ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 and other information included in our prospectus which includes our audited financial statements for the year ended December 31, 2019 and 2020 and this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and timing of selected events 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 the sections titled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” included in our prospectus. 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 and Adjusted Net Income, which are not presented in accordance with GAAP. Adjusted EBITDA and Adjusted Net Income 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 and Adjusted Net Income to be substitutes for any GAAP financial information. Readers of this Form 10-Q should use Adjusted EBITDA and Adjusted Net Income only in conjunction with Net Income, the most comparable GAAP financial measure. Reconciliations of Adjusted EBITDA and Adjusted Net Income to Net Income, the most comparable GAAP measure, is provided in Non-GAAP Financial Matters.
Overview
We are a global provider of advanced solar tracker systems. Our trackers are supported by proprietary software designed to increase energy production yield from our tracker systems. We also support our customers in project design and development by providing value-added engineering services that assist customers in optimizing our products and reducing total project costs. Our mission is to provide differentiated products, software and services that maximize energy generation and cost savings for our customers. We believe achieving our mission will 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 systems offer efficiency gains relative to other tracker systems due to our tracker’s enhanced design, which includes a two-panel in-portrait format and independent rows, and its optimization for use with bifacial panels. Additionally, these efficiency gains can be enhanced by our proprietary software solutions. Our customers include leading project developers, solar asset owners and EPC contractors that design and build solar energy projects. Our team of experienced renewable energy professionals is focused on delivering compelling value to customers across the full solar energy project lifecycle, including at the development, construction and operations phases.
Our corporate headquarters and testing lab is located in Austin, Texas, and we have a training and technology development site in Aurora, Colorado. To assist with our global expansion effort, we have grown our sales and support network abroad, with employees located in Australia, India, the Middle East, China, Europe, South Africa, and South-East Asia as of March 31, 2021. As of March 31, 2021, we had 207 full-time employees.
We currently offer tracking and software solutions targeting the utility-scale solar energy markets to current and potential customers in the United States, Asia, the Middle East, North Africa, Europe, South America and Australia. In 2020 and as of March 31, 2021, we derived the majority of our revenue from EPC contractors in the United States. We expect this revenue profile to shift over time as project developers and solar asset owners make more direct purchases of solar installations and as we continue to expand our global footprint in Latin America, Europe and certain other markets. We derived 86% of all of our revenue from tracker system sales for the three months ended March 31, 2021. During this same period, substantially all of our revenues were derived from sales to our customers in the United States. We have maintained focus on our growth strategy throughout the quarter ended March 31, 2021. We also secured the first order of our SunPath performance enhancing software product which we introduced at the end of 2020. Our SunPath product boosts project energy production yield. Our solution is differentiated from other products in the marketplace by eliminating row-to-row shading, optimizing capture of diffuse light and increasing the system yield. We estimate this enables customers to achieve up to a 6% increase in energy yield at a solar installation. We also launched a large format module tracker system in January of 2021. We currently have customer projects utilizing this large format tracker system. With the industry seeing increasing interest in large format
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modules, we are providing tracker systems that are compatible with a wide variety of module sizes and configurations, while maintaining the format and installation speed in portrait orientation. FTC is committed to providing innovative solutions designed to benefit our customers and deliver value.
Key Factors Affecting Our Performance
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 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.
Megawatts Shipped and Average Selling Price. The primary operating metric we use to evaluate our sales performance and to track market acceptance of our products is the change in megawatts (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 MW, including the change in average selling price (“ASP”) from period to period and cost per watt. ASP is calculated by dividing total revenue by total MW and cost per watt is calculated by dividing total costs of goods sold by total MW. These metrics enable us to evaluate trends in pricing, manufacturing cost and profitability.
