☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 001-39942
Shoals Technologies Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
85-3774438
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1400 Shoals Way
Portland
Tennessee
37148
(Address of principal executive offices)
(Zip Code)
(Registrant’s telephone number, including area code)
(615)
451-1400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, $0.00001 Par Value
SHLS
Nasdaq Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
Smaller reporting company
☐
Emerging growth company
☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of November 7, 2022, the registrant had 113,508,362 shares of Class A common stock and 53,816,214 shares of Class B common stock issued and outstanding.
This report contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, technology developments, financing and investment plans, dividend policy, competitive position, industry and regulatory environment, potential growth opportunities and the effects of competition. Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” "seek," “should,” “will,” “would” or similar expressions and the negatives of those terms.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Given these uncertainties, you should not place undue reliance on forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this report. You should read this report with the understanding that a number of factors could cause actual results to differ materially from those indicated by forward-looking statements in this report, including, without limitation, those factors described in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I and Item 1A “Risk Factors” of Part II, as well as Part I Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022.
Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Some of the key factors that could cause actual results to differ from our expectations include the following:
•if demand for solar energy projects does not continue to grow or grows at a slower rate than we anticipate, our business will suffer;
•existing electric utility industry policies and regulations, and any subsequent changes, may present technical, regulatory and economic barriers to the purchase and use of solar energy systems that may significantly reduce demand for our products or harm our ability to compete;
•our industry has historically been cyclical and experienced periodic downturns;
•current macroeconomic events, including heightened inflation, rise in interest rates and potential recession could impact our business and financial results;
•the interruption of the flow of components and materials from international vendors has disrupted our supply chain, including as a result of the imposition of additional duties, tariffs and other charges on imports and exports;
•changes in the United States trade environment, including the imposition of import tariffs and antidumping and countervailing duties, could adversely affect the amount or timing of our revenue, results of operations or cash flows;
•if we fail to, or incur significant costs in order to, obtain, maintain, protect, defend or enforce our intellectual property and other proprietary rights, our business and results of operations could be materially harmed;
•if we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed;
•acquisitions, joint ventures and/or investments and the failure to integrate acquired businesses, could disrupt our business and/or dilute or adversely affect the price of our common stock;
•if our trademarks and trade names are not adequately protected, we may not be able to build name recognition in our markets of interest, and our competitive position may be harmed;
•we may experience delays, disruptions or quality control problems in our manufacturing operations in part due to vendor concentration;
•we face risks related to actual or threatened health epidemics, such as the COVID-19 pandemic, and other outbreaks, which could significantly disrupt our manufacturing and operations;
•our future growth in the EV charging market is highly dependent on the demand for, and consumers’ willingness to adopt, EVs;
•the reduction, elimination or expiration of government incentives for, or regulations mandating the use of, renewable energy and solar energy specifically could reduce demand for solar energy systems and harm our business;
•a drop in the price of electricity sold may harm our business, financial condition, results of operations and prospects;
•an increase in interest rates, or a reduction in the availability of tax equity or project debt capital in the global financial markets could make it difficult for end customers to finance the cost of a solar energy system and could reduce the demand for our products;
•defects or performance problems in our products could result in loss of customers, reputational damage and decreased revenue, and we may face warranty, indemnity and product liability claims arising from defective products;
•our results of operations may fluctuate from quarter to quarter, which could make our future performance difficult to predict and could cause our results of operations for a particular period to fall below expectations, resulting in a decline in the price of our Class A common stock;
•compromises, interruptions or shutdowns of our systems, including those managed by third parties, whether intentional or inadvertent, could lead to delays in our business operations and, if significant or extreme, affect our results of operations;
•our indebtedness could adversely affect our financial flexibility and our competitive position;
•our indebtedness may restrict our current and future operations, which could adversely affect our ability to respond to changes in our business and to manage our operations;
•developments in alternative technologies may have a material adverse effect on demand for our offerings;
•we are a holding company and our principal asset is our interest in Shoals Parent and, accordingly, we are dependent upon Shoals Parent and its consolidated subsidiaries for our results of operations, cash flows and distributions;
•we are required to make payments under the Tax Receivable Agreement and the amounts of such payments will be significant;
•we will not be reimbursed for any payments made to the beneficiaries under the Tax Receivable Agreement in the event that any purported tax benefits are subsequently disallowed by the IRS;
•provisions in our certificate of incorporation and our bylaws may have the effect of delaying or preventing a change of control or changes in our management;
•our certificate of incorporation also provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees;
•future sales of our Class A common stock, or the perception that such sales may occur, could depress our Class A common stock price; and
•if we fail to implement and maintain effective internal controls over financial reporting, we may be unable to accurately or timely report our financial condition or results of operations, which may adversely affect our business.
Current portion of payable pursuant to the tax receivable agreement
3,583
—
Long-term debt—current portion
2,000
2,000
Total Current Liabilities
70,373
31,554
Revolving line of credit
85,640
55,140
Long-term debt, less current portion
189,289
189,913
Payable pursuant to the tax receivable agreement, less current portion
157,420
156,374
Other long-term liabilities
4,500
931
Total Liabilities
507,222
433,912
Commitments and Contingencies (Note 15)
Stockholders’ Equity (Deficit)
Preferred stock, $0.00001 par value - 5,000,000 shares authorized; none issued and outstanding as of September 30, 2022 and December 31, 2021
—
—
Class A common stock, $0.00001 par value - 1,000,000,000 shares authorized; 113,508,362 and 112,049,981 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
1
1
Class B common stock, $0.00001 par value - 195,000,000 shares authorized; 53,816,214 and 54,794,479 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
1
1
Additional paid-in capital
104,539
95,684
Accumulated deficit
(78,133)
(93,133)
Total stockholders’ equity attributable to Shoals Technologies Group, Inc.
26,408
2,553
Non-controlling interests
(3,738)
(10,051)
Total stockholders' equity (deficit)
22,670
(7,498)
Total Liabilities and Stockholders’ Equity (Deficit)
$
529,892
$
426,414
See accompanying notes to condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Organization and Business
Shoals Technologies Group, Inc. (the “Company”) was formed as a Delaware corporation on November 4, 2020 for the purpose of facilitating an initial public offering ("IPO") and other related organizational transactions to carry on the business of Shoals Parent LLC and its subsidiaries (“Shoals Parent”).
Shoals Parent is a Delaware limited liability company formed on May 9, 2017. The Company is headquartered in Portland, Tennessee and is a manufacturer of electrical balance of systems (“EBOS”) solutions and components for solar, battery storage and electric vehicle charging applications, selling to customers across the United States and internationally. Shoals Parent, through its wholly-owned subsidiaries, Shoals Intermediate Holdings LLC (“Intermediate”) and Shoals Holdings LLC (“Holdings”) owns five other subsidiaries through which it conducts substantially all operations: Shoals Technologies, LLC, Shoals Technologies Group, LLC, Solon, LLC, Shoals Structures, LLC (collectively “Shoals”) and Shoals Connect LLC. Shoals Parent acquired Shoals on May 25, 2017.
On August 26, 2021, the Company acquired 100% of the stock of ConnectPV, Inc. (“ConnectPV”) with cash and Class A common stock. The acquisition was accounted for as a business combination and following the acquisition, the Company immediately converted ConnectPV to a limited liability company (Shoals Connect LLC) and contributed the entity to Shoals Parent, LLC through a series of transactions – see Note 3 - Acquisition of ConnectPV.
Initial Public Offering
On January 29, 2021, the Company completed an IPO of 11,550,000 shares of Class A common stock at a public offering price of $25.00 per share, including shares issued pursuant to the underwriters' over-allotment option. The Company received $278.8 million in proceeds, net of underwriting discounts and commissions of $9.9 million, which was used to purchase 6,315,790 newly-issued membership interests (“LLC Interests”) from Shoals Parent and 5,234,210 LLC Interests from the founder and Class B unit holder in Shoals Parent at a price per interest equal to the IPO price of $25.00 per share.
Organizational Transactions
In connection with the IPO, the Company and Shoals Parent completed a series of transactions (the "Organizational Transactions") including the following:
•the limited liability company agreement (the “LLC Agreement”) of Shoals Parent was amended and restated to, among other things, (i) provide for a new single class of LLC Interests in Shoals Parent, (ii) exchange all of the then existing membership interests of the holders of Shoals Parent membership interests for LLC Interests and (iii) appoint the Company as the sole managing member of Shoals Parent;
•the Company's certificate of incorporation was amended and restated to, among other things, (i) provide for Class A common stock with voting and economic rights (ii) provide for Class B common stock with voting rights but no economic rights and (iii) issue 78,300,817 shares of Class B common stock to the former Class B and Class C members of Shoals Parent (the “Continuing Equity Owners”) on a one-to-one basis with the number of LLC Interests they own; and
Notes to Condensed Consolidated Financial Statements (Unaudited)
•the acquisition, by merger, of Shoals Investment CTB or the former Class A member of Shoals Parent (the "Class A Shoals Equity Owners"), for which the Company issued 81,977,751 shares Class A common stock as merger consideration (the "Merger").
Follow-On Offering
On July 16, 2021, the Company completed a follow-on offering consisting of 4,989,692 shares of Class A common stock offered by selling shareholders and 10,402,086 shares of Class A common stock offered by the Company. The Company used the proceeds of the sale of Class A common stock to purchase an equal number of LLC Interests and Class B common stock from our founder and management.
2. Summary of Significant Accounting Policies
Basis of Accounting and Presentation
The condensed consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
Non-controlling Interest
The non-controlling interest on the consolidated statement of operations represents the portion of earnings or loss attributable to the economic interest in the Company's subsidiary, Shoals Parent, held by the Continuing Equity Owners. Non-controlling interest on the condensed consolidated balance sheet represents the portion of net assets of the Company attributable to the Continuing Equity Owners, based on the portion of the LLC Interests owned by such unit holders. As of September 30, 2022, the non-controlling interest was 32.16%.
