QUALTEK SERVICES INC. The following discussion and analysis should be read in conjunction with the accompanying unaudited interim condensed consolidated financial statements and related notes. Pursuant toSEC rules for reports covering interim periods, we have prepared this analysis to enable you to assess material changes in our financial condition and results of operations sinceDecember 31, 2021 , the date of our Annual Report, which should be read in conjunction with this discussion and analysis. Overview We are a technology-driven, leading provider of communications infrastructure services, power grid modernization, and renewables solutions to the telecommunications and utilities industries acrossthe United States . We provide a variety of mission-critical services across the telecom and renewable energy value chain, including wireline and fiber optic terminations, wireless, fiber-to-the-home, or FTTH, and customer fulfillment activities. Our experienced management team has leveraged our technical expertise, rigorous quality and safety standards, and execution track record to establish and maintain long-standing relationships with blue-chip customers. We operate in two segments: (i) Telecom and (ii) Renewables & Recovery Logistics. Our Telecom segment provides engineering, construction, installation, network design, project management, site acquisition and maintenance services to major telecommunication, utility, and cable carriers in various locations inthe United States . Our Renewables & Recovery Logistics segment provides businesses with continuity and disaster recovery operations as well as new fiber optic construction services to renewable energy, commercial and utilities customers acrossthe United States . The Transaction OnFebruary 14, 2022 ,QualTek Services Inc. completed the Business Combination (the "Business Combination") withQualTek HoldCo, LLC (f/k/aBCP QualTek HoldCo, LLC ), aDelaware limited liability company ("BCP QualTek") (the "Closing"), pursuant to the Business Combination Agreement (the "Business Combination Agreement") dated as ofJune 16, 2021 , by and among (i) ROCR, (ii)Roth CH III Blocker Merger Sub, LLC , aDelaware limited liability company and wholly-owned subsidiary of ROCR ("Blocker Merger Sub"), (iii)BCP QualTek Investors, LLC , aDelaware limited liability company (the "Blocker"), (iv)Roth CH III Merger Sub, LLC , aDelaware limited liability company and wholly-owned subsidiary of ROCR ("Company Merger Sub"), (v) BCP QualTek and (vi)BCP QualTek, LLC , aDelaware limited liability company, solely in its capacity as representative of the Blocker's equity holders and BCP QualTek's equity holders. See Note 1 - Nature of Business and Summary of Significant Accounting policies to the condensed consolidated financial statements for additional information on the Business Combination. As a consequence of the Business Combination, we became the successor to anSEC -registered and Nasdaq-listed company which required us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional ongoing annual expenses as a public company for, among other things, directors' and officers' liability insurance, director fees and additional internal and external accounting, legal and administrative resources, including increased audit and legal fees.
Key Financial and Operating Measures
We monitor the following key financial and operational metrics to evaluate our
business, measure our performance, identify trends affecting our business,
formulate business plans, and make strategic decisions. We believe that these
financial performance metrics represent the primary drivers of value
enhancement, balancing both short- and long-term
30--------------------------------------------------------------------------------
Table of Contents
indicators of increased shareholder value. These are the metrics we use to
measure our results and evaluate our business. See "- Results of Operations" for
further detail.
For the Three Months Ended For the Nine Months Ended
October 2, October 2,
(in thousands) October 1, 2022 2021 October 1, 2022 2021
Revenue $ 216,120 $
215,462
- $ 726 $ - $ (1,349)
Total Adjusted EBITDA $ 15,733 $ 45,331 $ 29,918 $ 54,642 For further information about how we calculate EBITDA and Adjusted EBITDA as well as limitations of its use and a reconciliation of EBITDA and Adjusted EBITDA to net loss, see "- Non-GAAP Financial Measures" below.
Non-GAAP Financial Measures
In order to provide additional information regarding our financial results, we have disclosed in the table above Adjusted EBITDA, which is a non-GAAP financial measure that we calculate as our net income (loss) before interest, taxes, depreciation and amortization, management fees, transaction expenses, share-based compensation, change in fair value of contingent consideration, remeasurement of TRA liabilities, loss on extinguishment of convertible notes, expenses associated with public company readiness and net income (loss) from certain regional market shutdowns. The reconciliation of net loss to Adjusted EBITDA is provided below. We present Adjusted EBITDA as a key measure used by our management to assess the operating and financial performance of our operations in order to make decisions on the allocation of resources. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are as follows: •although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; •Adjusted EBITDA does not reflect: (1) changes in, or cash requirements for, our working capital needs; (2) the potentially dilutive impact of non-cash stock-based compensation; (3) tax payments that may represent a reduction in cash available to us; or (4) net interest expense/income; and •other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.