Government Regulations. Changes in the U.S. trade environment, including the imposition of import tariffs, continue to affect the amount and timing of our revenue, results of operations and cash flows. Escalating trade tensions, particularly between the United States and China, 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 on our business by reducing our reliance on China. In 2019, 90% of our supply chain was sourced from China. As of March 31, 2021, we have qualified suppliers outside of China for all our commodities and reduced the extent to which our supply chain for U.S.-based projects is subject to existing tariffs. We have entered into partnerships with manufacturers in the United States, Mexico, Canada, Spain, Brazil, Turkey, Saudi Arabia, India, China, Vietnam and Korea to diversify our supply chain and optimize costs.
Impact of the COVID-19 Pandemic
In March of 2020, the World 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 continued spread of COVID-19, governmental authorities in the United States and around the world have imposed various restrictions designed to slow the pace of the pandemic, including restrictions on travel and other restrictions that prohibit employees from going to work, including in cities where we have offices, employees, and customers, causing severe disruptions in the worldwide economy. 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, which have contributed to an increase in lead times for delivery of our tracker systems. The reduced capacity for logistics is causing increases in logistics costs. We also experienced a COVID-related supplier production slowdown in India at the end of March 2021. Additionally, ground operations at project sites have been impacted by health-related restrictions, shelter-in-place orders and worker absenteeism, which resulted in delays in project completion in 2020, and these restrictions have also hindered our ability to provide on-site support to our customers and conduct inspections of our contract manufacturers. 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.
Key Components of Our Results of Operations
The following discussion describes certain line items in our condensed consolidated statements of operations.
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Revenue
We generate our revenue in two streams – Product revenue and Service revenue. Product revenue is derived from the sale of Voyager Trackers, customized components of Voyager Trackers, individual part sales for certain specific transactions and sale of term-based software licenses. Revenue from the sale of Voyager Trackers and customized components of Voyager Trackers 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 correlate with our performance in transferring control over Voyager Trackers and its components. Revenue from the sale of a Voyager Tracker’s 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. Service revenue includes revenue from shipping and handling services, subscription-based enterprise licensing model and maintenance and support services in connection with the term-based software licenses. Revenue for shipping and handling services is recognized over time based on shipping terms of the arrangements. Subscription revenue, which is derived from a 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 Voyager Trackers and related parts can vary between eight weeks and 16 weeks. 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 and availability of government incentives to the end-users of our products. Additionally, our revenue may be impacted by seasonality and variability related to ITC step-downs and construction activity as well as inclement weather conditions.
Our revenue growth is dependent on continued growth in the number of solar tracker projects, software sales and engineering services we win in competitive bidding processes. Our growth targets are impacted by our ability to increase our market share in each of the geographies in which we currently compete and to expand our global footprint to new emerging markets. To support this planned growth, we must 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.
Cost of Revenue and Gross Profit
Cost of revenue consists primarily of Voyager Trackers’ raw material costs, including purchased components, as well as costs related to freight and delivery, product warranty, supply chain personnel and consultants, insurance and customer support. Personnel costs include both direct labor costs as well as costs attributable to any individuals whose activities relate to the procurement, installation and delivery of the finished product and provision of services.
We subcontract to third party contract 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 apply financial hedges 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. The industry is currently experiencing rising steel and logistics costs. We do not have any multi-year contracts with unhedged steel exposure. We fix our steel input prices as close to signing a customer purchase order as possible. We also recently expanded our global supply chain which has improved our ability to secure necessary supplies and further diversifies us on key components and positions us with additional flexibility moving forward. Subsequent to the quarter ended March 31, 2021, we entered into contracts to provide more certainty for a substantial portion of the steel commodities required for our anticipated production in the second half of the year.
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Gross profit may vary from quarter-to-quarter and is primarily affected by our ASP, product costs, product mix, customer mix, geographical mix, shipping method and costs, warranty costs and seasonality.
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 full-time employee headcount in research and development, selling and marketing and general and administrative capacities has grown as we invested in new employees to support our growth and operations as a publicly traded company.
