QUALTEK SERVICES INC. The following discussion and analysis should be read in conjunction with the accompanying audited consolidated financial statements and related notes in Item 8 of this Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks, uncertainties, and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in "Risk Factors" in Item 1A of this Form 10-K. Unless the context otherwise requires, references in this section to the "Company," "we," "us" or "our" are intended to mean the business and operations ofQualTek and its consolidated subsidiaries.
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 . 35
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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 Bu siness and Summary of Significant Accounting Policies to the 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. Nasdaq Notifications Nasdaq MVLS Notice OnJanuary 3, 2023 , we received a letter from theListing Qualifications Department (the "Staff") of theNasdaq Stock Market ("Nasdaq") notifying us that, for the last 30 consecutive business days prior to the date of the letter, the Company's Minimum Value ofListed Securities ("MVLS") was less than$35,000 thousand , which does not meet the requirement for continued listing on The Nasdaq Capital Market. The Staff has provided the Company with 180 calendar days, or untilJuly 3, 2023 , to regain compliance with the MVLS Rule. The MVLS Notice has no immediate effect on the listing of the Company's securities on The Nasdaq Capital Market. If the Company regains compliance with the MVLS Rule, the Staff will provide written confirmation to the Company and close the matter. To regain compliance with the MVLS Rule, the Company's MVLS must meet or exceed$35,000 thousand for a minimum of ten consecutive business days during the 180-day compliance period ending onJuly 3, 2023 . In the event the Company does not regain compliance with the MVLS Rule prior to the expiration of the compliance period, it will receive written notification that its securities are subject to delisting. At that time, the Company may appeal the delisting determination to aHearings Panel .
Nasdaq Minimum Bid Price Notice
OnJanuary 5, 2023 , the Company received a letter (the "Minimum Bid Price Notice") from the Staff notifying the Company that its Class A common stock,$0.0001 par value per share (the "Common Stock"), fails to comply with the$1 minimum bid price required for continued listing on The Nasdaq Capital Market (the "Minimum Bid Price Rule") based upon the closing bid price of the Common Stock for the 30 consecutive business days prior to the date of the notice from Nasdaq. The Minimum Bid Price Notice has no immediate effect on the listing of the Common Stock on The Nasdaq Capital Market and, at this time, the Common Stock will continue to trade on The Nasdaq Capital Market under the symbol "QTEK". The Company has been provided an initial compliance period of 180 calendar days, or untilJuly 5, 2023 , to regain compliance with the Minimum Bid Price Rule. To regain compliance, the closing bid price of the Common Stock must meet or exceed$1.00 per share for a minimum of ten consecutive business days prior toJuly 5, 2023 . If the Company is unable to regain compliance with the Minimum Bid Price Rule byJuly 5, 2023 , the Company may be eligible for an additional 180-day compliance period to demonstrate compliance with the Minimum Bid Price Rule. To qualify, the Company will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the Minimum Bid Price Rule, and will need to provide written notice to Nasdaq of its intention to cure the deficiency during the second compliance period. If the Company does not qualify for the second compliance period or fails to regain compliance during the second 36 -------------------------------------------------------------------------------- 180-day period, Nasdaq will notify the Company of its determination to delist the Common Stock, at which point the Company would have an opportunity to appeal the delisting determination to aHearings Panel . The Company will continue to monitor its MVLS and the bid price of its Common Stock and consider its available options to regain compliance with the MVLS and Minimum Bid Price rules. However, there can be no assurance that the Company will be able to regain compliance with the MVLS and Minimum Bid Price rules.
Nasdaq Continued Listing Rule or Standard Notice
OnApril 18, 2023 , we received a written notice from Nasdaq stating that because the Company had not yet filed its Form 10-K, the Company was no longer in compliance with Nasdaq Listing Rule 5250(c)(1), which requires listed companies to timely file all required periodic financial reports with theSEC . This notification had no immediate effect on the listing of the Company's shares on Nasdaq. The Company regained compliance solely with Nasdaq Listing Rule 5250(c)(1) after the filing of the Form 10-K onApril 28, 2023 .
Recent Financing
Subsequent toDecember 31, 2022 , onMarch 16, 2023 , the Company, through its wholly-owned subsidiariesQualTek Buyer, LLC andQualTek LLC , entered into an amendment to each of (i) the Term Credit and Guaranty Agreement, dated as ofJuly 18, 2018 , amongQualTek Buyer, LLC ,QualTek LLC , certain subsidiaries ofQualTek LLC andCitibank, N.A ., as administrative agent and collateral agent (the "Term Loan Amendment") and (ii) the ABL Credit and Guaranty Agreement, dated as ofJuly 18, 2018 , amongQualTek Buyer, LLC ,QualTek LLC , certain subsidiaries ofQualTek LLC andPNC Bank, National Association , as administrative agent and collateral agent (the "ABL Amendment"). The Term Loan Amendment provides for$55,000 thousand of immediately available new money incremental term loans under the Term Loan Credit Agreement. OnMarch 16, 2023 , the Company borrowed the full$55,000 thousand of new money incremental term loans. The Term Loan Amendment also provides for$20,000 thousand of additional new money incremental term loans under the Term Loan Credit Agreement, subject to the satisfaction of certain conditions precedent. OnApril 28, 2023 , the Company expects to borrow an additional$5,000 thousand of new money incremental term loans. The Company expects to borrow an additional$5,000 thousand of new money incremental term loans byMay 12, 2023 and may also request to borrow an additional$10,000 thousand of additional new money incremental term loans, which will be subject to the approval of the Required Lenders. Each of the lenders providing the new money incremental term loans, and existing term lenders who agree to take new money incremental term loans by assignment after the closing date and participate in the reallocation process, will be entitled to receive rollover loans structured as a new facility of term loans under the Term Loan Credit Agreement. Pursuant to the payment waterfall, the new money incremental term loans will be senior to the rollover loans, and the rollover loans will be senior to the existing term loans. The interest rate on the new money incremental term loans will be the secured overnight financing rate ("SOFR") plus 