Shoals Technologies Group, Inc 10-Q for FY2022 Q3
Shoals Technologies Group, Inc. (SHLS)
10-Q
2022-11-14
For: 2022-09-30
View Original
Added on
April 10, 2026
About this 10-Q
Shoals Technologies Group, Inc filed this 10-Q on November 14, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $90.82M
- up 51.8% from $59.84M a year earlier
- Net income
- $7.96M
- up 220.1% from net income of $2.49M a year earlier
- Diluted EPS
- $0.07
- up 250.0% from $0.02 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2022
or
For the transition period from _________ to _________
Commission File Number: 001-39942
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||||||||
| (Registrant’s telephone number, including area code) | ||||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
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 | ☐ | ||||||||
| ☒ | Smaller reporting company | ||||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of November 7, 2022, the registrant had 113,508,362 shares of Class A common stock and 53,816,214 shares of Class B common stock issued and outstanding.
i
TABLE OF CONTENTS
| ITEM | PAGE | |||||||
| PART I | ||||||||
| Item 1. | Financial Statements (Unaudited) | |||||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |||||||
| Item 4. | Controls and Procedures | |||||||
| PART II | ||||||||
| Item 1. | Legal Proceedings | |||||||
| Item 1A. | Risk Factors | |||||||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||||||
| Item 3. | Defaults Upon Senior Securities | |||||||
| Item 4. | Mine Safety Disclosures | |||||||
| Item 5. | Other Information | |||||||
| Item 6. | Exhibits | |||||||
| SIGNATURES | ||||||||
ii
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, technology developments, financing and investment plans, dividend policy, competitive position, industry and regulatory environment, potential growth opportunities and the effects of competition. Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” "seek," “should,” “will,” “would” or similar expressions and the negatives of those terms.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Given these uncertainties, you should not place undue reliance on forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this report. You should read this report with the understanding that a number of factors could cause actual results to differ materially from those indicated by forward-looking statements in this report, including, without limitation, those factors described in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I and Item 1A “Risk Factors” of Part II, as well as Part I Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022.
Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Some of the key factors that could cause actual results to differ from our expectations include the following:
•if demand for solar energy projects does not continue to grow or grows at a slower rate than we anticipate, our business will suffer;
•existing electric utility industry policies and regulations, and any subsequent changes, may present technical, regulatory and economic barriers to the purchase and use of solar energy systems that may significantly reduce demand for our products or harm our ability to compete;
•our industry has historically been cyclical and experienced periodic downturns;
•current macroeconomic events, including heightened inflation, rise in interest rates and potential recession could impact our business and financial results;
•the interruption of the flow of components and materials from international vendors has disrupted our supply chain, including as a result of the imposition of additional duties, tariffs and other charges on imports and exports;
•changes in the United States trade environment, including the imposition of import tariffs and antidumping and countervailing duties, could adversely affect the amount or timing of our revenue, results of operations or cash flows;
•if we fail to, or incur significant costs in order to, obtain, maintain, protect, defend or enforce our intellectual property and other proprietary rights, our business and results of operations could be materially harmed;
•if we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed;
•acquisitions, joint ventures and/or investments and the failure to integrate acquired businesses, could disrupt our business and/or dilute or adversely affect the price of our common stock;
iii
•if our trademarks and trade names are not adequately protected, we may not be able to build name recognition in our markets of interest, and our competitive position may be harmed;
•we may experience delays, disruptions or quality control problems in our manufacturing operations in part due to vendor concentration;
•we face risks related to actual or threatened health epidemics, such as the COVID-19 pandemic, and other outbreaks, which could significantly disrupt our manufacturing and operations;
•our future growth in the EV charging market is highly dependent on the demand for, and consumers’ willingness to adopt, EVs;
•the reduction, elimination or expiration of government incentives for, or regulations mandating the use of, renewable energy and solar energy specifically could reduce demand for solar energy systems and harm our business;
•a drop in the price of electricity sold may harm our business, financial condition, results of operations and prospects;
•an increase in interest rates, or a reduction in the availability of tax equity or project debt capital in the global financial markets could make it difficult for end customers to finance the cost of a solar energy system and could reduce the demand for our products;
•defects or performance problems in our products could result in loss of customers, reputational damage and decreased revenue, and we may face warranty, indemnity and product liability claims arising from defective products;
•our results of operations may fluctuate from quarter to quarter, which could make our future performance difficult to predict and could cause our results of operations for a particular period to fall below expectations, resulting in a decline in the price of our Class A common stock;
•compromises, interruptions or shutdowns of our systems, including those managed by third parties, whether intentional or inadvertent, could lead to delays in our business operations and, if significant or extreme, affect our results of operations;
•our indebtedness could adversely affect our financial flexibility and our competitive position;
•our indebtedness may restrict our current and future operations, which could adversely affect our ability to respond to changes in our business and to manage our operations;
•developments in alternative technologies may have a material adverse effect on demand for our offerings;
•we are a holding company and our principal asset is our interest in Shoals Parent and, accordingly, we are dependent upon Shoals Parent and its consolidated subsidiaries for our results of operations, cash flows and distributions;
•we are required to make payments under the Tax Receivable Agreement and the amounts of such payments will be significant;
•we will not be reimbursed for any payments made to the beneficiaries under the Tax Receivable Agreement in the event that any purported tax benefits are subsequently disallowed by the IRS;
•provisions in our certificate of incorporation and our bylaws may have the effect of delaying or preventing a change of control or changes in our management;
•our certificate of incorporation also provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees;
•future sales of our Class A common stock, or the perception that such sales may occur, could depress our Class A common stock price; and
iv
•if we fail to implement and maintain effective internal controls over financial reporting, we may be unable to accurately or timely report our financial condition or results of operations, which may adversely affect our business.
v
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Shoals Technologies Group, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except shares and par value)
| September 30, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Unbilled receivables | |||||||||||
| Inventory, net | |||||||||||
| Other current assets | |||||||||||
| Total Current Assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Deferred tax assets | |||||||||||
| Other assets | |||||||||||
| Total Assets | $ | $ | |||||||||
| Liabilities and Stockholders' Equity (Deficit) | |||||||||||
| Current Liabilities | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses and other | |||||||||||
| Current portion of payable pursuant to the tax receivable agreement | |||||||||||
| Long-term debt—current portion | |||||||||||
| Total Current Liabilities | |||||||||||
| Revolving line of credit | |||||||||||
| Long-term debt, less current portion | |||||||||||
| Payable pursuant to the tax receivable agreement, less current portion | |||||||||||
| Other long-term liabilities | |||||||||||
| Total Liabilities | |||||||||||
| Commitments and Contingencies (Note 15) | |||||||||||
| Stockholders’ Equity (Deficit) | |||||||||||
Preferred stock, $ | |||||||||||
Class A common stock, $ | |||||||||||
Class B common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity attributable to Shoals Technologies Group, Inc. | |||||||||||
| Non-controlling interests | ( | ( | |||||||||
| Total stockholders' equity (deficit) | ( | ||||||||||
| Total Liabilities and Stockholders’ Equity (Deficit) | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
1
Shoals Technologies Group, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||
| General and administrative expenses | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Total Operating Expenses | |||||||||||||||||||||||
| Income from Operations | |||||||||||||||||||||||
| Interest expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Payable pursuant to the tax receivable agreement adjustment | ( | ( | |||||||||||||||||||||
| Loss on debt repayment | ( | ||||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Income tax benefit (expense) | ( | ( | |||||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Less: net income attributable to non-controlling interests | |||||||||||||||||||||||
| Net income attributable to Shoals Technologies Group, Inc. | $ | $ | $ | $ | |||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, 2022 | Period from January 27, 2021 to September 30, 2021 | |||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
Earnings per share of Class A common stock: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
Weighted average shares of Class A common stock outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
2
Shoals Technologies Group, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (Unaudited)
(in thousands, except shares)
For the three and nine months ended September 30, 2022
| Class A Common Stock | Class B Common Stock | Additional Paid-In Capital | Accumulated Deficit | Non-Controlling Interests | Total Stockholders' Equity (Deficit) | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Activity under equity-based compensation plan | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted share units | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interest | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Deferred tax adjustments related to Tax Receivable Agreement | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Exchange of Class B to Class A common stock | — | ( | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Activity under equity-based compensation plan | — | — | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted share units | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interest | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Reallocation of non-controlling interest | — | — | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Deferred tax adjustments related to Tax Receivable Agreement | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Exchange of Class B to Class A common stock | — | ( | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Activity under equity-based compensation plan | — | — | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted share units | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interest | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Reallocation of non-controlling interest | — | — | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||||
3
Shoals Technologies Group, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Deficit (Unaudited) (continued)
(in thousands, except shares)
| Class A Common Stock | Class B Common Stock | Additional Paid-In Capital | Accumulated Deficit | Non-Controlling Interests | Total Stockholders' Equity (Deficit) | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
For the three and nine months ended September 30, 2021
| Members' Equity | Class A Common Stock | Class B Common Stock | Additional Paid-In Capital | Accumulated Deficit | Non-Controlling Interests | Total Members'/Stockholders Deficit | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | ( | $ | $ | $ | $ | $ | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Net income prior to the Organizational Transactions | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Effect of Organizational Transactions | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock sold in IPO, net of underwriting discounts and commissions and offering costs | — | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss subsequent to the Organizational Transactions | — | — | — | — | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation recognized subsequent to the Organizational Transactions | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Activity under equity-based compensation plan | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Deferred tax adjustment related to Tax Receivable Agreement | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
4
Shoals Technologies Group, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Deficit (Unaudited) (continued)
(in thousands, except shares)
| Members' Equity | Class A Common Stock | Class B Common Stock | Additional Paid-In Capital | Accumulated Deficit | Non-Controlling Interests | Total Members'/Stockholders Deficit | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Activity under equity-based compensation plan | — | — | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interest | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Reallocation of non-controlling interest | — | — | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock sold in follow-on offering, net of underwriting discounts | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of LLC Interests and Class B common stock | — | — | — | ( | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Deferred tax adjustment related to purchase of LLC Interests in follow-on offering | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Deferred tax adjustment related to ConnectPV LLC conversion | — | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock in connection with an acquisition | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Activity under stock compensation plan | — | — | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interest | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Reallocation of non-controlling interest | — | — | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
5
Shoals Technologies Group, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash Flows from Operating Activities | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization/write off of deferred financing costs | |||||||||||
| Equity-based compensation | |||||||||||
| Provision for obsolete or slow-moving inventory | |||||||||||
| Deferred taxes | |||||||||||
| Payable pursuant to the tax receivable agreement adjustment | |||||||||||
| Gain on sale of assets | |||||||||||
| Changes in assets and liabilities, net of business acquisition: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Unbilled receivables | ( | ||||||||||
| Inventory | ( | ( | |||||||||
| Other assets | ( | ( | |||||||||
| Accounts payable | ( | ||||||||||
| Accrued expenses and other | |||||||||||
| Net Cash Provided by (Used in) Operating Activities | ( | ||||||||||
| Cash Flows Used In Investing Activities | |||||||||||
| Purchases of property, plant and equipment | ( | ( | |||||||||
| Acquisition of a business, net of cash acquired | ( | ||||||||||
| Other | ( | ||||||||||
| Net Cash Used in Investing Activities | ( | ( | |||||||||
| Cash Flows from Financing Activities | |||||||||||
| Distributions to non-controlling interest | ( | ( | |||||||||
| Employee withholding taxes related to net settled equity awards | ( | ( | |||||||||
| Deferred financing costs | ( | ||||||||||
| Payments on term loan facility | ( | ( | |||||||||
| Proceeds from revolving credit facility | |||||||||||
| Repayments of revolving credit facility | ( | ||||||||||
| Proceeds from issuance of Class A common stock sold in an IPO, net of underwriting discounts and commissions | |||||||||||
| Proceeds from issuance of Class A common stock in follow-on offering, net of underwriting discounts and commissions | |||||||||||
| Purchase of LLC Interests with proceeds from follow-on offering | ( | ||||||||||
| Payment of debt assumed in acquisition | ( | ||||||||||
| Deferred offering costs | ( | ||||||||||
| Net Cash Provided By Financing Activities | |||||||||||
| Net Increase in Cash, Cash Equivalents and Restricted Cash | |||||||||||
6
Shoals Technologies Group, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
(in thousands)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash, Cash Equivalents and Restricted Cash—Beginning of Period | |||||||||||
| Cash, Cash Equivalents and Restricted Cash—End of Period | $ | $ | |||||||||
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Supplemental Cash Flows Information: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for taxes | $ | $ | |||||||||
| Non-cash investing and financing activities: | |||||||||||
| Reclassification of deferred offering costs to additional paid-in capital | $ | $ | |||||||||
| Recording of deferred tax assets | $ | $ | |||||||||
| Recording of amounts payable pursuant to tax receivable agreement | $ | $ | |||||||||
| Capital contribution related to tax receivable agreement | $ | $ | |||||||||
| Income tax receivable from merger due to former owner | $ | $ | |||||||||
| Deferred tax asset and additional paid-in capital from ConnectPV | $ | $ | |||||||||
| Class A common stock issued in ConnectPV acquisition | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
7
Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Organization and Business
Shoals Technologies Group, Inc. (the “Company”) was formed as a Delaware corporation on November 4, 2020 for the purpose of facilitating an initial public offering ("IPO") and other related organizational transactions to carry on the business of Shoals Parent LLC and its subsidiaries (“Shoals Parent”).
Shoals Parent is a Delaware limited liability company formed on May 9, 2017. The Company is headquartered in Portland, Tennessee and is a manufacturer of electrical balance of systems (“EBOS”) solutions and components for solar, battery storage and electric vehicle charging applications, selling to customers across the United States and internationally. Shoals Parent, through its wholly-owned subsidiaries, Shoals Intermediate Holdings LLC (“Intermediate”) and Shoals Holdings LLC (“Holdings”) owns five other subsidiaries through which it conducts substantially all operations: Shoals Technologies, LLC, Shoals Technologies Group, LLC, Solon, LLC, Shoals Structures, LLC (collectively “Shoals”) and Shoals Connect LLC. Shoals Parent acquired Shoals on May 25, 2017.
On August 26, 2021, the Company acquired 100 % of the stock of ConnectPV, Inc. (“ConnectPV”) with cash and Class A common stock. The acquisition was accounted for as a business combination and following the acquisition, the Company immediately converted ConnectPV to a limited liability company (Shoals Connect LLC) and contributed the entity to Shoals Parent, LLC through a series of transactions – see Note 3 - Acquisition of ConnectPV.
Initial Public Offering
On January 29, 2021, the Company completed an IPO of 11,550,000 shares of Class A common stock at a public offering price of $25.00 per share, including shares issued pursuant to the underwriters' over-allotment option. The Company received $278.8 million in proceeds, net of underwriting discounts and commissions of $9.9 million, which was used to purchase 6,315,790 newly-issued membership interests (“LLC Interests”) from Shoals Parent and 5,234,210 LLC Interests from the founder and Class B unit holder in Shoals Parent at a price per interest equal to the IPO price of $25.00 per share.
Organizational Transactions
In connection with the IPO, the Company and Shoals Parent completed a series of transactions (the "Organizational Transactions") including the following:
•the limited liability company agreement (the “LLC Agreement”) of Shoals Parent was amended and restated to, among other things, (i) provide for a new single class of LLC Interests in Shoals Parent, (ii) exchange all of the then existing membership interests of the holders of Shoals Parent membership interests for LLC Interests and (iii) appoint the Company as the sole managing member of Shoals Parent;
•the Company's certificate of incorporation was amended and restated to, among other things, (i) provide for Class A common stock with voting and economic rights (ii) provide for Class B common stock with voting rights but no economic rights and (iii) issue 78,300,817 shares of Class B common stock to the former Class B and Class C members of Shoals Parent (the “Continuing Equity Owners”) on a one -to-one basis with the number of LLC Interests they own; and
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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
•the acquisition, by merger, of Shoals Investment CTB or the former Class A member of Shoals Parent (the "Class A Shoals Equity Owners"), for which the Company issued 81,977,751 shares Class A common stock as merger consideration (the "Merger").
Follow-On Offering
On July 16, 2021, the Company completed a follow-on offering consisting of 4,989,692 shares of Class A common stock offered by selling shareholders and 10,402,086 shares of Class A common stock offered by the Company. The Company used the proceeds of the sale of Class A common stock to purchase an equal number of LLC Interests and Class B common stock from our founder and management.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
Unaudited Interim Financial Information
The accompanying condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, the statements of operations, stockholders’ equity (deficit) and cash flows for the periods ended September 30, 2022 and 2021 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2022 and the results of its operations and its cash flows for the periods ended September 30, 2022 and 2021. The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2022 and 2021 are also unaudited. The results for the three and nine months ended September 30, 2022 and 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2022, any other interim periods, or any future year or period. The balance sheet as of December 31, 2021 included herein was derived from the audited financial statements as of that date. Certain disclosures have been condensed or omitted from the interim financial
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Notes to Condensed Consolidated Financial Statements (Unaudited)
statements. These financial statements should be read in conjunction with the Company’s consolidated financial statements and related notes thereto included in the Company’s 2021 Form 10-K.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include revenue recognition, allowance for doubtful accounts, useful lives of property, plant and equipment and other intangible assets, impairment of long-lived assets, allowance for slow moving inventory, payable pursuant to the tax receivable agreement (“TRA”) and valuation allowance on deferred tax assets.
A reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheet is as follows (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash included in other current asset | |||||||||||
| Restricted cash included in other assets | |||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
Impact of COVID-19 Pandemic and Macroeconomic Events
In 2022, COVID-19 has impacted our business in the following ways:
•Our ability to obtain raw material and required components from domestic and international suppliers required to manufacture our products; and
•Our ability to secure inbound and outbound logistics to and from our facilities, with additional delays linked to international border crossings and the associated approvals and documentation and;
Significant levels of inflation have increased energy prices, freight premiums, and other operating costs. As a result of inflation, during 2022, the Federal Reserve increased interest rates resulting in higher interest rates associated with our Senior Secured Credit Agreement, as defined below. Any additional increases in interest rates by the Federal Reserve would have a corresponding increase in the interest rates charged under our Senior Secured Credit Agreement. The eventual implications of higher government deficits and debt, tighter monetary policy, and potentially higher long-term interest rates may drive a higher cost of capital during our forecast period.
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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company does not directly source raw materials from Europe. However, the ongoing conflict in Ukraine has reduced the availability of certain material that can be sourced in Europe and, as a result, increased global logistics costs for the procurement of some inputs and materials used in our products. We do not know the ultimate severity or duration of the conflict in Ukraine, but we are continuously monitoring the situation and evaluating our procurement strategy and supply chain as to reduce any negative impact on our business, financial condition, and results of operations.
As response to supply chain constraints, in 2022 we have increased certain raw materials inventory, partly to limit the potential impact of supply chain issues of raw materials in the near term.
To date we have not had any material adverse effects on our financial results from these events.
Customer Concentrations
The Company had the following revenue concentrations representing 10% or more of revenue for the nine months ended September 30, 2022 and 2021 and related accounts receivable concentrations as of September 30, 2022 and December 31, 2021:
| 2022 | 2021 | ||||||||||||||||||||||
| Revenue % | Accounts Receivable % | Revenue % | Accounts Receivable % | ||||||||||||||||||||
| Customer A | % | % | % | % | |||||||||||||||||||
| Customer B | % | % | % | % | |||||||||||||||||||
Recent Accounting Pronouncements
Adopted
On January 1, 2022, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02 (Topic 842) “Leases” which supersedes the lease recognition requirements in Accounting Standards Codification (“ASC”) Topic 840, “Leases”. Under ASU No. 2016-02, lessees are required to recognize assets and liabilities on the consolidated balance sheets for most leases and provide enhanced disclosures. For companies that are not emerging growth companies (“EGCs”), the ASU was effective for fiscal years beginning after December 15, 2018. For EGCs, the ASU is effective for fiscal years beginning after December 15, 2021. The Company adopted the new standard using the modified retrospective method by recording a right-of-use asset of $1.2 million, short-term portion of lease liabilities of $0.4 million and long-term portion of lease liabilities of $0.8 million as of the effective date. Prior periods will not be restated and will continue to be reported under Topic 840 guidance in effect during those periods. The Company applied the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. The adoption did not have a material impact on its consolidated statements of operations or its consolidated statements of cash flows. See Note 14 - Leases for further information and disclosures related to the adoption of this standard.
Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses, which was subsequently amended by ASU No. 2018-19 and ASU No. 2019-10, and which requires the measurement of expected credit losses for financial instruments carried at amortized cost held at the reporting date based on historical experience, current conditions and reasonable forecasts. The updated guidance also amends the
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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. For EGC’s, the standard is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2022. The Company will continue to assess the possible impact of this standard, but currently does not expect the adoption of this standard will have a significant impact on its financial statements and its limited history of bad debt expense relating to trade accounts receivable.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU requires that contract assets and contract liabilities acquired in a business combination be recognized and measured in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. This guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within that fiscal year. Early adoption of the amendments is permitted, including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application. We are currently evaluating the impact of the new standard on our financial statements and related disclosures.
Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.
3. Acquisition of ConnectPV
On August 26, 2021, the Company acquired 100 % of the common stock of ConnectPV. The acquisition of ConnectPV was accounted for as a business combination using the acquisition method of accounting. The aggregate purchase price was $13.8 million in cash (net of $0.8 million cash acquired) and 209,437 shares of Class A Common stock valued at $6.5 million.
The cash portion of the purchase price was funded by borrowing under our Revolving Credit Facility (as defined below). The purchase price paid has been allocated to record the acquired assets and assumed liabilities based upon their estimated fair value pending finalization of the working capital calculation with the sellers. When determining the fair values of the assets acquired and assumed liabilities, management made significant estimates, judgements and assumptions. Management estimated that consideration paid exceeded the fair value of the net assets acquired. Therefore, goodwill of $19.8 million was recorded. The goodwill recognized was primarily attributable to the workforce and synergies related to the Company’s EBOS solutions and components business that are expected to arise from the ConnectPV acquisition.
The following table is the balance sheet of ConnectPV as of the acquisition date, August 26, 2021, and includes the estimated fair value of the assets acquired and assumed liabilities. The estimated fair value allocated to certain property, plant and equipment, identifiable intangible assets and goodwill was determined
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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
based on a combination of market, cost and income approaches with the assistance of a third-party valuation firm (in thousands):
| Purchase Price Allocation | |||||
| Cash and cash equivalents | $ | ||||
| Accounts receivable | |||||
| Inventory | |||||
| Other current assets | |||||
| Total current assets | |||||
| Property, plant and equipment | |||||
| Goodwill | |||||
| Other intangible assets | |||||
| Total Assets | |||||
| Accounts payable | |||||
| Accrued expenses | |||||
| Debt | |||||
| Total liabilities | |||||
| Net assets acquired | $ | ||||
Pro Forma Financial Information (Unaudited)
The pro forma information below gives effect to the ConnectPV acquisition as if it had been completed on the first day of each period presented. The pro forma results of operations are presented for informational purposes only. As such, they are not necessarily indicative of the Company’s results had the acquisition been completed on the first day of each period presented, nor do they intend to represent the Company’s future results. The pro forma information does not reflect any cost savings from operating efficiencies or synergies that could result from the acquisition and does not reflect additional revenue opportunities following the acquisition. The pro forma information includes adjustments to record the assets and liabilities associated with the acquisition at their respective fair values, based on available information and to give effect to the financing for the acquisition (in thousands):
| Nine Months Ended September 30, 2021 | |||||
| Revenue | $ | ||||
| Net income | $ | ||||
4. Accounts Receivable
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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
| September 30, 2022 | December 31, 2021 | ||||||||||
| Accounts receivable | $ | $ | |||||||||
| Less: allowance for doubtful accounts | ( | ( | |||||||||
| Accounts receivable, net | $ | $ | |||||||||
5. Inventory
| September 30, 2022 | December 31, 2021 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Allowance for obsolete or slow-moving inventory | ( | ( | |||||||||
| Inventory, net | $ | $ | |||||||||
6. Property, Plant and Equipment
Property, plant, and equipment, net consists of the following (in thousands):
| Estimated Useful Lives (Years) | |||||||||||||||||
| September 30, 2022 | December 31, 2021 | ||||||||||||||||
| Land | N/A | $ | $ | ||||||||||||||
| Building and land improvements | |||||||||||||||||
| Machinery and equipment | |||||||||||||||||
| Furniture and fixtures | |||||||||||||||||
| Vehicles | |||||||||||||||||
| Less: accumulated depreciation | ( | ( | |||||||||||||||
| Property, plant and equipment, net | $ | $ | |||||||||||||||
Depreciation expense for the three months ended September 30, 2022 and 2021 was $0.5 million and $0.5 million, respectively. During the three months ended September 30, 2022 and 2021, $0.4 million and $0.4 million, respectively, of depreciation expense was allocated to cost of revenue and $0.1 million and $0.1 million, respectively, of depreciation expense was allocated to operating expenses.
Depreciation expense for the nine months ended September 30, 2022 and 2021 was $1.4 million and $1.3 million, respectively. During the nine months ended September 30, 2022 and 2021, $1.1 million and $1.0 million, respectively, of depreciation expense was allocated to cost of revenue and $0.3 million and $0.3 million, respectively, of depreciation expense was allocated to operating expenses.
7. Goodwill and Other Intangible Assets
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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Goodwill
Goodwill relates to the acquisition of Shoals and ConnectPV. As of September 30, 2022 and December 31, 2021, goodwill totaled $69.9 million and $69.4 million, respectively. Changes in the carrying amount of goodwill during the nine months ended September 30, 2022 are shown below (in thousands):
| Goodwill | |||||
| Beginning Balance | $ | ||||
| Adjustments related to finalization of working capital in the acquisition of ConnectPV | |||||
| Ending Balance | $ | ||||
Other Intangible Assets
Other intangible assets consists of the following (in thousands):
| Estimated Useful Lives (Years) | September 30, 2022 | December 31, 2021 | |||||||||||||||
| Amortizable: | |||||||||||||||||
| Costs: | |||||||||||||||||
| Customer relationships | $ | $ | |||||||||||||||
| Developed technology | |||||||||||||||||
| Trade names | |||||||||||||||||
| Backlog | |||||||||||||||||
| Noncompete agreements | |||||||||||||||||
| Total amortizable intangibles | |||||||||||||||||
| Accumulated amortization: | |||||||||||||||||
| Customer relationships | |||||||||||||||||
| Developed technology | |||||||||||||||||
| Trade names | |||||||||||||||||
| Backlog | |||||||||||||||||
| Noncompete agreements | |||||||||||||||||
| Total accumulated amortization | |||||||||||||||||
| Total amortizable intangibles, net | $ | $ | |||||||||||||||
Amortization expense related to intangible assets amounted to $2.1 million and $2.1 million for the three months ended September 30, 2022 and 2021 and $6.6 million and $6.1 million for the nine months ended September 30, 2022 and 2021, respectively.
8. Accrued Expenses and Other
| September 30, 2022 | December 31, 2021 | ||||||||||
| Accrued compensation | $ | $ | |||||||||
| Deferred revenue | |||||||||||
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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
| September 30, 2022 | December 31, 2021 | ||||||||||
| Accrued interest | |||||||||||
| Accrued professional fees | |||||||||||
| Lease liability | |||||||||||
| Other accrued expenses | |||||||||||
| Total accrued expenses and other | $ | $ | |||||||||
9. Long-Term Debt
Long-term debt consists of the following (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
| Term Loan Facility | $ | $ | |||||||||
| Revolving Credit Facility | |||||||||||
| Less: deferred financing costs | ( | ( | |||||||||
| Total debt, net of deferred financing costs | |||||||||||
| Less: current portion | ( | ( | |||||||||
| Long-term debt, less current portion | $ | $ | |||||||||
Senior Secured Credit Agreement
On November 25, 2020 Shoals Holdings, entered into a senior secured credit agreement (the “Senior Secured Credit Agreement”), consisting of (i) a $350.0 million senior secured six-year term loan facility (the “Term Loan Facility”), (ii) a $30.0 million senior secured delayed draw term loan facility, which matures concurrently with the six-year Term Loan Facility (the “Delayed Draw Term Loan Facility”) and (iii) an uncommitted super senior first out revolving credit facility (the “Revolving Credit Facility”).
In December 2020, Shoals Holdings entered into two amendments to the Senior Secured Credit Agreement in order to obtain a $100.0 million increase (the “Revolver Upsize”) to the Revolving Credit Facility and modify the terms of the interest rate and prepayment premium. As part of the first amendment the Company repaid and terminated all outstanding commitments under the Delayed Draw Term Loan Facility.
On January 29, 2021, the Company used proceeds from the IPO to repay $150.0 million of outstanding borrowings under the Term Loan Facility. The repayment of a portion of the borrowings under the Term Loan Facility resulted in a $16.0 million loss on debt repayment as the result of the $11.3 million prepayment premium and $4.7 million write-off of a portion of the deferred financing costs.
On May 2, 2022, Shoals Holdings entered into an amendment to the Senior Secured Credit Agreement in order to increase the amount available for borrowing under the Revolving Credit Facility from $100.0 million to $150.0 million. The amendment also set forth SOFR as the benchmark rate to succeed LIBOR and amended the financial covenant such that, commencing with September 30, 2022, Shoals Holdings shall not permit its Consolidated First Lien Secured Leverage Ratio (as defined in the Senior Secured Credit Agreement) to exceed 6.50 :1.00.
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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of September 30, 2022, interest rates on the Term Loan Facility was SOFR plus 3.25 %, or 5.94 %, and the Revolving Credit Facility was SOFR plus 3.25 %, ranging from 5.41 % to 6.89 %. As of September 30, 2022, the Company had $64.4 million of availability under the Revolving Credit Facility.
The Senior Secured Credit Agreement contains affirmative and negative covenants, including covenants that restrict the Company’s incurrence of indebtedness, incurrence of liens, dispositions, investments, acquisitions, restricted payments, and transactions with affiliates. The Senior Secured Credit Agreement also includes customary events of default, including the occurrence of a change of control. As of September 30, 2022, the Company was in compliance with all the required covenants.
10. Earnings per Share ("EPS")
Basic EPS of Class A Common Stock is computed by dividing net income (loss) attributable to the Company by the weighted average number of shares of Class A Common Stock outstanding during the period. Diluted EPS of Class A Common Stock is computed similarly to basic EPS except the weighted average shares outstanding are increased to include additional shares from the exchange of Class B Common Stock under the if-converted method and the assumed exercise of any common stock equivalents using the treasury stock method, if dilutive. The Company’s restricted stock units are considered common stock equivalents for this purpose.
All earnings prior to and up to January 26, 2021, the date of the IPO, were entirely allocable to non-controlling interest and, as a result, EPS information is not applicable for reporting periods prior to this date. Consequently, only the net income allocable to Shoals Technologies Group, Inc. from the period subsequent to January 26, 2021 is included in the net loss attributable to the stockholders of Class A Common Stock for the periods ended September 30, 2021.
| Three Months Ended September 30, | Nine Months Ended September 30, 2022 | Period from January 27, 2021 to September 30, 2021 | |||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income attributable to Shoals Technologies Group, Inc. - basic | $ | $ | $ | $ | |||||||||||||||||||
| 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 | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average shares of Class A common stock outstanding - basic | |||||||||||||||||||||||
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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, 2022 | Period from January 27, 2021 to September 30, 2021 | |||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Restricted / Performance Stock Units | |||||||||||||||||||||||
| Class B Common Stock | |||||||||||||||||||||||
| Weighted average shares of Class A common stock outstanding - diluted | |||||||||||||||||||||||
| Earnings (loss) per share of Class A common stock - basic | $ | $ | $ | $ | |||||||||||||||||||
| Earnings (loss) per share of Class A common stock - diluted | $ | $ | $ | $ | |||||||||||||||||||
11. Equity-Based Compensation
2021 Long-term Incentive Plan
On January 26, 2021, the Shoals Technologies Group, Inc. 2021 Long-Term incentive Plan (the “2021 Incentive Plan”) became effective. The 2021 Incentive Plan authorized 8,768,124 new shares, subject to adjustment pursuant to the 2021 Incentive Plan.
Restricted Stock Units
During the nine months ended September 30, 2022, the Company granted 665,179 restricted stock units (“RSUs") to certain employees, officers and directors of the Company. The RSUs have grant date fair values ranging from $10.42 to $25.05 per unit and generally vest ratably over 3 years, except for some officer and employee grants for bonuses which immediately vested.
Activity under the 2021 Incentive Plan for RSUs was as follows:
| Restricted Stock Units | Weighted Average Price | ||||||||||
| Outstanding, December 31, 2021 | $ | ||||||||||
| Granted | $ | ||||||||||
| Vested | ( | $ | |||||||||
| Forfeited | ( | $ | |||||||||
| Outstanding, September 30, 2022 | $ | ||||||||||
Performance Stock Units
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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
During the nine months ended September 30, 2022, the Company granted an aggregate of 242,907 Performance Stock Units ("PSUs") to certain executives. The PSUs cliff vest after 3 years upon meeting certain revenue and gross margin targets and contain certain modifiers which could increase or decrease the ultimate number of Class A common stock issued to the executives. The PSUs were valued using the market value of the Class A common stock on the grant date ranging from $10.42 to $12.60 per PSUs. Based on results achieved in 2022 and the forecasted amounts over the remainder of the performance period, the Company expects the units to vest and the modifier to be achieved related to the gross margin target.
Activity under the 2021 Incentive Plan for PSUs was as follows:
| Performance Stock Units | Weighted Average Price | ||||||||||
| Outstanding, December 31, 2021 | $ | ||||||||||
| Granted | $ | ||||||||||
| Vested | $ | ||||||||||
| Forfeited | $ | ||||||||||
| Outstanding, September 30, 2022 | $ | ||||||||||
The Company recognized equity-based compensation of $4.0 million and $2.7 million for the three months ended September 30, 2022 and 2021, respectively, and $11.9 million and $6.9 million for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, the Company had $34.6 million of unrecognized compensation costs which is expected to be recognized over a period of 2.3 years.
12. Stockholders' Equity (Deficit)
Amendment and Restatement of Certificate of Incorporation
As discussed in Note 1, on January 26, 2021, the Company's certificate of incorporation was amended and restated to, among other things, provide for the (i) authorization of 1,000,000,000 shares of Class A common stock with a par value of $0.00001 per share; (ii) authorization of 195,000,000 shares of Class B common stock with a par value of $0.00001 per share; (iii) authorization of 5,000,000 shares of preferred stock that may be issued from time to time by the Company's Board of Directors in one or more series; and (iv) establishment of a classified board of directors, divided into three classes, the members of which will serve for staggered terms.
Holders of Class A common stock and Class B common stock are entitled to one 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.
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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company must, at all times, maintain a one -to-one ratio between the number of shares of Class A common stock issued by the Company and the number of LLC Interests owned by the Company (subject to certain exceptions for treasury shares and shares underlying certain convertible or exchangeable securities).