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 anticipate that each of the following categories of operating expenses will increase in absolute dollar amounts for the foreseeable future.
Research and Development Expenses
Research and development expenses consist primarily of salaries, 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, legal fees for registering patents and other costs for performing research and development on our software products.
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of salaries, employee benefits, stock-based compensation expenses and travel expenses related to our selling 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.
We expect an increase in the number of selling and marketing personnel in connection with the expansion of our global selling and marketing footprint as we enter new markets. The majority of our selling and marketing expenses for the period ended March 31, 2020 were related to sales to customers in the United States and business development in other parts of the world. As of March 31, 2021, we have a sales presence in the United States, Australia, India, the Middle East, China, Europe, South Africa, and South-East Asia. We intend to continue to expand our sales presence and marketing efforts to additional countries.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries, employee benefits, stock-based compensation expenses, and travel expenses related to our executives, finance team, and the administrative employees. It also consists of legal, consulting, and professional fees, rent and lease expenses pertaining to our international offices, business insurance costs and other costs. 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.
Non-Operating Expenses and Other Items
Interest Expense
Interest expense consists of interest payments related to a revolving line of credit with Western Alliance Bank, which was scheduled to mature on June 10, 2021 (See “Debt Obligations” below) but was paid off during the quarter ended March 31, 2021.
Gain on extinguishment of debt
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Gain on extinguishment of debt is the result of a forgiveness of a loan effective January 20, 2021 (See “Debt Obligations” below) under the SBA’s Paycheck Protection Program (PPP).
Income Taxes
Benefit from income taxes consists primarily of income taxes related to foreign and state jurisdictions in which we conduct business.
Income (Loss) from Unconsolidated Subsidiary
Income (loss) from unconsolidated subsidiary is comprised of income/expense allocation from our equity method investment.
Results of Operations
The following tables summarizes our results of operations as well as other financial data management considers meaningful for the three months ended March 31, 2021 and 2020. This information should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. The results of historical periods are not necessarily indicative of the results of operations for any future period.
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Three Months Ended
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March 31,
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2020
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|
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2021
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(dollars in thousands)
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Revenue:
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Product revenue
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$
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30,469
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$
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56,462
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Service revenue
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|
1,907
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|
|
|
9,245
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|
Total revenue
|
|
|
32,376
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|
|
|
65,707
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Cost of revenue (a):
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|
|
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Product cost of revenue
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|
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23,747
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|
|
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54,996
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Service cost of revenue
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|
|
1,649
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|
|
|
10,592
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Total cost of revenue
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|
|
25,396
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|
|
|
65,588
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Gross profit
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|
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6,980
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|
|
|
119
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Operating expenses
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|
|
|
|
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Research and development (a)
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1,094
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|
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1,954
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Selling and marketing (a)
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|
|
515
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|
|
|
1,100
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General and administrative (a)
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|
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2,475
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|
|
|
5,084
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Total operating expenses
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4,084
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|
|
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8,138
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Income (loss) from operations
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|
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2,896
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(8,019
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)
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Interest expense
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|
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(112
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)
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|
|
(14
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)
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Gain on extinguishment of debt
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—
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|
|
|
790
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Income (loss) before income taxes
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|
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2,784
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|
|
|
(7,243
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)
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Benefit from income taxes
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|
|
158
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|
|
|
19
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|
Income (loss) from unconsolidated
subsidiary
|
|
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478
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|
|
|
(218
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)
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Net income (loss)
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|
$
|
3,420
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|
|
$
|
(7,442
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)
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Other comprehensive income (loss):
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Foreign currency translation adjustments
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8
|
|
|
|
(1
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)
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Comprehensive income (loss)
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|
$
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3,428
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|
|
$
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(7,443
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)
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(a)
Includes stock-based compensation expense as follows:
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|
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|
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Three Months Ended
March 31,
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2020
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2021
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Cost of revenue
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$
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82
|
|
|
$
|
66
|
|
Research and development
|
|
|
16
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|
|
|
15
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|
Selling and marketing
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|
|
9
|
|
|
|
9
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|
General and administrative
|
|
|
351
|
|
|
|
359
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|
Total stock-based compensation expense
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|
$
|
458
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|
|
$
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449
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Comparison of the Three Months ended March 31, 2020 and 2021
Product Revenue
Product revenue for the three months ended March 31, 2021 was $56.5 million an increase of $26.0 million, or 85.3%, as compared to $30.5 million for the three months ended March 31, 2020, primarily driven by a 104% increase in MW shipped and a slight decrease in ASP. During the quarter ended March 31, 2021, 70% of the MW shipped were to new customers that we did not have in the quarter ended March 31, 2020 and 30% represented new projects with customers we worked with in the quarter ended March 31, 2020. The revenue was generated by customer projects located in the United States.
