UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2021
or
For the transition period from _________ to _________
Commission File Number: 001-39613
(Exact Name of Registrant as Specified in its Charter)
| (State or Other Jurisdiction) | (I.R.S. Employer Identification No.) | ||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||||||||
| (Registrant’s telephone number, including area code) | ||||||||
(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 | ||||||||||||
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. ☒ Yes ☐ 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). ☒ Yes ☐ 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.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ||||||||
| ☒ | Smaller reporting company | ||||||||||
| Emerging growth company | |||||||||||
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 ☒ 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 May 5, 2021, there were 126,994,467 shares of common stock, par value $0.001 per share, issued and outstanding.
Array Technologies, Inc.
Index to Form 10-Q
| PART I - FINANCIAL INFORMATION | ||||||||
| Item 1. | Unaudited Condensed Consolidated Financial Statements | |||||||
| Condensed Consolidated Balance Sheets | ||||||||
| Condensed Consolidated Statements of Operations | ||||||||
| Condensed Consolidated Statements of Changes in Member’s Equity/Stockholders’ Deficit | ||||||||
| Condensed Consolidated Statements of Cash Flows | ||||||||
| Notes to Condensed Consolidated Financial Statements | ||||||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |||||||
| Item 4. | Controls and Procedures | |||||||
| PART II - OTHER INFORMATION | ||||||||
| Item 1. | Legal Proceedings | |||||||
| Item 1A. | Risk Factors | |||||||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||||||
| Item 3. | Defaults Upon Senior Securities | |||||||
| Item 4. | Mine Safety Disclosures | |||||||
| Item 5. | Other Information | |||||||
| Item 6. | Exhibits | |||||||
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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Array Technologies, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
(in thousands, except per share and share amounts)
| March 31, 2021 | December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventories, net | |||||||||||
| Income tax receivables | |||||||||||
| Prepaid expenses and other | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | |||||||||||
| Current Liabilities | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accounts payable - related party | |||||||||||
| Accrued expenses and other | |||||||||||
| Accrued warranty reserve | |||||||||||
| Income tax payable | |||||||||||
| Deferred revenue | |||||||||||
| Current portion of contingent consideration | |||||||||||
| Current portion of term loan | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term liabilities | |||||||||||
| Deferred tax liability | |||||||||||
| Contingent consideration, net of current portion | |||||||||||
| Other long-term liabilities | |||||||||||
| Long-term debt, net of current portion, debt discount and issuance costs | |||||||||||
| Total long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
Commitments and contingencies (Note 12) | |||||||||||
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| March 31, 2021 | December 31, 2020 | ||||||||||
Preferred stock of | |||||||||||
Common stock of $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ deficit | ( | ( | |||||||||
| Total liabilities and stockholders’ deficit | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Array Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except per share amounts)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenue | $ | $ | |||||||||
| Cost of revenue | |||||||||||
| Gross profit | |||||||||||
| Operating expenses | |||||||||||
| General and administrative | |||||||||||
| Contingent consideration | ( | ||||||||||
| Depreciation and amortization | |||||||||||
| Total operating expenses | |||||||||||
| Income from operations | |||||||||||
| Other expense | |||||||||||
| Other (expense) income, net | ( | ||||||||||
| Interest expense | ( | ( | |||||||||
| Total other expense | ( | ( | |||||||||
| Income before income tax expense | |||||||||||
| Income tax expense | |||||||||||
| Net income | $ | $ | |||||||||
| Earnings per share | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
| Weighted average number of shares | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Array Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Member’s Equity/Stockholders’ Deficit
(unaudited)
(in thousands)
For the Three Months Ended March 31, 2021
| Preferred Stock | Common Stock | Additional | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | paid-in capital | Retained earnings | Total Stockholders’ Deficit | ||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | — | $ | — | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||
| Equity based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net Income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | — | $ | — | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||
For the Three Months Ended March 31, 2020
| Units (*) | Total Members’ Equity | ||||||||||
| Balance, December 31, 2019 | $ | ||||||||||
| Equity based compensation | |||||||||||
| Net Income | — | ||||||||||
| Balance, March 31, 2020 | $ | ||||||||||
(*) See note 2 - Summary of Significant Accounting Policies - corporate conversion and stock split
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Array Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows used in operating activities | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash used in operating activities: | |||||||||||
| Provision for (recovery of) bad debts | ( | ||||||||||
| Deferred tax benefit | ( | ( | |||||||||
| Depreciation and amortization | |||||||||||
| Amortization of debt discount and issuance costs | |||||||||||
| Interest paid-in-kind | |||||||||||
| Equity-based compensation | |||||||||||
| Contingent consideration | ( | ||||||||||
| Warranty provision | |||||||||||
| Changes in operating assets and liabilities | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventories | ( | ||||||||||
| Income tax receivables | |||||||||||
| Prepaid expenses and other | ( | ||||||||||
| Accounts payable | ( | ( | |||||||||
| Accounts payable - related party | |||||||||||
| Accrued expenses and other | |||||||||||
| Income tax payable | |||||||||||
| Lease liabilities | |||||||||||
| Deferred revenue | ( | ( | |||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows used in investing activities | |||||||||||
| Purchase of property, plant and equipment | ( | ( | |||||||||
| Investment in equity security | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities | |||||||||||
| Proceeds from revolving credit facility | |||||||||||
| Principal payments on term loan facility | ( | ( | |||||||||
| Debt issuance costs | ( | ||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Cash, cash equivalents and restricted cash, beginning of period | |||||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Array Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Organization and Business
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 subsidiaries, High Desert Finance, LLC (“HDF”) and ATI Investment Holdings, Inc. (“ATI Investment”) owns two other subsidiaries through which it conducts substantially all operations; Array Tech, Inc. and Array Technologies Patent Holdings Co., LLC (collectively “AT”).
