Array Technologies, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and the related notes and other financial information included in this Annual Report on Form 10-K. 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 Form 10-K captioned “Forward-Looking Statements” and “Risk Factors.” Overview We are one of the world’s largest manufacturers of ground-mounting systems used in solar energy projects. Our principal product is an integrated system of steel supports, electric motors, gearboxes and electronic controllers commonly referred to as a single-axis “tracker.” Trackers move solar panels throughout the day to maintain an optimal orientation to the sun, which significantly increases their energy production. Solar energy projects that use trackers generate more energy and deliver a lower LCOE than projects that use “fixed tilt” mounting systems, which do not move. The vast majority of ground mounted solar systems in the United States use trackers. Our trackers use a patented design that allows one motor to drive multiple rows of solar panels through articulated driveline joints. To avoid infringing on our U.S. patent, our competitors must use designs that we believe are inherently less efficient and reliable. For example, our largest competitor’s design requires one motor for each row of solar panels. As a result, we believe our products have greater reliability, lower installation costs, reduced maintenance requirements and competitive manufacturing costs. Our core U.S. patent on a linked-row, rotating gear drive system does not expire until February 5, 2030. We sell our products to engineering, procurement and construction firms (“EPCs”) that build solar energy projects and to large solar developers, independent power producers and utilities, often under master supply agreements or multi-year procurement contracts. During the year ended December 31, 2021, we derived 97% and 3% of our revenues from customers in the United States and rest of the world, respectively. We are a U.S. company and our headquarters and principal manufacturing facility are in Albuquerque, New Mexico. As of December 31, 2021, we had 471 full-time employees. Acquisition of STI On January 11, 2022 (the “Closing Date”), the Company completed the previously announced STI Acquisition, pursuant to that certain definitive agreement (the “Purchase Agreement”), dated as of November 10, 2021, by and among Array Tech, Inc, a wholly-owned subsidiary of the Company, Amixa Capital, S.L. and Aurica Trackers, S.L., each a company duly organized under the laws of the Kingdom of Spain, and Mr. Javier Reclusa Etayo. In accordance with the Purchase Agreement, the Company paid closing consideration to STI consisting of $410.5 million in cash (the “Cash Consideration”) and 13,894,800 shares of the Company’s common stock (the “Stock Consideration”). The fair value of the cash and common stock consideration was $610.7 million and resulted in the Company owning 100% of the interests in STI. The Company is in the process of performing a valuation of the acquisition assets and liabilities and the related accounting impact. The purchase price will be increased by the amount that is four times the audited Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) of the target less €47.0 million ($53.5 million at current 42 Table of Contents exchange rates), such that the amount of contingent consideration is subject to a cap of €45.0 million ($52.0 million at current exchange rates). In connection with the entry into the Purchase Agreement, the Company entered into a debt commitment letter dated November 10, 2021 pursuant to which third-party financial institutions have committed, subject to the satisfaction of standard conditions, to provide the Company with a bridge loan facility in aggregate principal amount of up to $300 million. The Company was able, however, to finance the transaction and related fees and expenses with cash on hand, borrowings under its senior credit facilities, proceeds from our option to require the holders of our Series A Redeemable Perpetual Preferred Stock to purchase additional shares of Series A Redeemable Perpetual Preferred Stock, and through the proceeds of its Convertible Notes Offering. Series A Redeemable Perpetual Preferred Stock On August 10, 2021, the Company entered into the Securities Purchase Agreement with an investment vehicle of funds affiliated with Blackstone Inc. (the “Purchaser”). Pursuant to the Securities Purchase Agreement, on August 11, 2021, the Company issued and sold to the Purchaser 350,000 shares of Series A Redeemable Perpetual Preferred Stock, having the powers, designations, preferences, and other rights set forth in the Certificate of Designations, and 7,098,765 shares of the Company’s Common Stock, for an aggregate purchase price of $346.0 million. Further, pursuant to the Securities Purchase Agreement, the Company has issue and sold to the Purchaser 776,235 shares of Common Stock for an aggregate purchase price of $776 on September 27, 2021. For more information related to the Series A Redeemable Perpetual Preferred Stock, see Note 11 - Redeemable Perpetual Preferred, to the accompanying consolidated financial statements. In connection with the Stock Purchase Agreement and the Certificate of Designations governing the Series A Redeemable Perpetual Preferred Stock (see Note 11 - Redeemable Perpetual Preferred), on January 7, 2022, the Company issued and sold to the Purchasers 50,000 shares of Series A Redeemable Perpetual Preferred Stock and 1,125,000 shares of Common Stock in an Additional Closing for an aggregate purchase price of $49,376,125. Update on the Impact of COVID-19 In December 2019, a novel strain of coronavirus, SARS-CoV-2, which causes coronavirus disease 2019, or COVID-19, surfaced in Wuhan, China. Since then, COVID-19 has spread to multiple countries, including the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. With the second wave of the pandemic including variants of COVID-19, we continue to closely monitor the situation in all the locations where we operate. Our priority remains the welfare of our employees. We expect persistent waves of COVID-19 to remain a headwind into the near future. Refer to “Risk Factors - The ongoing COVID-19 pandemic has materially and adversely affected our business and results of operations resulting in reduced margins due to the rise in steel and other commodity costs and as well as logistics delays and costs. The duration and extent to which it will continue to adversely impact our business and results of operations remains uncertain and could be material,” as disclosed in Part II, “Item 1A. Risk Factors.” Performance Measures In managing our business and assessing financial performance, we supplement the information provided by the financial statements with other operating metrics. These operating metrics are utilized by our management to evaluate our business, measure our performance, identify trends affecting our business and formulate projections. The primary operating metric we use to evaluate our sales performance and to track market acceptance of our products from year to year is megawatts (“MWs”) shipped generally and the change in MW shipped from period to period specifically. MWs is measured for each individual project and is calculated based on the expected output of that project once installed and fully operational. 