ARRAY TECHNOLOGIES, INC. 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 unaudited condensed financial statements and the related notes and other financial information included in this Quarterly Report on Form 10-Q and our audited financial statements and notes thereto as of and for the years endedDecember 31, 2020 , 2019 and 2018 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, including Critical Accounting Policies and Significant Judgements and Estimates, included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 filed with theSecurities and Exchange Commission , or theSEC , onMarch 10, 2021 . Each of the terms the "Company," "Array," "we," or "us" as used herein refers collectively toArray Technologies, Inc. and its wholly owned subsidiaries, unless otherwise stated. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. 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 captioned "Forward-Looking Statements" and "Risk Factors" in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 .
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 our actual future results may be materially different from what we expect.
Important factors that could cause actual results to differ materially from our expectations include:
•the impacts on our business due to component shortages, disruptions in
transportation or other supply chain related constraints including as a result
of the COVID-19 pandemic;
•if demand for solar energy projects does not continue to grow or grows at a
slower rate than we anticipate, our business will suffer?
•the viability and demand for solar energy are impacted by many factors outside
of our control, which makes it difficult to predict our future prospects;
•a loss of one or more of our significant customers, their inability to perform
under their contracts, or their default in payment, could harm our business and
negatively impact revenue, results of operations and cash flow;
•a drop in the price of electricity derived from the utility grid or from
alternative energy sources may harm our business, financial condition, results
of operations and prospects;
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•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 customers to finance the cost of a solar energy system and could reduce the
demand for our products?
•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, which may significantly reduce demand for our
products or harm our ability to compete;
•the interruption of the flow of materials from international vendors could
disrupt our supply chain, including as a result of the imposition of additional
duties, tariffs and other charges on imports and exports;
•changes in the U.S. trade environment, including the imposition of import
tariffs, could adversely affect the amount or timing of our revenues, results of
operations or cash flows?
•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?
•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?
•we may need to defend ourselves against third-party claims that we are
infringing, misappropriating or otherwise violating others' intellectual
property rights, which could divert management's attention, cause us to incur
significant costs and prevent us from selling or using the technology to which
such rights relate?
•significant changes in the cost of raw materials could adversely affect our
financial performance;
•we are dependent on transportation and logistics providers to deliver our
products in a cost efficient manner. Disruptions to transportation and
logistics, including increases in shipping costs, could adversely impact our
financial condition and results of operations;
•the requirements of being a public company may strain our resources, divert
management's attention and affect our ability to attract and retain qualified
board members and officers;
•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; and
•certain provisions in our certificate of incorporation and our bylaws may delay
or prevent a change of control.
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.
Overview
We are one of the world's largest manufacturers of ground-mounting systems used in solar energy projects. Our principal product is an integrated system of steel supports, electric motors, gearboxes and electronic controllers commonly referred to as a single-axis "tracker." Trackers move solar panels throughout the day to maintain an optimal orientation to the sun, which significantly increases their energy production. Solar energy projects that use trackers generate up to 25% more energy than projects that use "fixed tilt" mounting systems, which do not move. Our trackers use a patented design that allows one motor to drive multiple rows of solar panels through articulated driveline joints. To avoid infringing on ourU.S. patent, our competitors must use designs that we believe are inherently less efficient and reliable. For example, our largest competitor's design requires one motor for each row of solar panels. As a result, we believe our products have greater reliability, lower installation costs, reduced maintenance requirements and competitive manufacturing costs. Our coreU.S. patent on a linked-row, rotating gear drive system does not expire untilFebruary 5, 2030 . 27 -------------------------------------------------------------------------------- We sell our products to engineering, procurement and construction firms ("EPCs") that build solar energy projects and to large solar developers, independent power producers and utilities, often under master supply agreements or multi-year procurement contracts. In the six months endedJune 30, 2021 , we derived 99% and 1% of our revenues from customers in theU.S. and rest of the world, respectively.