The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”), pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The unaudited interim financial 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 months ended March 31, 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2021, any other interim periods, or any future year or period. The balance sheet as of December 31, 2020 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 Company’s 10-K filed with SEC on March 10, 2021.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
2. Summary of Significant Accounting Policies
Recently Adopted Accounting Pronouncements
On January 1, 2021, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02 (Topic 842) “Leases” which supersedes the lease recognition requirements in ASC Topic 840, “Leases”. Under ASU No. 2016-02, lessees are required to recognize assets and liabilities on the consolidated balance sheets for most leases and provide enhanced disclosures. For companies that are not emerging growth companies (“EGCs”), the ASU was effective for fiscal years beginning after December 15, 2018. For EGCs, the ASU is effective for fiscal years beginning after December 15, 2021. The Company early adopted the new standard using the modified retrospective method by recording and right-of-use asset of $13.2 million, short-term portion of lease liabilities of $6.3 million and long-term portion of lease liabilities of $7.2 million as of the effective date. Prior periods will not be restated and will continue to be reported under Topic 840 guidance in effect during those periods. The Company applied the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. The adoption did not have a material impact on its consolidated statements of
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operations or its consolidated statements of cash flows. See Note 13, Leases, for further information and disclosures related to the adoption of this standard.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU No. 2019-12”), which is intended to simplify various aspects of the accounting for income taxes. ASU No. 2019-12 removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application. This standard is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company has adopted the pronouncement and it did not have a material impact on its consolidated financial statements and related disclosures.
Corporate Conversion and Stock Split
On October 14, 2020, prior to the issuance of any of our shares of common stock in our initial public offering (the “IPO”), we converted from a Delaware limited liability company to a Delaware corporation. In connection with the corporate conversion, we converted all 1,000 of our outstanding member units into 100,000,000 shares of common stock and then completed a stock split of 1.19994 -for-1. The corporate conversion and stock split representing 119,994,467 shares of common stock have been adjusted retroactively for the purposes of calculating basic and diluted earnings per share.
Principles of Consolidation
The consolidated financial statements include the accounts of Array Technologies, Inc. and its Subsidiaries. All intercompany accounts and transactions have been eliminated upon consolidation.
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New Accounting Standards
To be adopted
8
3. Inventories
Inventories consist of the following (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Finished goods | |||||||||||
| Reserve for excess or obsolete inventory | ( | ( | |||||||||
| Total | $ | $ | |||||||||
4. Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
| Estimated Useful Lives (Years) | March 31, 2021 | December 31, 2020 | |||||||||||||||
| Land | N/A | $ | $ | ||||||||||||||
| Buildings and land improvements | |||||||||||||||||
| Manufacturing equipment | |||||||||||||||||
| Furniture, fixtures and equipment | |||||||||||||||||
| Vehicles | |||||||||||||||||
| Hardware and software | |||||||||||||||||
| Machinery in progress | |||||||||||||||||
| Total | |||||||||||||||||
| Less: accumulated depreciation | ( | ( | |||||||||||||||
| Property, plant and equipment, net | $ | $ | |||||||||||||||
5. Goodwill and Other Intangible Assets
Goodwill
Goodwill relates to the Former Parent’s acquisition of AT (the “Acquisition”) in 2016. As of July 8, 2016 (the “Acquisition Date”), goodwill was $121.6 million. As of March 31, 2021 and December 31, 2020 goodwill totaled $69.7 51.9
Other Intangible Assets
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| Estimated Useful Lives (Years) | March 31, 2021 | December 31, 2020 | |||||||||||||||
| Amortizable: | |||||||||||||||||
| Costs: | |||||||||||||||||
| Developed technology | $ | $ | |||||||||||||||
| Customer relationships | |||||||||||||||||
| Internal-use software modification | |||||||||||||||||
| Total amortizable intangibles | |||||||||||||||||
| Accumulated amortization: | |||||||||||||||||
| Developed technology | |||||||||||||||||
| Customer relationships | |||||||||||||||||
| Internal-use software modification costs | |||||||||||||||||
| Total accumulated amortization | |||||||||||||||||
| Total amortizable intangibles, net | |||||||||||||||||
| Non-amortizable costs: | |||||||||||||||||
| Trade name | |||||||||||||||||
| Total other intangible assets, net | $ | $ | |||||||||||||||
6. Investment in Equity Security
7. Income Taxes
The Company follows guidance under ASC Topic 740-270, Interim Reporting, which requires that an estimated annual effective tax rate is applied to year-to-date ordinary income. 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.
For the three months ended March 31, 2021 and 2020 the Company recorded total income tax expense of $1.1 million and $22.5 million, respectively. The effective tax rate was higher than the statutory tax rate of 21% primarily due to state income taxes, non-deductible equity-based compensation, Follow-on Offering costs and other non-deductible expenses for tax reporting purposes.
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8. Term and Revolving Loan
| March 31, | December 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Term loan facility | $ | $ | |||||||||
| Revolving credit facility | |||||||||||
Less discount and issuance costs | ( | ( | |||||||||
| Long term debt, net of debt discount and issuance costs | |||||||||||
| Less current portion of long-term debt | ( | ( | |||||||||
| Long-term debt, net of current portion, debt discount and issuance costs | $ | $ | |||||||||
Senior Secured Credit Facility
On October 14, 2020, the Company entered into a senior secured credit facility consisting of (i) a $575 million senior secured seven-year term loan facility (the “Term Loan Facility”) and (ii) a $150 million senior secured 5-year revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Secured Credit Facility”). As of March 31, 2021, the Term Loan Facility had a balance of $430 million. On February 23, 2021 the Company entered into the First Amendment (“First Amendment”) to it’s Senior Secured Credit Facility. The First Amendment, in the case of the Eurocurrency borrowings, lowers the London interbank offered rate floor to 50 basis points from 100 basis points and lowers the applicable margin to 325 basis points from 400 basis points per annum. This results in the current rate on the Term Loan Facility of 3.75 %. On February 26, 2021, we entered into the incremental facility amendment No. 2 (the “Second Amendment”) to the Senior Secured Credit Facility. The Second Amendment increases the $150.0 million Revolving Credit Facility from $150.0 million to $200.0 million. The balance of the Term Loan Facility is presented in the accompanying condensed consolidated balance sheets net of debt discount and issuance costs of $34.0 million at March 31, 2021. The debt discount and issuance costs are being amortized using the effective interest method and the rate as of March 31, 2021 is 5.01 %. The Term Loan Facility has an annual excess cash flow calculation beginning with the year ended December 31, 2021 which could require the Company to make advance principal payments.
