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Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-10 · 174 added, 97 removed, 188 unchanged (59% of the section changed)

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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 unaudited condensed consolidated financial statements and the related notes and other financial information included in this Quarterly Report on Form 10-Q and our audited financial statements and notes thereto as of and for the year ended December 31, 2021 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Quarterly Report on Form 10-Q and our audited financial statements and notes thereto as of and for the year ended December 31, 2021 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K, as amended by Form 10-K/A for the year ended December 31, 2021 (collectively, “2021 Form 10-K”).

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes and other financial information included in Part I, “Item 1.

Financial Statements” of this Quarterly Report on Form 10-Q (this “Quarterly Report”), as well as our audited financial statements and notes thereto as of and for the year ended December 31, 2021 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Annual Report”).

Each of the terms the “Company,” “Array,” “we,” or “us” as used herein refers collectively to Array Technologies, Inc.

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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 captioned “Forward-Looking Statements” and “Risk Factors” in this Quarterly Report on Form 10-Q and our 2021 Form 10-K.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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You should read this report 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 factors in “Summary Risk Factors” and the “Risk Factors” sections of this Quarterly Report on Form 10-Q.

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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Our business is subject to a number of risks that if realized could materially and adversely affect our business, financial conditions, results of operations, cash flows and access to liquidity.

These risks are discussed more fully in the “Risk Factors” section of this Quarterly Report on Form 10-Q.

These risks are discussed more fully in the “Risk Factors” section of this Quarterly Report.

Our principal risks include the following:

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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;

• a failure to retain key personnel a failure to attract additional qualified personnel may affect our ability to achieve our anticipated level of growth adversely affect our business;

• a failure to retain key personnel or a failure to attract additional qualified personnel may affect our ability to achieve our anticipated level of growth adversely affect our business;

• a drop in the price of electricity derived from the utility grid or from alternative energy sources may harm our business, financial condition, results of operations and prospects;

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• 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, which may significantly reduce demand for our products or harm our ability to compete;

• the interruption of the flow of 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;

• changes in the U.S.

trade environment, including the imposition of import tariffs, could adversely affect the amount or timing of our revenues, results of operations or cash flows;

• a negative determination by the U.S.

Department of Commerce in its investigation of alleged circumvention of antidumping and countervailing duties on Chinese imports by crystalline silicon PV cells and module imports assembled and completed in southeast Asia could adversely affect the demand for our products;

• the impact of the ongoing conflict in Ukraine on our supply chain and cost of logistics;

trade environment, including the imposition of import tariffs or other import restrictions, could adversely affect the amount or timing of our revenues, results of operations or cash flows;

• the impact of the ongoing conflict in Ukraine on our supply chain and cost of logistics could adversely affect the amount or timing of our revenues, results of operations or cash flows;

• 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;

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Disruptions to transportation and logistics, including increases in shipping costs, could adversely impact our financial condition and results of operations;

• the determination to restate prior period financial statement could negatively affect investor confidence and raise reputational issues;

• the determination to restate prior period financial statements could negatively affect investor confidence and raise reputational issues;

• our substantial indebtedness could adversely affect our financial condition;

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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 three months ended March 31, 2022, we derived 83% and 17% of our revenues from customers in the United States and the rest of the world, respectively.

During the six months ended June 30, 2022, we derived 81% and 19% of our revenues from customers in the United States and the 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 March 31, 2022, we had 1,348 full-time employees, up from 471 as of December 31, 2021, with the increase primarily due to the acquisition of STI.

As of June 30, 2022, we had 1,135 full-time employees, up from 471 as of December 31, 2021, with the increase primarily due to the STI Acquisition (as defined below).

Acquisition of STI

On January 11, 2022 (the “Closing Date”) the Company closed the acquisition of Soluciones Técnicas Integrales Norland, S.L.

and its subsidiaries (collectively, “STI”) (the “STI Acquisition”).

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 $610.8 million and resulted in the Company owning 100% of the interests in STI.

The STI Acquisition will provide the Company with an immediate presence in Brazil and Western Europe.

