10-Q 1 shls-20210930.htm 10-Q shls-20210930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________

Commission File Number: 001-39942

Shoals Technologies Group, Inc.
(Exact name of registrant as specified in its charter)

Delaware85-3774438
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
1400 Shoals WayPortlandTennessee37148
(Address of principal executive offices)(Zip Code)

(Registrant’s telephone number, including area code)(615)451-1400

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock, $0.00001 Par ValueSHLSNasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes No

As of November 8, 2021, the registrant had 104,179,939 shares of Class A common stock and 62,664,521 shares of Class B common stock issued and outstanding.

i


TABLE OF CONTENTS

ITEMPAGE
PART I
Item 1.Financial Statements (Unaudited)
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
PART II
Item 1.Legal Proceedings
Item 1A.Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
Item 6.Exhibits
SIGNATURES


ii

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, technology developments, financing and investment plans, dividend policy, competitive position, industry and regulatory environment, potential growth opportunities and the effects of competition. Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” "seek," “should,” “will,” “would” or similar expressions and the negatives of those terms.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Given these uncertainties, you should not place undue reliance on forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this report. You should read this report with the understanding that our actual future results may be materially different from what we expect.

Important factors that could cause actual results to differ materially from our expectations are included in Part II, Item 1A “Risk Factors.”

Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
iii

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

Shoals Technologies Group, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except shares)
September 30,
2021
December 31, 2020
Assets
Current Assets
Cash and cash equivalents$14,189 $10,073 
Accounts receivable, net44,588 27,004 
Unbilled receivables10,554 3,794 
Inventory, net27,832 15,121 
Other current assets11,706 155 
Total Current Assets108,869 56,147 
Property, plant and equipment, net14,358 12,763 
Goodwill69,321 50,176 
Other intangible assets, net67,508 71,988 
Deferred tax asset121,545  
Other assets1,204 4,236 
Total Assets$382,805 $195,310 
Liabilities and Stockholders' Deficit / Members’ Deficit
Current Liabilities
Accounts payable$18,664 $14,634 
Accrued expenses15,112 5,967 
Long-term debt—current portion2,000 3,500 
Total Current Liabilities35,776 24,101 
Revolving line of credit60,140 20,000 
Long-term debt, less current portion190,136 335,332 
Payable Pursuant to the Tax Receivable Agreement107,880  
Total Liabilities393,932 379,433 
Commitments and Contingencies (Note 13)
Stockholders’ Deficit / Members’ Deficit
Members’ deficit— (184,123)
Preferred stock, $0.00001 par value - 5,000,000 shares authorized; none issued and outstanding as of September 30, 2021
 — 
Class A common stock, $0.00001 par value - 1,000,000,000 shares authorized; 104,179,939 shares issued and outstanding as of September 30, 2021
1 — 
Class B common stock, $0.00001 par value - 195,000,000 shares authorized; 62,664,521 shares issued and outstanding as of September 30, 2021
1 — 
Additional paid-in capital92,149 — 
Accumulated deficit(91,296)— 
Total stockholders’ equity attributable to Shoals Technologies Group, Inc. / members' deficit855 (184,123)
Non-controlling interests(11,982)— 
Total stockholders’ deficit / members’ deficit(11,127)(184,123)
Total Liabilities and Stockholders’ Deficit / Members’ Deficit$382,805 $195,310 
See accompanying notes to condensed consolidated financial statements.
1



Shoals Technologies Group, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share amounts)

Three Months Ended
September 30,
Nine Months Ended
September 30,
2021202020212020
Revenue$59,840 $52,598 $165,166 $136,765 
Cost of revenue38,071 31,909 98,444 85,061 
Gross profit21,769 20,689 66,722 51,704 
Operating Expenses
General and administrative expenses10,031 3,515 26,865 15,390 
Depreciation and amortization2,175 2,069 6,305 6,194 
Total Operating Expenses12,206 5,584 33,170 21,584 
Income from Operations9,563 15,105 33,552 30,120 
Interest expense, net(3,582)(104)(10,911)(601)
Tax receivable agreement liability adjustment(2,014) (3,678) 
Loss on debt repayment  (15,990) 
Income before income taxes3,967 15,001 2,973 29,519 
Income tax benefit1,309  3,123  
Net income5,276 15,001 6,096 29,519 
Less: net income attributable to non-controlling interests2,790  1,911  
Net income attributable to Shoals Technologies Group, Inc.$2,486 $15,001 $4,185 $29,519 
Three Months Ended
September 30, 2021
Period from January 27, 2021 to September 30, 2021
Earnings per share of Class A common stock:
Basic$0.02 $0.02 
Diluted$0.02 $0.02 
Weighted average shares of Class A common stock outstanding:
Basic101,890 96,354 
Diluted102,251 96,527 

See accompanying notes to condensed consolidated financial statements.
2



Shoals Technologies Group, Inc.
Condensed Consolidated Statements of Changes in Members’ / Stockholders’ Equity (Deficit) (Unaudited)
(in thousands, except shares)

For the three and nine months ended September 30, 2021
Members' DeficitClass A
Common Stock
Class B
Common Stock
Additional Paid-In CapitalAccumulated DeficitNon-Controlling InterestTotal Members'/Stockholders Deficit
SharesAmountSharesAmount
Balance at
December 31, 2020
$(184,123) $  $ $ $ $ $(184,123)
Net income prior to the Organizational Transactions2,675 — — — — — — — 2,675 
Effect of Organizational Transactions181,448 81,977,751 1 78,300,817 1 — (92,806)(88,644) 
Issuance of Class A common stock sold in IPO, net of underwriting discounts and commissions and offering costs— 11,550,000 — (5,234,210)— 70,188 — 70,976 141,164 
Net loss subsequent to the Organizational Transactions— — — — — — (5,534)(5,475)(11,009)
Equity-based compensation recognized subsequent to the Organizational Transactions— — — — — 1,392 — — 1,392 
Activity under stock compensation plan— 11,941 — — — (687)— 550 (137)
Deferred tax adjustment related to Tax Receivable Agreement— — — — — 7,180 — — 7,180 
Balance at
March 31, 2021
 93,539,692 1 73,066,607 1 78,073 (98,340)(22,593)(42,858)
Net income— — — — — — 4,558 4,596 9,154 
Equity-based compensation— — — — — 1,955 — — 1,955 
Activity under stock compensation plan— 5,872 — — — (857)— 857  
Distributions to Non-controlling interest— — — — — — — (2,973)(2,973)
Reallocation of non-controlling interest— — — — — (288)— 288  
Balance at
June 30, 2021
 93,545,564 1 73,066,607 1 78,883 (93,782)(19,825)(34,722)
3



