Shoals Technologies Group Inc

Previous wording

Throughout the first two quarters of 2024, we have maintained focus on our growth strategy and continued strengthening our leadership position in the industry. We believe that as of June 30, 2024, we have worked with 13 of the top 15 U.S. solar EPCs, per Wood Mackenzie data from 2022-2024, and 11 of those EPCs used our combine-as-you-go system on their projects.

Current wording

Throughout the first three quarters of 2024, we have maintained focus on our growth strategy and continued strengthening our leadership position in the industry. We believe that as of September 30, 2024, we have worked with 13 of the top 15 U.S. solar EPCs, per Wood Mackenzie data from 2022-2024, and 11 of those EPCs used our combine-as-you-go system on their projects.

Previous wording

We derived 76.0% of our revenue from the sale of system solutions for the six months ended June 30, 2024. For the same period, we derived substantially all of our revenue from customers in the U.S. As of June 30, 2024, we had $642.3 million of backlog and awarded orders, backlog of $206.7 million represents signed purchase orders or contractual minimum purchase commitments with take-or-pay provisions and awarded orders of $435.6 million are orders we are in the process of documenting a contract for but for which a contract has not yet been signed. As of June 30, 2024, we believe approximately $206.1 million of backlog and $259.5 million of awarded orders have delivery dates in the next twelve months. Additionally, more than 12% of our June 30, 2024 backlog and awarded orders related to international projects. As of June 30, 2024, backlog and awarded orders increased by 18% relative to the same date last year and increased by 4% relative to March 31, 2024.

Current wording

We derived 76.3% of our revenue from the sale of system solutions for the nine months ended September 30, 2024. For the same period, we derived substantially all of our revenue from customers in the U.S. As of September 30, 2024, we had $596.6 million of backlog and awarded orders, backlog of $153.4 million represents signed purchase orders or contractual minimum purchase commitments with take-or-pay provisions and awarded orders of $443.2 million are orders we are in the process of documenting a contract for but for which a contract has not yet been signed. As of September 30, 2024, we believe approximately $144.4 million of backlog and $310.8 million of awarded orders have delivery dates in the next twelve months. Additionally, more than 13% of our September 30, 2024 backlog and awarded orders related to international projects. As of September 30, 2024, backlog and awarded orders decreased by 5.8% relative to the same date last year and decreased by 7.1% relative to June 30, 2024, as a result of previously disclosed project delays.

Previous wording

Global inflationary pressures are expected to persist to a lesser extent during the remainder of 2024. As a result of such inflationary pressures, increased energy prices, freight premiums, and other operating costs continued in the first two quarters of 2024 and are expected to persist during the rest of 2024. Increased interest rates also continued to result in generally higher interest rates associated with our Senior Secured Credit Agreement in the three and six months ended June 30, 2024. The eventual implications of higher government deficits and debt, tighter monetary policy, and potentially high interest rates may drive a higher cost of capital during our forecasted period.

Current wording

Global inflationary pressures are expected to persist to a lesser extent during the remainder of 2024. As a result of such inflationary pressures, increased energy prices, freight premiums, and other operating costs continued in the first three quarters of 2024 and are expected to persist during the rest of 2024. Increased interest rates also continued to result in generally higher interest rates associated with our Senior Secured Credit Agreement in the three and nine months ended September 30, 2024. The eventual implications of higher government deficits and debt, tighter monetary policy, and continued high interest rates may drive a higher cost of capital during our forecasted period.

Previous wording

Our ability to obtain raw materials required to manufacture our components and system solutions from domestic and international suppliers, as well as our ability to secure inbound logistics to and from our facilities, were still impacted in 2023 and the first two quarters of 2024. The Company does not directly source a significant amount of raw materials from Europe. However, the Russia-Ukraine war has reduced the availability of certain materials 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 expect these trends to persist throughout the remainder of 2024.

Current wording

Our ability to obtain raw materials required to manufacture our components and system solutions from domestic and international suppliers, as well as our ability to secure inbound logistics to and from our facilities, were still impacted in 2023 and the first three quarters of 2024. The Company does not directly source a significant amount of raw materials from Europe. However, the Russia-Ukraine war has reduced the availability of certain materials 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 expect these trends to persist throughout the remainder of 2024.

