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OFFON

ENPHASE ENERGY, INC.

(ENPH)
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ENPHASE ENERGY : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

07/27/2021 | 04:53pm EDT
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 ended December 31, 2020.
Business Overview and First Half 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 36 million microinverters, and over 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 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 through December 31,
2019, which was reduced to a tax credit of 26% for any solar energy system that
began construction during 2020 through December 31, 2022, and 22% thereafter to
December 31, 2023 before being reduced to 10% for commercial installations and
0% for residential installations beginning on January 1, 2024. As a result,
several of our customers explored opportunities to purchase products in 2019 to
take advantage of safe harbor guidance from the IRS published in June 2018,
allowing them to preserve the historical 30% investment tax credit for solar
equipment purchased in 2019 for solar projects that are completed after December
31, 2019. Safe harbor prepayments from customers in the fourth quarter of 2019
resulted in $44.5 million of revenue recognized in the first quarter of 2020
when we delivered the product. There was no safe harbor revenue recognized in
the three and six months ended June 30, 2021 in comparison.
Acquisitions
On January 25, 2021, we completed the acquisition of 100% of the shares of
Sofdesk 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 on January 25,
2021 and (ii) are liable for up to approximately $3.7 million of contingent
consideration payable during the first quarter of 2022, of which we recorded a
liability of approximately $3.5 million representing the fair value of the
contingent consideration. In addition to the purchase price, we will be
obligated to pay up to approximately $3.7 million during the first quarter of
2022, subject to continued employment of key employees of Sofdesk. Further
details on the Sofdesk acquisition may be found in   Note 4  , "Business
Combinations", in the notes to the condensed consolidated financial statements
included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
                   Enphase Energy, Inc. | 2021 Form 10-Q | 42
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On March 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 in North America
and will enhance our digital transformation effort. As part of the purchase
price, we paid approximately $24.8 million in cash. In addition to the purchase
price paid, we are obligated to pay up to i) approximately $5.0 million in equal
monthly installments over the course of one year following the acquisition date;
and ii) approximately $5.0 million payable in one year following the acquisition
date subject to achievement of certain revenue and operational targets. Both
additional payments require continuous employment of certain key employees of
DIN. Further details on the DIN's solar design services business acquisition may
be found in   Note 4  , "Business Combinations", in the notes to the condensed
consolidated financial statements included in Part I, Item 1 of this Quarterly
Report on Form 10-Q.
Convertible Notes
On March 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, on March 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 and U.S. Bank National
Association, as trustee. The Notes due 2026 will mature on March 1, 2026 and
Notes due 2028 will mature on March 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 Quarterly Report on Form 10-Q.
During the first quarter of 2021, $87.1 million in aggregate principal amount of
the Notes due 2024 were converted or repurchased by us, and the principal amount
of the converted and repurchased Notes due 2024 was repaid in cash. Of the
$87.1 million in aggregate principal amount, $25.5 million in aggregate
principal amount was repurchased pursuant to separately- and
privately-negotiated exchange agreements entered into in March 2020 with certain
holders of Notes due 2024 concurrently with the offering of the Notes due 2026
and the Notes due 2028. In connection with such conversions or repurchases,
during the first quarter of 2021, we also issued 3.8 million shares of our
common stock to the holders of the converted and repurchased Notes due 2024 with
an aggregate fair value of $659.4 million, representing the conversion value in
excess of the principal amount of the Notes due 2024, which were fully offset by
shares received from the settlements of the associated note hedging
arrangements.
During the first quarter of 2021, concurrently with the offering of the Notes
due 2026 and the Notes due 2028, we entered into separately- and
privately-negotiated transactions to repurchase approximately $217.7 million in
aggregate principal amount of the Notes due 2025. The principal amount (and for
certain holders the conversion value in excess of the principal amount) of the
repurchased Notes due 2025 was repaid in cash. We also issued approximately
1.7 million shares of our common stock to the holders of the repurchased notes
with an aggregate fair value of $302.7 million, representing the conversion
value in excess of the principal amount of the Notes due 2025, which were fully
offset by shares received from the settlements of the associated note hedging
arrangements.
Repurchases of Common Stock
In April 2020, our board of directors authorized the repurchase of up to $200.0
million of our common stock, exclusive of brokerage commissions under the 2020
Repurchase Program. During the three and six months ended June 30, 2021, we
repurchased and subsequently retired approximately 1.7 million shares of common
stock from the open market at an average cost of $117.47 per share for a total
of $ 200.0 million. In May 2021, our board of directors authorized a new share
repurchase program (the "2021 Repurchase Program") pursuant to which we may
repurchase up to an aggregate of $500.0 million of our common stock. Purchases
may be completed from time to time in the open market or through structured
repurchase agreements with third parties. The program may be discontinued or
amended at any time and expires on May 13, 2024. Such purchases are expected to
continue through May 2024 unless otherwise extended or shortened by our board of
directors.
Tariff Refunds
On March 26, 2020, the Office 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 under U.S. note 20(ss)(40) to subchapter III of