Shoals Technologies Group, Inc.
Condensed Consolidated Statements of Changes in Members’ / Stockholders’ Equity (Deficit) (Unaudited) (continued)
(in thousands, except shares)
Members' DeficitClass A
Common Stock
Class B
Common Stock
Additional Paid-In CapitalAccumulated DeficitNon-Controlling InterestTotal Members'/Stockholders Deficit
SharesAmountSharesAmount
Net income— — — — — — 2,486 2,790 5,276 
Equity-based compensation— — — — — 3,057 — — 3,057 
Issuance of Class A common stock sold in follow-on offering, net of underwriting discounts
— 10,402,086 — — — 281,064 — — 281,064 
Purchase of LLC Interests and Class B common stock
— — — (10,402,086)— (281,064)— — (281,064)
Deferred tax adjustment related to purchase of LLC Interests in follow-on offering— — — — — 11,031 — — 11,031 
Deferred tax adjustment related to ConnectPV LLC conversion
— — — — — (405)— — (405)
Issuance of Class A common stock in connection with an acquisition209,437 — — — 6,500 — — 6,500 
Activity under stock compensation plan— 22,852 — — — (1,200)— 1,200  
Distributions to Non-controlling interest— — — — — — — (1,864)(1,864)
Reallocation of non-controlling interest
— — — — — (5,717)— 5,717  
Balance at
September 30, 2021
$ 104,179,939 $1 62,664,521 $1 $92,149 $(91,296)$(11,982)$(11,127)



4



Shoals Technologies Group, Inc.
Condensed Consolidated Statements of Changes in Members’ / Stockholders’ Equity (Deficit) (Unaudited) (continued)
(in thousands, except shares)
For the three and nine months ended September 30, 2020
Members' Equity
Balance at December 31, 2019$149,906 
Member distributions(214)
Equity-based compensation 
Net income9,295 
Balance at March 31, 2020158,987 
Member distributions 
Equity-based compensation6,704 
Net income5,223 
Balance at June 30, 2020170,914 
Member distributions(11,142)
Equity-based compensation515 
Net income15,001 
Balance at September 30, 2020$175,288 

See accompanying notes to condensed consolidated financial statements.
5



Shoals Technologies Group, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Nine Months Ended
September 30,
20212020
Cash Flows from Operating Activities
Net income$6,096 $29,519 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization7,345 7,017 
Amortization/write off of deferred financing costs5,692 31 
Equity-based compensation6,404 7,219 
Provision for slow-moving inventory435 488 
Deferred taxes640  
Tax receivable agreement liability adjustment3,678  
Gain on sale of assets61  
Changes in assets and liabilities, net of business acquisition:
Accounts receivable(12,271)(1,087)
Unbilled receivables(6,760)(6,076)
Inventory(8,505)(2,953)
Other assets(6,904)670 
Accounts payable(5,198)285 
Accrued expenses2,608 3,002 
Net Cash Provided by (Used in) Operating Activities(6,679)38,115 
Cash Flows Used In Investing Activities
Purchases of property, plant and equipment(2,483)(2,786)
Acquisition of a business, net of cash acquired(12,909) 
Net Cash Used in Investing Activities(15,392)(2,786)
Cash Flows from Financing Activities
Member / non-controlling interest distributions(4,837)(11,356)
Employee withholding taxes related to net settled equity awards(137) 
Deferred financing costs(94) 
Payments on term loan facility(152,250) 
Proceeds from revolving credit facility40,140  
Payments on senior debt - term loan (21,810)
Proceeds from issuance of Class A common stock sold in an IPO, net of underwriting discounts and commissions154,521  
Proceeds from issuance of Class A common stock in follow-on offering, net of underwriting discounts and commissions281,064  
Purchase of LLC Interests with proceeds from follow-on offering(281,064) 
Payment of debt acquired in acquisition(1,537) 
Deferred offering costs(9,619) 
Net Cash Provided by (Used in) Financing Activities26,187 (33,166)
Net Increase in Cash and Cash Equivalents4,116 2,163 
6



Shoals Technologies Group, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
(in thousands)
Nine Months Ended
September 30,
20212020
Cash and Cash Equivalents—Beginning of Period10,073 7,082 
Cash and Cash Equivalents—End of Period$14,189 $9,245 



7



Shoals Technologies Group, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
(in thousands)
Nine Months Ended
September 30,
20212020
Supplemental Cash Flows Information:
Cash paid for interest$7,683 $631 
Cash paid for taxes$1,176 $ 
Non-cash financing activities:
Reclassification of deferred offering costs to additional paid-in capital$3,736 $ 
Initial establishment of deferred tax assets$49,049 $ 
Initial establishment of amounts payable under tax receivable agreement$41,692 $ 
Initial capital contribution related to tax receivable agreement$7,178 $ 
Income tax receivable from merger due to former owner$3,842 $ 
Establishment of deferred tax assets from follow-on offering$73,541 $ 
Establishment of amounts payable under tax receivable agreement from follow-on offering$62,510 $ 
Capital contribution related to tax receivable agreement from follow-on offering$11,031 $ 
Deferred tax asset and additional paid-in capital from ConnectPV$405 $ 
Class A common stock issued in ConnectPV acquisition$6,500 $ 

See accompanying notes to condensed consolidated financial statements.
8



Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

1.    Organization and Business

Shoals Technologies Group, Inc. (the “Company”) was formed as a Delaware corporation on November 4, 2020 for the purpose of facilitating an initial public offering ("IPO") and other related organizational transactions to carry on the business of Shoals Parent LLC and its subsidiaries (“Shoals Parent”).

Shoals Parent is a Delaware limited liability company formed on May 9, 2017. The Company is headquartered in Portland, Tennessee and is a manufacturer of electrical balance of systems (“EBOS”) solutions and components related to solar fields selling to customers across the United States and internationally. Shoals Parent, through its wholly-owned subsidiaries, Shoals Intermediate Holdings LLC (“Intermediate”), Shoals Holdings LLC (“Holdings”) which owns five other subsidiaries through which it conducts substantially all operations: Shoals Technologies, LLC, Shoals Technologies Group, LLC, Solon, LLC, Shoals Structures, LLC and Shoals Connect LLC (collectively “Shoals”). Shoals Parent acquired Shoals on May 25, 2017.

On August 26, 2021, the Company acquired 100% of the stock of ConnectPV, Inc. (“ConnectPV”) with cash and the issuance of Class A common stock. The acquisition was accounted for as a business combination and following the acquisition, the Company immediately converted ConnectPV to a limited liability company (Shoals Connect LLC) and contributed the entity to Shoals Parent, LLC through a series of transactions – see Note 3.

