Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.23M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 26K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 26K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 22K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 22K
11: R1 Cover Page HTML 73K
12: R2 Condensed Consolidated Balance Sheets (Unaudited) HTML 155K
13: R3 Condensed Consolidated Balance Sheets (Unaudited) HTML 50K
(Parenthetical)
14: R4 Condensed Consolidated Statements of Operations HTML 134K
(Unaudited)
15: R5 Condensed Consolidated Statements of Comprehensive HTML 43K
Income (Loss) (Unaudited)
16: R6 Condensed Consolidated Statements of Changes in HTML 120K
Redeemable Perpetual Preferred Stock and
Stockholders? Equity (Unaudited)
17: R7 Condensed Consolidated Statements of Cash Flows HTML 142K
(Unaudited)
18: R8 Organization, Business and Out-of-Period HTML 33K
Adjustments
19: R9 Summary of Significant Accounting Policies HTML 40K
20: R10 Inventories HTML 28K
21: R11 Property, Plant and Equipment, Net HTML 39K
22: R12 Goodwill and Other Intangible Assets, Net HTML 60K
23: R13 Income Taxes HTML 28K
24: R14 Debt HTML 49K
25: R15 Redeemable Perpetual Preferred Stock HTML 31K
26: R16 Revenue HTML 46K
27: R17 Earnings Per Share HTML 47K
28: R18 Commitments and Contingencies HTML 52K
29: R19 Fair Value of Financial Instruments HTML 43K
30: R20 Equity-Based Compensation HTML 45K
31: R21 Segment Reporting HTML 47K
32: R22 Pay vs Performance Disclosure HTML 34K
33: R23 Insider Trading Arrangements HTML 45K
34: R24 Summary of Significant Accounting Policies HTML 55K
(Policies)
35: R25 Inventories (Tables) HTML 29K
36: R26 Property, Plant and Equipment, Net (Tables) HTML 38K
37: R27 Goodwill and Other Intangible Assets, Net (Tables) HTML 88K
38: R28 Debt (Tables) HTML 35K
39: R29 Revenue (Tables) HTML 39K
40: R30 Earnings Per Share (Tables) HTML 46K
41: R31 Commitment and Contingencies (Tables) HTML 35K
42: R32 Fair Value of Financial Instruments (Tables) HTML 44K
43: R33 Equity-Based Compensation (Tables) HTML 42K
44: R34 Segment Reporting (Tables) HTML 43K
45: R35 Organization, Business and Out-of-Period HTML 119K
Adjustments (Details)
46: R36 Summary of Significant Accounting Policies HTML 45K
(Details)
47: R37 Inventories (Details) HTML 27K
48: R38 Property, Plant and Equipment, Net - Summary of HTML 56K
Property, Plant and Equipment (Details)
49: R39 Property, Plant and Equipment, Net - Narrative HTML 28K
(Details)
50: R40 Goodwill and Other Intangible Assets, Net - HTML 39K
Schedule of Goodwill (Details)
51: R41 Goodwill and Other Intangible Assets, Net - HTML 48K
Schedule of Other Intangible Assets, Net (Details)
52: R42 Goodwill and Other Intangible Assets, Net - HTML 32K
Narrative (Details)
53: R43 Goodwill and Other Intangible Assets, Net - HTML 37K
Schedule of Future Annual Amortization Expense of
Amortizable Intangible Assets (Details)
54: R44 Income Taxes (Details) HTML 27K
55: R45 Debt - Schedule of Debt (Details) HTML 48K
56: R46 Debt - Narrative (Details) HTML 131K
57: R47 Redeemable Perpetual Preferred Stock (Details) HTML 99K
58: R48 Revenue (Details) HTML 54K
59: R49 Earnings Per Share - Schedule of Earnings Per HTML 70K
Share, Basic and Diluted (Details)
60: R50 Earnings Per Share - Narrative (Details) HTML 26K
61: R51 Commitments and Contingencies - Narrative HTML 39K
(Details)
62: R52 Commitments and Contingencies - Schedule of HTML 34K
Liability Related To Estimated Contingent
Consideration (Details)
63: R53 Fair Value of Financial Instruments - Schedule of HTML 28K
Carrying Values and Estimated Fair Values of Debt
Instruments (Details)
64: R54 Fair Value of Financial Instruments - Schedule of HTML 30K
Activity Related to the Capped Calls (Details)
65: R55 Fair Value of Financial Instruments - Narrative HTML 33K
(Details)
66: R56 Equity-Based Compensation - Narrative (Details) HTML 48K
67: R57 Equity-Based Compensation - Schedule of RSU/PSU HTML 52K
Activity (Details)
68: R58 Equity-Based Compensation - Schedule of HTML 37K
Assumptions (Details)
69: R59 Segment Reporting - Narrative (Details) HTML 26K
70: R60 Segment Reporting - Schedule of Segment Reporting HTML 39K
Information, by Segment (Details)
73: XML IDEA XML File -- Filing Summary XML 133K
71: XML XBRL Instance -- arry-20230930_htm XML 1.31M
72: EXCEL IDEA Workbook of Financial Report Info XLSX 137K
7: EX-101.CAL XBRL Calculations -- arry-20230930_cal XML 180K
8: EX-101.DEF XBRL Definitions -- arry-20230930_def XML 558K
9: EX-101.LAB XBRL Labels -- arry-20230930_lab XML 1.67M
10: EX-101.PRE XBRL Presentations -- arry-20230930_pre XML 999K
6: EX-101.SCH XBRL Schema -- arry-20230930 XSD 140K
74: JSON XBRL Instance as JSON Data -- MetaLinks 489± 722K
75: ZIP XBRL Zipped Folder -- 0001820721-23-000171-xbrl Zip 332K
(Exact Name of Registrant as Specified in its Charter)
iDelaware
i83-2747826
(State
or Other Jurisdiction)
(I.R.S. Employer Identification No.)
i3901 Midway Place NE
iAlbuquerque
iNew
Mexico
i87109
(Address of principal executive offices)
(Zip Code)
(Registrant’s telephone number, including area code)
i(505)
i881-7567
(Former name, former address and former fiscal year, if changed since last report)N/A
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
stock, $0.001 par value
iARRY
iNasdaq Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ iYes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit such files). ☒ iYes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and "emerging
growth company" in Rule 12b-2 of the Exchange Act.
iLarge accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller
reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes i☒ No
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
As of November 3, 2023, there were i151,216,480 shares of common stock, par value $0.001 per share, issued and outstanding.
Series A Redeemable Perpetual Preferred Stock of $ii0.001/
par value - ii500,000/ authorized; i425,956
and i406,389 shares issued as of September 30, 2023 and December 31, 2022, respectively; liquidation preference of $i493.1 million and
$i493.1 million at respective dates
i337,929
i299,570
Stockholders’
equity:
Preferred stock of $ii0.001/
par value - ii4,500,000/ shares authorized; iinone/
issued at respective dates
i—
i—
Common stock
of $ii0.001/ par value - ii1,000,000,000/
shares authorized; i151,071,429 and i150,513,104 shares issued at respective dates
i151
i150
Additional
paid-in capital
i407,916
i383,176
Accumulated
deficit
(i153,316)
(i267,470)
Accumulated
other comprehensive income
i23,714
i8,425
Total
stockholders’ equity
i278,465
i124,281
Total liabilities, redeemable
perpetual preferred stock and stockholders’ equity
$
i1,778,757
$
i1,706,052
See
accompanying Notes to Condensed Consolidated Financial Statements.
2
Array Technologies, Inc.
Condensed Consolidated Statements of Operations (unaudited)
Net
cash provided by (used in) financing activities
(i84,442)
i33,146
Effect
of exchange rate changes on cash and cash equivalent balances
(i1,808)
(i1,555)
Net
change in cash and cash equivalents
i40,109
(i304,892)
Cash
and cash equivalents, beginning of period
i133,901
i367,670
Cash
and cash equivalents, end of period
$
i174,010
$
i62,778
Supplemental
Cash Flow Information
Cash paid for interest
$
i36,136
$
i22,226
Cash
paid for income taxes (net of refunds)
$
i36,797
$
i1,189
Non-cash
Investing and Financing Activities
Dividends accrued on Series A Preferred
$
i19,567
$
i—
Stock
consideration paid for acquisition of STI
$
i—
$
i200,224
See
accompanying Notes to Condensed Consolidated Financial Statements.
11
Array Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1.iOrganization,
Business and Out-of-Period Adjustments
Array Technologies, Inc. (the “Company”), formerly ATI Intermediate Holdings, LLC, is a Delaware corporation formed in December 2018 as a wholly owned subsidiary of ATI Investment Parent, LLC (“Former Parent”). On October 14, 2020, the Company converted from a Delaware limited liability company to a Delaware corporation and changed the Company’s name to Array Technologies, Inc. The Company is headquartered in Albuquerque, New Mexico, and manufactures and supplies solar tracking systems and related products for customers
across the United States and internationally. The Company, through its wholly-owned subsidiary, ATI Investment Sub, Inc., owns subsidiaries through which it conducts substantially all operations.
Acquisition of STI Norland
On January 11, 2022, the Company acquired i100%
of the share capital of Soluciones Técnicas Integrales Norland, S.L.U., a Spanish private limited liability Company, and its subsidiaries (collectively, “STI”) with cash and common stock of the Company (the “STI Acquisition”). The STI Acquisition was accounted for as a business combination.
Upon completion of the STI Acquisition, the Company began operating as iitwo/
reportable operating segments: the Array legacy operating segment (the “Array Legacy Operations”) and the newly acquired operations (the “STI Operations”) pertaining to STI.
Out-of-Period Adjustment for the Correction of Errors
During the first quarter of fiscal year 2023, the Company identified certain errors in its previously issued financial statements that have been corrected through a cumulative out-of-period adjustment in the condensed consolidated financial statements as of and for the three months ended March 31, 2023. The Company has concluded that the errors are not material to the previously issued
financial statements and the cumulative out-of-period adjustment for the correction of these errors is not material to the financial statements for the three months ended March 31, 2023. Below is a summary of each of the errors corrected and a summary of the cumulative impact.
Capped Calls
As discussed in Note 10 – Debt of the Company’s consolidated financial statements for the fiscal year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March
22, 2023, in November 2021 the Company paid $i52.9 million to enter into capped call option agreements (the “Capped Calls”) to reduce the potential dilution to holders of the Company’s common stock after a conversion of the Company’s Convertible Notes (as defined below). The
Company originally concluded that the Capped Calls met the criteria for equity classification because the Capped Calls are indexed to the Company’s common stock, and the Company has discretion to settle the Capped Calls in shares or cash. As a result, the Company originally recorded the amount paid for the Capped Calls as a reduction to additional paid-in capital of $i52.9
million, offset by $i12.4 million of income taxes.
When the Company entered into the Capped Calls, the Company executed certain side letters (the “Side Letters”) with the counterparties that replaced some of the terms described in the primary contract including the volatility inputs used
to value the Capped Calls under certain circumstances. Upon further evaluation, the Company has concluded that the modification to the volatility inputs precludes the Capped Calls from being
12
Array Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
indexed to its own stock because there is the possibility that the Capped Calls will settle at an amount that exceeds fair value and, therefore, prevents the Capped Calls from being classified as equity.
In addition, the Side Letters also provide
for certain adjustments to settlement amounts on the basis of holder-specific taxes which are impermissible inputs to the valuation that also prevents the Capped Calls from being indexed to the Company’s own stock, and therefore, prevents the Capped Calls from being classified as equity. As a result, for the three months ended March 31, 2023, the Company has concluded that the cash paid for the Capped Calls should have been recorded as an asset of $i52.9
million with the asset being subsequently marked to market at the end of each accounting period.
Additional Closing Purchased Put Option
As discussed in Note 11 – Redeemable Perpetual Preferred Stock, of the Company’s consolidated financial statements for the fiscal year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 22, 2023, in August 2021 the Company entered into a Securities Purchase Agreement (the “SPA”) with certain
Purchasers (as defined below), which gives the Company the option to require the Purchasers to purchase up to an additional i150,000 shares of Series A Shares (as defined below) and up to i3,375,000
shares of common stock for $i148.0 million until June 30, 2023 (the “Put Option”), which has expired. Upon issuance of the Put Option, the Company recorded a reduction to additional paid-in-capital of approximately $i12.4
million because the Company originally concluded that the Put Option should be classified as equity.
During the first quarter of 2023, the Company reconsidered the provisions of this option. Because the Series A Shares underlying the Put Option could potentially require redemption under the Certificate of Designations governing the Series A Shares, the Put Option should not have been equity classified. As a result, during the three months ended March 31, 2023, the Company has concluded that the value of the Put Option at inception should have been recorded as an asset of $i12.4
million, with the asset being subsequently marked to market at the end of each accounting period.
Correction of the Capped Calls and Put Option
The adjustments to correct the Capped Calls and the Put Option at January 1, 2023 resulted in an increase in Derivative assets of $i55.7 million, a decrease in Deferred income tax assets of $i11.0
million, an increase in additional paid-in-capital of $i52.9 million, and a decrease in net income of $i8.1 million.
Goodwill
In connection with
the acquisition of STI, the Company had understated goodwill by $ii2.0/ million and overstated
inventory by the same amount that was sold during fiscal 2022. The Company corrected the goodwill balance during the first quarter of fiscal year 2023, resulting in an increase in goodwill and a decrease in cost of goods sold.
2. iSummary of Significant Accounting Policies
i
Basis
of Accounting and Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), pursuant to the rules and regulations of the SEC. The unaudited interim financial
13
statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of results for the interim periods reported. The results for the three and nine months ended September
30, 2023, are not necessarily indicative of results to be expected for the year ending December 31, 2023, or any other interim periods, or any future year or period. The balance sheet as of December 31, 2022, included herein was derived from the audited financial statements as of that date. Certain disclosures have been condensed or omitted from the interim financial statements. These financial statements should be read in conjunction with the Company’s audited financial statements included in the 2022 Annual Report.
Unless expressly stated or the context otherwise requires, the terms “the Company”, “we”,
“us”, “our”, “Array”, and “Array Technologies” refer to Array Technologies, Inc. and its consolidated subsidiaries, and the term “condensed consolidated financial statements” refers to the accompanying unaudited condensed consolidated financial statements contained in this Quarterly Report.
iReclassifications
Beginning in the third quarter of 2023, the
Company reclassified amounts recorded for amortization of certain acquired intangible assets in prior presentations from Total operating expenses under the caption "Depreciation and amortization" to Total cost of revenue under the caption "Amortization of developed technology" in the condensed consolidated statements of operations. The Company believes this presentation enhances the comparability of the Company’s financial statements to industry peers.
These reclassifications resulted in $i3.6
million and $i10.9 million recorded to Amortization of developed technology within Total cost of revenue and a $i3.6 million and $i10.9
million decrease to Depreciation and amortization within Total operating expenses during the three and nine months ended September 30, 2022, respectively.
These reclassifications did not impact the Company’s operating income (loss), net income (loss) or earnings (loss) per share for any current or historical periods. These reclassifications also did not impact the condensed consolidated balance sheets or condensed consolidated statements of cash flows.
Beginning in the third quarter of 2023, revenue excludes a $ii20.1/
million Brazil value-added tax benefit, Imposto sobre Circulação de Mercadorias e Servicos (“ICMS”), that has been reclassified and included in cost of revenues in the current year. This reclassification was determined to be appropriate after we evaluated the expected accounting treatment related to future governmental incentives under the Inflation Reduction Act. For the nine months ended September 30, 2022, an ICMS benefit of $ii8.2/
million was included in revenues.
This reclassification had no impact on the Company’s gross profit, income (loss) from operations, net income or income (loss) per common share in the current period. These reclassifications also did not impact the condensed consolidated balance sheets or condensed consolidated statements of cash flows.
i
Principles of Consolidation
The condensed consolidated financial statements
include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated upon consolidation.
14
i
Use of Estimates
The preparation of condensed consolidated 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 and the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from previously estimated amounts, and such differences may be material to the condensed consolidated financial statements; however, management believes that these estimates and assumptions provide a reasonable basis for the fair presentation of the consolidated financial statements. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period they occur.
i
Impact
of the Ongoing Russian-Ukraine Conflict
The ongoing Russian-Ukraine conflict 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 the ultimate severity or duration of the 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.
Inflation
Inflationary pressures are expected to persist, at least in the near-term, and may negatively impact our results of operations. 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.
i
Business Combinations
The Company accounts for its business acquisitions under the acquisition method of accounting in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 805 Business Combinations (“ASC 805”). The excess of the purchase price over the
estimated fair values of the net assets acquired is recorded as goodwill. 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.
i
Foreign Currency Translation Exposure
The functional currencies of certain of our foreign
subsidiaries are their local currencies. Accordingly, we apply period-end exchange rates to translate their assets and liabilities, historical exchange rates to translate their retained earnings, and average exchange rates prevailing during the period to translate their revenues, expenses, gains, and losses into U.S. dollars. We include the associated translation adjustments as a separate component of “Accumulated other comprehensive income (loss)” within stockholders’ equity.
Certain of our foreign subsidiaries have local currencies that are different than the subsidiaries functional currencies. When translating from
the local currency to the functional currency, monetary assets and liabilities are translated at the current exchange rate resulting in foreign exchange gains or losses, and non-monetary assets are translated at historical exchange rates. Changes in the exchange rates between the functional
15
currencies of our subsidiaries and the currencies in which monetary financial assets and liabilities are denominated, will create fluctuations in our reported condensed consolidated statements of operations and cash flows.
iDerivative
Financial Instruments
Both the Capped Call and the Put Option are accounted for as assets that are recorded at fair value within Derivative assets on the condensed consolidated balance sheets. The changes in fair value to Derivative assets are recorded within change in fair value of derivative assets on the Condensed Consolidated Statements of Operations. See Note 1 – Organization, Business and Out-of-Period Adjustments, for further information. As of June 30, 2023, the Put Option has expired and as a result, the fair value of the Put Option is $i0.
i
Recent
Accounting Pronouncements
In March 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, to provide entities with relief during the transition period by deferring the effective date of reference rate reform from
December 31, 2022 to December 31, 2024. ASU 2022-06 is effective upon issuance. During the three months ended March 31, 2023, the Company adopted ASU 2020-04 and ASU 2022-06. Simultaneously, the Company elected to apply the debt accounting optional expedient, under which the reporting entity will account for amendments to debt agreements, which sole intent are the replacement of a discontinued reference rate(s), as being not substantial and thus a continuation of the existing contract. There was no significant impact
to the Company’s condensed consolidated financial statements related to the adoption of ASU 2020-04 and ASU 2022-06. The Company continues to evaluate the impact of the ASU 2020-04 guidance and may apply other elections, as applicable, as additional changes in the market occur.
In March 2023, the Company amended an existing debt agreement to replace the London Interbank Offered Rate (“LIBOR”) interest rate provisions with interest rate provisions based on a forward-looking term rate based on the secured overnight funding rate (“SOFR”) (see Note
7 – Debt). There were no other changes to the agreement. There was no significant impact to the Company’s condensed consolidated financial statements.
3.iInventories
i
Inventories
consisted of the following (in thousands):
Depreciation
expense was $i0.9 million and $i0.7 million for the three months ended September 30, 2023 and 2022, respectively, of which $ii0.4/ million
was included in cost of revenue in both periods and $i0.5 million and $i0.3 million, respectively, was included in depreciation and amortization, on the accompanying condensed consolidated statements of operations.
Depreciation
expense was $i2.4 million and $i1.9 million for the nine months ended September 30, 2023 and 2022, respectively, of which $i1.0 million
and $i1.2 million, respectively, was included in cost of revenue and $i1.4 million and $i0.6 million,
respectively, was included in depreciation and amortization on the accompanying condensed consolidated statements of operations.
5. iGoodwill and Other Intangible Assets, Net
Goodwill
i
Changes
in the carrying amount of goodwill by operating segment during the nine months ended September 30, 2023, consisted of the following (in thousands):
Array Legacy Operations(1)
STI Operations
Total
Beginning
balance
$
i69,727
$
i346,457
$
i416,184
Adjustment
to goodwill (see Note 1)
i—
i2,000
i2,000
Foreign
currency translation
i—
i8,357
i8,357
Ending
balance
$
i69,727
$
i356,814
$
i426,541
(1)
Goodwill attributable to Array Legacy Operations is net of impairment of $i51.9 million.
/
Each quarter the Company evaluates if facts and circumstances indicate that it is more-likely-than-not that the fair value of its reporting units is less than their carrying value, which would require the
Company to perform an interim goodwill impairment test. During our most recent evaluation, we concluded there were no indicators of impairment as of September 30, 2023.
17
Other Intangible Assets, Net
ii
Other
intangible assets consisted of the following (in thousands, except useful lives):
Amortization
expense related to intangible assets was $i12.6 million and $i24.6 million for the three months ended September 30, 2023 and 2022, respectively,
of which $ii3.6/ million was included in amortization of developed technology,
a component of cost of revenue, in both periods and $i9.0 million and $i21.0 million, respectively, was included in depreciation and amortization, on the accompanying condensed consolidated statements of operations.
Amortization
expense related to intangible assets was $i38.8 million and $i73.5 million for the nine months ended September 30, 2023 and 2022, respectively, of
which $ii10.9/ million was included in amortization of developed technology,
a component of cost of revenue, in both periods and $i27.9 million and $i62.6 million, respectively, was included in depreciation and amortization, on the accompanying condensed consolidated statements of operations.
18
i
Estimated
future amortization expense of intangible assets as of September 30, 2023, is as follows (in thousands):
Amount
Remainder of 2023
$
i12,384
2024
i49,538
2025
i49,538
2026
i45,232
2027
i40,588
Thereafter
i146,343
$
i343,623
/
Long-lived
assets, including both amortizable and non-amortizable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset group may not be recoverable. As of September 30, 2023, no events or circumstances were noted that would indicate the carrying amount of any of our asset groups may not be recoverable.
6.iIncome
Taxes
The Company follows guidance under ASC Topic 740-270 Income Taxes, which requires that an estimated annual effective tax rate is applied to year-to-date ordinary income (loss). At the end of each interim period, the Company estimates the effective tax rate expected to be applicable for the full fiscal year. The tax effect of discrete items is recorded in the quarter in which the discrete events occur.
The Company recorded income tax expense of $i7.2
million and $i10.0 million for the three months ended September 30, 2023 and 2022, respectively, and an expense of $i39.5 million and a benefit of $i23.2
million for the nine months ended September 30, 2023 and 2022, respectively. The income tax expense for the nine months ended September 30, 2023, was unfavorably impacted by higher income in non-U.S. jurisdictions and an increase in income tax expense related to the Put Option (see Note 1 – Organization, Business and Out-of-Period Adjustments), partially offset by benefits related to excess equity-based compensation deductions recorded discretely. The tax expense for the nine months ended September 30, 2022, was favorably impacted by losses in non-U.S. jurisdictions which have higher tax rates than the U.S., partially offset by non-deductible
expenses.
For the nine months ended September 30, 2023 and 2022, iiiino///
reserves for uncertain tax positions have been recorded. The Company will continue to monitor this position each interim period.
19
7.iDebt
i
The
following table summarizes the Company’s total debt (in thousands):
On October 14, 2020, the Company entered into a credit agreement (as amended, the “Credit Agreement”) governing the Company’s senior secured credit facility, consisting of (i) a $i575 million senior secured i7-year
term loan facility (the “Term Loan Facility”) and (ii) a $i200 million senior secured i5-year revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Secured Credit Facility”). The Credit Agreement was amended on February
23, 2021 (the “First Amendment”), on February 26, 2021 (the “Second Amendment”) and again on March 2, 2023 (the “Third Amendment”). The single purpose of the Third Amendment in March 2023 was to replace the former discontinued Senior Secured Credit Facility reference rate of LIBOR, with the comparable active reference rate, SOFR. There were no other changes as a result of the Third Amendment.
Revolving Credit Facility
Under the Revolving Credit Facility, the Company had iino/
outstanding balance as of both September 30, 2023 and December 31, 2022, $i24.9 million and $i38.8 million in standby letters of
credit at September 30, 2023 and December 31, 2022, respectively, and availability of $i175.1 million and $i161.2
million at September 30, 2023 and December 31, 2022, respectively. In accordance with the Third Amendment, the Revolving Credit Facility pays interest at the Company’s election, at either (x) for SOFR Loans at Adjusted Term SOFR (as defined in the Credit Agreement) plus i3.25% or (y) for Base Rate Loans at the higher of the Prime Rate, one half of i1.00%
above the Federal Funds Rate or the Adjusted Term SOFR for one month interest period, after giving effect to any floor plus i1.00%, plus i2.25%.
Term Loan Facility
The
Term Loan Facility had a balance of $i239.3 million and $i312.5 million as of September 30, 2023 and December 31, 2022, respectively. The balance of
the Term Loan Facility is presented in the accompanying condensed consolidated balance sheets, net of debt discount and issuance costs of $i12.0 million and $i19.1
million as of September 30, 2023 and December 31, 2022, respectively. In accordance with the Third Amendment, the Term Loan Facility pays interest at the Company’s election, at either (x) for SOFR Loans at Adjusted Term SOFR (subject to a floor of i0.50%) plus i3.25%
or (y) for Base Rate Loans at the higher of the
20
Prime Rate, one half of i1.00% above the Federal Funds Rate or the Adjusted Term SOFRfor one-month interest period, after giving effect to any floor plus i1.00%,
plus i2.25%. The debt discount and issuance costs are being amortized using the effective interest method and the effective interest rate of the Term Loan Facility as of September 30, 2023, was i9.95%. The Term
Loan Facility has an annual excess cash flow calculation, for which the prescribed formula did not result in requiring the Company to make an advance principal payment for the year ended December 31, 2022.
Convertible Notes
On December 3, 2021 and December 9, 2021, the Company completed a $i425.0
million private offering ($i375 million and $i50 million, respectively), of its ii1.00/%
Convertible Senior Notes due 2028 (the “Convertible Notes”), resulting in proceeds of $i413.3 million ($i364.7 million and $i48.6
million, respectively), after deducting the original issue discount of ii2.75/%.
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 will mature on December 1, 2028, unless earlier converted, redeemed, or repurchased. The Convertible Notes bear interest at a rate of i1.00%
per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2022. As of September 30, 2023 and December 31, 2022, the principal balance of the Convertible Notes was $ii425.0/ million
with unamortized discount and issuance costs of $i9.8 million and $i11.3 million,
respectively, for a net carrying amount of $i415.2 million and $i413.8 million, respectively.
The conversion rate for the Notes was initially i41.9054
shares of the Company’s common stock per $i1,000 principal amount of Notes, which was equivalent to an initial conversion price of approximately $i23.86 per share of common stock
or i10.1 million shares of common stock. The Convertible Notes were not convertible during the nine months ended September 30, 2023, and none have been converted to date. Also, given that the average market price of the Company’s common stock has not exceeded the exercise price since inception, there was iino/
dilutive impact for the three and nine months ended September 30, 2023.
Capped Calls
In connection with the issuances of the Convertible Notes, the Company paid $i52.9 million, in aggregate, to enter into capped call option agreements to reduce the potential dilution to holders of the
Company’s common stock after a conversion of the Convertible Notes. Specifically, upon the exercise of the Capped Call instruments issued pursuant to the agreements (the “Capped Calls”), the Company would receive shares of its common stock equal to approximately i17.8 million shares (a) multiplied by (i) the lower of $i36.0200
or the then-current market price of its common stock, less (ii) the applicable exercise price, $i23.86, and (b) divided by the then-current market price of its common stock. The results of this formula are that the Company would receive more shares as the market price of its common stock exceeds the exercise price and approaches the cap, which was initially $i36.02
per share.
Consequently, if the Convertible Notes are converted, then the number of shares to be issued by the Company would be effectively partially offset by the shares of common stock received by the Company under the Capped Calls as they are exercised. The formula above would be adjusted in the event of certain specified extraordinary events affecting the Company, including: a merger; a tender offer; nationalization, insolvency or delisting of the Company’s common stock; changes in law; failure to deliver; insolvency filing; stock splits,
combinations, dividends, repurchases or similar events; or an announcement of certain of the preceding actions.
21
The Company can also elect to receive the equivalent value of cash in lieu of shares of common stock upon settlement, except in certain circumstances. The Capped Calls expire on December 1, 2028, and terminate upon the occurrence of certain extraordinary events such as a merger, tender offer, nationalization, insolvency, delisting, event of default, a change in law, failure to deliver, an announcement of certain of these events, or an early conversion of the Convertible Notes. Although
intended to reduce the net number of shares of common stock issued after a conversion of the Convertible Notes, the Capped Calls were separately negotiated transactions, are not a part of the terms of the Convertible Notes, and do not affect the rights of the holders of the Convertible Notes. See Note 2 – Summary of Significant Accounting Policies for information regarding the accounting for the Capped Calls.
Other Debt
Other debt consists of the debt obligations of STI. Interest rates on other debt range from i0.55%
to i4.41% annually. Of the $i55.3 million other debt balance, approximately $i45.3
million is denominated in Euros and $i10.0 million is denominated in Brazilian Real.
8.iRedeemable
Perpetual Preferred Stock
Series A Redeemable Perpetual Preferred Stock
The Company entered into a Securities Purchase Agreement (the “SPA”) with certain investors (the “Purchasers”) pursuant to which, on August 11, 2021, the Company issued i350,000
shares of its newly designated Series A Redeemable Perpetual Preferred Stock (the “Series A Shares”) and i7,098,765 shares of the Company’s common stock for an aggregate purchase price of $i346.0
million (the “Initial Closing”). Further, pursuant to the SPA, on September 27, 2021, the Company issued and sold to the Purchasers i776,235 shares of common stock for an aggregate purchase price of $i0.01
million (the “Prepaid Forward Contract”). The Company used the net proceeds from the initial Closing to repay the $i102.0 million outstanding balance under its existing Revolving Credit Facility and prepay $i100.0
million of the Company’s Term Loan Facility. The Series A Shares have no maturity date.
The Put Option included in the SPA required the Purchasers to purchase up to an additional i150,000 shares of Series A Shares and up to i3,375,000
shares of common stock (or up to i6,100,000 shares of common stock in the event of certain price-related adjustments) until June 30, 2023, 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 $i148.0
million (the “Delayed Draw Commitment” or the “Put Option”). The Put Option expired effective June 30, 2023.
On January 7, 2022, pursuant to the Put Option, the Company issued and sold to the Purchasers i50,000 shares of Series A Shares and i1,125,000
shares of the Company’s common stock in an additional closing for an aggregate purchase price of $i49.4 million (the “Additional Closing”).
The Company has classified the Series A Shares as 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 $i18.8 million and $i17.2 million for the nine months ended September 30, 2023 and 2022,
respectively. Refer to Note 2 – Summary of Significant Accounting Policies for information regarding the accounting for the Put Option.
22
Dividends
On or prior to the fifth anniversary of the Initial Closing, the Company may pay dividends on the Series A Shares either in (i) cash at the then-applicable Cash Regular Dividend Rate (as defined below), (ii) through accrual to the Liquidation Preference at the Accrued Regular Dividend Rate of i6.25%
(the “Permitted Accrued Dividends”), or (iii) a combination thereof. Following the fifth anniversary of the Initial Closing, dividends are payable only in cash. To the extent the Company does not declare such dividends and pay in cash following the fifth anniversary of the Initial Closing, the dividends accrue to the Liquidation Preference (“Default Accrued Dividends”) at the then-applicable Cash Regular Dividend Rate plus i200 basis points. In the event there are Default Accrued Dividends outstanding for six consecutive
quarters, the Company, at the option of the holders of the Series A Shares, will pay i100% of the amount of Default Accrued Dividends by delivering to such holder a number of shares of the Company’s common stock equal to the quotient of (i) the amount of Default Accrued Dividends divided by (ii) i95%
of the 30-day VWAP of the Company’s common stock (“Non-Cash Dividend”).
The “Cash Regular Dividend Rate” of the Series A Shares means (i) initially, i5.75% per annum on the Liquidation Preference and (ii) increased by (a) i50
basis points on each of the fifth, sixth and seventh anniversaries of the Initial Closing and (b) i100 basis points on each of the eighth, ninth and tenth anniversaries of the Initial Closing. The “Accrued Regular Dividend Rate” on the Series A Shares means i6.25% per
annum on the Liquidation Preference.
As used herein, “Liquidation Preference” means, with respect to the Series A Shares, the initial liquidation preference of $i1,000 per share, plus accrued dividends of such share at the time of the determination.
During the nine months ended September 30, 2023, the
Company accrued dividends on the Series A Shares at the Accrued Regular Dividend rate of i6.25% totaling $i19.6 million. As of September 30, 2023, total accrued and
unpaid dividends were $i26.0 million.
The Series A Shares have similar characteristics of an “Increasing Rate Security” as described by SEC Staff Accounting Bulletin Topic 5Q, Increasing Rate Preferred Stock. As a result, the discount on Series A Shares is considered an unstated dividend cost that is amortized over the period preceding commencement of the perpetual dividend using the effective interest method, by charging imputed dividend cost against retained
earnings, or additional paid in capital in the absence of retained earnings, and increasing the carrying amount of the Series A Shares by a corresponding amount. Accordingly, the discount is amortized over ifive years using the effective yield method.
Fees
During the six months ended June 30, 2023, the Company paid the Purchasers a per annum cash commitment fee totaling $i1.5
million on the unpurchased portion of Put Option. The Put Option expired effective June 30, 2023.
23
9.iRevenue
The
Company disaggregates its revenue from contracts with customers by sales recorded over time and sales recorded at a point in time. iThe following table presents the Company’s disaggregated revenues (in thousands):
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (“contract assets”), and deferred revenue (“contract liabilities”) on the condensed consolidated balance sheets. The majority of the Company’s contract amounts are billed as work progresses, in accordance with agreed-upon contractual terms, which generally coincide with the shipment of one or more phases of the project. Billing sometimes occurs subsequent to revenue recognition, resulting in contract
assets. The changes in contract assets and the corresponding amounts recorded in revenue relate to fluctuations in the timing and volume of billings.
Contract assets are recorded within accounts receivable, net on the condensed consolidated balance sheets on a contract-by-contract basis and consisted of the following at the end of each reporting period (in thousands):
The
Company also receives advances or deposits from its customers, before revenue is recognized, resulting in contract liabilities. The changes in contract liabilities relate to advanced orders and payments received by the Company.
Contract liabilities are recorded on a contract-by-contract basis and consisted of the following at the end of each
reporting period (in thousands):
During
the nine months ended September 30, 2023, the Company converted $i153.9 million in deferred revenue to revenue, which represented i86%
of the prior year’s deferred revenue balance.
Bill-and-Hold Arrangements
Revenue recognized for the Company’s federal investment tax credit (“ITC”) contracts and standalone system component sales is recorded at a point in time and recognized when obligations under the terms of the contract with the Company’s 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.
24
In
certain situations, the Company recognizes revenue under a bill-and-hold arrangement with its customers. An example of such a situation is when customers purchase material prior to the start of construction of a solar project in order to meet the Five Percent Safe Harbor test to qualify for the ITC. Because the customers lack sufficient storage capacity to accept a large amount of material prior to the start of construction, they request that the Company keep the product in its custody. All bill-and-hold inventory is bundled or palletized in the Company’s warehouses, separately identified as not belonging to the Company and ready
for immediate transport to the customer project upon request. Additionally, title and risk of loss has passed to the customer and the Company does not have the ability to use the product or direct it to another customer. During the three and nine months ended September 30, 2023, the Company recognized izero and $i22.8
million, respectively, in revenue from a single customer for the sale of goods and services that also contained bill-and-hold obligations such as storage, handling and other custodial duties.
Remaining Performance Obligations
As of September 30, 2023, the Company had $i336.2 million of remaining performance obligations. The
Company expects to recognize revenue on i100% of these performance obligations in the next itwelve months.
10. iEarnings
Per Share
i
The following table sets forth the computation of basic and diluted income (loss) per share (in thousands, except per share amounts):
Potentially
dilutive common shares issuable pursuant to equity-based awards of i108,111 were not included for the nine months ended September 30, 2022, as their potential effect was anti-dilutive given the Company generated a net loss to common shareholders.
There were iino/
potentially dilutive common shares issuable pursuant to the Convertible Notes for both the nine months ended September 30, 2023 and 2022, as the average market price of the Company’s common stock has not exceeded the exercise price since their issuance.
25
11.iCommitments
and Contingencies
Legal Proceedings
The Company, in the normal course of business, is subject to claims and litigation. The Company reviews the status of each matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Company would accrue a liability for the estimated loss.
On August 30, 2017, the
Company filed its first amended complaint in the U.S. District Court for the District of New Mexico against Nextracker LLC, Daniel S. Shugar, Marco Garcia, Flextronics International U.S.A., Inc., Scott Graybeal and Colin Mitchell (collectively, the “Defendants”) asserting (among other claims) trade secret misappropriation, tortious interference with contract, fraud, and breach of contract (the “Nextracker Litigation”). On July 15, 2022, the Company settled its claims against Defendants for $i42.8 million
and received payment on August 4, 2022.
On May 14, 2021, a putative class action was filed in the U.S. District Court for the Southern District of New York (the “Southern District of New York” or the “Court”) against the Company and certain officers and directors alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, promulgated thereunder, and Sections 11, 12(a)(2) and 15 of the Securities Exchange Act of 1933 (“Plymouth Action”). The Plymouth Action alleges misstatements and/or omissions in the Company’s registration statements and prospectuses
related to the Company’s October 2020 initial public offering (“IPO”), the Company’s December 2020 offering (the “2020 Follow-On Offering”), and the Company’s March 2021 offering (the “2021 Follow-On Offering”) during the putative class period of October 14, 2020 through May 11, 2021.
On June 30, 2021, a second putative class action was filed in the Southern District of New York against the
Company and certain officers and directors alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, promulgated thereunder, and Sections 11 and 15 of the Securities Exchange Act of 1933 (“Keippel Action”). The Keippel Action similarly alleged misstatements and/or omissions in certain of the Company’s registration statements and prospectuses related to the Company’s IPO, the Company’s 2020 Follow-On Offering, and the Company’s 2021 Follow-On Offering during the putative class period of October 14, 2020 through May
11, 2021. On July 6, 2021, the Court entered an order that the Keippel Action was in all material respects substantially similar to the Plymouth Action that both actions arise out of the same or similar operative facts, and that the parties are substantially the same parties. The Court accordingly consolidated the Keippel Action with the Plymouth Action for all pretrial purposes and, ordered all filings to be made in the Plymouth Action.
On July 16, 2021, a verified derivative complaint was filed in the Southern District of New York against certain officers and directors of the Company (“First SDNY Derivative Action”). The complaint alleges: (1) violations of Section 14(a) of the Securities Exchange
Act of 1934 for misleading proxy statements, (2) breach of fiduciary duty, (3) unjust enrichment, (4) abuse of control, (5) gross mismanagement, (6) corporate waste, (7) aiding and abetting breach of fiduciary duty, and (8) contribution under sections 10(b) and 21D of the Securities Exchange Act of 1934.
On July 30, 2021, a second and related verified derivative complaint was filed in the Southern District of New York against certain officers and directors of the Company (“Second SDNY Derivative Action”). The complaint alleges: (1) violations of Section 14(a) of the Securities Exchange Act of 1934 for causing the issuance of a
26
false/misleading
proxy statement, (2) breach of fiduciary duty, and (3) aiding and abetting breaches of fiduciary duty. On August 24, 2021, the Second SDNY Derivative Action was consolidated with the First SDNY Derivative Action (the “Consolidated SDNY Derivative Action”), the Court appointed co-lead counsel, and the case was temporarily stayed pending the entry of an order on all motions to dismiss directed at the pleadings filed in the Plymouth Action. The stay shall remain in effect until the later of (a) the entry of an order on any motions to dismiss the Plymouth Action or, (b) to the extent the complaint in the Plymouth Action is amended, the entry of an order on any motions to dismiss any such amended complaints in the Plymouth Action.
On September 21, 2021, the Court in the Plymouth Action appointed
a group comprised of institutional investors Plymouth County Retirement Association and Carpenters Pension Trust Fund for Northern California as lead plaintiffs.
On December 7, 2021, an amended class action complaint was filed by lead plaintiffs in the Plymouth Action against the Company and certain officers and directors alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, promulgated thereunder, and Sections 11, 12(a)(2), and 15 of the Securities Exchange Act of 1933, on behalf of a putative class of persons and entities that purchased or otherwise acquired the Company’s securities during the period from October
14, 2020 through May 11, 2021 (the “Consolidated Amended Complaint”). The Consolidated Amended Complaint alleges misstatements and/or omissions in: (1) certain of the Company’s registration statements and prospectuses related to the Company’s IPO, the Company’s 2020 Follow-On Offering, and the Company’s 2021 Follow-On Offering; (2) in the Company’s Annual Report on Form 10-K and associated press
release announcing results for the fourth quarter and full fiscal year 2020; and (3) in the Company’s November 5, 2020 and March 9, 2021 earnings calls.
On October 17, 2022, the Company and other defendants in the Plymouth Action filed a joint motion to dismiss (the “Motion to Dismiss”) the Consolidated Amended Complaint. The lead plaintiff filed a motion opposing the Motion to Dismiss on December 16, 2022, and the Company and other
defendants filed a reply in support of the motion to dismiss on January 17, 2023.
On May 19, 2023, the Court in the Plymouth Action granted the Company’s Motion to Dismiss. On July 5, 2023, the Court denied the lead plaintiffs’ request for leave to amend the Consolidated Amended Complaint and dismissed the Plymouth Action with prejudice.
On August 4, 2023, the lead plaintiffs filed a notice of appeal of the Court’s dismissal of the Consolidated Amended Complaint (the “Second Circuit Appeal”).
On
September 11, 2023, pursuant to a scheduling request filed by lead plaintiffs, the United States Court of Appeals for the Second Circuit ordered lead plaintiffs to file their opening brief in the Second Circuit Appeal by November 17, 2023.
On August 3, 2022, a verified derivative complaint was filed in the Court of Chancery of the State of Delaware (the “Court of Chancery”) against certain officers and directors of the Company, asserting claims for: (1) breach of fiduciary duty and (2) unjust enrichment (“First Delaware Derivative Action”).
On August
11, 2022, a second verified derivative complaint was filed against certain officers and directors of the Company Court of Chancery, asserting claims for: (1) breach of fiduciary duty; (2) aiding and abetting
27
breaches of fiduciary duty; (3) waste of corporate assets; (4) unjust enrichment; (5) insider selling; and (6) aiding and abetting insider selling (“Second Delaware Derivative Action”).
On September 2, 2022, the Second Delaware Derivative Action was consolidated with the First Delaware Derivative Action (the “Consolidated Delaware Derivative
Action”), the Court of Chancery appointed co-lead counsel, and the case was temporarily stayed pending the entry of an order on all motions to dismiss directed at the pleadings filed in the Plymouth Action. The stay shall remain in effect until the later of (a) the entry of an order on the pending motion to dismiss the Consolidated Amended Complaint in the Plymouth Action, (b) to the extent the Consolidated Amended Complaint in the Plymouth Action is further amended, the entry of an order on any motions to dismiss any such amended complaints in the Plymouth Action, or (c) the public announcement of a settlement of the Plymouth Action.
The stays in both the Consolidated SDNY Derivative Action and the Consolidated Delaware Derivative Action remain in place following the dismissal of the Plymouth Action during the pendency of the Second Circuit Appeal.
At
this time the Company believes that the likelihood of any material loss related to these matters is remote given the preliminary stage of the claims and strength of the Company’s defenses. The Company has not recorded any material loss contingency in the condensed consolidated balance sheets as of September 30, 2023.
Contingent Consideration
Tax Receivable Agreement
Concurrent with the Former Parent’s acquisition of Array Technologies Patent Holdings Co., LLC on July
8, 2016, the Company’s operating subsidiary, Array Tech, Inc. (f/k/a Array Technologies, Inc.), entered into a Tax Receivable Agreement (the “TRA”) with the former majority shareholder of Array. The TRA is valued based on the future expected payments under the agreement. The TRA provides for the payment by Array Tech, Inc., to the former owners 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 TRA is accounted for as contingent consideration and subsequent changes in fair value of the contingent liability are recognized in contingent consideration on the condensed consolidated statements of operations. As of September 30, 2023 and December
31, 2022, the fair value of the TRA was $i9.6 million and $i8.6 million, respectively.
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 the former owners 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.
Payments made under the TRA consider tax positions taken by the Company and are due within i125 days following the filing of
the Company’s U.S. federal and state income tax returns under procedures described in the agreement. The current portion of the TRA liability is based on tax returns. The TRA will continue until all tax benefit payments have been made or the Company elects early termination under the terms described in the TRA.
28
i
The
following table summarizes the activity related to the estimated TRA liability (in thousands):
The
TRA liability requires significant judgment and is classified as Level 3 in the fair value hierarchy.
Surety Bonds
As of September 30, 2023, the Company posted surety bonds in the total amount of $i217.6 million. The Company is required to provide surety bonds to various parties
as required for certain transactions initiated during the ordinary course of business to guarantee the Company’s performance in accordance with contractual or legal obligations. These off-balance sheet arrangements do not adversely impact the Company’s liquidity or capital resources.
12. iFair
Value of Financial Instruments
i
The carrying values and estimated fair values of the Company’s debt financial instruments were as follows (in thousands):
The
fair value of the Convertible Notes is estimated using Level 2 inputs, as they are not registered securities nor listed on any securities exchange but may be traded by qualified institutional buyers.
i
The following table summarizes the activity related to the Capped Calls (in thousands):
The
Capped Calls are valued using a Black-Scholes model, with the most judgmental unobservable input being the volatility measure. The value of the Capped Call is determined using unobservable inputs and is considered to be a Level 3 value in the fair value hierarchy.
29
The fair value of the Term Loans and Other Debt is estimated using Level 2 inputs. The carrying values of the Term Loans outstanding under the Senior Secured Credit facility recorded in the condensed consolidated balance sheets approximate fair value due to the variable nature of the interest rates.
Other Debt totaling $i55.3 million,
consists of $i40.0 million variable rate obligations and $i15.3 million fixed rate obligations. Of the $i15.3 million
fixed rate obligations, $i3.3 million mature in 2023 and $i11.9 million mature in 2024. Due to the relative short-term
maturity of the fixed rate obligations, the Company believes current carrying value approximates fair value. The carrying value of the $i40.0 million variable rate obligations approximate fair value due to the variable nature of the interest rates.
13.iEquity-Based
Compensation
2020 Equity Incentive Plan
On October 14, 2020, the Company’s 2020 Equity Incentive Plan (the “2020 Plan”) became effective. The 2020 Plan authorized i6,683,919 new shares, subject to adjustments
pursuant to the 2020 Plan.
Restricted Stock Units
Pursuant to the 2020 Plan, the Company grants restricted stock units (“RSUs”) to employees and members of the Company’s board of directors. The fair value of the RSUs is determined using the market value of the Company’s common stock on the grant date.
i
RSU
activity under the 2020 Plan during the nine months ended September 30, 2023, was as follows:
The Company has granted performance stock units (“PSUs”) to certain employees. The PSUs cliff vest after ithree years and upon meeting certain revenue and adjusted EPS targets. The PSUs also contain a modifier based on the total stock return (“TSR”) compared to a certain index which modifies the number of PSUs that vest. The PSUs were valued using a Monte-Carlo simulation method on the date of grant based on the
U.S. Treasury Constant Maturity rates. The following assumptions were used in the Monte Carlo simulation for computing the grant date fair value of the PSUs issued during the nine months ended September 30, 2023 and 2022:
2023
2022
Volatility
i90
%
i60
%
Risk-free
interest rate
i3.74
%
i2.83
%
Dividend
yield
i—
%
i—
%
PSU
activity under the 2020 Plan during the nine months ended September 30, 2023, was as follows:
For
the three months ended September 30, 2023 and 2022, the Company recognized $i3.4 million and $i4.2
million, respectively, in equity-based compensation expense. For the nine months ended September 30, 2023 and 2022, the Company recognized $i11.9 million and $i11.7
million, respectively, in equity-based compensation. At September 30, 2023, the Company had $i24.7 million of unrecognized compensation costs related to RSUs and PSUs, which are expected to be recognized over approximately i2.0
years and i2.2 years, respectively.
14 iSegment
Reporting
ASC 280 Segment Reporting establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Historically, the Company managed its business on the basis of iione/
operating and reportable segment. Concurrent with the acquisition of STI in January 2022, the Company began operating as iitwo/
segments; Array Legacy Operations and STI Operations.
i
The following table provides a reconciliation of certain financial information for the Company’s reportable segments to information presented in its condensed consolidated financial statements for the three and nine months ended September 30, 2023 and 2022 (in thousands):
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes and other financial information included in Part I, “Item 1. Financial Statements” of this Quarterly Report on Form 10-Q (this “Quarterly Report”), as well as our audited financial statements and notes thereto as of and for the year ended December 31, 2022 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December
31, 2022 (“2022 Annual Report”). Each of the terms the “Company,”“Array,”“we,” or “us” as used herein refers collectively to Array Technologies, Inc. and its wholly owned subsidiaries, unless otherwise stated. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the sections captioned “Forward-Looking Statements” and “Risk Factors” in this Quarterly Report and our 2022 Annual Report.
This
report contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, technology developments, financing and investment plans, dividend policy, competitive position, industry and regulatory environment, potential growth opportunities and the effects of competition. Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipate,”“believe,”“could,”“estimate,”“expect,”“intend,”“may,”“plan,”“potential,”“predict,”“project,”“seek,”“should,”“will,”“would” or similar expressions and the negatives of those terms.
Forward-looking
statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Given these uncertainties, you should not place undue reliance on forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this report. You should read this report with the understanding that our actual future results may be materially different from what we expect.
Important factors that could cause actual results to differ materially from our expectations include factors in “Summary Risk Factors” and the “Risk Factors” sections of this Quarterly Report. Except as required by law, we assume no obligation to update these forward-looking
statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
Summary Risk Factors
Our business is subject to a number of risks that if realized could materially and adversely affect our business, financial conditions, results of operations, cash flows and access to liquidity. These risks are discussed more fully in the “Risk Factors” section of this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Our principal risks include the following:
•if demand for solar energy projects does not continue to
grow or grows at a slower rate than we anticipate, our business will suffer;
32
•the viability and demand for solar energy are impacted by many factors outside of our control, which makes it difficult to predict our future prospects;
•competitive pressures within our industry may harm our business, revenues, growth rates and market share;
•a loss of one or more of our significant customers, their inability to perform under their contracts, or their default in payment, could harm our business and negatively impact
revenue, results of operations and cash flow;
•a failure to retain key personnel or a failure to attract additional qualified personnel may affect our ability to achieve our anticipated level of growth and adversely affect our business;
•a drop in the price of electricity derived from the utility grid or from alternative energy sources may harm our business, financial condition, results of operations and prospects;
•we have and may continue to face challenges in our ability to consolidate the financial reporting of our acquired foreign subsidiaries;
•defects or performance problems in our products could result
in loss of customers, reputational damage and decreased revenue, and we may face warranty, indemnity and product liability claims arising from defective products;
•we may experience delays, disruptions or quality control problems in our product development operations;
•a further increase in interest rates, or a reduction in the availability of tax equity or project debt capital in the global financial markets could make it difficult for customers to finance the cost of a solar energy system and could reduce the demand for our products;
•changes to tax laws and regulations that are applied adversely to us or our customers could materially adversely affect our business, financial condition, results of operations and prospects;
•existing
electric utility industry policies and regulations, and any subsequent changes, may present technical, regulatory and economic barriers to the purchase and use of solar energy systems, which may significantly reduce demand for our products or harm our ability to compete;
•the interruption of the flow of materials from international vendors could disrupt our supply chain, including as a result of the imposition of additional duties, tariffs and other charges or restrictions on imports and exports;
•changes in the global trade environment, including the imposition of import tariffs or other import restrictions, could adversely affect the amount or timing of our revenues, results of operations or cash flows;
•economic, political and market conditions, including the
Russian-Ukraine conflict, uncertain credit and global financial markets resulting from increasing inflation and interest rates along with recent bank failures, and the COVID-19 pandemic, have had and could continue to have an adverse effect on our business, results of operations and financial condition, including our revenue growth and profitability, which in turn could adversely affect our stock price;
•the reduction, elimination or expiration of government incentives for, or regulations mandating the use of, renewable energy and solar energy specifically could reduce demand for solar energy systems and harm our business;
33
•if we fail to, or incur significant costs
in order to obtain, maintain, protect, defend or enforce, our intellectual property and other proprietary rights, our business and results of operations could be materially harmed;
•significant changes in the cost of raw materials could adversely affect our financial performance;
•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;
•the implementation of the Inflation Reduction Act may not deliver as much growth as we are anticipating, and we may not be able to maximize its benefits; and
•cybersecurity or other data incidents,
including unauthorized disclosure of personal or sensitive data or theft of confidential information could harm our business.
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 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 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 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 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 nine months ended September 30, 2023, we derived 72% and 28% of our revenues from customers in the United States and the rest of the world, respectively. As of September 30, 2023, we had shipped more than 70.0 gigawatts of trackers to customers worldwide, including STI.
Our corporate headquarters are located in Albuquerque, New Mexico. As of September 30, 2023, we had 1,058 full-time employees.
34
Acquisition of STI Norland
On January
11, 2022, the Company completed its acquisition of STI for purchase consideration 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.
STI generates revenue through the design, manufacture and sale of its utility-scale solar tracker systems to customers in global markets that include Spain, Brazil, U.S. and South Africa. The integration of STI provides us the opportunity to accelerate our international expansion and better address rising global demand for utility-scale solar
projects, particularly in developing countries in South America and Africa.
Out-of-Period Adjustment for the Correction of Errors
During the first quarter of fiscal year 2023, the Company identified certain errors in its previously issued financial statements that have been corrected through a cumulative out-of-period adjustment in the condensed consolidated financial statements as of and for the three months ended March 31, 2023. The Company has concluded that the cumulative out-of-period adjustment for the correction of these errors is not material to the financial statements for the three months ended March
31, 2023. A summary of these corrections and a summary of the cumulative impact is provided in Note 1 – Organization, Business and Out-of-Period Adjustments in Part I of this Quarterly Report.
Inflation
Inflationary pressures 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 U.S. Department of Commerce (“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 and/or exporters, are circumventing the Solar 1 Orders and therefore should be subject to the antidumping and countervailing duty liabilities arising from those orders.
As a result of the USDOC’s
investigation, we saw a number of projects in our 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) termination of the emergency declaration by the President. 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. On May 3, 2023, however, the U.S. Senate voted to repeal
President Biden’s emergency declaration. On May 16, President Biden announced that he had vetoed the U.S. Senate’s actions, and the emergency declaration will remain in place until June of 2024.
On August 18, 2023, the USDOC announced the final determinations in the circumvention inquiries of solar cells and modules from China. The USDOC found that certain Chinese producers were shipping solar products through Cambodia, Malaysia, Thailand, and/or Vietnam for minor processing in an attempt to circumvent
35
antidumping and countervailing duties. The final determination affirms the USDOC’s preliminary findings in most respects;
however, pursuant to President Biden’s June 6, 2022 emergency declaration, duties will not be collected on any solar module and cell imports from these four countries until June 2024. The repeal of the President’s emergency declaration, and any affirmative determinations made once the suspension is lifted in any event, would 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.
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, we have 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 Uyghur Forced Labor Prevention Act (“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.
Antidumping and Countervailing Duty Petitions on Aluminum Extrusions
On October 4, 2023, domestic producers filed petitions with the USDOC International Trade Commission, seeking antidumping duties on imports of aluminum extrusions from Colombia, the Dominican Republic, Ecuador, India, Indonesia, Italy, Malaysia, Mexico, China, South Korea, Taiwan, Thailand, Turkey, the United Arab Emirates (UAE) and Vietnam, and countervailing duties on such imports from
China, Indonesia, Mexico and Turkey.
The merchandise subject to this investigation is aluminum extrusions, regardless of form, finishing or fabrication, whether assembled with other parts or unassembled, whether coated, painted, anodized or thermally improved. Certain components in our trackers, including certain clamps, U-joints, and bearing housings are made using extruded aluminum. It is anticipated that the USDOC will set preliminary countervailing duty rates in March of 2024 and preliminary antidumping rates in May of 2024, with the potential to cover materials imported from December 2023 and February 2024 onward, respectively. We cannot currently predict what, if any, impact the USDOC’s investigation will have on the overall future supply of these components. We continue to monitor developments in the investigation and work to mitigate its impact on our
36
supply
chain, but if we are unable to do so, these antidumping and countervailing duties could negatively impact our business, financial condition, and results of operations.
Impact of the Ongoing Russian-Ukraine Conflict
The ongoing Russian-Ukraineconflict 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, 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
In managing our business and assessing financial performance, we supplement the information provided by the financial statements with other operating metrics. These operating metrics are utilized by our management to evaluate our business, measure our performance, identify trends affecting our business and formulate projections. The primary operating metric we use to evaluate our sales performance and to track market acceptance of our products from year to year is megawatts (“MWs”) shipped generally and the change in MW shipped from period to period specifically. MWs are measured for each individual project and calculated based on the expected output of that project 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, while 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
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. Our contractual delivery period for the tracker system and parts can vary from days to several months. Contracts can range in value from hundreds of thousands to tens of millions of dollars.
Our revenue is affected by changes in the volume and ASPs of solar tracking systems purchased by our customers. The quarterly volume and ASP of our systems is driven by the supply of, and demand for, our products, changes in product mix between module type and wattage, geographic mix of our customers, strength of competitors’ product offerings, and
availability of government incentives to the end-users of our products.
Our revenue growth is dependent on continued growth in the amount of solar energy projects installed each year as well as our ability to increase our share of demand in each of the geographies where we compete, 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.
37
Cost of Revenue and Gross Profit
Cost
of revenue for both segments consists primarily of product costs, including purchased components, as well as costs related to shipping, tariffs, customer support, product warranty, personnel and depreciation of test and manufacturing equipment. Personnel costs in cost of revenue includes both direct labor costs as well as costs attributable to any individuals whose activities relate to the transformation of raw materials or component parts into finished goods or the transportation of materials to the customer.
Some of these costs, primarily personnel and depreciation of test and manufacturing equipment, are not directly affected by sales volume. Our product costs are affected by the underlying cost of raw materials, including steel and aluminum; component costs, including electric motors and gearboxes; technological innovation; economies of scale resulting in lower component costs and
improvements in production processes and automation. We do not currently hedge against changes in the price of raw materials.
In addition, cost of revenue includes amortization of developed technology.
Gross profit may vary from quarter to quarter and is primarily affected by our ASPs, product costs, product mix, customer mix, geographical mix, shipping method, warranty costs and seasonality.
Operating Expenses
General and administrative expenses
General and administrative expenses 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. Further, as a relatively new public company, we may incur additional audit, accounting, tax, 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.
Contingent Consideration
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 by our Former Parent, ATI Investment Parent, LLC.
The
TRA liability is recorded at fair value and changes in the fair value are recognized in earnings. The TRA will generally provide for the payment by our operating company, Array Tech, Inc. (f/k/a Array Technologies, Inc.), to Ron P. Corio for certain federal, state, local and non-U.S. tax benefits deemed realized in post-closing taxable periods by Array Tech, Inc. from the use of certain deductions generated by the increase in the tax value of the developed technology. Estimating fair value of the TRA is by nature imprecise. The significant fair value inputs used to estimate the future expected TRA payments to 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.
Depreciation and Amortization
Depreciation
in our operating expense consists of costs associated with property, plant and equipment (“PP&E”) not used in manufacturing of our products. We expect that as we continue to grow both our revenue and our general and administrative personnel, we will require some additional PP&E to support this growth resulting in additional depreciation expense.
38
Amortization of intangibles consists of customer relationships, contractual backlog, and the STI trade name amortized over their expected period of use.
Non-Operating Expenses
Interest Expense
Interest
expense consists of interest and other charges paid in connection with (i) our $575 million senior secured 7-year term loan facility (the “Term Loan Facility”), (ii) our $200 million senior secured 5-year revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Secured Credit Facility”), (iii) our 1.00% Convertible Senior Notes due 2028 (the “Convertible Notes”), and (iv) the Other Debt we assumed in connection with the STI Acquisition.
Income Tax Expense
We are subject to U.S. federal and state and non-U.S. income taxes. As we expand into additional foreign markets, we may be subject to additional foreign tax.
Results
of Operations
The following table sets forth our consolidated statement of operations (dollars in thousands):
Three
Months Ended September 30,
Increase/(Decrease)
Nine Months Ended September 30,
Increase/(Decrease)
2023
2022
$
%
2023
2022
$
%
Revenue
$
350,438
$
515,024
$
(164,586)
(32)
%
$
1,234,936
$
1,235,475
$
(539)
—
%
Cost
of revenue:
Cost of product and service revenue
259,419
434,801
(175,382)
(40)
%
892,696
1,088,719
(196,023)
(18)
%
Amortization
of developed technology
3,640
3,640
—
—
%
10,918
10,918
—
—
%
Total cost
of revenue
263,059
438,441
(175,382)
(40)
%
903,614
1,099,637
(196,023)
(18)
%
Gross profit
87,379
76,583
10,796
14
%
331,322
135,838
195,484
144
%
Operating
expenses:
General and administrative
37,432
38,703
(1,271)
(3)
%
115,825
113,064
2,761
2
%
Change
in fair value of contingent consideration
190
(572)
762
133
%
2,232
(5,981)
8,213
137
%
Depreciation
and amortization
9,552
21,258
(11,706)
(55)
%
29,361
63,237
(33,876)
(54)
%
Total
operating expenses
47,174
59,389
(12,215)
(21)
%
147,418
170,320
(22,902)
(13)
%
39
Income
(loss) from operations
40,205
17,194
23,011
134
%
183,904
(34,482)
218,386
633
%
Other
(expense) income:
Other (expense), net
(446)
(1,092)
646
59
%
(127)
(2,295)
2,168
(94)
%
Interest
income
3,425
778
2,647
(340)
%
6,124
2,371
3,753
158
%
Legal settlement
—
42,750
(42,750)
(100)
%
—
42,750
(42,750)
(100)
%
Foreign
currency gain (loss)
207
(159)
366
230
%
273
1,968
(1,695)
(86)
%
Change in
fair value of derivative assets
116
—
116
100
%
(1,140)
—
(1,140)
(100)
%
Interest
expense
(13,064)
(8,831)
(4,233)
(48)
%
(35,372)
(23,812)
(11,560)
(49)
%
Total
other (expense) income
(9,762)
33,446
(43,208)
(129)
%
(30,242)
20,982
(51,224)
(244)
%
Income
(loss) before taxes
30,443
50,640
(20,197)
(40)
%
153,662
(13,500)
167,162
1238
%
Income
tax expense (benefit)
7,229
9,996
(2,767)
(28)
%
39,508
(23,183)
62,691
270
%
Net
income
$
23,214
$
40,644
$
(17,430)
(43)
%
$
114,154
$
9,683
$
104,471
1079
%
The
following table provides details on our operating results by reportable segment for the respective periods (dollars in thousands):
Consolidated revenue decreased $164.6 million, or 32%, driven primarily by a decrease in both Array Legacy Operations of 39% and STI Operations of 8%.
40
The decrease in revenue in Array Legacy Operations was driven by a 33% reduction in the number of MWs shipped due to project delays from our customers, as well as a 9% reduction in ASP due to lower input costs for materials and logistics.
The
decrease in revenue in STI Operations was driven by a decrease in the number of megawatts shipped, most notably in the Brazil region, which offset lower ASP due to a smaller percentage of construction services being offered.
Cost of Revenue and Gross Profit
Consolidated cost of revenue decreased by $175.4 million, or 40%, driven primarily by a reduction in revenue combined with lower input costs.
Consolidated gross profit increased by $10.8 million, or 14%. As a percentage of revenue, consolidated gross profit increased to 25% for the three months ended September 30, 2023, as compared to 15% during the same period in the prior year. Both operating segments had increases in gross profit as a percent of revenue.
Array
Legacy Operations gross profit decreased by $2.0 million, or 3%. As a percentage of revenue, gross profit increased to 24% from 15% for the three months ended September 30, 2023 and 2022, respectively. The increase in gross profit as a percent of revenue was driven by an improvement in pass through pricing to customers, in addition to cost savings due to improved raw materials pricing and lower logistics rates, as well as a higher proportion of higher margin non-tracker revenue.
STI Operations gross profit increased by $12.8 million, or 79%. As a percentage of revenue, gross profit for STI Operations increased to 28% from 14% for the three months ended September 30, 2023 and 2022, respectively,
driven primarily by improved pass through pricing, cost savings opportunities on raw materials and a reduced impact of lower margin construction related services provided.
Operating Expenses:
General and Administrative
Consolidated general and administrative expenses decreased by $1.3 million, or 3%. In the third quarter of 2022, the Company incurred $4.9 million in professional fees related to the STI acquisition for which there were no comparable expenses in the current year. Excluding those fees, expense was up primarily due to an increase in payroll and related costs, driven by an increase in headcount.
Contingent Consideration
Consolidated
contingent consideration expense increased by $0.8 million, or 133%, as a result of the increased valuation of the TRA liability.
Depreciation and Amortization
Consolidated depreciation and amortization decreased by $11.7 million or 55%, due to the decrease in the amortization of intangibles of $12.0 million, as the backlog purchased as part of the STI Acquisition had a one-year life and was fully amortized in the first quarter of 2023.
Interest Expense
Consolidated interest expense increased by $4.2 million, or 48%, primarily due to increased variable interest rates charged on our Term Loan Facility as well as the acceleration of $2.5 million of non-cash interest expense related to an unscheduled principal payment
made against the outstanding Term Loan balance.
41
We expect interest expense to be higher for the remainder of 2023 compared to 2022 as a result of continued higher variable interest rates.
Income Tax Expense (Benefit)
Consolidated income tax decreased by $2.8 million, or 28%. The Company recorded income tax expense of $7.2 million for the three months ended September 30, 2023, compared to income tax expense of $10.0 million for the three months ended September
30, 2022. Our effective tax rate was 23.7% for the three months ended September 30, 2023, and 19.7% for the three months ended September 30, 2022. The tax expense for the three months ended September 30, 2023, was unfavorably impacted by higher income in non-U.S. jurisdictions which have higher tax rates than the U.S. and non-deductible expenses. The tax expense for the three months ended September 30, 2022, which includes $8.7 million related to the legal settlement discretely recorded in the period, was favorably impacted by losses in non-U.S. jurisdictions which have higher tax rates than the U.S., partially offset by non-deductible expenses.
Net Income
Consolidated
net income decreased by $17.4 million, or 43%, driven by a $164.6 million decrease in consolidated revenue and the nonrecurrence in the current year of a $42.8 million legal settlement gain recognized by Array Legacy Operations during the three months ended September 30, 2022.
Consolidated revenue was flat year over year, driven by an increase in STI Operations of $102.4 million, offset by a decrease in Array Legacy Operations of $103.0 million.
The $102.4
million, or 43%, revenue increase in STI Operations was driven by an increase in the number of megawatts shipped, most notably in the Brazil region, which offset lower ASP due to a smaller percentage of construction services being offered.
The $103.0 million, or 10%, revenue decrease in Array Legacy Operations was driven by a decrease in the number of megawatts shipped, due primarily to project delays from our customers.
Cost of Revenue and Gross Profit
Consolidated cost of revenue decreased by $196.0 million, or 18%, driven primarily by a reduction in revenue combined with a decrease in input costs.
Consolidated gross profit increased by $195.5 million, or 144%. As a percentage
of revenue, consolidated gross profit increased to 27% for the nine months ended September 30, 2023, as compared to 11% during the same period in the prior year. The increase in gross profit dollars was driven by cost savings opportunities and lower overall costs in logistics and raw materials, a higher proportion of higher margin non-tracker revenue and a decrease in lower margin construction related services.
Array Legacy Operations gross profit increased by $132.9 million, or 123%. As a percentage of revenue, gross profit at Array Legacy Operations increased to 27% from 11% for the nine months ended September 30, 2023 and 2022, respectively. The increase in gross profit as a percent of revenue was driven by an improvement in pass through
pricing to customers, in addition to cost savings opportunities in logistics and raw materials, as well as a higher proportion of higher margin non-tracker revenue.
42
STI Operations gross profit increased by $62.6 million, or 226%. As a percentage of revenue, gross profit for STI Operations increased to 27% from 12% for the nine months ended September 30, 2023 and 2022, respectively, driven primarily by improved pass through pricing and a reduced impact of lower margin construction related services provided.
Operating Expenses:
General
and Administrative
Consolidated general and administrative expenses increased by $2.8 million, or 2%. The increase was driven by higher payroll and related expenses incurred to increase headcount in support of our growth and innovation strategy. These increases were partially offset by no acquisition related expenses in 2023 compared to expenses related to the STI Acquisition in 2022.
Contingent Consideration
Consolidated contingent consideration expense increased by $8.2 million, or 137% as a result of the increased valuation of the TRA liability, which was driven by a decrease in the credit spread used in the valuation, consistent with the overall downward trend of credit spreads subsequent to 2022.
Depreciation
and Amortization
Consolidated depreciation and amortization decreased by $33.9 million, or 54%, due to the decrease in the amortization of intangibles of $34.7 million, as the backlog purchased as part of the STI Acquisition had a one-year life and was fully amortized as of the first quarter of 2023.
Interest Expense
Consolidated interest expense increased by $11.6 million, or 49%, primarily due to increased variable interest rates charged on our Term Loan Facility as well as the acceleration of $3.6 million of non-cash interest expense related to unscheduled principal payments made against the outstanding Term Loan balance.
Income Tax Expense (Benefit)
Consolidated
income tax increased by $62.7 million, or 270%. The Company recorded income tax expense of $39.5 million for the nine months ended September 30, 2023, compared to a benefit of $23.2 million for the nine months ended September 30, 2022. Our effective tax rate was 25.7% and 171.7% for the nine months ended September 30, 2023 and 2022, respectively. The tax expense for the nine months ended September 30, 2023, was unfavorably impacted by higher income in non-U.S. jurisdictions and an increase in income tax expense related to the Put Option, partially offset by benefits related to excess stock compensation deductions recorded discretely during
the period. The tax benefit for the nine months ended September 30, 2022, which includes $8.7 million related to the legal settlement discretely recorded in the period, was favorably impacted by losses in non-U.S. jurisdictions which have higher tax rates than the U.S., partially offset by non-deductible expenses.
Net Income
Consolidated net income increased by $104.5 million, or 1,079%, driven by a 144% increase in consolidated gross profit margin and a $22.9 million reduction in operating expenses, partially offset by a $62.7 million increase in income tax expense and the nonrecurrence in the current year of a $42.8 million legal settlement gain recognized by Array Legacy Operations during the three months ended September 30, 2022.
Net cash (used in) provided by financing activities
(84,442)
33,146
Effect of exchange rate changes on cash and cash equivalents
(1,808)
(1,555)
Net change in cash and cash equivalents
$
40,109
$
(304,892)
We
have historically financed our operations primarily with the proceeds from contributions, operating cash flows and short and long-term borrowings. Our ability to generate positive cash flow from operations is dependent on the strength our gross margins as well as our ability to quickly turn our working capital. Based on our past performance and current expectations, we believe that operating cash flows will be sufficient to meet our future cash needs.
As of September 30, 2023, our cash balance was $174.0 million, of which $62.5 million was held outside the U.S., and net working capital was $462.6 million. We had outstanding borrowings of $239.3 million under our $575 million Term Loan Facility and $175.1 million available to us under our $200 million Revolving Credit Facility.
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.
Operating Activities
For the nine months ended September 30, 2023, cash provided by operating activities was $138.0 million, of which $184.8 million was generated from net income as adjusted for the impact of non-cash expenses, consisting primarily of depreciation and amortization, equity-based compensation, amortization of developed technology, and amortization of debt discount and issuance costs. Increases
in accrued expenses and other of $18.5 million, accounts payable of $14.4 million, and inventory of $12.6 million, were partially offset by decreases in deferred revenue of $78.2 million and accounts receivable of $6.4 million.
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.
Investing Activities
For the nine months ended September 30, 2023, net cash used in investing activities was $11.6 million, all of which was related to the purchase of property, plant and equipment.
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.
44
Financing
Activities
For the nine months ended September 30, 2023, net cash provided by financing activities was $84.4 million, driven primarily by $73.2 million in payments on our Term Loan and a $8.5 million net reduction of other debt.
For the nine months ended September 30, 2022, net cash provided by financing activities was $33.1 million, of which $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.
Series A Redeemable Perpetual Preferred Stock
On August 10, 2021, we
entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain investors (the “Purchasers”). Pursuant to the Securities Purchase Agreement, on August 11, 2021, we issued and sold to the Purchaser 350,000 shares of a newly designated Series A Redeemable Perpetual Preferred Stock, par value $0.001 per share (the “Series A Shares”), having the powers, designations, preferences, and other rights set forth in the Certificate of Designations, and 7,098,765 shares of our 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, as amended, we have issued and sold to the Purchasers 776,235 shares of common stock for an aggregate purchase price of $776.
In
January 2022, we issued 50,000 of Series A Shares, and 1,125,000 shares of our common stock in the Additional Closing for an aggregate purchase price of $49.4 million.
For a discussion of our debt obligations see Note 7 – Debt to our condensed consolidated financial statements included in this
Quarterly Report.
