No more major acquisitions. Here is why. I read and scour the financial statements. All of the answers are in there. Let me give you a hint.
This is the biggest issue shareholders face:
"The credit agreement includes covenants, restrictions and events of default usually present in credit facilities of this nature, including requirements to meet certain financial tests periodically and restrictions on additional indebtedness and encumbrances. The financial covenants the Company must maintain are as follows:
– a Fixed Charge Coverage Ratio of at least 1.20 to 1.00 on a rolling four-quarter basis; and
– a Senior Leverage Ratio of not more than 3.50 to 1.00 as at September 1, 2021 and thereafter up to and including the fiscal quarter ending March 31, 2023 and 3.00 to 1.00 from April 1, 2023 and at all times thereafter, up to and including the maturity date. This ratio may increase by 0.50 to 1.00 for the next two fiscal quarters immediately following an acquisition if the aggregate purchase price is equal to or
greater than US$20,000.
The Company was in compliance with all covenants as at December 31, 2021.
What does this mean?
The debt is underwritten by ITS EBITDA only. If earnings are flat at $4.1M a quarter for a year the total they equal $16.4M. The long term debt is $59M. The senior coverage ratio is currently at 3.5 which is currently right at the obligation of 3.5.
They have until March of 2023 to bring this down to 3.0 as per the agreement. That means they need $20M EBITDA or $5M per quarter in each of the next 4 quarter's just to meet the creditor obligations.
And if they have a sequential decline in EBITDA they will be in trouble as it relates to the covenants.
The good news of this debt agreement is that there is no capacity to add any more debt and vastly overpay for a highly dilutive acquisition.
BUT, it means that any future acquisition will rely ENTIRELY on cash and share issuance. And the fact that they are right at the edge of the debt covenants means they will need to have a much higher cash balance as a protection against creditors taking a pound of flesh.
They have $150 million more capacity on the shelf registration. There is no more debt capacity. You know what comes next.