☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
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 8, 2021, the registrant had 104,179,939 shares of Class A common stock and 62,664,521 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 our actual future results may be materially different from what we expect.
Important factors that could cause actual results to differ materially from our expectations are included in Part II, Item 1A “Risk Factors.”
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.
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 related to solar fields selling to customers across the United States and internationally. Shoals Parent, through its wholly-owned subsidiaries, Shoals Intermediate Holdings LLC (“Intermediate”), Shoals Holdings LLC (“Holdings”) which owns five other subsidiaries through which it conducts substantially all operations: Shoals Technologies, LLC, Shoals Technologies Group, LLC, Solon, LLC, Shoals Structures, LLC and Shoals Connect LLC (collectively “Shoals”). 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 the issuance of 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.
Initial Public Offering
On January 29, 2021, the Company closed 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 (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
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 of Shoals Parent was amended and restated to, among other things, (i) provide for a new single class of common membership interests or the 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;
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").
Immediately following the completion of the IPO and Organizational Transactions, the Company owned 56.14% of Shoals Parent. The Continuing Equity Owners owned the remaining 43.86% of Shoals Parent.
Follow On Offering / Tax Receivable Agreement
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 this offering, Oaktree Power Opportunities Fund IV (Delaware) Holdings, L.P. no longer beneficially owns 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. The Company obtained an increase in its share of the tax basis of the assets of Shoals Parent when LLC Interests and Class B common stock were redeemed or exchanged. This increase in tax basis may have the effect of reducing the amounts that the Company would otherwise pay in the future to various tax authorities. The increase in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. The exchange of 10,402,086 LLC Interests and shares of Class B common stock triggered a tax basis increase subject to the provisions of the Tax Receivable Agreement. In the third quarter of fiscal year 2021, the Company recognized a deferred tax asset in the amount of $73.5 million, a corresponding increase in the tax receivable agreement liability of $62.5 million, representing 85% of the tax benefits and $11.0 million of additional-paid-in capital.
2. Summary of 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.
Non-controlling Interest
The non-controlling interest on the condensed 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, 2021, the non-controlling interest was 37.56%.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company accounts for its business acquisitions under the acquisition method of accounting in ASC 805. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives, and market multiples amongst other items.
Unaudited Interim Financial Information
The accompanying condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020, the statements of operations, changes in stockholders’ deficit / members’ deficit and cash flows for the periods ended September 30, 2021 and 2020 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, 2021 and the results of its operations and its cash flows for the periods ended September 30, 2021 and 2020. The financial data and other information disclosed in these notes related to the periods ended September 30, 2021 and 2020 are also unaudited. The results for the three and nine months ended September 30, 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2021, any other interim periods, or any future year or period. The balance sheet as of December 31, 2020 included herein was derived from the audited financial statements as of that date. Certain disclosures have been condensed or omitted from the interim financial 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 Annual Report on Form 10-K for the year ended December 31, 2020.
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, other intangible assets, impairment of long-lived assets, reserve for excess and obsolete inventory, the tax receivable agreement and valuation allowance on deferred tax assets.
Impact of COVID-19 Pandemic
The global health crisis caused by the novel coronavirus COVID-19 pandemic and its resurgences has and may continue to negatively impact global economic activity, which, despite progress in vaccination efforts, remains uncertain and cannot be predicted with confidence. In addition, the Delta variant of COVID-19, which appears to be the most transmissible variant to date, has begun to spread globally and other variants of COVID-19 continue to emerge.
To date, while the Company has maintained uninterrupted business operations with normal turnaround times for its delivery of solar EBOS solutions and components, the impact of delays for other parts of customer systems has pushed some projects to future quarters. The Company has implemented adjustments to its operations designed to keep employees safe and comply with federal, state and local guidelines, including those regarding social distancing. For the three and nine months ended September 30, 2021, the Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
incurred $0.1 million and $0.3 million, respectively, in COVID-19 related costs (disinfecting and reconfiguration of facilities, medical professionals to conduct daily screening of employees and direct legal costs associated with the pandemic) which is included in general and administrative expenses in the accompanying condensed consolidated financial statements. For the three and nine months ended September 30, 2020, the Company incurred $1.2 million and $2.0 million, respectively, in COVID-19 related costs (disinfecting and reconfiguration of facilities, medical professionals to conduct daily screening of employees, premium pay during the pandemic to hourly workers and direct legal costs associated with the pandemic), of which $1.1 million and $1.9 million, respectively, is included in cost of revenues and $0.1 million and $0.1 million, respectively, is included in general and administrative expenses in the accompanying condensed consolidated financial statements.
The impact of the Delta and other emerging variants cannot be predicted at this time, and could depend on numerous factors, including vaccination rates among the population, the effectiveness of the COVID-19 vaccines against the Delta and other emerging variants and the response by governmental bodies and regulators. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the COVID-19 pandemic on our business, including, but not limited to, component shortages, disruptions in transportation or other supply chain related constraints.
Customer Concentrations
The Company had the following revenue concentrations representing 10% or more of revenue for the nine months ended September 30, 2021 and 2020 and related accounts receivable concentrations as of September 30, 2021 and December 31, 2020:
2021
2020
Revenue %
Accounts Receivable %
Revenue %
Accounts Receivable %
Customer A
22.5
%
24.4
%
22.0
%
10.7
%
Customer B
11.8
%
3.0
%
18.2
%
16.6
%
Customer C
8.6
%
23.7
%
9.9
%
12.5
%
Recent Accounting Pronouncements
Adopted
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU No. 2019-12”), which is intended to simplify various aspects of the accounting for income taxes. ASU No. 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The Company adopted ASU No. 2019-12 as of January 1, 2021 and it did not have a material impact on its consolidated financial statements and related disclosures.
Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02 (Topic 842) “Leases” which supersedes the lease recognition requirements in ASC Topic 840, “Leases.” Under ASU No. 2016-02, lessees are required to recognize assets and liabilities on the balance sheet for most leases and provide enhanced disclosures. Leases will continue to be classified as either finance or operating. For companies that are not emerging growth companies (“EGCs”), the ASU is 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 plans to adopt
Notes to Condensed Consolidated Financial Statements (Unaudited)
the new standard using the modified retrospective method, under which the Company will apply Topic 842 to existing and new leases as of January 1, 2022, but prior periods will not be restated and will continue to be reported under Topic 840 guidance in effect during those periods. The Company anticipates that the adoption will not have a material impact on its statements of operations or its statements of cash flows but expects to recognize right-of-use assets and liabilities for lease obligations associated with its operating leases.
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 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.
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. The purchase price paid has been preliminarily allocated to record the acquired assets and assumed liabilities based upon their estimated fair value. 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 $19.1 million was recorded. The goodwill recognized was primarily attributable to 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 preliminary 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 based on a combination of market, cost and income approaches with the assistance of a third-party valuation firm (in thousands):
Notes to Condensed Consolidated Financial Statements (Unaudited)
Preliminary Purchase Price Allocation
Cash and cash equivalents
$
848
Accounts receivable
5,313
Inventory
4,641
Other current assets
1,732
Total current assets
12,534
Property, plant and equipment
438
Goodwill
19,145
Other intangible assets
1,600
Total Assets
33,717
Accounts payable
9,228
Accrued expenses
2,695
Debt
1,537
Total liabilities
13,460
Net assets acquired
$
20,257
The Company expensed acquisition-related costs of $1.7 million which are included in general and administrative expenses in the condensed consolidated statement of operations. The goodwill and acquisition costs are not deductible for tax purposes.
4. Accounts Receivable
Accounts receivable consists of the following (in thousands):
September 30, 2021
December 31, 2020
Accounts receivable
$
45,104
$
27,206
Less: allowance for doubtful accounts
(516)
(202)
Accounts receivable, net
$
44,588
$
27,004
5. Inventory
Inventory consists of the following (in thousands):
Notes to Condensed Consolidated Financial Statements (Unaudited)
6. Property, Plant and Equipment
Property, plant, and equipment, net consists of the following (in thousands):
Estimated Useful Lives (Years)
September 30, 2021
December 31, 2020
Land
N/A
$
840
$
840
Building and land improvements
5-40
6,638
5,621
Machinery and equipment
3-5
10,690
9,028
Furniture and fixtures
3-7
1,262
1,025
Vehicles
5
104
318
19,534
16,832
Less: accumulated depreciation
(5,176)
(4,069)
Property, plant and equipment, net
$
14,358
$
12,763
Depreciation expense for the three months ended September 30, 2021 and 2020 was $0.5 million and $0.4 million, respectively. During the three months ended September 30, 2021 and 2020, $0.4 million and $0.3 million, respectively, of depreciation expense was allocated to cost of revenue. During the three months ended September 30, 2021 and 2020, $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, 2021 and 2020 was $1.3 million and $1.0 million, respectively. During the nine months ended September 30, 2021 and 2020, $1.0 million and $0.8 million, respectively, of depreciation expense was allocated to cost of revenue. During the nine months ended September 30, 2021 and 2020, $0.3 million and $0.2 million, respectively, of depreciation expense was allocated to operating expenses.
7. Goodwill and Other Intangible Assets
Goodwill
Goodwill relates to the acquisition of Shoals and ConnectPV. As of September 30, 2021 and December 31, 2020, goodwill totaled $69.3 million and $50.2 million, respectively.
Other Intangible Assets
Other intangible assets consisted of the following (in thousands):
Notes to Condensed Consolidated Financial Statements (Unaudited)
Estimated Useful Lives (Years)
September 30, 2021
December 31, 2020
Amortizable:
Costs:
Customer relationships
2-13
$
53,100
$
52,600
Developed technology
13
34,600
34,600
Trade names
2-13
11,900
11,400
Backlog
1
600
—
Noncompete agreements
5
2,000
2,000
Total amortizable intangibles
102,200
100,600
Accumulated amortization:
Customer relationships
17,555
14,499
Developed technology
11,533
9,537
Trade names
3,821
3,142
Backlog
50
—
Noncompete agreements
1,733
1,434
Total accumulated amortization
34,692
28,612
Total amortizable intangibles, net
$
67,508
$
71,988
Amortization expense related to intangible assets amounted to $2.1 million and $2.0 million for the three months ended September 30, 2021 and 2020 and $6.1 million and $6.0 million for the nine months ended September 30, 2021 and 2020, respectively.
8. Long-Term Debt
Long-term debt consists of the following (in thousands):
September 30, 2021
December 31, 2020
Term Loan Facility
$
197,750
$
350,000
Revolving Credit Facility
60,140
20,000
Senior Debt—term loan
—
—
Less: deferred financing costs
(5,614)
(11,168)
Total debt, net of deferred financing costs
252,276
358,832
Less: current portion
(2,000)
(3,500)
Long-term debt, net current portion
$
250,276
$
355,332
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”). The proceeds of the Term Loan Facility and a $10.0 million draw under the Delayed Draw Term Loan Facility were used to (i) make
Notes to Condensed Consolidated Financial Statements (Unaudited)
certain distributions from Shoals Holdings to Shoals Intermediate Holdings and from there to certain of the Company’s direct or indirect equity holders, (ii) pay transaction expenses, (iii) repay and terminate all outstanding commitments under the prior senior debt and (iv) finance working capital and general corporate purposes.
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.
In August 2021, Holdings entered into an amendment to the Senior Secured Credit Agreement to permit the temporary joinder of a parent co-borrower in order to facilitate the acquisition of Connect PV.
