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 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 the impact of the ongoing COVID-19 pandemic, 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, impact of current litigation on our business, results of operation, financial position or cash flows, 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 this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . Overview We are a global energy technology company. We deliver smart, easy-to-use solutions that manage solar generation, storage and communication on one intelligent 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 30 million microinverters, and approximately 1.3 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"). The historical ITC percentage has decreased from 30% to 26% of the basis of a solar energy system that began construction during 2020, 22% for 2021, and zero for residential and 10% for commercial if construction begins after 2021 or if the solar energy system is placed into service after 2023. 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. OnMarch 9, 2020 , we issued$320.0 million aggregate principal amount of our Convertible Senior Notes due 2025 (the "Notes due 2025") in a private placement. The Notes due 2025 are general unsecured obligations and bear interest at a rate of 0.25% per year, payable semi-annually onMarch 1 andSeptember 1 of each year, beginning onSeptember 1, 2020 . The Notes due 2025 will mature onMarch 1, 2025 , unless earlier repurchased by us or converted at the option of the holders. Further information relating to the Notes due 2025 may be found in Note 8, "Debt," of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q and below under the section titled "- Liquidity and Capital Resources."Enphase Energy, Inc. | 2020 Form 10-Q | 30
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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 the Harmonized Tariff Schedule ofthe United States (the "Tariff Exclusion"). The Tariff Exclusion applies to covered products under theChina 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$39 million plus accrued interest on tariffs previously paid fromSeptember 24, 2018 toMarch 31, 2020 for certain microinverters that qualify for the Tariff Exclusion. The refund request is subject to review and approval by theU.S. Customs and Border Protection ; therefore, we have assessed the probable loss recovery in the three and nine months endedSeptember 30, 2020 is equal to the approved refund requests available to us prior to issuance of the financial statements onOctober 27, 2020 . As ofSeptember 30, 2020 , we have received$16.0 million of tariff refunds and accrued for$7.0 million tariff refunds that were approved, however, not yet received on or beforeSeptember 30, 2020 . As of both the three and nine months endedSeptember 30, 2020 , we have recorded$23.0 million as a reduction to cost of revenues in our condensed consolidated statements 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. The tariff refund receivable of$7.0 million is 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 the condensed consolidated balance sheet as ofSeptember 30, 2020 . Potential tariff refunds not recorded as ofSeptember 30, 2020 totaled approximately$16.0 million plus accrued interest and will be recognized as a reduction to cost of revenues if and when approved. Although we feel the requests for refunds are supportable, we cannot be sure such requests will not be challenged by the government. We are also unable to predict the timing of receipt of any amounts approved. The Tariff Exclusion expired onAugust 7, 2020 and those microinverter products now are subject to tariffs. We 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. Impact of COVID-19 The ongoing COVID-19 pandemic ("COVID-19") continues to cause disruptions and uncertainties, including in the core markets in which we operate. The COVID-19 pandemic has significantly curtailed the movement of people, goods and services and had a notable impact on general economic conditions including but not limited to the temporary closures of many businesses, "shelter in place" orders and other governmental regulations, and reduced consumer spending. The most significant near-term impacts of COVID-19 on our financial performance are a decline in sales orders as future residential and commercial system owners are canceling sales meetings with system installation professionals or postponing system installations. As the purchase of new solar energy management solutions declines as part of the impact of COVID-19 on consumer spending, many businesses through which we distribute our products are working at limited operational capacity. The extent of the impact of COVID-19 on our future operational and financial performance will depend on various future developments, including the duration and spread of the outbreak, impact on our employees, impact on our customers, effect on our sales cycles or costs, and effect on our supply chain and vendors, all of which are uncertain and cannot be predicted, but which could have a material adverse effect on our business, results of operations or financial condition. Further information relating to the risks and uncertainties related to the ongoing COVID-19 pandemic may be found in Part II, Item 1A "Risk Factors" of this Form 10-Q, as well as in the "Risk Factors" section in our 2019 Annual Report on Form 10-K that could be heightened due to duration and spread, among other impacts of the pandemic. 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.
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The Enphase Home Energy Solution with IQ™ platform 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.
