10-Q 1 shls-20220930.htm 10-Q shls-20220930
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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, 2022

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 7, 2022, the registrant had 113,508,362 shares of Class A common stock and 53,816,214 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

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 a number of factors could cause actual results to differ materially from those indicated by forward-looking statements in this report, including, without limitation, those factors described in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I and Item 1A “Risk Factors” of Part II, as well as Part I Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022.

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. Some of the key factors that could cause actual results to differ from our expectations include the following:
if demand for solar energy projects does not continue to grow or grows at a slower rate than we anticipate, our business will suffer;
existing electric utility industry policies and regulations, and any subsequent changes, may present technical, regulatory and economic barriers to the purchase and use of solar energy systems that may significantly reduce demand for our products or harm our ability to compete;
our industry has historically been cyclical and experienced periodic downturns;
current macroeconomic events, including heightened inflation, rise in interest rates and potential recession could impact our business and financial results;
the interruption of the flow of components and materials from international vendors has disrupted our supply chain, including as a result of the imposition of additional duties, tariffs and other charges on imports and exports;
changes in the United States trade environment, including the imposition of import tariffs and antidumping and countervailing duties, could adversely affect the amount or timing of our revenue, results of operations or cash flows;
if we fail to, or incur significant costs in order to, obtain, maintain, protect, defend or enforce our intellectual property and other proprietary rights, our business and results of operations could be materially harmed;
if we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed;
acquisitions, joint ventures and/or investments and the failure to integrate acquired businesses, could disrupt our business and/or dilute or adversely affect the price of our common stock;
iii

if our trademarks and trade names are not adequately protected, we may not be able to build name recognition in our markets of interest, and our competitive position may be harmed;
we may experience delays, disruptions or quality control problems in our manufacturing operations in part due to vendor concentration;
we face risks related to actual or threatened health epidemics, such as the COVID-19 pandemic, and other outbreaks, which could significantly disrupt our manufacturing and operations;
our future growth in the EV charging market is highly dependent on the demand for, and consumers’ willingness to adopt, EVs;
the reduction, elimination or expiration of government incentives for, or regulations mandating the use of, renewable energy and solar energy specifically could reduce demand for solar energy systems and harm our business;
a drop in the price of electricity sold may harm our business, financial condition, results of operations and prospects;
an increase in interest rates, or a reduction in the availability of tax equity or project debt capital in the global financial markets could make it difficult for end customers to finance the cost of a solar energy system and could reduce the demand for our products;
defects or performance problems in our products could result in loss of customers, reputational damage and decreased revenue, and we may face warranty, indemnity and product liability claims arising from defective products;
our results of operations may fluctuate from quarter to quarter, which could make our future performance difficult to predict and could cause our results of operations for a particular period to fall below expectations, resulting in a decline in the price of our Class A common stock;
compromises, interruptions or shutdowns of our systems, including those managed by third parties, whether intentional or inadvertent, could lead to delays in our business operations and, if significant or extreme, affect our results of operations;
our indebtedness could adversely affect our financial flexibility and our competitive position;
our indebtedness may restrict our current and future operations, which could adversely affect our ability to respond to changes in our business and to manage our operations;
developments in alternative technologies may have a material adverse effect on demand for our offerings;
we are a holding company and our principal asset is our interest in Shoals Parent and, accordingly, we are dependent upon Shoals Parent and its consolidated subsidiaries for our results of operations, cash flows and distributions;
we are required to make payments under the Tax Receivable Agreement and the amounts of such payments will be significant;
we will not be reimbursed for any payments made to the beneficiaries under the Tax Receivable Agreement in the event that any purported tax benefits are subsequently disallowed by the IRS;
provisions in our certificate of incorporation and our bylaws may have the effect of delaying or preventing a change of control or changes in our management;
our certificate of incorporation also provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees;
future sales of our Class A common stock, or the perception that such sales may occur, could depress our Class A common stock price; and
iv

if we fail to implement and maintain effective internal controls over financial reporting, we may be unable to accurately or timely report our financial condition or results of operations, which may adversely affect our business.
v

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Shoals Technologies Group, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except shares and par value)

