Table of Contents

As filed with the Securities and Exchange Commission on January 25, 2021.

No. 333-251830

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 3

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Shoals Technologies Group, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

  

3674

   85-3774438

(State or other jurisdiction of

incorporation or organization)

  

(Primary Standard Industrial

Classification Code Number)

  

(I.R.S. Employer

Identification No.)

1400 Shoals Way

Portland, Tennessee 37148

(615) 451-1400

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Jason Whitaker

Chief Executive Officer

Shoals Technologies Group, Inc.

1400 Shoals Way

Portland, Tennessee 37148

(615) 451-1400

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:

 

Joshua N. Korff, P.C.

Michael Kim, P.C.

Kirkland & Ellis LLP

601 Lexington Avenue

New York, New York 10022

(212) 446-4800

 

Michael Kaplan

Roshni Banker Cariello

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York 10017

(212) 450-4000

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities
to be Registered
 

Amount to be

Registered(1)

 

Proposed Maximum

Offering Price Per

Unit(2)

  Proposed Maximum
Aggregate
Offering Price(2)(3)
  Amount of
Registration Fee(4)

Class A Common Stock, par value $0.00001 per share

  80,500,000   $23.00  

$1,851,500,000

 

$201,999

 

 

(1)

Includes 10,500,000 shares of Class A common stock that may be purchased by the underwriters upon the exercise of their option to purchase additional shares. See “Underwriting.”

(2)

Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.

(3)

Includes the offering price of the 10,500,000 shares of Class A common stock that may be purchased by the underwriters upon the exercise of their option to purchase additional shares. See “Underwriting.”

(4)

$131,739 previously paid.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated January 25, 2021

70,000,000 Shares

 

 

LOGO

Shoals Technologies Group, Inc.

Class A Common Stock

This is an initial public offering of shares of Class A common stock of Shoals Technologies Group, Inc. We are offering 9,000,000 shares of Class A common stock. The selling stockholder is offering 61,000,000 shares of Class A common stock. We will not receive any of the proceeds from the sale of shares by the selling stockholder.

Prior to this offering, there has been no public market for our Class A common stock. It is currently estimated that the initial public offering price per share of Class A common stock will be between $22.00 and $23.00. We have applied to list our Class A common stock on The Nasdaq Global Market (“Nasdaq”) under the symbol “SHLS.”

We will have two classes of common stock outstanding after this offering: Class A common stock and Class B common stock. Each share of our Class A common stock entitles its holder to one vote per share and each share of our Class B common stock entitles its holder to one vote per share on all matters presented to our stockholders generally. Immediately following the consummation of this offering, all of the outstanding shares of our Class B common stock will be held by the Continuing Equity Owners (as defined below), which will represent in the aggregate approximately 45.50% of the voting power of our outstanding common stock after this offering.

We will be a holding company, and upon consummation of this offering and the application of proceeds therefrom, our principal asset will consist of LLC Interests (as defined below), which we will acquire in part from certain of the Continuing Equity Owners (as defined below) with the net proceeds from this offering, collectively representing an aggregate 54.50% economic interest in Shoals Parent LLC. The remaining 45.50% economic interest in Shoals Parent LLC will be owned by the Continuing Equity Owners (excluding Oaktree (as defined below)) through their ownership of LLC Interests. Upon completion of this offering, Oaktree will beneficially own 12.57% of the combined voting power of all of our outstanding common stock, and the Continuing Equity Owners will beneficially own 45.50% of the combined voting power of all of our outstanding common stock. Accordingly, we will be a “controlled company” as defined under the corporate governance rules of Nasdaq. See “Management—Controlled Company Exemption” and “Principal and Selling Stockholders.”

Shoals Technologies Group, Inc. will be the sole managing member of Shoals Parent LLC. We will operate and control all of the business and affairs of Shoals Parent LLC and its direct and indirect subsidiaries and, through Shoals Parent LLC and its direct and indirect subsidiaries, conduct our business.

We are an “emerging growth company” as defined under the U.S. federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for this and future filings.

See “Risk Factors” beginning on page 26 to read about factors you should consider before investing in shares of our Class A common stock.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

     Per
Share
     Total  

Initial public offering price

   $                    $                

Underwriting discount(1)

   $        $    

Proceeds to Shoals Technologies Group, Inc., before expenses

   $        $    

Proceeds to the selling stockholder, before expenses

   $        $    

 

(1)

We have agreed to reimburse the underwriters for certain expenses in connection with this offering. See “Underwriting” for a description of the compensation payable to the underwriters.

The selling stockholder has granted the underwriters an option to purchase up to an additional 10,500,000 shares of Class A common stock from the selling stockholder at the initial price to the public less the underwriter discount within 30 days of the date of this prospectus.

Certain funds and accounts managed by subsidiaries of BlackRock, Inc. (collectively, “BlackRock”), and ClearBridge Investments, LLC (“ClearBridge”) have each separately indicated an interest in purchasing up to an aggregate of $150 million and $125 million, respectively, of our Class A common stock in this offering at the initial public offering price and on the same terms as the other shares being offered. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to BlackRock and/or ClearBridge, and BlackRock and/or ClearBridge could determine to purchase more, less or no shares in this offering. The underwriters will receive the same underwriting discounts and commissions on any of our shares of Class A common stock purchased by BlackRock and ClearBridge as they will from any other shares of Class A common stock sold to the public in this offering.

The underwriters expect to deliver the shares of Class A common stock against payment in New York, New York, on or about            , 2021 through the book-entry facilities of the Depository Trust Company.

Joint Bookrunners

Goldman Sachs & Co. LLC    J.P. Morgan    Guggenheim Securities    UBS Investment Bank
Morgan Stanley   Barclays   Credit Suisse

Co-Managers

 

Cowen   Oppenheimer & Co.
 

 

Prospectus dated            , 2021.

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

About This Prospectus

     ii  

Prospectus Summary

     1  

The Offering

     17  

Summary Consolidated Financial and Other Data

     22  

Risk Factors

     26  

Special Note Regarding Forward-Looking Statements

     57  

Use of Proceeds

     59  

Organizational Structure

     60  

Dividend Policy

     64  

Capitalization

     65  

Dilution

     67  

Selected Consolidated Financial and Other Data

     69  

Unaudited Pro Forma Consolidated Financial Information

     71  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     82  

Industry Overview

     96  

Business

     100  

Management

     111  

Executive Compensation

     117  

Principal and Selling Stockholders

     123  

Certain Relationships and Related Party Transactions

     125  

Description of Certain Indebtedness

     133  

Description of Capital Stock

     136  

Shares Eligible for Future Sale

     142  

Material U.S. Federal Income Tax Considerations for Non-U.S. Holders of Class A Common Stock

     144  

Underwriting

     149  

Legal Matters

     160  

Experts

     160  

Where You Can Find Additional Information

     160  

Index to Financial Statements

     F-1  


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ABOUT THIS PROSPECTUS

We, the selling stockholder and the underwriters have not authorized anyone to provide you with information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by or on behalf of us or to which we have referred you. We, the selling stockholder and the underwriters take no responsibility for, and provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby and only under circumstances and in jurisdictions where it is lawful to do so. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.

For investors outside the United States: we, the selling stockholder and the underwriters have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the shares of Class A common stock and the distribution of this prospectus outside the United States.

Organizational Structure

In connection with the closing of this offering, we will undertake certain organizational transactions to reorganize our corporate structure. Unless otherwise stated or the context otherwise requires, all information in this prospectus reflects the consummation of the organizational transactions described in the section titled “Organizational Structure” and this offering, and the application of the proceeds therefrom, which we refer to, collectively, as the “Transactions.” See “Organizational Structure” for a diagram depicting our organizational structure after giving effect to the Transactions, including this offering.

Certain Definitions

As used in this prospectus, unless the context otherwise requires:

 

   

awarded orders” means orders where we are in the process of documenting a contract but for which a contract has not yet been signed.

 

   

backlog” means signed purchase orders or contractual minimum purchase commitments with take-or-pay provisions.

 

   

Company,” “we,” “us,” “our,” “Shoals” and similar references refer, (1) following the consummation of the Transactions, including this offering, to Shoals Technologies Group, Inc., and, unless otherwise stated, all of its direct and indirect subsidiaries, including Shoals Parent LLC, and (2) prior to the completion of the Transactions, including this offering, to Shoals Parent LLC and, unless otherwise stated, all of its direct and indirect subsidiaries.

 

   

Continuing Equity Owners” refers collectively to direct or indirect holders of LLC Interests and/or our Class B common stock immediately following consummation of the Transactions, including our Founder and certain executive officers, employees and their respective permitted transferees who may, following the consummation of this offering, exchange at each of their respective options, in whole or in part from time to time, their LLC Interests (along with an equal number of shares of Class B common stock (and such shares shall be immediately cancelled)) for cash or newly issued shares of our Class A common stock as described in “Certain Relationships and Related Party Transactions—Shoals Parent LLC Agreement.” “Continuing Equity Owners” does not include Oaktree.

 

   

Founder” refers to Dean Solon, our founder.

 

   

installations” means the total capacity of solar energy projects or electrical balance of system components in MWs or GWs that were installed in the period.

 

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installation costs” generally refers to the cost of field labor and other “soft” costs involved in the installation of a solar energy project.

 

   

LLC Interests refers to the common units of Shoals Parent LLC, including those that we purchase with a portion of the net proceeds from this offering.

 

   

megawatts (“MWs) or gigawatts (GWs), when used to describe a solar energy project, means the direct current capacity of a solar energy project under standard temperature and conditions. When used to describe electrical balance of system components, MWs or GWs means the electrical balance of system components in the quantity or size necessary for a solar energy project with that capacity.

 

   

Oaktree refers to Oaktree Power Opportunities Fund IV (Delaware) Holdings, L.P., our majority owner and a Delaware limited partnership, and its affiliates.

 

   

Shoals Parent LLC Agreement” refers to Shoals Parent LLC’s third amended and restated limited liability company agreement, which will become effective substantially concurrently with or prior to the consummation of this offering.

 

   

solar energy projects or projects means solar photovoltaic systems that produce electricity.

 

   

strings means a series of solar panels that are wired together.

 

   

Transactions refers to the organizational transactions as described in “Organizational Structure— Transactions” and this offering, and the application of the net proceeds therefrom.

Shoals Technologies Group, Inc. will be a holding company and the sole managing member of Shoals Parent LLC, and upon consummation of the Transactions, its principal asset will consist of the LLC Interests.

Trademarks

This prospectus contains references to our trademarks, trade names and service marks, which are protected under applicable intellectual property laws and are our property. This prospectus also contains trademarks, trade names and service marks of other companies, which are the property of their respective owners. Solely for convenience, trademarks, trade names and service marks referred to in this prospectus may appear without the ®, or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks, trade names and service marks. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

Market and Industry Data

Unless otherwise indicated, information contained in this prospectus concerning our industry, competitive position and the markets in which we operate is based on information from independent industry and research organizations, other third-party sources and management estimates, including IHS Markit—Global PV Tracker Market Report—2020 (June 30, 2020), IHS Markit—PV Installations Tracker—Q3 2020 (September 16, 2020), GRAPH Strategy USA LP—U.S. Solar EBOS Survey (November 2020), Wood Mackenzie—U.S. PV System Pricing—H1 2020 (June 23, 2020), Wood Mackenzie—Global Solar Outlook—Q3 2020, Wood Mackenzie—U.S. Utility Solar-Plus-Storage: The Rise of Hybridization—Q3 2020 (August 2020), National Renewable Energy Laboratory—2018 U.S. Utility-Scale Photovoltaics-Plus-Energy Storage System Costs Benchmark (November 2018) and BloombergNEF—Long-Term Electric Vehicle Outlook 2020 (May 2019, 2020). Management estimates are derived from publicly available information released by independent industry analysts, subscription-based publications and other third-party sources, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data, and our experience in, and knowledge of, such industry and markets, which we believe to be reasonable, but we have not independently verified the accuracy of

 

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this information. Any industry forecasts are based on data (including third-party data), models and experience of various professionals and are based on various assumptions, all of which are subject to change without notice. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

 

Through and including                     , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. It does not contain all of the information that may be important to you and your investment decision. Before investing in our Class A common stock, you should carefully read this entire prospectus, including the matters set forth under the sections of this prospectus captioned “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and our condensed consolidated interim financial statements and related notes included elsewhere in this prospectus. Unless the context otherwise requires, descriptions of the percentage of the market that are represented by a particular type of solar project are based on the installed capacity in that period.

Our Company

Overview

We are a leading provider of electrical balance of system or “EBOS” solutions for solar energy projects in the United States. EBOS encompasses all of the components that are necessary to carry the electric current produced by solar panels to an inverter and ultimately to the power grid. EBOS components are mission-critical products that have a high consequence of failure, including lost revenue, equipment damage, fire damage, and even serious injury or death. As a result, we believe customers prioritize reliability and safety over price when selecting EBOS solutions.

EBOS components that we produce include cable assemblies, inline fuses, combiners, disconnects, recombiners, wireless monitoring systems, junction boxes, transition enclosures and splice boxes. We believe that approximately 54% of the solar energy generation capacity installed in the U.S. during the 12 month period ended September 30, 2020 used at least one of our EBOS products. We derive the majority of our revenues from selling “system solutions” which are complete EBOS systems that include several of our products, many of which are customized for the customer’s project. We believe our system solutions are unique in our industry because they integrate design and engineering support, proprietary components and innovative installation methods into a single offering that would otherwise be challenging for a customer to obtain from a single provider or at all.

EBOS components represent approximately 6% of the total cost of a solar energy project according to Wood Mackenzie, but the cost of the labor to install them can be equal to, or even greater than, the cost of the components themselves. The high ratio of installation to product cost is the result of the large number of time-consuming manual operations that need to be performed to “wire up” a solar energy project, including laying, measuring, stripping, crimping, inspecting and installing wire, as well as the requirement that those operations be performed by licensed electricians. The solar industry is increasingly seeking new products and methods that can reduce labor in the field as installation costs have grown from 17% of the total cost of a solar energy project in 2015 to more than 29% in 2020, according to Wood Mackenzie.

Our company was founded to provide innovative EBOS solutions that reduce installation costs and improve reliability and safety. We were the first company in our industry to successfully commercialize “plug-n-play” EBOS systems that use simple push connectors rather than the wire “crimps” used in conventional systems. Using push connectors allows our system to be installed by general labor rather than electricians. Our core plug-n-play product is the “Big Lead Assembly” or BLA. The BLA combines the functionality of cable assemblies, combiner boxes and fusing into one product that does not require licensed electricians to install. We believe our BLA costs less to install and is more reliable than any other solar EBOS system commercially available today.

We sell our products principally to engineering, procurement and construction firms (“EPCs”) that build solar energy projects. However, the decision to use our products typically involves input from both the EPC and



 

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the owner of the solar energy project, given the mission-critical nature of EBOS. We derived approximately 67% of our revenues from the sale of system solutions for the nine months ended September 30, 2020. The custom nature of our system solutions and the long development cycle for solar energy projects typically gives us 12 months or more of lead time to quote, engineer, produce and ship each order we receive, and we do not stock large amounts of finished goods. For the year ended December 31, 2019, we derived 97% and 3% of our revenues from customers in the U.S. and the rest of the world, respectively. We had $157.4 million of backlog and awarded orders as of December 31, 2020, representing a 46% and 13% increase relative to the same date last year and September 30, 2020, respectively.

We are a U.S. company and our headquarters are in Portland, Tennessee. Our principal manufacturing facilities are located in Portland, Tennessee, and Muscle Shoals, Alabama. Our Muscle Shoals, Alabama facility is ISO 9001 certified.

Our Proprietary EBOS System

Most solar energy projects use a wiring architecture known as “homerun.” Conventional homerun EBOS systems have two distinguishing characteristics: every string of solar panels in the project is connected to a combiner box with individual positive and negative “wire runs,” and connections between wires are made using a process called “crimping.” The combiner box functions as a central point to “combine” the individual wire runs into a single feeder cable and contains fuses to protect each circuit. Making each wire run from the strings to the combiner boxes is a laborious process. Each wire run must be measured, laid out and fished though conduits that are buried in trenches across the project site. Because each string is individually connected to a combiner box, the same distances are covered with multiple wire runs. Making the crimped connections between wires and interconnecting them in the combiner box is a complex, error prone process that requires special tools. Each wire must be cut and have a precise amount of insulation removed; the bare end must be inserted the correct depth into a terminal; and special tools must be used to deform metal sleeves and torque lock nuts to ensure an environmental seal. The entire installation must be performed by licensed electricians with special training and any mistake in the process can result in a catastrophic system failure.

We invented an alternative to homerun architecture which we refer to as “combine-as-you-go.” Rather than making individual wire runs from each string to combiner boxes, combine-as-you-go architecture connects multiple strings within each row using specialized wire harnesses with integrated fuses that we refer to as “interconnect harnesses.” The interconnect harnesses are then connected to a proprietary above ground feeder cable that we refer to as the BLA. The direct connection between the interconnect harness and the BLA and the integration of fuses into the interconnect harness dramatically reduce the number of wire runs required compared to a conventional homerun system and eliminate the need for combiner boxes. We believe our combine-as-you-go architecture using interconnect harnesses and BLA has several advantages when compared to conventional homerun EBOS, including:

 

   

Installing above ground. Wiring for conventional homerun systems is typically run through conduits that are buried in trenches. Trenching is costly and time consuming. Making repairs to buried wire can also be challenging and expensive, as well as run the risk of unintentionally damaging other buried wire that did not need to be repaired. Our BLA is hung from the mounting system used for the solar panels, enabling above ground installation. Above-ground installation is less costly and far faster than burying wire in conduits. Future maintenance is also significantly easier and less costly because our BLA is easily accessible if repairs are required.

 

   

Being installable by general labor rather than requiring electricians. Conventional homerun systems use crimps and other specialized procedures to connect wires and install combiner boxes that must be performed by licensed electricians. Because our interconnect harness and BLA use simple push connectors and do require combiner boxes, licensed electricians are not needed to install the system. According to the U.S. Bureau of Labor Statistics, the average hourly wage for licensed



 

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electricians is 29% higher than the average hourly wage for solar PV installers, which contributes to a lower cost to install a combine-as-you go system when compared to a conventional homerun system.

 

   

Reducing the number of wire runs. We believe using our interconnect harness and BLA reduces the number of string and inverter wire runs required for a typical utility-scale solar energy project by approximately 67% and 95%, respectively, when compared to a conventional homerun system. Reducing the number of wire runs speeds installation, lowers material and shipping costs, reduces the number of potential failure points and is beneficial to the environment because less copper, aluminum and plastics are consumed.

 

   

Eliminating combiner boxes. Conventional homerun systems require combiner boxes to interconnect the wire runs from each string into a feeder cable and house fuses that protect each circuit. Because our BLA is connected directly to strings and our interconnect harness has inline fuses, no combiner boxes are required for our system. Eliminating combiner boxes speeds installation, lowers material and shipping costs, reduces the number of potential failure points and is beneficial to the environment because less copper, aluminum and plastics are consumed.

 

   

Requiring fewer connections. We believe using our interconnect harness and BLA reduces the number of connection points in a typical utility-scale solar energy project by approximately 83% when compared to a conventional homerun system. Requiring fewer connections reduces the number of labor hours required to install the system as well as the number of potential failure points.

 

   

Having greater reliability and lower maintenance costs. Connection points are often the source of failure in EBOS systems and must be inspected regularly. A solar energy project that uses our interconnect harness and BLA will have significantly fewer connections and, as a result, fewer failure points to inspect and maintain than the same project would using a conventional homerun system. We believe fewer potential failure points contributes to higher reliability and lower maintenance costs for solar energy projects that use our combine-as-you-go system when compared to a conventional homerun system.

 

   

Enabling more energy generation. We believe the design of our interconnect harness and BLA reduces electrical resistance by approximately 43% when compared to a conventional homerun system. Lower resistance reduces energy loss to waste heat dissipation, which we believe results in greater energy generation from solar projects that use our combine-as-you-go system when compared to a conventional homerun system.

Together, these advantages can result in 43% lower installation costs and 20% lower material costs for combine-as-you-go systems when compared to conventional homerun systems based on the median of responses to a survey of 120 solar industry participants conducted by GRAPH Strategy USA LP.

We believe the cost and reliability advantages of our interconnect harness and BLA have contributed to the percentage of U.S. solar generation capacity that uses our combine-as-you-go system increasing from approximately 7% in 2017 to 32% in the 12 months ended September 30, 2020, based on our shipments and the capacity of solar energy projects installed during these periods according to IHS Markit.

System solutions for combine-as-you-go EBOS represented approximately 56% of our revenues for the nine months ended September 30, 2020.

Our Market Opportunity

Demand for EBOS is driven primarily by installations of new ground-mounted solar energy projects. Historically, we have derived the majority of our revenues from the sale of EBOS products for ground mounted solar energy projects located in the U.S.



 

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U.S. Solar Market. Solar is the fastest growing form of electricity generation in the U.S. From 2014 to 2019, annual installations of ground-mounted solar generation capacity in the U.S. grew at a compound annual growth rate of 20% and represented nearly 22% of all new generation over one megawatt brought online over the same time period, according to IHS Markit and the Federal Energy Regulatory Commission, respectively. IHS Markit forecasts that this rapid growth will continue, with annual installations of ground-mounted solar generation capacity in the U.S. increasing from 11.2 GWs in 2019 to 20.2 GWs in 2023, representing a compound annual growth rate of 16%. We believe key drivers supporting continued growth in U.S. solar generation include:

 

   

Increasing economic competitiveness of solar energy with fossil generation as measured by the Levelized Cost of Energy (“LCOE). LCOE represents the average cost per unit of electricity of building, financing, operating and maintaining a power plant over its operating life. The U.S. Energy Information Administration estimates that the LCOE for new solar generation capacity entering service in 2022 is $37.44 per megawatt hour without federal tax incentives and $28.88 per megawatt hour with federal tax incentives, which is lower than the cost of building new power plants that burn natural gas or coal and lower than the cost of operating existing fossil fuel generation in certain instances. Furthermore, improvements in system performance and efficiency are contributing to continued declines in LCOE, making utility-scale solar competitive even without incentives or subsidies and apart from environmental considerations.

 

   

Expanding state regulations requiring that an increasing proportion of the energy sold in the state come from renewable sources. As of September 2020, 30 U.S. states, three territories and the District of Columbia had adopted Renewable Portfolio Standards (“RPSs”), which mandate that a certain percentage of electricity sold in the jurisdiction by a certain date must come from renewable energy resources. An increasing number of these states and the District of Columbia have passed legislation, regulations or administrative or executive orders targeting 100% renewable or clean energy by 2050 or earlier. We believe that utilities and independent power producers will build a growing number of solar energy projects to meet these targets.

 

   

Growing corporate and investor support for decarbonization of energy. 245 companies in the S&P 500 had publicly disclosed emissions reduction targets as of October 2019, over 280 major companies had pledged to source 100% of their energy from renewables as part of the international RE100 initiative as of December 2020, and 31 companies had made the Amazon Climate Pledge as of December 2020, which calls on its signatories to be net-zero carbon across their businesses by 2040. In September 2020, Climate Action 100+, an investor initiative that represents 500 global investors who collectively manage more than $47 trillion in assets, sent letters to certain boards and CEOs of large corporate emitters to urge them to commit to and set clear goals to pursue transition to net-zero emissions by 2050 or sooner. We believe that corporate and investor commitments to reduce the carbon intensity of their businesses and use renewable energy will result in increasing demand for solar energy projects.

 

   

Accelerating deployment of utility-scale battery energy storage. By storing the energy generated from solar energy projects and making it available during non-daylight hours, or when weather conditions limit the amount of sunlight, battery storage makes solar energy a viable form of baseload generation. We believe that demand for solar energy projects to replace fossil fuel-fired baseload generation will increase as utility-scale battery storage decreases in cost and becomes more widely available. Additionally, solar energy projects with battery storage require more EBOS components than solar energy projects without battery storage.

 

   

Decommissioning of fossil-fuel and nuclear generation. According to the U.S. Energy Information Administration, more than 175 coal, petroleum, natural gas and nuclear power plants are expected to be retired over the next ten years, representing 134 GWs of generation capacity, or approximately 12% of the total U.S. utility-scale generation capacity as of May 2020. We believe that a significant proportion of these plants will be replaced by solar energy projects because of their environmental benefits and



 

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competitive cost compared to fossil and other forms of generation. President-elect Biden has set a goal of “zero-carbon” electricity by 2035 which we believe may lead to an acceleration of fossil-fueled generation retirements either through federal legislation or executive action, further increasing demand for new solar energy projects.

 

   

Electrification of equipment and infrastructure that has historically been powered by fossil fuels. Aggressive electrification of energy end uses such as transportation, space heating and water heating are needed for the U.S. and the world to achieve ambitious greenhouse gas emission reduction goals, according to the Lawrence Berkeley National Laboratory. Federal, state and local governments have responded with a variety of measures to incentivize electrification, ranging from tax credits for electric vehicles to prohibitions on gas lines into new construction to banning gasoline-powered lawn tools. We believe that the substitution of electricity for fossil fuels in vehicles, appliances and residential and commercial building systems will significantly increase electricity consumption over time. Higher levels of electricity consumption will need to be met with new generation, which we believe will increasingly come from new solar energy projects.

Impact of Battery Energy Storage. The share of solar energy projects that include battery energy storage will increase from 6% of capacity installed in 2019 to 22% of capacity installed in 2023 according to Wood Mackenzie. Based on research conducted by the National Renewable Energy Laboratory on the cost of two and four-hour duration battery energy storage and assuming the batteries are sized at 25% of the solar energy project’s capacity, we believe that projects with battery energy storage will require $0.086 of EBOS per watt of capacity, or approximately 55% more than projects without battery energy storage. We believe the growing percentage of solar energy projects that include battery energy storage coupled with the additional EBOS required for these projects will cause the addressable market for our EBOS products to grow faster than the overall market for solar.

Our Strengths

We believe the following strengths of our business position us to capitalize on continued growth in the solar energy market, reinforce our leadership position in the EBOS market and distinguish us from our competitors:

 

   

Leading market position in the U.S. solar industry. We believe that approximately 54% of the solar energy generation capacity installed in the U.S. during the 12 month period ended September 30, 2020 used at least one of our EBOS products based on our shipments and the capacity of solar energy projects installed during the period according to IHS Markit. We believe the widespread use of our products underscores their reliability, safety and installation cost advantages and reinforces our competitive position in the marketplace.

 

   

Sell mission-critical products that are less sensitive to price competition. EBOS components are mission critical products that have a high consequence of failure, including lost revenue, equipment damage, fire damage, and even serious injury or death. As a result, we believe customers prioritize reliability and safety over price when selecting EBOS suppliers.

 

   

The cost of installing our product is more important than the cost of the product itself. The cost of installing EBOS products can be equal to, or even greater than, the cost of the products themselves. As a result, customers highly value and will pay a premium for products that can be installed at low cost without specialized labor. We believe delivering differentiated products that reduce our customers’ installation costs limits price pressure on our products and allows us to maintain strong profit margins.

 

   

Rising wages and skilled labor shortages make our products more valuable. Over the past 10 years, the cost of constructing a solar energy project has declined 78% according to BloombergNEF, primarily as a result of significant decreases in the prices of solar panels, inverters and mounting systems. Over the same time period, the cost of labor to install solar energy projects has increased



 

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significantly with the average wage rate for construction workers increasing 20% since 2010 according to the U.S. Bureau of Labor Statistics. In 2020, installation costs represented 29% of the total cost of constructing a solar energy project according to Wood Mackenzie. At the same time, the availability of specialized labor, including electricians, has decreased as more workers are retiring from than are entering the construction trades. We believe our products substantially reduce the number of man hours required, as well as make it possible for general rather than specialized labor, to install solar EBOS so as wages rise, the savings that our products create for our customers also increases. We believe that wage rates, particularly for specialized labor, will continue to increase and that availability of construction labor will continue to decrease which will make our products more valuable to our customers as they seek to continue to reduce the cost of solar energy and ensure they have sufficient labor to complete their projects.