Previous wording

In addition, changes over the last few years in the international relations and tariff regimes between the U.S. and China in response to various political issues and heightened uncertainty regarding China-Taiwan relations could significantly adversely impact the availability of parts and components to us, and, correspondingly, our ability to produce our components at targeted levels, although we did not experience such negative effects during the first two quarters of 2024. We continue to monitor the condition of our supply chain and evaluate our procurement strategy to reduce any negative impact on our business, financial condition, and results of operations. During the three and six months ended June 30, 2024 we continued to monitor and reduce our inventory levels.

Current wording

In addition, changes over the last few years in the international relations and tariff regimes between the U.S. and China in response to various political issues and heightened uncertainty regarding China-Taiwan relations could significantly adversely impact the availability of parts and components to us, and, correspondingly, our ability to produce our components at targeted levels, although we did not materially experience such negative effects during the first three quarters of 2024. We continue to monitor the condition of our supply chain and evaluate our procurement strategy to reduce any negative impact on our business, financial condition, and results of operations. During the three and nine months ended September 30, 2024 we continued to monitor and optimize our inventory levels.

Previous wording

During 2023 and continuing in the first two quarters in 2024, the domestic utility scale solar market experienced project delays that have pushed projects out from the first half of 2024. Additionally, in 2023, the domestic utility scale solar market started experiencing slowing growth, which is expected to persist in the near term. These trends are the result of the costs of permitting issues; project financing; lingering uncertainty about the application of the Inflation Reduction Act of 2022 to solar projects; uncertainty regarding changes in the U.S. trade environment, including the imposition of trade restrictions, import tariffs, anti-dumping and countervailing duties; supply chain constraints; and interconnection complications. We expect these trends to persist throughout the remainder of 2024. These project slowdowns and delays have impacted our results, though we expect this trend to reverse over time. However, even though we expect our growth rate to decline from the very high levels of the last few years, we believe that our domestic utility scale business will continue growing at an attractive rate.

Current wording

During 2023 and continuing in the first three quarters in 2024, the domestic utility scale solar market experienced project delays that have pushed projects beyond 2024. Additionally, in 2023, the domestic utility scale solar market started experiencing slowing growth, which is expected to persist in the near term. These trends are the result of the costs of permitting issues; project financing; lingering uncertainty about the application of the Inflation Reduction Act of 2022 to solar projects; uncertainty regarding changes in the U.S. trade environment, including the imposition of trade restrictions, import tariffs, anti-dumping and countervailing duties; supply chain constraints; and interconnection complications. We expect these trends to persist beyond 2024 and reverse over time. These project slowdowns and delays have impacted our results, lowering demand and sales volume. However, even though we expect our growth rate to decline from the very high levels of the last few years, we believe that our domestic utility scale business will continue growing at an attractive rate.

Previous wording

We generate revenue from the sale of EBOS systems and components for homerun and combine-as-you-go architectures, battery storage, EV charging infrastructure, and operations and maintenance offerings. 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 solar system solutions. When we sell a solar 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 solar system solutions can vary from one to three months whereas manufacturing typically requires a shorter time frame. Contracts for solar system solutions can range in value from several hundred thousand to several million dollars.

Current wording

We generate revenue from the sale of EBOS systems and components for homerun and combine-as-you-go architectures, battery storage, and operations and maintenance offerings. Our customers include EPCs, utilities, solar developers, independent power producers, and solar module manufacturers. We derive the majority of our revenue from selling solar system solutions. When we sell a solar 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 solar system solutions can vary from one to three months whereas manufacturing typically requires a shorter time frame. Contracts for solar system solutions can range in value from several hundred thousand to several million dollars.

Previous wording

Operating expenses consist of general and administrative expenses 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 121 to 155 from June 30, 2023 to June 30, 2024, and we expect to hire new employees in the future to support our growth. The timing of these additional hires could materially affect our operating expenses in any particular period, both in absolute dollars and as a percentage of revenue.

Current wording

Operating expenses consist of general and administrative expenses 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 139 to 165 from September 30, 2023 to September 30, 2024, and we expect to hire new employees in the future to support our future 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.

Previous wording

Amortization of intangibles consists of amortization of customer relationships, developed technology, trade names, backlog and noncompete agreements over their expected period of use.

Current wording

Amortization of intangibles consists of amortization of customer relationships, developed technology, and trade names over their expected period of use.

Previous wording

Revenue decreased by $20.0 million, or 17%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, driven by lower sales volumes primarily resulting from lower demand as a result of solar project delays that have pushed projects out from the first half of 2024.

Current wording

Revenue decreased by $32.0 million, or 24%, for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023, driven by lower sales volumes primarily resulting from lower demand as a result of solar project delays that have pushed projects out from the first three quarters of 2024, and to a lesser extent, competitive dynamics, volume discounts, and customer mix in our key markets.

Previous wording

Cost of revenue decreased by $9.4 million, or 14%, for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023, driven by the decrease in revenue. Gross profit as a percentage of revenue was 40.3% during three months ended June 30, 2024, and 42.4% during the three months ended June 30, 2023. The decrease in gross profit as a percentage of revenue was driven by an increase in labor costs, and a reduction in leverage on fixed costs.

Current wording

Cost of revenue decreased by $43.3 million, or 36%, for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, driven by the decrease in revenue. Gross profit as a percentage of revenue was 24.8% during three months ended September 30, 2024, and 10.5% during the three months ended September 30, 2023. The increase in gross profit as a percentage of revenue was driven by a decrease in wire insulation shrinkback expenses recorded during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. This increase in gross profit as a percentage of revenue was offset by an increase in labor costs, non-recurring operational charges, competitive dynamics, volume discounts, and customer mix in our key markets, and a reduction in leverage on fixed costs.

Previous wording

Depreciation and amortization expenses increased by less than $0.1 million, or 2%, for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023. The increase in depreciation and amortization was due to an increase in depreciation expense related to additional purchases of PP&E to support our growth initiatives. This increase was offset by a decrease in depreciation and amortization resulting from definite lived intangible assets that became fully amortized during 2023.

Current wording

Depreciation and amortization expenses decreased by less than $0.1 million, or 3%, for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023. The decrease was due to definite lived intangible assets that became fully amortized during 2023.

Previous wording

Interest expense, net decreased by $3.4 million, or 53%, for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023. This decrease was due to a decrease in the total weighted average outstanding balance of the Term Loan Facility and Revolving Credit Facility (as defined in Note 9 - Long-Term Debt) during the three months ended June 30, 2024 compared to the three months ended June 30, 2023, as well as a decrease in borrowing rates as a result of the amendment to the Senior Secured Credit Agreement.

Current wording

Interest expense, net decreased by $2.8 million, or 48%, for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023. This decrease was due to a decrease in the total weighted average outstanding balance of the Term Loan Facility and Revolving Credit Facility during the three months ended September 30, 2024 compared to the three months ended September 30, 2023, as well as a decrease in borrowing rates applicable to the Senior Secured Credit Agreement as a result of the amendment to the Senior Secured Credit Agreement and decreases in the federal funds effective rate.

Previous wording

Income tax expense totaled $3.7 million for the three months ended June 30, 2024, as compared to income tax expense of $6.2 million for the three months ended June 30, 2023. Our effective income tax rate for the three months ended June 30, 2024 and 2023 was 23.9% and 24.7%, respectively. The decrease in our effective income tax rate for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023 was due to a refund received as a result of a change in Tennessee tax law that went into effect during May 2024.

Current wording

Income tax expense totaled $1.7 million for the three months ended September 30, 2024, as compared to income tax benefit of $6.6 million for the three months ended September 30, 2023. Our effective income tax rate for the three months ended September 30, 2024 and 2023 was 118.6% and 40.3%, respectively. The change in our effective income tax rate was due to various discrete items, particularly RSU and PSU shortfalls and return to provision adjustments, during the three months ended September 30, 2024. Additionally, during the three months ended September 30, 2023 we recorded an income tax benefit of $5.1 million in connection with termination of the Up-C structure on July 1, 2023, which increased our effective income tax rate when considered in relation to the net loss recorded during the three months ended September 30, 2023 .