Surety Bonds
We are required to provide surety bonds to various parties as required for certain transactions initiated during the ordinary course of business to guarantee our performance in accordance with contractual or legal obligations. As of September 30, 2023, we posted surety bonds in the total amount of approximately $217.6 million. These off-balance sheet arrangements do not adversely impact our liquidity or capital resources.
Critical Accounting Policies and Significant Management Estimates
Our condensed consolidated financial statements
are prepared in accordance with accounting principles generally accepted in the (“U.S. GAAP”). In connection with the preparation of our condensed consolidated financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our condensed consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our condensed consolidated financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates. To the extent that there
are material differences between
45
these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
We consider an accounting policy to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the condensed consolidated financial statements.
Fair Value of Financial Instruments
The capped call option agreements associated with conversion of the Convertible Notes (the “Capped Calls”) are accounted for as an asset that is recorded at fair value within Derivative assets in the consolidated balance sheets. The changes in fair value to Derivative assets are recorded within change in fair value of derivative assets in the Condensed Consolidated Statements of Operations. See Note 1 – Organization, Business and Out of Period Adjustments, and Note 2 – Summary of Significant Accounting Policies, of the condensed consolidated financial statements for further information regarding the accounting of these instruments.
The
Capped Calls are valued using a Black-Scholes model, with the most judgmental non-observable input being the volatility measure. Changes in the assumptions around the volatility can cause significant changes in the estimated fair value of the Capped Call.
Adoption of New and Recently Issued Accounting Pronouncements
Item
3. Quantitative and Qualitative Disclosures About Market Risk.
Customer Financing Exposure
We are also indirectly exposed to interest rate risk because many of our customers depend on debt financings to purchase our product. An increase in interest rates could make it challenging for our customers to obtain the capital necessary to make such purchases on favorable terms, or at all. Such factors could reduce demand or lower the price we can charge for our product, thereby reducing our net sales and gross profit.
Commodity and Component Risk
We are exposed to price risks for the raw materials, components, logistics services, and energy costs used in the manufacturing and transportation of our product. Additionally, some of our raw materials
and components are sourced from a limited number of suppliers or a single supplier. We evaluate our suppliers using a robust qualification process. In some cases, we also enter into long-term supply contracts for raw materials and components. Accordingly, we are exposed to price changes in the raw materials and components used in our product. In addition, the failure of a key supplier could disrupt our supply chain, which could result in higher prices and/or a disruption in our manufacturing process. We may be unable to pass along changes in the costs of the raw materials and components for our product, or the costs associated with logistics services for the distribution of our product, to our customers and may be in default of our delivery obligations if we experience a manufacturing disruption.
46
Item
4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2023. Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective at a reasonable assurance level, due to the material weaknesses previously identified and disclosed in our 2022 Annual Report and listed below. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting (“ICFR”) such that there is a reasonable possibility that a material misstatement
of our annual or interim financial statements will not be prevented or detected on a timely basis.
Management determined that the previously disclosed material weaknesses in its ICFR continue to exist at September 30, 2023. Specifically:
Control Environment, Risk Assessment and Monitoring Activities – We did not maintain appropriately designed entity-level controls impacting the control environment and effective monitoring controls to prevent or detect material misstatements to the consolidated financial statements. These deficiencies were attributed to (i) a lack of a sufficient number of qualified resources and inadequate oversight and accountability over the performance of control activities, (ii) ineffective identification
and assessment of risks to properly design and implement relevant controls, and (iii) ineffective evaluation and determination as to whether the components of internal control were present and functioning.
Control Activities – These material weaknesses contributed to the following additional material weaknesses within certain business processes:
•Inventory – We did not appropriately design, implement, and execute controls over the existence, accuracy, and cutoff of inventory.
•Revenue Recognition – We did not appropriately design, implement and maintain effective controls over revenue recognition, relating to the proper application of
Accounting Standards Codification Topic 606, Revenue from Contracts with Customers.
•Accounts Receivable – We did not appropriately design, implement and maintain effective controls over the existence of accounts receivable. Specifically, we did not design certain controls at an appropriate precision level to ensure the identification of material misstatements.
•Financial Reporting, Consolidation and Business Combination – We did not appropriately design, implement and maintain effective controls over the financial reporting process. Specifically, we did not maintain effective controls related to (i) preparation of consolidated financial statements, (ii) the accounting for
the business combination, including management review controls over the valuation and
47
purchase price allocation, at an appropriate level of precision to detect a material misstatement, and (iii) consolidation of our subsidiaries. In addition, we did not maintain sufficient appropriate audit evidence to demonstrate execution of the related controls.
•Foreign Currency – We did not appropriately design, implement, and execute controls over foreign currency, including (i) lack of identifying and recording our foreign subsidiaries’
goodwill and intangibles balances in the proper functional currency in our consolidated financial statements, and (ii) performing proper foreign currency translations. This resulted in the restatement of the Company’s interim unaudited condensed consolidated financial statements.
•STI - As 2023 is the first year STI is required to be Sarbanes-Oxley Act of 2002 compliant, management is in the process of conducting a formal ICFR assessment of STI and has identified material weaknesses in STI’s ICFR as follows:
◦We did not design, implement and monitor general information technology controls in the areas of program change management, user access, and segregation of duties for systems supporting substantially all of STI’s
internal control processes.
◦We did not design and implement formal accounting policies, procedures and controls across substantially all of STI’s business processes to achieve timely, complete and accurate financial accounting, reporting, and disclosures.
After giving full consideration to these material weaknesses, and the additional analyses and other procedures that we performed to ensure that our condensed consolidated financial statements included in this Quarterly Report were prepared in accordance with U.S. GAAP, our management has concluded that our condensed consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods disclosed in conformity with U.S. GAAP.
Remediation
Plan for Existing Material Weaknesses
We are in the process of, and continue to focus on, designing and implementing effective measures to strengthen our ICFR and remediate the material weaknesses. Our planned remediation efforts include the following:
Control Environment, Risk Assessment and Monitoring – We have hired and will continue to hire additional resources throughout 2023 in accounting and IT to supplement our existing capabilities and capacity; and we will concentrate on retaining key accounting, IT, and operational personnel. In 2023, we have engaged an outside global consulting firm to support our continued enhancement of the design and operation of monitoring controls and other activities that will allow us to timely assess the design and the operating effectiveness of our ICFR. In addition to enhancing
our ICFR overall, the consulting firm has been specifically focused on the identification of new controls and the improvement of existing controls related to STI, inventory management, revenue recognition and accounts receivable as well as business combination controls for future acquisitions.
Control Activities:
•Inventory – We continue to implement planned information system enhancements and the expansion of current information system capabilities, which will result in improved reliance on automated controls and less reliance on manual controls. Additionally, we are enhancing existing controls and are implementing new controls over the accounting, processing and recording of inventory. Specifically, we have strengthened the operation of control activities over inventory-in-transit, deploying
multiple levels of review and validation of information and supporting documentation. We expect to deploy final phases of information system enhancements by the end of 2023.
48
•Revenue Recognition and Accounts Receivable – We continue to evaluate our information system capabilities in order to reduce the manual calculations within the revenue recognition business processes. We have begun to deploy information systems enhancements targeted at eliminating manual processes. Additionally, we are enhancing the design of existing controls to ensure completeness and accuracy of underlying source data for revenue recognition and customer billing, as well as designing monitoring controls to increase oversight and timely
detection of potential errors. Lastly, we will continue to supplement our accounting staff with more experienced personnel which will enable us to incorporate an additional level of review.
•Foreign Currency – We have implemented information system enhancements which will automate this previously manual process. We will we utilize the enhancements in parallel with our manual process for the near term until the enhancements are fully deployed and the process is completely automated. We have continued to enhance the design of existing controls and processes related to the foreign currency translation process and over the consolidation of foreign entities into our condensed consolidated financial statements.
•Other Areas –
We are in the process of remediation activities, including enhancing the design and operating effectiveness of controls around our ICFR. We are actively working with an outside global consulting firm to assist us with (i) reviewing our current processes, procedures, and systems to assess our ICFR to identify opportunities to enhance the design of controls to address relevant risks identified by management, and (ii) enhancing and implementing protocols to retain sufficient documentary evidence of operating effectiveness of such controls. Additional activities in process include the following:
◦Continuing to enhance and formalize our accounting and business operations policies, procedures, and controls to achieve complete, accurate, and timely financial accounting, reporting and necessary disclosures;
◦Enhancing policies
and procedures to retain adequate documentary evidence for relevant management review controls over certain business processes including precision of review and evidence of review procedures performed to demonstrate effective operation of such controls; and
◦Developing monitoring controls and protocols that will allow us to timely assess the design and the operating effectiveness of controls over financial reporting and make necessary changes to the design of controls, if any.
While these actions currently in process are subject to ongoing management evaluation and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles, we are committed to the continuous improvement of our internal control over financial reporting and will continue
to review our internal control over financial reporting.
Changes in Internal Control over Financial Reporting
Other than as discussed above, there were no other changes to our internal control over financial reporting during the three months ended September 30, 2023, that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
49
Item
1. Legal Proceedings
See Note 11 – Commitments and Contingencies under the heading “Legal Proceedings” of our condensed consolidated financial statements for legal proceedings and related matters. In addition to the lawsuits described in Note 11 to our condensed consolidated financial statements, from time to time we may be involved in claims arising in the ordinary course of business. To our knowledge, other than the cases described in Note 11 to our condensed consolidated financial statements, no material legal proceedings, governmental actions, investigations or claims are currently pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business and financial
condition.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not
applicable.
Item 5. Other Information
During the third quarter of 2023, certain of our directors and officers (as defined in Rule 16a-1(f) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) entered into contracts, instructions or written plans for the purchase or sale of our securities that are intended to satisfy the conditions specified in Rule 10b5-1(c) under the Exchange Act for an affirmative defense against liability for trading in securities on the basis of material nonpublic information. We refer to these contracts,
instructions, and written plans as “iiiTrading Plans//”
and each one as a “Trading Plan.”
iThe following table sets forth the material terms of these Trading Plans:
50
Director/Officer
Action
& Date of Action
Commencement of Trading Period
Scheduled Termination of Trading Period (1)
Security Covered
Maximum Number of Securities to be Purchased or Sold Pursuant to the Rule 10b5-1 Trading Plan (2)
(1) The plans are subject to earlier termination under certain circumstances specified in the plans, including upon the sale or purchase (as applicable) of
all shares subject to the plan and upon either party to a plan giving notice of termination within the time prescribed under the plan.
(2) Subject to adjustments for stock splits, stock combinations, stock dividends and other similar changes to our common stock.
XBRL
Instance Document – the instance document does not appear in the Interactive Data file because its XBRL tags are embedded within the Inline XBRL document
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