Because of these and other limitations, you should consider Adjusted EBITDA along with other GAAP-based financial performance measures, including net loss, cash flow metrics and our GAAP financial results.
31--------------------------------------------------------------------------------
Table of Contents
The following table provides a reconciliation of net income (loss) to Adjusted
EBITDA:
For the Three Months Ended For the Nine Months Ended
October 2, October 2,
(in thousands) October 1, 2022 2021 October 1, 2022 2021
(Loss) income continuing operations
- (4,985) - (8,114)
Net (loss) income $ (6,920) $ 14,481 $ (73,116) $ (28,555)
Management fees 37 129 163 751
Transaction expenses 137 1,423 10,725 2,875
Share-based compensation 422 - 8,247 -
Depreciation and amortization 14,892 13,491 44,452 39,136
Interest expense 16,016 14,640 41,444 35,778
Loss on extinguishment of convertible
notes - - - 2,436
Change in fair value of contingent
consideration (11,763) (4,544) (11,763) (4,544)
Expenses associated with public company
readiness 1,042 - 1,693 -
Net losses from certain regional market
shutdowns (1) 2,990 - 9,193 -
Loss from discontinued operations - 4,985 - 8,114
Remeasurement of TRA liabilities (1,120) - (1,120) -
Adjusted EBITDA - continuing operations $ 15,733 $ 44,605 $ 29,918 $ 55,991
Adjusted EBITDA - discontinued operations
(2) - 726 - (1,349)
Total Adjusted EBITDA $ 15,733 $ 45,331 $ 29,918 $ 54,642 ____________________________________
(1)Primarily represents net losses associated with certain regional markets that did not meet the classification of discontinued operations under GAAP but operations in these markets have been ceased or are expected to be ceased within the next twelve months.
(2)Represents suspended Canadian operations within the Telecom segment
Factors Impacting Our Performance
Our historical financial performance and future financial performance depends on several factors that present significant opportunities but also pose risks and challenges, including those discussed below and in the section "- Risk Factors."
Acquisitions
As part of our growth strategy, we may acquire companies that expand, complement, or diversify our business. We regularly review opportunities and periodically engage in discussions regarding possible acquisitions.
The Company completed the acquisitions of FNS, Broken Arrow, Concurrent, andUrban Cable during 2021. The operations of the acquired entities are included in our results for the periods following the closing of the acquisition. See Note 4-Acquisitions to the condensed consolidated financial statements.
Seasonality and Cyclical Nature of Business
Certain services provided by the Company are seasonal and vary from market to
market in different geographic areas. As a majority of our work is performed in
an outdoor environment, adverse weather such as heavy snow or rain or extreme
low temperature could affect our performance. Conversely, demand for some
services within the Company's Renewables & Recovery Logistics businesses are
dependent upon the occurrence of adverse weather events.
The telecommunication industry has been and likely will continue to be highly
cyclical. Fluctuations in demand can be caused by many factors such as new
technology adoption, need for higher bandwidth, and change in spending
environments. We generally expect growth in our industry given the national roll
out of 5G network and home adoption of fiber optic internet. However, the demand
can be subject to volatility from factors such as our customers' access to
capital and changes in regional and global economic conditions. For instance, in
2021, we experienced delays in certain 5G rollout projects, including equipment
delays, which delayed or reduced our anticipated revenue or profits from these
projects. The
32--------------------------------------------------------------------------------
Table of Contents
effects of the COVID-19 pandemic could also result in greater seasonal and cyclical volatility than would otherwise exist under normal conditions. Since adverse weather events are more likely to occur in higher frequency and greater severity during winter, our first and fourth quarter results might be impacted by conditions that are out of our control.
Regulations
We are subject to many complex, overlapping local, state and federal laws, rules, regulations, policies and legal interpretations (collectively, "laws and regulations") in the markets in which we operate. These laws and regulations govern, among other things, consumer protection, state and municipal licensing, privacy and data protection, labor and employment, competition, and marketing and communications practices, to name a few. These laws and regulations will likely have evolving interpretations and applications, and it can often be difficult to predict how such laws and regulations may be applied to our business.
COVID-19 Impact
During the COVID-19 pandemic, our services have mostly been considered essential in nature. As the situation continues to evolve, we are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, in addition to how the COVID-19 pandemic impacts our ability to provide services to our customers. As the COVID-19 pandemic is expected to continue to affect our future business activities for an unknown period of time, we believe there could be impacts to our financial performance. These impacts include lost productivity from governmental permitting approval delays, reduced crew productivity due to social distancing, other mitigation measures or other factors, the health and availability of work crews or other key personnel, including subcontractors or supply chain disruptions, and/or delayed project start dates or project shutdowns or cancellations that may be mandated or requested by governmental authorities or others, all of which could result in lower revenue or higher costs. Additionally, disruptions in economic activity as a result of the COVID-19 pandemic have had, and may continue to have, adverse effects across our end markets. To the extent that future business activities are adversely affected by the pandemic, we intend to take appropriate actions designed to mitigate these impacts. Given the uncertainty regarding the magnitude and duration of the pandemic's effects, we are unable to predict with specificity or quantify any potential future impact on our business, financial condition and/or results of operations.