Service Revenue
Service revenue for the three months ended March 31, 2021 was $9.2 million, an increase of $7.3 million, or 384.2%, as compared to $1.9 million for the three months ended March 31, 2020, primarily driven by an increase in shipping and logistics revenue on Voyager Tracker sales due to a 104% increase in MW shipped to our U.S. customers and a small increase in ASP. In the period ended March 31, 2020, 65% of the MW shipped were related to individual part sales as customers sought to take advantage of safe harbor rules. Revenue recognized for these part sales, including shipping and handling revenue, are recorded at a point in time and included in product sales during the period delivered.
Cost of Revenue and Gross Profit
Cost of revenue for the three months ended March 31, 2021 was $65.6 million, an increase of $40.2 million, or 158.3%, as compared to $25.4 million for the three months ended March 31, 2020, primarily driven by the aforementioned increase in MW shipped. Cost per MW increased quarter over quarter due to increases in steel prices and logistics cost. Our approach when we receive a contract from our customers, is to place the related supply purchase orders for tracker components as soon as possible thus locking our costs for commodities like steel. We increased our head count in operations to support our rapid growth which is reflected in significantly higher overhead costs. Cost of revenue for the three months ended March 31, 2021 was also impacted by approximately $2.5 million in expenditures related to certain retrofits, remediations and product reconfigurations for certain of our solar tracker systems that had been previously installed, or were in the process of being installed, at customer sites. We undertook these activities after identifying these opportunities for such systems for our customers.
Gross margin was negatively impacted by increased logistics costs that we were not able to pass on to our customers, higher overhead costs and the expenses associated with remediation and retrofits. Our gross profit for the three months ended March 31, 2021 decreased by $6.9 million, or 98%, as compared to the three months ended March 31, 2020 due to the above stated reasons. The gross profit for the three months ended March 31, 2020 benefitted from a higher mix of safe harbor projects which carried a higher margin as customers were seeking to take advantage of the expected step down in investment tax credit.
Research and Development Expenses
Research and development expenses for the three months ended March 31, 2021 were $2.0 million, an increase of $0.9 million, or 78%, as compared to $1.1 million for the three months ended March 31, 2020. The increase in expenses was primarily attributable to an increase of $.3 million in personnel-related expenses, due to a net increase in headcount for the research and development of our products and an increase of $0.5 million in facilities and equipment related expenses. Research and development expenses as a percentage of revenue were 3% for the three months ended March 31, 2020 and 2021.
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Selling and Marketing Expenses
Selling and marketing expenses for the three months ended March 31, 2021 were $1.1 million, an increase of $0.6 million, or 114%, as compared to $0.5 million for the three months ended March 31, 2020. The increase in selling and marketing expenses was primarily attributable to an increase in personnel-related expenses, due to a net increase in headcount to support our international expansion plans. Selling and marketing expenses as a percentage of revenue for the three months ended March 31, 2020 and 2021 was approximately 2%.