 

   

Focus on customized “system solutions” that require specialized engineering and technical support capabilities that are challenging for competitors to replicate. Our customers rely on us to design and specify their EBOS systems, and we derive the majority of our revenues from the sale of complete EBOS systems that are customized for particular solar energy projects. We believe that our systems engineering capabilities, combined with the custom nature of solar EBOS systems, creates a barrier to entry for competitors.

 

   

Longstanding reputation for differentiated products that are unique in the solar industry. We believe that we have developed and commercialized most of the new EBOS products and installation methods adopted by the U.S. solar industry over the past five years, including plug-n-play wiring, interconnect harnesses and combine-as-you-go architecture for solar energy projects. We prioritize technological innovation within our company and we seek to develop new products that reduce the cost and improve the reliability and safety of renewable energy.

 

   

Intellectual property and trade secrets portfolio. We maintain a portfolio of intellectual property including patents, non-disclosure agreements, commercial contracts, trade secrets and trademarks. Our granted U.S. patents cover features of our products with respect to unique approaches to wire connections, coatings and moldings of insulating covers, wiring topology and skidded solutions. They also cover means of measuring and communicating the performance and characteristics of groups of solar panels. Collectively, these features reduce field labor, improve the energy efficiency and increase the reliability of electrical connections, increase electricity output, and reduce the cost of wire and enclosures required to construct a solar energy project. One of our core U.S. patents relates to using multiple layers of insulating materials with different performance characteristics to insulate connections which enables the manufacture of plug-n-play solutions with push connectors that can survive 30 years in an outdoor environment. We believe our patent prevents our competitors from producing a safe and reliable plug-n-play solution with push connectors which is a prerequisite for the labor savings and other advantages that our EBOS systems deliver. In addition to our patents, we maintain a portfolio of trade secrets relating to, among other things, manufacturing processes, manufacturing equipment and installation methods. We also seek to protect our intellectual property through non-disclosure agreements and commercial contracts.

 

   

Proprietary manufacturing process that drives high product reliability. Most electrical failures in solar energy projects occur because of a fault in the wiring. Faults typically occur when natural thermal expansion and contraction occurs at a point where two wires have been joined, loosening the insulation and allowing moisture into the joint. Faults can result in lost production, damage to the equipment, fire and injury or even death depending on their severity and whether people are onsite. We have developed a proprietary manufacturing process for our cable products that we believe is unique in our industry. Our process involves joining wire together using resistance welds and then sealing the joint with two separate layers of insulating material, which we refer to as “undermold/overmold.” We believe our process significantly reduces the risk of moisture infiltrating the connection and enables us to provide



 

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superior UV protection, strain relief, impact resistance and thermal stability over a wide range of environmental conditions.

 

   

Direct beneficiary of the global energy transition. Nations are rapidly moving to decarbonize their economies in order to reduce air pollution and fight climate change. A key element of decarbonizing the global economy is transitioning electricity generation from fossil fuels to renewable energy. Solar energy has become one of the lowest cost, most reliable and most flexible forms of energy generation and is becoming a preferred option for electricity generation worldwide. As a leading provider of EBOS for solar energy projects, we benefit directly from the global transition to renewable energy through growing demand for our products.

 

   

Panel, mounting system and rooftop/ground mount agnostic. All solar energy projects require EBOS, and our products are designed to work with ground-mounted and rooftop solar installations as well as all types of solar panels and mounting systems. As a result, we do not believe we are exposed to risk from changes in solar panel or mounting technology or shifts in market share between different manufacturers of solar panels or mounting systems. As long as there is demand for solar energy projects, we believe there will be demand for our products.

 

   

Low-cost manufacturing with minimal capital investment required for future expansion. Our principal manufacturing facilities are located in Tennessee and Alabama, where average labor rates for factory workers are 8% lower than the U.S. average according to the U.S. Department of Labor. Our total capital expenditures from January 1, 2018 to September 30, 2020 were $5.9 million, representing only 1.5% of our sales over the same time period. Our current production capacity for EBOS system solutions that utilize our combine-as-you-go architecture is approximately 1.8 times our sales volume over the past 12 months ended September 30, 2020. We believe the scalability and low capital requirements of our business, cost-competitiveness of our workforce and investments we have already made to create ample capacity for growth are significant competitive advantages.

 

   

U.S. operations that reduce the potential impact of trade tariffs. We are a U.S. company, and our principal operations and manufacturing facilities are in the U.S. We believe our status as a U.S. company with U.S. manufacturing reduces the potential impact of U.S. government tariffs placed on, or other U.S. government regulatory actions taken against, products manufactured in foreign countries.

 

   

Adherence to environmental, social and governance (“ESG”) principles. We believe that our impact on the environment; how we manage our relationships with employees, suppliers, customers and the communities where we operate; and the accountability of our leadership to our stockholders are critically important to our business. Our workforce is critical to our success and we are committed to fostering a culture of diversity and inclusion that makes our employees feel safe, empowered and engaged. We plan to report how we oversee and manage ESG factors material to our business under the sector-specific ESG standards recommended by the Sustainability Accounting Standards Board (“SASB”), an organization which provides an ESG framework preferred by investors for ESG evaluation and which announced its collaboration with the Global Reporting Initiative (“GRI”) in July 2020. As part of our plan to provide ESG disclosures pursuant to SASB standards, we will evaluate aligning our internal sustainability goals with certain Sustainable Development Goals (“UN SDGs”) to begin forming commitments to contribute to UN SDGs.

Our Growth Strategy

Our mission is to deliver innovative products that reduce the cost and improve the reliability and safety of renewable energy. Key elements of our growth strategy include:

 

   

Converting customers to our combine-as-you-go system. We are the inventor of combine-as-you-go architecture and the only commercial provider of plug-n-play combine-as-you-go products. We earn



 

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higher margins selling our combine-as-you-go products than we do selling our other products. We believe that the percentage of U.S. solar generation capacity that uses our combine-as-you-go system products has increased from approximately 7% in 2017 to 32% in the 12 months ended September 30, 2020, based on our shipments and the capacity of solar energy projects installed during these periods according to IHS Markit. In addition, we believe that four of the top 10 solar EPCs as reported by Solar Power World Magazine use our combine-as-you-go system on more than 75% of their projects, and we are currently in the process of transitioning an additional 10 EPCs and developers to our system. Our strategy is to continue to convert EPCs and other customers from competing homerun products to our combine-as-you-go system which will increase our revenues and profitability.

 

   

Introducing new products for solar EBOS categories that we do not currently serve. We believe our products currently address approximately 36% of the total amount customers spend on EBOS components for solar energy projects. We are currently developing products for EBOS categories that we do not participate in today, including IV curve benchmarking systems, messenger cable, wire management solutions, AC combiner boxes and high capacity plug-n-play wire harnesses as well as the next generation of our BLA which we believe will enable additional installation cost savings for our customers. Together, we believe these products will expand our addressable market by approximately 75%. If we are successful in developing and commercializing these products, we believe they could generate significant additional revenues for us. Moreover, we believe that the profit margins of these new products could be greater than the profit margins on our existing products because we will not require significant additional selling expense to deliver them to the same customers we are currently serving with our existing products.

 

   

Growing our international business. Excluding China, the international market for ground-mounted solar energy projects was more than 4.3 times larger than the U.S. market in 2019. We believe that most of the international market is still using conventional homerun architectures for solar energy projects and we are not aware of any EBOS solutions that are commercially available today that offer the labor savings and high reliability of our interconnect harness and BLA. In combination, we believe that the large size of the international market and lack of available products that are similar to ours creates a significant growth opportunity for us outside of the U.S. As a result, we have recently expanded our international sales team and are developing entry plans for several new markets outside of the U.S., including Spain, Brazil, Germany, Italy, Portugal and the Middle East as well as expanding our existing presence in Australia. Together, we believe these markets have sales potential nearly equivalent to our core U.S. market.

 

   

Taking advantage of both new and retrofit battery energy storage to sell more EBOS products. 10.2 GW of solar energy projects will be installed or retrofit with battery energy storage in the U.S. from 2021 to 2023 and 90 GW will be available for future retrofits at the end of 2023 according to Wood Mackenzie. We believe that solar energy projects with battery energy storage will spend approximately 55% more on EBOS components than solar energy projects without battery energy storage. Our strategy is to grow our sales of solar EBOS products faster than the overall solar market by concentrating our sales efforts on new projects that include battery energy storage and existing projects that plan to retrofit battery energy storage because they will purchase more EBOS than projects without battery energy storage.

 

   

Developing products for electric vehicle charging infrastructure. Investment in electric vehicle charging infrastructure is growing rapidly. BloombergNEF estimates that $2.3 billion will be spent on electric vehicle charging infrastructure in the U.S. from 2021 through 2023 with hardware and installation costs accounting for 43% and 57%, respectively, of the total spend over the period. Many of the operations involved in installing electric vehicle chargers are similar to those involved in installing solar energy projects and also require licensed electricians. Our strategy is to apply our experience developing products for solar EBOS that are simpler and less costly to install to developing products that can reduce



 

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the cost of installing EV charging infrastructure. We are currently in discussions with EPCs that install EV charging infrastructure regarding potential products and services that we could offer to help lower their costs, including supplying pre-fabricated “skids” that integrate the key components required for a commercial EV charging station with the objective of reducing the amount of labor required in the field. We expect to introduce offerings for this rapidly growing market in 2022.

 

   

Pursuing “rip and replace” opportunities with existing capacity. Based on feedback from project owners, we believe that some conventional homerun EBOS products of our competitors installed in existing projects are failing prior to their expected life. Because of the high voltages involved and the potential for fire, EBOS failures pose significant safety risks. We believe that as an increasing number of project owners experience or become aware of EBOS failures they will seek to proactively replace components with known reliability issues. We have already sold products that were used to replace a competitor’s product that had failed and we expect to see additional “rip and replace” orders in the future. Our strategy is leverage the greater reliability and lower maintenance costs of our products to pursue rip and replace opportunities with existing solar energy projects, particularly for the 37.4 GW of projects that were in operation in the U.S. at the end of 2018 according to Wood Mackenzie.

Recent Developments

Preliminary Estimated Unaudited Financial Results for the Year Ended December 31, 2020

Our preliminary estimated unaudited revenues, net income, Adjusted Net Income and Adjusted EBITDA for the year ended December 31, 2020 are set forth below. We have provided a range for these preliminary financial results because our closing procedures for our fiscal year ended December 31, 2020 are not yet complete. Our preliminary estimates of the financial results set forth below are based solely on information available to us as of the date of this prospectus and are inherently uncertain and subject to change. Our preliminary estimates contained in this prospectus are forward-looking statements. Our actual results remain subject to the completion of management’s final review and our other closing procedures, as well as the completion of the audit of our annual financial statements. These preliminary estimates are not a comprehensive statement of our financial results for the year ended December 31, 2020, and should not be viewed as a substitute for full financial statements prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”). In addition, these preliminary estimates for the year ended December 31, 2020 are not necessarily indicative of the results to be achieved in any future period. Accordingly, you should not place undue reliance on these preliminary financial results. See “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of certain factors that could result in differences between the preliminary estimated unaudited financial results reported below and the actual results. Our actual audited financial statements and related notes as of and for the year ended December 31, 2020 are not expected to be filed with the SEC until after this offering is completed.

The preliminary estimated unaudited financial results included in this prospectus have been prepared by, and are the responsibility of, our management. Our independent registered public accounting firm, BDO USA, LLP, has not audited, reviewed, compiled or performed any procedures with respect to the preliminary financial results. Accordingly, BDO USA, LLP does not express an opinion or any other form of assurance with respect thereto.

For the year ended December 31, 2020, we estimate that our revenues will range from $174.0 million to $176.0 million, an increase of $30.5 million or 21%, using the mid-point of the estimated revenues range when compared with revenues of $144.5 million for the year ended December 31, 2019. The increase in revenues was primarily due to increased demand for our combine-as-you-go system solutions in 2020 as compared to 2019. We believe the benefits (fewer wire runs and connections, lower installation and equipment costs along with reducing resistance losses) from our combine-as-you-go system solutions is resulting in increased demand for our products.



 

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For the year ended December 31, 2020, we estimate that our net income will range from $32.0 million to $34.5 million, an increase of $8.1 million or 32%, using the mid-point of the estimated revenues range when compared with revenues of $25.1 million for the year ended December 31, 2019. The increase in revenues was primarily due to increased revenue associated with increased demand for our combine-as-you-go system solutions offset by an increase in general and administrative expense primarily related to equity based compensation.

For the year ended December 31, 2020, we estimate that our Adjusted EBITDA will range from $60.0 million to $61.0 million, an increase of $23.7 million or 64%, using the midpoint of the estimated range when compared with our Adjusted EBITDA of $36.8 million for the year ended December 31, 2019. The increase in Adjusted EBITDA for the year was related to the increase in net income and adjustments related to equity based compensation and certain expenses related to COVID-19.

For the year ended December 31, 2020, we estimate that our Adjusted Net Income will range from $54.9 million to $56.3 million, an increase of $21.8 million or 64%, using the mid-point of the estimated range when compared with Adjusted Net Income of $33.8 million for the year ended December 31, 2019. The change in Adjusted Net Income was related to the increase in net income and adjustments related to equity based compensation and certain expenses related to COVID-19.

As of December 31, 2020, we estimate cash and cash equivalents to be approximately $10.1 million and outstanding borrowings under our New Senior Secured Credit Agreement of approximately $370.0 million, including approximately $350.0 million under our New Term Loan Facility and approximately $20.0 million under our New Revolving Credit Facility.

Reconciliation of Net Income to Adjusted Net Income and Adjusted EBITDA

Adjusted Net Income and Adjusted EBITDA are non-GAAP financial measures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for a discussion on how we define Adjusted Net Income and Adjusted EBITDA and why believe these measures are important.

The following tables reconcile estimated net income to estimated Adjusted EBITDA and Adjusted Net Income, respectively, for the year ended December 31, 2020:

 

     Shoals Parent LLC  
     Estimated      Actual  
     Year Ended
December 31, 2020
     Year Ended
December 31,
2019
 
     Low      High  
     (unaudited)         
     (in thousands)  

Net income

   $ 32,000      $ 34,500      $ 25,143  

Interest expense

     3,600        3,400        1,787  

Depreciation expense

     1,500        1,300        1,179  

Amortization of intangibles

     8,100        7,900        7,984  

Equity based compensation

     8,400        8,100        —    

COVID-19 expenses(a)

     3,100        2,800        —    

Non-recurring and other expenses(b)

     3,300        3,000        686  
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA(c)

   $ 60,000      $ 61,000      $ 36,779  
  

 

 

    

 

 

    

 

 

 


 

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     Shoals Parent LLC  
     Estimated      Actual  
     Year Ended
December 31, 2020
     Year Ended
December 31,
2019
 
     Low      High  
     (unaudited)         
     (in thousands)  

Net income

   $ 32,000      $ 34,500      $ 25,143  

Amortization of intangibles

     8,100        7,900        7,984  

Equity based compensation

     8,400        8,100        —    

COVID-19 expenses(a)

     3,100        2,800        —    

Non-recurring and other expenses(b)

     3,300        3,000        686  
  

 

 

    

 

 

    

 

 

 

Adjusted Net Income(c)

   $ 54,900      $ 56,300      $ 33,813  
  

 

 

    

 

 

    

 

 

 

 

(a)

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

 

(b)

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

 

(c)

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

Summary Risk Factors

Our business and our ability to execute our strategy are subject to many risks. Before making a decision to invest in our Class A common stock, you should carefully consider all of the risks and uncertainties described in the section of this prospectus captioned “Risk Factors” immediately following this Prospectus Summary and all of the other information in this prospectus. These risks include, but are not limited to, the following:

Risks Related to Our Business and Our Industry

 

   

if demand for solar energy projects does not continue to grow or grows at a slower rate than we anticipate, our business will suffer;

 

   

existing electric utility industry policies and regulations, and any subsequent changes, may present technical, regulatory and economic barriers to the purchase and use of solar energy systems that may significantly reduce demand for our products or harm our ability to compete;

 

   

our industry has historically been cyclical and experienced periodic downturns;

 

   

if we fail to, or incur significant costs in order to, obtain, maintain, protect, defend or enforce our intellectual property and other proprietary rights, our business and results of operations could be materially harmed;

 

   

if we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed;

 

   

if our trademarks and trade names are not adequately protected, we may not be able to build name recognition in our markets of interest, and our competitive position may be harmed;

 

   

we may need to defend ourselves against third-party claims that we are infringing, misappropriating or otherwise violating others’ intellectual property rights, which could divert management’s attention, cause us to incur significant costs, and prevent us from selling or using the technology to which such rights relate;



 

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we may experience delays, disruptions or quality control problems in our manufacturing operations;

 

   

the interruption of the flow of components and materials from international vendors could disrupt our supply chain, including as a result of the imposition of additional duties, tariffs and other charges on imports and exports;

 

   

we face risks related to actual or threatened health epidemics, such as the COVID-19 pandemic, and other outbreaks, which could significantly disrupt our manufacturing and operations;

 

   

the viability and demand for solar energy and the demand for our products are impacted by many factors outside of our control, which makes it difficult to predict our future prospects;

 

   

a loss of one or more of our significant customers, their inability to perform under their contracts, or their default in payment could harm our business and negatively impact revenue, results of operations and cash flow;

 

   

the reduction, elimination or expiration of government incentives for, or regulations mandating the use of, renewable energy and solar energy specifically could reduce demand for solar energy systems and harm our business;

 

   

a drop in the price of electricity sold may harm our business, financial condition, results of operations and prospects;

 

   

an increase in interest rates, or a reduction in the availability of tax equity or project debt capital in the global financial markets could make it difficult for end customers to finance the cost of a solar energy system and could reduce the demand for our products; and

 

   

defects or performance problems in our products could result in loss of customers, reputational damage and decreased revenue, and we may face warranty, indemnity and product liability claims arising from defective products.

Risks Related to This Offering and Our Class A Common Stock

 

   

Oaktree and the Continuing Equity Owners will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote;

 

   

following the offering, we will be classified as a “controlled company,” and as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements. In addition, Oaktree’s or the Continuing Equity Owners’ interests may conflict with our interests and the interests of other stockholders;

 

   

the requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members and officers; and

 

   

provisions in our certificate of incorporation and bylaws, to be adopted upon the consummation of this offering, may have the effect of delaying or preventing a change of control or changes in our management.

Summary of the Transactions

Shoals Technologies Group, Inc., a Delaware corporation, was formed on November 4, 2020 and is the issuer of the Class A common stock offered by this prospectus.

Prior to this offering, all of our business operations have been conducted through Shoals Parent LLC and its direct and indirect subsidiaries.



 

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The following organizational transactions have already occurred in connection with this offering:

 

   

on November 25, 2020, Shoals Holdings LLC entered into a new credit facility consisting of (i) $350.0 million senior secured six-year term loan facility, (ii) a $30.0 million senior secured six-year delayed draw term loan facility, which matures concurrently with the six-year term loan facility and (iii) an uncommitted super senior revolving credit facility (the “New Senior Secured Credit Agreement”). See “Description of Certain Indebtedness—New Senior Secured Credit Agreement”;

 

   

on December 22, 2020, Shoals Holdings LLC entered into an amendment to the New Senior Secured Credit Agreement in order to obtain a $100.0 million increase to the New Revolving Credit Facility (as defined below);

 

   

on December 30, 2020, Shoals Holdings LLC entered into a second amendment to the New Senior Secured Credit Agreement; and

 

   

on November 25, 2020, Shoals Holdings LLC paid a $355.8 million special distribution to Shoals Intermediate Holdings LLC who then distributed to the direct or indirect holders of Shoals Intermediate Holdings LLC (the “Special Distribution”).

Prior to the Transactions, we expect there will initially be one holder of common stock of Shoals Technologies Group, Inc. We will consummate the following organizational transactions in connection with this offering:

 

   

we will amend and restate the existing limited liability company agreement of Shoals Parent LLC, which will become effective substantially concurrently with or prior to the consummation of this offering, to, among other things, (1) recapitalize all existing ownership interests in Shoals Parent LLC (including profits interests awarded under the existing limited liability company agreement of Shoals Parent LLC (and corresponding profits interests issued under the existing limited liability agreement of Shoals Management Holdings LLC)) into 160,278,568 LLC Interests (and, in the case of corresponding profits interests issued by Shoals Management Holdings LLC, into common units of Shoals Management Holdings LLC) and (2) appoint Shoals Technologies Group, Inc. as the sole managing member of Shoals Parent LLC upon its acquisition of LLC Interests in connection with this offering;

 

   

we will amend and restate Shoals Technologies Group, Inc.’s certificate of incorporation to, among other things, provide (1) for Class A common stock, with each share of our Class A common stock entitling its holder to one vote per share on all matters presented to our stockholders generally, and (2) for Class B common stock, with each share of our Class B common stock entitling its holder to one vote per share on all matters presented to our stockholders generally but without economic rights, and that shares of our Class B common stock may only be held by the Continuing Equity Owners and their respective permitted transferees as described in “Description of Capital Stock—Common Stock—Class B Common Stock”;

 

   

Shoals Technologies Group, Inc. will (1) acquire LLC Interests held by Shoals Investment CTB LLC, Oaktree’s wholly owned subsidiary (“Blocker”), by means of one or more mergers (the “Blocker Merger”) with Blocker and will issue to Oaktree 81,986,291 shares of our Class A common stock as consideration in the Blocker Merger and (2) agree to pay Oaktree at a future date certain tax refunds payable to the Blocker, which are expected to consist of $1.9 million of excess federal income tax payments previously paid by the Blocker;

 

   

we will issue 78,292,277 shares of our Class B common stock to the Continuing Equity Owners, which is equal to the number of LLC Interests held by such Continuing Equity Owners, for nominal consideration;

 

   

we will issue 9,000,000 shares of our Class A common stock to the purchasers in this offering in exchange for net proceeds of approximately $188.8 million based upon an assumed initial public offering price of $22.50 per share (which is the midpoint of the estimated price range set forth on the cover page of this prospectus), less the underwriting discounts and commissions and estimated offering expenses payable by us;



 

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Shoals Technologies Group, Inc. will use the net proceeds from this offering to purchase 2,339,182 LLC Interests from Shoals Parent LLC and certain Continuing Equity Owners at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discounts and commissions;

 

   

Shoals Parent LLC will use the net proceeds it receives from the sale of LLC Interests to Shoals Technologies Group, Inc. to prepay approximately $150.0 million of the outstanding borrowings under our New Senior Secured Credit Agreement; and

 

   

Shoals Technologies Group, Inc. will enter into (1) the Stockholders Agreement with the Continuing Equity Owners and Oaktree, (2) the Registration Rights Agreement with the Continuing Equity Owners and Oaktree and (3) the Tax Receivable Agreement with Oaktree and our Founder. For a description of the terms of the Stockholders Agreement, the Registration Rights Agreement and the Tax Receivable Agreement, see “Certain Relationships and Related Party Transactions.”

Immediately following the consummation of the Transactions (including this offering):

 

   

Shoals Technologies Group, Inc. will be a holding company and its principal asset will consist of LLC Interests it acquires as a result of the Blocker Merger and from Shoals Parent LLC and certain of the Continuing Equity Owners with the net proceeds from this offering. Shoals Technologies Group, Inc. will own, directly or indirectly, 90,986,291 LLC Interests of Shoals Parent LLC, representing approximately 54.50% of the economic interest in Shoals Parent LLC;

 

   

Shoals Technologies Group, Inc. will be the sole managing member of Shoals Parent LLC and will control the business and affairs of Shoals Parent LLC and its direct and indirect subsidiaries;

 

   

the Continuing Equity Owners will own (1) 75,953,095 LLC Interests of Shoals Parent LLC, representing approximately 45.50% of the economic interest in Shoals Parent LLC and (2) 75,953,095 shares of Class B common stock of Shoals Technologies Group, Inc., representing approximately 45.50% of the combined voting power of all of Shoals Technologies Group, Inc.’s common stock;

 

   

Oaktree (1) will own 20,986,291 shares of Class A common stock of Shoals Technologies Group, Inc. (or 10,486,291 shares of Class A common stock of Shoals Technologies Group, Inc. if the underwriters exercise in full their option to purchase additional shares of Class A common stock), representing approximately 12.57% of the combined voting power of all of Shoals Technologies Group, Inc.’s common stock and approximately 23.07% of the economic interest in Shoals Technologies Group, Inc. (or approximately 6.28% of the combined voting power and approximately 11.53% of the economic interest if the underwriters exercise in full their option to purchase additional shares of Class A common stock), and (2) through Shoals Technologies Group, Inc.’s ownership of LLC Interests, indirectly will hold approximately 12.57% of the economic interest in Shoals Parent LLC (or approximately 6.28% of the economic interest in Shoals Parent LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock); and

 

   

the purchasers in this offering (1) will own 70,000,000 shares of Class A common stock of Shoals Technologies Group, Inc. (or 80,500,000 shares of Class A common stock of Shoals Technologies Group, Inc. if the underwriters exercise in full their option to purchase additional shares of Class A common stock), representing approximately 41.93% of the combined voting power of all of Shoals Technologies Group, Inc.’s common stock and approximately 76.93% of the economic interest in Shoals Technologies Group, Inc. (or approximately 48.22% of the combined voting power and approximately 88.47% of the economic interest if the underwriters exercise in full their option to purchase additional shares of Class A common stock), and (2) through Shoals Technologies Group, Inc.’s ownership of LLC Interests, indirectly will hold approximately 41.93% of the economic interest in Shoals Parent LLC (or approximately 48.22% of the economic interest in Shoals Parent LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock).



 

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Ownership Structure

The diagram below depicts our organizational structure after giving effect to the Transactions, including this offering, assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock.

 

 

LOGO

Oaktree

Oaktree is a leader among global investment managers specializing in alternative investments, with $140 billion in assets under management as of September 30, 2020. The firm emphasizes an opportunistic, value-oriented and risk-controlled approach to investments in credit, private equity, real assets and listed equities. The firm has over 1,000 employees and offices in 19 cities worldwide.



 

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Corporate Information

Shoals Technologies Group, Inc., the issuer of the Class A common stock in this offering, was incorporated as a Delaware corporation on November 4, 2020. Our principal executive offices are located at 1400 Shoals Way, Portland, Tennessee, 37148 and our telephone number is (615) 451-1400. Our principal website address is https://shoals.com. Information contained in, or accessible through, our website is not a part of, and is not incorporated into, this prospectus.

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of relief from certain reporting requirements and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

   

presenting only two years of audited financial statements and only two years of selected financial data;

 

   

an exemption from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;

 

   

reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements, and registration statements; and

 

   

exemptions from the requirements of holding nonbinding advisory votes on executive compensation or golden parachute arrangements.

In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards, and therefore, we will not be subject to the same new or revised accounting standards at the same time as other public companies that are not emerging growth companies or those that have opted out of using such extended transition period, which may make comparison of our financial statements with such other public companies more difficult. We may take advantage of these reporting exemptions until we no longer qualify as an emerging growth company or, with respect to adoption of certain new or revised accounting standards, until we irrevocably elect to opt out of using the extended transition period.

We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of this offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; and (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. We may choose to take advantage of some but not all of these reduced reporting burdens.



 

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THE OFFERING

 

Issuer

Shoals Technologies Group, Inc.

 

Class A Common Stock Offered by Us

9,000,000 shares.

 

Class A Common Stock Offered by the Selling Stockholder

61,000,000 shares (or 71,500,000 shares if the underwriters exercise in full their option to purchase additional shares).

 

Underwriters’ Option to Purchase Additional Shares of Class A Common Stock from the Selling Stockholder

10,500,000 shares.

 

Shares of Class A Common Stock to Be
Outstanding Immediately After This Offering

90,986,291 shares, representing approximately 54.50% of the combined voting power of all of Shoals Technologies Group, Inc.’s common stock, 100.0% of the economic interest in Shoals Technologies Group, Inc. and 54.50% of the indirect economic interest in Shoals Parent LLC.

 

Shares of Class B Common Stock to Be
Outstanding Immediately After This Offering

75,953,095 shares, representing approximately 45.50% of the combined voting power of all of Shoals Technologies Group, Inc.’s common stock and no economic interest in Shoals Technologies Group, Inc.

 

LLC Interests to Be Held Directly by Us Immediately After This Offering

90,986,291 LLC Interests, representing approximately 54.50% of the economic interest in Shoals Parent LLC.