We are a
Securities Purchase Agreement
OnAugust 10, 2021 , the Company entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") withBCP Helios Aggregator L.P. , aDelaware limited partnership (the "Purchaser"), an investment vehicle of funds affiliated with Blackstone Inc. Pursuant to the Securities Purchase Agreement, onAugust 11, 2021 , the Company issued and sold to the Purchaser 350,000 shares of a newly designated Series A Perpetual Preferred Stock of the Company, par value$0.001 per share (the "Series A Perpetual Preferred Stock"), having the powers, designations, preferences, and other rights set forth in the Certificate of Designations (as defined below), and 7,098,765 shares of the Company's common stock, par value$0.001 per share ("Common Stock"), for an aggregate purchase price of$346.0 million (the "Initial Closing"). Further, pursuant to the Securities Purchase Agreement, and subject to the terms and conditions set forth therein, including the expiry or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, the Company has agreed to issue and sell to the Purchaser 776,235 shares of Common Stock for an aggregate purchase price of$776 . The Company intends to use the net proceeds from the Initial Closing to repay all of the outstanding amounts under the Company's existing revolving credit facility and to prepay at least$100 million under the Company's term loan and for general corporate purposes. Pursuant to the Securities Purchase Agreement, the Purchaser is entitled to designate one representative (the "Series A Director") to be appointed to the Company's board of directors (the "Board"), and to appoint three non-voting observers to the Board, in each case until such time as the Purchaser and its Permitted Transferees (as defined in the Securities Purchase Agreement) no longer beneficially own shares of the Series A Perpetual Preferred Stock with at least$100 million aggregate Liquidation Preference (as defined below).
Dividends
On or prior to the fifth anniversary of the Initial Closing, the Company may pay
dividends on the Series A Perpetual Preferred Stock either in cash at the
then-applicable Cash Regular Dividend Rate, through accrual to the Liquidation
Preference at the Accrued Regular Dividend Rate (the "Permitted Accrued
Dividends"), or a combination thereof. Folloing the fifth anniversary of the
Initial Closing, dividends shall be payable only in cash. To the extent the
Comany does not declare such dividends and pay in cash following the fifth
anniversary of the Initial Closing, such dividends shall accrue to the
Liquidation Preference ("Default Accrued Dividends", and together with Permitted
Accrued Dividends, "Accrued Dividends") at the then-applicable Cash Regular
Dividend Rate plus 200 basis points. In the event there are Default Accrued
Dividends outstanding for six consecutive quarters, the Company, at the option
of the holder of the Series A Perpetual Preferred Stock (each a "holder"), will
pay 100% of the amount of Default Accrued Dividends by delivering to the Holder
a number of shares of Common Stock equal to the quotient of (i) the amount of
Default Accrued Dividends) divided by (ii) 95% of the 30-day VWAP of the Common
Stock ("Non-Cash Dividend").
As used herein, "Cash Regular Dividend Rate" with respect to the Series A
Perpetual Preferred Stock means (i)
initially, 5.75% per annum on the Liquidation Preference and (ii) increased by
(a) 50 basis points on each of the fifth, sixth and seventh anniversaries of the
Initial Closing and (b) 100 basis points on each of the eighth, ninth and tenth
anniversaries of the Initial Closing. The "Accrued Regular Dividend Rate" with
respect to the Series A Perpetual Preferred Stock means 6.25% per annum on the
Liquidation Preference.
Additional Closings
28-------------------------------------------------------------------------------- Pursuant to the Securities Purchase Agreement, untilJune 30, 2023 , the Company, subject to the terms and conditions set forth therein, shall have the option to require the Purchaser to purchase, in the aggregate, in one or more additional closings (the "Additional Closings"), up to 150,000 shares (the "Delayed Draw Commitment") of the Series A Perpetual Preferred Stock and up to 3,375,000 shares of Common Stock (or up to 6,100,000 shares of Common Stock in the event of certain price-related adjustments) (subject to certain equitable adjustments pursuant to any stock dividend, stock split, stock combination, reclassification or similar transaction) for an aggregate purchase price up to$148 million .
Fees
UntilJune 30, 2023 , the Company will pay the Purchaser a cash commitment premium on the unpurchased portion of Delayed Draw Commitment as follows: •0% through the six-month anniversary of the Initial Closing; •1.5% from the six-month anniversary of the Initial Closing through the 12-month anniversary of the initial closing; and •3.0% from the 12-month anniversary of the Initial Closing throughJune 30, 2023 .
The Company may terminate some or all of the Delayed Draw Commitment, from time to time, at its sole discretion.
Registration Rights Agreement In connection with the Securities Purchase Agreement, on August [9], 2021, the Company and the Purchaser entered into a Registration Rights Agreement pursuant to which, among other things, the Company granted the Purchaser certain registration rights with respect to Common Stock purchased pursuant to the Securities Purchase Agreement, including customary shelf registration rights and "piggyback" registration rights.