Initial Public Offering
As discussed in Note 1, on January 29, 2021, the Company closed an IPO of 11,550,000 shares of the Class A common stock at a public offering price of $25.00 per share. The Company received $278.8 million in proceeds, net of underwriting discounts and commissions, which was used to purchase 6,315,790 LLC Interests from Shoals Parent and 5,234,210 LLC Interests from the founder and Class B unit holder in Shoals Parent at a price per interest equal to the IPO price of the Class A common stock of $25.00 .
Shoals Parent Recapitalization
As noted above, in connection with the IPO, the limited liability company agreement of Shoals Parent was amended and restated to, among other things, (i) provide for a new single class of common membership interests in Shoals Parent, or the LLC Interests; (ii) exchange all of the then existing membership interests of the Continuing Equity Owners for LLC Interests (iii) exchange all the then existing membership interest of the Class A Shoals Equity Owners for LLC Interests and (iv) appoint the Company as the sole managing member of Shoals Parent. The Company has a majority economic interest in, is the sole managing member of, has the sole voting power in, and controls the management of Shoals Parent.
The amendment also requires that Shoals Parent, at all times, maintain (i) a one -to-one ratio between the number of shares of Class A common stock issued by the Company and the number of LLC Interests owned by the Company and (ii) a one -to-one ratio between the number of shares of Class B common stock owned by the Continuing Equity Owners and the number of LLC Interests owned by the Continuing Equity Owners.
Acquisition of Former Shoals Equity Owners
On January 26, 2021, the Company acquired, by merger, an entity that was a member of Shoals Parent, or the Class A Shoals Equity Owners, for which the Company issued 81,977,751 shares of Class A common stock as merger consideration. The only assets held by the Class A Shoals Equity Owners were 81,977,751 LLC Interests. Upon consummation of the merger, the Company recognized the LLC Interests at carrying value, as the merger is considered to be a transaction between entities under common control.
13. Non-Controlling Interests
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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
| Nine Months Ended September 30, 2022 | Period from January 27, 2021 to September 30, 2021 | ||||||||||
| Net income attributable to non-controlling interest | $ | $ | |||||||||
| Transfers to non-controlling interests | |||||||||||
| Decrease as a result of the Organizational Transactions | ( | ||||||||||
| Increase as a result of newly issued LLC Interests in IPO | |||||||||||
| Increase as a result of activity under equity-based compensation plan | |||||||||||
| Decrease from tax distributions to non-controlling interest | ( | ( | |||||||||
| Reallocation of non-controlling interest | |||||||||||
| Change from net income attributable to/from non-controlling interest and transfers to non-controlling interest | $ | $ | ( | ||||||||
Issuance of Additional LLC Interests
Under the LLC Agreement, the Company is required to cause Shoals Parent to issue additional LLC Interests to the Company when the Company issues additional shares of Class A Common Stock. Other than as it relates to the issuance of Class A Common Stock in connection with an equity incentive program, the Company must contribute to Shoals Parent net proceeds and property, if any, received by the Company with respect to the issuance of such additional shares of Class A Common Stock. The Company must cause Shoals Parent to issue a number of LLC Interests equal to the number of shares of Class A Common Stock issued such that, at all times, the number of LLC Interests held by the Company equals the number of outstanding shares of Class A Common Stock. During the nine months ended September 30, 2022, the Company caused Shoals Parent to issue to the Company a total of 480,116 LLC Interests for the vesting of awards granted under the Shoals Technologies Group, Inc. 2021 Long-Term Incentive Plan.
Distributions for Taxes
As a limited liability company (treated as a partnership for income tax purposes), Shoals Parent does not incur significant federal, state or local income taxes, as these taxes are primarily the obligations of its members. As authorized by the LLC Agreement, Shoals Parent is required to distribute cash, to the extent that Shoals Parent has cash available, on a pro rata basis, to its members to the extent necessary to cover the members’ tax liabilities, if any, with respect to each member’s share of Shoals Parent taxable earnings. Shoals Parent makes such tax distributions to its members quarterly, based on the single highest marginal tax rate applicable to its members applied to projected year-to-date taxable income, with a final accounting once actual taxable income or loss has been determined. During the nine months ended September 30, 2022 and 2021, tax distributions to non-controlling LLC Interests holders was $7.8 million and $4.8 million, respectively.
Other Distributions
Pursuant to the LLC Agreement, the Company has the right to determine when distributions will be made to LLC members and the amount of any such distributions. If the Company authorizes a distribution, such distribution will be made to the members of the LLC (including the Company) pro rata in accordance with the percentages of their respective LLC units.
14. Leases
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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Effective January 1, 2021, the Company adopted ASC 842 Leases using the modified retrospective approach. The Company elected the use of the package of practical expedients permitted under the transition guidance which allows the Company not to reassess whether a contract contains a lease, carry forward the historical lease classification and not reassess initial direct lease costs. The Company also elected to apply the short-term measurement and recognition exemption in which the right-of-use (“ROU”) assets and lease liabilities are not recognized for short-term leases. Adoption of this standard resulted in recording of net operating lease ROU assets and corresponding operating lease liabilities of $1.2 million and $1.2 million, respectively. The standard did not materially affect the condensed consolidated statements of income and had no impact on the condensed consolidated statements of cash flows.
The following table summarizes the balances as it relates to leases at the end of the period (in thousands):
| (*) | September 30, 2022 | ||||||||||
| ROU asset | $ | ||||||||||
| Lease liability, current portion | $ | ||||||||||
| Lease liability, long-term portion | |||||||||||
| Total lease liability | $ | ||||||||||
(*) Location on the condensed consolidated balance sheet
The Company determines if an arrangement is a lease at its inception. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Operating lease ROU assets also include any initial direct costs and prepayments less lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. As the Company’s leases generally do not provide an implicit rate, the Company uses its collateralized incremental borrowing rate based on the information available at the lease commencement date, including lease term, in determining the present value of lease payments. Lease expense for these leases is recognized on a straight-line basis over the lease term.
Operating lease arrangements are comprised primarily of real estate and equipment agreements for which the right-of-use assets are included in other assets and the corresponding lease liabilities, depending on their maturity, are included in accrued liabilities or other long-term liabilities in the condensed consolidated balance sheets. The Company also elected to apply the practical expedient to consider non-lease components as a part of the lease. The Company's leases contain certain non-lease components for common area maintenance which are variable on a month to month basis and as such recorded as a variable lease expense as incurred.
The details of the Company’s operating leases are as follows (in thousands):
| Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 | ||||||||||
| Operating lease expense | $ | $ | |||||||||
| Variable lease expense | |||||||||||
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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
| Short-term lease expense | |||||||||||
| Total lease expense | $ | $ | |||||||||
The following table presents the maturities of lease liabilities (in thousands):
| Fiscal year ending December 31, | Operating Leases | ||||
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total lease payments | |||||
| Less: Imputed lease interest | ( | ||||
| Total lease liabilities | $ | ||||
The following table represents future minimum lease obligations under non-cancelable operating leases (in thousands):
| Fiscal year ending December 31, | Operating Leases | ||||
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Total | $ | ||||
The Company’s weighted-average remaining lease-term and weighted-average discount rate are as follows (in thousands):
| Nine Months Ended September 30, 2022 | |||||
| Weighted average remaining lease-term | |||||
| Weighted average discount rate | % | ||||
Supplemental cash flow and other information related to operating leases are as follows:
| Nine Months Ended September 30, 2022 | |||||
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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
| Operating cash flows from operating leases | $ | ||||
| Non cash investing activities: | |||||
| Lease liabilities arising from obtaining right-of-use assets as of January 1, 2022 | $ | ||||
| Lease liabilities arising from obtaining right-of-use assets during the nine months ended September 30, 2022 | $ | ||||
15. Commitments and Contingencies
Litigation
The Company is from time to time subject to legal proceedings and claims, which arise in the normal course of its business. In the opinion of management and legal counsel, the amount of losses that may be sustained, if any, would not have a material effect on the financial position, results of operations or cash flows of the Company.
Surety Bonds
The Company provides surety bonds to various parties as required for certain transactions initiated during the ordinary course of business to guarantee the Company’s performance in accordance with contractual or legal obligations. As of September 30, 2022, the maximum potential payment obligation with regard to surety bonds was $16.0 million.
Employee Benefit Plan
The Company has a 401(k) retirement plan for substantially all of its employees based on certain eligibility requirements. Effective January 1, 2021 the Company began making matching contributions to the plan and may also provide discretionary contributions to the plan at the discretion of management. No such discretionary contributions have been made since inception of the plan. For the nine months ended September 30, 2022 and 2021, the Company made matching contributions totaling $0.3 million and $0.1 million, respectively.
16. Income Taxes
In August 2022, the U.S. President signed into law the Inflation Reduction Act of 2022 (the “IRA”), which revised U.S. tax law by, among other things, including a new corporate alternative minimum tax (the “CAMT”) of 15% on certain large corporations, imposing a 1% excise tax on stock buybacks, and providing incentives to address climate change, including the introduction of advanced manufacturing production tax credits. The provisions of the IRA are generally effective for tax years beginning after 2022. Given the complexities of the IRA, which is pending technical guidance and regulations from the Internal Revenue Service and U.S. Treasury Department, we will continue to monitor these developments and evaluate the potential future impact to our results of operations.
The Company is taxed as a subchapter C corporation and is subject to federal and state income taxes. The Company’s sole material asset is Shoals Parent, which is a limited liability company that is taxed as a
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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
partnership for US federal and certain state and local income tax purposes. Shoals Parent’s net taxable income and related tax credits, if any, are passed through to its members and included in the member’s tax returns.
Shoals Parent is subject to and reports an entity level tax in various states. The income tax burden on the earnings taxed to the noncontrolling interest holders is not reported by the Company in its consolidated financial statements under U.S. GAAP. As a result, the Company’s effective tax rate differs materially from the statutory rate. Our effective income tax rate for the nine months ended September 30, 2022 and 2021, was 18.2 % and 105.0 % respectively.
In calculating the provision for interim income taxes, in accordance with ASC Topic 740, an estimated annual effective tax rate is applied to year-to-date ordinary income. At the end of each interim period, the Company estimates the effective tax rate expected to be applicable for the full fiscal year. This differs from the method utilized at the end of an annual period.
For annual periods, the Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that the deferred tax assets will be realized. Deferred tax assets and liabilities are calculated by applying existing tax laws and the rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change.
The Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return, which are subject to examination by federal and state taxing authorities. The tax benefit from an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination by taxing authorities based on technical merits of the position. The amount of the tax benefit recognized is the largest amount of the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The effective tax rate and the tax basis of assets and liabilities reflect management’s estimates of the ultimate outcome of various tax uncertainties. The Company recognizes penalties and interest related to uncertain tax positions within the provision (benefit) for income taxes line in the accompanying consolidated statements of operations. As of the quarter ended September 30, 2022, the Company has recorded $1.0 million of gross unrecognized tax benefits inclusive of interest and penalties, all of which, if recognized, would favorably impact the effective tax rate. The Company recognizes penalties and interest related to uncertain tax positions within the provision (benefit) for income taxes line in the accompanying consolidated statements of operations.
The Company files U.S. federal and certain state income tax returns. The income tax returns of the Company are subject to examination by U.S. federal and state taxing authorities for various time periods, depending on those jurisdictions’ rules, generally after the income tax returns are filed.
17. Payable Pursuant to the Tax Receivable Agreement
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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
and increases to such allocable share of existing tax basis, (ii) certain increases in the tax basis of assets of Shoals Parent and its subsidiaries resulting from purchases or exchanges of LLC Interests, and (iii) certain other tax benefits related to the Company entering into the TRA, including those attributable to payments made under the TRA. These contractual payment obligations are obligations of the Company and not of Shoals Parent. The Company’s payable pursuant to the TRA was determined on an undiscounted basis in accordance with ASC 450, Contingencies, since the contractual payment obligations were deemed to be probable and reasonably estimable.
For purposes of the TRA, the benefit deemed realized by the Company is computed by comparing the actual income tax liability of the Company (calculated with certain assumptions) to the amount of such taxes that the Company would have been required to pay had there been no increase to the tax basis of the assets of Shoals Parent as a result of the purchases or exchanges, and had the Company not entered into the TRA.
The following table reflects the changes to the Company's payable pursuant to the tax receivable agreement (in thousands):
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Beginning balance | $ | $ | |||||||||
| Additions to TRA: | |||||||||||
| Exchange of LLC Interests for Class A Common Stock | |||||||||||
| Merger of Shoals investment CTB | |||||||||||
| Adjustment for change in estimated effective income tax rate | |||||||||||
| Payments under TRA | |||||||||||
| Payable pursuant to TRA | |||||||||||
| Less: current portion | ( | ||||||||||
| Payable pursuant to TRA, less current portion | $ | $ | |||||||||
The TRA further provides that, upon certain mergers, asset sales or other forms of business combinations or other changes of control, or if the Company materially breaches any of its material obligations under the TRA, the Company (or its successor) would owe to the TRA Owners a lump-sum payment equal to the present value of all forecasted future payments that would have otherwise been made under the TRA that would be based on certain assumptions, including a deemed exchange of LLC Interests and that the Company would have sufficient taxable income to fully utilize the deductions arising from the increased tax basis and other tax benefits related to entering into the TRA. The Company also is entitled to terminate the TRA, which, if terminated, would obligate the Company to make early termination payments to the TRA Owners.
When estimating the expected tax rate to use in order to determine the tax benefit expected to be recognized from the Company’s increased tax basis as a result of exchanges of LLC Interests by the TRA Owners, the Company continuously monitors changes in its overall tax posture, including changes resulting from new legislation and changes as a result of new jurisdictions in which the Company is subject to tax.
The Company has recorded deferred tax assets of $190.4 million since our IPO associated with basis differences in the net assets of Shoals Parent and pursuant to making an election under Section 754 of the Internal Revenue Code of 1986 (the "Internal Revenue Code"), as amended. The aggregate payable pursuant
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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
18. Revenue by Product
Based on Topic 606 provisions, the Company disaggregates its revenue from contracts with customers between system solutions and components. System solutions are contracts under which the Company provides multiple products typically in connection with the design and specification of an entire EBOS system. Components represents sales of individual components.
The following table presents the Company’s revenue disaggregated by system solutions and components (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| System solutions | $ | $ | $ | $ | |||||||||||||||||||
| Components | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information included in our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”) and this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate” or “continue” or comparable terminology are intended to identify forward-looking statements. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the sections of our 2021 Form 10-K and this Form 10-Q captioned “Forward-Looking Statements” and “Risk Factors”.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains the presentation of Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted Earnings per Share, which are not presented in accordance with GAAP. Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted Earnings per Share are being presented because they provide the Company, investors and readers of this Form 10-Q with additional insight into our operational performance relative to earlier periods and relative to our competitors. We do not intend Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted Earnings per Share to be substitutes for any GAAP financial information. Readers of this Form 10-Q should use Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted Earnings per Share only in conjunction with Net Income, the most comparable GAAP financial measure. Reconciliations of Adjusted EBITDA, Adjusted Net Income to Net Income and Adjusted Diluted Earnings per Share, the most comparable GAAP measure to each, are provided in “—Non-GAAP Financial Measures.”
Overview
We are a leading provider of electrical balance of system (“EBOS”) solutions and components for solar, battery storage and electrical vehicle (“EV”) charging applications, selling to customers across the United States and internationally. EBOS encompasses all of the components that are necessary to carry the electric current produced by solar panels to an inverter and ultimately to the power grid. EBOS components are mission-critical products that have a high consequence of failure, including lost revenue, equipment damage, fire damage, and even serious injury or death. As a result, we believe customers prioritize reliability and safety over price when selecting EBOS solutions.
EBOS components that we produce include cable assemblies, inline fuses, combiners, disconnects, recombiners, wireless monitoring systems, junction boxes, transition enclosures and splice boxes. We derive the majority of our revenue from selling “system solutions” which are complete EBOS systems that include several of our products, many of which are customized for the customer’s project. We believe our system solutions are unique in our industry because they integrate design and engineering support, proprietary components and innovative installation methods into a single offering that would otherwise be challenging for a customer to obtain from a single provider or at all.
We sell our solar products principally to engineering, procurement and construction firms ("EPCs”) that build solar energy projects. However, given the mission critical nature of EBOS, the decision to use our products typically involves input from both the EPC and the owner of the solar energy project. The custom nature of our system solutions and the long development cycle for solar energy projects typically gives us 12
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months or more of lead time to quote, engineer, produce and ship each order we receive, and we do not stock large amounts of finished goods.
We have maintained focus on our growth strategy throughout the third quarter, including developments in converting customers to our combine-as-you-go system and developing products for the rapidly growing electric vehicle charging infrastructure market. We believe that as of September 30, 2022, 14 of the top 15 solar EPCs as reported by Solar Power World Magazine use our combine-as-you-go system on their projects and we are currently in the process of transitioning an additional 15 EPCs and developers to our system. Additionally, in 2022 we launched four new product families for the EV charging market. The first is the power center which combines equipment needed to protect the charging equipment and transform voltage levels from the electric utility to those needed on the respective site. The power center provides an efficient, cost effective and aesthetically focused option versus traditional methods. The second offering focuses on quick connect solutions for chargers made by any manufacturer and any power level to connect to the Shoals system. The quick connect bases dramatically reduce the time required on site for a deployment and reduce the amount of labor required in the field. The third offering uses our Big Lead Assembly (“BLA”) technology in the EV space to connect multiple chargers to a single power center. This solution eliminates the need for homeruns from each dispenser and is above ground rated which allows wire to be run above ground rather than in underground conduit. The fourth offering is a raceway system that protects the above ground EV BLAs in walk over and drive over applications. The raceway system coupled with the EV BLA deploys much more rapidly and cost effectively than traditional methods of deployment. We introduced these first four offerings in the fourth quarter of 2021 and began taking orders and shipping some component products in Q1 2022. Significant order flow continued during Q3 2022 with scaled production underway to fulfill system solution orders in hand. We recently completed UL certification for many of our products and expect the balance to be certified by the end of the year.