 

LLC Interests to Be Held Indirectly by the Selling Stockholder Immediately After This Offering

20,986,291 LLC Interests, representing approximately 12.57% of the economic interest in Shoals Parent LLC (or 10,486,291 LLC Interests, representing approximately 6.28% of the economic interest in Shoals Parent LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

LLC Interests to Be Held Directly by the
Continuing Equity Owners Immediately After
This Offering

75,953,095 LLC Interests, representing approximately 45.50% of the economic interest in Shoals Parent LLC.


 

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Ratio of Shares of Class A Common Stock to LLC Interests

Our amended and restated certificate of incorporation and the Shoals Parent LLC Agreement will require that we and Shoals Parent LLC at all times maintain a one-to-one ratio between the number of shares of Class A common stock issued by us and the number of LLC Interests owned by us, except as otherwise determined by us.

 

Ratio of Shares of Class B Common Stock to LLC Interests

Our amended and restated certificate of incorporation and the Shoals Parent LLC Agreement will require that we and Shoals Parent LLC at all times maintain a one-to-one ratio between the number of shares of Class B common stock owned by the Continuing Equity Owners and their respective permitted transferees and the number of LLC Interests owned by the Continuing Equity Owners and their respective permitted transferees, except as otherwise determined by us. Immediately after the Transactions, the Continuing Equity Owners will together own 100% of the outstanding shares of our Class B common stock.

 

Permitted Holders of Shares of Class B Common Stock

Only the Continuing Equity Owners and the permitted transferees of Class B common stock as described in this prospectus will be permitted to hold shares of our Class B common stock. Shares of Class B common stock are transferable for shares of Class A common stock only together with an equal number of LLC Interests. See “Certain Relationships and Related Party Transactions—Shoals Parent LLC Agreement.”

 

Voting Rights

Holders of shares of our Class A common stock and our Class B common stock will vote together as a single class on all matters presented to stockholders for their vote or approval, except as otherwise required by law or our amended and restated certificate of incorporation. Each share of our Class A common stock entitles its holders to one vote per share, and each share of our Class B common stock entitles its holders to one vote per share on all matters presented to our stockholders generally. See “Description of Capital Stock.”

 

Redemption Rights of Holders of LLC Interests

The Continuing Equity Owners may, subject to certain exceptions, from time to time at each of their options require Shoals Parent LLC to redeem all or a portion of their LLC Interests in exchange for, at our election (determined solely by a majority of our directors who are disinterested), newly issued shares of our Class A common stock on a one-for-one basis or a cash payment equal to a volume-weighted average market price of one share of our Class A common stock for each LLC Interest so redeemed, in each case, in accordance with the terms of the Shoals Parent LLC Agreement; provided that, at our election (determined solely by a majority of our directors who are disinterested), we may effect a direct exchange by Shoals Technologies Group, Inc. of such Class A common stock or such cash, as applicable, for such LLC Interests. The Continuing Equity



 

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Owners may, subject to certain exceptions, exercise such redemption right for as long as their LLC Interests remain outstanding. See “Certain Relationships and Related Party Transactions—Shoals Parent LLC Agreement.” Simultaneously with the payment of cash or shares of Class A common stock, as applicable, in connection with a redemption or exchange of LLC Interests pursuant to the terms of the Shoals Parent LLC Agreement, a number of shares of our Class B common stock registered in the name of the redeeming or exchanging Continuing Equity Owner will automatically be transferred to the Company and will be cancelled for no consideration on a one-for-one basis with the number of LLC Interests so redeemed or exchanged.

 

Tax Receivable Agreement

We intend to enter into a Tax Receivable Agreement with our Founder and Oaktree substantially concurrently with or prior to the consummation of this offering. The Tax Receivable Agreement provides for the payment by us to our Founder and Oaktree, collectively, of 85% of the amount of tax benefits, if any, that we actually realize, or in some circumstances are deemed to realize, as a result of (i) Shoals Technologies Group, Inc.’s allocable share of existing tax basis acquired in connection with the 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 LLC and its subsidiaries resulting from purchases or exchanges of LLC Interests and (iii) certain other tax benefits related to our entering into the Tax Receivable Agreement, including tax benefits attributable to payments that we make under the Tax Receivable Agreement (collectively, the “Tax Attributes”). The payment obligations under the Tax Receivable Agreement are not conditioned upon any LLC Interest holder maintaining a continued ownership interest in us or Shoals Parent LLC and the rights of our Founder and Oaktree under the Tax Receivable Agreement are assignable. We expect to benefit from the remaining 15% of the tax benefits, if any, that we may actually realize. The actual Tax Attributes, as well as any amounts paid to our Founder and Oaktree under the Tax Receivable Agreement, will vary depending on a number of factors, including the timing of any future exchanges, the price of shares of our Class A common stock at the time of any future exchanges, the extent to which such exchanges are taxable, the amount and timing of our income and applicable tax rates. The payment obligations under the Tax Receivable Agreement are obligations of Shoals Technologies Group, Inc. and not of Shoals Parent LLC. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

 

Use of Proceeds

We expect to receive approximately $188.8 million based on an assumed initial public offering price of $22.50 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and offering expenses payable by us.


 

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  Shoals Technologies Group, Inc. intends to use the net proceeds from this offering to purchase 9,000,000 LLC Interests from Shoals Parent LLC and certain Continuing Equity Owners at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discounts and commissions. We intend to use remaining proceeds, if any, for general corporate purposes to support the growth of the business.

 

  Shoals Parent LLC intends to use the net proceeds it receives from the sale of LLC Interests to Shoals Technologies Group, Inc. to prepay approximately $150 million of the outstanding borrowings under our New Senior Secured Credit Agreement.

 

  We will not receive any proceeds from the sale of our Class A common stock by the selling stockholder.

 

  Shoals Parent LLC will bear or reimburse Shoals Technologies Group, Inc. for all of the expenses of this offering. See “Use of Proceeds.”

 

Indication of Interest

BlackRock and ClearBridge have each separately indicated an interest in purchasing up to an aggregate of $150 million and $125 million, respectively, of our Class A common stock in this offering at the initial public offering price and on the same terms as the other shares being offered. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to BlackRock and/or ClearBridge, and BlackRock or ClearBridge could determine to purchase more, less or no shares in this offering. The underwriters will receive the same underwriting discounts and commissions on any of our shares of Class A common stock purchased by BlackRock and/or ClearBridge as they will from any other shares of Class A common stock sold to the public in this offering.

 

Controlled Company

Upon completion of this offering, Oaktree and the Continuing Equity Owners will continue to beneficially own more than 50% of the voting power of our outstanding common stock. As a result, we intend to avail ourselves of the “controlled company” exemptions under the rules of Nasdaq, including exemptions from certain of the corporate governance listing requirements. See “Management—Controlled Company Exemption” and “Certain Relationships and Related Party Transactions.”

 

Dividend Policy

We did not declare any dividends in 2019 and 2018, and we currently do not anticipate paying any cash dividends after this offering and for the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be used to repay debt, for working capital, to support our operations and to finance the growth and development of our business. Any future determination relating to dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including restrictions in our current and future debt instruments, our future



 

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earnings, capital requirements, financial condition, prospects, and applicable Delaware law, which provides that dividends are only payable out of surplus or current net profits. See “Dividend Policy.”

 

Listing

We have applied to list our Class A common stock on Nasdaq under the symbol “SHLS.”

 

Risk Factors

See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our Class A common stock.

Unless we specifically state otherwise or the context otherwise requires, the share information in this prospectus:

 

   

assumes an initial public offering price of $22.50, the midpoint of the estimated price range set forth on the cover page of this prospectus;

 

   

assumes no exercise of the underwriters’ option to purchase up to an additional 10,500,000 shares of Class A common stock from the selling stockholder in this offering; and

 

   

does not reflect the issuance of any shares of Class A common stock outstanding at the closing of this offering (on a fully diluted basis) that are reserved for future grants or sale under our new long-term incentive plan (the “LTIP”).



 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The following table presents summary historical consolidated financial data for Shoals Parent LLC and its subsidiaries as of the dates and for the periods indicated, as well as certain pro forma financial data of Shoals Parent LLC and Shoals Technologies Group, Inc. The summary consolidated statements of operations data and statements of cash flows data for the years ended December 31, 2018 and 2019 and the summary consolidated balance sheet data as of December 31, 2018 and 2019 are derived from the audited consolidated financial statements of Shoals Parent LLC included elsewhere in this prospectus. The summary consolidated statements of operations data and statements of cash flows data for the nine months ended September 30, 2019 and 2020 and the summary consolidated balance sheet data as of September 30, 2020 are derived from the unaudited interim condensed consolidated financial statements of Shoals Parent LLC which are included elsewhere in this prospectus.

Historically, our business has been operated through Shoals Parent LLC, together with its subsidiaries. Shoals Technologies Group, Inc. was formed for the purpose of this offering and has engaged to date only in activities in contemplation of this offering. Upon the completion of this offering, all of our business will continue to be conducted through Shoals Parent LLC, together with its subsidiaries, and the financial results of Shoals Parent LLC will be consolidated in our financial statements. Shoals Technologies Group, Inc. will be a holding company whose sole material asset will be the LLC Interests in Shoals Parent LLC. For more information regarding the organizational transactions and holding company structure, see “Organizational Structure.”

The unaudited interim condensed consolidated financial statements include all normal recurring adjustments necessary, in the opinion of management, to summarize the financial positions and results for the period presented. Our historical results are not necessarily indicative of our results to be expected in any future period, and the historical results for the nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the full year.

The unaudited pro forma consolidated balance sheet as of September 30, 2020 presents the consolidated financial position of Shoals Parent LLC after giving pro forma effect to the Transactions, excluding this offering, and Shoals Technologies Group, Inc. adjusted for this offering and the contemplated use of the net proceeds from this offering as described under “Organization Structure” and “Use of Proceeds” as if such transactions had occurred as of the balance sheet date. The unaudited pro forma consolidated statements of operations for the year ended December 31, 2019 and the nine months ended September 30, 2020 present the consolidated results of operations of Shoals Parent LLC after giving pro forma effect to the Transactions, excluding this offering, and Shoals Technologies Group, Inc. adjusted for this offering and the contemplated use of the net proceeds from this offering as described under “Organization Structure” and “Use of Proceeds” as if such transactions had occurred on January 1, 2019. The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of the Transactions, excluding this offering, and as further adjusted for this offering, on the historical financial information of Shoals Parent LLC. The unaudited pro forma consolidated financial information is subject to change based on the actual initial public offering price, the number of common shares sold in this offering, and other terms of this offering determined at pricing. The unaudited pro forma consolidated financial information is included for informational purposes only and does not purport to reflect the results of operations or financial position of Shoals Technologies Group, Inc. that would have occurred had it operated according to the organizational structure set forth herein to be in place post-offering as a standalone public company during the periods presented.

The summary of our consolidated financial data and our condensed consolidated interim financial data set forth below and the pro forma financial data should be read together with our consolidated financial statements and our condensed consolidated interim financial statements and the related notes, as well as the sections captioned “Selected Consolidated Financial and Other Data,” “Unaudited Pro Forma Consolidated Financial



 

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Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

 

    Shoals Parent, LLC     Pro Forma Shoals
Technologies Group, Inc.
 
    Year Ended
December 31,
    Nine Months Ended
September 30,
    Year Ended
December 31,
2019
    Nine
Months
Ended

September 30,
2020
 
    2018     2019     2019     2020  
                (unaudited)     (unaudited)  
    ($ in thousands, except per share amounts)  

Consolidated Statements of Operations Data:

           

Revenues

  $ 103,750     $ 144,496     $ 106,613     $ 136,765     $ 144,496     $ 136,765  

Cost of revenue

    75,582       100,284       74,874       85,061       100,284       85,061  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    28,168       44,212       31,739       51,704       44,212       51,704  

Operating expenses:

           

General and administrative expenses

    8,904       9,065       6,795       15,390       9,065       15,390  

Depreciation and amortization

    8,177       8,217       6,156       6,194       8,217       6,194  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    17,081       17,282       12,951       21,584       17,282       21,584  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    11,087       26,930       18,788       30,120       26,930       30,120  

Interest expense, net

    (2,440     (1,787     1,481       601       (12,451     (8,149
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

            14,479       21,971  

Income tax expense

            (1,712     (2,599
         

 

 

   

 

 

 

Net income

  $ 8,647     $ 25,143     $ 17,307     $ 29,519     $ 12,767     $ 19,372  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to non-controlling interest

            5,809       8,813  
         

 

 

   

 

 

 

Net income attributable to Shoals Technologies Group, Inc.

          $ 6,958     $ 10,559  
         

 

 

   

 

 

 

Pro forma net income per share data(1) (unaudited):

           

Pro forma weighted average shares of Class A common stock outstanding:

           

Basic

            90,986,291       90,986,291  
         

 

 

   

 

 

 

Diluted

            166,939,386       166,939,386  
         

 

 

   

 

 

 

Pro forma net income available to Class A common stock per share:

           

Basic

          $ 0.08     $ 0.12  
         

 

 

   

 

 

 

Diluted

          $ 0.08     $ 0.12  
         

 

 

   

 

 

 

 

     Shoals Parent LLC      Pro Forma
Shoals Parent
LLC(2)
     Pro Forma
Shoals
Technologies
Group, Inc.(2)
 
     As of December 31,      As of
September 30, 2020
 
     2018      2019  
                   (unaudited)  
                  

(in thousands)

 

Consolidated Balance Sheet Data:

              

Cash and cash equivalents

   $ 108      $ 7,082      $ 9,245      $ 4,245      $ —    

Total assets

   $ 185,533      $ 187,607      $ 194,497      $ 189,497      $ 198,843  

Total liabilities

   $ 47,251      $ 37,701      $ 19,209      $ 370,013      $ 268,582  

Total members’ equity (deficit) /stockholders’ equity (deficit)

   $ 138,282      $ 149,906      $ 175,288      $ (180,516    $ (69,739


 

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     Shoals Parent LLC  
     Year Ended
December 31,
     Nine Months Ended
September 30,
 
     2018      2019      2019      2020  
                   (unaudited)  
     (in thousands)  

Statement of Cash Flows Data:

           

Net cash provided by operating activities

   $ 3,001      $ 36,182      $ 28,687      $ 38,115  

Net cash used in investing activities

   $ (1,405    $ (1,719    $ (1,409    $ (2,786

Net cash used in financing activities

   $ (19,161    $ (27,489    $ (22,903    $ (33,166

 

     Shoals Parent LLC  
     Year Ended
December 31,
     Nine Months Ended
September 30,
 
     2018      2019      2019      2020  
     (in thousands)  

Other Financial Information (unaudited):

           

Adjusted EBITDA(3)

   $ 21,130      $ 36,779      $ 26,102      $ 46,806  

Adjusted Net Income(3)

   $ 17,684      $ 33,813      $ 23,771      $ 45,176  

 

(1)

See Note 6 to the unaudited pro forma consolidated statements of operations for the year ended December 31, 2019 and the nine months ended September 30, 2020 in “Unaudited Pro Forma Consolidated Financial Information” for the calculation of pro forma basic net income per share and pro forma diluted net income per share.

(2)

See unaudited pro forma consolidated balance sheet at September 30, 2020 in “Unaudited Pro Forma Consolidated Financial Information.”

 

(3)

We define Adjusted EBITDA as net income plus (i) interest expense, net, (ii) depreciation expense, (iii) amortization of intangibles, (iv) equity based compensation, (v) COVID-19 expenses and (vi) non-recurring and other expenses. We define Adjusted Net Income as net income plus (i) amortization of intangibles, (ii) equity based compensation, (iii) COVID-19 expenses and (iv) non-recurring and other expenses.

Adjusted EBITDA and Adjusted Net Income are intended as supplemental measures of performance that are neither required by, nor presented in accordance with, generally accepted accounting principles in the U.S. (“GAAP”). We present Adjusted EBITDA and Adjusted Net Income because we believe they assist investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA and Adjusted Net Income: (i) as factors in evaluating management’s performance when determining incentive compensation; (ii) to evaluate the effectiveness of our business strategies; and (iii) because our credit agreement uses measures similar to Adjusted EBITDA and Adjusted Net Income to measure our compliance with certain covenants.

Among other limitations, Adjusted EBITDA and Adjusted Net Income do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments; do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; do not reflect income tax expense or benefit; and other companies in our industry may calculate Adjusted EBITDA and Adjusted Net Income differently than we do, which limits their usefulness as comparative measures.

Because of these limitations, Adjusted EBITDA and Adjusted Net Income should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA and Adjusted Net Income on a supplemental basis. You should review the reconciliation of net income to Adjusted EBITDA and Adjusted Net Income below and not rely on any single financial measure to evaluate our business.



 

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The following table reconciles net income to Adjusted EBITDA for the years ended December 31, 2018 and 2019 and the nine months ended September 30, 2019 and 2020, respectively:

 

     Shoals Parent LLC  
     Year Ended
December 31,
     Nine Months Ended
September 30,
 
     2018      2019      2019      2020  
     (in thousands)  

Net income

   $ 8,647      $ 25,143      $ 17,307      $ 29,519  

Interest expense

     2,440        1,787        1,481        601  

Depreciation expense

     1,006        1,179        850        1,029  

Amortization of intangibles

     7,984        7,984        5,988        5,988  

Equity based compensation

                          7,219  

COVID-19 expenses(a)

                          2,006  

Non-recurring and other expenses(b)

     1,053        686        476        444  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 21,130      $ 36,779      $ 26,102      $ 46,806  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (a)

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

 

  (b)

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

The following table reconciles net income to Adjusted Net Income for the years ended December 31, 2018 and 2019 and the nine months ended September 30, 2019 and 2020, respectively:

 

     Shoals Parent LLC  
     Year Ended
December 31,
     Nine Months Ended
September 30,
 
     2018      2019      2019      2020  
     (in thousands)  

Net income

   $ 8,647      $ 25,143      $ 17,307      $ 29,519  

Amortization of intangibles

     7,984        7,984        5,988        5,988  

Equity based compensation

                          7,219  

COVID-19 expenses(a)

                          2,006  

Non-recurring and other expenses(b)

     1,053        686        476        444  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Net Income

   $ 17,684      $ 33,813      $ 23,771      $ 45,176  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (a)

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

 

  (b)

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



 

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RISK FACTORS

Investing in our Class A common stock involves a substantial risk of loss. You should carefully consider these risk factors, together with all of the other information included in this prospectus, before you decide to purchase shares of our Class A common stock. If any of the following risks occur, it could have a material adverse effect on our business, financial condition or results of operations. In that case, the trading price of our Class A common stock could decline, and you could lose part or all of your investment. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. See the section of this prospectus captioned “Special Note Regarding Forward-Looking Statements.”

Risks Related to Our Business and Our Industry

If demand for solar energy projects does not continue to grow or grows at a slower rate than we anticipate, our business will suffer.

Our solution is utilized in solar energy projects. As a result, our future success depends on continued demand for solar energy solutions and the ability of solar equipment vendors to meet this demand. The solar industry is an evolving industry that has experienced substantial changes in recent years, and we cannot be certain that consumers and businesses will adopt solar energy as an alternative energy source at levels sufficient to grow our business. If demand for solar energy fails to develop sufficiently, demand for our products will decrease, which would have an adverse impact on our ability to increase our revenue and grow our business.

Existing electric utility industry policies and regulations, and any subsequent changes, may present technical, regulatory and economic barriers to the purchase and use of solar energy systems that may significantly reduce demand for our products or harm our ability to compete.

Federal, state, local and foreign government regulations and policies concerning the broader electric utility industry, as well as internal policies and regulations promulgated by electric utilities and organized electric markets with respect to fees, practices, and rate design, heavily influence the market for electricity generation products and services. These regulations and policies often affect electricity pricing and the interconnection of generation facilities, and can be subject to frequent modifications by governments, regulatory bodies, utilities and market operators. For example, changes in fee structures, electricity pricing structures, and system permitting, interconnection and operating requirements can deter purchases of renewable energy products, including solar energy systems, by reducing anticipated revenues or increasing costs or regulatory burdens for would-be system purchasers. The resulting reductions in demand for solar energy systems could harm our business, prospects, financial condition and results of operations.

A significant recent development in renewable-energy pricing policies in the U.S. occurred on July 16, 2020, when the Federal Energy Regulatory Commission (“FERC”) issued a final rule amending regulations that implement the Public Utility Regulatory Policies Act (“PURPA”). Among other requirements, PURPA mandates that electric utilities buy the output of certain renewable generators, including qualifying solar energy facilities, below established capacity thresholds. PURPA also requires that such sales occur at a utility’s “avoided cost” rate. FERC’s PURPA reforms include modifications (1) to how regulators and electric utilities may establish avoided cost rates for new contracts; (2) that reduce from 20 MW to 5 MW the capacity threshold above which a renewable-energy qualifying facility is rebuttably presumed to have nondiscriminatory market access, thereby removing the requirement for utilities to purchase its output; (3) that require regulators to establish criteria for determining when an electric utility incurs a legally enforceable obligation to purchase from a PURPA facility; and (4) that reduce barriers for third parties to challenge PURPA eligibility. The net effect of these changes is uncertain, as FERC’s final rules do not become effective until 120 days after publication in the Federal Register, and some changes will not become fully effective until states and other jurisdictions implement the new authorities provided by FERC. In general, however, FERC’s PURPA reforms have the potential to reduce prices for the output from certain new renewable generation projects while also narrowing the scope of PURPA

 

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eligibility for new projects. These effects could reduce demand for PURPA-eligible solar energy systems and could harm our business, prospects, financial condition and results of operations.

Changes in other current laws or regulations applicable to us or the imposition of new laws, regulations or policies in the U.S., Europe or other jurisdictions in which we do business could have a material adverse effect on our business, financial condition and results of operations. Any changes to government, utility or electric market regulations or policies that favor electric utilities, non-solar generation, or other market participants, or that make construction or operation of new solar generation facilities more expensive or difficult, could reduce the competitiveness of solar energy systems and cause a significant reduction in demand for our products and services and adversely impact our growth. In addition, changes in our products or changes in export and import laws and implementing regulations may create delays in the introduction of new products in international markets, prevent our customers from deploying our products internationally or, in some cases, prevent the export or import of our products to certain countries altogether. Any such event could have a material adverse effect on our business, financial condition and results of operations.

Our industry has historically been cyclical and experienced periodic downturns.

Our future success partly depends on continued demand for solar PV systems in the end markets we serve. The solar industry has historically been cyclical and has experienced periodic downturns, which may affect the demand for the products that we manufacture. The solar industry has undergone challenging business conditions, mainly as a result of overproduction, and reductions in applicable governmental subsidies, contributing to demand decreases. Although the solar industry has been experiencing significant changes over the past years, there is no assurance that the solar industry will not suffer significant downturns in the future, which will adversely affect demand for our solar products and our results of operations.

If we fail to, or incur significant costs in order to, obtain, maintain, protect, defend or enforce our intellectual property and other proprietary rights, our business and results of operations could be materially harmed.

Our success depends to a significant degree on our ability to protect our intellectual property and other proprietary rights. We rely on a combination of patent, trademark, copyright, trade secret and unfair competition laws, as well as confidentiality and license agreements and other contractual provisions, to establish and protect our intellectual property and other proprietary rights. Such means may afford only limited protection of our intellectual property and may not (i) prevent our competitors from duplicating our processes or technology; (ii) prevent our competitors from gaining access to our proprietary information and technology; or (iii) permit us to gain or maintain a competitive advantage.

We generally seek or apply for patent protection as and if we deem appropriate, based on then-current facts and circumstances. We have applied for patents in the United States, some of which have been issued. We cannot guarantee that any of our pending patent applications or other applications for intellectual property registrations will be issued or granted or that our existing and future intellectual property rights will be sufficiently broad to protect our proprietary technology. While a presumption of validity exists with respect to United States patents issued to us, there can be no assurance that any of our patents, patent applications, or other intellectual property rights will not be, in whole or in part, opposed, contested, challenged, invalidated, circumvented, designed around, or rendered unenforceable. If we fail to obtain issuance of patents or registration of other intellectual property, or our patent claims or other intellectual property rights are rendered invalid or unenforceable, or narrowed in scope, pursuant to, for example, judicial or administrative proceedings, including reexamination, post-grant review, interference, opposition, or derivation proceedings, the coverage of patents and other intellectual property rights afforded our products could be impaired. Even if we are to obtain issuance of further patents or registration of other intellectual property, such intellectual property could be subjected to attacks on ownership, validity, enforceability, or other legal attacks. Any such impairment or other failure to obtain sufficient intellectual property protection could impede our ability to market our products, negatively affect our competitive position and harm our business and operating results, including by forcing us to, among other things,

 

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rebrand or redesign our affected products. Moreover, our patents and patent applications may only cover particular aspects of our products, and competitors and other third parties may be able to circumvent or design around our patents. Competitors may develop and obtain patent protection for more effective technologies, designs or methods. There can be no assurance that third parties will not create new products or methods that achieve similar or better results without infringing upon patents we own. If these developments occur, they could have an adverse effect on our sales or market position.

In countries where we have not applied for patent protection or trademark or other intellectual property registration or where effective patent, trademark, trade secret, and other intellectual property laws and judicial systems may not be available to the same extent as in the United States, we may be at greater risk that our proprietary rights will be circumvented, misappropriated, infringed, or otherwise violated. Filing, prosecuting, maintaining, and defending our intellectual property in all countries throughout the world may be prohibitively expensive, and we may choose to forgo such activities in some applicable jurisdictions. The lack of adequate legal protections of intellectual property or failure of legal remedies or related actions in jurisdictions outside of the United States could have a material adverse effect on our business, financial condition, results of operations, and prospects.

We may in the future need to initiate infringement claims or litigation in order to try to protect or enforce our intellectual property rights. Litigation, whether we are a plaintiff or a defendant, can be expensive and time consuming and may divert the efforts of our management and other personnel, which could harm our business, whether or not such litigation results in a determination favorable to us. Litigation also puts our patents or other intellectual property at risk of being invalidated or interpreted narrowly and our patent applications or applications for other intellectual property registrations at risk of not issuing. Additionally, any enforcement of our patents or other intellectual property may provoke third parties to assert counterclaims against us. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

We rely heavily on trade secrets and nondisclosure agreements to protect our unpatented know-how, technology, and other proprietary information, and to maintain our competitive position. However, trade secrets and know-how can be difficult to protect. We seek to protect these trade secrets and other proprietary technology, in part, by entering into nondisclosure and confidentiality agreements with parties who have access to them, such as our employees, consultants, and other third parties. However, we cannot guarantee that we have entered into such agreements with each party that has or may have had access to our proprietary information, know-how and trade secrets. Moreover, no assurance can be given that these agreements will be effective in controlling access to, distribution, use, misuse, misappropriation, or disclosure of our proprietary information, know-how and trade secrets. Further, these agreements may not prevent our competitors from independently developing technologies that are substantially equivalent or superior to ours. These agreements may be breached, and we may not have adequate remedies for any such breach. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects.

We may be subject to claims that our employees, consultants, or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting ownership of what we regard as our own intellectual property.

Many of our employees and consultants are currently or were previously employed at other companies in our field, including our competitors or potential competitors. Although we try to ensure that our employees and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these individuals have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer. Litigation may be necessary to

 

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defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third parties or defend claims that they may bring against us to determine the ownership of what we regard as our intellectual property. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects.

If our trademarks and trade names are not adequately protected, we may not be able to build name recognition in our markets of interest, and our competitive position may be harmed.

The registered or unregistered trademarks or trade names that we own may be challenged, infringed, circumvented, declared generic, lapsed or determined to be infringing on or dilutive of other marks. We may not be able to protect our rights in these trademarks and trade names, which we need in order to build name recognition with potential members. In addition, third parties may file for registration of trademarks similar or identical to our trademarks, thereby impeding our ability to build brand identity and possibly leading to market confusion. If they succeed in registering or developing common-law rights in such trademarks, and if we are not successful in challenging such third-party rights, we may not be able to use these trademarks to develop brand recognition of our technologies, products or services. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. If we are unable to establish name recognition based on our trademarks and trade names, we may not be able to compete effectively, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

We may need to defend ourselves against third-party claims that we are infringing, misappropriating or otherwise violating others’ intellectual property rights, which could divert management’s attention, cause us to incur significant costs, and prevent us from selling or using the technology to which such rights relate.