12.00%, with a minimum cash pay requirement of SOFR plus 1.00% and the remainder to be paid-in-kind. The maturity date on the new money incremental term loans will beJune 15, 2024 . The Term Loan Amendment also implements modifications to certain affirmative covenants, negative covenants and events of default and certain other amendments. Modifications to affirmative covenants include furnishing information regarding the Company's ABL Facility, providing budgetary reports with variance analysis, weekly status updates and achievement of contractual milestones. Negative covenant modifications include a reduction in the outstanding indebtedness and the addition of maintaining a minimum liquidity. The interest rate and maturity date of the rollover loans will remain consistent with the existing term loans. The ABL Amendment provides for a reduction in the aggregate commitment from$130,000 thousand to$105,000 thousand , a modification of the interest rate to SOFR plus 5.00% and a modification of the maturity date of the ABL facility to beJune 16, 2024 . The ABL Amendment will also implement modifications to certain of the affirmative covenants, negative covenants and events of default. Additionally, onMarch 15, 2023 , the Company did not make an interest payment of approximately$3,700 thousand due on its 2027 Convertible Notes. The Company had a 30-day grace period, or untilApril 14, 2023 , to make the interest payment. The Company has not made the interest payment, and, as a result, an event of default has occurred under the Indenture, the ABL Credit Agreement and the Term Loan Credit Agreement. Pursuant to the Indenture, upon an event of default, the trustee under the 2027 Convertible Notes or holders of 25% in aggregate principal amount of the outstanding 37 -------------------------------------------------------------------------------- 2027 Convertible Notes may declare the principal of, premium, if any, on and accrued and unpaid interest on, the 2027 Convertible Notes to be due and payable immediately, which would require the Company to pay approximately$130,000 thousand immediately. In addition, pursuant to each of the ABL Credit Agreement and the Term Loan Credit Agreement, upon an event of default, the lenders under such facilities can accelerate the repayment of the outstanding borrowings thereunder and exercise other rights and remedies that they have under applicable laws. The Company has not received any notices of acceleration as of the date hereof. The Company has entered into a forbearance agreement with holders of approximately 72% of the aggregate principal amount of the outstanding 2027 Convertible Notes, pursuant to which the Forbearing Holders have agreed to (i) forbear from exercising any of their rights and remedies, including with respect to an acceleration, under the Indenture or applicable law with respect to any default or any event of default arising under the Indenture relating to or as a proximate result of the Company's failure to pay interest on the 2027 Convertible Notes onMarch 15, 2023 or during the subsequent 30-day grace period and (ii) exercise their rights pursuant to the Indenture to direct the trustee to forbear from exercising any remedy available to the trustee or exercising any trust or power conferred upon the trustee with respect to such defaults or events of default, in each case during the period commencing onApril 24, 2023 and ending upon the earliest to occur of (a)11:59 p.m. (New York City time) onMay 15, 2023 , (b) the occurrence of any event of default other than the defaults and events of default specified above, (c) payment of interest that was dueMarch 15, 2023 to each Forbearing Holder, (d) the Company's failure to pay any amounts owed to certain of the Forbearing Holders' advisors, (e) an event of default, acceleration, or similar event in connection with any of the Company's funded and/or revolving indebtedness, provided that the Company has not entered into a forbearance or similar agreement with respect to the foregoing clause (e), and (f) any borrowing or further extension of credit under the Company's Term Loan Facility, any provision of additional collateral to or for the benefit of the lenders under such Term Loan Facility or any other lenders, agents, trustees or other parties under any credit facility or any other financing or similar instrument, or entry into any other non-ordinary course financing or similar transaction or any material asset disposition, in each case without the express written consent of the Forbearing Holders. The Company has entered into a forbearance agreement with the administrative agent and lenders under the ABL Credit Agreement, pursuant to which the ABL Forbearing Holders have agreed to forbear from exercising any of their rights and remedies, including with respect to an acceleration, in respect of a cross-payment event of default arising under Section 8.1(b)(i) of the ABL Credit Agreement, among other changes and forbearances, including a reduction in the aggregate commitment from$105,000 thousand to$90,000 thousand . The forbearance period shall expire on the earliest of: (i)May 15, 2023 , (ii) the time at which any of the representations and warranties in the forbearance agreement is inaccurate in any material respect or any covenant is breached in any material respect, (iii) the occurrence of any other default or event of default under the ABL Credit Agreement or (iv) the trustee under the 2027 Convertible Notes exercises any remedy under the Indenture. The Company has entered into a limited waiver agreement with the administrative agent and required lenders under the Term Loan Credit Agreement, pursuant to which the Term Loan Waiving Holders have agreed to waive certain defaults, including with respect to an acceleration, due to a cross-payment event of default under Section 8.1(b)(i) of the Term Loan Credit Agreement, among other changes and waivers, including changes that will allow the Company to request additional borrowings in the form of new money incremental term loans in an amount of up to$20,000 thousand , subject to the approval of the Required Lenders. The waiver period shall expire on the earliest of: (i)May 15, 2023 , (ii) the time at which any of the representations and warranties in the limited waiver agreement is inaccurate in any material respect or any covenant is breached in any material respect, (iii) the occurrence of any other default or event of default under the Term Loan Credit Agreement or (iv) the trustee under the 2027 Convertible Notes exercises any remedy under the Indenture. We will likely choose or need to obtain alternative sources of capital or otherwise meet our liquidity needs and/or restructure our existing indebtedness through the protections available under applicable bankruptcy or insolvency laws, including Chapter 11 of theU.S. Bankruptcy Code. Holders of our Class A Common Stock will likely not receive any value or payments in a restructuring or similar transaction.
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 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.
