Shoals Technologies Group, Inc. 10-K

Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2021. Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2021, our disclosure controls and procedures were effective at the reasonable assurance level. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term as defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. 58 Table of Contents As of December 31, 2021, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013 Framework). Based on this assessment, our management concluded that, as of December 31, 2021, our internal control over financial reporting was effective based on those criteria. Changes in Internal Control Over Financial Reporting There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the fourth quarter of 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Item 9B. Other Information Not applicable. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. PART III Item 10. Directors, Executive Officers and Corporate Governance The information required to be disclosed by this item is incorporated by reference to the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report. Item 11. Executive Compensation The information required to be disclosed by this item is incorporated by reference to the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required to be disclosed by this item is incorporated by reference to the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required to be disclosed by this item is incorporated by reference to the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report. 59 Table of Contents Item 14. Principal Accountant Fees and Services The information required to be disclosed by this item is incorporated by reference to the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report. PART IV Item 15. Exhibit and Financial Statement Schedules (a)(1) Financial Statements. The financial statements and supplementary data required by this item are included after the Signature page of this Annual Report on Form 10-K beginning on page F-1. (a)(2) Financial Statement Schedules. All schedules have been omitted because they are not required or because the required information is given in the Financial Statements or Notes thereto. (a)(3) Exhibits. The exhibits listed in the Exhibit Index below are filed or incorporated by reference as part of this Annual Report. 60 Table of Contents EXHIBIT INDEX Incorporated by Reference Number Description of Document Form Filing Date Exhibit No. 3.1 Amended and Restated Certificate of Incorporation of Shoals Technologies Group, Inc., dated January 28, 2021 8-K 1/29/2021 3.1 3.2 Amended and Restated Bylaws of Shoals Technologies Group, Inc., dated January 28, 2021 8-K 1/29/2021 3.2 4.1* Description of Registered Securities 10.1 Amendment No. 2, dated as of December 30, 2020, to the Credit Agreement, dated as of November 25, 2020, by and among Shoals Holdings LLC, Shoals Intermediate Holdings LLC, Wilmington Trust, National Association, as administrative agent and collateral agent, the lenders party thereto from time to time, and JPMorgan Chase Bank, N.A. and Guggenheim Securities, LLC, as lead arrangers and bookrunners S-1/A 1/25/2021 10.1 10.2 Tax Receivable Agreement, dated as of January 29, 2021 by and among Shoals Technologies Group, Inc., Shoals Parent LLC and the other parties thereto 8-K 1/29/2021 10.1 10.3 Registration Rights Agreement, dated January 29, 2021 by and among Shoals Technologies Group, Inc. and certain holders identified therein 8-K 1/29/2021 4.1 10.4 Shoals Technologies Group, Inc. 2021 Long-Term Incentive Plan S-8 1/29/2021 10.1 10.5 Form of RSU Grant Notice and Award Agreement (Employees) S-8 1/29/2021 10.2 10.6 Form of RSU Grant Notice and Award Agreement (Directors) S-8 1/29/2021 10.3 10.7 Form of Director and Officer Indemnification Agreement S-1/A 1/25/2021 10.5 10.8 Stockholders’ Agreement, dated as of January 29, 2021 by and among Shoals Technologies Group, Inc., Oaktree Power Opportunities Fund IV (Delaware) Holdings, LP, Solon Holdco I, GP, Solon Holdco II, GP, Dean Solon and Shoals Management Holdings LLC 8-K 1/29/2021 10.2 10.9 Third Amended and Restated Limited Liability Company Agreement, dated as of January 29, 2021, by and among Shoals Parent LLC, Dean Solon and Shoals Management Holdings LLC 8-K 1/29/2021 10.3 10.10 Employment Agreement, effective as of December 18, 2020, by and between Dean Solon and Shoals Technologies Group, LLC S-1/A 1/25/2021 10.8 10.11 Employment Agreement, effective as of December 18, 2020, by and between Jason Whitaker and Shoals Technologies Group, LLC S-1/A 1/25/2021 10.9 10.12 Employment Agreement, effective as of December 18, 2020, by and between Philip Garton and Shoals Technologies Group, LLC S-1/A 1/25/2021 10.10 61 Table of Contents EXHIBIT INDEX Incorporated by Reference Number Description of Document Form Filing Date Exhibit No. 10.13 Employment Agreement, effective as of December 31, 2020, by and between Mehgan Peetz and Shoals Technologies Group, LLC S-1/A 1/25/2021 10.11 10.14 Third Amendment to the Senior Secured Credit Agreement 10-Q 11/10/2021 10.1 21.1* List of Subsidiaries of the Registrant 23.1* Consent of BDO USA, LLP, as to Shoals Technologies Group, Inc. 31.1* Certification of the Chief Executive Officer, as required by Section 302 of the Sarbanes- Oxley Act of 2002 (18 U.S.C. 1350) 31.2* Certification of the Chief Financial Officer, as required by Section 302 of the Sarbanes- Oxley Act of 2002 (18 U.S.C. 1350) 32.1* Certification of the Chief Executive Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002 ( and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350) 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document 101.SCH* XBRL Taxonomy Extension Schema Document 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* XBRL Taxonomy Extension Label Linkbase Document 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document ________ * Filed herewith † Indicates a management contract or compensatory plan. Item 16. Form 10–K Summary None 62 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on March 10, 2022. Shoals Technologies Group, Inc. By: /s/ Jason Whitaker Name: Jason Whitaker Title: Chief Executive Officer * * * * Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated. Signature Title Date /s/ Jason Whitaker Chief Executive Officer and Director March 10, 2022 Jason Whitaker (Principal Executive Officer) /s/ Philip Garton Chief Financial Officer March 10, 2022 Philip Garton (Principal Financial and Accounting Officer) /s/ Brad Forth Chairman of the Board of Directors March 10, 2022 Brad Forth /s/ Peter Jonna Director March 10, 2022 Peter Jonna /s/ Ty Daul Director March 10, 2022 Ty Daul /s/ Lori Sundberg Director March 10, 2022 Lori Sundberg /s/ Toni Volpe Director March 10, 2022 Toni Volpe /s/ Peter Wilver Director March 10, 2022 Peter Wilver 63 Table of Contents INDEX TO FINANCIAL STATEMENTS Shoals Technologies Group, Inc. Report of Independent Registered Public Accounting Firm ( BDO USA, LLP ; Austin, Texas ; PCAOB ID# 243 ) F-2 Consolidated Balance Sheets F- 3 Consolidated Statements of Operations F- 4 Consolidated Statements of Changes in Members’ / Stockholders’ Equity (Deficit) F- 5 Consolidated Statements of Cash Flows F- 7 Notes to Consolidated Financial Statements F- 9 F-1 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Shoals Technologies Group, Inc. Portland, Tennessee Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Shoals Technologies Group, Inc. and Subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, changes in members’ / stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ BDO USA, LLP We have served as the Company’s auditor since 2017. Austin, Texas March 10, 2022 F-2 Table of Contents Shoals Technologies Group, Inc. Consolidated Balance Sheets (in thousands, except shares and par value) December 31, 2021 2020 Assets Current Assets Cash and cash equivalents $ 5,006 $ 10,073 Accounts receivable, net 31,499 27,004 Unbilled receivables 13,533 3,794 Inventory, net 38,368 15,121 Other current assets 5,042 155 Total Current Assets 93,448 56,147 Property, plant and equipment, net 15,574 12,763 Goodwill 69,436 50,176 Other intangible assets, net 65,236 71,988 Deferred tax assets 176,958 — Other assets 5,762 4,236 Total Assets $ 426,414 $ 195,310 Liabilities and Stockholders' Deficit / Members’ Deficit Current Liabilities Accounts payable $ 19,985 $ 14,634 Accrued expenses 9,569 5,967 Long-term debt—current portion 2,000 3,500 Total Current Liabilities 31,554 24,101 Revolving line of credit 55,140 20,000 Long-term debt, less current portion 189,913 335,332 Payable pursuant to the tax receivable agreement 156,374 — Other long-term liabilities 931 — Total Liabilities 433,912 379,433 Commitments and Contingencies (Note 13) Stockholders’ Deficit / Members’ Deficit Members’ deficit — ( 184,123 ) Preferred stock, $ 0.00001 par value - 5,000,000 shares authorized; none issued and outstanding as of December 31, 2021 — — Class A common stock, $ 0.00001 par value - 1,000,000,000 shares authorized; 112,049,981 shares issued and outstanding as of December 31, 2021 1 — Class B common stock, $ 0.00001 par value - 195,000,000 shares authorized; 54,794,479 shares issued and outstanding as of December 31, 2021 1 — Additional paid-in capital 95,684 — Accumulated deficit ( 93,133 ) — Total stockholders’ equity attributable to Shoals Technologies Group, Inc. / members' equity (deficit) 2,553 ( 184,123 ) Non-controlling interests ( 10,051 ) — Total stockholders’ deficit / members’ deficit ( 7,498 ) ( 184,123 ) Total Liabilities and Stockholders’ Deficit / Members’ Deficit $ 426,414 $ 195,310 See accompanying notes to consolidated financial statements. F-3 Table of Contents Shoals Technologies Group, Inc. Consolidated Statements of Operations (in thousands, except per share amounts) Year Ended December 31, 2021 2020 2019 Revenue $ 213,212 $ 175,518 $ 144,496 Cost of revenue 130,567 108,972 100,284 Gross profit 82,645 66,546 44,212 Operating Expenses General and administrative expenses 37,893 21,008 9,065 Depreciation and amortization 8,520 8,262 8,217 Total Operating Expenses 46,413 29,270 17,282 Income from Operations 36,232 37,276 26,930 Interest expense, net ( 14,549 ) ( 3,510 ) ( 1,787 ) Payable pursuant to the tax receivable agreement adjustment ( 1,663 ) — — Loss on debt repayment ( 15,990 ) — — Income before income taxes 4,030 33,766 25,143 Income tax expense ( 86 ) — — Net income 3,944 33,766 25,143 Less: net income attributable to non-controlling interests 1,596 — — Net income attributable to Shoals Technologies Group, Inc. $ 2,348 $ 33,766 $ 25,143 Period from January 27, 2021 to December 31, 2021 Loss per share of Class A common stock: Basic $ 0.00 Diluted $ 0.00 Weighted average shares of Class A common stock outstanding: Basic 99,269 Diluted 99,269 See accompanying notes to consolidated financial statements. F-4 Table of Contents Shoals Technologies Group, Inc. Consolidated Statements of Changes in Members’ / Stockholders’ Equity (Deficit) (in thousands, except shares) Members' Equity (Deficit) Class A Common Stock Class B Common Stock Additional Paid-In Capital Accumulated Deficit Non-Controlling Interest Total Members'/Stockholders Equity (Deficit) Shares Amount Shares Amount Balance at December 31, 2018 $ 138,282 — $ — — $ — $ — $ — $ — $ 138,282 Effect of adoption of ASC 606 470 — — — — — — — 470 Member distributions ( 13,989 ) — — — — — — — ( 13,989 ) Net income 25,143 — — — — — — — 25,143 Balance at December 31, 2019 149,906 — — — — — — — 149,906 Member distributions ( 376,046 ) — — — — — — — ( 376,046 ) Equity-based compensation 8,251 — — — — — — — 8,251 Net income 33,766 — — — — — — — 33,766 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 ) — 69,939 — 70,976 140,915 Activity subsequent to the Organizational Transactions: Deferred tax adjustments related to Tax Receivable Agreements — — — — — 20,997 — — 20,997 Issuance of Class A common stock sold in follow-on offering, net of underwriting discounts — 10,402,086 — — — 281,064 — — 281,064 F-5 Table of Contents Shoals Technologies Group, Inc. Consolidated Statements of Changes in Members’ / Stockholders’ Equity (Deficit) (continued) (in thousands, except shares) Members' Equity (Deficit) Class A Common Stock Class B Common Stock Additional Paid-In Capital Accumulated Deficit Non-Controlling Interest Total Members'/Stockholders Equity (Deficit) Shares Amount Shares Amount Purchase of LLC Interests and Class B common stock — — — ( 10,402,086 ) — ( 281,064 ) — — ( 281,064 ) Exchange of Class B to Class A common stock — 7,870,042 — ( 7,870,042 ) — — — — — Deferred tax adjustment related to ConnectPV LLC conversion — — — — — ( 238 ) — — ( 238 ) Issuance of Class A common stock in connection with an acquisition — 209,437 — — — 6,500 — — 6,500 Net income — — — — — — ( 327 ) 1,596 1,269 Equity-based compensation — — — — — 9,481 — — 9,481 Activity under stock compensation plan — — — — — ( 3,755 ) — 3,618 ( 137 ) Distributions to non-controlling interest — — — — — — — ( 4,837 ) ( 4,837 ) Vesting of restricted share units — 40,665 — — — — — — — Reallocation of non-controlling interest — — — — — ( 7,240 ) — 7,240 — Balance at December 31, 2021 $ — 112,049,981 $ 1 54,794,479 $ 1 $ 95,684 $ ( 93,133 ) $ ( 10,051 ) $ ( 7,498 ) See accompanying notes to consolidated financial statements. F-6 Table of Contents Shoals Technologies Group, Inc. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2021 2020 2019 Cash Flows from Operating Activities Net income $ 3,944 $ 33,766 $ 25,143 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 10,053 9,405 9,163 Amortization/write off of deferred financing costs 5,969 351 38 Equity-based compensation 11,286 8,251 — Provision for slow-moving inventory ( 1,418 ) 188 301 Deferred taxes ( 1,476 ) — — Payable pursuant to the TRA adjustment 1,663 — — Gain on sale of assets 52 — — Changes in assets and liabilities, net of business acquisition: Accounts receivable 818 288 ( 473 ) Unbilled receivables ( 9,739 ) ( 1,289 ) ( 1,345 ) Inventory ( 17,188 ) ( 6,475 ) ( 694 ) Other assets 341 643 137 Accounts payable ( 3,877 ) 4,251 4,195 Accrued expenses ( 4,511 ) 4,703 ( 283 ) Net Cash Provided by (Used in) Operating Activities ( 4,083 ) 54,082 36,182 Cash Flows Used In Investing Activities Purchases of property, plant and equipment ( 4,126 ) ( 3,236 ) ( 1,719 ) Acquisition of a business, net of cash acquired ( 12,909 ) — — Net Cash Used in Investing Activities ( 17,035 ) ( 3,236 ) ( 1,719 ) Cash Flows from Financing Activities Member / non-controlling interest distributions ( 4,837 ) ( 376,046 ) ( 13,989 ) Employee withholding taxes related to net settled equity awards ( 137 ) — — Deferred financing costs ( 94 ) ( 11,821 ) — Proceeds from term loan facility — 350,000 — Payments on term loan facility ( 152,750 ) — — Proceeds from revolving credit facility 49,140 20,000 — Repayments of revolving credit facility ( 14,000 ) — — Proceeds from issuance of Class A common stock sold in an IPO 278,833 — — Purchase of LLC Interests with proceeds from IPO ( 124,312 ) — — Proceeds from issuance of Class A common stock in follow-on offering, net of underwriting discounts and commissions 281,064 — — Purchase of LLC Interests with proceeds from follow-on offering ( 281,064 ) — — Payment of debt assumed in acquisition ( 1,537 ) — — Deferred offering costs ( 9,704 ) ( 3,738 ) — Payments on senior debt - term loan — ( 26,250 ) ( 3,500 ) Proceeds from senior debt - revolving line of credit — — 2,500 F-7 Table of Contents Shoals Technologies Group, Inc. Consolidated Statements of Cash Flows (continued) (in thousands) Year Ended December 31, 2021 2020 2019 Payments on senior debt - revolving line of credit — — ( 12,500 ) Proceeds from delayed draw term loan facility — 20,000 — Payments on delayed draw term loan facility — ( 20,000 ) — Net Cash Provided by (Used in) Financing Activities 20,602 ( 47,855 ) ( 27,489 ) Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash ( 516 ) 2,991 6,974 Cash, Cash Equivalents and Restricted Cash—Beginning of Period 10,073 7,082 108 Cash, Cash Equivalents and Restricted Cash—End of Period $ 9,557 $ 10,073 $ 7,082 Year Ended December 31, 2021 2020 2019 Supplemental Cash Flows Information: Cash paid for interest $ 10,809 $ 3,033 $ 1,819 Cash paid for taxes $ 1,190 $ — $ — Non-cash investing and financing activities: Reclassification of deferred offering costs to additional paid-in capital $ 3,902 $ — $ — Establishment of deferred tax assets $ 181,901 $ — $ — Establishment of amounts payable pursuant to tax receivable agreement $ 154,711 $ — $ — Capital contribution related to tax receivable agreement $ 27,011 $ — $ — Reduction of deferred tax assets and additional paid-in-capital for negative basis on exchanges $ 6,014 $ — $ — Income tax receivable from merger due to former owner $ 3,842 $ — $ — Deferred tax asset and additional paid-in capital from ConnectPV $ 238 $ — $ — Class A common stock issued in ConnectPV acquisition $ 6,500 $ — $ — See accompanying notes to consolidated financial statements. F-8 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements 1. Organization and Business Shoals Technologies Group, Inc. (the “Company”) was formed as a Delaware corporation on November 4, 2020 for the purpose of facilitating an initial public offering ("IPO") and other related organizational transactions to carry on the business of Shoals Parent LLC and its subsidiaries (“Shoals Parent”). Shoals Parent is a Delaware limited liability company formed on May 9, 2017. The Company is headquartered in Portland, Tennessee and is a manufacturer of electrical balance of systems (“EBOS”) solutions and components related to solar fields selling to customers across the United States and internationally. Shoals Parent, through its wholly-owned subsidiaries, Shoals Intermediate Holdings LLC (“Intermediate”), Shoals Holdings LLC (“Holdings”) which owns five other subsidiaries through which it conducts substantially all operations: Shoals Technologies, LLC, Shoals Technologies Group, LLC, Solon, LLC, Shoals Structures, LLC and Shoals Connect LLC (collectively “Shoals”). Shoals Parent acquired Shoals on May 25, 2017. On August 26, 2021, the Company acquired 100 % of the stock of ConnectPV, Inc. (“ConnectPV”) with cash and Class A common stock. The acquisition was accounted for as a business combination and following the acquisition, the Company immediately converted ConnectPV to a limited liability company (Shoals Connect LLC) and contributed the entity to Shoals Parent, LLC through a series of transactions – see Note 3 - Acquisition of ConnectPV. Initial Public Offering On January 29, 2021, the Company closed an IPO of 11,550,000 shares of Class A common stock at a public offering price of $ 25.00 per share, including shares issued pursuant to the underwriters' over-allotment option. The Company received $ 278.8 million in proceeds, net of underwriting discounts and commissions of $ 9.9 million, which was used to purchase 6,315,790 newly-issued membership interests (the “LLC Interests”) from Shoals Parent and 5,234,210 LLC Interests from the founder and Class B unit holder in Shoals Parent at a price per interest equal to the IPO price of $ 25.00 per share. Organizational Transactions In connection with the IPO, the Company and Shoals Parent completed a series of transactions (the "Organizational Transactions") including the following: • the limited liability company agreement (the “LLC 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; F-9 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements • the acquisition, by merger, of Shoals Investment CTB or the former Class A member of Shoals Parent (the "Class A Shoals Equity Owners"), for which the Company issued 81,977,751 shares Class A common stock as merger consideration (the "Merger"). Follow-On Offering On July 16, 2021, the Company completed a follow-on offering consisting of 4,989,692 shares of Class A common stock offered by selling shareholders and 10,402,086 shares of Class A common stock offered by the Company. The Company used the proceeds of the sale of Class A common stock to purchase an equal number of LLC Interests and Class B common stock from our founder and management. 2. Summary of Significant Accounting Policies Basis of Accounting and Presentation The 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 consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. Non-controlling Interest The non-controlling interest on the consolidated statement of operations represents the portion of earnings or loss attributable to the economic interest in the Company's subsidiary, Shoals Parent, held by the Continuing Equity Owners. Non-controlling interest on the 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 December 31, 2021, the non-controlling interest was 32.84 %. 