Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Securities Act of 1933, as amended (the “Securities Act”), which are subject to risks, uncertainties, and assumptions that are difficult to predict. All statements in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements. These forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements, among other things, concerning: the length and severity of the ongoing COVID-19 (novel coronavirus) outbreak, including its impacts across our businesses on demand, manufacturing operations, construction activities associated with our expanding manufacturing capacity, financing, and our global supply chains, actions that may be taken by governmental authorities to contain the COVID-19 outbreak or to treat its impacts, and the ability of our customers, suppliers, equipment vendors, and other counterparties to fulfill their contractual obligations to us; effects resulting from certain module manufacturing changes; our business strategy, including anticipated trends and developments in and management plans for our business and the markets in which we operate; future financial results, operating results, revenues, gross margin, operating expenses, products, projected costs (including estimated future module collection and recycling costs), warranties, solar module technology and cost reduction roadmaps, restructuring, product reliability, investments, and capital expenditures; our ability to continue to reduce the cost per watt of our solar modules; the impact of public policies, such as tariffs or other trade remedies imposed on solar cells and modules; the potential impact of legislation intended to encourage renewable energy investments through tax credits; effects resulting from pending litigation; our ability to expand manufacturing capacity worldwide; the impact of supply chain disruptions, further exacerbated by the COVID-19 pandemic, that may affect the procurement of raw materials used in our manufacturing process and the distribution of our modules; research and development (“R&D”) programs and our ability to improve the wattage of our solar modules; sales and marketing initiatives; and competition. In some cases, you can identify these statements by forward-looking words, such as “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “seek,” “believe,” “forecast,” “foresee,” “likely,” “may,” “should,” “goal,” “target,” “might,” “will,” “could,” “predict,” “continue,” “contingent,” and the negative or plural of these words, and other comparable terminology.

Forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q and therefore speak only as of the filing date. You should not place undue reliance on these forward-looking statements. We undertake no obligation to update any of these forward-looking statements for any reason, whether as a result of new information, future developments, or otherwise. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by these statements. These factors include, but are not limited to, the severity and duration of the COVID-19 pandemic, including its potential impact on the Company’s business, financial condition, and results of operations; structural imbalances in global supply and demand for PV solar modules; the market for renewable energy, including solar energy; our competitive position and other key competitive factors; reduction, elimination, or expiration of government subsidies, policies, and support programs for solar energy projects; the impact of public policies, such as tariffs or other trade remedies imposed on solar cells and modules; the passage of legislation intended to encourage renewable energy investments through tax credits; our ability to execute on our long-term strategic plans; our ability to execute on our solar module technology and cost reduction roadmaps; our ability to produce bifacial solar modules and next generation Series 7 modules; our ability to improve the wattage of our solar modules; interest rate fluctuations and our customers’ ability to secure financing; the loss of any of our large customers, or the ability of our customers and counterparties to perform under their contracts with us; the satisfaction of conditions precedent in our sales agreements; our ability to attract new customers and to develop and maintain existing customer and supplier relationships; our ability to convert existing or construct production facilities to support new product lines; general economic and business conditions, including those influenced by

U.S., international, and geopolitical events; environmental responsibility, including with respect to CdTe and other semiconductor materials; claims under our limited warranty obligations; changes in, or the failure to comply with, government regulations and environmental, health, and safety requirements; effects resulting from pending litigation; future collection and recycling costs for solar modules covered by our module collection and recycling program; supply chain disruption, including the availability of shipping containers, port congestion, cancelled shipments by logistic providers, and the cost of fuel, demurrage, and detention charges, all of which may be exacerbated by the COVID-19 pandemic; our ability to protect our intellectual property; our ability to prevent and/or minimize the impact of cyber-attacks or other breaches of our information systems; our continued investment in research and development (“R&D”); the supply and price of components and raw materials, including CdTe; our ability to attract and retain key executive officers and associates; and the matters discussed in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021, elsewhere in this Quarterly Report on Form 10-Q, and our other reports filed with the SEC. You should carefully consider the risks and uncertainties described in these reports.

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 the related notes thereto included in this Quarterly Report on Form 10-Q. When referring to our manufacturing capacity, total sales, and solar module sales, the unit of electricity in watts for megawatts (“MW”) and gigawatts (“GW”) is direct current (“DC” or “DC”) unless otherwise noted. When referring to our projects or systems, the unit of electricity in watts for MW and GW is alternating current (“AC” or “AC”) unless otherwise noted.

Executive Overview

We are a leading American solar technology company and global provider of PV solar energy solutions. Developed at our R&D labs in California and Ohio, we manufacture and sell PV solar modules with an advanced thin film semiconductor technology that provide a high-performance, lower-carbon alternative to conventional crystalline silicon PV solar modules. From raw material sourcing through end-of-life module recycling, we are committed to reducing the environmental impacts and enhancing the social and economic benefits of our products across their life cycle. We are the world’s largest thin film PV solar module manufacturer and the largest PV solar module manufacturer in the Western Hemisphere.

Certain of our financial results and other key operational developments for the three months ended September 30, 2022 include the following:

*•*Net sales for the three months ended September 30, 2022 increased by 8% to $628.9 million compared to $583.5 million for the same period in 2021. The increase was primarily driven by an increase in the volume of modules sold to third parties, partially offset by a decrease in the average selling price per watt.

*•*Gross profit for the three months ended September 30, 2022 decreased 18.1 percentage points to 3.3% from 21.4% for the same period in 2021. The decrease in gross profit was primarily due to a decrease in the average selling price per watt of our modules, an increase in sales freight, demurrage, and detention charges, a lower benefit from reductions to our product warranty liability, and a favorable settlement with a customer in the prior period. These decreases to gross profit were partially offset by the higher volume of modules sold, a decrease to our module collection and recycling liability in the current period compared to an increase in the prior period, and continued module cost reductions.

• As of September 30, 2022, we had approximately 9 GWDC of total installed nameplate production capacity across all our facilities. We produced 2.4 GWDC of solar modules during the three months ended September 30, 2022, which represented an 18% increase in module production from the same period in 2021. The increase in production was primarily driven by higher throughput at our manufacturing facilities. We expect to produce between 8.9 GWDC and 9.0 GWDC of solar modules during 2022.

*•*During the three months ended September 30, 2022, we announced plans to expand our manufacturing capacity by an additional 4.4 GWDC by constructing our fourth manufacturing facility in the United States and increasing our manufacturing footprint at our existing facilities in Ohio. Such expansion plans, in combination with our previously announced expansion plans, are expected to increase our manufacturing capacity by approximately 11 GWDC by 2025.

