NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business: QualTek Services, Inc. (f/k/a Roth CH Acquisition III Co. ("ROCR")) (collectively with its consolidated subsidiaries, "QualTek", the "Company", "we", "our", or "us") is a leading provider of communication infrastructure services and renewable solutions, delivering a full suite of critical services to major telecommunications and utility customers across the United States.
We operate in two reportable segments, which reflects the way performance is assessed and resources are allocated by our Chief Executive Officer, who is our chief operating decision maker. Our Telecom segment provides engineering, construction, installation, network design, project management, site acquisition and maintenance services to major telecommunication carriers, cable providers and utility companies in various locations in the United States. Our Renewables and Recovery Logistics segment provides businesses with continuity and disaster recovery operations as well as new fiber optic construction services and maintenance and repair services for telecommunications, renewable energy, commercial and utilities customers across the United States.
On February 14, 2022, QualTek Services Inc. completed the Business Combination (the “Business Combination”) with QualTek HoldCo, LLC ("QualTek HoldCo") (f/k/a BCP QualTek HoldCo, LLC), a Delaware limited liability company (“BCP QualTek”) (the “Closing”), pursuant to the Business Combination Agreement (the “Business Combination Agreement”) dated as of June 16, 2021, by and among (i) ROCR, (ii) Roth CH III Blocker Merger Sub, LLC, a Delaware limited liability company and wholly-owned subsidiary of ROCR (“Blocker Merger Sub”), (iii) BCP QualTek Investors, LLC, a Delaware limited liability company (the “Blocker”), (iv) Roth CH III Merger Sub, LLC, a Delaware limited liability company and wholly-owned subsidiary of ROCR (“Company Merger Sub”), (v) BCP QualTek and (vi) BCP QualTek, LLC, a Delaware limited liability company, solely in its capacity as representative of the Blocker’s equity holders and BCP QualTek’s equity holders.
The cumulative value of the merger consideration in the Business Combination was $306,888 thousand. Blocker Merger Sub merged with and into the Blocker (the “Blocker Merger”), resulting in the equity interests of the Blocker being converted into the right to receive 11,924 thousand shares of Class A common stock of the Company (the “Class A Common Stock”), and the owners of such equity interests in the Blocker (the “Blocker Owners”) being entitled to such shares of Class A Common Stock at the Closing, and thereafter, the surviving Blocker merged with and into ROCR, with ROCR as the surviving company (the “Buyer Merger”), resulting in the cancellation of the equity interests of the surviving Blocker and ROCR directly owning all of the units of QualTek HoldCo (the “QualTek Units”) previously held by the Blocker. Immediately following the Buyer Merger, Company Merger Sub merged with and into QualTek HoldCo, with QualTek HoldCo as the surviving company (the “QualTek Merger”), resulting in (i) QualTek HoldCo becoming a subsidiary of ROCR, (ii) the QualTek Units (excluding those held by the Blocker and ROCR) being converted into the right to receive 18,765 thousand shares of Class B common stock, par value $0.0001 per share (the “Class B Common Stock” and, together with the Class A Common Stock, the “Common Stock”) and the holders of QualTek Units being entitled to such shares of Class B Common Stock at the Closing, (iii) the QualTek Units held by ROCR being converted into the right to receive a number of common units of QualTek HoldCo (the “Common Units”) equal to the number of shares of Class A Common Stock issued and outstanding (i.e., 21,571 thousand QualTek Units), less the number of Common Units received in connection with the contribution described immediately below (i.e., 16,160 thousand QualTek Units). With respect to the portion of merger consideration to which the Blocker Owners and holders of QualTek Units were entitled as described above, the cumulative value of such merger consideration equaled the Equity Value. The “Equity Value” is the sum of (i) $294,319 thousand, plus (ii) the value of any Equity Interests of the Company issued as consideration for any acquisitions by the Company prior to the Closing (i.e., $10,000 thousand), plus (iii) the amount of interest accrued on that certain convertible promissory note (see Note 8-Debt and Capital Lease Obligations) in an aggregate principal amount of $30,558 thousand issued by the Company to BCP QualTek II in exchange for all of BCP QualTek II’s Class B Units. No portion of the merger consideration was paid in cash. The foregoing represents the total consideration to be paid to the Blocker Owners and holders of QualTek Units in connection with the Business Combination. The Company contributed, as a capital contribution in exchange for a portion of the QualTek Units it acquired in the QualTek Merger (i.e., 16,160 thousand QualTek Units), $161,604 thousand, representing the amount of cash available after payment of the merger consideration under the Business Combination Agreement, which was used in part by QualTek or its Subsidiaries to pay the transaction expenses under the Business Combination Agreement.
On February 14, 2022, in connection with the Closing of the Business Combination, the Company:
–entered into an indenture (the “Indenture”) with Wilmington Trust, National Association, as trustee, and certain guarantors party thereto, including, among others, certain subsidiaries of the Company, in respect of $124,685 thousand in aggregate principal amount of senior unsecured convertible notes due 2027 (“Convertible Notes”, see Note 8-Debt and Capital Lease Obligations) that were issued to certain investors (collectively, the “Convertible Note Investors”). The Convertible Notes were purchased by the Convertible Note Investors pursuant to certain convertible note subscription agreements, dated as of February 14, 2022, between the Company and each of the Convertible Note Investors (collectively, the “Convertible Note Subscription Agreements”);
–received $35,915 thousand in aggregate consideration from Private Investment in Public Equity (“PIPE”) Subscribers Investors in exchange for 3,989 thousand shares of Class A common stock, pursuant to PIPE Subscription Agreements (“PIPE Financing”);
–received $1,033 thousand from ROCR at closing, comprised of $1,004 thousand from the trust account for 100 thousand shares that were not redeemed by the public shareholders and $29 thousand of cash from ROCR's closing balance sheet;
–issued 2,275 thousand shares of Class A Common Stock (“Blocker Owner Earnout Shares”) and 3,836 thousand shares of Class B Common Stock (“Earnout Voting Shares”) (collectively, the “Earnout Shares”) that are subject to certain restriction on transfer and voting and potential forfeiture pending the achievement of the earn out targets;
–converted Convertible notes – June 2021 (see Note 8-Debt and Capital Lease Obligations) into 2,875 thousand shares of Class A common stock and 4,063 thousand shares of Class B common stock;
–assumed 2,875 thousand Public Warrants and 102 thousand Private Placement Warrants sold by ROCR as part of its initial public offering;
–fully repaid $34,718 thousand of acquisition debt (see Note 8-Debt and Capital Lease Obligations) plus accrued interest with the proceeds from the transaction;
–paid down $73,000 thousand of debt associated with the line of credit (see Note 8-Debt and Capital Lease Obligations);
–paid down $500 thousand of ROCR's promissory note; and
–pursuant to the Tax Receivable Agreement (“TRA”) entered into by and between the Company, QualTek HoldCo, LLC, the TRA Holders (as defined in the TRA) and the TRA Holder Representative (as defined in the TRA), the Company will be required to pay the TRA Holders 85% of the amount of savings, if any, that the Company is deemed to realize in certain circumstances as a result of certain tax attributes that exist following the Business Combination and that are created thereafter, including as a result of payments made under the TRA. Refer to Note 14-Tax Receivable Agreement regarding the disclosures of the impact of the TRA as of the Closing Date and as of October 1, 2022.
The Business Combination is accounted for as a reverse recapitalization in accordance with accounting principles generally accepted in the United States of America (“GAAP”) with QualTek HoldCo treated as the accounting acquirer. Accordingly, our consolidated financial statements represent a continuation of the financial statements of QualTek HoldCo with net assets of QualTek Services Inc. stated at historical cost. Following the closing of the Business Combination, the combined company is organized in an “Up-C” structure in which QualTek Services Inc. became the sole managing member of QualTek HoldCo and therefore, operates and controls all of the business and affairs of QualTek HoldCo. Accordingly, QualTek Services Inc. consolidates the financial results of QualTek HoldCo, and reports a non-controlling interest in its consolidated financial statements representing the economic interest in QualTek HoldCo owned by the members, other than the Blocker, of QualTek HoldCo referred to as the “Flow-Through Sellers.” As of October 1, 2022, the Company owned an
economic interest of approximately 45% in QualTek HoldCo. The remaining approximately 55% economic interest is owned by the Flow-Through Sellers.
Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP, under the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and on a basis consistent with the audited consolidated financial statements and related notes thereto of QualTek HoldCo and its consolidated subsidiaries as of and for the year ended December 31, 2021. The consolidated balance sheet of QualTek HoldCo as of December 31, 2021, was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with such audited consolidated financial statements and related notes thereto of QualTek HoldCo, which are included in the Company’s Form 8-K filed with the SEC on September 16, 2022 (the "Form 8-K").
These unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments unless otherwise noted) that management considers necessary for a fair statement of the Company’s results of operations, comprehensive loss, financial condition, cash flows and stockholders’ equity for the interim periods presented. Due to the seasonal nature of the Company's business, interim results are not necessarily indicative of the results to be expected for the full year.
Certain prior-year information has been reclassified to conform to the current-year presentation for comparability purposes.
Going Concern
The accompanying condensed consolidated financial statements have been prepared assuming that the Company 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.
During 2022, the Company’s interest costs have increased as a result of the Federal Reserve raising interest rates as well as the result of certain amendments to the Company’s credit facility. This increased interest cost will make it more difficult for the Company to meet its financial covenants in the future.
