What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-08-11 compared with 2021-05-04 · 151 added, 95 removed, 196 unchanged (56% of the section changed)

2 unchanged sentences

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”.

14 unchanged sentences

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.

We derived approximately 73% of our revenue from the sale of system solutions for the three months ended March 31, 2021.

We derived approximately 80% of our revenue from the sale of system solutions for the six months ended June 30, 2021.

For the same period, we derived substantially all of our revenue from customers in the U.S.

We had $180.6 million of backlog and awarded orders as of March 31, 2021, representing a 42% and 15% increase relative to the same date last year and December 31, 2020, respectively.

We had $200.5 million of backlog and awarded orders, backlog represents signed purchase orders or contractual minimum purchase commitments with take-or-pay provisions and awarded orders are orders we are in the process of documenting a contract but for which a contract has not yet been signed, as of June 30, 2021, representing a 63% and 11% increase relative to the same date last year and March 31, 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.

3 unchanged sentences

raceways that allow wire to be run above ground rather than in underground conduit;

EV-BLA that eliminates homeruns from each dispenser and offers benefits similar to our solar BLA, including a 75% reduction in wire runs;

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.

3 unchanged sentences

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.

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.

Subsequent to the IPO and related organizational transactions that occurred in connection with the IPO, the Company is the sole managing member of, and had a 56.14% economic interest in, Shoals Parent.

Organizational Transactions

In connection with the IPO, the Company and Shoals Parent completed the Organizational Transactions.

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.

As the Organization Transactions are 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.

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.

Impact of COVID-19

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.

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, a new Delta variant of COVID-19, which appears to be the most transmissible variant to date, has begun to spread globally.

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 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 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 these factors will have on our financial results during 2021 and beyond, but developments related to COVID-19 may materially affect us in 2021.

Key Components of Our Results of Operations

23 unchanged sentences

Personnel-related costs are the most significant component of our operating expenses and include salaries, equity-based compensation, benefits, payroll taxes and commissions.

The number of full-time employees in our general and administrative departments increased from 44 to 57 from March 31, 2020 to March 31, 2021, and we expect to hire new employees in the future to support our growth.

The timing of these

additional hires could materially affect our operating expenses in any particular period, both in absolute dollars and as a percentage of revenue.

The number of full-time employees in our general and administrative departments increased from 42 to 68 from June 30, 2020 to June 30, 2021, and we expect to hire new employees in the future to support our growth.

The timing of these additional hires could materially affect our operating expenses in any particular period, both in absolute dollars and as a percentage of revenue.

We expect to invest in additional resources to support our growth which will increase our operating expenses.

3 unchanged sentences

We expect to increase our sales and marketing personnel as we expand into new geographic markets.

The majority of our sales in 2020 were in the U.S.

Substantially all of our sales in 2020 were in the U.S.

We currently have a sales presence in the U.S., Australia and Spain.

7 unchanged sentences

Interest expense consists of interest and other charges paid in connection with our current Senior Secured Credit Agreement (as defined below) and our former Senior Debt which included a revolving line of credit and term loan, which was fully repaid on October 8, 2020.

Tax Receivable Agreement Liability Adjustment

Tax receivable agreement liability adjustment consists of changes to our effective interest rate since the initial recording of the liability related to our tax receivable agreement with our founder and former Class A Shoals Equity Owners of Shoals Parent.

Loss on Debt Repayment

7 unchanged sentences

The following table summarizes our results of operations (dollars in thousands):

Three Months Ended March 31, Increase / (Decrease)

Three Months Ended June 30, Increase / (Decrease) Six Months Ended June 30, Increase / (Decrease)

2021 2020 2021 2020

Revenue $ 59,722 $ 43,427 $ 16,295 38 % $ 105,326 $ 84,167 $ 21,159 25 %

7 unchanged sentences

Interest expense, net (3,620) (225) (3,395) 1509 % (7,329) (497) (6,832) 1375 %

Tax receivable agreement liability adjustment (1,664) — (1,664) 100 % (1,664) — (1,664) 100 %

Loss on debt repayment — — — — % (15,990) — (15,990) 100 %

1 unchanged sentence

Income tax benefit 339 — 339 100 % 1,814 — 1,814 100 %

Net income (loss) (8,334) 9,295 (17,629) (190) %

net loss attributable to non-controlling interests (5,475) — (5,475) 100 %

Net income (loss) attributable to Shoals Technologies Group, Inc.

