Pursuant to the requirements
of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
We consent to the incorporation by reference in the Registration Statement
on Form S-1 (No. 333-259069), as amended, of QualTek Services Inc. of our report dated April 1, 2022, relating to the consolidated financial
statements of BCP QualTek Holdco, LLC, appearing in this Form 8-K/A (Amendment No. 1) of QualTek Services Inc. for the year ended December
31, 2021.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and
Summary of Significant Accounting Policies
This summary of significant accounting policies of BCP QualTek Holdco,
LLC (collectively with its subsidiaries, “QualTek”, “BCP QualTek”, the “Company”, “we”,
“our”, or “us”) is presented to assist in understanding the Company’s consolidated financial statements
(“financial statements”). The financial statements and notes are the responsibility of the Company’s management, who
is responsible for their integrity and objectivity.
Nature
of business: The Company is a leading provider of communication infrastructure services and renewable solutions and disaster
recovery services, delivering a full suite of critical services to major telecommunications and utility customers throughout North America.
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, utility, and cable carriers 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 renewable energy, commercial and utilities customers across the United States.
On February 14, 2022, BCP QualTek Holdco, LLC and Roth CH Acquisition
III Co. (“ROCR”) consummated the business combination, pursuant to the terms of the Business Combination Agreement dated June 16,
2021 resulting in the Company becoming a publicly listed company. The combined company changed its name from Roth CH Acquisition III Co.
to QualTek Services Inc. and BCP QualTek Holdco, LLC changed its name to QualTek Holdco, LLC See Note 15 for additional information.
Principles
of presentation: The accompanying financial statements, including the accounts of QualTek and its wholly owned subsidiaries,
have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All
intercompany transactions and balances have been eliminated in consolidation.
Discontinued
operations: The Company presents discontinued operations when there is a disposal of a component group or a group of components
that in our judgment represents a strategic shift that will have a major effect on our operations and financial results. We aggregate
the results of operations for discontinued operations into a single line item in the consolidated statements of operations and comprehensive
loss for all periods presented. Assets and liabilities of the discontinued operations are aggregated and reported separately as assets
and liabilities of discontinued operations in the consolidated balance sheets as of December 31, 2021 and 2020. Throughout these
financial statements, unless otherwise indicated, amounts and activity are presented on a continuing operations basis. See Note 3 for
additional information.
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 and liabilities and disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. The most significant of these estimates and
assumptions relate to the recognition of contract revenues under the cost-to-cost method of progress, fair value estimates, the allowance
for doubtful accounts, long-lived assets and intangible assets, asset impairment (including goodwill and other long-lived assets), valuation
of assets acquired and liabilities assumed in business combinations, and acquisition-related contingent consideration. 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.
Accounts
receivable: The Company’s accounts receivable are due primarily from major telecommunication and utility companies operating
within the United States and are carried at original contract amount less an estimate for uncollectible amounts based on historical experience.
Management determines the allowance for doubtful receivables by regularly evaluating individual customer receivables and considering a
customer’s financial condition and current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries
of accounts receivable previously written off are recorded when received. The Company generally does not require collateral. Accounts
receivable are considered past due if any portion of the receivables balance is outstanding for more than one day beyond the contractual
due date. The Company does not charge interest on past due accounts.
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, totaled $1,003 thousand and $1,713 thousand for the
years ended December 31, 2021 and 2020, respectively.
Contract
assets: Contract assets include unbilled amounts typically resulting from arrangements whereby complete satisfaction of a performance
obligation and the right to payment are conditioned on completing additional tasks or services under the terms of the contract.
Contract
liabilities: Contract liabilities consist of amounts invoiced to customers in excess of revenue recognized. The Company’s
contract assets and liabilities are reported in a net position on a contract by contract basis at the end of each reporting period. As
of December 31, 2021 and 2020, the contract liabilities balance is classified as a current liability as uncompleted contracts are
typically resolved within one year and not considered significant financing components.
Cash:
Cash includes cash on hand and deposits with banks.
Concentration
of credit risk: Financial instruments that potentially subject the Company to concentration of credit risks consist principally
of cash and accounts receivable.
The Company maintains certain cash balances with U.S. and Canadian
financial institutions and, from time to time, the Company may have balances in excess of the federally insured deposit limit.
Inventories:
Inventories are valued at the lower of cost or net realizable value. The cost of inventory is maintained using the weighted average-cost
method. Consideration is given to excess, obsolescence and other factors in determining estimated net realizable value.
Property
and equipment: Property and equipment acquired through business combinations are stated at the estimated fair value at the
date of acquisition. Purchases are recorded at cost. Maintenance and repairs are expensed as incurred. Renewals and betterments that materially
extend the life of assets are capitalized. Depreciation and amortization are computed using the straight-line method over the estimated
useful lives of the related assets, which generally range from 3 to 7 years. Leasehold improvements are amortized over the shorter of
the estimated useful life of the improvement or the remaining lease term.
Goodwill
and intangible assets: Goodwill is assessed annually for impairment as of the first day of the fourth fiscal quarter of each
year, or more frequently if events occur that would indicate a potential reduction in the fair value of a reporting unit below its carrying
value. The Company performs an annual impairment review of goodwill at the reporting unit level, which is one level below the operating
segment. The Company determines the fair value of the reporting units using a weighting of fair values derived in equal proportions from
the income approach and market approach valuation methodologies. The income approach uses the discounted cash flow method and the market
approach uses the guideline public company method. If the Company determines the fair value of the reporting unit’s goodwill is
less than its carrying value, an impairment loss is recognized and reflected in the operating income or loss in the consolidated statements
of operations and comprehensive loss.