The ability of the Company to continue as a going concern is 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 growth initiatives and operating activities, generating adequate profitability to support the current debt structure and reorganizing the capital structure, including maintaining adequate availability under our line of credit to fund ongoing operations.
The Company’s capital requirements will depend on several factors. The Company’s plans to mitigate against these factors include improving profitability within the Company’s Telecom Segment, working to achieve a more sustainable leverage model and reviewing funding sources to support the Company’s business plan and current backlog.
Based on evaluation of the significance of the conditions described above, there is substantial doubt the Company will have sufficient funds to meet its obligations within one year from the date the condensed consolidated financial statements were issued and continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates are based on historical experience and various other assumptions that management believes to be reasonable under the current facts and circumstances. Actual results could differ from those estimates and assumptions.
Emerging Growth Company: The Company is an “Emerging Growth Company (“EGC”),” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it is exempted from certain 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 independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(l) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised, it will have different application dates for public or private companies, the Company, as an EGC, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s consolidated financial statements with another public company which is neither an EGC nor an EGC which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Risks and uncertainties: On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19 and actions taken to mitigate its spread have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates.
It is unknown how long the adverse conditions associated with the coronavirus will last and what the complete financial effect will be to the Company.
Summary of Significant Accounting Policies: The Company’s significant accounting policies are discussed in Note 1 to BCP QualTek’s consolidated financial statements in the Form 8-K filed with the SEC on September 16, 2022. There have been no significant changes to these policies which have had a material impact on the Company’s interim unaudited consolidated financial statements and related notes during the three and nine months ended October 1, 2022, except as noted below.
Principles of Consolidation: For the periods subsequent to the Business Combination, the condensed consolidated financial statements comprise the accounts of the Company and its consolidated subsidiaries, including QualTek HoldCo.
For the periods prior to the Business Combination, the consolidated financial statements of the Company comprise the accounts of QualTek HoldCo and its consolidated subsidiaries.
All intercompany accounts and transactions have been eliminated in consolidation.
Non-controlling Interests: The Company presents non-controlling interests as a component of equity on its unaudited condensed consolidated balance sheets and reports the portion of its loss for non-controlling interests as net loss attributable to non-controlling interests in the unaudited condensed consolidated statements of operations and comprehensive loss. For the periods subsequent to the Business Combination, the non-controlling interests represent the economic interest in QualTek Holdco held by the Flow-through Sellers (see Note 11-Equity).
Stock-Based Compensation: The Company provides the QualTek Services Inc. 2022 Long-Term Incentive Plan (the “LTIP”), which was adopted by the Board of Directors and was approved by the Company’s stockholders on February 14, 2022. The Company measures all stock-based awards granted to employees based on the fair value on the date of grant in accordance with ASC 718, Compensation - Stock Compensation (“ASC 718”). Compensation expense of those awards is recognized over the requisite service period, which is generally the vesting period of the respective award. Generally, the Company issues awards with service-only vesting conditions and records the expense using the straight-line method. The Company accounts for forfeitures as they occur. The Company uses the Black-Scholes option-pricing model to determine the fair value of its option awards at the time of grant. The Company classifies stock-based compensation expense in its unaudited condensed consolidated statements of operations in the same manner in which the award recipient’s payroll costs are classified.
Income Taxes: Prior to the Business Combination, QualTek HoldCo was treated as a partnership for U.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 the U.S. federal, state, and local levels for income tax purposes, including with respect to its allocable share of any taxable income and other separately stated items 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.
Tax Receivable Agreement Liabilities: The TRA liabilities represent amounts payable to the Flow-through Sellers. The TRA liabilities are carried at a value equal to the undiscounted expected future payments due under the TRA. The Company recorded its initial estimate of future payments as an increase in TRA liabilities and a decrease to additional paid-in capital in the consolidated financial statements. Subsequent adjustments to the liabilities for future payments under the TRA related to changes in estimated future tax rates or state income tax apportionment are recognized through current period net loss in the consolidated statements of operations and comprehensive loss. See Note 14-Tax Receivable Agreement.
Basic and Diluted Loss Per Share: The Company applies the two-class method for calculating and presenting loss per share, and separately presents loss per share for Class A Common Stock. Shares of Class B Common Stock do not participate in the earnings and losses of the Company. As a result, the shares of Class B Common Stock are not considered participating securities and are not included in the weighted-average shares outstanding for purposes of loss per share. The Company has issued and outstanding Earnout Shares, including the Blocker Owner Earnout Shares and Earnout Voting Shares, which are subject to forfeiture if the achievement of certain stock price thresholds are not met within five years of the Business Combination. The basic and diluted net loss per share is presented in conformity with the two-class method required for participating securities, as the Blocker Owner Earnout Shares are considered participating securities. Unvested Blocker Owner Earnout Shares are not included in the denominator of the basic and diluted loss per share calculation until the contingent condition is met. The Earnout Voting Shares are not considered participating securities and are not included in the weighted-average shares outstanding for purposes of calculating loss per share.
Warrant Accounting: The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own ordinary shares, among other conditions for equity classification. This assessment is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. The Company recorded the Public Warrants assumed as part of the Business Combination as equity (see Note 11-Equity). For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the consolidated statements of operations. The Company recorded the Private Placement Warrants assumed as part of the Business Combination as a liability. The fair value of the Private Placement Warrants (see Note 9-Warrants) was estimated using Black-Scholes call option model (see Note 10-Fair Value Measurements).
Earnout Shares: During the five-year period following the closing of the Business Combination (the “Earnout Period”), (i) if the closing sale price per share of Class A Common Stock equals or exceeds $15.00 per share for 20 trading days during any 30 consecutive trading day period, 50% of the Earnout Shares will be earned, and (ii) if the closing sale price per share of Class A Common Stock equals or exceeds $18.00 per share for 20 trading days during any 30 consecutive trading day period, the remaining 50% of the Earnout Shares will be earned. Once the Earnout Shares are earned, they are no longer subject to the restrictions on transfer and voting.
The Earnout Shares are considered legally issued and outstanding shares of common stock subject to restrictions on transfer and voting and potential forfeiture pending the achievement of the earn out targets described above. The Company evaluated the Earnout Shares and concluded that they meet the criteria for equity classification. The Earnout Shares were classified in stockholders’ equity, recognized at fair value upon the closing of the Business Combination and will not be subsequently remeasured.
Convertible Instruments: In August 2020, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2020-06, “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which is intended to reduce complexity in applying GAAP to certain financial instruments with characteristics of liabilities and equity. The guidance in ASU 2020-06 simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock. The guidance in ASC 470-20 applies to convertible instruments for which the embedded conversion features are not required to be bifurcated from the host contract and accounted for as derivatives. In addition, the amendments revise the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification. These amendments are expected to result in more freestanding financial instruments qualifying for equity classification (and, therefore, not accounted for as derivatives), as well as fewer embedded features requiring separate accounting from the host contract. The amendments in ASU 2020-06 further revise the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (“EPS”) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares.
For the Company, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. Adoption of the standard requires using either a modified retrospective or a full retrospective approach.
Effective January 1, 2022, the Company early adopted ASU 2020-06 using the modified retrospective method which enables entities to apply the transition requirements in this ASU at the effective date of ASU 2020-06 (rather than as of the earliest comparative period presented) with the effect of initially adopting ASU 2020-06 recognized as a cumulative-effect adjustment to accumulated deficit on the first day of the period adopted. Therefore, this transition method applies the amendments in ASU 2020-06 to outstanding financial instruments as of the beginning of the fiscal year of adoption (January 1, 2022), with the cumulative effect of the change recognized as an adjustment to the opening balance of accumulated deficit as of the date of adoption.
The Company applied ASU-2020-06 to all outstanding financial instruments as of January 1, 2022 (the date of adoption of ASU 2020-06). The Convertible Notes-June 2021 (see Note 8-Debt and Capital Lease Obligations) issued on June 16, 2021 was the only outstanding financial instrument affected by this new accounting standard as of January 1, 2022. Therefore the application of ASU-2020-06 to this convertible note payable was used to determine the cumulative effect of the adoption of the new accounting standard (see Note 8-Debt and Capital Lease Obligations).
Transaction Costs: The Company incurred $24,999 thousand in direct and incremental costs associated with the Business Combination and PIPE Financing related to the equity issuance, consisting primarily of investment banking, legal, accounting and other professional fees, which were capitalized and charged against the proceeds of the Business Combination and PIPE Financing as a reduction of additional paid-in capital in the accompanying unaudited condensed consolidated balance sheets in accordance with Staff Accounting Bulletin (“SAB”) Topic 5.A, Expenses of Offering. The Company also incurred $137 thousand and $10,725 thousand of expenses for the three and nine months ended October 1, 2022, respectively, and $1,423 thousand and $2,875 thousand of expenses for the three and nine months ended October 2, 2021, respectively, that were not direct and incremental costs and accordingly, were recorded in "Transaction expenses" on condensed consolidated statements of operations and comprehensive loss.