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For the Year Ended
(in thousands) December 31, 2022 December 31, 2021
Revenue $ 753,856 $ 612,241
Loss from continuing operations (104,792) (101,575)
Adjusted EBITDA - continuing operations 32,662
60,035
Adjusted EBITDA - discontinued operations - (1,349) Total Adjusted EBITDA $ 32,662 $ 58,686
For further information about how we calculate Adjusted EBITDA as well as limitations of its use and a reconciliation of 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 loss before interest, taxes, depreciation
and amortization, management fees, transaction expenses, share-based
compensation, loss on legal settlement, change in fair value of contingent
consideration, impairment of goodwill, impairment of long-lived assets, loss on
extinguishment of convertible notes, expenses associated with public company
readiness, net income (loss) from certain regional market shutdowns,
professional fees and remeasurement of Tax Receivable Agreement (TRA)
liabilities. 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.
We believe these non-GAAP financial measures, when viewed together with our GAAP
financial performance measures and our GAAP financial results, provide a more
complete understanding of our business. We strongly encourage investors to
review our consolidated financial statements and publicly filed reports in their
entirety and not rely on any single financial measure.
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The following table provides a reconciliation of net loss to Adjusted EBITDA:
For the Years Ended
December 31,
(in thousands) 2022 2021
Net loss - continuing operations $ (104,792) $ (101,575)
Net loss - discontinued operations - (8,851)
Net loss (104,792) (110,426)
Management fees 342 889
Transaction expenses 10,749 3,826
Share-based compensation 8,637 -
Loss on legal settlement - 2,600Change in fair value of contingent consideration, net of accretion
(18,058) (3,575)
Impairment of goodwill 14,160 52,487
Impairment of long-lived assets 1,007 -
Depreciation and amortization 58,377 52,470
Interest expense 59,317 50,477
Loss on extinguishment of convertible notes - 2,436
Expenses associated with public company readiness 2,923 -
Net losses from certain regional market shutdowns (1) 14,635 -
Restructuring and other professional fees(2) 4,373 -
Remeasurement of TRA liabilities (19,008) -
Loss from discontinued operations - 8,851
Adjusted EBITDA - continuing operations $ 32,662 $ 60,035
Adjusted EBITDA - discontinued operations (3) - (1,349)
Total Adjusted EBITDA $ 32,662 $ 58,686
(1) Primarily represents net losses associated with certain projects and
regional markets that did not meet the classification of discontinued operations
under GAAP but operations of these projects and/or markets have been ceased or
are expected to be ceased within the next twelve months.
(2) Non-recurring executive employee severance costs and professional fees
related to strategic planning.
(3) Represents discontinued 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 ofConcurrent Group LLC ("Concurrent"),Broken Arrow Communications, Inc. ("Broken Arrow"),Fiber Network Solutions, LLC ("FNS"), andUrban Cable Technology, LLC ("Urban 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 consolidated financial statements.
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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, specifically our RLI business, 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. The 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.
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 employee and subcontractor direct labor costs, as well as materials, equipment, vehicle and overhead costs incurred in the services sold in the period as well as insurance costs incurred in performing those services. Labor and overhead costs consist of direct and indirect service costs, including wages and fringe benefits, and operating expenses including field facility expenses, rent, and travel. We expect our cost of revenue to grow proportionately 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, professional fees, and changes in certain accounting estimates such as TRA liabilities, etc., 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 financing lease, machinery, equipment, vehicles, office furniture,
computers, leasehold improvements, software, and amortization of defined-lived
intangible assets.
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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 Years Ended
The following table sets forth our consolidated results of operations for the
periods presented:
For the Years Ended December 31,
($) (%)
(in thousands) 2022 2021 Change Change
Revenue $ 753,856 $ 612,241 $ 141,615 23.1 %
Costs and expenses:
Cost of revenues 665,291 502,688 162,603 32.3 %
General and administrative 69,892 50,994 18,898 37.1 %
Transaction expenses 10,749 3,826 6,923 180.9 %
Loss on legal settlement - 2,600 (2,600) 100.0 %
Change in fair value of contingent
consideration, net of accretion (18,058) (3,575) (14,483) 405.1 %
Impairment of goodwill 14,160 52,487 (38,327) (73.0) %
Impairment of long-lived assets 1,007 - 1,007 100.0 %
Depreciation and amortization 58,377 52,470 5,907 11.3 %
Total costs and expenses 801,418 661,490 139,928 21.2 %
Loss from operations (47,562) (49,249) 1,687 (3.4) %
Other income (expense):
Gain on sale of property and equipment 2,087 587 1,500 255.5 %
Interest expense (59,317) (50,477) (8,840) 17.5 %
Loss on extinguishment of convertible
notes - (2,436) 2,436 (100.0) %
Total other expense (57,230) (52,326) (4,904) 9.4 %
Loss from continuing operations (104,792) (101,575) (3,217) 3.2 %
Loss from discontinued operations - (8,851) 8,851 (100.0) %
Net loss $ (104,792) $ (110,426) $ 5,634 (5.1) %
Less: Net loss attributable to
non-controlling interests (68,372) - (68,372) 100.0 %
Net loss attributable to QualTek Services
Inc. (36,420) (110,426) 74,006 (67.0) %
Revenue
Revenue increased by $141,615 thousand , or 23.1%, for the year ended
December 31, 2022 compared to the year ended December 31, 2021 . The increase was
primarily driven by an $89,345 thousand increase in our Telecom segment for new
customer programs and growth in support of 5G and C-Band spectrum deployment, a
$25,355 thousand increase in new installation and underground projects, and a
$50,230 thousand increase attributable to a full year ownership of Concurrent
and Urban Cable compared to a partial year in 2021. These increases were
partially offset by a $22,536 thousand decrease in our Renewables & Recovery
Logistics segment due to timing of event-based revenues in 2022 compared to 2021
as well as delays in renewable projects by our customers.