Components of Our Results of Operations
Revenue
We generate revenue from engineering, construction, installation, network design, project management, site acquisition, maintenance services, business continuity, disaster recovery operations, and fiber optic construction services inthe United States . Cost of Revenues Cost of revenues primarily consists of labor, materials, equipment and overhead costs incurred in the services sold in the period as well as insurance costs. Labor and overhead costs consist of direct and indirect service costs, including wages and fringe benefits, and operating expenses. We expect our cost of revenues to continue to change proportionally and remain relatively flat as a percentage of revenue as we scale our business.
General and Administrative Expenses
General and administrative expenses consist primarily of payroll and related benefit costs for our employees involved in general corporate functions and changes in fair value of contingent considerations from business acquisitions as well as costs associated with the use by these functions of facilities and equipment, such as rent, insurance, and other occupancy expenses. General and administrative expenses also include legal, consulting and professional fees.
Depreciation and Amortization Expenses
Depreciation and amortization expenses primarily consist of depreciation on
assets under capital lease, machinery, equipment, vehicles, office furniture,
computers, leasehold improvements, software, and amortization of intangible
assets. We expect depreciation and amortization expenses to increase for the
foreseeable future as we scale our business.
33--------------------------------------------------------------------------------
Table of Contents
Other Expense, Net
Other expense, net, consists primarily of interest expense, loss on extinguishment of convertible notes, and gain/loss on the sale/ disposal of property and equipment.
Results of Operations
Comparison of the Three Months Ended
The following table sets forth our condensed consolidated results of operations
for the periods presented:
For the Three Months Ended
October 1, October 2,
(in thousands) 2022 2021 ($) Change (%) Change
Revenue $ 216,120 $ 215,462 $ 658 0.3 %
Cost and Expenses:
Cost of revenues 188,108 157,157 30,951 19.7 %
General and administrative 3,890 9,495 (5,605) (59.0) %
Transaction expense 137 1,423 (1,286) (90.4) %
Depreciation and amortization 14,892 13,491 1,401 10.4 %
Total costs and expenses 207,027 181,566 25,461 14.0 %
Income from operations 9,093 33,896 (24,803) (73.2) %
Other income (expense):
Gain on sale/disposal of property and
equipment 3 210 (207) (98.6) %
Interest expense (16,016) (14,640) (1,376) 9.4 %
Total other expense (16,013) (14,430) (1,583) 11.0 %
Net (loss) income from continuing
operations (6,920) 19,466 (26,386) (135.5) %
Net loss from discontinued operations - (4,985) 4,985 (100.0) %
Net (loss) income $ (6,920) $ 14,481 $ (21,401) (147.8) %
Revenue
Revenue increased $0.7 million , or 0.3%, for the three months ended October 1,
2022 , compared to the three months ended October 2, 2021 , driven by a $52.7
million increase in Telecom revenues primarily due to new customer programs and
growth in 5G and C-Band deployment. Telecom revenue growth was mostly offset by
timing of event-based revenues within our Recovery business.
Cost of Revenues
Cost of revenues increased by$31.0 million , or 19.7%, for the three months endedOctober 1, 2022 , compared to the three months endedOctober 2, 2021 , primarily due to higher labor, fuel, and material costs. Cost of revenues was also impacted by a higher mix of Telecom revenue versus the prior year period of a higher mix of Renewables and Recovery revenue.
General and Administrative
General and administrative expenses decreased by$5.6 million , or 59.0%, for the three months endedOctober 1, 2022 , compared to the three months endedOctober 2, 2021 . The decrease was primarily related to changes in fair value of contingent consideration of$11.8 million and a$1.1 million gain from remeasurement of TRA liabilities during the three months endedOctober 1, 2022 , partially offset by increased salary and compensation costs, share-based compensation related to the Company's Long-Term Incentive Plan ("LTIP") and incremental costs required of being a public company.
