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 Q1 2021 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 34 million microinverters, and approximately 1.5 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 fourth quarter of 2019 and 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 first quarter of 2021 in comparison. Acquisitions OnJanuary 25, 2021 , we completed the acquisition of 100% of the shares ofSofdesk Inc. ("Sofdesk"), 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 Form 10-Q. Enphase Energy, Inc. | 2021 Form 10-Q | 41 -------------------------------------------------------------------------------- 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. 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 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 8, "Debt" , of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q. During the first quarter of 2021, holders exchanged$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 and exchanges, 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. 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 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$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,Enphase Energy, Inc. | 2021 Form 10-Q | 42 -------------------------------------------------------------------------------- Table of Contents 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 ofMarch 31, 2021 andDecember 31, 2020 , respectively. 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 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 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 with 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 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")Enphase Energy, Inc. | 2021 Form 10-Q | 43 -------------------------------------------------------------------------------- Table of Contents modules. Our IQ 7X™ 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 IQ 7A™ for high-power monofacial and bifacial solar modules to customers inAustralia andEurope . Our IQ 7A 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 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 fourth quarter of 2020 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™ 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™ 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™, IQ 6™, IQ 7™ 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 storage systems to customers inNorth America during the second quarter of 2020 and expect to launch them inAustralia andEurope in 2021. We expect further revisions of our storage products with Ensemble technology to be released in 2021, with a focus on the grid-agnostic IQ 8™ PV microinverter for residential installations. 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 ("IoT"), cloud software. The advantage of IQ 8s on the roof will be that these grid-forming microinverters produce power from panels even during blackouts, as long as the sun is still shining. It addresses a major drawback of traditional solar installations without the need for storage and is differentiated in that respect. We expect to introduce our small commercial solution in 2021. The core element of this solution is our IQ 8D™ microinverter which allows an installer to connect two solar panels to a single microinverter. We also expect to introduce Enphase IQ 8D™ for commercial solar purposes. We are making progress on our portable power station, formerly known as Ensemble-in-a Box™, an off-grid solar and storage system. The product will 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 | 44 --------------------------------------------------------------------------------
Table of Contents Results of OperationsNet Revenues Three Months Ended March 31, Change in 2021 2020 $ % (In thousands, except percentages) Net revenues$ 301,754
Net revenues increased by 47% or$96.2 million in three months endedMarch 31, 2021 , as compared to the same period in 2020, primarily due to the 22% increase in the microinverter units volume shipped primarily as a result of business growth in theU.S. , favorable product mix as we sold more IQ 7+ microinverters relative to IQ 7 microinverters, increases in the average selling price due to customer mix, as well as shipments of our Enphase Encharge storage systems to customers inNorth America starting in the second quarter of 2020. We sold 2.5 million microinverter units in three months endedMarch 31, 2021 , as compared to 2.0 million units in three months endedMarch 31, 2020 . Cost of Revenues and Gross Margin Three Months Ended March 31, Change in 2021 2020 $ % (In thousands, except percentages) Cost of revenues$ 178,805 $ 124,870 $ 53,935 43 % Gross profit 122,949 80,675 42,274 52 % Gross margin 40.7 % 39.2 % 1.5 % Cost of revenues increased by 43% or$53.9 million in the three months endedMarch 31, 2021 , as compared to the same period in 2020, primarily due to higher volume of microinverter units sold, shipments of our Enphase Encharge storage systems starting in the second quarter of 2020, 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 higher expedited freight costs as a result of business growth in theU.S. in combination with semiconductor supply constraints, partially offset by a decrease in the unit cost of our products as a result of our cost reduction efforts. Gross margin increased by 1.5% points for the three months endedMarch 31, 2021 , as compared to the same period in 2020. The increase in gross margin was primarily attributable to 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 toMexico andIndia to mitigate tariffs. Research and Development Three Months Ended March 31, Change in 2021 2020 $ % (In thousands, except percentages) Research and development$ 21,818 $ 11,876 $ 9,942 84 % Percentage of net revenues 7 % 6 % Research and development expense increased by 84% or$9.9 million in three months endedMarch 31, 2021 , as compared to the same period in 2020. The increase was due to$8.4 million of higher personnel-related expenses and$1.5 million of outside consulting services associated with the development, introduction and qualification of new products. The increase in personnel-related expenses was primarily due to hiring employees inNew Zealand ,India and theU.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 | 45 -------------------------------------------------------------------------------- Table of Contents Sales and Marketing Three Months Ended March 31, Change in 2021 2020 $ % (In thousands, except percentages) Sales and marketing$ 19,622 $ 11,772 $ 7,850 67 % Percentage of net revenues 7 % 6 % Sales and marketing expense increased by 67% or$7.9 million in three months endedMarch 31, 2021 , as compared to the same period in 2020. The increase was primarily due to$6.1 million of higher personnel-related expenses primarily due to hiring employees as a result of our efforts to improve customer experience by hiring additional employees to provide 24/7 support for installers and Enphase system owners globally, as well as support our business growth in theU.S. and international expansion inEurope , and$2.3 million for a combination of higher marketing expenses, professional services, advertising costs and facility costs to enable business growth, partially offset by$0.5 million reduction in travel expenditures 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 pandemic. General and Administrative Three Months Ended March 31, Change in 2021 2020 $ % (In thousands, except percentages) General and administrative$ 20,123 $ 12,315 $ 7,808 63 % Percentage of net revenues 7 % 6 % General and administrative expense increased by 63% or$7.8 million in three months endedMarch 31, 2021 , as compared to the same period in 2020. The increase was primarily due to$3.1 million of acquisition related costs,$2.7 million of higher personnel-related expenses primarily due to hiring employees,$1.3 million of other operational, technological and facilities costs to support scalability of our business growth and$0.7 million of higher legal and professional services. Other Income (Expense), Net Three Months Ended March 31, Change in 2021 2020 $ % (In thousands, except percentages) Interest income $ 73$ 1,091 $ (1,018) (93) % Interest expense (7,329) (3,155) (4,174) 132 % Other (expense) income, net 573 (924) 1,497 (162) % Change in fair value of derivatives - 15,344 (15,344) (100) % Loss on partial settlement of convertible notes (56,369) - (56,369)
**%
Total other income (expense), net$ (63,052) $ 12,356 $ (75,408) (610) % ** Not meaningful Interest income of$0.1 million for the three months endedMarch 31, 2021 decreased, as compared to$1.1 million for the three months endedMarch 31, 2020 , primarily due to significant decline in interest rates earned on cash balances, partially offset by a higher average cash balance earning interest in the three months endedMarch 31, 2021 , compared to the same period in 2020. Enphase Energy, Inc. | 2021 Form 10-Q | 46 -------------------------------------------------------------------------------- Table of Contents Cash interest expense Cash interest expense for the three months endedMarch 31, 2021 and 2020 totaled$0.2 million and$0.4 million , respectively. Cash interest expense in the three months endedMarch 31, 2021 primarily includes$0.2 million coupon interest incurred with our Notes due 2025, Notes due 2024 and Notes due 2023. Cash interest expense in the three months endedMarch 31, 2020 primarily includes$0.4 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$7.1 million for the three months endedMarch 31, 2021 primarily relates to$7.0 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$0.1 million relates to the amortization of debt issuance costs associated with Notes due 2023. Interest expense of$2.8 million for the three months endedMarch 31, 2020 primarily includes$2.6 million related to the accretion of the debt discount and amortization of debt issuance cost incurred associated with our Notes due 2024 and Notes due 2025,$0.1 million of interest expense related to long-term financing receivable recorded as debt and interest expense of$0.1 million related to amortization of debt issuance costs associated with our Notes due 2023. Other income (expense), net of$0.6 million income for the three months endedMarch 31, 2021 relates to a$1.4 million non-cash gain related to change in the fair value of a debt security, partially offset by$0.8 million net loss related a foreign currency exchange and remeasurement. Other expense, net of$0.9 million expense for the three months endedMarch 31, 2020 , relates to the net loss from foreign currency exchange and remeasurement. The conversion option associated with the Notes due 2025 met the criteria for an embedded derivative liability which required bifurcation and separate accounting in the first quarter of 2020. In addition, the privately-negotiated convertible note hedge and warrant transactions were also classified as a derivative asset and liability, respectively, in the first quarter of 2020. Changes in the fair value of these derivatives prior to being classified in equity are reflected in other income (expense), net, in our condensed consolidated statement of operations. Change in fair value of derivatives of$15.3 million in the three months endedMarch 31, 2020 primarily includes the gain recognized for the change in fair value of our convertible notes embedded derivative and warrants of$23.6 million and$32.9 million , respectively. This gain is partially offset by a loss recognized for the change in fair value of our convertible notes hedge of$41.2 million . We did not have any derivatives during the three months endedMarch 31, 2021 . Loss on partial settlement of convertible notes 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,$9.4 million non-cash loss on settlement of$217.7 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 8, "Debt" of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q. Income Tax Benefit Three Months Ended March 31, Change in 2021 2020 $ %
(In thousands, except percentages)
Income tax benefit$ 33,364 $ 11,868 $ 21,496 181 % The income tax benefit of$33.4 million for the three months endedMarch 31, 2021 , increased compared to the income tax benefit of$11.9 million for the same period in 2020, both calculated using the annualized effective tax rate method, which is primarily due to higher stock-based compensation expense, partially offset by higher projected tax expense in foreign jurisdictions that are profitable in 2021 compared to 2020. Enphase Energy, Inc. | 2021 Form 10-Q | 47 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Sources of Liquidity As ofMarch 31, 2021 , we had$1.4 billion in working capital, including cash and cash equivalents of$1.5 billion , of which approximately$1.5 billion 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. 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 uncertain and cannot be precisely predicted at this time. Convertible Notes Notes due 2023. As ofMarch 31, 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 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 ofMarch 31, 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 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. FromApril 1, 2020 throughJune 30, 2021 , 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,September 30, 2020 ,December 31, 2020 andMarch 31, 2021 was greater than or equal to$26.65 on each applicable trading day. Upon conversion of any of the Notes due 2024, 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$20.50 to$25.23 . FromApril 1, 2021 throughApril 27, 2021 , we had not purchased any shares under the convertible note hedge and the warrants relating to the Notes due 2024. If we receive additional requests for conversion from the holders of the Notes due 2024, we have indicated our current intention and ability to settle the remaining$1.1 million aggregate principal amount of the Notes due 2024 in cash. Notes due 2025. As ofMarch 31, 2021 , we had$102.3 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. FromJanuary 1, 2021 throughJune 30, 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 onDecember 31, 2020 andMarch 31, 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. Enphase Energy, Inc. | 2021 Form 10-Q | 48 -------------------------------------------------------------------------------- Table of Contents 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. FromApril 1, 2021 throughApril 27, 2021 , we've received the request for conversion of approximately$0.1 million in principal amount of our Notes due 2025, of which we have elected to settle the aggregate principal amount of the Notes due 2025 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 inMay 2021 . We may purchase shares under the convertible note hedge for the Notes due 2025 to the extent shares of our common stock are issued for the additional conversion amount payable by us over the principal amount. FromApril 1, 2021 throughApril 27, 2021 , 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 2025 to exercise their right to convert the debt to equity, we have indicated our current intention and ability to settle the remaining$102.3 million aggregate principal amount of the Notes due 2025 in cash. Notes due 2026. As ofMarch 31, 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 onMarch 1, 2026 , unless earlier repurchased by us or converted at the option of the holders at a conversion price of$307.47 per share. Notes due 2028. As ofMarch 31, 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 onMarch 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. 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 endedDecember 31, 2020 filed onFebruary 16, 2021 . 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. Stock Repurchase Program InApril 2020 , our board of directors authorized the repurchase of up to$200.0 million of our common stock, exclusive of brokerage commissions. Purchases will be completed from time to time in the open market or through structured repurchase agreements with third parties. Such purchases are expected to continue throughMarch 2022 unless otherwise extended or shortened by our board of directors. The timing and amount of repurchases will depend on a variety of factors, including the price of our common stock compared to the intrinsic value, alternative investment opportunities, corporate and regulatory requirements and market conditions. As ofMarch 31, 2021 , we have not repurchased any shares under this repurchase program. Enphase Energy, Inc. | 2021 Form 10-Q | 49
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Cash Flows. The following table summarizes our cash flows for the periods
presented:
Three Months Ended
March 31,
2021 2020
(In thousands)
Net cash provided by operating activities
(702) (205)
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 tax benefit, 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$36.6 million for the three months endedMarch 31, 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$15.6 million cash repayment deemed attributable to accreted debt discount as an amount paid for settlement of$87.1 million and$217.7 million in aggregate principal amount of the Notes due 2024 and Notes due 2025, respectively. Cash Flows from Investing Activities For the three months endedMarch 31, 2021 , net cash used in investing activities was primarily from 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,$25.0 million from the investment in a debt security, and$9.9 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. For the three months endedMarch 31, 2020 , net cash used in investing activities was$3.4 million , primarily 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. Cash Flows from Financing Activities For the three months endedMarch 31, 2021 , net cash provided by financing activities of$824.7 million was primarily from$1,189.4 million net proceeds from the issuance of our Notes due 2028 and Notes due 2026,$220.8 million from sale of warrants related to our Notes due 2028 and Notes due 2026, and$0.2 million net proceeds from employee stock option exercises, partially offset by$286.2 million purchase of convertible note hedge related to our Notes due 2028 and Notes due 2026,$289.2 million cash paid to settle both$87.1 million in aggregate principal amount of the Notes due 2024 and$217.7 million in aggregate principal amount of the Notes due 2025,$9.2 million payment of employee withholding taxes related to net share settlement of equity awards, and$1.1 million of repayment on sale of long-term financing receivables. For the three months endedMarch 31, 2020 net cash provided by financing activities of$262.1 million was primarily from$313.0 million net proceeds from the issuance of our Notes due 2025,$71.6 million from sale of warrants related to our Notes due 2025,$2.0 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 hedge related to our Notes due 2025,$34.3 million payment of employee withholding taxes related to net share settlement of equity awards and$1.1 million of repayment on sale of long-term financing receivables.Enphase Energy, Inc. | 2021 Form 10-Q | 50 -------------------------------------------------------------------------------- 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 ofMarch 31, 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 ofMarch 31, 2021 , see Note 9, "Operating Leases" section and "Purchase Obligations" section of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q. The following table updates our contractual obligations as ofMarch 31, 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 8, "Debt" of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.
Payments Due by Period
2021 (remaining
Total nine months) 2022-2023 2024-2025 Beyond 2025
(In thousands)
Notes due 2024 principal and
interest $ 1,106 $ 11
103,284 213 512 102,559 -
Notes due 2026 principal and
interest 632,500 - - - 632,500
Notes due 2028 principal and
interest 575,000 - - - 575,000
Total $ 1,311,890 $ 224 $ 534 $ 103,632 $ 1,207,500
(1) Reflects the request for conversion of approximately $0.1 million in
principal amount of our Notes due 2025 received through issuance of the
condensed consolidated financial statements on April 27, 2021 , of which we have
elected to settle the aggregate principal amount of the Notes due 2025 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 May 2021 .
Off-Balance Sheet Arrangements
As of March 31, 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.
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 since the
second quarter of 2020 and we expect this to continue to have a negative impact
on our sales and our results of operations in the second quarter of 2021. 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
Enphase Energy, Inc. | 2021 Form 10-Q | 51
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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" section 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.
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