As of September 30, 2021, interest rates on the Term Loan Facility and the Revolving Credit Facility were 4.25% and 3.75%, respectively and the Company had $39.9 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, 2021, the Company was in compliance with all the required covenants.
Senior Debt Agreement
Intermediate and subsidiaries were party to a credit agreement (the “Senior Debt Agreement” and obligations thereunder, the “Senior Debt”) under which Holdings and its subsidiaries were borrowers and Intermediate was a guarantor. The Senior Debt was collateralized by all of the assets of the guarantor and borrowers. The amended agreement provided a term loan of $35 million and a revolving line of credit of $25 million.
On October 8, 2020, the Company paid the outstanding amount due on the Senior Debt and settled all obligations with respect to the Senior Debt Agreement.
The Senior Debt provided for an interest rate to equal the base rate plus margin. The base rate charged was the highest rate of three defined methods as follows: 1) Federal Funds Rate plus 0.5%, 2) Fifth Third Bank N.A. Rate or 3) LIBOR Rate plus 1%. The base rate ranged from 1% to 2.5% depending on the EBITDA Rate calculation as defined in the Senior Debt Agreement (the “EBITDA Rate Calculation”) for the Federal Funds Rate. The base rate for the LIBOR Rate ranged from 2% to 3.5% depending on the EBITDA Rate Calculation.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Basic earnings per share of Class A Common Stock is computed by dividing net income attributable to the Company by the weighted average number of shares of Class A Common Stock outstanding during the period. Diluted earnings per share of Class A Common Stock is computed similarly to basic earnings per share except the weighted average shares outstanding are increased to include additional shares from the redemption 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, earnings per share 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 income attributable to the stockholders of Class A Common Stock for the periods ended September 30, 2021. Basic and diluted earnings per share of Class A Common Stock from January 27, 2021 to September 30, 2021 have been computed as follows (in thousands, except per share amounts):
Three Months Ended September 30, 2021
Period from January 27, 2021 to September 30, 2021
Numerator:
Net income attributable to Shoals Technologies Group, Inc. - basic
$
2,486
$
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
$
2,486
$
1,510
Denominator:
Weighted average shares of Class A common stock outstanding - basic
101,890
96,354
Effect of dilutive securities:
Restricted Stock Units
361
173
Class B Common Stock
—
—
Weighted average shares of Class A common stock outstanding - diluted
102,251
96,527
Earnings per share of Class A common stock - basic
$
0.02
$
0.02
Earnings per share of Class A common stock - diluted
$
0.02
$
0.02
For the three and nine months ended 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 the Class B common stock to the weighted average shares of Class A common stock outstanding – dilutive as it was antidilutive.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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.
Since January 26, 2021, the Company has granted 1,367,058 restricted stock units (“RSUs") to certain employees, officers and directors of the Company. The RSUs have grant date fair values ranging from $21.50 to $34.60 per unit and generally vest ratably over either 4 years or 3 years, except for some of the director grants which immediately vested or vest over 1 year. There were a limited number of awards with immediate vesting.
The following table summarizes the RSUs activity for the nine months ended September 30, 2021:
RSUs
Weighted Average Price
Outstanding at beginning of period
—
$
—
Granted
1,367,058
$
26.57
Forfeited
(5,621)
$
29.37
Vested
(44,724)
$
28.58
Outstanding at end of period
1,316,713
$
26.49
For the three and nine months ended September 30, 2021, the Company recognized $2.7 million and $6.9 million, respectively, in equity-based compensation. As of September 30, 2021, the Company had $29.9 million of unrecognized compensation costs which is expected to be recognized over a period of 3.3 years.
11. Stockholders' 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.
12. Non-Controlling Interests
On January 26, 2021, the Company used net proceeds from the IPO 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. In addition, the Company issued 81,977,751 Class A common stock for the same number of LLC Interests as Merger consideration. As of September 30, 2021, the Company owned 62.44% 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)
Three Months Ended September 30, 2021
Period from January 27, 2021 to September 30, 2021
Net income attributable to non-controlling interest
$
2,790
$
1,911
Transfers to non-controlling interests
Increase in accumulated deficit as a result of the Organizational Transactions
—
(88,644)
Decrease in accumulated deficit as a result of newly issued LLC Interests in IPO
—
70,976
Decrease in accumulated deficit as a result of activity under stock compensation plan
1,200
2,607
Distributions to non-controlling interest
(1,864)
(4,837)
Reallocation of non-controlling interest
5,717
6,005
Change from net income attributable to non-controlling interest and transfers to non-controlling interest
$
7,843
$
(11,982)
Issuance of Additional LLC Interests
Under the first amended and restated limited liability company agreement of Shoals Parent, as amended (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, 2021, the Company caused Shoals Parent to issue to the Company a total of 6,315,790 LLC Interests in connection with the issuance of Class A common stock in the IPO, 10,402,086 LLC Interests in connection with the issuance of Class A common stock in the follow-on offering, 209,437 LLC Interests in connection with the acquisition of ConnectPV and 40,665 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 rateapplicable 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, 2021, tax distributions to non-controlling LLC Interests holders was $4.8 million.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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, 2021, the maximum potential payment obligation with regard to surety bonds was $12.6 million.
14. Income Taxes
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 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 Tennessee and Texas. 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. The Company’s income tax provision was a benefit of $1.3 million and $3.1 million for the three and nine months ended September 30, 2021, respectively, and the effective tax rate is primarily impacted by the allocation of income taxes to the noncontrolling interest, benefit of the foreign derived intangible income and changes in our valuation allowance. The tax benefit for the three and nine months ended September 30, 2021 includes $2.0 million and $3.7 million, respectively, of deferred income tax benefit resulting from an increase in the blended state income tax rate.
As of September 30, 2021, the Company had recorded a deferred tax asset related to the partnership basis differences in Shoals Parent of $121.5 million. The Company also recorded an income tax receivable of $8.6 million of which the Company estimates $3.8 million is owed to the prior owner related to taxes paid prior to the IPO transaction.
