FTC SOLAR, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included in Item 1 of this Form 10-Q and along with information included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , as updated in our Current Report on Form 8-K filedJune 13, 2022 . In addition to historical financial information, the following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in Part I, Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Additionally, our historical results are not necessarily indicative of the results that may be expected in any future period. This discussion and analysis of our financial condition and results of operations contain the presentation of Adjusted EBITDA, Adjusted Net Loss and Adjusted EPS, which are not presented in accordance with GAAP. Adjusted EBITDA, Adjusted Net Loss and Adjusted EPS are being presented because they provide the Company and readers of this Form 10-Q with additional insight into our operational performance relative to earlier periods and relative to our competitors. We do not intend Adjusted EBITDA, Adjusted Net Loss and Adjusted EPS to be substitutes for any GAAP financial information. Readers of this Form 10-Q should use Adjusted EBITDA Adjusted Net Loss and Adjusted EPS only in conjunction with Net Loss and Net Loss per Share, the most comparable GAAP financial measures. Reconciliations of Adjusted EBITDA, Adjusted Net Loss and Adjusted EPS to Net Loss and Net Loss per Share, the most comparable GAAP measures, is provided in "Non-GAAP Financial Measures".
Overview
FTC Solar, Inc. (the "Company", "we", "our", or "us") was founded in 2017 and is incorporated in the state ofDelaware . We are a global provider of advanced solar tracker systems, supported by proprietary software and value-added engineering services. Our mission is to provide differentiated products, software, and services that maximize energy generation and cost savings for our customers, and to help facilitate the continued growth and adoption of solar power globally. Trackers significantly increase the amount of solar energy produced at a solar installation by moving solar panels throughout the day to maintain an optimal orientation relative to the sun. Our primary tracker system is currently marketed under the Voyager brand name ("Voyager"). Voyager is a next-generation two-panel in-portrait single-axis tracker solution that we believe offers industry-leading performance and ease of installation. InSeptember 2022 , we announced the introduction of Pioneer, a new and differentiated one module-in-portrait (1P) solar tracker solution that allows for a pile count reduction per megawatt compared to similar industry-leading solutions, as well as providing other benefits, giving customers increased flexibility and additional cost savings. We have also launched a new solution for thin-film modules, filling a gap in our offering for certainU.S. modules. We have a team of dedicated renewable energy professionals with significant project installation experience focused on delivering cost reductions to ourU.S. and worldwide clients across the solar project development and construction cycle. Our solar solutions span a range of applications, including ground mount, tracker, canopy, and rooftop. The Company is headquartered inAustin, Texas , and has international subsidiaries inAustralia ,China ,India andSouth Africa . InApril 2021 , we completed an initial public offering ("IPO") of 19,840,000 shares of our common stock receiving proceeds of$241.2 million , net of underwriting discounts and commissions, but before offering costs, and began trading on the Nasdaq Global Market under the symbol "FTCI". Prior to the completion of the IPO, the board of directors and stockholders approved an approximately 8.25-for-1 forward stock split (the "Forward Stock Split") of the Company's shares of common stock which became effective onApril 28, 2021 . Proceeds from the IPO were used for general corporate purposes, with$54.2 million used to purchase an aggregate of 4,455,384 shares of our common stock, including shares resulting from the settlement of certain vested restricted stock units ("RSUs") and exercise of certain options in connection with the IPO at the IPO price, less underwriting discounts and commissions. 21 -------------------------------------------------------------------------------- We are an emerging growth company, as defined in the Jumpstart Our Business Startups (JOBS) Act. Under the JOBS Act, we elected to use the allowed extended transition period to delay adopting new or revised accounting standards until such time as those standards apply to private companies.
Key Factors Affecting Our Performance
Government Regulations. Changes in theU.S. trade environment, including the imposition of import tariffs, AD/CVD investigations and the Uyghur Forced Labor Prevention Act ("UFLPA"), which became effective inJune 2022 , can have an impact on the timing of developer projects. The UFLPA resulted in new rules for module importers and reviews byU.S. Customs andBorder Patrol . There is currently uncertainty in the market around achieving full compliance with UFLPA, whether related to sufficient traceability of materials or other factors. Escalating trade tensions, particularly betweenthe United States andChina , have led to increased tariffs and trade restrictions, including tariffs applicable to certain raw materials and components for our products. We have taken measures with the intention of mitigating the effect of tariffs and the impact of AD/CVD and UFLPA on our business by reducing our reliance onChina . In 2019, 90% of our supply chain was sourced fromChina . As ofSeptember 30, 2022 , we have qualified suppliers outside ofChina for all our commodities and reduced the extent to which our supply chain forU.S. -based projects is subject to existing tariffs. We have entered into partnerships with manufacturers inthe United States ,Mexico ,Canada ,Spain ,Brazil ,Turkey ,Saudi Arabia ,India ,Thailand ,Vietnam andKorea to diversify our supply chain and optimize costs. OnJune 6, 2022 ,President Biden issued an Executive Order allowingU.S. solar deployers the ability to import solar modules and cells fromCambodia ,Malaysia ,Thailand andVietnam free from certain duties for 24 months, along with other incentives designed to accelerateU.S. domestic production of clean energy technologies. The most notable incentive program impacting ourU.S. business has been the investment tax credit ("ITC") for solar energy projects, which allows taxpayers to offset theirU.S. federal income tax liability by a certain percentage of their cost basis in solar energy systems placed in service for commercial use. The Inflation Reduction Act of 2022, passed by theU.S. Congress and signed into law byPresident Biden onAugust 16, 2022 , expanded and extended the tax credits available to solar energy projects. ITCs have been extended for such projects through at least 2032 and, depending on the location of a particular project and its ability to satisfy certain labor and domestic content requirements, the ITC percentage can be between 30% and 50%. New solar projects are now eligible to claim production tax credits as an alternative to the ITC. We believe this law will bolster and extend future demand for our products in theU.S. Disruptions in Transportation and Supply Chain. Our costs are affected by certain component costs including steel, motors and micro-chips, as well as transportation costs. Current market conditions and international conflicts that constrain supply of materials and disrupt the flow of materials from international vendors impact the cost of our products and services, along with overall rates of inflation in the global economy, which have been higher than recent historical rates. We have also seen increases in domestic fuel prices and transportation costs in the past couple of years. These cost increases impact our operating margins. We have taken steps to expand and diversify our manufacturing partnerships and have in the past employed alternative modes of transportation to mitigate the impact of the current headwinds in the global supply chain and logistics markets. Although overall transportation costs are higher than pre-pandemic rates, there has been a decline in recent months in costs for both charter vessels and in the premium container market, as well as an easing of congestion inU.S. ports. However, recent COVID shutdowns inChina have created a backlog of exports and increased demand for container shipments fromChina . We continue to monitor the logistics markets and have adjusted our use of various modes of transportation when warranted to optimize our transportation costs. Additionally, inFebruary 2022 , we contracted with a related-party consulting firm to support us in making ongoing improvements to our processes and performance in various areas, including design, sourcing, logistics, pricing, software and our distributed generation business. Further information may be found in Note 16 in Part 1, Item 1 of this Form 10-Q with regard to the related-party consulting firm. We intend to maintain a sharp focus on our design to value initiative to improve margins by reducing manufacturing and material costs of our products. Megawatts ("MW") Shipped and Average Selling Price ("ASP"). The primary operating metric we use to evaluate our sales performance and to track market acceptance of our products is the change in quantity of MW shipped from period to period. MW are measured for each individual project and are 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 watt, including the change in ASP from period to period and cost per watt. ASP is calculated by dividing total revenue by total watts and cost per watt is calculated by dividing total costs of goods sold by total watts. These metrics enable us to evaluate trends in pricing, manufacturing and logistics costs and profitability. Events such as the COVID-19 pandemic, global inflation rates and international conflicts can impact theU.S. economy, global