Intangible assets consist of customer relationships, trademarks and
trade names. Intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated useful lives
ranging from 1 year to 15 years.
Impairment
of long-lived and intangible assets: The Company reviews its long-lived assets, including property and equipment, and intangible
assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable.
The Company measures recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows that the assets
or the asset group are expected to generate. If the carrying value of the assets or asset group are not recoverable, the impairment recognized
is measured as the amount by which the carrying value exceeds its fair value.
Business
combinations: The Company accounts for business combinations under the acquisition method of accounting. The purchase price
of each business acquired is allocated to the tangible and intangible assets acquired and the liabilities assumed based on information
regarding their respective fair values on the date of acquisition. Any excess of the purchase price over the fair value of the separately
identifiable assets acquired and the liabilities assumed is allocated to goodwill. Management determines the fair values used in purchase
price allocations for intangible assets based on historical data, estimated discounted future cash flows, expected royalty rates for trademarks
and trade names, as well as certain other information. The valuation of assets acquired, and liabilities assumed requires a number of
judgments and is subject to revision as additional information about the fair value of assets and liabilities becomes available. Additional
information, which existed as of the acquisition date but unknown to us at that time, may become known during the remainder of the measurement
period. This measurement period may not exceed 12 months from the acquisition date. The Company recognizes any adjustments to provisional
amounts that are identified during the measurement period in the reporting period in which the adjustments are determined. Additionally,
in the same period in which adjustments are recognized, the Company records the effect on earnings of changes in depreciation, amortization,
or other income effects, if any, as a result of any change to the provisional amounts, calculated as if the accounting adjustment had
been completed at the acquisition date. Acquisition costs are expensed as incurred. The results of operations of businesses acquired are
included in the consolidated statements of operations and comprehensive loss from their dates of acquisition.
Deferred
financing costs: Deferred financing costs are presented in the consolidated balance sheets as a direct reduction from the carrying
amount of long-term debt and are amortized over the term of the related debt. For the years ended December 31, 2021 and 2020, the
Company amortized $4,795 thousand and $3,090 thousand, respectively, which is included in interest expense on the accompanying consolidated
statements of operations and comprehensive loss.
Foreign
currency: The discontinued operations of the Company's foreign subsidiary is translated from the local (functional) currency
into U.S. dollars using period-end rates of exchange for assets and liabilities and average monthly rates of exchange for revenues and
expenses. Translation gains and losses resulting from these translation adjustments are recorded in the consolidated balance sheets as
a component of accumulated other comprehensive income.
Income
taxes: No provision for income taxes has been made in the accompanying financial statements since all items of income and loss
are allocated to the members for inclusion in their respective tax returns. Accounting Standards Codification (ASC) Topic 740, Income
Taxes, provides guidance for how uncertain tax positions should be recognized, measured, disclosed and presented in the financial
statements. This requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s
tax returns to determine whether the tax positions are more likely than not of being sustained when challenged or when examined by the
applicable tax authority.
Tax positions not deemed to meet the more-likely-than-not threshold
would be recorded as a tax expense or benefit and liability in the current year. Based on the Company’s assessment of many factors,
including past experience and complex judgments about future events, the Company does not currently anticipate significant changes in
its uncertain tax positions over the next 12 months. The Company is not subject to income tax examinations by the U.S. federal, state,
or local tax authorities prior to 2018.
Revenue
recognition: Revenue is recognized when, or as, control of promised goods and services is transferred to customers, and the
amount of revenue recognized reflects the consideration to which the Company expects to be entitled in exchange for the goods and services
transferred. A contractual agreement exists when each party involved approves and commits to, the rights of the parties and payment terms
are identified, the agreement has commercial substance, and collectability of consideration is probable. The Company’s services
are performed for the sole benefit of its customers, whereby the assets being created or maintained are controlled by the customer and
the services the Company performs do not have alternative benefits for the Company.
The Company acquires revenue primarily from construction related projects
under certain master service and other service agreements contracts. Portions of the contracts include one or multiple performance obligations,
which is a contractual promise to deliver a distinct good or transfer of a specific service to a customer. We use different methods of
revenue recognition for different types of contracts.
For the Company’s projects recognized under the input method,
the Company typically identifies two promised goods and services in the contract: (a) delivery of materials, which is recognized
as point in time revenue, and (b) installation and construction services, which are recognized over time as related costs are incurred.
The Company determined that the materials and the construction services are both considered distinct performance obligations. The Company’s
customers are able to benefit from the materials and construction services both on their own and in connection with readily available
resources, indicating that both promises are capable of being distinct. The Company further determined that its promises to transfer the
materials and to provide the construction services are each separately identifiable from the other promises in the contract. Further,
these promises do not represent inputs to a combined output which may represent a single performance obligation as no significant integration
services are provided, there is not a high degree of customization, and the promises are not highly interrelated. As a result, the Company
concludes that its input method contracts typically include two performance obligations: the sale of materials and construction services.
Revenue for engineering, construction, project management and site
acquisition services are primarily recognized by the Company over time utilizing the cost-to-cost measure of progress, which is an input
method, on contracts for specific projects, and for certain master service and other service agreements.