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
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 the 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, 2021, no uncertain tax positions have been recorded. The Company will continue to monitor this position each interim period.
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.
15. Tax Receivable Agreement
In connection with the Organization Transactions and the IPO, the Company entered into a tax receivable agreement (the “TRA”) with the founder and former equity owners of Shoals Investment CTB (the “TRA Owners”). The TRA provides for the payment from time to time by the Company to the TRA Owners of 85% of the amount of the benefits, if any, that the Company has deemed to realize as a result of (i) increases in tax basis resulting from the purchase or exchange of LLC Interests and other qualifying transactions. These payment obligations are obligations of the Company and not of Shoals Parent. For purposes of the TRA, the benefit deemed realized by the Company will generally be 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 TRA further provides that, upon certain mergers, asset sales or other forms of business combinations or other changes of control, 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 Shoals Parent 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.
On January 26, 2021, the Company acquired 5,234,210 LLC Interests from the founder. This acquisition triggered a tax basis increase subject to the provisions of the TRA. The Company recognized (i) a deferred tax asset in the amount of $32.1 million, (ii) a corresponding liability of $27.2 million, representing 85% of the tax benefits to the TRA Owners and (iii) $4.9 million of additional paid-in capital.
Notes to Condensed Consolidated Financial Statements (Unaudited)
On January 26, 2021, in connection with the merger with Shoals Investment CTB, the Company distributed 85% of the value in the tax basis from the original acquisition of Shoals Parent by Shoals investment CTB in 2017 to the holders of the TRA. In the first quarter of fiscal year 2021, the Company recognized (i) a deferred tax asset of $16.9 million, (ii) a corresponding liability of $14.4 million representing 85% of the tax benefits to the TRA Owners and (iii) $2.5 million of additional paid-in capital.
During 2021, the TRA liability was increased by $3.7 million resulting from an estimated increase in the Company’s blended state income tax rate. As a result of the adjustment to the Tax Receivable Agreement liability, the Company recorded approximately $2.0 million and $3.7 million of other expense in the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2021, respectively.
On July 16, 2021, the Company acquired 10,402,086 LLC Interests from the founder and selling shareholders. This acquisition triggered a tax basis increase subject to the provisions of the TRA. The Company recognized (i) a deferred tax asset in the amount of $73.5 million, (ii) a corresponding liability of $62.5 million, representing 85% of the tax benefits to the TRA Owners and (iii) $11.0 million of additional paid-in capital.
As of September 30, 2021, the amount of Tax Receivable Agreement payments due under the Tax Receivable Agreement was $107.9 million.
16. 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 solar components.
The following table presents the Company’s revenue disaggregated by system solutions and solar components which are recorded over time as follows (in thousands):
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 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, 2020 (“2020 Form 10-K”) and this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion and analysis contain 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 10-K and this Form 10-Q captioned “Special Note Regarding Forward-Looking Statements” and “Risk Factors”.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contain the presentation of Adjusted EBITDA and Adjusted Net Income, which are not presented in accordance with GAAP. Adjusted EBITDA and Adjusted Net Income are being presented because they provide the Company 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 and Adjusted Net Income to be substitutes for any GAAP financial information. Readers of this Form 10-Q should use Adjusted EBITDA and Adjusted Net Income only in conjunction with Net Income, the most comparable GAAP financial measure. Reconciliations of Adjusted EBITDA and Adjusted Net Income to Net Income, 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 or “EBOS” solutions for solar energy projects in the United States. 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 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 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 derived approximately 75% of our revenue from the sale of system solutions for the nine months ended September 30, 2021. For the same period, we derived substantially all of our revenue from customers in the U.S. We had $270.7 million of backlog and awarded orders, backlog of $112.6 million represents signed purchase orders or contractual minimum purchase commitments with take-or-pay provisions and awarded orders of $158.1 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, 2021, representing a 101% and 35% increase relative to the same date last year and June 30, 2021, respectively.
We have maintained focus on our growth strategy throughout the 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 eight of the top 10 solar EPCs as reported by Solar Power World Magazine use our combine-as-you-go system on a majority of their projects and we are currently in the process of transitioning an additional 11 EPCs and developers to our system. Additionally, we are currently developing four new product families for the EV charging market: skid solutions that package the key components required for an EV charging station in the factory with the objective of reducing the amount of labor required in the field; raceways that allow wire to be run above ground rather than in underground conduit; EV-Big Lead Assembly (“BLA”) that eliminates homeruns from each dispenser and offers benefits similar to our solar BLA, including a 75% reduction in wire runs; and quad chargers that are prefabricated dispensers with four charge points. We expect to introduce our first offerings for this rapidly growing market in the fourth quarter of 2021.
Initial Public Offering
On January 29, 2021, the Company closed 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, 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 $25.00 per share.
Organizational Transactions
See Note 1 to the condensed consolidated financial statements of Shoals, 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.
Following the completion of the Organizational Transactions, the Company owned 56.14% of Shoals Parent. The Continuing Equity Owners owned the remaining 43.86% of Shoals Parent.
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 / Tax Receivable Agreement
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 this 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. The Company obtained an increase in its share of the tax basis of the
assets of Shoals Parent when LLC Interests and Class B common stock were redeemed or exchanged. This increase in tax basis may have the effect of reducing the amounts that we would otherwise pay in the future to various tax authorities. The increase in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. The exchange of 10,402,086 LLC Interests and shares of Class B common stock triggered a tax basis increase subject to the provisions of the Tax Receivable Agreement. In the third quarter of fiscal year 2021, we recognized a deferred tax asset in the amount of $73.5 million, a corresponding increase in the tax receivable agreement liability of $62.5 million, representing 85% of the tax benefits and $11.0 million of additional-paid-in capital.