Transaction Expenses
Transaction expenses decreased by$1.3 million , or 90.4%, for the three months endedOctober 1, 2022 , compared to the three months endedOctober 2, 2021 due primarily to no acquisitions closing in the 2022 period. 34
--------------------------------------------------------------------------------
Table of Contents
Depreciation and Amortization
Depreciation and amortization expenses increased by
Gain on sale/disposal of property and equipment
There was no material change to the gain on sale/disposal of property and
equipment for the three months ended
Interest Expense, Net
Interest expense increased by$1.4 million , or 9.4%, for the three months endedOctober 1, 2022 , compared to the three months endedOctober 2, 2021 . This was due to the issuance of$124.7 million unsecured convertible notes in connection with the Business Combination as well as higher interest rates on both our Term loan and line of credit.
Comparison of the Nine Months Ended
The following table sets forth our condensed consolidated results of operations
for the periods presented:
For the Nine Months Ended
October 1, October 2,
(in thousands) 2022 2021 ($) Change (%) Change
Revenue $ 548,503 $ 465,184 $ 83,319 17.9 %
Costs and Expenses:
Cost of revenues 484,393 372,496 111,897 30.0 %
General and administrative 42,668 33,418 9,250 27.7 %
Transaction expense 10,725 2,875 7,850 273.0 %
Depreciation and amortization 44,452 39,136 5,316 13.6 %
Total costs and expenses 582,238 447,925 134,313 30.0 %
(Loss) income from operations (33,735) 17,259 (50,994) (295.5) %
Other income (expense):
Gain on sale/disposal of property and
equipment 2,063 514 1,549 301.4 %
Interest expense (41,444) (35,778) (5,666) 15.8 %
Loss on extinguishment of convertible
notes - (2,436) 2,436 (100.0) %
Total other expense (39,381) (37,700) (1,681) 4.5 %
Net loss from continuing operations (73,116) (20,441) (52,675) 257.7 %
Net loss from discontinued operations - (8,114) 8,114 (100.0) %
Net loss $ (73,116) $ (28,555) $ (44,561) 156.1 %
Revenue
Revenue increased $83.3 million , or 17.9%, for the nine months ended October 1,
2022 , compared to the nine months ended October 2, 2021 , driven by a $136.1
million , or 37.8%, increase in Telecom revenues primarily due to new customer
programs and growth in 5G and C-Band deployment, partially offset by timing of
event-based revenues within our Recovery business.
Cost of Revenues
Cost of revenues increased by$111.9 million , or 30.0%, for the nine months endedOctober 1, 2022 , compared to the nine months endedOctober 2, 2021 , due to increased revenues, higher labor and material costs, and a higher mix of Telecom revenue. 35
--------------------------------------------------------------------------------
Table of Contents
General and Administrative
General and administrative expenses increased by$9.3 million , or 27.7%, for the nine months endedOctober 1, 2022 , compared to the nine months endedOctober 2, 2021 . The increase was primarily related to share-based compensation triggered by the close of the Business Combination and the Company's LTIP, increased salary and compensation costs, and incremental costs required of being a public company, partially offset by changes in fair value of contingent consideration of$11.8 million and a$1.1 million gain from remeasurement of TRA liabilities during the three months endedOctober 1, 2022 .
Transaction Expenses
Transaction expenses increased by$7.9 million for the nine months endedOctober 1, 2022 , compared to the nine months endedOctober 2, 2021 due to the closing of the Business Combination onFebruary 14, 2022 .
Depreciation and Amortization
Depreciation and amortization expenses increased by$5.3 million , or 13.6%, for the nine months endedOctober 1, 2022 , compared to the nine months endedOctober 2, 2021 . The increase was driven by the depreciation and amortization related to the 2021 business acquisitions.
Gain on sale/disposal of property and equipment
Gain on sale/disposal of property and equipment increased by
Interest Expense, Net
Interest expense increased by$5.7 million , or 15.8%, for the nine months endedOctober 1, 2022 , compared to the nine months endedOctober 2, 2021 . This was due to the issuance of$124.6 million unsecured convertible notes in connection with the Business Combination as well as higher interest rates on both our Term loan and line of credit.
Review of Operating Segments
Comparison of the Three Months Ended
For the Three Months Ended
October 1, October 2,
(in thousands) 2022 2021 ($) Change (%) Change
Revenue:
Telecom $ 188,297 $ 135,581 $ 52,716 38.9 %
Renewables & Recovery Logistics 27,823 79,881 (52,058) (65.2) %
Total revenue $ 216,120 $ 215,462 $ 658 0.3 %
Adjusted EBITDA:
Telecom $ 14,103 $ 10,891 $ 3,212 29.5 %
Renewables & Recovery Logistics 8,671 38,162 (29,491) (77.3) %
Corporate (7,041) (4,448) (2,593) 58.3 %
Total Adjusted EBITDA - continuing
operations $ 15,733 $ 44,605 $ (28,872) (64.7) %
Total Adjusted EBITDA - discontinued
operations - 726 (726) (100.0) %
Total Adjusted EBITDA $ 15,733 $ 45,331 $ (29,598) (65.3) %
36--------------------------------------------------------------------------------
Table of Contents Telecom Revenue Revenue increased by$52.7 million , or 38.9%, for the three months endedOctober 1, 2022 , compared to the three months endedOctober 2, 2021 . The increase was primarily due to increased 5G and C-Band deployment, as well as growth outside of our top two customers.
