CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following is a summary of transactions to which we are a party in which the amount involved exceeded or exceeds $120,000 and in which any of our directors, executive officers, holders of more than 5% of any class of our voting securities or any member of the immediate family of any of the foregoing persons, had or will have a direct or indirect material interest, other than compensation arrangements with directors and executive officers, which are described under “Executive Compensation” and
“Management—New Director Compensation Program.“Director Compensation.” For the
yearyears ended December 31, 2019,
2020 and
2020,2021, the Company recognized $0.8 million,
$4.8 million and
$4.8$13.8 million, respectively, in equity-based compensation.
History of Array Technologies, Inc. and Partnership with Oaktree
Ron
P. Corio founded the business of the Company in 1989. On July 8, 2016, Oaktree, through
ATI Investment Parent,
LLC (“ATI Investment”), our former parent company, purchased a majority of the ownership of Array Tech, Inc. with Ron
P. Corio and the other selling stockholders rolling over a portion of their ownership into
Parent. Ron P. Corio continues to hold a significant majority of the minority shareholding of the Company.ATI Investment. Although Ron
P. Corio is no longer involved in the
day-to-day operations of the Company, he is a member of
the board of directors of Parent, ATI Investment Holdings, Inc., ATI Investment Sub, Inc. and Array Tech, Inc. and participates with Oaktree in the overall leadership of the Company’s business.Parent LLC Agreement
The LLC Agreement specifies the rights and obligations of the members of Parent and the rights of the various classes of limited liability company interests therein. Limited liability company interests of Parent are currently held in the form of class AA preferred units, class A common units, class B common units and class C common units. Pursuant to the LLC Agreement, only holders of class A common units have voting rights Oaktree and Ron P. Corio are the holders of the majority of the class A common units. Additionally, pursuant to the LLC Agreement, upon the consummation of our IPO, all convertible class A preferred units converted automatically to class A common units. The holders of class AA preferred units, class A common units, class B common units and class C common units in Parent will share in any distributions related to an offering by us, in the following order (the “Waterfall”): (i) to the holders of class AA preferred units until their unreturned capital is reduced to zero, (ii) to the holders of class AA preferred units until their unpaid yield of 18% per annum is reduced to zero, (iii) to the holders of Class B common units subject to certain participation thresholds (such class B common units that exceed such thresholds (the “Participating Class B Units”), an amount equal to the Class B Distribution Amount (as described below), (iv) to the holders of class A common units until their unreturned capital is reduced to zero, (v) to the holders of class C common units, an amount equal to the sum of (a) a percentage between 0% and 1% calculated based on the linear interpolation of the internal rate of return of all investments in the convertible class A preferred units and class A common units (“Class A IRR”) when such IRR is between 8% and 12% of all distributions to holders of convertible class A preferred units and class A common units only to the extent such distributions are made when the Class A IRR is less than or equal to 12% and (b) 2% of all distributions to the holders of convertible class A preferred units and class A common units only to the extent such distributions are made when the Class A IRR is greater than 12% and (vi) the remaining amount of the distribution to be shared on a pro rata basis among the holders of the class A common units (including the convertible class A preferred units, as converted). The “Class B Distribution Amount” is equal to the (1) the product of (A) 7%, (B) the ratio of the number of Participating Class B Units over 32,789,474 and (C) an amount equal to all distributions (including tax distributions) made or contemplated to be made under the LLC Agreement in excess of $50,133,333.33 and the yield accrued on the class AA preferred units less (2) any distributions previously made to the holders of class B common units. Parent received the net proceeds of the Special Distribution from our IPO and the net proceeds from its sale of our common stock from our IPO, our December 2020 follow-on offering (the “Initial Follow-on Offering”) and our March 2021 follow-on offering (the “Second Follow-on Offering”), and the LLC Agreement will govern the rights and obligations of the members of Parent and the rights of the various classes of limited liability company interests with respect to such net proceeds. Our Chairman and our listed executive officers received net proceeds from the Special Distribution and our IPO of approximately $45 million in respect of such interests, based on the initial public offering price of $22.00 per share. Our Chairman and our listed executive officers have reinvested, through the purchase of shares of our common stock, approximately 50% (except with respect to Jeff Krantz, our Chief Commercial Officer, approximately 40%) of the after-tax value of the distributions they received in respect of their vested Class B Common Units. See “Executive Compensation—Actions Taken in Connection with Our IPO—Class B Common Units in Parent.” Based on the initial public offering price of $22.00 per share, such reinvestment resulted in our Chairman and our listed executive officers purchasing approximately 527,506 shares of our common stock.