Net income 9,154 5,223 3,931 75 % 820 14,518 (13,698) (94) %

net income (loss) attributable to non-controlling interests 4,596 — 4,596 100 % (879) — (879) 100 %

Net income attributable to Shoals Technologies Group, Inc.

$ 4,558 $ 5,223 $ (665) (13) % $ 1,699 $ 14,518 $ (12,819) (88) %

Comparison of the Three Months Ended June 30, 2021 and 2020

Revenue increased by $16.3 million, or 38%, for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020, driven by an increase in demand for solar EBOS generally and our combine-as-you-go system solutions specifically.

Our total number of customers increased in 2021 as compared to 2020.

We believe customer recognition of the benefits of our combine-as-you-go system is resulting in increased demand for our products.

Cost of Revenue and Gross Profit

Cost of revenue increased by $6.9 million, or 26%, for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020, primarily driven by an increase in production volumes.

Gross profit as a percentage of revenue increased from 38.8% in 2020 to 43.8% in 2021 in part due to purchasing efficiencies from increased volumes, improved material planning which reduced logistics costs,

enhancements to product design that lowered manufacturing costs and other manufacturing efficiencies resulting from higher production volumes.

Changes in product mix also contributed to the increase in margin as sales of system solutions for combine-as-you-go EBOS, which have higher margin than our other products, increased as a percentage of our total revenue.

Operating Expenses

General and Administrative

General and administrative expenses increased $0.7 million, or 8%, for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.

The increase in general and administrative expenses was primarily the result of an increase in professional fees of $1.9 million related to preparation for our public offerings, wages and related taxes of $1.6 million related to increased head count and year-end bonuses, and an insurance expense of $0.8 million primarily related to increased costs for our directors and officers policy, offset by a decrease in equity-based compensation of $4.1 million.

Depreciation and Amortization

There was no significant change in depreciation and amortization expense during the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.

Interest Expense

Interest expense, net increased by $3.4 million or 1509%, for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020, due to increased borrowings and related deferred financing costs under our Senior Secured Credit Facility entered into on November 25, 2020.

We expect interest expense to increase in 2021 as a result of our higher average borrowings under the Senior Secured Credit Facility (see description under “Debt Obligations”).

Tax Receivable Agreement Liability Adjustment

Tax receivable agreement liability adjustment totaled $1.7 million for the three months ended June 30, 2021.

The adjustment resulted from an estimated increase in the Company’s blended state income tax rate.

Income Tax Benefit

Income tax benefit totaled $0.3 million for the three months ended June 30, 2021.

The Company did not incur income tax expense prior to the Organizational Transactions, or during the three months ended June 30, 2020.

Comparison of the Six Months Ended June 30, 2021 and 2020

Revenue increased by $21.2 million, or 25%, for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020, driven by an increase in demand for solar EBOS generally and our combine-as-you-go system solutions specifically.

Our total number of customers increased in 2021 as compared to 2020.

We believe customer recognition of the benefits of our combine-as-you-go system is resulting in increased demand for our products.

Cost of Revenue and Gross Profit

Cost of revenue increased by $7.2 million, or 14%, for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020, primarily driven by an increase in production volumes.

Gross profit as a percentage of revenue increased from 36.8% for the six months ended June 30, 2020 to 42.7% for the six months ended June 30, 2021 in part due to purchasing efficiencies from increased volumes, improved material planning which reduced logistics costs, enhancements to product design that lowered manufacturing costs and other manufacturing efficiencies resulting from higher production volumes.