Recent accounting pronouncements: In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), requiring an entity to recognize assets and liabilities arising from operating leases with terms longer than 12 months. The updated standard replaces most existing lease recognition guidance in GAAP when it becomes effective. The updated standard is effective for annual reporting periods beginning after December 15, 2021. We have adopted this standard effective January
1, 2022, for non-interim periods, with the impact resulting in the Company recognizing right-of-use assets and operating lease liabilities on our balance sheets upon adoption, which increases our total assets and liabilities.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU No. 2016-13”), which requires the measurement and recognition of expected credit losses for certain financial assets, including trade accounts receivable. ASU No. 2016-13 replaces the existing incurred loss impairment model with an expected loss model that requires the use of relevant information, including an entity’s historical experience, current conditions and other reasonable and supportable forecasts that affect collectability over the life of a financial asset. The amendments in ASU No. 2016-13 are effective for fiscal years beginning after December 15, 2022, with early adoption permitted. We expect to adopt this standard effective January 1, 2023 and are currently evaluating the impact that the adoption of this new standard will have on our financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805)—Accounting for Contract Assets and Contract Liabilities from Contracts with Customers to improve the accounting for acquired revenue contracts with customers in business combination by addressing diversity in practice and inconsistency related to (i) the recognition of an acquired contract liability and (ii) payment terms and their effect on subsequent revenue recognized by the acquirer. This amendment requires that, at acquisition date, an entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) as if it had originated the contracts, while also taking into account how the acquiree applied ASC 606. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023, with early adoption permitted. We are currently evaluating the effect that the updated standard will have on our financial statements.
Note 2. Earnings Per Share
Prior to the Business Combination, the QualTek HoldCo membership structure included Class A Units, Preferred Class B Units, and Class P Units with only Class A Units outstanding upon the Closing of the Business Combination. The Company analyzed the calculation of net loss per unit for periods prior to the Business Combination and determined that it resulted in values that would not be meaningful to the users of these unaudited condensed consolidated financial statements. Therefore, the basic and diluted loss per share for the nine months ended October 1, 2022 represents only the period from February 14, 2022 to October 1, 2022.
The Company calculated the basic and diluted loss per share for the period following the Business Combination under the two-class method. The Earnout Shares are considered legally issued and outstanding shares of Class A and Class B common stock, subject to restrictions on transfer and voting. The Blocker Owner Earnout Shares are entitled to receive, ratably with the other outstanding Class A common stock, dividends, and other distributions prior to vesting. The Earnout Voting Shares have only voting rights and therefore are not entitled to receive any distributions. The basic and diluted net loss per share is presented in conformity with the two-class method required for participating securities, as the Blocker Owner Earnout Shares are considered participating securities. The net loss per share amounts is the same for Class A common stock and the Blocker Owner Earnout Shares because the holders of each are legally entitled to equal per share earnings, losses, and distributions, whether through dividends or liquidation. Shares of Class B common stock do not participate in the earnings or losses of the Company and, therefore, are not participating securities. As such, a separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented.
The basic loss per share was computed by dividing net loss attributable to common shareholders for the period subsequent to the Business Combination by the weighted average number of shares of Class A common stock outstanding for the same period. Diluted loss per share was computed in a manner consistent with that of basic loss per share while giving effect to all shares of potentially dilutive common stock that were outstanding during the period.
The following tables present the calculation of basic and diluted loss per share for the three months ended October 1, 2022 and for the period from February 14, 2022 to October 1, 2022 following the Business Combination when the Company had Class A common stock outstanding (in thousands, except share and per share data):
| | | | | | | | | | | |
| Basic: | | | |
| Three months ended
October 1, 2022 | | February 14, 2022 through
October 1, 2022 |
| | | |
| Numerator: | | | |
| Net loss | $ | (6,920) | | | $ | (43,513) | |
| Less: Loss attributable to non-controlling interests | (3,778) | | | (23,725) | |
| Net loss attributable to QualTek Services Inc. | (3,142) | | | (19,788) | |
| Less: Loss attributable to participating securities | (292) | | | (1,841) | |
| Net loss attributable to Class A common shareholders, basic | $ | (2,850) | | | $ | (17,947) | |
| | | |
| Denominator: | | | |
| Weighted average Class A common shares outstanding | 24,446,284 | | 24,446,284 |
| Less: Weighted average unvested Blocker Owner Earnout Shares outstanding | (2,274,934) | | (2,274,934) |
| Weighted average Class A common shares outstanding, basic | 22,171,350 | | 22,171,350 |
| | | |
| Net loss per share - basic | $ | (0.13) | | | $ | (0.81) | |
| | | | | | | | | | | |
| Diluted: | | | |
| Three months ended
October 1, 2022 | | February 14, 2022 through
October 1, 2022 |
| | | |
| Numerator: | | | |
| Net loss | $ | (6,920) | | | $ | (43,513) | |
| Less: Loss attributable to non-controlling interests | (544) | | | (3,418) | |
| Net loss attributable to Class A and B common shareholders, diluted | (6,376) | | | (40,095) | |
| Less: Loss attributable to participating securities | (307) | | | (1,930) | |
| Net loss attributable to Class A common shareholders, diluted | $ | (6,069) | | | $ | (38,165) | |
| | | |
| Denominator: | | | |
| Weighted average Class A common shares outstanding | 24,446,284 | | 24,446,284 |
| Less: weighted average unvested Blocker Owner Earnout Shares outstanding | (2,274,934) | | (2,274,934) |
| Add: Weighted-average Class B common shares if converted to Class A common shares outstanding (excluding Earnout Voting shares) | 22,827,398 | | 22,827,398 |
| Weighted average Class A and B common shares outstanding, diluted | 44,998,748 | | 44,998,748 |
| | | |
| Net loss per share - diluted | $ | (0.13) | | | $ | (0.85) | |
The condensed consolidated statements of operations and comprehensive loss reflect a net loss in the period presented and therefore the effect of the following securities are not included in the calculation of diluted loss per share as including them would have had an anti-dilutive effect:
| | | | | | | | | | | |
| Three months ended
October 1, 2022 | | February 14, 2022 through
October 1, 2022 |
Excluded from the calculation (1) | | | |
| Stock options | 5,161,375 | | 5,161,375 |
| Private Placement Warrants | 101,992 | | 101,992 |
| Public Warrants | 2,874,979 | | 2,874,979 |
| Convertible Notes | 12,468,500 | | 12,468,500 |
| Total potentially dilutive shares excluded from calculation | 20,606,846 | | 20,606,846 |
____________________________________
(1)This table excludes Earnout Voting Shares as the earn out contingency has not been met at period end.
| | | | | | | | | | | |
| Three months ended
October 2, 2021 | | Nine months ended
October 2, 2021 |
| Numerator | | | |
| Income (loss) from continuing operations | $ | 19,466 | | | $ | (20,441) | |
| Loss from discontinued operations | (4,985) | | | (8,114) | |
| Net income (loss) | 14,481 | | | (28,555) | |
| Less: accrued preferred return | — | | | 1,638 | |
| Net income (loss) attributable to Class A common shareholders - basic and diluted | $ | 14,481 | | | $ | (30,193) | |
| | | |
| Denominator | | | |
| Weighted average Class A common shares outstanding - basic | 11,923,941 | | 11,839,015 |
| Add: weighted average Class B common shares if converted to Class A common shares | 12,034,098 | | — |
| Add: Pre-PIPE Notes | 3,322,361 | | — |
| Weighted average Class A and B common shares outstanding - diluted | 27,280,400 | | 11,839,015 |
| | | |
| Continuing operations - basic | $ | 1.63 | | | $ | (1.86) | |
| Continuing operations - diluted | $ | 0.71 | | | $ | (1.86) | |
| Discontinued operations - Class A - basic and diluted | $ | (0.42) | | | $ | (0.69) | |
| Net income (loss) - basic | $ | 1.21 | | | $ | (2.55) | |
| Net income (loss) - diluted | $ | 0.30 | | | $ | (2.55) | |
| | | | | | | | | |
| | | Nine months ended
October 2, 2021 |
| Excluded from the calculation | | | |
| Class B common stock | | | 12,034,098 |
| Pre-PIPE Notes | | | 3,322,361 |
| Total potentially dilutive shares excluded from calculation | | | 15,356,459 |
Note 3. Discontinued Operations
At the end of the third quarter of 2021, we suspended all operations associated with our Canadian subsidiary within the Telecom segment, which ceased our foreign operations. The disposition of the Canadian subsidiary was considered a
strategic shift that had a major effect on our operations and financial results. As a result of the suspension of operations, any new business with customers was terminated and remaining orders were canceled/settled.