Cost of Revenues
Cost of revenues increased by$162,603 thousand , or 32.3%, for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . Cost of revenues as a percentage of revenue increased from 82.1% of revenue in 2021 to 42 -------------------------------------------------------------------------------- 88.3% of revenue in 2022. The$162,603 thousand increase in cost of revenues is primarily attributable to higher revenue in 2022 resulting in higher labor costs and related equipment rental costs and partially attributable to an inflationary economic environment, specifically in regard to fuel, travel, and logistics costs.
General and Administrative
General and administrative expenses increased by$18,898 thousand , or 37.1%, for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . This increase was mainly due to a$37,906 thousand increase of costs associated with becoming a publicly traded company, such as higher legal, accounting, and insurance fees, as well as newly granted share-based compensation awards; offset by a decrease of$19,008 thousand in the Company's TRA liability due to a decrease in management's long-term plan of the Company's future taxable income.
Transaction Expenses
Transaction expenses increased by$6,923 thousand , or 180.9%, for the year endedDecember 31, 2022 , compared to the year endedDecember 31 , 2021.This increase is due to$10,749 thousands of one-time costs associated with the Business Combination during 2022, partially offset by$3,826 thousand of transaction expenses for business acquisitions in 2021.
Loss on legal settlement
We had one legal settlement with a customer in our Renewables & Recovery Logistics segment in 2021. There were no material settlements in 2022.
Change in Fair Value of Contingent Consideration, Net of Accretion
The change in fair value of contingent consideration, net of accretion represents the Company's measurement at fair value of the contingent consideration liability from business acquisitions. During the year endedDecember 31, 2022 , the Company recognized a decrease in the contingent consideration liability of$18,058 thousand (net of accretion of$1,440 thousand ). During the year endedDecember 31, 2021 , the Company recognized a decrease in the contingent consideration liability of $$3,575 thousand (net of accretion of$1,205 thousand ). The following summarizes the change in fair value of contingent consideration: •During 2022, management decreased the contingent consideration liability for the 2019 acquisition ofVinculums Services, LLC by$9,300 thousand due to the acquired business not achieving its annual EBITDA earnout targets. Due to results of operations and changes in management's forecasts, management increased the contingent consideration liability by$6,172 thousand during 2021. •During 2022 and 2021, management decreased the contingent consideration liability for the 2021 acquisition of Broken Arrow by$258 thousand and$4,795 thousand , respectively, due to the acquired business not achieving its annual EBITDA earnout targets.
•During, 2022 and 2021, management decreased the contingent consideration
liability for the 2021 acquisition of FNS by
•During 2022 and 2021, management decreased the contingent consideration liability for the 2021 acquisition of Urban Cable by$2,055 thousand and$196 thousand , respectively, due to the acquired business not achieving its annual EBITDA earnout targets. •During 2022 and 2021, management decreased the contingent consideration liability for the 2021 acquisition of Concurrent by$1,797 thousand and$1,204 thousand , respectively, due to the acquired business not achieving its annual EBITDA earnout targets. Impairment ofGoodwill As ofDecember 31, 2022 , management identified a material weakness related to the Company's process for performing interim impairment trigger analyses. In the third quarter 2022, management concluded that there was 43 -------------------------------------------------------------------------------- substantial doubt the Company would have sufficient funds to meet its obligations within one year from the date the consolidated financial statements were issued, and as a result, disclosed there was substantial doubt about the Company's ability to continue as a going concern in its third quarter 2022 Form 10-Q. Management did not consider the implications of the going concern conclusion when assessing whether events or circumstances existed that would suggest it was more likely than not that an impairment exists. In the fourth quarter of 2022, in conjunction with performing its annual goodwill impairment assessment onOctober 2, 2022 , we recorded an out-of-period non-cash goodwill impairment charge of$14,160 thousand . Had management performed an interim impairment trigger analysis in the third quarter 2022, the goodwill impairment charge would have been recorded in the third quarter financial statements for the period-endedOctober 1, 2022 . The Company recorded goodwill impairment charges for two reporting units, one within the Telecom segment and one within the Renewable and Recovery Logistics segment. Within the Telecom segment, the Company recorded a goodwill impairment charge of$6,078 thousand associated with its Concurrent business, primarily due to lower forecasted operating margins which adversely impacted operating cash flows. Within the Renewables and Recovery Logistics segment, the Company recorded a goodwill impairment charge of$8,082 thousand associated with its FNS business. The impairment in FNS was primarily due to reduced customer demand which led to lower volumes from a key customer, which adversely impacted the projected operating cash flows. The 2021 goodwill impairment charge was due to a decrease to the future discounted cash flows for one of our reporting units within our Telecom segment, which resulted in a carrying value in excess of its estimated fair value. This decrease was attributable to a significant wind down of a large customer program, delays resulting from spectrum auctions impacting build plans, and, to a lesser degree, impacts of the COVID-19 pandemic.
Impairment of Long-lived assets
Impairment of long-lived assets was$1,007 thousand for the year endedDecember 31, 2022 , which was due to the impairment of an operating lease. In 2013, the Company signed a 10-year lease for an office building inKing of Prussia, PA to provide working space for its corporate and office employees. The Company outgrew its office space inKing of Prussia, PA and moved their corporate and office employees into a new leased office building inBlue Bell, PA inJuly 2020 . ByDecember 2020 , theKing of Prussia, PA office was fully vacated and the Company was unable to sublet or find an alternative use for the office. In connection with the Company's adoption of the FASB's updated accounting standard on leases, effectiveJanuary 1, 2022 , the company performed an assessment of the previously vacatedKing of Prussia, PA lease to determine proper treatment. Management determined the lease to have no expected cash inflows and the carrying amount of the right-of-use asset was determined to be not recoverable. As a result, an impairment charge of$1,007 thousand was recorded for the year endedDecember 31, 2022 .