Initial Public Offering
On January 29, 2021, the Company closed an IPO of 11,550,000 shares of Class A common stock at a public offering price of $25.00 per share, including shares issued pursuant to the underwriters' over-allotment option. The Company received $278.8 million in proceeds, net of underwriting discounts and commissions of $9.9 million, which was used to purchase 6,315,790 newly-issued membership interests (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
In connection with the IPO, the Company and Shoals Parent completed a series of transactions (the "Organizational Transactions") including the following:
the limited liability company agreement of Shoals Parent was amended and restated to, among other things, (i) provide for a new single class of common membership interests or the LLC Interests in Shoals Parent, (ii) exchange all of the then existing membership interests of the holders of Shoals Parent membership interests for LLC Interests and (iii) appoint the Company as the sole managing member of Shoals Parent;
the Company's certificate of incorporation was amended and restated to, among other things, (i) provide for Class A common stock with voting and economic rights (ii) provide for Class B common stock with voting rights but no economic rights and (iii) issue 78,300,817 shares of Class B common stock to the former Class B and Class C members of Shoals Parent (the “Continuing Equity Owners”) on a one-to-one basis with the number of LLC Interests they own;
9



Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
the acquisition, by merger, of Shoals Investment CTB or the former Class A member of Shoals Parent (the "Class A Shoals Equity Owners"), for which the Company issued 81,977,751 shares Class A common stock as merger consideration (the "Merger").
Immediately following the completion of the IPO and Organizational Transactions, the Company owned 56.14% of Shoals Parent. The Continuing Equity Owners owned the remaining 43.86% of Shoals Parent.

Follow On Offering / Tax Receivable Agreement
On July 16, 2021, the Company completed a follow-on offering consisting of 4,989,692 shares of Class A common stock offered by the selling shareholders and 10,402,086 shares of Class A common stock offered by the Company. Following the closing of this offering, Oaktree Power Opportunities Fund IV (Delaware) Holdings, L.P. no longer beneficially owns 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. The Company obtained an increase in its share of the tax basis of the assets of Shoals Parent when LLC Interests and Class B common stock were redeemed or exchanged. This increase in tax basis may have the effect of reducing the amounts that the Company would otherwise pay in the future to various tax authorities. The increase in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. The exchange of 10,402,086 LLC Interests and shares of Class B common stock triggered a tax basis increase subject to the provisions of the Tax Receivable Agreement. In the third quarter of fiscal year 2021, the Company recognized a deferred tax asset in the amount of $73.5 million, a corresponding increase in the tax receivable agreement liability of $62.5 million, representing 85% of the tax benefits and $11.0 million of additional-paid-in capital.

2.    Summary of Accounting Policies

Basis of Accounting and Presentation
The condensed consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Non-controlling Interest
The non-controlling interest on the condensed consolidated statement of operations represents the portion of earnings or loss attributable to the economic interest in the Company's subsidiary, Shoals Parent, held by the Continuing Equity Owners. Non-controlling interest on the condensed consolidated balance sheet represents the portion of net assets of the Company attributable to the Continuing Equity Owners, based on the portion of the LLC Interests owned by such unit holders. As of September 30, 2021, the non-controlling interest was 37.56%.

Acquisition Accounting
10



Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company accounts for its business acquisitions under the acquisition method of accounting in ASC 805. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives, and market multiples amongst other items.

Unaudited Interim Financial Information
The accompanying condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020, the statements of operations, changes in stockholders’ deficit / members’ deficit and cash flows for the periods ended September 30, 2021 and 2020 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2021 and the results of its operations and its cash flows for the periods ended September 30, 2021 and 2020. The financial data and other information disclosed in these notes related to the periods ended September 30, 2021 and 2020 are also unaudited. The results for the three and nine months ended September 30, 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2021, any other interim periods, or any future year or period. The balance sheet as of December 31, 2020 included herein was derived from the audited financial statements as of that date. Certain disclosures have been condensed or omitted from the interim financial statements. These financial statements should be read in conjunction with the Company’s consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include revenue recognition, allowance for doubtful accounts, useful lives of property, plant and equipment, other intangible assets, impairment of long-lived assets, reserve for excess and obsolete inventory, the tax receivable agreement and valuation allowance on deferred tax assets.

Impact of COVID-19 Pandemic
The global health crisis caused by the novel coronavirus COVID-19 pandemic and its resurgences has and may continue to negatively impact global economic activity, which, despite progress in vaccination efforts, remains uncertain and cannot be predicted with confidence. In addition, the Delta variant of COVID-19, which appears to be the most transmissible variant to date, has begun to spread globally and other variants of COVID-19 continue to emerge.

To date, while the Company has maintained uninterrupted business operations with normal turnaround times for its delivery of solar EBOS solutions and components, the impact of delays for other parts of customer systems has pushed some projects to future quarters. The Company has implemented adjustments to its operations designed to keep employees safe and comply with federal, state and local guidelines, including those regarding social distancing. For the three and nine months ended September 30, 2021, the Company
11



Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
incurred $0.1 million and $0.3 million, respectively, in COVID-19 related costs (disinfecting and reconfiguration of facilities, medical professionals to conduct daily screening of employees and direct legal costs associated with the pandemic) which is included in general and administrative expenses in the accompanying condensed consolidated financial statements. For the three and nine months ended September 30, 2020, the Company incurred $1.2 million and $2.0 million, respectively, in COVID-19 related costs (disinfecting and reconfiguration of facilities, medical professionals to conduct daily screening of employees, premium pay during the pandemic to hourly workers and direct legal costs associated with the pandemic), of which $1.1 million and $1.9 million, respectively, is included in cost of revenues and $0.1 million and $0.1 million, respectively, is included in general and administrative expenses in the accompanying condensed consolidated financial statements.

The impact of the Delta and other emerging variants cannot be predicted at this time, and could depend on numerous factors, including vaccination rates among the population, the effectiveness of the COVID-19 vaccines against the Delta and other emerging variants and the response by governmental bodies and regulators. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the COVID-19 pandemic on our business, including, but not limited to, component shortages, disruptions in transportation or other supply chain related constraints.