We derived approximately 74.5% of our revenue from the sale of system solutions for the nine months ended September 30, 2022. For the same period, we derived substantially all of our revenue from customers in the U.S. As of September 30, 2022, we had $471.2 million of backlog and awarded orders, backlog of $199.3 million represents signed purchase orders or contractual minimum purchase commitments with take-or-pay provisions and awarded orders of $271.9 million are orders we are in the process of documenting a contract but for which a contract has not yet been signed. As of September 30, 2022, backlog and awarded orders represented a 74% and 44% increase relative to the same date last year and June 30, 2022, respectively.
Initial Public Offering
On January 29, 2021, we completed an IPO of 11,550,000 shares of Class A common stock at a public offering price of $25.00 per share, including shares issued pursuant to the underwriters' over-allotment option. We received $278.8 million in proceeds, net of underwriting discounts and commissions of $9.9 million, which was used to purchase 6,315,790 newly-issued membership interests (the “LLC Interests”) from Shoals Parent and 5,234,210 LLC Interests from the founder and Class B unit holder in Shoals Parent at a price per interest equal to the IPO price of $25.00 per share.
Organizational Transactions
See Note 1 to the condensed consolidated financial statements, included in this Quarterly Report on Form 10-Q for more information about the above-mentioned transactions as well as the other transactions completed in connection with the IPO.
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As the Organization Transactions were considered transactions between entities under common control, the condensed consolidated financial statements for the periods prior to the IPO and Organizational Transactions have been adjusted to combine the previously separate entities for presentation purposes.
Follow On Offering
On July 16, 2021, the Company completed a follow-on offering consisting of 4,989,692 shares of Class A common stock offered by the selling shareholders and 10,402,086 shares of Class A common stock offered by the Company. Following the closing of the follow-on offering, Oaktree Power Opportunities Fund IV (Delaware) Holdings, L.P. no longer beneficially owned any shares of our common stock. The Company used the proceeds of the sale of Class A common stock to purchase an equal number of LLC Interests and Class B common stock from our founder and management.
Acquisition of ConnectPV
On August 26, 2021, we acquired 100% of the stock of ConnectPV, for $13.8 million in cash (net of $0.8 million cash acquired) and 209,437 shares of Class A Common stock valued at $6.5 million. The acquisition was accounted for as a business combination and following the acquisition we immediately converted ConnectPV to a limited liability company (Shoals Connect LLC) and contributed the entity to Shoals Parent, LLC through a series of transactions.
Shoals Technologies Group, Inc Ownership in Shoals Parent
As of September 30, 2022, the Company owned 67.84% of Shoals Parent. The Continuing Equity Owners owned the remaining 32.16% of Shoals Parent.
Impact of COVID-19 and Macroeconomic Events
In 2022, COVID-19 has impacted our business in the following ways:
•Our ability to obtain raw material and required components from domestic and international suppliers required to manufacture our products; and
•Our ability to secure inbound and outbound logistics to and from our facilities, with additional delays linked to international border crossings and the associated approvals and documentation and;
Significant levels of inflation have increased energy prices, freight premiums, and other operating costs. As a result of inflation, during 2022, the Federal Reserve increased interest rates resulting in higher interest rates associated with our Senior Secured Credit Agreement. Any additional increases in interest rates by the Federal Reserve would have a corresponding increase in the interest rates charged under our Senior Secured Credit Agreement. The eventual implications of higher government deficits and debt, tighter monetary policy, and potentially higher long-term interest rates may drive a higher cost of capital during our forecast period.
The Company does not directly source raw materials from Europe. However, the ongoing conflict in Ukraine has reduced the availability of certain material that can be sourced in Europe and, as a result, increased global logistics costs for the procurement of some inputs and materials used in our products. We do not know the ultimate severity or duration of the conflict in Ukraine, but we are continuously monitoring the situation and evaluating our procurement strategy and supply chain as to reduce any negative impact on our business, financial condition, and results of operations.
As response to supply chain constraints, in 2022 we have increased certain raw materials inventory, partly to limit the potential impact of supply chain issues of raw materials in the near term.
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To date we have not had any material adverse effects on our financial results from these events.
Key Components of Our Results of Operations
The following discussion describes certain line items in our consolidated statements of operations.
Revenue
We generate revenue from the sale of EBOS systems and components for homerun and combine-as-you-go architectures, battery storage and EV charging infrastructure. Our customers include EPCs, utilities, solar developers, independent power producers, solar module manufacturers and charge point operators. We derive the majority of our revenue from selling system solutions. When we sell a system solution, we enter into a contract with our customers covering the price, specifications, delivery dates and warranty for the products being purchased, among other things. Our contractual delivery period for system solutions can vary from one to three months whereas manufacturing typically requires a shorter time frame. Contracts for system solutions can range in value from several hundred thousand to several million dollars.
Our revenue is affected by changes in the price, volume and mix of products purchased by our customers. The price and volume of our products is driven by the demand for our products, changes in product mix between homerun and combine-as-you-go EBOS, geographic mix of our customers, strength of competitors’ product offerings, and availability of government incentives to the end-users of our products.
Our revenue growth is dependent on continued growth in the amount of solar energy projects constructed each year and our ability to increase our share of demand in the geographies where we currently compete and plan to compete in the future as well as our ability to continue to develop and commercialize new and innovative products that address the changing technology and performance requirements of our customers.
Cost of Revenue and Gross Profit
Cost of revenue consists primarily of product costs, including purchased materials and components, as well as costs related to shipping, customer support, product warranty, personnel and depreciation of manufacturing and testing equipment. Personnel costs in cost of revenue include both direct labor costs as well as costs attributable to any individuals whose activities relate to the transformation of raw materials or component parts into finished goods or the transportation of materials to the customer. Our product costs are affected by the underlying cost of raw materials, including copper and aluminum; component costs, including fuses, resin, enclosures, and cable; technological innovation; economies of scale resulting in lower component costs; and improvements in production processes and automation. We do not currently hedge against changes in the price of raw materials. Some of these costs, primarily indirect personnel and depreciation of manufacturing and testing equipment, are not directly affected by sales volume. Gross profit may vary from year to year and is primarily affected by our sales volume, product prices, product costs, product mix, customer mix, geographical mix, shipping method and warranty costs.
Operating Expenses
Operating expenses consist of general and administrative costs as well as depreciation and amortization expense. Personnel-related costs are the most significant component of our operating expenses and include salaries, equity-based compensation, benefits, payroll taxes and commissions. The number of full-time employees in our general and administrative departments increased from 68 to 103 from September 30, 2021 to September 30, 2022, and we expect to hire new employees in the future to support our growth. The timing of these additional hires could materially affect our operating expenses in any particular period, both in
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absolute dollars and as a percentage of revenue. We expect to invest in additional resources to support our growth which will increase our operating expenses.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries, equity-based compensation expense, employee benefits and payroll taxes related to our executives, and our sales, finance, human resources, information technology, engineering and legal organizations, travel expenses, facilities costs, marketing expenses, insurance, bad debt expense and fees for professional services. Professional services consist of audit, tax, accounting, legal, internal controls, information technology, investor relations and other costs. We expect to increase our sales and marketing personnel as we expand into new geographic markets. Substantially all of our sales are currently in the U.S. We currently have a sales presence in the U.S., Australia, Europe and Latin America. We intend to expand our sales presence and marketing efforts to additional countries in the future. We will cease to be an emerging growth company as of December 31, 2022, and we will continue to incur additional audit, tax, accounting, legal and other costs related to compliance with applicable securities and other regulations, as well as other costs associated with being a public company.
Depreciation
Depreciation in our operating expenses consists of costs associated with property, plant and equipment (“PP&E”) not used in manufacturing our products. We expect that as we increase both our revenue and the number of our general and administrative personnel, we will invest in additional PP&E to support our growth resulting in additional depreciation expense.
Amortization
Amortization of intangibles consists of customer relationships, developed technology, trade names, backlog and non-compete agreements over their expected period of use.
Non-operating Expenses
Interest Expense
Interest expense consists of interest and other charges paid in connection with our Senior Secured Credit Agreement.
Payable Pursuant to the Tax Receivable Agreement Adjustment
Tax receivable agreement adjustment consists of changes to our tax rate since the initial recording of the liability related to our tax receivable agreement.
Loss on Debt Repayment
Loss on debt repayment consists of prepayment premiums and the write-off of a portion of the deferred financing costs from the prepayment of outstanding borrowings under the Term Loan Facility.
Income Tax Expense
Shoals Technologies Group, Inc. is subject to U.S. federal and state income tax in multiple jurisdictions with respect to our allocable share of any net taxable income of Shoals Parent. Shoals Parent is a pass-through entity for federal income tax purposes but incurs income tax in certain state jurisdictions.
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Results of Operations
The following table summarizes our results of operations (dollars in thousands):
| Three Months Ended September 30, | Increase / (Decrease) | Nine Months Ended September 30, | Increase / (Decrease) | ||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 90,823 | $ | 59,840 | $ | 30,983 | 52 | % | $ | 232,289 | $ | 165,166 | $ | 67,123 | 41 | % | |||||||||||||||||||||||||
| Cost of revenue | 54,776 | 38,071 | 16,705 | 44 | % | 141,357 | 98,444 | 42,913 | 44 | % | |||||||||||||||||||||||||||||||
| Gross profit | 36,047 | 21,769 | 14,278 | 66 | % | 90,932 | 66,722 | 24,210 | 36 | % | |||||||||||||||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||||||||||||||||||||
| General and administrative expenses | 13,853 | 10,031 | 3,822 | 38 | % | 41,037 | 26,865 | 14,172 | 53 | % | |||||||||||||||||||||||||||||||
| Depreciation and amortization | 2,229 | 2,175 | 54 | 2 | % | 6,939 | 6,305 | 634 | 10 | % | |||||||||||||||||||||||||||||||
| Total Operating Expenses | 16,082 | 12,206 | 3,876 | 32 | % | 47,976 | 33,170 | 14,806 | 45 | % | |||||||||||||||||||||||||||||||
| Income from Operations | 19,965 | 9,563 | 10,402 | 109 | % | 42,956 | 33,552 | 9,404 | 28 | % | |||||||||||||||||||||||||||||||
| Interest expense, net | (4,754) | (3,582) | 1,172 | 33 | % | (12,760) | (10,911) | 1,849 | 17 | % | |||||||||||||||||||||||||||||||
| Payable pursuant to the tax receivable agreement adjustment | — | (2,014) | (2,014) | (100) | % | — | (3,678) | (3,678) | (100) | % | |||||||||||||||||||||||||||||||
| Loss on debt repayment | — | — | — | — | % | — | (15,990) | (15,990) | (100) | % | |||||||||||||||||||||||||||||||
| Income before income taxes | 15,211 | 3,967 | 11,244 | (283) | % | 30,196 | 2,973 | 27,223 | (916) | % | |||||||||||||||||||||||||||||||
| Income tax benefit (expense) | (2,452) | 1,309 | 3,761 | 287 | % | (5,485) | 3,123 | 8,608 | 276 | % | |||||||||||||||||||||||||||||||
| Net income | 12,759 | 5,276 | 7,483 | 142 | % | 24,711 | 6,096 | 18,615 | (305) | % | |||||||||||||||||||||||||||||||
| Less: net income attributable to non-controlling interests | 4,801 | 2,790 | 2,011 | 72 | % | 9,711 | 1,911 | 7,800 | (408) | % | |||||||||||||||||||||||||||||||
| Net income attributable to Shoals Technologies Group, Inc. | $ | 7,958 | $ | 2,486 | $ | 5,472 | 220 | % | $ | 15,000 | $ | 4,185 | $ | 10,815 | (258) | % | |||||||||||||||||||||||||
Comparison of the Three Months Ended September 30, 2022 and 2021
Revenue
Revenue increased by $31.0 million, or 52%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, driven by higher sales volumes as a result of increased demand for solar EBOS generally and our combine-as-you-go system solutions specifically, our EV solutions launch, along with our acquisition of ConnectPV. Our total number of customers increased in 2022 as compared to 2021. We believe expanding customer recognition of the benefits of our combine-as-you-go system is continuing to result in increased demand for our products.
Cost of Revenue and Gross Profit
Cost of revenue increased by $16.7 million, or 44%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily driven by an increase in revenue. Gross profit as a percentage of revenue increased from 36.4% in 2021 to 39.7% in 2022 due to an increase in system solutions for combine-as-you-go EBOS, which have higher margins than our other products.
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Operating Expenses
General and Administrative
General and administrative expenses increased $3.8 million, or 38%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. The increase in general and administrative expenses was primarily the result of an increase in professional fees of $1.4 million mainly related to accounting, legal and recruiting, an increase in wages and related taxes of $1.3 million due to increased employee head counts to support our growth initiatives and requirements of being a public company, $1.1 million related to equity-based compensation and $0.7 million related to trade shows and travel, offset by a decrease of $1.7 million in acquisition-related expenses.
Depreciation and Amortization
Depreciation and Amortization expenses increased $0.1 million, or 2%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. The increase in depreciation and amortization was primarily due to the addition of intangibles acquired in the ConnectPV acquisition.
Interest Expense
Interest expense, net increased by $1.2 million or 33%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, due to increased borrowing rates and increased borrowings to support our growth and working capital needs under our Senior Secured Credit Agreement that we amended on May 5, 2022. During 2022, the Federal Reserve increased interest rates resulting in higher interest rates associated with our Senior Secured Credit Agreement. Any additional increases in interest rates by the Federal Reserve would have a corresponding increase in the interest rates charged under our Senior Secured Credit Agreement.
Payable Pursuant to the Tax Receivable Agreement Adjustment
Payable pursuant to the TRA adjustment decreased $2.0 million or 100% for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 as last year’s adjustment was driven by a change in the tax rate, which didn’t reoccur in the current year.
Income Tax Benefit (Expense)
Income tax expense totaled $2.5 million for the three months ended September 30, 2022 as compared to an income tax benefit of $1.3 million for the three months ended September 30, 2021. Our effective income tax rate for the three months ended September 30, 2022 and 2021 was 16.1% and 33.0% respectively. The 2022 rate decrease in our effective income tax rate for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 is primarily due to the vesting of equity-based compensation at a market price less than the initial grant date fair value, resulting in a permanent difference between book and tax expense in 2022 and an increase in the effective income tax rate resulting from the acquisition of ConnectPV in 2021.
Comparison of the Nine Months Ended September 30, 2022 and 2021
Revenue
Revenue increased by $67.1 million, or 41%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, driven by higher sales volumes as a result of
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increased demand for solar EBOS generally and our combine-as-you-go system solutions specifically, our EV solutions launch, along with our acquisition of ConnectPV. Our total number of customers increased in 2022 as compared to 2021. We believe expanding customer recognition of the benefits of our combine-as-you-go system is continuing to result in increased demand for our products.
Cost of Revenue and Gross Profit
Cost of revenue increased by $42.9 million, or 44%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily driven by an increase in revenue. Gross profit as a percentage of revenue decreased from 40.4% in 2021 to 39.1% in 2022 due to increased materials and logistics costs in the first half of 2022.
Operating Expenses
General and Administrative
General and administrative expenses increased $14.2 million, or 53%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The increase in general and administrative expenses was primarily the result of an increase in equity-based compensation of $4.4 million, an increase in wages and related taxes of $3.8 million due to increased employee head counts to support our growth and being a public company, $3.4 million in professional fees, mainly related to accounting, legal and recruiting, an increase of $0.8 million for travel and trade shows, and an increase of $0.4 million related to insurance, offset by a decrease of $1.7 million in acquisition-related expenses.
Depreciation and Amortization
Depreciation and amortization expense increased by $0.6 million, or 10%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, due to the addition of intangibles acquired in the ConnectPV acquisition.
Interest Expense
Interest expense, net increased by $1.8 million or 17%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, due to increased borrowing rates and borrowings that we amended on May 5, 2022 to support our growth and working capital under our Senior Secured Credit Agreement. During 2022, the Federal Reserve increased interest rates resulting in higher interest rates associated with our Senior Secured Credit Agreement. Any additional increases in interest rates by the Federal Reserve would have a corresponding increase in the interest rates charged under our Senior Secured Credit Agreement.
Payable Pursuant to the Tax Receivable Agreement Adjustment
Payable pursuant to the TRA adjustment decreased $3.7 million or 100% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, due to no changes in our tax rate in the current period.
Loss on Debt Repayment
Loss on debt repayment for the nine months ended September 30, 2021 totaled $16.0 million, which consisted of $11.3 million of prepayment premium and $4.7 million in write-off off a portion of the deferred financing costs related to a prepayment of $150.0 million of outstanding borrowings under the Term Loan Facility. There was no loss on debt repayment for the nine months ended September 30, 2022.
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Income Tax Expense
Income tax expense was $5.5 million for the nine months ended September 30, 2022 as compared to an income tax benefit of $3.1 million for the nine months ended September 30, 2021. Our effective income tax rate for the nine months ended September 30, 2022 and 2021 was 18.2% and 105.0% respectively. The 2022 rate was impacted by the vesting of equity-based compensation at a market price less than the initial grant date fair value resulting in a permanent difference between book and tax expense in 2022. The 2021 rate was impacted by a change in our effective income tax rate resulting from the acquisition of ConnectPV in 2021.