Depreciation and Amortization
Depreciation and amortization expenses increased by$5,907 thousand , or 11.3%, for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The increase was driven by a full year of amortization recorded for customer lists acquired as part of the FNS, Broken Arrow, Concurrent and Urban Cable acquisitions that occurred in 2021. Similarly, the Company acquired certain fixed assets as part of the 2021 acquisitions, which led to increased depreciation expense in 2022. Additionally, we added approximately$19,292 thousand in fixed assets, net of retirements, in 2022.
Interest Expense
Interest expense increased by$8,840 thousand , or 17.5%, for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . This was mainly due to increased interest rates on our adjustable-rate debt instruments, as well as a higher average balance of interest-bearing debt in 2022 compared to 2021, respectively. The higher interest rates in 2022 are attributable to both increases set forth by theFederal Reserve as well as amendments to our ABL Credit Agreement with PNC. 44
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Review of Operating Segments
Comparison of the Years Ended
For the Years Ended December 31,
($) (%)
(in thousands) 2022 2021 Change Change
Revenue:
Telecom $ 665,511 $ 498,221 $ 167,290 33.6 %
Renewables & Recovery Logistics 88,345 114,020 (25,675) (22.5) %
Total revenue 753,856 612,241 141,615 23.1 %
Adjusted EBITDA:
Telecom 31,193 32,542 (1,349) (4.1) %
Renewables & Recovery Logistics 28,388 44,869 (16,481) (36.7) %
Corporate (26,919) (17,376) (9,543) 54.9 %
Total Adjusted EBITDA - continuing
operations 32,662 60,035 (27,373) (45.6) %
Total Adjusted EBITDA - discontinued
operations - (1,349) 1,349 (100.0) %
Total Adjusted EBITDA $ 32,662 $ 58,686 $ (26,024) (44.3) %
Telecom
Revenue
Revenue increased by $167,290 thousand , or 33.6%, for the year ended
December 31, 2022 compared to the year ended December 31, 2021 . The increase was
driven by an $89,345 thousand increase attributable to our Wireless line of
business, primarily resulting from increased activity related to 5G rollouts and
C-Band spectrum deployments, a $13,901 thousand increase in our underground
fiber services, an $11,454 thousand increase in our presence in new locations,
and a $50,230 thousand increase attributable to a full year ownership of
Concurrent and Urban Cable compared to a partial year in 2021.
Adjusted EBITDA
Telecom Adjusted EBITDA decreased by
Renewables and Recovery Logistics
Revenue
Revenue decreased by$25,675 thousand , or 22.5%, for the year endedDecember 31, 2022 compared to the same period in 2021. The decrease was primarily related to a$25,829 thousand decrease in revenue from fewer event-based storm recovery events in 2022 compared to 2021. Additionally in 2022, the Renewables business experienced an overall decline in project wins as well as lower volumes from a key customer. Adjusted EBITDA Renewables & Recovery Logistics Adjusted EBITDA decreased by$16,481 thousand , or 36.7%, for the year endedDecember 31, 2022 compared to 2021, primarily due to lower Recovery Logistics earnings on account of a less impactful tropical storm season in 2022.
Liquidity and Capital Resources
We have historically financed our operations through cash flows generated by
operations and, as needed, with borrowings under our revolving credit facility
with PNC ("ABL Facility") under our ABL Credit and Guaranty Agreement,
45
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dated as of July 18, 2018 (as amended, the "ABL Credit Agreement") and our term
loan facility with Citibank (the "Term Loan Facility") under our Term Credit and
Guaranty Agreement, dated as of July 18, 2018 (as amended, the "Term Loan Credit
Agreement"). On December 23, 2022 , the Company executed the Tenth Amendment to
the ABL Facility that increased the aggregate revolving commitments to $130,000
thousand until June 30, 2023 , and $120,000 thousand from July 1, 2023 through
December 31, 2023 , and $103,500 thousand thereafter. See Note 8-Debt and
Financing Lease Obligations to the consolidated financial statements for additional information on the amendment.
Our uses of cash have been primarily to fund payroll, payments to subcontractors for ordinary course construction projects, payment of our debt obligations and related interest expense, payment of contingent consideration earnouts, equipment and vehicle expenses, capital expenditures, and inventory. Our most significant contractual obligation for future uses of cash is our Term Loan Facility and the 2027 Convertible Notes As ofDecember 31, 2022 ,$341,917 thousand was outstanding under our Term Loan Facility. The Company is required to make quarterly principal payments of$2,391 thousand plus interest with all unpaid principal and interest due at maturity of the Term Loan Facility, which contractually, is onJuly 17, 2025 . As ofDecember 31, 2022 ,$124,685 thousand was outstanding under our senior unsecured convertible notes. The Company is required to make quarterly interest payments on the senior unsecured convertible notes with all unpaid principal due at maturity, which contractually, is onFebruary 15, 2027 . As a result of the Company not making an interest payment of$3,700 thousand due onMarch 15, 2023 associated with the 2027 Convertible Notes, an event of default has occurred. As a result of the event of default, the lenders under the ABL Facility, Term Loan Facility and 2027 Convertible Notes can accelerate the repayment of the outstanding borrowings thereunder and exercise other rights and remedies that they have under applicable laws. OnApril 24, 2023 , the Company entered into a forbearance agreement with a majority of convertible noteholders of the 2027 Convertible Notes. This forbearance agreement follows the Company's election to enter a 30-day grace period endingApril 14, 2023 , to make the interest payment on its Convertible Notes and subsequent decision to not make the payment. The Company also entered into a forbearance agreement with its administrative agent and lenders on its ABL Credit Agreement and a limited waiver agreement with required creditors of its