supply chains, and our business. These impacts can cause significant shipping delays and cost increases, as well as offsetting ASP increases, and also raise the price of inputs like steel and logistics, affecting our cost per watt. 22 -------------------------------------------------------------------------------- Investment in Technology and Personnel. We invest in both the people and technology behind our products. We intend to continue making significant investments in the technology for our products and expansion of our patent portfolio to attract and retain customers, expand the capabilities and scope of our products, and enhance user experience. We also intend over time to make significant investments to attract and retain employees in key positions, including sales leads, engineers, software developers, quality assurance personnel, supply chain personnel, product management, and operations personnel, to help us drive additional efficiencies across our marketplace and, in the case of sales leads, to continue to enhance and diversify our sales capabilities, including international expansion. Impact of the COVID-19 Pandemic. In March of 2020, theWorld Health Organization declared that the worldwide spread and severity of a new coronavirus, referred to as COVID-19, was severe enough to be characterized as a pandemic. In response to the initial and continued spread of COVID-19, governmental authorities inthe United States and around the world imposed, and in some cases continue to impose, various restrictions designed to slow the pace of the pandemic, including restrictions on travel and other restrictions that prohibited employees from going to work, including in cities where we have offices, employees, and customers, causing severe disruptions in the worldwide economy. The continued implications of the COVID-19 pandemic on our business, financial condition and results of operations remain uncertain and will depend on certain developments, including the duration and severity of the COVID-19 pandemic, the impact of virus variants, the rate of vaccinations, the COVID-19 pandemic's impact on our customers and suppliers and the range of governmental and community reactions to the pandemic. While our day-to-day operations have been affected, the impact has been less pronounced as most of our staff has worked remotely and continued to develop our product offerings, source materials and install our products. However, we have experienced significant supply chain disruptions that have caused delays in product deliveries due to diminished vessel capacity and port detainment of vessels as a consequence of the COVID-19 pandemic (including as a result of multiple COVID-19 variants), which have contributed to an increase in lead times for delivery of our tracker systems. For instance, we experienced a COVID-related supplier production slowdown inIndia at the end ofMarch 2021 , which continued throughout 2021 due to the emergence of the Omicron variant. In addition, recent COVID shutdowns inChina have created a backlog of exports and increased demand for container shipments fromChina . The reduced capacity for logistics has caused increases in logistics costs compared to pre-pandemic rates, although certain costs have begun to decline in recent months. Additionally, ground operations at project sites have been impacted by health-related restrictions, shelter-in-place orders and worker absenteeism, which has resulted in delays in project completions, and these restrictions have also hindered our ability to provide on-site support to our customers and conduct inspections of our contract manufacturers. The disruptions in the global supply chain have resulted in extended lead times for some of our component parts. Management will continue to monitor the impact of the global situation on our financial condition, cash flows, operations, contract manufacturers, industry, workforce and customer relationships. Impact of Climate Change. Climate change has primarily impacted our business operations by increasing demand for solar power generation and, as a result, for use of our products. While climate change has not resulted in any material negative impact to our operations to date, we recognize the risk of disruptions to our supply chain due to extreme weather events. This has led us to expand the diversity of our supplier base and to partner with more local suppliers to reduce shipping and transportation needs. We are also increasingly partnering with larger scale steel producers rather than smaller suppliers to facilitate scaling of our operations while remaining conscious of the environmental impacts of steel manufacturing as the regulatory landscape around these high-emitting industries evolves. We also attempt to mitigate the climate-related risks from the use of our products by designing our equipment and systems to have a high-slope tolerance and wind mitigation capabilities, while at the same time reducing the required foundation/pile count needed. This allows our trackers to be installed in increasingly hostile environments with minimal disturbance to the surrounding land. Non-GAAP Financial Measures
Adjusted EBITDA, adjusted net loss and adjusted earnings per share ("EPS")
We utilize Adjusted EBITDA, Adjusted Net Loss, and Adjusted EPS as supplemental
measures of our performance. We define Adjusted EBITDA as net loss plus (i)
provision (benefit) for income taxes, (ii) interest expense, net, (iii)
depreciation expense, (iv) amortization of intangibles, (v) stock-based
compensation, (vi) non-routine legal fees, certain severance and other costs
(credits) and (vii) the loss (income) from our unconsolidated subsidiary. We
also deduct the gains from the disposal of our investment in unconsolidated
subsidiary and from extinguishment of our debt from net loss in arriving at
Adjusted EBITDA. We define Adjusted Net Loss as net loss plus (i) amortization
of debt issue costs and intangibles, (ii) stock-based compensation, (iii)
non-routine legal fees, severance and certain other costs (credits), (iv) the
loss (income) from our unconsolidated subsidiary and (v) the income tax expense
(benefit) of those adjustments. We also deduct the gains or add back the losses
from the disposal of our investment in unconsolidated subsidiary and from
extinguishment of our debt from net loss in arriving at Adjusted Net Loss.
Adjusted EPS is defined as Adjusted Net Loss on a per share basis using the
weighted average diluted shares outstanding.
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Adjusted EBITDA, Adjusted Net Loss, and Adjusted EPS are intended as
supplemental measures of performance that are neither required by, nor presented
in accordance with, U.S. generally accepted accounting principles ("GAAP"). We
present Adjusted EBITDA, Adjusted Net Loss and Adjusted EPS, because we believe
they assist investors and analysts in comparing our performance across reporting
periods on an ongoing basis by excluding items that we do not believe are
indicative of our core operating performance. In addition, we use Adjusted
EBITDA, Adjusted Net Loss and Adjusted EPS to evaluate the effectiveness of our
business strategies.
Among other limitations, Adjusted EBITDA, Adjusted Net Loss, and Adjusted EPS do
not reflect (i) our cash expenditures, or future requirements, for capital
expenditures or contractual commitments, and (ii) the impact of certain cash
charges resulting from matters we consider not to be indicative of our ongoing
operations. Further, the adjustments noted in Adjusted EBITDA do not reflect the
impact of any income tax expense or benefit. Additionally, other companies in
our industry may calculate Adjusted EBITDA, Adjusted Net Loss, and Adjusted EPS
differently than we do, which limits its usefulness as a comparative measure.
Because of these limitations, Adjusted EBITDA, Adjusted Net Loss, and Adjusted
EPS should not be considered in isolation or as substitutes for performance
measures calculated in accordance with GAAP, and you should not rely on any
single financial measure to evaluate our business. These non-GAAP financial
measures, when presented, are reconciled to the most closely applicable GAAP
measure as disclosed below:
Three months ended September 30,
2022 2021
(in thousands, except
shares and per share
data) Adjusted EBITDA Adjusted Net Loss Adjusted EBITDA Adjusted Net Loss
Net loss per GAAP $ (25,636 ) $ (25,636 ) $ (22,915 ) $ (22,915 )
Reconciling items -
Provision (benefit)
for income taxes (151 ) - 41 -
Interest expense, net 160 - 301 -
Amortization of debt
issue costs in
interest expense - 177 - 173
Depreciation expense 182 - 53 -
Amortization of
intangibles 135 135 - -
Stock-based
compensation 7,507 7,507 5,381 5,381
Gain from disposal of
investment in
unconsolidated
subsidiary(a) (1,408 ) (1,408 ) (210 ) (210 )
Non-routine legal
fees(b) 842 842 988 988
Severance(c) 311 311 - -
Other costs(d) 324 324 270 270
Adjusted Non-GAAP
amounts $ (17,734 ) $ (17,748 ) $ (16,091 ) $ (16,313 )
GAAP net loss per
share:
Basic N/A $ (0.25 ) N/A $ (0.24 )
Diluted N/A $ (0.25 ) N/A $ (0.24 )
Adjusted Non-GAAP net
loss per share
(Adjusted EPS):
Basic N/A $ (0.17 ) N/A $ (0.17 )
Diluted N/A $ (0.17 ) N/A $ (0.17 )
Weighted-average
common shares
outstanding:
Basic N/A 102,164,455 N/A 94,596,519
Diluted N/A 102,164,455 N/A 94,596,519
(a) Our management excludes the gain from current year collections of contingent
contractual amounts arising from the sale in 2021 of our investment in our
unconsolidated subsidiary when evaluating our operating performance.
(b) Non-routine legal fees represent legal fees and other costs incurred for
matters that were not ordinary or routine to the operations of the business.
(c) Severance costs were incurred related to agreements with certain executives
due to restructuring changes.
(d) Other costs include installment payments in both periods relating to a CEO
transition event that occurred in 2021, as well as professional services
associated with our IPO and a registration statement filing.
