ENPHASE ENERGY, INC. Forward-Looking Statements The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements reflecting our current expectations and involves risks and uncertainties. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend," "potential" or "continue" or the negative of these terms or other comparable terminology. Such statements, include but are not limited to statements regarding our expectations as to future financial performance, expense levels, liquidity sources, the capabilities and performance of our technology and products and planned changes, timing of new product releases, our business strategies, including anticipated trends, growth and developments in markets in which we target, the anticipated market adoption of our current and future products, performance in operations, including component supply management, product quality and customer service, risks related to the ongoing COVID-19 pandemic and the anticipated benefits and risks relating to the transaction with SunPower Corporation. Our actual results and the timing of events may differ materially from those discussed in our forward-looking statements as a result of various factors, including those discussed below and those discussed in the section entitled "Risk Factors" included in Part II, Item 1A in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . Business Overview and Highlights We are a global energy technology company. We deliver smart, easy-to-use solutions that manage solar generation, storage and communication on one platform. We revolutionized the solar industry with our microinverter technology and we produce a fully integrated solar-plus-storage solution. To date, we have shipped more than 39 million microinverters, and over 1.7 million Enphase residential and commercial systems have been deployed in more than 130 countries. We sell our solutions primarily to distributors who resell them to solar installers. We also sell directly to large installers, OEMs, strategic partners and homeowners. Our revenue in the first quarter of 2020 was positively impacted by the scheduled phase-down of the investment tax credit for solar projects under Section 48(a) (the "ITC") of the Internal Revenue Code of 1986, as amended (the "Code"). Safe Harbor Prepayments The Renewable Energy and Job Creation Act of 2008 provided a 30% federal tax credit for residential and commercial solar installations throughDecember 31, 2019 , which was reduced to a tax credit of 26% for any solar energy system that began construction during 2020 throughDecember 31, 2022 , and 22% thereafter toDecember 31, 2023 before being reduced to 10% for commercial installations and 0% for residential installations beginning onJanuary 1, 2024 . As a result, several of our customers explored opportunities to purchase products in 2019 to take advantage of safe harbor guidance from theIRS published inJune 2018 , allowing them to preserve the historical 30% investment tax credit for solar equipment purchased in 2019 for solar projects that are completed afterDecember 31, 2019 . Safe harbor prepayments from customers in the fourth quarter of 2019 resulted in$44.5 million of revenue recognized in the first quarter of 2020 when we delivered the product. There was no safe harbor revenue recognized in the three and nine months endedSeptember 30, 2021 in comparison. Acquisitions OnJanuary 25, 2021 , we completed the acquisition of 100% of the shares ofSofdesk Inc. , a privately-held company. Sofdesk provides design tools and services software for residential solar installers and roofing companies and will enhance our digital transformation efforts. As part of the purchase price, we (i) paid approximately$32.0 million in cash onJanuary 25, 2021 and (ii) are liable for up to approximately$3.7 million of contingent consideration payable during the first quarter of 2022, of which we recorded a liability of approximately$3.5 million representing the fair value of the contingent consideration. In addition to the purchase price, we will be obligated to pay up to approximately$3.7 million during the first quarter of 2022, subject to continued employment of key employees of Sofdesk. Further details on the Sofdesk acquisition may be found in Note 4 , "Business Combinations", in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Enphase Energy, Inc. | 2021 Form 10-Q | 42 -------------------------------------------------------------------------------- Table of Contents OnMarch 31, 2021 , we completed the acquisition of DIN's solar design services business. DIN's solar design services business provides outsourced proposal drawings and permit plan sets for residential solar installers inNorth America and will enhance our digital transformation effort. As part of the purchase price, we paid approximately$24.8 million in cash. In addition to the purchase price paid, we are obligated to pay up to i) approximately$5.0 million in equal monthly installments over the course of one year following the acquisition date; and ii) approximately$5.0 million payable in one year following the acquisition date subject to achievement of certain revenue and operational targets. Both additional payments require continuous employment of certain key employees of DIN. Further details on the DIN's solar design services business acquisition may be found in Note 4 , "Business Combinations", in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Convertible Notes OnMarch 1, 2021 , we issued an aggregate principal amount of$1.15 billion of convertible senior notes comprised of$575.0 million of 0.0% Notes due 2026 and$575.0 million of 0.0% Notes due 2028. In addition, onMarch 12, 2021 , we issued$57.5 million aggregate principal amount of the Notes due 2026 in connection with the initial purchasers' full exercise of the over-allotment option to purchase additional Notes due 2026. The Notes due 2026 and Notes due 2028 will not bear regular interest, and the principal amount of the Notes due 2026 and Notes due 2028 will not accrete. The Notes due 2026 and the Notes due 2028 are general unsecured obligations and the Notes due 2026 and Notes due 2028 are governed by relevant indentures entered by and between us andU.S. Bank National Association , as trustee. The Notes due 2026 will mature onMarch 1, 2026 and Notes due 2028 will mature onMarch 1, 2028 , unless earlier repurchased by us or converted at the option of the holders. Further information relating to the Notes due 2026 and Notes due 2028 may be found in Note 9 , "Debt", of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. During the first quarter of 2021,$87.1 million in aggregate principal amount of the Notes due 2024 were converted or repurchased by us, and the principal amount of the converted and repurchased Notes due 2024 was repaid in cash. Of the$87.1 million in aggregate principal amount,$25.5 million in aggregate principal amount was repurchased pursuant to separately- and privately-negotiated exchange agreements entered into inMarch 2020 with certain holders of Notes due 2024 concurrently with the offering of the Notes due 2026 and the Notes due 2028. In connection with such conversions or repurchases, during the first quarter of 2021, we also issued 3.8 million shares of our common stock to the holders of the converted and repurchased Notes due 2024 with an aggregate fair value of$659.4 million , representing the conversion value in excess of the principal amount of the Notes due 2024, which were fully offset by shares received from the settlements of the associated note