SEC Filing | Enphase Energy

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 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, including zip code)

(707) 774-7000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.00001 par value per share	ENPH	NASDAQ Global Market

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 ☒ 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 ☒ 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	☐	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 ☒

As of July 23, 2019, there were 121,974,905 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 JUNE 30, 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	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	37
	Signature	38

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, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	205,959		$	106,237
Accounts receivable, net	97,537			78,938
Inventory	20,094			16,267
Prepaid expenses and other assets	26,261			20,860
Total current assets	349,851			222,302
Property and equipment, net	21,532			20,998
Operating lease, right of use asset	12,304			—
Intangible assets, net	32,943			35,306
Goodwill	24,783			24,783
Other assets	40,105			36,548
Total assets	$	481,518		$	339,937
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	65,989		$	48,794
Accrued liabilities	33,536			29,010
Deferred revenues, current	33,577			33,119
Warranty obligations, current	7,468			8,083
Debt, current	3,043			28,155
Total current liabilities	143,613			147,161
Long-term liabilities:
Deferred revenues, noncurrent	82,288			76,911
Warranty obligations, noncurrent	25,526			23,211
Other liabilities	12,930			3,250
Debt, noncurrent	99,890			81,628
Total liabilities	364,247			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 121,950 shares and 107,035 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively	1			1
Additional paid-in capital	449,802			353,335
Accumulated deficit	(332,946		)	(346,302		)
Accumulated other comprehensive income	414			742
Total stockholders’ equity	117,271			7,776
Total liabilities and stockholders’ equity	$	481,518		$	339,937

See Notes to Condensed Consolidated Financial Statements.

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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,
	2019			2018			2019			2018
Net revenues	$	134,094		$	75,896		$	234,244		$	145,868
Cost of revenues	88,775			53,195			155,586			104,851
Gross profit	45,319			22,701			78,658			41,017
Operating expenses:
Research and development	9,604			9,462			18,128			17,082
Sales and marketing	9,054			6,828			16,487			13,055
General and administrative	8,583			6,969			18,463			13,913
Restructuring charges	631			—			999			—
Total operating expenses	27,872			23,259			54,077			44,050
Income (loss) from operations	17,447			(558		)	24,581			(3,033		)
Other expense, net
Interest income	593			154			804			247
Interest expense	(1,351		)	(2,423		)	(5,102		)	(4,809		)
Other expense, net	(5,480		)	(572		)	(5,961		)	(698		)
Total other expense, net	(6,238		)	(2,841		)	(10,259		)	(5,260		)
Income (loss) before income taxes	11,209			(3,399		)	14,322			(8,293		)
Provision for income taxes	(591		)	(339		)	(939		)	(573		)
Net income (loss)	$	10,618		$	(3,738	)	$	13,383		$	(8,866	)
Net income (loss) per share:
Basic	$	0.09		$	(0.04	)	$	0.12		$	(0.09	)
Diluted	$	0.08		$	(0.04	)	$	0.11		$	(0.09	)
Shares used in per share calculation:
Basic	113,677			97,321			110,951			94,026
Diluted	130,737			97,321			129,400			94,026

See Notes to Condensed Consolidated Financial Statements.

Enphase Energy, Inc. | Q2 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 June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net income (loss)	$	10,618		$	(3,738	)	$	13,383		$	(8,866	)
Other comprehensive income (loss):
Foreign currency translation adjustments	(249		)	15			(328		)	303
Comprehensive income (loss)	$	10,369		$	(3,723	)	$	13,055		$	(8,563	)

See Notes to Condensed Consolidated Financial Statements.

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ENPHASE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY (DEFICIT)

(In thousands)
(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Common stock and paid-in capital
Balance, beginning of period	$	357,024		$	309,020		$	353,336		$	287,257
Cumulative-effect adjustment to additional paid in capital⁽¹⁾and other	1			—			27			—
Common stock issued under equity incentive and stock purchase plans, net	223			1,254			532			1,523
Conversion of convertible notes due 2023, net	58,857			—			58,857			—
Equity component of convertible notes due 2024, net	35,089			—			35,089			—
Cost of convertible notes hedge related to the convertible notes due 2024	(36,313		)	—			(36,313		)	—
Sale of warrants related to the convertible notes due 2024	29,818			—			29,818			—
Issuance of common stock, net	—			(152		)	—			19,771
Stock-based compensation expense and other	5,104			3,657			8,457			5,228
Balance, end of period	$	449,803		$	313,779		$	449,803		$	313,779

Retained earnings
Balance, beginning of period	$	(343,563	)	$	(339,803	)	$	(346,302	)	$	(295,727	)
Cumulative-effect adjustment to accumulated deficit⁽¹⁾ and other	(1		)	—			(27		)	(38,948		)
Net income (loss)	10,618			(3,738		)	13,383			(8,866		)
Balance, end of period	$	(332,946	)	$	(343,541	)	$	(332,946	)	$	(343,541	)

Accumulated other comprehensive income (loss)
Balance, beginning of period	$	663		$	(368	)	$	742		$	(656	)
Foreign currency translation adjustments	(249		)	15			(328		)	303
Balance, end of period	$	414		$	(353	)	$	414		$	(353	)
Total stockholders' equity (deficit), ending balance	$	117,271		$	(30,115	)	$	117,271		$	(30,115	)


(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.

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ENPHASE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)



	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities:
Net income (loss)	$	13,383		$	(8,866	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	7,694			4,469
Provision for doubtful accounts	207			753
Non-cash interest expense	2,266			1,133
Financing fees on extinguishment of debt	2,152			—
Fees paid for repurchase and exchange of convertible notes due 2023	6,000			—
Stock-based compensation	8,224			5,860
Changes in operating assets and liabilities:
Accounts receivable	(19,104		)	5,897
Inventory	(3,827		)	8,528
Prepaid expenses and other assets	(9,568		)	(1,551		)
Accounts payable, accrued and other liabilities	16,805			(3,817		)
Warranty obligations	1,699			1,826
Deferred revenues	5,904			(6,791		)
Net cash provided by operating activities	31,835			7,441
Cash flows from investing activities:
Purchases of property and equipment	(3,176		)	(1,475		)
Net cash used in investing activities	(3,176		)	(1,475		)
Cash flows from financing activities:
Issuance of convertible notes due 2024, net of issuance costs	128,040			—
Purchase of convertible note hedges	(36,313		)	—
Sale of warrants	29,819			—
Fees paid for repurchase and exchange of convertible notes due 2023	(6,000		)	—
Principal payments and financing fees on debt	(45,122		)	(3,129		)
Proceeds from issuance of common stock, net of issuance costs	—			19,923
Proceeds from debt, net of issuance costs	—			5,580
Proceeds from issuance of common stock under employee stock plans, net	532			1,370
Net cash provided by financing activities	70,956			23,744
Effect of exchange rate changes on cash	107			(383		)
Net increase in cash and cash equivalents	99,722			29,327
Cash and cash equivalents—Beginning of period	106,237			29,144
Cash and cash equivalents—End of period	$	205,959		$	58,471
Supplemental disclosures of non-cash investing and financing activities:
Purchases of fixed assets included in accounts payable	$	1,194		$	112
Accrued interest payable unpaid upon exchange of convertible notes due 2023	$	833		$	—

See Notes to Condensed Consolidated Financial Statements.

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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 the solar industry 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 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2019 (“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 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), stockholders’ equity (deficit) and cash flows for the interim periods indicated. The results of operations for the three and six months ended June 30, 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, accrued warranty obligations, and incremental borrowing rate for right-of-use assets and lease liability. 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.

Summary of Significant Accounting Policies

Except for the accounting policies for leases, updated as a result of adopting new accounting standard related to leases, there have been no significant changes to the Company’s significant accounting policies in Note 2. “Summary of Significant Accounting Policies,” of the notes to consolidated financial statements included in Item 8 of the Company’s Form 10-K.

Leases

The Company determines if an arrangement is or contains a lease at inception. Operating lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments over the lease term.

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Operating lease assets and liabilities are recognized based on the present value of the remaining lease payments discounted using the Company’s incremental borrowing rate. Operating lease assets also include initial direct costs incurred and prepaid lease payments, minus any lease incentives. The Company’s lease terms include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense is recognized on a straight-line basis over the lease term.

The Company combines the lease and non-lease components in determining the operating lease assets and liabilities.

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 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 using the 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. Disaggregated revenue by primary geographical market and timing of revenue recognition for the Company’s single product line are as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(In thousands)
Primary geographical markets:
United States	$	99,909	$	50,258	$	177,595	$	93,388
International	34,185		25,638		56,649		52,480
Total	$	134,094	$	75,896	$	234,244	$	145,868

Timing of revenue recognition:
Products delivered at a point in time	$	124,336	$	65,937	$	214,736	$	125,308
Products and services delivered over time	9,758		9,959		19,508		20,560
Total	$	134,094	$	75,896	$	234,244	$	145,868

Contract Balances

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



	June 30, 2019		December 31, 2018
	(In thousands)
Receivables	$	97,537	$	78,938
Short-term contract assets (Prepaid expenses and other assets)	13,900		13,516
Long-term contract assets (Other assets)	36,418		34,148
Short-term contract liabilities (Deferred revenues)	33,577		33,119
Long-term contract liabilities (Deferred revenues)	82,288		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 and six months ended June 30, 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	(7,283		)
Increase	9,937
Balance as of June 30, 2019	$	50,318

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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	(19,508		)
Increase due to billings	25,343
Balance as of June 30, 2019	$	115,865

Remaining Performance Obligations

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 are as follows:



	June 30, 2019
	(In thousands)
Fiscal year:
2019 (remaining six months)	$	18,305
2020	29,968
2021	23,773
2022	18,741
2023	12,948
Thereafter	12,130
Total	$	115,865


3.	OTHER FINANCIAL INFORMATION

Accounts Receivable, Net

Accounts receivable, net consist of the following:



	June 30, 2019			December 31, 2018
	(In thousands)
Accounts receivable	$	99,881		$	81,076
Allowance for doubtful accounts	(2,344		)	(2,138		)
Accounts receivable, net	$	97,537		$	78,938

Inventory

Inventory consist of the following:



	June 30, 2019		December 31, 2018
	(In thousands)
Raw materials	$	1,090	$	970
Finished goods	19,004		15,297
Total inventory	$	20,094	$	16,267

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Accrued Liabilities

Accrued liabilities consist of the following:



	June 30, 2019		December 31, 2018
	(In thousands)
Salaries, commissions, incentive compensation and benefits	$	4,559	$	4,107
Customer rebates and sales incentives	10,243		8,527
Freight	9,371		7,286
Other	9,363		9,090
Total accrued liabilities	$	33,536	$	29,010


4.	GOODWILL AND INTANGIBLE ASSETS

The Company’s goodwill and purchased intangible assets as of June 30, 2019 and December 31, 2018 are as follows:



	June 30, 2019							December 31, 2018
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
	(In thousands)
Goodwill	$	24,783	$	—		$	24,783	$	24,783	$	—		$	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		(2,000		)	11,100		13,100		(909		)	12,191
Customer relationships	23,100		(1,543		)	21,557		23,100		(271		)	22,829
Total purchased intangible assets	$	38,151	$	(5,208	)	$	32,943	$	38,151	$	(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 Form 10-K for additional information related to this acquisition.

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(In thousands)
Developed technology, and patents and licensed technology	$	546	$	76	$	1,092	$	152
Customer relationships	635		—		1,271		—
Total amortization expense	$	1,181	$	76	$	2,363	$	152

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 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.


5.	WARRANTY OBLIGATIONS

The Company’s warranty activities were as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(In thousands)
Warranty obligations, beginning of period	$	31,042		$	30,625		$	31,294		$	29,816
Accruals for warranties issued during period	1,312			775			2,170			1,533
Changes in estimates	699			1,378			1,503			2,828
Settlements	(2,206		)	(2,099		)	(4,502		)	(3,775		)
Increase due to accretion expense	550			520			1,101			939
Other	1,597			443			1,428			301
Warranty obligations, end of period	32,994			31,642			32,994			31,642
Less: current portion	(7,468		)	(8,275		)	(7,468		)	(8,275		)
Noncurrent	$	25,526		$	23,367		$	25,526		$	23,367


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.

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


•	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	June 30, 2019		December 31, 2018
		(In thousands)
Warranty obligations
Current		$	4,298	$	4,288
Non-current		10,558		7,469
Total warranty obligations measured at fair value	Level 3	$	14,856	$	11,757

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 June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(In thousands)
Balance at beginning of period	$	12,065		$	11,720		$	11,757		$	9,791
Accruals for warranties issued during period	1,312			775			2,170			1,533
Changes in estimates	519			210			860			1,995
Settlements	(1,188		)	(831		)	(2,460		)	(1,722		)
Increase due to accretion expense	550			520			1,101			939
Other	1,598			443			1,428			301
Balance at end of period	$	14,856		$	12,837		$	14,856		$	12,837

Quantitative and Qualitative Information about Level 3 Fair Value Measurements

As of June 30, 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	June 30, 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	15%	19%

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 $0.7 million reduction of the liability. Decreasing the discount rate by 100 basis points would result in a $0.8 million increase to the liability.


7.	RESTRUCTURING

Restructuring expense consist of the following:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019			2018
	(In thousands)
Redundancy and employee severance and benefit arrangements	$	631	$	—	$	1,099		$	—
Lease loss reserves	—		—		(100		)	—
Total restructuring charges	$	631	$	—	$	999		$	—

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	1,099			—			1,099
Cash payments	(1,350		)	—			(1,350		)
Non-cash settlement and other	(395		)	(288		)	(683		)
Balance as of June 30, 2019	$	258		$	—		$	258

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 completed its restructuring activities under the 2016 Plan in 2017.

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 June 30, 2019	$	—


(1)	Adoption of ASU 2016-02.


8.	DEBT

The following table provides information regarding the Company’s long-term debt.



	June 30, 2019			December 31, 2018
	(In thousands)
Convertible notes
Notes due 2024	$	132,000		$	—
Less: unamortized discount and issuance costs	(39,138		)	—
Carrying amount of Notes due 2024	92,862			—

Notes due 2023	5,000			65,000
Less: unamortized issuance costs	(162		)	(2,361		)
Carrying amount of Notes due 2023	4,838			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	5,233			6,679
Total carrying amount of debt	102,933			109,783
Less: current portion term loan	—			(25,417		)
Less: current portion of long-term financing receivable recorded as debt	(3,043		)	(2,738		)
Long-term debt	$	99,890		$	81,628

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Convertible Senior Notes due 2024

On June 5, 2019, the Company issued $132.0 million aggregate principal amount of 1.0% convertible senior notes due 2024 (the “Notes due 2024”). The Notes due 2024 are general unsecured obligations and bear interest at an annual rate of 1.0% per year, payable semi-annually on June 1 and December 1 of each year, beginning December 1, 2019. The Notes due 2024 are governed by an indenture between the Company and U.S. Bank National Association, as trustee. The Notes due 2024 will mature on June 1, 2024, unless earlier repurchased by the Company or converted at the option of the holders. The Company may not redeem the notes prior to the maturity date, and no sinking fund is provided for the notes. The Notes due 2024 may be converted, under certain circumstances as described below, based on an initial conversion rate of 48.7781 shares of common stock per $1,000 principal amount (which represents an initial conversion price of $20.5010 per share). The conversion rate for the Notes due 2024 will be subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest. In addition, upon the occurrence of a make-whole fundamental change (as defined in the relevant indenture), the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its notes in connection with such make-whole fundamental change. The Company received approximately $128.0 million in net proceeds, after deducting the initial purchasers’ discount, from the issuance of the Notes due 2024.

The Notes due 2024 may be converted on any day prior to the close of business on the business day immediately preceding December 1, 2023, in multiples of $1,000 principal amount, at the option of the holder under any of the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2019 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to $26.6513 (130% of the conversion price) on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in the relevant indenture) per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On and after December 1, 2023 until the close of business on the second scheduled trading day immediately preceding the maturity date of June 1, 2024, holders may convert their notes at any time, regardless of the foregoing circumstances. Upon the occurrence of a fundamental change (as defined in the relevant indenture), holders may require the Company to repurchase all or a portion of their Notes due 2024 for cash at a price equal to 100% of the principal amount of the notes to be repurchased plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

Upon conversion of any of the notes, the Company will pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and common stock, at the Company’s election.

In accounting for the issuance of the Notes due 2024, on June 5, 2019, the Company separated the Notes due 2024 into liability and equity components. The carrying amount of the liability component of approximately $95.6 million was calculated by using a discount rate of 7.75%, which was the Company’s borrowing rate on the date of the issuance of the notes for a similar debt instrument without the conversion feature. The carrying amount of the equity component of approximately $36.4 million, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the Notes due 2024. The equity component of the Notes due 2024 is included in additional paid-in capital in the condensed consolidated balance sheet and is not remeasured as long as it continues to meet the conditions for equity classification. The difference between the principal amount of the Notes due 2024 and the liability component (the “debt discount”) is amortized to interest expense using the effective interest method over the term of the Notes due 2024.

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