SHOALS TECHNOLOGIES GROUP, INC. 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 endedDecember 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 ofSeptember 30, 2022 , 14 of the top 15 solar EPCs as reported bySolar 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 ourBig 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 endedSeptember 30, 2022 . For the same period, we derived substantially all of our revenue from customers in theU.S. As ofSeptember 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 ofSeptember 30, 2022 , backlog and awarded orders represented a 74% and 44% increase relative to the same date last year andJune 30, 2022 , respectively. Initial Public Offering OnJanuary 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
OnJuly 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
OnAugust 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 toShoals Parent, LLC through a series of transactions.
As of
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, theFederal Reserve increased interest rates resulting in higher interest rates associated with our Senior Secured Credit Agreement. Any additional increases in interest rates by theFederal 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 fromEurope . However, the ongoing conflict inUkraine has reduced the availability of certain material that can be sourced inEurope 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 inUkraine , but we are continuously monitoring the situation and evaluating our procurement strategy and supply chain as to reduce any negative impact on our business, financial condition, and results of operations. As response to supply chain constraints, in 2022 we have increased certain raw materials inventory, partly to limit the potential impact of supply chain issues of raw materials in the near term. 30 --------------------------------------------------------------------------------
To date we have not had any material adverse effects on our financial results from these events.
Key Components of Our Results of Operations
The following discussion describes certain line items in our consolidated statements of operations.
Revenue
We generate revenue from the sale of EBOS systems and components for homerun and combine-as-you-go architectures, battery storage and EV charging infrastructure. Our customers include EPCs, utilities, solar developers, independent power producers, solar module manufacturers and charge point operators. We derive the majority of our revenue from selling system solutions. When we sell a system solution, we enter into a contract with our customers covering the price, specifications, delivery dates and warranty for the products being purchased, among other things. Our contractual delivery period for system solutions can vary from one to three months whereas manufacturing typically requires a shorter time frame. Contracts for system solutions can range in value from several hundred thousand to several million dollars. Our revenue is affected by changes in the price, volume and mix of products purchased by our customers. The price and volume of our products is driven by the demand for our products, changes in product mix between homerun and combine-as-you-go EBOS, geographic mix of our customers, strength of competitors' product offerings, and availability of government incentives to the end-users of our products. Our revenue growth is dependent on continued growth in the amount of solar energy projects constructed each year and our ability to increase our share of demand in the geographies where we currently compete and plan to compete in the future as well as our ability to continue to develop and commercialize new and innovative products that address the changing technology and performance requirements of our customers.
Cost of Revenue and Gross Profit
Cost of revenue consists primarily of product costs, including purchased materials and components, as well as costs related to shipping, customer support, product warranty, personnel and depreciation of manufacturing and testing equipment. Personnel costs in cost of revenue include both direct labor costs as well as costs attributable to any individuals whose activities relate to the transformation of raw materials or component parts into finished goods or the transportation of materials to the customer. Our product costs are affected by the underlying cost of raw materials, including copper and aluminum; component costs, including fuses, resin, enclosures, and cable; technological innovation; economies of scale resulting in lower component costs; and improvements in production processes and automation. We do not currently hedge against changes in the price of raw materials. Some of these costs, primarily indirect personnel and depreciation of manufacturing and testing equipment, are not directly affected by sales volume. Gross profit may vary from year to year and is primarily affected by our sales volume, product prices, product costs, product mix, customer mix, geographical mix, shipping method and warranty costs.