Unaudited Interim Financial Information
The accompanying condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, the statements of operations, stockholders’ equity (deficit) and cash flows for the periods ended September 30, 2022 and 2021 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2022 and the results of its operations and its cash flows for the periods ended September 30, 2022 and 2021. The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2022 and 2021 are also unaudited. The results for the three and nine months ended September 30, 2022 and 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2022, any other interim periods, or any future year or period. The balance sheet as of December 31, 2021 included herein was derived from the audited financial statements as of that date. Certain disclosures have been condensed or omitted from the interim financial
Notes to Condensed Consolidated Financial Statements (Unaudited)
statements. These financial statements should be read in conjunction with the Company’s consolidated financial statements and related notes thereto included in the Company’s 2021 Form 10-K.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include revenue recognition, allowance for doubtful accounts, useful lives of property, plant and equipment and other intangible assets, impairment of long-lived assets, allowance for slow moving inventory, payable pursuant to the tax receivable agreement (“TRA”) and valuation allowance on deferred tax assets.
Restricted Cash
Restricted cash is included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Restricted cash is restricted as to withdrawal or use. Tax distributions paid by Shoals Parent to the Company are restricted under the LLC Agreement for future payments under the TRA and totaled $20.4 million and $4.6 million as of September 30, 2022 and December 31, 2021, respectively.
A reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheet is as follows (in thousands):
September 30, 2022
December 31, 2021
Cash and cash equivalents
$
11,202
$
5,006
Restricted cash included in other current asset
3,583
—
Restricted cash included in other assets
16,831
4,551
Total cash, cash equivalents and restricted cash
$
31,616
$
9,557
Impact of COVID-19 Pandemicand Macroeconomic Events
In 2022, COVID-19 has impacted our business in the following ways:
•Our ability to obtain raw material and required components from domestic and international suppliers required to manufacture our products; and
•Our ability to secure inbound and outbound logistics to and from our facilities, with additional delays linked to international border crossings and the associated approvals and documentation and;
Significant levels of inflation have increased energy prices, freight premiums, and other operating costs. As a result of inflation, during 2022, the Federal Reserve increased interest rates resulting in higher interest rates associated with our Senior Secured Credit Agreement, as defined below. Any additional increases in interest rates by the Federal Reserve would have a corresponding increase in the interest rates charged under our Senior Secured Credit Agreement. The eventual implications of higher government deficits and debt, tighter monetary policy, and potentially higher long-term interest rates may drive a higher cost of capital during our forecast period.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company does not directly source raw materials from Europe. However, the ongoing conflict in Ukraine has reduced the availability of certain material that can be sourced in Europe and, as a result, increased global logistics costs for the procurement of some inputs and materials used in our products. We do not know the ultimate severity or duration of the conflict in Ukraine, but we are continuously monitoring the situation and evaluating our procurement strategy and supply chain as to reduce any negative impact on our business, financial condition, and results of operations.
As response to supply chain constraints, in 2022 we have increased certain raw materials inventory, partly to limit the potential impact of supply chain issues of raw materials in the near term.
To date we have not had any material adverse effects on our financial results from these events.
Customer Concentrations
The Company had the following revenue concentrations representing 10% or more of revenue for the nine months ended September 30, 2022 and 2021 and related accounts receivable concentrations as of September 30, 2022 and December 31, 2021:
2022
2021
Revenue %
Accounts Receivable %
Revenue %
Accounts Receivable %
Customer A
9.0
%
7.1
%
22.5
%
15.8
%
Customer B
6.9
%
3.3
%
11.8
%
4.6
%
Recent Accounting Pronouncements
Adopted
On January 1, 2022, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02 (Topic 842) “Leases” which supersedes the lease recognition requirements in Accounting Standards Codification (“ASC”) Topic 840, “Leases”. Under ASU No. 2016-02, lessees are required to recognize assets and liabilities on the consolidated balance sheets for most leases and provide enhanced disclosures. For companies that are not emerging growth companies (“EGCs”), the ASU was effective for fiscal years beginning after December 15, 2018. For EGCs, the ASU is effective for fiscal years beginning after December 15, 2021. The Company adopted the new standard using the modified retrospective method by recording a right-of-use asset of $1.2 million, short-term portion of lease liabilities of $0.4 million and long-term portion of lease liabilities of $0.8 million as of the effective date. Prior periods will not be restated and will continue to be reported under Topic 840 guidance in effect during those periods. The Company applied the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. The adoption did not have a material impact on its consolidated statements of operations or its consolidated statements of cash flows. See Note 14 - Leases for further information and disclosures related to the adoption of this standard.
Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses, which was subsequently amended by ASU No. 2018-19 and ASU No. 2019-10, and which requires the measurement of expected credit losses for financial instruments carried at amortized cost held at the reporting date based on historical experience, current conditions and reasonable forecasts. The updated guidance also amends the
Notes to Condensed Consolidated Financial Statements (Unaudited)
current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. For EGC’s, the standard is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2022. The Company will continue to assess the possible impact of this standard, but currently does not expect the adoption of this standard will have a significant impact on its financial statements and its limited history of bad debt expense relating to trade accounts receivable.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU requires that contract assets and contract liabilities acquired in a business combination be recognized and measured in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. This guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within that fiscal year. Early adoption of the amendments is permitted, including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application. We are currently evaluating the impact of the new standard on our financial statements and related disclosures.
Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.
3. Acquisition of ConnectPV
On August 26, 2021, the Company acquired 100% of the common stock of ConnectPV. The acquisition of ConnectPV was accounted for as a business combination using the acquisition method of accounting. The aggregate purchase price was $13.8 million in cash (net of $0.8 million cash acquired) and 209,437 shares of Class A Common stock valued at $6.5 million.
The cash portion of the purchase price was funded by borrowing under our Revolving Credit Facility (as defined below). The purchase price paid has been allocated to record the acquired assets and assumed liabilities based upon their estimated fair value pending finalization of the working capital calculation with the sellers. When determining the fair values of the assets acquired and assumed liabilities, management made significant estimates, judgements and assumptions. Management estimated that consideration paid exceeded the fair value of the net assets acquired. Therefore, goodwill of $19.8 million was recorded. The goodwill recognized was primarily attributable to the workforce and synergies related to the Company’s EBOS solutions and components business that are expected to arise from the ConnectPV acquisition.
The following table is the balance sheet of ConnectPV as of the acquisition date, August 26, 2021, and includes the estimated fair value of the assets acquired and assumed liabilities. The estimated fair value allocated to certain property, plant and equipment, identifiable intangible assets and goodwill was determined
Notes to Condensed Consolidated Financial Statements (Unaudited)
based on a combination of market, cost and income approaches with the assistance of a third-party valuation firm (in thousands):
Purchase Price Allocation
Cash and cash equivalents
$
849
Accounts receivable
5,382
Inventory
4,273
Other current assets
1,583
Total current assets
12,087
Property, plant and equipment
438
Goodwill
19,765
Other intangible assets
1,600
Total Assets
33,890
Accounts payable
9,440
Accrued expenses
2,655
Debt
1,537
Total liabilities
13,632
Net assets acquired
$
20,258
Pro Forma Financial Information (Unaudited)
The pro forma information below gives effect to the ConnectPV acquisition as if it had been completed on the first day of each period presented. The pro forma results of operations are presented for informational purposes only. As such, they are not necessarily indicative of the Company’s results had the acquisition been completed on the first day of each period presented, nor do they intend to represent the Company’s future results. The pro forma information does not reflect any cost savings from operating efficiencies or synergies that could result from the acquisition and does not reflect additional revenue opportunities following the acquisition. The pro forma information includes adjustments to record the assets and liabilities associated with the acquisition at their respective fair values, based on available information and to give effect to the financing for the acquisition (in thousands):
Nine Months Ended September 30, 2021
Revenue
$
181,663
Net income
$
4,226
4. Accounts Receivable
Accounts receivable consists of the following (in thousands):
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2022
December 31, 2021
Accounts receivable
$
71,938
$
32,015
Less: allowance for doubtful accounts
(286)
(516)
Accounts receivable, net
$
71,652
$
31,499
5. Inventory
Inventory consists of the following (in thousands):
September 30, 2022
December 31, 2021
Raw materials
$
82,451
$
39,265
Allowance for obsolete or slow-moving inventory
(1,293)
(897)
Inventory, net
$
81,158
$
38,368
6. Property, Plant and Equipment
Property, plant, and equipment, net consists of the following (in thousands):
Estimated Useful Lives (Years)
September 30, 2022
December 31, 2021
Land
N/A
$
840
$
840
Building and land improvements
5-40
8,833
7,801
Machinery and equipment
3-5
11,970
10,693
Furniture and fixtures
3-7
1,797
1,775
Vehicles
5
127
65
23,567
21,174
Less: accumulated depreciation
(6,971)
(5,600)
Property, plant and equipment, net
$
16,596
$
15,574
Depreciation expense for the three months ended September 30, 2022 and 2021 was $0.5 million and $0.5 million, respectively. During the three months ended September 30, 2022 and 2021, $0.4 million and $0.4 million, respectively, of depreciation expense was allocated to cost of revenue and $0.1 million and $0.1 million, respectively, of depreciation expense was allocated to operating expenses.