Customer Concentrations
The Company had the following revenue concentrations representing 10% or more of revenue for the nine months ended September 30, 2021 and 2020 and related accounts receivable concentrations as of September 30, 2021 and December 31, 2020:
20212020
Revenue %Accounts
Receivable %
Revenue %Accounts
Receivable %
Customer A22.5 %24.4 %22.0 %10.7 %
Customer B11.8 %3.0 %18.2 %16.6 %
Customer C8.6 %23.7 %9.9 %12.5 %

Recent Accounting Pronouncements
Adopted
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU No. 2019-12”), which is intended to simplify various aspects of the accounting for income taxes. ASU No. 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The Company adopted ASU No. 2019-12 as of January 1, 2021 and it did not have a material impact on its consolidated financial statements and related disclosures.

Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02 (Topic 842) “Leases” which supersedes the lease recognition requirements in ASC Topic 840, “Leases.” Under ASU No. 2016-02, lessees are required to recognize assets and liabilities on the balance sheet for most leases and provide enhanced disclosures. Leases will continue to be classified as either finance or operating. For companies that are not emerging growth companies (“EGCs”), the ASU is effective for fiscal years beginning after December 15, 2018. For EGCs, the ASU is effective for fiscal years beginning after December 15, 2021. The Company plans to adopt
12



Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
the new standard using the modified retrospective method, under which the Company will apply Topic 842 to existing and new leases as of January 1, 2022, but prior periods will not be restated and will continue to be reported under Topic 840 guidance in effect during those periods. The Company anticipates that the adoption will not have a material impact on its statements of operations or its statements of cash flows but expects to recognize right-of-use assets and liabilities for lease obligations associated with its operating leases.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses, which was subsequently amended by ASU No. 2018-19 and ASU No. 2019-10, and which requires the measurement of expected credit losses for financial instruments carried at amortized cost held at the reporting date based on historical experience, current conditions and reasonable forecasts. The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. For EGC’s, the standard is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2022. The Company will continue to assess the possible impact of this standard, but currently does not expect the adoption of this standard will have a significant impact on its financial statements and its limited history of bad debt expense relating to trade accounts receivable.

3.    Acquisition of ConnectPV

On August 26, 2021, the Company acquired 100% of the common stock of ConnectPV. The acquisition of ConnectPV was accounted for as a business combination using the acquisition method of accounting. The aggregate purchase price was $13.8 million in cash (net of $0.8 million cash acquired) and 209,437 shares of Class A Common stock valued at $6.5 million.

The cash portion of the purchase price was funded by borrowing under our Revolving Credit Facility. The purchase price paid has been preliminarily allocated to record the acquired assets and assumed liabilities based upon their estimated fair value. When determining the fair values of the assets acquired and assumed liabilities, management made significant estimates, judgements and assumptions. Management estimated that consideration paid exceeded the fair value of the net assets acquired. Therefore, goodwill of $19.1 million was recorded. The goodwill recognized was primarily attributable to synergies related to the Company’s EBOS solutions and components business that are expected to arise from the ConnectPV acquisition.

The following table is the preliminary balance sheet of ConnectPV as of the acquisition date, August 26, 2021, and includes the estimated fair value of the assets acquired and assumed liabilities. The estimated fair value allocated to certain property, plant and equipment, identifiable intangible assets and goodwill was determined based on a combination of market, cost and income approaches with the assistance of a third-party valuation firm (in thousands):
13



Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Preliminary Purchase Price Allocation

Cash and cash equivalents$848 
Accounts receivable 5,313 
Inventory4,641 
Other current assets1,732 
Total current assets12,534 
Property, plant and equipment438 
Goodwill19,145 
Other intangible assets1,600 
Total Assets33,717 
Accounts payable9,228 
Accrued expenses2,695 
Debt1,537 
Total liabilities13,460 
Net assets acquired$20,257 

The Company expensed acquisition-related costs of $1.7 million which are included in general and administrative expenses in the condensed consolidated statement of operations. The goodwill and acquisition costs are not deductible for tax purposes.

4.    Accounts Receivable

Accounts receivable consists of the following (in thousands):
September 30,
2021
December 31, 2020
Accounts receivable$45,104 $27,206 
Less: allowance for doubtful accounts(516)(202)
Accounts receivable, net$44,588 $27,004 


5.    Inventory

Inventory consists of the following (in thousands):
September 30,
2021
December 31, 2020
Raw materials$29,827 $17,390 
Allowance for slow-moving inventory(1,995)(2,269)
Inventory, net$27,832 $15,121 


14



Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
6.    Property, Plant and Equipment

Property, plant, and equipment, net consists of the following (in thousands):
    Estimated Useful Lives (Years)
September 30,
2021
December 31, 2020
LandN/A$840 $840 
Building and land improvements
5-40
6,638 5,621 
Machinery and equipment
3-5
10,690 9,028 
Furniture and fixtures
3-7
1,262 1,025 
Vehicles
5
104 318 
19,534 16,832 
Less: accumulated depreciation(5,176)(4,069)
Property, plant and equipment, net$14,358 $12,763 

Depreciation expense for the three months ended September 30, 2021 and 2020 was $0.5 million and $0.4 million, respectively. During the three months ended September 30, 2021 and 2020, $0.4 million and $0.3 million, respectively, of depreciation expense was allocated to cost of revenue. During the three months ended September 30, 2021 and 2020, $0.1 million and $0.1 million, respectively, of depreciation expense was allocated to operating expenses.

Depreciation expense for the nine months ended September 30, 2021 and 2020 was $1.3 million and $1.0 million, respectively. During the nine months ended September 30, 2021 and 2020, $1.0 million and $0.8 million, respectively, of depreciation expense was allocated to cost of revenue. During the nine months ended September 30, 2021 and 2020, $0.3 million and $0.2 million, respectively, of depreciation expense was allocated to operating expenses.

7.    Goodwill and Other Intangible Assets

Goodwill
Goodwill relates to the acquisition of Shoals and ConnectPV. As of September 30, 2021 and December 31, 2020, goodwill totaled $69.3 million and $50.2 million, respectively.

Other Intangible Assets
Other intangible assets consisted of the following (in thousands):
15



Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Estimated Useful Lives (Years)September 30,
2021
December 31, 2020
Amortizable:
Costs:
Customer relationships
2-13
$53,100 $52,600 
Developed technology
13
34,600 34,600 
Trade names
2-13
11,900 11,400 
Backlog1600  
Noncompete agreements
5
2,000 2,000 
Total amortizable intangibles102,200 100,600 
Accumulated amortization:
Customer relationships17,555 14,499 
Developed technology11,533 9,537 
Trade names3,821 3,142 
Backlog50  
Noncompete agreements1,733 1,434 
Total accumulated amortization34,692 28,612 
Total amortizable intangibles, net$67,508 $71,988 

Amortization expense related to intangible assets amounted to $2.1 million and $2.0 million for the three months ended September 30, 2021 and 2020 and $6.1 million and $6.0 million for the nine months ended September 30, 2021 and 2020, respectively.