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, reserve for excess and obsolete inventory, payable pursuant to the tax receivable agreement and valuation allowance on deferred tax assets. Impact of COVID-19 Pandemic The global health crisis caused by the novel coronavirus COVID-19 pandemic and its resurgences has and may continue to negatively impact global economic activity, which, despite progress in vaccination efforts, remains uncertain and cannot be predicted with confidence. In addition, the Omicron variant of COVID-19, F-10 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements which appears to be the most transmissible variant to date, has spread globally and other variants of COVID-19 continue to emerge. To date, while the Company has maintained uninterrupted business operations with normal turnaround times for its delivery of solar EBOS solutions and components, the impact of delays for other parts of customer systems has pushed some projects to future quarters. The Company has implemented adjustments to its operations designed to keep employees safe and comply with federal, state and local guidelines, including those regarding social distancing. The impact of the Omicron and other emerging variants cannot be predicted at this time, and could depend on numerous factors, including vaccination rates among the population, the effectiveness of the COVID-19 vaccines against the Omicron and other emerging variants and the response by governmental bodies and regulators. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the COVID-19 pandemic on our business, including, but not limited to, component shortages, disruptions in transportation or other supply chain related constraints. Cash and Cash Equivalents The Company considers cash and cash equivalents to include cash on hand, cash held in demand deposit accounts, and all highly liquid financial instruments purchased with a maturity of three months or less. Restricted Cash Restricted cash is included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Restricted cash is restricted as to withdrawal or use. Tax distributions paid by Shoals Parent to the Company are restricted under the LLC Agreement for future payments under the tax receivable agreement and totaled $ 4.6 million as of December 31, 2021. A reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheet is as follows (in thousands): As of December 31, 2021 2020 Cash and cash equivalents $ 5,006 $ 10,073 Restricted cash included in other current asset — — Restricted cash included in other assets 4,551 — Total cash, cash equivalents, and restricted cash $ 9,557 $ 10,073 Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable is comprised of amounts billed to customers, net of an allowance for doubtful accounts. Interest is not charged on receivables. The allowance for doubtful accounts is estimated by management and is based on specific information about customer accounts, past loss experience, and general economic conditions. Periodically, management reviews the accounts receivable balances of its customers and adjusts the allowance based on current circumstances and charges off uncollectible receivables when all attempts to collect have failed although collection efforts may continue. F-11 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements Unbilled Receivables Unbilled receivables arise when the Company recognizes revenue for amounts which cannot yet be billed under terms of the contract with the customer. Inventory Inventories consist of raw materials. Inventories are stated at the lower of cost or net realizable value. Cost is calculated using the weighted average cost method. Provisions are made to reduce excess or obsolete inventories to their estimated net realizable values. Property, Plant, and Equipment Property, plant, and equipment acquired in the acquisition of Shoals and ConnectPV are recorded at fair value at the date of acquisition net of accumulated depreciation; all other property, plant and equipment are recorded at cost, net of accumulated depreciation. Improvements, betterments and replacements which significantly extend the life of an asset are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Repair and maintenance costs are expensed as incurred. A gain or loss on the sale of property, plant and equipment is calculated as the difference between the cost of the asset disposed of, net of accumulated depreciation, and the sales proceeds received. A gain or loss on an asset disposal is recognized in the period that the sale occurs. The Company conveyed certain of its real and personal property at its Tennessee facilities to the Industrial Development Board of the City of Portland, Tennessee (the “Board”), for purposes of securing a property tax abatement. The Company is eligible to regain title of the property from the Board at any time for a nominal fee. The conveyed property is still recognized on the Company’s consolidated balance sheet as all the risks and rewards remain with the Company. Impairment of Long-Lived Assets When events, circumstances or operating results indicate that the carrying values of long-lived assets might not be recoverable through future operations, the Company prepares projections of the undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the projections indicate that the recorded amounts are not expected to be recoverable, such amounts are reduced to estimated fair value. Fair value is estimated based upon internal evaluation of each asset that includes quantitative analyses of net revenue and cash flows, review of recent sales of similar assets and market responses based upon discussions in connection with offers received from potential buyers. Management determined there was no impairment for the years ended December 31, 2021, 2020 and 2019. Goodwill Goodwill is assessed using either a qualitative assessment or quantitative approach to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount. The qualitative assessment evaluates factors including macroeconomic conditions, industry-specific and company-specific considerations, legal and regulatory environments, and historical performance. If the Company determines that is more likely than not that the fair value of a reporting unit is less than its carrying value, a quantitative assessment is performed. Otherwise, no further assessment is required. The quantitative approach F-12 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements compares the estimate fair value of the reporting units to its carrying amount, including goodwill. Impairment is indicated if the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, and an impairment charge is recognized for the differential. The Company completes its annual goodwill impairment test as of October 1 each year. For the years ended December 31, 2021, 2020 and 2019, the Company performed a qualitative assessment of its goodwill and determined no impairment. Since the Company’s formation on May 9, 2017, the Company has not had any goodwill impairment. Amortizable and Other Intangible Assets The Company amortizes identifiable intangible assets consisting of customer relationships, developed technology, trade names and noncompete agreements because these assets have finite lives. The Company’s intangible assets with finite lives are amortized on a straight‐line basis over the estimated useful lives. The basis of amortization approximates the pattern in which the assets are utilized over their estimated useful lives. The Company reviews for impairment indicators of finite-lived intangibles, as described in the “Impairment of Long-Lived Assets” significant accounting policy. Deferred Offering Costs Deferred offering costs consist primarily of registration fees, filing fees, listing fees, specific legal and accounting costs and transfer agent fees, which are direct and incremental fees related to the IPO. As of December 31, 2020, the Company had $ 3.9 million in deferred offering costs, which are reported as Other assets - long-term on the consolidated balance sheets. The deferred offering costs as of December 31, 2020 were offset against IPO proceeds along with $ 9.7 million in offering costs incurred during the year ended December 31, 2021. Deferred Financing Costs Costs incurred to issue debt are capitalized and recorded net of the related debt and amortized using the effective interest method as a component of interest expense over the terms of the related debt agreement. Revenue Recognition The Company recognizes revenue primarily from the sale of EBOS systems and components. The Company determines its revenue recognition through the following steps: (i) identification of the contract or contracts with a customer, (ii) identification of the performance obligations within the contract, (iii) determination of the transaction price, (iv) allocation of the transaction price to the performance obligations within the contract, and (v) recognition of revenue as the performance obligation has been satisfied. The Company’s contracts with customers predominately are accounted for as one performance obligation, as the majority of the obligations under the contracts relate to a single project. For each contract entered into, the Company determines the transaction price based on the consideration expected to be received. The transaction price identified is allocated to each distinct performance obligation to deliver a good or service based on the relative standalone selling prices. Management has concluded that the prices negotiated with each individual customer are representative of the standalone selling price of the product. The Company recognizes revenue over time as a result of the continuous transfer of control of its product to the customer using the output method based on units manufactured. This continuous transfer of F-13 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements control to the customer is supported by clauses in the contracts that provide rights to payment of the transaction price associated with work performed to date on products that do not have an alternative use