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 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, 2021, the Company owned 62.44% of Shoals Parent
Impact of COVID-19
The global health crisis caused by the novel coronavirus COVID-19 pandemic and its resurgences has and may continue to negatively impact global economic activity, which, despite progress in vaccination efforts, remains uncertain and cannot be predicted with confidence. In addition, the Delta variant of COVID-19, which appears to be the most transmissible variant to date, has begun to spread globally and other variants of COVID-19 continue to emerge. The impact of the Delta variant cannot be predicted at this time, and could depend on numerous factors, including vaccination rates among the population, the effectiveness of the COVID-19 vaccines against the Delta variant and other variants along with the response by governmental bodies and regulators. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the COVID-19 pandemic on our business.
Many countries around the world have continued to impose quarantines and restrictions on travel and mass gatherings to slow the spread of the virus. Accordingly, our ability to continue to operate our business may also be limited. Such events may result in a period of business, supply and manufacturing disruptions, and in reduced operations, any of which could materially affect our business, financial condition and results of operations.
A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock.
We continue to monitor the impacts of COVID-19 on the global economy and on our business operations. Although we expect the vaccinations for COVID-19 will continue to improve conditions, the ultimate impact from COVID-19 on our business operations and financial results during 2021 and beyond will depend on, among other things, the ultimate severity and scope of the pandemic, including the new variants of the virus, the pace at which governmental and private travel restrictions and public concerns about public gatherings will ease, the rate at which historically large increases in unemployment rates will decrease, if at all, and whether, and the speed with which, the economy recovers. We are not able to fully quantify the impact that
these factors will have on our financial results during 2021 and beyond, but developments related to COVID-19 may materially affect us in 2021 and beyond.
Key Components of Our Results of Operations
The following discussion describes certain line items in our condensed consolidated statements of operations.
Revenue
We generate revenue from the sale of EBOS systems and components for homerun and combine-as-you-go architectures. Our customers include EPCs, utilities, solar developers, independent power producers and solar module manufacturers. 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 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, warranty costs and seasonality.
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 42 to 68 from September 30, 2020 to September 30, 2021, 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
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, bad debt expense and fees for professional services. Professional services consist of audit, legal, tax, insurance, information technology and other costs. We expect to increase our sales and marketing personnel as we expand into new geographic markets. Substantially all of our sales in 2020 were in the U.S. We currently have a sales presence in the U.S., Australia and Spain. We intend to expand our sales presence and marketing efforts to additional countries in the future. We also expect that as a result of our recent IPO, we will incur additional audit, tax, accounting, legal and other costs related to compliance with applicable securities and other regulations, as well as additional insurance, investor relations and 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 current Senior Secured Credit Agreement (as defined below) and our former Senior Debt which included a revolving line of credit and term loan, which was fully repaid on October 8, 2020.
Tax Receivable Agreement Liability Adjustment
Tax receivable agreement liability adjustment consists of changes to our effective interest rate since the initial recording of the liability related to our tax receivable agreement with our founder and former Class A Shoals Equity Owners of Shoals Parent.
Loss on Debt Repayment
Loss on debt repayment consists of prepayment premiums and the write-off off 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.
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)
2021
2020
2021
2020
Revenue
$
59,840
$
52,598
$
7,242
14
%
$
165,166
$
136,765
$
28,401
21
%
Cost of revenue
38,071
31,909
6,162
19
%
98,444
85,061
13,383
16
%
Gross profit
21,769
20,689
1,080
5
%
66,722
51,704
15,018
29
%
Operating Expenses
General and administrative expenses
10,031
3,515
6,516
185
%
26,865
15,390
11,475
75
%
Depreciation and amortization
2,175
2,069
106
5
%
6,305
6,194
111
2
%
Total Operating Expenses
12,206
5,584
6,622
119
%
33,170
21,584
11,586
54
%
Income from Operations
9,563
15,105
(5,542)
(37)
%
33,552
30,120
3,432
11
%
Interest expense, net
(3,582)
(104)
(3,478)
3344
%
(10,911)
(601)
(10,310)
1715
%
Tax receivable agreement liability adjustment
(2,014)
—
(2,014)
100
%
(3,678)
—
(3,678)
100
%
Loss on debt repayment
—
—
—
—
%
(15,990)
—
(15,990)
100
%
Income before income taxes
3,967
15,001
(11,034)
(74)
%
2,973
29,519
(26,546)
(90)
%
Income tax benefit
1,309
—
1,309
100
%
3,123
—
3,123
100
%
Net income
5,276
15,001
(9,725)
(65)
%
6,096
29,519
(23,423)
(79)
%
Less: net income attributable to non-controlling interests
2,790
—
2,790
100
%
1,911
—
1,911
100
%
Net income attributable to Shoals Technologies Group, Inc.
$
2,486
$
15,001
$
(12,515)
(83)
%
$
4,185
$
29,519
$
(25,334)
(86)
%
Comparison of the Three Months Ended September 30, 2021 and 2020
Revenue
Revenue increased by $7.2 million, or 14%, for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, driven by an increase in solar component revenue of $5.6 million.Revenue from our system solution increased $1.7 million driven by an increase in demand for our solar EBOS generally and our combine-as-you-go system solutions specifically. We believe customer recognition of the benefits of our combine-as-you-go system is resulting in increased demand for our products.Our total number of customers increased in 2021 as compared to 2020.
Cost of Revenue and Gross Profit
Cost of revenue increased by $6.2 million, or 19%, for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily driven by an increase in production volumes. Gross profit as a percentage of revenue decreased from 39.3% in 2020 to 36.4% in 2021 in part due
to changes in product mix which contributed to the decrease in margin as sales of solar components have lower margin than our system solutions.