Non-GAAP Financial Measures
Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted Earnings per Share (“EPS”)
We define Adjusted EBITDA as net income (loss) plus (i) interest expense, net, (ii) income tax expense, (iii) depreciation expense, (iv) amortization of intangibles, (v) payable pursuant to the TRA adjustment, (vi) loss on debt repayment, (vii) equity-based compensation, (viii) acquisition-related expenses, (ix) COVID-19 expenses and (x) non-recurring and other expenses. We define Adjusted Net Income as net income (loss) attributable to Shoals Technologies Group, Inc. plus (i) net income impact from pro forma conversion of Class B common stock to Class A common stock, (ii) amortization of intangibles, (iii) payable pursuant to the tax receivable agreement adjustment, (iv) loss on debt repayment, (v) amortization of deferred financing costs, (vi) equity-based compensation, (vii) acquisition-related expenses, (viii) COVID-19 expenses and (ix) non-recurring and other expenses, all net of applicable income taxes. We define Adjusted Diluted EPS as Adjusted Net Income divided by the diluted weighted average shares of Class A common shares outstanding for the applicable period, which assumes the pro forma exchange of all outstanding Class B common shares for Class A common shares.
Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS are intended as supplemental measures of performance that are neither required by, nor presented in accordance with, GAAP. We present Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS because we believe they assist investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS: (i) as factors in evaluating management’s performance when determining incentive compensation; (ii) to evaluate the effectiveness of our business strategies; and (iii) because our credit agreement uses measures similar to Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS to measure our compliance with certain covenants.
Among other limitations, Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments; do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; in the case of Adjusted EBITDA, does not reflect income tax expense or benefit for periods prior to the reorganization; and may be calculated by other companies in our industry differently than we do or not at all, which may limit their usefulness as comparative measures.
Because of these limitations, Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP. You should review the reconciliation of net income to Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS below and not rely on any single financial measure to evaluate our business.
Reconciliation of Net Income to Adjusted EBITDA (in thousands):
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| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income | $ | 12,759 | $ | 5,276 | $ | 24,711 | $ | 6,096 | |||||||||||||||
| Interest expense, net | 4,754 | 3,582 | 12,760 | 10,911 | |||||||||||||||||||
| Income tax benefit (expense) | 2,452 | (1,309) | 5,485 | (3,123) | |||||||||||||||||||
| Depreciation expense | 478 | 449 | 1,371 | 1,265 | |||||||||||||||||||
| Amortization of intangibles | 2,121 | 2,088 | 6,630 | 6,080 | |||||||||||||||||||
Payable pursuant to the TRA adjustment (a) | — | 2,014 | — | 3,678 | |||||||||||||||||||
| Loss on debt repayment | — | — | — | 15,990 | |||||||||||||||||||
| Equity-based compensation | 3,991 | 2,732 | 11,887 | 6,904 | |||||||||||||||||||
| Acquisition-related expenses | 20 | 1,697 | 32 | 1,697 | |||||||||||||||||||
COVID-19 expenses (b) | — | 108 | — | 269 | |||||||||||||||||||
Non-recurring and other expenses (c) | — | 243 | — | 1,821 | |||||||||||||||||||
| Adjusted EBITDA | $ | 26,575 | $ | 16,880 | $ | 62,876 | $ | 51,588 | |||||||||||||||
(a) Represents an adjustment to eliminate the remeasurement of the payable pursuant to the TRA.
(b) Represents costs incurred as a direct impact from the COVID-19 pandemic, disinfecting and reconfiguration of facilities, medical professionals to conduct daily screenings of employees and direct legal costs associated with the pandemic.
(c) Represents certain costs associated with non-recurring professional services, our prior private equity owners’ expenses and other costs.
Reconciliation of Net Income Attributable to Shoals Technologies Group, Inc. to Adjusted Net Income (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income attributable to Shoals Technologies Group, Inc. | $ | 7,958 | $ | 2,486 | $ | 15,000 | $ | 4,185 | |||||||||||||||
Net income impact from pro forma conversion of Class B common stock to Class A common stock (a) | 4,801 | 2,790 | 9,711 | 1,911 | |||||||||||||||||||
Adjustment to the provision for income tax (b) | (1,134) | (668) | (2,293) | (476) | |||||||||||||||||||
| Tax effected net income | 11,625 | 4,608 | 22,418 | 5,620 | |||||||||||||||||||
| Amortization of intangibles | 2,121 | 2,088 | 6,630 | 6,080 | |||||||||||||||||||
| Amortization of deferred financing costs | 339 | 278 | 1,023 | 953 | |||||||||||||||||||
Payable pursuant to the TRA adjustment (c) | — | 2,014 | — | 3,678 | |||||||||||||||||||
| Loss on debt repayment | — | — | — | 15,990 | |||||||||||||||||||
| Equity-based compensation | 3,991 | 2,732 | 11,887 | 6,904 | |||||||||||||||||||
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| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Acquisition-related expenses | 20 | 1,697 | 32 | 1,697 | |||||||||||||||||||
COVID-19 expenses (d) | — | 108 | — | 269 | |||||||||||||||||||
Non-recurring and other expenses (e) | — | 243 | — | 1,821 | |||||||||||||||||||
Tax impact of adjustments (f) | (1,529) | (2,166) | (4,621) | (7,972) | |||||||||||||||||||
| Adjusted Net Income | $ | 16,567 | $ | 11,602 | $ | 37,369 | $ | 35,040 | |||||||||||||||
(a) Reflects net income to Class A common shares from pro forma exchange of corresponding shares of our Class B common shares held by our founder and management.
(b) Shoals Technologies Group, Inc. is subject to U.S. Federal income taxes, in addition to state and local taxes with respect to its allocable share of any net taxable income of Shoals Parent LLC. The adjustment to the provision for income tax reflects the effective tax rates below, assuming Shoals Technologies Group, Inc. owns 100% of the units in Shoals Parent LLC.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Statutory U.S. Federal income tax rate | 21.0 | % | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||||||
| Permanent adjustments | 0.1 | % | 0.1 | % | 0.1 | % | 1.0 | % | |||||||||||||||
| State and local taxes (net of federal benefit) | 2.5 | % | 2.9 | % | 2.5 | % | 2.9 | % | |||||||||||||||
| Effective income tax rate for Adjusted Net Income | 23.6 | % | 24.0 | % | 23.6 | % | 24.9 | % | |||||||||||||||
(c) Represents an adjustment to eliminate the remeasurement of the payable pursuant to the TRA.
(d) Represents costs incurred as a direct impact from the COVID-19 pandemic, disinfecting and reconfiguration of facilities, medical professionals to conduct daily screenings of employees and direct legal costs associated with the pandemic.
(e) Represents certain costs associated with non-recurring professional services, our prior private equity owners’ expenses and other costs.
(f) Represents the estimated tax impact of all Adjusted Net Income add-backs, excluding those which represent permanent differences between book versus tax.
Reconciliation of Diluted Weighted Average Shares Outstanding to Adjusted Diluted Weighted Average Shares Outstanding (in thousands, except per share):
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| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Diluted weighted average shares of Class A common shares outstanding, excluding Class B common shares | 113,584 | 102,251 | 112,816 | 96,527 | |||||||||||||||||||
| Assumed pro forma conversion of Class B common shares to Class A common shares | 54,253 | 64,813 | 54,579 | 70,285 | |||||||||||||||||||
| Adjusted diluted weighted average shares outstanding | 167,837 | 167,064 | 167,395 | 166,812 | |||||||||||||||||||
Adjusted Net Income (a) | $ | 16,567 | $ | 11,602 | $ | 37,369 | $ | 35,040 | |||||||||||||||
| Adjusted Diluted EPS | $ | 0.10 | $ | 0.07 | $ | 0.22 | $ | 0.21 | |||||||||||||||
(a) Represents Adjusted Net Income for the full period presented.
Liquidity and Capital Resources
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
Net cash used in operating activities | $ | 5,014 | $ | (6,679) | |||||||
Net cash used in investing activities | (2,896) | (15,392) | |||||||||
Net cash provided by financing activities | 19,941 | 26,187 | |||||||||
Net increase in cash and cash equivalents | $ | 22,059 | $ | 4,116 | |||||||
We finance our operations primarily with operating cash flows and short and long-term borrowings. Our ability to generate positive cash flow from operations is dependent on the strength of our gross margins as well as our ability to quickly turn our working capital. Based on our past performance and current expectations, we believe that operating cash flows and availability under our Revolving Credit Facility will be sufficient to meet our near and long-term future cash needs.
We generated cash from operating activities of $5.0 million in the nine months ended September 30, 2022 as compared to cash used in operating activities of $6.7 million for the nine months ended September 30, 2021. As of September 30, 2022, our cash and cash equivalents were $11.2 million and we had outstanding borrowings of $281.4 million. We also had $64.4 million available for additional borrowings under our $150.0 million Revolving Credit Facility.
Operating Activities
For the nine months ended September 30, 2022, cash provided by operating activities was $5.0 million, primarily due to increases of accounts payable and accrued expenses and other of $35.7 million which relates to increased inventory purchases in accounts payable and increased deferred revenue in accrued expenses and other, along with operating results that included $24.7 million of net income which was reduced by $26.7 million of non-cash expenses offset by an increase of $43.6 million in inventory as a result of increasing our raw materials inventory to support growth and reduce the likelihood of supply chain issues from our raw
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materials suppliers along with a change in our terms with an overseas supplier and $38.1 million in receivables which related to an increase in revenue.
For the nine months ended September 30, 2021, cash used in operating activities was $6.7 million, primarily due to an increase of $19.0 million in receivables, $8.5 million in inventory, $6.9 million in other assets and a decrease in accounts payable and accrued expenses of $2.6 million offset by operating results that included $6.1 million of net income which was reduced by $24.3 million of non-cash expenses.
Investing Activities
For the nine months ended September 30, 2022, net cash used in investing activities was $2.9 million, of which $2.4 million was attributable to the purchase of property and equipment.
For the nine months ended September 30, 2021, net cash used in investing activities was $15.4 million, of which $2.5 million was attributable to the purchase of property and equipment and $12.9 million related to the acquisition of ConnectPV.
Financing Activities
For the nine months ended September 30, 2022, net cash provided by financing activities was $19.9 million, including $30.5 million in borrowings under the Revolving Credit Facility offset by $7.8 million in distributions to our non-controlling interest holders, $1.5 million in payments on the Term Loan Facility and $1.3 million in taxes related to net share settled equity awards.
For the nine months ended September 30, 2021, net cash provided by financing activities was $26.2 million including $144.9 million in net proceeds from the IPO and $40.1 million in borrowings under the Revolving Credit Facility offset by $152.3 million of payments on the Term Loan Facility.
From time to time, we may seek to retire or purchase the Company’s outstanding debt or equity securities through cash purchases and/or exchanges for other debt or equity securities in open market purchases, privately negotiated transactions, or otherwise, that may be made pursuant to Rule 10b5-1 or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors.
Debt Obligations
For a discussion of our debt obligations see Note 9 - Long-Term Debt in our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q
Surety Bonds
We provide surety bonds to various parties as required for certain transactions initiated during the ordinary course of business to guarantee our performance in accordance with contractual or legal obligations. As of September 30, 2022, the maximum potential payment obligation with regard to surety bonds was $16.0 million.
Critical Accounting Policies and Significant Management Estimates
As of September 30, 2022, there were no significant changes in the application of our critical accounting policies or estimation procedures from those presented in our 2021 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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There have been no material changes with respect to our market risk disclosed in our 2021 Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2022. Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2022, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting that occurred during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be involved in litigation relating to claims that arise out of our operations and businesses and that cover a wide range of matters, including, among others, intellectual property matters, contract and employment claims, personal injury claims, product liability claims and warranty claims. Currently, there are no claims or proceedings against us that we believe will have a material adverse effect on our business, financial condition, results of operations or cash flows. However, the results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, we may incur significant costs and experience a diversion of management resources as a result of litigation.
Item 1A. Risk Factors
There have been no material changes, except as discussed below, with respect to our risk factors disclosed in our 2021 Form 10-K.
Changes in the United States trade environment, including the imposition of trade restrictions, import tariffs, anti-dumping and countervailing duties could adversely affect the amount or timing of our revenue, results of operations or cash flows.
Escalating trade tensions, particularly between the United States and China, have led to increased tariffs and trade restrictions, including tariffs applicable to certain materials and components for our products or for products used in solar energy projects more broadly, such as module supply and availability. More
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specifically, in March 2018, the United States imposed a 25% tariff on steel imports and a 10% tariff on aluminum imports pursuant to Section 301 of the Trade Act of 1974 and has imposed additional tariffs on steel and aluminum imports pursuant to Section 232 of the Trade Expansion Act of 1962. Additionally, in January 2018, the United States adopted a tariff on imported solar modules and cells pursuant to Section 201 of the Trade Act of 1974, which was extended in February 2022 for another four years. The tariff was initially set at 30%, with a gradual reduction over four years to 15%. This tariff may indirectly affect us by impacting the financial viability of solar energy projects, which could in turn reduce demand for our products. Furthermore, in July 2018, the United States adopted a 10% tariff on a long list of products imported from China under Section 301 of the Trade Act of 1974, including inverters and power optimizers, which became effective on September 24, 2018. In June 2019, the U.S. Trade Representative increased the rate of such tariffs from 10% to 25%. These tariffs could impact the solar energy projects in which our products are used, which could lead to decreased demand for our products.
On January 15, 2020, the United States and China entered into an initial trade deal that preserves the bulk of the tariffs placed in 2018 and maintains a threat of additional tariffs should China breach the terms of the deal.
In December 2021, President Biden signed the Uyghur Forced Labor Prevention Act (“UFLPA”) into law, which seeks to block the import of products made with forced labor in certain areas of China. As a result, some suppliers of solar modules have seen shipments detained by U.S. Customs and Border Patrol pursuant to the UFLPA. These detainments have not significantly impacted any of our customers’ projects to date; however, continued or future detainments could affect the industry and impact solar energy projects more broadly, which in turn could affect our business. We are monitoring developments in this area.
In addition, the United States currently imposes antidumping and countervailing duties on certain imported crystalline silicon PV cells and modules from China and Taiwan. Such antidumping and countervailing duties can change over time pursuant to annual reviews conducted by the U.S. Department of Commerce, and an increase in duty rates could have an adverse impact on our operating results. In February 2022, a petitioner requested that the U.S. Department of Commerce (“USDOC”) investigate alleged circumvention of antidumping and countervailing duties on Chinese imports by crystalline silicon PV cells and module imports assembled and completed in Cambodia, Malaysia, Thailand, and Vietnam. On March 28, 2022, the USDOC announced that it would investigate the circumvention alleged in the petition. As the timing and progress of many of our customers’ projects depend upon the supply of PV cells and modules, our operating results could be adversely impacted if the USDOC investigation is not resolved quickly and/or the USDOC makes negative circumvention determinations. More recently, on October 7, 2022, the Biden Administration adopted export controls related to technology that could harm U.S. national security. Tariffs and the possibility of additional tariffs in the future, including as a result of the petition pending with the USDOC regarding circumvention of antidumping and countervailing duties, have created uncertainty in the industry. If the price of solar systems in the United States increases, the use of solar systems could become less economically feasible and could reduce our gross margins or reduce the demand of solar systems manufactured and sold, which in turn may decrease demand for our products. Additionally, existing or future tariffs or other trade restrictions may negatively affect key customers, suppliers, and manufacturing partners. Such outcomes could adversely affect the amount or timing of our revenue, results of operations or cash flows, and continuing uncertainty could cause sales volatility, price fluctuations or supply shortages or cause our customers to advance or delay their purchase of our products. It is difficult to predict what further trade-related actions governments may take, which may include additional or increased tariffs and trade restrictions, and we may be unable to quickly and effectively react to such actions.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
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Recent Sales of Unregistered Equity Securities
There were no unregistered sales of equity during the three months ended September 30, 2022.
During the three months ended September 30, 2022, pursuant to the terms of the Exchange Agreement entered into in connection with our IPO, certain Continuing Equity Owners exchanged 718,377 LLC Units together with an equal number of shares of Class B common stock for 718,377 newly-issued shares of Class A common stock. These shares of Class A common stock were issued in reliance on an exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
| EXHIBIT INDEX | ||||||||||||||||||||||||||
| Incorporated by Reference | ||||||||||||||||||||||||||
| Number | Description of Document | Form | Filing Date | Exhibit No. | ||||||||||||||||||||||
| 3.1 | 8-K | 1/29/2021 | 3.1 | |||||||||||||||||||||||
| 3.2 | 8-K | 1/29/2021 | 3.2 | |||||||||||||||||||||||
| 10.1* | ||||||||||||||||||||||||||
| 31.1* | Certification of the Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) | |||||||||||||||||||||||||
| 31.2* | ||||||||||||||||||||||||||
| 32.1* | ||||||||||||||||||||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||||||||||||||||||||||||
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| EXHIBIT INDEX | ||||||||||||||||||||||||||
| Incorporated by Reference | ||||||||||||||||||||||||||
| Number | Description of Document | Form | Filing Date | Exhibit No. | ||||||||||||||||||||||
| 101.SCH* | XBRL Taxonomy Extension Schema Document | |||||||||||||||||||||||||
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||||||||||||||
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||||||||||||||||
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |||||||||||||||||||||||||
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||||||||||||||||||||||||
________
* Filed herewith
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Shoals Technologies Group, Inc. | |||||||||||||||||||||||
| Date: | November 14, 2022 | By: | /s/ Jason Whitaker | ||||||||||||||||||||
| Name: | Jason Whitaker | ||||||||||||||||||||||
| Title: | Chief Executive Officer | ||||||||||||||||||||||
| Date: | November 14, 2022 | By: | /s/ Dominic Bardos | ||||||||||||||||||||
| Name: | Dominic Bardos | ||||||||||||||||||||||
| Title: | Chief Financial Officer | ||||||||||||||||||||||
45
EXECUTION VERSION
EMPLOYMENT AGREEMENT
This Employment Agreement (“Agreement”) is made and entered into as of 8/11/2022, by and between Shoals Technologies Group, Inc., a Delaware corporation (the “Company”), and Dominic Bardos (“Employee”).