On January 11, 2022 (the “Acquisition Date”), the Company closed the acquisition (the “STI Acquisition”) of Soluciones Técnicas Integrales Norland, S.L.

and its subsidiaries (collectively, “STI”) pursuant to that certain purchase agreement, dated November 10, 2021, by and among Amixa Capital, S.L.

and Aurica Trackers, S.L., each a company duly organized under the laws of the Kingdom of Spain (together, the “Sellers”) and Mr.

Javier Reclusa Etayo (the “STI Purchase Agreement”).

In accordance with the STI Purchase Agreement, the Company paid closing consideration to the Sellers 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 $610.8 million and resulted in the Company owning 100% of the equity interests in STI.

The STI Acquisition provided the Company with an immediate presence in Brazil, Western Europe and South Africa.

As a result of the STI Acquisition, the Company began reporting its results of operations in two segments:

its Array legacy operating segment (the “Array Legacy Operations”) and the newly acquired operations (the “STI Operations”) pertaining to STI.

The primary source of revenue of the STI Operations is the design, manufacture and sale of its solar tracker system to utility scale customers in principal markets to include Spain, Brazil, South Africa and other international markets.

Update on the Impact of COVID-19

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.

We continue to closely monitor the ongoing impact of the COVID-19 pandemic 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.

The duration and extent to which it will continue to adversely impact our business and results of operations remains uncertain and could be material.

We expect persistent waves of COVID-19, including variants of the virus, to remain a headwind into the near future.

The duration and extent to which it will continue to adversely impact our business and results of operations remain uncertain and could be material.

We are continuously evaluating our capital structure in response to the current environment and expect that our current financial condition, including our liquidity sources will be adequate to fund future commitments.

See additional discussion in the Liquidity and Capital Resources section below.

We could see an impact from inflationary pressures which has continued to accelerate in the wake of Russia’s invasion of Ukraine, driving up energy prices, freight premiums, and other operating costs.

Inflation in the United States rose by 9.1% on an annual basis in June 2022, which represents a 40-year high.

Surging energy prices drove the inflation rate for the euro zone 8.6% higher on an annual basis in June 2022.

Interest rates, notably mature market government bond yields, remain low by historical standards but are rising as central banks around the world tighten monetary policy in response to inflation pressures, while government deficits and debt remain at high levels in many major markets.

The eventual implications of higher government deficits and debt, tighter monetary policy, and potentially higher long-term interest rates may drive a higher cost of capital during our forecast period.

Impact of Potential Solar Module Supply Chain Disruptions

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On March 28, 2022, the USDOC announced that it would investigate the circumvention alleged in the petition.

The investigation has created uncertainty related to the supply of solar modules and is expected to disrupt the solar panel supply chain in the near-term, which could negatively impact the global solar market as well as the timing and viability of solar projects to which we sell our products.

This negative impact on the global solar market could, as a result, have a material adverse effect on our business, financial condition and results of operations.

As disclosed in our quarterly report on Form 10-Q for the three months ended March 31, 2022, the investigation created uncertainty related to the supply of solar modules.

As a result of the USDOC’s investigation, the Company saw a number of projects in its order book initially delayed;

however, on June 6, 2022, President Biden suspended, for a period of 24 months, certain antidumping and countervailing duties on crystalline silicon PV cells and module imports assembled and completed in southeast Asia.

Due to these developments the Company has not observed a material decrease in customer demand for our product, and unless the duties are reinstated, the Company does not currently believe the investigation is reasonably likely to have a material adverse effect on future periods.

While we do not sell solar modules, the degree of our exposure is dependent on, among other things, the impact of the investigation on the projects that are also intended to use our products, with such impact being largely out of our control.

To date, the Company has seen a number of projects in our order book delayed as a result of the USDOC investigation;

however, the ultimate severity or duration of the expected solar panel

supply chain disruption or its effects on our clients’ solar project development and construction activities is uncertain.

Additionally, certain suppliers could be blocked from importing solar panels to the United States under the Uyghur Forced Labor Prevention Act (“UFLPA”).

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Array is monitoring whether UFLPA will affect supplies of solar modules for any of the projects to which we sell our products.

