RE:cash and working capital what will it be used forTsmith, let me try to add perspective to your two questions:
- Where is the money go; and
- Will QTRH continue with an acquisition-based growth strategy?
First, where did the money go? There are three easily identified events:
- $14.6 million charge to settle litigation and arbitration disputes with the former owners of VIZIYA.
- Payment of contingency award/fees to McKool Smith for representation of Wilan v. Apple. Some industry sources pegged the amount at 30% to 35% of the award. This may have been netted in the financials so it may be a red herring.
- Under-bidding or mis-scoping by ETC of contract awards (both pre-acquisition and post-acquisition - but believed to be more pre-acquisition contracts). This was further exacerbated by labor and supply chain disruptions/cost increases as a result of Covid. The cash used in operations numbers in your post suggest that this third factor was the major use of cash.
Your second question is on QTRH's growth strategy. Understanding of the direction will need comment from the new CEO - hopefully a presentation at the Q3 call. However, since Rusty Lewis was on the BoD from early 2022 and has to be considered the major driver of QTRH's forward strategy, we can review what we have observed or has been indicated up to this point.
- Acquisition growth seems to have been put on hold. This has undoubtedly is the result of the cash requirements to address project completion, as noted above.
- With management focus on project completion, margin management and wringing efficiencies from ETC/IRD shared services, we were told during several calls that any acquisition would be tuck-ins to the existing IRD and ETC platforms. This type of acquisition could still be on the table.
- QTRH's acquisition financing target has been to use cash for approximately 50% of a major acquisition and finance the balance. However, QTRH's ability to finance any new major acquisition is constrained by the financial performance to date relative to the two major financing liabilities - the ETC acquisition funding and the debentures. Approximately $30 million remains on the balance sheet from the original $75 million financing of the ETC acquisition in September 2021. As you know, QTRH recently received approval from HBSC for an extension through Q4 to bring covenants into line with the loan agreement. Additionally, the debentures, due in Q4-2026, represent a potential cash overhang if the share price does not increase sufficiently to motivate holders to take shares upon redemption. If the share price rises significantly through 2024, QTRH can be in a position to force redemption of the debentures in Q4-24. I think the share price has to be in the mid $4s for QTRH to trigger this clause. The debenture document can be found on SEDAR.
With the constraints imposed by point 3, management needs to outline the growth strategy beyond organic growth. Organic growth has clearly been communicated by management as the near term source of growth. That understanding underpins the assumptions in my financial projects I posted earlier this week. IRD is performing in this area but ETC has been constrained from aggressive pursuit of new business by the need to manage implementation more profitably through to thte operational phase. However, ETC is now seems to be in a position to aggressively bid on new contracts - although the fruits of a bidding ramp up may not appear until 2024.
There are ITS businesses for sale that QTRH could look at. For exsample, you will recall that Conduent ran up a trial balloon on selling its transportation unit, opining that its value was ~$1 billion. After the laughter receded, Conduent decided to not pursue the strategic review.
QTRH's financial position, which can be expected to improve substantially through 2024, may allow it to jump back into the major acquisition game to accelerate growth. On the other hand, the possiblity of a merger, where one plus one can equal three, could be on the table. Shareholders need to hear QTRH's forward vision from management. As I opined earlier in this post, Rusty Lewis is QTRH's ITS strategist and he has now hired a CEO that has historically been in lock-step wit his vision to make it happen.
I hope this perspective provides food to thought Tsmith. Please post your thoughts on this subject.