43 Table of Contents We also utilize metrics related to price and cost of goods sold per MW, including average selling price (“ASP”) and cost per watt (“CPW”). ASP is calculated by dividing total applicable revenues by total applicable MWs, whereas CPW is calculated by dividing total applicable costs of goods sold by total applicable MWs. These metrics enable us to evaluate trends in pricing, manufacturing cost and customer profitability. Key Components of Our Results of Operations The following discussion describes certain line items in our consolidated statements of operations. Revenue We generate revenue from the sale of solar tracking systems and parts. Our customers include EPCs, utilities, solar developers and independent power producers. For each individual solar project, 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 the tracker system and parts can vary from days to several months. Contracts can range in value from hundreds of thousands to tens of millions of dollars. Our revenue is affected by changes in the volume and ASPs of solar tracking systems purchased by our customers. The quarterly volume and ASP of our systems is driven by the supply of, and demand for, our products, changes in product mix between module type and wattage, 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 installed each year as well as our ability to increase our share of demand in each of the geographies where we compete, expand our global footprint to new evolving markets, grow our production capabilities to meet demand and to continue to develop and introduce new and innovative products that address the changing technology and performance requirements of our customers. Cost of Revenue and Gross Profit Cost of revenue consists primarily of product costs, including purchased components, as well as costs related to shipping, tariffs, customer support, product warranty, personnel and depreciation of test and manufacturing 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 steel and aluminum; component costs, including electric motors and gearboxes; technological innovation; economies of scale resulting in lower component costs, and improvements in production processes and automation. In 2021, our business has been impacted by the Covid-19 pandemic by increased raw materials and shipping costs and delays which has resulting in reduced margins and in certain instances have incurred remediation costs and liquidated damages owed to the customer. We have modified our processes in order to decrease the impact on our margins of these cost increases however we do not know how long the current operating environment will persist. We do not currently hedge against changes in the price of raw materials. Some of these costs, primarily personnel and depreciation of test and manufacturing equipment, are not directly affected by sales volume. Gross profit may vary from quarter to quarter and is primarily affected by our ASPs, product costs, product mix, customer mix, geographical mix, shipping method, warranty costs and seasonality. Operating Expenses Operating expenses consist of general and administrative costs, contingent consideration, as well as depreciation and amortization expense. Personnel-related costs are the most significant component of our 44 Table of Contents operating expenses and include salaries, benefits, payroll taxes and commissions. Our full-time employee headcount in our general and administrative departments has grown from approximately 150 as of December 31, 2019 to approximately 177 as of December 31, 2020 to approximately 210 at December 31, 2021, and we expect to continue to hire new employees 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 continue to invest substantial resources to support our growth and continued technological advancement and anticipate that general and administrative and depreciation expenses will increase in absolute dollar amounts for the foreseeable future. General and administrative expenses General and administrative expenses consist primarily of salaries, equity-based compensation, employee benefits and payroll taxes related to our executives, sales, finance, human resources, information technology, engineering and legal organizations, as well as travel, facilities costs, marketing, bad debt and fees for professional services. Professional services consist of audit, legal, tax, insurance, information technology and other costs. We expect an increase in the number of sales and marketing personnel in connection with the expansion of our global sales and marketing footprint, enabling us to penetrate new markets. The majority of our sales in 2021 were in the United States; however, during the year we expanded our international presence with additional global sales staff. We currently have a sales presence in the United States, Australia, the U.K. and Brazil. We intend to continue to expand our sales presence and marketing efforts to additional countries. We also expect that as a public company 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. We also anticipate an increase in our spend related to product innovation as we hire additional engineering resources and increase our external research and development spend. Contingent Consideration Contingent consideration consists of the changes in fair value of the earn-out and the TRA entered into with Ron P. Corio, a former indirect stockholder, concurrent with the acquisition of Patent LLC by ATI Investment Parent, LLC (“Former Parent”). The earn-out liability was recorded at fair value as of July 8, 2016 (the “Acquisition Date”) and subsequent changes in the fair value are recognized in earnings. Fair value of the earn-out liability is measured based upon the expected return of investment of Former Parent, among other things. Cash payments related to the earn-out liability are required to be evaluated upon the occurrence of certain events, including the consummation of an initial public offering; the sale, transfer, assignment, pledge, encumbrance, distribution or disposition of shares of Former Parent held by Oaktree Power Opportunities Fund IV (Delaware) Holdings, L.P. and Oaktree ATI Investors, L.P. to a third-party; the sale of equity securities or assets of Former Parent, ATI Investment Sub, Inc. (“Investment Sub”) or the Company to a third-party; or a merger, consolidation, recapitalization or