The following table presents the aggregate carrying amounts of the classes of assets and liabilities of discontinued operations included in "Other current assets" and "Other current liabilities" on the condensed consolidated balance sheets (in thousands). The amounts at October 1, 2022 were not material.
| | | | | | | | | | | |
| | | December 31, 2021 |
| Carrying amounts of assets included as part of discontinued operations: | | | |
| Cash | | | $ | 1,545 | |
| Accounts receivable, net of allowance | | | 1,292 | |
| Other current assets | | | 1,665 | |
| Total current assets of discontinued operations | | | $ | 4,502 | |
| Carrying amounts of liabilities included as part of discontinued operations: | | | |
| Current portion of long-term debt and capital lease obligations | | | $ | 14 | |
| Accounts payable | | | 559 | |
| Accrued expenses | | | 1,475 | |
| Total current liabilities of discontinued operations | | | $ | 2,048 | |
The financial results are presented as loss from discontinued operations on the condensed consolidated statements of operations and comprehensive loss as follows (in thousands):
| | | | | | | | | | | |
| For The Three Months Ended
October 2, 2021 | | For The Nine Months Ended
October 2, 2021 |
| Revenue | $ | 454 | | | $ | 5,850 | |
| Costs and expenses: | | | |
| Cost of revenues | 696 | | | 8,025 | |
| General and administrative | 133 | | | 275 | |
| Depreciation and amortization | 5,690 | | | 6,667 | |
| Total costs and expenses | 6,519 | | | 14,967 | |
| Loss from operations of discontinued operations | (6,065) | | | (9,117) | |
| Other expense: | | | |
| Gain on sale/disposal of property and equipment | 1,101 | | | 1,101 | |
| Interest expense | (21) | | | (98) | |
| Loss from discontinued operations | $ | (4,985) | | | $ | (8,114) | |
Note 4. Acquisitions
On January 26, 2021, the Company purchased 100% of the membership interests of Fiber Network Solutions, LLC (“FNS”), a Texas based company that provides new fiber optic construction services, as well as maintenance and repair services to renewable energy, commercial, and utility clientele in the United States. The overall consideration transferred was $20,059 thousand of cash and rollover equity valued at $2,000 thousand. The purchase price is subject to adjustment based upon FNS exceeding predetermined EBITDA thresholds for the years ending 2021, 2022, 2023, and 2024, as defined in the agreement, subject to a maximum additional payment of $20,000 thousand. As of the acquisition date, the fair value of the contingent consideration was determined to be $8,200 thousand. The cash consideration was funded by the issuance of equity, as well as the issuance of convertible notes with the majority member of QualTek HoldCo (see Note 8-Debt and Capital Lease Obligation).
On August 6, 2021, the Company acquired certain assets and liabilities from Broken Arrow Communications, Inc. (“Broken Arrow”), a New Mexico based company that provided a wide variety of services for the installation, construction, and maintenance of wireless communication facilities. The consideration transferred was $5,000 thousand of cash. The
purchase price is subject to adjustment based upon Broken Arrow exceeding predetermined crew count and EBITDA thresholds for certain markets for the 5-month period of August 2021 through December 2021 and for the year ending December 31, 2022, as defined in the agreement, subject to a maximum additional payment of $10,000 thousand. As of the acquisition date, the fair value of the contingent consideration was determined to be $7,552 thousand. The cash consideration was funded by the issuance of convertible notes in June 2021 (see Note 8-Debt and Capital Lease Obligation).
On August 30, 2021, the Company purchased 100% of the membership interests of Concurrent Group LLC (“Concurrent”), a Florida based company that provides construction, maintenance, and restoration services for utilities, electric membership co-ops, and municipally owned power providers. The overall consideration transferred was $13,828 thousand of cash, rollover equity valued at $6,000 thousand, and acquisition debt of $14,143 thousand. The purchase price is subject to adjustment based upon Concurrent exceeding predetermined EBITDA thresholds for LTM periods ending at the closing of the third quarter of 2022, 2023 and 2024, as defined in the agreement, subject to a maximum additional payment of $30,000 thousand. As of the acquisition date, the fair value of the contingent consideration was determined to be $7,000 thousand. The cash consideration was funded by convertible notes issued by the Company in June 2021. (see Note 8-Debt and Capital Lease Obligation).
On October 15, 2021, the Company purchased 100% of the membership interests of Urban Cable Technology, LLC (“Urban Cable”), a Pennsylvania based company that provides a range of services, including aerial and underground construction, engineering, multiple dwelling units wiring and rewiring, and fiber placement to broadband and telecom cable operators. The overall consideration transferred was $8,436 thousand of cash and rollover equity valued at $4,000 thousand. The purchase price is subject to adjustment based upon Urban Cable exceeding predetermined EBITDA for the years ending 2021, 2022, 2023, and 2024, as defined in the agreement. As of the acquisition date, the fair value of the contingent consideration was determined to be $3,450 thousand. The cash consideration was funded by line of credit.
The acquisitions were recognized as business combinations with FNS and associated goodwill reporting within our Renewables and Recovery Logistics Segment and Broken Arrow, Concurrent, and Urban Cable and associated goodwill reporting within our Telecom Segment. The identifiable assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition dates. Goodwill resulted from expected synergies and revenue growth from combining operations with the Company. The goodwill recognized from these acquisitions is not expected to be deductible for income tax purposes.
The following table summarizes the final fair value of the assets and liabilities acquired at the date of the acquisitions (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| FNS | | Broken Arrow | | Concurrent | | Urban Cable |
| Purchase consideration: | | | | | | | |
| Cash paid | $ | 20,059 | | | $ | 5,000 | | | $ | 13,828 | | | $ | 8,436 | |
| Rollover equity | 2,000 | | | — | | | 6,000 | | | 4,000 | |
| Contingent consideration | 8,200 | | | 7,552 | | | 7,000 | | | 3,450 | |
| Acquisition debt | — | | | — | | | 14,143 | | | — | |
| Due from seller | — | | | — | | | (510) | | | (151) | |
| $ | 30,259 | | | $ | 12,552 | | | $ | 40,461 | | | $ | 15,735 | |
| Purchase price allocations: | | | | | | | |
| Cash | $ | — | | | $ | — | | | $ | 1,289 | | | $ | 185 | |
| Accounts receivable | — | | | 5,126 | | | 8,458 | | | 3,695 | |
| Inventories | — | | | 133 | | | 25 | | | — | |
| Prepaid expenses | — | | | 94 | | | — | | | 14 | |
| Other current assets | — | | | — | | | 10 | | | 28 | |
| Property and equipment | 9,978 | | | 219 | | | 5,263 | | | 1,361 | |
| Other long-term assets | — | | | 32 | | | 60 | | | — | |
| Customer relationships | 17,370 | | | 5,750 | | | 22,330 | | | 10,910 | |
| Trademarks and trade names | 270 | | | 80 | | | 760 | | | 340 | |
| Goodwill | 8,082 | | | 5,319 | | | 8,552 | | | 799 | |
| 35,700 | | | 16,753 | | | 46,747 | | | 17,332 | |
| Accounts payable | — | | | (1,987) | | | (1,938) | | | (1,184) | |
| Accrued expenses | — | | | (156) | | | (799) | | | (323) | |
| Contract liabilities | — | | | (2,058) | | | (367) | | | — | |
| Capital lease obligations | (5,441) | | | — | | | (3,182) | | | (90) | |
| $ | 30,259 | | | $ | 12,552 | | | $ | 40,461 | | | $ | 15,735 | |
The measurement period adjustments made during 2022 and direct acquisition-related expenses associated with these acquisitions were not material.
Note 5. Property and Equipment
Property and equipment consisted of the following (in thousands):
| | | | | | | | | | | |
| October 1,
2022 | | December 31,
2021 |
| Office furniture | $ | 2,130 | | | $ | 1,382 | |
| Computers | 2,279 | | | 1,856 | |
| Machinery, equipment and vehicles | 26,522 | | | 17,331 | |
| Land | 140 | | | 140 | |
| Building | 340 | | | 340 | |
| Leasehold improvements | 5,159 | | | 4,552 | |
| Software | 2,418 | | | 2,320 | |
| Assets under capital lease | 53,649 | | | 50,941 | |
| Construction in process | 1,378 | | | 1,335 | |
| 94,015 | | | 80,197 | |
| Less: accumulated depreciation | (39,344) | | | (29,515) | |
| Property and equipment, net | $ | 54,671 | | | $ | 50,682 | |
Property and equipment include assets acquired under capital leases of $53,649 thousand and $50,941 thousand and accumulated depreciation of $16,446 thousand and $14,899 thousand as of October 1, 2022 and December 31, 2021, respectively. Depreciation expense was $4,132 thousand and $11,745 thousand for the three and nine months ended October 1, 2022, respectively, and was $2,485 thousand and $9,418 thousand for the three and nine months ended October 2, 2021, respectively.
Note 6. Accounts Receivable, Contract Assets and Liabilities, and Customer Credit Concentration
The following provides further details on the condensed consolidated balance sheet accounts of accounts receivable, contract assets and contract liabilities.
Accounts Receivable
The Company is party to non-recourse financing arrangements in the ordinary course of business, under which certain receivables are settled with the customer’s bank in return for a nominal fee. Discount charges related to these arrangements, which are included within interest expense, were not material in all periods presented.
Contract Assets and Liabilities
Contract assets represent our right to consideration from our customers when such right is conditioned on something other than the passage of time. Contract assets, which primarily consist of retainage (an agreed-upon portion of billed amounts not expected to be collected until the projects have been completed), were not material at October 1, 2022 or December 31, 2021. Our accounts receivable represent unconditional rights to consideration, including unbilled revenues for the estimated value of unbilled work for projects with performance obligations recognized over time.
Contract liabilities primarily represent advanced billing and payment received in excess of revenues recognized and before our performance obligations have been satisfied. Contract liabilities, included in "Other current liabilities" on the condensed consolidated balance sheets, were $17,988 thousand and $14,773 thousand at October 1, 2022 and December 31, 2021, respectively. The amount of revenue recognized for the nine months ended October 1, 2022 and October 2, 2021 from the amount that was included in contract liabilities at December 31, 2021 and 2020 was $11,636 thousand and $8,132 thousand, respectively.
