What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-09 compared with 2022-08-09 · 134 added, 117 removed, 245 unchanged (51% of the section changed)

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

• we may be unable to remediate our material weaknesses in a timely manner or at all;

• our substantial indebtedness could adversely affect our financial condition;

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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.

Our principal products are a portfolio of integrated system comprised 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 Levelized Cost of Energy than projects that use “fixed tilt” mounting systems, which do not move.

The vast majority of ground mounted solar systems in the United States, and an increasing amount outside of the U.S., use trackers.

Our flagship trackers uses 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.

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patent on a linked-row, rotating gear drive system does not expire until February 5, 2030.

Array acquired STI Norland in January 2022 introducing a dual-row tracker design to the product portfolio.

This tracker uses one motor to drive two connected rows, ideally suited for sites with irregular and highly angled boundaries or fragmented project areas.

To offer a comprehensive set of solutions to the growing market, in September of 2022, Array also introduced a third tracker product requiring significantly less grading and civil works permitting prior to installation in addition to accommodating uneven terrain.

This suite of products extends Array’s target applications and bankability to deliver the best utility-scale solar tracker solutions to the market.

All of our products are protected by U.S.

and international patents, including our core U.S.

patent on a linked-row, rotating gear drive system which 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 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.

During the nine months ended September 30, 2022, we derived 79% and 21% 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 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).

As of September 30, 2022, we had 1,118 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

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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”).

In accordance with the STI Purchase Agreement, the Company paid closing consideration to the Sellers consisting of $410.5 million in cash and 13,894,800 shares of the Company’s common stock.

The fair value of the purchase consideration was $610.8 million and resulted in the Company owning 100% of the equity interests in STI.

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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 Company could see an impact from elevated inflation and other operating costs.

Inflation in the United States peaked at a year-over-year rate of 9.1% in June, before moderating to a still-elevated 8.2% in September.

In Europe, energy price pressures and inflation have remained on an upward path, with September U.K.

inflation rebounding to 10.1% and Euro Area inflation at 9.9%, both on a year-over-year basis.

Interest rates have increased quickly and substantially as central banks in developed countries raise interest rates in an effort to subdue inflation, while government deficits and debt remain at high levels in many global 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.

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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;

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.

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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.

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 remains uncertain.

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

UFLPA seeks to block the import of products made with forced labor in certain areas of China.

An inter-agency task force was established to produce a report by June 21, 2022 which, among other things, will include a list of entities that are believed to be using or benefiting from forced labor.

An inter-agency task force produced a report on June 21, 2022 which, among other things, includes a list of entities that are believed to be using or benefiting from forced labor.

Some suppliers of solar modules have seen shipments detained by US Customs and Border Patrol pursuant to the UFLPA.

These detainments have not directly impacted any of Array’s projects to date;

however, we cannot be certain that future detainments will not directly impact projects that use our products and services.

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

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The ongoing conflict in Ukraine has reduced the availability of material that can be sourced in Europe and, as a result, increased logistics costs for the procurement of certain inputs and materials used in our products.

We do not know ultimate severity or duration of the conflict in Ukraine, but we are continuously monitoring the situation and evaluating our procurement strategy and supply chain as to reduce any negative impact on our business, financial condition and results of operations.

We do not know ultimate severity or duration of the conflict in Ukraine, but we continue to monitor the situation and evaluate our procurement strategy and supply chain as to reduce any negative impact on our business, financial condition and results of operations.

Performance Measures

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

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.

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

Our customers include EPCs, utilities, large 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.

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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, 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.

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 and supply chain 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

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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 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.

Our full-time employee headcount in our general and administrative departments has grown from approximately 210 as of December 31, 2021 to approximately 424, due in part to the STI Acquisition, as of September 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.

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.

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

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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 laws 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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Contingent consideration consists of the changes in fair value of the Taxes Receivable Agreement (“TRA”) entered into with Ron P.

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.

Corio, a former indirect stockholder, concurrent with the Acquisition of Array Technologies Patent Holdings Co., LLC by Former Parent.

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

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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, as well as other debt assumed in the STI Acquisition.

Legal Settlement

Legal settlement income includes a legal settlement awarded and paid from Nextracker LLC, for $42.8 million for the Company asserting (among other claims) trade secret misappropriation, tortious interference with contract, fraud, and breach of contract (the “Nextracker Litigation”).

Income Tax Expense

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

We are subject to United States federal and state income taxes as well as foreign income taxes.

Results of Operations

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

Three Months Ended September 30, Increase/Decrease Nine Months Ended September 30, Increase/Decrease

2022 2021 $ % 2022 2021 $ %

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Income (loss) from operations 18,520 (19,516) 38,036 (195) % (25,549) (4,729) (20,820) 440 %

Other expense

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

Other income (expense)

Other expense, net (399) (297) 102 (34) % (27) (497) (470) (95) %

Legal settlement 42,750 — 42,750 100 % 42,750 — 42,750 100 %

Foreign currency gain (loss) (159) — 159 100 % 1,968 — 1,968 100 %

Interest expense (8,746) (13,109) (4,363) 33 % (23,709) (28,769) (5,060) (18) %

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

Total other income (expense) 33,446 (13,406) (46,852) 349 % 20,982 (29,266) (50,248) (172) %

Income (loss) before income tax (benefit) expense 51,966 (32,922) 84,888 (258) % (4,567) (33,995) 29,428 (87) %

Income tax (benefit) expense 11,144 (5,361) 16,505 (308) % (18,109) (5,493) (12,616) 230 %

Net income (loss) $ 40,822 $ (27,561) $ 68,383 (248) % $ 13,542 $ (28,502) $ 42,044 (148) %

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

September 30, Increase/Decrease Nine Months Ended

September 30, Increase/Decrease

2022 2021 $ % 2022 2021 $ %

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Total Gross Profit $ 80,223 $ 5,897 $ 74,326 1260 % $ 146,756 $ 72,570 $ 74,186 102 %

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.

Comparison of three months ended September 30, 2022 and 2021

Our consolidated revenue increased by $326.3 million, or 173%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

The increase was partially driven by the STI Acquisition, which added $114.6 million of revenue when compared to the three months ended September 30, 2021.

Excluding the impact of the STI Acquisition, revenue was up $211.8 million, or 112%, 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.

Revenue for Array Legacy Operations increased 112% for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

Total MWs shipped were up approximately 63% for the three months ended September 30, 2022, driven by increased customer demand for our product.

ASP for the three months ended September 30, 2022 was up 29% compared to the three months ended September 30, 2021, which is reflective of higher pass-through pricing to our customers.

Revenue for STI Operations increased by $114.6 million for the three months ended September 30, 2022 compared to the three months ended September 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 $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.

Consolidated cost of revenue increased by $252.0 million, or 138%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, primarily due to the increase in the number of MWs delivered and the STI Acquisition.

Gross profit as a percentage of revenue increased from 3% for the three months ended September 30, 2021 to 16% for the three months ended September 30, 2022.

The increase in gross profit as a percentage of revenue reflects higher pass-through pricing of our material and logistics costs.

Gross profit as a percentage of revenue for the Array Legacy Operations increased to 16% for the three months ended September 30, 2022 from 3% for the three months ended September 30, 2021.

The increase was due to a higher proportion of our projects with improved pass-through pricing of our material and logistics costs.

Gross profit as a percentage of revenue for the STI segment was 14% for the three months ended September 30, 2022.

Operating Expenses:

General and Administrative

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.

Consolidated general and administrative expense increased by $20.4 million, or 110%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

Contingent Consideration

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.

Consolidated contingent consideration expense decreased by $1.5 million, for the three months ended September 30, 2022 compared to the three months ended September 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.

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

Amortization of Intangibles

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.

Consolidated amortization of intangibles increased by $17.2 million, or 292%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, primarily due to intangibles added as a result of the STI Acquisition.

Legal Settlement

Legal settlement income increased due to the Company being awarded and paid a settlement from Nextracker LLC, for $42.8 million for the Company asserting (among other claims) trade secret misappropriation, tortious interference with contract, fraud, and breach of contract (the “Nextracker Litigation”).

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.

Consolidated interest expense decreased by $4.4 million, or 33%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, primarily due to the write-off of fees associated with refinancing our debt that occurred in the three months ended September 30, 2021 for which we have no similar fees in the current period.

As of September 30, 2022, we had $425 million outstanding on the Convertible Notes, $323.6 million outstanding under the Term Loan Facility and no balance outstanding under the Revolving Credit Facility.

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

Consolidated income tax benefit increased by $16.5 million, or 308% for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

The tax expense in the three months ended September 30, 2022 includes tax expense of $8.7 million on the legal settlement income recorded discreetly in the current period.

Our effective tax rate, excluding the legal settlement was 26.5% for the three

months ended September 30, 2022 and 16.3% for the three months ended September 30, 2021.

The tax benefit increase, excluding the legal settlement, is primarily related to non-taxable contingent income, and a favorable mix of income for the three months ended September 30, 2022.

Comparison of the nine months ended September 30, 2022 and 2021

Consolidated revenue increased by $602.0 million, or 95%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by a revenue increase of $364.9 million, or 58%, resulting from both an increase in the total number of MWs shipped and an increase in ASP excluding the impact of the STI Acquisition.

The remainder of the increase in revenue resulted from the STI Acquisition of $237.2 million.

Revenue for Array Legacy Operations increased 58% for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Total MWs shipped were up approximately 31% for the nine months ended September 30, 2022, driven by increased customer demand for our product.

ASP for the nine months ended September 30, 2022 was up 20% compared to the nine months ended September 30, 2021, which is reflective of higher pass-through pricing to our customers.

Revenue for STI Operations increased by $237.2 million for the nine months ended September 30, 2022 compared to the nine months ended September 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.

Consolidated cost of revenue increased by $527.8 million, or 94%, for the nine months ended September 30, 2022 compared to the nine months ended September 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 increased from 11% for the nine months ended September 30, 2021 to 12% for the nine months ended September 30, 2022.

The increase in gross profit as a percentage of revenue reflects better pass-through pricing to our customers to offset higher commodity prices and logistics costs.

Gross profit as a percentage of revenue increased for Array Legacy Operations to 12% for the nine months ended September 30, 2022 from 11% for the nine months ended September 30, 2021 due to improved pass through pricing of commodity costs.

Gross profit as a percentage of revenue was 11% for STI for the nine months ended September 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.

Consolidated general and administrative expenses increased by $49.6 million, or 85%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

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

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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.

Consolidated contingent consideration expense decreased by $7.1 million for the nine months ended September 30, 2022 compared to the nine months ended September 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.

Consolidated depreciation expense for the nine months ended September 30, 2022 was similar to the nine months ended September 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.

Consolidated amortization of intangibles increased by $52.1 million, or 296%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily due to intangibles added as a result of the STI Acquisition.

Legal Settlement

Legal settlement income increased due to the Company being awarded and paid a settlement from Nextracker LLC, for $42.8 million for the Nextracker Litigation.

Other Expense, Net

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.

Consolidated other income (expense) increased by $0.5 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily due to the STI Acquisition.

Foreign Currency Gain

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.

Consolidated foreign currency gain increased by $2.0 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, due to the foreign currency translation gain resulting from the STI Acquisition.

Interest Expense

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.

Consolidated interest expense decreased by $5.1 million, or 18%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily due to the write-off of fees associated with refinancing our debt that occurred in the nine months ended September 30, 2021 for which we have no similar fees in the current period.

In the nine months ended September 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 September 30, 2022 for which interest expense is associated includes $425.0 million outstanding on the Convertible Notes, $323.6 million outstanding under the Term Loan Facility and no 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.

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 Facility and the Revolving Credit Facility.

Income Tax Benefit

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.

Consolidated income tax benefit increased by $12.6 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

The tax expense in the nine months ended September 30, 2022 includes tax expense of $8.7 million on the legal settlement income which was recorded discretely in the quarter.

Our effective tax rate, excluding the legal settlement benefit was 56.7% for the nine months ended September 30, 2022 and 16.2% for the nine months ended September 30, 2021.

The benefit increase excluding the legal settlement, is primarily related to non-taxable contingent consideration and the mix of earnings in foreign jurisdictions partially offset by an increase in non-deductible officer compensation for the nine months ended September 30, 2022.

Liquidity and Capital Resources

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

Six Months Ended June 30,

Nine Months Ended September 30,

Net cash used in operating activities $ 44,023 $ (165,837)

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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 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 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.

Due to current macroeconomic conditions, our industry has seen rapid changes in commodity prices, global tightening of supply chains, and strained logistics.