to the Company. The manufacturing process generally takes less than one week to complete production. The accounting for each contract involves a judgmental process of estimating total sales, costs, and profit for each performance obligation. Cost of revenue is recognized based on the unit of production. The amount reported as revenue is determined by adding a proportionate amount of the estimated profit to the amount reported as cost of revenue. Management believes that recognizing revenue using the output method based on units manufactured best depicts the extent of transfer of control to the customer. Payments from the customer are typically received after the receipt of inventory. Certain contracts contain retainage provisions. Retainage represents a contract asset for the portion of the contract price earned by the Company for work performed but held for payment by the customer as a form of security until the Company obtains specified milestones. The Company typically bills retainage amounts as work is performed. Retainage provisions are not considered a significant financing component because they are intended to protect the customer in the event that some or all of the obligations under the contract are not completed. Outstanding retainage billings of $ 4.8 million and $ 2.8 million are included in Accounts receivable, net, as of December 31, 2021 and 2020, respectively. The Company has elected to adopt certain practical expedients and exemptions as allowed under the new revenue recognition guidance such as (i) recording sales commissions as incurred because the amortization period is less than one year, (ii) excluding any collected sales tax amounts from the calculation of revenue, and (iii) accounting for shipping and handling activities that are incurred after the customer has obtained control of the product as fulfillment costs rather than a separate service provided to the customer for which consideration would need to be allocated (see Shipping and Handling). Shipping and Handling The Company accounts for shipping and handling related to contracts with customers as costs to fulfill its promise to transfer the associated products. Accordingly, payment by the Company’s customers for shipping and handling costs for delivery of the Company’s products are recorded as a component of revenue in the accompanying consolidated statements of operations. Shipping and handling expenses are included as a component of cost of revenue as incurred and totaled $ 5.2 million, $ 4.9 million and $ 3.3 million for the years ended December 31, 2021, 2020 and 2019, respectively. Concentrations The Company has cash deposited at certain financial institutions which, at times, may exceed the limits provided by the Federal Deposit Insurance Corporation (“FDIC”). The Company has not experienced any losses on such amount and believes it is not subject to significant credit risk related to cash balances. As of December 31, 2021, $ 8.5 million of the Company’s bank balances were in excess of FDIC insurance limits. The Company had the following revenue concentrations representing 10% or more of revenue for the years ended December 31, 2021, 2020 and 2019 and related accounts receivable concentrations as of December 31, 2021 and 2020: F-14 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements December 31, 2021 2020 2019 Revenue % Accounts Receivable % Revenue % Accounts Receivable % Revenue % Customer A 11.3 % 4.6 % 21.8 % 14.2 % 41.5 % Customer B 18.3 % 15.8 % 18.4 % 16.7 % 17.0 % Customer C 10.0 % 23.7 % 9.4 % 12.5 % 8.2 % Fair Value Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company follows a fair value hierarchy which requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs may be used to measure fair value, as follows: • Level 1 – Quoted prices in active markets for identical assets or liabilities. • Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3 – Unobservable inputs that are supported by little or no market activity that are significant to the fair value of the assets or liabilities. The fair values of the Company’s cash and cash equivalents, accounts receivable, and accounts payable approximate their carrying values due to their short maturities. The carrying value of the Company’s revolving line of credit and long-term debt approximates their fair values, as they are based on current market rates at which the Company could borrow funds with similar terms. The Company follows the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820-10 for nonfinancial assets and liabilities measured at fair value on a nonrecurring basis. As it relates to the Company, this applies to certain nonfinancial assets and liabilities acquired in business combinations. Income Taxes Pre-IPO Income Taxes Shoals Parent is treated as a partnership and is not subject to federal income tax; rather, Shoals Parent’s taxable income is passed through to its members and subject to federal income tax at the member level. Shoals Parent is the sole member of the following subsidiary LLCs, which are treated as disregarded entities for federal income tax purposes: Intermediate, Holdings, and Shoals. The activities of Shoals Parent and its subsidiary LLCs are reported on the federal income tax return of Shoals Parent. F-15 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements Shoals Parent and its subsidiary LLCs are generally not subject to state income tax; however, Shoals Technologies Group, LLC pays Tennessee, California, and Texas franchise taxes and Shoals Technologies, LLC pays Alabama franchise tax. Post-IPO Income Taxes The Company is taxed as a corporation for U.S. federal and state income tax purposes. 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. 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. 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. 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. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, carryback potential if permitted under the tax law, and results of recent operations. The Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return, which are subject to examination by federal and state taxing authorities. The tax benefit from an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the position. The amount of the tax benefit recognized is the largest amount of the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The effective tax rate and the tax basis of assets and liabilities reflect management’s estimates of the ultimate outcome of various tax uncertainties. The Company recognizes penalties and interest related to uncertain tax positions within the provision (benefit) for income taxes line in the accompanying consolidated statements of operations. The Company did not have any material interest and penalties during the year ended December 31, 2021. 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 each jurisdictions’ rules, beginning generally after the income tax returns are filed. Payable Pursuant to the Tax Receivable Agreement As a result of exchanges of LLC Interests into Class A Common Stock and purchases by the Company of LLC Interests from holders of LLC Interests, the Company will become entitled to a proportionate share of the existing tax basis of the assets of Shoals Parent at the time of such exchanges or purchases. In addition, such exchanges or purchases of LLC Interests are expected to result in increases in the tax basis of the assets of Shoals Parent that otherwise would not have been available. These increases in tax basis may reduce the amount of tax that the Company would otherwise be required to pay in the future. These increases in tax basis F-16 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements 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, and may increase depreciation and amortization to the Company. In connection with the recapitalization the Company completed in connection with its IPO, the Company entered into a tax receivable agreement (the “TRA”) with the founder and former equity owner of Shoals Investment CTB (the “TRA Owners”) that provides for the payment by the Company to the TRA Owners (or any permitted assignees) of 85 % of the amount of the benefits, if any, that the Company actually realizes or is deemed to realize as a result of (i) the Company’s allocable share of existing tax basis acquired in connection with the Organizational Transactions (including Blocker’s share of existing tax basis) and increases to such allocable share of existing tax basis, (ii) certain increases in the tax basis of assets of Shoals Parent and its subsidiaries resulting from purchases or exchanges of LLC Interests and (iii) certain other tax benefits, including those attributable to payments made, under the TRA. These contractual payment obligations are the Company's obligations and are not obligations of the LLC, and are accounted for in accordance with ASC 450, Contingencies , since the obligations were deemed to be probable and reasonably estimable. For purposes of the TRA, the benefit deemed realized by the Company will be computed by comparing its actual income tax liability (calculated with certain assumptions) to the amount of such taxes that it 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 timing and/or amount of aggregate payments due under the TRA may vary based on a number of factors, including the amount and timing of the taxable income the Company generates in the future and the tax rate then applicable and amortizable basis. The term of the TRA will continue until all such tax benefits have been utilized or expired, unless the Company exercises its right to terminate the TRA for an amount based on the agreed payments remaining to be made under the agreement. In certain mergers, asset sales or other forms of business combinations or other changes of control, or if the Company materially breaches any of its material obligations under the TRA, the Company (or its successor) would owe to the TRA Owners (or any permitted assignees) 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 all LLC Interests and that the Company would have had sufficient taxable income to fully utilize the deductions arising from the increased tax basis and other tax benefits related to entering into the TRA. Acquisition Accounting The Company accounts for its business acquisitions under the acquisition method of accounting in ASC 805. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives, and market multiples amongst other items. Equity-Based Compensation The Company recognizes equity-based compensation expense based on the equity award’s grant date fair value. The determination of the fair value of equity awards issued to employees of the Company is based upon the underlying unit price and a number of factors, including comparable companies, operating and financial performance, lack of liquidity of the units and general and industry specific economic outlook, amongst F-17 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements other factors. The Company accounts for forfeitures as they occur. The grant date fair value of each unit is amortized on a straight-line basis over the requisite service period, including those units with graded vesting. However, the amount of equity-based compensation at any date is at least equal to the portion of the grant date fair value of the award that is vested. Earnings per Share (“EPS”) Basic EPS is computed by dividing net income available to common shareholders by the weighted average shares outstanding during the period. Diluted EPS takes into account the potential dilution that could occur if securities or other contracts to issue shares, such as stock options and unvested restricted stock units, were exercised and converted into shares. Diluted EPS is computed by dividing net income available to common shareholders by the weighted average shares outstanding during the period, increased by the number of additional shares that would have been outstanding if the potential shares had been issued and were dilutive. Segment Reporting ASC 280 (“Segment Reporting”) establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company manages its business on the basis of one operating and reportable segment and derives revenues from selling its product. Advertising Expenses Advertising expenses are expensed as incurred. Advertising expenses for the years ended December 31, 2021, 2020 and 2019 were not material to our consolidated financial statements. Research and Development Expenses Research and development expenses are expensed as incurred. Research and development expenses for the years ended December 31, 2021, 2020 and 2019 were not material to our consolidated financial statements. New Accounting Standards Recently Adopted In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU No. 2019-12”), which is intended to simplify various aspects of the accounting for income taxes. ASU No. 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The Company adopted ASU No. 2019-12 as of January 1, 2021 and it did not have a material impact on its consolidated financial statements and related disclosures. Not Yet Adopted In February 2016, the FASB issued ASU No. 2016-02 (Topic 842) “Leases” which supersedes the lease recognition requirements in ASC Topic 840, “Leases.” Under ASU No. 2016-02, lessees are required to recognize assets and liabilities on the balance sheet for most leases and provide enhanced disclosures. Leases will continue to be classified as either finance or operating. For companies that are not emerging F-18 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements 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 will not have a material impact on its statements of operations or its statements of cash flows but expects to recognize right-of-use assets and liabilities for lease obligations associated with its operating leases. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses , which was subsequently amended by ASU No. 2018-19 and ASU No. 2019-10, and which requires the measurement of expected credit losses for financial instruments carried at amortized cost held at the reporting date based on historical experience, current conditions and reasonable forecasts. The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. For EGC’s, the standard is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2022. The Company will continue to assess the possible impact of this standard, but currently does not expect the adoption of this standard will have a significant impact on its financial statements and its limited history of bad debt expense relating to trade accounts receivable. 3. Acquisition of ConnectPV On August 26, 2021, the Company acquired 100 % of the common stock of ConnectPV. The acquisition of ConnectPV was accounted for as a business combination using the acquisition method of accounting. The aggregate purchase price was $ 13.8 million in cash (net of $ 0.8 million cash acquired) and 209,437 shares of Class A Common stock valued at $ 6.5 million. The cash portion of the purchase price was funded by borrowing under our Revolving Credit Facility. The purchase price paid has been preliminarily allocated to record the acquired assets and assumed liabilities based upon their estimated fair value pending finalization of the working capital calculation with the sellers. When determining the fair values of the assets acquired and assumed liabilities, management made significant estimates, judgements and assumptions. Management estimated that consideration paid exceeded the fair value of the net assets acquired. Therefore, goodwill of $ 19.3 million was recorded. The goodwill recognized was primarily attributable to the workforce and synergies related to the Company’s EBOS solutions and components business that are expected to arise from the ConnectPV acquisition. The following table is the preliminary balance sheet of ConnectPV as of the acquisition date, August 26, 2021, and includes the estimated fair value of the assets acquired and assumed liabilities. The estimated fair value allocated to certain property, plant and equipment, identifiable intangible assets and goodwill was determined based on a combination of market, cost and income approaches with the assistance of a third-party valuation firm (in thousands): F-19 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements Preliminary Purchase Price Allocation Cash and cash equivalents $ 849 Accounts receivable 5,313 Inventory 4,641 Other current assets 2,319 Total current assets 13,122 Property, plant and equipment 438 Goodwill 19,260 Other intangible assets 1,600 Total Assets 34,420 Accounts payable 9,228 Accrued expenses 3,397 Debt 1,537 Total liabilities 14,162 Net assets acquired $ 20,258 The Company expensed acquisition-related costs of $ 2.3 million which are included in general and administrative expenses in the consolidated statement of operations. The goodwill and acquisition costs are not deductible for tax purposes. Pro Forma Financial Information (Unaudited) The pro forma information below gives effect to the ConnectPV acquisition as if it had been completed on the first day of each period presented. The pro forma results of operations are presented for informational purposes only. As such, they are not necessarily indicative of the Company’s results had the acquisition been completed on the first day of each period presented, nor do they intend to represent the Company’s future results. The pro forma information does not reflect any cost savings from operating efficiencies or synergies that could result from the acquisition and does not reflect additional revenue opportunities following the acquisition. The pro forma information includes adjustments to record the assets and liabilities associated with the acquisition at their respective fair values, which are preliminary at this time, based on available information and to give effect to the financing for the acquisition (in thousands): Year Ended December 31, 2021 2020 Revenue $ 229,709 $ 200,892 Net income $ 3,305 $ 29,861 Since the acquisition date, August 26, 2021, the Company reported $ 10.0 million and $ 0.7 million in revenue and net income, respectively in the accompanying consolidated financial statements related to ConnectPV. 4. Accounts Receivable Accounts receivable consists of the following (in thousands): F-20 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements December 31, 2021 2020 Accounts receivable $ 32,015 $ 27,206 Less: allowance for doubtful accounts ( 516 ) ( 202 ) Accounts receivable, net $ 31,499 $ 27,004 5. Inventory Inventory consists of the following (in thousands): December 31, 2021 2020 Raw materials $ 39,265 $ 17,390 Allowance for slow-moving inventory ( 897 ) ( 2,269 ) Inventory, net $ 38,368 $ 15,121 6. Property, Plant and Equipment Property, plant, and equipment, net consists of the following (in thousands): Estimated Useful Lives (Years) December 31, 2021 2020 Land N/A $ 840 $ 840 Building and land improvements 5 - 40 7,801 6,212 Machinery and equipment 3 - 5 10,693 9,004 Furniture and fixtures 3 - 7 1,775 458 Vehicles 5 65 318 21,174 16,832 Less: accumulated depreciation ( 5,600 ) ( 4,069 ) Property, plant and equipment, net $ 15,574 $ 12,763 Depreciation expense for the years ended December 31, 2021, 2020 and 2019 was $ 1.7 million, $ 1.4 million and $ 1.2 million, respectively. During the years ended December 31, 2021, 2020 and 2019, $ 1.5 million, $ 1.1 million and $ 1.0 million, respectively, of depreciation expense was allocated to cost of revenue. During the years ended December 31, 2021, 2020 and 2019, $ 0.2 million, $ 0.3 million and $ 0.2 million, respectively, of depreciation expense was allocated to operating expenses. 