To date, the Company has seen a number of projects in our order book delayed as a result of the USDOC investigation;

however, the ultimate severity or duration of the expected solar panel supply chain disruption or its effects on our clients’ solar project development and construction activities is uncertain.

Impact of the Ongoing Conflict in Ukraine

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The following discussion describes certain line items in our consolidated statements of operations.

We generate revenue from the sale of solar tracking systems and parts.

Our operating segments generate revenue from the sale of solar tracking systems and parts.

Our customers include EPCs, utilities, solar developers and independent power producers.

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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.

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, expanding our global footprint to new evolving markets, growing our production capabilities to meet demand and continuing 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.

Cost of revenue for both segments 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;

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economies of scale resulting in lower component costs and improvements in production processes and automation.

In 2021, our business was impacted by the Covid-19 pandemic by increased raw materials and shipping costs and delays which have resulted 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;

In 2021, our business was impacted by the COVID-19 pandemic by increased raw materials and shipping costs and shipping delays which have resulted 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 from these cost increases;

however, we do not know how long the current operating environment will persist.

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Personnel-related costs are the most significant component of our 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 210 as of December 31, 2021 to approximately 382, due to the acquisition of STI, as of March 31, 2022, and we expect to continue to hire new employees to support our growth.

Our full-time employee headcount in our general and administrative departments has grown from approximately 210 as of December 31, 2021 to approximately 415, due in part to the STI Acquisition, as of June 30, 2022, 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.

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however, with the STI Acquisition, we continue to expand our international presence with additional global sales staff.

We currently have a sales presence in the U.S., Australia, the U.K.

We currently have a sales presence in the U.S., Australia, the U.K., Spain, South Africa 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 expect that as a public company we will incur additional audit, tax, accounting,

legal and other costs related to compliance with applicable securities laws 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 & development spend.

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Corio, a former indirect stockholder, concurrent with the Acquisition of Array Technologies Patent Holdings Co., LLC (“Patent LLC”) by ATI Investment Parent, LLC (“Former Parent”) Former Parent’s acquisition of Patent LLC.

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 liability is recorded at fair value and changes in the fair value are recognized in earnings.

The TRA will generally provide for the payment by Array Tech, Inc.

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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 of intangibles consist of developed technology, customer relationships and internal-use software modifications over their expected period of use.

Amortization of intangibles consists of developed technology, customer relationships, backlog, and trade name amortized 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 and our 1.00% Convertible Senior Notes due 2028 (the “Convertible Notes”) issued in December 2021.

Income Tax Expense

We are subject to federal and state income taxes in the United States.

As we expand into foreign markets, we may be subject to foreign tax.

Results of Operations

The following tables set forth our consolidated statement of operations (dollars in thousands):

Three Months Ended March 31, Increase/Decrease

The following table sets forth our consolidated statement of operations (dollars in thousands):

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

2022 2021 $ % 2022 2021 $ %

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Other income (expense), net (371) (122) 249 (204) % 372 (200) (572) (286) %

Foreign currency gain 3,863 — 3,863 100 %

Foreign currency gain (loss) (1,736) — 1,736 100 % 2,127 — 2,127 100 %

Interest expense (8,021) (6,651) 1,370 (21) % (14,963) (15,660) (697) (4) %

Total other expense (10,128) (6,773) 3,355 (50) % (12,464) (15,860) (3,396) (21) %

Income (loss) before income tax expense (benefit) (34,497) 6,274 (40,771) (650) %

Income tax expense (benefit) (12,443) 1,698 (14,141) (833) %

Net income (loss) $ (22,054) $ 4,576 $ (26,630) (582) %

Comparison of the three months ended March 31, 2022 and 2021

Revenue increased by $52.3 million, or 21%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily driven by the acquisition of STI which had revenue of $49.9 million.

Additionally, in the first quarter of 2021 the Company had $40.5 million of ITC related revenue for which there was no comparable revenue in the first quarter of 2022.

Excluding the impact of the ITC related revenue and the STI Acquisition, the Company had an increase of $43 million, or 21%.