Term Loan Credit Agreement. OnMarch 16, 2023 , the Company, through its wholly-owned subsidiariesQualTek Buyer, LLC andQualTek LLC , entered into an amendment to each of (i) the Term Loan Credit Agreement, amongQualTek Buyer, LLC ,QualTek LLC , certain subsidiaries ofQualTek LLC andCitibank, N.A ., as administrative agent and collateral agent (the "Term Loan Amendment") and (ii) the ABL Credit Agreement, amongQualTek Buyer, LLC ,QualTek LLC , certain subsidiaries ofQualTek LLC andPNC Bank, National Association , as administrative agent and collateral agent (the "ABL Amendment"). The Term Loan Amendment provides for$55,000 thousand of immediately available new money incremental term loans under the Term Loan Credit Agreement. OnMarch 16, 2023 , the Company borrowed the full$55,000 thousand of new money incremental term loans. The Term Loan Amendment also provides for$20,000 thousand of additional new money incremental term loans under the Term Loan Credit Agreement, subject to the satisfaction of certain conditions precedent. OnApril 28, 2023 , the Company expects to borrow$5,000 thousand of new money incremental term loans. The Company expects to borrow an additional$5,000 thousand of new money incremental term loans byMay 12, 2023 and may also request to borrow an additional$10,000 thousand of additional new money incremental term loans, which will be subject to the approval of the Required Lenders. There can be no assurances that, if requested, the Company will obtain such approval and subsequently be able to borrow the additional$10,000 thousand of new money incremental term loans. There also can be no assurance that the Company will otherwise be successful in improving profitability, raising additional capital, or achieving a more sustainable leverage model. Additionally, effective as of the date of the ABL Amendment, the Company's aggregate revolving commitments were reduced to$105,000 thousand throughDecember 31, 2023 and$103,500 thousand thereafter. The Company's aggregate revolving commitments were further reduced to$90,000 thousand in connection with the forbearance agreement described above. We will likely choose or need to obtain alternative sources of capital or otherwise meet our liquidity needs and/or restructure our existing indebtedness through the protections available under applicable bankruptcy or insolvency laws, including Chapter 11 of theU.S. Bankruptcy Code. Holders of our Class A Common Stock will likely lose their entire investment in a restructuring or similar scenario. OnMarch 15, 2023 , we did not make an interest payment of approximately$3,700 thousand due on the 2027 Convertible Notes. We had a 30-day grace period, or untilApril 14, 2023 , to make the interest payment. We have not made the interest payment, and as a result, an event of default has occurred under the indenture that governs our 2027 46 -------------------------------------------------------------------------------- Convertible Notes, the ABL Credit Agreement and the Term Loan Credit Agreement. Pursuant to the Indenture, upon an event of default, the trustee under the 2027 Convertible Notes or holders of 25% in aggregate principal amount of the outstanding 2027 Convertible Notes may declare the principal of, premium, if any, on and accrued and unpaid interest on, the 2027 Convertible Notes to be due and payable immediately, which would require the Company to pay approximately$130,000 thousand immediately. In addition, pursuant to each of the ABL Credit Agreement and the Term Loan Credit Agreement, upon an event of default, the lenders under such facilities can accelerate the repayment of the outstanding borrowings thereunder and exercise other rights and remedies that they have under applicable laws. The Company has not received any notices of acceleration as of the date hereof. OnApril 24, 2023 , the Company entered into forbearance agreements with 72% of the aggregate principal amount of the outstanding 2027 Convertible Notes, a forbearance agreement with the administrative agent and lenders under the ABL Credit Agreement, and a limited waiver agreement with the administrative agent and required lenders under the Term Loan Credit Agreement, each of which expire no later thanMay 15, 2023 . As a result, and based on the Company's current liquidity position, we have reclassified$548,847 thousand of debt under our 2027 Convertible Notes, ABL Credit Agreement, and Term Loan Credit Agreement to a current liability on theDecember 31, 2022 consolidated balance sheet. As ofDecember 31, 2022 and 2021, we had cash of$495 thousand and$606 thousand , respectively, and net working capital deficiency of$461,326 thousand and$40,684 thousand , respectively. Our net working capital atDecember 31, 2022 decreased by$420,642 thousand compared toDecember 31, 2021 , due to the reclassification as ofDecember 31, 2022 of$548,847 thousand of our outstanding debt from long-term to current resulting from the substantial doubt about the Company's ability to continue as a going concern as described below and the Company's default inMarch 2023 under the indenture that governs the Company's senior unsecured convertible notes as described above; offset by a reduction in short term debt. The primary drivers of this reduction were due to the following events that occurred in 2022: (1) conversion of$44,400 thousand of convertible promissory notes the Company issued onJune 16, 2021 ("Convertible notes -June 2021 "), (2) a$34,718 thousand payment which fully paid off the acquisition debt consisting of deferred purchase price due to sellers from past acquisitions, and (3) conversion of$30,568 thousand of convertible notes the Company issued onJune 16, 2021 toBCP QualTek II LLC in exchange for preferred ClassB Units ("Convertible Notes -Related Party "). Both the Convertible Notes -June 2021 and Convertible Notes -Related Party were converted under a mandatory conversion provision upon consummation of the Business Combination onFebruary 14, 2022 . In addition to the reduction of short-term debt, timing differences resulted in higher unbilled revenues which was partially offset by higher accounts payable due to timing.