These factors adversely impacted our business, causing us to experience decreased margins and thus decreased cash from operations.

In addition, they led to an increase in our unbilled receivables and in some instances liquidated damages owed to our customers.

Unbilled receivables, which represent temporary timing differences between shipments made and billing milestones achieved, were $137.0 million and $111.2 millions of the accounts receivable balances as of September 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 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.

The Company continues to improve its supply chain, logistics, and labor shortage issues to avoid causing any additional delays in delivering specific components to complete a MW delivery.

Accordingly, we would expect the unbilled receivable balance as a percentage of revenue to improve once the billing criteria is satisfied and the customers are invoiced.

The extent to which macroeconomic concerns, including the COVID-19 pandemic, rising interest rates, elevated inflation levels and the ongoing conflict in Ukraine, 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, as demonstrated by our sequential margin improvement over the last four quarters.

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.

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.

As of September 30, 2022, our cash and cash equivalents were $62.8 million.

Net working capital as of September 30, 2022 was $358.7 million.

As of September 30, 2022, we had outstanding borrowings of $323.6 million under the Term Loan Facility and a $200.0 million commitment under our Revolving Credit Facility, of which no balance is outstanding and $166.6 million was available to borrow to fund operations.

Operating Activities

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.

For the nine months ended September 30, 2022, cash provided by operating activities was $44.0 million, primarily due to an increase in net income and the Company being awarded and paid a settlement from Nextracker LLC, for $42.8 million for the Nextracker Litigation.

In addition, accounts payable and accruals increased cash by $42.2 million and $41.3 million, respectively, driven by higher expenses associated with higher sales, offset by a use from accounts receivable of $139.0 million driven primarily by higher sales.

For the nine months ended September 30, 2021, cash used in operating activities was $165.8 million, primarily due a decrease in deferred revenue of $68.5 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, an increase in accounts receivable of $58.2 million, and an increase in inventories of $55.4 million.

Investing Activities

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.

For the nine months ended September 30, 2022, net cash used in investing activities was $380.5 million, primarily due to cash used in the STI Acquisition.

For the nine months ended September 30, 2021, net cash used in investing activities was $14.2 million, primarily attributable to a $12.0 million investment in equity securities.

Financing Activities

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.

For the nine months ended September 30, 2022, net cash provided by financing activities was $33.1 million, of which and $48.4 million related to proceeds from the Additional Closing in January 2022 offset by a dividend payment of $18.4 million on the Series A preferred stock.

For the nine months ended September 30, 2021, net cash used by financing activities was $188.0 million, of which $345.6 million was proceeds from the Series A that closed on August 11, 2021, $102.0 million was from proceeds under the Revolving Credit Facility, offset by a $132.2 million payment on the Term Loan Facility, a $102.0 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 Credit Facility by $50.0 million.

Series A Redeemable Perpetual Preferred Stock

On August 10, 2021, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with BCP Helios Aggregator L.P., a Delaware limited partnership (the “Purchaser”), an investment vehicle of funds affiliated with Blackstone Inc.

Pursuant to the Securities Purchase Agreement, on August 11, 2021, the Company issued and sold to the Purchaser 350,000 shares of a newly designated Series A Redeemable Perpetual Preferred Stock of the Company, par value $0.001 per share (the “Series A 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, par value $0.001 per share (“Common Stock” and, together with the Series A Redeemable Perpetual Preferred Stock, the “Securities”), for an aggregate purchase price of $346.0 million.

Pursuant to the Securities Purchase Agreement, on August 11, 2021, the Company issued and sold to the Purchaser 350,000 shares of a newly designated Series A Redeemable Perpetual Preferred Stock of the Company, par value $0.001 per share (the “Series A 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, par value $0.001 per share, 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 issued and sold to the Purchaser 776,235 shares of common stock for an aggregate purchase price of $776.

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

For more information related to the Series A Redeemable Perpetual Preferred Stock, see Note 13 – Redeemable Perpetual Preferred Stock , 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.

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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 $5.8 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.

Such accretion totaled $5.9 million and $17.2 million for the three and nine months ended September 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 $6.1 million and $18.7 million in dividends, for the three and nine months ended September 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.

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

As of September 30, 2022, we posted surety bonds in the total amount of approximately $175.2 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 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.

As of September 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:

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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.

Inventories charged to cost of revenue 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