hedging arrangements. During the first quarter of 2021, concurrently with the offering of the Notes due 2026 and the Notes due 2028, we entered into separately- and privately-negotiated transactions to repurchase approximately$217.7 million in aggregate principal amount of the Notes due 2025. The principal amount (and for certain holders the conversion value in excess of the principal amount) of the repurchased Notes due 2025 was repaid in cash. We also issued approximately 1.7 million shares of our common stock to the holders of the repurchased notes with an aggregate fair value of$302.7 million , representing the conversion value in excess of the principal amount of the Notes due 2025, which were fully offset by shares received from the settlements of the associated note hedging arrangements. Repurchases of Common Stock InApril 2020 , our board of directors authorized the repurchase of up to$200.0 million of our common stock, exclusive of brokerage commissions under the 2020 Repurchase Program. During the second quarter of 2021, we repurchased and subsequently retired approximately$1.7 million shares of common stock from the open market at an average cost of$117.47 per share for a total of$200.0 million . InMay 2021 , our board of directors authorized 2021 Repurchase Program pursuant to which we may repurchase up to an aggregate of$500.0 million of our common stock. Purchases may be completed from time to time in the open market or through structured repurchase agreements with third parties. The program may be discontinued or amended at any time and expires onMay 13, 2024 . Such purchases are expected to continue throughMay 2024 unless otherwise extended or shortened by our board of directors. Tariff Refunds OnMarch 26, 2020 , theOffice of the United States Trade Representative (the "USTR") announced certain exclusion requests related to tariffs on Chinese imported microinverter products that fit the dimensions and weight limits within a Section 301 Tariff exclusion underU.S. note 20(ss)(40) to subchapter III of chapter 99 of theEnphase Energy, Inc. | 2021 Form 10-Q | 43 -------------------------------------------------------------------------------- Table of Contents Harmonized Tariff Schedule ofthe United States (the "Tariff Exclusion"). The Tariff Exclusion applies to covered products under the China Section 301 Tariff Actions ("Section 301 Tariffs") taken by the USTR exported fromChina tothe United States fromSeptember 24, 2018 untilAugust 7, 2020 . Accordingly, we sought refunds totaling approximately$38.9 million plus approximately$0.6 million accrued interest on tariffs previously paid fromSeptember 24, 2018 toMarch 31, 2020 for certain microinverters that qualify for the Tariff Exclusion. The refund request was subject to review and approval by theU.S. Customs and Border Protection . As ofDecember 31, 2020 , we had received$24.8 million of tariff refunds and accrued for the remaining$14.7 million tariff refunds that were approved, however, not yet received on or beforeDecember 31, 2020 . During the three months endedMarch 31, 2021 , we received the remaining$14.7 million tariff refunds. For the year endedDecember 31, 2020 , we recorded$38.9 million as a reduction to cost of revenues in our condensed consolidated statement of operations as the approved refunds relate to paid tariffs previously recorded to cost of revenues, therefore, we recorded the corresponding approved tariff refunds as credits to cost of revenues in the current period. For the year endedDecember 31, 2020 , we recorded the$0.6 million accrued interest as interest income in the condensed consolidated statement of operations. The tariff refund receivable of zero and$14.7 million was recorded as a reduction of accounts payable to Flex Ltd. and affiliates ("Flex"), our manufacturing partner and the importer of record who will first receive the tariff refunds, on our condensed consolidated balance sheet as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. The Tariff Exclusion expired onAugust 7, 2020 and those microinverter products now are subject to tariffs. We also continue to pay Section 301 Tariffs on our storage and communication products and other accessories imported fromChina which are not subject to the Tariff Exclusion. COVID-19 Update The COVID-19 pandemic has caused and continues to cause disruption to theU.S. and global economies, including the impact of government and company actions to reduce the spread of the virus and consumer behavior in response to the same; and, althoughthe United States and other countries have continued to roll out vaccinations, it is uncertain how quickly and effectively such vaccinations will be distributed or help to control the spread of COVID-19 and its variants. We continue to actively monitor the impacts and potential impacts of the COVID-19 pandemic in all aspects of our business. Although we are unable to predict the impact of the COVID-19 pandemic on our business, results of operations, liquidity or capital resources at this time, we expect we may be negatively affected if the pandemic and related public health measures result in substantial manufacturing or supply chain problems, disruptions in local and global economies, volatility in the global financial markets, overall reductions in demand, delays in payment, restrictions on the shipment of our products, or other ramifications. Further information relating to the risks and uncertainties related to the ongoing COVID-19 pandemic may be found in the "Risk Factors" section included in Part II, Item 1A in our 2020 Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . Products We design, develop, manufacture and sell home energy solutions that manage energy generation, energy storage and control and communications on one intelligent platform. We have revolutionized the solar industry by bringing a systems approach to solar technology and by pioneering a semiconductor-based microinverter that converts energy at the individual solar module level and, combined with our proprietary networking and software technologies, provides advanced energy monitoring and control. This is vastly different than a central inverter system using string modules, with or without an optimizer, approach that only converts energy of the entire array of solar modules from a single high voltage electrical unit and lacks intelligence about the energy producing capacity of the solar array. The Enphase Home Energy Solution with IQ™ platform, which is our current generation integrated solar, storage and energy management offering, enables self-consumption and delivers our core value proposition of yielding more energy, simplifying design and installation, and improving system uptime and reliability. The IQ family of microinverters, like all of our previous microinverters, is fully compliant with NEC 2014 and 2017 rapid shutdown requirements. Unlike string inverters, this capability is built-in, with no additional equipment necessary. The Enphase Home Energy Solution with IQ™ brings a high technology, networked approach to solar generation plus energy storage, by leveraging our design expertise across power electronics, semiconductors and cloud-based software technologies. Our integrated approach to energy solutions maximizes a home's energy potential while providing advanced monitoring and remote maintenance capabilities. The Enphase Home Energy Solution with IQ uses a single technology platform for seamless management of the whole solution, enabling rapid commissioning with the Installer