Going Concern
The accompanying 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 the year endedDecember 31, 2022 , the Company reported a net loss of$104,792 thousand and net cash used in operating activities of$68,535 thousand . During 2022, the Company's project mix, coupled with operating in an inflationary environment, led to lower gross margins particularly within the Telecom segment. In addition, the Company's interest costs have increased as a result of theFederal Reserve increasing interest rates as well as certain amendments to the ABL Credit Agreement. The Company is subject to various financial covenants as part of its debt agreements, which if not complied with, may result in the acceleration of the maturity of amounts borrowed. Finally, if the Company is unable to regain compliance with its current deficiencies related to Nasdaq's Minimum Value ofListed Securities ("MVLS") Rule and Minimum Bid Price Rule, and the Company's Class A common shares were to become formally delisted, the holders of the 2027 Convertible Notes could contractually require us to repurchase their 2027 Convertible Notes. Should the Company be unable to improve its profitability or the maturities of the Company's debt be accelerated, there could be no assurance the Company will have sufficient access to funding to meet its obligations. Additionally, onMarch 16, 2023 , the Company did not make an interest payment of approximately$3,700 thousand due on its 2027 Convertible Notes. The Company had a 30-day grace period, or untilApril 14, 2023 , to make the interest payment. The Company has not made the interest payment, and, as a result, an event of default has occurred under the Indenture, the ABL Credit Agreement and the Term Loan Credit Agreement. Pursuant to the Indenture, upon an event of default, the trustee under the 2027 Convertible Notes or holders of 25% in aggregate principal amount of the outstanding 2027 Convertible Notes may declare the principal of, premium, if any, on and accrued and unpaid interest on, the 2027 Convertible Notes to be due and payable immediately, which would require the Company to pay approximately$130,000 thousand immediately. In addition, pursuant to each of the ABL Credit Agreement and the Term Loan Credit Agreement, upon an event of default, the lenders under such facilities can accelerate the repayment of the outstanding borrowings thereunder and exercise other rights and remedies that they have under applicable laws. The Company has not received any notices of acceleration as of the date hereof. The Company has entered into forbearance agreements with holders of approximately 72% of the aggregate principal amount of the outstanding 47 -------------------------------------------------------------------------------- Convertible Notes and the administrative agent and lenders under the ABL Credit Agreement and a limited waiver agreement with the administrative agent and required lenders under the Term Loan Credit Agreement with respect to this event of default, as well as any event of default that may arise under the ABL Credit Agreement or the Term Loan Credit Agreement as a result of our failure to deliver an unqualified audit report (a report not containing an explanatory paragraph regarding "going concern") with respect to our financial statements for the fiscal year endedDecember 31, 2022 . We will likely choose or need to obtain alternative sources of capital or otherwise meet our liquidity needs and/or restructure our existing indebtedness through the protections available under applicable bankruptcy or insolvency laws, including Chapter 11 of theU.S. Bankruptcy Code. Holders of our Class A Common Stock will likely not receive any value or payments in a restructuring or similar transaction. Each of the factors discussed above raises substantial doubt about our ability to continue as a going concern.
For additional information on the Company's forbearance agreements and future obligations see Note 8-Debt and Financing Lease Obligations to the consolidated financial statements
We are subject to 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 believes that the Company's capital requirements will depend on many factors. These factors include improving profitability within our Telecom Segment, reviewing funding sources to support our business plan relating to our$1,600,000 thousand backlog, and working to achieve a more sustainable leverage model. There can be no assurances we will be successful with these initiatives.
Summary of Cash Flows
The following table summarizes our cash flows for the years endedDecember 31, 2022 and 2021: For the Years Ended December 31, (in thousands) 2022 2021
Net cash used in operating activities from continuing operations
(3,357) (48,030)
Net cash provided by financing activities from continuing operations 70,236
66,119
Net (decrease)/increase in cash $
(1,656)
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 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 consolidated financial statements. However, there exists the possibility the payments the Company will be required to make in connection with the Tax Receivable Agreement may 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 48 -------------------------------------------------------------------------------- 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 the Company's liquidity or financial condition.
Comparison of the Years Ended
Operating Activities
Cash used in the Company's operating activities was$68,535 thousand for the year endedDecember 31, 2022 , compared to cash used in operating activities of$17,011 thousand for the year endedDecember 31, 2021 . The higher net cash outflow in operations during 2022 was primarily driven by higher input costs, particularly wage and fuel, along with an unfavorable project mix, particularly in the Company's Telecom segment along with lower earnings in the Renewables & Recovery Logistics segment due to a less impactful tropical storm season. Also contributing to the increase in operating cash outflows were higher interest costs on the Company's variable-rate debt, higher costs related to the business combination completed inFebruary 2022 , and costs related to operating as a public company.
Investing Activities
Net cash used in the Company's investing activities decreased to$3,357 thousand for the year endedDecember 31, 2022 , from$48,030 thousand for the year endedDecember 31, 2021 . The primary driver of the change in cash outflow was cash paid related to the acquisitions of FNS, Broken Arrow, Urban Cable and Concurrent in 2021. There were no acquisitions in 2022.
Financing Activities
Net cash provided by the Company's financing activities increased to$70,236 thousand for the year endedDecember 31, 2022 compared to net cash provided by financing activities of$66,119 thousand for the year endedDecember 31, 2021 . The primary driver of the change in cash inflows is the activity related to the Business Combination that resulted in$124,685 thousand 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.
Contractual Obligations
The following table includes aggregated information about contractual
obligations as of
Payments Due by Period
More
Less than than 5
(in thousands) Total 1 Year 1- 3 Years 3- 5 Years Years
Line of credit $ 91,809 $ 91,809 $ - $ - $ -
Term loan 341,917 341,917 - - -
Convertible notes 124,685 124,685 - - -
Lease obligations 67,982 22,672 31,392 10,378 3,540
Total $ 626,393 $ 581,083 $ 31,392 $ 10,378 $ 3,540 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 consolidated financial statements. The discussion and analysis of our
financial conditions and results of operations is based on our 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 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.
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We believe the following critical accounting policies contain the more significant judgments and estimates used in the preparation of our consolidated financial statements.
•Revenue Recognition •Accounts Receivable
•Concentration of Credit Risk
•Business Combination
•Impairment of
Revenue Recognition
The Company recognizes revenue from contracts with customers using the five-step
model prescribed in ASC Topic 606, Revenue from Contracts with Customers ("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 MSAs and other service agreements. Revenue
for engineering, aerial and underground construction for projects with
customer-specified service requirements are primarily performed under MSAs 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 generated from fulfillment, maintenance, compliance and
recovery services as well as certain performance obligations related to material
sales is recognized at a point in time. 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.