Customer Credit Concentration
Customers whose accounts receivable exceeded 10% of the total gross accounts receivable were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| October 1, 2022 | | December 31, 2021 |
| Amounts | | % of Total | | Amounts | | % of Total |
| AT&T | $ | 88,870 | | | 30.7 | % | | $ | 56,280 | | | 27.1 | % |
| Verizon | 53,681 | | | 18.5 | % | | 35,756 | | | 17.2 | % |
| T-Mobile | 42,595 | | | 14.7 | % | | 50,218 | | | 24.2 | % |
| Total | $ | 185,146 | | | 63.9 | % | | $ | 142,254 | | | 68.5 | % |
Note 7. Goodwill and Intangible Assets
Goodwill
Changes in the carrying amount of goodwill by reportable segment is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Renewables
and
Recovery
Logistics | | Telecom | | Total |
| Goodwill as of December 31, 2021 (a) | $ | 21,680 | | | $ | 7,043 | | | $ | 28,723 | |
| Measurement period adjustments, net | — | | | (70) | | | (70) | |
| Goodwill as of October 1, 2022 (a) | $ | 21,680 | | | $ | 6,973 | | | $ | 28,653 | |
____________________________________
(a)Goodwill is net of accumulated impairment charges of $89,421 thousand as of October 1, 2022 and December 31, 2021 in the Telecom segment. There have been no impairment charges within the Renewables and Recovery Logistics segment.
Intangible Assets
Intangible assets consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| October 1, 2022 |
| Weighted
Average
Remaining
Useful Life | | Gross
Carrying
Amount | | Accumulated
amortization | | Net carrying
Amount |
| Customer relationships | 9.1 | | $ | 424,260 | | | $ | (124,727) | | | $ | 299,533 | |
| Trademarks and trade names | 9.3 | | 59,969 | | | (27,286) | | | 32,683 | |
| | | $ | 484,229 | | | $ | (152,013) | | | $ | 332,216 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Weighted
Average
Remaining
Useful Life | | Gross
carrying
amount | | Accumulated
amortization | | Net carrying
Amount |
| Customer relationships | 9.5 | | $ | 424,560 | | | $ | (98,307) | | | $ | 326,253 | |
| Trademarks and trade names | 9.5 | | 59,969 | | | (22,048) | | | 37,921 | |
| | | $ | 484,529 | | | $ | (120,355) | | | $ | 364,174 | |
Amortization expense of intangible assets was $10,553 thousand and $31,658 thousand for the three and nine months ended October 1, 2022, respectively and was $7,910 thousand and $29,020 thousand for the three and nine months ended October 2, 2021, respectively.
Note 8. Debt and Capital Lease Obligations
Convertible notes – related party: On June 16, 2021, the Company issued a convertible note (“Convertible Note – Related Party – June 2021”) in the aggregate principal amount of $30,568 thousand to BCP QualTek II LLC, an affiliate of its majority member, in exchange for the 25,000 outstanding Preferred Class B Units (Preferred Units) and the associated accumulated preferred return. The Convertible Note – Related Party - June 2021 converted under its mandatory conversion provision, as defined in the agreement, upon the consummation of the Business Combination on February 14, 2022, as noted in Note 1-Nature of Business and Summary of Significant Accounting Policies.
Convertible notes – June 2021: On June 16, 2021, the Company issued convertible promissory notes (the “Convertible Notes – June 2021”) with an aggregate principal amount of $44,400 thousand. The Convertible Notes – June 2021 did not require interest to be accrued or payable and did not have a fixed maturity date. The Convertible Notes – June 2021 converted under its mandatory conversion provision, as defined in the agreement, upon the consummation of the Business Combination on February 14, 2022 (See Note 1-Nature of Business and Summary of Significant Accounting Policies). There was a beneficial conversion feature of $12,270 thousand related to the Convertible Notes – June 2021 that was amortized over the life of the notes, using the effective interest method.
Effective January 1, 2022, the Company early adopted ASU 2020-06 using the modified retrospective method. As a result of the adoption of ASU 2020-06, previously recognized beneficial conversion feature for the Convertible Notes – June 2021 outstanding as of January 1, 2022 was removed from additional paid-in capital and the debt discount. A cumulative impact adjustment was recorded to account for a reduction in interest expense due to a decrease in the discount, which is recognized as interest expense upon conversion of the convertible debt. Adoption of the new standard resulted in a decrease to additional paid-in capital of $12,270 thousand, an increase to convertible debt, net of $3,409 thousand, and a decrease to accumulated deficit of $8,861 thousand.
Line of credit: The Company, through its wholly-owned subsidiaries, has an Asset Based Lending Credit Agreement (“Credit Agreement”) with PNC Bank, National Association (“PNC”). Under the Credit Agreement, the Company has available an aggregate revolving credit facility, including a swingline subfacility and a letter of credit subfacility, in the amount of $103,500 thousand, for working capital needs and general corporate purposes. Interest on the outstanding principal amount, payable in arrears monthly, is based on either an elected Base Rate plus an applicable margin, or an adjusted Eurodollar rate, plus an applicable margin, as defined in the agreement.
On January 28, 2022, the Company executed an amendment to the Credit Agreement to temporarily increase the maximum availability of the revolving credit facility to the amount of $115,000 thousand until February 15, 2022. On February 14, 2022, the maximum availability was automatically reduced to the amount of $103,500 thousand. In connection with the Business Combination, on February 14, 2022, the Company repaid $73,000 thousand of debt associated with the line of credit.
On May 13, 2022, the Company executed an amendment to the Credit Agreement that extended the maturity date by two years from July 18, 2023 to July 17, 2025 and clarified certain provisions to exclude the payment of the earn-out obligations made in February 2022 from the proceeds from the Business Combination in the calculation of the Consolidated Fixed Charges Coverage Ratio.
On September 19, 2022, the Company executed an amendment to the Credit Agreement that increased the aggregate revolving commitments to $130,000 thousand from September 15 through December 31 of each year (the “Seasonal Increase Period”). The aggregate revolving commitments from January 1 through September 14 of each year will remain at $103,500 thousand. The amendment provides for a 0.50% increase in the applicable margin during the Seasonal Increase Period and a 0.25% increase in the applicable margin for all other time periods. All other terms of the Credit Agreement, including the maturity date, remained the same. The interest rate under the Credit Agreement as of October 1, 2022 was 8.25%.
On November 11, 2022, the Company through its wholly-owned subsidiaries QualTek Buyer, LLC and QualTek LLC, entered into the Ninth Amendment and Waiver to ABL Credit and Guaranty Agreement. Interest on the principal amounts outstanding under the Amended Credit Agreement, payable in arrears monthly, is based on either an elected Base Rate plus an applicable margin, or an adjusted Eurodollar rate, plus an applicable margin, as defined in the agreement (the “Applicable Margin”). The Ninth Amendment provides for a 0.50% increase in the Applicable Margin for all time periods provided for in the Amended Credit Agreement. In addition, the Amendment revises the fixed charge coverage ratio covenant such that the borrower must be in compliance with the fixed charge coverage ratio at the end of every fiscal
quarter and as amended by the Amendment (the “Amended Credit Agreement”). Further, PNC prospectively waived fixed charge coverage ratio covenant for the third quarter 2022 under the Credit Agreement.
Standby letters of credit totaling $5,031 thousand, issued for our insurance carriers and in support of performance under certain contracts, were outstanding and the borrowing capacity available under the Credit Facility was $18,197 thousand as of October 1, 2022.
Term loan: The Company has a Senior Secured Term Credit and Guaranty Agreement (“Term Loan”) with Citibank as the administrative agent for $380,000 thousand. The Term Loan interest is payable either monthly or quarterly, in arrears, based on the Company’s interest election. The Company may elect either a Base Rate plus an applicable rate (11.50% at October 1, 2022), or an adjusted Eurodollar rate, plus an applicable rate (10.00% at October 1, 2022), as defined in the agreement. The Term Loan agreement requires an excess cash calculation, as defined in the agreement, which could result in additional required principal payments on the loan. There were no excess cash principal payments due October 1, 2022.
Acquisition debt: Acquisition debt consists of deferred purchase price due to the sellers in the Recovery Logistics, Inc., Vertical Limit LLC, Vinculums Services, LLC, and Concurrent acquisitions. The acquisition debt was paid in full with proceeds from the Business Combination on February 14, 2022 (see Note 1 - Nature of Business and Summary of Significant Accounting Policies).
Senior Unsecured Convertible Notes: In connection with the Business Combination, on February 14, 2022, the Company entered into an Indenture with Wilmington Trust, National Association (the “Trustee”) where the Company has issued senior unsecured convertible notes (the “Convertible Notes”) due February 15, 2027, in an aggregate principal amount of $124,685 thousand, receiving $122,191 thousand in net cash proceeds. The Convertible Notes have an original issue discount of $2,494 thousand. Further, $6,384 thousand in debt issuance costs were incurred. The total of $8,878 thousand recorded as debt discount is being amortized using the effective interest method through the maturity dates of the Convertible Notes. The Convertible Notes provide for an interest rate that is set quarterly based on gross leverage with a minimum interest rate of 9.50% per annum and up to a maximum of 11.75% per annum, with an additional interest of 2% per annum upon the occurrence of an event of default (as defined in the Indenture). Interest is payable on a quarterly basis commencing on June 15, 2022. For the three and nine months ended October 1, 2022, the Company recorded interest expense of $3,581 thousand and $9,197 thousand, respectively. As of October 1, 2022, the Convertible Notes are presented net of a debt discount of $7,768 thousand on the condensed consolidated balance sheet with accretion of $444 thousand and $1,110 thousand for the three and nine months ended October 1, 2022, respectively.