September 30,
2022
December 31, 2021
Assets
Current Assets
Cash and cash equivalents$11,202 $5,006 
Accounts receivable, net71,652 31,499 
Unbilled receivables11,561 13,533 
Inventory, net81,158 38,368 
Other current assets7,608 5,042 
Total Current Assets183,181 93,448 
Property, plant and equipment, net16,596 15,574 
Goodwill69,941 69,436 
Other intangible assets, net58,606 65,236 
Deferred tax assets177,112 176,958 
Other assets24,456 5,762 
Total Assets$529,892 $426,414 
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable$21,383 $19,985 
Accrued expenses and other43,407 9,569 
Current portion of payable pursuant to the tax receivable agreement3,583  
Long-term debt—current portion2,000 2,000 
Total Current Liabilities70,373 31,554 
Revolving line of credit85,640 55,140 
Long-term debt, less current portion189,289 189,913 
Payable pursuant to the tax receivable agreement, less current portion157,420 156,374 
Other long-term liabilities4,500 931 
Total Liabilities507,222 433,912 
Commitments and Contingencies (Note 15)
Stockholders’ Equity (Deficit)
Preferred stock, $0.00001 par value - 5,000,000 shares authorized; none issued and outstanding as of September 30, 2022 and December 31, 2021
  
Class A common stock, $0.00001 par value - 1,000,000,000 shares authorized; 113,508,362 and 112,049,981 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
1 1 
Class B common stock, $0.00001 par value - 195,000,000 shares authorized; 53,816,214 and 54,794,479 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
1 1 
Additional paid-in capital104,539 95,684 
Accumulated deficit(78,133)(93,133)
Total stockholders’ equity attributable to Shoals Technologies Group, Inc.26,408 2,553 
Non-controlling interests(3,738)(10,051)
Total stockholders' equity (deficit)22,670 (7,498)
Total Liabilities and Stockholders’ Equity (Deficit)$529,892 $426,414 
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,
2022202120222021
Revenue$90,823 $59,840 $232,289 $165,166 
Cost of revenue54,776 38,071 141,357 98,444 
Gross profit36,047 21,769 90,932 66,722 
Operating Expenses
General and administrative expenses13,853 10,031 41,037 26,865 
Depreciation and amortization2,229 2,175 6,939 6,305 
Total Operating Expenses16,082 12,206 47,976 33,170 
Income from Operations19,965 9,563 42,956 33,552 
Interest expense, net(4,754)(3,582)(12,760)(10,911)
Payable pursuant to the tax receivable agreement adjustment (2,014) (3,678)
Loss on debt repayment   (15,990)
Income before income taxes15,211 3,967 30,196 2,973 
Income tax benefit (expense)(2,452)1,309 (5,485)3,123 
Net income12,759 5,276 24,711 6,096 
Less: net income attributable to non-controlling interests4,801 2,790 9,711 1,911 
Net income attributable to Shoals Technologies Group, Inc.$7,958 $2,486 $15,000 $4,185 
Three Months Ended September 30,Nine Months Ended
September 30, 2022
Period from January 27, 2021
to September 30, 2021
20222021
Earnings per share of Class A common stock:
Basic$0.07 $0.02 $0.13 $0.02 
Diluted$0.07 $0.02 $0.13 $0.02 
Weighted average shares of Class A common stock outstanding:
Basic112,975 101,890 112,561 96,354 
Diluted113,584 102,251 112,816 96,527 