1.Employment. During the Employment Period (as defined in Section 4), the Company shall employ Employee, and Employee shall serve, as Chief Financial Officer of the Company and in such other position or positions as may be assigned from time to time by the Company or the board of directors of the Company (the “Board”).
2.Duties and Responsibilities of Employee.
(a)During the Employment Period, Employee shall devote Employee’s best efforts and full business time and attention to the businesses of the Company and its direct and indirect subsidiaries as may exist from time to time (collectively, the Company and its direct and indirect subsidiaries are referred to as the “Company Group”) as may be requested by the Company or the Board from time to time. Employee’s duties and responsibilities shall include those normally incidental to the position(s) identified in Section 1, as well as such additional duties as may be assigned to Employee by the Company or the Board from time to time, which duties and responsibilities may include providing services to other members of the Company Group in addition to the Company. Employee may, without violating this Section 2(a), (i) as a passive investment, own publicly traded securities in such form or manner as will not require any services by Employee in the operation of the entities in which such securities are owned; (ii) engage in charitable and civic activities; or (iii) with the prior written consent of the Board, engage in other personal and passive investment activities, in each case, so long as such ownership, interests or activities do not interfere with Employee’s ability to fulfill Employee’s duties and responsibilities under this Agreement and are not inconsistent with Employee’s obligations to any member of the Company Group or competitive with the business of any member of the Company Group.
(b)Employee hereby represents and warrants that Employee is not the subject of, or a party to, any non-competition, non-solicitation, non-disclosure, restrictive covenant or other agreement, obligation or restriction that would prohibit Employee from executing this Agreement or fully performing each of Employee’s duties and responsibilities hereunder, or would in any manner, directly or indirectly, limit or affect any of the duties and responsibilities that may now or in the future be assigned to Employee hereunder. Employee expressly acknowledges and agrees that Employee is strictly prohibited from using or disclosing any confidential information belonging to any prior employer or other third party in the course of performing services for any member of the Company Group, and Employee promises that Employee shall not do so. Employee shall not introduce documents or other materials containing confidential information of any prior employer or other third party to the premises or property (including computers and computer systems) of any member of the Company Group.
(c)Employee owes each member of the Company Group fiduciary duties (including (i) duties of care, loyalty and disclosure and (ii) such fiduciary duties that an officer of the Company would have if the Company were a corporation organized under the laws of the State of Delaware), and the obligations described in this Agreement are in addition to, and not in lieu of, the obligations Employee owes each member of the Company Group under statutory and common law.
(d)During the Employment Period, Employee’s principal place of employment with the Company shall be in Portland, Tennessee; provided, that Employee
understands and agrees that Employee may be required to travel from time to time for business purposes, subject to the Company’s travel policy.
1.Compensation.
(e)Base Salary. During the Employment Period, the Company shall pay to Employee an annualized base salary of $425,000 (the “Base Salary”) in consideration for Employee’s services under this Agreement, payable in substantially equal installments in conformity with the Company’s customary payroll practices for similarly situated employees as may exist from time to time, but no less frequently than monthly. Notwithstanding any provision of this Agreement, the Company may decrease Employee’s Base Salary as part of one or more reductions in base salaries that apply equally to each of the members of the Company’s senior management team in substantially the same proportions.
(f)Annual Bonus. For each complete calendar year during the Employment Period, Employee shall be eligible for discretionary bonus compensation with a target amount of up to seventy-five percent (75%) of Employee’s Base Salary (the “Annual Bonus”). The performance targets that must be achieved in order to be eligible for certain bonus levels shall be established by the Board (or a committee thereof) for each applicable calendar year (the “Bonus Year”) and provided to Employee. Each Annual Bonus, if any, shall be paid as soon as administratively feasible after the Board (or a committee thereof) determines whether the applicable performance targets for the applicable Bonus Year have been achieved, but in no event later than March 15 following the end of such Bonus Year. Notwithstanding the foregoing, Employee shall be eligible to receive an Annual Bonus for calendar year 2022 equal to $137,312, payable in two installments as follows: (i) $68,656 shall be paid to Employee on the first payroll date following the Effective Date (as defined below) (the “Advance Bonus”); provided, that in the event Employee’s employment hereunder is terminated by the Company for Cause pursuant to Section 7(a) or by Employee without Good Reason pursuant to Section 7(e), in each case, prior to the one-year anniversary of the Effective Date, then Employee must repay the full amount of the Advance Bonus to the Company within thirty (30) days following the date of such termination; and (ii) $68,656 shall be paid to Employee at the same time as annual bonuses are generally paid to similarly situated Company employees (but in no event later than March 15, 2023). Notwithstanding anything in this Section 3(b) to the contrary, no Annual Bonus, if any, or any portion thereof, shall be payable for any Bonus Year unless Employee remains continuously employed by the Company from the Effective Date through the date on which such Annual Bonus is paid.
(g)Equity Awards. During the Employment Period, Employee shall be eligible to receive equity awards under the Company’s 2021 Long-Term Incentive Plan (the “LTIP”). All awards granted to Employee under the LTIP shall be in such amounts and on such terms and conditions as the Board or a committee thereof shall determine from time to time, taking into account Employee’s position and performance, and shall be subject to and governed by the terms and provisions of the LTIP and the applicable award agreements evidencing such awards. Subject to approval by the Board or a committee thereof, as soon as reasonably practicable following the Effective Date, Employee shall be granted the following initial equity awards under the LTIP: (i) an equity award with respect to fiscal year 2022, with a value equal to $560,000, granted fifty percent (50%) in the form of time-based restricted stock units of the Company (“RSUs”) and fifty percent (50%) in the form of performance-based restricted stock units of the Company (the “Fiscal Year 2022 Award”), and (ii) an equity award intended to reimburse Employee for the forfeited equity awards previously granted to Employee by Employee’s former employer, with a value equal to $770,000, granted one-hundred percent (100%) in the form of RSUs (the “Replacement Equity Award”), in each case, calculated based on the average Fair Market Value of the Company’s Common Stock (each as defined in the LTIP) during the five (5)-day trading period ending on and including the applicable grant date.
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Subject to approval by the Board or a committee thereof, Employee shall be eligible to receive long-term incentive compensation for fiscal year 2023, with an aggregate target value equal to $1,050,000, calculated based on the average Fair Market Value of the Company’s Common Stock during the five (5)-day trading period ending on and including the applicable grant date (the “Fiscal Year 2023 Award”). The design of the Fiscal Year 2023 Award shall be commensurate with other Company executives, as determined by the Board or a committee thereof. The Fiscal Year 2022 Award, the Replacement Equity Award and the Fiscal Year 2023 Award shall each be subject to the terms and conditions of the LTIP, and shall each vest in accordance with the applicable award agreements. Nothing herein shall be construed to give Employee any rights to any amount or type of grant or award except as provided in the applicable award agreements and authorized by the Board or a committee thereof.
2.Term of Employment. The term of Employee’s employment under this Agreement shall commence on October 3, 2022 (the “Effective Date”) and continue until Employee’s employment is terminated in accordance with Section 7. The period from the Effective Date through the termination of Employee’s employment pursuant to this Agreement, regardless of the time or reason for such termination, shall be referred to herein as the “Employment Period.”
3.Business Expenses. Subject to Section 23, the Company shall reimburse Employee for Employee’s reasonable and documented out-of-pocket business-related expenses actually incurred in the performance of Employee’s duties under this Agreement so long as such expenses are consistent with the Company’s expense policy as in effect from time to time and Employee timely submits all documentation for such expenses, as required by such policy. Any such reimbursement of expenses shall be made by the Company upon or as soon as practicable following receipt of such documentation (but in any event not later than the close of Employee’s taxable year following the taxable year in which the expense is incurred by Employee). In no event shall any reimbursement be made to Employee for any expenses incurred after the date of Employee’s termination of employment with the Company.
4.Benefits. During the Employment Period, Employee shall be eligible to participate in the same benefit plans and programs in which other similarly situated Company employees are eligible to participate, subject to the terms and conditions of the applicable plans and programs in effect from time to time. The Company shall not, however, by reason of this Section 6, be obligated to institute, maintain, or refrain from changing, amending, or discontinuing, any such plan or policy.
5.Termination of Employment.
(h)Company’s Right to Terminate Employee’s Employment for Cause. The Company shall have the right to terminate Employee’s employment hereunder at any time for Cause. For purposes of this Agreement, “Cause” shall mean, as determined by the Board:
(i)Employee’s material breach of this Agreement or any other written agreement between Employee and one or more members of the Company Group, including Employee’s material breach of any representation, warranty or covenant made under any such agreement;
(ii)Employee’s breach of any policy or code of conduct established by a member of the Company Group and applicable to Employee, including any policy or code of conduct provision relating to discrimination, harassment or retaliation;
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(iii)Employee’s personal violation of any material law applicable to the workplace or any member of the Company Group (including any law regarding anti-discrimination, anti-harassment or anti-retaliation);
(iv)Employee’s gross negligence, willful misconduct, breach of fiduciary duty, fraud, theft or embezzlement that has or could reasonably be expected to have an adverse effect on any member of the Company Group;
(v)the commission by Employee of, or conviction or indictment of Employee for, or plea of nolo contendere by Employee to, any felony (or state law equivalent) or any crime or act involving moral turpitude; or
(vi)Employee’s willful failure or refusal, other than due to Disability, to perform Employee’s obligations pursuant to this Agreement or to follow any lawful directive from the Company or the Board, as determined by the Company or the Board (sitting without Employee, if applicable) in its sole discretion; provided, however, that if Employee’s actions or omissions as set forth in this Section 7(a)(vi) are of such a nature that the Company or the Board determines that they are curable by Employee, such actions or omissions must remain uncured thirty (30) days after the Company or the Board first provided Employee written notice of the obligation to cure such actions or omissions.
(i)Company’s Right to Terminate for Convenience. The Company shall have the right to terminate Employee’s employment for convenience at any time and for any reason, or no reason at all, upon written notice to Employee.
(j)Employee’s Right to Terminate for Good Reason. Employee shall have the right to terminate Employee’s employment with the Company at any time for Good Reason. For purposes of this Agreement, “Good Reason” shall mean:
(i)a material diminution in Employee’s Base Salary or authority, duties and responsibilities with the Company or its subsidiaries; provided, however, that if Employee is serving as an officer or member of the board of directors (or similar governing body) of any member of the Company Group or any other entity in which a member of the Company Group holds an equity interest, in no event shall the removal of Employee as an officer or board member, regardless of the reason for such removal, constitute Good Reason; or
(ii)the relocation of the geographic location of Employee’s principal place of employment by more than fifty (50) miles from the location of Employee’s principal place of employment as of the Effective Date.
Notwithstanding the foregoing provisions of this Section 7(c) or any other provision of this Agreement to the contrary, any assertion by Employee of a termination for Good Reason shall not be effective unless all of the following conditions are satisfied: (A) the condition described in Section 7(c)(i) or (ii) giving rise to Employee’s termination of employment must have arisen without Employee’s consent; (B) Employee must provide written notice to the Board of the existence of such condition(s) within thirty (30) days after the initial occurrence of such condition(s); (C) the condition(s) specified in such notice must remain uncorrected for thirty (30) days following the Board’s receipt of such written notice; and (D) the date of Employee’s termination of employment must occur within sixty (60) days after the initial occurrence of the condition(s) specified in such notice. Further and notwithstanding the foregoing, no suspension of Employee or a reduction in Employee’s authority, duties and responsibilities in conjunction
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with any leave required, or other action taken, by the Company as part of any investigation into alleged wrongdoing by Employee shall give rise to Good Reason.
(k)Death or Disability. Upon the death or Disability of Employee, Employee’s employment with the Company shall automatically (and without any further action by any person or entity) terminate with no further obligation under this Agreement of either party hereunder. For purposes of this Agreement, a “Disability” shall exist if the Board determines that Employee is unable to perform the essential functions of Employee’s position (after accounting for reasonable accommodation, if applicable and required by applicable law), due to physical or mental impairment that continues, or can reasonably be expected to continue, for a period in excess of ninety (90) consecutive days or one hundred-twenty (120) days, whether or not consecutive (or for any longer period as may be required by applicable law), in any twelve (12)-month period.
(l)Employee’s Right to Terminate for Convenience. In addition to Employee’s right to terminate Employee’s employment for Good Reason, Employee shall have the right to terminate Employee’s employment with the Company for convenience at any time and for any other reason, or no reason at all, upon thirty (30) days’ advance written notice to the Company; provided, however, that if Employee has provided notice to the Company of Employee’s termination of employment, the Company may determine, in its sole discretion, that such termination shall be effective on any date prior to the effective date of termination provided in such notice (and, if such earlier date is so required, then it shall not change the basis for Employee’s termination of employment nor be construed or interpreted as a termination of employment pursuant to Section 7(b)) and any requirement to continue salary or benefits shall cease as of such earlier date.
(m)Effect of Termination.
(vii)If Employee’s employment hereunder is terminated by the Company without Cause pursuant to Section 7(b), or is terminated by Employee for Good Reason pursuant to Section 7(c), then so long as (and only if) Employee: (A) executes on or before the Release Expiration Date (as defined below), and does not revoke within any time provided by the Company to do so, a separation agreement and release of all claims in a form provided to Employee by the Company (the “Release”), which Release shall, among other things, release each member of the Company Group and their respective affiliates, and the foregoing entities’ respective shareholders, members, partners, officers, managers, directors, fiduciaries, employees, representatives, agents and benefit plans (and fiduciaries of such plans) from any and all claims, including any and all causes of action arising out of Employee’s employment and relationship with the Company and any other member of the Company Group or the termination of such employment or relationship, but excluding all claims to severance payments Employee may have under this Section 7; and (B) abides by the terms of each of Sections 9, 10 and 11 and any other post-employment obligations that Employee may owe to any member of the Company Group, then:
(A)The Company shall make severance payments to Employee in a total amount equal to twelve (12) months’ worth of Employee’s Base Salary for the year in which such termination occurs (such total severance payments being referred to as the “Severance Payment”). The Severance Payment will be divided into substantially equal installments paid over the twelve (12) month period (the “Severance Period”) following the date on which Employee’s employment terminates (the “Termination Date”). On the Company’s first regularly scheduled pay date that is on or after the date the Release has become irrevocable (the “First Payment Date”), the Company shall pay to Employee,
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without interest, the aggregate amount payable pursuant to any installments that would have been paid during the period beginning on the Termination Date and ending on the First Payment Date had the installments been paid on the Company’s regularly scheduled pay dates on or following the Termination Date, and, subject to Section 23, each of the remaining installments shall be paid on the Company’s regularly scheduled pay dates during the remainder of such twelve (12)-month period.
(B)During the portion, if any, of the Severance Period that Employee is eligible to and elects to continue coverage for Employee and Employee’s spouse and eligible dependents, if any, under the Company’s group health plans pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”), the Company shall, at its option pay or reimburse Employee on a monthly basis for the difference between the amount Employee pays to effect and continue such coverage and the employee contribution amount that similarly situated employees of the Company pay for the same or similar coverage under such group health plans (the “COBRA Benefit”). Each payment of the COBRA Benefit shall be paid on or about the Company’s first regularly scheduled pay date in the calendar month immediately following the calendar month in which Employee submits to the Company documentation of the applicable premium payment having been paid by Employee, which documentation shall be submitted by Employee to the Company within thirty (30) days following the date on which the applicable premium payment is paid. Employee shall be eligible to receive such reimbursement payments until the earliest of: (i) the last day of the Severance Period; (ii) the date Employee is no longer eligible to receive COBRA continuation coverage; and (iii) the date on which Employee becomes eligible to receive coverage under a group health plan sponsored by another employer (and any such eligibility shall be promptly reported to the Company by Employee); provided, however, that the election of COBRA continuation coverage and the payment of any premiums due with respect to such COBRA continuation coverage shall remain Employee’s sole responsibility, and the Company shall not assume any obligation for payment of any such premiums relating to such COBRA continuation coverage.
(iii)If the Release is not executed and returned to the Company on or before the Release Expiration Date, and the required revocation period has not fully expired without revocation of the Release by Employee, then Employee shall not be entitled to any portion of the Severance Payment or the COBRA Benefit. As used herein, the “Release Expiration Date” is that date that is twenty-one (21) days following the date upon which the Company delivers the Release to Employee (which shall occur no later than seven (7) days after the Termination Date) or, in the event that such termination of employment is determined by the Company to be “in connection with an exit incentive or other employment termination program” (as such phrase is defined in the Age Discrimination in Employment Act of 1967), the date that is forty-five (45) days following such delivery date.