Toolkit™; consumption monitoring with our Envoy™ Communications Gateway withEnphase Energy, Inc. | 2021 Form 10-Q | 44 -------------------------------------------------------------------------------- Table of Contents IQ Combiner+, Enphase Enlighten™, a cloud-based energy management platform, and our Enphase AC Battery™. System owners can use Enphase Enlighten to monitor their home's solar generation, energy storage and consumption from any web-enabled device. Unlike some of our competitors, who utilize a traditional inverter, or offer separate components of solutions, we have built-in system redundancy in both photovoltaic ("PV") generation and energy storage, eliminating the risk that comes with a single-point of failure. Further, the nature of our cloud-based, monitored system allows for remote firmware and software updates, enabling cost-effective remote maintenance and ongoing utility compliance. The Enphase IQ7™ microinverter and Enphase IQ7+™ microinverter, part of our seventh-generation IQ product family, support high-powered 60-cell and 72-cell solar modules and integrate with alternating current ("AC") modules. Our IQ7X™ microinverter addresses 96-cell PV modules up to 400W direct current ("DC") and with its 97.5%California Energy Commission ("CEC") efficiency rating, is ideal for integration into high power modules. During 2020, we started shipping our IQ7A™ for high-power monofacial and bifacial solar modules to customers inAustralia andEurope . Our IQ7A microinverters, which began shipping to customers inNorth America inNovember 2019 , support up to 450W high-power modules, targeting high-power residential and commercial applications. Our customers will be able to pair the IQ7A microinverter with monofacial or bifacial solar modules, up to 450 W, from solar module manufacturers who are expected to introduce high-power variants of their products in the next three years. AC Module ("ACM") products are integrated systems which allow installers to be more competitive through improved logistics, reduced installation times, faster inspection and training. We continue to make steady progress with our ACM partners, including SunPower Corporation,Panasonic Corporation of North America ,LONGi Solar ,Solaria Corporation , Hanwha Q CELLS, and Maxeon Solar Technologies, Sonnenstromfabrik (CS Wismar GmBH), and DMEGC Solar. During the second quarter of 2020, we introduced our Enphase Encharge 10™ and Encharge 3™ battery storage systems, with usable and scalable capacity of 10.1 kWh and 3.4 kWh, respectively, based on Ensemble™ energy management technology, which powers the world's first grid-independent microinverter-based storage system to customers inNorth America . Enphase Encharge™ battery storage systems feature Enphase embedded grid-forming microinverters that enable the Always-On capability that keeps homes powered when the grid goes down, and the ability to save money when the grid is up. These systems are now compatible with both new and existing Enphase IQ solar systems with M-series™, IQ6™ and IQ7™ microinverters. InJanuary 2021 , we announced expanded compatibility of the Enphase Storage system with our M-series microinverters and string inverters. The expanded compatibility provides approximately 300,000 additional Enphase system owners with the possibility of achieving grid-agnostic energy resilience through the Enphase Upgrade Program. The program provides solar installers the opportunity to renew engagements with the installed base of Enphase system owners through microinverter, solar, and energy storage upgrades, and reflects our continued commitment to reliability, service, and long-term customer relationships. We started production shipments of Enphase Encharge battery storage systems to customers inNorth America during the second quarter of 2020, to customers inGermany during the second quarter of 2021, and to customers inBelgium inOctober 2021 . During the second quarter of 2021, we introduced Load Control for our Enphase Encharge™ battery storage systems. Load control allows homeowners to decide what gets power in their home in the event of a grid outage, with the ability to choose up to four loads. These loads will be on when the grid is present and shed automatically in the event of a grid failure. OnOctober 21, 2021 , we announced that our home energy systems will soon integrate with most leading models of home standby AC generators, providing enhanced performance and a glitch-free transition for homeowners during power outages. Homeowners can also monitor real-time power flow, start and stop their generator remotely, set quiet hours to prevent their generator from operating until their batteries fall below a designated threshold, and control it all with the Enphase app. The new feature functions without a generator automatic transfer switch and eliminates the power glitches that reset home electronic appliances when switching to generator power. OnOctober 25, 2021 , we announced our all-in-one Energy System with IQ8™ solar microinverters for customers inNorth America . Our investment in custom application specific integrated circuit (ASIC) chips has resulted in a software-defined microinverter smart enough to form a microgrid. Many homeowners often assume that their solar systems will function if the sun is shining, even during a power outage. This has unfortunately notEnphase Energy, Inc. | 2021 Form 10-Q | 45 -------------------------------------------------------------------------------- Table of Contents been true until the introduction of IQ8. Now, with IQ8 homeowners can realize the true promise of solar - to make and use their own power. IQ8 solar microinverters can provide Sunlight Backup during an outage, even without a battery. We expect to start piloting our IQ8D™ microinverter, a high-power 640W AC microinverter capable of supporting two panels for small commercial solar with select installers in the fourth quarter of 2021 and begin production shipments in the first quarter of 2022. We are making progress on our Portable Energy System, formerly known as Ensemble-in-a Box™, an off-grid solar and storage system. The product is expected to provide energy security indoors as well as energy-on-the-go outdoors. We also view this as a starter product for those homeowners who are not yet ready to invest in a full solar or storage system.Enphase Energy, Inc. | 2021 Form 10-Q | 46 -------------------------------------------------------------------------------- Table of Contents Results of OperationsNet Revenues Three Months Ended
Nine Months Ended
September 30, Change in September 30, Change in
2021 2020 $ % 2021 2020 $ %
(In thousands, except percentages)
Net revenues $ 351,519 $ 178,503 $ 173,016 97 % $ 969,330 $ 509,586 $ 459,744 90 %
Three months ended September 30, 2021 and 2020
Net revenues increased by 97% or $173.0 million in three months ended
September 30, 2021 , as compared to the same period in 2020, primarily due to the
80% increase in the microinverter units volume shipped primarily as a result of
business growth in the U.S. and internationally. We sold 2.6 million
microinverter units in the three months ended September 30, 2021 , as compared to
1.4 million units in the same period in 2020. The increase in net revenues is
also due to favorable product mix as we sold more IQ7+ microinverters relative
to IQ7 microinverters, increases in the average selling price due to customer
mix, as well as increase in shipments of our Enphase Encharge™ storage systems
to customers in North America and Europe .
Nine months ended September 30, 2021 and 2020
Net revenues increased by 90% or $459.7 million for the nine months ended
September 30, 2021 , as compared to the same period in 2020, primarily due to the
63% increase in the microinverter units volume shipped primarily as a result of
business growth in the U.S. and internationally. In the nine months ended
September 30, 2020 , the COVID-19 pandemic resulted in a decline in sales orders,
partially offset by higher units shipped in the first quarter of 2020 as our
customers took advantage of safe harbor guidance from the IRS . In the nine
months ended September 30, 2021 , consumer demand improved from the rebound in
economic growth as compared to the same period in 2020 when we had an economic
downturn from the COVID-19 pandemic. We sold approximately 7.4 million
microinverter units in the nine months ended September 30, 2021 , as compared to
approximately 4.5 million units in the same period in 2020. The increase in net
revenues is also due to favorable product mix as we sold more IQ7+
microinverters relative to IQ7 microinverters, increases in the average selling
price due to customer mix and price increase, as well as increase in shipments
of our Enphase Encharge™ storage systems to customers in North America and
Europe .
Cost of Revenues and Gross Margin
Three Months Ended Nine Months Ended
September 30, Change in September 30, Change in
2021 2020 $ % 2021 2020 $ %
(In thousands, except percentages)
Cost of revenues $ 211,161 $ 83,522 $ 127,639 153 % $ 578,222 $ 285,543 $ 292,679 102 %
Gross profit $ 140,358 $ 94,981 $ 45,377 48 % $ 391,108 $ 224,043 $ 167,065 75 %
Gross margin 39.9 % 53.2 % (13.3) % 40.3 % 44.0 % (3.7) %
Three months ended September 30, 2021 and 2020
Cost of revenues increased by 153% or $127.6 million in the three months ended
September 30, 2021 , as compared to the same period in 2020, primarily due to
higher volume of microinverter units sold, higher shipments of our Enphase
Encharge™ storage systems, higher expedited freight costs as a result of
economic recovery from the COVID-19 pandemic globally in combination with
semiconductor supply constraints, higher costs of certain components
experiencing supply constraints, and $23.0 million in refunds approved for
tariffs previously paid on certain microinverter products and were recorded as a
reduction to our cost of revenues in the three months ended September 30, 2020 .
Cost of revenues increase in the three months ended September 30, 2021 , as
compared to the same period in 2020, was partially offset by a decrease in the
unit cost of our products as a result of ramping microinverter production at
Salcomp in India since the fourth quarter of 2020 as well as other cost
reduction efforts.
Enphase Energy, Inc. | 2021 Form 10-Q | 47
--------------------------------------------------------------------------------
Table of Contents
Gross margin decreased by 13.3 percentage points for the three months ended
September 30, 2021 , as compared to the same period in 2020. The decrease in
gross margin was primarily attributable to the $23.0 million in refunds approved
for tariffs in the three months ended September 30, 2020 mentioned above and
higher expedited freight costs in the three months ended September 30, 2021 ,
partially offset by the increase in average selling price of microinverters due
to change in product and customer mix as well as cost management efforts,
including the transition of our contract manufacturing from China to Mexico and
India to mitigate tariffs.
Nine months ended September 30, 2021 and 2020
Cost of revenues increased by 102% or $292.7 million in the nine months ended
September 30, 2021 , as compared to the same period in 2020, primarily due to
higher volume of microinverter units sold, higher shipments of our Enphase
Encharge™ storage systems, higher expedited freight costs as a result of
economic recovery from the COVID-19 pandemic globally in combination with
semiconductor supply constraints, higher costs of certain components
experiencing supply constraints, higher warranty expense based on continuing
analysis of field performance data and diagnostic root-cause failure analysis
primarily relating to our prior generation products, and $23.0 million in
refunds approved for tariffs previously paid on certain microinverter products
and were recorded as a reduction to our cost of revenues in the nine months
ended September 30, 2020 . Cost of revenues increase in the nine months ended
September 30, 2021 , as compared to the same period in 2020, was partially offset
by a decrease in the unit cost of our products as a result of ramping
microinverter production at Salcomp in India since the fourth quarter of 2020 as
well as other cost reduction efforts.
Gross margin decreased by 3.7 percentage points for the nine months ended
September 30, 2021 , as compared to the same period in 2020. The decrease in
gross margin was primarily attributable to the $23.0 million in refunds approved
for tariffs in the nine months ended September 30, 2020 mentioned above and
higher expedited freight costs in the nine months ended September 30, 2021
partially offset by the increase in average selling price due to change in
product and customer mix as well as cost management efforts, including the
transition of our contract manufacturing from China to Mexico and India to
mitigate tariffs.
Research and Development
Three Months Ended Nine Months Ended
September 30, Change in September 30, Change in
2021 2020 $ % 2021 2020 $ %
(In thousands, except percentages)
Research and development $ 29,411 $ 15,052 $ 14,359 95 % $ 73,937 $ 40,120 $ 33,817 84 %
Percentage of net revenues 8 % 8 % 8 % 8 %
Three months ended September 30, 2021 and 2020
Research and development expense increased by 95% or $14.4 million in three
months ended September 30, 2021 , as compared to the same period in 2020.
The increase was due to $12.2 million of higher personnel-related expenses and
$2.2 million of outside consulting services associated with our investment in
the development, introduction and qualification of new products innovation. The
increase in personnel-related expenses was primarily due to hiring and retention
programs for employees in New Zealand , India and the U.S. as well as onboarded
employees through the acquisition of Sofdesk, increasing total compensation
costs, including stock-based compensation. The amount of research and
development expenses may fluctuate from period to period due to the differing
levels and stages of development activity.
Nine months ended September 30, 2021 and 2020
Research and development expense increased by 84% or $33.8 million in nine
months ended September 30, 2021 , as compared to the same period in 2020.
The increase was due to $27.8 million of higher personnel-related expenses and
$6.0 million of outside consulting services associated with our investment in
the development, introduction and qualification of new product innovation. The
increase in personnel-related expenses was primarily due to hiring and retention
programs for employees in New Zealand , India and the U.S. as well as onboarded
employees through the acquisition of Sofdesk, increasing total compensation
costs, including stock-based compensation. The amount of research and
development expenses may fluctuate from period to period due to the differing
levels and stages of development activity.
Enphase Energy, Inc. | 2021 Form 10-Q | 48
--------------------------------------------------------------------------------
Table of Contents
Sales and Marketing
Three Months Ended Nine Months Ended
September 30, Change in September 30, Change in
2021 2020 $ % 2021 2020 $ %
(In thousands, except percentages)
Sales and marketing $ 39,296 $ 14,645 $ 24,651 168 % $ 84,504 $ 38,788 $ 45,716 118 %
Percentage of net
revenues 11 % 8 % 9 % 8 %
Three months ended September 30, 2021 and 2020
Sales and marketing expense increased by 168% or $24.7 million in three months
ended September 30, 2021 , as compared to the same period in 2020. The increase
was primarily due to $18.7 million of higher personnel-related expenses
primarily due to hiring employees as a result of our efforts to improve customer
experience, provide 24/7 support for installer and Enphase system owners
globally, as well as support our business growth in the U.S. and international
expansion in Europe , retention programs for employees increasing total
compensation costs, including stock-based compensation, and $6.0 million for a
combination of higher advertising costs, marketing expenses, professional
services and facility costs to enable business growth.
Nine months ended September 30, 2021 and 2020
Sales and marketing expense increased by 118% or $45.7 million in nine months
ended September 30, 2021 , as compared to the same period in 2020. The increase
was primarily due to $32.4 million of higher personnel-related expenses
primarily due to hiring employees as a result of our efforts to improve customer
experience, provide 24/7 support for installers and Enphase system owners
globally, as well as support our business growth in the U.S. and international
expansion in Europe , retention programs for employees increasing total
compensation costs, including stock-based compensation, and $13.3 million for a
combination of higher advertising costs, marketing expenses, professional
services and facility costs to enable business growth.
General and Administrative
Three Months Ended Nine Months Ended
September 30, Change in September 30, Change in
2021 2020 $ % 2021 2020 $ %
(In thousands, except percentages)
General and administrative $ 34,300 $ 13,525 $ 20,775 154 % $ 74,530 $ 37,810 $ 36,720 97 %
Percentage of net revenues 10 % 8 % 8 % 7 %
Three months ended September 30, 2021 and 2020
General and administrative expense increased by 154% or $20.8 million in three
months ended September 30, 2021 , as compared to the same period in 2020. The
increase was primarily due to $17.2 million of higher personnel-related expenses
primarily due to hiring and retention programs for employees increasing total
compensation costs, including stock-based compensation and post business
combination employment-related expense, $2.2 million of investments in
technological infrastructure and other operational and facilities costs to
support scalability of our business growth and $1.4 million of higher legal and
professional services.
Nine months ended September 30, 2021 and 2020
General and administrative expense increased by 97% or $36.7 million in nine
months ended September 30, 2021 , as compared to the same period in 2020. The
increase was primarily due to $23.5 million of higher personnel-related expenses
primarily due to hiring and retention programs for employees increasing total
compensation costs, including stock-based compensation and post business
combination employment-related expense, $3.9 million of acquisition related
costs, $7.2 million of investments in technological infrastructure and other
operational and facilities costs to support scalability of our business growth
and $2.1 million of higher legal and professional services.
Enphase Energy, Inc. | 2021 Form 10-Q | 49
--------------------------------------------------------------------------------
Table of Contents
Other Income (Expense), Net
Three Months Ended Nine Months Ended
September 30, Change in September 30, Change in
2021 2020 $ % 2021 2020 $ %
(In thousands, except percentages)
Interest income $ 110 $ 110 $ 0 0 % $ 281 $ 1,483 $ (1,202) (81) %
Interest expense (12,628) (5,993) (6,635) 111 % (32,463) (15,100) (17,363) 115 %
Other (expense)
income, net 874 (1,031) 1,905 (185) % 814 (1,302) 2,116 (163) %
Change in fair
value of
derivatives - - - **% - (44,348) 44,348 (100) %
Loss on partial
settlement of
convertible notes - - -
**% (56,382) - (56,382) **%
Total other
expense, net $ (11,644) $ (6,914) $ (4,730) 68 % $ (87,750) $ (59,267) $ (28,483) 48 %
** Not meaningful
Three months ended September 30, 2021 and 2020
Interest income of $0.1 million for the three months ended September 30, 2021 is
same as compared to the interest income for the three months ended September 30,
2020 , due to significant decline in interest rates earned on cash, cash
equivalents and marketable securities, offset by a higher average cash, cash
equivalents and marketable securities earning interest in the three months ended
September 30, 2021 , compared to the same period in 2020.
Cash interest expense
Cash interest expense for the three months ended September 30, 2021 and 2020
totaled $0.2 million and $0.6 million , respectively. Cash interest expense in
the three months ended September 30, 2021 primarily includes $0.1 million coupon
interest incurred with our Notes due 2025, Notes due 2024 and Notes due 2023 and
less than $0.1 million accretion of interest expense on contingent
consideration. Cash interest expense in the three months ended September 30,
2020 primarily includes $0.6 million coupon interest incurred with our Notes due
2025, Notes due 2024 and Notes due 2023.
Non-cash interest expense
Non-cash interest expense of $12.4 million for the three months ended
September 30, 2021 primarily relates to $12.4 million for the debt discount and
amortization of debt issuance costs with our Notes due 2024, Notes due 2025,
Notes due 2026 and Notes due 2028. Interest expense of $5.4 million for the
three months ended September 30, 2020 primarily includes $5.3 million related to
the accretion of the debt discount and amortization of debt issuance cost
incurred associated with our Notes due 2025 and Notes due 2024, less than $0.1
million relates to the amortization of debt issuance costs associated with Notes
due 2023 and less than $0.1 million of interest expense related to long-term
financing receivable recorded as debt.
Other (expense) income, net of $0.9 million income for the three months ended
September 30, 2021 relates to a $0.1 million net income related to foreign
currency exchange and remeasurement and $0.8 million non-cash gain related to
the change in the fair value of debt securities. Other (expense) income, net of
$1.0 million expense for the three months ended September 30, 2020 relates to
the net loss from foreign currency exchange and remeasurement.
Nine months ended September 30, 2021 and 2020
Interest income of $0.3 million for the nine months ended September 30, 2021
decreased, as compared to $1.5 million for the nine months ended September 30,
2020 , primarily due to significant decline in interest rates earned on cash,
cash equivalents and marketable securities, partially offset by a higher average
cash, cash equivalents and marketable securities earning interest in the nine
months ended September 30, 2021 , compared to the same period in 2020.
Enphase Energy, Inc. | 2021 Form 10-Q | 50
--------------------------------------------------------------------------------
Table of Contents
Cash interest expense
Cash interest expense for the nine months ended September 30, 2021 and 2020
totaled $0.6 million and $1.6 million , respectively. Cash interest expense in
the nine months ended September 30, 2021 primarily includes $0.4 million coupon
interest incurred with our Notes due 2025, Notes due 2024 and Notes due 2023 and
$0.2 million accretion of interest expense on contingent consideration. Cash
interest expense in the nine months ended September 30, 2020 primarily includes
$1.6 million coupon interest incurred with our Notes due 2025, Notes due 2024
and Notes due 2023.
Non-cash interest expense
Non-cash interest expense of $31.9 million for the nine months ended September
30, 2021 primarily relates to $31.8 million for the debt discount and
amortization of debt issuance costs with our Notes due 2024, Notes due 2025,
Notes due 2026 and Notes due 2028 and less than $0.1 million relates to the
amortization of debt issuance costs associated with Notes due 2023. Interest
expense of $13.5 million for the nine months ended September 30, 2020 primarily
includes $13.1 million related to the accretion of the debt discount and
amortization of debt issuance cost incurred associated with our Notes due 2025,
Notes due 2024 and less than $0.1 million relates to the amortization of debt
issuance costs associated with Notes due 2023, and $0.4 million of interest
expense related to long-term financing receivable recorded as debt.
Other (expense) income, net of $0.8 million income for the nine months ended
September 30, 2021 relates to a $3.2 million non-cash gain related to change in
the fair value of debt securities, partially offset by a $2.4 million net loss
related to foreign currency exchange and remeasurement. Other (expense) income,
net of $1.3 million expense for the nine months ended September 30, 2020 ,
relates to the net loss from foreign currency exchange and remeasurement.
Change in fair value of derivatives associated with issuance of Notes due 2025
of $44.3 million for the nine months ended September 30, 2020 primarily includes
the charge recognized for the change in fair value of our convertible notes
embedded derivative and warrants of $47.6 million and $24.7 million ,
respectively. This charge is partially offset by a gain recognized for the
change in fair value of our convertible notes hedge of $28.0 million . We did not
have any derivatives during the nine months ended September 30, 2021 .
Loss on partial settlement of convertible notes recorded in the nine months
ended September 30, 2021 primarily relates to the $9.5 million non-cash loss on
partial settlement of $87.1 million aggregate principal amount of the Notes due
2024, $9.5 million non-cash loss on settlement of $217.8 million aggregate
principal amount of the Notes due 2025 and $37.5 million non-cash inducement
loss incurred on repurchase of Notes due 2025. Refer Note 9 , "Debt" of the
notes to condensed consolidated financial statements included in Part I, Item 1
of this Quarterly Report on Form 10-Q.
Income Tax Benefit (Provision)
Three Months Ended Nine Months Ended
September 30, Change in September 30, Change in
2021 2020 $ % 2021 2020 $ %
(In thousands, except percentages)
Income tax benefit
(provision) $ (3,898) $ (5,483) $ 1,585 (29) % $ 22,471 $ 12,946 $ 9,525 74 %
Three months ended September 30, 2021 and 2020
The income tax provision of $3.9 million for the three months ended
September 30, 2021 decreased compared to the income tax provision of $5.5
million for the same period in 2020, both are calculated using the annualized
effective tax rate method, which is primarily due to higher projected tax
expense in U.S. and foreign jurisdictions that are more profitable, partially
offset by higher tax deduction from employee stock-based compensation in 2021
compared to 2020.
Nine months ended September 30, 2021 and 2020
The income tax benefit of $22.5 million for the nine months ended September 30,
2021 increased, compared to the income tax benefit of $12.9 million for the same
period in 2020, both are calculated using the annualized effective tax rate
method, which is primarily due to higher tax deduction from employee stock-based
compensation, partially offset by higher projected tax expense in U.S. and
foreign jurisdictions that are more profitable in 2021 compared to 2020.
Enphase Energy, Inc. | 2021 Form 10-Q | 51
--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
Sources of Liquidity
As of September 30, 2021 , we had $1.4 billion in working capital, including
cash, cash equivalents and marketable securities of $1.4 billion , of which
approximately $1.4 billion were held in the U.S. Our cash, cash equivalents and
marketable securities primarily consist of U.S. government money market mutual
funds, U.S. Treasuries, Corporate notes and bonds and both interest-bearing and
non-interest-bearing deposits, with the remainder held in various foreign
subsidiaries. We consider amounts held outside the U.S. to be accessible and
have provided for the estimated U.S. income tax liability associated with our
foreign earnings. We believe we will be able to meet our anticipated cash needs
for at least the next 12 months. However, our liquidity may be negatively
impacted if sales decline significantly for an extended period due to the impact
of the ongoing COVID-19 pandemic. Further, the extent to which the ongoing
COVID-19 pandemic and our precautionary measures in response thereto impact our
business and liquidity will depend on future developments, which are uncertain
and cannot be precisely predicted at this time.
Convertible Notes
Notes due 2023. As of September 30, 2021 , we had $5.0 million aggregate
principal amount of our Notes due 2023 outstanding. The Notes due 2023 are
general unsecured obligations and bear interest at a rate of 4.00% per year,
payable semi-annually on February 1 and August 1 of each year. The Notes due
2023 will mature on August 1, 2023 , unless earlier repurchased by us or
converted at the option of the holders.
Notes due 2024. As of September 30, 2021 , we had $1.1 million aggregate
principal amount of our Notes due 2024 outstanding. The Notes due 2024 are
general unsecured obligations and bear interest at a rate of 1.0% per year,
payable semi-annually on June 1 and December 1 of each year. On October 12,
2021 , we received the request for conversion of the remaining approximately
$1.1 million in principal amount of Notes due 2024. We have elected to settle
the aggregate principal amount of the Notes due 2024 in a combination of cash
and any excess in shares of our common stock in accordance with the applicable
indenture. Such conversion will be settled in December 2021 .
Notes due 2025. As of September 30, 2021 , we had $102.2 million aggregate
principal amount of our Notes due 2025 outstanding. The Notes due 2025 are
general unsecured obligations and bear interest at a rate of 0.25% per year,
payable semi-annually on March 1 and September 1 of each year, beginning on
September 1, 2020 . The Notes due 2025 will mature on March 1, 2025 , unless
earlier repurchased by us or converted at the option of the holders at a
conversion price of $81.54 per share.
From January 1, 2021 through December 31, 2021 , the Notes due 2025 may be
converted because the last reported sale price of our common stock for at least
20 trading days during a period of 30 consecutive trading days ending on
December 31, 2020 , March 31, 2021 , June 30, 2021 and September 30, 2021 was
greater than or equal to $106.00 on each applicable trading day. Upon conversion
of any of the notes, we will pay or deliver, as the case may be, cash, shares of
common stock or a combination of cash and common stock, at our election.
In connection with the offering of the Notes due 2025, we entered into
privately-negotiated convertible note hedge transactions in order to reduce the
potential dilution to our common stock upon any conversion of the Notes due
2025. The total cost of the convertible note hedge transactions was
approximately $89.1 million . Also, concurrently with the offering of the Notes
due 2025, we entered into privately-negotiated warrant transactions whereby we
issued warrants to acquire shares of our common stock at a strike price of
$106.94 rather than the Notes due 2025 conversion price of $81.54 . We received
approximately $71.6 million from the sale of the warrants.
From October 1, 2021 through October 26, 2021 , we had not purchased any shares
remaining under the convertible note hedge and the warrants relating to the
Notes due 2025. If we receive additional request for conversion from the holders
of the Notes due 2025 to exercise their right to convert the debt to equity, we
have indicated our current intention and ability to settle the remaining $102.2
million aggregate principal amount of the Notes due 2025 in cash.
Notes due 2026. As of September 30, 2021 , we had $632.5 million aggregate
principal amount of our Notes due 2026 outstanding. The Notes due 2026 are
general unsecured obligations. The Notes due 2026 do not bear any regular
interest, and the principal amount of the Notes due 2026 will not accrete. The
Notes due 2026 will mature on March 1, 2026 , unless earlier repurchased by us or
converted at the option of the holders at a conversion price of $307.47 per
share.
Enphase Energy, Inc. | 2021 Form 10-Q | 52
--------------------------------------------------------------------------------
Table of Contents
Notes due 2028. As of September 30, 2021 , we had $575.0 million aggregate
principal amount of our Notes due 2028 outstanding. The Notes due 2028 are
general unsecured obligations. The Notes due 2028 do not bear any regular
interest, and the principal amount of the Notes due 2028 will not accrete. The
Notes due 2028 will mature on March 1, 2028 , unless earlier repurchased by us or
converted at the option of the holders at a conversion price of $284.87 per
share.
In connection with the offering of the Notes due 2026 and Notes due 2028, we
entered into privately-negotiated convertible note hedge transactions in order
to reduce the potential dilution to our common stock upon any conversion of the
Notes due 2026 and Notes due 2028. The total cost of the convertible note hedge
transactions was approximately $286.2 million . Also, concurrently with the
offering of the Notes due 2026 and Notes due 2028, we entered into
privately-negotiated warrant transactions whereby we issued warrants to acquire
shares of our common stock at a strike price of $397.91 rather than the
conversion price of $307.47 and $284.87 for Notes due 2026 and Notes due 2028,
respectively. We received approximately $220.8 million from the sale of
warrants.
Repurchase of Common Stock. During the second quarter of 2021, we repurchased
and subsequently retired 1.7 million shares of our common stock for an aggregate
amount of $200.0 million . In May 2021 , our board of directors authorized the
repurchase of up to an additional $500.0 million of our common stock. The
repurchases may be executed from time to time, subject to general business and
market conditions and other investment opportunities, through open market
purchases or privately negotiated transactions, including through Rule 10b5-1
plans. Such purchases are expected to continue through May 2024 unless otherwise
extended or shortened by our board of directors. Refer to Note 11
"Stockholders' Equity" of the Notes to condensed consolidated Financial
Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Cash from operations could be affected by various risks and uncertainties,
including, but not limited to, the effects of COVID-19 and other risk factors
discussed in the section entitled "Risk Factors" included in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2020 filed on February 16,
2021 . We believe that our cash flow from operations with existing cash, cash
equivalents and marketable securities will be sufficient to meet our anticipated
cash needs for at least the next 12 months and thereafter for the foreseeable
future. Our future capital requirements will depend on many factors including
our growth rate, the timing and extent of spending to support development
efforts, the expansion of sales and marketing activities, the introduction of
new and enhanced products, the costs to acquire or invest in complementary
businesses and technologies, the costs to ensure access to adequate
manufacturing capacity, the continuing market acceptance of our products and
macroeconomic events such as the impacts from COVID-19. We may also choose to
seek additional equity or debt financing. In the event that additional financing
is required from outside sources, we may not be able to raise it on terms
acceptable to us or at all. If we are unable to raise additional capital when
desired, our business, operating results, and financial condition may be
adversely affected.
Enphase Energy, Inc. | 2021 Form 10-Q | 53--------------------------------------------------------------------------------
Table of Contents
Cash Flows. The following table summarizes our cash flows for the periods
presented:
Nine Months Ended
September 30,
2021 2020
(In thousands)
Net cash provided by operating activities
(77)
Net increase in cash and cash equivalents
Cash Flows from Operating Activities Cash flows from operating activities consist of our net income adjusted for certain non-cash reconciling items, such as stock-based compensation expense, change in the fair value of investments, deferred income taxes, loss on conversion of Notes due 2024 and Notes due 2025, depreciation and amortization, and changes in our operating assets and liabilities. Net cash provided by operating activities increased by approximately$122.7 million for the nine months endedSeptember 30, 2021 compared to the same period in 2020, was primarily due to an increase in our gross profit as a result of increased revenue, partially offset by higher operating expenses as we continue to invest in the long-term growth of our business and also by approximately$15.6 million deemed cash repayment attributable to accreted debt discount as an amount paid for settlement of approximately$87.1 million and approximately$217.8 million in aggregate principal amount of the Notes due 2024 and Notes due 2025, respectively. Cash Flows from Investing Activities For the nine months endedSeptember 30, 2021 , net cash used in investing activities was primarily from approximately$545.5 million used in purchases of marketable securities, approximately$58.0 million from the investment in debt securities, approximately$30.5 million , net of cash acquired from the acquisition of Sofdesk, approximately$24.8 million from the acquisition of DIN's solar design services business, and approximately$39.1 million used in purchases of test and assembly equipment to expand our supply capacity, related facility improvements and information technology enhancements and capitalized costs related to internal-use software, partially offset by approximately$35.0 million maturities of marketable securities. For the nine months endedSeptember 30, 2020 , net cash used in investing activities was approximately$11.7 million , primarily from purchases of test and assembly equipment to expand our supply capacity, related facility improvements and information technology enhancements, and capitalized costs related to internal-use software. Cash Flows from Financing Activities For the nine months endedSeptember 30, 2021 , net cash provided by financing activities of approximately$615.6 million was primarily from approximately$1,188.4 million net proceeds from the issuance of our Notes due 2028 and Notes due 2026, approximately$220.8 million from sale of warrants related to our Notes due 2028 and Notes due 2026, and approximately$3.7 million net proceeds from employee stock option exercises, partially offset by approximately$286.2 million purchase of convertible note hedge related to our Notes due 2028 and Notes due 2026, approximately$289.3 million cash paid to settle both approximately$87.1 million in aggregate principal amount of the Notes due 2024 and approximately$217.8 million in aggregate principal amount of the Notes due 2025, approximately$200.0 million paid to repurchase our common stock, approximately$20.3 million payment of employee withholding taxes related to net share settlement of equity awards, and approximately$1.4 million of repayment on sale of long-term financing receivables. For the nine months endedSeptember 30, 2020 net cash provided by financing activities of approximately$245.3 million was primarily from approximately$312.4 million net proceeds from the issuance of our Notes due 2025, approximately$71.6 million from sale of warrants related to our Notes due 2025, approximately$4.7 million net proceeds from employee stock option exercises and issuance of common stock under our employee stock incentive program, partially offset by approximately$89.1 million purchase of convertible note bond hedge related to our Notes due 2025, approximately$52.0 million payment of employee withholding taxes related to net share settlement of equity awards and approximately$2.3 million of repayment on sale of long-term financing receivables. Enphase Energy, Inc. | 2021 Form 10-Q | 54 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations Our contractual obligations primarily consist of our Notes due 2028, Notes due 2026, Notes due 2025, Notes due 2024, Notes due 2023, obligations under operating leases and inventory component purchase. As ofSeptember 30, 2021 , except as shown in the table below, there have been no material changes from our disclosure in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . For more information on our future minimum operating leases and inventory component purchase obligations as of September 30, 2021, see Note 10 , "Operating Leases" section and "Purchase Obligations" section of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. The following table updates our contractual obligations as ofSeptember 30, 2021 associated with the Notes due 2024, Notes due 2025, Notes due 2026 and Notes due 2028. For more information on our Notes due 2024, Notes due 2025, Notes due 2026 and Notes due 2028, see Note 9 , "Debt" of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Payments Due by Period 2021 (remaining Total three months) 2022-2023 2024-2025 Beyond 2025 (In thousands) Notes due 2024 principal and interest (1)$ 1,073 $ 1,073
$ - $ - $ - Notes due 2025 principal and interest
103,071 - 512 102,559 -
Notes due 2026 principal and
interest 632,500 - - - 632,500
Notes due 2028 principal and
interest 575,000 - - - 575,000
Total $ 1,311,644 $ 1,073 $ 512 $ 102,559 $ 1,207,500
(1) Reflects the request for conversion of approximately $1.1 million in
principal amount of our Notes due 2024 received on October 12, 2021 . We have
elected to settle the aggregate principal amount of the Notes due 2024 in a
combination of cash and any excess in shares of our common stock in accordance
with the applicable indenture. Such conversion will be settled in December 2021 .
Off-Balance Sheet Arrangements
As of September 30, 2021 , we did not have any off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Critical Accounting Policies
Our condensed consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the U.S. , or GAAP. In connection
with the preparation of our condensed consolidated financial statements, we are
required to make assumptions and estimates about future events and apply
judgments that affect the reported amounts of assets, liabilities, revenue,
expenses and related disclosures. We base our assumptions, estimates and
judgments on historical experience, current trends and other factors that
management believes to be relevant at the time our condensed consolidated
financial statements are prepared. On a regular basis, we review the accounting
policies, assumptions, estimates and judgments to ensure that our condensed
consolidated financial statements are presented fairly and in accordance with
GAAP. However, because future events and their effects cannot be determined with
certainty, actual results could differ from our assumptions and estimates. To
the extent that there are material differences between these estimates and
actual results, our future financial statement presentation, financial
condition, results of operations and cash flows will be affected.
We consider an accounting policy to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, and if different estimates that reasonably
could have been used, or changes in the accounting estimates that are reasonably
likely to occur periodically, could materially impact the condensed consolidated
financial statements.
Adoption of New and Recently Issued Accounting Pronouncements
Refer to Note 1. "Summary of Significant Accounting Policies" section of the
notes to condensed consolidated financial statements included in Part I, Item 1
of this Quarterly Report on Form 10-Q for a discussion of adoption of new and
recently issued accounting pronouncements.
Enphase Energy, Inc. | 2021 Form 10-Q | 55--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
