DEF 14A: CareCloud Seeks Shareholder Approval to Amend Series A Preferred Stock, Aiming for Alignment with Series B and Potential Mandatory Exchange

CareCloud is asking Series A Preferred Shareholders to approve an amendment to their stock's certificate, which includes aligning change of control provisions with Series B Preferred Stock, reducing the dividend rate from 11% to 8.75%, and introducing a potential mandatory exchange for common stock.

Summary

• CareCloud is holding a Special Meeting on August 23, 2024, to seek approval from Series A Preferred Shareholders for an amendment to the Preferred Stock Certificate.
• The proposed amendment aims to align the Series A Preferred Stock with the Series B Preferred Stock by introducing a change of control provision and reducing the dividend rate from 11% to 8.75% per annum.
• The amendment also includes an exchange feature, allowing the company's board to exchange Series A Preferred Stock for Common Stock.
• Shareholders are also being asked to approve one or more adjournments of the Special Meeting, if necessary, to solicit additional proxies.
• The Board of Directors recommends voting FOR both the approval of the Preferred Stock Proposal and the Adjournment Proposal.
• The record date for determining shareholders eligible to vote at the Special Meeting is July 5, 2024.
• As of July 5, 2024, there were 4,526,231 shares of Series A Preferred Stock outstanding.
• If the amendment is approved, the Board may file it with the Delaware Secretary of State, but even with approval, the Board may choose not to proceed with the amendment.
• If the amendment is not filed within 45 days of approval, the Board will be deemed to have abandoned it.
• The affirmative vote of two-thirds (66 2/3%) of the Series A Preferred Stock is required to approve the Preferred Stock Proposal.
• The affirmative vote of a majority of the shares of Series A Preferred Stock present or represented by proxy at the Special Meeting is required for the Adjournment Proposal.

Sentiment

Score: 5

Explanation: The sentiment is neutral. While the company presents the amendment as beneficial, it involves a reduction in dividend rate for preferred shareholders, which could be viewed negatively. The potential for mandatory exchange also adds uncertainty.

Positives

• The amendment provides Series A Preferred Shareholders with similar change of control provisions afforded to the Series B Preferred Shareholders, protecting their liquidity and exchangeability in the event of a sale transaction.
• Aligning the terms of the Series A Preferred Stock to have the same rights and protections as the Series B Preferred Stock, while lowering the respective dividend rate and providing the Company with the right to implement an Exchange, is in the best interests of the Company, the preferred shareholders and the common shareholders.

Negatives

• Under the Preferred Stock Proposal, holders of the preferred stock are forfeiting certain rights.
• If shares of Series A Preferred Stock are exchanged into shares of Common Stock upon an Exchange pursuant to the Amendment, holders of Series A Preferred Stock will lose the right to receive monthly dividends, and the preference to distributions upon the liquidation of the Company, which currently amounts to $25.00 per preferred share plus accumulated and unpaid dividends (which currently amounts to $1.83 per preferred share).
• As noted above, under the Preferred Stock Proposal, the dividend rate of the Series A Preferred Stock will be reduced from 11% per annum prospectively to 8.75% per annum and the holders of the Series A Preferred Stock are forfeiting the right to receive such higher dividend rate.

Risks

• There are certain risks associated with the Amendment, and we cannot accurately predict or assure you that the Amendment, if approved, will produce or maintain the desired results.
• The Preferred Stock Proposal could result in adverse tax consequences for the Company.
• The issuance of new Common Stock in exchange for the Series A Preferred Stock could result in a change in control for U.S. federal income tax purposes.
• Accordingly, our ability to utilize existing net operating losses to offset future taxable income could be limited pursuant to Section 382 of the Internal Revenue Code.
• This could result in greater U.S. federal cash income taxes payable than would otherwise be the case.

Future Outlook

The company intends to regularly review and consider when the suspension of dividends on both the Series A and Series B Preferred Stock should be lifted, but cannot guarantee when or if this will occur.

Management Comments

• The Board believes that aligning the terms of the Series A Preferred Stock to have the same rights and protections as the Series B Preferred Stock, while lowering the respective dividend rate and providing the Company with the right to implement an Exchange, is in the best interests of the Company, the preferred shareholders and the common shareholders.

Industry Context

This type of preferred stock amendment is not uncommon when companies seek to streamline their capital structure or reduce dividend obligations. Aligning the terms of different series of preferred stock can simplify corporate governance and potentially make the company more attractive to investors.

Comparison to Industry Standards

• Similar preferred stock amendments have been seen in other publicly traded companies facing financial challenges or seeking to optimize their capital structure.
• For example, companies like Ashford Hospitality Trust have undertaken similar restructurings of their preferred stock to reduce dividend burdens and improve financial flexibility.
• The proposed dividend rate of 8.75% is within the range of other publicly traded preferred stocks, although the specific rate depends on the company's credit risk and market conditions.

Stakeholder Impact

• Shareholders: The amendment could impact the value and dividend income of Series A Preferred Stock.
• Common Stockholders: The potential exchange of preferred stock for common stock could dilute ownership.
• Company: The amendment could provide greater financial flexibility and reduce dividend obligations.

Next Steps

• Series A Preferred Shareholders need to vote on the proposed amendment and the adjournment proposal.
• The Board of Directors will decide whether to file the amendment with the Delaware Secretary of State if it is approved by shareholders.
• The company will announce the voting results on a Form 8-K filed with the SEC following the Special Meeting.

Key Dates

Keywords

Series A Preferred Stock, Amendment, Proxy Statement, Special Meeting, Dividends, Redemption, Change of Control, Exchange, CareCloud