Market Overview

Solar energy is one of the fastest growing forms of renewable energy with numerous economic and environmental benefits that make it an attractive complement to and/or substitute for traditional forms of energy generation. In recent years, the cost of producing electricity from PV solar power systems has decreased to levels that are competitive with or below the price of electricity in many markets. This price decline has opened new possibilities to develop systems in many locations with limited or no financial incentives, thereby promoting the widespread adoption of solar energy. Additionally, recently enacted government support programs, such as the IRA, have contributed to this momentum by providing solar module manufacturers, project developers, and project owners with tax incentives to accelerate the ongoing transition to clean energy. Among other things, the IRA (i) reinstates the 30% investment tax credit for qualifying solar projects that meet certain wage and apprenticeship requirements, (ii) extends the production tax credit (“PTC”) to include energy generated from solar projects, (iii) provides incremental investment and production tax credits for solar projects that meet certain domestic content and location requirements, and (iv) offers tax credits for solar modules and solar module components manufactured in the United States and sold to third parties. The provisions of the IRA are generally effective for tax years beginning after 2022.

Supply and demand. As a result of the market opportunities described above, we are in the process of expanding our manufacturing capacity by approximately 11 GWDC, including the construction of our third manufacturing facility in the United States, which is expected to commence operations in the first half of 2023; our first manufacturing facility in India, which is expected to commence operations in the second half of 2023; our fourth manufacturing facility in the United States, which is expected to commence operations in 2025, contingent upon permitting and pending approval of various federal, state, and local incentives; and the expansion of our manufacturing footprint at our existing facilities in Ohio. In the aggregate, we believe manufacturers of solar cells and modules, particularly those in China, have significant installed production capacity, relative to global demand, and the ability for additional capacity expansion. Accordingly, we believe the solar industry may experience periods of structural imbalance between supply and demand, which could lead to periods of pricing volatility. In light of such market realities, we continue to focus on our strategies and points of differentiation, which include our advanced module technology, our manufacturing process, our R&D capabilities, the sustainability advantage of our modules, and our financial stability.

Pricing competition. The solar industry has been characterized by intense pricing competition, both at the module and system levels. This competition may result in an environment in which pricing falls rapidly, thereby potentially increasing demand for solar energy solutions but constraining the ability for project developers and module manufacturers to sustain meaningful and consistent profitability. Module average selling prices in many global markets have declined for several years and are expected to continue to decline in the long-term. However, in certain markets, module average selling prices have been favorably influenced by trade measures and policies, government regulations, raw material availability, and supply chain disruptions. For example, module spot pricing in the United States has increased, in part, due to elevated commodity and logistics costs and, more recently, due to the rising demand for modules manufactured in the United States as a result of the IRA described above. While the duration of this elevated period of pricing is uncertain, module average selling prices in the United States are expected to remain elevated for the next several years.

Competitive pricing for modules and systems, relative to the cost of traditional forms of energy generation, is expected to contribute to diversification in global electricity generation and further demand for solar energy. Our results of operations could be adversely affected if competitors reduce pricing to levels below their costs, bid aggressively low prices for module sale agreements, or are able to operate at minimal or negative operating margins for sustained periods of time. For certain of our competitors, including many in China, these practices may be enabled by their direct or indirect access to sovereign capital or other forms of state-owned support. Additionally, in certain markets an oversupply imbalance at the grid level may reduce short-to-medium term demand for new solar installations relative to prior years, lower pricing for power purchase agreements (“PPAs”), and lower margins on module and system sales to such markets. However, we believe the effects of such imbalance can be mitigated by modern solar power plants and energy storage solutions that offer a flexible operating profile, thereby promoting greater grid stability and enabling a higher penetration of solar energy. We continue to address these uncertainties, in part, by executing on our module technology improvements and implementing certain other cost reduction initiatives.

Diverse offerings. We face intense competition from manufacturers of crystalline silicon solar modules and other emerging technologies. Solar module manufacturers compete with one another on sales price per watt, which may be influenced by several module value attributes, including wattage (through a larger form factor or an improved conversion efficiency), energy yield, degradation, sustainability, and reliability. Sales price per watt may also be influenced by warranty terms and customer payment terms. While conventional solar modules are monofacial, meaning their ability to produce energy is a function of direct and diffuse irradiance on their front side, most module manufacturers offer bifacial modules that also capture diffuse irradiance on the back side of a module. We currently produce monofacial solar modules and, based on recent R&D activities, expect to produce bifacial solar modules in the near term. Bifaciality compromises nameplate efficiency, but by converting both front and rear side irradiance, such technology may improve the overall energy production of a module relative to nameplate efficiency when applied in certain applications, which could potentially lower the overall levelized cost of electricity (“LCOE”) of a system when compared to systems using conventional solar modules, including the modules we currently produce. Additionally, certain module manufacturers have introduced n-type mono-crystalline modules, such as tunnel oxide passivated contact modules, which are expected to provide certain improvements to module efficiency, temperature coefficient, and bifacial performance, and claim to provide certain degradation advantages compared to other mono-crystalline modules.

Production efficiencies. We believe we are among the lowest cost module manufacturers in the solar industry on a module cost per watt basis, based on publicly available information. This cost competitiveness allows us to compete favorably in markets where pricing for modules and systems is highly competitive. Our cost competitiveness is based in large part on our advanced thin film semiconductor technology, module wattage (or conversion efficiency), proprietary manufacturing process (which enables us to produce a CdTe module in a matter of hours using a continuous and highly automated industrial manufacturing process, as opposed to a batch process), and our focus on operational excellence. In addition, our CdTe modules use approximately 2% of the amount of semiconductor material that is used to manufacture conventional crystalline silicon solar modules. The cost of polysilicon is a significant driver of the manufacturing cost of crystalline silicon solar modules, and the timing and rate of change in the cost of silicon feedstock and polysilicon could lead to changes in solar module pricing levels. In recent years, polysilicon consumption per cell has been reduced through various initiatives, such as the adoption of diamond wire saw technology, which have contributed to declines in our relative manufacturing cost competitiveness over conventional crystalline silicon module manufacturers.

Energy performance. In many climates our solar modules provide certain energy production advantages relative to competing crystalline silicon solar modules. For example, our CdTe solar technology provides:

• a superior temperature coefficient, which results in stronger system performance in typical high insolation climates as the majority of a system’s generation, on average, occurs when module temperatures are well above 25°C (standard test conditions);

• a superior spectral response in humid environments where atmospheric moisture alters the solar spectrum relative to standard test conditions;

• a better partial shading response than competing crystalline silicon technologies, which may experience significantly lower energy generation than CdTe solar modules when partial shading occurs; and

• an immunity to cell cracking and its resulting power output loss, a common failure often observed in crystalline silicon modules caused by poor manufacturing, handling, weather, or other conditions.