Previous wording

Revenue decreased by $34.2 million, or 15%, for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023, driven by lower sales volumes resulting from solar project delays that have pushed projects out from the first half of 2024.

Current wording

Revenue decreased by $66.3 million, or 18%, for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, driven by lower sales volumes resulting from solar project delays that have pushed projects out from the first three quarters of 2024, and to a lesser extent, competitive dynamics, volume discounts, and customer mix in our key markets.

Previous wording

Cost of revenue decreased by $11.9 million, or 9%, for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023, driven by the decrease in revenue. Gross profit as a percentage of revenue was 40.2% during the six months ended June 30, 2024, and 44.0% during the six months ended June 30, 2023. The decrease in gross profit as a percentage of revenue was driven by an increase in labor costs, and a reduction in leverage on fixed costs.

Current wording

Cost of revenue decreased by $55.2 million, or 22%, for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, driven by the decrease in revenue. Gross profit as a percentage of revenue increased during the nine months ended September 30, 2024 to 34.8%, as compared to 31.5% during the nine months ended September 30, 2023. The increase in gross profit as a percentage of revenue was driven by a decrease in wire insulation shrinkback expenses recorded during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. This increase in gross profit as a percentage of revenue was offset by an increase in labor costs, competitive dynamics, volume discounts, and customer mix in our key markets, and a reduction in leverage on fixed costs.

Previous wording

General and administrative expenses increased $5.3 million, or 14%, for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. The increase in general and administrative expenses was the result of an increase in professional fees of $5.1 million primarily related to legal fees incurred in connection with the ongoing patent infringement and wire insulation shrinkback litigation, as well as an increase in wages and related taxes of $2.2 million due to increased employee headcount to support our growth. These increases are offset by a decrease in equity-based compensation of $2.8 million mainly related to termination of our former CEO’s employment for disability during the six months ended June 30, 2023.

Current wording

General and administrative expenses increased $1.5 million, or 2%, for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023. The increase in general and administrative expenses was the result of an increase in professional fees of $5.2 million primarily related to legal fees incurred in connection with the ongoing patent infringement, wire insulation shrinkback litigation, and securities litigation, as well as an increase in wages and related taxes of $1.4 million due to increased employee headcount to support our future growth. These increases are offset by a decrease in equity-based compensation of $6.3 million related to a reduction in the probable outcome of PSU performance vesting conditions and forfeiture of RSUs and PSUs related to the resignation of a former officer during the nine months ended September 30, 2024, as well as termination of our former Chief Executive Officer’s employment for disability in March 2023, which resulted in acceleration of equity based compensation during the nine months ended September 30, 2023.

Previous wording

Depreciation and amortization expense decreased by less than $0.1 million, or 0.5%, for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. The decrease was due to definite lived intangible assets that became fully amortized during 2023. The decrease in depreciation and amortization is offset by an increase in depreciation expense related to additional purchases of PP&E to support our growth initiatives.

Current wording

Depreciation and amortization expense decreased by less than $0.1 million, or 1.3%, for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023. The decrease was due to definite lived intangible assets that became fully amortized during 2023. The decrease in depreciation and amortization is offset by an increase in depreciation expense related to additional purchases of PP&E to support our growth initiatives.

Previous wording

Interest expense, net decreased by $5.1 million, or 41%, for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. This decrease was due to a write-off of $2.5 million of unamortized deferred interest as a result of voluntary prepayments made on, and the payoff of, the Term Loan Facility during the six months ended June 30, 2024, as well as a decrease in the total weighted average outstanding balance of the Term Loan Facility and Revolving Credit Facility (as defined in Note 9 - Long-Term Debt) during the six months ended June 30, 2024 compared to the six months ended June 30, 2023, and a decrease in borrowing rates as a result of the amendment to the Senior Secured Credit Agreement. The decrease was offset by a write-off of $2.3 million of unamortized deferred financing costs as a result of voluntary prepayments made on, and the payoff of, the Term Loan Facility during the six months ended June 30, 2024.

Current wording

Interest expense, net decreased by $7.9 million, or 43%, for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023. This decrease was due to a write-off of $2.5 million of unamortized deferred interest as a result of voluntary prepayments made on, and the payoff of, the Term Loan Facility during the nine months ended September 30, 2024, as well as a decrease in the total weighted average outstanding balance of the Term Loan Facility and Revolving Credit Facility during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, and a decrease in borrowing rates applicable to the Senior Secured Credit Agreement. The decrease was offset by a write-off of $2.3 million of unamortized deferred financing costs as a result of voluntary prepayments made on, and the payoff of, the Term Loan Facility during the nine months ended September 30, 2024.

Previous wording

Income tax expense was $6.2 million for the six months ended June 30, 2024 as compared to income tax expense of $9.3 million for the six months ended June 30, 2023. Our effective income tax rate for the six months ended June 30, 2024 and 2023 was 27.1% and 20.6%, respectively. The increase in the effective tax rate was due to a reduction in favorable permanent differences as a result of net income attributable to non-controlling interests and discrete tax adjustments related to RSU and PSU vestings during the six months ended June 30, 2024.

Current wording

Income tax expense was $7.9 million for the nine months ended September 30, 2024 as compared to income tax expense of $2.7 million for the nine months ended September 30, 2023. Our effective income tax rate for the nine months ended September 30, 2024 and 2023 was 32.5% and 9.3%, respectively. The increase in our effective income tax rate was due to an income tax benefit of $5.1 million recorded in connection with termination of the Up-C structure on July 1, 2023, as discussed in more detail in Note 14 - Income Taxes. The effective tax rate was further increased by various discrete items, particularly RSU and PSU shortfalls, during the nine months ended September 30, 2024.

Previous wording

We define Adjusted Gross Profit as gross profit plus wire insulation shrinkback expenses. We define Adjusted Gross Profit Percentage as Adjusted Gross Profit divided by revenue. We define Adjusted EBITDA as net income plus (i) interest expense, net, (ii) income tax expense, (iii) depreciation expense, (iv) amortization of intangibles, (v) equity-based compensation, (vi) wire insulation shrinkback expenses, and (vii) wire insulation shrinkback litigation expenses. We define Adjusted Net Income as net income attributable to Shoals Technologies Group, Inc. plus (i) net income impact from assumed exchange of Class B common stock to Class A common stock as of the beginning of the earliest period presented, (ii) adjustment to the provision for income tax, (iii) amortization of intangibles, (iv) amortization / write-off of deferred financing costs, (v) equity-based compensation, (vi) wire insulation shrinkback expenses, and (vii) wire insulation shrinkback litigation 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 stock outstanding for the applicable period, which assumes the exchange of all outstanding Class B common stock for Class A common stock as of the beginning of the earliest period presented.

Current wording

We define Adjusted Gross Profit as gross profit plus wire insulation shrinkback expenses. We define Adjusted Gross Profit Percentage as Adjusted Gross Profit divided by revenue. We define Adjusted EBITDA as net income (loss) plus (i) interest expense, net, (ii) income tax benefit (expense), (iii) depreciation expense, (iv) amortization of intangibles, (v) equity-based compensation, (vi) wire insulation shrinkback expenses, and (vii) wire insulation shrinkback litigation expenses. We define Adjusted Net Income as net income (loss) attributable to Shoals Technologies Group, Inc. plus (i) net income (loss) impact from assumed exchange of Class B common stock to Class A common stock as of the beginning of the earliest period presented, (ii) adjustment to the provision for income tax, (iii) amortization of intangibles, (iv) amortization / write-off of deferred financing costs, (v) equity-based compensation, (vi) wire insulation shrinkback expenses, and (vii) wire insulation shrinkback litigation 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 stock outstanding for the applicable period, which assumes the exchange of all outstanding Class B common stock for Class A common stock as of the beginning of the earliest period presented.

Previous wording

Because of these limitations, Adjusted Gross Profit, Adjusted Gross Profit Percentage, 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 gross profit to Adjusted Gross Profit and Adjusted Gross Profit Percentage, net income to Adjusted EBITDA, and net income attributable to Shoals Technologies Group, Inc. to Adjusted Net Income and Adjusted Diluted EPS below and not rely on any single financial measure to evaluate our business.

Current wording

Because of these limitations, Adjusted Gross Profit, Adjusted Gross Profit Percentage, 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 gross profit to Adjusted Gross Profit and Adjusted Gross Profit Percentage, net income (loss) to Adjusted EBITDA, and net income (loss) attributable to Shoals Technologies Group, Inc. to Adjusted Net Income and Adjusted Diluted EPS below and not rely on any single financial measure to evaluate our business.

Previous wording

Reconciliation of Net Income to Adjusted EBITDA (in thousands):

Current wording

Reconciliation of Net Income (Loss) to Adjusted EBITDA (in thousands):

Previous wording

Reconciliation of Net Income Attributable to Shoals Technologies Group, Inc. to Adjusted Net Income (in thousands):

Current wording

Reconciliation of Net Income (Loss) Attributable to Shoals Technologies Group, Inc. to Adjusted Net Income (in thousands):

Previous wording

(a)For the six months ended June 30, 2024, represents (i) $0.5 million of inventory write-downs of wire in connection with the identification, repair and replacement of a subset of wire harnesses presenting unacceptable levels of wire insulation shrinkback. For the six months ended June 30, 2023, represents (i) $8.9 million of wire insulation shrinkback warranty expenses related to the identification, repair and replacement of a subset of wire harnesses presenting unacceptable levels of wire insulation shrinkback, recorded during the three months ended June 30, 2023 and (ii) $2.6 million of inventory write-downs of defective wire in connection with the identification, repair and replacement of a subset of wire harnesses presenting unacceptable levels of wire insulation shrinkback, including $2.0 million and $0.6 million, respectively, recorded during the three months ended March 31, 2023 and June 30, 2023. We consider expenses incurred in connection with the identification, repair and replacement of the impacted wire harnesses distinct from normal, ongoing service identification, repair and replacement expenses that would be reflected under ongoing warranty expenses within the operation of our business, which we do not exclude from our non-GAAP measures. In the future, we also intend to exclude from our non-GAAP measures the benefit of liability releases, if any. We believe excluding expenses from these discrete liability events provides investors with a better view of the operating performance of our business and allows for comparability through periods. See Note 8 - Warranty Liability, in our condensed consolidated financial statements included in this Form 10-Q for more information.

Current wording

(a)For the three and nine months ended September 30, 2024, represents (i) $13.3 million of wire insulation shrinkback warranty expenses related to the identification, repair and replacement of a subset of wire harnesses presenting unacceptable levels of wire insulation shrinkback, (ii) zero and $0.5 million, respectively, of inventory write-downs of wire in connection with wire insulation shrinkback. For the three and nine months ended September 30, 2023 represents, (i) $50.2 million and $59.1 million, respectively, of wire insulation shrinkback warranty expenses related to the identification, repair and replacement of a subset of wire harnesses presenting unacceptable levels of wire insulation shrinkback, and (ii) zero and $2.6 million, respectively, of inventory write-downs of wire in connection with the identification, repair and replacement of a subset of wire harnesses presenting unacceptable levels of wire insulation shrinkback. We consider expenses incurred in connection with the identification, repair and replacement of the impacted wire harnesses distinct from normal, ongoing service identification, repair and replacement expenses that would be reflected under ongoing warranty expenses within the operation of our business, which we do not exclude from our non-GAAP measures. In the future, we also intend to exclude from our non-GAAP measures the benefit of liability releases, if any. We believe excluding expenses from these discrete liability events provides investors with a better view of the operating performance of our business and allows for comparability through periods. See Note 8 - Warranty Liability, in our condensed consolidated financial statements included in this Form 10-Q for more information.

Previous wording

(b)For the three and six months ended June 30, 2024, represents $1.4 million and $2.2 million, respectively, of expenses incurred in connection with the lawsuit initiated by the Company against the supplier of the defective wire. We consider this litigation distinct from ordinary course legal matters given the expected magnitude of the expenses, the nature of the allegations in the Company’s complaint, the amount of damages sought, and the impact of the matter underlying the litigation on the Company’s financial results. In the future, we also intend to exclude from our non-GAAP measures the benefit of recovery, if any. We believe excluding expenses from these discrete litigation events provides investors with a better view of the operating performance of our business and allows for comparability through periods. See Note 13 -

Current wording

(b)For the three and nine months ended September 30, 2024, represents $2.3 million and $4.5 million, respectively, of expenses incurred in connection with the lawsuit initiated by the Company against the supplier of the defective wire. For both the three and nine months ended September 30, 2023, represents $0.6 million of expenses incurred in connection with the lawsuit initiated by the Company against the supplier of the defective wire. We consider this litigation distinct from ordinary course legal matters given the expected magnitude of the expenses, the nature of the allegations in the Company’s complaint, the amount of damages sought, and the impact of the matter underlying the litigation on the Company’s financial results. In the future, we also intend to exclude from our non-GAAP measures the benefit of recovery, if any. We believe excluding expenses from these discrete litigation events provides investors with a better view of the operating performance of our business and allows for comparability through periods. See Note 13 - Commitments and Contingencies, in our condensed consolidated financial statements included in this Form 10-Q for more information.

Previous wording

30, 2023. As of June 30, 2024, our cash and cash equivalents were $3.2 million, a decrease from $22.7 million as of December 31, 2023. As of June 30, 2024 we had outstanding borrowings of $146.8 million, a decrease from $183.8 million as of December 31, 2023. As of June 30, 2024, we also had $52.9 million available for additional borrowings under our $200.0 million Revolving Credit Facility.

Current wording

We generated cash from operating activities of $66.4 million during the nine months ended September 30, 2024, as compared to cash provided by operating activities of $65.5 million during the nine months ended September 30, 2023. As of September 30, 2024, our cash and cash equivalents were $11.1 million, a decrease from $22.7 million as of December 31, 2023. As of September 30, 2024 we had outstanding borrowings of $141.8 million, a decrease from $183.8 million as of December 31, 2023. As of September 30, 2024, we also had $57.9 million available for additional borrowings under our $200.0 million Revolving Credit Facility.

Previous wording

In connection with the Repurchase Program, on June 11, 2024, the Company entered into an ASR with Jefferies LLC to repurchase $25.0 million of the Company’s Class A common stock. Under the terms of the ASR, the Company paid $25.0 million to Jefferies LLC on June 12, 2024, and received 2,202,643 shares of Class A common stock, representing approximately 60% of the notional amount of the ASR, based on the closing price of $6.81 on June 10, 2024.

Current wording

In connection with the Repurchase Program, on June 11, 2024, the Company entered into an ASR with Jefferies LLC to repurchase $25.0 million of the Company’s Class A common stock. Under the terms of the ASR, the Company paid $25.0 million to Jefferies LLC on June 12, 2024, and received a total of 3,908,387 shares of the Company’s Class A common stock upon final settlement. Final settlement was based on a repurchase price of $6.40 per share, which was based on the average of the daily volume weighted average price per share of the Company’s Class A common stock during the term of the ASR, less a discount.

Previous wording

During the six months ended June 30, 2024, we also used approximately $9.0 million of cash to pay for expenses related to the identification, repair and replacement of the wire harnesses impacted in connection with the wire insulation shrinkback matter. We expect to continue spending significant amounts of cash in connection thereof. For more information, see Note 8 - Warranty Liability in our condensed consolidated financial statements.

Current wording

During the nine months ended September 30, 2024, we also used approximately $15.2 million of cash to pay for expenses related to the identification, repair and replacement of the wire harnesses impacted in connection with the wire insulation shrinkback matter. We expect to continue spending significant amounts of cash in connection thereof. For more information, see Note 8 - Warranty Liability in our condensed consolidated financial statements.

Previous wording

For the six months ended June 30, 2023, cash provided by operating activities was $37.8 million, primarily due to operating results that included $35.9 million of net income, which included $39.5 million of non-cash expense, along with an increase of $8.0 million in deferred revenue and an increase of $6.8 million in accounts payable and accrued expenses. These cash inflows were partially offset by an increase in accounts receivable and unbilled receivables of $51.8 million.

Current wording

For the nine months ended September 30, 2024, cash provided by operating activities was $66.4 million, primarily due to operating results that included $16.3 million of net income, which included $47.6 million of non-cash expense, along with decreases in accounts receivable and unbilled receivables of $38.2 million. These cash inflows were offset by cash outflows of $15.4 million related to the warranty liability as well as an increase in inventory of $14.6 million, an increase in other assets of $2.7 million, a decrease in accounts payable and accrued expenses of $1.4 million, and a decrease of $1.7 million in deferred revenue.

Previous wording

For the six months ended June 30, 2024, cash provided by operating activities was $50.7 million, primarily due to operating results that included $16.6 million of net income, which included $26.5 million of non-cash expense, along with a decrease in accounts receivable and unbilled receivables of $38.0 million. These cash inflows were offset by a decrease of $11.9 million in accounts payable and accrued expenses driven by payment of 2023 bonuses during March 2024 and a reduction in accrued interest, cash outflows of $9.0 million related to the warranty liability, an increase of $7.7 million in inventory, and a decrease of $1.0 million in deferred revenue.

Current wording

For the nine months ended September 30, 2023, cash provided by operating activities was $65.5 million, primarily due to operating results that included $26.1 million of net income, which included $92.0 million of non-cash expense, along with an increase of $10.7 million in accounts payable and accrued expenses, a decrease of $8.3 million in inventory, and an increase of $3.8 million in deferred revenue. These cash inflows were offset by an increase in accounts receivable and unbilled receivables of $70.4 million and cash outflows of $3.7 million related to the warranty liability.

Previous wording

For the six months ended June 30, 2024, net cash used in investing activities was $4.5 million, which was primarily attributable to the purchase of property and equipment.

Current wording

For the nine months ended September 30, 2024, net cash used in investing activities was $6.9 million, which was primarily attributable to the purchase of property and equipment.

Previous wording

For the six months ended June 30, 2023, net cash used in investing activities was $4.4 million, all of which was attributable to the purchase of property and equipment.

Current wording

For the nine months ended September 30, 2023, net cash used in investing activities was $7.9 million, which was primarily attributable to the purchase of property and equipment.

Previous wording

For the six months ended June 30, 2024, net cash used in financing activities was $65.7 million, primarily due to $143.8 million in principal payments on the Term Loan Facility, $25.2 million paid to repurchase the Company’s Class A Common Stock under the ASR, $2.6 million of deferred financing costs paid in connection with the amendment to the Senior Secured Credit Agreement, and $0.9 million in taxes related to net share settled equity awards. These cash outflows are offset by $106.8 million in net proceeds on the Revolving Credit Facility.

Current wording

For the nine months ended September 30, 2024, net cash used in financing activities was $71.1 million, primarily due to $143.8 million in principal payments on the Term Loan Facility, $25.3 million paid to repurchase the Company’s Class A Common Stock under the ASR, $2.6 million of deferred financing costs paid in connection with the amendment to the Senior Secured Credit Agreement, and $1.2 million in taxes related to net share settled equity awards. These cash outflows are offset by $101.8 million in net proceeds on the Revolving Credit Facility.

Previous wording

For the six months ended June 30, 2023, net cash used in financing activities was $36.4 million, primarily due to $3.6 million in taxes related to net share settled equity awards, $28.0 million in net payments on the Revolving Credit Facility, $1.0 million in principal payments on the Term Loan Facility, and $2.6 million in distributions to our non-controlling interest holders.

Current wording

For the nine months ended September 30, 2023, net cash used in financing activities was $57.1 million, primarily due to $3.9 million in taxes related to net share settled equity awards, $48.0 million in net payments on the Revolving Credit Facility, $1.5 million in principal payments on the Term Loan Facility, and $2.6 million in distributions to our non-controlling interest holders.