Depreciation expense for the nine months ended September 30, 2022 and 2021 was $1.4 million and $1.3 million, respectively. During the nine months ended September 30, 2022 and 2021, $1.1 million and $1.0 million, respectively, of depreciation expense was allocated to cost of revenue and $0.3 million and $0.3 million, respectively, of depreciation expense was allocated to operating expenses.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Goodwill
Goodwill relates to the acquisition of Shoals and ConnectPV. As of September 30, 2022 and December 31, 2021, goodwill totaled $69.9 million and $69.4 million, respectively. Changes in the carrying amount of goodwill during the nine months ended September 30, 2022 are shown below (in thousands):
Goodwill
Beginning Balance
$
69,436
Adjustments related to finalization of working capital in the acquisition of ConnectPV
505
Ending Balance
$
69,941
Other Intangible Assets
Other intangible assets consists of the following (in thousands):
Estimated Useful Lives (Years)
September 30, 2022
December 31, 2021
Amortizable:
Costs:
Customer relationships
13
$
53,100
$
53,100
Developed technology
13
34,600
34,600
Trade names
13
11,900
11,900
Backlog
1
600
600
Noncompete agreements
5
2,000
2,000
Total amortizable intangibles
102,200
102,200
Accumulated amortization:
Customer relationships
21,851
18,629
Developed technology
14,195
12,199
Trade names
4,948
4,103
Backlog
600
200
Noncompete agreements
2,000
1,833
Total accumulated amortization
43,594
36,964
Total amortizable intangibles, net
$
58,606
$
65,236
Amortization expense related to intangible assets amounted to $2.1 million and $2.1 million for the three months ended September 30, 2022 and 2021 and $6.6 million and $6.1 million for the nine months ended September 30, 2022 and 2021, respectively.
8. Accrued Expenses and Other
Accrued expenses and other consists of the following (in thousands):
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2022
December 31, 2021
Accrued interest
6,276
3,095
Accrued professional fees
595
548
Lease liability
1,139
—
Other accrued expenses
2,839
1,203
Total accrued expenses and other
$
43,407
$
9,569
9. Long-Term Debt
Long-term debt consists of the following (in thousands):
September 30, 2022
December 31, 2021
Term Loan Facility
$
195,750
$
197,250
Revolving Credit Facility
85,640
55,140
Less: deferred financing costs
(4,461)
(5,337)
Total debt, net of deferred financing costs
276,929
247,053
Less: current portion
(2,000)
(2,000)
Long-term debt, less current portion
$
274,929
$
245,053
Senior Secured Credit Agreement
On November 25, 2020 Shoals Holdings, entered into a senior secured credit agreement (the “Senior Secured Credit Agreement”), consisting of (i) a $350.0 million senior secured six-year term loan facility (the “Term Loan Facility”), (ii) a $30.0 million senior secured delayed draw term loan facility, which matures concurrently with the six-year Term Loan Facility (the “Delayed Draw Term Loan Facility”) and (iii) an uncommitted super senior first out revolving credit facility (the “Revolving Credit Facility”).
In December 2020, Shoals Holdings entered into two amendments to the Senior Secured Credit Agreement in order to obtain a $100.0 million increase (the “Revolver Upsize”) to the Revolving Credit Facility and modify the terms of the interest rate and prepayment premium. As part of the first amendment the Company repaid and terminated all outstanding commitments under the Delayed Draw Term Loan Facility.
On January 29, 2021, the Company used proceeds from the IPO to repay $150.0 million of outstanding borrowings under the Term Loan Facility. The repayment of a portion of the borrowings under the Term Loan Facility resulted in a $16.0 million loss on debt repayment as the result of the $11.3 million prepayment premium and $4.7 million write-off of a portion of the deferred financing costs.
On May 2, 2022, Shoals Holdings entered into an amendment to the Senior Secured Credit Agreement in order to increase the amount available for borrowing under the Revolving Credit Facility from $100.0 million to $150.0 million. The amendment also set forth SOFR as the benchmark rate to succeed LIBOR and amended the financial covenant such that, commencing with September 30, 2022, Shoals Holdings shall not permit its Consolidated First Lien Secured Leverage Ratio (as defined in the Senior Secured Credit Agreement) to exceed 6.50:1.00.
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of September 30, 2022, interest rates on the Term Loan Facility was SOFR plus 3.25%, or 5.94%, and the Revolving Credit Facility was SOFR plus 3.25%, ranging from 5.41% to 6.89%. As of September 30, 2022, the Company had $64.4 million of availability under the Revolving Credit Facility.
The Senior Secured Credit Agreement contains affirmative and negative covenants, including covenants that restrict the Company’s incurrence of indebtedness, incurrence of liens, dispositions, investments, acquisitions, restricted payments, and transactions with affiliates. The Senior Secured Credit Agreement also includes customary events of default, including the occurrence of a change of control. As of September 30, 2022, the Company was in compliance with all the required covenants.
10. Earnings per Share ("EPS")
Basic EPS of Class A Common Stock is computed by dividing net income (loss) attributable to the Company by the weighted average number of shares of Class A Common Stock outstanding during the period. Diluted EPS of Class A Common Stock is computed similarly to basic EPS except the weighted average shares outstanding are increased to include additional shares from the exchange of Class B Common Stock under the if-converted method and the assumed exercise of any common stock equivalents using the treasury stock method, if dilutive. The Company’s restricted stock units are considered common stock equivalents for this purpose.
All earnings prior to and up to January 26, 2021, the date of the IPO, were entirely allocable to non-controlling interest and, as a result, EPS information is not applicable for reporting periods prior to this date. Consequently, only the net income allocable to Shoals Technologies Group, Inc. from the period subsequent to January 26, 2021 is included in the net loss attributable to the stockholders of Class A Common Stock for the periods ended September 30, 2021.
Basic and diluted EPS of Class A Common Stock have been computed as follows (in thousands, except per share amounts):
Three Months Ended September 30,
Nine Months Ended September 30, 2022
Period from January 27, 2021 to September 30, 2021
2022
2021
Numerator:
Net income attributable to Shoals Technologies Group, Inc. - basic
$
7,958
$
2,486
$
15,000
$
1,510
Reallocation of net income attributable to non-controlling interests from the assumed conversion of Class B common stock
—
—
—
—
Net income attributable to Shoals Technologies Group, Inc. - diluted
$
7,958
$
2,486
$
15,000
$
1,510
Denominator:
Weighted average shares of Class A common stock outstanding - basic
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months Ended September 30,
Nine Months Ended September 30, 2022
Period from January 27, 2021 to September 30, 2021
2022
2021
Effect of dilutive securities:
Restricted / Performance Stock Units
609
361
255
173
Class B Common Stock
—
—
—
—
Weighted average shares of Class A common stock outstanding - diluted
113,584
102,251
112,816
96,527
Earnings (loss) per share of Class A common stock - basic
$
0.07
$
0.02
$
0.13
$
0.02
Earnings (loss) per share of Class A common stock - diluted
$
0.07
$
0.02
$
0.13
$
0.02
For the three and nine months ended September 30, 2022 and the period from January 27, 2021 to September 30, 2021, the reallocation of net income attributable to non-controlling interest from the assumed conversion of Class B common stock has been excluded along with the dilutive effect of Class B common stock to the weighted average shares of Class A common stock outstanding – dilutive as it was antidilutive.
11. Equity-Based Compensation
2021 Long-term Incentive Plan
On January 26, 2021, the Shoals Technologies Group, Inc. 2021 Long-Term incentive Plan (the “2021 Incentive Plan”) became effective. The 2021 Incentive Plan authorized 8,768,124 new shares, subject to adjustment pursuant to the 2021 Incentive Plan.
Restricted Stock Units
During the nine months ended September 30, 2022, the Company granted 665,179 restricted stock units (“RSUs") to certain employees, officers and directors of the Company. The RSUs have grant date fair values ranging from $10.42 to $25.05 per unit and generally vest ratably over 3 years, except for some officer and employee grants for bonuses which immediately vested.
Activity under the 2021 Incentive Plan for RSUs was as follows:
Notes to Condensed Consolidated Financial Statements (Unaudited)
During the nine months ended September 30, 2022, the Company granted an aggregate of 242,907 Performance Stock Units ("PSUs") to certain executives. The PSUs cliff vest after 3 years upon meeting certain revenue and gross margin targets and contain certain modifiers which could increase or decrease the ultimate number of Class A common stock issued to the executives. The PSUs were valued using the market value of the Class A common stock on the grant date ranging from $10.42 to $12.60 per PSUs. Based on results achieved in 2022 and the forecasted amounts over the remainder of the performance period, the Company expects the units to vest and the modifier to be achieved related to the gross margin target.
Activity under the 2021 Incentive Plan for PSUs was as follows:
Performance Stock Units
Weighted Average Price
Outstanding, December 31, 2021
—
$
—
Granted
242,907
$
11.41
Vested
—
$
—
Forfeited
—
$
—
Outstanding, September 30, 2022
242,907
$
11.41
The Company recognized equity-based compensation of $4.0 million and $2.7 million for the three months ended September 30, 2022 and 2021, respectively, and $11.9 million and $6.9 million for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, the Company had $34.6 million of unrecognized compensation costs which is expected to be recognized over a period of 2.3 years.
12. Stockholders' Equity (Deficit)
Amendment and Restatement of Certificate of Incorporation
As discussed in Note 1, on January 26, 2021, the Company's certificate of incorporation was amended and restated to, among other things, provide for the (i) authorization of 1,000,000,000 shares of Class A common stock with a par value of $0.00001 per share; (ii) authorization of 195,000,000 shares of Class B common stock with a par value of $0.00001 per share; (iii) authorization of 5,000,000 shares of preferred stock that may be issued from time to time by the Company's Board of Directors in one or more series; and (iv) establishment of a classified board of directors, divided into three classes, the members of which will serve for staggered terms.
Holders of Class A common stock and Class B common stock are entitled to one vote per share and, except as otherwise required, will vote together as a single class on all matters on which stockholders generally are entitled to vote. Holders of Class B common stock are not entitled to receive dividends and will not be entitled to receive any distributions upon the liquidation, dissolution or winding up of the Company. Shares of Class B common stock may only be issued to the extent necessary to maintain the one-to-one ratio between the number of LLC Interests held by the Continuing Equity Owners and the number of shares of Class B common stock held by the Continuing Equity Owners. Shares of Class B common stock are transferable only together with an equal number of LLC Interests. Shares of Class B common stock will be canceled on a one-for-one basis if the Company, at the election of a Continuing Equity Owner, redeem or exchange LLC Interests.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company must, at all times, maintain a one-to-one ratio between the number of shares of Class A common stock issued by the Company and the number of LLC Interests owned by the Company (subject to certain exceptions for treasury shares and shares underlying certain convertible or exchangeable securities).