In addition to these technological advantages, we also warrant that our solar modules will produce at least 98% of their labeled power output rating during the first year, with the warranty coverage reducing by a degradation factor between 0.3% and 0.5%, depending on the module series, every year thereafter throughout the limited power output warranty period of up to 30 years. As a result of these and other factors, our solar modules can produce more annual energy in real world operating conditions than conventional crystalline silicon modules with the same nameplate capacity.

While our modules are generally competitive in cost, reliability, and performance attributes, there can be no guarantee such competitiveness will continue to exist in the future to the same extent or at all. Any declines in the competitiveness of our products could result in further declines in the average selling prices of our modules and additional margin compression. We continue to focus on enhancing the competitiveness of our solar modules by accelerating progress along our module technology and cost reduction roadmaps.

Certain Trends and Uncertainties

We believe that our business, financial condition, and results of operations may be favorably or unfavorably impacted by the following trends and uncertainties. See Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021 for discussions of other risks (the “Risk Factors”) that may affect us.

Our business is evolving worldwide and is shaped by the varying ways in which our offerings can be compelling and economically viable solutions to energy needs in various markets. In addressing electricity demands, we are focused on providing utility-scale module offerings in key geographic markets that we believe have a compelling need for mass-scale PV solar electricity, including markets throughout the United States, India, and Europe. We closely evaluate and monitor the appropriate level of resources required to support such markets and their associated sales opportunities. When deployed in utility-scale applications, our modules provide energy at a lower LCOE compared to traditional forms of energy generation, making them an attractive alternative to or replacement for aging fossil fuel-based generation resources. Accordingly, future retirements of aging energy generation resources represent a significant increase in the potential market for solar energy.

This focus on utility-scale module offerings exists within a current market environment that includes rooftop and distributed generation solar. We believe that utility-scale solar will continue to be a compelling offering for companies with technology and cost leadership and will continue to represent an increasing portion of the overall electricity generation mix. However, our module offerings in certain markets may be driven, in part, by future demand for rooftop and distributed generation solar solutions. For example, we continue to evaluate opportunities to develop and leverage other solar cell technologies in multi-junction applications that utilize our thin film PV technology. We believe such applications have the potential to enable our module conversion efficiency to 24% by 2025 and 28% by 2030.

Demand for our solar energy solutions depends, in part, on market factors outside our control. For example, many governments have proposed or enacted policies or support programs intended to encourage renewable energy investments to achieve decarbonization objectives and/or establish greater energy independence. While we compete in many markets that do not require solar-specific government subsidies or support programs, our net sales and profits remain subject to variability based on the availability and size of government subsidies and economic incentives. Adverse changes in these factors could increase the cost of utility-scale systems, which could reduce demand for our solar modules. Recent developments to government support programs include the following:

• United States. In August 2022, the U.S. President signed the IRA into law, which is intended to accelerate the country’s ongoing transition to clean energy. The provisions of the IRA are generally effective for tax years beginning after 2022. Among other things, the financial incentives provided by the IRA are expected to significantly increase demand for modules manufactured in the United States. Accordingly, the demand for these solar modules is expected to increase domestic manufacturing in the near term, which may result in localized supply chain constraints and periods of inflationary pricing for certain of our key raw materials, including substrate glass and cover glass. The financial incentives provided by the IRA are also expected to significantly increase demand for solar modules in general due to the incremental tax credit available for the qualified production of clean hydrogen that is powered by renewable resources. Given the complexities of the IRA, which is pending technical guidance and regulations from the Internal Revenue Service and U.S. Treasury Department, we continue to evaluate the full extent of benefits available to us, which are expected to favorably impact our results of operations in future periods. For example, we currently expect to qualify for the advanced manufacturing production tax credit under Section 45X of the Internal Revenue Code, which provides certain specified benefits for solar modules and solar module components manufactured in the United States and sold to third parties. Such credits, which may be refundable to us or transferable to a third party, are available at their specified credit amounts through 2029 and are scheduled to phase out starting in the 2030 tax year with full phase out by the end of 2032.

*•*India. In September 2022, the government of India approved an expansion to its Production Linked Incentive (“PLI”) scheme to INR 195 billion ($2.5 billion), which is intended to promote the manufacturing of high efficiency solar modules in India and to reduce India’s dependency on foreign imports of solar modules. Under the PLI scheme, manufacturers are selected through a competitive bid process and receive certain cash incentives over a five-year period following the commissioning of their manufacturing facilities. Among other things, such incentives are based on the efficiency and temperature coefficient of the modules produced, the proportion of raw materials sourced from the domestic market, the extent to which the manufacturer’s operations are fully integrated within India, and the quantity of modules sold from such manufacturing operations. At this time, it is uncertain whether and to what extent we may qualify for such incentives.

Demand for our solar energy solutions also depends on domestic or international trade policies and government regulations, which may be proposed, revised, and/or enacted across short- and long-term time horizons with varying degrees of impact to our net sales, profit, and manufacturing operations. Changes in these policies and regulations could adversely impact the competitive landscape of solar markets, which could reduce demand for our solar modules. Recent revisions or proposed changes to trade policy and government regulations include the following:

• United States. In June 2022, the U.S. President authorized the U.S. Secretary of Commerce to provide a 24-month antidumping and countervailing duty tariff exemption for imported solar panels from certain Southeast Asian countries. For more information about this development, see Item 1A. “Risk Factors.” Separately, the U.S. President also authorized the use of the Defense Production Act to expand domestic production of clean energy technologies. At this time, it is uncertain what impact, if any, these developments will have on future investments in solar module manufacturing in the United States.

• United States. In June 2022, the U.S. Supreme Court issued a ruling in West Virginia, et al. v. Environmental Protection Agency, et al., which limited the Environmental Protection Agency’s (“EPA”) ability to regulate greenhouse gas (“GHG”) emissions under the Clean Air Act using a “generation shifting” approach from coal-fired power plants to renewable energy sources over time. At this time, it is unclear what effect this ruling will have on future EPA regulation of GHG emissions, the U.S. President’s climate change initiatives, internationally agreed-upon climate goals, the extent and timing of future coal plant retirements in the United States, and/or future investments in renewable energy.

• India. In May 2022, the government of India, through its Ministry of Environment, Forest and Climate Change and Ministry of New and Renewable Energy (“MNRE”), proposed legislation intended to regulate electronic waste (“e-waste”). Among other things, such proposed legislation expands the scope of India’s existing e-waste regulations to include PV solar modules, including certain recycling obligations for solar module manufacturers, and limits the use of certain hazardous substances, such as cadmium. The MNRE has engaged various stakeholders, including First Solar, in an effort to propose modifications intended to closely align this policy with the European Union’s Waste Electrical and Electronic Equipment Directive. At this time, it is unclear whether and to what extent such policy will be enacted into law. If such legislation is successfully signed into law without modification, it could negatively impact our business, financial condition, and results of operations.