Update on the Impact of COVID-19
With the second wave of the pandemic including follow-on variants of COVID-19, we continue to closely monitor the situation in all the locations where we operate. Our priority remains the welfare of our employees. We expect persistent waves of COVID-19 to remain a headwind into the near future. Refer to "Risk Factors - The ongoing COVID-19 pandemic has materially and adversely affected our business and results of operations. The duration and extent to which it will continue to adversely impact our business and results of operations remains uncertain and could be material," as disclosed in Part II, "Item 1A. Risk Factors."
We are continuously evaluating our capital structure in response to the current environment and expect that our current financial condition, including our liquidity sources are adequate to fund future commitments. See additional discussion in the Liquidity and Capital Resources section below.
Performance Measures
In managing our business and assessing financial performance, we supplement the
information provided by the financial statements with other operating metrics.
These operating metrics are utilized by our management to evaluate our business,
measure our performance, identify trends affecting our business and formulate
projections. The primary operating metric we use to evaluate our sales
performance and to track market acceptance of our products from year to year is
megawatts ("MWs") shipped generally and the change in MW shipped from period to
period specifically. MWs is measured for each individual project and is
calculated based on the expected output of that project once installed and fully
operational.
We also utilize metrics related to price and cost of goods sold per MW,
including average selling price ("ASP") and cost per watt ("CPW"). ASP is
calculated by dividing total applicable revenues by total applicable MWs,
whereas CPW is calculated by dividing total applicable costs of goods sold by
total applicable MWs. These metrics enable us to evaluate trends in pricing,
manufacturing cost and customer profitability.
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--------------------------------------------------------------------------------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 solar tracking systems and parts. Our customers include EPCs, utilities, solar developers and independent power producers. For each individual solar project, 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 the tracker system and parts can vary from days to several months. Contracts can range in value from hundreds of thousands to tens of millions of dollars. Our revenue is affected by changes in the volume and ASPs of solar tracking systems purchased by our customers. The quarterly volume and ASP of our systems is driven by the supply of, and demand for, our products, changes in product mix between module type and wattage, 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 installed each year as well as our ability to increase our share of demand in each of the geographies where we compete, expand our global footprint to new evolving markets, grow our production capabilities to meet demand and to continue to develop and introduce 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 components, as well as costs related to shipping, tariffs, customer support, product warranty, personnel and depreciation of test and manufacturing equipment. Personnel costs in cost of revenue includes 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 steel and aluminum; component costs, including electric motors and gearboxes; technological innovation; economies of scale resulting in lower component costs, and improvements in production processes and automation. We do not currently hedge against changes in the price of raw materials. Some of these costs, primarily personnel and depreciation of test and manufacturing equipment, are not directly affected by sales volume.
Gross profit may vary from quarter to quarter and is primarily affected by our ASPs, product costs, product mix, customer mix, geographical mix, shipping method, warranty costs and seasonality.
Operating Expenses Operating expenses consist of general and administrative costs, contingent consideration, as well as depreciation and amortization expense. Personnel-related costs are the most significant component of our operating expenses and include salaries, benefits, payroll taxes and commissions. Our full-time employee headcount in our general and administrative departments has grown from approximately 150 as ofDecember 31, 2019 to approximately 177 as ofDecember 31, 2020 and 175 atJune 30, 2021 , and we expect to continue to hire new employees to support our growth. The timing of these additional hires could materially affect our operating expenses in any particular period, both in absolute dollars and as a percentage of revenue. We expect to continue to invest substantial resources to support our growth and continued technological 30 --------------------------------------------------------------------------------
advancement and anticipate that general and administrative and depreciation expenses will increase in absolute dollar amounts for the foreseeable future.
