Shoals Technologies Group, Inc. 10-Q

Item 1. Financial Statements (Unaudited). Shoals Technologies Group, Inc. Condensed Consolidated Balance Sheets (Unaudited) (in thousands, except shares) March 31, 2021 December 31, 2020 Assets Current Assets Cash and cash equivalents $ 4,227 $ 10,073 Accounts receivable, net 28,138 27,004 Unbilled receivables 9,995 3,794 Inventory, net 21,092 15,121 Other current assets 6,512 155 Total Current Assets 69,964 56,147 Property, plant and equipment, net 13,160 12,763 Goodwill 50,176 50,176 Other intangible assets, net 69,992 71,988 Deferred tax asset 48,492 — Other assets 475 4,236 Total Assets $ 252,259 $ 195,310 Liabilities and Stockholders' Deficit / Members’ Deficit Current Liabilities Accounts payable $ 12,941 $ 14,634 Accrued expenses 8,534 5,967 Long-term debt—current portion 3,500 3,500 Total Current Liabilities 24,975 24,101 Revolving line of credit 39,000 20,000 Long-term debt, less current portion 189,450 335,332 Payable Pursuant to the Tax Receivable Agreement 41,692 — Total Liabilities 295,117 379,433 Commitments and Contingencies (Note 12) 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 March 31, 2021 — — Class A common stock, $ 0.00001 par value - 1,000,000,000 shares authorized; 93,539,692 shares issued and outstanding as of March 31, 2021 1 — Class B common stock, $ 0.00001 par value - 195,000,000 shares authorized; 73,066,607 shares issued and outstanding as of March 31, 2021 1 — Additional paid-in capital 78,073 — Accumulated deficit ( 98,340 ) — Total stockholders’ deficit attributable to Shoals Technologies Group, Inc. / members' deficit ( 20,265 ) ( 184,123 ) Non-controlling interests ( 22,593 ) — Total stockholders’ deficit / members’ deficit ( 42,858 ) ( 184,123 ) Total Liabilities and Stockholders’ Deficit / Members’ Deficit $ 252,259 $ 195,310 See accompanying notes to condensed consolidated financial statements. 1 Table of Contents Shoals Technologies Group, Inc. Condensed Consolidated Statements of Operations (Unaudited) (in thousands, except per share amounts) Three Months Ended March 31, 2021 2020 Revenue $ 45,604 $ 40,740 Cost of revenue 26,830 26,554 Gross profit 18,774 14,186 Operating Expenses General and administrative expenses 6,816 2,558 Depreciation and amortization 2,068 2,061 Total Operating Expenses 8,884 4,619 Income from Operations 9,890 9,567 Interest expense, net ( 3,709 ) ( 272 ) Loss on debt repayment ( 15,990 ) — Income (loss) before income taxes ( 9,809 ) 9,295 Income tax benefit 1,475 — Net income (loss) ( 8,334 ) 9,295 Less: net loss attributable to non-controlling interests ( 5,475 ) — Net income (loss) attributable to Shoals Technologies Group, Inc. $ ( 2,859 ) $ 9,295 Period from January 27, 2021 to March 31, 2021 Earnings per share of Class A common stock: Basic $ ( 0.06 ) Diluted $ ( 0.06 ) Weighted average shares of Class A common stock outstanding: Basic 93,540 Diluted 93,540 See accompanying notes to condensed consolidated financial statements. 2 Table of Contents Shoals Technologies Group, Inc. Condensed Consolidated Statements of Changes in Members’ / Stockholders’ Equity (Deficit) (Unaudited) (in thousands, except shares) For the three months ended March 31, 2021 Members' Equity Class A Common Stock Class B Common Stock Additional Paid-In Capital Accumulated Deficit Non-Controlling Interest Total Members'/Stockholders Deficit Shares Amount Shares Amount Balance at December 31, 2020 $ ( 184,123 ) — $ — — $ — $ — $ — $ — $ ( 184,123 ) Net income prior to the Organizational Transactions 2,675 — — — — — — — 2,675 Effect of Organizational Transactions 181,448 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 ) For the three months ended March 31, 2020 Members' Equity Balance at December 31, 2019 $ 149,906 Member distributions ( 214 ) Equity-based compensation — Net income 9,295 Balance at March 31, 2020 $ 158,987 See accompanying notes to condensed consolidated financial statements. 3 Table of Contents Shoals Technologies Group, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) Three Months Ended March 31, 2021 2020 Cash Flows from Operating Activities Net income (loss) $ ( 8,334 ) $ 9,295 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 2,401 2,322 Amortization/write off of deferred financing costs 5,110 9 Equity-based compensation 1,392 — Deferred taxes 557 — Gain on sale of assets 61 — Changes in assets and liabilities: Accounts receivable ( 1,134 ) 9,763 Unbilled receivables ( 6,201 ) ( 3,389 ) Inventory ( 5,971 ) ( 3,167 ) Other current assets ( 3,465 ) ( 32 ) Accounts payable ( 1,693 ) 2,208 Accrued expenses ( 502 ) 929 Net Cash Provided by (Used in) Operating Activities ( 17,779 ) 17,938 Cash Flows Used In Investing Activities Purchases of property, plant and equipment ( 863 ) ( 795 ) Net Cash Used in Investing Activities ( 863 ) ( 795 ) Cash Flows from Financing Activities Member distributions — ( 214 ) Employee withholding taxes related to net settled equity awards ( 137 ) — Deferred financing costs ( 94 ) — Payment on term loan facility ( 150,875 ) — Proceeds from revolving credit facility 19,000 — Payments on senior debt - term loan — ( 875 ) Proceeds from senior debt - revolving line of credit — 24,000 Proceeds from issuance