7. Goodwill and Other Intangible Assets Goodwill F-21 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements Goodwill relates to the acquisition of Shoals and ConnectPV. As of December 31, 2021 and 2020, goodwill totaled $ 69.4 million and $ 50.2 million, respectively. Changes in the carrying amount of goodwill during the years ended December 31, 2021 and 2020 are shown below (in thousands): Goodwill Balance at December 31, 2019 and 2020 $ 50,176 Acquisition of ConnectPV 19,260 Balance at December 31, 2021 $ 69,436 Other Intangible Assets Other intangible assets consisted of the following (in thousands): Estimated Useful Lives (Years) December 31, 2021 2020 Amortizable: Costs: Customer relationships 2 - 13 $ 53,100 $ 52,600 Developed technology 13 34,600 34,600 Trade names 2 - 13 11,900 11,400 Backlog 1 600 — Noncompete agreements 5 2,000 2,000 Total amortizable intangibles 102,200 100,600 Accumulated amortization: Customer relationships 18,629 14,499 Developed technology 12,199 9,537 Trade names 4,103 3,142 Backlog 200 — Noncompete agreements 1,833 1,434 Total accumulated amortization 36,964 28,612 Total amortizable intangibles, net $ 65,236 $ 71,988 Amortization expense related to intangible assets amounted to $ 8.4 million, $ 8.0 million and $ 8.0 million the years ended December 31, 2021, 2020 and 2019, respectively. Estimated future annual amortization expense for the above amortizable intangible assets are as follows (in thousands): F-22 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements For the Year Ended December 31, Amortization Expense 2022 $ 8,651 2023 7,918 2024 7,585 2025 7,585 2026 7,585 Thereafter 25,912 $ 65,236 8. Long-Term Debt Long-term debt consists of the following (in thousands): December 31, 2021 2020 Term Loan Facility $ 197,250 $ 350,000 Revolving Credit Facility 55,140 20,000 Less: deferred financing costs ( 5,337 ) ( 11,168 ) Total debt, net of deferred financing costs 247,053 358,832 Less: current portion ( 2,000 ) ( 3,500 ) Long-term debt, net current portion $ 245,053 $ 355,332 The aggregate amounts of principal maturities on the Company’s long-term debt is as follows (in thousands): For the Year Ended December 31, 2022 $ 2,000 2023 2,000 2024 2,000 2025 2,000 2026 244,390 $ 252,390 Senior Secured Credit Agreement On November 25, 2020 Shoals Holdings, entered into a senior secured credit agreement (the “Senior Secured Credit Agreement”), consisting of (i) a $ 350.0 million senior secured six-year term loan facility (the “Term Loan Facility”), (ii) a $ 30.0 million senior secured delayed draw term loan facility, which matures concurrently with the six-year Term Loan Facility (the “Delayed Draw Term Loan Facility”) and (iii) an uncommitted super senior first out revolving credit facility (the “Revolving Credit Facility”). The proceeds of the Term Loan Facility and a $ 10.0 million draw under the Delayed Draw Term Loan Facility were used to (i) make certain distributions from Shoals Holdings to Shoals Intermediate Holdings and from there to certain of the Company’s direct or indirect equity holders, (ii) pay transaction expenses, (iii) repay and terminate all outstanding commitments under the prior senior debt and (iv) finance working capital and general corporate purposes. F-23 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements 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. As of December 31, 2021, the outstanding balance of the Term Loan Facility was $ 197.3 million. The balance of the Term Loan Facility is presented in the accompanying consolidated balance sheets net of deferred financing fees of $ 5.3 million and $ 11.2 million at December 31, 2021 and 2020, respectively. The deferred financing fees are being amortized using the effective interest method. The effective interest rate at December 31, 2021 and 2020 was 6.42 % and 6.55 %, respectively. T he Revolving Credit Facility was $ 55.1 million and the Company had $ 44.9 million of availability under the Revolving Credit Facility. From December 31, 2021 through the date of this filing, the Company borrowed an additional $ 27.5 million under the Revolving Credit Facility. On January 29, 2021, the Company used proceeds from the IPO to repay $ 150.0 million of outstanding borrowings under the Term Loan Facility. The repayment of a portion of the borrowings under the Term Loan Facility resulted in a $ 16.0 million loss on debt repayment as the result of the $ 11.3 million prepayment premium and $ 4.7 million write-off of a portion of the deferred financing costs. In August 2021, Holdings entered into an amendment to the Senior Secured Credit Agreement to permit the temporary joinder of a parent co-borrower in order to facilitate the acquisition of Connect PV. Interest Rate The interest rates applicable to the loans under the Term Loan Facility ( 4.25 % at December 31, 2021) are based on a rate of interest determined by reference to either: (i) a base rate plus an applicable margin equal to (a) on and after December 30, 2020 until the later of either (1) February 28, 2021 or (2) December 31, 2022 so long as Holdings has prepaid the loans under the Term Loan Facility on or prior to February 28, 2021 in an amount that results in the aggregate outstanding principal amount of loans under the Term Loan Facility being equal to or less than the sum of (A) $ 200.0 million minus (B) any mandatory prepayments of the principal amount of loans under the Term Loan Facility or amortization payments made prior to February 28, 2021, 2.25 % and(b) thereafter, either (1) if Holdings has consummated an IPO the net cash proceeds of which have been used to repay the principal amount of the loans under the Term Loan Facility in an amount no less than $ 70.0 million, 4.75 % or (2) otherwise, 5.00 %; or (ii) a eurocurrency rate plus an applicable margin equal to (a) on and after December 30, 2020 until the later of either (1) February 28, 2021 or (2) December 31, 2022 so long as Holdings has prepaid the loans under the Term Loan Facility on or prior to February 28, 2021 in an amount that results in the aggregate outstanding principal amount of loans under the Term Loan Facility being equal to or less than the sum of (A) $ 200.0 million minus (B) any mandatory prepayments of the principal amount of loans under the Term Loan Facility or amortization payments made prior to February 28, 2021, 3.25 % and (b) thereafter, either (1) if Holdings has consummated an IPO the net cash proceeds of which have been used to repay the principal amount of the loans under the Term Loan Facility in an amount no less than $ 70.0 million, 5.75 % or (2) otherwise, 6.00 %. The interest rates applicable to the loans under the Revolving Credit Facility ( 3.75 % at December 31, 2021) are based on a rate of interest determined by reference to either (i) a base rate plus an applicable margin equal to 2.25 % or (ii) a eurocurrency rate plus an applicable margin equal to 3.25 %. F-24 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements Guarantees and Security The obligations under the Senior Secured Credit Agreement are guaranteed by Shoals Intermediate Holdings and its wholly owned domestic subsidiaries other than certain immaterial subsidiaries and other excluded subsidiaries. The obligations under the Senior Secured Credit Agreement are secured by a first priority security interest in substantially all of Holdings’ and the other guarantors’ existing and future property and assets, including accounts receivable, inventory, equipment, general intangibles, intellectual property, investment property, other personal property, material owned real property, cash and proceeds of the foregoing. Prepayments and Amortization Loans under the Revolving Credit Facility may be voluntarily prepaid, at Shoals Holdings’ option, in whole, or in part, in each case without premium or penalty. Loans under the Term Loan Facility may be voluntarily prepaid, at Holdings’ option, in whole, or in part, in each case without premium or penalty other than (i) a prepayment premium in an amount equal to (a) if such prepayment occurs prior to the first anniversary of the Senior Secured Credit Agreement Closing Date, a make-whole premium, (b) if such prepayment occurs on or after the first anniversary but prior to the second anniversary of the Senior Secured Credit Agreement Closing Date, 2.00 % and (c) if such prepayment occurs on or after the second anniversary but prior to the third anniversary of the Senior Secured Credit Agreement Closing Date, 1.00 % and (ii) with respect to prepayments in connection with an IPO, a change of control or a transformative disposition subject to certain exceptions and conditions, a prepayment premium equal to (a) if such prepayment occurs prior to the first anniversary of the Senior Secured Credit Agreement Closing Date, 2.00 % and (b) if such prepayment occurs after the first anniversary of the Senior Secured Credit Agreement Closing Date but prior to the second anniversary of the Senior Secured Credit Agreement Closing Date, 1.00 %. Notwithstanding anything to the contrary in the preceding paragraph, in the event that, on or after December 30, 2020 but prior to February 28, 2021, Shoals Holdings made any prepayment (including with respect to any acceleration) of any loans under the Term Loan Facility, Holdings would pay a premium on such prepayments made up to $ 150.0 million of the principal amount of such loans prepaid in an amount equal to 7.50 % multiplied by the principal amount of such loans prepaid, which, if applicable, would be in lieu of any applicable prepayment premium set forth in the preceding paragraph or in the paragraph below; provided that no amortization payments or mandatory prepayments required under the Senior Secured Credit Agreement shall be subject to the prepayment premium set forth in this paragraph. On January 29, 2021, the Company used proceeds from the IPO to repay $ 150.0 million of outstanding borrowings under the Term Loan Facility resulting in a prepayment premium of $ 11.3 million. Additionally, after February 28, 2021 but prior to the second anniversary of the Senior Secured Credit Agreement Closing Date, up to $ 175.0 million of the outstanding principal amount of the Term Loan Facility may be voluntarily prepaid upon the consummation of an IPO with proceeds from such IPO, subject to a prepayment premium in an amount equal to 1.00 % in lieu of any applicable call protection premiums set forth in the second preceding paragraph. The Senior Secured Credit Agreement requires mandatory prepayments, but not permanent reductions of commitments thereunder, for excess cash flow, asset sales, subject to a right of reinvestment, and refinancing facilities. F-25 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements The Term Loan Facility amortizes in equal quarterly installments in aggregate annual amounts equal to 1.00 % per annum of the original principal amount of the loans funded thereunder. There is no scheduled amortization under the Revolving Credit Facility. Restrictive Covenants and Other Matters The Senior Secured Credit Agreement contains affirmative and negative covenants that are customary for financings of this type, 