The majority of our performance obligations are completed within one
year. The cost-to-cost measure of progress best depicts the continuous transfer of control of goods or services to the customer, and correspondingly,
when performance obligations are satisfied, for these contracts.
Revenue for engineering, aerial and underground construction for projects
with customer-specified service requirements are primarily performed under master service agreements and other contracts that contain
customer-specified service requirements. These agreements include pricing for individual tasks, including, for example, the placement
of underground or aerial fiber, directional boring, and fiber splicing, each based on a specific unit of measure. Revenue is recognized
over time as services are performed and customers simultaneously receive and consume the benefits provided by the Company. Output measures
such as units delivered are utilized to assess progress against specific contractual performance obligations.
The Company allocates total contract consideration to each performance
obligation using the expected cost plus a margin approach to estimate the standalone selling price of each performance obligation. The
Company’s customers simultaneously receive and consume the benefit provided by the Company, and revenue is recognized over time
as services are performed for all performance obligations identified in the contract. Output measures such as units delivered are utilized
to assess progress against specific contractual performance obligations.
Revenue from fulfillment, maintenance, compliance, and recovery services
provided to the telecommunication, cable and utility industries is recognized as the services are rendered. These services are generally
performed under master or other service agreements and billed on a contractually agreed price per unit on a work order basis. Each service
is a separate performance obligation that is recognized upon completion at a point in time as the service is delivered.
Transaction prices for the Company’s contracts may include variable
consideration such as contracted materials. Management estimates variable consideration for a performance obligation utilizing estimation
methods that it believes best predict the amount of consideration to which the Company will be entitled. Variable consideration is included
in the estimated transaction price if it is probable that when the uncertainty associated with the variable consideration is resolved,
there will not be a significant reversal of the cumulative amount of revenue that has been recognized.
Management’s estimates of variable consideration and the determination
of whether to include estimated amounts in the transaction price are based largely on engineering studies, past practices with the customer,
specific discussions, correspondence or preliminary negotiations with the customer and all other relevant information that is reasonably
available at the time of the estimate. The effect of variable consideration on the transaction price of a performance obligation is typically
recognized as an adjustment to revenue on a cumulative catch-up basis, as such variable consideration is generally for services encompassed
under the existing contract.
To the extent variable consideration reflected in transaction prices
are not resolved in accordance with management’s estimates, there could be reductions in, or reversals of, previously recognized
revenue. Sales, use and other taxes collected concurrent with revenue-producing activities are excluded from revenue. Most of the Company’s
contracts include assurance warranties which do not include any additional distinct services other than the assurance that the services
and materials comply with agreed-upon specifications. Therefore, there is not a separate performance obligation for these warranties.
For contracts containing more than one performance obligation, the
Company allocates the transaction
price on a relative standalone selling price (“SSP”) basis.
The Company determines SSP based on the price at which the performance obligation is sold separately. If the SSP is not observable through
past transactions, the Company estimates the SSP taking into account available information, such as market conditions and internally approved
pricing guidelines related to the performance obligation.
Revenue generated from fulfillment, maintenance, compliance and recovery
services as well as certain performance obligations related to material sales is recognized at a point in time. Point in time revenue
accounted for approximately 37% and 35% of consolidated revenue for the years ended December 31, 2021 and 2020, respectively. Substantially
all the Company’s other revenue is recognized over time. The selection of the method to measure progress towards completion requires
judgment and is based on the nature of the services to be provided.
Equity
award compensation: The Company recognizes all equity award compensation to employees, including grants of employee awards
to be recognized in the consolidated statements of operations and comprehensive loss, based on their fair values over their vesting period.
Recent
accounting pronouncements: In February 2016, the FASB issued Accounting Standards Update (“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 will replace most existing lease recognition guidance in GAAP when it becomes effective. The updated standard
will be 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 are currently evaluating the impact that the adoption of this new standard
will have on its financial statements.
In August 2020, the FASB issued ASU 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, which address issues identified as a result of the complexity
associated with applying generally accepted accounting principles for certain financial instruments with characteristics of liabilities
and equity. This amendment is effective for public business entities that meet the definition of a Securities and Exchange Commission
(SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15,
2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning
after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal
years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating the effect
that the updated 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 Accounting Standards Codification Topic 606, Revenue from Contracts with Customers
(“Topic 606”) as if it had originated the contracts, while also taking into account how the acquiree applied Topic 606. This
guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early
adoption permitted. We are currently evaluating the effect that the updated standard will have on our financial statements.
Risks
and uncertainties: On January 30, 2020, the World Health Organization declared the coronavirus 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. The coronavirus and actions taken to mitigate the spread of it 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. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted to, amongst
other provisions, provide emergency assistance for individuals, families and businesses affected by the coronavirus pandemic.
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.
Basic net loss per unit is calculated by dividing net loss attributable
to Class A members by the weighted average units outstanding during the period, without consideration for Class A equivalents.
Diluted net loss per unit is calculated by adjusting weighted average units outstanding for the dilutive effect of common unit equivalents
outstanding for the period, determined using the treasury-stock method. If the Company reports a loss, rather than income, the computation
of diluted loss per unit excludes the effect of dilutive common unit equivalents, as their effect would be anti-dilutive. For the year
ended December 31, 2021, we excluded shares that would be issuable assuming conversion of all the Convertible Notes (See Note 8)
as their effect would be anti-dilutive under the if-converted method. For the year ended December 31, 2021, there were no existing
equity units considered to be Class A equivalents and therefore, basic and diluted net loss per unit were the same for all periods
presented.
