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, 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 July 28, 2020, there were 126,007,389 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, 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	40
Item 4.	Controls and Procedures	42

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	48
Item 4.	Mine Safety Disclosures	48
Item 5.	Other Information	48
Item 6.	Exhibits	49
	Signature	50

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
	June 30, 2020			December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	607,254		$	251,409
Restricted cash	—			44,700
Accounts receivable, net of allowances of $296 and $564 at June 30, 2020 and December 31, 2019, respectively	89,504			145,413
Inventory	31,186			32,056
Prepaid expenses and other assets	29,257			26,079
Total current assets	757,201			499,657
Property and equipment, net	32,972			28,936
Operating lease, right of use asset	11,462			10,117
Intangible assets, net	28,086			30,579
Goodwill	24,783			24,783
Other assets	49,551			44,620
Deferred tax assets, net	93,872			74,531
Total assets	$	997,927		$	713,223
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	24,135		$	57,474
Accrued liabilities	46,691			47,092
Deferred revenues, current	40,256			81,783
Warranty obligations, current (includes $6,917 and $6,794 measured at fair value at June 30, 2020 and December 31, 2019, respectively)	10,170			10,078
Debt, current	102,271			2,884
Total current liabilities	223,523			199,311
Long-term liabilities:
Deferred revenues, noncurrent	110,977			100,204
Warranty obligations, noncurrent (includes $14,215 and $13,012 measured at fair value at June 30, 2020 and December 31, 2019, respectively)	27,737			27,020
Other liabilities	12,340			11,817
Debt, noncurrent	253,174			102,659
Total liabilities	627,751			441,011
Commitments and contingencies (Note 9)
Stockholders’ equity:
Common stock, $0.00001 par value, 200,000 shares and 150,000 shares authorized; and 125,979 shares and 123,109 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively	1			1
Additional paid-in capital	534,867			458,315
Accumulated deficit	(163,539		)	(185,181		)
Accumulated other comprehensive loss	(1,153		)	(923		)
Total stockholders’ equity	370,176			272,212
Total liabilities and stockholders’ equity	$	997,927		$	713,223

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 June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net revenues	$	125,538		$	134,094		$	331,083		$	234,244
Cost of revenues	77,151			88,775			202,021			155,586
Gross profit	48,387			45,319			129,062			78,658
Operating expenses:
Research and development	13,192			9,604			25,068			18,128
Sales and marketing	12,371			9,054			24,143			16,487
General and administrative	11,970			8,583			24,285			18,463
Restructuring charges	—			631			—			999
Total operating expenses	37,533			27,872			73,496			54,077
Income from operations	10,854			17,447			55,566			24,581
Other expense, net
Interest income	282			593			1,373			804
Interest expense	(5,952		)	(1,351		)	(9,107		)	(5,102		)
Other (expense) income, net	653			(5,480		)	(271		)	(5,961		)
Change in fair value of derivatives	(59,692		)	—			(44,348		)	—
Total other expense, net	(64,709		)	(6,238		)	(52,353		)	(10,259		)
Income (loss) before income taxes	(53,855		)	11,209			3,213			14,322
Income tax benefit (provision)	6,561			(591		)	18,429			(939		)
Net income (loss)	$	(47,294	)	$	10,618		$	21,642		$	13,383
Net income (loss) per share:
Basic	$	(0.38	)	$	0.09		$	0.17		$	0.12
Diluted	$	(0.38	)	$	0.08		$	0.16		$	0.11
Shares used in per share calculation:
Basic	125,603			113,677			124,567			110,951
Diluted	125,603			130,737			138,910			129,400

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 (LOSS)

(In thousands)
(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net income (loss)	$	(47,294	)	$	10,618		$	21,642		$	13,383
Other comprehensive loss:
Foreign currency translation adjustments	(62		)	(249		)	(230		)	(328		)
Comprehensive income (loss)	$	(47,356	)	$	10,369		$	21,412		$	13,055