Letters of Credit
9. Related Party Loan
11
10. Revenue
Based on Topic 606 provisions, the Company disaggregates its revenue from contracts with customers by those sales recorded over-time and sales recorded at a point in time. The following table presents the Company’s revenue disaggregated by sales recorded over-time and sales recorded at a point in time (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Over-time revenue | $ | $ | |||||||||
| Point in time revenue | |||||||||||
| Total revenue | $ | $ | |||||||||
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and deferred revenue (contract liabilities) on the consolidated balance 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 (i.e. unbilled receivables) and the corresponding amounts recorded in revenue relate to fluctuations in the timing and volume of billings for the Company’s revenue recognized over-time. Contract assets consisting of unbilled receivables are recorded within accounts receivable on the consolidated balance sheets on a contract-by-contract basis at the end of the reporting period and consisted of the following (in thousands):
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Unbilled receivables | $ | $ | ||||||||||||
The Company also receives advances or deposits from its customers, before revenue is recognized, resulting in contract liabilities. The changes in contract liabilities (i.e. deferred revenue) relate to advanced orders and payments received by the Company. Contract liabilities consisting of deferred revenue recorded on a contract-by-contract basis at the end of each reporting period were as follows (in thousands):
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Deferred revenue | $ | $ | ||||||||||||
During the three months ended March 31, 2021, the Company converted $101.8 million deferred revenue to revenue which represented 68.0 % of the prior years deferred revenue balance.
Remaining Performance Obligations
11. Earnings per Share
12
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net income | $ | $ | |||||||||
| Basic: | |||||||||||
| Weighted-average shares | |||||||||||
| Earnings per share | $ | $ | |||||||||
| Diluted: | |||||||||||
| Weighted-average shares | |||||||||||
| Equity compensation dilutive securities | |||||||||||
| Weighted average dilutive shares | |||||||||||
| Earnings per share | $ | $ | |||||||||
There were 26,671,594 1,000
12. Commitments and Contingencies
Litigation
The Company, in the normal course of business, is subject to claims and litigation. Management believes that there are no outstanding claims or assessments against the Company that would result in a material unfavorable outcome.
Contingent Consideration
TRA
Concurrent with the Acquisition, Array Tech, Inc. (f/k/a Array Technologies, Inc.) entered into a 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, 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 general and administrative in the accompanying consolidated statements of operations. As of March 31, 2021 and December 31, 2020, the fair value of the TRA was $19.8 million and $19.7 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
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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 125 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.
Earn-Out Liability
The Company had a liability during the three months ended March 31, 2020 to the selling stockholders of Array for contingent consideration consisting of earn-out payments in the form of cash upon the occurrence of certain events, including the sale, transfer, assignment, pledge, encumbrance, distribution or disposition of shares held by the acquirer to a third party; initial public offering of the equity securities of Former Parent, acquirer or the Company; the sale of equity securities or assets of Former Parent, acquirer or the Company to a third-party; or a merger, consolidation, recapitalization or reorganization of Former Parent, acquirer or the Company. The maximum aggregate earn-out consideration was $25.0 million. The earn-out liability was paid off in the fourth quarter of the fiscal year ended December 31, 2020.
The fair value of the earn-out liability was initially determined as of the Acquisition Date using unobservable inputs. These inputs include the estimated amount and timing of future cash flows, the probability of a qualifying event occurring, and a risk-free rate used to adjust the probability-weighted cash flows to their present value. Subsequent to the Acquisition Date, at each reporting period, the earn-out liability is re-measured to fair value with changes in fair value recorded in general and administrative in the accompanying condensed consolidated statements of operations.
The following table summarizes the liability related to the estimated contingent consideration (in thousands):
| TRA | Earn-Out Liability | Contingent Consideration | |||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | ||||||||||||||
| Fair value adjustment | |||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | ||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | ||||||||||||||
| Fair value adjustment | ( | ( | ( | ||||||||||||||
| Balance, March 31, 2020 | $ | $ | $ | ||||||||||||||
13. Equity-Based Compensation
14
On October 14, 2020, the Company’s 2020 Plan became effective. The 2020 Plan authorized 6,683,919 new shares, subject to adjustments pursuant to the 2020 Plan.
In March 2021, the Company granted an aggregate of 226,819 RSU’s to employees and 150,462 Performance Stock Units (PSUs) to certain executives. The PSUs cliff vest after three years and upon meeting certain revenue and adjusted EPS targets. The PSUs also contain a modifier based on the total stock return (TSR) compared a certain Index which modifies the number of PSUs that vest.
Activity under the 2020 Plan was as follows:
| Number of Shares | Weighted Average Grant Date Fair Value | ||||||||||
| RSU | |||||||||||
| Unvested, December 31, 2020 | $ | ||||||||||
| Granted | |||||||||||
| Vested | |||||||||||
| Forfeited | |||||||||||
| Unvested, March 31, 2021 | $ | ||||||||||
| PSU | Number of Shares | Weighted Average Grant Date Fair Value | |||||||||
| Unvested, December 31, 2020 | $ | ||||||||||
| Granted | |||||||||||
| Vested | |||||||||||
| Forfeited | |||||||||||
| Unvested, March 31, 2021 | $ | ||||||||||
Class B Units
The Company accounted for equity grants to employees of Class B Units of Former Parent (the “Units”) as equity-based compensation under ASC 718, Compensation-Stock Compensation. The Units contained vesting provisions as defined in the agreement. Equity-based compensation cost was measured at the grant date fair value and recognized on a straight-line basis over the requisite service period, including those units with graded vesting with a corresponding credit to additional paid-in capital as a capital contribution from Former Parent; however, the amount of equity-based compensation at any date is equal to the portion of the grant date value of the award that is vested.
The Units issued to employees were measured at fair value on the grant date using an option pricing model. The Company utilizes the estimated weighted average of the Company’s expected fund life dependent on various exit scenarios to estimate the expected term of the awards. Expected volatility is based on the average of historical and implied volatility of a set of comparable companies, adjusted for size and leverage. The risk-free rates are based on the yields of U.S. Treasury instruments with comparable terms. Actual results may vary depending on the assumptions applied within the model.
On March 23, 2021, in connection with the closing of the 2021 Follow-on Offering, all of the outstanding Class B Units of Former Parent were immediately vested per the terms of the equity awards, resulting in the
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Company accelerating the recognition of the remaining unamortized compensation expense of $6.3 million in the three months ended March 31, 2021.