chapter 99 of the
                   Enphase Energy, Inc. | 2021 Form 10-Q | 43
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Harmonized Tariff Schedule of the United States (the "Tariff Exclusion"). The
Tariff Exclusion applies to covered products under the China Section 301 Tariff
Actions ("Section 301 Tariffs") taken by the USTR exported from China to the
United States from September 24, 2018 until August 7, 2020. Accordingly, we
sought refunds totaling approximately $38.9 million plus approximately $0.6
million accrued interest on tariffs previously paid from September 24, 2018 to
March 31, 2020 for certain microinverters that qualify for the Tariff Exclusion.
The refund request was subject to review and approval by the U.S. Customs and
Border Protection.
As of December 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 before December 31, 2020. During the three
months ended March 31, 2021, we received the remaining $14.7 million tariff
refunds. For the year ended December 31, 2020, we recorded $38.9 million as a
reduction to cost of revenues in our condensed consolidated statement of
operations as the approved refunds relate to paid tariffs previously recorded to
cost of revenues, therefore, we recorded the corresponding approved tariff
refunds as credits to cost of revenues in the current period. For the year ended
December 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 of June 30, 2021 and December 31, 2020,
respectively.
The Tariff Exclusion expired on August 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 from China
which are not subject to the Tariff Exclusion.
COVID-19 Update
The COVID-19 pandemic has caused and continues to cause disruption to the U.S.
and global economies, including the impact of government and company actions to
reduce the spread of the virus and consumer behavior in response to the same;
and, although the United States and other countries have continued to roll out
vaccinations, it is uncertain how quickly and effectively such vaccinations will
be distributed or help to control the spread of COVID-19 and its variants. We
continue to actively monitor the impacts and potential impacts of the COVID-19
pandemic in all aspects of our business. Although we are unable to predict the
impact of the COVID-19 pandemic on our business, results of operations,
liquidity or capital resources at this time, we expect we may be negatively
affected if the pandemic and related public health measures result in
substantial manufacturing or supply chain problems, disruptions in local and
global economies, volatility in the global financial markets, overall reductions
in demand, delays in payment, restrictions on the shipment of our products, or
other ramifications. Further information relating to the risks and uncertainties
related to the ongoing COVID-19 pandemic may be found in the "Risk Factors"
section included in Part II, Item 1A in our 2020 Annual Report on Form 10-K for
the fiscal year ended December 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
                   Enphase Energy, Inc. | 2021 Form 10-Q | 44
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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") 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 in Australia and Europe. Our IQ 7A
microinverters, which began shipping to customers in North America in November
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 continue to make steady progress with our ACM
partners, including SunPower Corporation, Panasonic Corporation of North
America, LONGi Solar, Solaria Corporation, Hanwha Q CELLS, and Maxeon Solar
Technologies, Sonnenstromfabrik (CS Wismar GmBH), and DMEGC Solar.
During the second quarter of 2020, we introduced our Enphase Encharge 10™ and
Encharge 3™ battery storage systems, with usable and scalable capacity of 10.1
kWh and 3.4 kWh, respectively, based on Ensemble™ energy management technology,
which powers the world's first grid-independent microinverter-based storage
system to customers in North America. Enphase Encharge™ battery storage systems
feature Enphase embedded grid-forming microinverters that enable the Always-On
capability that keeps homes powered when the grid goes down, and the ability to
save money when the grid is up. These systems are now compatible with both new
and existing Enphase IQ solar systems with M-series™, IQ 6™ and IQ 7™
microinverters. In January 2021, we announced expanded compatibility of the
Enphase Storage system with our M-series microinverters and string inverters.
The expanded compatibility provides approximately 300,000 additional Enphase
system owners with the possibility of achieving grid-agnostic energy resilience
through the Enphase Upgrade Program. The program provides solar installers the
opportunity to renew engagements with the installed base of Enphase system
owners through microinverter, solar, and energy storage upgrades, and reflects
our continued commitment to reliability, service, and long-term customer
relationships.
We started production shipments of Enphase Encharge™ battery storage systems to
customers in North America during the second quarter of 2020, and to customers
in Germany during the second quarter of 2021. We expect to launch the product to
other markets in Europe and Australia in the second half of 2021.
During the second quarter of 2021, we introduced load control for our Enphase
Encharge™ battery storage systems. Load control allows homeowners to decide what
gets power in their home in the event of a grid outage, with the ability to
choose up to four loads.
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
Enphase 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.
                   Enphase Energy, Inc. | 2021 Form 10-Q | 45
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We expect to introduce our small commercial solution in the second half of 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 | 46
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Results of Operations
Net Revenues
                   Three Months Ended                                        Six Months Ended
                        June 30,                    Change in                    June 30,                    Change in
                  2021           2020             $            %           2021           2020             $            %
                                                     (In thousands, except percentages)
Net revenues   $ 316,057      $ 125,538      $ 190,519       152   %    $ 617,811      $ 331,083      $ 286,728        87   %


Three months ended June 30, 2021 and 2020
Net revenues increased by 152% or $190.5 million in three months ended June 30,
2021, as compared to the same period in 2020, primarily due to the 117% increase
in the microinverter units volume shipped primarily as a result of business
growth in the U.S. In the three months ended June 30, 2020, the COVID-19
pandemic resulted in a decline in sales orders. In the three months ended June
30, 2021, consumer demand improved from the rebound in economic growth as
compared to the same period in 2020 when we had an economic downturn from the
COVID-19 pandemic. We sold 2.4 million microinverter units in three months ended
June 30, 2021, as compared to 1.1 million units in three months ended June 30,
2020. The increase in net revenues is also due to 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 increase in shipments of
our Enphase Encharge™ storage systems to customers in North America and Europe.
Six months ended June 30, 2021 and 2020
Net revenues increased by 87% or $286.7 million for the six months ended
June 30, 2021, as compared to the same period in 2020, primarily due to the 55%
increase in the microinverter units volume shipped primarily as a result of
business growth in the U.S. In the six months ended June 30, 2020, the COVID-19
pandemic resulted in a decline in sales orders, partially offset by higher units
shipped in the first quarter of 2020 as our customers took advantage of safe
harbor guidance from the IRS. In the six months ended June 30, 2021, consumer
demand improved from the rebound in economic growth as compared to the same
period in 2020 when we had an economic downturn from the COVID-19 pandemic. We
sold approximately 4.8 million microinverter units in the six months ended
June 30, 2021, as compared to approximately 3.1 million units in the same period
in 2020. The increase in net revenues is also due to 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 increase in shipments of
our Enphase Encharge™ storage systems to customers in North America and Europe.
Cost of Revenues and Gross Margin
                              Three Months Ended                                                       Six Months Ended
                                   June 30,                           Change in                            June 30,                            Change in
                            2021              2020                $                 %               2021               2020                $                 %
                                                                            (In thousands, except percentages)
Cost of revenues        $ 188,256          $ 77,151          $ 111,105             144  %       $ 367,061          $ 202,021          $ 165,040              82  %
Gross profit              127,801            48,387             79,414             164  %         250,750            129,062            121,688              94  %
Gross margin                 40.4  %           38.5  %                             1.9  %            40.6  %            39.0  %                             1.6  %


Three months ended June 30, 2021 and 2020
Cost of revenues increased by 144% or $111.1 million in the three months ended
June 30, 2021, as compared to the same period in 2020, primarily due to higher
volume of microinverter units sold, higher shipments of our Enphase Encharge™
storage systems, higher expedited freight costs as a result of business growth
in the U.S. in combination with semiconductor supply constraints, and higher
costs of certain components experiencing supply constraints, partially offset by
a decrease in the unit cost of our products as a result of ramping microinverter
production at Salcomp in India since the fourth quarter of 2020 as well as other
cost reduction efforts.
Gross margin increased by 1.9 percentage points for the three months ended
June 30, 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 from China to Mexico and
India to mitigate tariffs.
                   Enphase Energy, Inc. | 2021 Form 10-Q | 47
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Six months ended June 30, 2021 and 2020
Cost of revenues increased by 82% or $165.0 million in the six months ended June
30, 2021, as compared to the same period in 2020, primarily due to higher volume
of microinverter units sold, higher shipments of our Enphase Encharge™ storage
systems, higher expedited freight costs as a result of business growth in the
U.S. in combination with semiconductor supply constraints, higher costs of
certain components experiencing supply constraints, and higher warranty expense
based on continuing analysis of field performance data and diagnostic root-cause
failure analysis primarily relating to our prior generation products, partially
offset by a decrease in the unit cost of our products as a result of ramping
microinverter production at Salcomp in India since the fourth quarter of 2020 as
well as other cost reduction efforts.
Gross margin increased by 1.6 percentage points for the six months ended June
30, 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 from China to Mexico and India to
mitigate tariffs.
Research and Development
                                  Three Months Ended                                                     Six Months Ended
                                       June 30,                           Change in                          June 30,                           Change in
                                2021              2020                $                %              2021              2020                $                %
                                                                              (In thousands, except percentages)
Research and development     $ 22,708          $ 13,192          $  9,516              72  %       $ 44,526          $ 25,068          $ 19,458              78  %
Percentage of net revenues          7  %             11  %                                                7  %              8  %


Three months ended June 30, 2021 and 2020
Research and development expense increased by 72% or $9.5 million in three
months ended June 30, 2021, as compared to the same period in 2020.
The increase was due to $6.6 million of higher personnel-related expenses and
$2.9 million of outside consulting services associated with our investment in
the development, introduction and qualification of new products innovation. The
increase in personnel-related expenses was primarily due to hiring employees in
New Zealand, India and the U.S. as well as onboarded employees through the
acquisition of Sofdesk, increasing total compensation costs, including
stock-based compensation. The amount of research and development expenses may
fluctuate from period to period due to the differing levels and stages of
development activity.
Six months ended June 30, 2021 and 2020
Research and development expense increased by 78% or $19.5 million in six months
ended June 30, 2021, as compared to the same period in 2020. The increase was
due to $15.0 million of higher personnel-related expenses and $4.5 million of
outside consulting services associated with our investment in the development,
introduction and qualification of new product innovation. The increase in
personnel-related expenses was primarily due to hiring employees in New Zealand,
India and the U.S. as well as onboarded employees through the acquisition of
Sofdesk, increasing total compensation costs, including stock-based
compensation. The amount of research and development expenses may fluctuate from
period to period due to the differing levels and stages of development activity.

                   Enphase Energy, Inc. | 2021 Form 10-Q | 48
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Sales and Marketing
                             Three Months Ended                                                     Six Months Ended
                                  June 30,                           Change in                          June 30,                           Change in
                           2021              2020                $                %              2021              2020                $                %
                                                                         (In thousands, except percentages)
Sales and marketing     $ 25,586          $ 12,371          $ 13,215             107  %       $ 45,208          $ 24,143          $ 21,065              87  %
Percentage of net
revenues                       8  %             10  %                                                7  %              7  %


Three months ended June 30, 2021 and 2020
Sales and marketing expense increased by 107% or $13.2 million in three months
ended June 30, 2021, as compared to the same period in 2020. The increase was
primarily due to $8.0 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 the U.S. and
international expansion in Europe, and $5.0 million for a combination of higher
marketing expenses, professional services, advertising costs and facility costs
to enable business growth.
Six months ended June 30, 2021 and 2020
Sales and marketing expense increased by 87% or $21.1 million in six months
ended June 30, 2021, as compared to the same period in 2020. The increase was
primarily due to $14.1 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
the U.S. and international expansion in Europe, and $7.2 million for a
combination of higher marketing expenses, professional services, advertising
costs and facility costs to enable business growth.
General and Administrative
                                   Three Months Ended                                                     Six Months Ended
                                        June 30,                           Change in                          June 30,                           Change in
                                 2021              2020                $                %              2021              2020                $                %
                                                                               (In thousands, except percentages)
General and administrative    $ 20,107          $ 11,970          $  8,137              68  %       $ 40,230          $ 24,285          $ 15,945              66  %
Percentage of net revenues           6  %             10  %                                                7  %              7  %


Three months ended June 30, 2021 and 2020
General and administrative expense increased by 68% or $8.1 million in three
months ended June 30, 2021, as compared to the same period in 2020. The increase
was primarily due to $3.7 million of higher personnel-related expenses primarily
due to hiring employees and post business combination employment-related
expense, $1.9 million of investments in technological infrastructure and other
operational and facilities costs to support scalability of our business growth,
$1.7 million of higher legal and professional services and $0.8 million of
acquisition related costs.
Six months ended June 30, 2021 and 2020
General and administrative expense increased by 66% or $15.9 million in six
months ended June 30, 2021, as compared to the same period in 2020. The increase
was primarily due to $6.3 million of higher personnel-related expenses primarily
due to hiring employees and post business combination employment-related
expense, $3.9 million of acquisition related costs, $3.3 million of investments
in technological infrastructure and other operational and facilities costs to
support scalability of our business growth and $2.4 million of higher legal and
professional services.

                   Enphase Energy, Inc. | 2021 Form 10-Q | 49
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Other Income (Expense), Net
                           Three Months Ended                                                          Six Months Ended
                                June 30,                              Change in                            June 30,                             Change in
                         2021                 2020                $                %                2021               2020                $                 %
                                                                          (In thousands, except percentages)
Interest income    $      98              $     282          $   (184)      

(65) % $ 171 $ 1,373 $ (1,202)

      (88) %
Interest expense     (12,506)                (5,952)           (6,554)             110  %         (19,835)            (9,107)           (10,728)             118  %
Other (expense)
income, net             (633)                   653            (1,286)            (197) %             (60)              (271)               211              (78) %
Change in fair
value of
derivatives                -                (59,692)           59,692             (100) %               -            (44,348)            44,348             (100) %
Loss on partial
settlement of
convertible notes        (13)                     -               (13)     
          **%         (56,382)                 -            (56,382)                **%
Total other
expense, net         (13,054)             $ (64,709)         $ 51,655              (80) %       $ (76,106)         $ (52,353)         $ (23,753)              45  %




**  Not meaningful
Three months ended June 30, 2021 and 2020
Interest income of $0.1 million for the three months ended June 30, 2021
decreased, as compared to $0.3 million for the three months ended June 30, 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 ended June 30, 2021, compared to the same period in 2020.
Cash interest expense
Cash interest expense for the three months ended June 30, 2021 and 2020 totaled
$0.2 million and $0.6 million, respectively. Cash interest expense in the three
months ended June 30, 2021 primarily includes $0.1 million coupon interest
incurred with our Notes due 2025, Notes due 2024 and Notes due 2023 and less
than $0.1 million accretion of interest expense on contingent consideration.
Cash interest expense in the three months ended June 30, 2020 primarily includes
$0.6 million coupon interest incurred with our Notes due 2025, Notes due 2024
and Notes due 2023.
Non-cash interest expense
Non-cash interest expense of $12.3 million for the three months ended June 30,
2021 primarily relates to $12.3 million for the debt discount and amortization
of debt issuance costs with our Notes due 2024, Notes due 2025, Notes due 2026
and Notes due 2028 and less than $0.1 million relates to the amortization of
debt issuance costs associated with Notes due 2023. Interest expense of $5.4
million for the three months ended June 30, 2020 primarily includes $5.2 million
related to the accretion of the debt discount and amortization of debt issuance
cost incurred associated with our Notes due 2025 and Notes due 2024, $0.1
million relates to the amortization of debt issuance costs associated with Notes
due 2023 and less than $0.1 million of interest expense related to long-term
financing receivable recorded as debt.
Other (expense) income, net of $0.6 million expense for the three months ended
June 30, 2021 relates to a $1.5 million net loss related to foreign currency
exchange and remeasurement, partially offset by $0.9 million non-cash gain
related to the change in the fair value of debt securities. Other (expense)
income, net of $0.7 million income for the three months ended June 30, 2020
relates to the net gain from foreign currency exchange and remeasurement.
Change in fair value of derivatives associated with issuance of Notes due 2025
of $59.7 million in the three months ended June 30, 2020 primarily includes the
charge recognized for the change in fair value of our convertible notes embedded
derivative and warrants of $71.2 million and $57.7 million, respectively. This
charge is partially offset by a gain recognized for the change in fair value of
our convertible notes hedge of $69.2 million. We did not have any derivatives
during the three months ended June 30, 2021.

                   Enphase Energy, Inc. | 2021 Form 10-Q | 50
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Six months ended June 30, 2021 and 2020
Interest income of $0.2 million for the six months ended June 30, 2021
decreased, as compared to $1.4 million for the six months ended June 30, 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 six
months ended June 30, 2021, compared to the same period in 2020.
Cash interest expense
Cash interest expense for the six months ended June 30, 2021 and 2020 totaled
$0.4 million and $1.0 million, respectively. Cash interest expense in the six
months ended June 30, 2021 primarily includes $0.3 million coupon interest
incurred with our Notes due 2025, Notes due 2024 and Notes due 2023 and $0.1
million accretion of interest expense on contingent consideration. Cash interest
expense in the six months ended June 30, 2020 primarily includes $1.0 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 $19.5 million for the six months ended June 30,
2021 primarily relates to $19.4 million for the debt discount and amortization
of debt issuance costs with our Notes due 2024, Notes due 2025, Notes due 2026
and Notes due 2028 and less than $0.1 million relates to the amortization of
debt issuance costs associated with Notes due 2023. Interest expense of $8.1
million for the six months ended June 30, 2020 primarily includes $7.8 million
related to the accretion of the debt discount and amortization of debt issuance
cost incurred associated with our Notes due 2025, Notes due 2024 and less than
$0.1 million relates to the amortization of debt issuance costs associated with
Notes due 2023, and $0.3 million of interest expense related to long-term
financing receivable recorded as debt.
Other (expense) income, net of $0.1 million expense for the six months ended
June 30, 2021 relates to a $2.4 million net loss related to foreign currency
exchange and remeasurement, partially offset by $2.3 million non-cash gain
related to change in the fair value of debt securities. Other (expense) income,
net of $0.3 million expense for the six months ended June 30, 2020, relates to
the net loss from foreign currency exchange and remeasurement.
Change in fair value of derivatives associated with issuance of Notes due 2025
of $44.3 million for the six months ended June 30, 2020 primarily includes the
charge recognized for the change in fair value of our convertible notes embedded
derivative and warrants of $47.6 million and $24.7 million, respectively. This
charge is partially offset by a gain recognized for the change in fair value of
our convertible notes hedge of $28.0 million. We did not have any derivatives
during the six months ended June 30, 2021.
Loss on partial settlement of convertible notes recorded in the six months ended
June 30, 2021 primarily relates to the $9.5 million non-cash loss on partial
settlement of $87.1 million aggregate principal amount of the Notes due 2024,
$9.5 million non-cash loss on settlement of $217.8 million aggregate principal
amount of the Notes due 2025 and $37.5 million non-cash inducement loss incurred
on repurchase of Notes due 2025. Refer   Note 8  , "Debt" of the notes to
condensed consolidated financial statements included in Part I, Item 1 of this
Quarterly Report on Form 10-Q.
Income Tax Benefit (Provision)
                            Three Months Ended                                                       Six Months Ended
                                 June 30,                            Change in                           June 30,                           Change in
                           2021               2020               $                 %              2021              2020                $                %
                                                                         (In thousands, except percentages)
Income tax benefit
(provision)           $    (6,995)         $ 6,561          $ (13,556)                **       $ 26,369          $ 18,429          $  7,940              43  %




**  Not meaningful
Three months ended June 30, 2021 and 2020
The income tax provision of $7.0 million for the three months ended June 30,
2021 increased compared to the income tax benefit of $6.6 million for the same
period in 2020, both calculated using the annualized effective tax rate method,
which is primarily due to higher projected tax expense in U.S. and foreign
jurisdictions that are profitable in 2021 compared to 2020, partially offset by
higher tax deduction from employee stock-based compensation.
                   Enphase Energy, Inc. | 2021 Form 10-Q | 51
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Six months ended June 30, 2021 and 2020
The income tax benefit of $26.4 million for the six months ended June 30, 2021
increased, compared to the income tax benefit of $18.4 million for the same
period in 2020, both calculated using the annualized effective tax rate method,
which is primarily due to higher tax deduction from employee stock-based
compensation, partially offset by higher projected tax expense in U.S. and
foreign jurisdictions that are profitable in 2021 compared to 2020.
                   Enphase Energy, Inc. | 2021 Form 10-Q | 52
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Liquidity and Capital Resources
Sources of Liquidity
As of June 30, 2021, we had $1.3 billion in working capital, including cash and
cash equivalents of $1.3 billion, of which approximately $1.3 billion were held
in the U.S. Our cash and cash equivalents primarily consist of U.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 the U.S. to be accessible and have provided for the
estimated U.S. income tax liability associated with our foreign earnings. We
believe we will be able to meet our anticipated cash needs for at least the next
12 months. However, our liquidity may be negatively impacted if sales decline
significantly for an extended period due to the impact of the ongoing COVID-19
pandemic. Further, the extent to which the ongoing COVID-19 pandemic and our
precautionary measures in response thereto impact our business and liquidity
will depend on future developments, which are uncertain and cannot be precisely
predicted at this time.
Convertible Notes
Notes due 2023. As of June 30, 2021, we had $5.0 million aggregate principal
amount of our Notes due 2023 outstanding. The Notes due 2023 are general
unsecured obligations and bear interest at a rate of 4.00% per year, payable
semi-annually on February 1 and August 1 of each year. The Notes due 2023 will
mature on August 1, 2023, unless earlier repurchased by us or converted at the
option of the holders.
Notes due 2024. As of June 30, 2021, we had $1.1 million aggregate principal
amount of our Notes due 2024 outstanding. The Notes due 2024 are general
unsecured obligations and bear interest at a rate of 1.0% per year, payable
semi-annually on June 1 and December 1 of each year. The Notes due 2024 will
mature on June 1, 2024, unless earlier repurchased by us or converted at the
option of the holders at a conversion price of $20.50 per share.
From April 1, 2020 through September 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 on March
31, 2020, June, 30, 2020, September 30, 2020, March 31, 2021 and June 30, 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.
From July 1, 2021 through July 27, 2021, we had not purchased any shares
remaining 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 of June 30, 2021, we had $102.2 million aggregate principal
amount of our Notes due 2025 outstanding. The Notes due 2025 are general
unsecured obligations and bear interest at a rate of 0.25% per year, payable
semi-annually on March 1 and September 1 of each year, beginning on September 1,
2020. The Notes due 2025 will mature on March 1, 2025, unless earlier
repurchased by us or converted at the option of the holders at a conversion
price of $81.54 per share.
From January 1, 2021 through September 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 on
December 31, 2020, March 31, 2021 and June 30, 2021 was greater than or equal to
$106.00 on each applicable trading day. Upon conversion of any of the notes, we
will pay or deliver, as the case may be, cash, shares of common stock or a
combination of cash and common stock, at our election.
                   Enphase Energy, Inc. | 2021 Form 10-Q | 53
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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
$106.94 rather than the Notes due 2025 conversion price of $81.54. We received
approximately $71.6 million from the sale of the warrants.
From July 1, 2021 through July 27, 2021, we had not purchased any shares
remaining under the convertible note hedge and the warrants relating to the
Notes due 2025. If we receive additional request for conversion from the holders
of the Notes due 2025 to exercise their right to convert the debt to equity, we
have indicated our current intention and ability to settle the remaining $102.2
million aggregate principal amount of the Notes due 2025 in cash.
Notes due 2026. As of June 30, 2021, we had $632.5 million aggregate principal
amount of our Notes due 2026 outstanding. The Notes due 2026 are general
unsecured obligations. The Notes due 2026 do not bear any regular interest, and
the principal amount of the Notes due 2026 will not accrete. The Notes due 2026
will mature on March 1, 2026, unless earlier repurchased by us or converted at
the option of the holders at a conversion price of $307.47 per share.
Notes due 2028. As of June 30, 2021, we had $575.0 million aggregate principal
amount of our Notes due 2028 outstanding. The Notes due 2028 are general
unsecured obligations. The Notes due 2028 do not bear any regular interest, and
the principal amount of the Notes due 2028 will not accrete. The Notes due 2028
will mature on March 1, 2028, unless earlier repurchased by us or converted at
the option of the holders at a conversion price of $284.87 per share.
In connection with the offering of the Notes due 2026 and Notes due 2028, we
entered into privately-negotiated convertible note hedge transactions in order
to reduce the potential dilution to our common stock upon any conversion of the
Notes due 2026 and Notes due 2028. The total cost of the convertible note hedge
transactions was approximately $286.2 million. Also, concurrently with the
offering of the Notes due 2026 and Notes due 2028, we entered into
privately-negotiated warrant transactions whereby we issued warrants to acquire
shares of our common stock at a strike price of $397.91 rather than the
conversion price of $307.47 and $284.87 for Notes due 2026 and Notes due 2028,
respectively. We received approximately $220.8 million from the sale of
warrants.
Repurchase of Common Stock. During the three and six months ended June 30, 2021,
we repurchased and subsequently retired 1.7 million shares of our common stock
for an aggregate amount of $200.0 million. In May 2021, our board of directors
authorized the repurchase of up to an additional $500.0 million of our common
stock. The repurchases may be executed from time to time, subject to general
business and market conditions and other investment opportunities, through open
market purchases or privately negotiated transactions, including through Rule
10b5-1 plans. Such purchases are expected to continue through May 2024 unless
otherwise extended or shortened by our board of directors. Refer to   N    ote
10   "Stockholders' Equity" of the Notes to Consolidated Financial Statements
included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Cash from operations could be affected by various risks and uncertainties,
including, but not limited to, the effects of COVID-19 and other risk factors
discussed in the section entitled "Risk Factors" included in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2020 filed on February 16,
2021. We believe that our cash flow from operations with existing cash 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.
                   Enphase Energy, Inc. | 2021 Form 10-Q | 54

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Cash Flows. The following table summarizes our cash flows for the periods
presented:
                                                  Six Months Ended
                                                      June 30,
                                                2021           2020
                                                   (In thousands)

Net cash provided by operating activities $ 141,501 $ 64,653 Net cash used in investing activities (126,607) (7,804) Net cash provided by financing activities 618,914 254,477 Effect of exchange rate changes on cash

           (926)          (181)