Operating Expenses
General and Administrative
General and administrative expenses increased $6.5 million, or 185%, for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. The increase in general and administrative expenses was primarily the result of an increase in professional fees of $0.6 million related to preparation for our public offerings, wages and related taxes of $1.3 million related to increased head count, insurance expense of $0.8 million primarily related to increased costs for our directors and officers policy, equity-based compensation of $1.9 million and acquisition-related expenses of $1.7 million for the acquisition of ConnectPV.
Depreciation and Amortization
There was no significant change in depreciation and amortization expense during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.
Interest Expense
Interest expense, net increased by $3.5 million or 3344%, for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, due to increased borrowings and related deferred financing costs under our Senior Secured Credit Facility entered into on November 25, 2020. We expect interest expense to increase in 2021 as a result of our higher average borrowings under the Senior Secured Credit Facility (see description under “Debt Obligations”).
Tax Receivable Agreement Liability Adjustment
Tax receivable agreement liability adjustment totaled $2.0 million for the three months ended September 30, 2021. The adjustment resulted from an estimated increase in the Company’s blended state income tax rate.
Income Tax Benefit
Income tax benefit totaled $1.3 million for the three months ended September 30, 2021. The Company did not incur income tax expense prior to the Organizational Transactions, or during the three months ended September 30, 2020. We believe our estimated effective income tax rate to be approximately 15% of net income attributable to Shoals Technologies Group, Inc. for the remainder of 2021 and 2022.
Comparison of the Nine Months Ended September 30, 2021 and 2020
Revenue
Revenue increased by $28.4 million, or 21%, for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, driven by an increase in system solutions revenue of $31.9 million as demand for solar EBOS generally and our combine-as-you-go system solutions specifically. The increased revenue for our system solutions was offset by a decrease in revenue of our solar components of $3.5 million. We believe customer recognition of the benefits of our combine-as-you-go system is resulting in increased demand for our products. Our total number of customers increased in 2021 as compared to 2020.
Cost of revenue increased by $13.4 million, or 16%, for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily driven by an increase in production volumes. Gross profit as a percentage of revenue increased from 37.8% for the nine months ended September 30, 2020 to 40.4% for the nine months ended September 30, 2021 in part due to purchasing efficiencies from increased volumes, improved material planning which reduced logistics costs, enhancements to product design that lowered manufacturing costs and other manufacturing efficiencies resulting from higher production volumes. Changes in product mix also contributed to the increase in margin as sales of system solutions for combine-as-you-go EBOS, which have higher margin than our solar components, increased as a percentage of our total revenue.
Operating Expenses
General and Administrative
General and administrative expenses increased by $11.5 million, or 75%, for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. The increase in general and administrative expenses was primarily the result of an increase in professional fees of $3.1 million related to preparation for our public offerings, wages and related taxes of $4.4 million related to increased head count, insurance expense of $2.3 million primarily related to increased costs for our directors and officers policy and acquisition-related expenses of $1.7 million for the acquisition of ConnectPV, offset by a decrease in equity-based compensation of $0.8 million.
Depreciation and Amortization
There was no significant change in depreciation and amortization expense during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.
Interest Expense
Interest expense, net increased by $10.3 million or 1715%, for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, due to increased borrowings and related deferred financing costs under our Senior Secured Credit Facility entered into on November 25, 2020. We expect interest expense to increase in 2021 as a result of our higher average borrowings under the Senior Secured Credit Facility (see description under “Debt Obligations”).
Tax Receivable Agreement Liability Adjustment
Tax receivable agreement liability adjustment totaled $3.7 million for the nine months ended September 30, 2021. The adjustment resulted from an estimated increase in the Company’s blended state income tax rate.
Loss on Debt Repayment
Loss on debt repayment for the nine months ended September 30, 2021 consists 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.
Income Tax Benefit
Income tax benefit totaled $3.1 million for the nine months ended September 30, 2021. The Company did not incur income tax expense prior to the Organizational Transactions, or during the nine months ended
September 30, 2020. We believe our estimated effective income tax rate to be approximately 15% of net income attributable to Shoals Technologies Group, Inc. for the remainder of 2021 and 2022.
Non-GAAP Financial Measures
Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS
We define Adjusted EBITDA as net income (loss) plus (i) interest expense, (ii) income taxes, (iii) depreciation expense, (iv) amortization of intangibles, (v) tax receivable agreement liability adjustment, (vi) loss on debt repayment, (vii) equity-based compensation, (viii) COVID-19 expenses and (ix) non-recurring and other expenses. We define Adjusted Net Income as net income (loss) plus (i) amortization of intangibles, (ii) tax receivable agreement liability adjustment, (iii) loss on debt repayment, (iv) amortization of deferred financing costs, (v) equity-based compensation, (vi) COVID-19 expenses and (vii) 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):
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Net income
$
5,276
$
15,001
$
6,096
$
29,519
Interest expense
3,582
104
10,911
601
Income tax benefit
(1,309)
—
(3,123)
—
Depreciation expense
449
391
1,265
1,029
Amortization of intangibles
2,088
1,996
6,080
5,988
Tax receivable agreement liability adjustment(a)
2,014
—
3,678
—
Loss on debt repayment
—
—
15,990
—
Equity-based compensation
2,732
1,032
6,904
7,219
Acquisition-related expenses
1,697
—
1,697
—
COVID-19 expenses(b)
108
1,200
269
2,006
Non-recurring and other expenses(c)
243
150
1,821
444
Adjusted EBITDA
$
16,880
$
19,874
$
51,588
$
46,806
(a) Represents an adjustment to eliminate the remeasurement of the Tax Receivable Agreement.
(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, premium pay during the pandemic to hourly workers in 2020 and direct legal costs associated with the pandemic.
(c) Represents certain costs associated with non-recurring professional services, Oaktree’s expenses and other costs.