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. The Revolving Credit Facility also includes a springing financial maintenance covenant that is tested on the last day of each fiscal quarter if the outstanding loans under the Revolving Credit Facility exceed 35 % of the aggregate amount of commitments thereunder, subject to customary exclusions and conditions. If the financial maintenance covenant is triggered, Shoals Intermediate Holdings’ first lien net leverage ratio will be tested for compliance not to exceed 8.25 to 1.00. As of December 31, 2021, the Company was in compliance with all the required covenants. Senior Debt Agreement Intermediate and subsidiaries were party to a credit agreement (the “Senior Debt Agreement” and obligations thereunder, the “Senior Debt”) under which Holdings and its subsidiaries were borrowers and Intermediate was a guarantor. The Senior Debt was collateralized by all of the assets of the guarantor and borrowers. The amended agreement provided a term loan of $ 35 million and a revolving line of credit of $ 25 million. On October 8, 2020, the Company paid the outstanding amount due on the Senior Debt and settled all obligations with respect to the Senior Debt Agreement. The Senior Debt provided for an interest rate to equal the base rate plus margin. The base rate charged was the highest rate of three defined methods as follows: 1) Federal Funds Rate plus 0.5 %, 2) Fifth Third Bank N.A. Rate or 3) LIBOR Rate plus 1 %. The base rate ranged from 1 % to 2.5 % depending on the EBITDA Rate calculation as defined in the Senior Debt Agreement (the “EBITDA Rate Calculation”) for the Federal Funds Rate. The base rate for the LIBOR Rate ranged from 2 % to 3.5 % depending on the EBITDA Rate Calculation. 9. EPS Basic EPS of Class A Common Stock is computed by dividing net income attributable to the Company by the weighted average number of shares of Class A Common Stock outstanding during the period. Diluted EPS of Class A Common Stock is computed similarly to basic EPS except the weighted average shares outstanding are increased to include additional shares from the exchange 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. F-26 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements 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, EPS information is not applicable for reporting periods prior to this date. Consequently, only the net income allocable to Shoals Technologies Group, Inc. from the period subsequent to January 26, 2021 is included in the net income attributable to the stockholders of Class A Common Stock for the period ended December 31, 2021. Basic and diluted EPS of Class A Common Stock from January 27, 2021 to December 31, 2021 have been computed as follows (in thousands, except per share amounts): Period from January 27, 2021 to December 31, 2021 Numerator: Net loss attributable to Shoals Technologies Group, Inc. - basic $ ( 327 ) Reallocation of net income attributable to non-controlling interests from the assumed conversion of Class B common stock — Net loss attributable to Shoals Technologies Group, Inc. - diluted $ ( 327 ) Denominator: Weighted average shares of Class A common stock outstanding - basic 99,269 Effect of dilutive securities: Restricted Stock Units — Class B Common Stock — Weighted average shares of Class A common stock outstanding - diluted 99,269 Loss per share of Class A common stock - basic $ 0.00 Loss per share of Class A common stock - diluted $ 0.00 For the year ended December 31, 2021 the reallocation of net income attributable to non-controlling interest from the assumed conversion of Class B common stock has been excluded along with the dilutive effect of the restricted stock units and Class B common stock to the weighted average shares of Class A common stock outstanding – dilutive as it was antidilutive. 10. Equity-Based Compensation 2021 Long-term Incentive Plan On January 26, 2021, the Shoals Technologies Group, Inc. 2021 Long-Term incentive Plan (the “2021 Incentive Plan”) became effective. The 2021 Incentive Plan authorized 8,768,124 new shares, subject to adjustment pursuant to the 2021 Incentive Plan. Since January 26, 2021, the Company has granted 1,701,306 restricted stock units (“RSUs") to certain employees, officers and directors of the Company. The RSUs have grant date fair values ranging from $ 21.50 to $ 34.60 per unit and generally vest ratably over either 4 years or 3 years, except for some of the director grants which immediately vested or vest over 1 year. There were a limited number of awards with immediate vesting. F-27 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements The following table summarizes the RSUs activity for the year ended December 31, 2021: RSUs Weighted Average Price Outstanding at beginning of period — $ — Granted 1,701,306 $ 27.61 Forfeited ( 23,738 ) $ 29.46 Vested ( 44,724 ) $ 28.60 Outstanding at end of period 1,632,844 $ 27.55 For the year ended December 31, 2021, the Company recognized $ 11.3 million in equity-based compensation. As of December 31, 2021, the Company had $ 36.8 million of unrecognized compensation costs which is expected to be recognized over a period of 3.0 years. Pre-IPO Class C Units The Company accounted for equity grants to employees (Class C units) as equity-based compensation. The Class C units contained vesting provisions as defined in the agreement. Vested units did not forfeit upon termination and represented a residual interest in the Company. Equity-based compensation cost was measured at the grant date fair value and was recognized on a straight-line basis over the requisite service period, including those units with graded vesting with a corresponding credit to members’ equity (deficit). However, the amount of equity-based compensation at any date was at least equal to the portion of the grant date value of the award that was vested. In May 2020, the Company issued 11,150,000 Class C units to certain employees of the Company of which approximately 77 % were vested on the grant date. The fair value of such units was determined by management with the assistance of a third party valuation by considering a number of factors, including comparison companies, operating and financial performance, the lack of liquidity of the units, and general and industry specific economic outlook, amongst other factors. The grant date fair value of the Class C units granted during 2020 was $ 0.74 per unit. In November 2020, the Company modified and accelerated the remaining vesting on the unvested Class C units. On January 26, 2021 as part of the Corporate Conversion the 11,150,000 Class C Units were converted into 9,986,025 LLC Interest in Shoals Parent. For the year ended December 31, 2020 the Company recognized $ 8.3 million in equity-based compensation. At December 31, 2020, the Company had no remaining unrecognized compensation costs related to Class C units. There were no forfeitures during the year ended December 31, 2020. 11. Stockholders' Deficit Amendment and Restatement of Certificate of Incorporation As discussed in Note 1, on January 26, 2021, the Company's certificate of incorporation was amended and restated to, among other things, provide for the (i) authorization of 1,000,000,000 shares of Class A common stock with a par value of $ 0.00001 per share; (ii) authorization of 195,000,000 shares of Class B common stock with a par value of $ 0.00001 per share; (iii) authorization of 5,000,000 shares of preferred stock that may be issued from time to time by the Company's Board of Directors in one or more series; and (iv) F-28 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements 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 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. F-29 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements 12. Non-Controlling Interests On January 26, 2021, the Company used net proceeds from the IPO to purchase 6,315,790 LLC Interests from Shoals Parent and 5,234,210 LLC Interests from the founder and Class B unit holder in Shoals Parent. On July 16, 2021, the Company used new proceeds from the follow-on offering to purchase 10,402,056 LLC Interests from our founder and other LLC Interest holders of Shoals Parent. On December 7, 2021, the Company exchanged 7,870,042 of Class A common stock for 7,870,042 LLC Interests and Class B common stock. As of December 31, 2021, the Company owned 67.16 % of Shoals Parent. The following table summarizes the effects of the changes in ownership in Shoals Parent on equity (in thousands): Period from January 27, 2021 to December 31, 2021 Net income attributable to non-controlling interest $ 1,596 Transfers to non-controlling interests Decrease as a result of the Organizational Transactions ( 88,644 ) Increase as a result of newly issued LLC Interests in IPO 70,976 Increase as a result of activity under stock compensation plan 3,618 Decrease from distributions to non-controlling interest ( 4,837 ) Increase from reallocation of non-controlling interest 7,240 Change from net income attributable to/from non-controlling interest and transfers to non-controlling interest $ ( 10,051 ) Issuance of Additional LLC Interests Under 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 year ended December 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, 10,402,086 LLC Interests in connection with the issuance of Class A common stock in the follow-on offering, 209,437 LLC Interests in connection with the acquisition of ConnectPV and 40,665 LLC Interests for the vesting of awards granted under the Shoals Technologies Group, Inc. 2021 Long-Term Incentive Plan. Distributions for Taxes As a limited liability company (treated as a partnership for income tax purposes), Shoals Parent does not incur significant federal, state or local income taxes, as these taxes are primarily the obligations of its members. As authorized by the LLC Agreement, Shoals Parent is required to distribute cash, to the extent that F-30 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements Shoals Parent has cash available, on a pro rata basis, to its members to the extent necessary to cover the members’ tax liabilities, if any, with respect to each member’s share of Shoals Parent taxable earnings. Shoals Parent makes such tax distributions to its members quarterly, based on the single highest marginal tax rate applicable to its members applied to projected year-to-date taxable income, with a final accounting once actual taxable income or loss has been determined. During the year ended December 31, 2021, tax distributions to non-controlling LLC Interests holders was $ 4.8 million. Other Distributions Pursuant to the LLC Agreement, the Company has the right to determine when distributions will be made to LLC members and the amount of any such distributions. If the Company authorizes a distribution, such distribution will be made to the members of the LLC (including the Company) pro rata in accordance with the percentages of their respective LLC units. 