Initial Public Offering
As discussed in Note 1, on January 29, 2021, the Company closed an IPO of 11,550,000 shares of the Class A common stock at a public offering price of $25.00 per share. The Company received $278.8 million in proceeds, net of underwriting discounts and commissions, which was used to purchase 6,315,790 LLC Interests from Shoals Parent and 5,234,210 LLC Interests from the founder and Class B unit holder in Shoals Parent at a price per interest equal to the IPO price of the Class A common stock of $25.00.
Shoals Parent Recapitalization
As noted above, in connection with the IPO, the limited liability company agreement of Shoals Parent was amended and restated to, among other things, (i) provide for a new single class of common membership interests in Shoals Parent, or the LLC Interests; (ii) exchange all of the then existing membership interests of the Continuing Equity Owners for LLC Interests (iii) exchange all the then existing membership interest of the Class A Shoals Equity Owners for LLC Interests and (iv) appoint the Company as the sole managing member of Shoals Parent. The Company has a majority economic interest in, is the sole managing member of, has the sole voting power in, and controls the management of Shoals Parent.
The amendment also requires that Shoals Parent, at all times, maintain (i) a one-to-one ratio between the number of shares of Class A common stock issued by the Company and the number of LLC Interests owned by the Company and (ii) a one-to-one ratio between the number of shares of Class B common stock owned by the Continuing Equity Owners and the number of LLC Interests owned by the Continuing Equity Owners.
Acquisition of Former Shoals Equity Owners
On January 26, 2021, the Company acquired, by merger, an entity that was a member of Shoals Parent, or the Class A Shoals Equity Owners, for which the Company issued 81,977,751 shares of Class A common stock as merger consideration. The only assets held by the Class A Shoals Equity Owners were 81,977,751 LLC Interests. Upon consummation of the merger, the Company recognized the LLC Interests at carrying value, as the merger is considered to be a transaction between entities under common control.
13. Non-Controlling Interests
As of September 30, 2022, the Company owned 67.84% of Shoals Parent. The following table summarizes the effects of the changes in ownership in Shoals Parent on equity:
Notes to Condensed Consolidated Financial Statements (Unaudited)
Nine Months Ended September 30, 2022
Period from January 27, 2021 to September 30, 2021
Net income attributable to non-controlling interest
$
9,711
$
1,911
Transfers to non-controlling interests
Decrease as a result of the Organizational Transactions
—
(88,644)
Increase as a result of newly issued LLC Interests in IPO
—
70,976
Increase as a result of activity under equity-based compensation plan
4,257
2,607
Decrease from tax distributions to non-controlling interest
(7,762)
(4,837)
Reallocation of non-controlling interest
107
6,005
Change from net income attributable to/from non-controlling interest and transfers to non-controlling interest
$
6,313
$
(11,982)
Issuance of Additional LLC Interests
Under the LLC Agreement, the Company is required to cause Shoals Parent to issue additional LLC Interests to the Company when the Company issues additional shares of Class A Common Stock. Other than as it relates to the issuance of Class A Common Stock in connection with an equity incentive program, the Company must contribute to Shoals Parent net proceeds and property, if any, received by the Company with respect to the issuance of such additional shares of Class A Common Stock. The Company must cause Shoals Parent to issue a number of LLC Interests equal to the number of shares of Class A Common Stock issued such that, at all times, the number of LLC Interests held by the Company equals the number of outstanding shares of Class A Common Stock. During the nine months ended September 30, 2022, the Company caused Shoals Parent to issue to the Company a total of 480,116 LLC Interests for the vesting of awards granted under the Shoals Technologies Group, Inc. 2021 Long-Term Incentive Plan.
Distributions for Taxes
As a limited liability company (treated as a partnership for income tax purposes), Shoals Parent does not incur significant federal, state or local income taxes, as these taxes are primarily the obligations of its members. As authorized by the LLC Agreement, Shoals Parent is required to distribute cash, to the extent that Shoals Parent has cash available, on a pro rata basis, to its members to the extent necessary to cover the members’ tax liabilities, if any, with respect to each member’s share of Shoals Parent taxable earnings. Shoals Parent makes such tax distributions to its members quarterly, based on the single highest marginal tax rate applicable to its members applied to projected year-to-date taxable income, with a final accounting once actual taxable income or loss has been determined. During the nine months ended September 30, 2022 and 2021, tax distributions to non-controlling LLC Interests holders was $7.8 million and $4.8 million, respectively.
Other Distributions
Pursuant to the LLC Agreement, the Company has the right to determine when distributions will be made to LLC members and the amount of any such distributions. If the Company authorizes a distribution, such distribution will be made to the members of the LLC (including the Company) pro rata in accordance with the percentages of their respective LLC units.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Effective January 1, 2021, the Company adopted ASC 842 Leases using the modified retrospective approach. The Company elected the use of the package of practical expedients permitted under the transition guidance which allows the Company not to reassess whether a contract contains a lease, carry forward the historical lease classification and not reassess initial direct lease costs. The Company also elected to apply the short-term measurement and recognition exemption in which the right-of-use (“ROU”) assets and lease liabilities are not recognized for short-term leases. Adoption of this standard resulted in recording of net operating lease ROU assets and corresponding operating lease liabilities of $1.2 million and $1.2 million, respectively. The standard did not materially affect the condensed consolidated statements of income and had no impact on the condensed consolidated statements of cash flows.
The following table summarizes the balances as it relates to leases at the end of the period (in thousands):
(*)
September 30, 2022
ROU asset
Other assets
$
4,358
Lease liability, current portion
Accrued expenses and other
$
1,139
Lease liability, long-term portion
Other long-term liabilities
3,553
Total lease liability
$
4,692
(*) Location on the condensed consolidated balance sheet
The Company determines if an arrangement is a lease at its inception. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Operating lease ROU assets also include any initial direct costs and prepayments less lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. As the Company’s leases generally do not provide an implicit rate, the Company uses its collateralized incremental borrowing rate based on the information available at the lease commencement date, including lease term, in determining the present value of lease payments. Lease expense for these leases is recognized on a straight-line basis over the lease term.
Operating lease arrangements are comprised primarily of real estate and equipment agreements for which the right-of-use assets are included in other assets and the corresponding lease liabilities, depending on their maturity, are included in accrued liabilities or other long-term liabilities in the condensed consolidated balance sheets. The Company also elected to apply the practical expedient to consider non-lease components as a part of the lease. The Company's leases contain certain non-lease components for common area maintenance which are variable on a month to month basis and as such recorded as a variable lease expense as incurred.
The details of the Company’s operating leases are as follows (in thousands):
Notes to Condensed Consolidated Financial Statements (Unaudited)
Operating cash flows from operating leases
$
918
Non cash investing activities:
Lease liabilities arising from obtaining right-of-use assets as of January 1, 2022
$
1,239
Lease liabilities arising from obtaining right-of-use assets during the nine months ended September 30, 2022
$
3,990
15. Commitments and Contingencies
Litigation
The Company is from time to time subject to legal proceedings and claims, which arise in the normal course of its business. In the opinion of management and legal counsel, the amount of losses that may be sustained, if any, would not have a material effect on the financial position, results of operations or cash flows of the Company.
Surety Bonds
The Company provides surety bonds to various parties as required for certain transactions initiated during the ordinary course of business to guarantee the Company’s performance in accordance with contractual or legal obligations. As of September 30, 2022, the maximum potential payment obligation with regard to surety bonds was $16.0 million.
Employee Benefit Plan
The Company has a 401(k) retirement plan for substantially all of its employees based on certain eligibility requirements. Effective January 1, 2021 the Company began making matching contributions to the plan and may also provide discretionary contributions to the plan at the discretion of management. No such discretionary contributions have been made since inception of the plan. For the nine months ended September 30, 2022 and 2021, the Company made matching contributions totaling $0.3 million and $0.1 million, respectively.
16. Income Taxes
In August 2022, the U.S. President signed into law the Inflation Reduction Act of 2022 (the “IRA”), which revised U.S. tax law by, among other things, including a new corporate alternative minimum tax (the “CAMT”) of 15% on certain large corporations, imposing a 1% excise tax on stock buybacks, and providing incentives to address climate change, including the introduction of advanced manufacturing production tax credits. The provisions of the IRA are generally effective for tax years beginning after 2022. Given the complexities of the IRA, which is pending technical guidance and regulations from the Internal Revenue Service and U.S. Treasury Department, we will continue to monitor these developments and evaluate the potential future impact to our results of operations.
The Company is taxed as a subchapter C corporation and is subject to federal and state income taxes. The Company’s sole material asset is Shoals Parent, which is a limited liability company that is taxed as a
Notes to Condensed Consolidated Financial Statements (Unaudited)
partnership for US federal and certain state and local income tax purposes. Shoals Parent’s net taxable income and related tax credits, if any, are passed through to its members and included in the member’s tax returns.
Shoals Parent is subject to and reports an entity level tax in various states. The income tax burden on the earnings taxed to the noncontrolling interest holders is not reported by the Company in its consolidated financial statements under U.S. GAAP. As a result, the Company’s effective tax rate differs materially from the statutory rate. Our effective income tax rate for the nine months ended September 30, 2022 and 2021, was 18.2% and 105.0% respectively.
In calculating the provision for interim income taxes, in accordance with ASC Topic 740, an estimated annual effective tax rate is applied to year-to-date ordinary income. At the end of each interim period, the Company estimates the effective tax rate expected to be applicable for the full fiscal year. This differs from the method utilized at the end of an annual period.
For annual periods, the Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that the deferred tax assets will be realized. Deferred tax assets and liabilities are calculated by applying existing tax laws and the rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change.
The Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return, which are subject to examination by federal and state taxing authorities. The tax benefit from an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination by taxing authorities based on technical merits of the position. The amount of the tax benefit recognized is the largest amount of the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The effective tax rate and the tax basis of assets and liabilities reflect management’s estimates of the ultimate outcome of various tax uncertainties. The Company recognizes penalties and interest related to uncertain tax positions within the provision (benefit) for income taxes line in the accompanying consolidated statements of operations. As of the quarter ended September 30, 2022, the Company has recorded $1.0 million of gross unrecognized tax benefits inclusive of interest and penalties, all of which, if recognized, would favorably impact the effective tax rate. The Company recognizes penalties and interest related to uncertain tax positions within the provision (benefit) for income taxes line in the accompanying consolidated statements of operations.
The Company files U.S. federal and certain state income tax returns. The income tax returns of the Company are subject to examination by U.S. federal and state taxing authorities for various time periods, depending on those jurisdictions’ rules, generally after the income tax returns are filed.
17. Payable Pursuant to the Tax Receivable Agreement
The Company has a TRA with the TRA Owners that provides for the payment by the Company to the TRA Owners (or their permitted assignees) of 85% of the amount of the benefits, if any, that the Company actually realizes or is deemed to realize as a result of (i) the Company’s allocable share of existing tax basis acquired in connection with the Organizational Transactions (including Blocker’s share of existing tax basis)
Notes to Condensed Consolidated Financial Statements (Unaudited)
and increases to such allocable share of existing tax basis, (ii) certain increases in the tax basis of assets of Shoals Parent and its subsidiaries resulting from purchases or exchanges of LLC Interests, and (iii) certain other tax benefits related to the Company entering into the TRA, including those attributable to payments made under the TRA. These contractual payment obligations are obligations of the Company and not of Shoals Parent. The Company’s payable pursuant to the TRA was determined on an undiscounted basis in accordance with ASC 450, Contingencies, since the contractual payment obligations were deemed to be probable and reasonably estimable.
For purposes of the TRA, the benefit deemed realized by the Company is computed by comparing the actual income tax liability of the Company (calculated with certain assumptions) to the amount of such taxes that the Company would have been required to pay had there been no increase to the tax basis of the assets of Shoals Parent as a result of the purchases or exchanges, and had the Company not entered into the TRA.
The following table reflects the changes to the Company's payable pursuant to the tax receivable agreement (in thousands):
Nine Months Ended September 30,
2022
2021
Beginning balance
$
156,374
$
—
Additions to TRA:
Exchange of LLC Interests for Class A Common Stock
4,629
92,376
Merger of Shoals investment CTB
—
13,490
Adjustment for change in estimated effective income tax rate
—
2,014
Payments under TRA
—
—
Payable pursuant to TRA
161,003
107,880
Less: current portion
(3,583)
—
Payable pursuant to TRA, less current portion
$
157,420
$
107,880
The TRA further provides that, upon certain mergers, asset sales or other forms of business combinations or other changes of control, or if the Company materially breaches any of its material obligations under the TRA, the Company (or its successor) would owe to the TRA Owners a lump-sum payment equal to the present value of all forecasted future payments that would have otherwise been made under the TRA that would be based on certain assumptions, including a deemed exchange of LLC Interests and that the Company would have sufficient taxable income to fully utilize the deductions arising from the increased tax basis and other tax benefits related to entering into the TRA. The Company also is entitled to terminate the TRA, which, if terminated, would obligate the Company to make early termination payments to the TRA Owners.
When estimating the expected tax rate to use in order to determine the tax benefit expected to be recognized from the Company’s increased tax basis as a result of exchanges of LLC Interests by the TRA Owners, the Company continuously monitors changes in its overall tax posture, including changes resulting from new legislation and changes as a result of new jurisdictions in which the Company is subject to tax.
The Company has recorded deferred tax assets of $190.4 million since our IPO associated with basis differences in the net assets of Shoals Parent and pursuant to making an election under Section 754 of the Internal Revenue Code of 1986 (the "Internal Revenue Code"), as amended. The aggregate payable pursuant
Notes to Condensed Consolidated Financial Statements (Unaudited)
to the TRA represents 85% of the tax benefits that the Company expects to receive in connection with the Section 754 election. In accordance with the TRA, the next annual payment is anticipated on February 20, 2023, approximately 125 days after filing the federal tax return.
18. Revenue by Product
Based on Topic 606 provisions, the Company disaggregates its revenue from contracts with customers between system solutions and components. System solutions are contracts under which the Company provides multiple products typically in connection with the design and specification of an entire EBOS system. Components represents sales of individual components.
The following table presents the Company’s revenue disaggregated by system solutions and components (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
System solutions
$
69,486
$
38,641
$
173,136
$
123,252
Components
21,337
21,199
59,153
41,914
Total revenue
$
90,823
$
59,840
$
232,289
$
165,166
27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information included in our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”) and this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate” or “continue” or comparable terminology are intended to identify forward-looking statements. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the sections of our 2021 Form 10-K and this Form 10-Q captioned “Forward-Looking Statements” and “Risk Factors”.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains the presentation of Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted Earnings per Share, which are not presented in accordance with GAAP. Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted Earnings per Share are being presented because they provide the Company, investors and readers of this Form 10-Q with additional insight into our operational performance relative to earlier periods and relative to our competitors. We do not intend Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted Earnings per Share to be substitutes for any GAAP financial information. Readers of this Form 10-Q should use Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted Earnings per Share only in conjunction with Net Income, the most comparable GAAP financial measure. Reconciliations of Adjusted EBITDA, Adjusted Net Income to Net Income and Adjusted Diluted Earnings per Share, the most comparable GAAP measure to each, are provided in “—Non-GAAP Financial Measures.”
Overview
We are a leading provider of electrical balance of system (“EBOS”) solutions and components for solar, battery storage and electrical vehicle (“EV”) charging applications, selling to customers across the United States and internationally. EBOS encompasses all of the components that are necessary to carry the electric current produced by solar panels to an inverter and ultimately to the power grid. EBOS components are mission-critical products that have a high consequence of failure, including lost revenue, equipment damage, fire damage, and even serious injury or death. As a result, we believe customers prioritize reliability and safety over price when selecting EBOS solutions.
EBOS components that we produce include cable assemblies, inline fuses, combiners, disconnects, recombiners, wireless monitoring systems, junction boxes, transition enclosures and splice boxes. We derive the majority of our revenue from selling “system solutions” which are complete EBOS systems that include several of our products, many of which are customized for the customer’s project. We believe our system solutions are unique in our industry because they integrate design and engineering support, proprietary components and innovative installation methods into a single offering that would otherwise be challenging for a customer to obtain from a single provider or at all.
We sell our solar products principally to engineering, procurement and construction firms ("EPCs”) that build solar energy projects. However, given the mission critical nature of EBOS, the decision to use our products typically involves input from both the EPC and the owner of the solar energy project. The custom nature of our system solutions and the long development cycle for solar energy projects typically gives us 12
28
months or more of lead time to quote, engineer, produce and ship each order we receive, and we do not stock large amounts of finished goods.
We have maintained focus on our growth strategy throughout the third quarter, including developments in converting customers to our combine-as-you-go system and developing products for the rapidly growing electric vehicle charging infrastructure market. We believe that as of September 30, 2022, 14 of the top 15 solar EPCs as reported by Solar Power World Magazine use our combine-as-you-go system on their projects and we are currently in the process of transitioning an additional 15 EPCs and developers to our system. Additionally, in 2022 we launched four new product families for the EV charging market. The first is the power center which combines equipment needed to protect the charging equipment and transform voltage levels from the electric utility to those needed on the respective site. The power center provides an efficient, cost effective and aesthetically focused option versus traditional methods. The second offering focuses on quick connect solutions for chargers made by any manufacturer and any power level to connect to the Shoals system. The quick connect bases dramatically reduce the time required on site for a deployment and reduce the amount of labor required in the field. The third offering uses our Big Lead Assembly (“BLA”) technology in the EV space to connect multiple chargers to a single power center. This solution eliminates the need for homeruns from each dispenser and is above ground rated which allows wire to be run above ground rather than in underground conduit. The fourth offering is a raceway system that protects the above ground EV BLAs in walk over and drive over applications. The raceway system coupled with the EV BLA deploys much more rapidly and cost effectively than traditional methods of deployment. We introduced these first four offerings in the fourth quarter of 2021 and began taking orders and shipping some component products in Q1 2022. Significant order flow continued during Q3 2022 with scaled production underway to fulfill system solution orders in hand. We recently completed UL certification for many of our products and expect the balance to be certified by the end of the year.
We derived approximately 74.5% of our revenue from the sale of system solutions for the nine months ended September 30, 2022. For the same period, we derived substantially all of our revenue from customers in the U.S. As of September 30, 2022, we had $471.2 million of backlog and awarded orders, backlog of $199.3 million represents signed purchase orders or contractual minimum purchase commitments with take-or-pay provisions and awarded orders of $271.9 million are orders we are in the process of documenting a contract but for which a contract has not yet been signed. As of September 30, 2022, backlog and awarded orders represented a 74% and 44% increase relative to the same date last year and June 30, 2022, respectively.
Initial Public Offering
On January 29, 2021, we completed an IPO of 11,550,000 shares of Class A common stock at a public offering price of $25.00 per share, including shares issued pursuant to the underwriters' over-allotment option. We received $278.8 million in proceeds, net of underwriting discounts and commissions of $9.9 million, which was used to purchase 6,315,790 newly-issued membership interests (the “LLC Interests”) from Shoals Parent and 5,234,210 LLC Interests from the founder and Class B unit holder in Shoals Parent at a price per interest equal to the IPO price of $25.00 per share.
Organizational Transactions
See Note 1 to the condensed consolidated financial statements, included in this Quarterly Report on Form 10-Q for more information about the above-mentioned transactions as well as the other transactions completed in connection with the IPO.
29
As the Organization Transactions were considered transactions between entities under common control, the condensed consolidated financial statements for the periods prior to the IPO and Organizational Transactions have been adjusted to combine the previously separate entities for presentation purposes.