Our integrated approach to energy management helps to facilitate ease of
installation and optimizing a home's energy usage. Enphase's Always-On connected
system also provides 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 Enphase Combiner 3C™ that
includes the Envoy™ Communications Gateway, Enphase Enlighten™, a cloud-based
energy management platform, Enphase IQ Combiner 3C™, designed to provide an
uninterrupted connectivity to Enphase Enlighten, 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 IQ 7™ microinverter and Enphase IQ 7+™ 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 IQ 7X™
product addresses 96-cell PV modules up to 400W direct current ("DC") and with
its 97.5 percent California Energy Commission ("CEC") efficiency rating, is
ideal for integration into high power modules. Our IQ 7A™ microinverters are for
solar modules up to 450 W, targeting high-power residential and commercial
applications. Our customers should be able to pair the IQ 7A 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 continued to make steady progress during the third
quarter of 2020 with our ACM partners, including SunPower, Panasonic Corporation
of North America , LONGi Solar , Solaria Corporation , Hanwha Q CELLS, and Maxeon
Solar Technologies. We announced during the third quarter of 2020 a strategic
partnership with Sonnenstromfabrik (CS Wismar GmbH ), one of Europe's most
modern, high-quality manufacturers of solar modules, to develop the first
high-efficiency Enphase Energized™ ACM for the European residential solar
market. These ACMs are available in Germany , Belgium , France , and the
Netherlands .
Our next-generation battery in North America is Enphase Encharge 10™ or Encharge
3™ storage systems, with usable and scalable capacity of 10.1 kWh and 3.4 kWh,
respectively. Enphase Encharge™ 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 compatible with both new and existing Enphase IQ
solar systems with IQ 6™ or IQ 7™ microinverters and provide a simple upgrade
path for our existing solar customers. We started production shipments of
Enphase Encharge storage systems to customers in North America during the second
quarter of 2020.
Our next-generation IQ 8™ system is based upon our Always On Enphase Ensemble™
energy management technology. This system has five components: 1) energy
generation, which is accomplished with the grid-agnostic microinverter IQ 8; 2)
energy storage, which is achieved by the Encharge™ battery with capacities of
10.1 kWh and 3.4 kWh; 3) Enpower™ smart switch, which includes a microgrid
interconnect device (MID); 4) communication and control via the combiner box
with the Envoy gateway; and 5) Enlighten, which is the internet of things, or
IoT, cloud software.
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Results of OperationsNet Revenues Three Months Ended Nine Months Ended September 30, Change in September 30, Change in 2020 2019 $ % 2020 2019 $ % (In thousands, except percentages)
Net revenues
Three months endedSeptember 30, 2020 and 2019 Net revenues decreased by 1% or$1.6 million for the three months endedSeptember 30, 2020 , as compared to the same period in 2019, primarily due to the 20% decrease in microinverter unit volume shipped globally, partially offset by shipments of our Enphase Encharge storage systems to customers inNorth America . We sold approximately 1,443 thousand microinverter units in the three months endedSeptember 30, 2020 , as compared to approximately 1,796 thousand microinverter units in the same period in 2019. Nine months endedSeptember 30, 2020 and 2019 Net revenues increased by 23% or$95.3 million for the nine months endedSeptember 30, 2020 , as compared to the same period in 2019, primarily due to the 12% increase in microinverter unit volume shipped primarily as a result of business growth in theU.S. , higher microinverter units shipped in the first quarter of 2020 as our customers took advantage of safe harbor guidance from theIRS and shipments of our Enphase Encharge storage systems to customers inNorth America . We sold approximately 4,543 thousand microinverter units in the nine months endedSeptember 30, 2020 , as compared to approximately 4,056 thousand microinverter units in the same period in 2019. Cost of Revenues and Gross Profit Three Months Ended
Nine Months Ended
September 30, Change in September 30, Change in
2020 2019 $ % 2020 2019 $ %
(In thousands, except percentages)
Cost of revenues$ 83,522 $ 115,351 $ (31,829 ) (28 )%$ 285,543 $ 270,937 $ 14,606 5 % Gross profit 94,981 64,706 30,275 47 % 224,043 143,364 80,679 56 % Gross margin 53.2 % 35.9 %
44.0 % 34.6 %