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 the age of outstanding receivables, as well as individual customer receivables and their financial condition, 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 years endedDecember 31, 2022 and 2021, our top three customers accounted for 66% and 77% of our total revenues, and the same three customers accounted for 68% and 69% of our total accounts receivable atDecember 31, 2022 and December 31, 2021. See Note 1 - Nature of Business and Summary of Significant Accounting Policies and Note 6 - Accounts Receivable, Contract Assets and Liabilities, and Customer Credit Concentration to the 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.
50--------------------------------------------------------------------------------
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 at the start of the fourth quarter of each year or more frequently when changes in circumstances indicate that the carrying value may not be recoverable. Such circumstances may include a significant adverse change in the business climate or growth opportunities for our reporting units; a decision to dispose of a reporting unit or a significant portion of a reporting unit; changes in the economic environment; or a sustained decrease in share price. The Company initially performs a qualitative assessment as to the likelihood of the occurrence of an impairment. For the qualitative assessment, the Company determines 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 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 public company method. Changes in our judgments and projections could result in significantly different estimates of fair value, potentially resulting in impairments of goodwill and other intangible assets. If any impairment exists, we record the impairment to the statement of operations in the period the impairment is identified. The profitability of individual reporting units may be impacted by changes in customer demand, increased costs of providing services, and the level of overall economic activity. Our customers may reduce capital expenditures and defer or cancel pending projects for a variety of reasons. The profitability of reporting units may be negatively impacted if actual costs of providing services exceed the forecasted costs anticipated when the Company enters into contracts. Additionally, adverse conditions in the economy and future volatility in the equity and credit markets could impact the valuation of the Company's reporting units. The cyclical nature of our business, the high level of competition within our industry, and the concentration of its revenues from a limited number of customers may also cause results to vary. These factors may affect individual reporting units disproportionately, relative to the Company as a whole. As a result, the performance of one or more of the reporting units could decline, resulting in an impairment of goodwill or intangible assets. Additionally, as ofDecember 31, 2022 , we identified a material weakness related to the Company's process for performing interim impairment trigger analyses. In the third quarter 2022, we concluded that there was substantial doubt the Company would have sufficient funds to meet its obligations within one year from the date the consolidated financial statements were issued, and as a result, disclosed there was substantial doubt about the Company's ability to continue as a going concern in its third quarter 2022 Form 10-Q. We did not consider the implications of the going concern conclusion when assessing whether events or circumstances existed that would suggest it was more likely than not that an impairment exists. In the fourth quarter of 2022, in conjunction with performing its annual goodwill impairment assessment onOctober 2, 2022 , we recorded an out-of-period non-cash goodwill impairment charge of$14,160 thousand . Had management performed an interim impairment trigger analysis in the third quarter 2022, the goodwill impairment charge would have been recorded in the third quarter financial statements for the period-endedOctober 1, 2022 . In 2022, the Company recorded goodwill impairment charges for two reporting units, one within the Telecom segment and one within the Renewable and Recovery Logistics segment. Within the Telecom segment, the Company recorded a goodwill impairment charge of$6,078 thousand associated with its Concurrent business, primarily due to lower forecasted operating margins which adversely impacted operating cash flows. Within the Renewable and Recovery Logistics segment, the Company recorded a goodwill impairment charge of$8,082 thousand associated with its FNS business. The impairment in FNS was primarily due to reduced customer demand which led to lower volumes from a key customer, which adversely impacted the projected operating cash flows. In the fourth quarter of 2021, the Company recorded a goodwill impairment charge of$52,487 thousand , which was due to a decrease in the future discounted cash flows for one of our reporting units within our Telecom segment, which resulted in a carrying value in excess of its estimated fair value. This decrease was attributable to a significant wind down of a large customer program, delays resulting from spectrum auctions impacting build plans, and, to a lesser degree, 51
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impacts of the COVID-19 pandemic. The estimated fair value of the Company's remaining reporting units exceeded their carrying values.
The goodwill impairment charges did not affect the Company's compliance with its financial covenants. The Company's remaining reporting units with goodwill had adequate fair value in excess of their carrying value. Determining the fair value of a reporting unit requires a high degree of judgement and involves the use of significant estimates and assumptions. Significant assumptions used in the determination of the estimated fair values of the reporting units are the estimated future net annual cash flows for each reporting unit, which is based on internally developed forecasts, the long-term inflationary growth rate and the discount rate. The estimated future net annual cash flows and long-term inflationary growth rates are dependent on overall market growth rates, the competitive environment, and business activities that impact customer demand. As a result, the growth rate could be adversely impacted by a sustained increase in the competitive environment, inflation, or adverse changes in our customer base. The discount rate, which is consistent with a weighted average cost of capital that is likely to be expected by a market participant, is based upon rates of return available from alternative investments of similar type and quality, including consideration of both debt and equity components of the capital structure. Our discount rate may be impacted by adverse changes in the macroeconomic environment and volatility in the equity and debt markets. Any changes in operating plans or adverse changes in the future could reduce the underlying cash flows used to estimate fair values and would likely result in a decline in fair value that would trigger future impairment charges of a reporting units' goodwill. As ofDecember 31, 2022 , the aggregate carrying value of these reporting units' goodwill was$14,493 thousand . For additional information on the goodwill impairment charge, see Note 7-Goodwill and Intangibles Assets , to the consolidated financial statements. The long-term growth rate and discount rate assumptions used for determining fair value were: 2022 2021 Long-Term Growth Rate 3 % 3 % Discount Rate 16 % - 25 % 12% - 26.25 % 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. We recorded impairment of long-lived assets of$1,007 thousand for the year endedDecember 31, 2022 , which was due to the impairment of an operating lease upon adoption of the FASB's updated accounting standard on leases. No impairments occurred during the year endedDecember 31, 2021 .
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 consolidated financial statements for more information.
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