See accompanying notes to condensed consolidated financial statements.
2


Shoals Technologies Group, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (Unaudited)
(in thousands, except shares)
For the three and nine months ended September 30, 2022
Class A
Common Stock
Class B
Common Stock
Additional Paid-In CapitalAccumulated DeficitNon-Controlling InterestsTotal Stockholders' Equity (Deficit)
SharesAmountSharesAmount
Balance at December 31, 2021112,049,981 $1 54,794,479 $1 $95,684 $(93,133)$(10,051)$(7,498)
Equity-based compensation— — — — 5,636 — — 5,636 
Activity under equity-based compensation plan— — — — (2,944)— 1,647 (1,297)
Vesting of restricted share units308,416 — — — — — — — 
Distributions to non-controlling interest— — — — — — (2,938)(2,938)
Net income— — — — — 2,640 2,009 4,649 
Balance at March 31, 2022112,358,397 1 54,794,479 1 98,376 (90,493)(9,333)(1,448)
Deferred tax adjustments related to Tax Receivable Agreement— — — — 148 — — 148 
Exchange of Class B to Class A common stock259,888 — (259,888)— — — — — 
Equity-based compensation— — — — 4,065 — — 4,065 
Activity under equity-based compensation plan— — — — (1,326)— 1,326  
Vesting of restricted share units48,721 — — — — — — — 
Distributions to non-controlling interest— — — — — — (1,628)(1,628)
Reallocation of non-controlling interest— — — — (20)— 20  
Net income— — — — — 4,402 2,901 7,303 
Balance at June 30, 2022112,667,006 1 54,534,591 1 101,243 (86,091)(6,714)8,440 
Deferred tax adjustments related to Tax Receivable Agreement— — — — 676 — — 676 
Exchange of Class B to Class A common stock718,377 — (718,377)— — — — — 
Equity-based compensation— — — — 3,991 — — 3,991 
Activity under equity-based compensation plan— — — — (1,284)— 1,284  
Vesting of restricted share units122,979 — — — — — — — 
Distributions to non-controlling interest— — — — — — (3,196)(3,196)
Reallocation of non-controlling interest— — — — (87)— 87  
3


Shoals Technologies Group, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Deficit (Unaudited) (continued)
(in thousands, except shares)
Class A
Common Stock
Class B
Common Stock
Additional Paid-In CapitalAccumulated DeficitNon-Controlling InterestsTotal Stockholders' Equity (Deficit)
SharesAmountSharesAmount
Net income— — — — — 7,958 4,801 12,759 
Balance at September 30, 2022113,508,362 $1 53,816,214 $1 $104,539 $(78,133)$(3,738)$22,670 

For the three and nine months ended September 30, 2021
Members' EquityClass A
Common Stock
Class B
Common Stock
Additional Paid-In CapitalAccumulated DeficitNon-Controlling InterestsTotal 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 equity-based 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 
4


Shoals Technologies Group, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Deficit (Unaudited) (continued)
(in thousands, except shares)
Members' EquityClass A
Common Stock
Class B
Common Stock
Additional Paid-In CapitalAccumulated DeficitNon-Controlling InterestsTotal Members'/Stockholders Deficit
SharesAmountSharesAmount
Activity under equity-based 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)
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 acquisition— 209,437 — — — 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)

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,
20222021
Cash Flows from Operating Activities
Net income$24,711 $6,096 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization8,001 7,345 
Amortization/write off of deferred financing costs1,023 5,692 
Equity-based compensation11,887 6,404 
Provision for obsolete or slow-moving inventory443 435 
Deferred taxes5,299 640 
Payable pursuant to the tax receivable agreement adjustment 3,678 
Gain on sale of assets 61 
Changes in assets and liabilities, net of business acquisition:
Accounts receivable(40,084)(12,271)
Unbilled receivables1,972 (6,760)
Inventory(43,601)(8,505)
Other assets(381)(6,904)
Accounts payable1,186 (5,198)
Accrued expenses and other34,558 2,608 
Net Cash Provided by (Used in) Operating Activities5,014 (6,679)
Cash Flows Used In Investing Activities
Purchases of property, plant and equipment(2,393)(2,483)
Acquisition of a business, net of cash acquired (12,909)
Other(503) 
Net Cash Used in Investing Activities(2,896)(15,392)
Cash Flows from Financing Activities
Distributions to non-controlling interest(7,762)(4,837)
Employee withholding taxes related to net settled equity awards(1,297)(137)
Deferred financing costs (94)
Payments on term loan facility(1,500)(152,250)
Proceeds from revolving credit facility46,000 40,140 
Repayments of revolving credit facility(15,500) 
Proceeds from issuance of Class A common stock sold in an IPO,
net of underwriting discounts and commissions
 154,521 
Proceeds from issuance of Class A common stock in follow-on offering, net of underwriting discounts and commissions 281,064 
Purchase of LLC Interests with proceeds from follow-on offering (281,064)
Payment of debt assumed in acquisition (1,537)
Deferred offering costs (9,619)
Net Cash Provided By Financing Activities19,941 26,187 
Net Increase in Cash, Cash Equivalents and Restricted Cash22,059 4,116 
6