(n)After-Acquired Evidence. Notwithstanding any provision of this Agreement to the contrary, in the event that the Company determines that Employee is eligible to receive the Severance Payment pursuant to Section 7(f) but, during the Severance Period, the Company subsequently acquires evidence or determines that: (i) Employee has failed to abide by the terms of Sections 9, 10 or 11 or any other post-employment obligations that Employee may owe to any member of the Company Group; or (ii) a Cause condition existed prior to the Termination Date that, had the Company been fully aware of such condition, would have given the Company the right to terminate Employee’s employment pursuant to Section 7(a), then the
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Company shall have the right to cease the payment of any future installments of the Severance Payment and Employee shall promptly return to the Company the pre-tax value of all installments of the Severance Payment received by Employee prior to the date that the Company determines that the conditions of this Section 7(g) have been satisfied.
1.Disclosures.
(o)Employee hereby represents and warrants that as of the Effective Date, there exist (i) no actual or potential Conflicts of Interest and (ii) no current or pending lawsuits, claims or arbitrations filed by, against or involving Employee or any trust or vehicle owned or controlled by Employee.
(p)Promptly (and in any event, within three (3) business days) upon becoming aware of (i) any actual or potential Conflict of Interest or (ii) any lawsuit, claim or arbitration filed by, against or involving Employee or any trust or vehicle owned or controlled by Employee, in each case, Employee shall disclose such actual or potential Conflict of Interest or such lawsuit, claim or arbitration to the Board.
(q)A “Conflict of Interest” shall exist when Employee engages in, or plans to engage in, any activities, associations, or interests that conflict with, or create an appearance of a conflict with, Employee’s duties, responsibilities, authorities, or obligations for and to any member of the Company Group.
6.Confidentiality. In the course of Employee’s employment with the Company and the performance of Employee’s duties on behalf of the Company Group hereunder, Employee will be provided with, and will have access to, Confidential Information (as defined below). In consideration of Employee’s receipt and access to such Confidential Information, and as a condition of Employee’s employment, Employee shall comply with this Section 9.
(r)Both during the Employment Period and thereafter, except as expressly permitted by this Agreement, Employee shall not disclose any Confidential Information to any person or entity and shall not use any Confidential Information except for the benefit of the Company Group. Employee acknowledges and agrees that Employee would inevitably use and disclose Confidential Information in violation of this Section 9 if Employee were to violate any of the covenants set forth in Section 10. Employee shall follow all Company Group policies and protocols regarding the security of all documents and other materials containing Confidential Information (regardless of the medium on which Confidential Information is stored). Except to the extent required for the performance of Employee’s duties on behalf of the Company Group, Employee shall not remove from facilities of any member of the Company Group any information, property, equipment, drawings, notes, reports, manuals, invention records, computer software, customer information, or other data or materials that relate in any way to the Confidential Information, whether paper or electronic and whether produced by Employee or obtained by the Company Group. The covenants of this Section 9(a) shall apply to all Confidential Information, whether now known or later to become known to Employee during the period that Employee is employed by or affiliated with the Company or any other member of the Company Group.
(s)Notwithstanding any provision of Section 9(a) to the contrary, Employee may make the following disclosures and uses of Confidential Information:
(viii)disclosures to other employees, officers or directors of a member of the Company Group who have a need to know the information in connection with the businesses of the Company Group;
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(ix)disclosures to customers and suppliers when, in the reasonable and good faith belief of Employee, such disclosure is in connection with Employee’s performance of Employee’s duties under this Agreement and is in the best interests of the Company Group;
(x)disclosures and uses that are approved in writing by the Board; or
(xi)disclosures to a person or entity that has (x) been retained by a member of the Company Group to provide services to one or more members of the Company Group and (y) agreed in writing to abide by the terms of a confidentiality agreement.
(t)Upon the expiration of the Employment Period, and at any other time upon request of the Company, Employee shall promptly and permanently surrender and deliver to the Company all documents (including electronically stored information) and all copies thereof and all other materials of any nature containing or pertaining to all Confidential Information and any other Company Group property (including any Company Group-issued computer, mobile device or other equipment) in Employee’s possession, custody or control and Employee shall not retain any such documents or other materials or property of the Company Group. Within ten (10) days of any such request, Employee shall certify to the Company in writing that all such documents, materials and property have been returned to the Company.
(u)“Confidential Information” means all confidential, competitively valuable, non-public or proprietary information that is conceived, made, developed or acquired by or disclosed to Employee (whether conveyed orally or in writing), individually or in conjunction with others, during the period that Employee is employed by or otherwise affiliated with the Company or any other member of the Company Group (whether during business hours or otherwise and whether on the Company’s premises or otherwise) including: (i) technical information of any member of the Company Group, its affiliates, its investors, customers, vendors, suppliers or other third parties, including computer programs, software, databases, data, ideas, know-how, formulae, compositions, processes, discoveries, machines, inventions (whether patentable or not), designs, developmental or experimental work, techniques, improvements, work in process, research or test results, original works of authorship, training programs and procedures, diagrams, charts, business and product development plans, and similar items; (ii) information relating to any member of the Company Group’s businesses or properties, products or services (including all such information relating to corporate opportunities, operations, future plans, methods of doing business, business plans, strategies for developing business and market share, research, financial and sales data, pricing terms, evaluations, opinions, interpretations, acquisition prospects, the identity of customers or acquisition targets or their requirements, the identity of key contacts within customers’ organizations or within the organization of acquisition prospects, or marketing and merchandising techniques, prospective names and marks) or pursuant to which any member of the Company Group owes a confidentiality obligation; (iii) other valuable, confidential information and trade secrets of any member of the Company Group, its affiliates, its customers or other third parties; and (iv) this Agreement. Moreover, all documents, videotapes, written presentations, brochures, drawings, memoranda, notes, records, files, correspondence, manuals, models, specifications, computer programs, e-mail, voice mail, electronic databases, maps, drawings, architectural renditions, models and all other writings or materials of any type including or embodying any of such information, ideas, concepts, improvements, discoveries, inventions and other similar forms of expression are and shall be the sole and exclusive property of the Company or the other applicable member of the Company Group and be subject to the same restrictions on disclosure applicable to all Confidential Information pursuant to this Agreement. For purposes of this Agreement, Confidential Information shall not include any information that (A) is or becomes generally available to the public other than as a result of a disclosure or wrongful act of Employee or any of Employee’s
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agents; (B) was available to Employee on a non-confidential basis before its disclosure by a member of the Company Group; (C) becomes available to Employee on a non-confidential basis from a source other than a member of the Company Group; provided, however, that such source is not bound by a confidentiality agreement with, or other obligation with respect to confidentiality to, a member of the Company Group; or (D) is required to be disclosed by applicable law.
(v)Notwithstanding the foregoing, nothing in this Agreement shall prohibit or restrict Employee from lawfully: (i) initiating communications directly with, cooperating with, providing information to, causing information to be provided to, or otherwise assisting in an investigation by, any governmental authority regarding a possible violation of any law; (ii) responding to any inquiry or legal process directed to Employee from any such governmental authority; (iii) testifying, participating or otherwise assisting in any action or proceeding by any such governmental authority relating to a possible violation of law; or (iv) making any other disclosures that are protected under the whistleblower provisions of any applicable law. Additionally, pursuant to the federal Defend Trade Secrets Act of 2016, an individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that: (A) is made (1) in confidence to a federal, state or local government official, either directly or indirectly, or to an attorney and (2) solely for the purpose of reporting or investigating a suspected violation of law; (B) is made to the individual’s attorney in relation to a lawsuit for retaliation against the individual for reporting a suspected violation of law; or (C) is made in a complaint or other document filed in a lawsuit or proceeding, if such filing is made under seal. Nothing in this Agreement requires Employee to obtain prior authorization before engaging in any conduct described in this paragraph, or to notify the Company that Employee has engaged in any such conduct.
7.Non-Competition; Non-Solicitation.
(w)The Company shall provide Employee access to Confidential Information for use only during the Employment Period, and Employee acknowledges and agrees that the Company Group will be entrusting Employee, in Employee’s unique and special capacity, with developing the goodwill of the Company Group, and in consideration of the Company providing Employee with access to Confidential Information, clients and customers and as an express incentive for the Company to enter into this Agreement and employ Employee, Employee has voluntarily agreed to the covenants set forth in this Section 10. Employee agrees and acknowledges that the limitations and restrictions set forth herein, including geographical and temporal restrictions on certain competitive activities, are reasonable in all respects, do not interfere with public interests, will not cause Employee undue hardship, and are material and substantial parts of this Agreement intended and necessary to prevent unfair competition and to protect the Company Group’s Confidential Information, goodwill and legitimate business interests.
(x)During the Prohibited Period, Employee shall not, without the prior written approval of the Board, directly or indirectly, for Employee or on behalf of or in conjunction with any other person or entity of any nature:
(i)engage in or participate in (or prepare to engage in or participate in) the Business within the Market Area, which prohibition shall prevent Employee from directly or indirectly: (A) owning, investing in, controlling, managing, operating, participating in, lending Employee’s name to, contributing to, providing assistance to or being an officer or director of, any person or entity engaged in or planning to engage in the Business in the Market Area, or (B) joining, becoming an employee or consultant of, or otherwise rendering services for or being affiliated with or engaged by, any person or entity engaged in, or planning to engage in, the Business in the Market Area in any
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capacity (with respect to this clause (B)) in which Employee’s customer or client relationships, duties or responsibilities are the same as or similar to the customer or client relationships, duties or responsibilities that Employee had on behalf of any member of the Company Group;
(ii)appropriate or interfere with or attempt to appropriate or interfere with any Business Opportunity of, or relating to, any member of the Company Group located in the Market Area;
(iii)solicit, canvass, approach, encourage, entice or induce any customer, vendor or supplier of any member of the Company Group with whom Employee had contact (including oversight responsibility) or learned Confidential Information about during Employee’s employment with any member of the Company Group to cease or lessen such customer’s, vendor’s or supplier’s business with any member of the Company Group or otherwise adversely affect such relationship, or attempt to do any of the foregoing; or
(iv)solicit, canvass, approach, encourage, entice or induce any employee or contractor of any member of the Company Group to terminate his, her or its employment or engagement with any member of the Company Group, or hire or retain any such employee or contractor.
Notwithstanding the foregoing, nothing herein shall not limit Employee’s ability to accept employment and perform work with any person or entity where (x) the services provided by Employee to such person or entity are not, and do not directly or indirectly benefit any division or business of such person or entity that is, in competition with the Business or any other material business in which a member of the Company Group has made a significant financial investment on or prior to the date of termination to be engaged in on or after such date and (y) Employee does not own more than 2% of the equity securities of such person or entity.
(y)Because of the difficulty of measuring economic losses to the Company Group as a result of a breach or threatened breach of the covenants set forth in Section 9 and in this Section 10, and because of the immediate and irreparable damage that would be caused to the members of the Company Group for which they would have no other adequate remedy, the Company and each other member of the Company Group shall be entitled to enforce the foregoing covenants, in the event of a breach or threatened breach, by injunctions and restraining orders from any court of competent jurisdiction, without the necessity of showing any actual damages or that money damages would not afford an adequate remedy, and without the necessity of posting any bond or other security. The aforementioned equitable relief shall not be the Company’s or any other member of the Company Group’s exclusive remedy for a breach but instead shall be in addition to all other rights and remedies available to the Company and each other member of the Company Group at law and equity. Employee further agrees that Employee will not challenge the reasonableness or enforceability of any of the covenants set forth in this Section 10, and that Employee will reimburse the Company Group for all costs (including reasonable attorneys’ fees) incurred in connection with any action to enforce any of the provisions of this Section 10 if Employee challenges the reasonableness or enforceability of any of the provisions of this Section 10.
(z)The covenants in this Section 10, and each provision and portion hereof, are severable and separate, and the unenforceability of any specific covenant (or portion thereof) shall not affect the provisions of any other covenant (or portion thereof). Moreover, in the event any arbitrator or court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions
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be enforced to the fullest extent which such arbitrator or court deems reasonable, and this Agreement shall thereby be reformed.
(aa)The following terms shall have the following meanings:
(i)“Business” shall mean the business and operations that are the same or similar to those performed by the Company and any other member of the Company Group for which Employee provides services or about which Employee obtains Confidential Information during the Employment Period, which business and operations include the design, manufacture, distribution, or sale of electrical wire harnesses, combiner boxes and junction boxes.
(ii)“Business Opportunity” shall mean any actual or potential commercial, investment or other business opportunity of any member of the Company Group or relating to the Business about which Employee learned Confidential Information during Employee’s employment with any member of the Company Group.
(iii)“Market Area” shall mean (A) the United States and (B) the geographic area within a one hundred (100) mile radius of any location where, prior to the termination of Employee’s employment with the Company Group, any member of the Company Group conducts the Business or has plans to conduct the Business.
(iv)“Prohibited Period” shall mean the period during which Employee is employed by any member of the Company Group and continuing for a period of twenty-four (24) months following the date that Employee is no longer employed by any member of the Company Group.
(ab)Employee undertakes and agrees that following the date that Employee is no longer employed by any member of the Company Group and prior to entering into any relationship with any other party to serve as an officer, director, employee, consultant, partner, advisor, joint-venturer or in any other capacity with any other person or entity, Employee shall disclose to such other party the terms of the restrictive covenants set forth herein and hereby consents to the Company making any related disclosures.
1.Ownership of Intellectual Property.
(ac)Employee agrees that the Company shall own, and Employee shall (and hereby does) assign, all right, title and interest relating to any and all inventions (whether or not patentable), discoveries, developments, improvements, innovations, works of authorship, mask works, designs, know-how, ideas, formulae, processes, techniques, data and information authored, created, contributed to, made or conceived or reduced to practice, in whole or in part, by Employee during the period in which Employee is or has been employed by or affiliated with the Company or any other member of the Company Group, whether or not registerable under U.S. law or the laws of other jurisdictions, that either (a) relate, at the time of conception, reduction to practice, creation, derivation or development, to any member of the Company Group’s businesses or actual or anticipated research or development, or (b) were developed on any amount of the Company’s or any other member of the Company Group’s time or with the use of any member of the Company Group’s equipment, supplies, facilities or Confidential Information (all of the foregoing collectively referred to herein as “Company Intellectual Property”), and Employee shall promptly disclose all Company Intellectual Property to the Company in writing. To support Employee’s disclosure obligation herein, Employee shall keep and maintain adequate and current written records of all Company Intellectual Property made by Employee (solely or jointly with others) during the period in which Employee is or has been employed by or affiliated with the Company or any other member of the Company Group in such
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form as may be specified from time to time by the Company. These records shall be available to, and remain the sole property of, the Company at all times. For the elimination of doubt, the foregoing ownership and assignment provisions apply without limitation to patent rights, copyrights, trade secret rights, mask work rights, trademark rights, and all other intellectual and industrial property rights of any sort throughout the world.
(ad)All of Employee’s works of authorship and associated copyrights created during the period in which Employee is employed by or affiliated with the Company or any other member of the Company Group and in the scope of Employee’s employment or engagement shall be deemed to be “works made for hire” within the meaning of the Copyright Act. To the extent any right, title and interest in and to Company Intellectual Property cannot be assigned by Employee to the Company, Employee shall grant, and does hereby grant, to the Company Group an exclusive, perpetual, royalty-free, transferable, irrevocable, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, use, sell, offer for sale, import, export, reproduce, practice and otherwise commercialize such rights, title and interest.
(ae)Employee recognizes that this Agreement will not be deemed to require assignment of any invention or intellectual property that Employee developed entirely on Employee’s own time without using the equipment, supplies, facilities, trade secrets, or Confidential Information of any member of the Company Group. In addition, this Agreement does not apply to any invention that qualifies fully for protection from assignment to the Company under any specifically applicable state law or regulation.
(af)To the extent allowed by law, this Section applies to all rights that may be known as or referred to as “moral rights,” “artist’s rights,” “droit moral,” or the like, including without limitation those rights set forth in 17 U.S.C. §106A (collectively, “Moral Rights”). To the extent Employee retain any Moral Rights under applicable law, Employee hereby ratifies and consents to any action that may be taken with respect to such Moral Rights by or authorized by the Company or any member of the Company Group, and Employee hereby waives and agrees not to assert any Moral Rights with respect to such Moral Rights. Employee shall confirm any such ratifications, consents, waivers, and agreements from time to time as requested by the Company.
(ag)Employee shall perform, during and after the period in which Employee is or has been employed by or affiliated with the Company or any other member of the Company Group, all acts deemed necessary or desirable by the Company to permit and assist each member of the Company Group, at the Company’s expense, in obtaining and enforcing the full benefits, enjoyment, rights and title throughout the world in the Company Intellectual Property and Confidential Information assigned, to be assigned, or licensed to the Company under this Agreement.. Such acts may include execution of documents and assistance or cooperation (i) in the filing, prosecution, registration, and memorialization of assignment of any applicable patents, copyrights, mask work, or other applications, (ii) in the enforcement of any applicable patents, copyrights, mask work, moral rights, trade secrets, or other proprietary rights, and (iii) in other legal proceedings related to the Company Intellectual Property or Confidential Information.
(ah)In the event that the Company (or, as applicable, a member of the Company Group) is unable for any reason to secure Employee’s signature to any document required to file, prosecute, register, or memorialize the assignment of any patent, copyright, mask work or other applications or to enforce any patent, copyright, mask work, moral right, trade secret or other proprietary right under any Confidential Information or Company Intellectual Property, Employee hereby irrevocably designates and appoints the Company and each of the Company’s duly authorized officers and agents as Employee’s agents and attorneys-in-fact to act for and on Employee’s behalf and instead of Employee, (i) to execute, file, prosecute, register and memorialize the assignment of any such application, (ii) to execute and file any
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documentation required for such enforcement, and (iii) to do all other lawfully permitted acts to further the filing, prosecution, registration, memorialization of assignment, issuance, and enforcement of patents, copyrights, mask works, moral rights, trade secrets or other rights under the Confidential Information or Company Intellectual Property, all with the same legal force and effect as if executed by Employee. For the avoidance of doubt, the provisions of this Section 11(f) apply fully to all derivative works, improvements, renewals, extensions, continuations, divisionals, continuations in part, continuing patent applications, reissues, and reexaminations of all Company Intellectual Property.