Three months endedSeptember 30, 2020 and 2019 Cost of revenues decreased by 28% or$31.8 million for the three months endedSeptember 30, 2020 , as compared to the same period in 2019, primarily due to$23.0 million in refunds approved for tariffs previously paid on certain microinverter products that meet the definition of the Tariff Exclusion, which is recorded as a reduction to our cost of revenues. Of the$39 million total refund sought, we have received an approval for$23.0 million throughOctober 27, 2020 , of which we had received$16.0 million in the three months endedSeptember 30, 2020 . In addition, the decline in cost of revenue period over period is due to a decrease in the unit cost of our products as a result of our cost reduction efforts and decrease in the volume of microinverter units sold, partially offset by shipments of our Enphase Encharge storage systems to customers inNorth America . The Tariff Exclusion expired onAugust 7, 2020 . Gross margin increased by 17.3 percentage points for the three months endedSeptember 30, 2020 , as compared to the same period in 2019. The increase in gross margin was primarily attributable to the$23.0 million in refunds approved for tariffs mentioned above as well as our overall pricing and cost management efforts, including the transition of our contract manufacturing toMexico to mitigate tariffs, partially offset by a higher fixed costs per unit due to lower volume. Nine months endedSeptember 30, 2020 and 2019 Cost of revenues increased by 5% or$14.6 million for the nine months endedSeptember 30, 2020 , as compared to the same period in 2019, primarily due to higher volume of microinverter units sold and shipments of our Enphase Encharge storage systems primarily as a result of business growth in theU.S. , as well as higher units shipped in the first quarter of 2020 as our customers took advantage of safe harbor guidance from theIRS , partially offset by the$23.0 million in refunds approved for tariffs mentioned above and a decrease in the unit cost of our products as a result of our cost reduction efforts.Enphase Energy, Inc. | 2020 Form 10-Q | 33
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Gross margin increased by 9.4 percentage points for the nine months endedSeptember 30, 2020 , as compared to the same period in 2019. The increase in gross margin was primarily attributable to the$23.0 million in refunds approved for tariffs mentioned above as well as our overall pricing and cost management efforts, including the transition of our contract manufacturing toMexico to mitigate tariffs. Research and Development Three Months Ended Nine
Months Ended
September 30, Change in September 30, Change in
2020 2019 $ % 2020 2019 $ %
(In thousands, except percentages)
Research
and
development $ 15,052 $ 11,085 $ 3,967 36 % $ 40,120 $ 29,213 $ 10,907 37 %
Percentage
of net
revenues 8 % 6 % 8 % 7 %
Three months ended September 30, 2020 and 2019
Research and development expense increased by 36% or $4.0 million for the three
months ended September 30, 2020 , as compared to the same period in 2019. The
increase was primarily due to $4.3 million higher personnel-related expenses
associated with the innovation and development, introduction and qualification
of new products, partially offset by a $0.3 million reduction in travel
expenditure as we implemented travel restrictions prohibiting all non-essential
business travel. The increase in personnel-related expenses was primarily due to
hiring employees in New Zealand , India and U.S. , increasing total compensation
costs. The amount of research and development expenses may fluctuate from period
to period due to differing levels and stages of development activity.
Nine months ended September 30, 2020 and 2019
Research and development expense increased by 37% or $10.9 million for the nine
months ended September 30, 2020 , as compared to the same period in 2019. The
increase was primarily due to $9.8 million higher personnel-related expenses and
$1.5 million of outside consulting, engineering services and equipment
associated with the innovation and development, introduction and qualification
of new products, partially offset by a $0.4 million reduction in travel
expenditure as we implemented travel restrictions prohibiting all non-essential
business travel. The increase in personnel-related expenses was primarily due to
hiring employees in New Zealand , India and US, increasing total compensation
costs. The amount of research and development expenses may fluctuate from period
to period due to differing levels and stages of development activity.
Sales and Marketing
Three Months Ended Nine Months Ended
September 30, Change in September 30, Change in
2020 2019 $ % 2020 2019 $ %
(In thousands, except percentages)
Sales and
marketing $ 14,645 $ 9,551 $ 5,094 53 % $ 38,788 $ 26,038 $ 12,750 49 %
Percentage
of net
revenues 8 % 5 % 8 % 6 %
Three months ended September 30, 2020 and 2019
Sales and marketing expense increased by 53% or $5.1 million for the three
months ended September 30, 2020 as compared to the same period in 2019. The
increase was primarily due to $3.7 million of higher personnel-related expenses
as a result of our efforts to improve customer experience by hiring additional
employees to reduce the average call wait time for customers, as well as support
our business growth in the U.S. and international expansion in Europe , and $1.8
million for a combination of higher marketing expenses, professional services,
advertising costs and facilities costs to enable business growth, partially
offset by $0.4 million reduction in travel expenditure as we implemented travel
restrictions prohibiting all non-essential business travel and converting where
possible our in-person sales, trainings and marketing events to virtual-only due
to COVID-19.
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Nine months endedSeptember 30, 2020 and 2019 Sales and marketing expense increased by 49% or$12.8 million for the nine months endedSeptember 30, 2020 as compared to the same period in 2019. The increase was primarily due to$9.9 million of higher personnel-related expenses as result of our efforts to improve customer experience by hiring additional employees to reduce the average call wait time for customers, as well as support our business growth in theU.S. and international expansion inEurope , and$3.3 million for a combination of higher marketing expenses, professional services, advertising costs and facilities costs to enable business growth, partially offset by$0.5 million reduction in travel expenditure as we implemented travel restrictions prohibiting all non-essential business travel and converting where possible our in-person sales, trainings and marketing events to virtual-only due to COVID-19. General and Administrative Three Months Ended Nine Months Ended September 30, Change in September 30, Change in 2020 2019 $ % 2020 2019 $ % (In thousands, except percentages) General and administrative$ 13,525 $ 9,895 $ 3,630 37 % $
37,810$ 28,358 $ 9,452 33 % Percentage of net revenues 8 % 5 % 7 % 7 % Three months endedSeptember 30, 2020 and 2019 General and administrative expense increased 37% or$3.6 million for the three months endedSeptember 30, 2020 , as compared to the same period in 2019. The increase was primarily due to$2.4 million of higher personnel-related expenses,$0.9 million of higher legal and professional services and$0.4 million of other corporate costs to support our business growth, partially offset by$0.1 million reduction in travel expenditures as we implemented travel restrictions prohibiting all non-essential business travel in response to COVID-19. Nine months endedSeptember 30, 2020 and 2019 General and administrative expense increased 33% or$9.5 million for the nine months endedSeptember 30, 2020 , as compared to the same period in 2019. The increase was primarily due to$7.9 million of higher personnel-related expenses,$1.0 million of higher legal and professional services and,$0.9 million of other operational and facilities costs to support our business growth, partially offset by$0.3 million reduction in travel expenditures as we implemented travel restrictions prohibiting all non-essential business travel in response to COVID-19. Restructuring Charges Three Months Ended Nine Months Ended September 30, Change in September 30, Change in 2020 2019 $ % 2020 2019 $ % (In thousands, except percentages) Restructuring charges $ -$ 469 $ (469 ) (100 )% $ -$ 1,468 $ (1,468 ) (100 )% Three months endedSeptember 30, 2020 and 2019 We completed our 2018 restructuring plan in 2019, hence we incurred no restructuring expenses during the three months endedSeptember 30, 2020 . Restructuring charges for three months endedSeptember 30, 2019 primarily included$0.5 million of one-time termination benefits and other employee-related expenses under our 2018 Plan. Nine months endedSeptember 30, 2020 and 2019 We completed our 2018 restructuring plan in 2019, hence we incurred no restructuring expenses during the nine months endedSeptember 30, 2020 . Restructuring expense for the nine months endedSeptember 30, 2019 primarily include$1.6 million of one-time termination benefits and other employee-related expenses under our 2018 Plan, partially offset by a$0.1 million reduction in lease loss reserve.
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Other Expense, Net
Three Months Ended Nine Months Ended
September 30, Change in September 30, Change in
2020 2019 $ % 2020 2019 $ %
(In thousands, except percentages)
Interest
income $ 110 $ 894 $ (784 ) (88 )% $ 1,483 $ 1,698 $ (215 ) (13 )%
Interest
expense (5,993 ) (2,286 ) (3,707 ) 162 % (15,100 ) (7,388 ) (7,712 ) 104 %
Other
expense, net (1,031 ) (943 ) (88 ) 9 % (1,302 ) (6,904 ) 5,602 (81 )%
Change in
fair value
of
derivatives - - - ** $ (44,348 ) $ - $ (44,348 ) **
Total other
expense, net $ (6,914 ) $ (2,335 ) $ (4,579 ) (196 )% $ (59,267 ) $ (12,594 ) $ (46,673 ) (371 )%
** Not meaningful
Three months ended September 30, 2020 and 2019
Interest income of $0.1 million for the three months ended September 30, 2020
decreased, as compared to $0.9 million in the same period in 2019, primarily due
to significant decline in interest rates earned on cash balances, partially
offset by higher average cash balance earning interest in the three months ended
September 30, 2020 compared to the same period in 2019.
Interest expense of $6.0 million for the three months ended September 30, 2020
primarily includes $5.8 million related to the accretion of the debt discount,
amortization of debt issuance cost and coupon interest incurred associated with
our Notes due 2024 and Notes due 2025, interest expense of $0.1 million related
to coupon interest incurred and amortization of debt issuance costs associated
with our Notes due 2023 and $0.1 million of interest expense related to
long-term financing receivable recorded as debt. Interest expense of
$2.3 million for the three months ended September 30, 2019 primarily includes
$2.0 million related to the accretion of the debt discount, amortization of debt
issuance cost and coupon interest incurred associated with our Notes due 2024,
$0.2 million interest expense related to long-term financing receivable recorded
as debt and interest expense of $0.1 million related to coupon interest incurred
and amortization of debt issuance costs associated with our Notes due 2023.
Other expense, net of $1.0 million for the three months ended September 30,
2020 , relates to a net loss related to foreign currency exchange and
remeasurement. Other expense, net of $0.9 million for the three months ended
September 30, 2019 , primarily relates to a net loss related to foreign currency
exchange and remeasurement.
Nine months ended September 30, 2020 and 2019
Interest income of $1.5 million for the nine months ended September 30, 2020
decreased, as compared to $1.7 million in the same period in 2019, primarily due
to significant decline in interest rates earned on cash balances, partially
offset by a higher average cash balance earning interest in the nine months
ended September 30, 2020 compared to the same period in 2019.
Interest expense of $15.1 million for the nine months ended September 30, 2020
primarily includes $14.5 million related to the accretion of the debt discount,
amortization of debt issuance cost and coupon interest incurred associated with
our Notes due 2024 and Notes due 2025, $0.4 million of interest expense related
to long-term financing receivable recorded as debt and interest expense of
$0.2 million related to coupon interest incurred and amortization of debt
issuance costs associated with our Notes due 2023. Interest expense of
$7.4 million for the nine months ended September 30, 2019 primarily
includes $3.4 million related to the repayment of our term loans,
$2.6 million related to the accretion of the debt discount, amortization of debt
issuance cost and coupon interest incurred associated with our Notes due 2024,
and interest expense of $1.4 million related to coupon interest incurred and
amortization of debt issuance costs associated with our Notes due 2023.
Other expense, net of $1.3 million for the nine months ended September 30, 2020
primarily relates to the net loss related to foreign currency exchange and
remeasurement. Other expense, net of $6.9 million for the nine months ended
September 30, 2019 primarily relates to the $6.0 million fees paid for the
repurchase and exchange of our Notes due 2023 and $0.9 million net loss related
to foreign currency exchange and remeasurement.
Change in fair value of derivatives 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
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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 . See Note 8, "Debt," of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for additional information. Income Tax Benefit (Provision) Three Months Ended Nine Months Ended September 30, Change in September 30, Change in 2020 2019 $ % 2020 2019 $ % (In thousands, except percentages) Income tax benefit (provision)$ (5,483 ) $ (272 ) $ (5,211 ) **$ 12,946 $ (1,211 ) $ 14,157 ** ** Not meaningful Three months endedSeptember 30, 2020 and 2019 The income tax provision of$5.5 million for the three months endedSeptember 30, 2020 , calculated using the annualized effective tax rate method, increased compared to the income tax provision of$0.3 million in 2019, calculated using the discrete tax approach, which is due to higher projected tax expense in theU.S. and foreign jurisdictions that are profitable in 2020 compared to 2019, partially offset by increased tax deduction of stock based compensation. Nine months endedSeptember 30, 2020 and 2019 The income tax benefit of$12.9 million for the nine months endedSeptember 30, 2020 , calculated using the annualized effective tax rate method, increased compared to the income tax provision of$1.2 million in 2019, calculated using the discrete tax approach, which is due to tax deduction from employee stock compensation as a discrete event in the nine months endedSeptember 30, 2020 , partially offset by higher projected tax expense in theU.S. and foreign jurisdictions that are profitable in 2020 compared to 2019. Liquidity and Capital Resources Sources of Liquidity As ofSeptember 30, 2020 , we had$593.7 million in working capital, including cash and cash equivalents of$661.8 million , of which approximately$654.3 million were held in theU.S. Our cash and cash equivalents primarily consist ofU.S. government money market mutual funds and both interest-bearing and non-interest-bearing deposits, with the remainder held in various foreign subsidiaries. We consider amounts held outside theU.S. to be accessible and have provided for the estimatedU.S. income tax liability associated with our foreign earnings. 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. While we have experienced delays in collections from certain customers due to COVID-19, we believe we will be able to meet our anticipated cash needs for at least the next 12 months. 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 highly uncertain and cannot be precisely predicted at this time. Convertible Notes Notes due 2023. As ofSeptember 30, 2020 , 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 onFebruary 1 andAugust 1 of each year. The Notes due 2023 will mature onAugust 1, 2023 , unless earlier repurchased by us or converted at the option of the holders. Notes due 2024. As ofSeptember 30, 2020 , we had$132.0 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 onJune 1 andDecember 1 of each year. The Notes due 2024 will mature onJune 1, 2024 , unless earlier repurchased by us or converted at the option of the holders at a conversion price of$20.50 per share. Enphase Energy, Inc. | 2020 Form 10-Q | 37
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The Notes due 2024 may be converted on any day prior to the close of business on the business day immediately precedingDecember 1, 2023 , in multiples of$1,000 principal amount, at the option of the holder only under any of the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending onSeptember 30, 2019 (and only during such calendar quarter), if the last reported sale price of the our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to$26.6513 (130% of the conversion price) on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the "measurement period") in which the "trading price" (as defined in the relevant indenture) per$1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the our common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. 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. FromApril 1, 2020 throughDecember 31, 2020 , the Notes due 2024 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 onMarch 31, 2020 ,June 30, 2020 andSeptember 30, 2020 was greater than or equal to$26.6513 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 2024, 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 2024. Also, concurrently with the offering of the Notes due 2024, we entered into privately-negotiated warrant transactions whereby we issued warrants to effectively increase the overall conversion price of Notes due 2024 from$20.5010 to$25.2320 . As ofOctober 27, 2020 , we've received the request for conversion of approximately$5.4 million in principal amount of Notes due 2024, of which 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 inDecember 2020 . We may purchase shares under the convertible note hedge to the extent shares of our common stock are issued for the additional conversion amount due over the principal amount. As ofOctober 27, 2020 , we had not purchased any shares under the convertible note hedge and the warrants had not been exercised and remain outstanding. If we receive additional request for conversion from the holders of the Notes due 2024 to exercise their right to convert the debt to equity we have asserted our intent and ability to settle the$132.0 million aggregate principal amount of the Notes due 2024 in cash. Notes due 2025. As ofSeptember 30, 2020 , we had$320.0 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 onMarch 1 andSeptember 1 of each year, beginning onSeptember 1, 2020 . The Notes due 2025 will mature onMarch 1, 2025 , unless earlier repurchased by us or converted at the option of the holders at a conversion price of$81.54 per share. The Notes due 2025 may be converted on any day prior to the close of business on the business day immediately precedingSeptember 1, 2024 , in multiples of$1,000 principal amount, at the option of the holder only under any of the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending onJune 30, 2020 (and only during such calendar quarter), if the last reported sale price of the our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to$81.5400 (130% of the conversion price) on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the "measurement period") in which the "trading price" (as defined in the relevant indenture) per$1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the our common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On and afterSeptember 1, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date ofMarch 1, 2025 , holders may convert their notes at any time, regardless of the foregoing circumstances. Upon the occurrence of a fundamental change (as defined in the relevant indenture), holders may require the Company to repurchase all or a portion of their Notes due 2025 for cash at a price equal to 100% of the principal amount of the notes to be repurchased plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.Enphase Energy, Inc. | 2020 Form 10-Q | 38
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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$106.9400 rather than the Notes due 2025 conversion price of$81.5400 . We received approximately$71.6 million from the sale of the warrants. As ofOctober 27, 2020 , the Notes due 2025 were not convertible, therefore, we had not purchased any shares under the convertible note hedge and the warrants had not been exercised and remain outstanding. If holders of the Notes due 2025 are able to convert the debt to equity, and exercise that right, we have asserted our intent and ability to settle the$320.0 million aggregate principal amount of the Notes due 2025 in cash. See Note 8, "Debt," of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for more information relating to the convertible note hedge transactions and warrants. Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the effects of COVID-19 and other risks detailed in Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q, as well as in the "Risk Factors" section in our 2019 Annual Report on Form 10-K. We believe that our cash flow from operations with existing cash and cash equivalents 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. Cash Flows. The following table summarizes our cash flows for the periods presented: Nine Months EndedSeptember 30, 2020 2019 (In thousands)
Net cash provided by operating activities
Cash Flows from Operating Activities For the nine months endedSeptember 30, 2020 , net cash provided by operating activities was$132.2 million compared to net cash provided by operating activities of$36.8 million in the same period 2019, an increase of$95.4 million year-over-year. This$95.4 million increase in net cash provided by operating activities is primarily driven by an increase in our net revenues of$95.3 million and an increase in our gross profit of$80.7 million , of which$23.0 million relates to approved refunds for tariffs previously paid on certain microinverter products that meet the definition of the Tariff Exclusion, and of that$23.0 million approved,$16.0 million was received and$7.0 million was accrued as a reduction in accounts payable, thus contributing to$16.5 million of higher cash flows generated during the nine months endedSeptember 30, 2020 as compared to the same period in 2019, adjusted for$52.3 million higher net non-cash charges and$26.5 million decrease in cash used in changes from working capital. Non-cash charges include change in the fair value of derivatives, deferred income tax, stock-based compensation, amortization of debt discount, and depreciation and amortization. The$26.5 million decrease in cash used in changes from working capital for the nine months endedSeptember 30, 2020 , compared to the same period in 2019, was primarily due to collections of$79.7 million of accounts receivable and$8.5 million decrease in inventory, partially offset by$35.3 million decrease in deferred revenue as we delivered safe harbor orders that were prepaid in the fourth quarter of 2019 and$27.9 million decrease in accounts payable due to pay off of liabilities.
Enphase Energy, Inc. | 2020 Form 10-Q | 39
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Cash Flows from Investing Activities For the nine months endedSeptember 30, 2020 , net cash used in investing activities was$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. For the nine months endedSeptember 30, 2019 , net cash used in investing activities of$7.4 million primarily resulted from purchases of test and assembly equipment to expand our supply capacity and related facility improvements, and capitalized costs related to internal-use software. Cash Flows from Financing Activities For the nine months endedSeptember 30, 2020 , net cash provided by financing activities of$245.3 million was primarily from$312.4 million net proceeds from the issuance of our Notes due 2025,$71.6 million from sale of warrants related to our Notes due 2025,$4.7 million net proceeds from employee stock option exercises and issuance of common stock under our employee stock incentive program, partially offset by$89.1 million purchase of convertible note bond hedge related to our Notes due 2025,$52.0 million payment of employee withholding taxes related to net share settlement of equity awards and$2.3 million of repayment on sale of long-term financing receivables. For the nine months endedSeptember 30, 2019 , net cash provided by financing activities of$67.8 million was primarily from net proceeds of$127.5 million received from the issuance of our Notes due 2024,$29.8 million from sale of warrants, as well as$2.9 million net proceeds from issuance of common stock under our employee stock incentive program. These proceeds were partially offset by$45.7 million for principal payments on debts and financing fees associated with repayment of our term loan,$36.3 million for purchase of bond hedges related to our Notes due 2024,$6.0 million attributable to inducement costs incurred for repurchase of our Notes due 2023 and$4.4 million for the payment of taxes related to net share settlement of equity awards. Contractual Obligations Our contractual obligations primarily consist of our Notes due 2025, Notes due 2024, Notes due 2023, obligations under operating leases and inventory component purchase. As ofSeptember 30, 2020 , 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, 2019 . For more information on our future minimum operating leases and inventory component purchase obligations as ofSeptember 30, 2020 , see Note 9, Operating Leases section and Purchase Obligations section under "Commitments and Contingencies", of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q. InMarch 2020 , we issued the Notes due 2025 and inOctober 2020 , we received a request for conversion of approximately$5.4 million in principal amount of Notes due 2024. The following table updates our contractual obligations as ofSeptember 30, 2020 associated with the Notes due 2025 and Notes due 2024. For more information on our Notes due 2025 and Notes due 2024, see Note 8, "Debt" of the notes to condensed consolidated financial statements included in Part 1 of this Form 10-Q. Payments Due by Period 2020 (remaining Total three months) (1) 2021-2022 2023-2024 Beyond 2024 (In thousands) Notes due 2024 principal and interest 137,112 6,020 2,535 128,557 - Notes due 2025 principal and interest 323,602 - 1,600 1,600 320,402 Total$ 460,714 $ 6,020$ 4,135 $ 130,157 $ 320,402
(1) Includes approximately
of which 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 ourcommon stock in accordance with the applicable indenture. Such conversion
will be settled in December 2020 after the $0.6 million interest due on
December 1, 2020 .
Enphase Energy, Inc. | 2020 Form 10-Q | 40--------------------------------------------------------------------------------
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Off-Balance Sheet Arrangements As ofSeptember 30, 2020 , 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 theU.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. 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. This had a negative impact on our sales and our results of operations for the second quarter of 2020 and we expect this to continue to have a negative impact on our sales and our results of operations for the remainder of 2020. In preparing our condensed consolidated financial statements in accordance with GAAP, we are required to make estimates, assumptions and judgments that affect the amounts reported in our 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, we are not aware of any specific event or circumstance that would require us to update our estimates, judgments or revise the carrying value of our 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 our financial statements. 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" of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for a discussion of adoption of new and recently issued accounting pronouncements. Item 3. Quantitative and Qualitative Disclosures About Market Risk For quantitative and qualitative disclosures about market risk, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" of our Annual Report on Form 10K for the fiscal year endedDecember 31, 2019 . Our exposures to market risk have not changed materially sinceDecember 31, 2019 , except as described below. Market Risk OnMarch 9, 2020 , we issued$320 million aggregate principal amount of our Notes due 2025, and entered into privately-negotiated convertible note hedge and warrant transactions, which in combination are intended to reduce the potential dilution from the conversion of the Notes due 2025 and to effectively increase the overall conversion price from$81.54 to$106.94 per share. For the period fromMarch 9, 2020 throughMay 19, 2020 , the Notes due 2025, convertible note hedge and warrant transactions could only be settled in cash because the number of authorized and unissued shares of our common stock that was not reserved for other purposes was less than the maximum number of underlying shares that would be required to settle the Notes due 2025, convertible note hedge and warrantsEnphase Energy, Inc. | 2020 Form 10-Q | 41
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transactions. As such, the embedded conversion option associated with the Notes due 2025, convertible notes hedge and warrants liability met the criteria for derivative accounting, and as a result, derivative financial instruments were marked-to-market at each reporting period. The volatile market conditions arising from the COVID-19 pandemic resulted in significant changes in the price of our common stock in the first half of 2020, causing variability in the fair value of these derivative financial instruments, and materially affecting our condensed consolidated statement of operations three and nine months endedSeptember 30, 2020 . Change in fair value of derivatives of$44.3 million for the nine months endedSeptember 30, 2020 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 . OnMay 20, 2020 , we received approval at our annual meeting of stockholders to increase the authorized shares of our common stock, par value$0.00001 per share, from 150,000,000 shares to 200,000,000 shares. As discussed further in Note 8, "Debt," of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q, we reclassified the remeasured fair value of embedded derivative, warrants and convertible notes hedge to additional paid-in-capital in the condensed consolidated balance in the second quarter of 2020. As a result of this reclassification, embedded derivative, warrants and convertible notes hedge are no longer marked to fair value at each reporting period. Credit Risk Financial instruments that subject us to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, and derivative financial instruments. We maintain a substantial portion of our cash balances in non-interest-bearing and interest-bearing deposits and money market accounts. The derivative financial instruments expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the arrangement. We mitigate this credit risk by transacting with major financial institutions with high credit ratings. We are not required to pledge, and are not entitled to receive, cash collateral related to these derivative instruments. We do not enter into derivative contracts for trading or speculative purposes. Our net revenues are primarily concentrated among a limited number of customers. We monitor the financial condition of our customers and perform credit evaluations whenever considered necessary and maintain an allowance for doubtful accounts for estimated potential credit losses.Enphase Energy, Inc. | 2020 Form 10-Q | 42
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