Shoals Technologies Group, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
(in thousands)
Nine Months Ended
September 30,
20222021
Cash, Cash Equivalents and Restricted Cash—Beginning of Period9,557 10,073 
Cash, Cash Equivalents and Restricted Cash—End of Period$31,616 $14,189 


Nine Months Ended
September 30,
20222021
Supplemental Cash Flows Information:
Cash paid for interest$8,376 $7,683 
Cash paid for taxes$767 $1,176 
Non-cash investing and financing activities:
Reclassification of deferred offering costs to additional paid-in capital$ $3,736 
Recording of deferred tax assets$5,453 $122,590 
Recording of amounts payable pursuant to tax receivable agreement$4,629 $104,202 
Capital contribution related to tax receivable agreement$824 $18,209 
Income tax receivable from merger due to former owner$ $3,842 
Deferred tax asset and additional paid-in capital from ConnectPV$ $405 
Class A common stock issued in ConnectPV acquisition$ $6,500 

See accompanying notes to condensed consolidated financial statements.
7



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 for solar, battery storage and electric vehicle charging applications, selling to customers across the United States and internationally. Shoals Parent, through its wholly-owned subsidiaries, Shoals Intermediate Holdings LLC (“Intermediate”) and Shoals Holdings LLC (“Holdings”) owns five other subsidiaries through which it conducts substantially all operations: Shoals Technologies, LLC, Shoals Technologies Group, LLC, Solon, LLC, Shoals Structures, LLC (collectively “Shoals”) and Shoals Connect LLC. 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 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 - Acquisition of ConnectPV.

Initial Public Offering
On January 29, 2021, the Company completed an IPO of 11,550,000 shares of Class A common stock at a public offering price of $25.00 per share, including shares issued pursuant to the underwriters' over-allotment option. 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 (“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 (the “LLC Agreement”) of Shoals Parent was amended and restated to, among other things, (i) provide for a new single class of 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; and
8



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").
Follow-On Offering
On July 16, 2021, the Company completed a follow-on offering consisting of 4,989,692 shares of Class A common stock offered by selling shareholders and 10,402,086 shares of Class A common stock offered by the Company. 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.

2.    Summary of Significant 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.

Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.

Non-controlling Interest
The non-controlling interest on the 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, 2022, the non-controlling interest was 32.16%.

Unaudited Interim Financial Information
The accompanying condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, the statements of operations, stockholders’ equity (deficit) and cash flows for the periods ended September 30, 2022 and 2021 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, 2022 and the results of its operations and its cash flows for the periods ended September 30, 2022 and 2021. The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2022 and 2021 are also unaudited. The results for the three and nine months ended September 30, 2022 and 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2022, any other interim periods, or any future year or period. The balance sheet as of December 31, 2021 included herein was derived from the audited financial statements as of that date. Certain disclosures have been condensed or omitted from the interim financial
9



Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 2021 Form 10-K.

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 and other intangible assets, impairment of long-lived assets, allowance for slow moving inventory, payable pursuant to the tax receivable agreement (“TRA”) and valuation allowance on deferred tax assets.

Restricted Cash
Restricted cash is included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Restricted cash is restricted as to withdrawal or use. Tax distributions paid by Shoals Parent to the Company are restricted under the LLC Agreement for future payments under the TRA and totaled $20.4 million and $4.6 million as of September 30, 2022 and December 31, 2021, respectively.

A reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheet is as follows (in thousands):
September 30,
2022
December 31, 2021
Cash and cash equivalents$11,202 $5,006 
Restricted cash included in other current asset3,583  
Restricted cash included in other assets16,831 4,551 
Total cash, cash equivalents and restricted cash$31,616 $9,557 

Impact of COVID-19 Pandemic and Macroeconomic Events
In 2022, COVID-19 has impacted our business in the following ways:
Our ability to obtain raw material and required components from domestic and international suppliers required to manufacture our products; and
Our ability to secure inbound and outbound logistics to and from our facilities, with additional delays linked to international border crossings and the associated approvals and documentation and;
Significant levels of inflation have increased energy prices, freight premiums, and other operating costs. As a result of inflation, during 2022, the Federal Reserve increased interest rates resulting in higher interest rates associated with our Senior Secured Credit Agreement, as defined below. Any additional increases in interest rates by the Federal Reserve would have a corresponding increase in the interest rates charged under our Senior Secured Credit Agreement. The eventual implications of higher government deficits and debt, tighter monetary policy, and potentially higher long-term interest rates may drive a higher cost of capital during our forecast period.

10



Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company does not directly source raw materials from Europe. However, the ongoing conflict in Ukraine has reduced the availability of certain material 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 do not know the ultimate severity or duration of the conflict in Ukraine, but we are continuously monitoring the situation and evaluating our procurement strategy and supply chain as to reduce any negative impact on our business, financial condition, and results of operations.

As response to supply chain constraints, in 2022 we have increased certain raw materials inventory, partly to limit the potential impact of supply chain issues of raw materials in the near term.

To date we have not had any material adverse effects on our financial results from these events.

Customer Concentrations
The Company had the following revenue concentrations representing 10% or more of revenue for the nine months ended September 30, 2022 and 2021 and related accounts receivable concentrations as of September 30, 2022 and December 31, 2021:
20222021
Revenue %Accounts
Receivable %
Revenue %Accounts
Receivable %
Customer A9.0 %7.1 %22.5 %15.8 %
Customer B6.9 %3.3 %11.8 %4.6 %

Recent Accounting Pronouncements
Adopted
On January 1, 2022, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02 (Topic 842) “Leases” which supersedes the lease recognition requirements in Accounting Standards Codification (“ASC”) Topic 840, “Leases”. Under ASU No. 2016-02, lessees are required to recognize assets and liabilities on the consolidated balance sheets for most leases and provide enhanced disclosures. For companies that are not emerging growth companies (“EGCs”), the ASU was 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 adopted the new standard using the modified retrospective method by recording a right-of-use asset of $1.2 million, short-term portion of lease liabilities of $0.4 million and long-term portion of lease liabilities of $0.8 million as of the effective date. Prior periods will not be restated and will continue to be reported under Topic 840 guidance in effect during those periods. The Company applied the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. The adoption did not have a material impact on its consolidated statements of operations or its consolidated statements of cash flows. See Note 14 - Leases for further information and disclosures related to the adoption of this standard.

Not Yet Adopted
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
11



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

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU requires that contract assets and contract liabilities acquired in a business combination be recognized and measured in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. This guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within that fiscal year. Early adoption of the amendments is permitted, including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application. We are currently evaluating the impact of the new standard on our financial statements and related disclosures.

Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.

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 (as defined below). The purchase price paid has been allocated to record the acquired assets and assumed liabilities based upon their estimated fair value pending finalization of the working capital calculation with the sellers. 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 $19.8 million was recorded. The goodwill recognized was primarily attributable to the workforce and 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 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
12



Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
based on a combination of market, cost and income approaches with the assistance of a third-party valuation firm (in thousands):

Purchase Price Allocation

Cash and cash equivalents$849 
Accounts receivable5,382 
Inventory4,273 
Other current assets1,583 
Total current assets12,087 
Property, plant and equipment438 
Goodwill19,765 
Other intangible assets1,600 
Total Assets33,890 
Accounts payable9,440 
Accrued expenses2,655 
Debt1,537 
Total liabilities13,632 
Net assets acquired$20,258 

Pro Forma Financial Information (Unaudited)
The pro forma information below gives effect to the ConnectPV acquisition as if it had been completed on the first day of each period presented. The pro forma results of operations are presented for informational purposes only. As such, they are not necessarily indicative of the Company’s results had the acquisition been completed on the first day of each period presented, nor do they intend to represent the Company’s future results. The pro forma information does not reflect any cost savings from operating efficiencies or synergies that could result from the acquisition and does not reflect additional revenue opportunities following the acquisition. The pro forma information includes adjustments to record the assets and liabilities associated with the acquisition at their respective fair values, based on available information and to give effect to the financing for the acquisition (in thousands):
Nine Months Ended
September 30, 2021
Revenue$181,663 
Net income$4,226 


4.    Accounts Receivable

Accounts receivable consists of the following (in thousands):
13



Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30,
2022
December 31, 2021
Accounts receivable$71,938 $32,015 
Less: allowance for doubtful accounts(286)(516)
Accounts receivable, net$71,652 $31,499 


5.    Inventory

Inventory consists of the following (in thousands):
September 30,
2022
December 31, 2021
Raw materials$82,451 $39,265 
Allowance for obsolete or slow-moving inventory(1,293)(897)
Inventory, net$81,158 $38,368 


6.    Property, Plant and Equipment

Property, plant, and equipment, net consists of the following (in thousands):
    Estimated Useful Lives (Years)
September 30,
2022
December 31, 2021
LandN/A$840 $840 
Building and land improvements
5-40
8,833 7,801 
Machinery and equipment
3-5
11,970 10,693 
Furniture and fixtures
3-7
1,797 1,775 
Vehicles
5
127 65 
23,567 21,174 
Less: accumulated depreciation(6,971)(5,600)
Property, plant and equipment, net$16,596 $15,574 

Depreciation expense for the three months ended September 30, 2022 and 2021 was $0.5 million and $0.5 million, respectively. During the three months ended September 30, 2022 and 2021, $0.4 million and $0.4 million, respectively, of depreciation expense was allocated to cost of revenue and $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, 2022 and 2021 was $1.4 million and $1.3 million, respectively. During the nine months ended September 30, 2022 and 2021, $1.1 million and $1.0 million, respectively, of depreciation expense was allocated to cost of revenue and $0.3 million and $0.3 million, respectively, of depreciation expense was allocated to operating expenses.

7.    Goodwill and Other Intangible Assets

14



Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Goodwill
Goodwill relates to the acquisition of Shoals and ConnectPV. As of September 30, 2022 and December 31, 2021, goodwill totaled $69.9 million and $69.4 million, respectively. Changes in the carrying amount of goodwill during the nine months ended September 30, 2022 are shown below (in thousands):
Goodwill
Beginning Balance$69,436 
Adjustments related to finalization of working capital in the acquisition of ConnectPV505 
Ending Balance$69,941 

Other Intangible Assets
Other intangible assets consists of the following (in thousands):
Estimated Useful Lives (Years)September 30,
2022
December 31, 2021
Amortizable:
Costs:
Customer relationships13$53,100 $53,100 
Developed technology1334,600 34,600 
Trade names1311,900 11,900 
Backlog1600 600 
Noncompete agreements52,000 2,000 
Total amortizable intangibles102,200 102,200 
Accumulated amortization:
Customer relationships21,851 18,629 
Developed technology14,195 12,199 
Trade names4,948 4,103 
Backlog600 200 
Noncompete agreements2,000 1,833 
Total accumulated amortization43,594 36,964 
Total amortizable intangibles, net$58,606 $65,236 


Amortization expense related to intangible assets amounted to $2.1 million and $2.1 million for the three months ended September 30, 2022 and 2021 and $6.6 million and $6.1 million for the nine months ended September 30, 2022 and 2021, respectively.

8.    Accrued Expenses and Other

Accrued expenses and other consists of the following (in thousands):
September 30,
2022
December 31, 2021
Accrued compensation$3,838 $2,882 
Deferred revenue28,720 1,841 
15



Shoals Technologies Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30,
2022
December 31, 2021
Accrued interest6,276 3,095 
Accrued professional fees595 548 
Lease liability1,139  
Other accrued expenses2,839 1,203 
Total accrued expenses and other$43,407 $9,569 


9.    Long-Term Debt

Long-term debt consists of the following (in thousands):
September 30,
2022
December 31, 2021
Term Loan Facility$195,750 $197,250 
Revolving Credit Facility