QualTek Services, Inc., currently in a Chapter 11 bankruptcy reorganization, knew that its stock would be delisted from the NASDAQ stock market after it was notified on January 5, 2023, that if its listed securities didn’t reach a minimum bid price of $1 for 30 consecutive days through July 5, 2023, the company’s shares would be delisted. NASDAQ made it official Thursday and said that QualTek would be delisted at the July 30, 2023 opening trading session.
After trading at $10, a year and one-half later, it tanked to a two-cent stock
The company’s shares had been suspended on June 2, 2023, and began trading on the over-the-counter exchange. This morning it is currently at $0.0268.
On February 14, 2022, QualTek became publicly traded on NASDAQ at $10 through a special purpose acquisition company transaction (SPAC) projected to secure substantial additional liquidity for the company.
At that time, the company’s two-year backlog stood at $1.7B, including several new 5G telecommunications contracts for 2022 and beyond, and its workforce had a national footprint with more than 80 operation centers across the U.S.
However, the SPAC secured only a fraction of that projected financing, and the stock took an immediate hit within a month to $2.44, to a low on Friday of $0.0216.
Upon reorganization, the company’s Class A and B common stock and other equity interests will be canceled, and QualTek’s stockholders and other equity holders will experience a complete loss on their investment.
Bankruptcy court approves plan for reorganization as its CEO plans his exit
On June 30, 2023, the bankruptcy court approved QualTek’s Chapter 11 reorganization plan. The plan allows for trade claims to be paid in the ordinary course of business. The reorganized company will enter into exit financing facilities, including $25 million in principal amount of first-lien term loans to be funded by new money investments from the company’s post-petition term loan lenders.
QualTek said in a filing that it expects to emerge from bankruptcy “on or around July 14, 2023,” providing that it meets its restructuring transactions in its bankruptcy plan. The company previously said it anticipated that its plan would be supported by at least 85% of its secured debt holders and 80% of convertible noteholders.
The new board of directors of the reorganized company will establish a management incentive plan. QualTek CEO and co-founder Christopher Hisey said in May, “With the continued dedication of our employees and partners, we plan to emerge stronger and ready to build for the future,” which he would not be a part of. In March, Hisey notified his board that he would not renew his employment agreement, which expires on July 18, 2023. However, he reached a deal with the board to continue working for an additional 30 days.
What caused QualTek to almost shutter its doors?
According to QualTek’s Chief Restructuring Officer, Cari Turner, there were multiple reasons why QualTek found itself in a cash crunch. In a filing, she noted that increasing interest rates played a pivotal role.
In February 2022, when QualTek’s SPAC went public, the company expected it would cost $44.6 million to service its debt. However, in 2022 that amount increased to $59.3 million and could go higher since Federal Reserve officials might need to raise interest rates twice this year after raising rates ten times since March 2022.
Rising gasoline prices, inflation, salaries, and other factors also contributed to declining profit margins.
The company also faced substantial challenges in its Recovery Logistics division. In 2022, hurricanes and tropical storms in the southeastern United States essentially made landfall in areas that do not match historical data and where QualTek has less of a strategic presence, resulting in depressed Q3 earnings.
Turner ignored QualTek’s earnings being further depressed by the elephant in the room, AT&T, described by one industry executive as the Death Star for industry failures caused by contracting below a responsible price matrix and accelerated by poor management.
Turner also said that QualTek had increased employee salaries “in response to external competitive forces, both among the contracting firms QualTek contracts for services including labor and QualTek’s competitors in the telecommunications, power, renewables, and recovery markets.”
Yet the salary statement seems inconsistent with QualTek’s opinion that their successful long-term master service agreements pricing is based upon their ability to “derive a marginal profit under the contract sufficient to satisfy the company’s target returns.” And their “ability to ‘lock-in’ labor rates for the work to be performed; and the pass-through nature of material purchases.”
Their serious capital search began in 2019
In 2019, QualTek found it necessary to explore strategic options to raise new capital to support the integration of prior acquisitions such as Vertical Limit Construction, Vinculums Services, Aerial Wireless Services, Recovery Logistics, and Site Resources, as well as fund potential new expansion and acquisitions.
Through 2019 and 2020, the company negotiated with several parties to see if they were interested in buying QualTek, but there were no offers.
In early 2023, QualTek and its advisors commenced a financing process to solicit proposals from existing lenders and potential third-party financing sources without success.
On March 16, 2023, however, QualTek and an ad hoc lender group were able to close on $75 million in bridge financing to allow for the company’s emergence.
On June 30, 2023, QualTek had total assets of approximately $599,619 million and total liabilities of approximately $779,438 million.
Emergence will continue to keep 400 tower technicians and 500 veterans employed.
QualTek’s wireless group has approximately 115 crews composed of three to four tower technicians and 300 to 400 independent contractor crews. Although carrier OPEX has stalled, QualTek’s current MSAs should keep their employees working. The company is currently advertising for technicians, although it is not known if they are increasing their crew count or if the positions are for regular turnover replacements. In 2022 the wireless segment accounted for $472 million in revenue.
The company’s wireline group provides turnkey fiber optic infrastructure services and employs approximately 105 in-house technicians and 145 independent contractor technicians. In 2022 the group accounted for $157 million in revenue. With a large percentage of BEAD’s $42.5 million in funding for fiber optic installations, QualTek can capitalize upon growth in that segment.
Founded by military veterans in 2012, QualTek is an active supporter of the military community and has a long and proud tradition of hiring military veterans and first responders, which account for approximately 500 of their 1,800 employees, according to their June 9, 2023 bankruptcy filing. In a February 15, 2022, press release, QualTek stated it had a workforce of over 5,000 people. That total is listed as 6,000 on the company’s LinkedIn page.