Our competitors and other third parties hold numerous patents related to technology used in our industry and may hold or obtain patents, copyrights, trademarks or other intellectual property rights that could prevent, limit, or interfere with our ability to make, use, develop, sell or market our products and services, which could make it more difficult for us to operate our business. From time to time, we may be subject to claims of infringement, misappropriation, or other violation of patents or other intellectual property rights and related litigation, and if we gain greater recognition in the market, we face a higher risk of being the subject of these types of claims. Regardless of their merit, responding to such claims can be time consuming, can divert management’s attention and resources, and may cause us to incur significant expenses in litigation or settlement, and we cannot be certain that we would be successful in defending against any such claims in litigation or other proceedings. If we do not successfully defend or settle an intellectual property claim, we could be liable for significant monetary damages and could be prohibited from continuing to use certain technology, business methods, content, or brands, and from making, selling or incorporating certain components or intellectual property into the products and services we offer. As a result, we could be forced to redesign our products and services and/or to establish and maintain alternative branding for our products and services. To avoid litigation or being prohibited from marketing or selling the relevant products or services, we could seek a license from the applicable third party, which could require us to pay significant royalties, licensing fees, or other payments, increasing our operating expenses. If a license is not available at all or not available on reasonable terms, we may be required to develop or license a non-violating alternative, either of which could be infeasible or require significant effort and expense. If we cannot license or develop a non-violating alternative, we would be forced to limit or stop sales of our offerings

 

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and may be unable to effectively compete. Moreover, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our Class A common stock. Any of these results would materially and adversely affect our business, financial condition, results of operations and prospects. Finally, any litigation or claims, whether or not valid, could result in substantial costs, negative publicity and diversion of resources and management attention, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects.

We may experience delays, disruptions or quality control problems in our manufacturing operations in part due to our vendor concentration.

Our product development, manufacturing and testing processes are complex and require significant technological and production process expertise, and we depend on a limited number of vendors and suppliers. Any vendor delay or disruption could cause a delay or disruption in our ability to meet customer requirements which may result in a loss of customers. Such processes involve a number of precise steps from design to production. Any change in our processes could cause one or more production errors, requiring a temporary suspension or delay in our production line until the errors can be researched, identified and properly addressed and rectified. This may occur particularly as we introduce new products, modify our engineering and production techniques, and/or expand our capacity. In addition, our failure to maintain appropriate quality assurance processes could result in increased product failures, loss of customers, increased warranty reserve, increased production and logistics costs and delays. Any of these developments could have a material adverse effect on our business, financial condition, and results of operations.

The interruption of the flow of components and materials from international vendors could disrupt our supply chain, including as a result of the imposition of additional duties, tariffs and other charges on imports and exports.

We purchase some of our components and materials outside of the United States through arrangements with various vendors. Political, social or economic instability in these regions, or in other regions where our products are made, could cause disruptions in trade. Actions in various countries have created uncertainty with respect to tariff impacts on the costs of some of our components and materials. The degree of our exposure is dependent on (among other things) the type of materials, rates imposed, and timing of the tariffs. Other events that could also cause disruptions to our supply chain include:

 

   

the imposition of additional trade law provisions or regulations;

 

   

the imposition of additional duties, tariffs and other charges on imports and exports, including as a result of the escalating trade war between China and the United States;

 

   

the potential imposition of restrictions on our acquisition, importation, or installation of equipment under future U.S. regulations implementing the Executive Order on Securing the United States Bulk-Power System;

 

   

quotas imposed by bilateral trade agreements;

 

   

foreign currency fluctuations;

 

   

natural disasters;

 

   

public health issues and epidemic diseases, their effects (including any disruptions they may cause) or the perception of their effects, such as the ongoing novel coronavirus outbreak originating in China;

 

   

theft;

 

   

restrictions on the transfer of funds;

 

   

the financial instability or bankruptcy of vendors; and

 

   

significant labor disputes, such as dock strikes.

 

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We cannot predict whether the countries in which our components and materials are sourced, or may be sourced in the future, will be subject to new or additional trade restrictions imposed by the United States or other foreign governments, including the likelihood, type or effect of any such restrictions. Trade restrictions, including new or increased tariffs or quotas, border taxes, embargoes, safeguards and customs restrictions against certain components and materials, as well as labor strikes and work stoppages or boycotts, could increase the cost or reduce or delay the supply of components and materials available to us and adversely affect our business, financial condition or results of operations.

Changes in the United States trade environment, including the imposition of import tariffs, could adversely affect the amount or timing of our revenues, results of operations or cash flows.

Escalating trade tensions, particularly between the United States and China, have led to increased tariffs and trade restrictions, including tariffs applicable to certain materials and components for our products or for products used in solar energy projects more broadly, such as module supply and availability. More specifically, in March 2018, the United States imposed a 25% tariff on steel imports and a 10% tariff on aluminum imports pursuant to Section 301 of the Trade Act of 1974 and has imposed additional tariffs on steel and aluminum imports pursuant to Section 232 of the Trade Expansion Act of 1962. Additionally, in January 2018, the United States adopted a tariff on imported solar modules and cells pursuant to Section 201 of the Trade Act of 1974. The tariff was initially set at 30%, with a gradual reduction over four years to 15%. This tariff may indirectly affect us by impacting the financial viability of solar energy projects, which could in turn reduce demand for our products. Furthermore, in July 2018, the United States adopted a 10% tariff on a long list of products imported from China under Section 301 of the Trade Act of 1974, including inverters and power optimizers, which became effective on September 24, 2018. In June 2019, the U.S. Trade Representative increased the rate of such tariffs from 10% to 25%. These tariffs could impact the solar energy projects in which our products are used, which could lead to decreased demand for our products.

On January 15, 2020, the United States and China entered into an initial trade deal that preserves the bulk of the tariffs placed in 2018 and maintains a threat of additional tariffs should China breach the terms of the deal.

Tariffs and the possibility of additional tariffs in the future have created uncertainty in the industry. If the price of solar systems in the United States increases, the use of solar systems could become less economically feasible and could reduce our gross margins or reduce the demand of solar systems manufactured and sold, which in turn may decrease demand for our products. Additionally, existing or future tariffs may negatively affect key customers, suppliers, and manufacturing partners. Such outcomes could adversely affect the amount or timing of our revenues, results of operations or cash flows, and continuing uncertainty could cause sales volatility, price fluctuations or supply shortages or cause our customers to advance or delay their purchase of our products. It is difficult to predict what further trade-related actions governments may take, which may include additional or increased tariffs and trade restrictions, and we may be unable to quickly and effectively react to such actions.

We face risks related to actual or threatened health epidemics, such as the COVID-19 pandemic, and other outbreaks, which could significantly disrupt our manufacturing and operations.

Our business could be adversely impacted by the effects of a widespread outbreak of contagious disease, including the recent outbreak of respiratory illness caused by a novel coronavirus (“COVID-19”) pandemic. Any widespread outbreak of contagious diseases, and other adverse public health developments, could cause disruption to, among other things, our ground operations at project sites, our manufacturing facilities and our suppliers and vendors and have a material and adverse effect on our business operations. While we have only experienced a short term work stoppage at the onset of the pandemic, our ground operations at project sites, our manufacturing facilities and our suppliers and vendors could be disrupted by worker absenteeism, quarantines, shortage of COVID-19 test kits and personal protection equipment for employees, office and factory closures, disruptions to ports and other shipping infrastructure, or other travel or health-related restrictions. If our ground operations at project sites, our manufacturing facilities and our suppliers or vendors are so affected, our supply chain, manufacturing and product shipments will be delayed, which could adversely affect our business,

 

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operations and customer relationships. In response to the COVID-19 pandemic, in the first half of 2020, we paid our employees an hourly incentive fee to address worker absenteeism, which resulted in increased operating expenses, and there can be no assurances that such payments will not be necessary in the future. We also implemented adjustments to our operations designed to keep employees safe and comply with federal, state and local guidelines, including those regarding social distancing. For the nine months ended September 30, 2020, the Company incurred $2.0 million in COVID-19 related costs, including disinfecting and reconfiguration of facilities, medical professionals to conduct daily screening of employees, premium pay during the pandemic to hourly workers and direct legal costs associated with the pandemic. There can be no assurances that such costs will not be incurred in the future. In addition, the macroeconomic effects of the COVID-19 pandemic in the United States and other markets has resulted in a widespread health crisis that has adversely affected the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products and impact our operating results.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the COVID-19 pandemic can be controlled and abated, and cannot be predicted at this time. Further, while jurisdictions in which we operate have gradually allowed the reopening of businesses and other organizations and removed the sheltering restrictions, it is premature to assess whether doing so will result in a meaningful increase in economic activity and the impact of such actions on further COVID-19 cases.

Although we have thus far avoided significant impact to performance of operations, and have not incurred, to date, liquidated damages due to delay, we have encountered, and could encounter in the future, project delays due to impacts on suppliers, customers, or others. The duration and intensity of these impacts and resulting disruption to our operations is uncertain and continues to evolve as of the date of this registration statement. Accordingly, management will continue to monitor the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce.

To the extent the COVID-19 pandemic adversely affects our financial condition, operating results and cash flows, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our high level of indebtedness, our need to generate sufficient cash flows to service our indebtedness and our ability to comply with the covenants contained in the agreements that govern our indebtedness.

We may not be eligible to participate in the relief programs provided under the recently adopted Coronavirus Aid Relief, and Economic Security (CARES) Act, and even if we are eligible, we may not realize any material benefits from participating in such programs.

The U.S. government has taken a number of actions to mitigate the impact of the COVID-19 pandemic on the U.S. economy. Among other steps taken, the Federal Reserve cut the federal funds rate in March 2020 and also lowered the interest rate on emergency lending at the discount window and lengthened the term of loans to 90 days. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law. Key provisions of the CARES Act include one-time payments to individuals, strengthened unemployment insurance, additional health-care funding, loans and grants to certain businesses, and temporary amendments to the U.S. Internal Revenue Code of 1986, as amended (the “Code”). The Small Business Administration was tapped to lead the effort to loan funds to small businesses, in conjunction with banks. The Federal Reserve and the U.S. Treasury have also responded with lending programs under the CARES Act. Further, the Federal Reserve has intervened with a number of credit facilities intended to keep the capital markets liquid.

The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer-side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to net interest deduction limitations, increased limitations on qualified charitable

 

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contributions, and technical corrections to tax depreciation methods for qualified improvement property. While we have not been eligible to participate in certain relief programs provided under the CARES Act, such as the Paycheck Protection Program, we are evaluating the applicability of other relief programs provided under the CARES Act to the Company and the potential impacts on our business.

Accounting for the income tax effects of the CARES Act and subsequent guidance issued will require complex new calculations to be performed and significant judgments in interpreting the legislation. Additional guidance may be issued on how the provisions of the CARES Act will be applied or otherwise administered that is different from our interpretation. We continue to examine the impact that the CARES Act may have on our business. We began deferring the employer portion of social security payments in April 2020.

While we may determine to apply for such credits or other tax benefits provided under the CARES Act, there is no guarantee that we will meet any eligibility requirements to benefit from any of the tax relief provisions under the CARES Act or, even if we are able to participate, that such provisions will provide meaningful benefit to our business.

The viability and demand for solar energy and the demand for our products are impacted by many factors outside of our control, which makes it difficult to predict our future prospects.

The viability and demand for solar energy, and in turn, our products, may be affected by many factors outside of our control. Our significant growth and expansion, combined with the rapidly evolving and competitive nature of our industry, makes it difficult to predict our future prospects. We have limited insight into emerging trends that may adversely affect our business, financial condition, results of operations and prospects. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, including unpredictable and volatile revenues and increased expenses as we continue to grow our business. Some of the factors outside of our control that may impact the viability and demand for solar energy include:

 

   

cost competitiveness, reliability and performance of solar energy systems compared to conventional and non-solar renewable energy sources and products and cost competitiveness, reliability and performance of our products compared to our competitors;

 

   

availability and scale and scope of government subsidies and incentives to support the development and deployment of solar energy solutions;

 

   

prices of traditional carbon-based energy sources;

 

   

levels of investment by end users of solar energy projects, which tend to decrease when economic growth slows; and

 

   

the emergence, continuance or success of, or increased government support for, other alternative energy generation technologies and products.

If we do not manage these risks and overcome these difficulties successfully, our business will suffer.

The market for our products is competitive, and we may face increased competition as new and existing competitors introduce EBOS system solutions and components, which could negatively affect our results of operations and market share.

The market for EBOS system solutions and components, including cable assemblies, inline fuses, combiners, disconnects, recombiners, wireless monitoring systems, junction boxes, transition enclosures and splice boxes, is competitive. Our principal competitors include SolarBOS Inc., Bentek Corporation and ConnectPV, Inc. We compete on the basis of product performance and features, installation cost, reliability and duration of product warranty, sales and distribution capabilities, and training and customer support. Competition

 

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may intensify as new and existing competitors enter the market. If our competitors introduce new technologies that are successful in offering a price competitive and technological attractive EBOS system solutions and components, it may become more difficult for us to maintain market share.

Several of our existing and potential competitors may have or obtain the financial resources to offer competitive products at aggressive or below-market pricing levels, which could cause us to lose sales or market share or require us to lower prices for our products in order to compete effectively. If we have to reduce our prices by more than we anticipated, or if we are unable to offset any future reductions in our average selling prices by increasing our sales volume, reducing our costs and expenses or introducing new products, our revenues and gross profit will suffer.

In addition, competitors may be able to develop new products more quickly than us, may partner with other competitors to provide combined technologies and competing solutions and may be able to develop products that are more reliable or that provide more functionality than ours.

A loss of one or more of our significant customers, their inability to perform under their contracts, or their default in payment could harm our business and negatively impact revenue, results of operations, and cash flow.

We are dependent on a relatively small number of customers for our sales, and a small number of customers have historically accounted for a material portion of our revenue. The loss of any one of the Company’s significant customers, their inability to perform under their contracts, or their default in payment could have a materially adverse effect on the revenues and profits of the Company. Further, the Company’s trade accounts receivable are from companies within the solar industry, and as such, the Company is exposed to normal industry credit risks. For the near future, we may continue to derive a significant portion of our net sales from a small number of customers. For the year ended December 31, 2019, our two largest customers represented approximately 59% of our revenue. Our top five customers accounted for approximately 80% of our revenue for the year ended December 31, 2019. For the nine months ended September 30, 2020, our two largest customers represented approximately 40% of our revenue. Our top five customers accounted for approximately 66% of our revenue for the nine months ended September 30, 2020. Accordingly, loss of a significant customer or a significant reduction in pricing or order volume from a significant customer could materially reduce net sales and operating results in any reporting period.

The reduction, elimination or expiration of government incentives for, or regulations mandating the use of, renewable energy and solar energy specifically could reduce demand for solar energy systems and harm our business.

Federal, state, local and foreign government bodies provide incentives to owners, end users, distributors, system integrators and manufacturers of solar energy systems to promote solar electricity in the form of rebates, tax credits and other financial incentives such as system performance payments, payments of renewable energy credits associated with renewable energy generation, and an exclusion of solar energy systems from property tax assessments.

The range and duration of these incentives varies widely by jurisdiction. Our customers typically use our systems for grid-connected applications wherein solar power is sold under a power purchase agreement or into an organized electric market. This segment of the solar industry has historically depended in large part on the availability and size of government incentives and regulations mandating the use of renewable energy. Consequently, the reduction, elimination or expiration of government incentives for grid-connected solar electricity or regulations mandating the use of renewable energy may negatively affect the competitiveness of solar electricity relative to conventional and non-solar renewable sources of electricity and could harm or halt the growth of the solar electricity industry and our business. These subsidies and incentives may expire on a particular date, end when the allocated funding is exhausted or be reduced or terminated as solar energy adoption

 

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rates increase or as a result of legal challenges, the adoption of new statutes or regulations, or the passage of time. These reductions or terminations may occur without warning.

In addition, federal, state, local and foreign government bodies have implemented various policies that are intended to promote renewable electricity generally or solar electricity in particular. Chief among these policies is the RPS. Currently, 30 U.S. states, the District of Columbia, and 3 U.S. territories have implemented some form of RPS, which mandates that a certain portion of electricity delivered by regulated utilities to customers come from a set of eligible renewable energy resources by a certain compliance date. RPSs vary widely by jurisdiction. In some areas, requirements have been satisfied and utilities must only prevent reductions in qualifying energy purchases and sales, while other jurisdictions’ RPSs continue to require substantial increases, up to 100 percent renewable electric generation, with final compliance dates typically 20 or more years out.

While the recent trend has been for jurisdictions with RPSs to maintain or expand them, there have been certain exceptions and there can be no assurances that RPSs or other policies supporting renewable energy will continue. Proposals to extend compliance deadlines, reduce renewable requirements or solar set-asides, or entirely repeal RPSs emerge from time to time in various jurisdictions. Reduction or elimination of RPSs, as well as changes to other renewable-energy and solar-energy policies, could reduce the potential growth of the solar energy industry and our business.

Moreover, policies of the current as well as those of the incoming U.S. presidential administrations may create regulatory uncertainty in the renewable energy industry, including the solar energy industry, and adversely affect our business. For example, in June 2017, the U.S. President announced that the United States would withdraw from participation in the 2015 Paris Agreement on climate change mitigation, and in June 2019, the U.S. Environmental Protection Agency issued the final Affordable Clean Energy (“ACE”) rule and repealed the Clean Power Plan (“CPP”). Under the ACE rule, emissions from electric utility generation facilities would be regulated only through the use of various “inside the fence” or onsite efficiency improvements and emission control technologies. In contrast, the CPP employed emissions reduction strategies that included “outside the fence” measures, including those associated with renewable energy projects. The ACE rule is currently subject to legal challenges and may be subject to future challenges and is expected to be reconsidered by the incoming U.S. presidential administration. The ultimate outcome of these developments, and the ultimate impact of the ACE rule, is uncertain.

Finally, the solar industry has in past years experienced periodic downturns due to, among other things, changes in subsidies and incentives, as well as other policies and regulations, which, as noted above, may affect the demand for equipment that we manufacture. Although the solar industry has recovered from these downturns, there is no assurance that the solar industry will not suffer significant downturns in the future, which will adversely affect demand for our solar products.

A drop in the price of electricity sold may harm our business, financial condition, results of operations and prospects.

Decreases in the price of electricity, whether in organized electric markets or with contract counterparties, may negatively impact the owners of the solar energy projects or make the purchase of solar energy systems less economically attractive and would likely lower sales of our products. The price of electricity could decrease as a result of:

 

   

construction of a significant number of new lower-cost power generation plants, including plants utilizing natural gas, renewable energy or other generation technologies;

 

   

relief of transmission constraints that enable distant lower-cost generation to transmit energy less expensively or in greater quantities;

 

   

reductions in the price of natural gas or other fuels;

 

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utility rate adjustment and customer class cost reallocation;

 

   

decreased electricity demand, including from energy conservation technologies and public initiatives to reduce electricity consumption;

 

   

development of smart-grid technologies that lower the peak energy requirements;

 

   

development of new or lower-cost customer-sited energy storage technologies that have the ability to reduce a customer’s average cost of electricity by shifting load to off-peak times; and

 

   

development of new energy generation technologies that provide less expensive energy.

Moreover, technological developments in the solar components industry could allow our competitors and their customers to offer electricity at costs lower than those that can be achieved by us and our customers, which could result in reduced demand for our products.

If the cost of electricity generated by solar energy installations incorporating our systems is high relative to the cost of electricity from other sources, then our business, financial condition and results of operations may be harmed.

An increase in interest rates or a reduction in the availability of tax equity or project debt capital in the global financial markets could make it difficult for end customers to finance the cost of a solar energy system and could reduce the demand for our products.

Many end users depend on financing to fund the initial capital expenditure required to construct a solar energy project. As a result, an increase in interest rates or a reduction in the supply of project debt or tax equity financing could reduce the number of solar projects that receive financing or otherwise make it difficult for our customers or their customers to secure the financing necessary to construct a solar energy project on favorable terms, or at all, and thus lower demand for our products, which could limit our growth or reduce our net sales. In addition, we believe that a significant percentage of end-users construct solar energy projects as an investment, funding a significant portion of the initial capital expenditure with financing from third parties. An increase in interest rates could lower an investor’s return on investment on a solar energy project, increase equity requirements or make alternative investments more attractive relative to solar energy projects and, in each case, could cause these end users to seek alternative investments.

Defects or performance problems in our products could result in loss of customers, reputational damage and decreased revenue, and we may face warranty, indemnity and product liability claims arising from defective products.

EBOS components, including cable assemblies, inline fuses, combiners, disconnects, recombiners, wireless monitoring systems, junction boxes, transition enclosures, splice boxes, conventional homerun EBOS system solutions and combine-as-you-go EBOS system solutions, are mission-critical products and systems that have a high consequence of failure, including lost revenue, equipment damage, fire damage, and even serious injury or death because of the high voltages involved and potential for fire. Further, a fault in the wiring of an EBOS system, whether as a result of product malfunctions, defects or improper installation, may cause electrical failures in solar energy projects. Faults typically occur when natural thermal expansion and contraction occurs at a point where two wires have been joined, loosening the insulation and allowing moisture into the joint. Faults can result in lost production, damage to the equipment, fire and injury or death depending on their severity and whether people are onsite.

Although our products meet our stringent quality requirements, they may contain undetected errors or defects, especially when first introduced or when new generations are released. Errors, defects, product failures, destructions or poor performance can arise due to design flaws, defects in raw materials or components or manufacturing difficulties, which can affect both the quality and the yield of the product. Any actual or perceived errors, defects or poor performance in our products could result in the replacement or recall of our products, shipment delays, rejection of our products, damage to our reputation, lost revenue, diversion of our engineering

 

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personnel from our product development efforts and increases in customer service and support costs, all of which could have a material adverse effect on our business, financial condition and results of operations.

Furthermore, defective components may give rise to warranty, indemnity or product liability claims against us that exceed any revenue or profit we receive from the affected products. Our limited warranties cover defects in materials and workmanship of our products under normal use and service conditions. As a result, we bear the risk of warranty claims long after we have sold products and recognized revenue. While we do have accrued reserves for warranty claims, our estimated warranty costs for previously sold products may change to the extent future products are not compatible with earlier generation products under warranty. Our warranty accruals are based on our assumptions and we do not have a long history of making such assumptions. As a result, these assumptions could prove to be materially different from the actual performance of our systems, causing us to incur substantial unanticipated expense to repair or replace defective products in the future or to compensate customers for defective products. Our failure to accurately predict future claims could result in unexpected volatility in, and have a material adverse effect on, our financial condition.

If one of our products causes injury to someone or causes property damage, including as a result of product malfunctions, defects or improper installation, then we could be exposed to product liability claims. We could incur significant costs and liabilities if we are sued and if damages are awarded against us. Further, any product liability claim we face could be expensive to defend and could divert management’s attention. The successful assertion of a product liability claim against us could result in potentially significant monetary damages, penalties or fines; subject us to adverse publicity; damage our reputation and competitive position; and adversely affect sales of our products. In addition, product liability claims, injuries, defects or other problems experienced by other companies in the solar industry could lead to unfavorable market conditions for the industry as a whole and may have an adverse effect on our ability to attract new customers, thus harming our growth and financial performance.

Changes in tax laws or regulations that are applied adversely to us or our customers could materially adversely affect our business, financial condition, results of operations and prospects.

Changes in corporate tax rates, tax incentives for renewable energy projects, the realization of net deferred tax assets relating to our U.S. operations, the taxation of foreign earnings, and the deductibility of expenses under future tax reform legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges in the current or future taxable years, and could increase our future U.S. tax expense, which could have a material adverse effect on our business, financial condition, results of operations, and prospects.

We may incur obligations, liabilities or costs under environmental, health and safety laws, which could have an adverse impact on our business, financial condition and results of operations.

Our operations involve the use, handling, generation, storage, discharge and disposal of hazardous substances, chemicals and wastes. As a result, we are required to comply with national, state, local, and foreign laws and regulations regarding the protection of the environment and health and safety. Adoption of more stringent laws and regulations in the future could require us to incur substantial costs to come into compliance with these laws and regulations. In addition, violations of, or liabilities under, these laws and regulations may result in restrictions being imposed on our operating activities or in our being subject to adverse publicity, substantial fines, penalties, criminal proceedings, third-party property damage or personal injury claims, cleanup costs, or other costs. We may become liable under certain of these laws and regulations for costs to investigate or remediate contamination at properties we own or operate, we formerly owned or operated or to which hazardous substances were sent by us for disposal. Liability under these laws and regulations can be imposed on a joint and several basis and without regard to fault or the legality of the activities giving rise to the contamination conditions. In addition, future developments such as more aggressive enforcement policies (including by the incoming U.S. presidential administration) or the discovery of presently unknown environmental conditions may

 

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require expenditures that could have an adverse effect on our business, financial condition, and results of operations.

Failure by our vendors or our component or raw material suppliers to use ethical business practices and comply with applicable laws and regulations may adversely affect our business.

We do not control our vendors or suppliers or their business practices. Accordingly, we cannot guarantee that they follow ethical business practices, such as fair wage practices and compliance with environmental, safety and other local laws. A lack of demonstrated compliance could lead us to seek alternative manufacturers or suppliers, which could increase our costs and result in delayed delivery of our products, product shortages or other disruptions of our operations. Violation of labor or other laws by our manufacturers or suppliers or the divergence of a supplier’s labor or other practices from those generally accepted as ethical in the U.S. or other markets in which we do business could also attract negative publicity for us and harm our business.

Our results of operations may fluctuate from quarter to quarter, which could make our future performance difficult to predict and could cause our results of operations for a particular period to fall below expectations, resulting in a decline in the price of our Class A common stock.

Our quarterly results of operations are difficult to predict and may fluctuate significantly in the future. We have experienced seasonal and quarterly fluctuations in the past as a result of seasonal fluctuations in our customers’ business. Our end users’ ability to install solar energy systems is affected by weather, as for example during the winter months in the northeastern U.S. and Europe. Such installation delays can impact the timing of orders for our products. Further, given that we are an early-stage company operating in a rapidly growing industry, the true extent of these fluctuations may have been masked by our recent growth rates and consequently may not be readily apparent from our historical results of operations and may be difficult to predict. Our financial performance, sales, working capital requirements and cash flow may fluctuate, and our past quarterly results of operations may not be good indicators of future performance. Any substantial decrease in revenues would have an adverse effect on our financial condition, results of operations, cash flows and stock price.

Failure to effectively utilize information technology systems or implement new technologies could disrupt our business or reduce our sales or profitability.

We rely extensively on various information technology systems, including data centers, hardware, software and applications to manage many aspects of our business, including to operate and provide our products and services, to process and record transactions, to enable effective communication systems, to track inventory flow, to manage logistics and to generate performance and financial reports. We are dependent on the integrity, security and consistent operations of these systems and related backup systems. Our computer and information technology systems and the third-party systems we rely upon are also subject to damage or interruption from a number of causes, including power outages; computer and telecommunications failures; computer viruses, malware, phishing or distributed denial-of-service attacks; security breaches; cyberattacks; catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes; acts of war or terrorism and design or usage errors by our employees or contractors.

Compromises, interruptions or shutdowns of our systems, including those managed by third parties, whether intentional or inadvertent, could lead to delays in our business operations and, if significant or extreme, affect our results of operations.

From time to time, our systems require modifications and updates, including by adding new hardware, software and applications; maintaining, updating or replacing legacy programs; and integrating new service providers and adding enhanced or new functionality. Although we are actively selecting systems and vendors and implementing procedures to enable us to maintain the integrity of our systems when we modify them, there are inherent risks associated with modifying or replacing systems, and with new or changed relationships, including

 

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accurately capturing and maintaining data, realizing the expected benefit of the change and managing the potential disruption of the operation of the systems as the changes are implemented. Potential issues associated with implementation of these technology initiatives could reduce the efficiency of our operations in the short term. In addition, any interruption in the operation of our websites or systems could cause us to suffer reputational harm or to lose sales if customers are unable to access our site or purchase merchandise from us during such interruption. The efficient operation and successful growth of our business depends upon our information technology systems. The failure of our information technology systems and the third-party systems we rely on to perform as designed, or our failure to implement and operate them effectively, could disrupt our business or subject us to liability and thereby have a material adverse effect on our business, financial condition, results of operations and prospects.

Our planned expansion could subject us to additional business, financial, regulatory and competitive risks.

Our strategy is to introduce new products and grow our revenues outside of the U.S. by developing region-specific products; entering into joint-venture or licensing arrangements with companies in certain markets; expanding our relationships with value-added resellers of our products in some countries; and utilizing locally sourced components in our products in jurisdictions where locally sourced components are a regulatory or customer requirement.

Our products and services to be offered outside of the U.S. may differ from our current products and services in several ways, such as the consumption and utilization of local raw materials, components and logistics, the reengineering of select components to reduce costs, and region-specific customer training, site commissioning, warranty remediation and other technical services.

These markets have different characteristics from the markets in which we currently sell products, and our success will depend on our ability to adapt properly to these differences. These differences may include differing regulatory requirements, including tax laws, trade laws, labor regulations, tariffs, export quotas, customs duties or other trade restrictions, limited or unfavorable intellectual property protection, international political or economic conditions, restrictions on the repatriation of earnings, longer sales cycles, warranty expectations, product return policies and cost, performance and compatibility requirements. In addition, expanding into new geographic markets will increase our exposure to presently existing risks, such as fluctuations in the value of foreign currencies and difficulties and increased expenses in complying with U.S. and foreign laws, regulations and trade standards, including the Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”).

Failure to develop these new products successfully or to otherwise manage the risks and challenges associated with our potential expansion into new geographic markets could adversely affect our revenues and our ability to achieve or sustain profitability. There can be no assurance that any new products will be well-received by our customers or achieve commercial viability. Expanding into new markets and investing resources towards developing new products imposes additional burdens on our research, systems development, sales, marketing and general managerial resources. The processes are costly, and our efforts to expand into new markets or develop new products may not be successful. If we are unsuccessful in expanding into new markets or in obtaining widespread adoption of new products, we may not be able to offset the expenses associated with the expansion into new markets or development of new products. If we are unable to manage our expansion and development efforts effectively, if our expansion and development efforts take longer than planned or if our costs for these efforts exceed our expectations, our business, financial condition, results of operations or prospects could be adversely affected.

Our indebtedness could adversely affect our financial flexibility and our competitive position.

As of December 31, 2020, the New Senior Secured Credit Agreement had $350.0 million of term loans and $20.0 million of revolving credit loans outstanding. Our level of indebtedness increases the risk that we may

 

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be unable to generate cash sufficient to pay amounts due in respect of our indebtedness. Our indebtedness could have other important consequences to you and significant effects on our business. For example, it could:

 

   

increase our vulnerability to adverse changes in general economic, industry and competitive conditions;

 

   

require us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

   

restrict us from exploiting business opportunities;

 

   

make it more difficult to satisfy our financial obligations, including payments on our indebtedness;

 

   

place us at a disadvantage compared to our competitors that have less debt; and

 

   

limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general corporate purposes.

In addition, the New Senior Secured Credit Agreement contains, and the agreements evidencing or governing any other future indebtedness may contain, restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all of our indebtedness. See “Description of Certain Indebtedness.”

The phase-out, replacement or unavailability of LIBOR and/or other interest rate benchmarks could adversely affect our indebtedness.

The interest rates applicable to the New Senior Secured Credit Agreement are based on, and the interest rates applicable to certain debt obligations we may incur in the future may be based on, a fluctuating rate of interest determined by reference to the London Interbank Offered Rate (“LIBOR”). In July 2017, the U.K.’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. In response to concerns regarding the future of LIBOR, the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee (the “ARRC”) to identify alternatives to LIBOR. The ARRC has recommended a benchmark replacement waterfall to assist issuers in continued capital market entry while safeguarding against LIBOR’s discontinuation. The initial steps in the ARRC’s recommended provision reference variations of the Secured Overnight Financing Rate (“SOFR”), calculated using short-term repurchase agreements backed by Treasury securities. At this time, it is not possible to predict whether SOFR will attain market traction as a LIBOR replacement. Additionally, it is uncertain if LIBOR will cease to exist after calendar year 2021, or whether additional reforms to LIBOR may be enacted, or whether alternative reference rates will gain market acceptance as a replacement for LIBOR. In anticipation of LIBOR’s phase-out, the New Senior Secured Credit Agreement provides for alternative base rates, as well as a transition mechanism for selecting a benchmark replacement rate for LIBOR, with such benchmark replacement rate to be mutually agreed with the administrative agent and subject to the majority lenders not objecting to such benchmark replacement.

There can be no assurance that we will be able to reach any agreement on a replacement benchmark, and there can be no assurance that any agreement we reach will result in effective interest rates at least as favorable to us as our current effective interest rates. The failure to reach an agreement on a replacement benchmark, or the failure to reach an agreement that results in an effective interest rate at least as favorable to us as our current effective interest rates, could result in a significant increase in our debt service obligations, which could adversely affect our financial condition and results of operations. In addition, the overall financing market may be disrupted as a result of the phase-out or replacement of LIBOR, which could have an adverse impact on our

 

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ability to refinance, reprice or amend the New Senior Secured Credit Agreement or incur additional indebtedness, on favorable terms or at all.

Our indebtedness may restrict our current and future operations, which could adversely affect our ability to respond to changes in our business and to manage our operations.

The New Senior Secured Credit Agreement contains, and the agreements evidencing or governing any other future indebtedness may contain, financial restrictions on us and our restricted subsidiaries, including restrictions on our or our restricted subsidiaries’ ability to, among other things:

 

   

place liens on our or our restricted subsidiaries’ assets;

 

   

make investments other than permitted investments;

 

   

incur additional indebtedness;

 

   

prepay or redeem certain indebtedness;

 

   

merge, consolidate or dissolve;

 

   

sell assets;

 

   

engage in transactions with affiliates;

 

   

change the nature of our business;

 

   

change our or our subsidiaries’ fiscal year or organizational documents; and

 

   

make restricted payments (including certain equity issuances).

In addition, we are required to maintain compliance with various financial ratios in the New Senior Secured Credit Agreement. A failure by us or our subsidiaries to comply with the covenants or to maintain the required financial ratios contained in the New Senior Secured Credit Agreement could result in an event of default under such indebtedness, which could adversely affect our ability to respond to changes in our business and manage our operations. Additionally, a default by us under the New Senior Secured Credit Agreement or an agreement governing any other future indebtedness may trigger cross-defaults under any other future agreements governing our indebtedness. Upon the occurrence of an event of default or cross-default under any of the present or future agreements governing our indebtedness, the lenders could elect to declare all amounts outstanding to be due and payable and exercise other remedies as set forth in the agreements. If any of our indebtedness is accelerated, there can be no assurance that our assets will be sufficient to repay this indebtedness in full, which could have a material adverse effect on our ability to continue to operate as a going concern. See “Description of Certain Indebtedness.”

Developments in alternative technologies may have a material adverse effect on demand for our offerings.

Significant developments in alternative technologies, such as advances in other forms of EBOS systems may have a material adverse effect on our business and prospects. Any failure by us to adopt new or enhanced technologies or processes, or to react to changes in existing technologies, could result in product obsolescence, the loss of competitiveness of our products, decreased revenue and a loss of market share to competitors.

If we fail to manage our recent and future growth effectively, we may be unable to execute our business plan, maintain high levels of customer service or adequately address competitive challenges.

We have experienced significant growth in recent periods. We intend to continue to expand our business significantly within existing and new markets. This growth has placed, and any future growth may place, a significant strain on our management, operational and financial infrastructure. In particular, we will be required to expand, train and manage our growing employee base and scale and otherwise improve our IT infrastructure in tandem with that headcount growth. Our management will also be required to maintain and expand our relationships with customers, suppliers and other third parties and attract new customers and suppliers, as well as manage multiple geographic locations.

 

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Our current and planned operations, personnel, IT and other systems and procedures might be inadequate to support our future growth and may require us to make additional unanticipated investment in our infrastructure. Our success and ability to further scale our business will depend, in part, on our ability to manage these changes in a cost-effective and efficient manner. If we cannot manage our growth, we may be unable to take advantage of market opportunities, execute our business strategies or respond to competitive pressures. This could also result in declines in quality or customer satisfaction, increased costs, difficulties in introducing new offerings or other operational difficulties. Any failure to effectively manage growth could adversely impact our business and reputation.

Amounts included in our backlog and awarded orders may not result in actual revenue or translate into profits.

As of December 31, 2020, our backlog was $98.3 million, a portion of which has subsequently been recognized as revenue and our awarded orders were $59.1 million. Although this amount is based on purchase orders or other contractual commitments or orders where we are in the process of documenting a contract but for which a contract has not yet been signed, we cannot guarantee that our backlog or awarded orders will result in actual revenue in the originally anticipated period or at all. In addition, the contracts included in our backlog or awarded orders may not generate margins equal to our historical operating results. We have only recently begun to track our backlog and awarded orders on a consistent basis as performance measures, and as a result, we do not have significant experience in determining the level of realization that we will actually achieve on our backlog or awarded orders. Our customers may experience project delays or cancel orders as a result of external market factors and economic or other factors beyond our control. If our backlog and awarded orders fail to result in revenue at all or in a timely manner, we could experience a reduction in revenue, profitability and liquidity.

Risks Related to Our Organizational Structure

We will be a holding company and our principal asset after completion of the reorganization and this offering will be our interest in Shoals Parent LLC and, accordingly, we will be dependent upon Shoals Parent LLC and its consolidated subsidiaries for our results of operations, cash flows and distributions.

Upon completion of this offering and the Transactions, we will be a holding company and have no material assets other than our ownership of the LLC Interests. As such, we have no independent means of generating revenue or cash flow, and our ability to pay our taxes and operating expenses, including to satisfy our obligations under the Tax Receivable Agreement, or declare and pay dividends in the future, if any, depend upon the results of operations and cash flows of Shoals Parent LLC and its consolidated subsidiaries and distributions we receive from Shoals Parent LLC. There can be no assurance that our subsidiaries will generate sufficient cash flow to distribute funds to us or that applicable state law and contractual restrictions will permit such distributions.

We anticipate that Shoals Parent LLC will continue to be treated as a partnership (and not as a “publicly traded partnership,” within the meaning of Section 7704(b) of the Code, subject to tax as a corporation) for U.S. federal income tax purposes and, as such, generally will not be subject to any entity-level U.S. federal income tax. Instead, taxable income will be allocated to holders of the LLC Interests of Shoals Parent LLC. Accordingly, we and our subsidiaries will be required to pay income taxes on our allocable share of any net taxable income of Shoals Parent LLC. Further, Shoals Parent LLC and its subsidiaries may, absent an election to the contrary, be subject to material liabilities pursuant to partnership audit rules enacted pursuant to the Bipartisan Budget Act of 2015 and related guidance if, for example, its calculations of taxable income are incorrect. Further, we will be responsible for the unpaid tax liabilities of the corporate entities we acquire as part of the Transactions, including for the taxable year (or portion thereof) of such entities ending on the date of this Offering. To the extent that we need funds and Shoals Parent LLC and its subsidiaries are restricted from making such distributions, under applicable law or regulation, or as a result of covenants in the credit agreements of Shoals Parent LLC and its subsidiaries, we may not be able to obtain such funds on terms acceptable to us or at all and as a result could suffer an adverse effect on our liquidity and financial condition.

 

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We will be required to make payments under the Tax Receivable Agreement and the amounts of such payments could be significant.

Concurrent with the acquisition of Shoals Parent LLC, the Company intends to enter into a tax receivable agreement (the “Tax Receivable Agreement”) with Oaktree and our Founder. The Tax Receivable Agreement requires that the Company pay Oaktree and our Founder 85% of the amount of any tax benefits that we actually realize, or in some circumstances are deemed to realize, as a result of (i) Shoals Technology Group, Inc.’s allocable share of existing tax basis acquired in connection with the Transactions (including Blocker’s share of existing tax basis) and increases to such allocable share of existing basis, (ii) certain increases in the tax basis of assets of Shoals Parent LLC and its subsidiaries resulting from purchases or exchanges of LLC Interests and (iii) certain other tax benefits related to our entering into the Tax Receivable Agreement, including tax benefits attributable to payments that we make under the Tax Receivable Agreement. These payments are obligations if and when cash tax savings are realized. The Tax Receivable Agreement will continue until all tax benefit payments have been made or we elect early termination under the terms described in the Tax Receivable Agreement (or the Tax Receivable Agreement is otherwise terminated pursuant to its terms).

Estimating the amount of payments that may be made under the Tax Receivable Agreement is by nature imprecise; however, these payments could be significant. Assuming no material changes in the relevant tax law, and that we earn sufficient taxable income to realize all tax benefits that are subject to the Tax Receivable Agreement, we expect that future payments under the Tax Receivable Agreement relating to the Transactions (including the purchase by Shoals Technologies Group, Inc. of LLC Interests in connection with this offering) to range over the next 15 years from approximately $0.9 million to $2.2 million per year. These estimates are based on an initial public offering price of $22.50 per share of Class A common stock, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus. Future payments in respect of subsequent exchanges or financing would be in addition to these amounts and are expected to be substantial. The actual amounts may materially differ from these hypothetical amounts, as potential future reductions in tax payments for us and tax receivable agreement payments by us will be determined in part by reference to the market value of our Class A common stock at the time of the sale and the prevailing tax rates applicable to us over the life of the Tax Receivable Agreement and will be dependent on us generating sufficient future taxable income to realize the benefit. In addition, the Tax Receivable Agreement generally provides that if (1) certain mergers, asset sales, other forms of business combination, or other changes of control were to occur, (2) we materially breach any of our material obligations under the Tax Receivable Agreement or (3) we elect an early termination of the Tax Receivable Agreement, then the Tax Receivable Agreement will terminate and our obligations, or our successor’s obligations, under the Tax Receivable Agreement will accelerate and become due and payable, based on certain assumptions, and payments under the Tax Receivable Agreement may significantly exceed the actual benefits, if any, we realize in respect of the tax attributes subject to the Tax Receivable Agreement.

Further, our payment obligations under the Tax Receivable Agreement are not conditioned upon the Continuing Equity Owners having a continued interest in us or our subsidiaries. Accordingly, the Continuing Equity Owners interests may conflict with those of the holders of our Class A common stock. Please see “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” for more information.

Finally, because we are a holding company with no operations of our own, our ability to make payments under the Tax Receivable Agreement is dependent on the ability of our subsidiaries to make distributions to us.

In certain circumstances, under its limited liability company agreement, Shoals Parent LLC will be required to make tax distributions to the Company and the Continuing Equity Owners, and the distributions that Shoals Parent LLC will be required to make may be substantial.

Funds used by Shoals Parent LLC to satisfy its tax distribution obligations to the Continuing Equity Owners will not be available for reinvestment in our business. Moreover, the tax distributions that Shoals Parent LLC

 

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will be required to make may be substantial and will likely exceed (as a percentage of Shoals Parent LLC’s net income) the overall effective tax rate applicable to a similarly situated corporate taxpayer.

As a result of potential differences in the amount of net taxable income allocable to us and to the Continuing Equity Owners, as well as the use of an assumed tax rate in calculating Shoals Parent LLC’s tax distribution obligations to the Continuing Equity Owners, we may receive distributions significantly in excess of our tax liabilities and obligations to make payments under the Tax Receivable Agreement. To the extent, as currently expected, we do not distribute such cash balances as dividends on shares of our Class A common stock and instead, for example, hold such cash balances or lend them to Shoals Parent LLC, the Continuing Equity Owners would benefit from any value attributable to such accumulated cash balances as a result of their ownership of Class A common stock following an exchange of their LLC Interests for such Class A common stock.

We will not be reimbursed for any payments made to the beneficiaries under the Tax Receivable Agreement in the event that any purported tax benefits are subsequently disallowed by the IRS.

If the IRS or a state or local taxing authority challenges the tax basis adjustments and/or deductions that give rise to payments under the Tax Receivable Agreement and the tax basis adjustments and/or deductions are subsequently disallowed, the recipients of payments under the agreements will not reimburse us for any payments we previously made to them. Any such disallowance would be taken into account in determining future payments under the Tax Receivable Agreement and may, therefore, reduce the amount of any such future payments. Nevertheless, if the claimed tax benefits from the tax basis adjustments and/or deductions are disallowed, our payments under the Tax Receivable Agreement could exceed our actual tax savings, and we may not be able to recoup payments under the Tax Receivable Agreement that were calculated on the assumption that the disallowed tax savings were available.

Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our financial condition and results of operations.

We will be subject to income taxes in the U.S. and foreign jurisdictions, and our domestic and foreign tax liabilities will be subject to the allocation of expenses in differing jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:

 

   

changes in the valuation of our deferred tax assets and liabilities;

 

   

expected timing and amount of the release of any tax valuation allowances;

 

   

tax effects of equity-based compensation;

 

   

costs related to intercompany restructurings;

 

   

changes in tax laws, regulations, or interpretations thereof; or

 

   

lower than anticipated future earnings in jurisdictions where we have lower statutory tax rates and higher than anticipated future earnings in jurisdictions where we have higher statutory tax rates.

Risks Related to This Offering and Our Class A Common Stock

Oaktree and the Continuing Equity Owners will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote.

We are currently controlled, and after this offering is completed will continue to be controlled, by Oaktree and the Continuing Equity Owners. Upon completion of this offering, Oaktree will beneficially own 12.57% of the combined voting power of all of our outstanding common stock, and the Continuing Equity Owners will beneficially own 45.50% of the combined voting power of all of our outstanding common stock. As long as Oaktree and the Continuing Equity Owners collectively own or control at least a majority of our outstanding

 

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voting power, they will have the ability to exercise substantial control and significant influence over our management and affairs and all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including the election and removal of directors and the size of our board of directors, any amendment of our certificate of incorporation or bylaws, or the approval of any merger or other significant corporate transaction, including a sale of substantially all of our assets. See “Description of Capital Stock.” The concentration of voting power limits your ability to influence corporate matters, and as a result, we may take actions that you do not view as beneficial. As a result, the market price of our Class A common stock could be adversely affected. Even if their collective ownership falls below 50%, Oaktree and the Continuing Equity Owners will continue to be able to strongly influence or effectively control our decisions.

In addition, in connection with this offering, we intend to enter into a stockholders agreement with Oaktree and the Continuing Equity Owners, which, among other matters, will provide that Oaktree and the Founder will be entitled to nominate up to three directors and one director, respectively, for election to our board of directors depending on the amount of outstanding equity securities of the Company held by them. For more information, see “Certain Relationships and Related Party Transactions—Stockholders Agreement.”

Additionally, the interests of Oaktree or the Continuing Equity Owners may not align with the interests of our other stockholders. Oaktree and the Continuing Equity Owners may, in the ordinary course of their respective businesses, acquire and hold interests in businesses that compete directly or indirectly with us. Oaktree and the Continuing Equity Owners each may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us.

Following the offering, we will be classified as a “controlled company,” and as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements. In addition, Oaktree or the Continuing Equity Owners’ interests may conflict with our interests and the interests of other stockholders.

After the closing of this offering, Oaktree and the Continuing Equity Owners’ will continue to control a majority of our voting power.

As a result, we will be a “controlled company” within the meaning of the applicable stock exchange corporate governance standards. Under the rules of Nasdaq, a company of which more than 50% of the outstanding voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain stock exchange corporate governance requirements, including:

 

   

the requirement that a majority of our board of directors consist of independent directors;

 

   

the requirement that nominating and corporate governance matters be decided solely by independent directors; and

 

   

the requirement that employee and officer compensation matters be decided solely by independent directors.

Following this offering, we intend to utilize these exemptions. As a result, we may not have a majority of independent directors, and our nominating and corporate governance and compensation functions may not be decided solely by independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the stock exchange corporate governance requirements.

The interests of Oaktree or the Continuing Equity Owners and their affiliates could conflict with or differ from our interests or the interests of our other stockholders. For example, the concentration of ownership beneficially held by Oaktree or the Continuing Equity Owners’ could delay, defer or prevent a change of control of our Company or impede a merger, takeover or other business combination, which may otherwise be favorable for us and our other stockholders. Additionally, Oaktree is in the business of making investments in companies

 

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and Oaktree or the Continuing Equity Owners may, from time to time, acquire and hold interests in businesses that compete, directly or indirectly, with us. Oaktree or the Continuing Equity Owners may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as Oaktree or the Continuing Equity Owners continue to directly or indirectly own a significant amount of our common stock, even if such amount is less than a majority thereof, Oaktree or the Continuing Equity Owners will continue to be able to substantially influence or effectively control our ability to enter into corporate transactions.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members and officers.

As a public company, we will be subject to the reporting requirements of the Exchange Act, the listing requirements of Nasdaq, and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations and maintain effective disclosure controls and procedures and internal control over financial reporting. To maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and results of operations. Although we have already hired additional employees in preparation for these heightened requirements, we may need to hire more employees in the future which would increase our costs and expenses.

We also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance and we may have to choose between reduced coverage or substantially higher costs to obtain coverage. These factors could make it more difficult for us to attract and retain qualified executive officers and members of our board of directors, particularly to serve on our audit committee and compensation committee.

An active, liquid trading market for our Class A common stock may not develop.

Prior to this offering, there has not been a public market for our Class A common stock. Although we will list our Class A common stock on Nasdaq, we cannot predict whether an active public market for our Class A common stock will develop or be sustained after this offering. If an active and liquid trading market does not develop, you may have difficulty selling or may not be able to sell any of the shares of our Class A common stock that you purchase.

We cannot assure you that the price of our Class A common stock will not decline or not be subject to significant volatility after this offering.

The market price of our Class A common stock could be subject to significant fluctuations after this offering. The price of our stock may change in response to fluctuations in our results of operations in future periods and also may change in response to other factors, including factors specific to companies in our industry, many of which are beyond our control. As a result, our share price may experience significant volatility and may not necessarily reflect the value of our expected performance. Among other factors that could affect our stock price are:

 

   

changes in laws or regulations applicable to our industry or offerings;

 

   

speculation about our business in the press or the investment community;

 

   

price and volume fluctuations in the overall stock market;

 

   

volatility in the market price and trading volume of companies in our industry or companies that investors consider comparable;

 

   

share price and volume fluctuations attributable to inconsistent trading levels of our shares;

 

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our ability to protect our intellectual property and other proprietary rights and to operate our business without infringing, misappropriating or otherwise violating the intellectual property and other proprietary rights of others;

 

   

sales of our common stock by us or our significant stockholders, officers and directors;

 

   

redemptions and exchanges by the Continuing Equity Owners of their LLC Interests into shares of Class A Common Stock;

 

   

the expiration of contractual lockup agreements;

 

   

the development and sustainability of an active trading market for our common stock;

 

   

success of competitive products or services;

 

   

the public’s response to press releases or other public announcements by us or others, including our filings with the Securities and Exchange Commission (the “SEC”), announcements relating to litigation or significant changes to our key personnel;

 

   

the effectiveness of our internal controls over financial reporting;

 

   

changes in our capital structure, such as future issuances of debt or equity securities;

 

   

our entry into new markets;

 

   

tax developments in the U.S., Europe or other markets;

 

   

strategic actions by us or our competitors, such as acquisitions or restructurings; and

 

   

changes in accounting principles.

Further, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. In addition, the stock prices of many renewable energy companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may cause the market price of our Class A common stock to decline.

We cannot assure you that you will be able to resell any of your shares of our Class A common stock at or above the initial public offering price. The initial public offering price will be determined by negotiations between us, the selling stockholder and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market, if a trading market develops, after this offering. If the market price of our Class A common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment and may lose some or all of your investment.

We cannot predict the effect our dual class structure may have on the trading market for our Class A common stock.

We cannot predict whether our dual class structure will result in a lower or more volatile market price of our Class A common stock or other adverse consequences. For example, certain index providers have announced restrictions on including companies with multiple-class share structures in certain of their indexes. S&P, Dow Jones and FTSE Russell have each announced changes to their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500. These changes exclude companies with multiple classes of shares of common stock or ordinary shares from being added to these indices. Furthermore, we cannot assure you that other stock indices will not take a similar approach to S&P, Dow Jones or FTSE Russell in the future. Exclusion from indices could make our Class A common stock less attractive to investors, and as a result, the market price of our Class A common stock could be adversely affected.

The Continuing Owners have the right to have their LLC Interests exchanged for cash or shares of Class A common stock at the election of the Company and any disclosure of such exchange or the subsequent sale (or any

 

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disclosure of an intent to enter into such an exchange or subsequent sale) of such shares of Class A common stock may cause volatility in our stock price.

Immediately following the Transactions, we will have an aggregate of 75,953,095 shares of Class A common stock that are issuable upon exchange of LLC Interests that are held by the Continuing Equity Owners. Under the LLC Agreement, subject to certain restrictions set forth therein and as described elsewhere in this prospectus, including lockup agreements with the underwriters or the market standoff provisions of the LLC Agreement, the Continuing Equity Owners will be entitled to have their LLC Interests exchanged for cash or shares of our Class A common stock at the election of the Company.

We cannot predict the timing, size, or disclosure of any future issuances of our Class A common stock resulting from the exchange of LLC Interests or the effect, if any, that future issuances, disclosure, if any, or sales of shares of our Class A common stock may have on the market price of our Class A common stock. Sales or distributions of substantial amounts of our Class A common stock, or the perception that such sales or distributions could occur, may cause the market price of our Class A common stock to decline.

If you purchase shares of our Class A common stock sold in this offering, you will incur immediate and substantial dilution.

If you purchase shares of our Class A common stock in this offering, you will incur immediate and substantial dilution in the amount of $23.71 per share because the initial public offering price will be substantially higher than the pro forma net tangible book value per share of our outstanding Class A common stock. This dilution would result because our earlier investors paid substantially less than the initial public offering price when they purchased their shares. In addition, you may also experience additional dilution upon future equity issuances, the exercise of stock options to purchase Class A common stock granted to our employees and directors under our stock option and equity incentive plans or the exercise of warrants to purchase common stock. See “Dilution.”

As an emerging growth company within the meaning of the Securities Act, we may utilize certain modified disclosure requirements, and we cannot be certain if these reduced requirements will make our Class A common stock less attractive to investors.

We are an emerging growth company, and for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute compensation not previously approved. We have in this prospectus utilized, and we may in future filings with the SEC continue to utilize, the modified disclosure requirements available to emerging growth companies. As a result, our stockholders may not have access to certain information they may deem important.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to not “opt out” of this exemption from complying with new or revised accounting standards, and therefore, we are permitted to adopt new or revised accounting standards at the time private companies adopt the new or revised accounting standard and are permitted to do so until such time that we either (i) irrevocably elect to “opt out” of such extended transition period or (ii) no longer qualify as an emerging growth company.

Following this offering, we could remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year during which we had total annual gross revenues of at least $1.07 billion (as indexed

 

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for inflation); (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of common stock under this registration statement; (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer,” as defined under the Exchange Act.

A credit ratings downgrade or other negative action by a credit rating organization could adversely affect the trading price of the shares of our Class A common stock.

Credit rating agencies continually revise their ratings for companies they follow. The condition of the financial and credit markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future. In addition, developments in our business and operations could lead to a ratings downgrade for us or our subsidiaries. Any such fluctuation in our or our subsidiaries’ ratings may impact our ability to access debt markets in the future or increase our cost of future debt, which could have a material adverse effect on our operations and financial condition, which in return may adversely affect the trading price of shares of our Class A common stock.

Provisions in our certificate of incorporation and bylaws, to be adopted upon the consummation of this offering, may have the effect of delaying or preventing a change of control or changes in our management.

Our certificate of incorporation and bylaws will contain provisions that could depress the trading price of our Class A common stock by discouraging, delaying or preventing a change of control of our Company or changes in our management that the stockholders of our Company may believe advantageous. These provisions include:

 

   

authorizing “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;

 

   

providing for a classified board of directors with staggered three-year terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors;

 

   

not providing for cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

 

   

limiting the ability of stockholders to call a special stockholder meeting;

 

   

prohibiting stockholders from acting by written consent from and after the date on which Oaktree and its affiliates cease to beneficially own at least 50% of the outstanding shares of common stock (the “Trigger Event”);

 

   

establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings;

 

   

from and after the Trigger Event, the removal of directors only for cause and only upon the affirmative vote of the holders of at least 66 2/3% in voting power of all the then-outstanding shares of common stock of the Company entitled to vote thereon;

 

   

providing that our board of directors is expressly authorized to amend, alter, rescind or repeal our bylaws; and

 

   

from and after the Trigger Event, requiring the affirmative vote of holders of at least 66 2/3% of the voting power of all of the then-outstanding shares of Class A common stock to amend provisions of our certificate of incorporation relating to the management of our business, our board of directors, stockholder action by written consent, calling special meetings of stockholders, competition and corporate opportunities, Section 203 of the Delaware General Corporation Law (the “DGCL”), forum selection and the liability of our directors, or to amend, alter, rescind or repeal our bylaws.

 

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In addition, we are not governed by the provisions of Section 203 of the DGCL, which generally prohibits a Delaware corporation from engaging in a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder becomes an “interested” stockholder. For a description of our capital stock, see “Description of Capital Stock.”

In addition, our certificate of incorporation will provide that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act but that the forum selection provision will not apply to claims brought to enforce a duty or liability created by the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Our certificate of incorporation will also provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our certificate of incorporation will provide that, unless we consent in writing to the selection of an alternate forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the DGCL, our certificate of incorporation or our bylaws; any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or our bylaws; any action asserting a claim against us that is governed by the internal affairs doctrine; or any action asserting an “internal corporate claim” as defined in Section 115 of the DGCL. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court finds the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could materially and adversely affect our business, financial condition, and results of operations.

Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. In addition, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our certificate of incorporation will provide that, unless we consent in writing to the selection of an alternate forum, the federal district court for the District of Delaware will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the federal securities laws. We note that there is uncertainty as to whether a court would enforce the choice of forum provision with respect to claims under the federal securities laws, and that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder.

We do not intend to pay any cash distributions or dividends on our Class A common stock in the foreseeable future.

We have never declared or paid any distributions or dividends on our Class A common stock. We currently intend to retain any future earnings and do not expect to pay any cash distributions or dividends in the foreseeable future. Any future determination to declare cash distributions or dividends will be made at the discretion of our board of directors, subject to applicable laws and provisions of our debt instruments and organizational documents, after taking into account our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant. As a result, capital appreciation in the price of our Class A common stock, if any, may be your only source of gain on an investment in our Class A common stock. See “Dividend Policy.”

 

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General Risk Factors

If we fail to retain our key personnel or if we fail to attract additional qualified personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.

Our future success and ability to implement our business strategy depends, in part, on our ability to attract and retain key personnel, and on the continued contributions of members of our senior management team and key technical personnel, each of whom would be difficult to replace. All of our employees, including our senior management, are free to terminate their employment relationships with us at any time. Competition for highly skilled individuals with technical expertise is extremely intense, and we face challenges in identifying, hiring and retaining qualified personnel in many areas of our business. Integrating new employees into our team could prove disruptive to our operations, require substantial resources and management attention and ultimately prove unsuccessful. An inability to retain our senior management and other key personnel or to attract additional qualified personnel could limit or delay our strategic efforts, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

Unauthorized disclosure of personal or sensitive data or confidential information, whether through a breach of our computer system or otherwise, could severely hurt our business.

Some aspects of our business involves the collection, receipt, use, storage, processing and transmission of personal information (of our customers’ and end users of our customers’ solar energy systems, including names, addresses, e-mail addresses, credit information, energy production statistics), consumer preferences as well as confidential information and personal data about our employees, our suppliers and us, some of which is entrusted to third-party service providers and vendors. We increasingly rely on commercially available systems, software, tools (including encryption technology) and monitoring to provide security and oversight for processing, transmission, storage and protection of confidential information and personal data. Despite the security measures we have in place, our facilities and systems, and those of third parties with which we do business, may be vulnerable to security breaches, acts of vandalism and theft, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events, and there is no guarantee that inadvertent or unauthorized use or disclosure will not occur or that third parties will not gain unauthorized access to this type of confidential information and personal data.

Electronic security attacks designed to gain access to personal, sensitive or confidential information data by breaching mission critical systems of large organizations are constantly evolving, and high-profile electronic security breaches leading to unauthorized disclosure of confidential information or personal data have occurred recently at a number of major U.S. companies.

Attempts by computer hackers or other unauthorized third parties to penetrate or otherwise gain access to our computer systems or the systems of third parties with which we do business through fraud or other means of deceit, if successful, may result in the misappropriation of personal information, data, check information or confidential business information. Hardware, software or applications we utilize may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. In addition, our employees, contractors or third parties with which we do business or to which we outsource business operations may attempt to circumvent our security measures in order to misappropriate such information and data and may purposefully or inadvertently cause a breach or other compromise involving such information and data. Despite advances in security hardware, software, and encryption technologies, the methods and tools used to obtain unauthorized access, disable or degrade service, or sabotage systems are constantly changing and evolving, and may be difficult to anticipate or detect for long periods of time. We are implementing and updating our processes and procedures to protect against unauthorized access to, or use of, secured data and to prevent data loss. However, the ever-evolving threats mean we and our third-party service providers and vendors must continually evaluate and adapt our respective systems, procedures, controls and processes, and there is no guarantee that they will be adequate to safeguard against all data security breaches, misappropriating of confidential information, or misuses of personal data. Moreover, because techniques used to obtain unauthorized access or sabotage systems

 

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change frequently and generally are not identified until they are launched against a target, we and our suppliers or vendors may be unable to anticipate these techniques or to implement adequate preventative or mitigation measures.

Despite our precautions, an electronic security breach in our systems (or in the systems of third parties with which we do business) that results in the unauthorized release of personally identifiable information regarding customers, employees or other individuals or other sensitive data could nonetheless occur lead to serious disruption of our operations, financial losses from remedial actions, loss of business or potential liability, including possible punitive damages. As a result, we could be subject to demands, claims, and litigation by private parties and investigations, related actions, and penalties by regulatory authorities. In addition, we could incur significant costs in notifying affected persons and entities and otherwise complying with the multitude of foreign, federal, state and local laws and regulations relating to the unauthorized access to, or use or disclosure of, personal information. Finally, any perceived or actual unauthorized access to, or use or disclosure of, such information could harm our reputation, substantially impair our ability to attract and retain customers and have an adverse impact on our business, financial condition and results of operations.

In addition, as the regulatory environment relating to retailers and other companies’ obligation to protect such sensitive data becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could result in additional costs, and a material failure on our part to comply could subject us to fines or other regulatory sanctions and potentially to lawsuits. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects.

Failure to comply with current or future federal, state and foreign laws and regulations and industry standards relating to privacy, data protection, advertising and consumer protection could adversely affect our business, financial condition, results of operations and prospects.

We rely on a variety of marketing and advertising techniques and we are subject to various laws, regulations and industry standards that govern such marketing and advertising practices. A variety of federal, state and foreign laws and regulations and certain industry standards govern the collection, use, processing retention, sharing and security of consumer data.

Laws, regulations and industry standards relating to privacy, data protection, marketing and advertising, and consumer protection are evolving and subject to potentially differing interpretations. These requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices. As a result, our practices may not have complied or may not comply in the future with all such laws, regulations, standards, requirements and obligations. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any federal or state privacy or consumer protection-related laws, regulations, industry self-regulatory principles, industry standards or codes of conduct, regulatory guidance, orders to which we may be subject or other legal obligations relating to privacy or consumer protection could adversely affect our reputation, brand and business, and may result in claims, fines, penalties, investigations, proceedings or actions against us by governmental entities, customers, suppliers or others or other liabilities or may require us to change our operations and/or cease using certain data.

Any such claims, proceedings, investigations or actions could hurt our reputation, brand and business, force us to incur significant expenses in defense of such claims, proceedings, investigations or actions, distract our management, increase our costs of doing business, result in a loss of customers, suppliers or vendors and result in the imposition of monetary penalties. We may also be contractually required to indemnify and hold harmless third parties from the costs and consequences of noncompliance with any laws, regulations or other legal obligations relating to privacy or consumer protection or any inadvertent or unauthorized use or disclosure of data that we store or handle as part of operating our business.

 

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Federal, state and foreign governmental authorities continue to evaluate the privacy implications inherent in the use of third-party “cookies” and other methods of online tracking for behavioral advertising and other purposes. The U.S. government has enacted, has considered or is considering legislation or regulations that could significantly restrict the ability of companies and individuals to engage in these activities, such as by regulating the level of consumer notice and consent required before a company can employ cookies or other electronic tracking tools or the use of data gathered with such tools. Additionally, some providers of consumer devices and web browsers have implemented, or announced plans to implement, means to make it easier for Internet users to prevent the placement of cookies or to block other tracking technologies, which could, if widely adopted, result in the use of third-party cookies and other methods of online tracking becoming significantly more restricted and less effective. The regulation of the use of these cookies and other current online tracking and advertising practices or a loss in our ability to make effective use of services that employ such technologies could increase our costs of operations and limit our ability to acquire new customers on cost-effective terms and, consequently, materially and adversely affect our business, financial condition, and results of operations.

In addition, various federal, state and foreign legislative and regulatory bodies, or self-regulatory organizations, may expand current laws or regulations, enact new laws or regulations or issue revised rules or guidance regarding privacy, data protection, consumer protection, and advertising. For example, in June 2018, the State of California enacted the California Consumer Privacy Act of 2018 (the “CCPA”), which came into effect on January 1, 2020. The CCPA requires companies that process information relating to California residents to implement additional data security measures, to make new disclosures to consumers about their data collection, use and sharing practices, and allows consumers to opt out of certain data sharing with third parties. In addition, the CCPA provides for civil penalties and allows private lawsuits from California residents in the event of certain data breaches. Additionally, the Federal Trade Commission and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination and security of data. Each of these privacy, security, and data protection laws and regulations, and any other such changes or new laws or regulations, could impose significant limitations, require changes to our business, or restrict our use or storage of personal information, which may increase our compliance expenses and make our business more costly or less efficient to conduct. In addition, any such changes could compromise our ability to develop an adequate marketing strategy and pursue our growth strategy effectively.

Any failure to comply with applicable laws or other obligations or any security incident or breach involving the misappropriation, loss or other unauthorized processing, use or disclosure of sensitive or confidential consumer or other personal information, whether by us, one of our third-party service providers or vendors or another third party, could have adverse effects, including, but not limited to, investigation costs; material fines and penalties; compensatory, special, punitive and statutory damages; litigation; consent orders regarding our privacy and security practices; requirements that we provide notices, credit monitoring services and/or credit restoration services or other relevant services to impacted individuals; reputational damage; and injunctive relief. We cannot assure you that our vendors or other third-party service providers with access to our or our customers’ or employees’ personally identifiable and other sensitive or confidential information in relation to which we are responsible will not breach contractual obligations imposed by us, or that they will not experience data security breaches, which could have a corresponding effect on our business, including putting us in breach of our obligations under privacy laws and regulations and/or which could in turn adversely affect our business, results of operations and financial condition. We also cannot assure you that our contractual measures and our own privacy and security-related safeguards will protect us from the risks associated with the third-party processing, use, storage and transmission of such information. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects.

We may not be able to raise additional capital to execute our current or future business strategies on favorable terms, if at all, or without dilution to our stockholders.

We expect that we may need to raise additional capital to execute our current or future business strategies. However, we do not know what forms of financing, if any, will be available to us. Some financing activities in

 

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which we may engage could cause your equity interest in the Company to be diluted, which could cause the value of your stock to decrease. If financing is not available on acceptable terms, if and when needed, our ability to fund our operations, expand our research and development and sales and marketing functions, develop and enhance our products, respond to unanticipated events, including unanticipated opportunities, or otherwise respond to competitive pressures would be significantly limited. In any such event, our business, financial condition and results of operations could be materially harmed, and we may be unable to continue our operations.

We could be adversely affected by any violations of the FCPA, the U.K. Bribery Act and other foreign anti-bribery laws.

The FCPA generally prohibits companies and their intermediaries from making improper payments to foreign government officials for the purpose of obtaining or retaining business. Other countries in which we operate also have anti-bribery laws, some of which prohibit improper payments to government and nongovernment persons and entities. Our policies mandate compliance with these anti-bribery laws. However, we currently operate in and intend to further expand into, many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. In addition, due to the level of regulation in our industry, our entry into certain jurisdictions requires substantial government contact where norms can differ from U.S. standards. It is possible that our employees, subcontractors, agents and partners may take actions in violation of our policies and anti-bribery laws. Any such violation, even if prohibited by our policies, could subject us to criminal or civil penalties or other sanctions, which could have a material adverse effect on our business, financial condition, cash flows and reputation.

The price of our Class A common stock could decline if securities analysts do not publish research or if securities analysts or other third parties publish inaccurate or unfavorable research about us.

The trading of our Class A common stock is likely to be influenced by the reports and research that industry or securities analysts publish about us, our business, our market or our competitors. We do not currently have and may never obtain research coverage by securities or industry analysts. If no securities or industry analysts commence coverage of our Company, the trading price for our Class A common stock would be negatively affected. If we obtain securities or industry analyst coverage but one or more analysts downgrade our Class A common stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more securities or industry analysts ceases to cover the Company or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

Future sales of our Class A common stock, or the perception that such sales may occur, could depress our Class A common stock price.

Sales of a substantial number of shares of our Class A common stock in the public market following this offering, or the perception that such sales may occur, could depress the market price of our Class A common stock. Our executive officers and directors and certain of our equity holders have agreed with the underwriters not to offer, sell, dispose of or hedge any shares of our Class A common stock or any options or warrants to purchase any shares of our Class A common stock, or securities convertible into, exchangeable for, or that represent the right to receive, shares of our Class A common stock, subject to specified limited exceptions described elsewhere in this prospectus, during the period ending 180 days after the date of the final prospectus, except with the prior written consent of the representatives of the underwriters. Our certificate of incorporation, as expected to be in effect upon the completion of this offering, will authorize us to issue up to 1,000,000,000 of our authorized shares of Class A common stock, of which 90,986,291 shares of common stock will be outstanding and 75,953,095 will be available upon the exchange of outstanding LLC units. All shares of our Class A common stock will be subject to the lockup agreements or market standoff provisions described under “Shares Eligible for Future Sale.” Shares of our Class A common stock held by our affiliates will continue to be

 

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subject to the volume and other restrictions of Rule 144 under the Securities Act. Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC may, in their sole discretion and at any time without notice, release all or any portion of the shares subject to the lockup. See “Underwriting.”

Upon the completion of this offering, the holders of an aggregate of 20,986,291 shares of our Class A common stock, based on shares of Class A common stock outstanding as of the date of effectiveness of this registration statement, or their transferees, will be entitled to rights with respect to the registration of their shares under the Securities Act. In addition, immediately following this offering, we intend to file a registration statement registering under the Securities Act the shares of Class A common stock reserved for issuance under the LTIP. See the information under the heading “Shares Eligible for Future Sale” for a more detailed description of the shares that will be available for future sales upon completion of this offering. Sales of our Class A common stock pursuant to these registration rights or this registration statement may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause our stock price to fall and make it more difficult for you to sell shares of our Class A common stock.

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

Our management has not completed an assessment of the effectiveness of our internal control over financial reporting, and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. Evaluation by us of our internal controls over financial reporting may identify material weaknesses. The identification of a material weakness in our internal controls or the failure to remediate existing material weaknesses in our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of Nasdaq rules. There also could be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. This could have a material adverse effect on our business, financial condition and results of operations and could also lead to a decline in the price of our Class A common stock.

We are not currently required to comply with the SEC’s rules implementing Section 404 of Sarbanes-Oxley and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of Sarbanes-Oxley, which will require our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. Though we will be required to disclose material changes made to our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following the first annual report we are required to file with the SEC. To comply with the requirements of being a public company, we will need to implement additional internal controls, reporting systems and procedures and hire additional accounting, finance and legal staff. For as long as we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404. We could be an “emerging growth company” for up to five years. An independent assessment of the effectiveness of our internal control over financial reporting could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal control over financial reporting could lead to financial statement restatements and require us to incur the expense of remediation.

 

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If we fail to establish and maintain an effective system of integrated internal controls, we may not be able to report our financial results accurately, which could have a material adverse effect on our business, financial condition and results of operations.

Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that will need to be evaluated frequently. Section 404 of the Sarbanes-Oxley Act requires public companies to conduct an annual review and evaluation of their internal controls and requires attestations of the effectiveness of internal controls by independent auditors. We would be required to perform the annual review and evaluation of our internal controls no later than for fiscal 2021. We initially expect to qualify as an emerging growth company, and thus, we would be exempt from the auditors’ attestation requirement until such time as we no longer qualify as an emerging growth company. Regardless of whether we qualify as an emerging growth company, we will still need to implement substantial control systems and procedures in order to satisfy the reporting requirements under the Exchange Act and applicable Nasdaq requirements, among other items. Establishing these internal controls will be costly and may divert management’s attention.

Evaluation by us of our internal controls over financial reporting may identify material weaknesses that may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of Nasdaq rules. There also could be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements also could suffer if we or our independent registered public accounting firm were to report a material weakness in our internal controls over financial reporting. This could have a material adverse effect on our business, financial condition and results of operations and could also lead to a decline in the price of our Class A common stock.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in the sections captioned “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Industry Overview” and “Business.” Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, technology developments, financing and investment plans, dividend policy, competitive position, industry and regulatory environment, potential growth opportunities and the effects of competition. Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “will,” “would” or similar expressions and the negatives of those terms.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Given these uncertainties, you should not place undue reliance on forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this prospectus. You should read this prospectus and the documents that we have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

Important factors that could cause actual results to differ materially from our expectations include:

 

   

if demand for solar energy projects does not continue to grow or grows at a slower rate than we anticipate, our business will suffer;

 

   

existing electric utility industry policies and regulations, and any subsequent changes, may present technical, regulatory and economic barriers to the purchase and use of solar energy systems that may significantly reduce demand for our products or harm our ability to compete;

 

   

our industry has historically been cyclical and experienced periodic downturns;

 

   

if we fail to, or incur significant costs in order to, obtain, maintain, protect, defend or enforce our intellectual property and other proprietary rights, our business and results of operations could be materially harmed;

 

   

if we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed;

 

   

if our trademarks and trade names are not adequately protected, we may not be able to build name recognition in our markets of interest, and our competitive position may be harmed;

 

   

we may need to defend ourselves against third-party claims that we are infringing, misappropriating or otherwise violating others’ intellectual property rights, which could divert management’s attention, cause us to incur significant costs, and prevent us from selling or using the technology to which such rights relate;

 

   

we may experience delays, disruptions or quality control problems in our manufacturing operations;

 

   

the interruption of the flow of components and materials from international vendors could disrupt our supply chain, including as a result of the imposition of additional duties, tariffs and other charges on imports and exports;

 

   

we face risks related to actual or threatened health epidemics, such as the COVID-19 pandemic, and other outbreaks, which could significantly disrupt our manufacturing and operations;

 

   

the viability and demand for solar energy and the demand for our products are impacted by many factors outside of our control, which makes it difficult to predict our future prospects;

 

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a loss of one or more of our significant customers, their inability to perform under their contracts, or their default in payment could harm our business and negatively impact revenue, results of operations and cash flow;

 

   

the reduction, elimination or expiration of government incentives for, or regulations mandating the use of, renewable energy and solar energy specifically could reduce demand for solar energy systems and harm our business;

 

   

a drop in the price of electricity sold may harm our business, financial condition, results of operations and prospects;

 

   

an increase in interest rates, or a reduction in the availability of tax equity or project debt capital in the global financial markets could make it difficult for end customers to finance the cost of a solar energy system and could reduce the demand for our products;

 

   

defects or performance problems in our products could result in loss of customers, reputational damage and decreased revenue, and we may face warranty, indemnity and product liability claims arising from defective products;

 

   

Oaktree and the Continuing Equity Owners will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote;

 

   

following the offering, we will be classified as a “controlled company,” and as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements. In addition, Oaktree’s or the Continuing Equity Owners’ interests may conflict with our interests and the interests of other stockholders;

 

   

the requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members and officers; and

 

   

provisions in our certificate of incorporation and bylaws, to be adopted upon the consummation of this offering, may have the effect of delaying or preventing a change of control or changes in our management.

Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

 

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USE OF PROCEEDS

We estimate, based upon an assumed initial public offering price of $22.50 per share (which is the midpoint of the estimated price range set forth on the cover page of this prospectus), that we will receive net proceeds from this offering of approximately $188.8 million, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

Shoals Technologies Group, Inc. intends to use the net proceeds from this offering to purchase 9,000,000 LLC Interests from Shoals Parent LLC and certain Continuing Equity Owners at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discounts and commissions. We intend to use remaining proceeds, if any, for general corporate purposes to support the growth of the business.

Shoals Parent LLC intends to use the net proceeds it receives from the sale of LLC Interests to Shoals Technologies Group, Inc. to prepay approximately $150.0 million of the outstanding borrowings under our New Senior Secured Credit Agreement. See “Description of Certain Indebtedness—New Senior Secured Credit Agreement” for a description of interest rate and maturity.

We will not receive any proceeds from the sale of our Class A common stock by the selling stockholder. We will, however, bear the costs associated with the sale of shares of Class A common stock by the selling stockholder, other than underwriting discounts and commissions. For more information, see “Principal and Selling Stockholders” and “Underwriting.” Shoals Parent LLC will bear or reimburse Shoals Technologies Group, Inc. for all of the expenses incurred in connection with the Transactions, including this offering.

Each $1.00 increase (decrease) in the assumed initial public offering price of $22.50 per share (which is the midpoint of the estimated price range set forth on the cover page of this prospectus) would increase (decrease) the net proceeds to us from this offering by approximately $8.55 million and, in turn, the net proceeds received by Shoals Parent LLC from the sale of LLC Interests to Shoals Technologies Group, Inc. by $6.33 million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

Each 1,000,000 share increase (decrease) in the number of shares offered by us in this offering would increase (decrease) the net proceeds to us from this offering by approximately $21.38 million, assuming that the price per share for the offering remains at $22.50 (which is the midpoint of the estimated price range set forth on the cover page of this prospectus), and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

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ORGANIZATIONAL STRUCTURE

Shoals Technologies Group, Inc., a Delaware corporation, was formed on November 4, 2020 and is the issuer of the Class A common stock offered by this prospectus. Prior to this offering and the Transactions (as defined below), all of our business operations have been conducted through Shoals Parent LLC and its direct and indirect subsidiaries, and the Continuing Equity Owners and Oaktree are the only owners of Shoals Parent LLC. We will consummate the Transactions, excluding this offering, substantially concurrently with or prior to the consummation of this offering.

Existing Organization

Shoals Parent LLC is treated as a partnership for U.S. federal income tax purposes and, as such, is generally not subject to any U.S. federal entity-level income taxes. Taxable income or loss of Shoals Parent LLC is included in the U.S. federal income tax returns of Shoals Parent LLC’s members.

The following organizational transactions have already occurred in connection with this offering:

 

   

on November 25, 2020, Shoals Holdings LLC entered into the New Senior Secured Credit Agreement. See “Description of Certain Indebtedness—New Senior Secured Credit Agreement”;

 

   

on December 22, 2020, Shoals Holdings LLC entered into an amendment to the New Senior Secured Credit Agreement;

 

   

on December 30, 2020, Shoals Holdings LLC entered into a second amendment to the New Senior Secured Credit Agreement; and

 

   

on November 25, 2020, Shoals Holdings LLC paid a $355.8 million special distribution to Shoals Intermediate Holdings LLC who then distributed to the direct or indirect holders of Shoals Intermediate Holdings LLC (the “Special Distribution”).

Transactions

We will consummate the following organizational transactions in connection with this offering:

 

   

we will amend and restate the existing limited liability company agreement of Shoals Parent LLC, which will become effective substantially concurrently with or prior to the consummation of this offering, to, among other things, (1) recapitalize all existing ownership interests in Shoals Parent LLC into 160,278,568 LLC Interests and (2) appoint Shoals Technologies Group, Inc. as the sole managing member of Shoals Parent LLC upon its acquisition of LLC Interests in connection with this offering;

 

   

we will amend and restate Shoals Technologies Group, Inc.’s certificate of incorporation as described in “Description of Capital Stock”;

 

   

Shoals Technologies Group, Inc. will (1) acquire LLC Interests held by Blocker by means of the Blocker Merger and will issue to Oaktree 81,986,291 shares of our Class A common stock as consideration in the Blocker Merger and (2) agree to pay at a future date Oaktree certain tax refunds payable to the Blocker, which are expected to consist of $1.9 million of excess federal income tax payments previously paid by the Blocker;

 

   

we will issue 78,292,277 shares of our Class B common stock to the Continuing Equity Owners, which is equal to the number of LLC Interests held by such Continuing Equity Owners;

 

   

we will issue 9,000,000 shares of our Class A common stock to the purchasers in this offering in exchange for net proceeds of approximately $188.8 million based upon an assumed initial public offering price of $22.50 per share (which is the midpoint of the estimated price range set forth on the cover page of this prospectus), less the underwriting discounts and commissions and estimated offering expenses payable by us;

 

   

Shoals Technologies Group, Inc. will use the net proceeds from this offering to purchase 2,339,182 LLC Interests (or 2,339,182 LLC Interests if the underwriters exercise in full their option to purchase

 

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additional shares of Class A common stock) from Shoals Parent LLC and certain Continuing Equity Owners at a price per unit equal to the initial public offering price per share of Class A common stock in this offering, less the underwriting discounts and commissions;

 

   

Shoals Parent LLC will use the net proceeds it receives from the sale of LLC Interests to Shoals Technologies Group, Inc. to prepay approximately $150.0 million of the outstanding borrowings under our New Senior Secured Credit Agreement; and

 

   

Shoals Technologies Group, Inc. will enter into (1) the Stockholders Agreement with the Continuing Equity Owners and Oaktree, (2) the Registration Rights Agreement with the Continuing Equity Owners and Oaktree and (3) the Tax Receivable Agreement with Oaktree and our Founder. For a description of the terms of the Stockholders Agreement, the Registration Rights Agreement and the Tax Receivable Agreement, see “Certain Relationships and Related Party Transactions.”

Organizational Structure Following the Transactions

 

   

Shoals Technologies Group, Inc. will be a holding company, and its principal asset will consist of LLC Interests it acquires as a result of the Blocker Merger and from Shoals Parent LLC and certain of the Continuing Equity Owners with the net proceeds from this offering. Shoals Technologies Group, Inc. will own, directly or indirectly, 90,986,291 LLC Interests of Shoals Parent LLC, representing approximately 54.50% of the economic interest in Shoals Parent LLC;

 

   

Shoals Technologies Group, Inc. will be the sole managing member of Shoals Parent LLC and will control the business and affairs of Shoals Parent LLC and its direct and indirect subsidiaries;

 

   

the Continuing Equity Owners will own (1) 75,953,095 LLC Interests of Shoals Parent LLC, representing approximately 45.50% of the economic interest in Shoals Parent LLC, and (2) 75,953,095 shares of Class B common stock of Shoals Technologies Group, Inc., representing approximately 45.50% of the combined voting power of all of Shoals Technologies Group, Inc.’s common stock;

 

   

Oaktree (1) will own 20,986,291 shares of Class A common stock of Shoals Technologies Group, Inc. (or 10,486,291 shares of Class A common stock of Shoals Technologies Group, Inc. if the underwriters exercise in full their option to purchase additional shares of Class A common stock), representing approximately 12.57% of the combined voting power of all of Shoals Technologies Group, Inc.’s common stock and approximately 23.07% of the economic interest in Shoals Technologies Group, Inc. (or approximately 6.28% of the combined voting power and approximately 11.53% of the economic interest if the underwriters exercise in full their option to purchase additional shares of Class A common stock), and (2) through Shoals Technologies Group, Inc.’s ownership of LLC Interests, indirectly will hold approximately 12.57% of the economic interest in Shoals Parent LLC (or approximately 6.28% of the economic interest in Shoals Parent LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock); and

 

   

the purchasers in this offering will own (1) 70,000,000 shares of Class A common stock of Shoals Technologies Group, Inc. (or 80,500,000 shares of Class A common stock of Shoals Technologies Group, Inc. if the underwriters exercise in full their option to purchase additional shares of Class A common stock), representing approximately 41.93% of the combined voting power of all of Shoals Technologies Group, Inc.’s common stock and approximately 76.93% of the economic interest in Shoals Technologies Group, Inc. (or approximately 48.22% of the combined voting power and approximately 88.47% of the economic interest if the underwriters exercise in full their option to purchase additional shares of Class A common stock), and (2) through Shoals Technologies Group, Inc.’s ownership of LLC Interests, indirectly will hold approximately 41.93% of the economic interest in Shoals Parent LLC (or approximately 48.22% of the economic interest in Shoals Parent LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

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The diagram below depicts our organizational structure after giving effect to the Transactions, including this offering, assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock.

 

 

LOGO

As the sole managing member of Shoals Parent LLC, we will operate and control all of the business and affairs of Shoals Parent LLC and, through Shoals Parent LLC and its direct and indirect subsidiaries, conduct our business. Following the Transactions, including this offering, Shoals Technologies Group, Inc. will have the majority economic interest in Shoals Parent LLC and will control the management of Shoals Parent LLC as its sole managing member. As a result, Shoals Technologies Group, Inc. will consolidate Shoals Parent LLC and record a significant noncontrolling interest in a consolidated entity in Shoals Technologies Group, Inc.’s consolidated financial statements for the economic interest in Shoals Parent LLC held by the Continuing Equity Owners.

Unless otherwise indicated, this prospectus assumes the shares of Class A common stock are offered at $22.50 per share (the midpoint of the estimated price range set forth on the cover page of this prospectus).

 

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Pursuant to the terms of the Existing LLC Agreement, the split between the number of LLC Interests among the Continuing Equity Owners will vary depending on the initial public offering price in this offering. The initial public offering price will also impact the relative allocation of LLC Interests issued in the Transactions among the Continuing Equity Owners and, in turn, the shares of Class A common stock and Class B common stock issued to the Continuing Equity Owners in the Transactions. Additionally, while the number of shares of Class A common stock being offered hereby to the public will not change, any increase or decrease in the number of shares of Class A common stock sold by Shoals Technologies Group, Inc. in this offering due to a change in the initial public offering price will result in a corresponding increase or decrease in the number of LLC Interests purchased by Shoals Technologies Group, Inc. from Shoals Parent LLC and certain Continuing Equity Owners at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discounts and commissions. Therefore, the indirect economic interest in Shoals Parent LLC represented by the shares of Class A common stock sold in this offering will be largely unaffected by the initial public offering price.

Incorporation of Shoals Technologies Group, Inc.

Shoals Technologies Group, Inc., the issuer of the Class A common stock offered by this prospectus, was incorporated as a Delaware corporation on November 4, 2020. Shoals Technologies Group, Inc. has not engaged in any material business or other activities except in connection with its formation and the Transactions. The amended and restated certificate of incorporation of Shoals Technologies Group, Inc. that will become effective immediately prior to the consummation of this offering will, among other things, authorize two classes of common stock, Class A common stock and Class B common stock, each having the terms described in “Description of Capital Stock.”

Reclassification and Amendment and Restatement of the Shoals Parent LLC Agreement

Prior to or substantially concurrently with the consummation of this offering, the existing limited liability company agreement of Shoals Parent LLC will be amended and restated to, among other things, recapitalize its capital structure by creating a single new class of units that we refer to as “common units” and provide for a right of redemption of common units in exchange for, at our election (determined solely by a majority of our directors who are disinterested), shares of our Class A common stock or cash. See “Certain Relationships and Related Party Transactions—Shoals Parent LLC Agreement.”

 

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DIVIDEND POLICY

We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness, and therefore we do not anticipate declaring or paying any cash dividends on our Class A common stock in the foreseeable future. Holders of our Class B common stock are not entitled to participate in any dividends declared by our board of directors. Furthermore, because we are a holding company, our ability to pay cash dividends on our Class A common stock depends on our receipt of cash distributions from Shoals Parent LLC and, through Shoals Parent LLC, cash distributions and dividends from our other direct and indirect subsidiaries. Our ability to pay dividends may be restricted by the terms of our New Senior Secured Credit Agreement and any future credit agreement or any of our or our subsidiaries future debt or preferred equity securities. See “Description of Capital Stock,” “Description of Certain Indebtedness” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors, subject to compliance with contractual restrictions and covenants in the agreements governing our current and future indebtedness. Any such determination will also depend upon our business prospects, results of operations, financial condition, cash requirements and availability, applicable Delaware law and other factors that our board of directors may deem relevant.

Accordingly, you may need to sell your shares of our Class A common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them. See “Risk Factors—Risks Related to This Offering and Our Class A Common Stock—We do not intend to pay any cash distributions or dividends on our Class A common stock in the foreseeable future.”

Immediately following this offering, we will be a holding company, and our principal asset will be LLC Interests. If we decide to pay a dividend in the future, we would need to cause Shoals Parent LLC to make distributions to us in an amount sufficient to cover such dividend. If Shoals Parent LLC makes such distributions to us, the other holders of LLC Interests will be entitled to receive pro rata distributions. See “Risk Factors—Risks Related to Our Organizational Structure—We will be a holding company and our principal asset after completion of the reorganization and this offering will be our interest in Shoals Parent LLC, and, accordingly, we will be dependent upon Shoals Parent LLC and its consolidated subsidiaries for our results of operations, cash flows and distributions.”

 

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CAPITALIZATION

The following table sets forth our cash and restricted cash and capitalization as of September 30, 2020, as follows:

 

   

of Shoals Parent LLC and its subsidiaries on an actual basis;

 

   

of Shoals Parent LLC and its subsidiaries on a pro forma basis to give effect to (i) the Recapitalization (as defined below) and (ii) the Special Distribution to the members of Shoals Parent LLC subsequent to September 30, 2020; and

 

   

of Shoals Technologies Group, Inc. and its subsidiaries on a pro forma as adjusted basis to give further effect to (i) the Transactions and (ii) the sale of the shares of Class A common stock in this offering at an assumed initial public offering price of $22.50 per share (which is the midpoint of the estimated price range set forth on the cover of this prospectus), after deducing the underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds therefrom as described under “Use of Proceeds.”

For more information, please see “Organizational Structure,” “Use of Proceeds” and “Unaudited Pro Forma Consolidated Financial Information” included elsewhere in this prospectus. You should read this information together with our consolidated financial statements and our consolidated interim financial statements and the related notes included elsewhere in this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial information contained in this prospectus.

 

     As of
September 30, 2020
(unaudited)
 
(in thousands, except per share and share data)    Shoals Parent
LLC
    Pro Forma
Shoals Parent
LLC(3)
    Pro Forma
Shoals
Technologies
Group, Inc.(4)
 

Cash and cash equivalents

   $ 9,245     $ 4,245     $ —    
  

 

 

   

 

 

   

 

 

 

Indebtedness:

      

Term Loan

   $ 4,275 (1)    $ 353,479     $ 207,937  

Revolving Loan

     —   (1)      —         3,380 (5) 
  

 

 

   

 

 

   

 

 

 

Total indebtedness

   $ 4,275     $ 353,479     $ 211,317  
  

 

 

   

 

 

   

 

 

 

Total equity:

      

Members’ equity (deficit)

     175,288       (180,516     —    

Class A common stock, par value $0.00001; 1,000,000,000 shares authorized, 90,986,291 shares issued and outstanding pro
forma

     —         —         1  

Class B common stock, par value $0.00001; 195,000,000 shares authorized, 75,953,095 shares issued and outstanding pro
forma

     —         —         1  

Additional paid-in capital

     —         —         176,485  

Accumulated deficit

     —         —         (220,088
  

 

 

   

 

 

   

 

 

 

Total members’/stockholders’ equity (deficit)

   $ 175,288     $ (180,516   $ (43,601
  

 

 

   

 

 

   

 

 

 

Noncontrolling interest(2)

     —         —         (26,138
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 179,563     $ 172,963     $ 141,578  
  

 

 

   

 

 

   

 

 

 

 

(1)

Under that certain Credit Agreement, dated as of May 25, 2017 (as amended by that certain Waiver and First Amendment to Credit Agreement, dated as of October 18, 2017 and as amended by that certain Consent, Waiver and Second Amendment to Credit Agreement, dated as of August 20, 2018, the

 

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  “Credit Agreement”), by and among Shoals Holdings LLC, a Delaware limited liability company, Shoals Intermediate Holdings LLC, a Delaware limited liability company, the subsidiary guarantors from time to time party thereto, the lenders and other financial institutions party thereto from time to time and MB Financial Bank, N.A., as administrative agent, swingline lender and issuing lender, the lenders party thereto advanced a $35 million term loan (the “Term Loan”) and have provided a revolving commitment (the “Revolving Loan”) of $15 million, which was increased to $25 million by that certain Consent, Waiver and Second Amendment to the Credit Agreement. On November 25, 2020, we repaid and terminated all outstanding commitments under the Credit Agreement.
(2)

On a pro forma basis, includes the membership interests not owned by us, which represents 45.50% of Shoals Parent LLC’s outstanding common units. The Continuing Equity Owners will hold the 45.50% non-controlling interest in Shoals Parent LLC. Shoals Technologies Group, Inc. will hold 54.50% of the economic interests in Shoals Parent LLC and the Continuing Equity Owners will hold 45.50% of the economic interests in Shoals Parent LLC.

(3)

The pro forma data in this column gives effect to the $360.0 million of incremental borrowings under our New Senior Secured Credit Agreement and the use of the proceeds thereunder to pay a $355.8 million distribution to Shoals Intermediate Holdings LLC who then distributed to the direct or indirect holders of Shoals Intermediate Holdings LLC on November 25, 2020 as if such debt was incurred and such distributions were declared and paid on September 30, 2020. See Note 2 to the unaudited pro forma consolidated balance sheet as of September 30, 2020, in “Unaudited Pro Forma Consolidated Financial Information.”

(4)

Each $1.00 increase (decrease) in the assumed initial public offering price of $22.50 per share (which is the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization on a pro forma basis by approximately $8.55 million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each 1,000,000 share increase (decrease) in the number of shares offered in this offering would increase (decrease) the net proceeds to us from this offering by approximately $21.38 million, assuming that the price per share for the offering remains at $22.50 (which is the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(5)

Represents a draw under the New Revolving Credit Facility in connection with the Transactions and the offering.

 

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DILUTION

The Continuing Equity Owners will own LLC Interests after the Transactions. Because the Continuing Equity Owners do not own any Class A common stock or have any right to receive distributions from Shoals Technologies Group, Inc., we have presented dilution in pro forma net tangible book value per share both before and after this offering assuming that all of the holders of LLC Interests (other than Shoals Technologies Group, Inc.) had their LLC Interests redeemed or exchanged for newly issued shares of Class A common stock on a one-for-one basis (rather than for cash) and the automatic transfer to the Company and cancellation for no consideration of all of their shares of Class B common stock (which are not entitled to receive distributions or dividends, whether cash or stock from Shoals Technologies Group, Inc.) in order to more meaningfully present the dilutive impact on the investors in this offering. We refer to the assumed redemption or exchange of all LLC Interests for shares of Class A common stock as described in the previous sentence as the Assumed Redemption.

Dilution is the amount by which the offering price paid by the purchasers of the Class A common stock in this offering exceeds the pro forma net tangible book value per share of Class A common stock after the offering. Shoals Parent LLC’s pro forma net tangible book value as of September 30, 2020 prior to this offering and after giving effect to the other Transactions and the Assumed Redemption was a deficit of $304.7 million. Pro forma net tangible book value per share prior to this offering is determined by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of Class A common stock deemed to be outstanding after giving effect to the Assumed Redemption.

If you invest in our Class A common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share of our Class A common stock after this offering.

Pro forma net tangible book value per share after this offering is determined by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of Class A common stock deemed to be outstanding, after giving effect to the Transactions, including this offering and the application of the proceeds from this offering as described in “Use of Proceeds,” and the Assumed Redemption. Our pro forma net tangible book value as of September 30, 2020, after giving effect to this offering would have been approximately a deficit of $193.9 million, or $(1.21) per share of Class A common stock. This amount represents an immediate decrease in pro forma net tangible book value of $(1.53) per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $(23.71) per share to new investors purchasing shares of Class A common stock in this offering. We determine dilution by subtracting the pro forma net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of Class A common stock. The following table illustrates this dilution:

The following table illustrates this dilution on a per share basis to new investors.

 

Assumed initial public offering price per share (the midpoint of the estimated price range set forth on the cover of this prospectus)

     $ 22.50  

Pro forma net tangible book value (deficit) per share as of September 30, 2020, before this offering

   $ 0.32    

Decrease in net tangible book value (deficit) per share attributable to new investors participating in this offering

   $ (1.53  
  

 

 

   

Pro forma net tangible book value (deficit) per share, after this offering

   $ (1.21  

Dilution per share to new Class A common stock investors participating in this offering

     $ 23.71  
    

 

 

 

The following table summarizes, as of September 30, 2020, after giving effect to the Transactions (including this offering) and the Assumed Redemption, the number of shares of Class A common stock purchased from us, the total consideration paid, or to be paid, to us and the average price per share paid, or to be paid, by existing

 

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owners and by the new investors. The calculation below is based on an assumed initial public offering price of $22.50 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, before deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number     Percent     Amount      Percent  

Selling stockholder and Continuing Equity Owners

     160,278,568 (1)      70   $ 90,000,000        5   $ 0.56  

New investors

     70,000,000 (1)      30     1,575,000,000        95   $ 22.50  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

     230,278,568       100   $ 1,665,000,000        100   $ 7.23  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1)

Reflects 63,339,182 shares owned by the selling stockholder and Continuing Equity Owners that will be purchased by new investors as a result of this offering:

 

     Shares Purchased            Total Consideration     Average
Price
Per
Share
 
     Number      Percent
of
Total
           Amount      Percent
of
Total
 

Selling stockholder and Continuing Equity Owners

     63,339,182        28      $ 35,566,367        2   $ 0.56  

Each $1.00 increase (decrease) in the assumed initial public offering price of $22.50 per share would increase (decrease) the total consideration paid by new investors and the total consideration paid by all stockholders by $70.0 million, assuming the number of shares offered by us and the selling stockholder, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions but before estimated offering expenses.

Except as otherwise indicated, the discussion and the tables above assume no exercise of the underwriters’ option to purchase additional shares of Class A common stock. In addition, the discussion and tables above exclude shares of Class B common stock, because holders of the Class B common stock are not entitled to distributions or dividends, whether cash or stock, from Shoals Technologies Group, Inc. The number of shares of our Class A common stock outstanding after this offering as shown in the tables above is based on the number of shares outstanding as of September 30, 2020, after giving effect to the Transactions and the Assumed Redemption. To the extent that options are issued under our compensatory stock plans or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering.

If the underwriters exercise in full their option to purchase additional shares of Class A common stock:

 

   

the percentage of shares of Class A common stock held by Oaktree will decrease to approximately 6.28% of the total number of shares of our Class A common stock outstanding after this offering; and

 

   

the number of shares held by new investors will increase to 80,500,000, or approximately 88.5% of the total number of shares of our Class A common stock outstanding after this offering.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following table presents the selected historical condensed consolidated financial data for Shoals Parent LLC and its subsidiaries. The selected consolidated statements of operations data and statements of cash flows data for the years ended December 31, 2018 and 2019, and the selected consolidated balance sheet data as of December 31, 2018 and 2019 are derived from the audited consolidated financial statements of Shoals Parent LLC included elsewhere in this prospectus. The selected consolidated statements of operations data and statements of cash flows data for the nine months ended September 30, 2019 and 2020 and the selected consolidated balance sheet data as of September 30, 2020 are derived from the unaudited interim condensed consolidated financial statements of Shoals Parent LLC which are included elsewhere in this prospectus.

The information set forth below should be read together with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and the consolidated financial statements and the consolidated interim financial statements and accompanying notes included elsewhere in this prospectus.

Historically, our business has been operated through Shoals Parent LLC, together with its subsidiaries. Shoals Technologies Group, Inc. was formed for the purpose of this offering and has engaged to date only in activities in contemplation of this offering. Upon the completion of this offering, all of our business will continue to be conducted through Shoals Parent LLC, together with its subsidiaries, and the financial results of Shoals Parent LLC will be consolidated in our financial statements. Shoals Technologies Group, Inc. will be a holding company whose sole material asset will be the LLC Interests in Shoals Parent LLC. For more information regarding the organizational transactions and holding company structure, see “Organizational Structure.”

 

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The unaudited interim condensed consolidated financial statements include all normal recurring adjustments necessary, in the opinion of management, to summarize the financial positions and results for the period presented. Our historical results are not necessarily indicative of our results to be expected in any future period. The information set forth below should be read together with the our consolidated financial statements and our condensed consolidated interim financial statements and the related notes, as well as the sections captioned “Unaudited Pro Forma Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

 

    Year Ended
December 31,
    Nine Months Ended
September 30,
 
(in thousands, except per unit data)   2018     2019     2019     2020  
                (unaudited)  

Consolidated Statements of Operations Data:

       

Revenues

  $ 103,750     $ 144,496     $ 106,613     $ 136,765  

Cost of revenue

    75,582       100,284       74,874       85,061  
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    28,168       44,212       31,739       51,704  

Operating expenses:

       

General and administrative expenses

    8,904       9,065       6,795       15,390  

Depreciation and amortization

    8,177       8,217       6,156       6,194  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    17,081       17,282       12,951       21,584  
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    11,087       26,930       18,788       30,120  

Interest expense, net

    (2,440     (1,787     (1,481     (601
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 8,647     $ 25,143     $ 17,307     $ 29,519  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

     As of December 31,      As of
September 30,
 
     2018      2019              2020          
                   (unaudited)  
     (in thousands)  

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $ 108      $ 7,082      $ 9,245  

Total assets

   $ 185,533      $ 187,607      $ 194,497  

Total liabilities

   $ 47,251      $ 37,701      $ 19,209  

Total members’ equity/stockholders’ equity

   $ 138,282      $ 149,906      $ 175,288  

 

     Year Ended
December 31,
     Nine Months Ended
September 30,
 
     2018      2019      2019      2020  
                   (unaudited)  
     (in thousands)  

Statement of Cash Flows Data:

           

Net cash provided by operating activities

   $ 3,001      $ 36,182      $ 28,687      $ 38,115  

Net cash used in investing activities

   $ (1,405    $ (1,719    $ (1,409    $ (2,786

Net cash used in financing activities

   $ (19,161    $ (27,489    $ (22,903    $ (33,166

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma consolidated financial information reflects the impact of this offering, after giving effect to the Transactions discussed in “Organizational Structure.” Following the completion of the Transactions, Shoals Technologies Group, Inc. will be a holding company whose principal asset will consist of 54.50% of the outstanding LLC Interests that it acquires as a result of the Blocker Merger and from Shoals Parent LLC and certain of the Continuing Equity Owners in connection with this offering with the net proceeds from this offering. The remaining LLC Interests will be held by the Continuing Equity Owners. Shoals Technologies Group, Inc. will act as the sole managing member of Shoals Parent LLC, will operate and control the business and affairs of Shoals Parent LLC and its direct and indirect subsidiaries and, through Shoals Parent LLC and its direct and indirect subsidiaries, conduct its business.

The following unaudited pro forma consolidated statements of operations for the year ended December 31, 2019 and the nine months ended September 30, 2020 give effect to the Special Distribution and the Transactions, including this offering, as if the same had occurred on January 1, 2019. The unaudited pro forma consolidated balance sheet as of September 30, 2020 presents our unaudited pro forma balance sheet giving effect to the Recapitalization, the Special Distribution and the Transactions, including this offering, as if they had occurred as of September 30, 2020.

We have derived the unaudited pro forma consolidated statement of operations and unaudited pro forma consolidated balance sheet from the consolidated financial statements and the unaudited condensed consolidated interim financial statements of Shoals Parent LLC and its subsidiaries included elsewhere in this prospectus. The historical consolidated financial information of Shoals Parent LLC has been adjusted in this unaudited pro forma consolidated financial information to give effect to events that are directly attributable to the Transactions, are factually supportable and, with respect to the consolidated statement of operations, are expected to have a continuing impact on Shoals Technologies Group, Inc. The unaudited pro forma consolidated financial information reflects adjustments that are described in the accompanying notes and are based on available information and certain assumptions we believe are reasonable, but are subject to change.

We refer to the adjustments related to the Transactions, including the impact of the Transactions described in “Organizational Structure,” but excluding the adjustments related to the Recapitalized Adjustments and Offering, as the Pro Forma Transaction Adjustments.

The adjustments related to this offering, which we refer to as the Pro Forma Offering Adjustments, are described in the notes to the unaudited pro forma consolidated financial information and principally include the following:

 

   

the amendment and restatement of the limited liability company agreement of Shoals Parent LLC to, among other things, appoint Shoals Technologies Group, Inc. as the sole managing member of Shoals Parent LLC and provide certain redemption rights to the Continuing Equity Owners;

 

   

the issuance of 9,000,000 shares of our Class A common stock to the investors in this offering in exchange for net proceeds of approximately $192.4 million (based on an assumed initial public offering price of $22.50 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus), after deducting the underwriting discounts and commissions but before estimated offering expenses payable by us;

 

   

the payment of fees and expenses related to this offering and the application of the net proceeds from the sale of Class A common stock in this offering to purchase LLC Interests from Shoals Parent LLC and certain Continuing Equity Owners at a purchase price per unit equal to the initial public offering price per share of Class A common stock less the underwriting discounts and commissions, with such LLC Interests representing 5.4% of the outstanding LLC Interests;

 

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the entry into the Tax Receivable Agreement with Oaktree and our Founder. For a description of the terms of the Tax Receivable Agreement, see “Certain Relationships and Related Party Transactions”;

 

   

the use of a portion of the proceeds by Shoals Parent LLC (from the sale of common units to us using the proceeds of this offering) to repay a portion of the outstanding borrowings under our New Senior Secured Credit Agreement as described in “Use of Proceeds”; and

 

   

a provision for federal, state and local income taxes of Shoals Technologies Group, Inc. as a taxable corporation at an effective rate of 21.7% for the year ended December 31, 2019 and the nine months ended September 30, 2020, which includes a provision for U.S. federal income taxes and assumes the highest statutory rates applied to income apportioned to each state and local jurisdiction.

Except as otherwise indicated, the unaudited pro forma condensed consolidated financial information presented assumes no exercise by the underwriters of their option to purchase additional shares of Class A common stock in the offering.

As a public company, we will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. We expect to incur additional annual expenses related to these additional procedures and processes and, among other things, additional directors’ and officers’ liability insurance, director fees, additional expenses associated with complying with the reporting requirements of the SEC, transfer agent fees, costs relating to additional accounting, legal and administrative personnel, increased auditing, tax and legal fees, stock exchange listing fees and other public company expenses. We have not included any pro forma adjustments relating to these costs in the information below.

The unaudited pro forma consolidated financial information is included for informational purposes only. The unaudited pro forma consolidated financial information should not be relied upon as being indicative of our results of operations or financial condition had the Transactions, including this offering, occurred on the dates assumed. The unaudited pro forma consolidated financial information also does not project our results of operations or financial position for any future period or date. The unaudited pro forma consolidated statement of operations and balance sheet should be read in conjunction with the “Risk Factors,” “Prospectus Summary—Summary Consolidated Financial and Other Data,” “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and our consolidated interim financial statements and related notes included elsewhere in this prospectus.

Shoals Technologies Group, Inc. and subsidiaries

Unaudited pro forma consolidated balance sheet as of September 30, 2020

 

(in thousands, except share amounts)   Shoals
Parent
LLC
Historical(1)
    Recapitalization
Adjustments(2)
    Pro
Forma
Shoals
Parent
LLC
    Pro Forma
Transaction
Adjustments
    Pro Forma
Offering
Adjustments
    Pro Forma
Shoals
Technologies
Group, Inc.
 

Assets

           

Current assets:

           

Cash and cash equivalents

  $ 9,245     $ (5,000 )(2)    $ 4,245     $ —       $ (4,245 )(3)    $ —    

Accounts receivable, net

    28,379       —         28,379       —         —         28,379  

Unbilled receivables

    8,581       —         8,581       —         —         8,581  

Inventory, net

    11,299       —         11,299       —         —         11,299  

Other current assets

    128       —         128       —         —         128  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    57,632       (5,000     52,632       —         (4,245     48,387  

Property, plant and equipment, net

    12,704       —         12,704       —         —         12,704  

Goodwill

    50,176       —         50,176       —         —         50,176  

 

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(in thousands, except share amounts)   Shoals
Parent
LLC
Historical(1)
    Recapitalization
Adjustments(2)
    Pro
Forma
Shoals
Parent
LLC
    Pro Forma
Transaction
Adjustments
    Pro Forma
Offering
Adjustments
    Pro Forma
Shoals
Technologies
Group, Inc.
 

Other intangible assets, net

    73,985       —         73,985       —         —         73,985  

Deferred tax asset

    —         —         —         13,591 (5)      —         13,591  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 194,497     $ (5,000   $ 189,497     $ 13,591     $ (4,245   $ 198,843  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and members’ equity

           

Current liabilities:

           

Accounts payable

  $ 10,668     $ —       $ 10,668     $ —       $ —       $ 10,668  

Accrued expenses

    4,266       1,600 (2)      5,866       —         14,850 (3)      20,716  

Long-term debt—current portion

    4,275       2,625 (2)      6,900       —         3,380 (3)      10,280  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    19,209       4,225       23,434       —         18,230       41,664  

Revolving line of credit

    —         —         —         —         —         —    

Long-term debt, less current portion

    —         346,579 (2)      346,579       —         (145,542 )(3)      201,037  

Other long-term liability

    —         —         —         25,881 (5)      —         25,881  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    19,209       350,804       370,013       25,881       (127,312     268,582  

Members’ equity (deficit)

           

Membership Units

           

Class A Common units—no par value; 90,000,000 issued and outstanding at September 30, 2020

    —         —         —         —         —         —    

Class B Common units—no par value; 75,000,000 issued and outstanding at September 30, 2020

    —         —         —         —         —         —    

Class C Common units—no par value; 11,150,000 issued and outstanding at September 30, 2020

 

 

—  

 

    —         —         —         —         —    

Members’ Equity (deficit)

    175,288       (355,804 )(2)      (180,516     180,516 (4)      —         —    

Class A common stock—$0.00001 par value per share, shares authorized on a pro forma basis, 90,986,291 shares issued and outstanding on a pro forma basis

    —         —         —         1 (6)      —         1  

Class B common stock—$0.00001 par value per share, shares authorized on a pro forma basis, 75,953,095 shares issued and outstanding on a pro forma basis

    —         —         —         1 (6)      —         1  

Additional Paid-in Capital

    —         —         —         (12,290 )(5)      188,775 (3)      176,485  

Accumulated deficit

    —         —         —         (96,155 )(4)      (123,933 )(3)      (220,088
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total members’/stockholders’ equity (deficit) attributable to Shoals Parent LLC/Shoals Technologies Group, Inc.(a)

    175,288       (355,804     (180,516     (108,443     64,842       (43,601
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noncontrolling interest

    —         —         —         (84,363 )(4)      58,225 (4)      (26,138
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total members’/stockholders’ equity (deficit)

    175,288       (355,804     (180,516     (12,290     123,067       (69,739
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and members’/stockholders’ equity (deficit)

  $ 194,497     $ (5,000   $ 189,497     $ 13,591     $ (4,245   $ 198,843  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

For historical amounts, represents total members’ deficit attributable to Shoals Parent LLC. For Pro Forma amounts, represents total members’/stockholders’ equity attributable to Shoals Technologies Group, Inc.

 

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Shoals Technologies Group, Inc. and subsidiaries

Notes to unaudited pro forma condensed consolidated balance sheet

 

(1)

Shoals Technologies Group, Inc. was formed on November 4, 2020 and will have no material assets or results of operations until the consummation of the Transactions, and therefore its historical financial position is not shown in a separate column in this unaudited pro forma balance sheet.

 

(2)

On November 25, 2020, Shoals Holdings LLC entered into a New Senior Secured Credit Agreement to, among other things, provide for incremental term loan borrowings of $350 million, delayed draw borrowings up to $30 million and an uncommitted super senior revolving credit facility, to increase the capacity for payments by the borrower for payments of regular tax distributions to its common unit holders, including us, and permit a $355.8 million Special Distribution of a portion of such incremental borrowings under our New Senior Secured Credit Agreement which distribution was made on November 25, 2020 (the “Recapitalization”). This adjustment represents the recognition of the incremental borrowings under the New Senior Secured Credit Agreement of $360 million, net of deferred financing fees of $10.8 million and the $355.8 million Special Distribution as if such debt had been incurred and such distribution had been declared and paid on September 30, 2020.

 

(3)

Reflects the net effect on cash of the receipt of offering proceeds to us of $188.8 million, based on the assumed sale of shares of Class A common stock at an assumed initial public offering of $22.50 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. These amounts, as described in “Use of Proceeds,” relate to:

 

  (a)

payment of $188.8 million to purchase 9,000,000 LLC Interests from Shoals Parent LLC and certain Continuing Equity Owners at an assumed initial public offering of $22.50 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus after deducting the underwriting discounts and commissions;

 

  (b)

payment of approximately $3.6 million of estimated offering expenses and an $11.3 million prepayment premium; and

 

  (c)

repayment of approximately $150.0 million to repay outstanding borrowings under our New Senior Secured Credit Agreement utilizing proceeds. The repayment of a portion of our borrowings under our New Senior Secured Credit Agreement resulted in a $4.5 million loss on debt repayment as the result of the write-off of a portion of the unamortized original issue discount and capitalized finance costs.

 

(4)

Upon completion of the Transactions, we will become the sole managing member of Shoals Parent LLC. We will have the sole voting interest in, and control of the management of, Shoals Parent LLC. As a result, we will consolidate the financial results of Shoals Parent LLC and will report a noncontrolling interest related to the interests in Shoals Parent LLC held by the Continuing Equity Owners on our consolidated balance sheet. Immediately following the Transactions, the economic interests held by the noncontrolling interest will be approximately 45.50%. If the underwriters were to exercise their option to purchase additional shares of our Class A common stock in full, the economic interests held by the noncontrolling interest would remain approximately 45.50%.

Following the consummation of this offering, the LLC Interest held by the Continuing Equity Owners, representing the noncontrolling interest, will be redeemable at each of their options, for, at our election (determined solely by a majority of our directors who are disinterested), newly issued shares of our Class A common stock on a one-for-one basis or a cash payment equal to a volume-weighted average market price of one share of Class A common stock for each LLC Interest so redeemed, in each case in accordance with the terms of the Shoals Parent LLC Agreement; provided that, at our election (determined solely by a majority of our directors who are disinterested), we may effect a direct exchange of such Class A common stock or such cash, as applicable, for such LLC Interests. The Continuing Equity Owners may exercise such redemption right for as long as their LLC Interests remain outstanding. See “Certain Relationships and Related Party Transactions—Shoals Parent LLC Agreement.”

 

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The transaction adjustments include adjustments to transfer pro forma Shoals Parent LLC members’ deficit to accumulated deficit and report a noncontrolling interest equal to the Continuing Equity Owners’ economic interest in Shoals Parent LLC of 46.73%. The following table describes such Transaction adjustments ($ in thousands):

 

Noncontrolling interest

      

Members’ deficit—Shoals Parent LLC

   $ (180,516

Oaktree Class A common stock economic interest in Shoals Parent LLC

     53.27

Members’ deficit attributable to Oaktree Class A common stock

     (96,153
  

 

 

 

Members’ deficit attributable to Continuing Equity Owners—noncontrolling interest

   $ (84,363
  

 

 

 

The Offering Adjustments include adjustments to report a noncontrolling interest equal to the Continuing Equity Owners’ economic interest in Shoals Parent LLC of 45.50%, after giving effect to the issuance of 9,000,000 shares of Class A common stock in this offering based on the pro forma Shoals Parent LLC members’ deficit adjusted for the net proceeds received from the sale of common units, less offering expenses and write off of unamortized original issue discount, capitalized finance costs and a prepayment premium paid by Shoals Parent LLC, which are included in stockholders’ equity. The following table describes such offering adjustments ($ in thousands):

 

Noncontrolling interest

      

Members’ deficit—Shoals Parent LLC

   $ (180,516

Purchase of Shoals Parent LLC common units with net proceeds of the offering

     142,375  

Offering expense paid by Shoals Parent LLC

     (3,600

Partial extinguishment of debt and prepayment premium

     (15,708
  

 

 

 

Shoals Parent LLC members’ deficit after the offering

     (57,499

Continuing Equity Owners’ interest in Shoals Parent LLC

     45.50
  

 

 

 

Members’ deficit attributable to Continuing Equity Owners—noncontrolling interest

     (26,138

Less noncontrolling interest included in the “Transaction Adjustments” column

     (84,363
  

 

 

 

Noncontrolling interest—“Offering Adjustments” column

   $ 58,225  
  

 

 

 

In connection with this offering, we will issue 75,953,095 shares of Class B common stock to the Continuing Equity Owners, on a one-to-one basis with the number of common units of Shoals Parent LLC they own for nominal consideration. Holders of our Class B common stock, along with the holders of our Class A common stock, will have certain voting rights as described under “Description of Capital Stock,” but holders of our Class B common stock will not be entitled to receive any distributions from or participate in any dividends declared by our board of directors.

 

(5)

We expect to obtain an increase in the tax basis of our share of the assets of Shoals Parent LLC when common units are redeemed or exchanged by the Continuing Equity Owners and other qualifying transactions. This increase in tax basis may have the effect of reducing the amounts that we would otherwise pay in the future to various tax authorities. The increase in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. In connection with the consummation of this offering, we will enter into a tax receivable agreement with Oaktree and our Founder that will provide for the payment by us to Oaktree and our Founder of 85% of the amount of tax benefits, if any, that we actually realize or in some cases are deemed to realize as a result of (i) Shoals Technologies Group, Inc.’s allocable share of existing tax basis acquired in connection with the 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 LLC and its subsidiaries

 

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  resulting from purchases or exchanges of LLC Interests and (iii) certain other tax benefits related to our entering into the Tax Receivable Agreement, including tax benefits attributable to payments that we make under the Tax Receivable Agreement. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

The merger of the Blocker in connection with this offering and the establishment of the Tax Receivable Agreement will result in Shoals Technologies Group, Inc. establishing a liability for 85% of the estimated tax benefit received from the existing Blockers share of tax basis totaling $14.3 million, with the offset to additional paid-in capital.

The sale by certain of the Continuing Equity Owners in connection with this offering of certain of their LLC Interest for $22.50 (based on the midpoint of the estimated price range set forth on the cover page of this prospectus) will trigger an increase in the tax basis of the assets of Shoals Parent LLC subject to the provisions of the Tax Receivable Agreement. Assuming a public offering price of $22.50 per share (the midpoint of the estimated price range set forth on the cover page of this prospectus), we will recognize a deferred tax asset in the amount of $13.6 million and a liability of $11.6 million, representing 85% of the tax benefits and an adjustment to additional paid-in capital for the difference.

If all of the Continuing Equity Owners were to exchange or redeem their LLC Interests, we would recognize a deferred tax asset of approximately $453.3 million and a related liability for payments under the Tax Receivable Agreement of approximately $385.3 million, assuming, among other factors, (i) all exchanges occurred on the same day; (ii) a price of $22.50 per share of Class A common stock (the midpoint of the estimated price range set forth on the cover of this prospectus); (iii) a constant corporate tax rate of 21.7%; (iv) we will have sufficient taxable income to fully utilize the tax benefits; (v) Shoals Parent LLC is able to fully depreciate or amortize its assets; and (vi) no material changes in applicable tax law. For each 5% increase (decrease) in the amount of LLC Interests exchanged by the Continuing Equity Owners, our deferred tax asset would increase (decrease) by approximately $20.8 million and the related liability for payments under the Tax Receivable Agreement would increase (decrease) by approximately $17.7 million, assuming that the price per share of the Class A Common Stock at the time of the exchange and corporate tax rate remain the same. These amounts are estimates and have been prepared for informational purposes only. The actual amount of deferred tax assets and related liabilities that we will recognize will differ based on, among other things, the timing of the redemptions or exchanges, the price of our shares of Class A common stock at the time of the redemptions or exchanges and the tax rates then in effect.

 

(6)

In connection with this offering, Shoals Technologies Group, Inc. will acquire LLC Interests held by the Blocker by means of the Blocker Merger and will issue to the Selling Stockholder 81,986,291 shares of Class A common stock as consideration in the Blocker Merger, of which 61,000,000 are being offered in this offering.

 

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Shoals Technologies Group, Inc. and subsidiaries

Unaudited pro forma consolidated statement of operations for the year ended December 31, 2019

 

(in thousands, except share amounts)

  Historical(1)
Shoals Parent
LLC
    Recapitalization
Transactions(2)
    Pro Forma
Shoals Parent
LLC
    Pro Forma
Transaction
Adjustments
    Pro Forma
Offering
Adjustments
    Pro Forma
Shoals
Technologies
Group, Inc.
 

Revenues

  $ 144,496     $ —       $ 144,496     $ —       $ —       $ 144,496  

Cost of revenue

    100,284       —         100,284       —         —         100,284  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    44,212         44,212       —         —         44,212  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

           

General and administrative

    9,065       —         9,065       —         —         9,065  

Depreciation and amortization

    8,217       —         8,217       —         —         8,217  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    17,282       —         17,282       —         —         17,282  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    26,930         26,930       —           26,930  

Interest expense, net

    (1,787     (18,559 )(2)      (20,346     —         7,895 (6)      (12,451
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    25,143       (18,559     6,584       —         7,895       14,479  

Income tax expense

    —         —         —         —         (1,712 )(3)      (1,712
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    25,143       (18,559     6,584       —         6,183       12,767  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to non-controlling interests

    —         —         —         3,077 (4)      2,732 (4)      5,809  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Shoals Technologies Group, Inc.

  $ 25,143     $ (18,559   $ 6,584     $ (3,077   $ 3,451     $ 6,958  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma Net Income Per Share Data(5):

           
           

Net income available to Class A common stock per share:

           

Basic

            $ 0.08  
           

 

 

 

Diluted

            $ 0.08  
           

 

 

 

Weighted-average shares to Class A common stock outstanding:

           

Basic

              90,986,291  
           

 

 

 

Diluted

              166,939,386  
           

 

 

 

 

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Unaudited pro forma consolidated statement of operations for the nine months ended September 30, 2020

 

(in thousands, except share amounts)

  Historical(1)
Shoals Parent
LLC
    Recapitalization
Transactions(2)
    Pro Forma
Shoals Parent
LLC
    Pro Forma
Transaction
Adjustments
    Pro Forma
Offering
Adjustments
    Pro Forma
Shoals
Technologies
Group, Inc.
 

Revenues

  $ 136,765     $ —       $ 136,765     $ —       $ —       $ 136,765  

Cost of revenue

    85,061       —         85,061       —         —         85,061  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    51,704       —         51,704       —         —         51,704  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

           

General and administrative

    15,390       —         15,390       —         —         15,390  

Depreciation and amortization

    6,194       —         6,194       —         —         6,194  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    21,584       —         21,584       —         —         21,584  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    30,120       —         30,120       —         —         30,120  

Interest expense, net

    (601     (13,470 )(2)      (14,071     —         5,922 (6)      (8,149
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    29,519       (13,470     16,049       —         5,922       21,971  

Income tax expense

          —         —         —         (2,599 )(3)      (2,599
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    29,519       (13,470     16,049       —         3,323       19,372  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to non-controlling interests

    —         —         —         7,500 (4)      1,313 (4)      8,813  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Shoals Technologies Group, Inc.

  $ 29,519     $ (13,470   $ 16,049     $ (7,500     2,010       10,559  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma Net Income Per Share Data(5):

           

Net income available to Class A common stock per share:

           

Basic

            $ 0.12  
           

 

 

 

Diluted

            $ 0.12  
           

 

 

 

Weighted-average shares of Class A common stock outstanding:

           

Basic

              90,986,291  
           

 

 

 

Diluted

              166,939,386  
           

 

 

 

Shoals Technologies Group, Inc. and subsidiaries

Notes to unaudited pro forma condensed consolidated statement of operations

 

  (1)

Shoals Technologies Group, Inc. was formed on November 4, 2020 and will have no material assets or results of operations until the consummation of the Transactions, and therefore its historical financial position is not shown in a separate column in this unaudited pro forma balance sheet.

 

  (2)

On November 25, 2020, Shoals Parent LLC entered into a New Senior Secured Credit Agreement to, among other things, provide for incremental term loan borrowings of $350 million and delayed draws up to $30 million, to increase the capacity for payments by the borrower for payments of regular tax distributions to its common unit holders, including us, and permit a $355.8 million Special Distribution of a portion of such incremental borrowings under our New Senior Secured Credit Agreement which

 

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  distribution was made on November 25, 2020. Accordingly, pro forma adjustments have been made to reflect an increase in interest expense of $18.6 million and $13.5 million for the year ended December 31, 2019 and the nine months ended September 30, 2020, respectively, computed at the effective interest rate of 5.39%, assumed to finance the portion of the Special Distribution that exceeds the prior twelve months earnings.

 

  (3)

Following the Transactions, we will be subject to United States federal income taxes, in addition to applicable state and local taxes, with respect to our allocable share of any net taxable income of Shoals Parent LLC. As a result, the unaudited pro forma consolidated statement of operations includes an adjustment to our income tax expense to reflect an effective income tax rate of 21.7%, which includes a provision for United States federal income taxes and assumes the highest statutory rates apportioned to each state and local jurisdiction.

The income tax expense for the Offering Adjustments is determined using the Shoals Technologies Group, Inc.’s economic interest in Shoals Parent LLC of 54.50%, based on the pro forma Shoals Technologies Group, Inc. income before income taxes. The effective tax rate derived from the face of the unaudited pro forma consolidated statement of income will be lower than the stated effective tax rate, as the effective tax rate is only applied to the 54.50% of the income before taxes based on Shoals Technologies Group, Inc.’s economic interest in Shoals Parent LLC. Our pro forma allocable share of income from Shoals Parent LLC was $7.0 million and $10.6 million, and our income tax was $1.7 million and $2.6 million, respectively, for the year ended December 31, 2019 and the nine months ended September 30, 2020.

 

  (4)

Upon completion of the Transactions, we will become the sole managing member of Shoals Parent LLC. We will have the sole voting interest in, and control of the management of, Shoals Parent LLC. As a result, we will consolidate the financial results of Shoals Parent LLC and will report a noncontrolling interest related to the interests in Shoals Parent LLC held by the Continuing Equity Owners on our consolidated balance sheet. Immediately following the Transactions, the economic interests held by the noncontrolling interest will be approximately 45.50%. If the underwriters exercise their option to purchase additional shares of our Class A common stock in full, the economic interests held by the noncontrolling interest will remain approximately 45.50%.

 

  (5)

Pro forma basic earnings per share is computed by dividing the net income available to Class A common stockholders by the weighted-average shares of Class A common stock outstanding during the period. Pro forma diluted earnings per share is computed by adjusting the net income available to Class A common stockholders and the weighted-average shares of Class A common stock outstanding to give effect to potentially dilutive securities. Shares of our Class B common stock are not entitled to receive any distributions or dividends and have no rights to convert into Class A common stock. When a common unit is exchanged for, at the holder’s election, cash or Class A common stock by a

 

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  Continuing Equity Owner who holds shares of our Class B common stock, such Continuing Equity Owner will be required to surrender a share of Class B common stock, which we will cancel for no consideration. Therefore, we did not include shares of our Class B common stock in the computation of pro forma basic earnings per share. The following table sets forth a reconciliation of the numerators and denominators used to compute pro forma basic and diluted earnings per share:

 

(in thousands, except per share data)

   Year Ended
December 31,
2019
     Nine Month
Ended
September 30,
2020
 

Basic earnings per share: Numerator

     

Net Income

   $ 12,767      $ 19,372  

Less: Net income attributable to noncontrolling interests

     5,809        8,813  
  

 

 

    

 

 

 

Net income attributable to Class A common stockholders—basic

   $ 6,958      $ 10,559  
  

 

 

    

 

 

 

Basic earnings per share: Denominator

     

Shares of Class A common stock held by our Selling Stockholder

     20,986,291        20,986,291  

Shares of Class A common stock sold in this offering

     70,000,000        70,000,000  

Weighted-average shares of Class A common stock outstanding—basic

     90,986,291        90,986,291  
  

 

 

    

 

 

 

Basic earnings per share

   $ 0.08      $ 0.12  
  

 

 

    

 

 

 

Diluted earnings per share: Numerator

     

Net income available to Class A common stockholders—basic

   $ 6,958      $ 10,559  

Reallocation of net income assuming conversion of common units(a)

     5,809        8,813  
  

 

 

    

 

 

 

Net income attributable to Class A stockholders—diluted

   $
12,767
 
   $ 19,372  
  

 

 

    

 

 

 

Diluted earnings per share: Denominator

     

Weighted-average shares of Class A common stock outstanding—basic

     90,986,291        90,986,291  

Weighted-average effect of dilutive securities(b)

     75,953,095        75,953,095  
  

 

 

    

 

 

 

Weighted-average shares of Class A common stock outstanding—diluted

     166,939,386        166,939,386  
  

 

 

    

 

 

 

Diluted earnings per share

   $ 0.08      $ 0.12  
  

 

 

    

 

 

 

 

  (a)

The reallocation of net income assuming conversion of common units represents the tax effected net income attributable to noncontrolling interests using the effective income tax rates described in footnote (3) and assuming all common units of Shoals Parent LLC were exchanged for Class A common stock at the beginning of the period. The common units of Shoals Parent LLC held by the Continuing Equity Owners are potentially dilutive securities and the computations of pro forma diluted earnings per share assume that all common units of Shoals Parent LLC were exchanged for shares of Class A common stock at the beginning of the period. This adjustment was made for purposes of calculating pro forma diluted earnings per share only and does not necessarily reflect the amount of exchanges that may occur subsequent to this offering.

 

  (b)

Includes 75,953,095 shares of Class A common stock issuable upon the exchange of LLC Interest to be held by the Continuing Equity Owners prior to this offering.

 

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  (6)

As described in “Use of Proceeds,” Shoals Parent LLC intends to use the net proceeds it receives from the sale of common units to Shoals Technologies Group, Inc. to repay $150.0 million of outstanding borrowings under our New Senior Secured Credit Agreement. Accordingly, pro forma adjustments have been made to reflect a reduction in interest expense of $7.9 million and $5.9 million for the year ended December 31, 2019 and the nine months ended September 30, 2020, respectively, computed at effective interest rates of 5.4%, in each case, as if the outstanding borrowings had been repaid on January 1, 2019.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

This section, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” should be read in conjunction with the sections of this prospectus captioned “Selected Consolidated Financial and Other Data” and “Business” and our consolidated financial statements and the related notes to those statements included elsewhere in this prospectus. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the sections of this prospectus captioned “Special Note Regarding Forward-Looking Statements” and “Risk Factors.”

This section contains the presentation of Adjusted EBITDA and Adjusted Net Income, which are not presented in accordance with GAAP. Adjusted EBITDA and Adjusted Net Income are being presented because they provide the Company and readers of this prospectus with additional insight into our operational performance relative to earlier periods and relative to our competitors. We do not intend Adjusted EBITDA and Adjusted Net Income to be substitutes for any GAAP financial information. Readers of this prospectus should use Adjusted EBITDA and Adjusted Net Income only in conjunction with Net Income, the most comparable GAAP financial measure. Reconciliations of Adjusted EBITDA and Adjusted Net Income to Net Income, the most comparable GAAP measure to each, are provided in “—Non-GAAP Financial Measures.”

Historically, our business has been operated through Shoals Parent LLC, together with its subsidiaries. Shoals Technologies Group, Inc. was formed for the purpose of this offering and has engaged to date only in activities in contemplation of this offering. Upon the completion of this offering, all of our business will continue to be conducted through Shoals Parent LLC, together with its subsidiaries, and the financial results of Shoals Parent LLC will be consolidated in our financial statements. Shoals Technologies Group, Inc. will be a holding company whose sole material asset will be the LLC Interests in Shoals Parent LLC. For more information regarding the organizational transactions and holding company structure, see “Organizational Structure.”

Overview

We are a leading provider of electrical balance of system or “EBOS” solutions for solar energy projects in the United States. EBOS encompasses all of the components that are necessary to carry the electric current produced by solar panels to an inverter and ultimately to the power grid. EBOS components are mission-critical products that have a high consequence of failure, including lost revenue, equipment damage, fire damage, and even serious injury or death. As a result, we believe customers prioritize reliability and safety over price when selecting EBOS solutions.

EBOS components that we produce include cable assemblies, inline fuses, combiners, disconnects, recombiners, wireless monitoring systems, junction boxes, transition enclosures and splice boxes. We derive the majority of our revenues from selling “system solutions” which are complete EBOS systems that include several of our products, many of which are customized for the customer’s project. We believe our system solutions are unique in our industry because they integrate design and engineering support, proprietary components and innovative installation methods into a single offering that would otherwise be challenging for a customer to obtain from a single provider or at all.

We sell our products principally to EPCs that build solar energy projects. However, the decision to use our products typically involves input from both the EPC and the owner of the solar energy project, given the mission-critical nature of EBOS. We derived approximately 67% of our revenues from the sale of system solutions for the nine months ended September 30, 2020. The custom nature of our system solutions and the long development cycle for solar energy projects typically gives us 12 months or more of lead time to quote, engineer, produce and ship each order we receive, and we do not stock large amounts of finished goods.

 

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Key Components of Our Results of Operations

The following discussion describes certain line items in our Consolidated Statements of Operations.

Revenues

We generate revenue from the sale of EBOS systems and components for homerun and combine-as-you-go architectures. Our customers include EPCs, utilities, solar developers, independent power producers and solar module manufacturers. We derive the majority of our revenues from selling system solutions. When we sell a system solution, we enter into a contract with our customers covering the price, specifications, delivery dates and warranty for the products being purchased, among other things. Our contractual delivery period for system solutions can vary from one to three months whereas manufacturing typically requires a shorter time frame. Contracts for system solutions can range in value from several hundred thousand to several million dollars.

Our revenue is affected by changes in the price, volume and mix of products purchased by our customers. The price and volume of our products is driven by the demand for our products, changes in product mix between homerun and combine-as-you-go EBOS, geographic mix of our customers, strength of competitors’ product offerings, and availability of government incentives to the end-users of our products.

Our revenue growth is dependent on continued growth in the amount of solar energy projects constructed each year and our ability to increase our share of demand in the geographies where we currently compete and plan to compete in the future as well as our ability to continue to develop and commercialize new and innovative products that address the changing technology and performance requirements of our customers.

Cost of Revenue and Gross Profit

Cost of revenues consists primarily of product costs, including purchased materials and components, as well as costs related to shipping, customer support, product warranty, personnel and depreciation of manufacturing and testing equipment. Personnel costs in cost of revenue includes both direct labor costs as well as costs attributable to any individuals whose activities relate to the transformation of raw materials or component parts into finished goods or the transportation of materials to the customer. Our product costs are affected by the underlying cost of raw materials, including copper and aluminum; component costs, including fuses, resin, enclosures, and cable; technological innovation; economies of scale resulting in lower component costs; and improvements in production processes and automation. We do not currently hedge against changes in the price of raw materials. Some of these costs, primarily personnel and depreciation of manufacturing and testing equipment, are not directly affected by sales volume.

Gross profit may vary from quarter to quarter and is primarily affected by our sales volume, product prices, product costs, product mix, customer mix, geographical mix, shipping method, warranty costs and seasonality.

Operating Expenses

Operating expenses consist of general and administrative costs as well as depreciation and amortization expense. Personnel-related costs are the most significant component of our operating expenses and include salaries, benefits, payroll taxes and commissions. The number of full-time employees in our general and administrative departments increased from 36 to 44 from September 30, 2019 to September 30, 2020, and we expect to hire new employees in the future to support our growth. The timing of these additional hires could materially affect our operating expenses in any particular period, both in absolute dollars and as a percentage of revenue. We expect to invest in additional resources to support our growth which will increase our operating expenses.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries, share based compensation expense, employee benefits and payroll taxes related to our executives, sales, finance, human resources, information

 

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technology, engineering and legal organizations, travel expenses, facilities costs, marketing expenses, bad debt expense and fees for professional services. Professional services consist of audit, legal, tax, insurance, information technology and other costs. We expect to increase our sales and marketing personnel as we expand into new geographic markets. The majority of our sales in 2019 were in the U.S. We currently have a sales presence in the U.S. and Australia. We intend to expand our sales presence and marketing efforts to additional countries in the future. We also expect that after the completion of this offering, we will incur additional audit, tax, accounting, legal and other costs related to compliance with applicable securities and other regulations, as well as additional insurance, investor relations and other costs associated with being a public company.

Depreciation

Depreciation in our operating expense consists of costs associated with property, plant and equipment (“PP&E”) not used in manufacturing of our products. We expect that as we increase both our revenues and the number of our general and administrative personnel, we will invest in additional PP&E to support our growth resulting in additional depreciation expense.

Amortization

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

Non-operating Expenses

Interest Expense

Interest expense consists of interest and other charges paid in connection with our Revolving Loan and Term Loan, which was fully repaid on October 8, 2020.

Non-GAAP Financial Measures

Adjusted EBITDA and Adjusted Net Income

We define Adjusted EBITDA as net income plus (i) interest expense, net, (ii) depreciation expense, (iii) amortization of intangibles, (iv) equity based compensation, (v) COVID-19 expenses and (vi) non-recurring and other expenses. We define Adjusted Net Income as net income plus (i) amortization of intangibles, (ii) equity based compensation, (iii) COVID-19 expenses and (iv) non-recurring and other expenses.

Adjusted EBITDA and Adjusted Net Income are intended as supplemental measures of performance that are neither required by, nor presented in accordance with, GAAP. We present Adjusted EBITDA and Adjusted Net Income because we believe they assist investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA and Adjusted Net Income: (i) as factors in evaluating management’s performance when determining incentive compensation; (ii) to evaluate the effectiveness of our business strategies; and (iii) because our credit agreement uses measures similar to Adjusted EBITDA and Adjusted Net Income to measure our compliance with certain covenants.

Among other limitations, Adjusted EBITDA and Adjusted Net Income do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments; do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; do not reflect income tax expense or benefit; and other companies in our industry may calculate Adjusted EBITDA and Adjusted Net Income differently than we do, which limits their usefulness as comparative measures.

 

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Because of these limitations, Adjusted EBITDA and Adjusted Net Income should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA and Adjusted Net Income on a supplemental basis. You should review the reconciliation of net income to Adjusted EBITDA and Adjusted Net Income below and not rely on any single financial measure to evaluate our business.

The following table reconciles net income to Adjusted EBITDA for the years ended December 31, 2018 and 2019 and the nine months ended September 30, 2019 and 2020, respectively:

 

     Shoals Parent LLC  
     Year Ended
December 31,
     Nine Months Ended
September 30,
 
     2018      2019      2019      2020  
     (in thousands)  

Net income

   $ 8,647      $ 25,143      $ 17,307      $ 29,519  

Interest expense

     2,440        1,787        1,481        601  

Depreciation expense

     1,006        1,179        850        1,029  

Amortization of intangibles

     7,984        7,984        5,988        5,988  

Equity based compensation

     —          —          —          7,219  

COVID-19 expenses(a)

     —          —          —          2,006  

Non-recurring and other expenses(b)

     1,053        686        476        444  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 21,130      $ 36,779      $ 26,102      $ 46,806  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

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

(b)

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

The following table reconciles net income to Adjusted Net Income for the years ended December 31, 2018 and 2019 and the nine months ended September 30, 2019 and 2020, respectively:

 

     Shoals Parent LLC  
     Year Ended
December 31,
     Nine Months Ended
September 30,
 
     2018      2019      2019      2020  
     (in thousands)  

Net income

   $ 8,647      $ 25,143      $ 17,307      $ 29,519  

Amortization of intangibles

     7,984        7,984        5,988        5,988  

Equity based compensation

     —          —          —          7,219  

COVID-19 expenses(a)

     —          —          —          2,006  

Non-recurring and other expenses(b)

     1,053        686        476        444