8.    Long-Term Debt

Long-term debt consists of the following (in thousands):
September 30,
2021
December 31, 2020
Term Loan Facility$197,750 $350,000 
Revolving Credit Facility60,140 20,000 
Senior Debt—term loan  
Less: deferred financing costs(5,614)(11,168)
Total debt, net of deferred financing costs252,276 358,832 
Less: current portion(2,000)(3,500)
Long-term debt, net current portion$250,276 $355,332 

Senior Secured Credit Agreement
On November 25, 2020 Shoals Holdings, entered into a senior secured credit agreement (the “Senior Secured Credit Agreement”), consisting of (i) a $350.0 million senior secured six-year term loan facility (the “Term Loan Facility”), (ii) a $30.0 million senior secured delayed draw term loan facility, which matures concurrently with the six-year Term Loan Facility (the “Delayed Draw Term Loan Facility”) and (iii) an uncommitted super senior first out revolving credit facility (the “Revolving Credit Facility”). The proceeds of the Term Loan Facility and a $10.0 million draw under the Delayed Draw Term Loan Facility were used to (i) make
16



Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
certain distributions from Shoals Holdings to Shoals Intermediate Holdings and from there to certain of the Company’s direct or indirect equity holders, (ii) pay transaction expenses, (iii) repay and terminate all outstanding commitments under the prior senior debt and (iv) finance working capital and general corporate purposes.

In December 2020, Shoals Holdings entered into two amendments to the Senior Secured Credit Agreement in order to obtain a $100.0 million increase (the “Revolver Upsize”) to the Revolving Credit Facility and modify the terms of the interest rate and prepayment premium. As part of the first amendment the Company repaid and terminated all outstanding commitments under the Delayed Draw Term Loan Facility.

On January 29, 2021, the Company used proceeds from the IPO to repay $150.0 million of outstanding borrowings under the Term Loan Facility. The repayment of a portion of the borrowings under the Term Loan Facility resulted in a $16.0 million loss on debt repayment as the result of the $11.3 million prepayment premium and $4.7 million write-off of a portion of the deferred financing costs.

In August 2021, Holdings entered into an amendment to the Senior Secured Credit Agreement to permit the temporary joinder of a parent co-borrower in order to facilitate the acquisition of Connect PV.

As of September 30, 2021, interest rates on the Term Loan Facility and the Revolving Credit Facility were 4.25% and 3.75%, respectively and the Company had $39.9 million of availability under the Revolving Credit Facility.

The Senior Secured Credit Agreement contains affirmative and negative covenants, including covenants that restrict the Company’s incurrence of indebtedness, incurrence of liens, dispositions, investments, acquisitions, restricted payments, and transactions with affiliates. The Senior Secured Credit Agreement also includes customary events of default, including the occurrence of a change of control. As of September 30, 2021, the Company was in compliance with all the required covenants.

Senior Debt Agreement
Intermediate and subsidiaries were party to a credit agreement (the “Senior Debt Agreement” and obligations thereunder, the “Senior Debt”) under which Holdings and its subsidiaries were borrowers and Intermediate was a guarantor. The Senior Debt was collateralized by all of the assets of the guarantor and borrowers. The amended agreement provided a term loan of $35 million and a revolving line of credit of $25 million.

On October 8, 2020, the Company paid the outstanding amount due on the Senior Debt and settled all obligations with respect to the Senior Debt Agreement.

The Senior Debt provided for an interest rate to equal the base rate plus margin. The base rate charged was the highest rate of three defined methods as follows: 1) Federal Funds Rate plus 0.5%, 2) Fifth Third Bank N.A. Rate or 3) LIBOR Rate plus 1%. The base rate ranged from 1% to 2.5% depending on the EBITDA Rate calculation as defined in the Senior Debt Agreement (the “EBITDA Rate Calculation”) for the Federal Funds Rate. The base rate for the LIBOR Rate ranged from 2% to 3.5% depending on the EBITDA Rate Calculation.

9.    Earnings per Share

17



Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Basic earnings per share of Class A Common Stock is computed by dividing net income attributable to the Company by the weighted average number of shares of Class A Common Stock outstanding during the period. Diluted earnings per share of Class A Common Stock is computed similarly to basic earnings per share except the weighted average shares outstanding are increased to include additional shares from the redemption of Class B Common Stock under the if-converted method and the assumed exercise of any common stock equivalents using the treasury stock method, if dilutive. The Company’s restricted stock units are considered common stock equivalents for this purpose.

All earnings prior to and up to January 26, 2021, the date of the IPO, were entirely allocable to non-controlling interest and, as a result, earnings per share information is not applicable for reporting periods prior to this date. Consequently, only the net income allocable to Shoals Technologies Group, Inc. from the period subsequent to January 26, 2021 is included in the net income attributable to the stockholders of Class A Common Stock for the periods ended September 30, 2021. Basic and diluted earnings per share of Class A Common Stock from January 27, 2021 to September 30, 2021 have been computed as follows (in thousands, except per share amounts):
Three Months Ended September 30, 2021
Period from January 27, 2021 to September 30, 2021
Numerator:
Net income attributable to Shoals Technologies Group, Inc. - basic$2,486 $1,510 
Reallocation of net income attributable to non-controlling interests from the assumed conversion of Class B common stock  
Net income attributable to Shoals Technologies Group, Inc. - diluted$2,486 $1,510 
Denominator:
Weighted average shares of Class A common stock outstanding - basic101,890 96,354 
Effect of dilutive securities:
Restricted Stock Units361 173 
Class B Common Stock  
Weighted average shares of Class A common stock outstanding - diluted102,251 96,527 
Earnings per share of Class A common stock - basic$0.02 $0.02 
Earnings per share of Class A common stock - diluted$0.02 $0.02 

For the three and nine months ended September 30, 2021 the reallocation of net income attributable to non-controlling interest from the assumed conversion of Class B common stock has been excluded along with the dilutive effect of the Class B common stock to the weighted average shares of Class A common stock outstanding – dilutive as it was antidilutive.

10.    Equity-Based Compensation

18



Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
On January 26, 2021, the Shoals Technologies Group, Inc. 2021 Long-Term incentive Plan (the “2021 Incentive Plan”) became effective. The 2021 Incentive Plan authorized 8,768,124 new shares, subject to adjustment pursuant to the 2021 Incentive Plan.

Since January 26, 2021, the Company has granted 1,367,058 restricted stock units (“RSUs") to certain employees, officers and directors of the Company. The RSUs have grant date fair values ranging from $21.50 to $34.60 per unit and generally vest ratably over either 4 years or 3 years, except for some of the director grants which immediately vested or vest over 1 year. There were a limited number of awards with immediate vesting.