The performance-based Class P units (See Note 10) are omitted
from the calculation of diluted Earnings Per Unit until it is determined that the performance criteria have been met at the end of the
reporting period.
The basic and diluted earnings per unit calculations for the years
presented are as follows (in thousands, except share and per unit amounts):
| |
December 31, | |
| |
2021 | | |
2020 | |
Numerator: | |
| | | |
| | |
Loss from continuing operations | |
$ | (101,575 | ) | |
$ | (94,222 | ) |
Loss from discontinued operations | |
| (8,851 | ) | |
| (3,865 | ) |
Net loss | |
| (110,426 | ) | |
| (98,087 | ) |
Less: accrued preferred return | |
| (1,638 | ) | |
| (3,287 | ) |
Net loss attributable to Class A Units (basic) | |
$ | (112,064 | ) | |
$ | (101,374 | ) |
Denominator: | |
| | | |
| | |
Weighted-average number of units outstanding, basic and diluted | |
| | | |
| | |
Class A - basic and diluted | |
| 2,184,696 | | |
| 2,005,824 | |
EPU: | |
| | | |
| | |
Continuing operations - Class A - basic and diluted | |
$ | (47.24 | ) | |
$ | (48.61 | ) |
Discontinued operations - Class A - basic and diluted | |
$ | (4.05 | ) | |
$ | (1.93 | ) |
Net loss - Class A - basic and diluted | |
$ | (51.29 | ) | |
$ | (50.54 | ) |
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 and
disposed/abandoned the subsidiary, 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 intangible assets were fully re-measured for their useful lives,
and an accelerated amortization charge of $5,239 thousand was recognized in the year ended December 31, 2021.
The following table presents the aggregate carrying amounts of the
classes of assets and liabilities of discontinued operations in the consolidated balance sheets (in thousands):
| |
December 31, | |
| |
2021 | | |
2020 | |
Carrying amounts of assets included as part of discontinued operations: | |
| | | |
| | |
Cash | |
$ | 1,545 | | |
$ | 93 | |
Accounts receivable, net of allowance | |
| 1,292 | | |
| 5,743 | |
Inventories, net | |
| - | | |
| 28 | |
Prepaid expenses | |
| - | | |
| 71 | |
Other current assets | |
| 1,665 | | |
| 599 | |
Total current assets of discontinued operations | |
$ | 4,502 | | |
$ | 6,534 | |
Property and equipment, net | |
| - | | |
| 3,280 | |
Intangible assets, net | |
| - | | |
| 5,712 | |
Other long-term assets | |
| - | | |
| 280 | |
Total non-current assets of discontinued operations | |
$ | - | | |
$ | 9,272 | |
| |
| | | |
| | |
Carrying amounts of liabilities included as part of discontinued operations: | |
| | | |
| | |
Current portion of long-term debt and capital lease obligations | |
$ | 14 | | |
$ | 920 | |
Accounts payable | |
| 559 | | |
| 809 | |
Accrued expenses | |
| 1,475 | | |
| 1,636 | |
Total current liabilities of discontinued operations | |
$ | 2,048 | | |
$ | 3,365 | |
Capital lease obligations, net of current portion | |
| - | | |
| 1,793 | |
Total non-current liabilities of discontinued operations | |
$ | - | | |
$ | 1,793 | |
The financial results are presented as a loss from discontinued operations
on our consolidated statements of operations and comprehensive loss for the years ended December 31, 2021 and 2020. The following
table presents the financial results (in thousands):
| |
For the Years Ended December 31, | |
| |
2021 | | |
2020 | |
Revenue | |
$ | 5,850 | | |
$ | 17,481 | |
Costs and expenses: | |
| | | |
| | |
Cost of revenues | |
| 9,562 | | |
| 18,331 | |
General and administrative | |
| 381 | | |
| 804 | |
Depreciation and amortization | |
| 6,798 | | |
| 2,022 | |
Total costs and expenses | |
| 16,741 | | |
| 21,157 | |
Loss from operations of discontinued operations | |
| (10,891 | ) | |
| (3,676 | ) |
Other income (expense): | |
| | | |
| | |
Gain on sale/ disposal of property and equipment | |
| 2,235 | | |
| - | |
Interest expense | |
| (195 | ) | |
| (189 | ) |
Loss from discontinued operations | |
$ | (8,851 | ) | |
$ | (3,865 | ) |
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 pre-determined EBITDA thresholds for the years ending 2021, 2022, 2023, and 2024, as defined in the agreement, subject
to a maximum additional payment of $20.0 million. 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.
On August 6, 2021, the Company acquired certain assets and liabilities
from Broken Arrow Communications, Inc. (“Broken Arrow”), a New Mexico based company that provides 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 pre-determined 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 $10.0 million. 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.
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 pre-determined EBITDA thresholds for LTM periods ending in the third quarter of 2022, 2023
and 2024, as defined in the agreement, subject to a maximum additional payment of $30.0 million. 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 the issuance of convertible
notes in June 2021.
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 pre-determined 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
reporting within our Renewables and Recovery Logistics Segment and Broken Arrow, Concurrent, and Urban Cable 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 working capital amounts for Concurrent and Urban are considered
provisional and are subject to adjustment as the Company obtains additional information. Any adjustments to the purchase price allocation
will be made as soon as practicable, but no later than one year from the acquisition date.