General and administrative expenses General and administrative expenses consist primarily of salaries, equity-based compensation, employee benefits and payroll taxes related to our executives, sales, finance, human resources, information technology, engineering and legal organizations, as well as travel, facilities costs, marketing, bad debt and fees for professional services. Professional services consist of audit, legal, tax, insurance, information technology and other costs. We expect an increase in the number of sales and marketing personnel in connection with the expansion of our global sales and marketing footprint, enabling us to penetrate new markets. The majority of our sales in 2020 were in theU.S. ; however, during the year we expanded our international presence with additional global sales staff. We currently have a sales presence in theU.S. ,Australia , theU.K. andBrazil . We intend to continue to expand our sales presence and marketing efforts to additional countries. We also expect that as a public company we will incur additional audit, tax, accounting, legal and other costs related to compliance with applicable securities and other regulations, as well as additional insurance, investor relations and other costs associated with being a public company. We also anticipate an increase in our spend related to product innovation as we hire additional engineering resources and increase our external research & development spend. Contingent Consideration Contingent consideration consists of the changes in fair value of the earn-out and the Tax Receivable Agreement ("TRA") entered into withRon P. Corio , a former indirect stockholder, concurrent with the Acquisition ofArray Technologies Patent Holdings Co., LLC ("Patent LLC ") byATI Investment Parent, LLC ("Former Parent") Former Parent's acquisition ofPatent LLC . The earn-out liability was recorded at fair value as ofJuly 8, 2016 (the "Acquisition Date") and subsequent changes in the fair value are recognized in earnings. Fair value of the earn-out liability is measured based upon the expected return of investment of Former Parent, among other things. Cash payments related to the earn-out liability are required to be evaluated upon the occurrence of certain events, including the consummation of an initial public offering; the sale, transfer, assignment, pledge, encumbrance, distribution or disposition of shares of Former Parent held byOaktree Power Opportunities Fund IV (Delaware) Holdings, L.P. andOaktree ATI Investors, L.P. to a third party; the sale of equity securities or assets of Former Parent,ATI Investment Sub, Inc. ("Investment Sub") or the Company to a third-party; or a merger, consolidation, recapitalization or reorganization of Former Parent, Investment Sub, or the Company. Our initial public offering of common stock ("IPO"), the cash distribution of$589 million that we paid toATI Investment Parent, LLC upon the closing of our IPO and our Follow-on Offering of common stock inDecember 2020 (the "2020 Follow-on Offering") required the Company to make a cash payment of$9.1 million inOctober 2020 and$15.9 million inDecember 2020 . As a result of these payments our earn-out liability has been paid in full. The TRA liability was recorded at fair value at the Acquisition Date and subsequent changes in the fair value are recognized in earnings. The TRA will generally provide for the payment byArray Tech, Inc. (f/k/aArray Technologies, Inc. ) toRon P. Corio for certain federal, state, local and non-U.S. tax benefits deemed realized in post-closing taxable periods byArray Tech, Inc. from the use of certain deductions generated by the increase in the tax value of the developed technology. Estimating fair value of the TRA is by nature imprecise. The significant fair value inputs used to estimate the future expected TRA payments toRon P. Corio include the timing of tax payments, a discount rate, book income projections, timing of expected adjustments to calculate taxable income and the projected rate of use for attributes defined in the TRA. Depreciation 31
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Depreciation in our operating expense consists of costs associated with
property, plant and equipment ("PP&E") not used in manufacturing of our
products. We expect that as we continue to grow both our revenue and our general
and administrative personnel we will require some additional PP&E to support
this growth resulting in additional depreciation expense.
Amortization
Amortization of intangibles consist of developed technology, customer relationships and internal-use software modifications 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 Facility and our SeniorABL Facility , interest on the Senior Secured Promissory Note, and interest on our Prior Term Loan Facility (as defined below), which was fully repaid onFebruary 2, 2020 . Income Tax Expense We are subject to federal and state income taxes inthe United States . As we expand into foreign markets, we may be subject to foreign tax. 32 --------------------------------------------------------------------------------
Results of Operations
The following tables set forth our consolidated statement of operations (dollars
in thousands):
Six Months Ended June
Three Months Ended June 30, Increase/Decrease 30, Increase/Decrease
2021 2020 $ % 2021 2020 $ %
Revenue $ 202,796 $ 114,916 $ 87,880 76 % $ 448,728 $ 552,634 $ (103,906) (19) %
Cost of revenue 176,009 92,714 83,295 90 % 378,083 412,016 (33,933) (8) %
Gross profit 26,787 22,202 4,585 21 % 70,645 140,618 (69,973) (50) %
Operating expenses
General and administrative 15,113 11,192 3,921 35 % 39,786 22,899 16,887 74 %
Contingent consideration (13) 3,430 (3,443) (100) % 135 2,417 (2,282) (94) %
Depreciation and
amortization 5,981 6,369 (388) (6) % 11,965 12,743 (778) (6) %
Total operating expenses 21,081 20,991 90 - % 51,886 38,059 13,827 36 %
Income from operations 5,706 1,211 4,495 371 % 18,759 102,559 (83,800) (82) %
Other expense
Other income (expense),
net (122) (2,242) 2,120 (95) % (200) (2,134) 1,934 (91) %
Interest expense (6,651) (2,411) (4,240) 176 % (15,660) (7,640) (8,020) 105 %
Total other expense (6,773) (4,653) (2,120) 46 % (15,860) (9,774) (6,086) 62 %
Income (loss) before
income tax expense (1,067) (3,442) 2,375 (69) % 2,899 92,785 (89,886) (97) %
Income tax (benefit)
expense (1,050) (5,834) 4,784 (82) % 29 16,708 (16,679) (100) %
Net (loss) income $ (17) $ 2,392 $ (2,409) (101) % $ 2,870 $ 76,077 $ (73,207) (96) %
Comparison of three months ended
Revenue
Revenue increased by$87.9 million , or 76%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . Total MW delivered increased by approximately 74% for the three months endedJune 30, 2021 mostly attributable to a higher proportion of our volume occurring in the first quarter of 2020 vs the second quarter of 2020 due to certain customers electing to take deliveries ahead of build schedules to take advantage of the ITC rate before it stepped down in 2020. 33 -------------------------------------------------------------------------------- Cost of Revenue and Gross Profit Cost of revenue increased by$83.3 million , or 90%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 primarily due to the increase in the number of MW delivered. Gross profit as a percentage of revenue decreased from 19.3% for the three months endedJune 30, 2020 to 13.2% for the three months endedJune 30, 2021 . The decrease in Gross Profit as a percentage of revenue reflects higher commodity prices and higher logistics costs. Operating Expenses: General and Administrative General and administrative expenses increased by$3.9 million , or 35%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . The increase in expense was primarily due to a$2.5 million increase in equity-based compensation due to a mark-to-market of a cash-settled award. The increase in expense also represents additional headcount driven by the growth of the company over the last twelve months. Contingent Consideration Contingent consideration expense decreased by$3.4 million , or 100%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . The decrease was primarily due to the prior period having a$3.4 million increase in the fair value of contingent consideration for which there is no increase in the current quarter.
Depreciation
Depreciation expense for the three months ended
Amortization of Intangibles Amortization of intangibles for the three months endedJune 30, 2021 was similar to the three months endedJune 30, 2020 as we did not add any significant intangible assets. Interest Expense Interest expenses increased by$4.2 million , or 176%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 , primarily due to interest on the higher average balance of our Term Loan Facility and Revolving Facility which were not outstanding during the three months endedJune 30, 2020 . As ofJune 30, 2021 , we had$429.0 million outstanding under the Term Loan and$102.0 million outstanding under the Revolving Senior Secured Credit Facility. We expect interest expense to be higher for the remainder of 2021 compared to 2020 as a result of the debt outstanding under the Senior Secured Credit Facility along with the amortization of the related discount and issuance costs. Income Tax Benefit Income tax benefit decreased by$4.8 million , or 82% for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . Our effective tax rate was 98.4% for the three months endedJune 30, 2021 and 169.5% for the three months endedJune 30, 2020 . The tax benefit decrease is primarily related to unfavorable non-deductible equity based compensation and Follow-on offering costs for the three months endedJune 30, 2021 and a favorable tax benefit related to an NOL carryback as a result of the CARES Act for the three months endedJune 30, 2020 .
Comparison of the six months ended
34
--------------------------------------------------------------------------------Revenue
Revenue decreased by$103.9 million , or 19%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . Total MW delivered decreased by approximately 2% for the six months endedJune 30, 2021 driven by heavier volume in the first half of 2020 due to certain customers electing to take deliveries ahead of build schedules to take advantage of the ITC, partially offset by lower ASPs in 2021. Cost of Revenue and Gross Profit Cost of revenue decreased by$33.9 million , or (8)%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 primarily due to the decrease in the number of MW delivered. Gross profit as a percentage of revenue decreased from 25.4% for the six months endedJune 30, 2020 to 15.7% for the six months endedJune 30, 2021 . The decrease in Gross Profit as percentage of revenue reflects higher commodity and logistics prices.
Operating Expenses:
General and Administrative General and administrative expenses increased by$16.9 million , or 74%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . The increase in expense was primarily due to a$4.1 million recovery of an account receivable that was previously reserved during the six months endedJune 30, 2020 for which there was no similar credit in the 2021 period. The increase in general and administrative expense also relates to a$8.7 million expense in the six months endedJune 30, 2021 for equity-based compensation with no comparable expense in 2020. Finally, in 2021 we increased our internal headcount leading to higher payroll and related costs, but we were able to partially offset those increases with a reduction in third-party spend related to business process outsourcing, consulting costs, and other professional fees. Contingent Consideration Contingent consideration expense decreased by$2.3 million , or 94%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . The decrease was primarily due to an increase in the fair value of our Tax Receivable Agreement obligation in the prior year period for which there was no corresponding increase in the current year period.
Depreciation
Depreciation expense for the six months ended
Amortization of Intangibles Amortization of intangibles for the six months endedJune 30, 2021 was similar to the six months endedJune 30, 2020 as we did not add any significant intangible assets. Interest Expense Interest expenses increased by$8.0 million , or 105%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 , primarily due to interest on the higher average balance of our Term Loan Facility and Revolving Facility which was not outstanding during six months endedJune 30, 2020 . As ofJune 30, 2021 , we had$429.0 million outstanding under the Term Loan and$102.0 million outstanding under the Revolving Senior Facility. We expect interest expense to be higher for the remainder of 2021 compared to 2020 as a result of the debt outstanding under the Senior Secured Credit Facility along with the amortization of the related discount and issuance costs.
Income Tax Expense
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Income tax expense decreased by $16.7 million , or 100% for the six months ended
June 30, 2021 compared to the six months ended June 30, 2020 . Our effective tax
rate was 1.0% for six months ended June 30, 2021 and 18.0% for the six months
ended June 30, 2020 . The reduction in the effective tax rate is primarily
related to unfavorable non-deductible equity-based compensation and Follow-on
offering costs for the six months ended June 30, 2021 , a favorable tax benefit
related to an NOL carryback as a result of the CARES Act in the six months ended
June 30, 2020 , and the level of earnings in each period.
Liquidity and Capital Resources
Historical Cash Flow
The following table compares the historical cash flow (in thousands):
Six
Months Ended
2021 2020
Net cash used in operating activities $ (134,109) $ (247,900)
Net cash used in investing activities (13,175) (265)
Net cash provided by (used in) financing activities 56,525 (75,108)
Net decrease in cash, cash equivalents and restricted
$ (323,273) cash We have historically financed our operations primarily with the proceeds from capital contributions, 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. InDecember 2019 , a novel strain of coronavirus, SARS-CoV-2, which causes coronavirus disease 2019, or COVID-19, surfaced inWuhan, China . Since then, COVID-19 has spread to multiple countries, includingthe United States . OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 a pandemic. Due to economic conditions our industry has seen rapid commodity price increases and strained logistics, causing us to experience temporary decreased margins and thus decreased cash from operations. We have taken mitigating steps to overcome the economic challenges and, therefore, believe the impact to be temporary, but cannot be certain the timing of when we will achieve better margins. In response to the recent challenging environment, we continuously evaluate our ability to meet our obligations over the next 12 months. We have sufficient financing options available to do so and we expect to have sufficient liquidity to fund current and future commitments.
As of
As of
Operating Activities For the six months endedJune 30, 2021 , cash used in operating activities was$134.1 million primarily due a decrease in deferred revenue of$98.4 million for which we made payments to our suppliers for products that we received the cash for in 2020, but that we did not ship until 2021, an increase in accounts receivable of$33.2 million , an increase in inventories of$20.5 million offset by net income and other add-backs to reconcile to net income. For the six months endedJune 30, 2020 cash used in operating activities was$247.9 million , due to a decrease in deferred revenue of$308.0 million , a decrease in accounts payable of$99.4 million , offset by a decrease in inventory of$42.5 million , a decrease in income tax payable of$35.8 million and net income of$76.1 million . 36 -------------------------------------------------------------------------------- Investing Activities For the six months endedJune 30, 2021 , net cash used in investing activities was$13.2 million , primarily attributable to a$12.0 million investment in equity securities.
For the six months ended
Financing Activities For the six months endedJune 30, 2021 , net cash provided by financing activities was$56.5 million , of which$102.0 million was from proceeds under the Revolving Facility, offset by$31.1 million payment on the Term Loan Facility and$6.6 million in fees paid on the Senior Secured Credit Facility and to increase the limit on the Revolving Facility by$50.0 million . For the six months endedJune 30, 2020 , net cash used by financing activities was$75.1 million , which was attributable to$57.7 million principal payments on the Term Loan Facility and$21.7 million on the related party loan. Securities Purchase Agreement OnAugust 10, 2021 , the Company entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") withBCP Helios Aggregator L.P. , aDelaware limited partnership (the "Purchaser"), an investment vehicle of funds affiliated with Blackstone Inc. Pursuant to the Securities Purchase Agreement, onAugust 11, 2021 , the Company issued and sold to the Purchaser 350,000 shares of a newly designated Series A Perpetual Preferred Stock of the Company, par value$0.001 per share (the "Series A Perpetual Preferred Stock"), having the powers, designations, preferences, and other rights set forth in the Certificate of Designations (as defined below), and 7,098,765 shares of the Company's common stock, par value$0.001 per share ("Common Stock"), for an aggregate purchase price of$346.0 million (the "Initial Closing"). Further, pursuant to the Securities Purchase Agreement, and subject to the terms and conditions set forth therein, including the expiry or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, the Company has agreed to issue and sell to the Purchaser 776,235 shares of Common Stock for an aggregate purchase price of$776 . The Company intends to use the net proceeds from the Initial Closing to repay all of the outstanding amounts under the Company's existing revolving credit facility and to prepay at least$100 million under the Company's term loan and for general corporate purposes. Pursuant to the Securities Purchase Agreement, the Purchaser is entitled to designate one representative (the "Series A Director") to be appointed to the Company's board of directors (the "Board"), and to appoint three non-voting observers to the Board, in each case until such time as the Purchaser and its Permitted Transferees (as defined in the Securities Purchase Agreement) no longer beneficially own shares of the Series A Perpetual Preferred Stock with at least$100 million aggregate Liquidation Preference (as defined below).
Dividends
On or prior to the fifth anniversary of the Initial Closing, the Company may pay
dividends on the Series A Perpetual Preferred Stock either in cash at the
then-applicable Cash Regular Dividend Rate, through accrual to the Liquidation
Preference at the Accrued Regular Dividend Rate (the "Permitted Accrued
Dividends"), or a combination thereof. Folloing the fifth anniversary of the
Initial Closing, dividends shall be payable only in cash. To the extent the
Comany does not declare such dividends and pay in cash following the fifth
anniversary of the Initial Closing, such dividends shall accrue to the
Liquidation Preference ("Default Accrued Dividends", and together with Permitted
Accrued Dividends, "Accrued Dividends") at the then-applicable Cash Regular
Dividend Rate plus 200 basis points. In the event there are Default Accrued
Dividends outstanding for six consecutive quarters, the Company, at the option
of the holder of the Series A Perpetual Preferred Stock (each a "holder"), will
pay 100% of the amount of Default Accrued Dividends by delivering to the Holder
a number of shares of Common Stock equal to the quotient of (i) the amount of
Default Accrued Dividends) divided by (ii) 95% of the 30-day VWAP of the Common
Stock ("Non-Cash Dividend").
37
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As used herein, "Cash Regular Dividend Rate" with respect to the Series A
Perpetual Preferred Stock means (i)
initially, 5.75% per annum on the Liquidation Preference and (ii) increased by
(a) 50 basis points on each of the fifth, sixth and seventh anniversaries of the
Initial Closing and (b) 100 basis points on each of the eighth, ninth and tenth
anniversaries of the Initial Closing. The "Accrued Regular Dividend Rate" with
respect to the Series A Perpetual Preferred Stock means 6.25% per annum on the
Liquidation Preference.
Additional Closings
Pursuant to the Securities Purchase Agreement, until June 30, 2023 , the Company,
subject to the terms and conditions set forth therein, shall have the option to
require the Purchaser to purchase, in the aggregate, in one or more additional
closings (the "Additional Closings"), up to 150,000 shares (the "Delayed Draw
Commitment") of the Series A Perpetual Preferred Stock and up to 3,375,000
shares of Common Stock (or up to 6,100,000 shares of Common Stock in the event
of certain price-related adjustments) (subject to certain equitable adjustments
pursuant to any stock dividend, stock split, stock combination, reclassification
or similar transaction) for an aggregate purchase price up to $148 million .
Fees
UntilJune 30, 2023 , the Company will pay the Purchaser a cash commitment premium on the unpurchased portion of Delayed Draw Commitment as follows: •0% through the six-month anniversary of the Initial Closing; •1.5% from the six-month anniversary of the Initial Closing through the 12-month anniversary of the initial closing; and •3.0% from the 12-month anniversary of the Initial Closing throughJune 30, 2023 .
The Company may terminate some or all of the Delayed Draw Commitment, from time to time, at its sole discretion.
Registration Rights Agreement In connection with the Securities Purchase Agreement, on August [9], 2021, the Company and the Purchaser entered into a Registration Rights Agreement pursuant to which, among other things, the Company granted the Purchaser certain registration rights with respect to Common Stock purchased pursuant to the Securities Purchase Agreement, including customary shelf registration rights and "piggyback" registration rights.