Subject to and upon compliance with the provisions of the Indenture, each holder of a Convertible Note is provided with the right, at such holder’s option, to convert all or any portion (if the portion to be converted is $1 thousand principal amount or an integral multiple thereof) of such Convertible Note at any time prior to the close of business on the second scheduled trading day immediately preceding February 15, 2027, at an initial conversion rate of 100 shares of the Company’s Class A common stock, which is equal to an initial conversion price of $10.00 per share (subject to adjustment as provided in the Indenture) per $1 thousand principal amount of the Convertible Note. If a fundamental change (as defined in the Indenture) occurs prior to February 15, 2027, holders of the Convertible Notes will have the right to require the Company to repurchase all or any portion of their Convertible Notes in principal amounts of $1 thousand or an integral multiple thereof, at a repurchase price equal to the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest.
The Convertible Notes may be converted by the Company any time after the two-year anniversary of the Closing of the Business Combination on February 14, 2022 (the “Company Forced Conversion Date” ) subject to the following conditions: (i) the Company’s share price trading at or above $14.00 per share for 20 out of any 30 consecutive trading days after the Company Forced Conversion Date; (ii) the holders receive a make-whole payment in the form of cash or additional shares at the time of such conversion; (iii) the 60-day average daily trading volume ending on the last trading day of the applicable exercise period being greater than or equal to $15,000 thousand; (iv) the conversion of the Convertible Notes being made on a pro-rata basis across all Convertible Note investors; and (v) the conversion of the Convertible Notes, together with all previously converted Convertible Notes, resulting in no more than 20% of the free float of the Company’s Class A Common Stock.
The Company determined that there was no derivative liability associated with the Convertible Notes under ASC 815-15, Derivatives and Hedging. Per ASC 815-10-15-74(a), contracts that are both indexed to its own stock and classified in stockholders’ equity in its statement of financial position are not considered to be derivative instruments. The conversion feature is indexed to the Company’s own stock and is classified in stockholders’ equity on the condensed consolidated
balance sheets. As the conversion features would meet the scope exception as described in paragraphs ASC 815-15-74(a), the conversion features are not required to be separated from the host instrument and accounted for separately. As a result, at October 1, 2022, the conversion feature does not meet derivative classification.
The Convertible Notes have customary anti-dilution protections and customary negative covenants, including limitations on indebtedness, restricted payments, and permitted investments. As of October 1, 2022, the Company was in compliance with the covenants under the Indenture.
Debt outstanding was as follows (in thousands):
| | | | | | | | | | | |
| October 1,
2022 | | December 31,
2021 |
| Current Maturities: | | | |
| Current maturities of long-term debt | $ | 9,564 | | | $ | 115,224 | |
| Current portion of capital lease obligations | 12,876 | | | 12,151 | |
| Current portion of long-term debt and capital lease obligations | $ | 22,440 | | | $ | 127,375 | |
| Long-term borrowings: | | | |
| Line of credit | $ | 102,223 | | | $ | 87,633 | |
| Term loan | 344,308 | | | 351,481 | |
| Acquisition debt | — | | | 34,718 | |
| Convertible notes – related party | — | | | 30,567 | |
| Convertible notes – June 2021 | — | | | 44,400 | |
| Senior unsecured convertible notes | 124,685 | | | — | |
| Less: current maturities of long-term debt | (9,564) | | | (115,224) | |
| Less: unamortized financing fees | (8,439) | | | (11,354) | |
| Less: convertible debt discount | (7,768) | | | (3,408) | |
| Long-term debt, net of current portion | $ | 545,445 | | | $ | 418,813 | |
| Capital lease obligations: | | | |
| Capital lease obligations | $ | 32,056 | | | $ | 32,002 | |
| Less: current portion of capital lease obligations | (12,876) | | | (12,151) | |
| Capital lease obligations, net of current portion | 19,180 | | | 19,851 | |
| Total long-term borrowings | $ | 564,625 | | | $ | 438,664 | |
Note 9. Warrants
Prior to the Business Combination, ROCR issued 2,875 thousand Public Warrants and 102 thousand Private Placement Warrants (collectively, the “Warrants”). Upon the closing of the Business Combination, the Company assumed the Warrants. The Public Warrants became exercisable on 30 days after the completion of the Business Combination. No warrants will be exercisable for cash unless the Company has an effective and current registration statement covering the shares of Class A Common Stock issuable upon exercise of the warrants and a current prospectus relating to such shares of Class A Common Stock. Notwithstanding the foregoing, if there is no effective registration statement covering the shares of Class A Common Stock issuable upon exercise of the Public Warrants within 120 days following the consummation of the Business Combination, warrant holders may, until such time as there is an effective registration statement and during any period when the Company shall have failed to maintain an effective registration statement, exercise warrants on a cashless basis pursuant to an available exemption from registration under the Securities Act. The warrants will expire five years from the closing of the Business Combination.
Once the warrants become exercisable, the Company may redeem the Public Warrants:
–in whole and not in part;
–at a price of $0.01 per warrant;
–at any time after the warrants become exercisable;
–upon not less than 30 days’ prior written notice of redemption to each warrant holder;
–if, and only if, the reported last sale price of the shares of Class A Common Stock equals or exceeds $18.00 per share, for any 20 trading days within a 30-day trading period commencing after the warrants become exercisable and ending on the third business day prior to the notice of redemption to warrant holders; and
–if, and only if, there is a current registration statement in effect with respect to the shares of Class A Common Stock underlying such warrants at the time of redemption and for the entire 30-day trading period referred to above and continuing each day thereafter until the date of redemption.
If the Company calls the Public Warrants for redemption, management will have the option to require all holders that wish to exercise the Public Warrants to do so on a “cashless basis,” as described in the warrant agreement. The exercise price and number of shares of Class A Common Stock issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, extraordinary dividend or recapitalization, reorganization, merger or consolidation. However, except as described below, the warrants will not be adjusted for issuances of shares of Class A Common Stock at a price below their respective exercise prices. Additionally, in no event will the Company be required to net cash settle the warrants.
The Private Placement Warrants are identical to the Public Warrants, except that the Private Placement Warrants and the shares of Class A Common Stock issuable upon the exercise of the Private Placement Warrants were not transferable, assignable or saleable until completion of the Business Combination, subject to certain limited exceptions. Additionally, the Private Placement Warrants are exercisable for cash or on a cashless basis, at the holder’s option, and are nonredeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Placement Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Placement Warrants are redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
Note 10. Fair Value Measurements
The Company measures and reports certain financial and non-financial assets and liabilities on a fair value basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). GAAP specifies a three-level hierarchy that is used when measuring and disclosing fair value. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e. observable inputs) and the lowest priority to data lacking transparency (i.e. unobservable inputs). An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant inputs to its valuation. The following is a description of the three hierarchy levels.
Level 1Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Active markets are considered to be those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in inactive markets.
Level 3Unobservable inputs are not corroborated by market data. This category is comprised of financial and non-financial assets and liabilities whose fair value is estimated based on internally developed models or methodologies using significant inputs that are generally less readily observable from objective sources.
Transfers into or out of any hierarchy level are recognized at the end of the reporting period in which the transfers occurred. There were no transfers between any levels during the three and nine months ended October 1, 2022 and October 2, 2021, respectively.
Acquisition-related contingent consideration is measured at fair value on a recurring basis using unobservable inputs such as projections of financial results and cash flows for the acquired businesses and a discount factor based on the weighted average cost of capital which fall within Level 3 of the fair value hierarchy.
As a result of the Business Combination, the Company has issued and outstanding Private Placement Warrants and Public Warrants. The Private Placement Warrants are substantially similar to the Public Warrants, but not directly traded or quoted on an active market and not subject to the redemption right under certain circumstances (see Note 9-Warrants). The Private Placement Warrants are accounted for as liabilities in accordance with ASC 815-40 and are presented within
warrant liability on the accompanying condensed consolidated balance sheet. As of the Closing Date and October 1, 2022, the Private Placement Warrants were valued using a Black-Scholes call option model. The Black-Scholes call option model’s primary unobservable input utilized in determining the fair value of the Private Placement Warrants is the Public Warrants implied volatility adjusted for the redemption feature, which is considered to be a Level 3 fair value measurement.
In accordance with the fair value hierarchy described above, the following tables show the fair value of the Company’s financial liabilities that are measured at fair value on a recurring basis at October 1, 2022 and December 31, 2021 and the related activity for the nine months ended October 1, 2022 and October 2, 2021 (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at October 1, 2022 |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 |
| Financial liabilities | | | | | | | |
Contingent consideration (1) | $ | 15,043 | | | $ | — | | | $ | — | | | $ | 15,043 | |
Warrant liability (2) | 77 | | | — | | | — | | | 77 | |
| $ | 15,120 | | | $ | — | | | $ | — | | | $ | 15,120 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at December 31, 2021 |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 |
| Financial liabilities | | | | | | | |
Contingent consideration (1) | $ | 30,756 | | | $ | — | | | $ | — | | | $ | 30,756 | |
| $ | 30,756 | | | $ | — | | | $ | — | | | $ | 30,756 | |
(1) Included in "Other current liabilities" and "Other non-current liabilities" on the condensed consolidated balance sheets.