Board.Following the Second Follow-on Offering, our Chairman and our listed executive officers will receive net proceeds of approximately $43 million in respect of their interests in Parent, based upon the public offering price of $28.00 per share.
Under the LLC Agreement, each member is required to vote its, his or her units in favor of a board of managers of Parent (the “Board of Managers”) consisting of (i) at least three representatives that Oaktree designates (the “Sponsor Managers”), (ii) so long as the Corio Group (as defined below) holds collectively not less than 10% of the aggregate outstanding convertible class A preferred units and class A common units, one representative that the Corio Group designates, and (iii) three additional representatives with significant experience in the solar industry, two of which shall be designated by the Board of Managers, and one of which shall be designated by the Corio Group and approved by Oaktree (each, an “Additional Manager”); provided, that no Additional Manager shall be an affiliate of Oaktree or the Corio Group. Additionally, Oaktree is entitled to designate one individual to act as an observer on the Board of Managers in addition to the Sponsor Managers. The “Corio Group” consists of Ron P. Corio, a non-employee member of our board of directors, his permitted transferees and family.
Additionally, under the LLC Agreement, if Oaktree sells its convertible class A preferred units or class A common units to a third party (disregarding sales transfers to employees of Parent, any member of Parent or their respective affiliates and certain other exceptions), the holders of the convertible class A preferred units or class A common units will have the option, but will not be required (except in the case of a change of control transaction of Parent), to participate in the sale and sell alongside Oaktree on a pro rata basis.
Ron P. Corio and Oaktree also each have special consent rights related to certain Parent actions. So long as the Corio Group holds collectively holds not less than ten percent (10%) of the aggregate outstanding (i) convertible class A preferred units (on an as converted basis) and (ii) class A common units, Parent will need the Corio Group’s prior consent to issue class B common units over 7% of the sum of the class A common units, class B common units and convertible class A preferred units (on an as converted basis) outstanding, pay salary or issue equity to Brad Forth other than class C common units, change the total managers of the Board of Managers, make any material changes to Parent’s or any of its subsidiary’s line of business or enter into a transaction with Oaktree or its affiliate. Parent will need the prior written consent of Oaktree to enter into any arrangements with the Corio Group except for customary and reasonable employment agreements.
Tax Receivable Agreement
Concurrent with
theATI Investment’s acquisition of
theArray Technologies Patent
Holdings Co., LLC, Array Tech, Inc. (f/k/a Array Technologies, Inc.) entered into
the Taxa Taxes Receivable Agreement
(the “Tax Receivable Agreement”(“TRA”) with
Ron P. Corio, our indirect stockholder.the former majority shareholder of Array. The
Tax Receivable Agreement requires thatTRA is valued based on the future expected payments under the agreement. The TRA provides for the payment by Array Tech, Inc.
(f/k/a Array Technologies, Inc.) pay Ron P. Corioto the former owner for
a portion of certain federal, state, local
and non-U.S. tax benefits
that we actually realize (or are deemed
to realizerealized in
certain circumstances) inpost-closing taxable periods
followingby Array, from the
acquisitionuse of certain deductions generated by the increase in the tax value of the
Patent LLC.developed technology. The
Tax Receivable AgreementTRA is accounted for as contingent consideration and subsequent changes in fair value of the contingent liability are recognized in
general and administrativecontingent consideration in the
Company’saccompanying consolidated
statementstatements of operations.
The Tax Receivable Agreement is valued based on the future expected payments under the agreement. At December 31,
2021, December 31, 2020,
and December 2019, the fair value of the
Tax Receivable AgreementTRA was
$14.6 million, $19.7
million.million and $17.8 respectively.
Estimating the amount of payments that may be made under the
Tax Receivable AgreementTRA is by nature imprecise. The significant fair value inputs used to estimate the future expected
Tax Receivable AgreementTRA payments to
Ron P. Coriothe former owners 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
Tax Receivable Agreement.TRA.