Debt Obligations
Senior Secured Credit Facility OnOctober 14, 2020 , we entered into a senior secured credit facility which was amended onFebruary 23, 2021 by the first amendment and onFebruary 26, 2021 by the second amendment. The senior secured facility consisted originally of (i) a$575.0 million senior secured seven-year term loan facility (the "Term Loan Facility") and (ii) a$150.0 million senior secured 5-year revolving credit facility (the "Revolving Credit Facility" and, together with the Term Loan Facility, the "Senior Secured Credit Facility"). OnFebruary 23, 2021 we entered into the first amendment ("First Amendment") to our Senior Secured Credit Facility. The First Amendment, in the case of Eurocurrency borrowings, lowers theLondon interbank offered rate floor to 50 basis points from 100 basis points and lowers the applicable margin to 325 basis points from 400 basis points per annum. This results in our current rate on the Term Loan Facility decreasing to 3.75% down from 5% prior to the First Amendment. OnFebruary 26, 2021 , we entered into the incremental facility amendment No. 2 (the "Second Amendment") to the Senior Secured Credit Facility. The Second Amendment increases the$150.0 million Revolving Credit Facility from$150.0 million to$200.0 million . The debt discount and issuance costs are being amortized using the effective interest method and the rate as ofJune 30, 2021 is 5.01%. The Term Loan Facility has an annual excess cash flow calculation beginning with the year endedDecember 31, 2021 which could require the Company to make advance principal payments. The balance of the Term Loan Facility is presented in the accompanying consolidated balance sheets net of debt discount and issuance costs of$34.0 38 --------------------------------------------------------------------------------
million at
Revolving Credit Facility Under the Revolving Credit Facility, the Company had$102.0 million outstanding,$11.0 million in standby letters of credit and availability of$87.0 million under the Revolving Credit Facility. Interest Rate The interest rates applicable to the loans under the Term Loan Facility equal, at our option, either, (i) in the case of ABR borrowings, the highest of (a) the Federal Funds Rate as of such day plus 50 basis points, (b) the prime rate and (c) the adjusted LIBOR rate as of such day for a deposit inU.S. dollars with a maturity of one month plus 100 basis points, provided that in no event shall the ABR be less than 150 basis points, plus, in each case, the applicable margin of 300 basis points per annum; or (ii) in the case of Eurocurrency borrowings, the greater of (a) theLondon interbank offered rate for the relevant currency, adjusted for statutory reserve requirements, and (b) 100 basis points, plus, in each case, the applicable margin of 400 basis points per annum. The interest rates applicable to the loans under the Revolving Facility equal, at our option, either, (i) in the case of ABR borrowings, the highest of (a) the Federal Funds Rate as of such day plus 50 basis points, (b) the prime rate and (c) the adjusted LIBOR rate as of such day for a deposit inU.S. dollars with a maturity of one month plus 100 basis points, provided that in no event shall the ABR be less than 150 basis points, plus, in each case, the applicable margin of 225 basis points per annum; or (ii) in the case of Eurocurrency borrowings, the greater of (a) theLondon interbank offered rate for the relevant currency, adjusted for statutory reserve requirements, and (b) 50 basis points, plus, in each case, the applicable margin of 325 basis points per annum. The Term Loan Facility amortizes in equal quarterly installments in aggregate annual amounts equal to 1.00% per annum of the original principal amount of the loans funded thereunder. There is no scheduled amortization under the Revolving Credit Facility.
Off-Balance Sheet Arrangements
As ofJune 30, 2021 , we posted surety bonds in the total amount of approximately$131.0 million . We are required to provide surety bonds to various parties for certain transactions initiated during the ordinary course of business to guarantee the Company's performance in accordance with contractual or legal obligations. These off-balance sheet arrangements do not adversely impact our liquidity or capital resources. .
Critical Accounting Policies and Significant Management Estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Due to the COVID-19 pandemic, there has been and will continue to be uncertainty and disruption in the global economy and financial markets. We have made estimates and assumptions taking into consideration certain possible impacts due to COVID-19. These estimates may change, as new events occur, and additional information is obtained. Actual results may differ from those estimates and assumptions. 39 -------------------------------------------------------------------------------- Refer to the accounting policies under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , where we discuss our more significant judgments and estimates used in the preparation of the condensed consolidated financial statements.
Equity-Based Compensation
The Company granted restricted stock units (RSU's) to employees and Performance Stock Units (PSUs) to certain executives. The PSUs contain performance and market conditions. The PSU grants were valued using the Monte Carlo simulation method and the assigned fair value on grant date will be recognized on a straight-line basis over the vesting term of the awards. The probability of the awards meeting the performance related vested conditions is not included in the grant date fair value, but rather will be estimated quarterly and the Company will true-up the expense recognition accordingly upon any probability to vest revision. The Company accounts for forfeitures as they occur.
The Class
As of
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