(ai)In the event that Employee enters into, on behalf of any member of the Company Group, any contracts or agreements relating to any Confidential Information or Company Intellectual Property, Employee shall assign such contracts or agreements to the Company (or the applicable member of the Company Group) promptly, and in any event, prior to Employee’s termination. If the Company (or the applicable member of the Company Group) is unable for any reason to secure Employee’s signature to any document required to assign said contracts or agreements, or if Employee does not assign said contracts or agreements to the Company (or the applicable member of the Company Group) prior to Employee’s termination, Employee hereby irrevocably designates and appoints the Company (or the applicable member of the Company Group) and each of the Company’s duly authorized officers and agents as Employee’s agents and attorneys-in-fact to act for and on Employee’s behalf and instead of Employee to execute said assignments and to do all other lawfully permitted acts to further the execution of said documents.
8.Arbitration.
(aj)Subject to Section 12(b), any dispute, controversy or claim between Employee and any member of the Company Group arising out of or relating to this Agreement or Employee’s employment or engagement with any member of the Company Group (“Disputes”) will be finally settled by confidential arbitration in the State of Tennessee in accordance with the then-existing American Arbitration Association (“AAA”) Employment Arbitration Rules. The arbitration award shall be final and binding on both parties. Any arbitration conducted under this Section 12 shall be private, shall be heard by a single arbitrator (the “Arbitrator”) selected in accordance with the then-applicable rules of the AAA and shall be conducted in accordance with the Federal Arbitration Act. The Arbitrator shall expeditiously hear and decide all matters concerning the Dispute. Except as expressly provided to the contrary in this Agreement, the Arbitrator shall have the power to (i) gather such materials, information, testimony and evidence as the Arbitrator deems relevant to the Dispute before him or her (and each party will provide such materials, information, testimony and evidence requested by the Arbitrator), and (ii) grant injunctive relief and enforce specific performance. All Disputes shall be arbitrated on an individual basis, and each party hereto hereby foregoes and waives any right to arbitrate any Dispute as a class action or collective action or on a consolidated basis or in a representative capacity on behalf of other persons or entities who are claimed to be similarly situated, or to participate as a class member in such a proceeding. The decision of the Arbitrator shall be reasoned, rendered in writing, be final and binding upon the disputing parties and the parties agree that judgment upon the award may be entered by any court of competent jurisdiction. The parties acknowledge and agree that in connection with any such arbitration and regardless of outcome, except as provided under this Section 12, each party will pay all of its own costs and expenses, including its own legal fees and expenses, and the arbitration costs will be shared equally by the Company and Employee.
(ak)Notwithstanding Section 12(a), either party may make a timely application for, and obtain, judicial emergency or temporary injunctive relief to enforce any of the provisions of Sections 9 through 11; provided, however, that the remainder of any such Dispute (beyond the
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application for emergency or temporary injunctive relief) shall be subject to arbitration under this Section 12.
(al)By entering into this Agreement and entering into the arbitration provisions of this Section 12, THE PARTIES EXPRESSLY ACKNOWLEDGE AND AGREE THAT THEY ARE KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVING THEIR RIGHTS TO A JURY TRIAL.
(am)Nothing in this Section 12 shall prohibit a party to this Agreement from (i) instituting litigation to enforce any arbitration award, or (ii) joining the other party to this Agreement in a litigation initiated by a person or entity that is not a party to this Agreement. Further, nothing in this Section 12 precludes Employee from filing a charge or complaint with a federal, state or other governmental administrative agency.
1.Defense of Claims; Cooperation. During the Employment Period and thereafter, upon request from the Company, Employee shall cooperate with the Company Group in the defense of any claims or actions that may be made by or against any member of the Company Group that relate to Employee’s actual or prior areas of responsibility or knowledge. Employee shall further provide reasonable and timely cooperation in connection with any actual or threatened claim, action, inquiry, review, investigation, process, or other matter (whether conducted by or before any court, arbitrator, regulatory, or governmental entity, or by or on behalf of any Company Group member), that relates to Employee’s actual or prior areas of responsibility or knowledge.
2.Withholdings; Deductions. The Company is authorized to withhold and deduct from any benefits, amounts, or payments related to this Agreement or Employee’s employment (a) all federal, state, local and other taxes and (b) any applicable deductions or withholdings.
3.Title and Headings; Construction. Titles and headings to Sections hereof are for the purpose of reference only and shall in no way limit, define or otherwise affect the provisions hereof. Any and all Exhibits or Attachments referred to in this Agreement are, by such reference, incorporated herein and made a part hereof for all purposes. Unless the context requires otherwise, all references to laws, regulations, contracts, documents, agreements and instruments refer to such laws, regulations, contracts, documents, agreements and instruments as they may be amended, restated or otherwise modified from time to time, and references to particular provisions of laws or regulations include a reference to the corresponding provisions of any succeeding law or regulation. All references to “dollars” or “$” in this Agreement refer to United States dollars. The words “herein”, “hereof”, “hereunder” and other compounds of the word “here” shall refer to the entire Agreement, including all Exhibits attached hereto, and not to any particular provision hereof. Unless the context requires otherwise, the word “or” is not exclusive. Wherever the context so requires, the masculine gender includes the feminine or neuter, and the singular number includes the plural and conversely. All references to “including” shall be construed as meaning “including without limitation.” Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against any party hereto, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by each of the parties hereto and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of the parties hereto.
4.Applicable Law; Submission to Jurisdiction. This Agreement shall in all respects be construed according to the laws of the State of Tennessee without regard to its conflict of laws principles that would result in the application of the laws of another jurisdiction. With respect to any claim or dispute related to or arising under this Agreement, the parties hereby consent to the arbitration provisions of Section 12 and recognize and agree that should
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any resort to a court be necessary and permitted under this Agreement, then they consent to the exclusive jurisdiction, forum and venue of the state and federal courts (as applicable) located in Tennessee.
5.Entire Agreement and Amendment. This Agreement contains the entire agreement of the parties with respect to the matters covered herein and supersedes all prior and contemporaneous agreements and understandings, oral or written, between the parties hereto concerning the subject matter hereof, including, without limitation, that certain offer letter entered into by and between Employee and the Company, dated as of August 5, 2022; provided, however, that the provisions of this Agreement are in addition to and complement (and do not replace or supersede) any other written agreement(s) or parts thereof between Employee and any member of the Company Group that create restrictions on Employee with respect to confidentiality, non-disclosure, non-competition, non-solicitation or non-disparagement. Without limiting the scope of the preceding sentence, except as otherwise expressly provided in this Section 17, all understandings and agreements preceding the Effective Date and relating to the subject matter hereof are hereby null and void and of no further force or effect, and this Agreement shall supersede all other agreements, written or oral, that purport to govern the terms of Employee’s employment (including Employee’s compensation) with any member of the Company Group. This Agreement may be amended only by a written instrument executed by both parties hereto.
6.Waiver of Breach. Any waiver of this Agreement must be executed by the party to be bound by such waiver. No waiver by either party hereto of a breach of any provision of this Agreement by the other party, or of compliance with any condition or provision of this Agreement to be performed by such other party, will operate or be construed as a waiver of any subsequent breach by such other party or any similar or dissimilar provision or condition at the same or any subsequent time. The failure of either party hereto to take any action by reason of any breach will not deprive such party of the right to take action at any time.
7.Assignment. This Agreement is personal to Employee, and neither this Agreement nor any rights or obligations hereunder shall be assignable or otherwise transferred by Employee. The Company may assign this Agreement without Employee’s consent, including to any member of the Company Group and to any successor to or acquirer of (whether by merger, purchase or otherwise) all or substantially all of the equity, assets or businesses of the Company.
8.Notices. Notices provided for in this Agreement shall be in writing and shall be deemed to have been duly received (a) when delivered in person, (b) when sent by facsimile transmission (with confirmation of transmission) or email on a business day to the number or email address set forth below, if applicable; provided, however, that if a notice is sent by facsimile transmission or email after normal business hours of the recipient or on a non-business day, then it shall be deemed to have been received on the next business day after it is sent, (c) on the first business day after such notice is sent by express overnight courier service, or (d) on the second business day following deposit with an internationally-recognized second-day courier service with proof of receipt maintained, in each case, to the following address, as applicable:
If to the Company, addressed to:
Shoals Technologies Group, LLC
1400 Shoals Way
Portland, TN 37148
Attn: Chief Executive Officer
Email: jason.whitaker@shoals.com
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If to Employee, addressed to:
Address and email on file with the Company
9.Counterparts. This Agreement may be executed in any number of counterparts, including by electronic mail or facsimile, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a copy hereof containing multiple signature pages, each signed by one party, but together signed by both parties hereto. Electronic copies shall have the same force and effect as the originals.
10.Deemed Resignations. Except as otherwise determined by the Board or as otherwise agreed to in writing by Employee and any member of the Company Group prior to the termination of Employee’s employment with the Company or any member of the Company Group, any termination of Employee’s employment shall constitute, as applicable, an automatic resignation of Employee: (a) as an officer of the Company and each member of the Company Group; (b) from the Board; and (c) from the board of directors or board of managers (or similar governing body) of any member of the Company Group and from the board of directors or board of managers (or similar governing body) of any corporation, limited liability entity, unlimited liability entity or other entity in which any member of the Company Group holds an equity interest and with respect to which board of directors or board of managers (or similar governing body) Employee serves as such Company Group member’s designee or other representative. Employee agrees to take any further actions that any member of the Company Group reasonably requests to effectuate or document the foregoing.
11.Section 409A. Notwithstanding any provision of this Agreement to the contrary:
(an)All provisions of this Agreement are intended to comply with Section 409A of the Internal Revenue Code of 1986 (the “Code”), and the applicable Treasury regulations and administrative guidance issued thereunder (collectively, “Section 409A”) or an exemption therefrom and shall be construed and administered in accordance with such intent. Any payments under this Agreement that may be excluded from Section 409A either as separation pay due to an involuntary separation from service or as a short-term deferral shall be excluded from Section 409A to the maximum extent possible. For purposes of Section 409A, each installment payment provided under this Agreement shall be treated as a separate payment. Any payments to be made under this Agreement upon a termination of Employee’s employment shall only be made if such termination of employment constitutes a “separation from service” under Section 409A.
(ao)To the extent, if any, that the aggregate amount of the installments of the Severance Payment that would otherwise be paid pursuant to Section 7(f)(i) after March 15 of the calendar year following the calendar year in which the Termination Date occurs (the “Applicable March 15”) exceeds the maximum exemption amount under Treasury Regulation Section 1.409A-1(b)(9)(iii)(A), then such excess shall be paid to Employee in a lump sum on the Applicable March 15 (or the first business day preceding the Applicable March 15 if the Applicable March 15 is not a business day) and the installments of the Severance Payment payable after the Applicable March 15 shall be reduced by such excess (beginning with the installment first payable after the Applicable March 15 and continuing with the next succeeding installment until the aggregate reduction equals such excess).
(ap)To the extent that any right to reimbursement of expenses or payment of any benefit in-kind under this Agreement constitutes nonqualified deferred compensation (within
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the meaning of Section 409A), (i) any such expense reimbursement shall be made by the Company no later than the last day of Employee’s taxable year following the taxable year in which such expense was incurred by Employee, (ii) the right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit, and (iii) the amount of expenses eligible for reimbursement or in-kind benefits provided during any taxable year shall not affect the expenses eligible for reimbursement or in-kind benefits to be provided in any other taxable year; provided, that the foregoing clause shall not be violated with regard to expenses reimbursed under any arrangement covered by Section 105(b) of the Code solely because such expenses are subject to a limit related to the period in which the arrangement is in effect.
(aq)If any payment or benefit provided for herein would be subject to additional taxes and interest under Section 409A if Employee’s receipt of such payment or benefit is not delayed until the earlier of (i) the date of Employee’s death or (ii) the date that is six (6) months after the Termination Date (such date, the “Section 409A Payment Date”), then such payment or benefit shall not be provided to Employee (or Employee’s estate, if applicable) until the Section 409A Payment Date. Notwithstanding the foregoing, the Company makes no representations that the payments and benefits provided under this Agreement are exempt from, or compliant with, Section 409A and in no event shall any member of the Company Group be liable for all or any portion of any taxes, penalties, interest or other expenses that may be incurred by Employee on account of non-compliance with Section 409A.
9.Certain Excise Taxes. Notwithstanding anything to the contrary in this Agreement, if Employee is a “disqualified individual” (as defined in Section 280G(c) of the Code), and the payments and benefits provided for in this Agreement, together with any other payments and benefits which Employee has the right to receive from the Company or any of its affiliates, would constitute a “parachute payment” (as defined in Section 280G(b)(2) of the Code), then the payments and benefits provided for in this Agreement shall be either (a) reduced (but not below zero) so that the present value of such total amounts and benefits received by Employee from the Company or any of its affiliates shall be one dollar ($1.00) less than three times Employee’s “base amount” (as defined in Section 280G(b)(3) of the Code) and so that no portion of such amounts and benefits received by Employee shall be subject to the excise tax imposed by Section 4999 of the Code or (b) paid in full, whichever produces the better net after-tax position to Employee (taking into account any applicable excise tax under Section 4999 of the Code and any other applicable taxes). The reduction of payments and benefits hereunder, if applicable, shall be made by reducing, first, payments or benefits to be paid in cash hereunder in the order in which such payment or benefit would be paid or provided (beginning with such payment or benefit that would be made last in time and continuing, to the extent necessary, through to such payment or benefit that would be made first in time) and, then, reducing any benefit to be provided in-kind hereunder in a similar order. The determination as to whether any such reduction in the amount of the payments and benefits provided hereunder is necessary shall be made by the Company in good faith. If a reduced payment or benefit is made or provided and through error or otherwise that payment or benefit, when aggregated with other payments and benefits from the Company or any of its affiliates used in determining if a “parachute payment” exists, exceeds one dollar ($1.00) less than three times Employee’s base amount, then Employee shall immediately repay such excess to the Company upon notification that an overpayment has been made. Nothing in this Section 24 shall require any member of the Company Group to be responsible for, or have any liability or obligation with respect to, Employee’s excise tax liabilities under Section 4999 of the Code.
10.Clawback. To the extent required by applicable law or any applicable securities exchange listing standards, or as otherwise determined by the Board (or a committee thereof), amounts paid or payable under this Agreement shall be subject to the provisions of any applicable clawback policies or procedures adopted by any member of the Company Group, which clawback policies or procedures may provide for forfeiture and/or recoupment of amounts
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paid or payable under this Agreement. Notwithstanding any provision of this Agreement to the contrary, each member of the Company Group reserves the right, without the consent of Employee, to adopt any such clawback policies and procedures, including such policies and procedures applicable to this Agreement with retroactive effect.
11.Effect of Termination. The provisions of Sections 7, 9-14 and 22, 24 and 25 and those provisions necessary to interpret and enforce them, shall survive any termination of this Agreement and any termination of the employment relationship between Employee and the Company.
12.Third-Party Beneficiaries. Each member of the Company Group that is not a signatory to this Agreement shall be a third-party beneficiary of Employee’s obligations under Sections 8, 9, 10, 11, 12 and 22 and shall be entitled to enforce such obligations as if a party hereto.
13.Severability. If an arbitrator or court of competent jurisdiction determines that any provision of this Agreement (or portion thereof) is invalid or unenforceable, then the invalidity or unenforceability of that provision (or portion thereof) shall not affect the validity or enforceability of any other provision of this Agreement, and all other provisions shall remain in full force and effect. It is the intention of the parties that any such invalid or unenforceable provision be reformed and enforced to the fullest extent permitted by law.
[Remainder of Page Intentionally Blank;
Signature Page Follows]
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IN WITNESS WHEREOF, Employee and the Company each have caused this Agreement to be executed and effective as of the Effective Date.
EMPLOYEE
/s/ Dominic Bardos
Dominic Bardos
SHOALS TECHNOLOGIES GROUP, LLC
By: /s/ Jason Whitaker
Jason Whitaker
Chief Executive Officer
Jason Whitaker
Chief Executive Officer
Signature Page to
Employment Agreement
EXHIBIT 31.1
CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO
RULE 13a-14(a) AND 15d-14(a) UNDER THE EXCHANGE ACT
I, Jason Whitaker, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Shoals Technologies Group, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| /s/ Jason Whitaker | ||
| Jason Whitaker | ||
| Chief Executive Officer | ||
Date: November 14, 2022
EXHIBIT 31.2
CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO
RULE 13a-14(a) AND 15d-14(a) UNDER THE EXCHANGE ACT
I, Dominic Bardos, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Shoals Technologies Group, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| /s/ Dominic Bardos | ||
| Dominic Bardos | ||
| Chief Financial Officer | ||
Date: November 14, 2022
EXHIBIT 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10‑Q of Shoals Technologies Group, Inc. (the “Company”) for the quarter ended September 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Jason Whitaker, as Chief Executive Officer of the Company, and Dominic Bardos, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002, that, to the best of his knowledge:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 14, 2022
| /s/ Jason Whitaker | ||
| Jason Whitaker | ||
| President, Chief Executive Officer and Director (Principal Executive Officer) | ||
| /s/ Dominic Bardos | ||
| Dominic Bardos | ||
| Chief Financial Officer (Principal Financial and Accounting Officer) | ||