The following table summarizes the RSUs activity for the nine months ended September 30, 2021:
RSUsWeighted Average Price
Outstanding at beginning of period $ 
Granted1,367,058 $26.57 
Forfeited(5,621)$29.37 
Vested(44,724)$28.58 
Outstanding at end of period1,316,713 $26.49 

For the three and nine months ended September 30, 2021, the Company recognized $2.7 million and $6.9 million, respectively, in equity-based compensation. As of September 30, 2021, the Company had $29.9 million of unrecognized compensation costs which is expected to be recognized over a period of 3.3 years.


11.    Stockholders' Deficit
         
Amendment and Restatement of Certificate of Incorporation
As discussed in Note 1, on January 26, 2021, the Company's certificate of incorporation was amended and restated to, among other things, provide for the (i) authorization of 1,000,000,000 shares of Class A common stock with a par value of $0.00001 per share; (ii) authorization of 195,000,000 shares of Class B common stock with a par value of $0.00001 per share; (iii) authorization of 5,000,000 shares of preferred stock that may be issued from time to time by the Company's Board of Directors in one or more series; and (iv) establishment of a classified board of directors, divided into three classes, the members of which will serve for staggered terms.

Holders of Class A common stock and Class B common stock are entitled to one vote per share and, except as otherwise required, will vote together as a single class on all matters on which stockholders generally are entitled to vote. Holders of Class B common stock are not entitled to receive dividends and will not be entitled to receive any distributions upon the liquidation, dissolution or winding up of the Company. Shares of Class B common stock may only be issued to the extent necessary to maintain the one-to-one ratio between the number of LLC Interests held by the Continuing Equity Owners and the number of shares of Class B common stock held by the Continuing Equity Owners. Shares of Class B common stock are transferable only together with an equal number of LLC Interests. Shares of Class B common stock will be canceled on a one-for-one basis if the Company, at the election of a Continuing Equity Owner, redeem or exchange LLC Interests.

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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company must, at all times, maintain a one-to-one ratio between the number of shares of Class A common stock issued by the Company and the number of LLC Interests owned by the Company (subject to certain exceptions for treasury shares and shares underlying certain convertible or exchangeable securities).

Initial Public Offering
As discussed in Note 1, on January 29, 2021, the Company closed an IPO of 11,550,000 shares of the Class A common stock at a public offering price of $25.00 per share. The Company received $278.8 million in proceeds, net of underwriting discounts and commissions, which was used to purchase 6,315,790 LLC Interests from Shoals Parent and 5,234,210 LLC Interests from the founder and Class B unit holder in Shoals Parent at a price per interest equal to the IPO price of the Class A common stock of $25.00.

Shoals Parent Recapitalization
As noted above, in connection with the IPO, the limited liability company agreement of Shoals Parent was amended and restated to, among other things, (i) provide for a new single class of common membership interests in Shoals Parent, or the LLC Interests; (ii) exchange all of the then existing membership interests of the Continuing Equity Owners for LLC Interests (iii) exchange all the then existing membership interest of the Class A Shoals Equity Owners for LLC Interests and (iv) appoint the Company as the sole managing member of Shoals Parent. The Company has a majority economic interest in, is the sole managing member of, has the sole voting power in, and controls the management of Shoals Parent.

The amendment also requires that Shoals Parent, at all times, maintain (i) a one-to-one ratio between the number of shares of Class A common stock issued by the Company and the number of LLC Interests owned by the Company and (ii) a one-to-one ratio between the number of shares of Class B common stock owned by the Continuing Equity Owners and the number of LLC Interests owned by the Continuing Equity Owners.

Acquisition of Former Shoals Equity Owners
On January 26, 2021, the Company acquired, by merger, an entity that was a member of Shoals Parent, or the Class A Shoals Equity Owners, for which the Company issued 81,977,751 shares of Class A common stock as merger consideration. The only assets held by the Class A Shoals Equity Owners were 81,977,751 LLC Interests. Upon consummation of the Merger, the Company recognized the LLC Interests at carrying value, as the Merger is considered to be a transaction between entities under common control.

12.    Non-Controlling Interests

On January 26, 2021, the Company used net proceeds from the IPO to purchase 6,315,790 LLC Interests from Shoals Parent and 5,234,210 LLC Interests from the founder and Class B unit holder in Shoals Parent. In addition, the Company issued 81,977,751 Class A common stock for the same number of LLC Interests as Merger consideration. As of September 30, 2021, the Company owned 62.44% of Shoals Parent.

The following table summarizes the effects of the changes in ownership in Shoals Parent on equity:
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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months Ended
September 30, 2021
Period from January 27, 2021 to September 30, 2021
Net income attributable to non-controlling interest$2,790 $1,911 
Transfers to non-controlling interests
Increase in accumulated deficit as a result of the Organizational Transactions (88,644)
Decrease in accumulated deficit as a result of newly issued LLC Interests in IPO 70,976 
Decrease in accumulated deficit as a result of activity under stock compensation plan1,200 2,607 
Distributions to non-controlling interest(1,864)(4,837)
Reallocation of non-controlling interest5,717 6,005 
Change from net income attributable to non-controlling interest and transfers to non-controlling interest$7,843 $(11,982)

Issuance of Additional LLC Interests
Under the first amended and restated limited liability company agreement of Shoals Parent, as amended (the "LLC Agreement'), the Company is required to cause Shoals Parent to issue additional LLC Interests to the Company when the Company issues additional shares of Class A Common Stock. Other than as it relates to the issuance of Class A Common Stock in connection with an equity incentive program, the Company must contribute to Shoals Parent net proceeds and property, if any, received by the Company with respect to the issuance of such additional shares of Class A Common Stock. The Company must cause Shoals Parent to issue a number of LLC Interests equal to the number of shares of Class A Common Stock issued such that, at all times, the number of LLC Interests held by the Company equals the number of outstanding shares of Class A Common Stock. During the nine months ended September 30, 2021, the Company caused Shoals Parent to issue to the Company a total of 6,315,790 LLC Interests in connection with the issuance of Class A common stock in the IPO, 10,402,086 LLC Interests in connection with the issuance of Class A common stock in the follow-on offering, 209,437 LLC Interests in connection with the acquisition of ConnectPV and 40,665 LLC Interests for the vesting of awards granted under the Shoals Technologies Group, Inc. 2021 Long-Term Incentive Plan.