of Class A common stock sold in an IPO, net of underwriting discounts and commissions 154,521 — Deferred offering costs ( 9,619 ) — Net Cash Provided By Financing Activities 12,796 22,911 Net Increase (Decrease) in Cash and Cash Equivalents ( 5,846 ) 40,054 Cash and Cash Equivalents—Beginning of Period 10,073 7,082 Cash and Cash Equivalents—End of Period $ 4,227 $ 47,136 4 Table of Contents Shoals Technologies Group, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (continued) (in thousands) Three Months Ended March 31, 2021 2020 Supplemental Cash Flows Information: Cash paid for interest $ 2,209 $ 249 Non-cash financing activities: Reclassification of deferred offering costs to additional paid-in capital $ 3,738 $ — Initial establishment of deferred tax assets $ 49,049 $ — Initial establishment of amounts payable under tax receivable agreement $ 41,692 $ — Capital contribution related to tax receivable agreement $ 7,357 $ — Income tax receivable from merger due to former owner $ 3,069 $ — See accompanying notes to condensed consolidated financial statements. 5 Table of Contents 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”) and Shoals Holdings LLC (“Holdings”) owns four other subsidiaries through which it conducts substantially all operations: Shoals Technologies, LLC, Shoals Technologies Group, LLC, Solon, LLC, and Shoals Structures, LLC (collectively “Shoals”). Shoals Parent acquired Shoals on May 25, 2017. 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 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. Subsequent to the IPO and related organizational transactions that occurred in connection with the IPO, the Company is the sole managing member of, and has a 56.14 % economic interest in, Shoals Parent. 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; • 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"). Following the completion of the Organizational Transactions, the Company owns 56.14 % of Shoals Parent. The Continuing Equity Owners own the remaining 43.86 % of Shoals Parent. 2. Summary of Accounting Policies 6 Table of Contents Shoals Technologies Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 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 March 31, 2021, the non-controlling interest was 43.86 %. Unaudited Interim Financial Information The accompanying condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020, the statements of operations, stockholders’ deficit / members’ deficit and cash flows for the three months ended March 31, 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 March 31, 2021 and the results of its operations and its cash flows for the three months ended March 31, 2021 and 2020. The financial data and other information disclosed in these notes related to the three months ended March 31, 2021 and 2020 are also unaudited. The results for the three months ended March 31, 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 and other intangible assets, impairment of long-lived assets, the reserve for excess and obsolete inventory, the tax receivable agreement, and valuation of deferred tax assets. Impact of COVID-19 Pandemic 7 Table of Contents Shoals Technologies Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) In December 2019, a novel strain of coronavirus, SARS-CoV-2, which causes coronavirus disease, or COVID-19, surfaced in Wuhan, China. Since then, COVID-19 has spread to multiple countries, including the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. To date, the Company has maintained uninterrupted business operations with normal turnaround times for its delivery of solar EBOS solutions and components. 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 months ended March 31, 2021, the Company incurred $ 0.1 million 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. The extent to which COVID-19 may further impact the Company’s business, results of operations, financial condition and cash flows will depend on future developments, which are highly uncertain and cannot be predicted with confidence. In response to COVID-19, the United States government has passed legislation and taken other actions to provide financial relief to companies and other organizations affected by the pandemic. Customer Concentrations The Company had the following accounts receivable concentrations as of March 31, 2021 and December 31, 2020 and revenue concentrations for the three months ended March 31, 2021 and 2020: 2021 2020 Revenue % Accounts Receivable % Revenue % Accounts Receivable % Customer A 18.2 % 31.7 % 24.0 % 16.7 % Customer B 16.4 % 9.6 % 27.0 % 14.2 % Customer C 14.2 % 25.1 % 0.6 % 18.7 % Customer D 4.8 % 2.9 % 18.7 % 12.0 % 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. 