In terminating a tax receivable agreement (TRA) Shoals Technologies Group (SHLS), a provider of electrical balance of system (EBOS) solutions for solar energy projects, recorded a $110.8 million gain in its consolidated statement of operations rather than a stockholder contribution. The one-time gain, using the company’s 2022 tax rate of 6%, resulted in the following:

—Inflated Shoals’ net income by 270.46%
—Accounted for $0.96 or 86.48% of Basic EPS

In explaining why it felt the non-recurring item should be included on the income statement rather than treated as a stockholder contribution, Shoals provided the following explanation in its latest annual report:

“Ultimately, we determined that, despite the involvement of the Founder, the transaction was performed at arm's length, both parties received the same payment based upon ownership percentage, and therefore, the gain should be recorded in the Consolidated Statement of Operations as of the TRA Amendment date.”

The company’s auditor, BDO, flagged the termination of the TRA and Shoals’ decision to include it on the income statement as a critical audit matter.

The TRA entitled its owners— founder Dean Solon and Oaktree Capital—to 85% of any realized tax benefits. On November 29, 2022, Shoals agreed to pay Solon and Oaktree $58 million to terminate the agreement. Seven days later— with only $11 million in cash on hand— Shoals sold two million shares for approximately $48 million to pay the termination fee.

The follow-on offering coincided with a dump of 27.9 million shares from unnamed “selling stockholders”, according to Shoals. On the same day, records show Dean Solon sold 27.9 million shares for a total of $599 million, or the equivalent of 18.37% of Shoals’ Enterprise Value as of this writing.

Less than three months later, Solon sold another 24.5 million shares for a total of $594.1 million.