(2) Included in "Other non-current liabilities" on the condensed consolidated balance sheets.
The following table sets forth a summary of the changes in fair value of the Company’s financial liabilities (in thousands):
| | | | | | | | | | | |
| Warrant
liability | | Contingent
consideration |
| January 1, 2022 | $ | — | | | $ | 30,756 | |
| Assumption of private placement warrants in Business Combination | 77 | | | — | |
| Accretion | — | | | 1,050 | |
| Reclassification to short term debt | — | | | (5,000) | |
| Change in fair value | — | | | (11,763) | |
| October 1, 2022 | $ | 77 | | | $ | 15,043 | |
| | | | | |
| Contingent
consideration |
| January 1, 2021 | $ | 18,129 | |
| Acquisition (see Note 4) | 8,200 | |
| Accretion | 440 | |
| Reclassification to acquisition debt | (10,000) | |
| October 2, 2021 | $ | 16,769 | |
Note 11. Equity
Immediately prior to the Business Combination, management made a non-cash discretionary distribution to effectively settle all existing Class P Units in exchange for Historical LLC Interests in QualTek HoldCo. In addition, as mentioned in Note 1 - Nature of Business and Summary of Significant Accounting Policies, per the Business Combination Agreement, QualTek HoldCo issued the Convertible Note – Related Party – June 2021 (see in Note 8-Debt and Capital Lease
Obligations) in an aggregate principal amount of $30,568 thousand to BCP QualTek II, LLC in exchange for all the Preferred Class B units, which automatically converted into Common Units upon closing of the Business Combination.
QualTek Services Inc. Preferred Stock: The Company is authorized to issue 1,000 thousand shares of preferred stock with a par value of $0.0001 per share. At October 1, 2022, there were no shares of preferred stock issued or outstanding.
QualTek Services Inc. Class A Common Stock: The Company is authorized to issue 500,000 thousand shares of Class A Common Stock with a par value of $0.0001 per share. At October 1, 2022, there were 24,446 thousand shares of Class A Common Stock (inclusive of 2,275 thousand shares of Blocker Owner Earnout Shares) issued and outstanding. Holders of Class A Common Stock are entitled to full economic rights, including the right to receive dividends when and if declared by the Board. Each holder of Class A Common Stock is entitled to one vote for each share of Class A Common Stock held. Upon liquidation of the Company, holders of Class A Common Stock are entitled to share ratably in all assets remaining after payment of debts and other liabilities.
QualTek Services Inc. Class B Common Stock: The Company is authorized to issue 500,000 thousand shares of Class B Common Stock with a par value of $0.0001 per share. At October 1, 2022, there were 26,664 thousand shares of Class B Common Stock (inclusive of 3,836 thousand shares of Earnout Voting Shares) issued and outstanding. Holders of Class B Common Stock do not have economic rights but are entitled to one vote for each share of Class B Common Stock held. Upon liquidation of the Company, holders are not entitled to receive any assets remaining after payment of debts and other liabilities.
Holders of Class A Common Stock and Class B Common Stock vote as a single class on all matters requiring a shareholder vote.
Non-controlling Interests: QualTek Services Inc. is the sole managing member of QualTek HoldCo and consolidates the financial results of QualTek HoldCo. The non-controlling interests balance represents the economic interest in QualTek HoldCo held by the Flow-through Sellers. The following table summarizes the ownership of QualTek HoldCo as of October 1, 2022:
| | | | | | | | | | | |
| Common Units | | Ownership
Percentage |
| Common Units held by QualTek Services Inc. | 22,171,350 | | 45 | % |
| Common Units held by Flow-through Sellers | 26,663,575 | | 55 | % |
| Balance at end of period | 48,834,925 | | 100 | % |
Each Common Unit corresponds to a share of Class B Common Stock. Common Unit holders share in QualTek HoldCo’s profits or loss and distributions on a pro rata basis. The Flow-through Sellers have the right to exchange their Common Units in QualTek HoldCo for shares of Class A Common Stock of QualTek Services Inc. on a one-to-one basis after the expiration of the Lock-Up Period (as defined in the Third Amended and Restated Limited Liability Company Agreement of QualTek HoldCo). In connection with the exercise of the exchange of the Common Units, the Flow-through Sellers will be required to surrender a number of shares of Class B Common Stock, which the Company will cancel for no consideration on a one-for-one basis with the number of Common Units so exchanged. Between October 2, 2022 and the date hereof, the Company converted 3,359,375 QualTek HoldCo units and shares of Class B Common Stock of the Company into 3,359,375 shares of Class A Common Stock of the Company after receiving requests for conversion from the holders thereof.
Public Warrants: In connection with the Business Combination, the Company assumed the Public Warrants which are recorded as a component of equity. At October 1, 2022, there were 2,875 thousand Public Warrants outstanding. Refer to Note 9-Warrants for additional information.
Earnout Shares: As discussed in Note 1-Nature of Business and Summary of Significant Accounting Policies, the Company issued 2,275 thousand shares of Class A Common Stock (Blocker Owner Earnout Shares) and 3,836 thousand shares of Class B Common Stock (Earnout Voting Shares) that are subject to certain restriction on transfer and voting and potential forfeiture pending the achievement of the earn out targets. Blocker Owner Earnout Shares are entitled to receive, ratably with the other outstanding shares of Class A Common Stock, dividends, and other distributions prior to vesting. Earnout Voting Shares have only voting rights and therefore are not entitled to receive any distributions. Each Earnout
Voting Share has a corresponding Common Unit of QualTek HoldCo which is subject to the same vesting conditions. At October 1, 2022, the earn out targets have not been achieved and all Earnout Shares are unvested.
Note 12. Stock-Based Compensation
Long-term Incentive Plan
The Company's LTIP allows for the award of equity incentives, including stock options, restricted shares, performance awards, stock appreciation rights, other share-based awards and other cash-based awards to certain employees, directors, officers, or consultants to the Company or its subsidiaries. As of October 1, 2022, there were 2.3 million shares of Class A Common Stock available for future grant under the Plan. The number of shares of Class A common stock reserved for issuance under the 2022 Plan will automatically increase on January 1st each year, starting on January 1, 2023 and continuing through January 1, 2032, by the lesser of (a) the lesser of (i) two percent (2%) of the total number of shares of the Company’s Class A Common Stock and Class B Common Stock outstanding on December 31st of the immediately preceding calendar year and (ii) such number of shares of Class A Common Stock that would result in the number of shares of Class A Common Stock reserved being equal to 15% of the aggregate number of shares of Class A Common Stock and Class B Common Stock outstanding as of the final day of the immediately preceding calendar year, and (b) a lesser number determined by the Company’s Board of Directors prior to the applicable January 1st. There was not a similar plan in 2021.
Stock Options
Stock options under the LTIP are granted at the discretion of the Board of Directors or its Committee and expire no more than ten years from the grant date. Outstanding stock options generally vest in equal installments over a four-year period subject to the grantee’s continued service on each applicable vesting. All options under the Plan are exercisable, upon vesting, for shares of Class A Common Stock of the Company. Outstanding stock options expire 10 years from the grant date.
During the nine months ended October 1, 2022, the Company granted stock options for 5.2 million shares of Class A Common Stock under the LTIP, with an aggregate grant date fair value of $7,605 thousand. During the nine months ended October 1, 2022, 645,563 stock options vested and the total fair value of stock options vested was $936 thousand. There were no stock options exercised during the nine months ended October 1, 2022.
As of October 1, 2022, 4.4 million outstanding stock options were unvested, which had a weighted average grant date fair value of $1.45. There were 5.1 million stock options outstanding as of October 1, 2022, with a weighted average exercise price of $1.45. There were no stock options outstanding as of October 2, 2021.
The following table summarizes stock-based compensation expense recognized in the condensed consolidated statements of operations (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
| Cost of revenue | $ | 46 | | | $ | — | | | $ | 167 | | | $ | — | |
| General and administrative expenses | 376 | | | — | | | 8,080 | | | — | |
| Total | $ | 422 | | | $ | — | | | $ | 8,247 | | | $ | — | |
As of October 1, 2022, there was $5,788 thousand of total unrecognized compensation cost related to unvested stock options. The unrecognized compensation cost as of October 1, 2022 is expected to be fully amortized over the next 3.4 years. Absent the effect of forfeiture of stock compensation cost for any departures of employees, the following tables
summarize the unrecognized compensation cost, the weighted average period the cost is expected to be amortized, and the estimated annual compensation cost for the future periods indicated below (excludes any future award) (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Unrecognized Compensation Cost | | Weighted
Average
Remaining
Period to be
Recognized (in Years) |
| October 1,
2022 | | October 2,
2021 | | October 1,
2022 | | October 2,
2021 |
| Stock options | $ | 5,788 | | | $ | — | | | 3.4 | | 0 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Unrecognized Compensation Cost |
| Total | | 2022 | | 2023 | | 2024 | | 2025 and beyond |
| Stock options | $ | 5,788 | | | $ | 431 | | | $ | 1,713 | | | $ | 1,713 | | | $ | 1,931 | |
Note 13. Income Taxes
Prior to the Business Combination, QualTek HoldCo was treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, QualTek HoldCo’s is not subject to U.S. federal and certain state and local income taxes. Any taxable income and losses were passed through to and included in the taxable income of its members.