Reconciliation of Net Income Attributable to Shoals Technologies Group, Inc. to Adjusted Net Income (in thousands):
Net income attributable to Shoals Technologies Group, Inc.
$
2,486
$
15,001
$
4,185
$
29,519
Net income impact from pro forma conversion of Class B common stock to Class A common stock (a)
2,790
—
1,911
—
Adjustment to the provision for income tax (b)
(668)
(3,255)
(476)
(6,406)
Tax effected net income
4,608
11,746
5,620
23,113
Amortization of intangibles
2,088
1,996
6,080
5,988
Amortization of deferred financing costs
278
10
953
31
Tax receivable agreement liability adjustment(c)
2,014
—
3,678
—
Loss on debt repayment
—
—
15,990
—
Equity-based compensation
2,732
1,032
6,904
7,219
Acquisition-related expenses
1,697
—
1,697
—
COVID-19 expenses (d)
108
1,200
269
2,006
Non-recurring and other expenses (e)
243
150
1,821
444
Tax impact of adjustments (f)
(2,166)
(728)
(7,972)
(1,838)
Adjusted Net Income
$
11,602
$
15,406
$
35,040
$
36,963
(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,
2021
2020
2021
2020
Statutory U.S. Federal income tax rate
21.0
%
21.0
%
21.0
%
21.0
%
State and local taxes (net of federal benefit)
2.9
%
0.7
%
2.9
%
0.7
%
Permanent items, including valuation adjustment
0.1
%
—
%
1.0
%
—
%
Effective income tax rate for Adjusted Net Income
24.0
%
21.7
%
24.9
%
21.7
%
(c) Represents an adjustment to eliminate the remeasurement of the Tax Receivable Agreement.
(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, premium pay during the pandemic to hourly workers in 2020 and direct legal costs associated with the pandemic.
(e) Represents certain costs associated with non-recurring professional services, Oaktree’s 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):
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Diluted weighted average shares of Class A common shares outstanding, excluding Class B common shares
102,251
N/A (b)
96,527
N/A (b)
Assumed pro forma conversion of Class B common shares to Class A common shares
64,813
N/A (b)
70,285
N/A (b)
Adjusted diluted weighted average shares outstanding
167,064
N/A (b)
166,812
N/A (b)
Adjusted Net Income (a)
$
11,602
N/A (b)
$
35,040
N/A (b)
Adjusted Diluted EPS
$
0.07
N/A (b)
$
0.21
N/A (b)
(a) Represents Adjusted Net Income for the full period presented.
(b) This Non-GAAP measure is not applicable for this period, as the reorganization transactions had not yet occurred.
Liquidity and Capital Resources
Nine Months Ended September 30,
2021
2020
Net cash provided by (used in) operating activities
$
(6,679)
$
38,115
Net cash used in investing activities
(15,392)
(2,786)
Net cash provided by (used in) financing activities
26,187
(33,166)
Net increase in cash and cash equivalents
$
4,116
$
2,163
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 term future cash needs.
We used cash from operating activities of $6.7 million in the nine months ended September 30, 2021 as compared to cash generated from operating activities of $38.1 million for the nine months ended September 30, 2020. As of September 30, 2021, our cash and cash equivalents were $14.2 million and we had outstanding borrowings of $257.9 million. We also had $39.9 million available for additional borrowings under our $100.0 million Revolving Credit Facility.
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, a decrease in accounts payable and accrued expenses of $2.6 million offset with operating results that included $6.1 million of net income which was reduced by $24.2 million, net of non-cash expenses.
For the nine months ended September 30, 2020, cash provided by operating activities was $38.1 million, primarily due to operating results that included $29.5 million of net income which was reduced by $14.8 million, net of non-cash expenses, an increase of $7.2 million in receivables, an increase of $3.0 million in inventory and an increase of $3.3 million in accounts payable and accrued expenses.
Investing Activities
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.
For the nine months ended September 30, 2020, net cash used in investing activities was $2.8 million, attributable to the purchase of property and equipment.
Financing Activities
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.
For the nine months ended September 30, 2020, net cash used in financing activities was $33.2 million. We made $21.8 million in payments on our Senior Debt and distributions of $11.4 million.
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
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”). The proceeds of the Term Loan Facility and a $10.0 million draw under the Delayed Draw Term Loan Facility were used to (i) make certain distributions from Shoals Holdings to Shoals Intermediate Holdings and from there to certain of our direct or indirect equity holders, (ii) pay transaction expenses, (iii) repay and terminate all outstanding commitments under the senior debt and (iv) finance working capital and general corporate purposes. An additional $10.0 million draw under the Delayed Draw Term Loan Facility funded on December 14, 2020.
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 we repaid and terminated all outstanding commitments under the Delayed Draw Term Loan Facility.
In August 2021, Holdings entered into an amendment to the Senior Secured Credit Agreement to permit the temporary joinder of a parent co-borrower in order to facilitate the acquisition of Connect PV.
As of September 30, 2021, interest rates on the Term Loan Facility and the Revolving Credit Facility were 4.25% and 3.75%, respectively and we had $39.9 million of availability under the Revolving Credit Facility.
The Senior Secured Credit Agreement contains affirmative and negative covenants, including covenants that restrict our 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, 2021, we were in compliance with all the required covenants.
Senior Debt Agreement
Intermediate and subsidiaries were party to the Senior Debt Agreement under which Holdings and its subsidiaries were borrowers and Intermediate was a guarantor. The Senior Debt was collateralized by all of the assets of the guarantor and borrowers. The amended agreement provided a term loan of $35 million and a revolving line of credit of $25 million.
On October 8, 2020, we paid the outstanding amount due on the Senior Debt and settled all obligations with respect to the Senior Debt Agreement.