reorganization of Former Parent, Investment Sub, or the Company. Our IPO, the cash distribution of $589 million that we paid to ATI Investment Parent, LLC upon the closing of our IPO, and our 2020 Follow-on Offering required the Company to make a cash payment of $9.1 million in October 2020 and $15.9 million in December 2020. As a result of these payments our earn-out liability has been paid in full. The TRA liability was recorded at fair value at the Acquisition Date and subsequent changes in the fair value are recognized in earnings. The TRA will generally provide for the payment by Array Tech, Inc. (f/k/a Array Technologies, Inc.) to Ron P. Corio for certain federal, state, local and non-U.S. tax benefits deemed realized in post-closing taxable periods by Array Tech, Inc. from the use of certain deductions generated by the increase in the tax value of the developed technology. Estimating fair value of the TRA is by nature imprecise. The significant fair value inputs used to estimate the future expected TRA payments to Ron P. Corio include the 45 Table of Contents timing of tax payments, a discount rate, book income projections, timing of expected adjustments to calculate taxable income and the projected rate of use for attributes defined in the TRA. 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 continue to grow both our revenue and our general and administrative personnel we will require some additional PP&E to support this growth resulting in additional depreciation expense. Amortization Amortization of intangibles consist of developed technology, customer relationships and internal-use software modifications over their expected period of use. Non-Operating Expenses Interest Expense Interest expense consists of interest and other charges paid in connection with our Senior Secured Credit Facility (as defined below) and our Senior ABL Facility, interest on the Senior Secured Promissory Note (as defined below), and interest on our Prior Term Loan Facility (as defined below), which was fully repaid on February 2, 2020. Income Tax Expense We are subject to federal and state income taxes in the United States and certain foreign markets. As we expand into additional foreign markets, we may be subject to additional foreign tax. 46 Table of Contents Results of Operations The following tables set forth our consolidated statement of operations (in thousands): Year Ended December 31, Increase (Decrease) 2021 2020 $ % Revenue $ 853,318 $ 872,662 $ (19,344) (2) % Cost of revenue 770,459 669,861 100,598 15 % Gross profit 82,859 202,801 (119,942) (59) % Operating Expenses General and administrative 80,974 55,634 25,340 46 % Contingent consideration 2,696 26,441 (23,745) (90) % Depreciation and amortization 23,930 25,514 (1,584) (6) % Total operating expenses 107,600 107,589 11 — % (Loss) income from operations (24,741) 95,212 (119,953) (126) % Other expense Other expense, net (905) (2,305) (1,400) (61) % Interest expense (35,475) (15,129) 20,346 134 % Total other expense (36,380) (17,434) 18,946 109 % Income (loss) before income tax expense (benefit) (61,121) 77,778 (138,899) (179) % Income tax expense (benefit) (10,718) 18,705 (29,423) (157) % Net (loss) income $ (50,403) $ 59,073 $ (109,476) (185) % Comparison of the years ended December 31, 2021 and 2020 Revenue Revenue decreased by $19.3 million, or 2%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. Total MW delivered increased by approximately 19% for the year ended December 31, 2021 due to increased demand for our products. Cost of Revenue and Gross Profit Cost of revenue increased by $100.6 million, or 15%, for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to the cost of raw materials and logistics increasing in 2021. Gross profit as a percentage of revenue decreased from 23.2% for the year ended December 31, 2020 to 9.7% for the year ended December 31, 2021. The decrease in Gross Profit as percentage of revenue reflects the higher commodity and logistics prices which we did not fully pass through to our customers via price increases. Operating Expenses: General and administrative General and administrative expenses increased by $25.3 million, or 46%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase in general and administrative expense 47 Table of Contents relates to a $11.5 million expense increase in equity-based compensation during the year ended December 31, 2021 compared to the prior year due to the acceleration of the Class B awards that occurred in 2021. Further, in 2021, we had higher legal and professional fees of approximately $7 million due to higher capital markets activity, M&A activity, as well as on-going securities litigation. In addition, in 2021 we had higher insurance costs of approximately $4 million as this was our first full year as a public company. Finally, we added headcount in 2021 to support growth, innovation, and to ensure operational execution; however, the increased costs related to these additions was largely offset by a reduction in variable compensation Contingent consideration Contingent consideration expense decreased by $23.7 million, or 90%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The decrease was primarily due to an increase in the fair value of our earn-out obligation in the prior year period for which there was no corresponding increase in the current year period. Depreciation Depreciation expense for the year ended December 31, 2021 was similar to the year ended December 31, 2020 as we did not add any significant capital assets. Amortization of intangibles Amortization of intangibles for the year ended December 31, 2021 was similar to the year ended December 31, 2020 as we did not add any significant intangible assets. Interest expense Interest expenses increased by $20.3 million, or 134%, for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to interest on the higher average balance of our Term Loan Facility and Revolving Facility which were not outstanding during the year ended December 31, 2020. In addition, $9.6 million in capitalized fees and discount was written off in 2021 in connection with unscheduled principal payoffs that occurred in February and August of 2021. As of December 31, 2021, we had $326.8 million outstanding under the Term Loan and no balance outstanding under the Revolving Senior Facility, as it was paid off in August 2021. The Convertible Notes issued in December of 2021 have a balance of $425.0 million as of December 31, 2021. Income tax expense (benefit) Income tax expense decreased by $29.4 million, or 157% for the year ended December 31, 2021 compared to the year ended December 31, 2020. Our effective tax rate was 17.5% for year ended December 31, 2021 and 24.0% for the year ended December 31, 2020. The reduction in the effective tax rate is primarily related to unfavorable non-deductible costs for equity-based compensation and our 2021 