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Buying CareCloud Preferred As

Note: I wrote this for myself. This isn't investment advice, just my notes. Updated 8/28/2024.

CareCloud Pref A is at $10. The preferred As collapsed from $27 to $5 after the owners realized that they didn't have change of control provisions. These are worth $25-$35. If they convert to common, pref holders are paying $1/share for $0.35 in earnings. If they don't convert, the discount is no longer warranted.

1. The company is currently breakeven, with $1.5M in interest/year and $15M in preferred dividends.1
2. Management struck a deal to lower preferred dividend of the As to 8.75% and add convertibility in exchange for adding a change of control provision.2
3. Management likely plans to convert all preferred shares to common, reducing preferred interest expense from $13MM/yr to $3MM/yr.
4. At current prices, preferred shareholders are paying $1/share for common stock that will earn about $0.35/share post-conversion due to a cost cutting program.3
5. Even if they don't convert the shares, the As will still be worth over $25 due to the dividend being twice covered.4

Putting it all together, I expect the company to make around $25MM in operating income from cost cutting and operations, and a conversion of As to common means $0.35/share in operating earnings.

You get that $0.35/share in earnings for the cost of $1/share ($10/share for pref A converted at a $2.50 stock price).

The security is trading at $10 and I think it is worth $25 in the case of non-conversion, as the dividend would be twice covered. Or worth $35 if they convert to shares. Some risks:

• The cost-cutting program may not achieve the projected $20M in FCF, or may destroy the company long term.
• Management owns no As, only commons, and may be hesitent to refinance the company or convert the A shares (diluting themselves)
• The company itself has some enterprise value, but is not a cash flow machine. It is a software company with a ton of financing and aggressive management.

Model

§Notes

1. 4.53MM pref A shares with 11% dividend yield, 1.48MM pref B with 8.75% dividend- both on $25 par means $2.75 and $2.19/share in dividends respectively.
2. Press Release
3. Common stock is at $2.50/share, and par for preferred is $25. That means preferred shareholders will get 10 shares for every 1 pref they own. Each pref costs $10. So $10/10 = $1/share cost basis
4. The dividend burden will be $13MM/year, and the company will make $25MM/year in EBITDA. Almost 2x coverage but who's counting.

§Updates

0. April 2026 Closing position/updates

CCLDP: buying at $10/share would have netted you 7.34 common shares, which at today's price of $3 would be worth $22/share
CCLDO: also had a good outcome, and was more protected from volatility etc. could have bought around $16/share and got a $27+ return

Good outcome!

1. April 2026: Redeemed B shares for $27.52/share
2. 2025-03-06: CareCloud announced they are converting all A preferreds to common at a 7.3358 rate. That is $15/share at the current stock price. Not a great outcome!
3. I've gotten some pushback on "the common will fall drastically post-conversion". Here's my perspective:
   • If all preferred shares are converted at $4 per common share, each preferred will receive approximately 7 shares.
   • At a $21 preferred A price, you are effectively paying $3 for each share of common.
   • With 6 million preferred shares outstanding, this conversion would result in an additional 42 million shares.
   • This would increase the total shares from 16 million to 58 million.
   • Assuming $20 million in free cash flow, each share would earn approximately $0.34.
   • Therefore, you are currently paying $3 per share for something that will earn $0.34+ per share and is growing.
   • Notice that with these assumptions, you are buying the common at a discount through the preferred.
4. 2025-01-21: Resumption of Preferred dividends. A's have a redemtion value of $28.17. They are going to pay a mix of regular dividends and catch-ups
5. 2025-01-01: CareCloud hired co-CEOs internally
6. 2024-11-15: CareCloud proposed increasing authorized shares from 35MM to 85MM. "flexibility needed for strategic growth initiatives, including future acquisitions, and to enable the potential conversion of the Company's outstanding Series A Preferred Stock to Common Stock"

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