Distributions for Taxes
As a limited liability company (treated as a partnership for income tax purposes), Shoals Parent does not incur significant federal, state or local income taxes, as these taxes are primarily the obligations of its members. As authorized by the LLC Agreement, Shoals Parent is required to distribute cash, to the extent that Shoals Parent has cash available, on a pro rata basis, to its members to the extent necessary to cover the members’ tax liabilities, if any, with respect to each member’s share of Shoals Parent taxable earnings. Shoals Parent makes such tax distributions to its members quarterly, based on the single highest marginal tax rate applicable to its members applied to projected year-to-date taxable income, with a final accounting once actual taxable income or loss has been determined. During the nine months ended September 30, 2021, tax distributions to non-controlling LLC Interests holders was $4.8 million.

13.    Commitments and Contingencies
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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

Litigation
The Company is from time to time subject to legal proceedings and claims, which arise in the normal course of its business. In the opinion of management and legal counsel, the amount of losses that may be sustained, if any, would not have a material effect on the financial position, results of operations or cash flows of the Company.

Surety Bonds
The Company provides surety bonds to various parties as required for certain transactions initiated during the ordinary course of business to guarantee the Company’s performance in accordance with contractual or legal obligations. As of September 30, 2021, the maximum potential payment obligation with regard to surety bonds was $12.6 million.

14.    Income Taxes

The Company is taxed as a subchapter C corporation and is subject to federal and state income taxes. The Company’s sole material asset is Shoals Parent, which is a limited liability company that is taxed as a partnership for US federal and certain state and local income tax purposes. Shoals Parent’s net taxable income and related tax credits, if any, are passed through to its members and included in the member’s tax returns. Shoals Parent is subject to and reports an entity level tax in Tennessee and Texas. The income tax burden on the earnings taxed to the noncontrolling interest holders is not reported by the Company in its consolidated financial statements under U.S. GAAP. As a result, the Company’s effective tax rate differs materially from the statutory rate. The Company’s income tax provision was a benefit of $1.3 million and $3.1 million for the three and nine months ended September 30, 2021, respectively, and the effective tax rate is primarily impacted by the allocation of income taxes to the noncontrolling interest, benefit of the foreign derived intangible income and changes in our valuation allowance. The tax benefit for the three and nine months ended September 30, 2021 includes $2.0 million and $3.7 million, respectively, of deferred income tax benefit resulting from an increase in the blended state income tax rate.

As of September 30, 2021, the Company had recorded a deferred tax asset related to the partnership basis differences in Shoals Parent of $121.5 million. The Company also recorded an income tax receivable of $8.6 million of which the Company estimates $3.8 million is owed to the prior owner related to taxes paid prior to the IPO transaction.

In calculating the provision for interim income taxes, in accordance with ASC Topic 740, an estimated annual effective tax rate is applied to year-to-date ordinary income. At the end of each interim period, the Company estimates the effective tax rate expected to be applicable for the full fiscal year. This differs from the method utilized at the end of an annual period.

For annual periods, the Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that the deferred tax assets will be realized. Deferred tax assets and liabilities are calculated by applying existing tax laws and the rates expected to apply to taxable income in the years in
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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change.

The Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return, which are subject to examination by federal and state taxing authorities. The tax benefit from an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the position. The amount of the tax benefit recognized is the largest amount of the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The effective tax rate and the tax basis of assets and liabilities reflect management’s estimates of the ultimate outcome of various tax uncertainties. The Company recognizes penalties and interest related to uncertain tax positions within the provision (benefit) for income taxes line in the accompanying consolidated statements of operations. As of the quarter ended September 30, 2021, no uncertain tax positions have been recorded. The Company will continue to monitor this position each interim period.

The Company files U.S. federal and certain state income tax returns. The income tax returns of the Company are subject to examination by U.S. federal and state taxing authorities for various time periods, depending on those jurisdictions’ rules, generally after the income tax returns are filed.

15. Tax Receivable Agreement
In connection with the Organization Transactions and the IPO, the Company entered into a tax receivable agreement (the “TRA”) with the founder and former equity owners of Shoals Investment CTB (the “TRA Owners”). The TRA provides for the payment from time to time by the Company to the TRA Owners of 85% of the amount of the benefits, if any, that the Company has deemed to realize as a result of (i) increases in tax basis resulting from the purchase or exchange of LLC Interests and other qualifying transactions. These payment obligations are obligations of the Company and not of Shoals Parent. For purposes of the TRA, the benefit deemed realized by the Company will generally be computed by comparing the actual income tax liability of the Company (calculated with certain assumptions) to the amount of such taxes that the Company would have been required to pay had there been no increase to the tax basis of the assets of Shoals Parent as a result of the purchases or exchanges, and had the Company not entered into the TRA.

The TRA further provides that, upon certain mergers, asset sales or other forms of business combinations or other changes of control, the Company (or its successor) would owe to the TRA Owners a lump-sum payment equal to the present value of all forecasted future payments that would have otherwise been made under the TRA that would be based on certain assumptions, including a deemed exchange of Shoals Parent LLC Interests and that the Company would have sufficient taxable income to fully utilize the deductions arising from the increased tax basis and other tax benefits related to entering into the TRA. The Company also is entitled to terminate the TRA, which, if terminated, would obligate the Company to make early termination payments to the TRA Owners.

On January 26, 2021, the Company acquired 5,234,210 LLC Interests from the founder. This acquisition triggered a tax basis increase subject to the provisions of the TRA. The Company recognized (i) a deferred tax asset in the amount of $32.1 million, (ii) a corresponding liability of $27.2 million, representing 85% of the tax benefits to the TRA Owners and (iii) $4.9 million of additional paid-in capital.

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Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
On January 26, 2021, in connection with the merger with Shoals Investment CTB, the Company distributed 85% of the value in the tax basis from the original acquisition of Shoals Parent by Shoals investment CTB in 2017 to the holders of the TRA. In the first quarter of fiscal year 2021, the Company recognized (i) a deferred tax asset of $16.9 million, (ii) a corresponding liability of $14.4 million representing 85% of the tax benefits to the TRA Owners and (iii) $2.5 million of additional paid-in capital.

During 2021, the TRA liability was increased by $3.7 million resulting from an estimated increase in the Company’s blended state income tax rate. As a result of the adjustment to the Tax Receivable Agreement liability, the Company recorded approximately $2.0 million and $3.7 million of other expense in the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2021, respectively.

On July 16, 2021, the Company acquired 10,402,086 LLC Interests from the founder and selling shareholders. This acquisition triggered a tax basis increase subject to the provisions of the TRA. The Company recognized (i) a deferred tax asset in the amount of $73.5 million, (ii) a corresponding liability of $62.5 million, representing 85% of the tax benefits to the TRA Owners and (iii) $11.0 million of additional paid-in capital.