Follow-on Offering for the year ended December 31, 2021, a favorable tax benefit related to an NOL carryback as a result of the CARES Act in the year ended December 31, 2020, and the level of earnings in each period. Net income (loss) As a result of the factors discussed above, our net income decreased by $109.5 million, or 185%, for the year ended December 31, 2021 as compared to the year ended December 31, 2020. Comparison of the years ended December 31, 2020 and 2019 48 Table of Contents A discussion and analysis covering the comparison of the year ended December 31, 2020 to the year ended December 31, 2019 is included in our annual report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2021. Restatement of Quarterly Financial Data The Company has restated its unaudited interim financial statements for the three months ended March 31, 2021, the three and six months ended June 30, 2021 and the three and nine months ended September 30, 2021. Detailed restatements of the Company's consolidated quarterly financial statements are provided in Note 22. The following unaudited quarterly statements of operations data for each of the four quarters in the period ended December 31, 2021 have been prepared on a basis consistent with our audited annual financial statements included in this Annual Report on Form 10-K and include, in our opinion, all normal recurring adjustments necessary for the fair presentation of the financial information contained in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future. The following quarterly financial data should be read in conjunction with our audited financial statements and the related notes included in this Annual Report on Form 10-K. The Company restated previously issued interim statements for the three months ended March 31, 2021, June 30, 2021, September 30, 2021 and for the six months ended June 30, 2021 and the for the nine months ended September 30, 2021 (the “Non-Reliance Periods”). See Note 22, “Restatement of Previously Issued Unaudited Interim Condensed Consolidated Financial Statements,” for the impact of these adjustments on each of the first three quarters of fiscal 2021. Three Months Ended (in thousands) March 31, 2021 As Restated June 30, 2021 As Restated September 30, 2021 As Restated December 31, 2021 Revenue $ 248,240 $ 196,516 $ 188,686 $ 219,876 Gross profit 46,166 20,507 5,897 10,289 Income (loss) before income tax expense (benefit) 6,274 (7,347) (32,922) (27,126) Income tax expense (benefit) 1,698 (1,830) (5,361) (5,225) Net income (loss) 4,576 (5,517) (27,561) (21,901) Dividends and accretion — — (5,479) (10,236) Net income (loss) to common stockholders $ 4,576 $ (5,517) $ (33,040) $ (32,137) Earnings (loss) per share basic and diluted $ 0.04 $ (0.04) $ (0.25) $ (0.24) Liquidity and Capital Resources Historical Cash Flow 49 Table of Contents The following table compares the historical cash flow (in thousands): Year Ended December 31, 2021 2020 2019 Net cash provided by (used in) operating activities $ (263,187) $ (122,205) $ 386,073 Net cash used in investing activities (15,332) (1,338) (1,697) Net cash provided by (used in) financing activities 537,748 (129,273) (63,945) Net change in cash and cash equivalents $ 259,229 $ (252,816) $ 320,431 We have historically financed our operations primarily with the proceeds from capital contributions, operating cash flows and short and long-term borrowings. Our ability to generate positive cash flow from operations is dependent on the strength of our gross margins as well as our ability to quickly turn our working capital. In December 2019, a novel strain of coronavirus, SARS-CoV-2, or COVID-19, surfaced in Wuhan, China. Since then, COVID-19 has spread to multiple countries, including the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. Due to economic conditions our industry has seen rapid commodity price increases and strained logistics, adversely impacting our business and causing us to experience decreased margins and thus decreased cash from operations. Due to strained logistics issues, we have experienced an increase in our unbilled revenues and also in some instances, liquidated damages owed to our customers. Unbilled receivables, which represent temporary timing differences between shipments made and billing milestones achieved, were $111.2 million and $18.1 million of the accounts receivable balances as of December 31, 2021 and 2020, respectively. These amounts have not been billed because we are waiting for agreed upon billing stipulations such as billing on a specified date of the month or upon completion of mega-watt deliveries. The unbilled balance has increased as of December 31, 2021 due to global challenges with supply chain logistics and labor shortages in some instances causing delays in delivering specific components to complete a mega-watt delivery. These will be invoiced once the commercial criteria have been met at which point we will invoice and expect payment within 30 to 60 days. We have taken mitigating steps to overcome the economic challenges but cannot be certain the timing of when we will achieve better margins. In response to the recent challenging environment, we continuously evaluate our ability to meet our obligations over the next 12 months. We have sufficient liquidity as well as financing options available to fund current and future commitments. As of December 31, 2021, our cash was $367.7 million. Net working capital as of December 31, 2021 was $606.7 million. In December of 2021, we issued $425.0 million in aggregate principal amount of 1.00% Convertible Senior Notes due 2028, as further discussed below. In August of 2021, we issued 350,000 shares of Series A Redeemable Perpetual Preferred Stock and 7,098,765 shares of common stock, par value $0.001 per share, for an aggregate purchase price of $346 million, as further described below. In January 2022, we issued 50,000 of Series A Redeemable Perpetual Preferred Stock, and 1,125,000 shares of our Common Stock, par value $0.001 per share, in an Additional Closing for an aggregate purchase price of $49,376,125. As of March 31, 2022, we estimate our cash on hand to be $40.4 million and the balance available to be drawn on the Revolving Credit Facility was $114.8 million, however, we had limited ability to draw on the available balance due to debt covenants. 50 Table of Contents As of December 31, 2021, we had outstanding borrowings of $326.8 million under the Term Loan Facility and $186.4 available of our $200.0 million commitment under our Revolving Credit Facility. Operating Activities For the year ended December 31, 2021, cash used by operating activities was $263.2 million primarily due to lower gross profit on projects delivered due to rapid increases in commodity and logistic costs which we were not able to fully pass on to our customers. Additionally, the cash used in operating activities reflects $96.6 million in cash used to build inventory due to growth in demand coupled with longer shipping lead-times leading the Company to carry more safety stock. Finally, the increase in accounts receivable used $118.4 million in cash during 2021 driven by increased sales coupled with a number of large projects not reaching billing milestones at the end of the year. For the year ended December 31, 2020 cash provided by operating activities was $122.2 million, primarily due to payments to our suppliers for products that were paid for by customers in 2019, but that we did not ship until 2020. In order for our customers to take advantage of the ITC credit, we received payment on these projects in the fourth quarter of 2019. Investing Activities For the year ended December 31, 2021, net cash used in investing activities was $15.3 million primarily attributable to a $12 million investment in equity securities. For the year ended December 31, 2020, net cash used in investing activities was $1.3 million primarily attributable to the purchase of property and equipment. Financing Activities For the year ended December 31, 2021, net cash provided by financing activities was $537.7 million of which $225.0 million was proceeds from the offering of our Series A Redeemable Perpetual Preferred Stock and $120.6 million from the proceeds of the sale of common stock, each of which that closed on August 11, 2021, $413.3 million in proceeds from the issuance of the Convertible Notes, $126.0 million was from proceeds under the Revolving Facility, offset by a $133.2 million payment on the Term Loan Facility, a $126.0 million payment of the Revolving Credit Facility, $11.1 million in equity issuance costs associated with the Series A and $6.6 million in fees paid on the Senior Secured Credit Facility and to increase the limit on the Revolving Facility by $50.0 million. For the year ended December 31, 2020, net cash used by financing activities was $129.3 million. Net proceeds from the Term Loan Facility and IPO were $460.0 million and $139.1 million, respectively. The Company also paid a special distribution to its members prior to our IPO of $589.0 million (the “Special Distribution”) along with $57.7 million and $45.6 million payments of the Term Loan and Senior Secured Promissory Note, respectively. Acquisition of STI On January 11, 2022 (the “Closing Date”), the Company completed the previously announced STI Acquisition, pursuant to that certain definitive agreement (the “Purchase Agreement”), dated as of November 10, 2021, by and among Array Tech, Inc, a wholly-owned subsidiary of the Company, Amixa Capital, S.L. and Aurica Trackers, S.L., each a company duly organized under the laws of the Kingdom of Spain, and Mr. Javier Reclusa Etayo. In accordance with the Purchase Agreement, the Company paid closing consideration to STI consisting of $410.5 million in cash (the “Cash Consideration”) and 13,894,800 shares of the Company’s common stock (the “Stock Consideration”). The fair value of the purchase consideration was $610.7 million and resulted in the 51 Table of Contents Company owning 100% of the interests in STI. The Company is in the process of performing a valuation of the acquisition assets and liabilities and the related accounting impact. The purchase price will be increased by the amount that is four times the audited EBITDA of the target less €47.0 million ($53.5 million at current exchange rates), such that the amount of contingent consideration is subject to a cap of €45.0 million ($52.0 million at current exchange rates). Subsequent to December 31, 2021, it was determined that the targets were not met. The Company financed the STI Acquisition and related fees and expenses with cash on hand, the sale and proceeds from the Convertible Notes, and $50.0 million in proceeds from the Delayed Draw. 1.00% Convertible Senior Notes due 2028 On December 3, 2021 and December 9, 2021, the Company completed a private offering of $375 million and $50 million over allotment, respectively, in aggregate principal amount of 1.00% Convertible Senior Notes due 2028 (the “Convertible Notes”) resulting in proceeds of $364.7 million and $48.6 million, respectively, after deducting the original issue discount of 2.75%. The Convertible Notes were issued pursuant to an indenture, dated December 3, 2021 (the “Indenture”), between the Company and U.S. Bank National Association, as trustee. The Convertible Notes are senior unsecured obligations of the Company and will mature on December 1, 2028, unless earlier converted redeemed or repurchased. The Convertible Notes will bear interest at a rate of 1.00% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2022. Series A Redeemable Perpetual Preferred Stock On August 10, 2021, the Company entered into the Securities Purchase Agreement with an investment vehicle of funds affiliated with Blackstone Inc. (the “Purchaser”) Pursuant to the Securities Purchase Agreement, on August 11, 2021, the Company issued and sold to the Purchaser 350,000 shares of the Series A Redeemable Perpetual Preferred Stock, having the powers, designations, preferences, and other rights set forth in the Certificate of Designations, and 7,098,765 shares of the Company’s Common Stock, for an aggregate purchase price of $346.0 million. Further, pursuant to the Securities Purchase Agreement, and subject to the terms and conditions set forth therein, including the expiry or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, the Company has agreed to issue and sell to the Purchaser 776,235 shares of Common Stock for an aggregate purchase price of $776. For more information related to the Series A Redeemable Perpetual Preferred Stock, see Note 11 - Redeemable Perpetual Preferred, to the accompanying consolidated financial statements. Registration Rights Agreement In connection with the Securities Purchase Agreement, on August 10, 2021, the Company and the Purchaser entered into a Registration Rights Agreement pursuant to which, among other things, the Company granted the Purchaser certain registration rights with respect to Common Stock purchased pursuant to the Securities Purchase Agreement, including customary shelf registration rights and “piggyback” registration rights. Direct costs associated with the issuance of the Securities were $11.1 million, which along with the $4.4 million discount, have been accounted for as a reduction in the proceeds of the Securities. These net proceeds of $334.6 million have been allocated on the balance sheet to the Series A Redeemable Perpetual Preferred Stock of $229.8 million, common stock of $105.4 million and additional paid-in capital of $12.4 million for the committed financing put right. The Company has presented the Series A Redeemable Perpetual Preferred Stock in temporary equity and accreting the carrying, amount to its full redemption amount from the date of issuance to the earliest redemption date using the effective interest method. Such accretion totaled $7.4 million for the year ended December 31, 2021. 52 Table of Contents The Company accreted the regular cash rate of dividends of 5.75% to the liquidation preference amount of the Series A Redeemable Perpetual Preferred Stock, or $8.2 million in dividends, for the year ended December 31, 2021. Discussion of 2019 Historical Cash Flows A discussion and analysis covering historical cash flows for the year ended December 31, 2019 is included in our annual report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2021. Debt Obligations 1.00% Convertible Senior Notes due 2028 On December 3, 2021 and December 9, 2021, the Company completed a private offering (the “Convertible Notes Offering”) of $375 million and $50 million over allotment, respectively, in aggregate principal amount of 1.00% Convertible Senior Notes due 2028 resulting in proceeds of $364.7 million and $48.6 million, respectively, after deducting the original issue discount of 2.75%. The Convertible Notes were issued pursuant to an indenture, dated December 3, 2021 (the “Indenture”), between the Company and U.S. Bank National Association, as trustee. The Convertible Notes are senior unsecured obligations of the Company and will mature on December 1, 2028, unless earlier converted redeemed or repurchased. The Convertible Notes bear interest at a rate of 1.00% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2022. The Convertible Notes were not convertible during the quarter ended December 31, 2021 and none have been converted to date. Also, given the average market price of the common stock has not exceeded the exercise price since inception, there was no impact to the diluted earnings per share for the quarter ended December 31,2021. Senior Secured Credit Facility On October 14, 2020, we entered into a senior secured credit facility which was amended on February 23, 2021 by the first amendment and on February 26, 2021 by the second amendment. The senior secured facility consisted originally of (i) a $575 million senior secured seven-year term loan facility (the “Term Loan Facility”) and (ii) a $150 million senior secured 5-year revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Secured Credit Facility”). On February 23, 2021, we entered into the first amendment (“First Amendment”) to our Senior Secured Credit Facility. The First Amendment, in the case of Eurocurrency borrowings, lowers the London interbank offered rate floor to 50 basis points from 100 basis points and lowers the applicable margin to 325 basis points from 400 basis points per annum. This results in our current rate on the Term Loan Facility decreasing to 3.75% down from 5% prior to the First Amendment. On February 26, 2021, we entered into the incremental facility amendment No. 2 (the “Second Amendment”) to the Senior Secured Credit Facility. The Second Amendment increases the $150.0 million Revolving Credit Facility from $150.0 million to $200.0 million. The debt discount and issuance costs are being amortized using the effective interest method and the rate as of December 31, 2021 is 4.9%. The Term Loan Facility has an annual excess cash flow calculation beginning with the year ended December 31, 2021, which could require the Company to make advance principal payments. The balance of the Term Loan Facility is presented in the accompanying consolidated balance sheets net of debt discount and issuance costs of $23.3 million at December 31, 2021. As of December 31, 2021, the Term Loan Facility had a balance of $326.8 million. We are in compliance with all covenants as of December 31, 2021. Letters of Credit 53 Table of Contents Under the Revolving Credit Facility, the Company had no outstanding balance, $13.6 million in standby letters of credit and availability of $186.4 million under the Revolving Credit Facility as of December 31, 2021; however, we had limited ability to draw on the available balance due to debt covenants.. Interest Rate The interest rates applicable to the loans under the Term Loan Facility equal, at our option, either, (i) in the case of ABR borrowings, the highest of (a) the Federal Funds Rate as of such day plus 50 basis points, (b) the prime rate and (c) the adjusted London Interbank offered rate (“LIBOR”) as of such day for a deposit in U.S. dollars with a maturity of one month plus 100 basis points, provided that in no event shall the ABR be less than 150 basis points, plus, in each case, the applicable margin of 300 basis points per annum; or (ii) in the case of Eurocurrency borrowings, the greater of (a) the LIBOR for the relevant currency, adjusted for statutory reserve requirements, and (b) 100 basis points, plus, in each case, the applicable margin of 400 basis points per annum. The interest rates applicable to the loans under the Revolving Facility equal, at our option, either, (i) in the case of ABR borrowings, the highest of (a) the Federal Funds Rate as of such day plus 50 basis points, (b) the prime rate and (c) the adjusted LIBOR as of such day for a deposit in U.S. dollars with a maturity of one month plus 100 basis points, provided that in no event shall the ABR be less than 150 basis points, plus, in each case, the applicable margin of 225 basis points per annum; or (ii) in the case of Eurocurrency borrowings, the greater of (a) the LIBOR for the relevant currency, adjusted for statutory reserve requirements, and (b) 50 basis points, plus, in each case, the applicable margin of 325 basis points per annum. The Term Loan Facility amortizes in equal quarterly installments in aggregate annual amounts equal to 1.00% per annum of the original principal amount of the loans funded thereunder. There is no scheduled amortization under the Revolving Credit Facility. Guarantees and Security The obligations under the Senior Secured Credit Facility are guaranteed by ATI Investment Sub, Inc. and its wholly owned domestic subsidiaries other than certain immaterial subsidiaries and other excluded subsidiaries. The obligations under the Senior Secured Credit Facility are secured by a first priority security interest in substantially all of Array Tech, Inc.’s and the guarantors’ existing and future property and assets, including accounts receivable, inventory, equipment, general intangibles, intellectual property, investment property, other personal property, material owned real property, cash and proceeds of the foregoing. Prepayments and Amortization Loans under the Revolving Credit Facility may be voluntarily prepaid in whole, or in part, in each case without premium or penalty. Loans under the Term Loan Facility may be voluntarily prepaid in whole, or in part, in each case without premium or penalty (other than a 1% premium with respect to prepayments on account of certain “repricing events,” subject to exceptions, occurring within 12 months of the closing date of the Senior Secured Credit Facility). The Senior Secured Credit Facility requires mandatory prepayments, but not permanent reductions of commitments thereunder, for excess cash flow, asset sales, subject to a right of reinvestment, and refinancing facilities. The Term Loan Facility amortizes in equal quarterly installments in aggregate annual amounts equal to 1.00% per annum of the original principal amount of the loans funded thereunder. There is no scheduled amortization under the Revolving Credit Facility. Restrictive Covenants and Other Matters 54 Table of Contents The Senior Secured Credit Facility contains affirmative and negative covenants including covenants that restrict our incurrence of indebtedness, incurrence of liens, dispositions, investments, acquisitions, restricted payments, transactions with affiliates, as well as other negative covenants customary for financings of this type. The Revolving Credit Facility also includes a springing financial maintenance covenant that is tested on the last day of each fiscal quarter if the outstanding loans and certain other credit extensions under the Revolving Credit Facility exceed 35% of the aggregate amount of commitments thereunder, subject to customary exclusions and conditions. If the financial maintenance covenant is triggered, the first lien net leverage ratio will be tested for compliance not to exceed 7.10 to 1.00. The Senior Secured Credit Facility also includes customary events of default, including the occurrence of a change of control. As of December 31, 2021, the Company was in compliance with all the required covenants. Surety Bonds As of December 31, 2021, we posted surety bonds in the total amount of approximately $160.4 million. We are required to provide surety bonds to various parties as required for certain transactions initiated during the ordinary course of business to guarantee the Company’s performance in accordance with contractual or legal obligations. These off-balance sheet arrangements do not adversely impact our liquidity or capital resources. Critical Accounting Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Due to the COVID-19 pandemic, there has been and will continue to be uncertainty and disruption in the global economy and financial markets. We have made estimates and assumptions taking into consideration certain possible impacts due to COVID-19. These estimates may change, as new events occur, and additional information is obtained. Actual results may differ from those estimates and assumptions. The critical accounting estimates discussed below are estimates made in accordance with U.S. GAAP that we believe involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Revenue Recognition Under ASC 606, Revenue from Contracts with Customers (“ASC 606), the Company recognizes revenues from the sale of solar tracking systems and parts and determines its revenue recognition through the following steps: (i) identification of the contract or contracts with a customer; (ii) identification of the performance obligations within the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations within the contract; and (v) recognition of revenue when, or as the performance obligation has been satisfied. Performance Obligations The majority of the Company’s contracts with customers are accounted for as one performance obligation, because the Company is integrating the solar tracker system components and related services as part of a single project. Certain contracts associated with customers using the federal investment tax credit (“ITC”) for solar energy projects and other standalone tracker component sales are accounted for as multiple performance obligations because some of these contracts consist of orders for tracker system components without certain of the related services. 55 Table of Contents For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using its best estimate of the standalone selling price of each distinct good or service in the contract. The Company uses the expected cost-plus margin approach to estimate the standalone selling price of each performance obligation. In contracts with one performance obligation, the Company’s performance obligation is satisfied over-time as control is transferred to the customer by measuring the progress toward complete satisfaction of the performance obligation using an input (i.e., “cost to cost”) method. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenue recognized for the Company’s ITC related contracts and standalone system component sales are recorded at a point in time and recognized when obligations under the terms of the contract with our customer are satisfied. Generally, this occurs with the transfer of control of the asset, which is typically upon delivery to the customer in line with shipping terms. In certain situations, when product is still in our custody, and title and risk of loss has passed to the customer (known as bill-and-hold arrangement), revenue will be recognized when all the specific requirements for transfer of control under a bill-and-hold arrangement have been met. In assessing the recognition of revenue, the Company also evaluates whether two or more contracts should be combined and accounted for as one contract and if the combined or single contract should be accounted for as multiple performance obligations which could change the amount of revenue and profit (loss) recorded in a period. Contracts are often modified through change orders to account for changes in specifications or design, manner of performance, equipment, materials, scope of work, and/or the period of completion of the project. Although the Company evaluates each change order to determine whether such modification creates a separate performance obligation, the majority of change orders are not distinct within the context of the original contract and, therefore, not treated as separate performance obligations but rather as a modification of the existing contract and performance obligation. Contract Estimates Accounting for contracts utilizing the cost-to-cost measure of progress is based on various assumptions to project the outcome of future events that can exceed a year. These assumptions include the cost and availability of materials. The cost estimation process for recognizing revenues over time under the cost-to-cost method is based on the professional knowledge and experience of the Company’s project managers, engineers and finance professionals. The Company reviews and updates its contract-related estimates on an ongoing basis and recognizes adjustments for any project specific facts and circumstances that could impact the measurement of the extent of progress, such as the total costs to complete the contracts, under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, the Company recognizes the total loss in the period it is identified. Contract Balances The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and deferred revenue (contract liabilities) on the consolidated balance sheet, recorded on a contract-by-contract basis at the end of each reporting period. The majority of the Company’s contract amounts are billed as work progresses in accordance with agreed-upon contractual terms, which generally coincide with the shipment of one or more phases of the project. Billing sometimes occurs subsequent to revenue recognition, resulting in contract assets. The changes in contract assets (i.e. unbilled receivables) and the corresponding amounts recorded in revenue relate to fluctuations in the timing and 56 Table of Contents volume of billings for the Company’s revenue recognized over-time. As of December 31, 2021 and December 31, 2020, contract assets consisting of unbilled receivables totaling $111.2 million and $18.1 million, respectively, were recorded within accounts receivable on the consolidated balance sheet. The Company also receives advances or deposits from its customers, before revenue is recognized, resulting in contract liabilities. The changes in contract liabilities (i.e. deferred revenue) relate to advanced orders and payments received by the Company and are the result of customers looking to take advantage of certain U.S. federal tax incentives set to decrease at the end of 2019. Based on the terms of the tax incentives the customer must pay for the goods prior to December 31, 2019 which accounts for the increase in the advanced orders and payments and the resulting deferred revenue. As of December 31, 2021 and December 31, 2020, contract liabilities consisting of deferred revenue was presented separately on the consolidated balance sheets. Product Warranty The Company offers an assurance type warranty for its products against manufacturer defects and does not contain a service element. For these assurance type warranties, a provision for estimated future costs related to warranty expense is recorded when they are probable and reasonably estimable, which is typically when products are delivered. This provision is based on historical information on the nature, frequency and average cost of claims for each product line. When little or no experience exists for an immature product line, the estimate is based on comparable product lines. These estimates are re-evaluated on an ongoing basis using best-available information and revisions to estimates are made as necessary. Inventory Valuation Inventories consist of raw materials and finished goods. Inventories are stated at the lower of cost or estimated net realizable value using the weighted average method. Provisions are made to reduce excess or obsolete inventories to their estimated net realizable values which require estimates by management. Contingent Consideration Tax Receivable Agreement Concurrent with Former Parent’s acquisition of Patent LLC, Array Tech, Inc. (f/k/a Array Technologies, Inc.) entered into the TRA with Ron P. Corio, a former indirect stockholder. The TRA is accounted for as contingent consideration and subsequent changes in fair value of the contingent liability are recognized in general and administrative in the Company’s consolidated statement of operations. The TRA obligations were recorded at acquisition-date fair value at inception and is classified as a liability. The TRA will generally provide for the payment by Array Tech, Inc. (f/k/a Array Technologies, Inc.) to Ron P. Corio, our indirect stockholder, for certain federal, state, local and non-U.S. tax benefits deemed realized in post-closing taxable periods by Array Tech, Inc. (f/k/a Array Technologies, Inc.) from the use of certain deductions generated by the increase in the tax value of the developed technology. Estimating the amount of payments that may be made under the TRA is by nature imprecise. The significant fair value inputs used to estimate the future expected TRA payments to Ron P. Corio include the timing of tax payments, a discount rate, book income projections, timing of expected adjustments to calculate taxable income and the projected rate of use for attributes defined in the TRA. As of December 31, 2021 and December 31, 2020, the estimated fair value of the TRA is $14.6 million and $19.7 million, respectively, which has been recorded as a liability. Subsequent changes in fair value of the TRA will be recognized in earnings. Equity-Based Compensation 57 Table of Contents The Company granted restricted stock units (RSU’s) to employees and Performance Stock Units (PSUs) to certain executives. The PSUs contain performance and market conditions. The PSU grants were valued using the Monte Carlo simulation method and the assigned fair value on grant date will be recognized on a straight-line basis over the vesting term of the awards. The probability of the awards meeting the performance related vested conditions is not included in the grant date fair value, but rather will be estimated quarterly and the Company will true-up the expense recognition accordingly upon any probability to vest revision. The Company accounts for forfeitures as they occur. Temporary Equity Equity instruments that are redeemable for cash or other assets are classified as temporary equity if the instrument is redeemable, at the option of the holder, at a fixed or determinable price on a fixed or determinable date or upon the occurrence of an event that is not solely within the control of the issuer. Redeemable equity instruments are initially carried at the fair value of the equity instrument at the issuance date, which is subsequently adjusted at each balance sheet date if the instrument is currently redeemable, or probable of becoming redeemable. The Series A Redeemable Preferred Stock issued in connection with the Securities Purchase Agreement, as described in Note 11 - Redeemable Perpetual Preferred in the accompanying notes to our consolidated financial statements included in this Annual Report on Form 10-K, is classified as temporary equity in the accompanying consolidated financial statements. The Company elected the accreted redemption value method under which is accretes changes in redemption value over the period from the date of issuance of the Series A Redeemable Preferred Stock to the earliest costless redemption date (the fifth anniversary) using the effective interest method. Such adjustments are included in preferred undeclared dividends and accretion on Series A Redeemable Preferred Stock on the Company’s consolidated statements of changes in equity and treated similarly to a dividend on preferred stock for GAAP purposes. Recent Accounting Pronouncements Refer to Note 2 - Summary of Significant Accounting Policies in the accompanying notes to our consolidated financial statements included in this Annual Report on Form 10-K for a discussion of recent accounting pronouncements.