Following the Business Combination, the Company is subject to income taxes at the U.S. federal, state, and local levels for income tax purposes, including with respect to its allocable share of any taxable income of QualTek HoldCo.
The effective tax rate was 0% for three and nine months ended October 1, 2022. The Company, based on the consideration of the relevant positive and negative evidence available, maintained a full valuation allowance against its deferred tax assets.
The Company provides for income taxes and related accounts 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. 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.
Note 14. Tax Receivable Agreement
As part of the Business Combination, the Company entered into the TRA. Under the terms of the TRA, the Company will be required to pay to the TRA Holders 85% of the applicable cash tax savings, if any, in the U.S. federal, state and local tax that the Company realizes or is deemed to realize in certain circumstances as a result of (i) existing tax basis in certain assets of QualTek HoldCo and certain of its direct and indirect subsidiaries allocable to the Company as a result of the acquisition of Common Units by the Company as part of the Business Combination, (ii) tax basis adjustments resulting from taxable exchanges of Common Units acquired by the Company, (iii) tax deductions in respect to portions of certain payments made under the TRA, and (iv) certain tax attributes of the Company that were acquired directly or indirectly pursuant to the Business Combination. The Company generally retains the benefit of the remaining 15% of the applicable tax savings.
The TRA liabilities are carried at a value equal to the undiscounted expected future payments due under the TRA. The Company recorded $34,092 thousand as an estimate of future payments as an increase in TRA liabilities and a decrease to additional paid-in capital in the condensed consolidated financial statements. The Company estimates it will be able to utilize some, but not all, of the tax attributes based on current tax forecasts. If there was sufficient income to utilize all tax attributes, the TRA liabilities would be $44,396 thousand. If subsequent adjustments to the liability for future payments occur, those changes would be recognized through current period earnings. During the three months ended October 1, 2022, the Company reduced the TRA liabilities to $32,972 thousand and recognized a gain of $1,120 thousand included in "General and administrative" expense on the condensed consolidated statements of operations and comprehensive loss.
Note 15. Segments and Related Information
The Chief Operating Decision Maker ("CODM") of the Company manages its operation under two operating segments, which represent its two reportable segments: (1) Telecom and (2) Renewables and Recovery Logistics.
The Telecom segment performs site acquisition, engineering, project management, installation, testing, last mile installation, and maintenance solutions of communication infrastructure for telecommunication and cable providers, businesses, public venues, government facilities, and residential subscribers. The Renewables and Recovery Logistics segment derives its revenue from providing new fiber optic construction services, maintenance and repair services as well as businesses with continuity and disaster relief services to renewable energy, commercial, telecommunication and utility companies. The segment also provides business-as-usual services such as generator storage and repair and cell maintenance services.
The accounting policies of the reportable segments are the same as those described in Note 1-Nature of Business and Summary of Significant Accounting Policies. All intercompany transactions and balances are eliminated in consolidation. Intercompany revenue and costs between entities within a reportable segment are eliminated to arrive at segment totals. Corporate results include amounts related to corporate functions such as administrative costs, professional fees, acquisition-related transaction costs and other discrete items.
We present adjusted EBITDA as the key metric used by our management to assess the operating and financial performance of our operations in order to make decisions on 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.
Summarized financial information for the Company’s reportable segments is presented and reconciled to the Company’s condensed consolidated financial information in the following tables (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | For The Nine Months Ended |
| Revenue: | October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
| Telecom | $ | 188,297 | | | $ | 135,581 | | | $ | 496,134 | | | $ | 360,020 | |
| Renewables and Recovery Logistics | 27,823 | | | 79,881 | | | 52,369 | | | 105,164 | |
| Total consolidated revenue | $ | 216,120 | | | $ | 215,462 | | | $ | 548,503 | | | $ | 465,184 | |
| | | | | | | | | | | |
| Total Assets: | October 1,
2022 | | December 31,
2021 |
| Telecom | $ | 620,277 | | | $ | 570,750 | |
| Renewables and Recovery Logistics | 97,792 | | | 90,638 | |
Corporate(1) | 11,003 | | | 10,371 | |
| Total consolidated assets | $ | 729,072 | | | $ | 671,759 | |
(1)Corporate includes both corporate assets and intercompany eliminations
| | | | | | | | | | | |
| For The Nine Months Ended |
| Capital Expenditures: | October 1, 2022 | | October 2, 2021 |
| Telecom | $ | 13,350 | | | $ | 1,843 | |
| Renewables and Recovery Logistics | 1,544 | | | 248 | |
| Corporate | 528 | | | 1,059 | |
| Total consolidated capital expenditures | $ | 15,422 | | | $ | 3,150 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | For The Nine Months Ended |
| Amortization and Depreciation: | October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
| Amortization and depreciation | | | | | | | |
| Telecom | $ | 11,779 | | | $ | 10,205 | | | $ | 35,145 | | | $ | 29,767 | |
| Renewables and Recovery Logistics | 2,892 | | | 3,040 | | | 8,672 | | | 8,644 | |
| Corporate | 221 | | | 246 | | | 635 | | | 725 | |
| Total consolidated amortization and depreciation | $ | 14,892 | | | $ | 13,491 | | | $ | 44,452 | | | $ | 39,136 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | For The Nine Months Ended |
| Adjusted EBITDA Reconciliation: | October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
| Telecom adjusted EBITDA | $ | 14,103 | | | $ | 10,891 | | | $ | 35,946 | | | $ | 26,907 | |
| Renewables and Recovery Logistics adjusted EBITDA | 8,671 | | | 38,162 | | | 13,379 | | | 42,181 | |
| Corporate adjusted EBITDA | (7,041) | | | (4,448) | | | (19,407) | | | (13,097) | |
| Total adjusted EBITDA - continuing operations | $ | 15,733 | | | $ | 44,605 | | | $ | 29,918 | | | $ | 55,991 | |
Total adjusted EBITDA - discontinued operations (1) | — | | | 726 | | | — | | | (1,349) | |
| Total adjusted EBITDA | $ | 15,733 | | | $ | 45,331 | | | $ | 29,918 | | | $ | 54,642 | |
| Less: | | | | | | | |
| 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 (2) | (2,990) | | | — | | | (9,193) | | | — | |
| Remeasurement of TRA liabilities | 1,120 | | | — | | | 1,120 | | | — | |
| Net (loss) income from continuing operations | $ | (6,920) | | | $ | 19,466 | | | $ | (73,116) | | | $ | (20,441) | |
| Net loss from discontinued operations | — | | | (4,985) | | | — | | | (8,114) | |
| Net (loss) income | $ | (6,920) | | | $ | 14,481 | | | $ | (73,116) | | | $ | (28,555) | |
(1) Represents suspended Canadian operations within the Telecom segment.
(2) 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.
Revenue by Service Offerings
Revenue for each of the Company’s end-market services offerings is presented below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | For The Nine Months Ended |
| October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
| Telecom Wireless | $ | 136,003 | | | $ | 102,479 | | | $ | 353,062 | | | $ | 278,125 | |
| Telecom Wireline | 41,810 | | | 24,502 | | | 117,745 | | | 73,296 | |
| Telecom Power | 10,484 | | | 8,598 | | | 25,327 | | | 8,598 | |
| Renewables | 7,311 | | | 11,568 | | | 14,959 | | | 25,086 | |
| Recovery Logistics | 20,512 | | | 68,315 | | | 37,410 | | | 80,079 | |
| Total | $ | 216,120 | | | $ | 215,462 | | | $ | 548,503 | | | $ | 465,184 | |
Significant Customers
Revenue concentration information for significant customers as a percentage of total consolidated revenue was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | For The Nine Months Ended |
| October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
| Customers: | Amount | | % of Total | | Amount | | % of Total | | Amount | | % of Total | | Amount | | % of Total |
| AT&T | $ | 82,901 | | | 38.4 | % | | $ | 65,689 | | | 30.5 | % | | $ | 216,146 | | | 39.4 | % | | $ | 189,381 | | | 40.7 | % |
| Verizon | 29,738 | | | 13.8 | % | | 16,897 | | | 7.8 | % | | 82,381 | | | 15.0 | % | | 51,773 | | | 11.1 | % |
| T-Mobile | 32,392 | | | 15.0 | % | | 22,817 | | | 10.6 | % | | 73,571 | | | 13.4 | % | | 59,369 | | | 12.8 | % |
| Total | $ | 145,031 | | | 67.2 | % | | $ | 105,403 | | | 48.9 | % | | $ | 372,098 | | | 67.8 | % | | $ | 300,523 | | | 64.6 | % |
Note 16. Commitments and Contingencies
Litigation: From time to time, we are subject to certain legal proceedings and claims arising in the ordinary course of business. These matters are subject to many uncertainties, and it is possible that some of these matters ultimately could be decided, resolved or settled in a manner that could have an adverse effect on us. Although the resolution and amount of liability cannot be predicted with certainty, it is the opinion of management, based on information available at this time, that such legal proceedings and claims are not expected to have a material effect on the Company’s financial position, results of operations, and cash flows.
Operating leases: The Company has entered into non-cancellable operating leases for various vehicles, equipment, office and warehouse facilities, which contain provisions for future rent increases or rent-free periods. The total amount of rental payments due over the lease terms is charged to rent expense on the straight-line method over the respective term of the lease. The leases expire at various dates through the year 2031. In addition, the agreements generally require the Company to pay executory costs (real estate taxes, insurance, and repairs).