Adjusted EBITDA - Continuing Operations
Telecom Adjusted EBITDA increased by$3.2 million , or 29.5%, for the three months endedOctober 1, 2022 , compared to the three months endedOctober 2, 2021 . The increase in Telecom Adjusted EBITDA was primarily due to increased revenues and improved scalability of our business, partially offset by higher labor, fuel, and material costs from sustained levels of inflation.
Renewables and Recovery Logistics
Revenue
Revenue decreased by$52.1 million , or 65.2%, for the three months endedOctober 1, 2022 , compared to the three months endedOctober 2, 2021 . The decrease was primarily driven by the timing of event-based revenues within our Recovery business.
Adjusted EBITDA - Continuing Operations
Renewables & Recovery Logistics Adjusted EBITDA decreased by$29.5 million , or 77.3%, for the three months endedOctober 1, 2022 , compared to the three months endedOctober 2, 2021 . The decrease was primarily driven by the timing of event-based revenue within our Recovery business.
Comparison of the Nine Months Ended
For the Nine Months Ended
October 1, October 2,
(in thousands) 2022 2021 ($) Change (%) Change
Revenue:
Telecom $ 496,134 $ 360,020 $ 136,114 37.8 %
Renewables & Recovery Logistics 52,369 105,164 (52,795) (50.2) %
Total revenue $ 548,503 $ 465,184 $ 83,319 17.9 %
Adjusted EBITDA:
Telecom $ 35,946 $ 26,907 $ 9,039 33.6 %
Renewables & Recovery Logistics 13,379 42,181 (28,802) (68.3) %
Corporate (19,407) (13,097) (6,310) 48.2 %
Total Adjusted EBITDA - continuing
operations $ 29,918 $ 55,991 $ (26,073) (46.6) %
Total Adjusted EBITDA - discontinued
operations - (1,349) 1,349 (100.0) %
Total Adjusted EBITDA $ 29,918 $ 54,642 $ (24,724) (45.2) %
Telecom
Revenue
Revenue increased by $136.1 million , or 37.8%, for the nine months ended October
1, 2022 , compared to the nine months ended October 2, 2021 . The growth was
primarily due to increased 5G and C-Band deployment as well as growth outside of
our top 2 customers.
37--------------------------------------------------------------------------------
Table of Contents
Adjusted EBITDA - Continuing Operations
Telecom Adjusted EBITDA increased by$9.0 million , or 33.6%, for the nine months endedOctober 1, 2022 , compared to the nine months endedOctober 2, 2021 . The increase in Telecom Adjusted EBITDA was primarily due increased revenues from 5G and C-Band deployment offset by higher labor, fuel, and material costs.
Renewables and Recovery Logistics
Revenue
Revenue decreased by$52.8 million , or 50.2%, for the nine months endedOctober 1, 2022 , compared to the nine months endedOctober 2, 2021 . The decrease was primarily driven by the timing of event-based revenue within our Recovery business.
Adjusted EBITDA - Continuing Operations
Renewables & Recovery Logistics Adjusted EBITDA decreased by$28.8 million , or 68.3%, for the nine months endedOctober 1, 2022 , compared to the nine months endedOctober 2, 2021 . The decrease was primarily driven by the timing of event-based revenue within our Recovery business.
Liquidity and Capital Resources
We have historically financed our operations primarily through cash flows
generated by operations and, as needed, with borrowings under our revolving
credit facility with PNC Bank ("PNC Facility"), and Senior Secured Term Credit
Guaranty Agreement with Citibank ("Term Loan"). On September 19, 2022 , we
executed an amendment of the PNC Facility that increased the aggregate revolving
commitments to $130.0 million from September 15 through December 31 of each
year. The aggregate revolving commitments from January 1 through September 14 of
each year will remain at $103.5 million . See Note 8-Debt and Capital Lease
Obligations to the condensed consolidated financial statements for additional
information on the amendment. Our uses of cash have been primarily to fund
acquisitions, for the purchase of inventory, payroll, capital expenditures, and
payment of our debt obligations and related interest expense. Our most
significant contractual obligation for future uses of cash is our Term Loan and
the senior unsecured convertible notes. As of October 1, 2022 , $344.3 million
was outstanding under our Term Loan and $124.7 million senior unsecured
convertible notes were outstanding. On a quarterly basis, the Company is
required to make principal payments of $2.4 million plus interest with all
unpaid principal and interest due at maturity on July 17, 2025 , on the Term Loan
and quarterly interest payments commencing June 15, 2022 on the senior unsecured
convertible notes with all unpaid principal due at maturity on February 15,
2027 . On October 1, 2022 , we had cash of $0.7 million and net working capital of
$141.1 million , and on December 31, 2021 , we had cash of $0.6 million and net
working capital of $78.8 million . Our net working capital at October 1, 2022
increased by $62.3 million compared to December 31, 2021 , mainly as a result of
timing differences resulting in higher unbilled revenues, lower accrued amounts
for annual year-end activities (insurance and compensation related items), lower
accrued interest, as well as SPAC convertible debt of $3.4 million .