For the three months ended March 31, 2021 and 2020, the Company recognized $7.9 million and $1.8 million in equity-based compensation. As of March 31, 2021, the Company had $22.3 million of unrecognized compensation costs which is expected to be recognized over a period of 2.8 years. There were no
14. Leases
Effective January 1, 2021, the Company adopted ASC 842 Leases using the modified retrospective approach. The Company elected the use of the package of practical expedients permitted under the transition guidance which allows the Company not to reassess whether a contract contains a lease, carry forward the historical lease classification and not reassess initial direct lease costs. The Company also elected to apply the short-term measurement and recognition exemption in which the right-of-use (“ROU”) assets and lease liabilities are not recognized for short-term leases. Adoption of this standard resulted in recording of net operating lease ROU assets and corresponding operating lease liabilities of $13.2 million and $13.5 million, respectively. The standard did not materially affect the condensed consolidated statements of income and had no impact on the condensed consolidated statements of cash flows.
The following table summarizes the balances as it relates to leases at the end of the period (in thousands):
| (*) | As of March 31, 2021 | ||||||||||
| ROU Asset | $ | ||||||||||
| Lease liability, current portion | $ | ||||||||||
| Lease liability, long-term portion | |||||||||||
| Total lease liability | $ | ||||||||||
(*) Location on the condensed consolidated balance sheet
The Company determines if an arrangement is a lease at its inception. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Operating lease ROU assets also include any initial direct costs and prepayments less lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. As the Company’s leases generally do not provide an implicit rate, the Company uses its collateralized incremental borrowing rate based on the information available at the lease commencement date, including lease term, in determining the present value of lease payments. Lease expense for these leases is recognized on a straight-line basis over the lease term.
Operating lease arrangements are comprised primarily of real estate and equipment agreements for which the right-of-use assets are included in other assets and the corresponding lease liabilities, depending on their maturity, are included in accrued liabilities or other long-term liabilities in the condensed consolidated balance sheets.
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| Three Months Ended | ||||||||
| March 31, 2021 | ||||||||
| Operating lease expense | $ | |||||||
| Variable lease expense | ||||||||
| Short-term lease expense | ||||||||
| Total lease expense | $ | |||||||
The following table presents the maturities of lease liabilities as of March 31, 2021 (in thousands):
| Fiscal year ending March 31, | Operating Leases | |||||||
| 2021 | ||||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less: Imputed lease interest | ( | |||||||
| Total lease liabilities | ||||||||
The following table represents future minimum lease obligations under non-cancelable operating leases as of December 31, 2020 (in thousands):
| Fiscal year ending December 31, | Operating Leases | |||||||
| 2021 | $ | |||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| Thereafter | ||||||||
| Total | $ | |||||||
The Company’s weighted-average remaining lease-term and weighted-average discount rate are as follows (in thousands):
| Three Months Ended | ||||||||
| March 31, 2021 | ||||||||
| Weighted average remaining lease-term | ||||||||
| Weighted average discount rate | % | |||||||
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Supplemental cash flow and other information related to operating leases are as follows:
| Three Months Ended | ||||||||
| March 31, 2021 | ||||||||
| Operating cash flows from operating leases | $ | |||||||
| Non cash investing activities: | ||||||||
| Lease liabilities arising from obtaining right-of-use assets as of January 1, 2021 | $ | |||||||
15. Related Party Transactions
Accounts Payable-Related Party
The Company had $2.6 million and $2.2 million as of March 31, 2021 and December 31, 2020, respectively, of accounts payable - related party with the former shareholders of Array and current unit holder of Former Parent. The payables relate to a federal tax refund related to the pre-Acquisition periods, restricted cash at Acquisition Date which were due to the sellers of Array upon release of the restriction offset by a receivable related to a sales/use tax audit from the pre-Acquisition period for which the seller provided the Company with indemnification.
Related Party Loans - see Note 9
Contingent Consideration - see Note 12
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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
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed financial statements and the related notes and other financial information included in this Quarterly Report on Form 10-Q and our audited financial statements and notes thereto as of and for the years ended December 31, 2020, 2019 and 2018 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, including Critical Accounting Policies and Significant Judgements and Estimates, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the Securities and Exchange Commission, or the SEC, on March 10, 2021. 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 on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
FORWARD-LOOKING STATEMENTS
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:
•if demand for solar energy projects does not continue to grow or grows at a slower rate than we anticipate, our business will suffer;
•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;
•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 drop in the price of electricity derived from the utility grid or from alternative energy sources may harm our business, financial condition, results of operations and prospects;
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•an 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;
•existing electric utility industry policies and regulations, and any subsequent changes, may present technical, regulatory and economic barriers to the purchase and use of solar energy systems, which may significantly reduce demand for our products or harm our ability to compete;
•the interruption of the flow of materials from international vendors could disrupt our supply chain, including as a result of the imposition of additional duties, tariffs and other charges on imports and exports;
•changes in the U.S. trade environment, including the imposition of import tariffs, could adversely affect the amount or timing of our revenues, results of operations or cash flows;
•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;
•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;
•we may need to defend ourselves against third-party claims that we are infringing, misappropriating or otherwise violating others’ intellectual property rights, which could divert management’s attention, cause us to incur significant costs and prevent us from selling or using the technology to which such rights relate;
•significant changes in the cost of raw materials could adversely affect our financial performance;
•we are dependent on transportation and logistics providers to deliver our products in a cost efficient manner. Disruptions to transportation and logistics, including increases in shipping costs, could adversely impact our financial condition and results of operations;
•the requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members and officers;
•we face risks related to actual or threatened health epidemics, such as the COVID-19 pandemic, and other outbreaks, which could significantly disrupt our manufacturing and operations; and
•certain provisions in our certificate of incorporation and our bylaws may delay or prevent a change of control.
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.
Overview
We are one of the world’s largest manufacturers of ground-mounting systems used in solar energy projects. Our principal product is an integrated system of steel supports, electric motors, gearboxes and electronic controllers commonly referred to as a single-axis “tracker.” Trackers move solar panels throughout the day to maintain an optimal orientation to the sun, which significantly increases their energy production. Solar energy projects that use trackers generate up to 25% more energy than projects that use “fixed tilt” mounting systems, which do not move.
Our trackers use a patented design that allows one motor to drive multiple rows of solar panels through articulated driveline joints. To avoid infringing on our U.S. patent, our competitors must use designs that we believe are inherently less efficient and reliable. For example, our largest competitor’s design requires one motor for each row of solar panels. As a result, we believe our products have greater reliability, lower installation costs, reduced maintenance requirements and competitive manufacturing costs. Our core U.S. patent on a linked-row, rotating gear drive system does not expire until February 5, 2030.
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We sell our products to engineering, procurement and construction firms (“EPCs”) that build solar energy projects and to large solar developers, independent power producers and utilities, often under master supply agreements or multi-year procurement contracts. In the three months ended March 31, 2021, we derived 99% and 1% of our revenues from customers in the U.S. and rest of the world, respectively.
We are a U.S. company and our headquarters and principal manufacturing facility are in Albuquerque, New Mexico. As of March 31, 2021, we had 387 full-time employees.
Impact of COVID-19
In December 2019, a novel strain of coronavirus, SARS-CoV-2, which causes coronavirus disease 2019, or COVID-19, surfaced in Wuhan, China. Since then, COVID-19 has spread to multiple countries, including the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. To date, we have maintained uninterrupted business operations with normal turnaround times for the delivery of solar tracking systems. We have implemented adjustments to our operations designed to keep employees safe and comply with federal, state and local guidelines, including those regarding social distancing. The extent to which COVID19 may further impact the Company’s business, results of operations, financial condition and cash flows will depend on future developments, which are highly uncertain and cannot be predicted with confidence. In response to COVID-19, the United States government has passed legislation and taken other actions to provide financial relief to companies and other organizations affected by the pandemic.
Performance Measures
In managing our business and assessing financial performance, we supplement the information provided by the financial statements with other operating metrics. These operating metrics are utilized by our management to evaluate our business, measure our performance, identify trends affecting our business and formulate projections. The primary operating metric we use to evaluate our sales performance and to track market acceptance of our products from year to year is megawatts (“MWs”) shipped generally and the change in MW shipped from period to period specifically. MWs is measured for each individual project and is calculated based on the expected output of that project once installed and fully operational.
We also utilize metrics related to price and cost of goods sold per MW, including average selling price (“ASP”) and cost per watt (“CPW”). ASP is calculated by dividing total applicable revenues by total applicable MWs, whereas CPW is calculated by dividing total applicable costs of goods sold by total applicable MWs. These metrics enable us to evaluate trends in pricing, manufacturing cost and customer profitability.
Key Components of Our Results of Operations
The following discussion describes certain line items in our consolidated statements of operations.
Revenue
We generate revenue from the sale of solar tracking systems and parts. Our customers include EPCs, utilities, solar developers and independent power producers. For each individual solar project, we enter into a contract with our customers covering the price, specifications, delivery dates and warranty for the products being purchased, among other things. Our contractual delivery period for the tracker system and parts can vary from days to several months. Contracts can range in value from hundreds of thousands to tens of millions of dollars.
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Our revenue is affected by changes in the volume and ASPs of solar tracking systems purchased by our customers. The quarterly volume and ASP of our systems is driven by the supply of, and demand for, our products, changes in product mix between module type and wattage, geographic mix of our customers, strength of competitors’ product offerings, and availability of government incentives to the end-users of our products.
Our revenue growth is dependent on continued growth in the amount of solar energy projects installed each year as well as our ability to increase our share of demand in each of the geographies where we compete, expand our global footprint to new evolving markets, grow our production capabilities to meet demand and to continue to develop and introduce new and innovative products that address the changing technology and performance requirements of our customers.
Cost of Revenue and Gross Profit
Cost of revenue consists primarily of product costs, including purchased components, as well as costs related to shipping, tariffs, customer support, product warranty, personnel and depreciation of test and manufacturing equipment. Personnel costs in cost of revenue includes both direct labor costs as well as costs attributable to any individuals whose activities relate to the transformation of raw materials or component parts into finished goods or the transportation of materials to the customer. Our product costs are affected by the underlying cost of raw materials, including steel and aluminum; component costs, including electric motors and gearboxes; technological innovation; economies of scale resulting in lower component costs, and improvements in production processes and automation. We do not currently hedge against changes in the price of raw materials. Some of these costs, primarily personnel and depreciation of test and manufacturing equipment, are not directly affected by sales volume.
Gross profit may vary from quarter to quarter and is primarily affected by our ASPs, product costs, product mix, customer mix, geographical mix, shipping method, warranty costs and seasonality.
Operating Expenses
Operating expenses consist of general and administrative costs, contingent consideration, as well as depreciation and amortization expense. Personnel-related costs are the most significant component of our operating expenses and include salaries, benefits, payroll taxes and commissions. Our full-time employee headcount in our general and administrative departments has grown from approximately 150 as of December 31, 2019 to approximately 177 as of December 31, 2020 and 175 at March 31, 2021, and we expect to continue to hire new employees to support our growth. The timing of these additional hires could materially affect our operating expenses in any particular period, both in absolute dollars and as a percentage of revenue. We expect to continue to invest substantial resources to support our growth and continued technological advancement and anticipate that general and administrative and depreciation expenses will increase in absolute dollar amounts for the foreseeable future.
General and administrative expenses
General and administrative expenses consist primarily of salaries, equity-based compensation, employee benefits and payroll taxes related to our executives, sales, finance, human resources, information technology, engineering and legal organizations, as well as travel, facilities costs, marketing, bad debt and fees for professional services. Professional services consist of audit, legal, tax, insurance, information technology and other costs. We expect an increase in the number of sales and marketing personnel in connection with the expansion of our global sales and marketing footprint, enabling us to penetrate new markets. The majority of our sales in 2020 were in the U.S.; however, during the year we expanded our international presence with additional global sales staff. We currently have a sales presence in the U.S., Australia, the U.K. and Brazil. We intend to continue to expand our sales presence and marketing efforts to additional countries. We also expect
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that as a public company we will incur additional audit, tax, accounting, legal and other costs related to compliance with applicable securities and other regulations, as well as additional insurance, investor relations and other costs associated with being a public company. We also anticipate an increase in our spend related to product innovation as we hire additional engineering resources and increase our external research & development spend.
Contingent Consideration
Contingent consideration consists of the changes in fair value of the earn-out and the Tax Receivable Agreement (“TRA”) entered into with Ron P. Corio, our indirect stockholder, concurrent with the Acquisition of Array Technologies Patent Holdings Co., LLC (“Patent LLC”) by ATI Investment Parent, LLC (“Former Parent”) Former Parent’s acquisition of Patent LLC.
The earn-out liability was recorded at fair value as of July 8, 2016 (the “Acquisition Date”) and subsequent changes in the fair value are recognized in earnings. Fair value of the earn-out liability is measured based upon the expected return of investment of Former Parent, among other things. Cash payments related to the earn-out liability are required to be evaluated upon the occurrence of certain events, including the consummation of an initial public offering; the sale, transfer, assignment, pledge, encumbrance, distribution or disposition of shares of Former Parent held by Oaktree Power Opportunities Fund IV (Delaware) Holdings, L.P. and Oaktree ATI Investors, L.P. to a third party; the sale of equity securities or assets of Former Parent, ATI Investment Sub, Inc. (“Investment Sub”) or the Company to a third-party; or a merger, consolidation, recapitalization or reorganization of Former Parent, Investment Sub, or the Company. Our initial public offering of common stock (“IPO”), the cash distribution of $589 million that we paid to ATI Investment Parent, LLC upon the closing of our IPO and our Follow-on Offering of common stock in December 2020 (the “2020 Follow-on Offering”) required the Company to make a cash payment of $9.1 million in October 2020 and $15.9 million in December 2020. As a result of these payments our earn-out liability has been paid in full.
The TRA liability was recorded at fair value at the Acquisition Date and subsequent changes in the fair value are recognized in earnings. The TRA will generally provide for the payment by Array Tech, Inc. (f/k/a Array Technologies, Inc.) to Ron P. Corio for certain federal, state, local and non-U.S. tax benefits deemed realized in post-closing taxable periods by Array Tech, Inc. from the use of certain deductions generated by the increase in the tax value of the developed technology. Estimating fair value of the TRA is by nature imprecise. The significant fair value inputs used to estimate the future expected TRA payments to Ron P. Corio include the timing of tax payments, a discount rate, book income projections, timing of expected adjustments to calculate taxable income and the projected rate of use for attributes defined in the TRA.
Depreciation
Depreciation in our operating expense consists of costs associated with property, plant and equipment (“PP&E”) not used in manufacturing of our products. We expect that as we continue to grow both our revenue and our general and administrative personnel we will require some additional PP&E to support this growth resulting in additional depreciation expense.
Amortization
Amortization of intangibles consist of developed technology, customer relationships and internal-use software modifications over their expected period of use.
Non-Operating Expenses
Interest Expense
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Interest expense consists of interest and other charges paid in connection with our Senior Secured Credit Facility and our Senior ABL Facility, interest on the Senior Secured Promissory Note, and interest on our Prior Term Loan Facility (as defined below), which was fully repaid on February 2, 2020.
Income Tax Expense
We are subject to federal and state income taxes in the United States.
Results of Operations
The following tables set forth our consolidated statement of operations (in thousands):
| Three Months Ended March 31, | Increase/(Decrease) | ||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| Revenue | $ | 245,932 | $ | 437,718 | $ | (191,786) | (44) | % | |||||||||||||||
| Cost of Revenue | 202,074 | 319,302 | (117,228) | (37) | % | ||||||||||||||||||
| Gross profit | 43,858 | 118,416 | (74,558) | (63) | % | ||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||
| General and administrative | 24,673 | 11,707 | 12,966 | 111 | % | ||||||||||||||||||
| Contingent consideration | 148 | (1,013) | 1,161 | (115) | % | ||||||||||||||||||
| Depreciation and amortization | 5,984 | 6,374 | (390) | (6) | % | ||||||||||||||||||
| Total Operating Expenses | 30,805 | 17,068 | 13,737 | 80 | % | ||||||||||||||||||
| Income from Operations | 13,053 | 101,348 | (88,295) | (87) | % | ||||||||||||||||||
| Other Expense | |||||||||||||||||||||||
| Other income (expense), net | (78) | 108 | (186) | (172) | % | ||||||||||||||||||
| Interest expense | (9,009) | (5,229) | (3,780) | 72 | % | ||||||||||||||||||
| Total Other Expense | (9,087) | (5,121) | (3,966) | 77 | % | ||||||||||||||||||
| Income Before Income Tax Expense | 3,966 | 96,227 | (92,261) | (96) | % | ||||||||||||||||||
| Income Tax Expense | 1,079 | 22,542 | (21,463) | (95) | % | ||||||||||||||||||
| Net Income | $ | 2,887 | $ | 73,685 | $ | (70,798) | (96) | % | |||||||||||||||
Comparison of three months ended March 31, 2021 and 2020
Revenue
Revenue decreased by $191.8 million, or 44%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Total MW delivered decreased by approximately 28% for the three months ended March 31, 2021 driven by a higher proportion of our volume occurring in the first quarter of the year in 2020 versus 2021, primarily due to certain customers electing to take deliveries ahead of build schedules to take advantage of the ITC rate before the rate step down in 2020.
Cost of Revenue and Gross Profit
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Cost of revenue decreased by $117.2 million, or 37%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily due to the decrease in the number of MW delivered. Gross profit as a percentage of revenue decreased from 27.1% for the three months ended March 31, 2020 to 17.8% for the three months ended March 31, 2021. The decrease in Gross Profit as a percentage of revenue reflects higher commodity prices, higher logistics and lower absorption of fixed costs.
Operating Expenses:
General and Administrative
General and administrative expenses increased by $13.0 million, or 111%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase in expense was primarily due to additional consulting and professional fees incurred in the first quarter of 2021 associated with our follow-on offering of common stock that closed in March of 2021 (the “2021 Follow-on Offering:). The increase in expense also represents additional headcount driven by the growth of the company over the last twelve months and a charge of $6.3 million for equity-based compensation expense for the accelerated vesting of the Class B Units in connection with the 2021 Follow-on Offering with no comparable expense in 2020.
Contingent Consideration
Contingent consideration expense increased by $1.2 million, or 115%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase was primarily due to an increase in the fair value of our Tax Receivable Agreement obligation.
Depreciation
Depreciation expense for the three months ended March 31, 2021 was similar to the three months ended March 31, 2020 as we did not add any significant capital assets.
Amortization of Intangibles
Amortization of intangibles for the three months ended March 31, 2021 was similar to the three months ended March 31, 2020 as we did not add any significant intangible assets.
Interest Expense
Interest expenses increased by $3.8 million, or 72%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to interest on the higher average balance of our Term Loan Facility which was not outstanding during three months ended March 31, 2020. As of March 31, 2021, we had $430.0 million outstanding under the Senior Secured Credit Facility. We expect interest expense to be higher for the remainder of 2021 compared to 2020 as a result of the debt outstanding under the Senior Secured Credit Facility along with the amortization of the related discount and issuance costs.
Income Tax Expense
Income tax expense decreased by $21.5 million, or 95% for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, due to the decrease in earnings. Our effective tax rate was 27.2% for the three months ended March 31, 2021 and 23.4% for the three months ended March 31, 2020.
Liquidity and Capital Resources
Historical Cash Flow
The following table compares the historical cash flow (in thousands):
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| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net cash used in operating activities | $ | (42,148) | $ | (200,576) | |||||||
| Net cash used in investing activities | (10,570) | (168) | |||||||||
| Net cash used in financing activities | (36,590) | (57,692) | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | $ | (89,308) | $ | (258,436) | |||||||
We have historically financed our operations primarily with the proceeds from capital contributions, operating cash flows and short and long-term borrowings. Our ability to generate positive cash flow from operations is dependent on the strength 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 and our availability under our Revolving Credit Facility will be sufficient to meet our future cash needs to fund operations.
As of March 31, 2021, our cash and cash equivalents was $19.1 million. Net working capital as of March 31, 2021 was $53.2 million.
As of March 31, 2021, we had outstanding borrowings of $430.0 million and $200.0 million commitment a under our Revolving Credit Facility, of which $160.3 million was available to borrow to fund operations.
Operating Activities
For the three months ended March 31, 2021, cash used in operating activities was $42.1 million primarily due a decrease in deferred revenue of $59.9 million for which we made payments to our suppliers for products that we received the cash for in 2020, but that we did not ship until 2021, a decrease in accounts payable of $10.6 million, an increase in accounts receivable of $2.6 million, an increase in inventories of $6.3 million offset by non-cash add-backs to net income of $17.8 million, a decrease in income tax receivables of $13.0 million and an increase in accrued expenses of $5.1 million and net income of $2.9 million.
For the three months ended March 31, 2020 cash used in operating activities was $200.6 million, due to an decrease in deferred revenue of $301.2 million, a decrease in accounts payable of $35.6 million, an increase in accounts receivable of $19.5 million, offset by a decrease in inventory of $27.4 million, a decrease in income tax payable of $23.2 million and net income of $73.7 million.
Investing Activities
For the three months ended March 31, 2021 and 2020, net cash used in investing activities was $10.6 million and $0.2 million, respectively, primarily attributable to a $10.0 million investment in equity securities.
Financing Activities
For the three months ended March 31, 2021, net cash used by financing activities was $36.6 million, of which $30.0 million was attributable to a payment on the Term Loan Facility and $6.6 million was attributable to fees paid to reduce the annual interest rate on the Senior Secured Credit Facility and to increase the limit on the Revolving Facility by $50.0 million.
For the three months ended March 31, 2020, net cash used by financing activities was $57.7 million, which was attributable to scheduled principal payments on the Term Loan Facility.
Debt Obligations
Senior Secured Credit Facility
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On October 14, 2020, the Company entered into a senior secured credit facility which was amended on February 23, 2021 by the first amendment and on February 26, 2021 by the second amendment. The senior secured facility consisted originally of (i) a $575.0 million senior secured seven-year term loan facility (the “Term Loan Facility”) and (ii) a $150.0 million senior secured 5-year revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Secured Credit Facility”). On February 23, 2021 we entered into the first amendment (“First Amendment”) to our Senior Secured Credit Facility. The First Amendment, in the case of the Eurocurrency borrowings, lowers the London interbank offered rate floor to 50 basis points from 100 basis points and lowers the applicable margin to 325 basis points from 400 basis points per annum. This results in our current rate on the Term Loan Facility decreasing to 3.75% down from 5% prior to the First Amendment. On February 26, 2021, we entered into the incremental facility amendment No. 2 (the “Second Amendment”) to the Senior Secured Credit Facility. The Second Amendment increases the $150.0 million Revolving Credit Facility from $150.0 million to $200.0 million. The debt discount and issuance costs are being amortized using the effective interest method and the rate as of March 31, 2021 is 5.01%. The Term Loan Facility has an annual excess cash flow calculation beginning with the year ended December 31, 2021 which could require the Company to make advance principal payments. The balance of the Term Loan Facility is presented in the accompanying consolidated balance sheets net of debt discount and issuance costs of $34.0 million at March 31, 2021. As of March 31, 2021, the Term Loan Facility had a balance of $430.0 million. We are in compliance with all covenants as of March 31, 2021.
Letters of Credit
Under the Revolving Credit Facility, the Company had no outstanding balance, $39.7 million in standby letters of credit and availability of $160.3 million under the Revolving Credit Facility.
Interest Rate
The interest rates applicable to the loans under the Term Loan Facility equal, at our option, either, (i) in the case of ABR borrowings, the highest of (a) the Federal Funds Rate as of such day plus 50 basis points, (b) the prime rate and (c) the adjusted LIBOR rate as of such day for a deposit in U.S. dollars with a maturity of one month plus 100 basis points, provided that in no event shall the ABR be less than 150 basis points, plus, in each case, the applicable margin of 300 basis points per annum; or (ii) in the case of Eurocurrency borrowings, the greater of (a) the London interbank offered rate for the relevant currency, adjusted for statutory reserve requirements, and (b) 100 basis points, plus, in each case, the applicable margin of 400 basis points per annum.
The interest rates applicable to the loans under the Revolving Facility equal, at our option, either, (i) in the case of ABR borrowings, the highest of (a) the Federal Funds Rate as of such day plus 50 basis points, (b) the prime rate and (c) the adjusted LIBOR rate as of such day for a deposit in U.S. dollars with a maturity of one month plus 100 basis points, provided that in no event shall the ABR be less than 150 basis points, plus, in each case, the applicable margin of 225 basis points per annum; or (ii) in the case of Eurocurrency borrowings, the greater of (a) the London interbank offered rate for the relevant currency, adjusted for statutory reserve requirements, and (b) 50 basis points, plus, in each case, the applicable margin of 325 basis points per annum.
The Term Loan Facility amortizes in equal quarterly installments in aggregate annual amounts equal to 1.00% per annum of the original principal amount of the loans funded thereunder. There is no scheduled amortization under the Revolving Credit Facility.
Off-Balance Sheet Arrangements
As of March 31, 2021, we posted surety bonds in the total amount of approximately $134.3 million. We are required to provide surety bonds to various parties as required for certain transactions initiated during the
27
ordinary course of business to guarantee the Company’s performance in accordance with contractual or legal obligations. These off-balance sheet arrangements do not adversely impact our liquidity or capital resources.
.
Critical Accounting Policies and Significant Management Estimates
Equity-Based Compensation
The Company granted restricted stock units (RSU’s) to employees and Performance Stock Units (PSUs) to certain executives. The PSUs contain performance and market conditions. The PSU grants were valued using the Monte Carlo simulation method and the assigned fair value on grant date will be recognized on a straight-line basis over the vesting term of the awards. The probability of the awards meeting the performance related vested conditions is not included in the grant date fair value, but rather will be estimated quarterly and the Company will true-up the expense recognition accordingly upon any probability to vest revision. The Company accounts for forfeitures as they occur.
The Class B Units fully accelerated vesting upon the completion 2021 Follow-on Offering and the Company recognized the remaining unamortized compensation expense of $6.3 million.
As of March 31, 2021, there were no other significant changes in the application of our critical accounting policies or estimation procedures from those presented in our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes to the market risk disclosures set forth in Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2020.
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 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 March 31, 2021. 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 as a result of the material weaknesses that existed in our internal control over financial reporting as described below. These material weaknesses related to our inventory cut-off, specifically due to lack of sufficient systems.
Changes in Internal Control over Financial Reporting.
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There were no changes in our internal control over financial reporting during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
On August 30, 2017, Array filed its first amended complaint in the U.S. District Court for the District of New Mexico against Colin Mitchell, Nextracker, Inc., Flextronics International U.S.A., Inc., Marco Garcia, Daniel S. Shugar, and Scott Graybeal (collectively “Defendants”) asserting (among other claims) trade secret misappropriation, tortious interference with contract, fraud, and breach of contract. Defendant Mitchell was formerly an employee of the Company, but was hired by Nextracker in violation of his non-compete agreement, and he shared with Nextracker and the other defendants certain of Array’s trade secrets and confidential information in violation of his legal obligations. Defendants filed their answer to the amended complaint on February 5, 2018 denying the allegations, but did not assert any counterclaims against Array. The case has been vigorously litigated through the close of fact discovery and expert discovery. As of September 1, 2020, the court has ruled on a number of motions, including a dismissal of the Defendants’ unclean hands defense and granting partial summary judgment in favor of Array for breach of contract. As of March 31, 2021, the Court has denied in every material aspect the motion for summary judgment filed by the Defendants. The Court has yet to rule on a motion for sanctions filed by Array. We anticipate that once the court has ruled on all of the pending motions, and the court procedures allow for jury trials to resume, it will set a trial date.
From time to time, we may be involved in litigation relating to claims arising out of our operations and businesses that cover a wide range of matters, including, among others, intellectual property matters, contract and employment claims, personal injury claims, product liability claims and warranty claims. Currently, there are no claims or proceedings against us that we believe will have a material adverse effect on our business, financial condition, results of operations or cash flows. However, the results of any current or future litigation cannot be predicted with certainty and, regardless of the outcome, we may incur significant costs and experience a diversion of management resources as a result of litigation.
Item 1A. Risk Factors
Other than risk factors described below, there has been no material changes in our risk factors from those disclosed in Part I, Item 1A, in our Annual Report on Form 10‑K for the fiscal year ended December 31, 2020.
You should consider carefully the risks described below, as well as the other information in this Quarterly Report on Form 10‑Q, before deciding whether to purchase, hold or sell shares of our common stock. The occurrence of any of the following risks could harm our business, financial condition, results of operations and/or growth prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. You should consider all of the factors described, including our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” when evaluating our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None.
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Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
| Number | Exhibit Description | Form | Date | No. | ||||||||||||||||||||||
| 3.1 | 8-K | 10/19/2020 | 3.1 | |||||||||||||||||||||||
| 3.2 | 8-K | 10/19/2020 | 3.2 | |||||||||||||||||||||||
| 10.1 | 10-K | 3/10/2021 | 10.14 | |||||||||||||||||||||||
| 10.2 | 8-K | 3/1/2021 | 10.1 | |||||||||||||||||||||||
| 31.1* | – | |||||||||||||||||||||||||
| 31.2* | – | |||||||||||||||||||||||||
| 32.1** | – | |||||||||||||||||||||||||
| 32.2** | – | |||||||||||||||||||||||||
| 101.INS | 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 | |||||||||||||||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | |||||||||||||||||||||||||
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| Number | Exhibit Description | Form | Date | No. | ||||||||||||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||||||||||||||||
| 101.LAB | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||||||||||||||
| 104 | Cover Page Interactive Data Files | |||||||||||||||||||||||||
* Filed herewith
** Furnished herewith
31
SIGNATURES
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.
Array Technologies, Inc.
| By: | /s/ Jim Fusaro | Date: | May 11, 2021 | ||||||||
| Jim Fusaro | |||||||||||
| Chief Executive Officer | |||||||||||
| By: | /s/ Nipul Patel | Date: | May 11, 2021 | ||||||||
| Nipul Patel | |||||||||||
| Chief Financial Officer | |||||||||||
32
EXHIBIT 31.1
CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO
RULE 13a-14(a) AND 15d-14(a) UNDER THE EXCHANGE ACT
I, Jim Fusaro, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Array Technologies, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [omitted pursuant to Rules 13a-14(a) and 15d-14(a)] for the registrant and have:
a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)[omitted pursuant to Rules 13a-14(a) and 15d-14(a)]
c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| /s/ Jim Fusaro | |||||
| Jim Fusaro | |||||
| Chief Executive Officer (Principal Executive Officer) | |||||
Date: May 11, 2021
EXHIBIT 31.2
CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO
RULE 13a-14(a) AND 15d-14(a) UNDER THE EXCHANGE ACT
I, Nipul Patel, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Array Technologies, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [omitted pursuant to Rules 13a-14(a) and 15d-14(a)] for the registrant and have:
a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)[omitted pursuant to Rules 13a-14(a) and 15d-14(a)]
c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| /s/ Nipul Patel | ||
| Nipul Patel | ||
| Chief Financial Officer (Principal Financial Officer) | ||
Date: May 11, 2021
EXHIBIT 32.1
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report of Array Technologies, Inc. (the "Company") filed on Form 10-Q for the period ended March 31, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jim Fusaro, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Jim Fusaro | ||
| Jim Fusaro | ||
| Chief Executive Officer | ||
Date: May 11, 2021
EXHIBIT 32.2
CERTIFICATION BY CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report of Array Technologies, Inc. (the "Company") filed on Form 10-Q for the period ended March 31, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Nipul Patel, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Nipul Patel | ||
| Nipul Patel | ||
| Chief Financial Officer | ||
Date: May 11, 2021