SEC Filing | Enphase Energy

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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 March 31, 2019



¨	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		20-4645388
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

47281 Bayside Parkway Fremont, CA		94538
(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 every Interactive Data File required to be submitted 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 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	x
Non-accelerated filer	¨	Smaller reporting company	¨
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 April 23, 2019, there were 110,226,728 shares of the registrant’s common stock outstanding, $0.00001 par value per share.

ENPHASE ENERGY, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019

TABLE OF CONTENTS



		Page
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Comprehensive Income (Loss)	3
	Condensed Consolidated Statements of Stockholders’ Equity (Deficit)	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	29
	Signature	30

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)



	March 31, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	78,087		$	106,237
Accounts receivable, net	81,715			78,938
Inventory	12,971			16,267
Prepaid expenses and other assets	22,669			20,860
Total current assets	195,442			222,302
Property and equipment, net	20,178			20,998
Operating lease, right of use asset	7,963			—
Intangible assets, net	34,124			35,306
Goodwill	24,783			24,783
Other assets	36,762			36,548
Total assets	$	319,252		$	339,937
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	52,489		$	48,794
Accrued liabilities	32,431			29,010
Deferred revenues, current	32,916			33,119
Warranty obligations	7,925			8,083
Debt, current	2,985			28,155
Total current liabilities	128,746			147,161
Long-term liabilities:
Deferred revenues, noncurrent	78,393			76,911
Warranty obligations, noncurrent	23,117			23,211
Other liabilities	9,466			3,250
Debt, noncurrent	65,406			81,628
Total liabilities	305,128			332,161
Commitments and contingent liabilities (Note 9)
Stockholders’ equity:
Preferred stock, $0.00001 par value, 10,000 shares authorized; none issued and outstanding	—			—
Common stock, $0.00001 par value, 150,000 shares and 150,000 shares authorized; and 110,211 shares and 107,035 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively	1			1
Additional paid-in capital	357,023			353,335
Accumulated deficit	(343,563		)	(346,302		)
Accumulated other comprehensive income	663			742
Total stockholders’ equity	14,124			7,776
Total liabilities and stockholders’ equity	$	319,252		$	339,937

See Notes to Condensed Consolidated Financial Statements.

Enphase Energy, Inc. | Q1 2019 Form 10-Q | 1

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ENPHASE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)
(Unaudited)



	Three Months Ended March 31,
	2019			2018
Net revenues	$	100,150		$	69,972
Cost of revenues	66,811			51,657
Gross profit	33,339			18,315
Operating expenses:
Research and development	8,524			7,620
Sales and marketing	7,433			6,227
General and administrative	9,880			6,943
Restructuring charges	368			—
Total operating expenses	26,205			20,790
Income (loss) from operations	7,134			(2,475		)
Other expense, net
Interest expense	(3,540		)	(2,292		)
Other expense	(481		)	(126		)
Total other expense, net	(4,021		)	(2,418		)
Income (loss) before income taxes	3,113			(4,893		)
Provision for income taxes	(348		)	(235		)
Net income (loss)	$	2,765		$	(5,128	)
Net income (loss) per share:
Basic	$	0.03		$	(0.06	)
Diluted	$	0.02		$	(0.06	)
Shares used in per share calculation:
Basic	108,195			91,422
Diluted	115,863			91,422

See Notes to Condensed Consolidated Financial Statements.

Enphase Energy, Inc. | Q1 2019 Form 10-Q | 2

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ENPHASE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)
(Unaudited)



	Three Months Ended March 31,
	2019			2018
Net income (loss)	$	2,765		$	(5,128	)
Other comprehensive (loss) income:
Foreign currency translation adjustments	(79		)	288
Comprehensive income (loss)	$	2,686		$	(4,840	)

See Notes to Condensed Consolidated Financial Statements.

Enphase Energy, Inc. | Q1 2019 Form 10-Q | 3

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ENPHASE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY (DEFICIT)

(In thousands)
(Unaudited)



	Three Months Ended March 31,
	2019			2018
Common stock and paid-in capital
Balance, beginning of period	$	353,336		$	287,257
Cumulative-effect adjustment to additional paid in capital ⁽¹⁾	26			—
Common stock issued under equity incentive and stock purchase plans, net	309			269
Issuance of common stock, net	—			19,923
Stock-based compensation expense and other	3,353			1,571
Balance, end of period	$	357,024		$	309,020

Retained earnings
Balance, beginning of period	$	(346,302	)	$	(295,727	)
Cumulative-effect adjustment to accumulated deficit ⁽¹⁾	(26		)	(38,948		)
Net income (loss)	2,765			(5,128		)
Balance, end of period	$	(343,563	)	$	(339,803	)

Accumulated other comprehensive income (loss)
Balance, beginning of period	$	742		$	(656	)
Foreign currency translation adjustments	(79		)	288
Balance, end of period	$	663		$	(368	)
Total stockholders’ equity, ending balance	$	14,124		$	(31,151	)


(1)	Includes the adoption of Accounting Standards Update (“ASU”) 2018-07, “Compensation - Stock Compensation: Improvements to Non-employee Share-Based Payment Accounting” on January 1, 2019 and the adoption of Accounting Standards Codification (“ASC”) No. 606, “Revenue Recognition” on January 1, 2018.

See Notes to Condensed Consolidated Financial Statements.

Enphase Energy, Inc. | Q1 2019 Form 10-Q | 4

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ENPHASE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)



	Three Months Ended March 31,
	2019			2018
Cash flows from operating activities:
Net income (loss)	$	2,765		$	(5,128	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	3,572			2,276
Provision for doubtful accounts	—			600
Amortization of debt issuance costs	1,490			537
Financing fees on extinguishment of debt	2,152			—
Stock-based compensation	3,290			1,571
Changes in operating assets and liabilities:
Accounts receivable	(3,266		)	9,125
Inventory	3,296			7,457
Prepaid expenses and other assets	(2,413		)	(1,039		)
Accounts payable, accrued and other liabilities	4,851			(11,667		)
Warranty obligations	(252		)	809
Deferred revenues	1,578			(1,180		)
Net cash provided by operating activities	17,063			3,361
Cash flows from investing activities:
Purchases of property and equipment	(658		)	(1,043		)
Net cash used in investing activities	(658		)	(1,043		)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs	—			19,923
Proceeds from debt, net of issuance costs	—			2,309
Principal payments and financing fees on debt	(44,731		)	(771		)
Proceeds from issuance of common stock under employee stock plans, net	309			269
Net cash provided by (used in) financing activities	(44,422		)	21,730
Effect of exchange rate changes on cash	(133		)	63
Net increase (decrease) in cash and cash equivalents	(28,150		)	24,111
Cash and cash equivalents—Beginning of period	106,237			29,144
Cash and cash equivalents—End of period	$	78,087		$	53,255
Supplemental disclosures of non-cash investing and financing activities:
Purchases of fixed assets included in accounts payable	$	458		$	117
Operating lease, right of use asset	$	8,392		$	—

See Notes to Condensed Consolidated Financial Statements.

Enphase Energy, Inc. | Q1 2019 Form 10-Q | 5

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1.	DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

Enphase Energy, Inc. (the “Company”) is a global energy technology company. The Company delivers smart, easy-to-use solutions that connect solar generation, storage and management on one intelligent platform. The Company revolutionized solar with its microinverter technology and produces a fully-integrated solar plus storage solution.

Basis of Presentation and Consolidation

The accompanying condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States (“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. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the U.S. The Company filed audited consolidated financial statements, which included all information and notes necessary for such a complete presentation in conjunction with its 2018 Annual Report on Form 10-K.

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 income (loss) and cash flows for the interim periods indicated. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the operating results for the full year.

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.

Enphase Energy, Inc. | Q1 2019 Form 10-Q | 6

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842).” ASU 2016-02 requires an entity to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. The guidance requires lessees to recognize all leases, with certain exceptions, on their balance sheets, whether operating or financing, while continuing to recognize the expenses on their income statements in a manner similar to current practice. The guidance states that a lessee must recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. On January 1, 2019, the Company adopted ASU 2016-02 using the modified retrospective transition option of applying the new standard at the adoption date for all leases with terms greater than 12 months. The Company elected certain practical expedients upon adoption and as such did not reassess the following: 1) whether any expired or existing contracts are or contain leases; 2) lease classification for any expired or existing leases; 3) initial direct costs for any expired or existing leases; 4) whether existing or expired land easements are or contain leases; and 5) regarding the lease term, from a hindsight perspective, whether or not the Company is reasonably certain to exercise the lease options. However, the Company will evaluate new or modified land easements under the new guidance after the commencement date. The Company also elected the practical expedient to not separate lease and non-lease components. The adoption of ASU 2016-02 on January 1, 2019 resulted in an increase in operating leases, right of use asset of $8.4 million, an increase in other liabilities of $6.8 million, an increase in accrued liabilities and other of $1.5 million and a decrease in other assets of $0.1 million on the Company’s consolidated balance sheets with no impact on the Company’s consolidated statements of operations.

In June 2018, the FASB issued ASU 2018-07, “Compensation - Stock Compensation: Improvements to Non-employee Share-Based Payment Accounting.” ASU 2018-07 was issued to provide to provide guidance on share-based payments granted to non-employees in exchange for goods or services used or consumed in an entity’s own operations and supersedes the guidance in ASC 505-50, “Equity-Based Payments to Non-Employees.” ASU 2018-07 aligns much of the guidance on measuring and classifying non-employee awards with that of awards to employees. The Company adopted ASU 2018-07 on January 1, 2019 a modified retrospective basis. The adopted standard did not have a material impact on the consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Effective

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” to reduce diversity in practice in accounting for the costs of implementing cloud computing arrangements that are service contracts. ASU 2018-15 allows entities to apply the guidance in the ASC 350-40, “Intangibles–Goodwill and Other–Internal-Use Software,” to determine which implementation costs are eligible to be capitalized as assets in a cloud computing arrangement that is considered a service contract. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. Entities have the option to apply the guidance prospectively to all implementation costs incurred after the date of adoption or retrospectively and are required to make certain disclosures in the interim and annual period of adoption. The Company is currently evaluating the impact this update will have on its consolidated financial statements.

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


2.	REVENUE RECOGNITION

Disaggregated Revenue

The Company has one business activity, which is the design, manufacture and sale of solutions for the solar photovoltaic (“PV”) 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:



	Three Months Ended March 31,
	2019		2018
	(In thousands)
Primary geographical markets:
United States	$	77,686	$	43,130
International	22,464		26,842
Total	$	100,150	$	69,972

Timing of revenue recognition:
Products delivered at a point in time	$	90,400	$	59,371
Products and services delivered over time	9,750		10,601
Total	$	100,150	$	69,972

Contract Balances

Receivables, and contract assets and contract liabilities from contracts with customers are as follows:



	March 31, 2019		December 31, 2018
	(In thousands)
Receivables	$	81,715	$	78,938
Short-term contract assets (Prepaid expenses and other assets)	13,595		13,516
Long-term contract assets (Other assets)	34,683		34,148
Short-term contract liabilities (Deferred revenues)	32,916		33,119
Long-term contract liabilities (Deferred revenues)	78,393		76,911

The Company receives payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. 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 three months ended March 31, 2019. 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.

Significant changes in the balances of contract assets (prepaid expenses and other assets) and contract liabilities (deferred revenues) during the period are as follows (in thousands):



Contract Assets
Balance on December 31, 2018	$	47,664
Amount recognized	(3,594		)
Increase	4,208
Balance as of March 31, 2019	$	48,278

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Contract Liabilities
Balance on December 31, 2018	$	110,030
Revenue recognized	(9,750		)
Increase due to billings	11,029
Balance as of March 31, 2019	$	111,309

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.



	March 31, 2019
	(In thousands)
Fiscal year:
2019 (remaining nine months)	$	26,092
2020	27,797
2021	21,626
2022	16,594
2023	10,801
Thereafter	8,399
Total	$	111,309

Enphase Energy, Inc. | Q1 2019 Form 10-Q | 9

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


3.	OTHER FINANCIAL INFORMATION

Accounts Receivable, Net

Accounts receivable, net consist of the following:



	March 31, 2019			December 31, 2018
	(In thousands)
Accounts receivable	$	83,855		$	81,076
Allowance for doubtful accounts	(2,140		)	(2,138		)
Accounts receivable, net	$	81,715		$	78,938

Inventory

Inventory consist of the following:



	March 31, 2019		December 31, 2018
	(In thousands)
Raw materials	$	950	$	970
Finished goods	12,021		15,297
Total inventory	$	12,971	$	16,267

Accrued Liabilities

Accrued liabilities consist of the following:



	March 31, 2019		December 31, 2018
	(In thousands)
Salaries, commissions, incentive compensation and benefits	$	6,442	$	4,107
Customer rebates and sales incentives	8,769		8,527
Freight	7,599		7,286
Other	9,621		9,090
Total accrued liabilities	$	32,431	$	29,010

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


4.	GOODWILL AND INTANGIBLE ASSETS

The following table presents the details of the Company’s goodwill and purchased intangible assets:



	March 31, 2019							December 31, 2018
	Gross		Accumulated Amortization			Net		Gross		Additions		Accumulated Amortization			Net
	(In thousands)
Goodwill	$	24,783	$	—		$	24,783	$	3,664	$	21,119	$	—		$	24,783

Intangible assets:
Other indefinite-lived intangibles	$	286	$	—		$	286	$	286	$	—	$	—		$	286
Intangible assets with finite lives:
Patents and licensed technology	1,665		(1,665		)	—		1,665		—		(1,665		)	—
Developed technology	13,100		(1,455		)	11,645		—		13,100		(909		)	12,191
Customer relationships	23,100		(907		)	22,193		—		23,100		(271		)	22,829
Total purchased intangible assets	$	38,151	$	(4,027	)	$	34,124	$	1,951	$	36,200	$	(2,845	)	$	35,306

In August 2018, the Company acquired certain finite-lived intangible assets in its acquisition of SunPower Corporation’s (“SunPower”) microinverter business pursuant to an Asset Purchase Agreement (“APA”), primarily developed technology and customer relationships. See Note 20. “Acquisition,” of the notes to consolidated financial statements included in Item 8 of the Company’s 2018 Form 10‑K filed with the SEC on March 15, 2019 for additional information related to this acquisition.

Amortization expense related to finite-lived intangible assets are as follows:



	Three Months Ended March 31,
	2019		2018
	(In thousands)
Developed technology, and patents and licensed technology	$	546	$	76
Customer relationships	636		—
Total amortization expense	$	1,182	$	76

Amortization of developed technology, patents and licensed technology is primarily recorded to sales and marketing expense. The developed technology acquired from the Company’s acquisition of SunPower’s microinverter business is embedded in the microinverters that SunPower sells to its customers. The Company does not actively use the developed technology acquired from SunPower and holds the developed technology to prevent others from using it. Accordingly, the Company accounts for the developed technology as a defensive intangible asset and amortizes the associated value over a period of six years from the date of acquisition.

The master service agreement (“MSA”) negotiated with SunPower in August 2018 provides the Company with the exclusive right to supply SunPower with module level power electronics for a period of five years, with options for renewals. The exclusivity arrangement extends throughout the term of the MSA, which comprises all of the expected cash flows from the customer relationship intangible asset, and was a condition to, and was an essential part of the acquisition of the SunPower’s microinverter business by the Company. As the fair value ascribed to the customer relationship intangible asset represents payments to a customer, the Company amortizes the value of the customer relationship intangible asset as a reduction to revenue using a pattern of economic benefit method over a useful life of nine years.

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


5.	WARRANTY OBLIGATIONS

The Company’s warranty activities were as follows:



	Three Months Ended March 31,
	2019			2018
	(In thousands)
Warranty obligations, beginning of period	$	31,294		$	29,816
Accruals for warranties issued during period	858			758
Changes in estimates	804			1,450
Settlements	(2,296		)	(1,676		)
Increase due to accretion expense	551			419
Other	(169		)	(142		)
Warranty obligations, end of period	31,042			30,625
Less current portion	(7,925		)	(7,699		)
Noncurrent	$	23,117		$	22,926


6.	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:



	Fair Value Hierarchy	March 31, 2019		December 31, 2018
		(In thousands)
Warranty obligations
Current		$	4,237	$	4,288
Non-current		7,828		7,469
Total warranty obligations	Level 3	$	12,065	$	11,757

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Fair Value Option for Warranty Obligations Related to Microinverters Sold Since January 1, 2014

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:



	Three Months Ended March 31,
	2019			2018
	(In thousands)
Balance at beginning of period	$	11,757		$	9,791
Accruals for warranties issued during period	858			758
Changes in estimates	341			1,785
Settlements	(1,272		)	(891		)
Increase due to accretion expense	551			419
Other	(170		)	(142		)
Balance at end of period	$	12,065		$	11,720

Quantitative and Qualitative Information about Level 3 Fair Value Measurements

As of March 31, 2019 and December 31, 2018, the significant unobservable inputs used in the fair value measurement of the Company’s liabilities designated as Level 3 are as follows:



			Percent Used (Weighted Average)
Item Measured at Fair Value	Valuation Technique	Description of Significant Unobservable Input	March 31, 2019	December 31, 2018
Warranty obligations for microinverters sold since January 1, 2014	Discounted cash flows	Profit element and risk premium	14%	16%
	Discounted cash flows	Credit-adjusted risk-free rate	18%	19%

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 the profit element and risk premium input by 100 basis points would result in a $0.1 million increase to the liability. Decreasing the profit element and risk premium by 100 basis points would result in a $0.1 million reduction of the liability. Increasing the discount rate by 100 basis points would result in a $0.5 million reduction of the liability. Decreasing the discount rate by 100 basis points would result in a $0.5 million increase to the liability.

Enphase Energy, Inc. | Q1 2019 Form 10-Q | 13

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


7.	RESTRUCTURING

Restructuring expense consist of the following:



	Three Months Ended March 31,
	2019			2018
	(In thousands)
Redundancy and employee severance and benefit arrangements	$	468		$	—
Lease loss reserves	(100		)	—
Total restructuring charges	$	368		$	—

2018 Plan

In the third quarter of 2018, the Company began implementing restructuring actions (the “2018 Plan”) to lower its operating expenses. The restructuring actions include reorganization of the Company’s global workforce, elimination of certain non-core projects and consolidation of facilities. The Company expects to complete this restructuring in 2019.

The following table provides information regarding changes in the Company’s 2018 Plan accrued restructuring balance for the periods indicated:



	Redundancy and Employee Severance and Benefits			Lease Loss Reserves and Contractual Obligations			Total
	(In thousands)
Balance as of December 31, 2018	$	904		$	288		$	1,192
Charges	468			—			468
Cash payments	(752		)	—			(752		)
Non-cash settlement and other	(55		)	(288		)	(343		)
Balance as of March 31, 2019	$	565		$	—		$	565

2016 Plan

In the third quarter of 2016, the Company began implementing restructuring actions (the “2016 Plan”) 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 under the 2016 Plan in 2017.

The following table provides information regarding changes in the Company’s 2016 Plan accrued restructuring balance for the periods indicated:



	Lease Loss Reserves and Contractual Obligations
	(In thousands)
Balance as of December 31, 2018	$	1,591
Other ⁽¹⁾	(1,591		)
Balance as of March 31, 2019	$	—


(1)	Adoption of ASU 2016-02.

Enphase Energy, Inc. | Q1 2019 Form 10-Q | 14

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


8.	DEBT

Long-term debt was comprised of the following:



	March 31, 2019			December 31, 2018
	(In thousands)
Convertible notes due 2023	$	65,000		$	65,000
Less unamortized issuance costs	(2,232		)	(2,361		)
Carrying amount of convertible notes due 2023	62,768			62,639

Term loan	—			41,524
Less unamortized discount and issuance costs	—			(1,059		)
Carrying amount of term loan	—			40,465

Sale of long-term financing receivable recorded as debt	5,623			6,679
Less value of future purchase option	—			—
Carrying amount of sale of long-term financing receivable recorded as debt	5,623			6,679
Total carrying amount of debt	68,391			109,783
Less current portion term loan	—			(25,417		)
Less current portion of long-term financing receivable recorded as debt	(2,985		)	(2,738		)
Long-term debt	$	65,406		$	81,628

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. 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 provided 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”).

On January 28, 2019, the Company repaid in full the remaining principal amount of the Term Loans of approximately $39.5 million plus accrued interest and fees.

Enphase Energy, Inc. | Q1 2019 Form 10-Q | 15

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


9.	COMMITMENTS AND CONTINGENT LIABILITIES

Operating Leases

The Company leases office facilities under noncancelable operating leases that expire on various dates through 2028, some of which may include options to extend the leases for up to 12 years.

The terms of the lease agreements generally provide for rental payments on a graduated basis, and certain leases require the Company to pay its portion of executory costs such as taxes, insurance, and operating expenses. The Company recognizes rent expense on a straight-line basis over the lease term.

The components of lease expense are presented as follows:



	Three Months Ended March 31, 2019
	(In thousands)
Operating lease cost	$	499

The components of lease liabilities are presented as follows:



	March 31, 2019
	(In thousands)
Lease liabilities, current (Accrued liabilities)	$	2,181
Lease liabilities, non-current (Other liabilities)	7,837
Total lease liabilities	$	10,018



Supplemental lease information
Weighted average remaining lease term	4.4 years
Weighted average discount rate	9.2%

Other information related to operating leases, are as follows:



	Three Months Ended March 31, 2019
	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities	$	737

Maturities of lease liabilities as of March 31, 2019 are as follows:



	Lease Amounts
	(In thousands)
Year:
2019 (remaining nine months)	$	2,248
2020	3,071
2021	3,155
2022	1,717
2023	893
Thereafter	1,227
Total	12,311
Less imputed lease interest	(2,293		)
Total lease liabilities	$	10,018

Enphase Energy, Inc. | Q1 2019 Form 10-Q | 16

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Litigation

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; however, the Company may 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 effect on its business, results of operations, financial position or cash flows.


10.	STOCK-BASED COMPENSATION

Stock-based Compensation Expense

Stock-based compensation expense for all stock-based awards expected to vest is measured at fair value on the date of 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:



	Three Months Ended March 31,
	2019		2018
	(In thousands)
Cost of revenues	$	231	$	198
Research and development	716		618
Sales and marketing	999		361
General and administrative	1,288		394
Restructuring	55		—
Total	$	3,289	$	1,571

The following table summarizes the various types of stock-based compensation expense for the periods presented:



	Three Months Ended March 31,
	2019		2018
	(In thousands)
Stock options, RSUs, and PSUs	$	3,222	$	1,317
Employee stock purchase plan	67		254
Total	$	3,289	$	1,571

As of March 31, 2019, there was approximately $30.3 million of total unrecognized stock-based compensation expense related to unvested equity awards expected to be recognized over a weighted-average period of 2.1 years.

No income tax benefit has been recognized relating to stock-based compensation expense and no tax benefits have been realized from exercised stock options for the three months ended March 31, 2019.

Enphase Energy, Inc. | Q1 2019 Form 10-Q | 17

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Valuation of Equity Awards

Stock Options

The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

•

Expected term—The expected term of the option awards represents the period of time between the grant date of the option awards and the date the option awards are either exercised, converted or canceled, including an estimate for those option awards still outstanding. The Company used the simplified method, as permitted by the SEC for companies with a limited history of stock option exercise activity, to determine the expected term for its option grants.


•	Expected volatility—The expected volatility was calculated based on the Company’s historical stock prices, supplemented as necessary with historical volatility of the common stock of several peer companies with characteristics similar to those of the Company.


•	Risk-free interest rate—The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant and with a maturity that approximated the Company’s expected term.


•	Dividend yield—The dividend yield was based on the Company’s dividend history and the anticipated dividend payout over its expected term.

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 March 31,
	2019	2018
Weighted average grant date fair value	**	$	1.83
Expected term (in years)	**	4.2
Expected volatility	**	86.4		%
Annual risk-free rate of return	**	2.4		%
Dividend yield	**	—		%


**	No stock options were granted during the period.

Restricted Stock Units

The fair value of the Company’s restricted stock units (“RSU”) awards granted is based upon the closing price of the Company’s stock price on the date of grant.

Performance Stock Units

The fair value of the Company’s non-market performance stock units (“PSU”) awards granted was based upon the closing price of the Company’s stock price on the date of grant. The fair value of awards of the Company’s PSU 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.

Enphase Energy, Inc. | Q1 2019 Form 10-Q | 18

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Equity Awards Activity

Stock Options

The following is a summary of stock option activity:



	Number of Shares Outstanding		Weighted- Average Exercise Price per Share		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value ⁽¹⁾
	(In thousands)				(Years)	(In thousands)
Outstanding at December 31, 2018	6,772		$	1.76
Granted	—		—
Exercised	(1,573	)	1.06			$	10,715
Canceled	(55	)	5.55
Outstanding at March 31, 2019	5,144		1.94		4.8	$	37,671
Vested and expected to vest at March 31, 2019	5,144		1.94		4.8	$	37,671
Exercisable at March 31, 2019	3,318		2.20		4.6	$	23,471

(1)

The intrinsic value of options exercised is based upon the value of the Company’s stock at exercise. The intrinsic value of options outstanding, vested and expected to vest, and exercisable as of March 31, 2019 is based on the closing price of the Company’s stock fair value on March 31, 2019 or the earlier of the last trading day prior to March 31, 2019, if March 31, 2019 is a non-trading day. The Company’s stock fair value used in this computation was $9.23 per share.

The following table summarizes information about stock options outstanding at March 31, 2019:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Shares	Weighted- Average Remaining Life	Weighted- Average Exercise Price		Number of Shares	Weighted- Average Exercise Price
	(In thousands)	(Years)			(In thousands)
$0.27 —– $1.14	1,061	5.6	$	0.83	703	$	0.79
$1.29 —– $1.29	1,000	5.5	1.29		375	1.29
$1.31 —– $1.31	1,752	5.0	1.31		1,230	1.31
$1.37 —– $6.98	1,034	3.9	2.90		713	3.03
$7.01 —– $12.57	297	2.2	8.40		297	8.40
Total	5,144	4.8	1.94		3,318	2.20

Enphase Energy, Inc. | Q1 2019 Form 10-Q | 19

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Restricted Stock Units

The following is a summary of RSU activity:



	Number of Shares Outstanding		Weighted- Average Fair Value per Share at Grant Date		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value ⁽¹⁾
	(In thousands)				(Years)	(In thousands)
Outstanding at December 31, 2018	4,352		$	3.52
Granted	1,114		8.12
Vested	(716	)	3.70			$	6,255
Canceled	(216	)	2.02
Outstanding at March 31, 2019	4,534		4.70		1.5	$	41,845
Expected to vest at March 31, 2019	4,532		4.70		1.5	$	41,835

(1)

The intrinsic value of RSUs vested is based upon the value of the Company’s stock when vested. The intrinsic value of RSUs outstanding and expected to vest as of March 31, 2019 is based on the closing price of the Company’s stock on March 31, 2019 or the earlier of the last trading day prior to March 31, 2019, if March 31, 2019 is a non-trading day. The Company’s stock fair value used in this computation was $9.23 per share.

Performance Stock Units

The following is a summary of PSU activity:



	Number of Shares Outstanding		Weighted- Average Fair Value per Share at Grant Date		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value ⁽¹⁾
	(In thousands)				(Years)	(In thousands)
Outstanding at December 31, 2018	1,330		$	4.66
Granted	1,046		9.40
Vested	(1,026	)	4.63			$	9,925
Canceled	(337	)	4.78
Outstanding at March 31, 2019	1,013		8.64		1.0	$	9,349
Expected to vest at March 31, 2019	1,013		8.64		1.0	$	9,349

(1)

The intrinsic value of PSUs vested is based upon the value of the Company’s stock when vested. The intrinsic value of PSUs outstanding and expected to vest as of March 31, 2019 is based on the closing price of the Company’s stock on March 31, 2019 or the earlier of the last trading day prior to March 31, 2019, if March 31, 2019 is a non-trading day. The Company’s stock fair value used in this computation was $9.23 per share.


11.	INCOME TAXES

The Company used the discrete tax approach in calculating the tax expense for the three months ended March 31, 2019 and 2018 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.

Enphase Energy, Inc. | Q1 2019 Form 10-Q | 20

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


12.	NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (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 stock options, RSUs, PSUs, shares to be purchased under the Company’s employee stock purchase program (“ESPP”), and the convertible notes. 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 income (loss) per share.

The following table presents the computation of basic and diluted net income (loss) per share for the periods presented:



	Three Months Ended March 31,
	2019		2018
	(In thousands, except per share data)
Numerator:
Net income (loss)	$	2,765	$	(5,128	)

Denominator:
Weighted average common shares outstanding	108,195		91,422
Effect of dilutive securities
Employee stock-based awards	7,668		—
Weighted average common shares outstanding for diluted calculation	115,863		91,422