13. 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 December 31, 2021, the maximum potential payment obligation with regard to surety bonds was $ 21.8 million. Employee Benefit Plan The Company has a 401(k) retirement plan for substantially all of its employees based on certain eligibility requirements. Effective January 1, 2021 the Company began making matching contributions to the plan and may also provide discretionary contributions to the plan at the discretion of management. No such discretionary contributions have been made since inception of the plan. For the year ended December 31, 2021, the Company made matching contributions totaling $ 0.2 million. Leases Future minimum lease payments under non-cancellable operating leases as of December 31, 2021 are as follows (in thousands): For the Year Ended December 31, Total 2022 $ 489 2023 499 2024 200 2025 58 2026 6 $ 1,252 F-31 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements Rent expense for the year ended December 31, 2021 totaled $ 0.4 million. Prior to 2021 rent expense was no t material to the consolidated financial statements. 14. Income Taxes Upon the completion of the IPO and Organizational Transactions, the Company is taxed as a subchapter C corporation for U.S. federal and state income tax purposes. 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. The components of income before income taxes are as follows (in thousands): Year Ended December 31, 2021 Domestic $ 4,030 Foreign — Income before income taxes $ 4,030 The components of income tax expense are as follows (in thousands): Year Ended December 31, 2021 Current income taxes: Federal $ — State 631 Foreign — Total current income taxes 631 Deferred income taxes: Federal 397 State ( 1,873 ) Foreign — Total deferred income taxes ( 1,476 ) Other tax expense 931 Income tax expense $ 86 F-32 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements The differences between income taxes expected at the U.S. federal statutory income tax rate and the reported income tax expense are summarized as follows (in thousands): Year Ended December 31, 2021 U.S. federal income taxes at statutory rate $ 846 State and local income tax net of federal benefit ( 1,380 ) Permanent tax adjustments 342 Pre-IPO income ( 562 ) Non-controlling interest ( 342 ) Remeasurement of TRA 349 Remeasurement of deferred taxes ( 1,939 ) Research and development credit ( 77 ) Uncertain tax positions 789 Change in valuation allowance 1,983 Other 77 Income tax expense $ 86 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 primary factors impacting the effective tax rate are the allocation of income taxes to the noncontrolling interest, remeasurement of deferreds due to tax rate changes, state taxes and changes in our valuation allowance. The components of the deferred tax assets and liabilities are as follows (in thousands): December 31, 2021 Investment in partnership $ 161,078 Tax receivable agreement 13,014 Net operating loss 3,772 Other 1,077 Total deferred income taxes 178,941 Valuation allowance ( 1,983 ) Net deferred tax asset $ 176,958 As of December 31, 2021, the Company has $ 8.1 million and $ 32.2 million federal and state net operating loss carryforwards, respectively. If not utilized, $ 8.1 million of the federal net operating loss can be carried forward indefinitely. If not utilized, $ 0.8 million of the state net operating loss can be carried forward indefinitely and the remainder will expire between 2036-2041. Quarterly, the Company considers whether it is more-likely-than-not that the deferred tax assets will be realized based available positive and negative evidence. As of December 31, 2021, a valuation allowance of $ 2.0 million has been recorded to recognize only the portion of deferred tax asset that is more likely than not to be realized. F-33 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements Uncertain Tax Positions The Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return, which are subject to examination by federal and state taxing authorities. The tax benefit from an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the position. The amount of the tax benefit recognized is the largest amount of the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The effective tax rate and the tax basis of assets and liabilities reflect management’s estimates of the ultimate outcome of various tax uncertainties. As of December 31, 2021, the Company has recorded $ 0.9 million of gross unrecognized tax benefits inclusive of interest and penalties, all of which, if recognized, would favorably impact the effective tax rate. 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. The following table presents a reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties as follows (in thousands): Year Ended December 31, 2021 Beginning Balance $ — Gross increases - tax positions in prior period 604 Gross decreases - tax positions in prior period — Gross increases - tax positions in current period — Settlement — Lapse of statute of limitations — Ending balance $ 604 We do not expect a significant change in our uncertain tax benefits in the next twelve months. The Company files U.S. federal and certain state income tax returns. The income tax returns of the Company are generally subject to examination by U.S. federal and state taxing authorities for years beginning after 2017. 15. Payable Pursuant to the Tax Receivable Agreement The Company has a TRA with the TRA Owners that provides for the payment by the Company to the TRA Owners (or their permitted assignees) of 85 % of the amount of the benefits, if any, that the Company actually realizes or is deemed to realize as a result of (i) the Company’s allocable share of existing tax basis acquired in connection with the Organizational Transactions (including Blocker’s share of existing tax basis) and increases to such allocable share of existing tax basis, (ii) certain increases in the tax basis of assets of Shoals Parent and its subsidiaries resulting from purchases or exchanges of LLC Interests, and (iii) certain other tax benefits related to the Company entering into the TRA, including those attributable to payments made under the TRA. These contractual payment obligations are obligations of the Company and not of Shoals Parent. The Company's payable pursuant to the TRA was determined on an undiscounted basis in accordance with ASC 450, Contingencies, since the contractual payment obligations were deemed to be probable and reasonably estimable. F-34 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements For purposes of the TRA, the benefit deemed realized by the Company is 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 following table reflects the changes to the Company's payable pursuant to the tax receivable agreement (in thousands): Year Ended December 31, 2021 Beginning balance $ — Additions to TRA: IPO exchange of LLC Interests for Class A Common Stock from founder 27,759 Merger of Shoals investment CTB 14,418 Follow-on offering exchange of LLC Interests for Class A common stock 62,025 December exchange of LLC Interest for Class A common stock 50,509 Adjustment for change in estimated tax rate 1,663 Payments under TRA — 156,374 Less current portion under TRA — Ending balance $ 156,374 The TRA further provides that, upon certain mergers, asset sales or other forms of business combinations or other changes of control, or if the Company materially breaches any of its material obligations under the TRA, 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 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. When estimating the expected tax rate to use in order to determine the tax benefit expected to be recognized from the Company’s increased tax basis as a result of exchanges of LLC Interests by the TRA Owners, the Company continuously monitors changes in its overall tax posture, including changes resulting from new legislation and changes as a result of new jurisdictions in which the Company is subject to tax. As of December 31, 2021, the Company recorded deferred tax assets of $ 184.0 million associated with basis differences in assets upon acquiring an interest in Shoals Parent and pursuant to making an election under Section 754 of the Internal Revenue Code of 1986 (the "Internal Revenue Code"), as amended. These basis differences are included in the overall partnership basis differences disclosed in Note 14. The aggregate payable pursuant to the tax receivable agreement represents 85 % of the tax benefits that the Company expects to receive in connection with the Section 754 election. In accordance with the TRA, the next annual payment is anticipated on February 20, 2023, approximately 125 days after filing the federal tax return. 16. Revenue by Product F-35 Table of Contents Shoals Technologies Group, Inc. Notes to Consolidated Financial Statements 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): Year Ended December 31, 2021 2020 2019 System solutions $ 155,818 $ 116,720 $ 74,207 Solar components 57,394 58,798 70,289 Total revenue $ 213,212 $ 175,518 $ 144,496 17 . Related Party Transactions Affiliated Customer under Common Control On November 11, 2020, a customer of the Company became an affiliate based upon common control. During the period November 11, 2020 to December 31, 2020, the Company fulfilled the terms of the existing contracts with the customer which resulted in $ 0.3 million in revenue. At December 31, 2020, the Company had outstanding accounts receivable totaling $ 3.0 million, which was collected in 2021. For the year ended December 31, 2020, the Company recognized revenue with this customer of $ 16.6 million. F-36