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 June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Common stock and paid-in capital
Balance, beginning of period	$	433,543		$	357,024		$	458,316		$	353,336
Cumulative-effect adjustment to additional paid in capital⁽¹⁾	—			1			—			27
Issuance of common stock from exercise of equity awards	2,867			958			4,846			2,622
Payment of withholding taxes related to net share settlement of equity awards	(9,385		)	(735		)	(43,652		)	(2,090		)
Conversion of convertible notes due 2023, net	—			58,857			—			58,857
Equity component of convertible notes	116,300			35,089			116,300			35,089
Cost of convertible notes hedge related to the convertible notes	(117,108		)	(36,313		)	(117,108		)	(36,313		)
Sale of warrants related to the convertible notes	96,351			29,818			96,351			29,818
Stock-based compensation expense and other	12,300			5,104			19,815			8,457
Balance, end of period	$	534,868		$	449,803		$	534,868		$	449,803

Accumulated deficit
Balance, beginning of period	$	(116,245	)	$	(343,563	)	$	(185,181	)	$	(346,302	)
Cumulative-effect adjustment to accumulated deficit⁽¹⁾and other	—			(1		)	—			(27		)
Net income (loss)	(47,294		)	10,618			21,642			13,383
Balance, end of period	$	(163,539	)	$	(332,946	)	$	(163,539	)	$	(332,946	)

Accumulated other comprehensive income (loss)
Balance, beginning of period	$	(1,091	)	$	663		$	(923	)	$	742
Foreign currency translation adjustments	(62		)	(249		)	(230		)	(328		)
Balance, end of period	$	(1,153	)	$	414		$	(1,153	)	$	414
Total stockholders' equity, ending balance	$	370,176		$	117,271		$	370,176		$	117,271


(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)



	Six Months Ended June 30,
	2020			2019
Cash flows from operating activities:
Net income	$	21,642		$	13,383
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	7,985			7,694
Provision for doubtful accounts	185			207
Non-cash interest expense	8,094			2,266
Financing fees on extinguishment of debt	—			2,152
Fees paid for repurchase and exchange of convertible notes due 2023	—			6,000
Stock-based compensation	19,815			8,224
Change in fair value of derivatives	44,348			—
Deferred income taxes	(19,567		)	—
Changes in operating assets and liabilities:
Accounts receivable	56,166			(19,104		)
Inventory	870			(3,827		)
Prepaid expenses and other assets	(9,534		)	(9,568		)
Accounts payable, accrued and other liabilities	(35,389		)	16,805
Warranty obligations	809			1,699
Deferred revenues	(30,771		)	5,904
Net cash provided by operating activities	64,653			31,835
Cash flows from investing activities:
Purchases of property and equipment	(7,804		)	(3,176		)
Net cash used in investing activities	(7,804		)	(3,176		)
Cash flows from financing activities:
Issuance of convertible notes, net of issuance costs	312,420			128,040
Purchase of convertible note hedges	(89,056		)	(36,313		)
Sale of warrants	71,552			29,819
Fees paid for repurchase and exchange of convertible notes due 2023	—			(6,000		)
Principal payments and financing fees on debt	(1,633		)	(45,122		)
Proceeds from exercise of equity awards and employee stock purchase plan	4,846			2,622
Payment of withholding taxes related to net share settlement of equity awards	(43,652		)	(2,090		)
Net cash provided by financing activities	254,477			70,956
Effect of exchange rate changes on cash and cash equivalents	(181		)	107
Net increase in cash and cash equivalents	311,145			99,722
Cash, cash equivalents and restricted cash—Beginning of period	296,109			106,237
Cash and cash equivalents—End of period	$	607,254		$	205,959

Supplemental disclosures of non-cash investing and financing activities:
Purchases of fixed assets included in accounts payable	$	1,636		$	1,194
Accrued interest payable unpaid upon exchange of convertible notes due 2023	$	—		$	833

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 (loss), stockholders’ equity and cash flows for the interim periods indicated. The results of operations for the three and six months ended June 30, 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 virus has resulted in a global slowdown of economic activity which decreased demand for a broad variety of goods and services, including from our customers, while also disrupting sales channels and marketing activities for an unknown period of time and may continue to create significant uncertainty in future operational and financial performance. The Company expects this to result in 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 on a prospective basis 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 June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	(In thousands)
Primary geographical markets:
United States	$	100,791	$	99,909	$	280,391	$	177,595
International	24,747		34,185		50,692		56,649
Total	$	125,538	$	134,094	$	331,083	$	234,244

Timing of revenue recognition:
Products delivered at a point in time	$	114,299	$	124,336	$	308,978	$	214,736
Products and services delivered over time	11,239		9,758		22,105		19,508
Total	$	125,538	$	134,094	$	331,083	$	234,244

Enphase Energy, Inc. | 2020 Form 10-Q | 7

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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:



	June 30, 2020		December 31, 2019
	(In thousands)
Receivables	$	89,504	$	145,413
Short-term contract assets (Prepaid expenses and other assets)	16,416		15,055
Long-term contract assets (Other assets)	46,960		42,087
Short-term contract liabilities (Deferred revenues)	40,256		81,783
Long-term contract liabilities (Deferred revenues)	110,977		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 and six months ended June 30, 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	(8,439		)
Increase	14,673
Balance as of June 30, 2020	$	63,376

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	(66,841		)
Increase due to billings	36,087
Balance as of June 30, 2020	$	151,233

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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:



	June 30, 2020
	(In thousands)
Fiscal year:
2020 (remaining six months)	$	21,679
2021	36,389
2022	31,357
2023	25,564
2024	20,373
Thereafter	15,871
Total	$	151,233


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:



	June 30, 2020			December 31, 2019
	(In thousands)
Accounts receivable	$	89,800		$	145,977
Allowance for doubtful accounts	(296		)	(564		)
Accounts receivable, net	$	89,504		$	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.



	Three Months Ended June 30,			Six Months Ended June 30,
	2020
	(In thousands)
Balance, at beginning of the period	$	374		$	564
Net charges to expenses	81			185
Write-offs, net of recoveries	(159		)	(453		)
Balance, at end of the period	$	296		$	296

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Inventory

Inventory consist of the following:



	June 30, 2020		December 31, 2019
	(In thousands)
Raw materials	$	5,800	$	4,197
Finished goods	25,386		27,859
Total inventory	$	31,186	$	32,056

Accrued Liabilities

Accrued liabilities consist of the following:



	June 30, 2020		December 31, 2019
	(In thousands)
Salaries, commissions, incentive compensation and benefits	$	3,607	$	5,524
Customer rebates and sales incentives	20,741		24,198
Freight	2,640		4,908
Operating lease liabilities, current	3,570		3,170
Other	16,133		9,292
Total accrued liabilities	$	46,691	$	47,092


4.	GOODWILL AND INTANGIBLE ASSETS

The Company’s goodwill and purchased intangible assets as of June 30, 2020 and December 31, 2019 are as follows:



	June 30, 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		(4,185		)	8,915		13,100		(3,093		)	10,007
Customer relationships	23,100		(4,215		)	18,885		23,100		(2,814		)	20,286
Total purchased intangible assets	$	36,486	$	(8,400	)	$	28,086	$	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 June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	(In thousands)
Developed technology, and patents and licensed technology	$	546	$	546	$	1,092	$	1,092
Customer relationships	700		635		1,401		1,271
Total amortization expense	$	1,246	$	1,181	$	2,493	$	2,363

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 June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	(In thousands)
Warranty obligations, beginning of period	$	37,501		$	31,042		$	37,098		$	31,294
Accruals for warranties issued during period	766			1,312			2,290			2,170
Changes in estimates	1,748			699			3,425			1,503
Settlements	(2,578		)	(2,206		)	(5,848		)	(4,502		)
Increase due to accretion expense	804			550			1,578			1,101
Other	(334		)	1,597			(636		)	1,428
Warranty obligations, end of period	37,907			32,994			37,907			32,994
Less: current portion	(10,170		)	(7,468		)	(10,170		)	(7,468		)
Noncurrent	$	27,737		$	25,526		$	27,737		$	25,526

Changes in Estimates

For the three and six months ended June 30, 2020, the Company recorded additional warranty expense of $1.7 million and $3.4 million, respectively, based on continuing analysis of field performance data and diagnostic root-cause failure analysis primarily relating to its prior generation products.

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


6.	FAIR VALUE MEASUREMENTS

The accounting guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:


•	Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of such assets or liabilities do not entail a significant degree of judgment.


•	Level 2—Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.


•	Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

Level 1. The Company considers all highly liquid investments, such as certificates of deposit and money market instruments with maturities of three months or less at the time of acquisition to be cash equivalents. For all periods presented, its cash balances consist of amounts held in non-interest-bearing and interest-bearing deposits and money market accounts 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 June 30, 2020, cash and cash equivalents balance includes money market funds of $598.5 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”). Concurrently with the issuance of 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. On May 20, 2020, at the Company’s annual meeting of stockholders, the stockholders approved an amendment to its certificate of incorporation to increase the number of authorized shares of the Company’s common stock. As a result, the Company satisfied the share reservation condition (as defined in the relevant indenture associated with the Notes due 2025). The Company will now be able to settle the Notes due 2025, convertible notes hedge and warrants through payment or delivery, as the case may be, of cash, shares of its common stock or a combination thereof, at the Company’s election. Accordingly, on May 20, 2020, the embedded derivative liability, convertible notes hedge and warrants liability were remeasured at a fair value of $116.3 million, $117.1 million and $96.4 million, respectively, and were then reclassified to additional paid-in-capital in the condensed consolidated balance sheet in the second quarter of 2020 and are no longer remeasured as long as they continue to meet the conditions for equity classification. See Note 8. “Debt” for additional information related to these transactions.

The fair value of the Convertible notes embedded derivative was estimated using Binomial Lattice model and the fair value of Convertible notes hedge and Warrants liability was estimated using Black-Scholes-Merton model. The significant observable inputs, either directly or indirectly, 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.

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 $288.9 million and $350.5 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.

The following table presents the Company’s warranty obligation that were measured at fair value on a recurring basis and its categorization within the fair value hierarchy.



	June 30, 2020		December 31, 2019
	(In thousands)
	Level 3		Level 3
Liabilities:
Warranty obligations
Current	$	6,917	$	6,794
Non-current	14,215		13,012
Total warranty obligations measured at fair value	21,132		19,806
Total liabilities measured at fair value	$	21,132	$	19,806

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,
	2020			2019			2020			2019
	(In thousands)
Balance at beginning of period	$	20,425		$	12,065		$	19,806		$	11,757
Accruals for warranties issued during period	766			1,312			2,290			2,170
Changes in estimates	983			519			1,598			860
Settlements	(1,511		)	(1,188		)	(3,504		)	(2,460		)
Increase due to accretion expense	804			550			1,578			1,101
Other	(335		)	1,598			(636		)	1,428
Balance at end of period	$	21,132		$	14,856		$	21,132		$	14,856

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Quantitative and Qualitative Information about Level 3 Fair Value Measurements

As of June 30, 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	June 30, 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 June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	(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 completed its restructuring activities under the 2018 Plan in 2019.

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


8.	DEBT

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



	June 30, 2020			December 31, 2019
	(In thousands)
Convertible notes
Notes due 2025	$	320,000		$	—
Less: unamortized discount and issuance costs	(72,000		)	—
Carrying amount of Notes due 2025	248,000			—

Notes due 2024	132,000			132,000
Less: unamortized discount and issuance costs	(32,301		)	(35,815		)
Carrying amount of Notes due 2024	99,699			96,185

Notes due 2023	5,000			5,000
Less: unamortized issuance costs	(122		)	(143		)
Carrying amount of Notes due 2023	4,878			4,857

Sale of long-term financing receivable recorded as debt	2,868			4,501
Total carrying amount of debt	355,445			105,543
Less: current portion of convertible notes and long-term financing receivable recorded as debt	(102,271		)