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Nine months ended September 30,
2022 2021
(in thousands, except
shares and per share
data) Adjusted EBITDA Adjusted Net Loss Adjusted EBITDA Adjusted Net Loss
Net loss per GAAP $ (79,112 ) $ (79,112 ) $ (82,707 ) $ (82,707 )
Reconciling items -
Provision (benefit)
for income taxes 15 - 137 -
Interest expense, net 882 - 515 -
Amortization of debt
issue costs in
interest expense - 526 - 288
Depreciation expense 447 - 95 -
Amortization of
intangibles 135 - - -
Stock-based
compensation 15,255 15,255 58,531 58,531
Gain from disposal of
investment in
unconsolidated
subsidiary(a) (1,745 ) (1,745 ) (20,829 ) (20,829 )
Gain on extinguishment
of debt - - (790 ) (790 )
Non-routine legal
fees(b) 5,742 5,742 1,778 1,778
Severance(c) 1,037 1,037 295 295
Other costs(d) 1,904 1,904 3,121 3,121
Loss from
unconsolidated
subsidiary(a) - - 354 354
Income tax benefit
attributable to
adjustments - - - (3 )
Adjusted Non-GAAP
amounts $ (55,440 ) $ (56,393 ) $ (39,500 ) $ (39,962 )
GAAP net loss per
share:
Basic N/A $ (0.79 ) N/A $ (1.00 )
Diluted N/A $ (0.79 ) N/A $ (1.00 )
Adjusted Non-GAAP net
loss per share
(Adjusted EPS):
Basic N/A $ (0.56 ) N/A $ (0.48 )
Diluted N/A $ (0.56 ) N/A $ (0.48 )
Weighted-average
common shares
outstanding:
Basic N/A 100,642,126 N/A 82,677,824
Diluted N/A 100,642,126 N/A 82,677,824
(a) Our management excludes the gain from current year collections of contingent
contractual amounts arising from the sale in 2021 of our investment in our
unconsolidated subsidiary, as well as the gain from the 2021 sale, when
evaluating our operating performance, along with the loss from operations of our
unconsolidated subsidiary prior to the sale.
(b) Non-routine legal fees represent legal fees and other costs incurred for
matters that were not ordinary or routine to the operations of the business.
(c) Severance costs were incurred related to agreements with certain executives
due to restructuring changes.
(d) Other costs include certain amounts related to our 2022 acquisition of HX
Tracker, as well as costs attributable to settlement of stock-based compensation
awards in 2022 resulting from our IPO, shareholder follow-on registration costs
pursuant to our IPO, installment payments relating to a CEO transition event
that occurred in 2021 and professional services associated with our IPO and a
registration statement filing. Other costs during 2021 also include consulting
fees in connection with operations and finance and costs associated with our
IPO.
Key Components of Our Results of Operations
The following discussion describes certain line items in our condensed consolidated statements of operations.
Revenue
Revenue from the sale of our solar tracker systems and customized components of
those systems is recognized over time, as work progresses, utilizing an input
measure of progress determined by cost incurred to date relative to total
expected cost on these projects to
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correlate with our performance in transferring control over the tracker systems
and their components. Revenue from the sale of individual parts is recognized
point-in-time as and when control transfers based on the terms of the contract.
Revenue from sale of term-based software licenses is recognized upon transfer of
control to the customer. Revenue for shipping and handling services is
recognized over time based on progress in meeting shipping terms of the
arrangements. Subscription revenue, which is derived from our subscription-based
enterprise licensing model, and support revenue, which is derived from ongoing
security updates and maintenance, are generally recognized on a straight-line
basis over the term of the contract.
Our customers include project developers, solar asset owners and EPC contractors
that design and build solar energy projects. 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 our solar tracker systems and
related parts can vary depending on size of the project and availability of
vessels and other means of delivery. Contracts can range in value from tens of
thousands to tens of millions of dollars.
Our revenue is affected by changes in the volume and ASP of our solar tracking
systems purchased by our customers and volume of sales of software products and
engineering services, among other things. The ASP of our solar tracker systems
and quarterly volume of sales is driven by the supply of, and demand for, our
products, changes in product mix, geographic mix of our customers, strength of
competitors' product offerings, tariff and import restrictions, supply chain
issues and availability of government incentives to the end-users of our
products. Additionally, our revenue may be impacted by seasonality due to cold
weather, which can cause variability in site construction activity.
The vast majority of our revenue in the periods presented was attributable to
sales in the United States and Australia . Our revenue growth is dependent on
continued growth in the number of solar tracker projects and engineering
services we win in competitive bidding processes and growth in our software
sales each year, as well as our ability to increase our market share in each of
the geographies in which we currently compete, expand our global footprint to
new emerging markets, grow our production capabilities to meet demand and
continue to develop and introduce new and innovative products that address the
changing technology and performance requirements of our customers, among other
things.
Cost of revenue and gross profit (loss)
We subcontract with third-party manufacturers to manufacture and deliver our products directly to our customers. Our product costs are affected by the underlying cost of raw materials procured by these contract manufacturers, including steel and aluminum; component costs, including electric motors and gearboxes; technological innovation in manufacturing processes; and our ability to achieve economies of scale resulting in lower component costs. We do not currently hedge against changes in the price of raw materials, but we continue to explore opportunities to mitigate the risks of foreign currency and commodity fluctuations through the use of hedges and foreign exchange lines of credit. Some of these costs, primarily personnel, are not directly affected by sales volume. We have increased our headcount since ourApril 2021 IPO as we scaled up our business. Our gross profit may vary period-to-period due to changes in our headcount, ASP, product costs, product mix, customer mix, geographical mix, shipping methods, warranty costs and seasonality. Pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), we received employee retention credits during 2021, which reduced the impact of increased personnel costs on our operating results during the prior year comparative period.
Operating expenses
Operating expenses consist of research and development expenses, selling and
marketing expenses and general and administrative expenses. Personnel-related
costs are the most significant component of our operating expenses and include
salaries, benefits, bonuses, commissions and stock-based compensation expenses.
Our increased headcount has contributed to increased operating costs both in
absolute dollars and as a percentage of revenue. While we have recently frozen
non-essential hiring in response to current regulatory issues that are
negatively impacting solar project activity levels, we expect to resume hiring
new employees in the future as needed to support our future expected growth and
in response to expected turnover. In addition, our operating costs have been
impacted by (i) our level of research activities to originate, develop and
enhance our products, (ii) our sales and marketing efforts as we expand our
development activities in other parts of the world, and (iii) increased legal
and professional fees, compliance costs, insurance, facility costs and other
costs associated with our expected growth and in being a public company.
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Results of Operations - Three Months Ended
Three months ended September 30,
2022 2021
(in thousands, except Percentage of Percentage of
percentages) Amounts revenue Amounts revenue
Revenue:
Product $ 3,543 21.4 % $ 45,582 86.0 %
Service 13,029 78.6 % 7,407 14.0 %
Total revenue 16,572 100.0 % 52,989 100.0 %
Cost of revenue:
Product 11,411 68.9 % 48,090 90.8 %
Service 14,676 88.6 % 12,938 24.4 %
Total cost of revenue 26,087 157.4 % 61,028 115.2 %
Gross profit (loss) (9,515 ) (57.4 %) (8,039 ) (15.2 %)
Operating expenses
Research and development 2,126 12.8 % 2,116 4.0 %
Selling and marketing 1,994 12.0 % 2,224 4.2 %
General and administrative 13,059 78.8 % 10,391 19.6 %
Total operating expenses 17,179 103.7 % 14,731 27.8 %
Loss from operations (26,694 ) (161.1 %) (22,770 ) (43.0 %)
Interest expense, net (160 ) (1.0 %) (301 ) (0.6 %)
Gain from disposal of investment
in unconsolidated subsidiary 1,408 8.5 % 210 0.4 %
Other income (expense) (341 ) (2.1 %) (13 ) 0.0 %
Loss from unconsolidated
subsidiary - 0.0 % - 0.0 %
Loss before income taxes (25,787 ) (155.6 %) (22,874 ) (43.2 %)
(Provision) benefit for income
taxes 151 0.9 % (41 ) (0.1 %)
Net loss $ (25,636 ) (154.7 %) $ (22,915 ) (43.2 %)
Revenue
We generate our revenue in two streams - Product revenue and Service revenue.
Product revenue is derived from the sale of solar tracker systems, customized
components for those systems, individual part sales for certain specific
transactions and the sale of term-based software licenses. Service revenue
includes revenue from shipping and handling services, our subscription-based
enterprise licensing model and maintenance and support services in connection
with the term-based software licenses.
Three months ended September 30,
(in thousands) 2022 2021 $ Change % Change
Product $ 3,543 $ 45,582 $ (42,039 ) (92.2 )%
Service 13,029 7,407 5,622 75.9 %
Total revenue $ 16,572 $ 52,989 $ (36,417 ) (68.7 )%
Product revenue
The decrease in product revenue for the three months ended September 30, 2022 ,
as compared to the three months ended September 30, 2021 , was primarily due to
(i) a 72% decrease in MW produced and (ii) a decrease of approximately 72% in
ASP.
The decrease in MW produced was due to the wind down in legacy project activity
as a result of supply chain availability and concerns by project developers and
owners in the U.S. in recent months over regulatory and tariff issues, including
AD/CVD and Withhold Release Orders ("WROs") pursuant to the UFLPA. We believe
the regulatory concerns regarding module availability, among other things, has
slowed new and existing project activity in the U.S. during the three months
ended September 30, 2022 , by pushing some activity into 2023 and beyond. The
decrease in ASP for our products was the result of a change in the mix of
projects between the periods.
