What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-10 compared with 2021-08-11 · 102 added, 70 removed, 277 unchanged (38% of the section changed)

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

We derived approximately 75% of our revenue from the sale of system solutions for the nine months ended September 30, 2021.

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

We had $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 had $270.7 million of backlog and awarded orders, backlog of $112.6 million represents signed purchase orders or contractual minimum purchase commitments with take-or-pay provisions and awarded orders of $158.1 million are orders we are in the process of documenting a contract but for which a contract has not yet been signed, as of September 30, 2021, representing a 101% and 35% increase relative to the same date last year and June 30, 2021, respectively.

We have maintained focus on our growth strategy throughout the quarter including developments in converting customers to our combine-as-you-go system and developing products for the rapidly growing electric vehicle charging infrastructure market.

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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 had a 56.14% economic interest in, Shoals Parent.

Organizational Transactions

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As the Organization Transactions were considered transactions between entities under common control, the condensed consolidated financial statements for the periods prior to the IPO and Organizational Transactions have been adjusted to combine the previously separate entities for presentation purposes.

Follow On Offering / Tax Receivable Agreement

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

Following the closing of this offering, Oaktree Power Opportunities Fund IV (Delaware) Holdings, L.P.

no longer beneficially owned any shares of our common stock.

The Company used the proceeds of the sale of Class A common stock to purchase an equal number of LLC Interests and Class B common stock from our founder and management.

The Company obtained an increase in its share of the tax basis of the

assets of Shoals Parent when LLC Interests and Class B common stock were redeemed or exchanged.

This increase in tax basis may have the effect of reducing the amounts that we would otherwise pay in the future to various tax authorities.

The increase in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.

The exchange of 10,402,086 LLC Interests and shares of Class B common stock triggered a tax basis increase subject to the provisions of the Tax Receivable Agreement.

In the third quarter of fiscal year 2021, we recognized a deferred tax asset in the amount of $73.5 million, a corresponding increase in the tax receivable agreement liability of $62.5 million, representing 85% of the tax benefits and $11.0 million of additional-paid-in capital.

Acquisition of ConnectPV

On August 26, 2021, we acquired 100% of the stock of ConnectPV, for $13.8 million in cash (net of $0.8 million cash acquired) and 209,437 shares of Class A Common stock valued at $6.5 million.

The acquisition was accounted for as a business combination and following the acquisition we immediately converted ConnectPV to a limited liability company and contributed the entity to Shoals Parent, LLC through a series of transactions.

Shoals Technologies Group, Inc Ownership in Shoals Parent

As of September 30, 2021, the Company owned 62.44% of Shoals Parent

Impact of COVID-19

The global health crisis caused by the novel coronavirus COVID-19 pandemic and its resurgences has and may continue to negatively impact global economic activity, which, despite progress in vaccination efforts, remains uncertain and cannot be predicted with confidence.

In addition, 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.

In addition, the Delta variant of COVID-19, which appears to be the most transmissible variant to date, has begun to spread globally and other variants of COVID-19 continue to emerge.

The impact of the Delta variant cannot be predicted at this time, and could depend on numerous factors, including vaccination rates among the population, the effectiveness of the COVID-19 vaccines against the Delta variant and other variants along with the response by governmental bodies and regulators.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the COVID-19 pandemic on our business.

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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.

Although we expect the vaccinations for COVID-19 will continue to improve conditions, the ultimate impact from COVID-19 on our business operations and financial results during 2021 and beyond will depend on, among other things, the ultimate severity and scope of the pandemic, including the new variants of the virus, the pace at which governmental and private travel restrictions and public concerns about public gatherings will ease, the rate at which historically large increases in unemployment rates will decrease, if at all, and whether, and the speed with which, the economy recovers.

We are not able to fully quantify the impact that

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

Key Components of Our Results of Operations

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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 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.

The number of full-time employees in our general and administrative departments increased from 42 to 68 from September 30, 2020 to September 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.

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We expect that as we increase both our revenue and the number of our general and administrative personnel, we will invest in additional PP&E to support our growth resulting in additional depreciation expense.

Amortization of intangibles consists of customer relationships, developed technology, trade names and non-compete agreements over their expected period of use.

Amortization of intangibles consists of customer relationships, developed technology, trade names, backlog and non-compete agreements over their expected period of use.