Payments made under the Tax Receivable AgreementTRA consider our tax positions taken by the Company and are generally due within 125 days following the filing of ourthe Company’s U.S. federal and state income tax returns under procedures described in the Tax Receivable Agreement.agreement. The current portion of the Tax Receivable AgreementTRA liability is based on tax returns. The Tax Receivable AgreementTRA will continue until all tax benefit payments have been made or the Company elects early termination under the terms described in the Tax Receivable Agreement (or the Tax Receivable Agreement is otherwise terminated pursuant to its terms).TRA.
As of December 31, 2020,2021, the undiscounted future expected payments through December 31, under the Tax Receivable AgreementTRA are as follows (in thousands):
| | | | |
For the Year Ending December 31, | | | |
2021 | | $ | 9,113 | |
2022 | | | 1,748 | |
2023 | | | 1,748 | |
2024 | | | 1,748 | |
2025 | | | 1,749 | |
Thereafter | | | 9,186 | |
| | | | |
| | $ | 25,292 | |
| | | | |
The foregoing amounts are estimates and the actual payments could differ materially. It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the Tax Receivable Agreement payments as compared to the foregoing estimates. Moreover, there may be a negative impact on our liquidity if, as a result of timing discrepancies or otherwise, the payments under the Tax Receivable Agreement exceed the actual tax benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement.
In addition, although we are not aware of any issue that would cause the Internal Revenue Service (or other relevant tax authorities) to challenge potential tax basis increases or other tax benefits covered by the Tax Receivable Agreement, Ron P. Corio is not obligated to reimburse us for any payments previously made under the Tax Receivable Agreement if any tax benefits that have given rise to payments under the Tax Receivable Agreement are subsequently disallowed, though we may net such excess payments against payments that would otherwise be made to Ron P. Corio under the Tax Receivable Agreement. Moreover, if we elect to terminate the Tax Receivable Agreement early, it is terminated early due to our breach of a material obligation thereunder, or another acceleration event under the Tax Receivable Agreement occurs, our obligations under the Tax Receivable Agreement would accelerate, and we would be required to make a lump-sum payment in advance of our realizing the associated tax benefits.
Earn-Out Obligations
Under the Earn-Out Agreement, the Company was required to pay the former stockholders of Array Tech, Inc., including Ron P. Corio, an indirect stockholder, future contingent consideration consisting of earn-out payments in the form of cash upon the occurrence of certain events, including the consummation of our IPO and the Initial Follow-on Offering; the sale, transfer, assignment, pledge, encumbrance, distribution or disposition of shares of Parent held by Oaktree Power and Oaktree Investors to a third party; the sale of equity securities or assets of Parent, ATI Investment Sub, Inc. or Array Technologies, Inc. to a third-party; or a merger, consolidation, recapitalization or reorganization of Parent, ATI Investment Sub, Inc. or the Company. The IPO, Special Distribution and Initial Follow-on Offering required the Company to make cash payments of $9.1 million in October 2020 and $15.9 million in December 2020. As a result of these payments, our earn-out liability has been paid in full.
Senior Secured Promissory Note
On August 22, 2018, High Desert Finance LLC, our wholly owned subsidiary, issued a $38.6 million Senior Secured Promissory Note (such Note, the “Senior Secured Promissory Note”) in favor of Ron P. Corio, our indirect stockholder, that was secured by the outstanding common stock of ATI Investment Holdings, Inc. The maturity due date of the Senior Secured Promissory Note was originally February 22, 2020 but was subsequently amended to extend the due date to September 22, 2020.
The Company paid the remaining outstanding balance and accrued interest on July 31, 2020 to settle the obligation with respect to the Senior Secured Promissory Note. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt Obligations” in our Annual Report.
2022 | | | $3,491 |
2023 | | | $1,746 |
2024 | | | $1,746 |
2025 | | | $1,746 |
2026 | | | $1,746 |
Thereafter | | | $7,856 |
| | | $18,331 |
The Company incurred $2.2 million in consent fees with the former majority shareholder of Array to allow a carryback of post-acquisition net operating losses to pre-acquisition periods under the CARES Act.