The following table summarizes the 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 | | |
| 735 | |
| |
| 35,700 | | |
| 16,753 | | |
| 46,747 | | |
| 17,268 | |
Accounts payable | |
| - | | |
| (1,987 | ) | |
| (1,938 | ) | |
| (1,120 | ) |
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 | |
During Q4 2021, the Company adjusted the provisional amounts within
purchase price allocation for Broken Arrow and Concurrent, which resulted in an increase in goodwill of $886 thousand for Broken Arrow
and a decrease of $2,186 in goodwill for Concurrent. The Company made this measurement period adjustment to reflect facts and circumstances
that related to accounts receivable, customer relationships, accounts payable, and contingent consideration for Broken Arrow and cash,
accounts receivable, property and equipment, customer relationships, trademarks and trade names, accounts payable, and contingent consideration
for Concurrent. The changes existed at the acquisition date and did not result from intervening events subsequent to such date.
Costs incurred to affect the acquisitions, including the ROCR business
combination, as well as, costs associated with failed transactions, are recognized separately rather than included in the cost allocated
to the assets acquired and liabilities assumed. Total transaction related costs of $3,826 thousand and $988 thousand were reflected in
the consolidated statements of operations and comprehensive loss during the years ended December 31, 2021 and 2020, respectively.
Note 5. Property and Equipment
Property and equipment consisted of the following (in thousands):
| |
December 31, | |
| |
2021 | | |
2020 | |
Office furniture | |
$ | 1,382 | | |
$ | 1,249 | |
Computers | |
| 1,856 | | |
| 1,217 | |
Machinery, equipment and vehicles | |
| 17,331 | | |
| 10,275 | |
Land | |
| 140 | | |
| - | |
Building | |
| 340 | | |
| - | |
Leasehold improvements | |
| 4,552 | | |
| 3,354 | |
Software | |
| 2,320 | | |
| 2,199 | |
Assets under capital lease | |
| 50,941 | | |
| 32,153 | |
Construction in process | |
| 1,335 | | |
| 605 | |
| |
| 80,197 | | |
| 51,052 | |
Less: accumulated depreciation | |
| (29,515 | ) | |
| (17,258 | ) |
Property and equipment, net | |
$ | 50,682 | | |
$ | 33,794 | |
Property and equipment include assets acquired under capital leases
of $50,941 thousand and $32,153 thousand and accumulated depreciation of $14,899 thousand and $8,062 thousand as of December 31,
2021 and December 31, 2020, respectively. Depreciation expense was $13,017 thousand and $8,997 thousand for the years ended December 31,
2021 and 2020, respectively.
Note 6. Accounts Receivable, Net
of Allowance, Contract Assets and Liabilities, and Customer Credit Concentration
The following provides further details on the consolidated balance
sheet accounts of accounts receivable, net and contract liabilities. See Note 1 for further information on our policies related to these
consolidated balance sheet accounts, as well as, our revenue recognition policies.
Accounts Receivable, Net of Allowance
Accounts receivable, net classified as current, consisted of the following
(in thousands):
| |
December 31, | |
| |
2021 | | |
2020 | |
Trade accounts receivable | |
$ | 74,601 | | |
$ | 44,419 | |
Contract assets | |
| 132,858 | | |
| 134,311 | |
| |
| 207,459 | | |
| 178,730 | |
Less: allowance for doubtful accounts | |
| (5,614 | ) | |
| (3,933 | ) |
Accounts receivable, net | |
$ | 201,845 | | |
$ | 174,797 | |
Contract Assets and Liabilities
Net contract assets consisted of the following (in thousands):
| |
December 31, | |
| |
2021 | | |
2020 | |
Contract assets | |
$ | 132,858 | | |
$ | 134,311 | |
Contract liabilities | |
| (14,773 | ) | |
| (14,945 | ) |
Contract assets, net | |
$ | 118,085 | | |
$ | 119,366 | |
The amount of revenue recognized in the years ended December 31,
2021 and 2020 that was previously included in contact liabilities at the beginning of the period was $13,747 thousand and $17,434 thousand,
respectively.
Customer Credit Concentration
Customers whose combined amounts of accounts receivable and contract
assets exceeded 10% of total combined accounts receivable and contract assets were as follows (in thousands):
| |
December 31, | |
| |
2021 | | |
2020 | |
| |
Amounts | | |
% of Total | | |
Amounts | | |
% of Total | |
AT&T | |
$ | 56,280 | | |
| 27.1 | % | |
$ | 81,796 | | |
| 45.8 | % |
T-Mobile | |
| 35,756 | | |
| 17.2 | % | |
| * | | |
| * | |
Verizon | |
| 50,218 | | |
| 24.2 | % | |
| 65,346 | | |
| 36.6 | % |
Total | |
$ | 142,254 | | |
| 68.5 | % | |
$ | 147,142 | | |
| 82.4 | % |
* Accounts receivable and contract assets from T-Mobile did not exceed
10% of total combined accounts receivable and contract assets for the year ended December 31, 2020.