Loss before income tax benefit (16,972) (7,347) (9,625) 131 % (51,469) (1,073) (50,396) 4697 %

Income tax benefit (14,195) (1,830) (12,365) 676 % (26,638) (132) (26,506) 20080 %

Net loss $ (2,777) $ (5,517) $ 2,740 (50) % $ (24,831) $ (941) $ (23,890) 2539 %

The following table provides details on our operating results by reportable segment for the respective periods (dollars in thousands):

Three Months Ended

June 30, Increase/Decrease Six Months Ended

June 30, Increase/Decrease

2022 2021 $ % 2022 2021 $ %

Array Legacy Operations $ 352,241 $ 196,516 $ 155,725 79 % $ 602,893 $ 444,756 $ 158,137 36 %

STI Operations 72,688 — 72,688 100 % 122,622 — 122,622 100 %

Total Revenue $ 424,929 $ 196,516 $ 228,413 116 % $ 725,515 $ 444,756 $ 280,759 63 %

Gross Profit:

Array Legacy Operations $ 38,904 $ 20,507 $ 18,397 90 % $ 60,172 $ 66,673 $ (6,501) (10) %

STI Operations 8,472 — 8,472 100 % 13,791 — 13,791 100 %

Total Gross Profit $ 47,376 $ 20,507 $ 26,869 131 % $ 73,963 $ 66,673 $ 7,290 11 %

Comparison of three months ended June 30, 2022 and 2021

Our consolidated revenue increased by $228.4 million, or 116%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

The increase was partially driven by the STI Acquisition, which added $72.7 million of revenue when compared to the three months ended June 30, 2021.

Excluding the impact of the STI Acquisition, revenue was up $155.7 million, or 79%, driven by both an increase in the total number of MWs shipped and an increase in ASP.

Revenue for Array Legacy Operations increased 79% for the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

Total MWs shipped were up approximately 54% for the three months ended June 30, 2022, driven by increased customer demand for our product.

ASP for the three months ended June 30, 2022 was up 16% compared to the three months ended June 30, 2021, which is reflective of higher pass-through pricing to our customers, driven by an increase in the Company’s input costs.

Revenue for STI Operations increased by $72.7 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, due to the STI Acquisition occurring in January 2022 with no activity in the prior period.

Cost of Revenue and Gross Profit

Cost of revenue increased by $71.9 million, or 36%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily due to the STI Acquisition and the cost of raw materials and logistics increasing over that period.

Gross profit as a percentage of revenue decreased from 18.6% for the three months ended March 31, 2021 to 8.8% for the three months ended March 31, 2022.

The decrease in Gross Profit as a percentage of revenue reflects the higher commodity prices and logistics costs.

Consolidated cost of revenue increased by $201.5 million, or 115%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to the STI Acquisition, the increase in the number of MWs delivered, and increased input costs from raw materials and logistics.

Gross profit as a percentage of revenue increased from 10% for the three months ended June 30, 2021 to 11% for the three months ended June 30, 2022.

The increase in Gross Profit as a percentage of revenue reflects higher prices, which are generally passed through to our customers, to offset the increase in input costs.

Gross profit as a percentage of revenue for the Array Legacy Operations increased to 11% for the three months ended June 30, 2022 from 10% for the three months ended June 30, 2021.

The increase was due to a higher proportion of our projects being priced to incorporate higher input costs when compared to the prior year comparable period.

Gross profit as a percentage of revenue for the STI segment was 12% for the three months ended June 30, 2022.

Operating Expenses:

General and Administrative

General and administrative expenses increased by $15.2 million, or 61%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

The increase in expense was primarily due to the STI Acquisition.

Additionally, increased consulting costs and other professional fees as well as our growing internal headcount lead to higher payroll and related costs.

Consolidated general and administrative expenses increased by $16.4 million, or 108%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

The increase in expense was primarily due to increased consulting costs, professional fees, legal costs, as well as higher payroll and related costs due to our growing internal headcount and the STI Acquisition, which had $5.7 million in general and administrative costs.