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The increase in service revenue for the three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 , primarily resulted from the timing of current shipping and logistics activity levels for two larger projects and an increase in ASP for shipping and logistics services due to higher pricing required to cover higher costs. During the three months endedSeptember 30, 2021 , increases in shipping and logistics costs were not fully recoverable under existing contracts at that time.
Cost of revenue and gross profit (loss)
Cost of revenue consists primarily of costs related to raw materials, freight
and delivery, product warranty, and personnel costs (salaries, bonuses,
benefits, and stock-based compensation). Personnel costs in cost of revenue
include both direct labor costs as well as costs attributable to any individuals
whose activities relate to the procurement, installment, and delivery of the
finished product and services. Personnel costs during 2021 are reported net of
federal employee retention credits received.
Gross profit may vary from period-to-period and is primarily affected by our
ASP, product costs, timing of tracker production and delivery, customer mix,
geographical mix, shipping method, logistics costs, warranty costs and
seasonality.
Three months ended September 30,
(in thousands) 2022 2021 $ Change % Change
Product $ 11,411 $ 48,090 $ (36,679 ) (76.3 )%
Service 14,676 12,938 1,738 13.4 %
Total cost of revenue $ 26,087 $ 61,028 $ (34,941 ) (57.3 )%
Gross profit (loss) $ (9,515 ) $ (8,039 ) $ (1,476 ) 18.4 %
Gross profit (loss) percentage of
revenue (57.4 %) (15.2 %)
The decrease in cost of revenue for the three months ended September 30, 2022 ,
as compared to the three months ended September 30, 2021 , was primarily driven
by (i) a decrease of 72% in MW produced and (ii) lower product costs due to
project mix changes compared to the same period last year. This was partially
offset by increases in overhead payroll expense and stock-based compensation
costs during the three months ended September 30, 2022 .
Our gross profit (loss) percentage of revenue for the three months ended
September 30, 2022 , was negative 57.4%, as compared to negative 15.2% for the
three months ended September 30, 2021 . We had a gross margin loss in our
products for the three months ended September 30, 2022 and 2021, as (i) current
period volumes were not sufficient to cover certain relatively fixed overhead
costs and (ii) due to certain projects that were in a loss position during the
three months ended September 30, 2021 , as steel prices and costs for retrofits,
remediations and product reconfigurations were increasing during that period. We
had a service gross margin loss for the three months ended September 30, 2022 ,
due to higher warehousing costs for product in transit to customers. This was
partially offset by better pricing in newer contracts that allowed us to recover
our costs and from higher shipping and logistics activity levels. The terms of
our contracts during the three months ended September 30, 2021 , did not allow us
to fully recover cost increases that were occurring during that time from
disruptions in the supply chain.
Research and development
Research and development expenses consist primarily of salaries (net of federal
employee retention credits received during 2021), employee benefits, stock-based
compensation expenses and travel expenses related to our engineers performing
research and development activities to originate, develop and enhance our
products. Additional expenses include consulting charges, component purchases
and other costs for performing research and development on our software
products.
Three months ended September 30,
(in thousands) 2022 2021 $ Change % Change
Research and development $ 2,126 $ 2,116 $ 10 0.5 %
Research and development expenses for the three months ended September 30, 2022 ,
were mostly flat as compared to the three months ended September 30, 2021 , as
higher payroll and stock compensation expenses from increased headcount were
largely offset by lower expenditures for professional services and equipment.
Research and development expenses as a percentage of revenue were 12.8% for the
three months ended September 30, 2022 , compared to 4.0% for the three months
ended September 30, 2021 . The increased percentage was due mainly to the low
level of revenue during the three months ended September 30, 2022 .
28
--------------------------------------------------------------------------------Selling and marketing
Selling and marketing expenses consist primarily of salaries (net of federal
employee retention credits received during 2021), employee benefits, stock-based
compensation expenses and travel expenses related to our sales and marketing and
business development personnel. Additionally, selling and marketing expenses
include costs associated with professional fees and support charges for software
subscriptions and licenses, trade shows and conventions.
Three months ended September 30,
(in thousands) 2022 2021 $ Change % Change
Selling and marketing $ 1,994 $ 2,224 $ (230 ) (10.3 %)
The decrease in selling and marketing expenses was primarily attributable to
$0.5 million of lower stock-based compensation expense, partially offset by
higher payroll-related costs. Selling and marketing costs as a percentage of
revenue were 12.0% for the three months ended September 30, 2022 , compared to
4.2% for the three months ended September 30, 2021 . The increased percentage was
due mainly to the low level of revenue during the three months ended September
30, 2022 .
General and administrative
General and administrative expenses consist primarily of salaries (net of
federal employee retention credits received during 2021), employee benefits,
stock-based compensation expenses, and travel expenses related to our
executives, finance team, and administrative employees. It also consists of
legal, consulting, and professional fees, rent and lease expenses pertaining to
our headquarters and international offices, business insurance costs and other
costs.
Three months ended September 30,
(in thousands) 2022 2021 $ Change % Change
General and administrative
25.7 %
The increase in general and administrative expenses was primarily attributable to$1.6 million of higher stock-based compensation expense and$0.6 million of higher payroll-related costs due to headcount increases. General and administrative expenses as a percentage of revenue were 78.8% for the three months endedSeptember 30, 2022 , compared to 19.6% for the three months endedSeptember 30, 2021 . The increased percentage was due mainly to the low level of revenue during the three months endedSeptember 30, 2022 . Interest expense, net Three months ended September 30, (in thousands) 2022 2021 $ Change % Change Interest expense, net$ 160 $ 301 $ (141 ) (46.8 )% Interest expense during the three months endedSeptember 30, 2022 , primarily consisted of commitment fees on our revolving credit facility with Barclays Bank that we entered into inApril 2021 , along with associated debt issue cost amortization. Interest income earned on our cash equivalents totaled approximately$0.1 million during the three months endedSeptember 30, 2022 .
Gain from disposal of investment in unconsolidated subsidiary
Three months ended September 30,
(in thousands) 2022 2021 $ Change % Change
Gain from disposal of investment
in unconsolidated subsidiary $ 1,408 $ 210 $ 1,198 570.5 %
29-------------------------------------------------------------------------------- We sold our interest in our unconsolidated subsidiary,Dimension Energy LLC ("Dimension"), onJune 24, 2021 . Dimension is a community solar developer based inAtlanta, Georgia that provides renewable energy solutions for local communities inthe United States . The sales agreement with Dimension includes an earnout provision which provides the potential to receive additional contingent consideration of up to approximately$14.0 million throughDecember 2024 , based on Dimension achieving certain performance milestones. The sales agreement also includes a projects escrow release which is an additional contingent consideration to receive$7 million based on Dimension's completion of certain construction projects in progress at the time of the sale. We made an accounting policy election to account for the contingent gains from the earnout provision and projects escrow release only when those amounts become realizable in the periods subsequent to the disposal date. During the three months endedSeptember 30, 2022 and 2021, we received escrow release payments of$1.4 million and$0.2 million , respectively, that were recognized in accordance with our policy election.
Results of Operations - Nine Months Ended
Nine months ended September 30,
2022 2021
(in thousands, except Percentage of Percentage of
percentages) Amounts revenue Amounts revenue
Revenue:
Product $ 43,677 45.1 % $ 137,799 81.6 %
Service 53,169 54.9 % 31,005 18.4 %
Total revenue 96,846 100.0 % 168,804 100.0 %
Cost of revenue:
Product 62,800 64.8 % 146,964 87.1 %
Service 59,360 61.3 % 45,810 27.1 %
Total cost of revenue 122,160 126.1 % 192,774 114.2 %
Gross profit (loss) (25,314 ) (26.1 %) (23,970 ) (14.2 %)
Operating expenses
Research and development 7,538 7.8 % 9,653 5.7 %
Selling and marketing 6,893 7.1 % 6,421 3.8 %
General and administrative 39,966 41.3 % 63,217 37.4 %
Total operating expenses 54,397 56.2 % 79,291 47.0 %
Loss from operations (79,711 ) (82.3 %) (103,261 ) (61.2 %)
Interest expense, net (882 ) (0.9 %) (515 ) (0.3 %)
Gain from disposal of investment
in unconsolidated subsidiary 1,745 1.8 % 20,829 12.3 %
Gain on extinguishment of debt - 0.0 % 790 0.5 %
Other income (expense) (249 ) (0.3 %) (59 ) 0.0 %
Loss from unconsolidated
subsidiary - 0.0 % (354 ) (0.2 %)
Loss before income taxes (79,097 ) (81.7 %) (82,570 ) (48.9 %)
(Provision) benefit for income
taxes (15 ) 0.0 % (137 ) (0.1 %)
Net loss $ (79,112 ) (81.7 %) $ (82,707 ) (49.0 %)
Revenue
Nine months ended September 30,(in thousands) 2022 2021 $ Change % Change Product$ 43,677 $ 137,799 $ (94,122 ) (68.3 )% Service 53,169 31,005 22,164 71.5 % Total revenue$ 96,846 $ 168,804 $ (71,958 ) (42.6 )% Product revenue The decrease in product revenue for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 , was primarily due to (i) a 47% decrease in MW produced, (ii) a decrease of approximately 37% in ASP, and (iii) a customer concession charge during the nine months endedSeptember 30, 2022 . The decrease in MW produced was due to the impact of supply chain availability and concerns by project developers and owners over regulatory and tariff issues, including AD/CVD and WROs pursuant to UFLPA, which slowed or pushed out demand for our trackers in 30 -------------------------------------------------------------------------------- comparison to production levels for various large projects during the nine months endedSeptember 30, 2021 . We believe the regulatory concerns regarding module availability, among other things, has slowed new and existing project activity during the nine months endedSeptember 30, 2022 , by pushing some activity out into 2023 and beyond. The decrease in ASP for our products was the result of a change in the mix of projects between the periods.