Operating Expenses

General and Administrative

General and administrative expenses increased by $5.0 million, or 42%, for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.

The increase in general and administrative expenses was primarily the result of an increase in professional fees of $2.5 million related to preparation for our public offerings, wages and related taxes of $2.8 million related to increased head count and year-end bonuses, an insurance expense of $1.5 million primarily related to increased costs for our directors and officers policy and franchise and other related taxes of $0.3 million, offset by a decrease in equity-based compensation of $2.8 million and a decrease in travel and trade shows of $0.2 million as a result of COVID-19.

Depreciation and Amortization

There was no significant change in depreciation and amortization expense during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.

Interest Expense

Interest expense, net increased by $6.8 million or 1375%, for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020, due to increased borrowings and related deferred financing costs under our Senior Secured Credit Facility entered into on November 25, 2020.

We expect interest expense to increase in 2021 as a result of our higher average borrowings under the Senior Secured Credit Facility (see description under “Debt Obligations”).

Tax Receivable Agreement Liability Adjustment

Tax receivable agreement liability adjustment totaled $1.7 million for the six months ended June 30, 2021.

The adjustment resulted from an estimated increase in the Company’s blended state income tax rate.

Loss on Debt Repayment

Loss on debt repayment for the six months ended June 30, 2021 consists of $11.3 million of prepayment premium and $4.7 million in write-off off a portion of the deferred financing costs related to a prepayment of $150.0 million of outstanding borrowings under the Term Loan Facility.

Income Tax Benefit

Income tax benefit totaled $1.8 million for the six months ended June 30, 2021.

The Company did not incur income tax expense prior to the Organizational Transactions, or during the six months ended June 30, 2020.

Non-GAAP Financial Measures

Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS

We define Adjusted EBITDA as net income (loss) plus (i) interest expense, (ii) income taxes, (iii) depreciation expense, (iv) amortization of intangibles, (v) loss on debt repayment, (vi) equity-based compensation, (vii) COVID-19 expenses and (viii) non-recurring and other expenses.

We define Adjusted Net Income as net income (loss) plus (i) amortization of intangibles, (ii) loss on debt repayment, (iii) amortization of deferred financing costs, (iv) equity-based compensation, (v) COVID-19 expenses and (vi) non-recurring and other expenses, all net of applicable income taxes.

We define Adjusted EBITDA as net income (loss) plus (i) interest expense, (ii) income taxes, (iii) depreciation expense, (iv) amortization of intangibles, (v) tax receivable agreement liability adjustment, (vi) loss on debt repayment, (vii) equity-based compensation, (viii) COVID-19 expenses and (ix) non-recurring and other expenses.

We define Adjusted Net Income as net income (loss) plus (i) amortization of intangibles, (ii) tax receivable agreement liability adjustment, (iii) loss on debt repayment, (iv) amortization of deferred financing costs, (v) equity-based compensation, (vi) COVID-19 expenses and (vii) non-recurring and other expenses, all net of applicable income taxes.

We define Adjusted Diluted EPS as Adjusted Net Income divided by the diluted weighted average shares of Class A common shares outstanding for the applicable period, which assumes the pro forma exchange of all outstanding Class B common shares for Class A common shares.

6 unchanged sentences

Among other limitations, Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations;

do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations;

in the case of Adjusted EBITDA, does not reflect income tax expense or benefit for periods prior to the reorganization;

2 unchanged sentences

You should review the reconciliation of net income to Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS below and not rely on any single financial measure to evaluate our business.

