business lines, rather than remaining focused on the Florida Medicare Advantage market.
“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,” the letter says.
The investors called on Cano to replace Hernandez, overhaul the board and revise Cano’s corporate governance policies. They also suggested Cano sell non-core businesses and refocus on the Florida market, citing its potential for growth with stronger margins, and assess other strategic alternatives, including a complete sale of the company.
Cano did not respond to a request for comment. However, when the investors resigned last week, the Florida-based chain called the allegations against Hernandez and Cano “misleading,” “reckless” and “irresponsible” in a statement.
Cano has grown since its founding in 2009 to operate more than 170 centers in 9 states. The company went public in 2021 through a $4.4 billion SPAC merger, but has struggled financially.
The company lost more than $426 million last year, and planned to “significantly reduce” investments in 2023 in the face of lower-than-anticipated patient utilization rates, according to the company’s most recent annual financial filing.
Cano’s stock has dropped almost 80% in the past 12 months.