Contingent Consideration

Contingent consideration expense decreased by $3.9 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

The decrease was primarily due to a decrease in the fair value of our TRA obligation due to a change in interest rates and other assumptions used to value the estimate.

Depreciation expense for the three months ended March 31, 2022 was similar to the three months ended March 31, 2021 as we did not add any significant capital assets.

Consolidated contingent consideration expense decreased by $1.7 million, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

The decrease was due to a decrease in the valuation of the associated liability.

Consolidated depreciation expense for the three months ended June 30, 2022 was similar to the three months ended June 30, 2021.

Amortization of Intangibles

Amortization of intangibles for the three months ended March 31, 2022 increased $16.6 million compared to the three months ended March 31, 2021, due to the STI Acquisition and additional amortizable intangibles acquired.

Consolidated amortization of intangibles increased by $18.3 million, or 311%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to intangibles added as a result of the STI Acquisition.

Interest Expense

Consolidated interest expense increased by $1.4 million, or 21%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to interest on the higher average balance of debt.

As of June 30, 2022, we had $425 million outstanding on the Convertible Notes, $324.6 million outstanding under the Term Loan and $68.0 million balance outstanding under the Revolving Credit Facility.

We expect interest expense to be higher for the remainder of 2022 compared to 2021 as a result of the debt outstanding under the Convertible Notes.

In addition, the Credit Facility has variable interest rates expected to fluctuate with the Federal Funds rate so interest expense could increase for the Term Loan and the Revolving Facility.

Income Tax Benefit

Consolidated income tax benefit increased by $12.4 million, or 676% for the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

Our effective tax rate was 83.6% for the three months ended June 30, 2022 and 24.9% for the three months ended June 30, 2021.

The tax benefit increase is primarily related to non-taxable contingent income, lower non-deductible transaction costs and a favorable mix of income for the three months ended June 30, 2022 and a favorable tax benefit related to an NOL carryback as a result of the CARES Act for the three months ended June 30, 2021.

Comparison of the six months ended June 30, 2022 and 2021

Consolidated revenue increased by $280.8 million, or 63%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily driven by the STI Acquisition, which resulted in added revenue of $122.6 million.

Excluding the impact of the STI Acquisition, revenue was up $158.1 million, or 36%, driven by both an increase in the total number of MWs shipped and an increase in ASP.

Revenue for Array Legacy Operations increased 36% for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Total MWs shipped were up approximately 17% for the six months ended June 30, 2022, driven by increased customer demand for our product.

ASP for the six months ended June 30, 2022 was up 16% compared to the six months ended June 30, 2021, which is reflective of higher pass-through pricing to our customers, driven by an increase in the Company’s input costs.

Revenue for STI Operations increased by $122.6 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, due to the STI Acquisition occurring in January 2022 with no activity in the prior period.

Cost of Revenue and Gross Profit

Consolidated cost of revenue increased by $273.5 million, or 72%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to the STI Acquisition and the higher cost of raw materials and logistics compared to the prior year period.

Gross profit as a percentage of revenue decreased from 15% for the six months ended June 30, 2021 to 10% for the six months ended June 30, 2022.

The decrease in Gross Profit as a percentage of revenue reflects higher commodity prices and logistics costs, which were not offset by commensurate pricing increases.

Gross profit as a percentage of revenue decreased for Array Legacy Operations to 10% for the six months ended June 30, 2022 from 15% for the six months ended June 30, 2021 due to a higher proportion of contracts delivered under our previous business processes, which did not match rapid increases in input costs with increases to customer pricing.

Gross profit as a percentage of revenue was 11% for STI for the six months ended June 30, 2022.

Operating Expenses:

General and Administrative

Consolidated general and administrative expenses increased by $31.6 million, or 79%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

The increase in expense was primarily due to the STI Acquisition, which resulted in an increase of $11.6 million.

Additionally, increased consulting costs and other professional fees, as well as increased headcount, led to higher payroll and related costs.

Contingent Consideration

Consolidated contingent consideration expense decreased by $5.5 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

The decrease was due to a decrease in the valuation of the associated liability.