Operating Expenses
Operating expenses consist of general and administrative costs as well as depreciation and amortization expense. Personnel-related costs are the most significant component of our operating expenses and include salaries, equity-based compensation, benefits, payroll taxes and commissions. The number of full-time employees in our general and administrative departments increased from 68 to 103 fromSeptember 30, 2021 toSeptember 30, 2022 , and we expect to hire new employees in the future to support our growth. The timing of these additional hires could materially affect our operating expenses in any particular period, both in 31 --------------------------------------------------------------------------------
absolute dollars and as a percentage of revenue. We expect to invest in additional resources to support our growth which will increase our operating expenses.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries, equity-based compensation expense, employee benefits and payroll taxes related to our executives, and our sales, finance, human resources, information technology, engineering and legal organizations, travel expenses, facilities costs, marketing expenses, insurance, bad debt expense and fees for professional services. Professional services consist of audit, tax, accounting, legal, internal controls, information technology, investor relations and other costs. We expect to increase our sales and marketing personnel as we expand into new geographic markets. Substantially all of our sales are currently in theU.S. We currently have a sales presence in theU.S. ,Australia ,Europe andLatin 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 ofDecember 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 toU.S. federal and state income tax in multiple jurisdictions with respect to our allocable share of any net taxable income of Shoals Parent. Shoals Parent is a pass-through entity for federal income tax purposes but incurs income tax in certain state jurisdictions. 32 --------------------------------------------------------------------------------
Results of Operations
The following table summarizes our results of operations (dollars in thousands):
Three Months Ended
September 30, Nine Months Ended September 30,
2022 2021 Increase / (Decrease) 2022 2021 Increase / (Decrease)
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
Revenue
Revenue increased by$31.0 million , or 52%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 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 endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 , primarily driven by an increase in revenue. Gross profit as a percentage of revenue increased from 36.4% in 2021 to 39.7% in 2022 due to an increase in system solutions for combine-as-you-go EBOS, which have higher margins than our other products. 33
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Operating Expenses General and Administrative General and administrative expenses increased$3.8 million , or 38%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 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 endedSeptember 30, 2022 as compared to the three months endedSeptember 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 endedSeptember 30, 2022 as compared to the three months endedSeptember 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 onMay 5, 2022 . During 2022, theFederal Reserve increased interest rates resulting in higher interest rates associated with our Senior Secured Credit Agreement. Any additional increases in interest rates by theFederal 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 endedSeptember 30, 2022 as compared to the three months endedSeptember 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 endedSeptember 30, 2022 as compared to an income tax benefit of$1.3 million for the three months endedSeptember 30, 2021 . Our effective income tax rate for the three months endedSeptember 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 endedSeptember 30, 2022 as compared to the three months endedSeptember 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
Revenue
Revenue increased by
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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 endedSeptember 30, 2022 as compared to the nine months endedSeptember 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 endedSeptember 30, 2022 as compared to the nine months endedSeptember 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 endedSeptember 30, 2022 as compared to the nine months endedSeptember 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 endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 , due to increased borrowing rates and borrowings that we amended onMay 5, 2022 to support our growth and working capital under our Senior Secured Credit Agreement. During 2022, theFederal Reserve increased interest rates resulting in higher interest rates associated with our Senior Secured Credit Agreement. Any additional increases in interest rates by theFederal 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
Loss on Debt Repayment Loss on debt repayment for the nine months endedSeptember 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 endedSeptember 30, 2022 . 35 --------------------------------------------------------------------------------
Income Tax Expense
Income tax expense was$5.5 million for the nine months endedSeptember 30, 2022 as compared to an income tax benefit of$3.1 million for the nine months endedSeptember 30, 2021 . Our effective income tax rate for the nine months endedSeptember 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 toShoals 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 Nine Months Ended
September 30, 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
Three Months Ended Nine Months Ended
September 30, 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 Nine Months Ended
September 30, 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 toU.S. Federal income taxes, in addition to state and local taxes with respect to its allocable share of any net taxable income ofShoals Parent LLC . The adjustment to the provision for income tax reflects the effective tax rates below, assumingShoals Technologies Group, Inc. owns 100% of the units inShoals Parent LLC . Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 StatutoryU.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 Nine Months Ended
September 30, 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
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 endedSeptember 30, 2022 as compared to cash used in operating activities of$6.7 million for the nine months endedSeptember 30, 2021 . As ofSeptember 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 endedSeptember 30, 2022 , cash provided by operating activities was$5.0 million , primarily due to increases of accounts payable and accrued expenses and other of$35.7 million which relates to increased inventory purchases in accounts payable and increased deferred revenue in accrued expenses and other, along with operating results that included$24.7 million of net income which was reduced by$26.7 million of non-cash expenses offset by an increase of$43.6 million in inventory as a result of increasing our raw materials inventory to support growth and reduce the likelihood of supply chain issues from our raw 39
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materials suppliers along with a change in our terms with an overseas supplier
and
For the nine months endedSeptember 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
For the nine months ended
Financing Activities For the nine months endedSeptember 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 endedSeptember 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 ofSeptember 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
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