General and Administrative Expenses
General and administrative expenses for the three months ended March 31, 2021 were $5.1 million, an increase of $2.6 million, or 105%, as compared to $2.5 million for the three months ended March 31, 2020. The increase in general and administrative expenses was primarily attributable to an increase of $0.8 million in personnel-related expenses, including stock-based compensation expense due to a net increase in headcount, an increase of $1.1 million in professional fees for consulting, legal and accounting services, an increase of $0.3 million in business insurance costs and an increase of $0.1 million pertaining to rent, lease and other office expenses in line with an increase in headcount. General and administrative expenses as a percentage of revenue was approximately 8% for the three months ended March 31, 2020 and 2021.
Interest Expense
Interest expense consists of interest expense in connection with our revolving line of credit with Western Alliance Bank, was scheduled to mature on June 10, 2021 (See “Debt Obligations” below) but was paid off during the quarter ended March 31, 2021.
Income (loss) from Unconsolidated Subsidiary
(Loss) from unconsolidated subsidiary for the three months ended March 31, 2021 was $0.2 million, a decrease of $0.7 million, or 145%, as compared to a $0.5 million income for the three months ended March 31, 2020. This decrease resulted from recording $218 thousand of loss from our investment in Dimension Energy LLC (“Dimension”) for the three months ended March 31, 2021, as compared to income from such investment for the three months ended March 31, 2020. Dimension is a community solar developer based in Atlanta, Georgia that provides renewable energy solutions for local communities in the United States. This decrease was primarily due to the fact that Dimension recognized a loss for the three months ended March 31, 2021 as projects did not reach performance obligation milestones to recognize revenue.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through sales of shares of common stock, issuance of debt and payments from our customers. Our ability to generate positive cash flow from operations is dependent on contract payment terms and the strength of our gross margins. We believe that operating cash flows and the cash generated by our IPO will be sufficient to meet our near term future cash needs. Please see our subsequent event footnote for information on a revolving credit facility agreement we entered into in April 2021.
We intend to maintain appropriate debt levels based upon cash flow expectations, our overall cost of capital and expected cash requirements for our operations, such as systems and project development activities in certain international regions. Any incremental debt financings could result in increased debt service expenses and/or restrictive covenants, which could limit our ability to pursue our strategic plans.
The following table shows our cash flows from operating activities, investing activities and financing activities for the stated periods:
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Three Months Ended
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March 31,
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2020
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2021
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(in thousands)
|
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Net cash used in operating activities
|
|
$
|
(6,300
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)
|
|
$
|
(26,988
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)
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Net cash used in investing activities
|
|
─
|
|
|
|
(85
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)
|
Net cash provided by (used in) financing activities
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|
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30,000
|
|
|
|
(961
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)
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Effect of exchange rate changes on cash and restricted cash
|
|
|
8
|
|
|
|
1
|
|
Increase (decrease) in cash and restricted cash
|
|
$
|
23,708
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|
|
$
|
(28,033
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)
|
Operating Activities
For the three months ended March 31, 2020, net cash used in operating activities was $6 million, primarily due to a net income of $3.4 million and an increase of $9.0 million in prepaid and other current assets, $11.6 million in deferred revenue, $4.3 million in accrued expenses and a decrease of $3.4 million in receivables and $4.1 million in inventories.
For the three months ended March 31, 2021, net cash used in operating activities was $27 million, primarily due to a net loss of $7.4 million which is reflective of our current investment in growing our operations and expanding our presence to additional countries. This reflects an increase of $20.2 million in receivables, $2.6 million in inventory, $2.9 million in prepaids, $3.6 million in other current assets, $12.9 million in accounts payable, $10.4 million in accrued expenses and a decrease of $14.8 million in deferred revenue.
Investing Activities
For the three months ended March 31, 2021, net cash used in investing activities was $0.1 million, which was attributable to the purchase of property and equipment.