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 sheets 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 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 8 Table of Contents Shoals Technologies Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 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. Accounts Receivable Accounts receivable consists of the following (in thousands): March 31, 2021 December 31, 2020 Accounts receivable $ 28,340 $ 27,206 Less: allowance for doubtful accounts ( 202 ) ( 202 ) Accounts receivable, net $ 28,138 $ 27,004 4. Inventory Inventory consists of the following (in thousands): March 31, 2021 December 31, 2020 Raw materials $ 23,361 $ 17,390 Allowance for slow-moving inventory ( 2,269 ) ( 2,269 ) Inventory, net $ 21,092 $ 15,121 9 Table of Contents Shoals Technologies Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 5. Property, Plant and Equipment Property, plant, and equipment, net consists of the following (in thousands): Estimated Useful Lives (Years) March 31, 2021 December 31, 2020 Land N/A $ 840 $ 840 Building and land improvements 5 - 40 5,621 5,621 Machinery and equipment 3 - 5 9,866 9,028 Furniture and fixtures 3 - 7 1,025 1,025 Vehicles 5 124 318 17,476 16,832 Less: accumulated depreciation ( 4,316 ) ( 4,069 ) Property, plant and equipment, net $ 13,160 $ 12,763 Depreciation expense for the three months ended March 31, 2021 and 2020 was $ 0.4 million and $ 0.3 million, respectively. During the three months ended March 31, 2021 and 2020, $ 0.3 million and $ 0.2 million, respectively, of depreciation expense was allocated to cost of revenue. During the three months ended March 31, 2021 and 2020, $ 0.1 million and $ 0.1 million, respectively, of depreciation expense was allocated to operating expenses. 6. Goodwill and Other Intangible Assets Goodwill Goodwill relates to the acquisition of Shoals. As of March 31, 2021 and December 31, 2020, goodwill totaled $ 50.2 million. Other Intangible Assets Other intangible assets consisted of the following (in thousands): 10 Table of Contents Shoals Technologies Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) Estimated Useful Lives (Years) March 31, 2021 December 31, 2020 Amortizable: Costs: Customer relationships 13 $ 52,600 $ 52,600 Developed technology 13 34,600 34,600 Trade names 13 11,400 11,400 Noncompete agreements 5 2,000 2,000 Total amortizable intangibles 100,600 100,600 Accumulated amortization: Customer relationships 15,510 14,499 Developed technology 10,203 9,537 Trade names 3,362 3,142 Noncompete agreements 1,533 1,434 Total accumulated amortization 30,608 28,612 Total amortizable intangibles, net $ 69,992 $ 71,988 Amortization expense related to intangible assets amounted to $ 2.0 million and $ 2.0 million for the three months ended March 31, 2021 and 2020, respectively. 7. Long-Term Debt Long-term debt consists of the following (in thousands): March 31, 2021 December 31, 2020 Term Loan Facility $ 199,125 $ 350,000 Revolving Credit Facility 39,000 20,000 Senior Debt—term loan — — Less: deferred financing costs ( 6,175 ) ( 11,168 ) Total debt, net of deferred financing costs 231,950 358,832 Less: current portion ( 3,500 ) ( 3,500 ) Long-term debt, net current portion $ 228,450 $ 355,332 Senior Secured Credit Agreement On November 25, 2020 Shoals Holdings, entered into that certain credit agreement with the lenders party thereto from time to time and Wilmington Trust, National Association, as administrative agent and collateral agent (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 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 11 Table of Contents Shoals Technologies Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) terminate all outstanding commitments under the Senior Debt (as defined herein) 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. As of March 31, 2021, interest rates on the Term Loan facility and the Revolving credit facility were 4.25 % and 3.75 %, respectively and the Company had $ 61.0 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 March 31, 2021, the Company was in compliance with all the required covenants. Senior Debt 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 term loan and settled all obligations with respect to the Senior Debt. 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. 8. Earnings per Share Basic net loss per share of Class A Common Stock is computed by dividing net loss attributable to the Company's losses by the weighted average number of shares of Class A Common Stock outstanding during the period. Diluted net loss per share of Class A Common Stock is computed similarly to basic net loss per share except the weighted average shares outstanding are increased to include additional shares from the 12 Table of Contents Shoals Technologies Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 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 (loss) per share information is not applicable for reporting periods prior to this date. Consequently, only the net loss allocable to Shoals Technologies Group, Inc. from the period subsequent to January 26, 2021 is included in the net loss attributable to the stockholders of Class A Common Stock for the three months ended March 31, 2021. Basic and diluted net loss per share of Class A Common Stock from January 27, 2021 to March 31, 2021 have been computed as follows (in thousands, except per share amounts): Period from January 27, 2021 to March 31, 2021 Numerator: Net Loss $ ( 11,009 ) Less: net loss attributable to non-controlling interests ( 5,475 ) Net loss attributable to Shoals Technologies Group, Inc. $ ( 5,534 ) Denominator: Weighted average shares of Class A common stock outstanding - basic 93,540 Effect of dilutive securities: Restricted Stock Units — Class B Common Stock — Weighted average shares of Class A common stock outstanding - diluted 93,540 Loss per share of Class A common stock - basic $ ( 0.06 ) Loss per share of Class A common stock - diluted $ ( 0.06 ) 896,206 restricted stock units and 73,066,067 Class B common stock shares were excluded from the computation of diluted loss per share of Class A common stock because the effect would have been anti-dilutive as we recorded a net loss for the period. 9. Equity-Based Compensation On January 26, 2021, the Company granted 912,206 restricted stock units to certain employees and the Company’s then directors under the Shoals Technologies Group, Inc. 2021 Incentive Award Plan. The restricted stock units were granted at the IPO price of $ 25.00 per unit and generally vest annually over four years . The following table summarizes the restricted stock unit activity for the three months ended March 31, 2021 (in thousands, except per share amounts): 13 Table of Contents Shoals Technologies Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) Restricted Stock Units Weighted Average Price Outstanding at beginning of period — $ — Granted 912,206 $ 25.00 Exercised — $ — Forfeited — $ — Vested ( 16,000 ) $ 25.00 Outstanding at end of period 896,206 $ 25.00 For the three months ended March 31, 2021, the Company recognized $ 1.4 million in equity-based compensation. As of March 31, 2021, the Company had $ 21.4 million of unrecognized compensation costs which is expected to be recognized over a period of 3.8 years. 10. 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 $ 0.0001 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. 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 14 Table of Contents Shoals Technologies Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 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. 11. 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. Following the completion of the Organizational Transactions and as of March 31, 2021, the Company owns 56.14 % of Shoals Parent. The following table summarizes the effects of the changes in ownership in Shoals Parent on equity: Period from January 27, 2021 to March 31, 2021 Net loss attributable to Shoals Technologies Group, Inc. $ ( 5,475 ) 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 plan 550 Change from net loss attributable to Shoals Technologies Group, Inc. and transfers to non-controlling interest $ ( 22,593 ) 15 Table of Contents Shoals Technologies Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 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 quarter ended March 31, 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 and 11,941 LLC Interests for the vesting of awards granted under the Shoals Technologies Group, Inc. Award Plan. 12. Commitments and Contingencies 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 March 31, 2021, the maximum potential payment obligation with regard to surety bonds was $ 11.8 million. 13. 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. 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 $ 1.5 million for the three months ended March 31, 2021 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. As of March 31, 2021, the Company had recorded a deferred tax asset related to the partnership basis differences in Shoals Parent of $ 48.5 million net of a $ 6.2 million valuation allowance. The Company also recorded an income tax receivable of $ 3.8 million of which the Company estimates $ 2.0 million is owed to prior owner related to taxes paid prior to the IPO transaction. 16 Table of Contents Shoals Technologies Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 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 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 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 March 31, 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. 14 . 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 Class A Shoals Equity Owners (the “TRA Owners”) of Shoals Parent. 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 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 17 Table of Contents Shoals Technologies Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 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. In addition, an existing owner may elect to unilaterally terminate the TRA with respect to such existing owner, which would obligate the Company to pay to such existing owner certain payments for tax benefits received through the taxable year of the election. On January 26, 2021, the Company redeemed 5,234,210 LLC Interests from the founder. This redemption triggered a tax basis increase subject to the provisions of the TRA. In the first quarter of fiscal year 2021, 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. On January 26, 2021, following 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 as a qualifying transaction. 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. 15. 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 March 31, 2021 2020 System solutions $ 33,369 $ 22,793 Solar components 12,235 17,947 Total revenue $ 45,604 $ 40,740 18