FTC Solar, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. FTC Solar supplies solar tracker systems, software and related engineering and logistics services. Financial amounts below are in millions of dollars unless noted.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $16.6 | $53.0 | $96.8 | $168.8 |
| Gross profit (loss) | ($9.5) | ($8.0) | ($25.3) | ($24.0) |
| Gross margin | (57.4%) | (15.2%) | (26.1%) | (14.2%) |
| Operating loss | ($26.7) | ($22.8) | ($79.7) | ($103.3) |
| Net loss | ($25.6) | ($22.9) | ($79.1) | ($82.7) |
| Adjusted EBITDA (non-GAAP) | ($17.7) | ($16.1) | ($55.4) | ($39.5) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | ($49.1) | ($92.4) |
Q3 product revenue was $3.5 million, down 92.2%, while service revenue rose 75.9% to $13.0 million. For the first nine months, product revenue fell 68.3% to $43.7 million and service revenue increased 71.5% to $53.2 million. Basic and diluted loss per share were $0.25 in Q3 and $0.79 for the nine-month period.
At September 30, 2022, cash was $49.8 million, working capital was $71.0 million, total assets were $148.5 million and stockholders’ equity was $81.5 million. Cash had declined from $102.2 million at December 31, 2021. Accounts receivable, net, was $52.9 million, versus $107.5 million at year-end; inventory was $17.3 million, versus $8.9 million. The company reported no long-term borrowings and had not drawn on its revolving credit facility. Unused borrowing capacity was approximately $98.2 million, including the effect of $1.8 million in outstanding letters of credit; the filing separately cites approximately $98.0 million of available liquidity after considering the facility covenant. Nine-month investing cash outflow was $4.1 million and financing cash inflow was $0.8 million.
Material changes and notable items
- Q3 revenue declined 68.7% year over year. Management attributed lower product revenue to a 72% decline in megawatts produced and approximately 72% lower average selling price, primarily reflecting project mix and delayed or deferred customer projects.
- The Q3 gross margin worsened to negative 57.4%. Management cited low production volumes and fixed overhead, product and project mix, and warehousing costs for goods in transit. Nine-month gross margin also deteriorated, with management citing a $5.0 million customer concession and higher product costs.
- Nine-month net loss was lower than in 2021, but the comparison includes a $20.6 million gain on the 2021 sale of Dimension Energy. The 2022 period included $1.7 million of subsequent escrow-release gains from that sale.
- Warranty reserves rose to $12.8 million at September 30, 2022, from $5.4 million at September 30, 2021. The nine-month 2022 warranty provision was $7.4 million.
- FTC Solar acquired HX Tracker in June for approximately $8.7 million in cash and stock, and acquired Standard Sun pile-testing and equipment-installation assets in July for approximately $0.8 million. The acquired businesses’ results were described as not material.
Outlook, risks and contingencies
- Management expects U.S. solar demand to benefit from the Inflation Reduction Act and the 24-month duty holiday for certain solar imports, and said developers were looking to reactivate deferred projects, supporting expected tracker demand in 2023. No quantified company revenue or earnings guidance was provided.
- UFLPA compliance reviews and uncertainty over module traceability and availability, the Department of Commerce AD/CVD investigation, supply-chain and logistics disruption, inflation, and steel, motor and chip costs could delay projects, pressure margins and cash flows, and affect 2023 revenue. Management said a recovery depends on greater clarity and customer visibility into module deliveries.
- The company reported cumulative losses and continued operating cash outflows. Management concluded existing cash and unused revolver capacity should fund operations for at least one year from issuance of the statements, but warned that weaker market conditions could require additional debt or equity financing and that financing may not be available on favorable terms or at all.
- The June 2022 credit-facility amendment lowered the minimum-liquidity covenant to $50 million through March 31, 2023 and added conditional covenants and restrictions. The company said it was compliant at quarter-end. It had authority to sell up to $100 million of common stock through an at-the-market program; no shares had been sold by September 30.
- FCX Solar litigation remains pending. Fraud and unjust-enrichment claims were dismissed, but breach-of-contract and patent claims remain; FCX had sought approximately $134 million in the contract case and seeks unspecified damages and injunctive relief in the patent case. FTC Solar says it will defend the claims; outcomes and potential losses are uncertain.
- Management concluded disclosure controls and procedures were not effective because of material weaknesses in financial reporting and IT controls. Remediation was underway, but the company cautioned that the weaknesses might not all be remediated by year-end 2022.
- A related-party consulting engagement generated $3.0 million of general and administrative expense in the first nine months of 2022. Q3 expense was $0.9 million.
Most important facts for investors to verify
- Whether deferred solar projects resume and whether product revenue and megawatts shipped recover as management expects.
- Whether margins improve as volumes, project mix, logistics costs and customer pricing change; monitor warranty claims and reserves.
- Cash burn, receivable collections, covenant compliance and remaining borrowing capacity, particularly as the minimum-liquidity amendment approaches its March 2023 end date.
- Any equity issuance under the $100 million ATM program and its potential dilution.
- Developments in UFLPA enforcement, the AD/CVD investigation, and the FCX litigation, including any resulting project delays, costs or liabilities.
- Progress in remediating the disclosed material weaknesses and any subsequent control or reporting issues.