Follow On Offering
On July 16, 2021, the Company completed a follow-on offering consisting of 4,989,692 shares of Class A common stock offered by the selling shareholders and 10,402,086 shares of Class A common stock offered by the Company. Following the closing of the follow-on offering, Oaktree Power Opportunities Fund IV (Delaware) Holdings, L.P. no longer beneficially owned any shares of our common stock. The Company used the proceeds of the sale of Class A common stock to purchase an equal number of LLC Interests and Class B common stock from our founder and management.
Acquisition of ConnectPV
On August 26, 2021, we acquired 100% of the stock of ConnectPV, for $13.8 million in cash (net of $0.8 million cash acquired) and 209,437 shares of Class A Common stock valued at $6.5 million. The acquisition was accounted for as a business combination and following the acquisition we immediately converted ConnectPV to a limited liability company (Shoals Connect LLC) and contributed the entity to Shoals Parent, LLC through a series of transactions.
Shoals Technologies Group, Inc Ownership in Shoals Parent
As of September 30, 2022, the Company owned 67.84% of Shoals Parent. The Continuing Equity Owners owned the remaining 32.16% of Shoals Parent.
Impact of COVID-19and Macroeconomic Events
In 2022, COVID-19 has impacted our business in the following ways:
•Our ability to obtain raw material and required components from domestic and international suppliers required to manufacture our products; and
•Our ability to secure inbound and outbound logistics to and from our facilities, with additional delays linked to international border crossings and the associated approvals and documentation and;
Significant levels of inflation have increased energy prices, freight premiums, and other operating costs. As a result of inflation, during 2022, the Federal Reserve increased interest rates resulting in higher interest rates associated with our Senior Secured Credit Agreement. Any additional increases in interest rates by the Federal Reserve would have a corresponding increase in the interest rates charged under our Senior Secured Credit Agreement. The eventual implications of higher government deficits and debt, tighter monetary policy, and potentially higher long-term interest rates may drive a higher cost of capital during our forecast period.
The Company does not directly source raw materials from Europe. However, the ongoing conflict in Ukraine has reduced the availability of certain material that can be sourced in Europe and, as a result, increased global logistics costs for the procurement of some inputs and materials used in our products. We do not know the ultimate severity or duration of the conflict in Ukraine, but we are continuously monitoring the situation and evaluating our procurement strategy and supply chain as to reduce any negative impact on our business, financial condition, and results of operations.
As response to supply chain constraints, in 2022 we have increased certain raw materials inventory, partly to limit the potential impact of supply chain issues of raw materials in the near term.
30
To date we have not had any material adverse effects on our financial results from these events.
Key Components of Our Results of Operations
The following discussion describes certain line items in our consolidated statements of operations.
Revenue
We generate revenue from the sale of EBOS systems and components for homerun and combine-as-you-go architectures, battery storage and EV charging infrastructure. Our customers include EPCs, utilities, solar developers, independent power producers, solar module manufacturers and charge point operators. We derive the majority of our revenue from selling system solutions. When we sell a system solution, we enter into a contract with our customers covering the price, specifications, delivery dates and warranty for the products being purchased, among other things. Our contractual delivery period for system solutions can vary from one to three months whereas manufacturing typically requires a shorter time frame. Contracts for system solutions can range in value from several hundred thousand to several million dollars.
Our revenue is affected by changes in the price, volume and mix of products purchased by our customers. The price and volume of our products is driven by the demand for our products, changes in product mix between homerun and combine-as-you-go EBOS, geographic mix of our customers, strength of competitors’ product offerings, and availability of government incentives to the end-users of our products.
Our revenue growth is dependent on continued growth in the amount of solar energy projects constructed each year and our ability to increase our share of demand in the geographies where we currently compete and plan to compete in the future as well as our ability to continue to develop and commercialize new and innovative products that address the changing technology and performance requirements of our customers.
Cost of Revenue and Gross Profit
Cost of revenue consists primarily of product costs, including purchased materials and components, as well as costs related to shipping, customer support, product warranty, personnel and depreciation of manufacturing and testing equipment. Personnel costs in cost of revenue include both direct labor costs as well as costs attributable to any individuals whose activities relate to the transformation of raw materials or component parts into finished goods or the transportation of materials to the customer. Our product costs are affected by the underlying cost of raw materials, including copper and aluminum; component costs, including fuses, resin, enclosures, and cable; technological innovation; economies of scale resulting in lower component costs; and improvements in production processes and automation. We do not currently hedge against changes in the price of raw materials. Some of these costs, primarily indirect personnel and depreciation of manufacturing and testing equipment, are not directly affected by sales volume. Gross profit may vary from year to year and is primarily affected by our sales volume, product prices, product costs, product mix, customer mix, geographical mix, shipping method and warranty costs.
Operating Expenses
Operating expenses consist of general and administrative costs as well as depreciation and amortization expense. Personnel-related costs are the most significant component of our operating expenses and include salaries, equity-based compensation, benefits, payroll taxes and commissions. The number of full-time employees in our general and administrative departments increased from 68 to 103 from September 30, 2021 to September 30, 2022, and we expect to hire new employees in the future to support our growth. The timing of these additional hires could materially affect our operating expenses in any particular period, both in
31
absolute dollars and as a percentage of revenue. We expect to invest in additional resources to support our growth which will increase our operating expenses.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries, equity-based compensation expense, employee benefits and payroll taxes related to our executives, and our sales, finance, human resources, information technology, engineering and legal organizations, travel expenses, facilities costs, marketing expenses, insurance, bad debt expense and fees for professional services. Professional services consist of audit, tax, accounting, legal, internal controls, information technology, investor relations and other costs. We expect to increase our sales and marketing personnel as we expand into new geographic markets. Substantially all of our sales are currently in the U.S. We currently have a sales presence in the U.S., Australia, Europe and Latin America. We intend to expand our sales presence and marketing efforts to additional countries in the future. We will cease to be an emerging growth company as of December 31, 2022, and we will continue to incur additional audit, tax, accounting, legal and other costs related to compliance with applicable securities and other regulations, as well as other costs associated with being a public company.
Depreciation
Depreciation in our operating expenses consists of costs associated with property, plant and equipment (“PP&E”) not used in manufacturing our products. We expect that as we increase both our revenue and the number of our general and administrative personnel, we will invest in additional PP&E to support our growth resulting in additional depreciation expense.
Amortization
Amortization of intangibles consists of customer relationships, developed technology, trade names, backlog and non-compete agreements over their expected period of use.
Non-operating Expenses
Interest Expense
Interest expense consists of interest and other charges paid in connection with our Senior Secured Credit Agreement.
Payable Pursuant to the Tax Receivable Agreement Adjustment
Tax receivable agreement adjustment consists of changes to our tax rate since the initial recording of the liability related to our tax receivable agreement.
Loss on Debt Repayment
Loss on debt repayment consists of prepayment premiums and the write-off of a portion of the deferred financing costs from the prepayment of outstanding borrowings under the Term Loan Facility.
Income Tax Expense
Shoals Technologies Group, Inc. is subject to U.S. federal and state income tax in multiple jurisdictions with respect to our allocable share of any net taxable income of Shoals Parent. Shoals Parent is a pass-through entity for federal income tax purposes but incurs income tax in certain state jurisdictions.
32
Results of Operations
The following table summarizes our results of operations (dollars in thousands):
Three Months Ended September 30,
Increase / (Decrease)
Nine Months Ended September 30,
Increase / (Decrease)
2022
2021
2022
2021
Revenue
$
90,823
$
59,840
$
30,983
52
%
$
232,289
$
165,166
$
67,123
41
%
Cost of revenue
54,776
38,071
16,705
44
%
141,357
98,444
42,913
44
%
Gross profit
36,047
21,769
14,278
66
%
90,932
66,722
24,210
36
%
Operating Expenses
General and administrative expenses
13,853
10,031
3,822
38
%
41,037
26,865
14,172
53
%
Depreciation and amortization
2,229
2,175
54
2
%
6,939
6,305
634
10
%
Total Operating Expenses
16,082
12,206
3,876
32
%
47,976
33,170
14,806
45
%
Income from Operations
19,965
9,563
10,402
109
%
42,956
33,552
9,404
28
%
Interest expense, net
(4,754)
(3,582)
1,172
33
%
(12,760)
(10,911)
1,849
17
%
Payable pursuant to the tax receivable agreement adjustment
—
(2,014)
(2,014)
(100)
%
—
(3,678)
(3,678)
(100)
%
Loss on debt repayment
—
—
—
—
%
—
(15,990)
(15,990)
(100)
%
Income before income taxes
15,211
3,967
11,244
(283)
%
30,196
2,973
27,223
(916)
%
Income tax benefit (expense)
(2,452)
1,309
3,761
287
%
(5,485)
3,123
8,608
276
%
Net income
12,759
5,276
7,483
142
%
24,711
6,096
18,615
(305)
%
Less: net income attributable to non-controlling interests
4,801
2,790
2,011
72
%
9,711
1,911
7,800
(408)
%
Net income attributable to Shoals Technologies Group, Inc.
$
7,958
$
2,486
$
5,472
220
%
$
15,000
$
4,185
$
10,815
(258)
%
Comparison of the Three Months Ended September 30, 2022 and 2021
Revenue
Revenue increased by $31.0 million, or 52%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, driven by higher sales volumes as a result of increased demand for solar EBOS generally and our combine-as-you-go system solutions specifically, our EV solutions launch, along with our acquisition of ConnectPV. Our total number of customers increased in 2022 as compared to 2021. We believe expanding customer recognition of the benefits of our combine-as-you-go system is continuing to result in increased demand for our products.
Cost of Revenue and Gross Profit
Cost of revenue increased by $16.7 million, or 44%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily driven by an increase in revenue. Gross profit as a percentage of revenue increased from 36.4% in 2021 to 39.7% in 2022 due to an increase in system solutions for combine-as-you-go EBOS, which have higher margins than our other products.