Net increase in cash and cash equivalents $ 632,882 $ 311,145



Cash Flows from Operating Activities
Cash flows from operating activities consist of our net income adjusted for
certain non-cash reconciling items, such as stock-based compensation expense,
change in the fair value of investments, deferred income taxes, loss on
conversion of Notes due 2024 and Notes due 2025, depreciation and amortization,
and changes in our operating assets and liabilities. Net cash provided by
operating activities increased by $76.8 million for the six months ended June
30, 2021 compared to the same period in 2020, was primarily due to an increase
in our gross profit as a result of increased revenue, partially offset by higher
operating expenses as we continue to invest in the long-term growth of our
business and also by $15.6 million deemed cash repayment attributable to
accreted debt discount as an amount paid for settlement of $87.1 million and
$217.8 million in aggregate principal amount of the Notes due 2024 and Notes due
2025, respectively.
Cash Flows from Investing Activities
For the six months ended June 30, 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, $45.0 million from the investment in debt
securities, and $26.4 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 six months ended June 30, 2020, net cash used in investing activities
was $7.8 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 six months ended June 30, 2021, net cash provided by financing
activities of $618.9 million was primarily from $1,188.4 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
$3.6 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, $289.3 million cash paid to settle both $87.1 million
in aggregate principal amount of the Notes due 2024 and $217.8 million in
aggregate principal amount of the Notes due 2025, $200.0 million paid to
repurchase our common stock, $17.0 million payment of employee withholding taxes
related to net share settlement of equity awards, and $1.4 million of repayment
on sale of long-term financing receivables.
For the six months ended June 30, 2020 net cash provided by financing activities
of $254.5 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, $4.8 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, $43.7 million payment of employee
withholding taxes related to net share settlement of equity awards and $1.6
million of repayment on sale of long-term financing receivables.
                   Enphase Energy, Inc. | 2021 Form 10-Q | 55
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  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 of June 30, 2021, except as shown in
the table below, there have been no material changes from our disclosure in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2020. For more
information on our future minimum operating leases and inventory component
purchase obligations as of June 30, 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 Quarterly
Report on Form 10-Q.
The following table updates our contractual obligations as of June 30, 2021
associated with the Notes due 2024, Notes due 2025, Notes due 2026 and Notes due
2028. For more information on our Notes due 2024, Notes due 2025, Notes due 2026
and Notes due 2028, see   Note 8  , "Debt" of the notes to condensed
consolidated financial statements included in Part I, Item 1 of this Quarterly
Report on Form 10-Q.
                                                                    Payments Due by Period
                                                    2021 (remaining
                                  Total               six months)            2022-2023          2024-2025          Beyond 2025

                                                                        (In thousands)

Notes due 2024 principal and
interest                      $     1,100          $            5          

$ 22 $ 1,073 $ - Notes due 2025 principal and interest

                          103,199                     128                 512            102,559                    -
Notes due 2026 principal and
interest                          632,500                       -                   -                  -              632,500
Notes due 2028 principal and
interest                          575,000                       -                   -                  -              575,000

Total                         $ 1,311,799          $          133          $      534          $ 103,632          $ 1,207,500


Off-Balance Sheet Arrangements
As of June 30, 2021, we did not have any off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Critical Accounting Policies
Our condensed consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the U.S., or GAAP. In connection
with the preparation of our condensed consolidated financial statements, we are
required to make assumptions and estimates about future events and apply
judgments that affect the reported amounts of assets, liabilities, revenue,
expenses and related disclosures. We base our assumptions, estimates and
judgments on historical experience, current trends and other factors that
management believes to be relevant at the time our condensed consolidated
financial statements are prepared. On a regular basis, we review the accounting
policies, assumptions, estimates and judgments to ensure that our condensed
consolidated financial statements are presented fairly and in accordance with
GAAP. However, because future events and their effects cannot be determined with
certainty, actual results could differ from our assumptions and estimates. To
the extent that there are material differences between these estimates and
actual results, our future financial statement presentation, financial
condition, results of operations and cash flows will be affected.
We consider an accounting policy to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, and if different estimates that reasonably
could have been used, or changes in the accounting estimates that are reasonably
likely to occur periodically, could materially impact the condensed consolidated
financial statements.
Adoption of New and Recently Issued Accounting Pronouncements
Refer to Note 1. "Summary of Significant Accounting Policies" section of the
notes to condensed consolidated financial statements included in Part I, Item 1
of this Quarterly Report on Form 10-Q for a discussion of adoption of new and
recently issued accounting pronouncements.
                   Enphase Energy, Inc. | 2021 Form 10-Q | 56

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