Service revenue
The increase in service revenue for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 , was primarily due to increased shipping and logistics activity levels due to high production activity in the fourth quarter of 2021, and an increase in ASP for shipping and logistics services due to higher pricing required to cover higher costs. During the nine months endedSeptember 30, 2021 , increases in shipping and logistics costs were not fully recoverable under existing contracts at that time. The differential between service revenues and costs during the nine months endedSeptember 30, 2022 , was largely due to a customer concession charge recorded against revenues during the first quarter of 2022.
Cost of revenue and gross profit (loss)
Nine months ended September 30,
(in thousands) 2022 2021 $ Change % Change
Product $ 62,800 $ 146,964 $ (84,164 ) (57.3 )%
Service 59,360 45,810 13,550 29.6 %
Total cost of revenue $ 122,160 $ 192,774 $ (70,614 ) (36.6 )%
Gross profit (loss) $ (25,314 ) $ (23,970 ) $ (1,344 ) 5.6 %
Gross profit (loss) percentage of
revenue (26.1 %) (14.2 %)
The decrease in cost of revenue for the nine months ended September 30, 2022 , as
compared to the nine months ended September 30, 2021 , was primarily driven by
(i) a decrease of 47% in MW produced and (ii) lower stock-based compensation
costs as a result of accelerated vesting of stock-based awards following our IPO
in 2021. This was partially offset by increases in shipping and logistics costs
during much of 2021 and into 2022, as well as higher product costs due to
project mix changes compared to the same period last year and higher employee
salary costs due to headcount increases.
Our gross profit (loss) percentage of revenue for the nine months ended
September 30, 2022 , was negative 26.1%, as compared to negative 14.2% for the
nine months ended September 30, 2021 . We had a gross margin loss in our products
for the nine months ended September 30, 2022 and 2021, as (i) current period
volumes were not sufficient to cover certain relatively fixed overhead costs and
(ii) due to certain projects that were in a loss position during the nine months
ended September 30, 2021 , due to our inability to pass on significant cost
increases to our customers on fixed price contracts. The decline in the gross
profit (loss) percentage was largely due to a $5.0 million customer concession
during the nine months ended September 30, 2022 , as well as higher product costs
due to project mix changes. This was partially offset by (i) an increase in
shipping and logistics activity levels, as well as increased shipping and
logistics revenues in order to cover increased costs, which improved our service
margins, despite higher warehousing costs for product in transit to customers,
and (ii) lower stock-based compensation costs.
Research and development
Nine months ended September 30,
(in thousands) 2022 2021 $ Change % Change
Research and development
The decrease in research and development expenses was primarily attributable to$2.8 million of lower stock-based compensation expense as a result of accelerated vesting of stock-based awards following our IPO in 2021. This was partially offset by higher payroll -related costs of$0.8 million due to headcount increases. Research and development expenses as a percentage of revenue were 7.8% for the nine months endedSeptember 30, 2022 , compared to 5.7% for the nine months endedSeptember 30, 2021 . The increased percentage was due mainly to the lower level of revenue during the nine months endedSeptember 30, 2022 . Selling and marketing Nine months ended September 30, (in thousands) 2022 2021 $ Change % Change Selling and marketing$ 6,893 $ 6,421 $ 472 7.4 % 31
-------------------------------------------------------------------------------- The increase in selling and marketing expenses was primarily attributable to higher provisions for uncollectible receivables totaling$1.1 million , as well as higher payroll, marketing and travel costs. This was partially offset by$1.3 million of lower stock-based compensation expense as a result of accelerated vesting of stock-based awards following our IPO in 2021. Selling and marketing expenses as a percentage of revenue were 7.1% for the nine months endedSeptember 30, 2022 , compared to 3.8% for the nine months endedSeptember 30, 2021 . The increased percentage was due mainly to the lower level of revenue during the nine months endedSeptember 30, 2022 .
General and administrative
Nine months ended September 30,
(in thousands) 2022 2021 $ Change % Change
General and administrative
The decrease in general and administrative expenses was primarily attributable to$34.1 million of lower stock-based compensation expense as a result of accelerated vesting of stock-based awards following our IPO in 2021. This was partially offset by (i) higher payroll costs of$4.0 million due to headcount increases, (ii) higher legal and professional fees of$4.0 million , and (iii) higher insurance costs as a result of being a public company sinceApril 2021 . General and administrative expenses as a percentage of revenue were 41.3% for the nine months endedSeptember 30, 2022 , compared to 37.4% for the nine months endedSeptember 30, 2021 . The increased percentage was due mainly to the lower level of revenue during the nine months endedSeptember 30, 2022 . Interest expense, net Nine months ended September 30, (in thousands) 2022 2021 $ Change % Change Interest expense, net$ 882 $ 515 $ 367 71.3 % Interest expense during the nine months endedSeptember 30, 2022 , primarily related to commitment fees on our revolving credit facility with Barclays Bank that we entered into inApril 2021 , along with associated debt issue cost amortization and lender fees paid in connection with aJune 2022 amendment to our revolving credit facility. Interest income earned on our cash equivalents totaled approximately$0.2 million during the nine months endedSeptember 30, 2022 .
Gain from disposal of investment in unconsolidated subsidiary
Nine months ended September 30,
(in thousands) 2022 2021 $ Change % Change
Gain from disposal of investment
in unconsolidated subsidiary $ 1,745 $ 20,829 $ (19,084 ) (91.6 %)
We sold our interest in our unconsolidated subsidiary, Dimension, on June 24,
2021 , recognizing a gain of $20.6 million on the sale. Dimension is a community
solar developer based in Atlanta, Georgia that provides renewable energy
solutions for local communities in the United States . The sales agreement with
Dimension includes an earnout provision which provides the potential to receive
additional contingent consideration of up to approximately $14.0 million through
December 2024 , based on Dimension achieving certain performance milestones. The
sales agreement also includes a projects escrow release which is an additional
contingent consideration to receive $7 million based on Dimension's completion
of certain construction projects in progress at the time of the sale. We made an
accounting policy election to account for the contingent gains from the earnout
provision and projects escrow release only when those amounts become realizable
in the periods subsequent to the disposal date.
During the nine months ended
Gain on extinguishment of debt
Nine months ended September 30,
(in thousands) 2022 2021 $ Change % Change
Gain on extinguishment of debt $ -
32
--------------------------------------------------------------------------------
In January 2021 , our Paycheck Protection Program loan that was received in April
2020 pursuant to the CARES Act, was forgiven, resulting in a gain on
extinguishment of debt. The terms of the CARES Act provided for loan forgiveness
if the proceeds were used to retain and pay employees and for other qualifying
expenditures.
Loss from unconsolidated subsidiary
Nine months ended September 30,
(in thousands) 2022 2021 $ Change % Change Loss from unconsolidated subsidiary $ -$ 354 $ (354 )
(100.0 %)
As discussed above, we sold our interest in our unconsolidated subsidiary, Dimension, onJune 24, 2021 . Our share of the loss prior to the sale from this unconsolidated subsidiary for the nine months endedSeptember 30, 2021 , was$0.4 million .