Going Concern
Our interest costs have increased during 2022 as a result of theFederal Reserve increasing interest rates as well as the result of certain amendments to the Credit Agreement. This increased interest cost will make it more difficult for the Company to meet the fixed charge coverage ratio covenant in the future. We are subject to a number of risks, including uncertainty related to a dependence on outside sources of capital; and operating in an increased interest rate environment. The attainment of profitable operations is dependent on future events, including obtaining adequate financing to fulfill our growth and operating activities, generating adequate profitability to support our debt structure; and reorganizing our capital structure, including maintaining adequate availability under our line of credit to fund ongoing operations. Management has evaluated the significance of the conditions described above in relation to our ability to meet our obligations and concluded that, without additional funding, there is substantial doubt we will have sufficient funds to meet our obligations within one year from the date the condensed consolidated financial statements were issued and continue as a going concern. 38
--------------------------------------------------------------------------------
Table of Contents
Management believes that the Company's capital requirements will depend on many factors. These factors include improving profitability within our Telecom Segment, working to achieve a more sustainable leverage model and reviewing funding sources to support our business plan relating to our$2.4 billion backlog. The accompanying condensed consolidated financial statements have been prepared assuming that we will continue as a going concern. This basis of presentation contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business. For additional information on the Company's future obligations see Note 8-Debt and Capital Lease Obligations to the condensed consolidated financial statements. As ofOctober 1, 2022 , we had$18.2 million available capacity under our PNC Facility.
The following table summarizes our cash flows for the periods presented:
For the Nine Months Ended
(in thousands) October 1, 2022 October 2, 2021
Net cash used in operating activities from continuing operations $ (81,311) $ (32,959)
Net cash used in investing activities from continuing operations $ (1,421) $ (38,533)
Net cash provided by financing activities from continuing
operations $ 82,861 $ 79,779
Net increase in cash $ 129 $ 6,508
____________________________________
Note: The following discussions related to our cash flows are presented on a continuing operations basis, which excludes the cash flows from our former operations associated with our Canadian subsidiary within the Telecom segment which are accounted for as discontinued operations. See Note 3-Discontinued Operations to the condensed consolidated financial statements. Following the consummation of the Business Combination, the Company is now obligated to make payments under the Tax Receivable Agreement. The actual timing and amount of any payments that may be made under the Tax Receivable Agreement are unknown at this time and will vary based on a number of factors. For more information about these factors, see Note 14-Tax Receivable Agreement to the condensed consolidated financial statements. However, the Company expects that the payments that it will be required to make in connection with the Tax Receivable Agreement will be substantial. Any payments made under the Tax Receivable Agreement could generally reduce the amount of cash that might have otherwise been available to the Company. For so long as the Company is the managing member of QualTek HoldCo, the Company intends to cause QualTek HoldCo to make ordinary distributions and tax distributions to the holders ofQualTek Common Units on a pro rata basis in amounts sufficient to enable the Company to cover payments under the Tax Receivable Agreement. However, QualTek HoldCo's ability to make such distributions may be subject to various limitations and restrictions, including, but not limited to, retention of amounts necessary to satisfy the obligations of QualTek HoldCo and its subsidiaries and restrictions on distributions that would violate any applicable restrictions contained in QualTek HoldCo's debt agreements, or any applicable law, or that would have the effect of rendering QualTek HoldCo insolvent. To the extent the Company is unable to make payments under the Tax Receivable Agreement for any reason, such payments will be deferred and will accrue interest until paid. Additionally, nonpayment for a specified period and/or under certain circumstances may constitute a material breach of a material obligation under the Tax Receivable Agreement and therefore accelerate payments under the Tax Receivable Agreement, which could be substantial and as a result, could have a substantial negative impact on our liquidity or financial condition.