Our ability to provide solar modules on economically attractive terms is also affected by the availability and cost of logistics services associated with the procurement of raw materials or equipment used in our manufacturing process and the shipping, handling, storage, and distribution of our modules. For example, the cost of ocean freight throughout many parts of the world remains at elevated levels, relative to pre-COVID-19 pandemic rates, primarily due to port congestion, cancellations of shipments by logistics providers, and elevated fuel costs. Such factors may disrupt our supply chain and adversely impact our manufacturing operations as several of our key raw materials and components are either single-sourced or sourced from a limited number of international suppliers. We may also incur additional logistics costs, such as demurrage and detention, to the extent we are unable to retrieve or return our shipping containers in a timely manner. To mitigate such costs and better meet our customer commitments, we may adjust our shipping plans to include additional lead times for module deliveries and/or utilize our network of U.S. distribution centers. We are also employing module contract structures that provide additional consideration to us if the cost of logistics services, excluding demurrage and detention, exceeds a defined threshold. Additionally, our manufacturing capacity expansions in the U.S. and India are expected to bring manufacturing activities closer to customer demand, further mitigating our exposure to the cost of ocean freight. While it is currently unclear how long these issues will persist, they may be further exacerbated by the disruption of major shipping routes or other economic disruptions.

We generally price and sell our solar modules on a per watt basis. As of September 30, 2022, we had entered into contracts with customers for the future sale of 50.0 GWDC of solar modules for an aggregate transaction price of $14.0 billion, which we expect to recognize as revenue through 2027 as we transfer control of the modules to the customers. Such volume includes contracts for the sale of 31.4 GWDC of solar modules that include transaction price adjustments associated with future module technology improvements, including new product designs and enhancements to certain energy related attributes. Based on these potential technology improvements, the contracted module volumes as of September 30, 2022, and the expected timing of module deliveries, such adjustments, if realized, could result in additional revenue of up to $0.7 billion, the majority of which would be recognized in 2024, 2025, and 2026. In addition to these price adjustments, certain of our contracts with customers may also include potential price adjustments associated with the extension of the U.S. ITC, sales freight, and changes to certain commodity prices.

We continually evaluate forecasted global demand, competition, and our addressable market and seek to effectively balance manufacturing capacity with market demand and the nature and extent of our competition. We continue to increase the nameplate production capacity of our existing manufacturing facilities by improving our production throughput, increasing module wattage (or conversion efficiency), and improving manufacturing yield losses. Additionally, we are in the process of expanding our manufacturing capacity by approximately 11 GWDC, including the construction of our third manufacturing facility in the United States, which is expected to commence operations in the first half of 2023; our first manufacturing facility in India, which is expected to commence operations in the second half of 2023; our fourth manufacturing facility in the United States, which is expected to commence operations in 2025, contingent upon permitting and pending approval of various federal, state, and local incentives; and the expansion of our manufacturing footprint at our existing facilities in Ohio. This additional capacity, and any other potential investments to add or otherwise modify our existing manufacturing capacity in response to market demand and competition, may require significant internal and possibly external sources of capital, and may be subject to certain risks and uncertainties described in the Risk Factors.

In response to the COVID-19 pandemic, governmental authorities have recommended or ordered the limitation or cessation of certain business or commercial activities in jurisdictions in which we do business or have operations. While some of these orders permit the continuation of essential business operations, or permit the performance of minimum business activities, these orders are subject to continuous revision or may be revoked or superseded, or our understanding of the applicability of these orders and exemptions may change at any time. As a result, we may at any time be ordered by governmental authorities, or we may determine, based on our understanding of the recommendations or orders of governmental authorities or the availability of our personnel, that we have to curtail or cease business operations or activities altogether, including manufacturing, fulfillment, R&D activities, the implementation of our technology roadmap, or construction activities associated with our expanding manufacturing capacity. At this time, such limitations have had a minimal effect on our manufacturing facilities. We maintain company plans and policies to implement all necessary safety precautions to protect our personnel as the COVID-19 pandemic evolves. Our R&D and manufacturing expansion activities may be delayed due to travel restrictions, quarantine requirements, other government orders, or increases in COVID-19 infection rates. Refer to the Risk Factors for more information related to impacts of COVID-19 on our business.

Results of Operations

The following table sets forth our condensed consolidated statements of operations as a percentage of net sales for the three and nine months ended September 30, 2022 and 2021:

						Three Months Ended September 30,												Nine Months Ended September 30,
						2022						2021						2022						2021
Net sales						100.0		%				100.0		%				100.0		%				100.0		%
Cost of sales						96.7		%				78.6		%				99.4		%				76.0		%
Gross profit						3.3		%				21.4		%				0.6		%				24.0		%
Selling, general and administrative						7.4		%				7.5		%				7.5		%				6.5		%
Research and development						4.6		%				4.4		%				5.0		%				3.4		%
Production start-up						3.1		%				0.5		%				2.5		%				0.8		%
Gain on sales of businesses, net						1.0		%				(0.3)		%				15.7		%				7.3		%
Operating (loss) income						(10.9)		%				8.7		%				1.2		%				20.5		%
Foreign currency loss, net						(0.8)		%				(0.2)		%				(0.7)		%				(0.2)		%
Interest income						1.6		%				0.3		%				0.9		%				0.2		%
Interest expense, net						(0.5)		%				(0.5)		%				(0.6)		%				(0.5)		%
Other income (expense), net						0.8		%				(0.4)		%				0.2		%				0.1		%
Income tax benefit (expense)						2.0		%				(0.1)		%				(3.2)		%				(3.4)		%
Net (loss) income						(7.8)		%				7.7		%				(2.3)		%				16.7		%

Segment Overview

Our primary segment is our modules business, which involves the design, manufacture, and sale of CdTe solar modules, which convert sunlight into electricity. Third-party customers of our modules segment include developers and operators of PV solar power systems. Our residual business operations include the results of operations from PV solar power systems we own and operate in certain international regions, as well as certain O&M services and project development activities.

For the year ended December 31, 2021, we changed our reportable segments to align with revisions to our internal reporting structure and long-term strategic plans. Following this change, our modules business represents our only reportable segment. We previously operated our business in two segments, which included our modules and systems businesses. Systems business activities primarily involved (i) project development, (ii) EPC services, and (iii) O&M services, which now comprise our residual business operations and are categorized as “Other” in the tables below. All prior year balances were revised to conform to the current year presentation.

Net sales

We generally price and sell our solar modules on a per watt basis. During the three and nine months ended September 30, 2022, we sold the majority of our solar modules to developers and operators of systems in the United States, and substantially all of our modules business net sales were denominated in U.S. dollars. We recognize revenue for module sales at a point in time following the transfer of control of the modules to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. Net sales from our residual business operations primarily consists of revenue recognized for sales of development projects or completed systems, including any modules installed in such systems and any revenue from energy generated by such systems. In certain prior periods, our residual business operations also included EPC services we provided to third parties.

The following table shows net sales by reportable segment for the three and nine months ended September 30, 2022 and 2021:

						Three Months Ended September 30,																								Nine Months Ended September 30,
(Dollars in thousands)						2022						2021						Three Month Change												2022						2021						Nine Month Change
Modules						$	619,922					$	562,810					$	57,112					10		%				$	1,582,248					$	1,640,436					$	(58,188)					(4)		%
Other						9,011						20,694						(11,683)						(56)		%				34,680						375,622						(340,942)						(91)		%
Net sales						$	628,933					$	583,504					$	45,429					8		%				$	1,616,928					$	2,016,058					$	(399,130)					(20)		%

Net sales from our modules segment increased $57.1 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 primarily due to a 23% increase in the volume of watts sold, partially offset by a 10% decrease in the average selling price per watt. Net sales from our residual business operations decreased $11.7 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 primarily due to a favorable settlement with a customer in the prior period.

Net sales from our modules segment decreased $58.2 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 primarily due to a 12% decrease in the average selling price per watt, partially offset by a 10% increase in the volume of watts sold. Net sales from our residual business operations decreased $340.9 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 primarily due to sales of certain projects in the United States in the prior period and the settlement of an outstanding indemnification arrangement associated with the sale of one of our projects. Under the terms of the indemnification arrangement, we received $65.1 million for our portion of the settlement payment, which we recorded as revenue in the prior period. See Note 10. “Commitments and Contingencies” to our condensed consolidated financial statements for discussion of our indemnification arrangements.

Cost of sales

Our modules business cost of sales includes the cost of raw materials and components for manufacturing solar modules, such as glass, transparent conductive coatings, CdTe and other thin film semiconductors, laminate materials, connector assemblies, edge seal materials, and frames. In addition, our cost of sales includes direct labor for the manufacturing of solar modules and manufacturing overhead, such as engineering, equipment maintenance, quality and production control, and information technology. Our cost of sales also includes depreciation of manufacturing plant and equipment, facility-related expenses, environmental health and safety costs, and costs associated with shipping, warranties, and solar module collection and recycling (excluding accretion). Cost of sales for our residual business operations primarily consists of project-related costs, such as development costs (legal, consulting, transmission upgrade, interconnection, permitting, and other similar costs), EPC costs (consisting primarily of solar modules, inverters, electrical and mounting hardware, project management and engineering, and construction labor), and site-specific costs.

The following table shows cost of sales by reportable segment for the three and nine months ended September 30, 2022 and 2021:

						Three Months Ended September 30,																								Nine Months Ended September 30,
(Dollars in thousands)						2022						2021						Three Month Change												2022						2021						Nine Month Change
Modules						$	595,882					$	444,550					$	151,332					34		%				$	1,515,852					$	1,312,389					$	203,463					16		%
Other						12,069						14,374						(2,305)						(16)		%				91,831						220,204						(128,373)						(58)		%
Total cost of sales						$	607,951					$	458,924					$	149,027					32		%				$	1,607,683					$	1,532,593					$	75,090					5		%
% of net sales						96.7		%				78.6		%																99.4		%				76.0		%

Cost of sales increased $149.0 million, or 32%, and increased 18.1 percentage points as a percent of net sales for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase in cost of sales was driven by a $151.3 million increase in our modules segment cost of sales primarily as a result of the following:

• higher costs of $101.3 million from an increase in the volume of modules sold;

• higher sales freight, demurrage, and detention charges of $59.4 million; and

• a reduction to our product warranty liability of $33.1 million in 2021 due to reductions to our projected module return rates; partially offset by

• continued module cost reductions, which decreased cost of sales by $11.8 million;

• an increase to our module collection and recycling liability of $10.8 million in 2021 due to lower estimated by-product credits for certain semiconductor materials recovered during the recycling process and updates to certain valuation assumptions;

• a reduction to our product warranty liability of $10.2 million in 2022 due to reductions to our projected module return rates; and

• a reduction to our module collection and recycling liability of $7.5 million in 2022 due to lower estimated capital and chemical costs resulting from improvements to our module recycling technology.

Cost of sales increased $75.1 million, or 5%, and increased 23.4 percentage points as a percent of net sales for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase in cost of sales was driven by a $203.5 million increase in our modules segment cost of sales primarily as a result of the following:

• higher costs of $124.3 million from an increase in the volume of modules sold;

• higher sales freight, demurrage, and detention charges of $114.2 million; and

• the reduction to our product warranty liability of $33.1 million in 2021 described above; partially offset by

• continued module cost reductions, which decreased cost of sales by $35.9 million;

• the increase to our module collection and recycling liability of $10.8 million in 2021 described above;

• the reduction to our product warranty liability of $10.2 million in 2022 described above;

*•*manufacturing charges of $9.9 million in the prior period associated with the COVID-19 pandemic; and

• the reduction to our module collection and recycling liability of $7.5 million in 2022 described above.

The increase in cost of sales was partially offset by a $128.4 million decrease in our residual business operations cost of sales primarily due to sales of certain projects in the United States in the prior period, partially offset by the impairment loss in the current period for our Luz del Norte PV solar power plant. See Note 5. “Consolidated Balance Sheet Details” to our condensed consolidated financial statements for discussion of the impairment of our Luz del Norte project.

Gross profit

Gross profit may be affected by numerous factors, including the selling prices of our modules and the selling prices of projects and services included in our residual business operations, our manufacturing costs, project development costs, the capacity utilization of our manufacturing facilities, and foreign exchange rates. Gross profit may also be affected by the mix of net sales from our modules business and residual business operations.

The following table shows gross profit for the three and nine months ended September 30, 2022 and 2021:

						Three Months Ended September 30,																								Nine Months Ended September 30,
(Dollars in thousands)						2022						2021						Three Month Change												2022						2021						Nine Month Change
Gross profit						$	20,982					$	124,580					$	(103,598)					(83)		%				$	9,245					$	483,465					$	(474,220)					(98)		%
% of net sales						3.3		%				21.4		%																0.6		%				24.0		%

Gross profit decreased 18.1 percentage points to 3.3% during the three months ended September 30, 2022 from 21.4% during the three months ended September 30, 2021 primarily due to a decrease in the average selling price per watt of our modules, an increase in sales freight, demurrage, and detention charges, a lower benefit from reductions to our product warranty liability described above, and the favorable settlement with a customer in the prior period mentioned above. These decreases to gross profit were partially offset by the higher volume of modules sold, the decrease to our module collection and recycling liability in the current period compared to the increase in the prior period described above, and continued module cost reductions.