Consolidated depreciation expense for the six months ended June 30, 2022 was similar to the six months ended June 30, 2021.

Amortization of Intangibles

Consolidated amortization of intangibles increased by $35.0 million, or 298%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to intangibles added as a result of the STI Acquisition.

Other Expense, Net

Other income (expense) increased by $0.8 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily due to the acquisition of STI.

Consolidated other income (expense) increased by $0.6 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to the STI Acquisition.

Foreign Currency Gain

Foreign currency gain increased by $3.9 million, or 100%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily due to the foreign currency translation gain of $3.9 million, due to the STI Acquisition.

Consolidated foreign currency gain increased by $2.1 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, due to the foreign currency translation gain resulting from the STI Acquisition.

Interest Expense

Interest expense decreased by $2.1 million, or 23%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily due to our lower average balance of our Term Loan Facility and no write off of fees in the current period.

In the three months ended March 31, 2021, we paid off a portion of our Term Loan Facility and therefore expensed the associated fees that were capitalized with no corresponding expense in the current period.

As of March 31, 2022, we had $328.0 million outstanding under the Term Loan Facility and $52.0 million outstanding under the Revolving Senior Facility.

Consolidated interest expense decreased by $0.7 million, or 4%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to the write-off of fees associated with refinancing our debt that occurred in the six months ended June 30, 2021 for which we have no similar fees in the current period.

In the six months ended June 30, 2021, we paid off a portion of our Term Loan Facility and therefore expensed the associated fees that were capitalized.

Our outstanding debt as of June 30, 2022 for which interest expense is associated includes $425.0 million outstanding on the Convertible Notes, $324.6 million outstanding under the Term Loan and $68.0 million balance outstanding under the Revolving Credit Facility.

We expect interest expense to be higher for the remainder of 2022 compared to 2021 as a result of the debt outstanding under the Convertible Notes.

In addition, the Credit Facility has variable interest rates expected to fluctuate with the Federal Funds rate so interest expense could increase for the Term Loan and the Revolving Facility.

Income Tax Benefit

Income tax expense decreased by $14.1 million, or 833%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

Our effective tax rate was 36.1% for three months ended March 31, 2022 and 27.1% for the three months ended March 31, 2021.

The increase in the effective tax rate is primarily related to the mix of earnings in foreign jurisdictions for the three months ended March 31, 2022.

Consolidated income tax benefit increased by $26.5 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Our effective tax rate benefit was 51.8% for the six months ended June 30, 2022 and 12.3% for the six months ended June 30, 2021.

The increase in the effective tax rate is primarily related to non-taxable contingent consideration and the mix of earnings in foreign jurisdictions for the six months ended June 30, 2022.

Liquidity and Capital Resources

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The following table compares the historical cash flow (in thousands):

Three Months Ended March 31,

Six Months Ended June 30,

Net cash used in operating activities $ (60,764) $ (134,109)

Net cash used in investing activities (377,713) (13,175)

Net cash provided by (used in) financing activities 100,736 (36,590)

Net cash provided by financing activities 122,697 56,525

Effect of exchange rate changes on cash and cash equivalents (844) —

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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, which causes coronavirus disease 2019 (“COVID-19”), surfaced in Wuhan, China.

In December 2019, a novel strain of coronavirus, SARS-CoV-2, which causes COVID-19, surfaced in Wuhan, China.

Since then, COVID-19 has spread to multiple countries, including the United States.

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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 $135.0 million and $111.2 million of the accounts receivable balances as of March 31, 2022 and December 31, 2021, respectively.

Due to global tightening of supply chain and strained logistics issues, we could experience an increase in our unbilled revenues and also in some instances incurred liquidated damages owed to our customers.

Unbilled receivables, which represent temporary timing differences between shipments made and billing milestones achieved, were $111.9 million and $111.2 millions of the accounts receivable balances as of June 30, 2022 and December 31, 2021, 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 MW deliveries.

The unbilled balance has increased as of March 31, 2022 due to global challenges with supply chain logistics and labor shortages in some instances causing delays in delivering specific components to complete a MW delivery.