Comparison of the Nine Months Ended
Operating Activities
Cash used in the Company's operating activities was$81.3 million for the nine months endedOctober 1, 2022 , compared to net cash used in operating activities of$33.0 million for the nine months endedOctober 2, 2021 . The primary driver of this cash used in operating activities is attributed to an increase in working capital associated with our Telecom segment period over period as well as accrued transaction expense, settled at the close of theSPAC transaction. 39
--------------------------------------------------------------------------------
Table of Contents
Investing Activities
Net cash used in the Company's investing activities was$1.4 million for the nine months endedOctober 1, 2022 , compared with net cash used of$38.5 million for the nine months endedOctober 2, 2021 . The primary driver of the change is attributed to cash paid related to the acquisitions of FNS, Broken Arrow and Concurrent from prior year. Financing Activities Net cash provided by the Company's financing activities increased to$82.9 million for the nine months endedOctober 1, 2022 , compared to net cash provided by financing activities of$79.8 million for the nine months endedOctober 2, 2021 . The primary driver of the change in cash inflows is attributable to activity related to the Business Combination that resulted in$124.7 million of cash proceeds from the issuance of the senior unsecured convertible notes and the issuance of common stock, partially offset by payments to settle the acquisition related debt, along with payments related to the equity issuance costs and lower net borrowings from the line of credit.
Critical Accounting Policies and Estimates
The following is not intended to be a comprehensive list of all our accounting policies. Our significant accounting policies are more fully described in Note 1-Nature of Business and Summary of Significant Accounting Policies to the condensed consolidated financial statements. The discussion and analysis of our financial conditions and results of operations is based on our condensed consolidated financial statements. These statements have been prepared in accordance with GAAP. In conformity with GAAP, the preparation of the financial statements requires management to make estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes. Given that management estimates, by their nature, involve judgment regarding future uncertainties, actual results may differ from these estimates if conditions change or if certain key assumptions used in making these estimates ultimately proven to be inaccurate.
We believe the following critical accounting policies contain the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.
•Revenue Recognition
•Accounts Receivable
•Concentration of Credit Risk
•Business Combination
•Impairment of
•Income Taxes
Revenue Recognition
The Company recognizes revenue from contracts with customers using the five-step
model prescribed in ASC 606. Revenue for engineering, construction, project
management, and site acquisition services are primarily recognized by the
Company over time utilizing the cost-to-cost measure of progress, which is an
input method, on contracts for specific projects, and for certain master service
and other service agreements. Revenue for engineering, aerial and underground
construction for projects with customer-specified service requirements are
primarily performed under master service agreements and other contracts that
contain customer-specified service requirements. These agreements include
pricing for individual tasks, including, for example, the placement of
underground or aerial fiber, directional boring, and fiber splicing, each based
on a specific unit of measure. Revenue is recognized over time as services are
performed and customers simultaneously receive and consume the benefits provided
by the Company. Output measures such as units delivered are utilized to assess
progress against specific contractual performance obligations. Revenue from
fulfillment, maintenance, compliance, and recovery services provided to the
telecommunication, cable and utility industries is recognized as the services
are rendered. These services are generally performed under master or other
service agreements and billed on a contractually agreed price per unit on a work
order basis.
40--------------------------------------------------------------------------------
Table of Contents
Accounts Receivable
The Company's accounts receivable are due primarily from large telecommunications carriers, cable providers, and utility companies operating acrossthe United States and are carried at original contract amount less an estimate for uncollectible amounts based on historical experience. Management determines the allowance for doubtful receivables by regularly evaluating individual customer receivables and considering a customer's financial conditions and current economic conditions. Accounts receivables are written off when deemed uncollectible. Recoveries of accounts receivables previously written off are recorded when received.
Concentration of Credit Risk
We have established relationships with many leading telecommunications carriers, cable providers and utility companies but our business is concentrated among relatively few customers. For the nine months endedOctober 1, 2022 , our top three customers accounted for 68% of our total revenues, and the same three customers accounted for 64% of our total accounts receivable atOctober 1, 2022 . See Note 6-Accounts Receivable, Contract Assets and Liabilities, and Customer Credit Concentration and Note 15-Segments and Related Information to the condensed consolidated financial statements for additional information.
Business Combination
The Company accounts for acquired businesses using the acquisition method of accounting, which requires that any assets acquired, and liabilities assumed be at their respective fair values on the date of acquisition. Any excess between the purchase price and the fair value of acquired net assets and liabilities assumed is recognized as goodwill. The assumptions made in calculating the fair value of assets acquired and liability assumed in business combinations require several significant judgements and estimates and is subject to revision if additional information, which existed as of the date of acquisition, about the fair values become available during the measurement period of up to 12 months from the acquisition date. The Company will recognize any adjustments to preliminary amounts that are identified during the measurement period in the reporting period in which the adjustments are determined.
Impairment of
Goodwill represents the excess purchase price paid to acquire a business over the fair value of net assets acquired. The Company has goodwill and long-lived intangible assets that have been recorded in connection with business acquisitions. We perform our annual impairment review of goodwill and long- lived intangible assets at the reporting unit level in the fourth quarter of each year or when changes in circumstances indicate that the carrying value may not be recoverable. Such circumstances include a significant adverse change in the business climate for one of our reporting units or a decision to dispose of a reporting unit or a significant portion of a reporting unit. We perform a qualitative assessment to test goodwill for impairment on the first day of the fourth quarter, or more frequently if events or changes in the business warrant it, by determining whether it is more likely than not (a likelihood of greater than 50%) that the fair value of a reporting unit is less than its carrying value. Qualitative factors that we consider include, but are not limited to, macroeconomics conditions, customer relations, market conditions, a significant adverse change in legal factors or in the business climate and reporting unit specific events. If, based on the qualitative assessment, we determine a quantitative assessment is necessary, we estimate the fair value of the reporting unit and compare that to its carrying value. To the extent the carrying value exceeds the fair value of a reporting unit, an impairment loss is recorded in an amount equal to that excess. Under our quantitative test, our estimate of fair value is primarily determined using a weighting of fair values derived in equal proportions from the income approach and market approach valuation methodologies. The income approach uses the discounted cash flow method, and the market approach uses the guideline company method. If any impairment exists, we record the impairment to the statement of operations in the period the impairment is recognized. As of and for the three and nine months endedOctober 1, 2022 andOctober 2, 2021 , there were no indications that it was more likely than not that the fair value of a reporting unit was less than its carrying value. As such, there were no goodwill impairment charges. For additional information on goodwill, see Note 7-Goodwill and Intangible Assets, to the condensed consolidated financial statements. 41
--------------------------------------------------------------------------------
Table of Contents
We review long-lived assets, which primarily includes finite-lived intangible assets and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. This analysis is performed by comparing the respective carrying values of the assets to the current and expected future cash flows, on an undiscounted basis, to be generated from such assets. If such analysis indicates that the carrying value of these assets is not recoverable, the carrying value of such assets is reduced to fair value. No impairments have occurred during the three and nine months endedOctober 1, 2022 andOctober 2, 2021 . For additional information on the impairment charge, see Note 7-Goodwill and Intangible Assets, to the condensed consolidated financial statements.
Income Taxes
Prior to the Business Combination, QualTek HoldCo, is treated as a partnership forU.S. federal and most applicable state and local income tax purposes. As a partnership, QualTek HoldCo's taxable income and losses were passed through to and included in the taxable income of its members. Accordingly, amounts related to income taxes were zero for QualTek HoldCo prior to the Business Combination. Following the Business Combination, the Company is subject to income taxes at theU.S. federal, state, and local levels for income tax purposes, including with respect to its allocable share of any taxable income of QualTek HoldCo. Income taxes are accounted for using the asset and liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequence on differences between the carrying amounts of assets and liabilities and their respective tax basis, using tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is "more-likely-than-not" that some portion or all of the deferred tax assets will not be realized. The realization of the deferred tax assets is dependent on the amount of future taxable income.
Emerging Growth Company Status
We qualify as an emerging growth company ("EGC") pursuant to the provisions of
the JOBS Act. For as long as we are an EGC, we may take advantage of certain
exemptions from various reporting requirements that are applicable to other
public companies that are not EGCs including, but not limited to, not being
required to comply with the auditor attestation requirements of Section 404(b)
of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation in our periodic reports and registration statements, exemptions
from the requirements of holding advisory "say-on-pay" votes on executive
compensation and shareholder advisory votes on golden parachute compensation.
In addition, under the JOBS Act, EGCs can delay adopting new or revised
accounting standards until such time as those standards apply to private
companies. We intend to take advantage of the longer phase-in periods for the
adoption of new or revised financial accounting standards under the JOBS Act
until we are no longer an EGC. Our election to use the phase-in periods
permitted by this election may make it difficult to compare our financial
statements to those of non-EGCs and other EGCs that have opted out of the longer
phase-in periods permitted under the JOBS Act and who will comply with new or
revised financial accounting standards. If we were to subsequently elect instead
to comply with public company effective dates, such election would be
irrevocable pursuant to the JOBS Act.
Recent Accounting Pronouncements
See Note 1-Nature of Business and Summary of Significant Accounting Policies to the condensed consolidated financial statements for more information.
© Edgar Online, source