The Senior Debt provided for an interest rate to equal the base rate plus margin. The base rate charged was the highest rate of three defined methods as follows: 1) Federal Funds Rate plus 0.5%, 2) Fifth Third Bank N.A. Rate or 3) LIBOR Rate plus 1%. The base rate ranged from 1% to 2.5% depending on the EBITDA Rate calculation as defined in the Senior Debt (the “EBITDA Rate Calculation”) for the Federal Funds Rate. The base rate for the LIBOR Rate ranged from 2% to 3.5% depending on the EBITDA Rate Calculation.
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, 2021, the maximum potential payment obligation with regard to surety bonds was $12.6 million.
Critical Accounting Policies and Significant Management Estimates
As of September 30, 2021, there were no significant changes in the application of our critical accounting policies or estimation procedures from those presented in our Annual Report on Form 10-K for the year ended December 31, 2020, except as discussed below.
Income Taxes
We record valuation allowances against our deferred tax assets when it is more likely than not that all or a portion of a deferred tax asset will not be realized. In making such determination, we consider all available evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and results of operations. We routinely evaluate the realizability of our deferred tax assets by assessing the likelihood that our deferred tax assets will be recovered based on all available positive and
negative evidence. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including revenue growth and operating margins, among others. As of September 30, 2021, we had $121.2 million of deferred tax assets, net of valuation allowances. We expect to realize future tax benefits related to the utilization of these assets. If we determine in the future that we will not be able to fully utilize all or part of these deferred tax assets, we would record a valuation allowance through earnings in the period the determination was made, which would have an adverse effect on our results of operations and earnings in future periods.
Liabilities Under Tax Receivable Agreement
As described in Note 15 to the condensed consolidated financial statements, we are a party to the TRA under which we are contractually committed to pay the TRA Owners 85% of the amount of the benefits, if any, that we are deemed to realize, as a result of certain transactions. Amounts payable under the TRA are contingent upon, among other things, (i) generation of future taxable income over the term of the TRA and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the TRA to utilize the tax benefits, then we generally would not be required to make the related TRA payments. Therefore, we will only recognize a liability for TRA payments if we determine it is probable that we will generate sufficient future taxable income over the term of the TRA to utilize the related tax benefits. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including revenue growth, and operating margins, among others. As of September 30, 2021, we recognized $107.9 million of liabilities relating to our obligations under the TRA, after concluding that it was probable that we would have sufficient future taxable income to utilize the related tax benefits. There were no transactions subject to the TRA for which we did not recognize the related liability, as we concluded that we would have sufficient future taxable income to utilize all of the related tax benefits generated by all transactions that occurred in connection with the IPO. If we determine in the future that we will not be able to fully utilize all or part of the related tax benefits, we would de-recognize the portion of the liability related the benefits not expected to be utilized.
Additionally, we estimate the amount of TRA payments expected to be paid within the next 12 months and classify this amount as current on our condensed consolidated balance sheets. This determination is based on our estimate of taxable income for the next fiscal year. To the extent our estimate differs from actual results, we may be required to reclassify portions of our liabilities under the TRA between current and non-current.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes with respect to our market risk disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
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, 2021 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 Annual Report on Form 10-K for the year ended December 31, 2020.
ConnectPV Acquisition Risks
Acquisitions, joint ventures and/or investments, including our most recently announced acquisition of ConnectPV, and the failure to integrate acquired businesses, could disrupt our business and/or dilute or adversely affect the price of our common stock.
Our success will depend, in part, on our ability to expand our product offerings and grow our business in response to changing technologies, customer demands and competitive pressures. In some circumstances, we may pursue growth through the acquisition of complementary businesses, solutions or technologies or through joint ventures or investments rather than through internal development. The identification of suitable acquisition or joint venture candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete identified acquisitions or joint ventures.
For example, on August 26, 2021, we acquired 100% of the stock of ConnectPV, with cash and the issuance of Class A common stock (the “Acquisition”). We completed the acquisition with the belief that the Acquisition will result in certain benefits, including certain operational synergies related to the Company’s EBOS solutions and components business and cost efficiencies, and drive product innovations synergies. Achieving these anticipated benefits will depend on successfully combining our and ConnectPV LLC’s businesses together. It is not certain that ConnectPV LLC’s business can be successfully integrated with our business in a timely manner or at all, or that any of the anticipated benefits will be realized for a variety of reasons, including, but not limited to: our inability to integrate or benefit from ConnectPV LLC’s acquired technologies or services in a profitable manner; diversion of capital and other resources, including management’s attention; unanticipated costs or liabilities related to the Acquisition; failure to leverage the
increased scale of the combined businesses quickly and effectively; the potential impact of the Acquisition on our relationships with employees, vendors, suppliers and customers; the impairment of relationships with, or the loss of, ConnectPV LLC’s employees, vendors, suppliers or customers; adverse changes in general economic conditions in regions in which we operate; potential litigation associated with the Acquisition; difficulties in the assimilation of employees and culture; difficulties in managing the expanded operations of a larger and more complex company; and challenges in attracting and retaining key personnel. Many of these factors will be outside of our control and any one of them could result in increased costs, decrease in expected revenues and diversion of management’s time and attention, which could materially impact the combined company. In addition, even if the operations of the businesses are integrated successfully, the full benefits of the Acquisition may not be realized within the anticipated time frame or at all. All of these factors could decrease or delay the expected accretive effect of the Acquisition and negatively impact the combined company.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Equity Securities
(a) Unregistered Sales of Equity Securities
On August 26, 2021, in connection with the acquisition of ConnectPV, we issued 209,437 shares of Class A common stock valued at $6,500,000, which were used as part of the purchase price in the acquisition.
The foregoing securities were issued and sold in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Rule 506(b) of Regulation D.
(b) Use of Proceeds
The issuance described above was made in connection with our acquisition of ConnectPV.No proceeds were received in connection with the above transactions.
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________
* Filed herewith
† Indicates a management contract or compensatory plan.
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.