Liquidity and Capital Resources
Liquidity
Since our inception, we have financed our operations primarily through sales of shares of common stock, including our IPO inApril 2021 , issuance of debt and payments from our customers. Our ability to generate positive cash flow from operations is dependent on contract payment terms, timely collections from our customers and the strength of our gross margins. We have incurred cumulative losses since inception, resulting in an accumulated deficit of$228.3 million as ofSeptember 30, 2022 , and have a history of cash outflows from operations. During the year endedDecember 31, 2021 , and the nine months endedSeptember 30, 2022 , we had$132.9 million and$49.1 million , respectively, of cash outflow from operations. As ofSeptember 30, 2022 , we had$49.8 million of cash on hand,$71.0 million of working capital and approximately$98.2 million of unused borrowing capacity under our existing revolving credit facility. The revolving credit facility includes a financial condition covenant stating we are required to have a minimum liquidity, consisting of cash on hand and unused borrowing capacity, of$50.0 million as of each quarter end throughMarch 31, 2023 . After considering this financial condition covenant, we had approximately$98.0 million of available liquidity as ofSeptember 30, 2022 , in order to retain access to our revolving credit facility. Additionally, we had no long-term borrowings or other material obligations requiring the use of cash as ofSeptember 30, 2022 . The UFLPA was passed by theU.S. Congress and signed into law byPresident Biden onDecember 23, 2021 . The UFLPA establishes a rebuttable presumption that the importation of any goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in theXinjiang Uyghur Autonomous Region ofthe People's Republic of China , or that are 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 tothe United States .U.S. Customs and Border Protection ("CBP") began implementing the provisions of UFLPA onJune 21, 2022 , resulting in new rules for solar module importers and reviews by CBP. There continues to be uncertainty in the market around achieving full compliance with UFLPA, whether related to sufficient traceability of materials or other factors. Once there is additional clarity around this, and customers get line-of-sight to module deliveries, we believe the market will see a recovery. OnMarch 25, 2022 , theU.S. Department of Commerce , in response to a petition byAuxin Solar, Inc. , initiated an investigation of claims related to alleged circumvention ofU.S. antidumping and countervailing duties ("AD/CVD") by solar manufacturers in certain Southeast Asian countries in an effort to determine whether or not solar cells and/or modules made in those Southeast Asian nations use parts originating fromChina in order to circumvent the AD/CVD tariffs. This decision resulted in some developers deferring projects due to the uncertainty of panel supply and costs, which has negatively impacted our current year revenues and cash flows and may continue to negatively impact our anticipated revenues and our cash flows in 2023. OnJune 6, 2022 ,President Biden issued an Executive Order allowingU.S. solar deployers the ability to import solar modules and cells fromCambodia ,Malaysia ,Thailand andVietnam free from certain duties for 24 months, along with other incentives designed to accelerateU.S. domestic production of clean energy technologies. The most notable incentive program impacting ourU.S. business has been the investment tax credit ("ITC") for solar energy projects, which allows taxpayers to offset theirU.S. federal income tax liability by a certain percentage of their cost basis in solar energy systems placed in service for commercial use. The Inflation Reduction Act of 2022, passed by theU.S. Congress and signed into law byPresident Biden onAugust 16, 2022 , expanded and extended the tax credits available to solar energy projects. ITCs have been extended for such projects through at least 2032 and, depending on the location of a particular project and its ability to satisfy certain labor and domestic content requirements, the ITC percentage can be between 30% and 50%. New solar projects are now eligible to claim production tax credits as an alternative to the ITC. We believe this law will bolster and extend future demand for our products in theU.S. 33 -------------------------------------------------------------------------------- Our costs are affected by certain component costs including steel, motors and micro-chips, as well as transportation costs. Current market conditions and international conflicts that constrain supply of materials and disrupt the flow of materials from international vendors impact the cost of our products and services, along with overall rates of inflation in the global economy, which have been higher than recent historical rates. We have also seen increases in domestic fuel prices and transportation costs in the past couple of years. These cost increases impact our operating margins. We have taken steps to expand and diversify our manufacturing partnerships and have in the past employed alternative modes of transportation to mitigate the impact of the current headwinds in the global supply chain and logistics markets. Although overall transportation costs are higher than pre-pandemic rates, there has been a decline in recent months in costs for both charter vessels and in the premium container market, as well as an easing of congestion inU.S. ports. However, recent COVID shutdowns inChina have created a backlog of exports and increased demand for container shipments fromChina . We continue to monitor the logistics markets and have adjusted our use of various modes of transportation when warranted to optimize our transportation costs. Additionally, inFebruary 2022 , we contracted with a related-party consulting firm to support us in making ongoing improvements to our processes and performance in various areas, including design, sourcing, logistics, pricing, software and our distributed generation business. For further information regarding this consulting firm, see Note 16 in Part I, Item 1 of this Quarterly Report on Form 10-Q. In accordance with ASC 205-40, Going Concern, we have evaluated whether there are conditions and events, considered in the aggregate, which raise substantial doubt about our ability to continue as a going concern within one year after the date these condensed consolidated financial statements are issued. While AD/CVD and UFLPA have created uncertainty in the market in recent periods, we believe the Executive Order providing for a 24-month holiday on duties for importation of solar modules and cells from certain countries and the passage of the Inflation Reduction Act of 2022, as described above, have reduced the level of uncertainty among solar project owners and developers with regard to new project development. We have also taken significant steps to address the recent market challenges and our historical use of cash through the following actions:
•
certain members of our senior management team have foregone certain cash compensation in exchange for equity compensation;
•
we have frozen non-essential hiring, reduced our travel expenses, decreased the future use of consultants and are deferring non-critical initiatives;
•
we have emphasized cash collections from customers, and continue to negotiate improved payment terms with both our customers and vendors;
•
we have launched Pioneer, a one module-in-portrait (1P) solar tracker solution, and a new solution for thin-film modules, each of which we believe will enhance our ability to win projects that are less exposed to the impacts of UFLPA;
•
we have initiated frequent, consistent communication with our customers, which has allowed us to resolve issues preventing timely collection of certain past due outstanding receivables; and
•
we continue to explore options to obtain additional sources of capital through either the issuance of new debt or equity. For example, (a) we executed Amendment No. 2 to our existing revolving credit facility inJune 2022 , as described further in Note 11 below, which has increased available liquidity under our credit facility throughMarch 31, 2023 and, (b) as described further in Note 15, we filed a prospectus supplement onSeptember 14, 2022 , providing us with the ability to sell from time to time, and in one or more transactions, newly issued shares of our common stock with an aggregate offering price of up to$100 million in future "at the market" offerings. Management believes that our existing capital, which includes cash on hand, as well as our unused borrowing capacity under our revolving credit facility is sufficient for us to fund our operations for at least one year from the date of issuance of these condensed consolidated financial statements. Accordingly, the accompanying financial statements assume we will continue as a going concern through the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business. We have achieved success in executing certain of the initiatives above and we continue to work to further reduce our use of cash to fund our operations. We expect the two-year holiday on duties announced byPresident Biden inJune 2022 will reduce the level of uncertainty in the market due to the ongoing AD/CVD investigation by theU.S. Department of Commerce , as described above, and we believe passage of the Inflation Reduction Act of 2022 will also benefit demand for our products in theU.S. At the same time, however, new rules for module importers and reviews by CBP pursuant to achieving full compliance with UFLPA are expected to continue creating uncertainty in the market. However, once there is additional clarity around compliance with UFLPA, and customers get line-of-sight to module deliveries, we believe the market will see a recovery. While there are already many underlying drivers of growth in the solar industry, the expected positive impact on demand for our products could take longer than expected to occur. In addition, market conditions could deteriorate significantly from what we currently expect, and regulatory and international trade policies could become more stringent 34 -------------------------------------------------------------------------------- as a result of (i) findings from theDepartment of Commerce's AD/CVD investigation, (ii) the level of enforcement of regulations issued under UFLPA, and (iii) other factors, which may result in a need for us to issue additional debt or obtain new equity financing to fund our operations beyond the next twelve months. We may be unable to obtain any desired additional financing on terms favorable to us, or at all, depending on market and other conditions. The ability to raise additional financing depends on numerous factors that are outside of our control, including macroeconomic factors such as the impact of the COVID 19 pandemic, inflation, the ongoing conflict in theUkraine , market conditions, the health of financial institutions, investors' and lenders' assessments of our prospects and the prospects of the solar industry in general.
Statements of cash flows
The following table shows our cash flows from operating activities, investing activities and financing activities for the stated periods:
Nine months ended September 30 ,
(in thousands) 2022 2021
Net cash used in operating activities$ (49,085 ) $ (92,414 ) Net cash provided by (used in) investing activities (4,076 ) 21,554 Net cash provided by financing activities 788 178,140 Effect of exchange rate changes on cash, cash equivalents and restricted cash 8 9 Net increase (decrease) in cash, cash equivalents and restricted cash$ (52,365 ) $ 107,289 Operating activities During the nine months endedSeptember 30, 2022 , we used approximately$59.9 million of cash to fund (i) losses on certain of our projects, largely related to increased material and logistics costs due to supply chain disruptions during the past year that were not fully recoverable and (ii) current period expenditures for personnel and facilities, legal and professional fees, insurance, research and development and various other operating activities. Economic conditions during 2021 and to date in 2022 caused our industry to experience rapid commodity price increases and significant increases in transportation costs since the beginning of 2021 which negatively impacted our margins in the near term and thus, our cash flow from operations. Additionally, onMarch 25, 2022 , theU.S. Department of Commerce initiated an investigation of claims related to alleged circumvention ofU.S. antidumping and countervailing duties by solar manufacturers in certain Southeast Asian countries. This decision resulted in some developers deferring projects later in the year due to the uncertainty of panel supply and costs, which negatively impacted our revenues and our cash flows during the nine months endedSeptember 30, 2022 . OnJune 6, 2022 ,President Biden issued an Executive Order allowingU.S. solar deployers the ability to import solar modules and cells fromCambodia ,Malaysia ,Thailand andVietnam free from certain duties for 24 months, along with other incentives designed to accelerateU.S. domestic production of clean energy technologies.U.S. developers are now looking to reactivate projects they were pushing out and we expect this will increase demand for solar trackers in theU.S. in 2023.
A total of approximately
During the nine months endedSeptember 30, 2021 , we used approximately$43.3 million to fund operating expenses as we continued to expand our presence to additional countries. A total of$49.1 million was also used during the nine months endedSeptember 30, 2021 , to fund increases in working capital, largely related to increased project activity levels and an increase in deposits made to secure supply capacity for the back half of 2021.
Investing activities
During the nine months endedSeptember 30, 2022 , we paid approximately$0.5 million , primarily for new lab equipment to be used for product testing, as well as new computer and IT equipment, acquired during the latter part of 2021, and$0.3 million for new IT equipment and tooling acquired during the current year-to-date period. Additionally, we received$1.7 million from escrow in connection with ourJune 2021 sale of Dimension due to the subsequent completion of certain construction projects that were in progress at the time of the sale. OnJune 14, 2022 , we closed on the acquisition of HX Tracker for a total purchase price of$8.7 million , consisting of cash and stock. Additionally, onJuly 1, 2022 , we acquired for approximately$0.8 million certain assets fromStandard Sun, Inc. constituting their pile 35 -------------------------------------------------------------------------------- testing and equipment installation business. The cash portion of the purchase price for both businesses, totaling approximately$5.1 million , was paid during the third quarter of 2022.
During the nine months ended
Financing activities
During the nine months ended
During the nine months endedSeptember 30, 2021 , we paid off the$1.0 million of outstanding borrowings under ourWestern Alliance Bank revolving line of credit facility. InApril 2021 , we completed our IPO, receiving proceeds of$241.2 million from sale of 19,840,000 shares of our common stock. We also paid$5.9 million in cash for offering costs in connection with the IPO during the nine months endedSeptember 30, 2021 . Proceeds from the IPO were used for general corporate purposes, with$54.2 million used to purchase an aggregate of 4,455,384 shares of our common stock, including shares resulting from the settlement of certain vested RSUs and exercise of certain options in connection with the IPO at the IPO price, less underwriting discounts and commissions. In connection with entering into our senior revolving credit facility onApril 30, 2021 , we also incurred approximately$2.0 million of costs associated with the new credit facility. Revolving line of credit OnApril 30, 2021 , we entered into a three-year senior secured revolving credit facility with various lenders, including Barclays Bank PLC, as issuing lender, the swingline lender and as administrative agent (the "Credit Facility Agreement"). OnJune 2, 2022 , we entered into Amendment No. 2 to the Credit Facility Agreement (the "Amendment") which, among other things, amended certain terms of the Credit Facility Agreement, including without limitation, to (i) reduce the minimum liquidity level in the minimum liquidity financial covenant from$125.0 million to$50.0 million untilMarch 31, 2023 and (ii) set forth additional financial condition covenants and reporting requirements that apply if the Company does not maintain specified minimum liquidity from the effectiveness of the Amendment until the earlier of (x)March 31, 2023 and (y) the occurrence of certain specified conditions. The new financial condition covenants include the following: (i) if loans are outstanding, (x) the Company shall not have more than$25.0 million in unrestricted cash and cash equivalents for longer than three business days and (y) the ratio of the amount of (A) 75% of specified third party accounts receivables to (B) outstanding loans shall not be less than 1.10:1.00 at the end of each month and (ii) the Company shall limit the amount of cash it pays to third parties (net of all cash received by the Company (subject to certain exclusions)) to not more than$50.0 million , with the financial covenants described in the foregoing clauses (i)(y) and (ii) only being applicable if the Company fails to maintain specified minimum liquidity, with the Company currently maintaining such specified minimum liquidity as ofSeptember 30, 2022 . Additionally, prior toMarch 31, 2023 , the Company and its restricted subsidiaries under the Credit Facility Agreement are not permitted to (i) incur additional indebtedness for borrowed money, other than through the Credit Facility Agreement or specified permitted unsecured debt, or (ii) pay dividends, subject to specified exceptions. The Amendment also sets forth certain informational rights of the lenders. The Credit Facility Agreement includes the following terms: (i) a base rate of LIBOR, plus 3.25% per annum, (ii) initial commitment fees of 0.50% per annum; (iii) initial letter of credit fees of 3.25% per annum; and (iv) other customary terms for a corporate revolving credit facility. Should LIBOR rates become unavailable during the term of the Credit Agreement, the rate per annum on loans will be based on the secured overnight financing rate (SOFR) published by theFederal Reserve Bank of New York , or a successor SOFR administrator. We have not made any draws on the revolving credit facility as ofSeptember 30, 2022 . However, as ofSeptember 30, 2022 , we did have$1.8 million in letters of credit outstanding that reduced our available borrowing capacity to approximately$98.2 million . The facility is secured by a first priority lien on substantially all of our assets, subject to certain exclusions, and customary guarantees. As ofSeptember 30, 2022 , we were in full compliance with our financial condition covenants.
Critical Accounting Policies and Significant Management Estimates
We prepare our interim unaudited condensed consolidated financial statements in
accordance with GAAP. The preparation of condensed consolidated financial
statements also requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
revenue and expenses
36
--------------------------------------------------------------------------------
during the period. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances.
Actual results could differ significantly from the estimates made by our
management. To the extent that there are differences between our estimates and
actual results, our future financial statement presentation, financial
condition, results of operations and cash flows will be affected. We believe
that the accounting policies discussed below are critical to understanding our
historical and future performance, as these policies relate to the more
significant areas involving management's judgments and estimates. Critical
accounting policies and estimates are those that we consider the most important
to the portrayal of our financial condition and results of operations because
they require our most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effects of matters that are
inherently uncertain.
We believe that the accounting policies described below involve a significant
degree of judgment and complexity. Accordingly, we believe these are the most
critical to aid in fully understanding and evaluating our condensed consolidated
financial condition and results of operations.
Revenue recognition
Policy description
We recognize revenue when promised goods or services are transferred to
customers in an amount that reflects the consideration to which we expect to be
entitled to in exchange for those goods or services by following a five-step
process: (1) identify the contract with a customer, (2) identify the performance
obligations in the contract, (3) determine the transaction price, (4) allocate
the transaction price to the performance obligations in the contract, and (5)
recognize revenue when or as the Company satisfies a performance obligation, as
further described below.
Identify the contract with a customer: A contract with a customer exists when
(i) the Company enters into an enforceable contract with a customer that defines
each party's rights regarding the products and services to be transferred and
identifies the payment terms related to these products and services, (ii) the
contract has commercial substance, and (iii) the Company determines that
collection of substantially all consideration for products and services that are
transferred is probable based on the customer's intent and ability to pay the
promised consideration. In assessing the recognition of revenue, we also
evaluate whether two or more contracts should be combined and accounted for as
one contract and if the combined or single contract should be accounted for as
multiple performance obligations which could change the amount of revenue and
profit (loss) recorded in a period. Change orders may include changes in
specifications or design, manner of performance, equipment, materials, scope of
work, and/or the period of completion of the project. We analyze change orders
to determine if they should be accounted for as a modification to an existing
contract or a new stand-alone contract.
Contracts we enter into with our customers for sale of solar tracker systems are
generally under two different types of arrangements: (1) purchase agreements and
equipment supply contracts ("Purchase Agreements") and (2) sale of individual
parts for those systems.
Change orders from our customers are generally modifications to existing contracts and are included in the total estimated contract revenue when it is probable that the change order will result in additional value that can be reliably estimated and realized.
Identify the performance obligations in the contract: We enter into contracts that can include various combinations of products and services, which are either capable of being distinct and accounted for as separate performance obligations or as one performance obligation since the majority of tasks and services are part of a single project or capability. However, determining whether products or services are considered distinct performance obligations that should be accounted for separately versus together may sometimes require significant judgment. Our Purchase Agreements typically include two performance obligations: 1) our solar tracker systems or customized components of those systems, and 2) shipping and handling services. The deliverables included as part of our solar tracker systems are predominantly accounted for as one performance obligation, as these deliverables are part of a combined promise to deliver a project.
The revenue for shipping and handling services will be recognized over time based on progress in meeting shipping terms of the arrangements, as this faithfully depicts the Company's performance in transferring control.
Sales of individual parts of our solar tracker systems for certain specific
transactions include multiple performance obligations consisting of individual
parts of those systems. Revenue is recognized for parts sales at a point in time
when the obligations under the terms
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--------------------------------------------------------------------------------of the contract with our customer are satisfied. Generally, this occurs with the transfer of control of the asset, which is in line with shipping terms.
Determine the transaction price: The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring services to the customer. Such amounts are typically stated in the customer contract, and to the extent that we identify variable consideration, we will estimate the variable consideration at the onset of the arrangement as long as it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The majority of our contracts do not contain variable consideration provisions as a continuation of the original contract. None of our contracts contain a significant financing component. Taxes collected from customers and remitted to governmental authorities are not included in revenue. Allocate the transaction price to performance obligations in the contract: Once we have determined the transaction price, we allocate the total transaction price to each performance obligation in a manner depicting the amount of consideration to which we expect to be entitled in exchange for transferring the good(s) or service(s) to the customer. We allocate the transaction price to each performance obligation identified in the contract on a relative standalone selling price basis. We use the expected cost-plus margin approach based on hardware, labor, and related overhead cost to estimate the standalone selling price of our solar tracker systems, customized components of those systems, and individual parts for certain specific transactions. We use the adjusted market assessment approach for all other performance obligations except shipping, handling, and logistics. For shipping, handling, and logistics performance obligations, we use a residual approach to calculate the standalone selling price, because of the nature of the highly variable and broad range of prices we charge to various customers for this performance obligation in the contracts. Recognize revenue when or as the Company satisfies a performance obligation: For each performance obligation identified, we determine at contract inception whether we satisfy the performance obligation over time or at a point in time. The performance obligations in the contracts for our solar tracker systems and customized components of those systems are satisfied over-time as work progresses, utilizing an input measure of progress determined by cost-to-cost measures on these projects as this faithfully depicts our performance in transferring control. Additionally, our performance does not create an asset with an alternative use, due to the highly customized nature of the product, and we have an enforceable right to payment for performance completed to date. Our performance obligations for individual part sales for certain specific transactions are recognized point-in-time as and when control transfers based on the Incoterms for the contract. Our performance obligations for term-based software licenses are recognized point-in-time as and when control transfers, either upon delivery to the customer or the software license start date, whichever is later. Our performance obligations for shipping and handling services are satisfied over-time as the services are delivered over the term of the contract. We recognize revenue for subscription and other services on a straight-line basis over the contract period. With regard to support revenue, a time-elapsed method is used to measure progress because we transfer control evenly over the contractual period. Accordingly, the fixed consideration related to support revenue is generally recognized on a straight-line basis over the contract term. Contract assets and liabilities: The timing of revenue recognition, billing, and cash collection results in the recognition of accounts receivable, unbilled receivables for revenue recognized in excess of billings, and deferred revenue in the Condensed Consolidated Balance Sheets. We may receive advances or deposits from our customers before revenue is recognized, resulting in contract liabilities, which are reflected as "deferred revenue" in our Condensed Consolidated Balance Sheets.
Judgments and assumptions
The timing and amounts of revenue and cost of revenue recognition, as well as
recording of related receivables and deferred revenue, is highly dependent on
our identification of performance obligations in each contract and our estimates
by contract of total project cost and our progress toward project completion as
of each period end. Certain estimates are subject to factors outside of our
control that may impact our suppliers and the global supply chain. As an
example, we began to experience increases in steel prices and shipping and
logistics costs, as well as delays in delivery of our products to customers
during 2021, which negatively impacted our results of operations as we were not
able to recover all of the additional costs under certain of our fixed fee
contracts. We base our estimates on the best information available at each
period end, but future events and their effects cannot be determined with
certainty, and actual results could differ materially from our assumptions and
estimates.
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--------------------------------------------------------------------------------Accounts receivable, net Policy description Trade receivables are recorded at invoiced amounts, net of allowances for doubtful accounts if applicable, and do not bear interest. We generally do not require collateral from our customers; however, in certain circumstances, we may require letters of credit, other collateral, additional guarantees or advance payments. The allowance for doubtful accounts is based on our assessment of the collectability of our customer accounts. We plan to adopt ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments effectiveJanuary 1, 2023 . For the nine months endedSeptember 30, 2022 and 2021, we have utilized the incurred loss model in estimating our allowance for doubtful accounts. We do not expect the adoption of ASU 2016-13 to have a material impact on our consolidated financial statements.
Judgments and assumptions
We regularly review our accounts receivable that remain outstanding past their applicable payment terms and establish allowances or make potential write-offs by considering certain factors such as historical experience, industry data, credit quality, age of balances and current economic conditions that may affect a customers' ability to pay. Adjustments to the allowance may either impact the amount of revenue previously recognized or bad debt expense depending on the facts and circumstances leading to the adjustment. Adjustments to amounts originally estimated to be collectible that are considered to be potential price concessions as a result of a dispute regarding performance or other matters affecting customer relationships will result in a reduction in revenue whereas adjustments due to changes in customer credit risk or their expected ability to pay will be recognized in bad debt expense. Warranty Policy description Typically, the sale of solar tracker projects includes parts warranties to customers as part of the overall price of the product. We provide standard assurance type warranties for our products for periods generally ranging from two to ten years. We record a provision for estimated warranty expenses in cost of sales, net of amounts recoverable from manufacturers under their warranty obligations to us. We do not maintain general or unspecified reserves; all warranty reserves are related to specific projects. All actual or estimated material costs incurred for warranty services in subsequent periods are charged to those established reserves.
Judgments and assumptions
We base our estimated warranty obligations on our historical experience and forward-looking factors including the nature and frequency of product failure rates and costs to address future claims. These estimates are inherently uncertain given our relatively short history of sales and changes to our historical or projected warranty experience may result in material changes to our warranty reserve in the future. Additionally, we make estimates of what costs we believe will be recoverable from the manufacturer of our products that we use to offset our obligations to our customers. While we periodically monitor our warranty activities and claims, if actual costs incurred were to be different from our estimates, we would recognize adjustments to our warranty reserves in the period in which those differences arise or are identified. Such adjustments could be material to our results of operations in the period the adjustments are made.
Stock-based compensation
Policy description
We recognize compensation expense in the accompanying condensed consolidated
statements of comprehensive loss for all share-based payment awards made,
including stock options and RSUs, based on the estimated fair value of the award
on the grant date. We calculate the fair value of stock options using the
Black-Scholes Option-Pricing model for awards with service-based vesting or
through
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use of a lattice model or a Monte Carlo simulation for awards with market
conditions. The fair value of RSUs is based on the estimated fair value of the
Company's common stock on the date of grant. Since completion of our IPO, we
consider the closing price of our stock, as reported on the Nasdaq Global
Market, to be the fair value of our stock on the grant date.
Forfeitures are accounted for as they occur. For service-based awards, stock-based compensation is recognized using the straight-line attribution approach over the requisite service period. For performance-based awards, stock-based compensation is recognized based on graded vesting over the requisite service period when the performance condition is probable of being achieved.
Judgments and assumptions
The Black-Scholes model relies on various assumptions, in addition to the exercise price of the option and the value of our common stock on the date of grant. These assumptions include:
Expected Term: The expected term represents the period that the Company's stock-based awards are expected to be outstanding and is calculated as the average of the option vesting and contractual terms, based on the simplified method. The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the options.
Expected Volatility: Since the Company did not have a trading history of its common stock prior to our IPO and since such trading history subsequent to our IPO is limited, the expected volatility is derived from the average historical stock volatilities of several public companies within the Company's industry that it considers to be comparable to its business over a period equivalent to the expected term of the stock option grants. Risk-Free-Interest-Rate: The Company bases the risk-free interest rate on the implied yield available onU.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term. Expected Dividend: The Company has not issued any dividends in its history and does not expect to issue dividends over the life of the options and, therefore, has estimated the dividend yield to be zero. Changes to any of these assumptions, but particularly our estimates of expected term and volatility, could change the fair value of our options and impact the amount of stock-based compensation expense we report each period. We typically employ third-party valuation consultants to assist in fair value determinations involving the use of lattice models orMonte Carlo simulations involving multiple simulation paths in a risk-neutral framework.
JOBS Act accounting election
We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We elected to use the allowed extended transition period for adopting new or revised accounting standards.
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