Financing Activities
For the three months ended March 31, 2020, net cash provided by financing activities was $30 million which was from the sale of stock.
For the three months ended March 31, 2021, net cash used in financing activities was $1.0 million which was attributable to paying off the Western Alliance Bank revolving line of credit facility.
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Debt Obligations
Revolving Line of Credit
On June 17, 2019, we entered into a revolving line of credit agreement with the Western Alliance Bank for a total aggregate principal amount of $1.0 million, which was scheduled to mature on June 10, 2021. As of March 31, 2021, the outstanding balance for the revolving line of credit was paid in full and the revolving credit line was closed.
Paycheck Protection Program
On April 30, 2020, we received a PPP loan pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) in the amount of $0.8 million. The PPP loan has a two-year term maturing on April 30, 2022 and bears a fixed interest rate of 1%. Under the terms of the CARES Act the loan is eligible for forgiveness, in part or whole, if the proceeds are used to retain and pay employees and for other qualifying expenditures. The PPP loan and the related accrued interest were fully forgiven on January 20, 2021.
Non-GAAP Financial Measures
Adjusted EBITDA, Adjusted Non-GAAP Net Income (Loss) and Adjusted Non-GAAP Net Income (Loss) Per Share (“ Adjusted EPS”)
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We present Adjusted EBITDA, Adjusted Non-GAAP Net Income (Loss) and Adjusted EPS as supplemental measures of our performance. We define Adjusted EBITDA as net loss plus (i) income tax benefit, (ii) interest expense, (iii) depreciation expense, (iv) amortization of intangibles, (v) stock-based compensation (vi) gain on extinguishment of debt, (vii) other costs (viii) (income) loss from unconsolidated subsidiary. We define Adjusted Net Income (Loss) as net income (loss) plus (i) amortization of intangibles, (ii) stock-based compensation, (iii) gain on extinguishment of debt, (iv) other costs, (v) (income) loss from unconsolidated subsidiary and (vi) income tax benefit of adjustments. Adjusted EPS is defined as Adjusted Non-GAAP Net Income (Loss) Per Share basis using the weighted average basic and diluted shares outstanding.
Adjusted EBITDA, Adjusted Non-GAAP Net Income (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 Non-GAAP Net Income (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 Non-GAAP Net Income (Loss) and Adjusted EPS to evaluate the effectiveness of our business strategies.
Among other limitations, Adjusted EBITDA, Adjusted Non-GAAP Net Income (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 Non-GAAP Net Income (Loss) and Adjusted EPS differently than we do, which limits its usefulness as a comparative measure.
Because of these limitations, Adjusted EBITDA, Adjusted Non-GAAP Net Income (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.
The following table reconciles Net Income (Loss) to Adjusted EBITDA for the three months ended March 31, 2020 and 2021, respectively:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2021
|
|
|
|
(in thousands)
|
|
Net income (loss)
|
|
$
|
3,420
|
|
|
$
|
(7,442
|
)
|
Income tax (benefit)
|
|
|
(158
|
)
|
|
|
(19
|
)
|
Interest expense, net(a)
|
|
|
112
|
|
|
|
14
|
|
Depreciation expense
|
|
|
3
|
|
|
|
9
|
|
Amortization of intangibles(b)
|
|
|
33
|
|
|
─
|
|
Stock-based compensation(c)
|
|
|
458
|
|
|
|
449
|
|
(Gain) on extinguishment of debt(d)
|
|
─
|
|
|
|
(790
|
)
|
Other costs (e)
|
|
─
|
|
|
|
897
|
|
(Income) loss from unconsolidated subsidiary(f)
|
|
|
(478
|
)
|
|
|
218
|
|
Adjusted EBITDA
|
|
$
|
3,390
|
|
|
$
|
(6,664
|
)
|
(a) Represents interest expense, annual amortization of debt issuance cost and loss on debt extinguishment in connection with our Secured Promissory Notes, and a revolving line of credit with Western Alliance Bank.