33
Operating Expenses
General and Administrative
General and administrative expenses increased $3.8 million, or 38%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. The increase in general and administrative expenses was primarily the result of an increase in professional fees of $1.4 million mainly related to accounting, legal and recruiting, an increase in wages and related taxes of $1.3 million due to increased employee head counts to support our growth initiatives and requirements of being a public company, $1.1 million related to equity-based compensation and $0.7 million related to trade shows and travel, offset by a decrease of $1.7 million in acquisition-related expenses.
Depreciation and Amortization
Depreciation and Amortization expenses increased $0.1 million, or 2%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. The increase in depreciation and amortization was primarily due to the addition of intangibles acquired in the ConnectPV acquisition.
Interest Expense
Interest expense, net increased by $1.2 million or 33%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, due to increased borrowing rates and increased borrowings to support our growth and working capital needs under our Senior Secured Credit Agreement that we amended on May 5, 2022. During 2022, the Federal Reserve increased interest rates resulting in higher interest rates associated with our Senior Secured Credit Agreement. Any additional increases in interest rates by the Federal Reserve would have a corresponding increase in the interest rates charged under our Senior Secured Credit Agreement.
Payable Pursuant to the Tax Receivable Agreement Adjustment
Payable pursuant to the TRA adjustment decreased $2.0 million or 100% for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 as last year’s adjustment was driven by a change in the tax rate, which didn’t reoccur in the current year.
Income Tax Benefit (Expense)
Income tax expense totaled $2.5 million for the three months ended September 30, 2022 as compared to an income tax benefit of $1.3 million for the three months ended September 30, 2021. Our effective income tax rate for the three months ended September 30, 2022 and 2021 was 16.1% and 33.0% respectively. The 2022 rate decrease in our effective income tax rate for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 is primarily due to the vesting of equity-based compensation at a market price less than the initial grant date fair value, resulting in a permanent difference between book and tax expense in 2022 and an increase in the effective income tax rate resulting from the acquisition of ConnectPV in 2021.
Comparison of the Nine Months Ended September 30, 2022 and 2021
Revenue
Revenue increased by $67.1 million, or 41%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, driven by higher sales volumes as a result of
34
increased demand for solar EBOS generally and our combine-as-you-go system solutions specifically, our EV solutions launch, along with our acquisition of ConnectPV. Our total number of customers increased in 2022 as compared to 2021. We believe expanding customer recognition of the benefits of our combine-as-you-go system is continuing to result in increased demand for our products.
Cost of Revenue and Gross Profit
Cost of revenue increased by $42.9 million, or 44%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily driven by an increase in revenue. Gross profit as a percentage of revenue decreased from 40.4% in 2021 to 39.1% in 2022 due to increased materials and logistics costs in the first half of 2022.
Operating Expenses
General and Administrative
General and administrative expenses increased $14.2 million, or 53%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The increase in general and administrative expenses was primarily the result of an increase in equity-based compensation of $4.4 million, an increase in wages and related taxes of $3.8 million due to increased employee head counts to support our growth and being a public company, $3.4 million in professional fees, mainly related to accounting, legal and recruiting, an increase of $0.8 million for travel and trade shows, and an increase of $0.4 million related to insurance, offset by a decrease of $1.7 million in acquisition-related expenses.
Depreciation and Amortization
Depreciation and amortization expense increased by $0.6 million, or 10%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, due to the addition of intangibles acquired in the ConnectPV acquisition.
Interest Expense
Interest expense, net increased by $1.8 million or 17%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, due to increased borrowing rates and borrowings that we amended on May 5, 2022 to support our growth and working capital under our Senior Secured Credit Agreement. During 2022, the Federal Reserve increased interest rates resulting in higher interest rates associated with our Senior Secured Credit Agreement. Any additional increases in interest rates by the Federal Reserve would have a corresponding increase in the interest rates charged under our Senior Secured Credit Agreement.
Payable Pursuant to the Tax Receivable Agreement Adjustment
Payable pursuant to the TRA adjustment decreased $3.7 million or 100% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, due to no changes in our tax rate in the current period.
Loss on Debt Repayment
Loss on debt repayment for the nine months ended September 30, 2021 totaled $16.0 million, which consisted of $11.3 million of prepayment premium and $4.7 million in write-off off a portion of the deferred financing costs related to a prepayment of $150.0 million of outstanding borrowings under the Term Loan Facility. There was no loss on debt repayment for the nine months ended September 30, 2022.
35
Income Tax Expense
Income tax expense was $5.5 million for the nine months ended September 30, 2022 as compared to an income tax benefit of $3.1 million for the nine months ended September 30, 2021. Our effective income tax rate for the nine months ended September 30, 2022 and 2021 was 18.2% and 105.0% respectively. The 2022 rate was impacted by the vesting of equity-based compensation at a market price less than the initial grant date fair value resulting in a permanent difference between book and tax expense in 2022. The 2021 rate was impacted by a change in our effective income tax rate resulting from the acquisition of ConnectPV in 2021.
Non-GAAP Financial Measures
Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted Earnings per Share (“EPS”)
We define Adjusted EBITDA as net income (loss) plus (i) interest expense, net, (ii) income tax expense, (iii) depreciation expense, (iv) amortization of intangibles, (v) payable pursuant to the TRA adjustment, (vi) loss on debt repayment, (vii) equity-based compensation, (viii) acquisition-related expenses, (ix) COVID-19 expenses and (x) non-recurring and other expenses. We define Adjusted Net Income as net income (loss) attributable to Shoals Technologies Group, Inc. plus (i) net income impact from pro forma conversion of Class B common stock to Class A common stock, (ii) amortization of intangibles, (iii) payable pursuant to the tax receivable agreement adjustment, (iv) loss on debt repayment, (v) amortization of deferred financing costs, (vi) equity-based compensation, (vii) acquisition-related expenses, (viii) COVID-19 expenses and (ix) non-recurring and other expenses, all net of applicable income taxes. We define Adjusted Diluted EPS as Adjusted Net Income divided by the diluted weighted average shares of Class A common shares outstanding for the applicable period, which assumes the pro forma exchange of all outstanding Class B common shares for Class A common shares.
Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS are intended as supplemental measures of performance that are neither required by, nor presented in accordance with, GAAP. We present Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS because we believe they assist investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS: (i) as factors in evaluating management’s performance when determining incentive compensation; (ii) to evaluate the effectiveness of our business strategies; and (iii) because our credit agreement uses measures similar to Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS to measure our compliance with certain covenants.
Among other limitations, Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments; do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; in the case of Adjusted EBITDA, does not reflect income tax expense or benefit for periods prior to the reorganization; and may be calculated by other companies in our industry differently than we do or not at all, which may limit their usefulness as comparative measures.
Because of these limitations, Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP. You should review the reconciliation of net income to Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS below and not rely on any single financial measure to evaluate our business.
Reconciliation of Net Income to Adjusted EBITDA (in thousands):
36
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Net income
$
12,759
$
5,276
$
24,711
$
6,096
Interest expense, net
4,754
3,582
12,760
10,911
Income tax benefit (expense)
2,452
(1,309)
5,485
(3,123)
Depreciation expense
478
449
1,371
1,265
Amortization of intangibles
2,121
2,088
6,630
6,080
Payable pursuant to the TRA adjustment (a)
—
2,014
—
3,678
Loss on debt repayment
—
—
—
15,990
Equity-based compensation
3,991
2,732
11,887
6,904
Acquisition-related expenses
20
1,697
32
1,697
COVID-19 expenses (b)
—
108
—
269
Non-recurring and other expenses (c)
—
243
—
1,821
Adjusted EBITDA
$
26,575
$
16,880
$
62,876
$
51,588
(a) Represents an adjustment to eliminate the remeasurement of the payable pursuant to the TRA.
(b) Represents costs incurred as a direct impact from the COVID-19 pandemic, disinfecting and reconfiguration of facilities, medical professionals to conduct daily screenings of employees and direct legal costs associated with the pandemic.
(c) Represents certain costs associated with non-recurring professional services, our prior private equity owners’ expenses and other costs.
Reconciliation of Net Income Attributable to Shoals Technologies Group, Inc. to Adjusted Net Income (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Net income attributable to Shoals Technologies Group, Inc.
$
7,958
$
2,486
$
15,000
$
4,185
Net income impact from pro forma conversion of Class B common stock to Class A common stock (a)
4,801
2,790
9,711
1,911
Adjustment to the provision for income tax (b)
(1,134)
(668)
(2,293)
(476)
Tax effected net income
11,625
4,608
22,418
5,620
Amortization of intangibles
2,121
2,088
6,630
6,080
Amortization of deferred financing costs
339
278
1,023
953
Payable pursuant to the TRA adjustment (c)
—
2,014
—
3,678
Loss on debt repayment
—
—
—
15,990
Equity-based compensation
3,991
2,732
11,887
6,904
37
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Acquisition-related expenses
20
1,697
32
1,697
COVID-19 expenses (d)
—
108
—
269
Non-recurring and other expenses (e)
—
243
—
1,821
Tax impact of adjustments (f)
(1,529)
(2,166)
(4,621)
(7,972)
Adjusted Net Income
$
16,567
$
11,602
$
37,369
$
35,040
(a) Reflects net income to Class A common shares from pro forma exchange of corresponding shares of our Class B common shares held by our founder and management.
(b) Shoals Technologies Group, Inc. is subject to U.S. Federal income taxes, in addition to state and local taxes with respect to its allocable share of any net taxable income of Shoals Parent LLC. The adjustment to the provision for income tax reflects the effective tax rates below, assuming Shoals Technologies Group, Inc. owns 100% of the units in Shoals Parent LLC.
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Statutory U.S. Federal income tax rate
21.0
%
21.0
%
21.0
%
21.0
%
Permanent adjustments
0.1
%
0.1
%
0.1
%
1.0
%
State and local taxes (net of federal benefit)
2.5
%
2.9
%
2.5
%
2.9
%
Effective income tax rate for Adjusted Net Income
23.6
%
24.0
%
23.6
%
24.9
%
(c) Represents an adjustment to eliminate the remeasurement of the payable pursuant to the TRA.
(d) Represents costs incurred as a direct impact from the COVID-19 pandemic, disinfecting and reconfiguration of facilities, medical professionals to conduct daily screenings of employees and direct legal costs associated with the pandemic.
(e) Represents certain costs associated with non-recurring professional services, our prior private equity owners’ expenses and other costs.
(f) Represents the estimated tax impact of all Adjusted Net Income add-backs, excluding those which represent permanent differences between book versus tax.
Reconciliation of Diluted Weighted Average Shares Outstanding to Adjusted Diluted Weighted Average Shares Outstanding (in thousands, except per share):
38
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Diluted weighted average shares of Class A common shares outstanding, excluding Class B common shares
113,584
102,251
112,816
96,527
Assumed pro forma conversion of Class B common shares to Class A common shares
54,253
64,813
54,579
70,285
Adjusted diluted weighted average shares outstanding
167,837
167,064
167,395
166,812
Adjusted Net Income (a)
$
16,567
$
11,602
$
37,369
$
35,040
Adjusted Diluted EPS
$
0.10
$
0.07
$
0.22
$
0.21
(a) Represents Adjusted Net Income for the full period presented.
Liquidity and Capital Resources
Nine Months Ended September 30,
2022
2021
Net cash used in operating activities
$
5,014
$
(6,679)
Net cash used in investing activities
(2,896)
(15,392)
Net cash provided by financing activities
19,941
26,187
Net increase in cash and cash equivalents
$
22,059
$
4,116
We finance our operations primarily with operating cash flows and short and long-term borrowings. Our ability to generate positive cash flow from operations is dependent on the strength of our gross margins as well as our ability to quickly turn our working capital. Based on our past performance and current expectations, we believe that operating cash flows and availability under our Revolving Credit Facility will be sufficient to meet our near and long-term future cash needs.
We generated cash from operating activities of $5.0 million in the nine months ended September 30, 2022 as compared to cash used in operating activities of $6.7 million for the nine months ended September 30, 2021. As of September 30, 2022, our cash and cash equivalents were $11.2 million and we had outstanding borrowings of $281.4 million. We also had $64.4 million available for additional borrowings under our $150.0 million Revolving Credit Facility.
Operating Activities
For the nine months ended September 30, 2022, cash provided by operating activities was $5.0 million, primarily due to increases of accounts payable and accrued expenses and other of $35.7 million which relates to increased inventory purchases in accounts payable and increased deferred revenue in accrued expenses and other, along with operating results that included $24.7 million of net income which was reduced by $26.7 million of non-cash expenses offset by an increase of $43.6 million in inventory as a result of increasing our raw materials inventory to support growth and reduce the likelihood of supply chain issues from our raw
39
materials suppliers along with a change in our terms with an overseas supplier and $38.1 million in receivables which related to an increase in revenue.
For the nine months ended September 30, 2021, cash used in operating activities was $6.7 million, primarily due to an increase of $19.0 million in receivables, $8.5 million in inventory, $6.9 million in other assets and a decrease in accounts payable and accrued expenses of $2.6 million offset by operating results that included $6.1 million of net income which was reduced by $24.3 million of non-cash expenses.
Investing Activities
For the nine months ended September 30, 2022, net cash used in investing activities was $2.9 million, of which $2.4 million was attributable to the purchase of property and equipment.
For the nine months ended September 30, 2021, net cash used in investing activities was $15.4 million, of which $2.5 million was attributable to the purchase of property and equipment and $12.9 million related to the acquisition of ConnectPV.
Financing Activities
For the nine months ended September 30, 2022, net cash provided by financing activities was $19.9 million, including $30.5 million in borrowings under the Revolving Credit Facility offset by $7.8 million in distributions to our non-controlling interest holders, $1.5 million in payments on the Term Loan Facility and $1.3 million in taxes related to net share settled equity awards.
For the nine months ended September 30, 2021, net cash provided by financing activities was $26.2 million including $144.9 million in net proceeds from the IPO and $40.1 million in borrowings under the Revolving Credit Facility offset by $152.3 million of payments on the Term Loan Facility.
From time to time, we may seek to retire or purchase the Company’s outstanding debt or equity securities through cash purchases and/or exchanges for other debt or equity securities in open market purchases, privately negotiated transactions, or otherwise, that may be made pursuant to Rule 10b5-1 or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors.
Debt Obligations
For a discussion of our debt obligations see Note 9 - Long-Term Debt in our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q
Surety Bonds
We provide surety bonds to various parties as required for certain transactions initiated during the ordinary course of business to guarantee our performance in accordance with contractual or legal obligations. As of September 30, 2022, the maximum potential payment obligation with regard to surety bonds was $16.0 million.
Critical Accounting Policies and Significant Management Estimates
As of September 30, 2022, there were no significant changes in the application of our critical accounting policies or estimation procedures from those presented in our 2021 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
40
There have been no material changes with respect to our market risk disclosed in our 2021 Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2022. Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2022, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting that occurred during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be involved in litigation relating to claims that arise out of our operations and businesses and that cover a wide range of matters, including, among others, intellectual property matters, contract and employment claims, personal injury claims, product liability claims and warranty claims. Currently, there are no claims or proceedings against us that we believe will have a material adverse effect on our business, financial condition, results of operations or cash flows. However, the results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, we may incur significant costs and experience a diversion of management resources as a result of litigation.
Item 1A. Risk Factors
There have been no material changes, except as discussed below, with respect to our risk factors disclosed in our 2021 Form 10-K.
Changes in the United States trade environment, including the imposition of trade restrictions, import tariffs, anti-dumping and countervailing duties could adversely affect the amount or timing of our revenue, results of operations or cash flows.
Escalating trade tensions, particularly between the United States and China, have led to increased tariffs and trade restrictions, including tariffs applicable to certain materials and components for our products or for products used in solar energy projects more broadly, such as module supply and availability. More
41
specifically, in March 2018, the United States imposed a 25% tariff on steel imports and a 10% tariff on aluminum imports pursuant to Section 301 of the Trade Act of 1974 and has imposed additional tariffs on steel and aluminum imports pursuant to Section 232 of the Trade Expansion Act of 1962. Additionally, in January 2018, the United States adopted a tariff on imported solar modules and cells pursuant to Section 201 of the Trade Act of 1974, which was extended in February 2022 for another four years. The tariff was initially set at 30%, with a gradual reduction over four years to 15%. This tariff may indirectly affect us by impacting the financial viability of solar energy projects, which could in turn reduce demand for our products. Furthermore, in July 2018, the United States adopted a 10% tariff on a long list of products imported from China under Section 301 of the Trade Act of 1974, including inverters and power optimizers, which became effective on September 24, 2018. In June 2019, the U.S. Trade Representative increased the rate of such tariffs from 10% to 25%. These tariffs could impact the solar energy projects in which our products are used, which could lead to decreased demand for our products.
On January 15, 2020, the United States and China entered into an initial trade deal that preserves the bulk of the tariffs placed in 2018 and maintains a threat of additional tariffs should China breach the terms of the deal.
In December 2021, President Biden signed the Uyghur Forced Labor Prevention Act (“UFLPA”) into law, which seeks to block the import of products made with forced labor in certain areas of China. As a result, some suppliers of solar modules have seen shipments detained by U.S. Customs and Border Patrol pursuant to the UFLPA. These detainments have not significantly impacted any of our customers’ projects to date; however, continued or future detainments could affect the industry and impact solar energy projects more broadly, which in turn could affect our business. We are monitoring developments in this area.
In addition, the United States currently imposes antidumping and countervailing duties on certain imported crystalline silicon PV cells and modules from China and Taiwan. Such antidumping and countervailing duties can change over time pursuant to annual reviews conducted by the U.S. Department of Commerce, and an increase in duty rates could have an adverse impact on our operating results. In February 2022, a petitioner requested that the U.S. Department of Commerce (“USDOC”) investigate alleged circumvention of antidumping and countervailing duties on Chinese imports by crystalline silicon PV cells and module imports assembled and completed in Cambodia, Malaysia, Thailand, and Vietnam. On March 28, 2022, the USDOC announced that it would investigate the circumvention alleged in the petition. As the timing and progress of many of our customers’ projects depend upon the supply of PV cells and modules, our operating results could be adversely impacted if the USDOC investigation is not resolved quickly and/or the USDOC makes negative circumvention determinations. More recently, on October 7, 2022, the Biden Administration adopted export controls related to technology that could harm U.S. national security. Tariffs and the possibility of additional tariffs in the future, including as a result of the petition pending with the USDOC regarding circumvention of antidumping and countervailing duties, have created uncertainty in the industry. If the price of solar systems in the United States increases, the use of solar systems could become less economically feasible and could reduce our gross margins or reduce the demand of solar systems manufactured and sold, which in turn may decrease demand for our products. Additionally, existing or future tariffs or other trade restrictions may negatively affect key customers, suppliers, and manufacturing partners. Such outcomes could adversely affect the amount or timing of our revenue, results of operations or cash flows, and continuing uncertainty could cause sales volatility, price fluctuations or supply shortages or cause our customers to advance or delay their purchase of our products. It is difficult to predict what further trade-related actions governments may take, which may include additional or increased tariffs and trade restrictions, and we may be unable to quickly and effectively react to such actions.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
42
Recent Sales of Unregistered Equity Securities
There were no unregistered sales of equity during the three months ended September 30, 2022.
During the three months ended September 30, 2022, pursuant to the terms of the Exchange Agreement entered into in connection with our IPO, certain Continuing Equity Owners exchanged 718,377 LLC Units together with an equal number of shares of Class B common stock for 718,377 newly-issued shares of Class A common stock. These shares of Class A common stock were issued in reliance on an exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
________
* Filed herewith
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, thereunto duly authorized.