As of September 30, 2021, the amount of Tax Receivable Agreement payments due under the Tax Receivable Agreement was $107.9 million.

16.    Revenue by Product

Based on Topic 606 provisions, the Company disaggregates its revenue from contracts with customers between system solutions and components. System solutions are contracts under which the Company provides multiple products typically in connection with the design and specification of an entire EBOS system. Components represents sales of individual solar components.

The following table presents the Company’s revenue disaggregated by system solutions and solar components which are recorded over time as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2021202020212020
System solutions$38,641 $36,962 $123,252 $91,381 
Solar components21,199 15,636 41,914 45,384 
Total revenue$59,840 $52,598 $165,166 $136,765 


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and the related notes and other financial information included in our Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Form 10-K”) and this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion and analysis contain 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 10-K and this Form 10-Q captioned “Special Note Regarding Forward-Looking Statements” and “Risk Factors”.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contain the presentation of Adjusted EBITDA and Adjusted Net Income, which are not presented in accordance with GAAP. Adjusted EBITDA and Adjusted Net Income are being presented because they provide the Company 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 and Adjusted Net Income to be substitutes for any GAAP financial information. Readers of this Form 10-Q should use Adjusted EBITDA and Adjusted Net Income only in conjunction with Net Income, the most comparable GAAP financial measure. Reconciliations of Adjusted EBITDA and Adjusted Net Income to Net Income, 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 or “EBOS” solutions for solar energy projects in the United States. 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 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 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.

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We derived approximately 75% of our revenue from the sale of system solutions for the nine months ended September 30, 2021. For the same period, we derived substantially all of our revenue from customers in the U.S. We had $270.7 million of backlog and awarded orders, backlog of $112.6 million represents signed purchase orders or contractual minimum purchase commitments with take-or-pay provisions and awarded orders of $158.1 million are orders we are in the process of documenting a contract but for which a contract has not yet been signed, as of September 30, 2021, representing a 101% and 35% increase relative to the same date last year and June 30, 2021, respectively.

We have maintained focus on our growth strategy throughout the 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 eight of the top 10 solar EPCs as reported by Solar Power World Magazine use our combine-as-you-go system on a majority of their projects and we are currently in the process of transitioning an additional 11 EPCs and developers to our system. Additionally, we are currently developing four new product families for the EV charging market: skid solutions that package the key components required for an EV charging station in the factory with the objective of reducing the amount of labor required in the field; raceways that allow wire to be run above ground rather than in underground conduit; EV-Big Lead Assembly (“BLA”) that eliminates homeruns from each dispenser and offers benefits similar to our solar BLA, including a 75% reduction in wire runs; and quad chargers that are prefabricated dispensers with four charge points. We expect to introduce our first offerings for this rapidly growing market in the fourth quarter of 2021.

Initial Public Offering
On January 29, 2021, the Company closed an IPO of 11,550,000 shares of Class A common stock at a public offering price of $25.00 per share, including shares issued pursuant to the underwriters' over-allotment option. The Company received $278.8 million in proceeds, net of underwriting discounts and commissions, which was used to purchase 6,315,790 LLC Interests from Shoals Parent and 5,234,210 LLC Interests from the founder and Class B unit holder in Shoals Parent at a price per interest equal to the IPO price of $25.00 per share.

Organizational Transactions
See Note 1 to the condensed consolidated financial statements of Shoals, 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.

Following the completion of the Organizational Transactions, the Company owned 56.14% of Shoals Parent. The Continuing Equity Owners owned the remaining 43.86% of Shoals Parent.

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 / Tax Receivable Agreement
On July 16, 2021, the Company completed a follow-on offering consisting of 4,989,692 shares of Class A common stock offered by the selling shareholders and 10,402,086 shares of Class A common stock offered by the Company. Following the closing of this 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. The Company obtained an increase in its share of the tax basis of the
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assets of Shoals Parent when LLC Interests and Class B common stock were redeemed or exchanged. This increase in tax basis may have the effect of reducing the amounts that we would otherwise pay in the future to various tax authorities. The increase in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. The exchange of 10,402,086 LLC Interests and shares of Class B common stock triggered a tax basis increase subject to the provisions of the Tax Receivable Agreement. In the third quarter of fiscal year 2021, we recognized a deferred tax asset in the amount of $73.5 million, a corresponding increase in the tax receivable agreement liability of $62.5 million, representing 85% of the tax benefits and $11.0 million of additional-paid-in capital.

Acquisition of ConnectPV
On August 26, 2021, we acquired 100% of the stock of ConnectPV, for $13.8 million in cash (net of $0.8 million cash acquired) and 209,437 shares of Class A Common stock valued at $6.5 million. The acquisition was accounted for as a business combination and following the acquisition we immediately converted ConnectPV to a limited liability company and contributed the entity to Shoals Parent, LLC through a series of transactions.

Shoals Technologies Group, Inc Ownership in Shoals Parent
As of September 30, 2021, the Company owned 62.44% of Shoals Parent

Impact of COVID-19
The global health crisis caused by the novel coronavirus COVID-19 pandemic and its resurgences has and may continue to negatively impact global economic activity, which, despite progress in vaccination efforts, remains uncertain and cannot be predicted with confidence. In addition, the Delta variant of COVID-19, which appears to be the most transmissible variant to date, has begun to spread globally and other variants of COVID-19 continue to emerge. The impact of the Delta variant cannot be predicted at this time, and could depend on numerous factors, including vaccination rates among the population, the effectiveness of the COVID-19 vaccines against the Delta variant and other variants along with the response by governmental bodies and regulators. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the COVID-19 pandemic on our business.

Many countries around the world have continued to impose quarantines and restrictions on travel and mass gatherings to slow the spread of the virus. Accordingly, our ability to continue to operate our business may also be limited. Such events may result in a period of business, supply and manufacturing disruptions, and in reduced operations, any of which could materially affect our business, financial condition and results of operations.

A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock.

We continue to monitor the impacts of COVID-19 on the global economy and on our business operations. Although we expect the vaccinations for COVID-19 will continue to improve conditions, the ultimate impact from COVID-19 on our business operations and financial results during 2021 and beyond will depend on, among other things, the ultimate severity and scope of the pandemic, including the new variants of the virus, the pace at which governmental and private travel restrictions and public concerns about public gatherings will ease, the rate at which historically large increases in unemployment rates will decrease, if at all, and whether, and the speed with which, the economy recovers. We are not able to fully quantify the impact that
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