(b) Represents amortization expense related to developed technology.
(c) Represents stock-based compensation expense.
(d) Represents a gain on extinguishment of debt resulting from forgiveness of a loan under the SBA’s Paycheck Protection Program. See “Note -7 Debt and Other Borrowings”
(e) Represents consulting fees in connection with operations and finance.
(f) Represents results of an entity that we do not consolidate, as our management excludes these results when evaluating our operating performance.
The following table reconciles Net Income (Loss) to Adjusted Non-GAAP Net Income (Loss) and Adjusted EPS for the three months ended March 31, 2020 and 2021, respectively. All shares and per share amounts have been adjusted for a approximately 8.25-for-1 share forward stock split which took effect on April 28, 2021:
28
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2020
|
|
2021
|
|
|
(in thousands, except per share data)
|
Net income (loss)
|
|
$
|
3,420
|
|
|
|
$
|
(7,442
|
)
|
|
Amortization of intangibles
|
|
|
33
|
|
|
|
─
|
|
|
Stock-based compensation
|
|
|
458
|
|
|
|
|
449
|
|
|
(Gain) on extinguishment of debt
|
|
─
|
|
|
|
|
(790
|
)
|
|
Other costs
|
|
─
|
|
|
|
|
897
|
|
|
(Income) loss from unconsolidated subsidiary
|
|
|
(478
|
)
|
|
|
|
218
|
|
|
Income tax expense of adjustments(a)
|
|
|
(3
|
)
|
|
|
|
(8
|
)
|
|
Adjusted Non-GAAP net income (loss)
|
|
$
|
3,430
|
|
|
|
$
|
(6,676
|
)
|
|
|
|
|
|
|
|
|
|
|
Adjusted Non-GAAP net income (loss) per share (Adjusted EPS)
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
|
|
$
|
(0.10
|
)
|
|
Diluted
|
|
$
|
0.04
|
|
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted-average Non-GAAP common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
67,334,111
|
|
|
|
|
66,875,469
|
|
|
Diluted
|
|
|
77,105,419
|
|
|
|
|
66,875,469
|
|
|
(a) Represents incremental tax expense of adjustments made to reconcile Net Income (Loss) to Adjusted Non-GAAP Net Income (Loss) driven from (Income) loss from unconsolidated subsidiary.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets or any obligation arising out of a material variable interest in an unconsolidated entity.
Recently Issued Accounting Pronouncements
See Note 2 to our condensed consolidated financial statements included elsewhere in this report.
Critical Accounting Policies and Significant Management Estimates
The preparation of our interim unaudited condensed consolidated financial statements in accordance with GAAP requires estimates, judgments and assumptions that affect the reported amounts and classifications of assets and liabilities, revenues and expenses and the related disclosures of contingent liabilities in our interim unaudited condensed consolidated financial statements and accompanying notes. The SEC has defined a company's critical accounting policies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the following critical accounting policies and estimates:
Equity method investments
Stock-based compensation;
Contingent consideration; and
29
We have other key accounting policies which involve the use of estimates, judgments and assumptions that are significant to understanding our results. See Note 2 - Summary of Significant Accounting Policies to the interim unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. Of those policies, we believe that the accounting policies enumerated above involve the greatest degree of complexity and exercise of judgment by our management.
During the three months ended March 31, 2021, there were no significant changes in our critical accounting policies or estimates which were included in the condensed consolidated financial statements and the accompanying notes for the fiscal year ended December 31, 2020, which are included in our financial statements for the fiscal year ended December 31, 2020, which are included in the Company’s final prospectus (the “IPO Prospectus”) for its initial public offering (“IPO”) dated as of April 29, 2021 and filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the “Securities Act”).
We evaluate our estimates, judgments and assumptions on an ongoing basis, and while we believe that our estimates, judgments and assumptions are reasonable, they are based upon information available at the time. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions