QualTek is squeezed for cash and has missed an interest payment of $3.7 million due on March 15, 2023, associated with their 2027 Convertible Notes. The company said Friday that if it couldn’t improve its liquidity, bankruptcy might be a considered option.
UPDATE: May 3, 2023 – A spokesperson for QualTek said that the company’s employees’ jobs were not at risk, and the turnkey infrastructure provider will “continue to be a workplace of choice.” They issued the following statement: “QualTek is continuing to actively negotiate with our creditors and is progressing towards a resolution that will position us for the future with a stronger balance sheet. These discussions are a top priority for the Company and expected to only strengthen our financial footing, set us up for growth, and ensure we continue to be a workplace of choice. We stress that we do not expect any roles or responsibilities to change as a result of this transaction while negotiations continue or once a deal is reached. We are delivering for our customers, forging new partnerships and focused on the future.”
May 2, 2023 – In mid-March well-respected turnkey services provider QualTek Services Inc. notified its investors that it had secured $55 million under an existing loan credit agreement. For the casual observer, it might appear to be another successful financing agreement allowing for continued growth and additional acquisitions.
It was logical since CEO Scott Hisey said it would be used “to strengthen our balance sheet and position us to maintain our industry leadership position well into the future.”
However, according to QualTek’s 2022 annual report released on April 28, 2023, the company’s liquidity crunch could see a short-lived future for the Blue Bell, Pennsylvania-based company if it cannot obtain an additional $20 million under its term loan agreement.
The company showed a net loss for continuing operations in 2022 of $104.8 million versus $101.6 million in 2021.
QualTek expected an additional $5 million in new money on April 28, 2023, and another $5 million next week, possibly another $10 million if their cash position improves.
“We will likely choose or need to obtain alternative sources of capital or otherwise meet our liquidity needs and/or restructure our existing indebtedness through the protections available under applicable bankruptcy or insolvency laws, including Chapter 11 of the U.S. Bankruptcy Code,” the company said in its SEC filing.
They also said holders of their Class A common stock would likely lose their entire investment in a restructuring or similar scenario.
Although many employees currently have underwater options, many executives and owners of companies acquired by QualTek will never benefit from their held shares.
QTEK began trading on February 4, 2022, at $9.98. This morning it was trading at $0.27.
Acquisitions made by QualTek since 2012 include NX Utilities, Empire Telecom, QualSat, Velocitel, SiteSafe, ACI, PremierCC, NX Utilities (Canada), Recovery Logistics, Site Resources, Vertical Limit, Vinculums, Aerial Wireless Services, Fiber Network Solutions, BACOM, Concurrent, and Urban Cable Technology.
A black hole in Brightstar’s universe of companies
Investment firm Brightstar Capital Partners completed the acquisition of QualTek in partnership with senior management in July 2018. Brightstar said the relationship positioned QualTek to continue leveraging its industry-leading track record as it executes 5G wireless and fiber optic deployment in its next growth phase.
Brightstar, whose only telecom investment is QualTek, says, “We want to help build companies that will endure for generations.”
Over 5,200 workers might be affected
According to a company filing, if QualTek were to limit operations through bankruptcy or restructuring, approximately 5,275 workers would be affected, including 1,947 employees and 3,328 contracted workers. Additionally, about 15% of the company’s workforce are Veterans of the U.S. Armed Forces.
QualTek has a workforce of approximately 803 in the Midwest, 1,159 in the West, 635 in the Southwest, 908 in the Southeast, and 1,770 in the Northeast.
QualTek also uses many industry subcontractors to complete its wireline, wireless, and disaster recovery contracts.
Cash could run out in 30 days
Although publicly traded companies must caveat their earnings reports and announcements with risk factors, many risks, such as climate change, are far removed from their ability to control them.
QualTek’s first risk factor portrayed a struggling company. “Our ability to continue as a going concern, including our belief that our current cash and cash equivalents will not suffice to fund our business for more than 30 days,” QualTek warned, was a priority consideration.
One of 49 other concerns stated: “The possibility that our material indebtedness is accelerated and that we are unable to pay or refinance such indebtedness, which could force us to liquidate and/or file for bankruptcy.”
QualTek said that on March 15, 2023, it did not make an interest payment of approximately $3.7 million due on its 2027 convertible notes, and a grace period expired on April 14, 2023. It cautioned that the asset-backed loan (ABL) agreement allowed the lender to immediately require QualTek to pay $130 million. However, a forbearance agreement waived that option until May 15, 2023.
If QualTek filed for bankruptcy, the company said it could limit its ability to maintain “relationships with our lenders, counterparties, vendors, suppliers, employees and other third parties; our ability to maintain contracts that are critical to our operations on reasonably acceptable terms and conditions; the ability of third parties to use certain limited safe harbor provisions of the U.S. Bankruptcy Code to terminate contracts without first seeking bankruptcy court approval.”
Unionization is an unlikely concern at this stage.
In April 2022, the Communications Workers of America (CWA) union captured a toehold in the wireless construction industry when it successfully got a QualTek office in Nevada to file a petition for their election to join the CWA, representing approximately 12 tower technicians.
To date, the National Labor Relations Board agents have reportedly been unable to obtain an election agreement with QualTek, the CWA, and other parties.
The CWA knew that QualTek was unprofitable, and their losses were mounting. Still, a union spokesperson informed Wireless Estimator that the union had a proven track record of working with companies to show that increases in employee benefits could be offset by profits that a safer work environment would provide.
In its filing on Friday, QualTek said, “Further disruptions to or organizing efforts within our workforce could negatively impact our business, result in adverse publicity, and lead to delays in project completion. Additionally, any action against us relating to any unionized workforce could have a material adverse effect on our liquidity, cash flows, and results of operations.”
QualTek hired Cari Turner of Alvarez & Marsal as its chief restructuring officer in March to assist it with its cash crunch. Turner has been an advisor to distressed and bankrupt companies and has represented Windstream Communications, Toys R Us, and other firms.
Correction: The May 2, 2023 article contained a photo caption that stated QualTek missed an interest payment on its asset-backed loan facility. It has been corrected to read they “missed an interest payment of $3.7 million due on March 15, 2023, associated with their 2027 Convertible Notes.”