Gross profit decreased 23.4 percentage points to 0.6% during the nine months ended September 30, 2022 from 24.0% during the nine months ended September 30, 2021 primarily due to a decrease in the average selling price per watt of our modules, an increase in sales freight, demurrage, and detention charges, the volume of higher gross profit projects sold during the prior period, the impairment loss in the current period for our Luz del Norte PV solar power plant described above, and the prior period indemnification matter described above. These decreases to gross profit were partially offset by the higher volume of modules sold and continued module cost reductions.

Selling, general and administrative

Selling, general and administrative expense consists primarily of salaries and other personnel-related costs, professional fees, insurance costs, and other business development and selling expenses.

The following table shows selling, general and administrative expense for the three and nine months ended September 30, 2022 and 2021:

						Three Months Ended September 30,																								Nine Months Ended September 30,
(Dollars in thousands)						2022						2021						Three Month Change												2022						2021						Nine Month Change
Selling, general and administrative						$	46,368					$	43,476					$	2,892					7		%				$	121,990					$	131,909					$	(9,919)					(8)		%
% of net sales						7.4		%				7.5		%																7.5		%				6.5		%

Selling, general and administrative expense for the three months ended September 30, 2022 increased compared to the three months ended September 30, 2021, primarily due to an increase in employee compensation expense driven by higher share-based compensation and employee bonus expenses, partially offset by higher charges for impairments of certain project assets in the prior period.

Selling, general and administrative expense for the nine months ended September 30, 2022 decreased compared to the nine months ended September 30, 2021 primarily due to higher charges for impairments of certain project assets in the prior period, a decrease in employee compensation expense driven by reductions in headcount from the sales of our North American O&M operations and U.S. project development business in the prior period, lower professional fees, and lower expected credit losses for our accounts receivable, partially offset by an increase in employee compensation expense driven by higher share-based compensation and employee bonus expenses.

Research and development

Research and development expense consists primarily of salaries and other personnel-related costs; the cost of products, materials, and outside services used in our R&D activities; and depreciation and amortization expense associated with R&D specific facilities and equipment. We maintain a number of programs and activities to improve our technology and processes in order to enhance the performance and reduce the costs of our solar modules.

The following table shows research and development expense for the three and nine months ended September 30, 2022 and 2021:

						Three Months Ended September 30,																								Nine Months Ended September 30,
(Dollars in thousands)						2022						2021						Three Month Change												2022						2021						Nine Month Change
Research and development						$	29,183					$	25,426					$	3,757					15		%				$	81,520					$	69,234					$	12,286					18		%
% of net sales						4.6		%				4.4		%																5.0		%				3.4		%

Research and development expense for the three months ended September 30, 2022 increased compared to the three months ended September 30, 2021 primarily due to higher employee compensation expense resulting from an increase in headcount.

Research and development expense for the nine months ended September 30, 2022 increased compared to the nine months ended September 30, 2021 primarily due to higher employee compensation expense resulting from an increase in headcount, increased material and module testing costs, lower share-based compensation expense in the prior period driven by the forfeiture of unvested shares by our former Chief Technology Officer, who retired in March 2021, and increased freight costs.

Production start-up

Production start-up expense consists of costs associated with operating a production line before it is qualified for commercial production, including the cost of raw materials for solar modules run through the production line during the qualification phase, employee compensation for individuals supporting production start-up activities, and applicable facility related costs. Production start-up expense also includes costs related to the selection of a new site and implementation costs for manufacturing process improvements to the extent we cannot capitalize these expenditures.

The following table shows production start-up expense for the three and nine months ended September 30, 2022 and 2021:

						Three Months Ended September 30,																								Nine Months Ended September 30,
(Dollars in thousands)						2022						2021						Three Month Change												2022						2021						Nine Month Change
Production start-up						$	19,768					$	2,945					$	16,823					>100%						$	40,337					$	16,014					$	24,323					152		%
% of net sales						3.1		%				0.5		%																2.5		%				0.8		%

During the three and nine months ended September 30, 2022, we incurred production start-up expense primarily for our third manufacturing facility in the U.S. and for certain manufacturing upgrades at our Malaysian facilities.

During the three months ended September 30, 2021, we incurred production start-up expense primarily for certain manufacturing upgrades at our facilities in Kulim, Malaysia. During the nine months ended September 30, 2021, we incurred production start-up expense primarily for the transition to Series 6 module manufacturing at our second facility in Kulim, Malaysia, which commenced commercial production in early 2021.

Gain on sales of businesses, net

The following table shows gain on sales of businesses, net for the three and nine months ended September 30, 2022 and 2021:

						Three Months Ended September 30,																								Nine Months Ended September 30,
(Dollars in thousands)						2022						2021						Three Month Change												2022						2021						Nine Month Change
Gain on sales of businesses, net						$	5,984					$	(1,866)					$	7,850					421		%				$	253,272					$	147,284					$	105,988					72		%
% of net sales						1.0		%				(0.3)		%																15.7		%				7.3		%

During the three months ended September 30, 2022, we completed the sales of certain international O&M operations to a subsidiary of Clairvest and PAG. During the nine months ended September 30, 2022, we also completed the sales of our Japan project development business to PAG and certain other international O&M operations to a subsidiary of Clairvest. During the nine months ended September 30, 2021, we completed the sales of our North American O&M operations to a subsidiary of Clairvest and our U.S. project development business to Leeward. See Note 2. “Sales of Businesses” to our condensed consolidated financial statements for further information related to these transactions.

Foreign currency loss, net

Foreign currency loss, net consists of the net effect of gains and losses resulting from holding assets and liabilities and conducting transactions denominated in currencies other than our subsidiaries’ functional currencies.

The following table shows foreign currency loss, net for the three and nine months ended September 30, 2022 and 2021:

						Three Months Ended September 30,																								Nine Months Ended September 30,
(Dollars in thousands)						2022						2021						Three Month Change												2022						2021						Nine Month Change
Foreign currency loss, net						$	(4,859)					$	(1,018)					$	(3,841)					377		%				$	(12,041)					$	(4,613)					$	(7,428)					161		%

Foreign currency loss, net for the three and nine months ended September 30, 2022 increased compared to the three and nine months ended September 30, 2021 primarily due to the differences between our economic hedge positions and the underlying exposures and higher costs associated with hedging activities related to our subsidiaries in India.

Interest income

Interest income is earned on our cash, cash equivalents, marketable securities, restricted cash, and restricted marketable securities. Interest income also includes interest earned from late customer payments.

The following table shows interest income for the three and nine months ended September 30, 2022 and 2021:

						Three Months Ended September 30,																								Nine Months Ended September 30,
(Dollars in thousands)						2022						2021						Three Month Change												2022						2021						Nine Month Change
Interest income						$	9,749					$	1,752					$	7,997					456		%				$	14,954					$	3,996					$	10,958					274		%

Interest income for the three and nine months ended September 30, 2022 increased compared to the three and nine months ended September 30, 2021 primarily due to higher interest rates on cash, time deposits, and restricted marketable securities.

Interest expense, net

Interest expense, net is primarily comprised of interest incurred on long-term debt, settlements of interest rate swap contracts, and changes in the fair value of interest rate swap contracts that do not qualify for hedge accounting in accordance with ASC 815. We may capitalize interest expense to our project assets or property, plant and equipment when such costs qualify for interest capitalization, which reduces the amount of net interest expense reported in any given period.

The following table shows interest expense, net for the three and nine months ended September 30, 2022 and 2021:

						Three Months Ended September 30,																								Nine Months Ended September 30,
(Dollars in thousands)						2022						2021						Three Month Change												2022						2021						Nine Month Change
Interest expense, net						$	(2,991)					$	(2,958)					$	(33)					1		%				$	(9,092)					$	(10,577)					$	1,485					(14)		%

Interest expense, net for the three months ended September 30, 2022 was consistent with the three months ended September 30, 2021. Interest expense, net for the nine months ended September 30, 2022 decreased compared to the nine months ended September 30, 2021 primarily due to changes in the fair value of interest rate swap contracts in the prior period, which did not qualify for hedge accounting, lower amortization of debt discounts and issuance costs in the current period, and lower interest expense associated with project debt.

Other income (expense), net

Other income (expense), net is primarily comprised of miscellaneous items and realized gains and losses on the sale of marketable securities and restricted marketable securities.

The following table shows other income (expense), net for the three and nine months ended September 30, 2022 and 2021:

						Three Months Ended September 30,																								Nine Months Ended September 30,
(Dollars in thousands)						2022						2021						Three Month Change												2022						2021						Nine Month Change
Other income (expense), net						$	4,774					$	(2,603)					$	7,377					283		%				$	2,679					$	2,598					$	81					3		%

Other income, net for the three months ended September 30, 2022 increased compared to the three months ended September 30, 2021 primarily due to an increase in the value of a strategic equity investment. Other income, net for the nine months ended September 30, 2022 increased compared to the nine months ended September 30, 2021 primarily due to the valuation increase of a strategic equity investment mentioned above, partially offset by higher realized gains from sales of restricted marketable securities in the prior period.

Income tax benefit (expense)

Income tax expense or benefit, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect our best estimate of current and future taxes to be paid. We are subject to income taxes in both the United States and numerous foreign jurisdictions in which we operate, principally Japan, Malaysia, and Vietnam. Significant judgments and estimates are required to determine our consolidated income tax expense. The statutory federal corporate income tax rate in the United States is 21%, and the tax rates in Japan, Malaysia, and Vietnam are 30.6%, 24%, and 20%, respectively. In Malaysia, we have been granted a long-term tax holiday, scheduled to expire in 2027, pursuant to which substantially all of our income earned in Malaysia is exempt from income tax, conditional upon our continued compliance with certain employment and investment thresholds. In Vietnam, we have been granted a long-term tax incentive, scheduled to expire at the end of 2036, pursuant to which income earned in Vietnam is subject to reduced annual tax rates, conditional upon our continued compliance with certain revenue and R&D spending thresholds.

The following table shows income tax benefit (expense) for the three and nine months ended September 30, 2022 and 2021:

						Three Months Ended September 30,																								Nine Months Ended September 30,
(Dollars in thousands)						2022						2021						Three Month Change												2022						2021						Nine Month Change
Income tax benefit (expense)						$	12,512					$	(837)					$	13,349					(>100%)						$	(51,788)					$	(67,673)					$	15,885					(23)		%
Effective tax rate						20.3		%				1.8		%																341.4		%				16.7		%

Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions. The rate is also affected by discrete items that may occur in any given period, but are not consistent from period to period. Income tax benefit increased by $13.3 million during the three months ended September 30, 2022 compared to the three months ended September 30, 2021 primarily due to our pretax loss in the current period, partially offset by losses in certain jurisdictions for which no tax benefit could be recorded. Income tax expense decreased by $15.9 million during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 primarily due to our lower pretax income in the current period, partially offset by losses in certain jurisdictions for which no tax benefit could be recorded and the remeasurement of our net deferred tax assets in Vietnam as a result of a long-term tax incentive granted in May 2022.

Critical Accounting Policies and Estimates

In preparing our condensed consolidated financial statements in conformity with U.S. GAAP, we make estimates and assumptions that affect the amounts of reported assets, liabilities, revenues, and expenses, as well as the disclosure of contingent liabilities. Some of our accounting policies require the application of significant judgment in the selection of the appropriate assumptions for making these estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We base our judgments and estimates on our historical experience, our forecasts, and other available information as appropriate. We believe the judgments and estimates involved in accrued solar module collection and recycling, product warranties, accounting for income taxes, and long-lived asset impairments have the greatest potential impact on our condensed consolidated financial statements. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected. For a description of the accounting policies that require the most significant judgment and estimates in the preparation of our condensed consolidated financial statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes to our accounting policies during the nine months ended September 30, 2022.

Recent Accounting Pronouncements

None.

Liquidity and Capital Resources

As of September 30, 2022, we believe that our cash, cash equivalents, marketable securities, cash flows from operating activities, and contracts with customers for the future sale of solar modules will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. As necessary, we also believe we will have adequate access to the capital markets. We monitor our working capital to ensure we have adequate liquidity, both domestically and internationally. We intend to maintain appropriate debt levels based upon cash flow expectations, our overall cost of capital, and expected cash requirements for operations, including near-term construction activities and purchases of manufacturing equipment for our manufacturing facilities in India and the United States. However, our ability to raise capital on terms commercially acceptable to us could be constrained if there is insufficient lender or investor interest due to company-specific, industry-wide, or broader market concerns.

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.

As of September 30, 2022 we had $1.9 billion in cash, cash equivalents, and marketable securities compared to $1.8 billion as of December 31, 2021. The increase in cash, cash equivalents, and marketable securities was primarily driven by cash receipts from module sales, including advance payments for future sales, proceeds from the sales of our Japan project development business and certain international O&M operations, and proceeds from borrowings, partially offset by purchases of property, plant and equipment, expenditures for the construction of certain projects in Japan, and other operating expenditures. As of September 30, 2022, $0.8 billion of our cash, cash equivalents, and marketable securities was held by our foreign subsidiaries and was primarily based in U.S. dollar, Japanese yen, Indian rupee, and Euro denominated holdings.

We utilize a variety of tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. If certain international funds were needed for our operations in the United States, we may be required to accrue and pay certain U.S. and foreign taxes to repatriate such funds. We maintain the intent and ability to permanently reinvest our accumulated earnings outside the United States, with the exception of our subsidiaries in Canada and Germany. In addition, changes to foreign government banking regulations may restrict our ability to move funds among various jurisdictions under certain circumstances, which could negatively impact our access to capital, resulting in an adverse effect on our liquidity and capital resources.

We continually evaluate forecasted global demand and seek to balance our manufacturing capacity with such demand. We are currently in the process of expanding our capacity by approximately 11 GWDC, including the construction of our third manufacturing facility in the United States, which is expected to commence operations in the first half of 2023; our first manufacturing facility in India, which is expected to commence operations in the second half of 2023; our fourth manufacturing facility in the United States, which is expected to commence operations in 2025, contingent upon permitting and pending approval of various federal, state, and local incentives; and the expansion of our manufacturing footprint at our existing facilities in Ohio. Our newest factories in the United States and India are expected to produce our next generation Series 7 modules, which combine our thin film CdTe technology with a larger form factor and an innovative steel back rail mounting system that reduces module installation time. In aggregate, we expect to invest approximately $2.5 billion for these facilities and upgrades. As we expand our manufacturing capacity, we expect to continue to receive advance payments from customers for the future sale of modules. Such advance payments are reflected as deferred revenue in our condensed consolidated balance sheets. As of September 30, 2022, our deferred revenue was approximately $0.6 billion. Accordingly, the capital expenditures necessary to expand our capacity in the near term are expected to be financed, in part, by advance payments for module sales in future periods.

In addition to the expansion plans described above, we continue to increase the nameplate production capacity of our existing manufacturing facilities by improving our production throughput, increasing module wattage (or conversion efficiency), and improving manufacturing yield losses. We have a demonstrated history of innovation, continuous improvement, and manufacturing success driven by our significant investments in various R&D initiatives. We continue to invest significant financial resources in such initiatives, and recently announced our plans to invest approximately $0.3 billion for a dedicated R&D facility in the United States to support the implementation of our technology roadmap. Such R&D facility will feature a high-tech pilot manufacturing line, allowing for the production of full-sized prototypes of thin film and tandem PV modules, and is expected to be completed in 2024. During 2022, we expect to spend $0.8 billion to $1.0 billion for capital expenditures, including the new facilities mentioned above and upgrades to machinery and equipment that we believe will further increase our module wattage and expand capacity and throughput at our manufacturing facilities.

We have also committed and expect to commit significant working capital to purchase various raw materials used in our module manufacturing process. Our failure to obtain raw materials and components that meet our quality, quantity, and cost requirements in a timely manner could interrupt or impair our ability to manufacture our solar modules or increase our manufacturing costs. Accordingly, we may enter into long-term supply agreements to mitigate potential risks related to the procurement of key raw materials and components, and such agreements may be noncancelable or cancelable with a significant penalty. For example, we have entered into long-term supply agreements for the purchase of certain specified minimum volumes of substrate glass and cover glass for our PV solar modules. Our remaining purchases under these supply agreements are expected to be approximately $1.6 billion of substrate glass and approximately $314 million of cover glass. We have the right to terminate these agreements upon payment of specified termination penalties (which, in aggregate, are up to $277 million as of September 30, 2022 and decline over the remaining supply periods). Additionally, for certain strategic suppliers, we have made, and may in the future be required to make, certain advance payments to secure the raw materials necessary for our module manufacturing.

We have also committed certain financial resources to fulfill our solar module collection and recycling obligations, and have established a trust under which these funds are put into custodial accounts with an established and reputable bank. As of September 30, 2022, such funds were comprised of restricted marketable securities of $182.2 million and restricted cash balances of $6.3 million. As of September 30, 2022, our module collection and recycling liability was $120.2 million. Trust funds may be disbursed for qualified module collection and recycling costs (including capital and facility related recycling costs), payments to customers for assuming collection and recycling obligations, and reimbursements of any overfunded amounts. Investments in the trust must meet certain investment quality criteria comparable to highly rated government or agency bonds. As necessary, we adjust the funded amounts for our estimated collection and recycling obligations on an annual basis based on the estimated costs of collecting and recycling covered modules, estimated rates of return on our restricted marketable securities, and an estimated solar module life of 25 years, less amounts already funded in prior years.

As of September 30, 2022, we had no off-balance sheet debt or similar obligations, other than financial assurance related instruments, which are not classified as debt. We do not guarantee any third-party debt. See Note 10. “Commitments and Contingencies” to our condensed consolidated financial statements for further information about our financial assurance related instruments.

Cash Flows

The following table summarizes key cash flow activity for the nine months ended September 30, 2022 and 2021 (in thousands):

						Nine Months Ended September 30,
						2022						2021
Net cash provided by operating activities						$	78,154					$	203,092
Net cash used in investing activities						(622,519)						(83,289)
Net cash provided by (used in) financing activities						209,461						(9,210)
Effect of exchange rate changes on cash, cash equivalents and restricted cash						39,866						1,687
Net (decrease) increase in cash, cash equivalents and restricted cash						$	(295,038)					$	112,280

Operating Activities

The decrease in net cash provided by operating activities was primarily driven by higher expenditures for the construction of certain projects in Japan and certain advance payments for raw materials in the current period, partially offset by higher cash receipts from module sales in the current period and higher operating expenditures in the prior period.

Investing Activities

The increase in net cash used in investing activities was primarily due to higher net purchases of marketable securities and restricted marketable securities, higher purchases of property, plant and equipment, and proceeds from the sales of our North American O&M operations and U.S. project development business in the prior period, partially offset by proceeds from the sales of our Japan project development business and certain international O&M operations in the current period.

Financing Activities

The increase in net cash provided by financing activities was primarily due to higher net borrowings under project specific debt financings for the construction of certain projects in Japan. Such project specific debt financings were assumed by PAG when we completed the sale of our Japan project development business in June 2022. The increase is also due to borrowings under the India Credit Facility in the current period for the development and construction of our first manufacturing facility in India.