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

Three Months Ended March 31,

Net income (loss) $ (8,334) $ 9,295

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

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

Net income $ 9,154 $ 5,223 $ 820 $ 14,518

Interest expense 3,620 225 7,329 497

2 unchanged sentences

Amortization of intangibles 1,996 1,996 3,992 3,992

Tax receivable agreement liability adjustment (a)

1,664 — 1,664 —

Loss on debt repayment — — 15,990 —

Equity-based compensation 2,780 6,704 4,172 6,704

COVID-19 expenses (a)

Non-recurring and other expenses (b)

COVID-19 expenses (b)

106 806 161 806

Non-recurring and other expenses (c)

1,239 112 1,578 294

Adjusted EBITDA $ 20,631 $ 15,404 $ 34,708 $ 27,475

(a) Represents costs incurred as a direct impact from the COVID-19 pandemic, disinfecting and reconfiguration of facilities, medical professionals to conduct daily screenings of employees, premium pay during the pandemic to hourly workers and direct legal costs associated with the pandemic.

(b) Represents certain costs associated with non-recurring professional services, Oaktree’s expenses and other costs.

Reconciliation of Net Income (Loss) Attributable to Shoals Technologies Group, Inc.

(a) Represents an adjustment to eliminate the remeasurement of the Tax Receivable Agreement.

(b) Represents costs incurred as a direct impact from the COVID-19 pandemic, disinfecting and reconfiguration of facilities, medical professionals to conduct daily screenings of employees, premium pay during the pandemic to hourly workers in 2020 and direct legal costs associated with the pandemic.

Reconciliation of Net Income Attributable to Shoals Technologies Group, Inc.

to Adjusted Net Income (in thousands):

Three Months Ended March 31,

Net income (loss) attributable to Shoals Technologies Group, Inc.

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

Net income attributable to Shoals Technologies Group, Inc.

$ 4,558 $ 5,223 $ 1,699 $ 14,518

Net income (loss) impact from pro forma conversion of Class B common stock to Class A common stock (a)

4,596 — (879) —

Adjustment to the provision for income tax (b)

(942) (1,133) 192 (3,150)

Tax effected net income (loss) (7,200) 7,218

Tax effected net income 8,212 4,090 1,012 11,368

Amortization of intangibles 1,996 1,996 3,992 3,992

Amortization of deferred financing costs 305 12 675 21

Tax receivable agreement liability adjustment (c)

1,664 — 1,664 —

Loss on debt repayment — — 15,990 —

Equity-based compensation 2,780 6,704 4,172 6,704

COVID-19 expenses (c)

Non-recurring and other expenses (d)

Tax impact of adjustments (e)

COVID-19 expenses (d)

106 806 161 806

Non-recurring and other expenses (e)

1,239 112 1,578 294

Tax impact of adjustments (f)

(1,635) (635) (5,806) (1,110)

Adjusted Net Income $ 14,667 $ 13,085 $ 23,438 $ 22,075

1 unchanged sentence

(b) Shoals Technologies Group, Inc.

will be subject to U.S.

is subject to U.S.

Federal income taxes, in addition to state and local taxes with respect to its allocable share of any net taxable income of Shoals Parent LLC.

1 unchanged sentence

owns 100% of the units in Shoals Parent LLC.

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

Statutory U.S.

1 unchanged sentence

State and local taxes (net of federal benefit) 2.0 % 0.7 % 2.0 % 0.7 %

Permanent items, including valuation adjustment (2.5) % — % (1.1) % — %

Effective income tax rate for Adjusted Net Income 20.5 % 21.7 % 21.9 % 21.7 %

(c) Represents costs incurred as a direct impact from the COVID-19 pandemic, disinfecting and reconfiguration of facilities, medical professionals to conduct daily screenings of employees, premium pay during the pandemic to hourly workers and direct legal costs associated with the pandemic.

(d) Represents certain costs associated with non-recurring professional services, Oaktree’s expenses and other costs.

(e) Represents the estimated tax impact of all Adjusted Net Income add-backs, excluding those which represent permanent differences between book versus tax.

(d) Represents costs incurred as a direct impact from the COVID-19 pandemic, disinfecting and reconfiguration of facilities, medical professionals to conduct daily screenings of employees, premium pay during the pandemic to hourly workers in 2020 and direct legal costs associated with the pandemic.

(e) Represents certain costs associated with non-recurring professional services, Oaktree’s expenses and other costs.

(f) Represents the estimated tax impact of all Adjusted Net Income add-backs, excluding those which represent permanent differences between book versus tax.

Reconciliation of Diluted Weighted Average Shares Outstanding to Adjusted Diluted Weighted Average Shares Outstanding (in thousands, except per share):

Three Months Ended March 31,

Diluted weighted average shares of Class A common shares outstanding 93,540 N/A (b)

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

Diluted weighted average shares of Class A common shares outstanding, excluding Class B common shares 93,760 N/A (b)

93,650 N/A (b)

Assumed pro forma conversion of Class B common shares to Class A common shares 73,067 N/A (b)

73,067 N/A (b)

Adjusted diluted weighted average shares outstanding 166,827 N/A (b)

166,717 N/A (b)

Adjusted Net Income (a)

$ 14,667 N/A (b)

$ 23,438 N/A (b)

Adjusted Diluted EPS $ 0.09 N/A (b)

$ 0.14 N/A (b)

(a) Represents Adjusted Net Income for the full period presented.

(b) This Non-GAAP measure is not applicable for this period, as the reorganization transactions had not yet occurred.

Comparison of the Three Months Ended March 31, 2021 and 2020

Revenue increased by $4.9 million, or 12%, for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, driven by an increase in demand for solar EBOS generally and our combine-as-you-go system solutions specifically.

Our total number of customers increased in 2021 as compared to 2020.

We believe customer recognition of the benefits of our combine-as-you-go system is resulting in increased demand for our products.

Cost of Revenue and Gross Profit

Cost of revenue increased by $0.3 million, or 1%, for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, primarily driven by an increase in production volumes.

Gross profit as a percentage of revenue increased from 35% in 2020 to 41% in 2021 in part due to purchasing efficiencies from increased volumes, improved material planning which reduced logistics costs, enhancements to product design that lowered manufacturing costs and other manufacturing efficiencies resulting from higher production volumes.

Operating Expenses

General and Administrative

General and administrative expenses increased $4.3 million, or 166%, for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

The increase in general and administrative expenses was primarily the result of $1.4 million in equity-based compensation related to restricted stock units issued in connection with our IPO, an increase in professional fees of $0.8 million related to preparation for our IPO, wages and related taxes of $1.2 million related to increased head count and year-end bonuses, insurance expense of $0.6 million, franchise and other related taxes of $0.3 million and certain COVID-19 related costs of $0.1 million, offset by a decrease in travel and trade shows of $0.2 million as a result of COVID-19.

Depreciation and Amortization

There was no significant change in depreciation and amortization expense during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

Interest Expense

Interest expense, net increased by $3.4 million or 1264%, for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, due to increased borrowings and related deferred financing costs under our Senior Secured Credit Facility entered into on November 25, 2020.

We expect interest expense to increase in 2021 as a result of our higher average borrowings under the Senior Secured Credit Facility (see description under “Debt Obligations”).

Loss on Debt Repayment

Loss on debt repayment for the three months ended March 31, 2021 consists of $11.3 million of prepayment premium and $4.7 million in write-off off a portion of the deferred financing costs related to a prepayment of $150.0 million of outstanding borrowings under the Term Loan Facility.

Income Tax Benefit

Income tax benefit totaled $1.5 million for the three months ended March 31, 2021.

The Company did not incur income tax expense prior to the Organizational Transactions, or during the three months ended March 31, 2020.

Liquidity and Capital Resources

Three Months Ended March 31,

Six Months Ended June 30,

Net cash provided by (used in) operating activities

1 unchanged sentence

Net cash used in investing activities

Net cash provided by financing activities

(1,736) (1,345)

Net increase (decrease) in cash and cash equivalents

Net cash provided by (used in) financing activities

18,948 (10,361)

Net increase in cash and cash equivalents

$ 3,098 $ 7,222

We finance our operations primarily with operating cash flows and short and long-term borrowings.

1 unchanged sentence

Based on our past performance and current expectations, we believe that operating cash flows and availability under our Revolving Credit Facility will be sufficient to meet our near term future cash needs.

We used cash from operating activities of $17.8 million in the three months ended March 31, 2021 as compared to cash generated from operating activities of $17.9 million for the three months ended March 31, 2020.

As of March 31, 2021, our cash and cash equivalents were $4.2 million and we had outstanding borrowings of $238.1 million.

We used cash from operating activities of $14.1 million in the six months ended June 30, 2021 as compared to cash generated from operating activities of $18.9 million for the six months ended June 30, 2020.

As of June 30, 2021, our cash and cash equivalents were $13.2 million and we had outstanding borrowings of $247.3 million.

We also had $51.0 million available for additional borrowings under our $100.0 million Revolving Credit Facility.

Operating Activities

For the three months ended March 31, 2021, cash used in operating activities was $17.8 million, primarily due to operating results that included $8.3 million of net loss, reflecting an increase of $6.0 million in

inventory, $7.3 million in receivables, $3.5 million in other current assets, and a decrease in accounts payable and accrued expenses of $2.2 million.

For the three months ended March 31, 2020, cash provided by operating activities was $17.9 million, primarily due to operating results that included $9.3 million of net income, reflecting a decrease of $6.4 million in receivables, a decrease in $3.1 million in accounts payable and accrued expenses partially offset by $3.1 million increase in inventory.

For the six months ended June 30, 2021, cash used in operating activities was $14.1 million, primarily due to operating results that included $0.8 million of net income which was reduced by $15.6 million, net of non-cash expenses, an increase of $6.2 million in inventory, $19.0 million in receivables, $4.6 million in other current assets and a decrease in accounts payable and accrued expenses of $0.8 million.

For the six months ended June 30, 2020, cash provided by operating activities was $18.9 million, primarily due to operating results that included $14.5 million of net income which was reduced by $11.4 million, net of non-cash expenses, an increase of $5.0 million in receivables, an increase of $3.4 million in inventory and an increase of $0.8 million in accounts payable and accrued expenses.

Investing Activities

For the three months ended March 31, 2021, net cash used in investing activities was $0.9 million, attributable to the purchase of property and equipment.

For the three months ended March 31, 2020, net cash used in investing activities was $0.8 million, attributable to the purchase of property and equipment.

For the six months ended June 30, 2021, net cash used in investing activities was $1.7 million, attributable to the purchase of property and equipment.

For the six months ended June 30, 2020, net cash used in investing activities was $1.3 million, attributable to the purchase of property and equipment.

Financing Activities

For the three months ended March 31, 2021, net cash provided by financing activities was $12.8 million, including $145.6 million in net proceeds from the IPO and $19.0 million in borrowings under the Revolving Credit Facility offset by $150.1 million of payments on term loan facility.

For the three months ended March 31, 2020, net cash provided by financing activities was $22.9 million.

We received proceeds from our senior debt – revolving credit facility of $24.0 million which was offset by payments to our members for tax distributions of $0.2 million and payments on our senior debt-term loan of $0.9 million.

From time to time, we may seek to retire or purchase the Company’s outstanding debt or equity securities through cash purchases and/or exchanges for other debt or equity securities in open market purchases, privately negotiated transactions, or otherwise, and may be made pursuant to Rule 10b5-1 or otherwise.

For the six months ended June 30, 2021, net cash provided by financing activities was $18.9 million, including $144.9 million in net proceeds from the IPO and $29.0 million in borrowings under the Revolving Credit Facility offset by $151.8 million of payments on term loan facility.

For the six months ended June 30, 2020, net cash used in financing activities was $10.4 million.

We made $8.4 million in payments on our senior debt – revolving credit facility, tax distributions of $0.2 million and payments on our senior debt-term loan of $1.7 million.

From time to time, we may seek to retire or purchase the Company’s outstanding debt or equity securities through cash purchases and/or exchanges for other debt or equity securities in open market purchases, privately negotiated transactions, or otherwise, that may be made pursuant to Rule 10b5-1 or otherwise.

Such repurchases or exchanges, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors.

4 unchanged sentences

An additional $10.0 million draw under the Delayed Draw Term Loan Facility funded on December 14, 2020.

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 we repaid and terminated all outstanding commitments under the Delayed Draw Term Loan Facility.

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 we had $61.0 million of availability under the Revolving Credit Facility.

As of June 30, 2021, interest rates on the Term Loan facility and the Revolving credit facility were 4.25% and 3.75%, respectively and we had $51.0 million of availability under the Revolving Credit Facility.

The Senior Secured Credit Agreement contains affirmative and negative covenants, including covenants that restrict our 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, we were in compliance with all the required covenants.

As of June 30, 2021, we were in compliance with all the required covenants.

Intermediate and subsidiaries were party to the Senior Debt Agreement under which Holdings and its subsidiaries were borrowers and Intermediate was a guarantor.

9 unchanged sentences

We provide surety bonds to various parties as required for certain transactions initiated during the ordinary course of business to guarantee our 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.

As of June 30, 2021, the maximum potential payment obligation with regard to surety bonds was $11.8 million.

Critical Accounting Policies and Significant Management Estimates

1 unchanged sentence

In making such determination, we consider all available evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and results of operation.

We routinely evaluate the realizability of our deferred tax assets by assessing the likelihood that our deferred tax assets will be recovered based on all available positive and negative evidence.

We routinely evaluate the realizability of our deferred tax assets by assessing the likelihood that our deferred tax assets will be recovered based on all available positive and

negative evidence.

Estimating future taxable income is inherently uncertain and requires judgment.

In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including revenue growth and operating margins, among others.

As of March 31, 2021, we had $48.5 million of deferred tax assets, net of valuation allowances.

As of June 30, 2021, we had $49.6 million of deferred tax assets, net of valuation allowances.

We expect to realize future tax benefits related to the utilization of these assets.

3 unchanged sentences

Amounts payable under the TRA are contingent upon, among other things, (i) generation of future taxable income over the term of the TRA and (ii) future changes in tax laws.

If we do not generate sufficient taxable income in the aggregate over the term of the TRA to utilize the tax benefits, then we would not be required to make the related TRA payments.

If we do not generate sufficient taxable income in the aggregate over the term of the TRA to utilize the tax benefits, then we generally would not be required to make the related TRA payments.

Therefore, we will only recognize a liability for TRA payments if we determine it is probable that we will generate sufficient future taxable income over the term of the TRA to utilize the related tax benefits.

1 unchanged sentence

In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including revenue growth, and operating margins, among others.

As of March 31, 2021, we recognized $41.7 million of liabilities relating to our obligations under the TRA, after concluding that it was probable that we would have sufficient future taxable income to utilize the related tax benefits.

As of June 30, 2021, we recognized $43.4 million of liabilities relating to our obligations under the TRA, after concluding that it was probable that we would have sufficient future taxable income to utilize the related tax benefits.

There were no transactions subject to the TRA for which we did not recognize the related liability, as we concluded that we would have sufficient future taxable income to utilize all of the related tax benefits generated by all transactions that occurred in connection with the IPO.

3 unchanged sentences

To the extent our estimate differs from actual results, we may be required to reclassify portions of our liabilities under the TRA between current and non-current.

As of March 31, 2021, there were no other significant changes in the application of our critical accounting policies or estimation procedures from those presented in our Annual Report on Form 10-K for the year ended December 31, 2020.

As of June 30, 2021, there were no other significant changes in the application of our critical accounting policies or estimation procedures from those presented in our Annual Report on Form 10-K for the year ended December 31, 2020.

Quantitative and Qualitative Disclosures About Market Risk

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis