Array Technologies, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and the related notes and other financial information included in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the sections of this Form 10-K captioned “Forward-Looking Statements” and “Risk Factors.” Overview We are one of the world’s largest manufacturers of ground-mounting tracking systems used in solar energy projects at utility scale. Our principal products are a portfolio of integrated solar tracking systems 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 LCOE than projects that use “fixed tilt” mounting systems, which do not move. The vast majority of ground mounted solar systems in the U.S. use trackers. Our flagship tracker 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. patent, our competitors must use designs that we believe are inherently less efficient and reliable. For example, our largest competitor’s design requires one motor for each row of solar panels. As a result, we believe our products have greater reliability, lower installation costs, reduced maintenance requirements and competitive manufacturing costs. Our core U.S. patent on a linked-row, rotating gear drive system does not expire until February 5, 2030. With our acquisition of STI in January 2022, we added a dual-row tracker design to our product portfolio. This tracker uses one motor to drive two connected rows and is 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, we 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 our target applications and ability to deliver the best utility-scale solar tracker solutions to the market. We sell our products to EPCs that build solar energy projects and to large solar developers, independent power producers and utilities, often under master supply agreements or multi-year procurement contracts. During the year ended December 31, 2022, we derived 79% and 21% of our revenues from customers in the U.S. and rest of the world, respectively. As of December 31, 2022, we had shipped more than 58 gigawatts of trackers to customers worldwide, including STI. STI Acquisition On January 11, 2022, the Company completed the STI Acquisition pursuant to a purchase agreement (“the “Purchase Agreement”), dated November 10, 2021. At closing, the Company paid consideration of $410.5 million in cash and 13,894,800 shares of the Company’s common stock in accordance with the Purchase Agreement. The fair value of the purchase consideration was $610.8 million and resulted in the Company owning 100% of the equity interests in STI. 47 STI was founded in 1996 and is headquartered in Pamplona, Spain. With manufacturing facilities in both Spain and Brazil, STI generates revenue through the design, manufacture and sale of its utility-scale solar tracker systems to customers in global markets including Spain, Brazil, U.S. and South Africa. Its dual-row tracker system is designed for irregular terrain and regions with low wind and/or snow load requirements. The integration of STI provides us the opportunity to accelerate our international growth and better address rising global demand for utility-scale solar projects, particularly in developing countries in South America and Africa. We financed the transaction and related fees and expenses with cash on hand, proceeds from the December 2021 issuance of $425 million of our 1.00% Convertible Senior Notes and proceeds from the issuance of 50,000 shares of our Series A Shares pursuant to the Delayed Draw provision of our SPA. For further discussion of the STI Acquisition, see Note 3 – Acquisition of STI in the accompanying consolidated financial statements. Update on the Impact of COVID-19 We continue to closely monitor the ongoing impact of the COVID-19 pandemic in all the locations where we operate. At this time, the extent to which the pandemic may affect our business, operations and plans, including the resulting impact on our expenditures and capital needs, remains uncertain and is subject to change, but overall, the pandemic appears to be having a lessening impact on our business and the markets in which we operate. On January 31, 2023, the Biden administration announced its plan to let the coronavirus public health emergency expire in May 2023. Inflation Inflationary pressures, while somewhat moderating recently, are expected to persist, at least in the near-term, and may continue to negatively impact our results of operation. To mitigate the inflationary pressures on our business, we have implemented selective price increases in certain markets, accelerated productivity initiatives and expanded our supplier base, while continuing to execute on overhead cost containment practices. Impact of Potential Solar Module Supply Chain Disruptions On April 1, 2022, the USDOC initiated anti-circumvention inquiries of the U.S. Solar 1 Orders covering merchandise from Vietnam, Malaysia, Thailand, and Cambodia pursuant to Section 781 of the Tariff Act of 1930. The USDOC issued preliminary determinations in these inquiries on December 1, 2022, affirmatively finding that certain photovoltaic solar cells and modules produced in Vietnam, Malaysia, Thailand, and Cambodia using parts and components from China from certain producers/exporters, are circumventing the Solar 1 Orders and therefore should be subject to the antidumping and countervailing duty liabilities arising from those orders. The USDOC is expected to issue final determinations in May 2023. 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 issued an emergency declaration delaying the imposition of any cash deposit or duty payment obligations on merchandise subject to these inquiries until the earlier of (i) the expiration of the order on June 6, 2024, or (ii) the President terminating the emergency declaration. Merchandise from the four subject countries covered under the scope of these inquiries should therefore not be subject to any antidumping or countervailing duty liabilities under the Solar 1 Orders until the termination of the emergency declaration as long as the importer(s) and exporter(s) follow proper certification procedures that will be implemented by the USDOC. The affirmative determinations could have an adverse effect on the global solar energy marketplace, and as such, an adverse effect on our business, financial condition, and results of operations. 48 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 remains uncertain. More broadly, legislation has been proposed that would make it easier for domestic companies to obtain affirmative determinations in antidumping and countervailing duties investigations. The proposed USICA/America COMPETES Act, if enacted, could result in future successful petitions that limit imports from Asia and other regions. Solar panel imports to the U.S. may also be impacted by the UFLPA that was signed into law by President Biden on December 23, 2021. According to U.S. Customs and Border Protection, “it establishes a rebuttable presumption that the importation of any goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in the Xinjiang Uyghur Autonomous Region of the People’s Republic of China, or produced by certain entities, is prohibited by Section 307 of the Tariff Act of 1930 and that such goods, wares, articles, and merchandise are not entitled to entry to the U.S. The presumption applies unless the Commissioner of U.S. Customs and Border Protection determines that the importer of record has complied with specified conditions and, by clear and convincing evidence, that the goods, wares, articles, or merchandise were not produced using forced labor.” There continues to be uncertainty in the market around achieving full compliance with UFLPA, whether related to sufficient traceability of materials or other factors. This has created a significant compliance burden and constrained solar panel imports. We cannot currently predict what, if any, impact the UFLPA will have on the overall future supply of solar panels into the U.S. and the related timing and cost of our clients’ solar project, development and construction activities. While we do not import or sell solar panels, project delays caused by solar panel constraints may negatively impact our product delivery schedules and future sales, and therefore our business, financial condition, and results of operations. Impact of the Ongoing Conflict in Ukraine The ongoing conflict in Ukraine has impacted the availability of material that can be sourced in Europe and, as a result, we have experienced increased logistics costs for the procurement of certain inputs and materials used in our products. We do not know the ultimate severity or duration of this conflict, 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. Uncertainty in the Banking System On March 10, 2023, the Federal Deposit Insurance Corporation took control and was appointed receiver of Silicon Valley Bank. If other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our existing cash, cash equivalents and investments may be threatened and could have a material adverse effect on our business and financial condition. Foreign Currency Translation For non-U.S. subsidiaries that operate in a local currency environment, assets and liabilities are translated into U.S. dollars 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 net parent investment. For non-U.S. 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. 49 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. Performance Measures In managing our business and assessing financial performance, we supplement the information provided by the financial statements with other operating metrics. These operating metrics are utilized by our management to evaluate our business, measure our performance, identify trends affecting our business and formulate projections. The primary operating metric we use to evaluate our sales performance and to track market acceptance of our products from year to year is megawatts (“MWs”) shipped generally and the change in MWs shipped from period to period specifically. MWs is measured for each individual project and is calculated based on the projects expected megawatt output once installed and fully operational. We also utilize metrics related to price and cost of goods sold per MW, including average selling price (“ASP”) and cost per watt (“CPW”). ASP is calculated by dividing total applicable revenues by total applicable MWs, whereas CPW is calculated by dividing total applicable costs of goods sold by total applicable MWs. These metrics enable us to evaluate trends in pricing, manufacturing cost and customer profitability. Key Components of Our Results of Operations The following discussion describes certain line items in our consolidated statements of operations. Revenue We generate revenue from the sale of solar tracking systems and parts. Our customers include EPCs, utilities, solar developers and independent power producers. For each individual solar project, we enter into a contract with our customers covering the price, specifications, delivery dates and warranty for the products being purchased, among other things. Our contractual delivery period for the tracker system and parts can vary from days to several months. Contracts can range in value from hundreds of thousands to tens of millions of dollars. Our revenue is affected by changes in the volume and ASPs of solar tracking systems purchased by our customers. The quarterly volume and ASP of our systems is driven by the supply of, and demand for, our products, changes in product mix between module type and wattage, geographic mix of our customers, strength of competitors’ product offerings, and availability of government incentives to the end-users of our products. Our revenue growth is dependent on continued growth in the size and number of solar energy projects installed each year as well as our ability to increase our market share in each of the geographies where we compete, expand our global footprint to new and evolving markets, grow our production capabilities to meet demand and to continue to develop and introduce new and innovative products that address the changing technology and performance requirements of our customers. Cost of Revenue and Gross Profit Cost of revenue consists primarily of product costs, including raw materials, purchased components, salaries, wages and benefits of manufacturing personnel, freight, tariffs, customer support, product warranty, and depreciation of manufacturing and testing equipment. Our product costs are affected by (i) the underlying cost of raw materials, including steel and aluminum, (ii) component costs, including electric motors and gearboxes, (iii) technological innovation, and (iv) economies of scale and improvements in production processes and automation. In 2021 and to a lesser extent in 2022, our business was impacted by the COVID-19 pandemic. We experienced disruptions to our supply chain and increased material and freight costs. When possible, we 50 modified our production schedules and processes to mitigate the impact of these disruptions and cost increases on our margins. We do not currently hedge against changes in the price of our raw materials. Gross profit may vary from quarter to quarter and is primarily affected by our volume, ASPs, product costs, product mix, customer mix, geographical mix, shipping method, warranty costs and seasonality. Operating Expenses General and administrative expenses General and administrative expense consist primarily of salaries, benefits and equity-based compensation related to our executive, sales, engineering, finance, human resources, information technology and legal personnel, as well as travel, facility costs, marketing, bad debt provision and professional fees. We expect to increase the number of sales and marketing personnel in connection with the expansion of our global sales and marketing footprint, enabling us to penetrate new markets. The majority of our sales in 2022 were in the U.S.; however, in January 2022, we expanded our international operations with the STI Acquisition. We currently have a sales presence in the U.S., Spain, Brazil, South Africa, Australia and the U.K. We intend to continue to expand our sales presence and marketing efforts to additional countries. We also anticipate an increase in spend related to product development and innovation as we hire additional engineering resources and increase our R&D spend. Further, as a relatively new public company, we may incur additional audit, accounting, tax, 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. Contingent Consideration Contingent consideration consists of the changes in fair value of the TRA and earn-out entered into with Ron P. Corio, a former indirect stockholder, concurrent with the acquisition of Patent LLC by Former Parent. The TRA liability was recorded at fair value as of July 8, 2016 (the “Patent Acquisition Date”) and subsequent changes in the fair value are recognized in earnings. The TRA will generally provide for the payment by Array Tech, Inc. to Ron P. Corio for certain federal, state, local and non-U.S. tax benefits deemed realized in post-closing taxable periods by Array Tech, Inc. from the use of certain deductions generated by the increase in the tax value of the developed technology. The earn-out liability was recorded at fair value at the Patent Acquisition Date and subsequent changes in the fair value are recognized in earnings. Fair value of the earn-out liability is measured based upon the expected return of investment of Former Parent, among other things. The $589 million cash special distribution paid to Former Parent upon the closing of our IPO, and the Company’s December 2020 offering required the Company to make a cash payment of $9.1 million in October 2020 and $15.9 million in December 2020. As a result of these payments, the earn-out liability has been paid in full. Depreciation and Amortization Depreciation expense consists of costs associated with property, plant and equipment not used in manufacturing of our products. We expect that as we continue to grow both our revenue and our general and administrative personnel we may require some additional property, plant and equipment to support this growth resulting in additional depreciation expense. Amortization of intangibles consists of developed technology, customer relationships, contractual backlog and the STI trade name expensed over their expected period of use. 51 Non-Operating Expenses Interest Expense Interest expense consists of interest and other charges paid in connection with our Senior Secured Credit Facility, the Convertible Notes, and the credit lines assumed by us with the STI Acquisition. Income Tax Expense We are subject to U.S. federal, state and non-U.S. income taxes. As we expand into additional foreign markets, we may be subject to additional foreign tax. Reportable Segments Subsequent to the acquisition of STI, the Company began reporting its results of operations in two segments; Array Legacy Operations and STI Operations. The segment amounts included in this Item 7. Man a gement ’ s Discussion and Analysis are presented on a basis consistent with our internal management reporting. Additional information on our reportable segments is contained in Note 20 – Segment and Geographic Information in the accompanying notes to the consolidated financial statements. Results of Operations The following table sets forth our consolidated statement of operations ( in thousands ): Year Ended December 31, Increase (Decrease) 2022 2021 $ % Revenue $ 1,637,546 $ 853,318 $ 784,228 92 % Cost of revenue 1,410,270 770,459 639,811 83 % Gross profit 227,276 82,859 144,417 174 % Operating expenses General and administrative 150,777 80,974 69,803 86 % Contingent consideration (4,507) 2,696 (7,203) (267) % Depreciation and amortization 99,139 23,930 75,209 314 % Total operating expenses 245,409 107,600 137,809 128 % Income (loss) from operations (18,133) (24,741) 6,608 (27) % Other income (expense) Other income (expense), net 2,789 (905) 3,694 408 % Legal settlement 42,750 — 42,750 100 % Foreign currency gain 1,155 — 1,155 100 % Interest expense (33,513) (35,475) 1,962 6 % Total other income (expense) 13,181 (36,380) 49,561 136 % Income (loss) before income tax benefit (4,952) (61,121) 56,169 (92) % Income tax (benefit) expense (9,384) (10,718) 1,334 (12) % Net income (loss) $ 4,432 $ (50,403) $ 54,835 109 % 52 The following table provides details on our operating results by reportable segment for the respective periods ( in thousands ): Year Ended December 31, Increase/Decrease Revenue: 2022 2021 $ % Array Legacy Operations $ 1,267,883 $ 853,318 $ 414,565 49 % STI Operations 369,663 — 369,663 100 % Total Revenue $ 1,637,546 $ 853,318 $ 784,228 92 % Gross Profit: Array Legacy Operations $ 168,170 $ 82,859 $ 85,311 103 % STI Operations 59,106 — 59,106 100 % Total Gross Profit $ 227,276 $ 82,859 $ 144,417 174 % Fiscal Year 2022 Compared with Fiscal Year 2021 Revenue Consolidated revenue increased $784.2 million, or 92%, driven by strong organic growth in the Array Legacy Operations segment, where revenue increased $414.6 million, or 49%, resulting from a 22% increase in MWs shipped due to increased customer demand for our products and a 21% year-over-year increase in ASP, which is reflective of higher pass-through pricing to our customers. Additionally, the STI Acquisition in January 2022 added $369.7 million in consolidated revenue over the prior year. Cost of Revenue and Gross Profit Consolidated cost of revenue increased $639.8 million, or 83%, driven by the STI acquisition, increased MWs shipped, combined with higher raw material and logistics costs as compared to the prior year. Consolidated gross profit as a percentage of revenue increased from 9.7% for the year ended December 31, 2021 to 13.9% for the year ended December 31, 2022. Array Legacy Operations gross profit percentage increased year-over-year from 9.7% to 13.3% during the same period due primarily to improved pass through pricing of commodity costs. Gross profit as a percent of revenue for the STI Operations was 16.0% for the year ended December 31, 2022. General and Administrative Consolidated general and administrative expense increased $69.8 million, or 86%. As a percent of revenue, general and administrative expense was 9.2% in fiscal year 2022 versus 9.5% in 2021. The STI Acquisition, completed in January 2022, accounted for almost $25.0 million of the total increase. The balance was attributable to Array Legacy where payroll and related expenses rose $16.9 million, driven largely by additional headcount to support organic revenue growth, product development and Environmental, Social, Governance and digital transformation initiatives. L egal and professional fees increased $14.6 million, driven by the integration of STI as well as higher audit and litigation costs. An approximate $8.3 million increase was driven by additional costs for marketing, travel, contract services, insurance, rent and computer related expenses, all which were incurred to support our growth and increased capacity. 53 Contingent Consideration Contingent consideration expense decreased by $7.2 million, or 267%, as a result of a decreased valuation of the TRA liability, which was driven by higher discount rates resulting from a trend in higher overall interest rates. Depreciation and Amortization Consolidated depreciation and amortization expense increased $75.2 million, or 314%, due primarily to the amortization of intangible assets, including developed technology, customer relationships, contractual backlog and the STI trade name acquired in the STI Acquisition. Amortization of the contractual backlog recorded in connection with the STI Acquisition, all of which is amortized over a single year, accounted for $50.0 million of the $75.2 million increase. Legal Settlement Legal settlement income in 2022 resulted from the settlement of litigation related to trade secret misappropriation, for which the Company received a $42.8 million settlement. The settlement is related to Nextracker’s acknowledgment that an Array employee was hired in violation of his non-compete agreement, certain Array confidential information was improperly obtained, and Nextracker’s behavior was wrongful. The parties concluded the matter and plan to continue their shared missions of mainstreaming clean energy worldwide. As part of the settlement, the parties agreed to treat the settlement terms as confidential except to the extent required or necessitated by law, regulation, or the corporate parties’ shareholder disclosure standards. There was no similar settlement in 2021. Foreign Currency Gain Consolidated foreign currency gain increased $1.2 million as compared with the prior year due to the foreign currency translation gain resulting from the STI Acquisition in January 2022. Interest Expense Consolidated interest expense decreased by $2.0 million, or 6%. The decrease was the result of a $9.6 million write-off in 2021 of capitalized fees and discounts related to unscheduled Term Loan principal payoffs that occurred in February and August of 2021 that had no equivalent in 2022. This decrease was partially offset by $4.2 million of interest expense related to the first full year of interest incurred on the Convertible Notes issued in December 2021 and $2.4 million of interest expense related to the debt obligations assumed by the Company in connection with the STI Acquisition. Income Tax (Benefit) Expense Income tax benefit decreased by $1.3 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. Our effective tax rate was a benefit of 189.5% and a benefit of 17.5% for the years ended December 31, 2022 and 2021, respectively. The decrease in the benefit is primarily related to a favorable mix of income and non-U.S. tax incentives. Net Income (Loss) Consolidated net income (loss) increased $54.8 million, or 109%, driven by a $784.2 million increase in consolidated revenue, a 4% increase in consolidated gross profit margin and a $42.8 million legal settlement, which were partially offset by a $69.8 million increase in consolidated general and administrative expense and an increase of $75.2 million in consolidated depreciation and amortization. 54 Fiscal Year 2021 Compared with Fiscal Year 2020 A discussion and analysis covering the comparison of the year ended December 31, 2021 to the year ended December 31, 2020 is included in our annual report on Form 10-K filed with the Securities and Exchange Commission on April 6, 2022. Restatement of Quarterly Financial Data The Company has restated its previously issued unaudited interim financial statements for the three months ended March 31, 2022, the three and six months ended June 30, 2022 and the three and nine months ended September 30, 2022 (the “Non-Reliance Periods”). Detailed restatements of the Company's consolidated quarterly financial statements are provided in Note 21 – Restatement (Unaudited) in the accompanying notes to the consolidated financial statements. The following unaudited quarterly statements of operations data for each of the four quarters in the period ended December 31, 2022 have been prepared on a basis consistent with our audited annual financial statements included in this Annual Report on Form 10-K and include, in our opinion, all normal recurring adjustments necessary for the fair presentation of the financial information contained in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future. The following should be read in conjunction with our audited financial statements and the related notes included in this Annual Report on Form 10-K. Three Months Ended (in thousands) March 31, 2022 As Restated June 30, 2022 As Restated September 30, 2022 As Restated December 31, 2022 Revenue $ 300,586 $ 419,865 $ 515,024 $ 402,071 Gross profit 26,587 39,946 80,223 80,520 Operating expenses 64,931 53,278 63,029 64,171 Income (loss) from operations (38,344) (13,332) 17,194 16,349 Income (loss) before income tax expense (benefit) (40,680) (23,460) 50,640 8,548 Income tax expense (benefit) (14,743) (18,436) 9,996 13,799 Net income (loss) (25,937) (5,024) 40,644 (5,251) Preferred dividends and accretion 11,606 12,182 12,257 12,009 Net income (loss) to common stockholders $ (37,543) $ (17,206) $ 28,387 $ (17,260) Income (loss) per common share Basic $ (0.25) $ (0.11) $ 0.19 $ (0.11) Diluted $ (0.25) $ (0.11) $ 0.19 $ (0.11) Liquidity and Capital Resources Financing Transactions Series A Shares On August 10, 2021, the Company entered into a SPA with BCP Helios Aggregator L.P., a Delaware limited partnership (the “Investor”), an investment vehicle of funds affiliated with Blackstone Inc. Pursuant to the SPA, 55 on August 11, 2021, the Company issued and sold to certain investors (the “Purchasers”) 350,000 shares of the Series A Shares, par value $0.001 per share, 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 (the “Initial Closing”). Further, pursuant to the SPA, on September 27, 2021, the Company issued and sold to the Purchasers 776,235 shares of common stock for an aggregate purchase price of $0.01 million. The Company used the net proceeds from the Initial Closing to repay the entire $102.0 million amount outstanding under its existing Revolving Credit Facility and prepay $100.0 million under the Company’s Term Loan Facility (as defined below). The SPA gives the Company the option to require the Purchasers to purchase up to an additional 150,000 shares of the Series A Shares until June 30, 2023 and up to 3,375,000 shares of common stock (or up to 6,100,000 shares of common stock in the event of certain price-related adjustments) subject to certain equitable adjustments pursuant to any stock dividend, stock split, stock combination, reclassification or similar transaction for an aggregate purchase price up to $148.0 million (the “Delayed Draw Commitment”). In January 2022, we issued 50,000 Series A Shares, and 1,125,000 shares of our common stock in an Additional Closing for an aggregate purchase price of $49.4 million. Registration Rights Agreement In connection with the SPA, the Company and the Investor entered into a Registration Rights Agreement pursuant to which, the Company granted the Investor certain registration rights with respect to Common Stock purchased, including customary shelf registration rights and “piggyback” registration rights. For more information related to the Series A Shares, see Note 11 – Redeemable Perpetual Preferred Stock , to the accompanying consolidated financial statements. 1.00% Convertible Senior Notes due 2028 On December 3, 2021 and December 9, 2021, the Company completed a $425.0 million private offering (the “Convertible Notes Offering”) ($375 million and $50 million, respectively), of its 1.00% Convertible Senior Notes due 2028 (the “Convertible Notes”), resulting in proceeds of $413.3 million ($364.7 million and $48.6 million, respectively) after deducting the original issue discount of 2.75%. The Convertible Notes were issued pursuant to an indenture, dated December 3, 2021, between the Company and U.S. Bank National Association, as trustee. The Convertible Notes are senior unsecured obligations of the Company and mature on December 1, 2028, unless earlier converted, redeemed or repurchased. The Convertible Notes bear interest at a rate of 1.00% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2022. The Convertible Notes were not convertible as of December 31, 2022 and as such have no dilutive impact to earnings per share. Senior Secured Credit Facility On October 14, 2020, we entered into a Senior Secured Credit Facility consisting of (i) a $575 million senior secured seven-year term loan facility (the “Term Loan Facility”) and (ii) a $150 million senior secured five-year revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Secured Credit Facility”). On February 23, 2021, we entered into the First Amendment to our Senior Secured Credit Facility. The First Amendment lowered the London interbank offered rate floor on Eurocurrency borrowings to 50 basis points from 100 basis points and lowered the applicable margin to 325 basis points from 400 basis points per annum. On February 26, 2021, we entered into a Second Amendment to the Senior 56 Secured Credit Facility pursuant to which the Revolving Credit Facility was increased from $150 million to $200 million. At December 31, 2022, the outstanding balance of the Term Loan Facility was $312.5 million and we were in compliance with all covenants. At December 31, 2022, under the Revolving Credit Facility, the Company had: (i) no outstanding balance, (ii) issued $38.8 million in standby letters of credit and (iii) availability of $161.2 million. For more information related to our Senior Secured Credit Facility, see Note 10 – Debt , in the accompanying notes to the consolidated financial statements. Surety Bonds We provide surety bonds to various parties as required for certain transactions initiated during the ordinary course of business to guarantee the Company’s performance in accordance with contractual or legal obligations. These off-balance sheet arrangements do not adversely impact our liquidity or capital resources. As of December 31, 2022, we posted surety bonds totaling approximately $199.3 million. Cash Flows (in thousands) Year Ended December 31, 2022 2021 Net cash provided by (used in) operating activities $ 141,493 $ (263,187) Net cash used in investing activities (384,437) (15,332) Net cash provided by financing activities 8,440 537,748 Effect of exchange rate changes on cash and cash equivalent balances 735 — Net change in cash and cash equivalents $ (233,769) $ 259,229 Historically, we have financed our operations with the proceeds from operating cash flows, capital contributions and short and long-term borrowings. Our ability to generate positive cash flow from operations is dependent on the strength of our gross margins as well as our ability to quickly turn our working capital. Due to recent macroeconomic conditions, our industry has seen rapid changes in commodity prices, global tightening of supply chains, and strained logistics. These factors can adversely impact our business and can put pressure on our margins. We have taken steps to overcome the economic challenges but cannot be certain of the timing of when we will achieve better margins. Furthermore, high volatility and uncertainty in the capital markets resulting from macroeconomic conditions, including rising inflation rates and interest rates, and recent and potential future disruptions in access to bank deposits or lending commitments due to bank failures, has had, and could continue to have, a negative impact on the price of our common stock and could adversely impact our ability to raise additional funds. In response to the recent challenging environment, we continuously evaluate our ability to meet our obligations over the next 12 months. We believe we have sufficient liquidity as well as financing options available to fund current and future commitments. As of December 31, 2022, our cash balance was $133.9 million, of which $29.2 million was held outside the U.S., and net working capital was $365.9 million. We had outstanding borrowings of $312.5 million under our $575 million Term Loan Facility and $161.2 million available to us under our $200.0 million Revolving Credit Facility. Also, through June 30, 2023, we have the option to require our Series A Shares investors to purchase 57 an additional 100,000 shares of our Series A Shares and 2,250,000 shares of our common stock for an aggregate purchase price of approximately $100.0 million. The Company continually monitors and reviews its liquidity position and funding needs. Management believes that the Company’s ability to generate operating cash flows in the future and available borrowing capacity under its Senior Secured Credit Facility will be sufficient to meet its future liquidity needs. Cash Flows from Operating Activities The Company generated $141.5 million in cash from operating activities during the year ended December 31, 2022, of which, $97.2 million was generated from net income as adjusted for the impact of non-cash expenses, primarily consisting of depreciation and amortization and equity-based compensation. The remaining $44.3 million was generated by changes in net working capital, including a $59.0 million increase in deferred revenue from deposits received from customers in 2022 for projects due in the first half of 2023, a $13.7 million increase in accounts payable and accrued expenses resulting from improved payables management, and a $20.9 million decrease in inventory levels as we burned down historically high raw material quantities from prior year, all of which were partially offset by a $77.0 million increase in accounts receivable driven primarily by a year-over-year increase in revenue. For the year ended December 31, 2021, cash used in operating activities was $263.2 million primarily due to lower gross profit on projects delivered due to rapid increases in commodity and logistic costs which we were not able to fully pass on to our customers. Additionally, cash used in operating activities reflects $96.6 million in cash used to build inventory due to growth in demand coupled with longer shipping lead-times leading the Company to carry more strategic inventory. Finally, the increase in accounts receivable used $118.4 million in cash during 2021 driven by increased sales coupled with a number of large projects not reaching billing milestones at the end of the year. Cash Flows from Investing Activities For the year ended December 31, 2022, cash used in investing activities was $384.4 million primarily related to the STI Acquisition; net of cash acquired, the Company paid $373.8 million in cash as part of the purchase price consideration. Additionally, the Company utilized $10.6 million for the purchase of property, plant and equipment. For the year ended December 31, 2021, the Company utilized $15.3 million in investing activities including $12.0 million for investment in equity securities and $3.4 million for the purchase of property, plant and equipment. Cash Flows from Financing Activities For the year ended December 31, 2022, net cash provided by financing activities was $8.4 million, which included $49.0 million related to proceeds from the sale of Series A Shares and common shares in January 2022 offset by a dividend payment of $18.7 million on the Series A Shares. For the year ended December 31, 2021, net cash provided by financing activities was $537.7 million of which $225.0 million was proceeds from the offering of our Series A Shares and $120.6 million from the proceeds of the sale of common stock, each of which that closed on August 11, 2021, $413.3 million in proceeds from the issuance of the Convertible Notes, $126.0 million was from proceeds under the Revolving Facility, offset by a $133.2 million payment on the Term Loan Facility, a $126.0 million payment of the Revolving Credit Facility, $11.1 million in equity issuance costs associated with the Series A Shares and $6.6 million in fees paid on the Senior Secured Credit Facility and to increase the limit on the Revolving Facility by $50.0 million. 58 Discussion of 2020 Historical Cash Flows A discussion and analysis covering historical cash flows for the year ended December 31, 2020 is included in our annual report on Form 10-K filed with the Securities and Exchange Commission on April 6, 2022. Critical Accounting Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Due to the COVID-19 pandemic, there has been and may continue to be uncertainty and disruption in the global economy and financial markets. We have made estimates and assumptions taking into consideration certain possible impacts due to COVID-19. These estimates may change, as new events occur, and additional information is obtained. Actual results may differ from those estimates and assumptions. The critical accounting estimates discussed below are estimates made in accordance with U.S. GAAP that we believe involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Revenue Recognition In accordance with Accounting Standards Codification (“ASC”) Topic 606 Revenue from Contracts with Customers (“ ASC 606”) the Company recognizes revenues from the sale of solar tracking systems and parts and determines its revenue recognition through the following steps: (i) identification of the contract or contracts with a customer; (ii) identification of the performance obligations within the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations within the contract; and (v) recognition of revenue when, or as the performance obligation has been satisfied. Performance Obligations The majority of the Company’s contracts with customers are accounted for as one performance obligation, because the Company is integrating the solar tracker system components and related services as part of a single project. Certain contracts associated with customers using the federal investment tax credit (“ITC”) for solar energy projects and other standalone tracker component sales are accounted for as multiple performance obligations because some of these contracts consist of orders for tracker system components without certain of the related services. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using its best estimate of the standalone selling price of each distinct good or service in the contract. The Company uses the expected cost-plus margin approach to estimate the standalone selling price of each performance obligation. In contracts with one performance obligation, the Company’s performance obligation is satisfied over-time as control is transferred to the customer by measuring the progress toward complete satisfaction of the performance obligation using an input (i.e. “cost to cost”) method. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenue recognized for the Company’s ITC related contracts and standalone system component sales are recorded at a point in time and recognized when obligations under the terms of the contract with our customer are satisfied. Generally, this occurs with the transfer of control of the asset, which is typically upon delivery to the customer in line with shipping terms. Infrequently, in certain situations, when product is still in our custody, 59 and title and risk of loss has passed to the customer (known as bill-and-hold arrangement), revenue will be recognized when all the specific requirements for transfer of control under a bill-and-hold arrangement have been met. In assessing the recognition of revenue, the Company also evaluates whether two or more contracts should be combined and accounted for as one contract and if the combined or single contract should be accounted for as multiple performance obligations which could change the amount of revenue and profit (loss) recorded in a period. Contracts are often modified through change orders to account for changes in specifications or design, manner of performance, equipment, materials, scope of work, and/or the period of completion of the project. Although the Company evaluates each change order to determine whether such modification creates a separate performance obligation, the majority of change orders are not distinct within the context of the original contract and, therefore, not treated as separate performance obligations but rather as a modification of the existing contract and performance obligation. Contract Estimates Accounting for contracts utilizing the cost-to-cost measure of progress is based on various assumptions to project the outcome of future events that can exceed a year. These assumptions include the cost and availability of materials. The cost estimation process for recognizing revenues over time under the cost-to-cost method is based on the professional knowledge and experience of the Company’s project managers, engineers and finance professionals. The Company reviews and updates its contract-related estimates on an ongoing basis and recognizes adjustments for any project specific facts and circumstances that could impact the measurement of the extent of progress, such as the total costs to complete the contracts, under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. Business Combinations The Company completed one business combination for an aggregate purchase price of $610.8 million during the year ended December 31, 2022. In accordance with Topic 805 Business Combinations, total consideration was first allocated to the fair value of assets acquired and liabilities assumed, with the excess being recorded as goodwill. The fair value of the identifiable intangible assets has been estimated using the Excess Earnings Method (customer relationships and backlog) and Relief from Royalty Method (trade name). Significant inputs using the Excess Earnings Method and Level 3 inputs in the fair value hierarchy include estimated revenue, expenses based on actuals and forecast. The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. Intangible assets have been recognized apart from goodwill whenever an acquired intangible asset arises from contractual or other legal rights, or whenever it is capable of being separated or divided from the acquired entity. Determining these fair values required us to make significant estimates and assumptions, particularly with respect to acquired intangible assets. The determination of fair value required considerable judgment and was sensitive to changes in underlying assumptions, estimates and market factors. The Company’s estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. Estimating fair value required us to make assumptions and estimates regarding our future plans, as well as industry and economic conditions. These assumptions and estimates include, but are not limited to: backlog, discount rate and customer attrition rate. The fair values of the intangible assets will be amortized over their useful lives. If actual results are materially different than the assumptions we used to determine fair value of the assets acquired and liabilities assumed through a business combination, it is possible that adjustments to the carrying 60 values of such assets and liabilities will have a material impact on our financial position and results of operations . See Note 3 – Acquisition of STI to the consolidated financial statements for more information. Goodwill Goodwill is assessed using either a qualitative assessment or quantitative approach to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount. The qualitative assessment evaluates factors including macroeconomic conditions, industry-specific and company-specific considerations, legal and regulatory environments, and historical performance. If the Company determines that is more likely than not that the fair value of a reporting unit is less than its carrying value, a quantitative assessment is performed. Otherwise, no further assessment is required. The quantitative approach compares the estimated fair value of the reporting unit to its carrying amount, including goodwill. Impairment is indicated if the estimated fair value or the reporting unit is less than the carrying amount of the reporting unit, and an impairment charge is recognized for the differential. The Company has two reporting units: 1) Array Legacy Operations, and 2) STI Operations. At March 31, 2022, the Company determined that the decrease in its stock price from December 31, 2021 and the continuing negative impact of the price of raw materials to the gross margin of the Array Legacy Operations reporting unit during the quarter were events indicating that the fair value of the Array Legacy Operations reporting unit may be less than its carrying amount. Based on the Company’s quantitative goodwill impairment analysis of the Array Legacy Operations reporting unit at March 31, 2022, the fair value exceeded the carrying value by a substantial margin. Accordingly, no impairment was recorded. As for the STI Operations reporting unit, the Company noted no such events or circumstances occurred from the date acquisition through March 31, 2022 and concluded an interim goodwill impairment test was not considered necessary at the time. The Company completed its annual goodwill impairment test using a qualitative approach and concluded goodwill was not impaired as of December 31, 2022. Product Warranty The Company offers an assurance type warranty for its products against manufacturer defects and does not contain a service element. For these assurance type warranties, a provision for estimated future costs related to warranty expense is recorded when they are probable and reasonably estimable, which is typically when products are delivered. This provision is based on historical information on the nature, frequency and average cost of claims for each product line. When little or no experience exists for an immature product line, the estimate is based on comparable product lines. These estimates are re-evaluated on an ongoing basis using best-available information and revisions to estimates are made as necessary. Tax Receivable Agreement Concurrent with the Former Parent’s acquisition of Patent LLC, Array Tech, Inc. entered into the TRA with Ron P. Corio, a former indirect stockholder. The TRA is accounted for as contingent consideration and subsequent changes in fair value of the contingent liability are recognized in general and administrative expense within the Company’s consolidated statement of operations. The TRA obligation was recorded at acquisition-date fair value at inception and is classified as a liability. The TRA will generally provide for the payment by Array Tech, Inc. to Mr. Corio for certain federal, state, local and non-U.S. tax benefits deemed realized in post-closing taxable periods by Array Tech, Inc. from the use of certain deductions generated by the increase in the tax value of the developed technology. Estimating the amount of payments that may be made under the TRA is by nature imprecise. The significant fair value inputs used to estimate the future expected TRA payments to Mr. Corio include the timing of tax payments, a discount rate, book income projections, timing of expected adjustments to calculate taxable income and the projected rate of use for attributes defined in the TRA. As of 61 December 31, 2022 and December 31, 2021, the estimated fair value of the TRA was $8.6 million and $14.6 million, respectively, which was recorded as a liability. Subsequent changes in fair value of the TRA will be recognized in earnings. Equity-Based Compensation The Company granted restricted stock units (“RSUs”) to employees and Performance Stock Units (“PSUs”) to certain executives. The PSUs contain performance and market conditions. The PSU grants were valued using the Monte Carlo simulation method and the assigned fair value on grant date will be recognized on a straight-line basis over the vesting term of the awards. The probability of the awards meeting the performance related vested conditions is not included in the grant date fair value, but rather will be estimated quarterly and the Company will true-up the expense recognition accordingly upon any probability to vest revision. The Company accounts for forfeitures as they occur. Temporary Equity Equity instruments that are redeemable for cash or other assets are classified as temporary equity if the instrument is redeemable, at the option of the holder, at a fixed or determinable price on a fixed or determinable date or upon the occurrence of an event that is not solely within the control of the issuer. Redeemable equity instruments are initially carried at the fair value of the equity instrument at the issuance date, which is subsequently adjusted at each balance sheet date if the instrument is currently redeemable, or probable of becoming redeemable. The Series A Shares issued in connection with the SPA, as described in Note 1 1 – Redeemable Perpetual Preferred Stock in the accompanying notes to our consolidated financial statements, is classified as temporary equity in the accompanying consolidated financial statements. The Company elected the accreted redemption value method which accretes changes in redemption value over the period from the date of issuance of the Series A Shares to the earliest costless redemption date (the fifth anniversary) using the effective interest method. Such adjustments are included in preferred undeclared dividends and accretion on Series A Shares in the Company’s consolidated statements of changes in equity and treated similarly to a dividend on preferred stock for U.S. GAAP purposes. Recent Accounting Pronouncements Refer to Note 2 – Summary of Significant Accounting Policies in the accompanying notes to our consolidated financial statements included in this Annual Report on Form 10-K for a discussion of recent accounting pronouncements.