The Company continues to work through supply chain logistics issues and labor shortage issues in some instances causing delays delivering specific components to complete a MW 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.

The extent to which the COVID-19 pandemic and recent supply chain constraints and price increases may further impact the Company’s business, results of operations, financial condition and cash flows will depend on future developments, which are highly uncertain and cannot be predicted with confidence.

We have taken mitigating steps to overcome the economic challenges and, therefore, believe the impact to be temporary, 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.

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 the Additional Closing for an aggregate purchase price of $49,376,125.

As of March 31, 2022, our cash and cash equivalents were $49.5 million.

Net working capital as of March 31, 2022 was $383.9 million.

As of March 31, 2022, we had outstanding borrowings of $377.7 million and a $200.0 million commitment under our Revolving Credit Facility, of which $52.0 million balance is outstanding and $114.8 million was available to borrow to fund operations.

Mitigation efforts to date have generally consisted of the introduction of new supply routes, the use of bulk shipping (to a limited degree), and—with respect to commodity price increases—changes in the Company’s contracting process that are designed to narrow the timeframe between when a price is agreed upon to when prices for the Company’s most volatile cost inputs are fixed.

The Company has utilized these strategies in combination over the last twelve months and expects to continue to do so in response to the recent challenging environment.

We continuously evaluate our ability to meet our obligations over the next 12 months and we have sufficient liquidity as well as financing options available to fund current and future commitments.

In January 2022, we issued 50,000 of Series A Redeemable Perpetual Preferred Stock (as defined below), and 1,125,000 shares of our common stock in an Additional Closing (as defined below) for an aggregate purchase price of $49.4 million.

As of June 30, 2022, our cash and cash equivalents were $51.0 million.

Net working capital as of June 30, 2022 was $392.7 million.

As of June 30, 2022, we had outstanding borrowings of $324.6 million under the Term Loan Facility and a $200.0 million commitment under our Revolving Credit Facility, of which $68.0 million balance is outstanding and $96.7 million was available to borrow to fund operations.

Due to covenant requirements, we do not expect to maximize the available balance.

Operating Activities

For the three months ended March 31, 2022, cash used in operating activities was $50.1 million, primarily due to an increase in inventories and accounts receivable of $46.3 million and $44.3 million respectively.

This increase was offset in part by an increase in accounts payable of $59.6 million.

For the three months ended March 31, 2021, cash used in operating activities was $42.1 million, due to a decrease in deferred revenue of $59.9 million, for which we made payments to our suppliers for products that we received the cash for in 2020, a decrease in income tax receivables of $22.0 million and increase in accrued expenses of $5.1 million.

For the six months ended June 30, 2022, cash used in operating activities was $60.8 million, primarily due to an increase in inventories and accounts receivable of $111.6 million and $77.2 million respectively.

Inventories increased as a result of a build up of product due to supply chain difficulties and accounts receivable is higher due to higher sales.

This increase was offset in part by an increase in accounts payable of $74.6 million due to higher expenses associated with increased sales.

For the six months ended June 30, 2021, cash used in operating activities was $134.1 million, primarily due to a decrease in deferred revenue of $98.4 million for which we made payments to our suppliers for products that we received the cash for in 2020 but that we did not ship until 2021.

Investing Activities

For the three months ended March 31, 2022, net cash used in investing activities was $376.2 million, primarily due to cash used in the STI Acquisition.

For the three months ended March 31, 2021, net cash used in investing activities was $10.6 million, due to a $10.0 million investment in equity securities.

For the six months ended June 30, 2022, net cash used in investing activities was $377.7 million, primarily due to cash used in the STI Acquisition.

For the six months ended June 30, 2021, net cash used in investing activities was $13.2 million, due to a $12.0 million investment in equity securities.

Financing Activities

For the three months ended March 31, 2022, net cash provided by financing activities was $100.7 million, of which $52.0 million related to proceeds under the Revolving Facility and $48.4 million related to proceeds from the Additional Closing in January 2022.

For the three months ended March 31, 2021, net cash used by financing activities was $36.6 million, which was attributable to $30.0 million principal payments on the Term Loan Facility and $6.6 million on debt issuance costs related to the first and second amendment of the Senior Secured Credit Facility.

For the six months ended June 30, 2022, net cash provided by financing activities was $122.7 million, of which $101.0 million related to proceeds under the Revolving Facility and $48.4 million related to proceeds from the Additional Closing in January 2022 offset by payments of $33.0 million on the Revolving Facility.

For the six months ended June 30, 2021, net cash used by financing activities was $56.5 million, which was attributable to $31.1 million principal payments on the Term Loan Facility and $6.6 million on debt issuance costs related to the first and second amendment of the Revolving Credit Facility.

Series A Redeemable Perpetual Preferred Stock

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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 issued and sold 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 13 – Redeemable Perpetual Preferred , to the accompanying condensed consolidated financial statements.

information related to the Series A Redeemable Perpetual Preferred Stock, see Note 13 – Redeemable Perpetual Preferred , to the accompanying condensed consolidated financial statements.

In January 2022, we issued 50,000 of Series A Redeemable Perpetual Preferred Stock, and 1,125,000 shares of our common stock in an Additional Closing for an aggregate purchase price of $49,376,125.

Registration Rights Agreement

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The Company has presented the Preferred Shares in temporary equity and is 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 $5.4 million for the three months ended March 31, 2022.

The Company accreted the dividends at a rate of 6.25% to the liquidation preference amount of the Series A Redeemable Perpetual Preferred Stock, or $6.3 million in dividends, for the three months ended March 31, 2022.

Such accretion totaled $5.8 million and $11.1 million for the three and six months ended June 30, 2022.

The Company accreted the dividends at an accrual rate of 6.25% to the Liquidation Preference of the Series A Redeemable Perpetual Preferred Stock, or $6.4 million and $12.6 million in dividends, for the three and six months ended June 30, 2022, respectively.

Debt Obligations

For a discussion of our debt obligations see Note 10 – Senior Secured Credit Facility and Note 11 – Convertible Debt in our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

As of March 31, 2022, we posted surety bonds in the total amount of approximately $168.5 million.

As of June 30, 2022, we posted surety bonds in the total amount of approximately $189.8 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.

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Critical Accounting Policies and Significant Management Estimates

As of March 31, 2022, there were the following changes in the application of our critical accounting policies or estimation procedures from those presented in our 2021 Form 10-K.

As of June 30, 2022, there were the following changes in the application of our critical accounting policies or estimation procedures from those presented in our 2021 Annual Report.

Business Combinations

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Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives, and market multiples amongst other items.

The valuation of intangible assets, in particular, requires that we use valuation techniques such as the income approach.

The valuation of intangible assets, in particular, requires that

we use valuation techniques such as the income approach.

The income approach includes the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires the following significant estimates:

revenue, expenses, capital spending and other costs, and discount rates based on the respective risks of the cash flows.

Under the acquisition method of accounting, the aggregate amount of consideration we pay for a company is allocated to net tangible assets and intangible assets based on their

estimated fair values as of the acquisition date.

Under the acquisition method of accounting, the aggregate amount of consideration we pay for a company is allocated to net tangible assets and intangible assets based on their estimated fair values as of the acquisition date.

The excess of the purchase price over the value of the net tangible assets and intangible assets is recorded to goodwill.

Goodwill is evaluated for impairment annually.

Foreign Currency Translation

subsidiaries that operate in a local currency environment, assets and liabilities are translated into the U.S.

dollar at period end exchange rates.

Income, expense and cash flow items are translated at average exchange rates prevailing during the period.

Translation adjustments for these subsidiaries are accumulated as a separate component of accumulated other comprehensive income in equity.

subsidiaries that use a U.S.

dollar functional currency, local currency inventories and property, plant and equipment are translated into U.S.

dollars at rates prevailing when acquired, and all other assets and liabilities are translated at period end exchange rates.

Inventories charged to cost of sales and depreciation are remeasured at historical rates, and all other income and expense items are translated at average exchange rates prevailing during the period.

Gains and losses which result from remeasurement are included in earnings.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis