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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 March 31, 2020



☐	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 April 28, 2020, there were 125,211,569 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, 2020

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	3
	Condensed Consolidated Statements of Stockholders’ Equity	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	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	39

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Mine Safety Disclosures	45
Item 5.	Other Information	45
Item 6.	Exhibits	46
	Signature	49

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)



	As of
	March 31, 2020			December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	549,144		$	251,409
Restricted cash	44,700			44,700
Accounts receivable, net of allowances of $374 and $564 at March 31, 2020 and December 31, 2019, respectively	95,484			145,413
Inventory	34,617			32,056
Prepaid expenses and other assets	27,752			26,079
Total current assets	751,697			499,657
Property and equipment, net	30,500			28,936
Operating lease, right of use asset	11,986			10,117
Intangible assets, net	29,332			30,579
Goodwill	24,783			24,783
Other assets	47,798			44,620
Deferred tax assets, net	86,806			74,531
Convertible notes hedge	47,885			—
Total assets	$	1,030,787		$	713,223
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	34,538		$	57,474
Accrued liabilities	49,817			47,092
Deferred revenues, current	39,022			81,783
Warranty obligations, current (includes $6,578 and $6,794 measured at fair value at March 31, 2020 and December 31, 2019, respectively)	9,678			10,078
Debt, current	100,567			2,884
Total current liabilities	233,622			199,311
Long-term liabilities:
Deferred revenues, noncurrent	106,205			100,204
Warranty obligations, noncurrent (includes $13,847 and $13,012 measured at fair value at March 31, 2020 and December 31, 2019, respectively)	27,823			27,020
Other liabilities	13,077			11,817
Debt, noncurrent ⁽¹⁾	295,216			102,659
Warrants liability	38,637			—
Total liabilities	714,580			441,011
Commitments and contingent liabilities (Note 9)
Stockholders’ equity:
Common stock, $0.00001 par value, 150,000 shares and 150,000 shares authorized; and 125,072 shares and 123,109 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively	1			1
Additional paid-in capital	433,542			458,315
Accumulated deficit	(116,245		)	(185,181		)
Accumulated other comprehensive loss	(1,091		)	(923		)
Total stockholders’ equity	316,207			272,212
Total liabilities and stockholders’ equity	$	1,030,787		$	713,223


(1)	Debt, noncurrent balance as of March 31, 2020, includes Convertible Notes due 2025 embedded derivative balance of $45.1 million. See Note 8, “Debt,” of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for further details.

See Notes to Condensed Consolidated Financial Statements.

Enphase Energy, Inc. | 2020 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,
	2020			2019
Net revenues	$	205,545		$	100,150
Cost of revenues	124,870			66,811
Gross profit	80,675			33,339
Operating expenses:
Research and development	11,876			8,524
Sales and marketing	11,772			7,433
General and administrative	12,315			9,880
Restructuring charges	—			368
Total operating expenses	35,963			26,205
Income from operations	44,712			7,134
Other income (expense), net
Interest income	1,091			211
Interest expense	(3,155		)	(3,751		)
Other expense, net	(924		)	(481		)
Change in fair value of derivatives	15,344			—
Total other income (expense), net	12,356			(4,021		)
Income before income taxes	57,068			3,113
Income tax benefit (provision)	11,868			(348		)
Net income	$	68,936		$	2,765
Net income per share:
Basic	$	0.56		$	0.03
Diluted	$	0.50		$	0.02
Shares used in per share calculation:
Basic	123,531			108,195
Diluted	138,104			115,863

See Notes to Condensed Consolidated Financial Statements.

Enphase Energy, Inc. | 2020 Form 10-Q | 2

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ENPHASE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)
(Unaudited)



	Three Months Ended March 31,
	2020			2019
Net income	$	68,936		$	2,765
Other comprehensive loss:
Foreign currency translation adjustments	(168		)	(79		)
Comprehensive income	$	68,768		$	2,686

See Notes to Condensed Consolidated Financial Statements.

Enphase Energy, Inc. | 2020 Form 10-Q | 3

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ENPHASE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

(In thousands)
(Unaudited)



	Three Months Ended March 31,
	2020			2019
Common stock and paid-in capital
Balance, beginning of period	$	458,316		$	353,336
Cumulative-effect adjustment to additional paid in capital⁽¹⁾	—			26
Issuance of common stock from exercise of equity awards	1,979			1,664
Payment of withholding taxes related to net share settlement of equity awards	(34,267		)	(1,355		)
Stock-based compensation expense and other	7,515			3,353
Balance, end of period	$	433,543		$	357,024

Accumulated deficit
Balance, beginning of period	$	(185,181	)	$	(346,302	)
Cumulative-effect adjustment to accumulated deficit⁽¹⁾and other	—			(26		)
Net income	68,936			2,765
Balance, end of period	$	(116,245	)	$	(343,563	)

Accumulated other comprehensive income (loss)
Balance, beginning of period	$	(923	)	$	742
Foreign currency translation adjustments	(168		)	(79		)
Balance, end of period	$	(1,091	)	$	663
Total stockholders' equity, ending balance	$	316,207		$	14,124


(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.

See Notes to Condensed Consolidated Financial Statements.

Enphase Energy, Inc. | 2020 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,
	2020			2019
Cash flows from operating activities:
Net income	$	68,936		$	2,765
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	3,844			3,572
Provision for doubtful accounts	104			—
Non-cash interest expense	2,722			1,490
Financing fees on extinguishment of debt	—			2,152
Stock-based compensation	7,515			3,290
Change in fair value of derivatives	(15,344		)	—
Deferred income taxes	(12,500		)	—
Changes in operating assets and liabilities:
Accounts receivable	49,637			(3,266		)
Inventory	(2,560		)	3,296
Prepaid expenses and other assets	(5,009		)	(2,413		)
Accounts payable, accrued and other liabilities	(22,066		)	4,851
Warranty obligations	403			(252		)
Deferred revenues	(36,460		)	1,578
Net cash provided by operating activities	39,222			17,063
Cash flows from investing activities:
Purchases of property and equipment	(3,353		)	(658		)
Net cash used in investing activities	(3,353		)	(658		)
Cash flows from financing activities:
Issuance of convertible notes, net of issuance costs	313,011			—
Purchase of convertible note hedges	(89,056		)	—
Sale of warrants	71,552			—
Principal payments and financing fees on debt	(1,148		)	(44,731		)
Proceeds from exercise of equity awards and employee stock purchase plan	1,979			1,664
Payment of withholding taxes related to net share settlement of equity awards	(34,267		)	(1,355		)
Net cash provided by (used in) financing activities	262,071			(44,422		)
Effect of exchange rate changes on cash and cash equivalents	(205		)	(133		)
Net increase (decrease) in cash, cash equivalents, and restricted cash	297,735			(28,150		)
Cash, cash equivalents and restricted cash—Beginning of period	296,109			106,237
Cash, cash equivalents and restricted cash—End of period	$	593,844		$	78,087
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets
Cash and cash equivalents	549,144			78,087
Restricted cash	44,700			—
Total cash, cash equivalents, and restricted cash	$	593,844		$	78,087

Supplemental disclosures of non-cash investing and financing activities:
Purchases of fixed assets included in accounts payable	$	585		$	458
Convertible senior note issuance costs included in accounts payable and accrued expense	$	591		$	—

See Notes to Condensed Consolidated Financial Statements.

Enphase Energy, Inc. | 2020 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 manage solar generation, storage and communication 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.

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, stockholders’ equity and cash flows for the interim periods indicated. The results of operations for the three months ended March 31, 2020 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, allowance for doubtful accounts, stock-based compensation, inventory valuation, accrued warranty obligations, fair value of debt derivatives, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment, incremental borrowing rate for right-of-use assets and lease liability, legal contingencies, and tax valuation allowance. 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.

The worldwide spread of the COVID-19 pandemic is expected to result in a global slowdown of economic activity which is likely to decrease demand for a broad variety of goods and services, including from the Company’s customers, while also disrupting sales channels and marketing activities for an unknown period of time until the disease is contained. The Company expects this to have a negative impact on its sales and its results of operations. In preparing the Company’s condensed consolidated financial statements in accordance with GAAP, the Company is required to make estimates, assumptions and judgments that affect the amounts reported in its financial statements and the accompanying disclosures. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. As of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update its estimates, judgments or revise the carrying value of its assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the Company’s financial statements.

Enphase Energy, Inc. | 2020 Form 10-Q | 6

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Summary of Significant Accounting Policies

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 2019 Annual Report on Form 10-K.

Recently Adopted Accounting Pronouncements

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 adopted the new standard effective January 1, 2020 on a prospective basis and the adoption of this guidance did not have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with a current expected credit loss (CECL) model which will result in earlier recognition of credit losses. On January 1, 2020, the Company adopted Topic 326, the measurement of expected credit losses under the CECL model is applicable to financial assets measured at amortized cost, including accounts receivable. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.


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 March 31,
	2020		2019
	(In thousands)
Primary geographical markets:
United States	$	179,600	$	77,686
International	25,945		22,464
Total	$	205,545	$	100,150

Timing of revenue recognition:
Products delivered at a point in time	$	194,679	$	90,400
Products and services delivered over time	10,866		9,750
Total	$	205,545	$	100,150

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Contract Balances

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



	March 31, 2020		December 31, 2019
	(In thousands)
Receivables	$	95,484	$	145,413
Short-term contract assets (Prepaid expenses and other assets)	15,928		15,055
Long-term contract assets (Other assets)	45,361		42,087
Short-term contract liabilities (Deferred revenues)	39,022		81,783
Long-term contract liabilities (Deferred revenues)	106,205		100,204

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, 2020.

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



Contract Assets
Balance on December 31, 2019	$	57,142
Amount recognized	(4,140		)
Increase	8,287
Balance as of March 31, 2020	$	61,289

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 liabilities (deferred revenues) during the period are as follows (in thousands):



Contract Liabilities
Balance on December 31, 2019	$	181,987
Revenue recognized	(55,373		)
Increase due to billings	18,613
Balance as of March 31, 2020	$	145,227

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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:



	March 31, 2020
	(In thousands)
Fiscal year:
2020 (remaining nine months)	$	30,514
2021	33,553
2022	28,527
2023	22,743
2024	17,566
Thereafter	12,324
Total	$	145,227


3.	OTHER FINANCIAL INFORMATION

Accounts Receivable, Net

The Company receives payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional.

Accounts receivable, net consist of the following:



	March 31, 2020			December 31, 2019
	(In thousands)
Accounts receivable	$	95,858		$	145,977
Allowance for doubtful accounts	(374		)	(564		)
Accounts receivable, net	$	95,484		$	145,413

Allowance for Doubtful Accounts

The Company maintains allowances for doubtful accounts for uncollectible accounts receivable. Management estimates anticipated losses from doubtful accounts based on financial health of customers, days past due, collection history and existing economic conditions. The following table sets forth activities in the allowance for doubtful accounts for the periods indicated.



	March 31, 2020			December 31, 2019
	(In thousands)
Balance, at beginning of the period	$	564		$	2,138
Net charges to expenses	104			217
Write-offs, net of recoveries	(294		)	(1,791		)
Balance, at end of the period	$	374		$	564

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Inventory

Inventory consist of the following:



	March 31, 2020		December 31, 2019
	(In thousands)
Raw materials	$	5,018	$	4,197
Finished goods	29,599		27,859
Total inventory	$	34,617	$	32,056

Accrued Liabilities

Accrued liabilities consist of the following:



	March 31, 2020		December 31, 2019
	(In thousands)
Salaries, commissions, incentive compensation and benefits	$	9,200	$	5,524
Customer rebates and sales incentives	21,601		24,198
Freight	3,734		4,908
Operating lease liabilities, current	3,511		3,170
Other	11,771		9,292
Total accrued liabilities	$	49,817	$	47,092


4.	GOODWILL AND INTANGIBLE ASSETS

The Company’s goodwill and purchased intangible assets as of March 31, 2020 and December 31, 2019 are as follows:



	March 31, 2020							December 31, 2019
	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:
Developed technology	13,100		(3,639		)	9,461		13,100		(3,093		)	10,007
Customer relationships	23,100		(3,515		)	19,585		23,100		(2,814		)	20,286
Total purchased intangible assets	$	36,486	$	(7,154	)	$	29,332	$	36,486	$	(5,907	)	$	30,579

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	Three Months Ended March 31,
	2020		2019
	(In thousands)
Developed technology, and patents and licensed technology	$	546	$	546
Customer relationships	701		636
Total amortization expense	$	1,247	$	1,182

Amortization of developed technology, patents and licensed technology is recorded to sales and marketing expense. The developed technology acquired from the Company’s acquisition of SunPower Corporation’s (“SunPower”) microinverter business in August 2018 was embedded in the microinverters that SunPower sold 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 supply agreement (“MSA”) entered into 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 March 31,
	2020			2019
	(In thousands)
Warranty obligations, beginning of period	$	37,098		$	31,294
Accruals for warranties issued during period	1,524			858
Changes in estimates	1,677			804
Settlements	(3,270		)	(2,296		)
Increase due to accretion expense	774			551
Other	(302		)	(169		)
Warranty obligations, end of period	37,501			31,042
Less: current portion	(9,678		)	(7,925		)
Noncurrent	$	27,823		$	23,117


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.

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 assets and liabilities that were measured at fair value on a recurring basis and its categorization within the fair value hierarchy.



	March 31, 2020				December 31, 2019
	(In thousands)
	Level 2		Level 3		Level 2		Level 3
Assets:
Convertible notes hedge	$	47,885	$	—	$	—	$	—

Liabilities:

Debt, non-current
Convertible notes embedded derivative	45,100		—		—		—
Warrants liability	38,637		—		—		—

Warranty obligations
Current	—		6,578		—		6,794
Non-current	—		13,847		—		13,012
Total warranty obligations measured at fair value	—		20,425		—		19,806
Total liabilities measured at fair value	$	83,737	$	20,425	$	—	$	19,806

Enphase Energy, Inc. | 2020 Form 10-Q | 12

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Level 1. The Company's cash and cash equivalents primarily include highly liquid money market fund instruments and are within Level 1 of the fair value hierarchy because they are valued using quoted market prices for identical instruments in active markets. As of March 31, 2020, cash and cash equivalents balance includes money market funds of $542.2 million.

Level 2.

Convertible Notes due 2025 Derivatives

On March 9, 2020, the Company issued $320 million aggregate principal amount of 0.25% convertible senior notes due 2025 (the “Notes due 2025”) as further described in Note. 8 “Debt”. Concurrently with the issuance of the Notes due 2025, the Company entered into privately-negotiated convertible note hedge and warrant transactions which in combination are intended to reduce the potential dilution from the conversion of the Notes due 2025 and to effectively increase the overall conversion price from $81.54 to $106.94 per share. Initially, conversion of the Notes due 2025 will be settled solely in cash; however, following satisfaction of certain share reservation conditions (as defined in the relevant Indenture), conversion of the Notes due 2025 may be settled in cash, shares of the Company’s common stock or a combination of cash and shares of its common stock, at the Company’s election. The conversion option associated with the Notes due 2025 currently meets the criteria for an embedded derivative liability which required bifurcation and separate accounting. In addition, the privately-negotiated convertible note hedge and warrant transactions are also currently classified as a derivative asset and liability, respectively, on the Company’s condensed consolidated balance sheet. On the date the Company increases its authorized shares of common stock and satisfies the share reservation condition, the derivative asset and liabilities will be reclassified to additional paid-in capital as the equity classification criteria is met. Changes in the fair value of these derivatives prior to being classified in equity are reflected in other income (expense), net, in the Company’s condensed consolidated statement of operations.

The fair value of the Convertible notes embedded derivative is estimated using Binomial Lattice model and the fair value of Convertible notes hedge and Warrants liability is estimated using Black-Scholes-Merton model. Based on the fair value hierarchy, the Company classified the Convertible notes embedded derivative, Convertible notes hedge and Warrants liability derivatives (collectively the “derivatives”) to be Level 2 as significant inputs are observable, either directly or indirectly. The significant inputs and assumptions used in the models to calculate the fair value of the derivatives include the Company’s common stock price, exercise price of the derivatives, risk-free interest rate, volatility, annual coupon rate and remaining contractual term.

Notes due 2025 and Notes due 2024. The Company carries the Notes due 2025 and Notes due 2024 (as defined below) at face value less unamortized discount and issuance costs on its condensed consolidated balance sheets. The fair value of the Notes due 2025 and Notes due 2024 of $262.3 million and $252.9 million, respectively, was determined based on the closing trading prices per $100 principal amount as of the last day of trading for the period. The Company considers the fair value of the Notes due 2025 and Notes due 2024 to be a Level 2 measurement as they are not actively traded.

Level 3.

Warranty Obligations.

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.

Enphase Energy, Inc. | 2020 Form 10-Q | 13

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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,
	2020			2019
	(In thousands)
Balance at beginning of period	$	19,806		$	11,757
Accruals for warranties issued during period	1,524			858
Changes in estimates	615			341
Settlements	(1,993		)	(1,272		)
Increase due to accretion expense	774			551
Other	(301		)	(170		)
Balance at end of period	$	20,425		$	12,065

Quantitative and Qualitative Information about Level 3 Fair Value Measurements

As of March 31, 2020 and December 31, 2019, 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, 2020	December 31, 2019
Warranty obligations for microinverters sold since January 1, 2014	Discounted cash flows	Profit element and risk premium	15%	14%
	Discounted cash flows	Credit-adjusted risk-free rate	16%	16%

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 $0.2 million increase to the liability. Decreasing the profit element and risk premium by 100 basis points would result in a $0.2 million reduction of the liability. Increasing the discount rate by 100 basis points would result in a $0.9 million reduction of the liability. Decreasing the discount rate by 100 basis points would result in a $1.0 million increase to the liability.


7.	RESTRUCTURING

Restructuring expense consist of the following:



	Three Months Ended March 31,
	2020		2019
	(In thousands)
Redundancy and employee severance and benefit arrangements	$	—	$	468
Lease loss reserves	—		(100		)
Total restructuring charges	$	—	$	368

Enphase Energy, Inc. | 2020 Form 10-Q | 14

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 completed its restructuring activities under the 2018 Plan in 2019.


8.	DEBT

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



	March 31, 2020			December 31, 2019
	(In thousands)
Convertible notes
Notes due 2025	$	320,000		$	—
Less: unamortized discount and issuance costs	(75,450		)	—
Carrying amount of Notes due 2025	244,550			—

Notes due 2025 embedded derivative	45,100			—

Notes due 2024	132,000			132,000
Less: unamortized discount and issuance costs	(34,087		)	(35,815		)
Carrying amount of Notes due 2024	97,913			96,185

Notes due 2023	5,000			5,000
Less: unamortized issuance costs	(132		)	(143		)
Carrying amount of Notes due 2023	4,868			4,857

Sale of long-term financing receivable recorded as debt	3,352			4,501
Total carrying amount of debt	395,783			105,543
Less: current portion of convertible notes and long-term financing receivable recorded as debt	(100,567		)	(2,884		)
Long-term debt	$	295,216		$	102,659

Convertible Senior Notes due 2025

On March 9, 2020, the Company issued $320.0 million aggregate principal amount of the Notes due 2025. The Notes due 2025 are general unsecured obligations and bear interest at an annual rate of 0.25% per year, payable semi-annually on March 1 and September 1 of each year, beginning September 1, 2020. The Notes due 2025 are governed by an indenture between the Company and U.S. Bank National Association, as trustee. The Notes due 2025 will mature on March 1, 2025, 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 2025 may be converted, under certain circumstances as described below, based on an initial conversion rate of 12.2637 shares of common stock per $1,000 principal amount (which represents an initial conversion price of $81.54 per share). The conversion rate for the Notes due 2025 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 $313.0 million in net proceeds, after deducting the initial purchasers’ discount, from the issuance of the Notes due 2025.

Enphase Energy, Inc. | 2020 Form 10-Q | 15

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Notes due 2025 may be converted prior to the close of business on the business day immediately preceding September 1, 2024, in multiples of $1,000 principal amount, at the option of the holder only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2020 (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 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 September 1, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date of March 1, 2025, 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 2025 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.

As of March 31, 2020, the number of authorized and unissued shares of the Company’s common stock that are not reserved for other purposes is less than the maximum number of underlying shares that will be required to settle the Notes due 2025 into equity. Accordingly, unless and until the Company has a number of authorized shares that have not been issued or reserved for any other purpose that equals or exceeds the maximum number of underlying shares (“share reservation condition”), the Company will pay to the converting holder in respect of each $1,000 principal amount of notes being converted solely cash in an amount equal to the sum of the daily conversion values for each of the 20 consecutive trading days during the related observation period. However, following satisfaction of the share reservation condition, the Company may settle conversions of notes through payment or delivery, as the case may be, of cash, shares of the Company’s common stock or a combination of cash and shares of its common stock, at the Company’s election.

In accounting for the issuance of the Notes due 2025, on March 9, 2020, the conversion option of the Notes due 2025 was deemed an embedded derivative requiring bifurcation from the Notes due 2025 (“host contract”) and separate accounting as an embedded derivative liability, as a result of the Company not having the necessary number of authorized but unissued shares of its common stock available to settle the conversion option of the Notes due 2025 in shares. The proceeds from the Notes due 2025 are first allocated to the embedded derivative liability and the remaining proceeds are then allocated to the host contract. On March 9, 2020, the carrying amount of the embedded derivative liability of $68.7 million representing the conversion option was determined using the Binomial Lattice model and the remaining $251.3 million was allocated to the host contract. The difference between the principal amount of the Notes due 2025 and the fair value of the host contract (the “debt discount”) is amortized to interest expense using the effective interest method over the term of the Notes due 2025.

As of March 31, 2020, the embedded derivative liability is included in Debt, non-current in the condensed consolidated balance sheet and the change in fair value of derivative is included in other income (expense), net in the condensed consolidated statement of operations.

The following table presents the fair value and the change in fair value for convertible note embedded derivative (in thousands):



Convertible note embedded derivative
Fair value as of March 09, 2020	$	68,700
Change in the fair value	(23,600		)
Fair value as of March 31, 2020	$	45,100

Enphase Energy, Inc. | 2020 Form 10-Q | 16

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Debt issuance costs for the issuance of the Notes due 2025 were approximately $7.6 million, consisting of initial purchasers' discount and other issuance costs. In accounting for the transaction costs, the Company allocated the total amount incurred to the Notes due 2025 host contract. Transaction costs were recorded as debt issuance cost (presented as contra debt in the condensed consolidated balance sheet) and are being amortized to interest expense over the term of the Notes due 2025.

The following table presents the total amount of interest cost recognized relating to the Notes due 2025:



	Three Months Ended March 31, 2020
	(In thousands)
Contractual interest expense	$	49
Amortization of debt discount	743
Amortization of debt issuance costs	87
Total interest cost recognized	$	879

The derived effective interest rate on the Notes due 2025 host contract was determined to be 5.18%, which remain unchanged from the date of issuance. The remaining unamortized debt discount was $68.0 million as of March 31, 2020, will be amortized over approximately 4.9 years.

Notes due 2025 Hedge and Warrant Transactions

In connection with the offering of the Notes due 2025, the Company entered into privately-negotiated convertible note hedge transactions pursuant to which the Company has the option to purchase a total of approximately 3.9 million shares of its common stock (subject to anti-dilution adjustments), which is the same number of shares initially issuable upon conversion of the notes, at a price of $81.54 per share, which is the initial conversion price of the Notes due 2025. The total cost of the convertible note hedge transactions was approximately $89.1 million. The convertible note hedge transactions are expected generally to reduce potential dilution to the Company’s common stock upon any conversion of the Notes due 2025 and/or offset any cash payments the Company is required to make in excess of the principal amount of converted notes, as the case may be. As of March 31, 2020, the Company had not purchased any shares under the convertible note hedge transactions.

Additionally, the Company separately entered into privately-negotiated warrant transactions (the “Warrants”) whereby the Company sold warrants to acquire approximately 3.9 million shares of the Company’s common stock (subject to anti-dilution adjustments) at an initial strike price of $106.94 per share. The Company received aggregate proceeds of approximately $71.6 million from the sale of the Warrants. If the market value per share of the Company’s common stock, as measured under the Warrants, exceeds the strike price of the Warrants, the Warrants will have a dilutive effect on the Company’s earnings per share, unless the Company elects, subject to certain conditions, to settle the Warrants in cash. Taken together, the purchase of the convertible note hedges and the sale of the Warrants are intended to reduce potential dilution from the conversion of the Notes due 2025 and to effectively increase the overall conversion price from $81.54 to $106.94 per share. The Warrants are only exercisable on the applicable expiration dates in accordance with the agreements relating to each of the Warrants. Subject to the other terms of the Warrants, the first expiration date applicable to the Warrants is June 1, 2025, and the final expiration date applicable to the Warrants is September 23, 2025. As of March 31, 2020, the Warrants had not been exercised and remained outstanding.

For the period from March 9, 2020, the issuance date of the convertible notes hedge and warrant transactions, through March 31, 2020, the number of authorized and unissued shares of the Company’s common stock that are not reserved for other purposes is less than the maximum number of underlying shares that will be required to settle the Notes due 2025 through the delivery of shares of the Company’s common stock. Accordingly, the convertibles note hedge transactions and the warrants may only be settled on net cash settlement basis. As a result the convertible note hedge transactions and the warrants have been classified as a Convertible notes hedge asset and Warrants liability, respectively, in the condensed consolidated balance sheet and the change in fair value of derivative is included in other income (expense), net in the condensed consolidated statement of operations.

Enphase Energy, Inc. | 2020 Form 10-Q | 17

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the fair value and the change in fair value for Convertible notes hedge and Warrants liability (in thousands):



	Convertible notes hedge			Warrants liability
	(In thousands)
Fair value as of March 09, 2020	$	89,056		$	71,552
Change in the fair value	(41,171		)	(32,915		)
Fair value as of March 31, 2020	$	47,885		$	38,637

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 only 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.

As of March 31, 2020, the sale price of the Company’s common stock was greater than or equal to $26.6513 (130% of the notes conversion price) for at least 20 trading days (whether consecutive or not) during a period of 30 consecutive trading days preceding the quarter-ended March 31, 2020. As a result, as of March 31, 2020, the Notes due 2024 became convertible at the holders’ option beginning on April 1, 2020 and ending June 30, 2020. Accordingly, the Company classified the net carrying amount of the Notes due 2024 of $97.9 million as Debt, current on the condensed consolidated balance sheet as of March 31, 2020.

Enphase Energy, Inc. | 2020 Form 10-Q | 18

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

The Company separated the Notes due 2024 into liability and equity components, this resulted in a tax basis difference associated with the liability component that represents a temporary difference. The Company recognized the deferred taxes of $0.3 million for the tax effect of that temporary difference as an adjustment to the equity component included in additional paid-in capital in the condensed consolidated balance sheet.

Debt issuance costs for the issuance of the Notes due 2024 were approximately $4.6 million, consisting of initial purchasers' discount and other issuance costs. In accounting for the transaction costs, the Company allocated the total amount incurred to the liability and equity components using the same proportions as the proceeds from the Notes due 2024. Transaction costs attributable to the liability component were approximately $3.3 million, were recorded as debt issuance cost (presented as contra debt in the condensed consolidated balance sheet) and are being amortized to interest expense over the term of the Notes due 2024. The transaction costs attributable to the equity component were approximately $1.3 million and were netted with the equity component in stockholders’ equity. As of March 31, 2020 and December 31, 2019, the unamortized deferred issuance cost for the Notes due 2024 was $2.8 million and $2.9 million, respectively, on the condensed consolidated balance sheets.

The following table presents the total amount of interest cost recognized relating to the Notes due 2024:



	Three Months Ended March 31, 2020
	(In thousands)
Contractual interest expense	$	330
Amortization of debt discount	1,562
Amortization of debt issuance costs	166
Total interest cost recognized	$	2,058

The effective interest rate on the liability component Notes due 2024 was 7.75% for the three months ended March 31, 2020, which remains unchanged from the date of issuance. The remaining unamortized debt discount was $31.3 million and $32.9 million as of March 31, 2020 and December 31, 2019, respectively, will be amortized over approximately 4.2 years from March 31, 2020.

Notes due 2024 Hedge and Warrant Transactions

In connection with the offering of the Notes due 2024, the Company entered into privately-negotiated convertible note hedge transactions pursuant to which the Company has the option to purchase a total of approximately 6.4 million shares of its common stock (subject to anti-dilution adjustments), which is the same number of shares initially issuable upon conversion of the notes, at a price of $20.5010 per share, which is the initial conversion price of the Notes due 2024. The total cost of the convertible note hedge transactions was approximately $36.3 million. The convertible note hedge transactions are expected generally to reduce potential dilution to the Company’s common stock upon any conversion of the Notes due 2024 and/or offset any cash payments the Company is required to make in excess of the principal amount of converted notes, as the case may be. As of March 31, 2020, and through the date of this quarterly report, the Company had not purchased any shares under the convertible note hedge transactions.

Enphase Energy, Inc. | 2020 Form 10-Q | 19

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Additionally, the Company separately entered into privately-negotiated warrant transactions (the “Warrants”) whereby the Company sold warrants to acquire approximately 6.4 million shares of the Company’s common stock (subject to anti-dilution adjustments) at an initial strike price of $25.2320 per share. The Company received aggregate proceeds of approximately $29.8 million from the sale of the Warrants. If the market value per share of the Company’s common stock, as measured under the Warrants, exceeds the strike price of the Warrants, the Warrants will have a dilutive effect on the Company’s earnings per share, unless the Company elects, subject to certain conditions, to settle the Warrants in cash. Taken together, the purchase of the convertible note hedges and the sale of the Warrants are intended to reduce potential dilution from the conversion of the Notes due 2024 and to effectively increase the overall conversion price from $20.5010 to $25.2320 per share. The Warrants are only exercisable on the applicable expiration dates in accordance with the Warrants. Subject to the other terms of the Warrants, the first expiration date applicable to the Warrants is September 1, 2024, and the final expiration date applicable to the Warrants is April 22, 2025. As of March 31, 2020, and through the report date, the Warrants had not been exercised and remained outstanding.

Given that the transactions meet certain accounting criteria, the Notes due 2024 hedge and the warrants transactions are recorded in stockholders’ equity, and they are not accounted for as derivatives and are not remeasured each reporting period.

Convertible Senior Notes due 2023

In August 2018, the Company sold $65.0 million aggregate principal amount of 4.0% convertible senior notes due 2023 (the “Notes due 2023”) in a private placement. On May 30, 2019, the Company entered into separately and privately negotiated transactions with certain holders of the Notes due 2023 resulting in the repurchase and exchange, as of June 5, 2019, of $60.0 million aggregate principal amount of the notes in consideration for the issuance of 10,801,080 shares of common stock and separate cash payments totaling $6.0 million. As of both March 31, 2020 and December 31, 2019, $5.0 million aggregate principal amount of the Notes due 2023 remain outstanding.

The remaining outstanding Notes due 2023 are general unsecured obligations and bear interest at a rate of 4.0% per year, payable semi-annually on February 1 and August 1 of each year. The Notes due 2023 are governed by an indenture between the Company and U.S. Bank National Association, as trustee. The remaining outstanding Notes due 2023 will mature on August 1, 2023, unless earlier repurchased by the Company or converted at the option of the holders. The Company may not redeem the remaining Notes due 2023 prior to the maturity date, and no sinking fund is provided for such notes. The remaining Notes due 2023 are convertible, at a holder’s election, in multiples of $1,000 principal amount, into shares of the Company’s common stock based on the applicable conversion rate. The initial conversion rate for such notes is 180.0180 shares of common stock per $1,000 principal amount of notes (which is equivalent to an initial conversion price of approximately $5.56 per share). The conversion rate and the corresponding conversion price are subject to adjustment upon the occurrence of certain events but will not be adjusted for any accrued and unpaid interest. Holders of the remaining Notes due 2023 who convert their notes in connection with a make-whole fundamental change (as defined in the applicable indenture) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a fundamental change, holders of the remaining Notes due 2023 may require the Company to repurchase all or a portion of their notes at a price equal to 100% of the principal amount of notes, plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchase date. Holders may convert all or any portion of their Notes due 2023 at their option at any time prior to the close of business on the business day immediately preceding the maturity date, in multiples of $1,000 principal amount.

The following table presents the amount of interest cost recognized relating to the contractual interest coupon and the amortization of debt issuance costs of the Notes due 2023.



	Three Months Ended March 31,
	2020		2019
	(In thousands)
Contractual interest expense	$	50	$	650
Amortization of debt issuance costs	10		129
Total interest costs recognized	$	60	$	779

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 was relieved in January 2019 as the underlying receivables were settled. During the year ended December 31, 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 condensed consolidated balance sheets, and the total associated debt balance will be relieved by September 2021 as the underlying receivables are settled.


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 components of lease expense are presented as follows:



	Three Months Ended March 31,
	2020		2019
	(In thousands)
Operating lease costs	$	1,222	$	499

The components of lease liabilities are presented as follows:



	March 31, 2020		December 31, 2019
	(In thousands)
Operating lease liabilities, current (Accrued liabilities)	$	3,511	$	3,170
Operating lease liabilities, noncurrent (Other liabilities)	10,972		9,542
Total operating lease liabilities	$	14,483	$	12,712

Supplemental lease information:
Weighted average remaining lease term	5.6 years		5.5 years
Weighted average discount rate	8.3%		8.6%

Supplemental cash flow and other information related to operating leases, are as follows:



	Three Months Ended March 31,
	2020		2019
	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,014	$	737

Non-cash investing activities:
Lease liabilities arising from obtaining right-of-use assets	$	2,941	$	—

Enphase Energy, Inc. | 2020 Form 10-Q | 21

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Undiscounted cash flows of operating lease liabilities as of March 31, 2020 are as follows:



	Lease Amounts
	(In thousands)
Year:
2020 (remaining nine months)	$	3,432
2021	4,651
2022	3,337
2023	2,619
2024	1,415
2025 and thereafter	1,902
Total lease payments	17,356
Less: imputed lease interest	(2,873		)