Enphase Energy
Enphase Energy, Inc. (Form: 10-Q, Received: 08/06/2018 13:30:39)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________________________
Form 10-Q
   ____________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-35480
  ____________________________________________
  Enphase Energy, Inc.
(Exact name of registrant as specified in its charter)
 ____________________________________________
Delaware
(State or other jurisdiction of
incorporation or organization)
 
20-4645388
(I.R.S. Employer
Identification No.)
 
 
 
1420 N. McDowell Blvd.
Petaluma, California
 
94954
(Address of principal executive offices)
 
(Zip Code)
(707) 774-7000
(Registrant’s telephone number, including area code)
 ____________________________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    x   No    ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes    x      No    ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an “emerging growth company.” See the definitions of “large accelerated filer,” “accelerated filer, ” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
x
 
 
 
 
 
 
 
Emerging growth Company
 
¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    ¨      No    x
As of July 26, 2018 , there were 96,848,549 shares of the registrant’s common stock outstanding, $0.00001 par value per share.
 


Table of Contents

ENPHASE ENERGY, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 


2

Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited)

ENPHASE ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
 
June 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
58,471

 
$
29,144

Accounts receivable, net of allowances of $3,071 and $2,378 at June 30, 2018 and December 31, 2017, respectively
58,696

 
65,346

Inventory
17,471

 
25,999

Prepaid expenses and other assets
20,741

 
9,957

Total current assets
155,379

 
130,446

Property and equipment, net
23,100

 
26,483

Goodwill
3,664

 
3,664

Intangibles, net
363

 
515

Other assets
36,030

 
8,039

Total assets
$
218,536

 
$
169,147

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
21,895

 
$
28,747

Accrued liabilities
31,095

 
22,447

Deferred revenues, current
34,954

 
15,691

Warranty obligations, current (includes $3,209 and $2,240 measured at fair value at June 30, 2018 and December 31, 2017, respectively)
8,275

 
7,427

Debt, current
18,429

 
17,429

Total current liabilities
114,648

 
91,741

Long-term liabilities:
 
 
 
Deferred revenues, noncurrent
75,107

 
29,941

Warranty obligations, noncurrent (includes $9,627 and $7,550 measured at fair value at June 30, 2018 and December 31, 2017, respectively)
23,367

 
22,389

Other liabilities
1,970

 
1,880

Debt, noncurrent
33,559

 
32,322

Total liabilities
248,651

 
178,273

Commitments and contingencies


 


Stockholders’ equity:
 
 
 
Preferred stock, $0.00001 par value, 10,000 shares authorized; none issued and outstanding

 

Common stock, $0.00001 par value, 150,000,000 shares and 125,000 shares authorized; and 98,082 and 85,914 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
1

 
1

Additional paid-in capital
313,778

 
287,256

Accumulated deficit
(343,541
)
 
(295,727
)
Accumulated other comprehensive loss
(353
)
 
(656
)
Total stockholders’ deficit
(30,115
)
 
(9,126
)
Total liabilities and stockholders’ equity
$
218,536

 
$
169,147

See notes to condensed consolidated financial statements.

3

Table of Contents

ENPHASE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Net revenues
$
75,896

 
$
74,704

 
$
145,868

 
$
129,455

Cost of revenues
53,195

 
61,157

 
104,851

 
108,861

Gross profit
22,701

 
13,547

 
41,017

 
20,594

Operating expenses:

 
 
 
 
 
 
Research and development
9,462

 
7,947

 
17,082

 
17,552

Sales and marketing
6,828

 
6,274

 
13,055

 
12,732

General and administrative
6,969

 
4,964

 
13,913

 
10,797

Restructuring charges

 
3,609

 

 
10,856

Total operating expenses
23,259

 
22,794

 
44,050

 
51,937

Loss from operations
(558
)
 
(9,247
)
 
(3,033
)
 
(31,343
)
Other expense, net:
 
 
 
 
 
 
 
Interest expense
(2,269
)
 
(2,080
)
 
(4,562
)
 
(4,219
)
Other income (expense)
(572
)
 
88

 
(698
)
 
1,148

Total other expense, net
(2,841
)
 
(1,992
)
 
(5,260
)
 
(3,071
)
Loss before income taxes
(3,399
)
 
(11,239
)
 
(8,293
)
 
(34,414
)
Provision for income taxes
(339
)
 
(854
)
 
(573
)
 
(984
)
Net loss
$
(3,738
)
 
$
(12,093
)
 
$
(8,866
)
 
$
(35,398
)
Net loss per share:
 
 
 
 
 
 
 
Basic and diluted
$
(0.04
)
 
$
(0.14
)
 
$
(0.09
)
 
$
(0.44
)
Shares used in per share calculation:
 
 
 
 
 
 
 
Basic and diluted
97,321

 
84,434

 
94,026

 
80,542

See notes to condensed consolidated financial statements.


4

Table of Contents

ENPHASE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(3,738
)
 
$
(12,093
)
 
$
(8,866
)
 
$
(35,398
)
Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation adjustments
15

 
462

 
303

 
123

Comprehensive loss
$
(3,723
)
 
$
(11,631
)
 
$
(8,563
)
 
$
(35,275
)
See notes to condensed consolidated financial statements.


5

Table of Contents

ENPHASE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended
June 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(8,866
)
 
$
(35,398
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
4,469

 
4,583

Provision for doubtful accounts
753

 
707

Asset impairment and restructuring

 
1,765

Amortization of debt issuance costs
1,133

 
1,063

Stock-based compensation
5,860

 
3,550

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
5,897

 
3,910

Inventory
8,528

 
11,121

Prepaid expenses and other assets
(1,551
)
 
(5,338
)
Accounts payable, accrued and other liabilities
(3,817
)
 
(14,107
)
Warranty obligations
1,826

 
199

Deferred revenues
(6,791
)
 
3,620

Net cash provided by (used in) operating activities
7,441

 
(24,325
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(1,475
)
 
(3,515
)
Net cash used in investing activities
(1,475
)
 
(3,515
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock, net of issuance costs
19,923

 
26,425

Proceeds from debt
5,580

 
24,240

Principal payments on term debt
(3,129
)
 

Payments under revolving credit facility

 
(10,100
)
Proceeds from issuance of common stock under employee stock plans
1,370

 
170

Net cash provided by financing activities
23,744

 
40,735

Effect of exchange rate changes on cash
(383
)
 
294

Net increase in cash and cash equivalents
29,327

 
13,189

Cash and cash equivalents—Beginning of period
29,144

 
17,764

Cash and cash equivalents—End of period
$
58,471

 
$
30,953

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Purchases of fixed and intangible assets included in accounts payable
$
112

 
$
311

Warrants issued in connection with debt
$

 
$
1,447

See notes to condensed consolidated financial statements.

6

Table of Contents

ENPHASE ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Enphase Energy, Inc. and subsidiaries (the “Company”) deliver simple, innovative and reliable energy management solutions that advance the worldwide potential of renewable energy. The Company’s semiconductor-based microinverter system converts direct current (DC) electricity to alternating current (AC) electricity at the individual solar module level and brings a system-based, high technology approach to solar energy generation leveraging our design expertise across power electronics, semiconductors, networking, and cloud-based software technologies. Since inception, the Company has shipped over 17 million microinverters, representing over 4 gigawatts of solar photovoltaic (PV) generating capacity, and more than 790,000 Enphase residential and commercial systems have been deployed in over 120 countries.
Basis of Presentation and Consolidation
The accompanying condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the U.S, or GAAP. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Unaudited Interim Financial Information
These accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring items, considered necessary to present fairly the Company's financial condition, results of operations, comprehensive loss and cash flows for the interim periods indicated. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the operating results for the full year. Certain information and footnote disclosures typically included in annual consolidated financial statements have been condensed or omitted. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 .
Other than as discussed in Note 2. “Revenue Recognition” and Note 11. “Stock-based Compensation,” there have been no material changes in the Company’s significant accounting policies during the six months ended June 30, 2018 , as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 . Reference is made to the disclosures therein for a summary of the Company’s significant accounting policies.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Significant estimates and assumptions reflected in the financial statements include revenue recognition, inventory valuation and accrued warranty obligations. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ materially from management’s estimates using different assumptions or under different conditions.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amended guidance, herein referred to as Topic 606, is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted for public companies effective for annual and interim reporting periods beginning after December 15, 2016. The Company has adopted Topic 606 effective January 1, 2018, using the modified retrospective transition method. The Company recognized the cumulative effect of

7


applying the new revenue standard as an adjustment to the opening balance of retained earnings on January 1, 2018. The comparative information has not been restated and continues to be reported under the accounting standards in effect for the period presented. See Note 2, “Revenue Recognition,” for additional accounting policy and transition disclosures.
  In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” which amends certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Changes to the current guidance include the accounting for equity investments, the presentation and disclosure requirements for financial instruments, and the assessment of valuation allowance on deferred tax assets related to available-for-sale securities. In addition, ASU 2016-01 establishes an incremental recognition and disclosure requirement related to the presentation of fair value changes of financial liabilities for which the fair value option has been elected. Under this guidance, an entity would be required to separately present in other comprehensive income the portion of the total fair value change attributable to instrument-specific credit risk as opposed to reflecting the entire amount in earnings. ASU 2016-01 is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption was not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The standard, which was adopted in the first quarter of 2018, did not have a material impact on the condensed consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18 (ASU 2016-18), “Statement of Cash Flows,” which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The standard, which was adopted in the first quarter of 2018, did not have a material impact on the condensed consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09 (ASU 2017-09), "Compensation - Stock Compensation."  ASU 2017-09 was issued to provide clarity and reduce both 1) diversity in practice and 2) cost and complexity when applying the guidance in Topic 718 to a change in the terms or conditions of a share-based payment award. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718. ASU 2017-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The standard, which was adopted in the first quarter of 2018, did not have a material impact on the condensed consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Effective
In February 2016, the FASB issued Accounting Standards Codification (“ASC”) 842 (“ASC 842”), “Leases,” which replaces the existing guidance in ASC 840, Leases.  ASC 842 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. ASC 842 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use (ROU) asset and a corresponding lease liability. For finance leases the lessee would recognize interest expense and amortization of the ROU asset and for operating leases the lessee would recognize a straight-line total lease expense. The Company is currently evaluating the impact of adoption on the consolidated financial statements.
2. REVENUE RECOGNITION
On January 1, 2018, the Company adopted Topic 606 and applied the modified retrospective method to all contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect in the prior period. The Company recorded a net reduction to opening equity of $38.9 million on January 1, 2018 for the cumulative effect of adopting Topic 606. The impact to net revenues from the adoption of Topic 606 for the six months ended June 30, 2018 was a net increase of $2.5 million .

Changes in accounting policies as a result of adopting Topic 606 and nature of goods
The most significant impacts upon adoption of Topic 606 were how the Company accounts for revenue related to its Envoy communications device and related Enlighten service and the timing of when certain sales incentives are recognized. Under ASC 605 the Company’s Envoy communications device and Enlighten service were considered two units of accounting, and the portion of the consideration related to the hardware was recognized at

8


the time of sale with the remaining consideration deferred and recognized over the estimated service period. Under ASC 606 the full consideration for these products represents a single performance obligation and is deferred and recognized over the estimated service period. This treatment resulted in a gross increase to deferred revenue of $77.5 million , an increase in deferred costs of $43.4 million and a net increase in accumulated deficit of $34.1 million upon adoption of ASC 606.
The Company previously sold its Envoy communications device to certain customers under a long-term financing arrangement. Under ASC 605, this arrangement resulted in the recording of both deferred revenue and unbilled receivables on the balance sheet. The Company’s opening entries related to ASC 606 included the netting of approximately $6.4 million of unbilled receivables against deferred revenue. Thus, the $77.5 million increase to deferred revenue noted above was partially offset by a $6.4 million reclassification of unbilled receivables to deferred revenue.
Under ASC 605 the Company recorded certain contra revenue promotions at the later of the date revenue was recognized or the date at which the promotional offer was extended. Under ASC 606 all such contra revenue programs are treated as variable consideration and recognized at the time the related revenue is recorded. This change in timing resulted in an increase in accrued liabilities of approximately $5.6 million and an increase to accumulated deficit of the same amount upon adoption of ASC 606. This change in timing is not expected to have a material impact in subsequent periods.
Topic 606 requires upfront contract acquisition costs, such as sales commissions, to be capitalized and amortized over the estimated life of the asset. For contracts that have a duration of less than one year, the Company follows the Topic 606 practical expedient and expense these costs when incurred. Commissions related to the Company’s sale of monitoring hardware and service are capitalized and amortized over the period of the associated revenue, which is 6.5 years . This treatment resulted in an increase in deferred costs of approximately $0.8 million and an increase in accumulated deficit of the same amount upon adoption of ASC 606.
Revenues are recognized when control of the promised goods or services are transferred to the Company’s customers in an amount that reflects the consideration that is expected to be received in exchange for those goods or services. The Company generates all of its revenues from contracts with its customers. A description of principal activities from which the Company generates revenues follows.

Products Delivered at a Point in Time
The Company sells its products to customers in accordance with the terms of the related customer contracts. The Company generates revenues from sales of its microinverter systems, which include microinverter units and related accessories, an Envoy communications gateway and Enlighten service, communications accessories and AC Battery storage solutions to distributors, large installers, OEMs and strategic partners. Microinverter units, microinverter accessories, and AC Battery storage solutions are delivered to customers at a point in time, and in accordance with Topic 606, the Company recognizes revenue for these products when the Company transfers control of the product to the customer, which is generally upon shipment.

Products Delivered Over Time
The sale of an Envoy communications gateway includes the Company’s Enlighten cloud-based monitoring service. Under Topic 606 the full consideration for these products represents a single performance obligation and is deferred at the sale date and recognized over the estimated service period, which is 6.5 years .
The Company also sells certain communication accessories that are delivered over time. The revenue from these products is recognized over the related service period, which is typically 5 or 12 years .

Disaggregation of Revenue
The Company has one business activity, which is the design, manufacture and sale of microinverter systems for the solar photovoltaic industry. The following table provides information about disaggregated revenue by primary geographical market and timing of revenue recognition for the Company’s single product line (in thousands):

9


 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Primary geographical markets:
 
 
 
 
United States
 
$
50,258

 
$
93,388

International
 
25,638

 
52,480

Total
 
$
75,896

 
$
145,868

 
 
 
 
 
Timing of revenue recognition:
 
 
 
 
Products transferred at a point in time
 
$
65,937

 
$
125,308

Products and services transferred over time
 
9,959

 
20,560

Total
 
$
75,896

 
$
145,868


Contract Balances

As of June 30, 2018 , receivables, contract assets and contract liabilities from contracts with customers consist of the following (in thousands):
 
 
June 30, 2018
Receivables
 
$
58,696

Short-term contract assets (Prepaid expenses and other assets)
 
13,626

Long-term contract assets (Other assets)
 
33,134

Short-term contract liabilities (Deferred revenues, current)
 
34,954

Long-term contract liabilities (Deferred revenues, noncurrent)
 
$
75,107


The Company receives payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract liabilities are recorded as deferred revenue on the accompanying condensed consolidated balance sheets and include payments received in advance of performance obligations under the contract and are realized when the associated revenue is recognized under the contract. Contract assets include deferred product costs and commissions associated with the deferred revenue and will be amortized along with the associated revenue. The Company had no asset impairment charges related to contract assets in the six months ended June 30, 2018 .
Significant changes in the balances of contract liabilities (deferred revenues) and contract assets (prepaid expenses and other assets) during the period are as follows (in thousands):
 
 
June 30, 2018
Contract Liabilities
 
 
Balance on January 1, 2018
 
$
116,830

Revenue recognized
 
(22,560
)
Increase due to billings
 
15,791

Balance as of June 30, 2018
 
$
110,061

Deferred revenue, current
 
34,954

Deferred revenue, noncurrent
 
75,107

 
 
 
Contract Assets
 
 
Balance on January 1, 2018
 
$
47,862

Amount recognized
 
(7,634
)
Increase
 
6,579

Balance as of June 30, 2018
 
$
46,807



10


Remaining Performance Obligations

The following table includes estimated revenue expected to be recognized in future periods related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period (in thousands).
 
 
June 30, 2018
Remainder of 2018
 
$
19,849

2019
 
29,349

2020
 
23,194

2021
 
16,997

2022
 
11,940

Thereafter
 
8,732

Total
 
$
110,061


Practical Expedients and Exemptions

The Company generally expenses sales commissions related to products delivered at a point in time when the commissions are incurred because the amortization period would have been less than one year. The Company records these costs as sales and marketing expense. The Company expenses shipping and handling costs as incurred.

Impact of Adoption of Topic 606

In accordance with Topic 606, the disclosure of the impact of adoption to the Company’s condensed consolidated statements of operations and condensed consolidated balance sheets was as follows (in thousands):

11


 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
As Reported
 
Adjustments
 
Without Adoption of Topic 606
 
As Reported
 
Adjustments
 
Without Adoption of Topic 606
Net revenues
$
75,896

 
$
(2,019
)
 
$
73,877

 
$
145,868

 
$
(2,458
)
 
$
143,410

Cost of revenues
53,195

 
(827
)
 
52,368

 
104,851

 
(996
)
 
103,855

Gross profit
22,701

 
(1,192
)
 
21,509

 
41,017

 
(1,462
)
 
39,555

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Research and development
9,462

 

 
9,462

 
17,082

 

 
17,082

Sales and marketing
6,828

 
(23
)
 
6,805

 
13,055

 
(58
)
 
12,997

General and administrative
6,969

 

 
6,969

 
13,913

 

 
13,913

Restructuring charges

 

 

 

 

 

Total operating expenses
23,259

 
(23
)
 
23,236

 
44,050

 
(58
)
 
43,992

Loss from operations
(558
)
 
(1,169
)
 
(1,727
)
 
(3,033
)
 
(1,404
)
 
(4,437
)
Other expense, net:
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(2,269
)
 

 
(2,269
)
 
(4,562
)
 

 
(4,562
)
Other income (expense)
(572
)
 

 
(572
)
 
(698
)
 

 
(698
)
Total other expense, net
(2,841
)
 

 
(2,841
)
 
(5,260
)
 

 
(5,260
)
Loss before income taxes
(3,399
)
 
(1,169
)
 
(4,568
)
 
(8,293
)
 
(1,404
)
 
(9,697
)
Provision for income taxes
(339
)
 

 
(339
)
 
(573
)
 

 
(573
)
Net loss
$
(3,738
)
 
$
(1,169
)
 
$
(4,907
)
 
$
(8,866
)
 
$
(1,404
)
 
$
(10,270
)
Net loss per share:
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted
$
(0.04
)
 
$
(0.01
)
 
$
(0.05
)
 
$
(0.09
)
 
$
(0.02
)
 
$
(0.11
)
Shares used in per share calculation:
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted
97,321

 


 
97,321

 
94,026

 


 
94,026

 
June 30, 2018
 
As Reported
 
Adjustments
 
Without Adoption of Topic 606
Prepaid expenses and other
$
20,741

 
$
(9,878
)
 
$
10,863

Other assets
36,030

 
(27,856
)
 
8,174

Accrued liabilities
31,095

 
(5,180
)
 
25,915

Deferred revenues
34,954

 
(19,884
)
 
15,070

Deferred revenues, noncurrent
75,107

 
(50,210
)
 
24,897

Accumulated deficit
$
(343,541
)
 
$
37,540

 
$
(306,001
)
3. INVENTORY
Inventory as of June 30, 2018 and December 31, 2017 consists of the following (in thousands):
 
June 30,
2018
 
December 31,
2017
Raw materials
$
2,889

 
$
2,341

Finished goods
14,582

 
23,658

Total inventory
$
17,471

 
$
25,999


12


4. WARRANTY OBLIGATIONS
The Company’s warranty activities during the three and six months ended June 30, 2018 and 2017 were as follows (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Warranty obligations, beginning of period
$
30,625

 
$
31,995

 
$
29,816

 
$
31,414

Accruals for warranties issued during period
775

 
1,089

 
1,533

 
1,921

Changes in estimates
1,378

 
(91
)
 
2,828

 
203

Settlements
(2,099
)
 
(1,981
)
 
(3,775
)
 
(3,598
)
Increase due to accretion expense
520

 
499

 
939

 
993

Other
443

 
102

 
301

 
680

Warranty obligations, end of period
$
31,642

 
$
31,613

 
$
31,642

 
$
31,613

Less current portion


 


 
$
(8,275
)
 
$
(8,032
)
Noncurrent


 


 
$
23,367

 
$
23,581

As of  June 30, 2018 , the  $31.6 million  of warranty obligations included  $12.8 million  measured at fair value. See Note 5, “Fair Value Measurements” for additional information.
5. FAIR VALUE MEASUREMENTS
The accounting guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of such assets or liabilities do not entail a significant degree of judgment.
Level 2—Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
 
The following table presents the Company’s liabilities that were measured at fair value on a recurring basis and its categorization within the fair value hierarchy at June 30, 2018 and December 31, 2017 (in thousands):
 
Fair Value
Hierarchy
 
June 30,
2018
 
December 31,
2017
Liabilities:
 
 
 
 
 
Warranty obligations
Level 3
 
$
12,836

 
$
9,790

Third party option to purchase receivables at a discount
Level 3
 

 
700

Fair Value Option for Warranty Obligations Related to Microinverters Sold Since January 1, 2014
The Company’s warranty obligations related to microinverters sold since January 1, 2014 provide the Company the right, but not the requirement, to assign its warranty obligations to a third-party. Under Accounting

13


Standards Codification (“ASC”) 825—Financial Instruments, (“fair value option”), an entity may choose to elect the fair value option for such warranties at the time it first recognizes the eligible item. The Company made an irrevocable election to account for all eligible warranty obligations associated with microinverters sold since January 1, 2014 at fair value. This election was made to reflect the underlying economics of the time value of money for an obligation that will be settled over an extended period of up to 25 years.
The Company estimates the fair value of warranty obligations by calculating the warranty obligations in the same manner as for sales prior to January 1, 2014 and applying an expected present value technique to that result. The expected present value technique, an income approach, converts future amounts into a single current discounted amount. In addition to the key estimates of failure rates, claim rates and replacement costs, the Company used certain Level 3 inputs which are unobservable and significant to the overall fair value measurement. Such additional assumptions included a discount rate based on the Company’s credit-adjusted risk-free rate and compensation comprised of a profit element and risk premium required of a market participant to assume the obligation.
The following table provides information regarding changes in nonfinancial liabilities related to the Company’s warranty obligations measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods indicated (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Balance at beginning of period
$
11,719

 
$
11,627

 
$
9,790

 
$
10,332

Accruals for warranties issued during period
775

 
1,080

 
1,533

 
1,910

Changes in estimates
210

 
(351
)
 
1,995

 
(617
)
Settlements
(831
)
 
(393
)
 
(1,722
)
 
(735
)
Increase due to accretion expense
520

 
499

 
939

 
994

Other
443

 
102

 
301

 
680

Balance at end of period
$
12,836

 
$
12,564

 
$
12,836

 
$
12,564


Quantitative and Qualitative Information about Level 3 Fair Value Measurements
 
As of June 30, 2018 , the significant unobservable inputs used in the fair value measurement of the Company’s liabilities designated as Level 3 are as follows:
Item Measured at Fair Value
 
Valuation Technique
 
Description of Significant Unobservable Input
 
Percent Used
(Weighted-Average)
Warranty obligations for microinverters sold since January 1, 2014
 
Discounted cash flows
 
Profit element and risk premium
 
16%
 
 
Credit-adjusted risk-free rate
 
16%
 
As of December 31, 2017 , the significant unobservable inputs used in the fair value measurement of the Company’s liabilities designated as Level 3 are as follows:

Item Measured at Fair Value
 
Valuation Technique
 
Description of Significant Unobservable Input
 
Percent Used
(Weighted-Average)
Warranty obligations for microinverters sold since January 1, 2014
 
Discounted cash flows
 
Profit element and risk premium
 
17%
 
 
Credit-adjusted risk-free rate
 
17%
Third party option to purchase receivables at a discount
 
Discounted cash flows
 
Counter party credit-adjusted risk-free rate
 
4%

14



Sensitivity of Level 3 Inputs
 
Warranty Obligations
 
Each of the significant unobservable inputs is independent of the other. The profit element and risk premium are estimated based on requirements of a third-party participant willing to assume the Company’s warranty obligations. The credit-adjusted risk free rate (“discount rate”) is determined by reference to the Company’s own credit standing at the fair value measurement date. Increasing or decreasing the profit element and risk premium input by 100 basis points would have a nominal impact on the fair value measurement of the liability. Increasing the discount rate by 100 basis points would result in a $0.6 million reduction of the liability. Decreasing the discount rate by 100 basis points would result in a $0.6 million increase to the liability.
6. GOODWILL AND INTANGIBLE ASSETS

The following table presents the details of the Company’s goodwill and purchased intangible assets as of June 30, 2018 and December 31, 2017 (in thousands):
 
June 30, 2018
 
December 31, 2017
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Goodwill
$
3,664

 
$

 
$
3,664

 
$
3,664

 
$

 
$
3,664

 
 
 
 
 
 
 
 
 
 
 
 
Other indefinite-lived intangibles
$
286

 
$

 
$
286

 
$
286

 
$

 
$
286

Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Patents and licensed technology
1,665

 
(1,588
)
 
77

 
1,665

 
(1,436
)
 
229

Total purchased intangible assets
$
1,951

 
$
(1,588
)
 
$
363

 
$
1,951

 
$
(1,436
)
 
$
515

 
In July 2014, the Company purchased certain patents related to system interconnection and photovoltaic AC module construction. The patents were amortized over their legal life of 3 years . In October 2015, the Company licensed certain technology related to ASIC development for a  3 year term, which is also its estimated useful life.
For the six months ended June 30, 2018 , amortization expense related to intangible assets was $0.1 million . The remaining $0.1 million of patents and licensed technology will be amortized during the remainder of 2018.
7. RESTRUCTURING

In the third quarter of 2016, the Company began implementing restructuring actions to lower its operating expenses. The restructuring actions have included reductions in the Company’s global workforce, the elimination of certain non-core projects, consolidation of office space at the Company’s corporate headquarters and the engagement of management consultants to assist the Company in making organizational and structural changes to improve operational efficiencies and reduce expenses. The Company substantially completed its restructuring activities in 2017.
The following table presents the details of the Company’s restructuring charges for the periods indicated (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Employee severance and benefit arrangements
$

 
$
123

 
$

 
$
1,715

Asset impairments

 

 

 
522

Consultants engaged in restructuring activities

 
3,000

 

 
7,000

Lease loss reserves and contract termination costs

 
486

 

 
1,619

Total restructuring and asset impairment charges
$

 
$
3,609

 
$

 
$
10,856



15


The following table provides information regarding changes in the Company’s accrued restructuring balance for the periods indicated (in thousands):
 
Employee Severance and Benefits
 
Lease Loss Reserves and Contractual Obligations
 
Total
Balance at end of period as of December 31, 2017
$
229

 
$
1,094

 
$
1,323

Cash payments and receipts, net
(229
)
 
54

 
(175
)
Balance at end of period as of June 30, 2018
$
0

 
$
1,148

 
$
1,148

8. DEBT
Term Loan
In July 2016, the Company entered into a Loan and Security Agreement (the “Original Term Loan Agreement”) with lenders that are affiliates of Tennenbaum Capital Partners, LLC (the “Lenders” or “TCP”). Under the agreement, the Lenders committed to advance a term loan in an aggregate principal amount of up to  $25.0 million  with a maturity date of July 1, 2020. The Company borrowed the entire  $25.0 million  of term loan commitments on the loan closing date. Monthly payments due through June 30, 2017 were interest only, followed by consecutive equal monthly payments of principal plus accrued interest that were to begin on July 1, 2017 and continue through the maturity date. The term loan provided for an interest rate per annum equal to the higher of (i)  10.25%  or (ii) LIBOR plus  9.5625% , subject to a  1.0%  reduction if the Company achieves minimum levels of Revenue and EBITDA (each as defined in the Original Term Loan Agreement) for the twelve-consecutive month period ending June 30, 2017 as set forth in the Original Term Loan Agreement. In addition, the Company paid a commitment fee of  3.3%  of the loan amount upon closing and a closing fee of  10.0%  of the loan amount is payable in four equal installments at each anniversary of the closing date. The Company could elect to prepay the loan by incurring a prepayment fee between  1%  and  3%  of the principal amount of the term loan depending on the timing and circumstances of prepayment.
In February 2017, the Company entered into an Amended and Restated Loan and Security Agreement (the “Loan Agreement”) that amended and restated the Original Term Loan Agreement. The Loan Agreement provides for a $25.0 million secured term loan to the Company (the “New Term Loan”), which is in addition to the $25.0 million secured term loan borrowed by the Company under the Original Term Loan Agreement (together with the “New Term Loan” the “Term Loans”). The New Term Loan has the same July 1, 2020 maturity date that was applicable to the Original Term Loan Agreement. The New Term Loan was fully drawn at closing, with approximately $10.3 million of the proceeds used to repay existing combined principal and interest due under the Company’s Revolver with Wells Fargo. Upon the repayment of loans under the Wells Fargo Revolver, the Wells Fargo Revolving Credit Agreement was terminated. The Company used the remainder of the proceeds from the New Term Loan for general corporate purposes.
Monthly payments under the Term Loans through February 28, 2018 are interest only, followed by consecutive equal monthly payments of principal plus accrued interest beginning on March 1, 2018 and continuing through the maturity date. Interest on the Term Loans is the greater of (a) 10.3125% , and (b) a fluctuating rate of interest per annum equal to the three-month LIBOR Rate (rounded up to the nearest 1/16th of one percent) plus 9.25% . In addition, the Company paid a commitment fee of 3.0% of the New Term Loan amount upon closing and a closing fee of 4.0% of the New Term Loan amount, which is payable with the closing fee under the Original Term Loan Agreement in four equal installments at each anniversary of the closing date of the Original Term Loan Agreement. The Company may elect to prepay the Term Loans by incurring a prepayment fee between 1% and 3% of the principal amount of the Term Loans depending on the timing and circumstances of prepayment.
On February 28, 2018, the Company entered into a Second Amendment to the Term Loans. The Second Amendment decreased by 50% the amount of principal repayments required under the Loan Agreement for the period from March 1, 2018 through December 31, 2018 and provided that the Company shall not prepay any part of the Term Loans during that same period without the Collateral Agent’s prior written consent.
The Term Loans are secured by a first-priority security interest on substantially all assets of the Company; provided, however, that the security interest in the Company’s intellectual property may be released if the Company

16


satisfies certain requirements. The Company’s obligations under the Term Loans are not guaranteed by any of the Company’s existing subsidiaries, nor have any existing subsidiaries of the Company pledged any of their assets to secure the Term Loans.
The Loan Agreement requires that (i) at all times from the closing date to and including March 31, 2018, the Company, and any future guarantors, have Unrestricted Cash (as defined in the Loan Agreement) of at least $10.0 million ; (ii) at all times from the closing date to and including March 31, 2018, that the aggregate amount of Consolidated Unrestricted Cash, plus the value of Consolidated Receivables, plus the value of Consolidated Inventory (each as defined in the Loan Agreement) divided by the outstanding principal amount of Term Loans, shall equal or exceed 1.5 ; and (iii) at all times from April 1, 2018 and thereafter, that the aggregate amount of Consolidated Unrestricted Cash, plus the value of Consolidated Receivables, plus the value of Consolidated Inventory divided by the outstanding principal amount of Term Loans, shall equal or exceed 1.75 . In addition, the Loan Agreement is subject to customary affirmative and negative covenants including restrictions on creation of liens, dispositions of assets, mergers, changing the nature of its business and dividends and other distributions, in each case subject to certain exceptions. The Loan Agreement also contains certain customary events of default including, but not limited to, failure to pay interest, principal and fees or other amounts when due, material breach of any representation or warranty, covenant defaults, cross defaults to other material indebtedness, events of bankruptcy and the occurrence of a material adverse change (as defined in the agreement) to the Company’s business. The Term Loan Agreement offers TCP customary rights and remedies in any event of default, including the ability to declare all amounts outstanding immediately due and payable.
In connection with the New Term Loan, the Company issued to the Lenders warrants to purchase an aggregate 1,220,000 shares of the Company’s Common Stock at an exercise price of $1.05 per share. The warrants have a term of seven years and contain a “cashless exercise” feature that allows the holder to exercise the warrant without a cash payment upon the terms set forth therein.
The Company estimated the fair value of the warrants by using the Black-Scholes approach and the following assumptions: stock price of $1.56 ; strike price of $1.05 ; volatility of 85.9% , risk-free rate of 2.23% ; dividend yield of 0% ; and a 7 year term. The resulting fair value was used to allocate the proceeds from the Term Loan between liability and equity components.
The Company classified the warrants as equity and allocated the proceeds from the Term Loan and warrants using the relative fair value method. Using this method, the Company allocated $1.4 million to the warrants, which was recorded as equity. This amount represents debt discount that will be amortized to interest expense over the term of the loan. The Lenders converted the warrants into 912,067 shares of the Company’s common stock in a cashless exercise in the first quarter of 2018.
 
As of June 30, 2018 , the estimated schedule of principal payments due on the term loan is as follows (in thousands):
 
Year
Amounts
2018
$
4,779

2019
25,238

2020
16,854

Total
$
46,871


Sale of Long Term Financing Receivables

The Company entered into an agreement with a third party in the fourth quarter of 2017 to sell certain current and future receivables at a discount. In December 2017, the third party made an initial purchase of receivables that resulted in net proceeds to the Company of $2.8 million . This transaction was recorded as debt on the accompanying consolidated balance sheets, and the debt balance will be relieved by January 2019 as the underlying receivables are settled. During the six months ended June 30, 2018 , the third party made three additional purchases of receivables that resulted in total net proceeds to the Company of $5.6 million . These transactions were recorded as debt on the accompanying consolidated balance sheets, and the total associated debt balance will be relieved by September 2021 as the underlying receivables are settled. After the initial purchase, the buyer had the option to purchase certain additional future receivables at various fixed discounts. This option was valued at $0.7 million and was recorded as a liability with a corresponding offset to debt as of December 31, 2017.

17


As of June 30, 2018 , all purchases relating to this option had been made, and the liability has been relieved. See Note 5, “Fair Value Measurements” for additional information.
Long-term debt was comprised of the following at June 30, 2018 and December 31, 2017 (in thousands):
 
 
June 30,
2018
 
December 31,
2017
Term loan
$
46,871

 
$
50,000

Less unamortized discount and issuance costs
(1,557
)
 
(2,111
)
Carrying amount of term loan
45,314

 
47,889

Sale of long term financing receivable recorded as debt
6,674

 
2,562

Less value of future purchase option

 
(700
)
Carrying amount of sale of long term financing receivable recorded as debt
6,674

 
1,862

Total carrying amount of debt
51,988

 
49,751

Less current portion term loan
(16,380
)
 
(15,715
)
Less current portion of long term financing receivable recorded as debt
(2,049
)
 
(1,714
)
Long-term debt
$
33,559

 
$
32,322


Revolving Credit Facility

The Company had a  $50.0 million  revolving credit facility with Wells Fargo Bank, N.A. (“Wells Fargo”) that was entered into in November 2012. The Revolver had a balance of $10.1 million as of December 31, 2016 and was fully repaid and terminated in February 2017.  
9. COMMITMENTS AND CONTINGENCIES

From time to time, the Company may be involved in litigation relating to claims arising out of its operations. The Company is not currently involved in any material legal proceedings. The Company may, however, be involved in material legal proceedings in the future. Such matters are subject to uncertainty and there can be no assurance that such legal proceedings will not have a material adverse effect on its business, results of operations, financial position or cash flows.

The Company was previously involved in a dispute with a supplier regarding purchase volume commitments for which the Company recorded a liability of $1.8 million in the first quarter of 2018. The matter was resolved in the second quarter of 2018 for approximately $1.8 million .
On June 12, 2018, the Company entered into an Asset Purchase Agreement (“APA”) with SunPower Corporation (“SunPower”) to purchase assets primarily relating to SunPower’s microinverter business (the “Business”). Upon the closing of the APA, which is currently expected to occur in the third quarter of 2018 (“Closing”), Enphase will acquire intellectual property, technology and other assets primarily relating to the Business and will assume certain contracts and other liabilities of the Business for the following consideration: (i) $15,000,000 payable in cash at Closing; (ii) 7,500,000 shares of Enphase common stock issuable to SunPower at Closing; and (iii) an additional cash payment of $10,000,000 payable by Enphase to SunPower on the earlier of the four month anniversary of the Closing and December 28, 2018.
10. SALE OF COMMON STOCK

On February 4, 2018, the Company entered into a Securities Purchase Agreement with an investor pursuant to which the Company, in a private placement, issued and sold to the investor 9,523,809 shares of the Company’s common stock at a price per share of $2.10 , for gross proceeds of $20.0 million .
11. STOCK-BASED COMPENSATION
The Company has adopted certain equity incentive and stock purchase plans as described in the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 .

18


Equity Awards Activity
Stock Options
The following is a summary of stock option activity for the six months ended June 30, 2018 (in thousands, except per share data):
 
Number of
Shares
Outstanding
 
Weighted-
Average
Exercise Price
per Share
Outstanding at December 31, 2017
8,426

 
$
1.77

Granted
213

 
4.43

Exercised
(803
)
 
1.73

Canceled
(149
)
 
5.06

Outstanding at June 30, 2018
7,687

 
$
1.78

The intrinsic value of options exercised in the six months ended June 30, 2018 was $3.0 million . As of June 30, 2018 , the intrinsic value of options outstanding was $38.6 million based on the closing price of the Company’s stock as of June 30, 2018 .
Restricted Stock Units and Performance Stock Units
The following is a summary of restricted stock unit (“RSU”) and performance stock unit (“PSU”) activity for the six months ended June 30, 2018 (in thousands, except per share data):
 
RSUs and PSUs
 
Weighted Average
Fair Value per Share at
Grant Date
Outstanding at December 31, 2017
3,505

 
$
2.03

Granted
3,536

 
3.47

Vested
(702
)
 
2.52

Canceled
(250
)
 
2.19

Outstanding at June 30, 2018
6,089

 
$
2.80

The total intrinsic value of RSUs and PSUs that vested in the six months ended June 30, 2018 was $3.0 million . As of June 30, 2018 , the intrinsic value of RSUs and PSUs outstanding was $41.0 million based on the closing price of the Company’s stock as of June 30, 2018 .
Stock-based compensation expense is measured at the grant date based on the fair value of the award. During the second quarter of 2018 the Company issued a PSU grant of 1.4 million shares, 720,000 of which include market conditions. Each grantee is granted a target award of PSUs and may earn between 0% and 150% of the target award depending on the Company’s performance against the performance goals. For PSUs, the grant date fair value is recognized as expense when the performance condition is probable of being achieved, and then on a graded basis over the requisite service period. The fair value of awards containing market conditions was determined using a Monte Carlo simulation model based upon the terms of the conditions, the expected volatility of the underlying security, and other relevant factors. The weighted average estimated fair value of the PSUs without market conditions was $4.57 per share, and the weighted average estimated fair value of the PSUs with market conditions was $4.54 per share.
On April 3, 2017, the Company commenced a Tender Offer (the “Offer”) to exchange out of the money stock options for restricted stock units. The Offer expired on Monday, May 1, 2017. Pursuant to the Offer, the Company accepted elections to exchange options to purchase 2,362,470 shares of common stock and issued replacement awards of RSUs for 733,559 shares of common stock. As the transaction approximated a value-for-value exchange, it did not have a material impact on the Company’s stock-based compensation expense.
Stock-Based Compensation Expense
Compensation expense for all stock-based awards expected to vest is measured at fair value on the date of

19


grant and recognized ratably over the requisite service period. The following table summarizes the components of total stock-based compensation expense included in the condensed consolidated statements of operations for the periods presented (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Cost of revenues
$
417

 
$
211

 
$
615

 
$
449

Research and development
1,149

 
636

 
1,767

 
1,387

Sales and marketing
997

 
285

 
1,358

 
663

General and administrative
1,725

 
489

 
2,120

 
1,051

Total
$
4,288

 
$
1,621

 
$
5,860

 
$
3,550

The following table summarizes the various types of stock-based compensation expense for the periods presented (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Stock options and RSUs and PSUs
$
3,975

 
$
1,291

 
$
5,293

 
$
2,890

Employee stock purchase plan
313

 
330

 
567

 
660

Total
$
4,288

 
$
1,621

 
$
5,860

 
$
3,550

The following table presents the weighted-average grant date fair value of options granted for the periods presented and the assumptions used to estimate those values using a Black-Scholes option pricing model:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Weighted average grant date fair value
$
3.51

 
$
0.71

 
$
2.74

 
$
0.71

Expected term (in years)
3.8

 
4.6

 
4.0

 
4.6

Expected volatility
89.7
%
 
84.9
%
 
88.1
%
 
85.0
%
Annual risk-free rate of return
2.7
%
 
1.8
%
 
2.6
%
 
1.8
%
Dividend yield
0.0
%
 
0.0
%
 
0.0
%
 
0.0
%
As of June 30, 2018 , there was approximately $16.8 million of total unrecognized compensation expense related to unvested equity awards expected to be recognized over a weighted-average period of 2.7 years.
12. INCOME TAXES
The Company used the discrete tax approach in calculating the tax expense for the three and six months ended June 30, 2018 and 2017 due to the fact that a relatively small change in the Company’s projected pre-tax net income (loss) could result in a volatile effective tax rate. Under the discrete method, the Company determines its tax (expense) benefit based upon actual results as if the interim period was an annual period. The tax provision recorded was primarily related to income taxes attributable to its foreign operations.
13. NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share is computed in a similar manner, but it also includes the effect of potential common shares outstanding during the period, when dilutive. Potential common shares include outstanding in-the-money stock options, restricted stock units, shares to be purchased under the Company’s employee stock purchase plan and warrants to purchase common stock. The dilutive effect of potentially dilutive common shares is reflected in diluted earnings per share by application of the treasury stock method. To the extent these potential common shares are antidilutive, they are excluded from the calculation of diluted net loss per share. 

20


The following table presents the computation of basic and diluted net loss per share for the periods presented (in thousands, except per share data):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net loss
$
(3,738
)
 
$
(12,093
)
 
$
(8,866
)
 
$
(35,398
)
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
97,321

 
84,434

 
94,026

 
80,542

Net loss per share, basic and diluted
$
(0.04
)
 
$
(0.14
)
 
$
(0.09
)
 
$
(0.44
)
As the Company incurred a net loss for all periods presented, potential dilutive securities from employee stock options, restricted stock units and warrants have been excluded from the diluted net loss per share computations because the effect of including such shares would have been anti-dilutive. The following table sets forth the potentially dilutive securities excluded from the computation of the diluted net loss per share (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Employee stock options
8,102

 
8,068

 
8,259

 
8,262

RSUs and PSUs
5,710

 
2,017

 
4,690

 
1,276

Warrants to purchase common stock

 
1,220

 

 
944

Total
13,812

 
11,305

 
12,949

 
10,482


21


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements reflecting our current expectations and involves risks and uncertainties. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential” or “continue” or the negative of these terms or other comparable terminology. For example, statements regarding our expectations as to future financial performance, expense levels, liquidity sources, timing of new product releases, the impact of tariffs and other government actions with respect to the solar industry and international trade, and our expectations for and ability to close the transactions under our recently announced Asset Purchase Agreement with SunPower Corporation and the anticipated benefits and risks relating to the transaction are forward-looking statements. Our actual results and the timing of events may differ materially from those discussed in our forward-looking statements as a result of various factors, including those discussed below and those discussed in the section entitled “Risk Factors” included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2017 .
Overview

We deliver simple, innovative and reliable energy management solutions that advance the worldwide potential of renewable energy. Our semiconductor-based microinverter system converts direct current (DC) electricity to alternating current (AC) electricity at the individual solar module level, and brings a system-based, high technology approach to solar energy generation leveraging our design expertise across power electronics, semiconductors, networking, and cloud-based software technologies. Our technology was designed to increase energy production, simplify design and installation, improve system uptime and reliability, reduce fire risk, and provide a platform for intelligent energy management. Since inception, we have shipped approximately 17 million microinverters representing over 4 gigawatts of solar PV generating capacity, and more than 790,000 Enphase residential and commercial systems have been deployed in over 120 countries.

We sell our microinverter systems primarily to distributors who resell them to solar installers. We also sell directly to large installers and through original equipment manufacturers (“OEMs”) and strategic partners.

On June 12, 2018, we entered into an Asset Purchase Agreement (“APA”) with SunPower Corporation (“SunPower”), to purchase assets primarily relating to SunPower’s microinverter business (the “Business”). Upon the anticipated closing of the transactions under the APA in the third quarter of 2018 (“Closing”), Enphase will acquire intellectual property, technology and other assets primarily relating to the Business and will assume certain contracts and other liabilities of the Business for the following consideration: (i) $15,000,000 payable in cash at Closing; (ii) 7,500,000 shares of Enphase common stock issuable to SunPower at Closing (“Closing Shares”); and (iii) an additional cash payment of $10,000,000 payable by Enphase to SunPower on the earlier of the four month anniversary of the closing and December 28, 2018. In addition, as conditions to the Closing, Enphase and SunPower will enter into (i) a Master Supply Agreement under which SunPower will exclusively procure module level power electronics and related equipment for use in the U.S. residential market from Enphase for a period of five years and (ii) a Stockholders Agreement to establish certain SunPower rights and obligations related to the Closing Shares, including SunPower’s right to appoint one person to the Enphase board of directors, a six-month lock-up period, certain additional transfer restrictions on the Closing Shares, registration rights, and voting, standstill and other undertakings by SunPower.
New Products
Enphase IQ Microinverter System

In the first quarter of 2018, we began shipping our seventh-generation Enphase IQ™ microinverters for the Enphase Home Energy Solution with IQ™, our next-generation integrated solar, storage and energy management system, to distributors in the United States. IQ 7 is a single worldwide SKU, which we began selling in Europe in the second quarter of 2018, representing Enphase’s entry into the German and Austrian solar markets, while expanding our presence in other solar markets such as France, Benelux, United Kingdom, and Switzerland. We also began selling IQ 7 in Australia and New Zealand during the second quarter of 2018.

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The Enphase IQ 7 Micro™ and Enphase IQ 7+ Micro™ support high-powered 60-cell and 72-cell solar modules and integrate with AC modules. During the second quarter of 2018, we began shipping our IQ 7X microinverter to solar distributors in the United States. The Enphase IQ 7X Micro™, the highest power and highest efficiency variant of our seventh-generation family of microinverters, supports and can be integrated with 96-cell modules.

Our next-generation system, IQ 8, is built on our grid-agnostic “always on” Ensemble™ technology. The IQ 8 ASIC is fully functional, which demonstrates the technological feasibility of Ensemble. This ASIC is made in 55nm technology at TSMC, enabling very high speed digital signal processing. We are continuing to commercialize IQ 8 and expect to introduce our off-grid solution in the fourth quarter of 2018, followed by a grid-agnostic solution in 2019.
The Enphase IQ microinverter is a key component of the Enphase Home Energy Solution, which can also include our Envoy™ Communications Gateway with IQ Combiner+, Enphase Enlighten™, a cloud-based energy management platform, and our Enphase AC Battery™. System owners can use Enphase Enlighten to monitor their home’s solar generation, energy storage and consumption from any web-enabled device.
Enphase Energized AC Modules
We began shipping Enphase Energized AC Modules in North America in 2017. The Enphase Energized AC Modules with IQ utilize our sixth- and seventh-generation microinverters and are produced through our AC module partnerships with LG Electronics Inc., JinkoSolar Technology and Waaree Energies Ltd.. In 2018 we announced new AC Module partnerships with SunPower, Panasonic Corporation and Solaria Corporation.
Components of Condensed Consolidated Statements of Operations
Net Revenues
We primarily generate net revenues from sales of our microinverter systems and related accessories, which can include our AC Battery storage systems, our Envoy communications gateway and Enlighten cloud-based monitoring service as well as other accessories.
Our revenue is affected by changes in the volume and average selling prices of our microinverter systems and related accessories, supply and demand, sales incentives, and competitive product offerings. Our revenue growth is dependent on our ability to compete effectively in the marketplace by remaining cost competitive, developing and introducing new products that meet the changing technology and performance requirements of our customers, the diversification and expansion of our revenue base, and our ability to market our products in a manner that increases awareness for microinverter technology and differentiates us in the marketplace.
Cost of Revenues and Gross Profit
Cost of revenues is comprised primarily of product costs, warranty, manufacturing personnel and logistics costs, freight costs, depreciation and amortization of test equipment and hosting services costs. Our product costs are impacted by technological innovations, such as advances in semiconductor integration and new product introductions, economies of scale resulting in lower component costs, and improvements in production processes and automation. Certain costs, primarily personnel and depreciation and amortization of test equipment, are not directly affected by sales volume.
We outsource our manufacturing to third-party contract manufacturers and generally negotiate product pricing with them on a quarterly basis. We believe our contract manufacturing partners have sufficient production capacity to meet the anticipated demand for our products for the foreseeable future. However, shortages in the supply of certain key raw materials could adversely affect our ability to meet customer demand for our products. We contract with third parties, including one of our contract manufacturers, to serve as our logistics providers by warehousing and delivering our products in the United States, Europe and Asia.
Gross profit may vary from quarter to quarter and is primarily affected by our average selling prices, product cost, product mix, warranty costs and sales volume fluctuations resulting from seasonality.
Operating Expenses
Operating expenses consist of research and development, sales and marketing, general and administrative and restructuring expenses. Personnel-related costs are the most significant component of each of these expense

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categories other than restructuring expense and include salaries, benefits, payroll taxes, sales commissions, incentive compensation and stock-based compensation.
Research and development expense includes personnel-related expenses, third-party design and development costs, testing and evaluation costs, depreciation expense and other indirect costs. Research and development employees are primarily engaged in the design and development of power electronics, semiconductors, powerline communications, networking and software functionality, and storage. We devote substantial resources to research and development programs that focus on enhancements to, and cost efficiencies in, our existing products and timely development of new products that utilize technological innovation to drive down product costs, improve functionality, and enhance reliability. We intend to continue to invest appropriate resources in our research and development efforts because we believe they are critical to maintaining our competitive position.
Sales and marketing expense consists primarily of personnel-related expenses such as salaries, commissions, stock-based compensation, employee benefits and travel. It also includes trade shows, marketing, customer support and other indirect costs. We expect to continue to make the necessary investments to enable us to execute our strategy to increase our market penetration geographically and enter into new markets by expanding our customer base of distributors, large installers, OEMs and strategic partners. We currently offer microinverter systems targeting the residential and commercial markets in the United States, Canada, Mexico and certain Central American markets, the United Kingdom, France, the Benelux region, certain other European markets, Australia, New Zealand, India and certain other Asian markets. We expect to continue to expand the geographic reach of our product offerings and explore new sales channels in addressable markets in the future.
General and administrative expense consists primarily of salaries, incentive compensation, stock-based compensation and employee benefits for personnel related to our executive, finance, human resources, information technology and legal organizations. General and administrative expense also includes facilities costs and fees for professional services, which consist primarily of outside legal, accounting and information technology consulting costs.
Restructuring charges are the net of charges resulting from restructuring initiatives implemented in 2016 and 2017 to improve operational performance and reduce overall operating expense and gain on divestiture of our services business. Costs included in restructuring primarily consist of fees paid to management consultants engaged to assist us in making organizational and structural changes to improve operational efficiencies and reduce expenses, severance for workforce reduction actions, non-cash charges related to the disposition of assets and impairment of property and equipment, and the establishment of lease loss reserves. Our restructuring initiatives were largely completed in 2017. See Note 7, “Restructuring” to the condensed consolidated financial statements for additional information.
Other Expense, Net
Other expense, net primarily consists of interest expense and commitment fees under our term loans and non-cash interest expense related to the amortization of deferred financing costs. Other expense, net also includes gains or losses upon conversion of foreign currency transactions into U.S. dollars.
Provision for Income Taxes
We are subject to income taxes in the countries where we sell our products. Historically, we have primarily been subject to taxation in the United States because we have sold the majority of our products to customers in the United States. As we have expanded the sale of products to customers outside the United States, we have become subject to taxation based on the foreign statutory rates in the countries where these sales took place. As sales in foreign jurisdictions increase in the future, our effective tax rate may fluctuate accordingly. Due to the history of losses we have generated in the United States since inception, we believe that it is more-likely-than-not that all of our U.S. and state deferred tax assets will not be realized as of June 30, 2018 .
Results of Operations for the Three Months Ended June 30, 2018 and 2017
Net Revenues  

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Three Months Ended
June 30,
 
Change in
 
Six Months Ended
June 30,
 
Change in
 
2018
 
2017
 
$
 
%
 
2018
 
2017
 
$
 
%
 
(dollars in thousands)
 
(dollars in thousands)
Net revenues
$
75,896

 
$
74,704

 
$
1,192

 
2
%
 
$
145,868

 
$
129,455

 
$
16,413

 
13
%
Three Months Ended June 30, 2018 and 2017
Net revenues increased by 2% for the three months ended June 30, 2018 , as compared to the same period in 2017 , primarily due to $2.0 million of revenue earned in the three months ended June 30, 2018 under a joint development arrangement, which was partially offset by a decrease in volume of microinverter systems sold. We sold 675,000 microinverter units in the three months ended June 30, 2018 , as compared to 775,000 units in the same period in 2017 . The impact of the lower sales volume was more than offset by an increase in average selling price per microinverter due to the transition to our IQ series of microinverters. IQ series microinverters comprised approximately 72% of the total volume of microinverters sold in the three months ended June 30, 2018 , as compared to approximately 20% in the same period in 2017 . See Note 2. “Revenue Recognition” to the condensed consolidated financial statements.
Six Months Ended June 30, 2018 and 2017
Net revenues increased by 13% for the six months ended June 30, 2018 , as compared to the same period in 2017 due primarily to an increase in the average selling price per inverter and $2.0 million of revenue earned under a joint development agreement in the six months ended June 30, 2018. The impact of the increase in the average selling price per microinverter was partially offset by a 5% decrease in microinverter units sold. The increase in average selling price per microinverter was due to the transition to our IQ series microinverters and pricing management. See Note 2. “Revenue Recognition” to the condensed consolidated financial statements.
Cost of Revenues and Gross Profit  
 
Three Months Ended
June 30,
 
Change in
 
Six Months Ended
June 30,
 
Change in
 
2018
 
2017
 
$
 
%
 
2018
 
2017
 
$
 
%
 
(dollars in thousands)
 
(dollars in thousands)
Cost of revenues
$
53,195

 
$
61,157

 
$
(7,962
)
 
(13
)%
 
$
104,851

 
$
108,861

 
$
(4,010
)
 
(4
)%
Gross profit
22,701

 
13,547

 
9,154

 
68
 %
 
41,017

 
20,594

 
20,423

 
99
 %
Gross margin
29.9
%
 
18.1
%
 


 
 
 
28.1
%
 
15.9
%
 


 
 
Three Months Ended June 30, 2018 and 2017
Cost of revenues decreased by 13% for the three months ended June 30, 2018 , as compared to the same period in 2017 . The decrease in cost of revenues was primarily attributable to the decrease in volume of microinverter units sold combined with a 10% decrease in the average product cost. The decrease in cost of revenues was partially offset by increased expedite fees due to component shortages and higher warranty provision. Gross margin increased by 11.8 percentage points for the three months ended June 30, 2018 , as compared to the same period in 2017 . The increase in gross margin was primarily attributable to the combination of generally higher average selling prices of our products combined with decreases in product costs as a result of the transition to the IQ series microinverters as well as our cost management efforts. The improvement in gross margin due to the $2.0 million in revenue under a joint development arrangement was mostly offset by increased costs associated with component shortages. Our ability to reduce product costs and the timing of product cost reductions relative to declines in the selling prices of our products can have a significant impact on our gross margin.
Six Months Ended June 30, 2018 and 2017
Cost of revenues decreased by 4% for the six months ended June 30, 2018 , as compared to the same period in 2017 , primarily due to a 5% decrease in microinverter units sold combined with a 10% decrease in the average cost. Gross margin increased by 12.2 percentage points for the six months ended June 30, 2018 , as compared to the same period in 2017 . The increase in gross margin was primarily attributable to the combination of generally higher average selling prices of our products combined with decreases in product costs as a result of the transition to the IQ series microinverter as well as our cost management efforts. The improvement in margin due to the $2.0

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million in revenue under a joint development arrangement was more than offset by increased costs associated with component shortages. Our ability to reduce product costs and the timing of product cost reductions relative to declines in the selling prices of our products can have a significant impact on our gross margin.
Research and Development
 
Three Months Ended
June 30,
 
Change in
 
Six Months Ended
June 30,
 
Change in
 
2018
 
2017
 
$
 
%
 
2018
 
2017
 
$
 
%
 
(dollars in thousands)
 
(dollars in thousands)
Research and development
$
9,462

 
$
7,947

 
$
1,515

 
19
%
 
$
17,082

 
$
17,552

 
$
(470
)
 
(3
)%
Three Months Ended June 30, 2018 and 2017
Research and development expense increased by 19% for the three months ended June 30, 2018 , as compared to the same period in 2017 . The increase is primarily due to a $0.9 million increase in research and development and professional expenses associated with the development, introduction and qualification of new products. Personnel related expenses increased by a net $0.5 million due to an increase in stock-based compensation and bonus expenses, partially offset by lower payroll expenses associated with moving certain functions to lower cost locations as part of the restructuring actions taken in 2017.
Six Months Ended June 30, 2018 and 2017
Research and development expense decreased by 3% for the six months ended June 30, 2018 , as compared to the same period in 2017 . The decrease is primarily due to a $1.0 million reduction in research and development personnel related expenses due to lower payroll expenses associated with moving certain functions to lower cost locations as part of the restructuring actions taken in 2017, which were partially offset by an increase in stock-based compensation and bonus expense and an increase in expenses associated with developing new products.
Sales and Marketing
 
Three Months Ended
June 30,
 
Change in
 
Six Months Ended
June 30,
 
Change in
 
2018
 
2017
 
$
 
%
 
2018
 
2017
 
$
 
%
 
(dollars in thousands)
 
(dollars in thousands)
Sales and marketing
$
6,828

 
$
6,274

 
$
554

 
9
%
 
$
13,055

 
$
12,732

 
$
323

 
3
%
Three Months Ended June 30, 2018 and 2017
Sales and marketing expense increased by 9% for the three months ended June 30, 2018 , as compared to the same period in 2017 . The increase is primarily due to an increase in stock-based compensation expense, which was partially offset by a decrease in bad debt expense, which was $0.2 million for the three months ended June 30, 2018 , as compared to $0.6 million for the same period in 2017.
Six Months Ended June 30, 2018 and 2017
Sales and marketing expense increased by 3% for the six months ended June 30, 2018 , as compared to the same period in 2017 . The increase was due an increase in personnel related expenses primarily due to higher stock-based compensation expense combined with higher professional expenses, which was partially offset by a decrease in facilities and equipment costs.
General and Administrative
 
Three Months Ended
June 30,
 
Change in
 
Six Months Ended
June 30,
 
Change in
 
2018
 
2017
 
$
 
%
 
2018
 
2017
 
$
 
%
 
(dollars in thousands)
 
(dollars in thousands)
General and administrative
$
6,969

 
$
4,964

 
$
2,005

 
40
%
 
$
13,913

 
$
10,797

 
$
3,116

 
29
%

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Three Months Ended June 30, 2018 and 2017
General and administrative expense increased by $2.0 million for the three months ended June 30, 2018 , as compared to the same period in 2017 . The increase is due to a $1.8 million increase in personnel related expenses primarily due to stock-based compensation and bonus expenses, which was partially offset by a decrease in professional fees. General and administrative expense for the three months ended June 30, 2018 also includes $0.4 million in acquisition related costs.
Six Months Ended June 30, 2018 and 2017
General and administrative expense increased by $3.1 million for the six months ended June 30, 2018 , as compared to the same period in 2017 . The increase is primarily due to $1.8 million paid to resolve a dispute with a supplier combined with higher personnel related expenses due to higher stock-based compensation and bonus expense and was partially offset by lower professional fees.
Restructuring Charges
 
Three Months Ended
June 30,
 
Change in
 
Six Months Ended
June 30,
 
Change in
 
2018
 
2017
 
$
 
%
 
2018
 
2017
 
$
 
%
 
(dollars in thousands)
 
(dollars in thousands)
Restructuring charges
$

 
$
3,609

 
$
(3,609
)
 
N/A
 
$

 
$
10,856

 
$
(10,856
)
 
N/A
Three Months Ended June 30, 2018 and 2017
We implemented a restructuring plan in 2016 to lower operating expenses that included reductions in our global workforce and the elimination of certain non-core projects. In 2017 we engaged a management consulting firm to assist us in making organizational and structural changes to improve operational efficiencies and reduce expenses. Our restructuring activities were largely completed in 2017. For the three months ended June 30, 2017, restructuring charges include $3.0 million of consulting services $0.4 million related to contract termination costs and lease loss reserves.
Six Months Ended June 30, 2018 and 2017
Restructuring charges for the six months ended June 30, 2017 include $7.0 million of consulting services, $1.7 million in cash-based severance and related benefits and $2.1 million in charges for asset impairments, contract termination costs and lease loss reserves.
Other Expense, Net
 
Three Months Ended
June 30,
 
Change in
 
Six Months Ended
June 30,
 
Change in
 
2018
 
2017
 
$
 
%
 
2018
 
2017
 
$
 
%
 
(dollars in thousands)
 
(dollars in thousands)
Other expense, net
$
(2,841
)
 
$
(1,992
)
 
$
(849
)
 
43
%
 
$
(5,260
)
 
$
(3,071
)
 
$
(2,189
)
 
71%
Three Months Ended June 30, 2018 and 2017
Other expense, net is primarily comprised of interest expense and gains and losses related to foreign currency exchange and remeasurement and was $2.8 million for three months ended June 30, 2018 as compared to $2.0 million for the same period in 2017. Net interest expense is primarily related to our term loan and increased by $0.2 million to $2.3 million for the three months ended June 30, 2018. Other expense, net also includes gains and losses related to foreign currency exchange and remeasurement that resulted in a net loss of $0.6 million for three months ended June 30, 2018, as compared to a net gain of $0.1 million for the three months ended June 30, 2017.
Six Months Ended June 30, 2018 and 2017
Other expense, net is primarily comprised of interest expense and gains and losses related to foreign currency exchange and remeasurement and was $5.3 million for six months ended June 30, 2018 , as compared to $3.1 million for the same period in 2017. Net interest expense is primarily related to our term loan and increased by $0.4

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Table of Contents

million to $4.6 million for the six months ended June 30, 2018. Other expense, net primarily includes gains and losses related to foreign currency exchange and remeasurement that resulted in a net loss of $0.7 million for six months ended June 30, 2018 as compared to a net gain of $1.1 million for the six months ended June 30, 2017.

Liquidity and Capital Resources
Sources of Liquidity
As of June 30, 2018 , we had $58.5 million in cash and cash equivalents and working capital of $40.7 million . Cash and cash equivalents held in the United States were $46.6 million and consisted primarily of U.S. Government money market mutual funds and non-interest-bearing checking deposits, with the remainder held in various foreign subsidiaries. We consider amounts held outside the U.S. to be accessible and have provided for the estimated U.S. income tax liability associated with our foreign earnings.
In December of 2016, we entered into an At The Market Issuance Sales Agreement (“ATM”) under which we sold shares of our common stock up to a gross aggregate offering price of $17.0 million. We realized the full $17.0 million of gross proceeds available under the ATM in the first quarter of 2017.
In January 2017, we completed a private placement of common stock that resulted in gross proceeds of $10.0 million. In February 2018, we completed another private placement of common stock that resulted in additional gross proceeds of $20.0 million.
In July 2016, we entered into a loan and security agreement (the “Term Loan Agreement” or “Original Term Loan Agreement”) with lenders that are affiliates of Tennenbaum Capital Partners, LLC (“TCP”), which has subsequently been amended and modified as discussed below and in Note 8, “Debt” to the condensed consolidated financial statements. Under the agreement, the lenders committed to advance a term loan in an aggregate principal amount of up to $25.0 million with a maturity date of July 1, 2020. We drew down the $25.0 million term loan commitment at closing.
Payments under the Original Term Loan Agreement were interest only through June 30, 2017, followed by consecutive equal monthly payments of principal plus accrued interest beginning on July 1, 2017 and continuing through the maturity date. In addition, we paid a commitment fee of 3.3% of the loan amount upon closing and a closing fee of 10.0% of the loan amount is payable in four equal installments at each anniversary of the closing date. We may elect to prepay the loan by incurring a prepayment fee between 1% and 3% of the principal amount of the term loan depending on the timing and circumstances of prepayment.
The Term Loan Agreement is subject to customary affirmative and negative covenants including restrictions on creation of liens, dispositions of assets, dividends, mergers, or changing the nature of its business, in each case, subject to certain customary exceptions. In addition, the Term Loan Agreement contains certain customary events of default including, but not limited to, failure to pay interest, principal and fees or other amounts when due, material breach of any representation or warranty, covenant defaults, cross defaults to other material indebtedness, events of bankruptcy and the occurrence of a material adverse change (as defined in the agreement) to our business. The Term Loan Agreement offers TCP customary rights and remedies in any event of default, including the ability to declare all amounts outstanding immediately due and payable. We were in compliance with all financial and other covenants under the Term Loan Agreement as of June 30, 2018 .
In February 2017, we amended and restated our loan and security agreement with TCP to provide an additional $25 million in principal (together with the Term Loan Agreement the “Combined Term Loans”). We simultaneously terminated our revolving credit facility with Wells Fargo Bank, N.A. (the “Revolver”), and the combined principal and interest balance of $10.3 under the Revolver million was fully repaid.
The Combined Term Loans have the same July 1, 2020 maturity date as the Original Term Loan Agreement. Monthly payments under the Combined Term Loans were interest only through February 28, 2018, followed by consecutive equal monthly payments of principal plus accrued interest beginning on March 1, 2018 and continuing through the maturity date. Interest on the Combined Term Loans is the greater of (a) 10.3125%, and (b) a fluctuating rate of interest per annum equal to the three-month LIBOR Rate (rounded up to the nearest 1/16th of one percent) plus 9.25%.
In February 2018, the Combined Term Loans were modified again to provide for the deferral of 50% of the scheduled principal payments in 2018. The term loans under our amended and restated loan and security agreement with TCP are secured by a first-priority security interest on substantially all of our assets; provided,

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however, that the security interest in our intellectual property may be released when we satisfy certain requirements.
The following table summarizes our cash flows for the periods indicated:
 
Six Months Ended
June 30,
 
2018
 
2017
 
(In thousands)
Net cash provided by (used in) operating activities
$
7,441

 
$
(24,325
)
Net cash used in investing activities
(1,475
)
 
(3,515
)
Net cash provided by financing activities
23,744

 
40,735

Operating Activities
For the six months ended June 30, 2018 , net cash provided by operating activities of $7.4 million was primarily attributable to a net loss of $8.9 million offset by non-cash charges of $12.2 million and net cash inflows from changes in operating assets and liabilities of $4.1 million . Non-cash charges included $5.9 million of stock-based compensation, $4.5 million of depreciation and amortization, $1.1 million of non-cash interest expense and a $0.8 million provision for doubtful accounts.
The primary drivers of cash inflows from changes in operating assets and liabilities were a $5.9 million decrease in accounts receivable due to the timing of revenue as well as the impact of cash management efforts and a $8.5 million decrease in inventory due to a combination of supply chain management efforts and the impact of component shortages, which were partially offset by a $3.8 million decrease in accounts payable as a result of lower inventory levels and the timing of vendor payments.
For the  six months ended June 30, 2017 , net cash used in operating activities of  $24.3 million  was primarily attributable to a net loss of  $35.4 million offset by non-cash charges of  $11.7 million  and net cash outflows from changes in operating assets and liabilities of $0.6 million. Non-cash charges included $3.6 million of stock-based compensation, $4.6 million of depreciation and amortization, $0.7 million provision for doubtful accounts and a net $1.8 million in asset impairment and restructuring charges.
The primary driver of cash outflows from changes in operating assets and liabilities was a $14.1 million decrease in accounts payable resulting from timing of vendor payments that led to a decrease in average days payable outstanding of approximately 47% and an increase in prepaid expenses and other assets of $5.3 million. Cash outflows from changes in operating assets and liabilities was mostly offset by a $11.1 million decrease in inventory, a $3.9 million decrease in accounts receivable and a $3.6 million increase in deferred revenue.
Investing Activities
For the six months ended June 30, 2018 , net cash used in investing activities of $1.5 million primarily resulted from purchases of test and assembly equipment and capitalized costs related to internal-use software.
For the six months ended June 30, 2017 , net cash used in investing activities of $3.5 million primarily resulted from purchases of test and assembly equipment and capitalized costs related to internal-use software.
Financing Activities
For the six months ended June 30, 2018 , net cash provided by financing activities of $23.7 million consisted of $21.3 million in net proceeds from sales of common stock and $5.6 million in net proceeds from the sale of certain long-term financing receivables. These proceeds were partially offset by a $3.1 million principal payment on our term loan.
For the  six months ended June 30, 2017 , net cash provided by financing activities of $40.7 million consisted of net proceeds from sales of common stock of $26.5 million, which included proceeds from the private placement and ATM offering described above and net proceeds from the term loan of $24.2 million, offset by the repayment of principal on our revolving credit facility of $10.1 million.

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Contractual Obligations
Other than as described below and in the current report on Form 8-K filed on June 12, 2018, there were no material changes during the three months ended June 30, 2018 to our contractual commitments as presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2017 Form 10-K. See Note 9. “Commitments and Contingencies.”
On June 12, 2018, we entered into an Asset Purchase Agreement (“APA”) with SunPower Corporation (“SunPower”), to purchase assets primarily relating to SunPower’s microinverter business (the “Business”). Upon the closing of the APA, which is currently anticipated to be in the third quarter of 2018 (“Closing”), Enphase will acquire intellectual property, technology and other assets primarily relating to the Business and will assume certain contracts and other liabilities of the Business for the following consideration: (i) $15,000,000 payable in cash at Closing; (ii) 7,500,000 shares of Enphase common stock issuable to SunPower at Closing; and (iii) an additional cash payment of $10,000,000 payable by Enphase to SunPower on the earlier of the four month anniversary of the Closing and December 28, 2018.
Off-Balance Sheet Arrangements
As of June 30, 2018 , we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. 
Critical Accounting Policies
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S., or GAAP. In connection with the preparation of our condensed consolidated financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our condensed consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
We consider an accounting policy to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the condensed consolidated financial statements.
Other than as described in Note 2. “Revenue Recognition” and Note 11. “Stock-based Compensation,” in the notes to the condensed consolidated financial statements, there have been no significant changes during the six months ended June 30, 2018 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2017 .
Recently Issued Accounting Pronouncements Not Yet Effective
See Note 1. “Description of Business and Basis of Presentation” to the Notes to Condensed Consolidated Financial Statements under Item 1 for recently issued accounting pronouncements not yet effective.

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Item 3.
Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of our annual report on Form 10-K for the year ended December 31, 2017 . Our exposures to market risk have not changed materially since December 31, 2017 .
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2018 . The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, includes, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of June 30, 2018 , our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION
 
Item 1.
Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising out of our operations. We are not currently involved in any material legal proceedings, and our management believes there are currently no claims or actions pending against us, the ultimate disposition of which could have a material adverse effect on our operations, financial condition, or cash flows. We may, however, be involved in material legal proceedings in the future. Such matters are subject to uncertainty and there can be no assurance that such legal proceedings will not have a material adverse effect on our business, results of operations, financial position or cash flows.
Item 1A.
Risk Factors
We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operations. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are not material may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes.
We have marked with an asterisk (*) those risks described below that reflect substantive changes from, or additions to, the risks described in our Annual Report on From 10-K for the year ended December 31, 2017 .
*We have a history of losses which may continue in the future, and we cannot be certain that we will achieve or sustain profitability.
We have incurred substantial net losses since our inception, including a net loss of $3.7 million for three months ended June 30, 2018 , and we may continue to incur additional losses in the future. For the years ended December 31, 2017, 2016 and 2015, we incurred net losses of $45.2 million, $67.5 million and $22.1 million, respectively. At June 30, 2018 , we had an accumulated deficit of $343.5 million . Our revenue growth may slow or revenue may decline for a number of reasons, many of which are outside our control, including a decline in demand for our offerings, increased competition, a decrease in the growth of the solar industry or our market share, future declines in average selling prices of our products, the impact of the January 2018 trade tariffs established by President Trump, the imposition of additional tariffs applicable to our industry or our products, or our failure to capitalize on growth opportunities. If we fail to generate sufficient revenue to support our operations, we may not be able to achieve or sustain profitability.
*We may not be able to raise additional capital to execute on our current or future business opportunities on favorable terms, if at all, or without dilution to our stockholders.
We believe that our existing cash and cash equivalents and cash flows from our operating activities will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, we may need to raise additional capital or debt financing to execute on our current or future business strategies, including to:
provide additional cash reserves to support our operations;
invest in our research and development efforts;
expand our operations into new product markets and new geographies;
acquire complementary businesses, products, services or technologies; or
otherwise pursue our strategic plans and respond to competitive pressures, including adjustments to our business to mitigate the effects of any tariffs that might apply to us or our industry.
We do not know what forms of financing, if any, will be available to us. If financing is not available on acceptable terms, if and when needed, our ability to fund our operations, enhance our research and development and sales and marketing functions, develop and enhance our products, respond to unanticipated events, including unanticipated opportunities, or otherwise respond to competitive pressures would be significantly limited. In any such event, our business, financial condition and results of operations could be materially harmed, and we may be unable to continue our operations. Moreover, if we raise additional funds through the issuance of equity or

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convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders.
*U.S. government actions with regard to the solar energy sector or international trade could materially harm our business, financial condition and results of operations.
The current U.S. presidential administration has created and may continue to create regulatory uncertainty in the clean energy sector generally and the solar energy sector in particular. If the administration or the U.S. Congress takes action to eliminate or reduce legislation, regulations and incentives supporting solar energy, such actions may result in a decrease in demand for solar energy in the United States and other geographical markets, which could materially harm our business, financial condition and results of operations.
On January 23, 2018, President Donald Trump signed a proclamation establishing tariffs on certain solar equipment manufactured outside of the U.S., and his administration has subsequently announced its intention to levy tariffs on additional classes of products. Such tariffs could have a negative impact on the overall demand for solar products in the U.S., and for our products in particular. Unless we obtain exemptions or take other actions to avoid them, such tariffs will apply to our microinverters and other products. If the tariffs are applied specifically to products that we or our commercial partners import, such tariffs could hurt the demand for these products and materially harm our business, financial condition and results of operations. We are seeking exemptions from those tariffs. There is no guarantee that we will be successful in obtaining such exemptions or any actions that we may pursue with respect to the organization and operation of our business to effectively mitigate the effects of any tariffs that apply to our business. If we are not able to avoid or mitigate the effects of such tariffs, the tariffs (or mitigating actions we might take) could result in material additional costs to us and our suppliers, and our results of operations could be negatively impacted as a result.
Furthermore, a significant portion of our business activities are conducted in foreign countries, including Mexico, Canada and China. During the 2016 election campaign, then-candidate Trump made comments suggesting that he was not supportive of certain existing international trade agreements, including the North American Free Trade Agreement (“NAFTA”). At this time, it remains unclear what the administration or the U.S. Congress may or may not do with respect to these international trade agreements. If the administration takes action to impose any border tariff or to withdraw from or materially modify NAFTA or certain other international trade agreements, our business, financial condition and results of operations could be adversely affected.
The rapidly changing solar industry makes it difficult to evaluate our current business and future prospects.
The rapidly changing solar industry makes it difficult to evaluate our current business and future prospects. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, including increased expenses as we continue to grow our business. If we do not manage these risks and overcome these difficulties successfully, our business will suffer.
Since we began commercial shipments of our products, our revenue, gross profit and results of operations have varied and are likely to continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. It is difficult for us to accurately forecast our future revenue and gross profit and plan expenses accordingly and, therefore, it is difficult for us to predict our future results of operations.
If demand for solar energy solutions does not grow or grows at a slower rate than we anticipate, our business will suffer.
Our microinverter and AC Battery storage systems are utilized in solar photovoltaic, or PV, installations, which provide on-site distributed power generation. As a result, our future success depends on continued demand for solar energy solutions and the ability of solar equipment vendors to meet this demand. The solar industry is an evolving industry that has experienced substantial changes in recent years , and we cannot be certain that consumers and businesses will adopt solar PV systems as an alternative energy source at levels sufficient to continue to grow our business. Traditional electricity distribution is based on the regulated industry model whereby businesses and consumers obtain their electricity from a government regulated utility. For alternative methods of distributed power to succeed, businesses and consumers must adopt new purchasing practices. The viability and continued growth in demand for solar energy solutions, and in turn, our products, may be impacted by many factors outside of our control, including:
market acceptance of solar PV systems based on our product platform;

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cost competitiveness, reliability and performance of solar PV systems compared to conventional and non-solar renewable energy sources and products;
availability and amount of government subsidies and incentives to support the development and deployment of solar energy solutions;
the extent to which the electric power industry and broader energy industries are deregulated to permit broader adoption of solar electricity generation;
the cost and availability of key raw materials and components used in the production of solar PV systems;
prices of traditional utility-provided energy sources;
levels of investment by end-users of solar energy products, which tend to decrease when economic growth slows; and
the emergence, continuance or success of, or increased government support for, other alternative energy generation technologies and products.
If demand for solar energy solutions does not grow, demand for our customers' products as well as demand for our products will decrease, which would have an adverse impact on our ability to increase our revenue and grow our business.
Short-term demand and supply imbalances, especially for solar module technology, have recently caused prices for solar technology solutions to decline rapidly. Furthermore, competition in the solar industry has increased due to the emergence of lower-cost manufacturers along the entire solar value chain causing further price declines, excess inventory and oversupply. These market disruptions may continue to occur and may increase pressure to reduce prices, which could adversely affect our business and financial results.
The loss of, or events affecting, one of our major customers could reduce our sales and have a material adverse effect on our business, financial condition and results of operations.
In 2017, two customers accounted for approximately 15% and 11% of total net revenues. Our customers’ decisions to purchase our products are influenced by a number of factors outside of our control, including retail energy prices and government regulation and incentives, among others. Although we have agreements with some of our largest customers, these agreements generally do not have long-term purchase commitments and are generally terminable by either party after a relatively short notice period. In addition, these customers may decide to no longer use, or to reduce the use of, our products and services for other reasons that may be out of our control. The loss of, or events affecting, one or more of our large customers have had, could have and could continue to have a material adverse effect on our business, financial condition and results of operations.
*The failure to close our agreements with SunPower or to successfully integrate our products with those of SunPower could have a material adverse effect on our business, financial condition and results of operations.
On June 12, 2018, we announced that we would be entering into a Master Supply Agreement with SunPower Corporation, from whom we are purchasing certain intellectual property and other assets. Our failure to enter into the Master Supply Agreement or to successfully integrate our microinverter products and software with SunPower’s solar modules could frustrate the purposes of our acquisition of SunPower’s assets, negatively impact our revenue projections, and otherwise have a material adverse effect on our business, financial condition and results of

*The closing of the asset purchase transaction with SunPower is subject to the satisfaction of various closing conditions.

On June 12, 2018, we announced that we had entered into an Asset Purchase Agreement with SunPower to acquire its microinverter business. We expect the transaction to close during the third quarter of 2018, subject to the satisfaction or waiver of closing conditions. We cannot provide any assurance that all of the closing conditions will be satisfied or waived. The failure to satisfy some or all of the required conditions could delay the closing of the acquisition for a significant period of time or prevent it from occurring. Further, our entry into supply arrangements with SunPower pursuant to a Master Supply Agreement depends on the closing of these transactions, and a failure to complete or delay in completing the closing under the Asset Purchase Agreement would result in a failure to implement (or a delay in implementing) the Master Supply Agreement with SunPower.


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*We may fail to realize some or all of the anticipated benefits of the SunPower transaction, and the closing of the SunPower transaction will result in dilution to our shareholders and a change in the composition of our board of directors, which may result in conflicts between us and SunPower.

Our ability to realize the anticipated benefits of the SunPower transaction will depend, to a large extent, on our ability to implement the master supply arrangements with SunPower under the Master Supply Agreement and to integrate our microinverter products and software with SunPower’s solar modules. The post-closing implementation of the master supply arrangements with SunPower could be a complex and time-consuming process, and our management may face challenges in the implementation of these arrangements. Any delay, failure or breach of our master supply arrangements that will be effective with SunPower following the closing under the Master Supply Agreement could adversely impact the expected benefits of the transaction and could otherwise have a material adverse effect on our business, financial condition and results of operations. Further, SunPower’s products are also subject to the Trump administration tariffs described above, which may reduce the benefits of the transaction to us.

Additionally, in connection with the closing under the Asset Purchase Agreement with SunPower, we will issue 7,500,000 shares of our common stock to SunPower as partial consideration for the transaction, which will result in additional dilution to our shareholders. SunPower will also have the right to designate one member of our board of directors. Through its share ownership and board seat, SunPower may have the ability to directly or indirectly influence our business, and conflicts may arise between us and SunPower regarding corporate priorities and strategic objectives.

*Future acquisitions could materially and adversely affect our results of operations.

In addition to the SunPower transaction, we may in the future seek to expand our business through further acquisitions and strategic transactions. Such transactions involve a number of risks that could harm our business or result in us not achieving anticipated benefits, including issues with integrating acquired businesses, the diversion of management time and attention, failures in due diligence or in identifying financial and legal liabilities and other risks, transaction related impairments or financial charges and the assumption of liabilities. In our future transactions, we may also decide to pay all or a portion of the transaction consideration through dilutive equity issuances, and our future acquisitions may require significant reductions in our available cash or the incurrence of indebtedness, all of which could harm our operating results.
*Our gross profit may fluctuate over time, which could impair our ability to achieve or maintain profitability.
Our gross profit has varied in the past and is likely to continue to vary significantly from period to period. Our gross profit may be adversely affected by numerous factors, some of which are beyond our control, including:
changes in customer, geographic or product mix;
increased price competition, including the impact of customer and competitor discounts and rebates;
our ability to reduce and control product costs, including our ability to make product cost reductions in a timely manner to offset declines in our product prices;
warranty costs and reserves, including changes resulting from changes in estimates related to the long-term performance of our products, product replacement costs and warranty claim rates;
loss of cost savings due to changes in component or raw material pricing or charges incurred due to inventory holding periods if product demand is not correctly anticipated;
introduction of new products;
ordering patterns from our distributors;
price reductions on older products to sell remaining inventory;
component shortages and related expedited shipping costs;
our ability to reduce production costs, such as through technology innovations, in order to offset price declines in our products over time;
changes in shipment volume;
changes in distribution channels;
excess and obsolete inventory and inventory holding charges;
expediting costs incurred to meet customer delivery requirements; and
fluctuations in foreign currency exchange rates.