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 January 1, 2020 | |
$ | 13,598 | | |
$ | 72,905 | | |
$ | 86,503 | |
Measurement period adjustments, net | |
| - | | |
| 821 | | |
| 821 | |
Impairment loss | |
| - | | |
| (28,802 | ) | |
| (28,802 | ) |
Goodwill as of December 31, 2020 (a) | |
$ | 13,598 | | |
$ | 44,924 | | |
$ | 58,522 | |
Additions from acquisitions (Note 4) | |
| 8,082 | | |
| 14,606 | | |
| 22,688 | |
Impairment loss | |
| - | | |
| (52,487 | ) | |
| (52,487 | ) |
Goodwill as of December 31, 2021 (a) | |
$ | 21,680 | | |
$ | 7,043 | | |
$ | 28,723 | |
| (a) | Goodwill
is net of accumulated impairment charges of $89,421 thousand and $36,934 thousand for the
years ended December 31, 2021 and 2020, respectively in the Telecom segment. There have
been no impairment charges within the Renewables and Recovery Logistics segment. |
For the years ended December 31, 2021 and 2020, the Company recognized
goodwill impairment within the Telecom segment of $52,487 thousand and $28,802 thousand, respectively. Impairment resulted from a change
in projected future discounted cash flows of the reporting units within the segment which resulted in an carrying value in excess of the
estimated fair value.
Intangible Assets
Intangible assets consisted of the following (in thousands):
| |
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 | |
| |
December 31, 2020 | |
| |
Weighted Average Remaining Useful Life | | |
Gross carrying amount | | |
Accumulated amortization | | |
Net carrying amount | |
Customer relationships | |
| 10.8 | | |
$ | 368,200 | | |
$ | (65,868 | ) | |
$ | 302,332 | |
Trademarks and trade names | |
| 9.9 | | |
| 58,519 | | |
| (15,035 | ) | |
| 43,484 | |
| |
| | | |
$ | 426,719 | | |
$ | (80,903 | ) | |
$ | 345,816 | |
Amortization expense of intangible assets was $39,453 thousand and
$35,812 thousand for the years ended December 31, 2021 and 2020, respectively.
The following table provides estimated future amortization expense
related to the intangible assets (in thousands):
Years ending December 31: | |
| |
2022 | |
$ | 42,916 | |
2023 | |
| 41,539 | |
2024 | |
| 39,520 | |
2025 | |
| 38,685 | |
2026 | |
| 37,885 | |
Thereafter | |
| 163,629 | |
| |
$ | 364,174 | |
Note 8. Debt and Capital Lease Obligations
Convertible
notes – related party: On January 20, 2021, the Company issued convertible promissory notes (the “Convertible
Notes – Related Party”) with its majority member with an aggregate principal amount of $5,000 thousand. There was a beneficial
conversion feature of $4,946 thousand related to the Convertible Notes – Related Party that was amortized over the life of the note,
using the effective interest method. On June 24, 2021, the Convertible Notes – Related Party was repaid in full and treated
as an extinguishment, which resulted in a loss on extinguishment of $2,436 thousand for the year ended December 31, 2021. The accretion
of the discount up to the extinguishment date was $2,198 thousand for the year ended December 31, 2021. The Company recorded interest
expense of $70 thousand for the year ended December 31, 2021.
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 (see Note 10). The Convertible Note – Related Party – June 2021 bears interest at an annual
rate of 12.00%, which accrues and is payable together with the principal balance. The Company recorded interest expense of $2,055 thousand
for the year ended December 31, 2021. There was no fixed maturity date, however, cash payments were required equal to tax distributions,
which the note holder would be entitled if the Convertible Note – Related Party – June 2021 were a Preferred Unit. 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 15.
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, as noted in Note 15. There was a beneficial conversion feature of $12,269 thousand related to the Convertible
Notes – June 2021 that was amortized over the life of the notes, using the effective interest method. The notes are presented
net of a discount of $3,408 thousand as of December 31, 2021 on the consolidated balance sheet with accretion of $8,861 thousand
for the year ended December 31, 2021.
Line
of credit: The Company has an Asset Based Lending Credit Agreement (“Credit Agreement”) with PNC Bank, N.A. (“PNC”).
Under the Credit Agreement, the Company has available a revolving credit facility in the amount of $103.5 million, for working capital
needs and general corporate purposes. The amount the Company may borrow is limited to the lesser of the maximum available amount and the
borrowing base. The borrowing base is calculated primarily as a percentage of the Company’s eligible accounts receivable, unbilled
revenue and eligible inventory, as defined in the Credit Agreement. Interest on the outstanding principal amount, payable in arrears monthly,
is based on either an elected Base Rate plus an applicable margin (4.75% at December 31, 2021), or an adjusted Eurodollar rate, plus
an applicable margin (ranging from 2.60% to 2.63% at December 31, 2021), as defined in the agreement. There was $6,691 thousand available
under this facility as of December 31, 2021. The entire unpaid principal amount of the line of credit together with accrued and unpaid
interest thereon, is due on July 18, 2023. Standby letters of credit of $3,977 thousand and $801 thousand, issued for our insurance
carriers and in support of performance under certain contracts, were outstanding under the Credit Agreement as of December 31, 2021
and December 31, 2020, respectively.
Term
loan: The Company has a Senior Secured Term Credit and Guaranty Agreement (“Term Loan”) with Citi Bank for $380.0
million. 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 (8.50% at December 31, 2021), or an adjusted Eurodollar rate, plus an
applicable rate (7.25% at December 31, 2021), as defined in the agreement. On a quarterly basis, the Company is required to make
principal payments of $2.4 million with all unpaid principal and interest due at maturity on July 17, 2025. 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 December 31, 2021.
The obligations of QualTek under the PNC Credit Agreement are secured
(a) on a first priority basis, by liens on the ABL Priority Collateral as defined in the ABL Intercreditor Agreement (“Intercreditor
Agreement”), dated as of July 18, 2018 of QualTek including accounts receivable and inventory and (b) on a second priority
basis, by liens on the Term Priority Collateral, as defined in the Intercreditor Agreement.
The obligations of QualTek under the Term Loan are secured (a) on
a first priority basis, by liens on the Term Priority Collateral of QualTek and (b) on a second priority basis, by liens on the ABL
Priority Collateral. Generally, Term Priority Collateral includes all assets, other than the ABL Priority Collateral, and equity interests
of QualTek.
Acquisition
debt: Acquisition debt consists of deferred purchase price due to sellers from the RLI, Vertical Limit, Vinculums, and Concurrent
acquisitions. The interest rates range between .18% and 3.25%. The Company recorded $791 thousand of interest expense for year ended December 31,
2021. The acquisition debt was paid in full with proceeds from the ROCR business combination on February 14, 2022 (see Note 15).
Debt outstanding, whose carrying value approximates fair market value
due to variable interest rates based on current rates available to the Company for similar instruments, was as follows (in thousands):
| |
December 31, | |
| |
2021 | | |
2020 | |
Line of credit | |
$ | 87,633 | | |
$ | 59,837 | |
Term loan | |
| 351,481 | | |
| 361,045 | |
Acquisition debt | |
| 34,718 | | |
| 10,575 | |
Convertible notes - related party | |
| 30,568 | | |
| - | |
Convertible notes - June 2021 | |
| 44,400 | | |
| - | |
Capital lease obligations | |
| 35,162 | | |
| 25,751 | |
Less: amounts representing interest | |
| (3,161 | ) | |
| (2,682 | ) |
Less: unamortized financing fees | |
| (11,354 | ) | |
| (13,854 | ) |
Less: convertible debt discount | |
| (3,408 | ) | |
| - | |
| |
| 566,039 | | |
| 440,672 | |
Less: current maturities of long-term debt | |
| (115,224 | ) | |
| (20,139 | ) |
Less: current portion of capital lease
obligations, net of capital lease interest | |
| (12,151 | ) | |
| (7,110 | ) |
| |
$ | 438,664 | | |
$ | 413,423 | |
The minimum payments of the Company’s long-term debt and capital
lease obligations are as follows (in thousands):
| |
| | |
| | |
| | |
| | |
Capital | | |
| |
| |
Line of | | |
Term | | |
Convertible | | |
Acquisition | | |
lease | | |
| |
| |
credit | | |
loan | | |
notes | | |
debt | | |
obligations | | |
Total | |
2022 | |
$ | - | | |
$ | 9,564 | | |
$ | 74,968 | | |
$ | 34,718 | | |
$ | 13,760 | | |
$ | 133,010 | |
2023 | |
| 87,633 | | |
| 9,564 | | |
| - | | |
| - | | |
| 10,874 | | |
| 108,071 | |
2024 | |
| - | | |
| 9,564 | | |
| - | | |
| - | | |
| 6,621 | | |
| 16,185 | |
2025 | |
| - | | |
| 322,789 | | |
| - | | |
| - | | |
| 2,785 | | |
| 325,574 | |
2026 | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,052 | | |
| 1,052 | |
Thereafter | |
| - | | |
| - | | |
| - | | |
| - | | |
| 70 | | |
| 70 | |
Total | |
$ | 87,633 | | |
$ | 351,481 | | |
$ | 74,968 | | |
$ | 34,718 | | |
$ | 35,162 | | |
$ | 583,962 | |
Note 9. 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 1 | Unadjusted 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 2 | Quoted 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 3 | Unobservable 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 year ended December 31,
2021.
The information following is provided to help readers gain an understanding
of the relationship between amounts reported in the accompanying financial statements and the related market or fair value. The disclosures
include financial instruments.
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.
In accordance with the fair value hierarchy described above, the following
tables show the fair value of the Company’s financial liabilities that are required to be measured at fair value on a recurring
basis at December 31, 2021 and December 31, 2020 and the related activity for the year ended December 31, 2021 and December 31,
2020.
| |
Fair Value at December 31, 2021 | |
(in thousands) | |
Carrying Value | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
Financial liabilities | |
| | | |
| | | |
| | | |
| | |
Contingent consideration | |
$ | 30,756 | | |
$ | - | | |
$ | - | | |
$ | 30,756 | |
| |
$ | 30,756 | | |
$ | - | | |
$ | - | | |
$ | 30,756 | |
| |
Fair Value at December 31, 2020 | |
(in thousands) | |
Carrying Value | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
Financial liabilities | |
| | | |
| | | |
| | | |
| | |
Contingent consideration | |
$ | 18,129 | | |
$ | - | | |
$ | - | | |
$ | 18,129 | |
| |
$ | 18,129 | | |
$ | - | | |
$ | - | | |
$ | 18,129 | |
The following table sets forth a summary of the changes in fair value
of the Company’s Level 3 financial liabilities:
January 1, 2020 | |
$ | 40,119 | |
Payment of contingent consideration | |
| (6,000 | ) |
Accretion | |
| 1,666 | |
Reclassification to acquistion debt | |
| (10,575 | ) |
Change in fair value | |
| (7,081 | ) |
December 31, 2020 | |
| 18,129 | |
Acquisitions (see Note 4) | |
| 26,202 | |
Accretion | |
| 1,205 | |
Change in fair value | |
| (4,780 | ) |
Reclassification to acquisition debt | |
| (10,000 | ) |
December 31, 2021 | |
$ | 30,756 | |
Note 10. Equity
Profits and losses of the Company are allocated to the Members in accordance
with the BCP QualTek Holdco, LLC Agreement (“HoldCo LLC Agreement”), as amended and restated on October 4, 2019. Distributions
made by the Company are based on the HoldCo LLC agreement.
Preferred
equity: On October 4, 2019, an affiliate of the Company's majority member, BCP QualTek II LLC, contributed $25,000 thousand
in exchange for 25,000 Preferred Units, as defined in the Holdco LLC Agreement. The Preferred Units had a liquidation preference equal
to the initial price per unit of $1,000 plus a preferred return accrued through the date of liquidation of 12.00% per annum, compounding
quarterly, as defined in the Holdco LLC Agreement. The Preferred Units had a perpetual term, with no fixed maturity date and no voting
rights. The Company had the right to redeem any or all of the Preferred Units, including the accrued return, at any time. The Preferred
Units were not convertible or exchangeable with any of the equity interest of the Company.
On June 16, 2021, the 25,000 Preferred Units and accumulated preferred
return, which totaled $5,568 thousand was exchanged for the Convertible Note – Related Party – June 2021 (see Note 8).
Profits
interests: The Company has granted certain Class P Units, as defined in the Holdco LLC Agreement, to certain employees
and executives of the Company. The Class P Units vest over five years, subject to certain criteria. All Class P Units vest immediately
upon a sale of the Company, as defined in the Holdco LLC Agreement. Each Class P Unit entitles a participant to a residual profits
interest payable after certain thresholds are met. Such profits would be considered compensation expense for the Company. From the grant
dates through December 31, 2021, the Company determined that the thresholds described previously were not probable and therefore,
the Company has not assigned any value to such Class P Units and no related expense were incurred during the years ended December 31,
2021 and 2020.
Distributions:
The Company recorded tax distributions of $6,676 thousand on behalf of its members for the year ended December 31, 2020. There were
no tax distributions for the year ended December 31, 2021. Tax distributions to the majority members of $11,409 thousand were unpaid
and are recorded as distributions payable on the consolidated balance sheets as of December 31, 2021 and 2020, respectively.
Note 11. Segments and Related Information
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 utility 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 services.
The accounting policies of the reportable segments are the same as
those described in Note 1. 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 consolidated financial information in the following tables, all of which are
presented in thousands.
| |
For the Years Ended December 31, | |
Revenue: | |
2021 | | |
2020 | |
Telecom | |
$ | 498,221 | | |
$ | 587,614 | |
Renewables and Recovery Logistics | |
| 114,020 | | |
| 68,910 | |
Total consolidated revenue | |
$ | 612,241 | | |
$ | 656,524 | |
| |
| | | |
| | |
| |
December 31, | |
Total Assets: | |
2021 | | |
2020 | |
Telecom | |
$ | 570,750 | | |
$ | 579,147 | |
Renewables and Recovery Logistics | |
| 90,638 | | |
| 55,370 | |
Corporate | |
| 10,371 | | |
| 6,351 | |
Total consolidated assets | |
$ | 671,759 | | |
$ | 640,868 | |
| |
For the Years Ended December 31, | |
Capital Expenditures: | |
2021 | | |
2020 | |
Telecom | |
$ | 11,109 | | |
$ | 8,831 | |
Renewables and Recovery Logistics | |
| 330 | | |
| 12,251 | |
Corporate | |
| 1,379 | | |
| 2,015 | |
Total consolidated capital expenditures | |
$ | 12,818 | | |
$ | 23,097 | |
| |
For the Years Ended December 31, | |
Amortization and Depreciation: | |
2021 | | |
2020 | |
Amortization and depreciation | |
| | | |
| | |
Telecom | |
$ | 41,105 | | |
$ | 40,588 | |
Renewables and Recovery Logistics | |
| 11,588 | | |
| 5,259 | |
Corporate | |
| 982 | | |
| 628 | |
Total consolidated amortization and depreciation | |
$ | 53,675 | | |
$ | 46,475 | |
| |
For the Years Ended December 31, | |
Adjusted EBITDA Reconciliation: | |
2021 | | |
2020 | |
Telecom adjusted EBITDA | |
$ | 32,542 | | |
$ | 2,409 | |
Renewables and Recovery Logistics adjusted EBITDA | |
| 44,869 | | |
| 28,943 | |
Corporate adjusted EBITDA | |
| (17,376 | ) | |
| (18,213 | ) |
Total adjusted EBITDA | |
$ | 60,035 | | |
$ | 13,139 | |
Less: | |
| | | |
| | |
Management fees | |
| (889 | ) | |
| (518 | ) |
Transaction expenses | |
| (3,826 | ) | |
| (988 | ) |
Loss on legal settlement | |
| (2,600 | ) | |
| - | |
Change in fair value of contingent consideration | |
| 4,780 | | |
| 7,081 | |
Impairment of goodwill | |
| (52,487 | ) | |
| (28,802 | ) |
Depreciation and amortization | |
| (53,675 | ) | |
| (46,475 | ) |
Interest expense | |
| (50,477 | ) | |
| (37,659 | ) |
Loss on extinguishment of convertible notes | |
| (2,436 | ) | |
| - | |
Loss from continuing operations | |
$ | (101,575 | ) | |
$ | (94,222 | ) |