Non-operating Expenses

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

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

Three Months Ended September 30, Increase / (Decrease) Nine Months Ended September 30, Increase / (Decrease)

2021 2020 2021 2020

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

Income (loss) before income taxes 8,815 5,223 3,592 69 % (994) 14,518 (15,512) (107) %

Income before income taxes 3,967 15,001 (11,034) (74) % 2,973 29,519 (26,546) (90) %

Income tax benefit 1,309 — 1,309 100 % 3,123 — 3,123 100 %

Net income 5,276 15,001 (9,725) (65) % 6,096 29,519 (23,423) (79) %

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

net income attributable to non-controlling interests 2,790 — 2,790 100 % 1,911 — 1,911 100 %

Net income attributable to Shoals Technologies Group, Inc.

$ 2,486 $ 15,001 $ (12,515) (83) % $ 4,185 $ 29,519 $ (25,334) (86) %

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.

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

Revenue increased by $7.2 million, or 14%, for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, driven by an increase in solar component revenue of $5.6 million.

Revenue from our system solution increased $1.7 million driven by an increase in demand for our solar EBOS generally and our combine-as-you-go system solutions specifically.

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

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

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.

Cost of revenue increased by $6.2 million, or 19%, for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily driven by an increase in production volumes.

Gross profit as a percentage of revenue decreased from 39.3% in 2020 to 36.4% in 2021 in part due

to changes in product mix which contributed to the decrease in margin as sales of solar components have lower margin than our system solutions.

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.

General and administrative expenses increased $6.5 million, or 185%, for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.

The increase in general and administrative expenses was primarily the result of an increase in professional fees of $0.6 million related to preparation for our public offerings, wages and related taxes of $1.3 million related to increased head count, insurance expense of $0.8 million primarily related to increased costs for our directors and officers policy, equity-based compensation of $1.9 million and acquisition-related expenses of $1.7 million for the acquisition of ConnectPV.

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.

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

Interest expense, net increased by $3.5 million or 3344%, for the three months ended September 30, 2021 as compared to the three months ended September 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.

Tax receivable agreement liability adjustment totaled $2.0 million for the three months ended September 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.

Income tax benefit totaled $1.3 million for the three months ended September 30, 2021.

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

We believe our estimated effective income tax rate to be approximately 15% of net income attributable to Shoals Technologies Group, Inc.

for the remainder of 2021 and 2022.

Comparison of the Nine Months Ended September 30, 2021 and 2020

Revenue increased by $28.4 million, or 21%, for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, driven by an increase in system solutions revenue of $31.9 million as demand for solar EBOS generally and our combine-as-you-go system solutions specifically.

The increased revenue for our system solutions was offset by a decrease in revenue of our solar components of $3.5 million.

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

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

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.

Cost of revenue increased by $13.4 million, or 16%, for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily driven by an increase in production volumes.

Gross profit as a percentage of revenue increased from 37.8% for the nine months ended September 30, 2020 to 40.4% for the nine months ended September 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.

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 solar components, increased as a percentage of our total revenue.

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.

General and administrative expenses increased by $11.5 million, or 75%, for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.

The increase in general and administrative expenses was primarily the result of an increase in professional fees of $3.1 million related to preparation for our public offerings, wages and related taxes of $4.4 million related to increased head count, insurance expense of $2.3 million primarily related to increased costs for our directors and officers policy and acquisition-related expenses of $1.7 million for the acquisition of ConnectPV, offset by a decrease in equity-based compensation of $0.8 million.

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.

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

Interest expense, net increased by $10.3 million or 1715%, for the nine months ended September 30, 2021 as compared to the nine months ended September 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.

Tax receivable agreement liability adjustment totaled $3.7 million for the nine months ended September 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.

Loss on debt repayment for the nine months ended September 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.

Income tax benefit totaled $3.1 million for the nine months ended September 30, 2021.

The Company did not incur income tax expense prior to the Organizational Transactions, or during the nine months ended

September 30, 2020.

We believe our estimated effective income tax rate to be approximately 15% of net income attributable to Shoals Technologies Group, Inc.

for the remainder of 2021 and 2022.

Non-GAAP Financial Measures

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

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

Three Months Ended September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

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Equity-based compensation 2,732 1,032 6,904 7,219

Acquisition-related expenses 1,697 — 1,697 —

COVID-19 expenses (b)

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to Adjusted Net Income (in thousands):

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

Three Months Ended September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

1 unchanged sentence

$ 2,486 $ 15,001 $ 4,185 $ 29,519

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

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

2,790 — 1,911 —

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Equity-based compensation 2,732 1,032 6,904 7,219

Acquisition-related expenses 1,697 — 1,697 —

COVID-19 expenses (d)

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Adjusted Net Income $ 11,602 $ 15,406 $ 35,040 $ 36,963

(a) Reflects net income (loss) to Class A common shares from pro forma exchange of corresponding shares of our Class B common shares held by our founder and management.

(a) Reflects net income to Class A common shares from pro forma exchange of corresponding shares of our Class B common shares held by our founder and management.

(b) Shoals Technologies Group, Inc.

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owns 100% of the units in Shoals Parent LLC.

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

Three Months Ended September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

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

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

Three Months Ended September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

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Liquidity and Capital Resources

Six Months Ended June 30,

Nine Months Ended

September 30,

Net cash provided by (used in) operating activities

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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 $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 used cash from operating activities of $6.7 million in the nine months ended September 30, 2021 as compared to cash generated from operating activities of $38.1 million for the nine months ended September 30, 2020.

As of September 30, 2021, our cash and cash equivalents were $14.2 million and we had outstanding borrowings of $257.9 million.

We also had $39.9 million available for additional borrowings under our $100.0 million Revolving Credit Facility.

Operating Activities

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.

For the nine months ended September 30, 2021, cash used in operating activities was $6.7 million, primarily due to an increase of $19.0 million in receivables, $8.5 million in inventory, $6.9 million in other assets, a decrease in accounts payable and accrued expenses of $2.6 million offset with operating results that included $6.1 million of net income which was reduced by $24.2 million, net of non-cash expenses.

For the nine months ended September 30, 2020, cash provided by operating activities was $38.1 million, primarily due to operating results that included $29.5 million of net income which was reduced by $14.8 million, net of non-cash expenses, an increase of $7.2 million in receivables, an increase of $3.0 million in inventory and an increase of $3.3 million in accounts payable and accrued expenses.

Investing Activities

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.

For the nine months ended September 30, 2021, net cash used in investing activities was $15.4 million, of which $2.5 million was attributable to the purchase of property and equipment and $12.9 million related to the acquisition of ConnectPV.

For the nine months ended September 30, 2020, net cash used in investing activities was $2.8 million, attributable to the purchase of property and equipment.

Financing Activities

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.

For the nine months ended September 30, 2021, net cash provided by financing activities was $26.2 million, including $144.9 million in net proceeds from the IPO and $40.1 million in borrowings under the Revolving Credit Facility offset by $152.3 million of payments on the Term Loan Facility.

For the nine months ended September 30, 2020, net cash used in financing activities was $33.2 million.

We made $21.8 million in payments on our Senior Debt and distributions of $11.4 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.

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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 our direct or indirect equity holders, (ii) pay transaction expenses, (iii) repay and terminate all outstanding commitments under the Senior Debt (as defined herein) and (iv) finance working capital and general corporate purposes.

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

The proceeds of the Term Loan Facility and a $10.0 million draw under the Delayed Draw Term Loan Facility were used to (i) make certain distributions from Shoals Holdings to Shoals Intermediate Holdings and from there to certain of our direct or indirect equity holders, (ii) pay transaction expenses, (iii) repay and terminate all outstanding commitments under the senior debt and (iv) finance working capital and general corporate purposes.

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.

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 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.

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

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

The Senior Secured Credit Agreement contains affirmative and negative covenants, including covenants that restrict 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 June 30, 2021, we were in compliance with all the required covenants.

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

Senior Debt Agreement

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

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The amended agreement provided a term loan of $35 million and a revolving line of credit of $25 million.

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

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

The Senior Debt provided for an interest rate to equal the base rate plus margin.

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

As of September 30, 2021, the maximum potential payment obligation with regard to surety bonds was $12.6 million.

Critical Accounting Policies and Significant Management Estimates

As of September 30, 2021, there were no 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, except as discussed below.

We record valuation allowances against our deferred tax assets when it is more likely than not that all or a portion of a deferred tax asset will not be realized.

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

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

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

As of September 30, 2021, we had $121.2 million of deferred tax assets, net of valuation allowances.

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

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Liabilities Under Tax Receivable Agreement

As described in Note 14 to the condensed consolidated financial statements, we are a party to the TRA under which we are contractually committed to pay the TRA Owners 85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of certain transactions.

As described in Note 15 to the condensed consolidated financial statements, we are a party to the TRA under which we are contractually committed to pay the TRA Owners 85% of the amount of the benefits, if any, that we are deemed to realize, as a result of certain transactions.

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.

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

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.

As of September 30, 2021, we recognized $107.9 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.

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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 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

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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