Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
Form 10-K
 
 
 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-35480
 
 
 
https://cdn.kscope.io/1c71e48d2533aab22a77e93023d2f729-enph.jpg
Enphase Energy, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
20-4645388
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
47281 Bayside Parkway
Fremont, CA 94538
(Address of principal executive offices) (Zip Code)

(707) 774-7000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Name of each exchange on which registered
Common Stock, par value $0.00001 per share
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨  No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨  No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x  No ¨


Table of Contents

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
 
 
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No x
The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2018, based upon the closing price of $6.73 of the registrant’s common stock as reported on the Nasdaq Global Market, was approximately $588.9 million.
As of March 6, 2019, there were 108,519,598 shares of the registrant’s common stock outstanding.
 
 
 
DOCUMENTS INCORPORATED BY REFERENCE
Certain information called for by Part III of this Form 10-K is incorporated by reference to the Proxy Statement for the registrant’s 2019 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2018.
 



ENPHASE ENERGY, INC.
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
Consolidated Statements of Comprehensive Loss
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

PART I

This Annual Report on Form 10-K contains “forward-looking statements” as defined under securities laws. Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts, “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms. These forward-looking statements are contained principally in Item 1, Business; Item 1A, Risk Factors; Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations; and other sections of this Annual Report on Form 10-K. Our actual results or experience could differ significantly from the forward-looking statements. Factors that could cause or contribute to these differences include those discussed in Item 1A, Risk Factors, as well as those discussed elsewhere in this Annual Report on Form 10-K.
Forward-looking statements are inherently uncertain, and you should not place undue reliance on these statements, which speak only as of the date that they were made. These cautionary statements should be considered in connection with any written or oral forward-looking statements that we may issue in the future. We do not undertake any obligation to release publicly any revisions to these forward-looking statements after completion of the filing of this Annual Report on Form 10-K to reflect later events or circumstances or to reflect the occurrence of unanticipated events.
In this report, unless otherwise indicated or the context otherwise requires, “Enphase Energy,” “Enphase,” “the Company,” “we,” “us,” and “our” refer to Enphase Energy, Inc., a Delaware corporation, and its subsidiaries.
Item 1. Business
Our Company
We are a global energy technology company, delivering smart, easy-to-use solutions that connect solar generation, storage and communications management on one intelligent platform. We revolutionized solar with our microinverter technology and produce the world’s only truly integrated solar-plus-storage solution. We have shipped more than 19 million microinverters, representing over 4 gigawatts of solar photovoltaic (“PV”) generating capacity, and more than 855,000 Enphase residential and commercial systems have been deployed in over 125 countries.
We were incorporated as PVI Solutions, Inc. in March 2006 in the State of Delaware and changed our name to Enphase Energy, Inc. in July 2007.
On August 9, 2018, we completed the purchase of assets primarily relating to SunPower Corporation’s (“SunPower”) microinverter business. We acquired intellectual property, technology and other assets primarily relating to the microinverter business and assumed certain intellectual property and customer relationships for the following consideration: (i) $25 million payable in cash; and (ii) 7.5 million shares of our common stock issued to SunPower at closing. In addition, we and SunPower entered into (i) a Master Supply Agreement (“MSA”) under which SunPower is obligated to exclusively procure module level power electronics and related equipment for use in the United States (“U.S.”) residential market from us for a period of five years and (ii) a stockholders agreement to establish certain SunPower rights and obligations related to the shares issued, including SunPower’s right to appoint one person to our board of directors, certain additional transfer restrictions on the shares, and voting, standstill and other undertakings by SunPower.
Industry Background
Historically, traditional central inverters were the only inverter technology used for solar PV installations. In an installation consisting of a traditional central inverter, the solar PV modules are connected in series strings. In a large installation, there are multiple series strings connected in parallel. The aggregated voltage from each of these strings is then fed into a large central inverter. As compared to microinverter systems, we believe that traditional central inverters have a number of design and performance challenges limiting innovation and their ability to reduce the cost of solar systems, including the following:
Productivity limits. If solar modules are wired using a traditional central inverter—group or “string” of modules are wired in series—an entire string’s output is limited by the output of the lowest-performing module. Because of its string design, there is a single point of failure risk with the traditional central inverter approach.

4

Table of Contents

Reliability issues. Traditional central inverters are the single most common component of solar installations to fail, resulting in system downtime and adversely impacting total energy output. As a result, central inverters typically carry warranties of only 5 to 10 years.
Complex design and installation requirements. The central inverter-based solar PV installation requires greater effort on the part of the installer, both in terms of design and on-site labor. Central inverter installations require string design and calculations for safe and reliable operation, as well as specialized equipment such as DC combiners, conduits and disconnects. In addition, the use of high-voltage direct current (“DC”) requires specialized knowledge and training and safety precautions to install central inverter technology.
Lack of monitoring. The majority of solar installations with central inverter technology offer limited monitoring capabilities. A failure of the central inverter will often go unnoticed for days or even weeks. If a module fails or is not performing to specification, the resulting loss of energy can go unnoticed for an extended period of time.
Safety issues. Central inverter solar PV installations have a wide distribution of high-voltage (600 volts to 1,000 volts) DC wiring. If damaged, DC wires can generate sustained electrical arcs, reaching temperatures of more than 5,000 °F. This creates the risk of fire for solar PV installation owners and injury for installers and maintenance personnel.
These challenges of traditional central inverters have a direct impact on the cost and expected return on investment of solar installations to both installers and system owners:
Installer. Solar PV installers aim for simple installation design, fast installation times and maximum system performance and predictability. The installation of high-voltage DC central inverter technology, however, requires significant preparation, precautionary safety measures, time-consuming string calculations, extensive design expertise and specialized installation equipment, training and knowledge. Together, these factors significantly increase complexity and cost of installation and limit overall productivity for the installer.
System owner. Solar system owners aim for high energy production, low cost, high reliability, and low maintenance requirements, as well as reduced fire risks. With traditional central inverters, owners often are unable to optimize the size or shape of their solar PV installations due to string design limitations. As such, they experience performance loss from shading and other obstructions, can face frequent system failures and lack the ability to effectively monitor the performance of their solar PV installation. In addition, central inverter installations operate at high-voltage DC which bears significant fire risks. Further, due to their large size, central inverter installations can affect architectural aesthetics of the house or commercial building.
Our Products
We design, develop, manufacture and sell home energy solutions that connect energy generation, energy storage and control and communications management 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 the string inverter 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 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.

5

Table of Contents

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 of the Installer Toolkit™; consumption monitoring with a metered Envoy™ and a consumption tracker; and energy insights from the Enphase Enlighten Software™, or Enlighten, platform’s easy-to-use interface. Unlike our core competitors, who utilize a single-point or traditional inverter, or offer separate components of solutions, we have built-in system redundancy in both 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 Home Energy Solution with IQ consists of four key components — Enphase microinverters, the AC Battery™, an Envoy gateway, and Enlighten cloud-based software:
Enphase microinverters provide highly reliable power conversion at the individual solar module level by introducing a digital architecture that incorporates custom application specific integrated circuits, or ASICs, specialized power electronics devices, and an embedded software subsystem that maximizes energy production from each module. The Enphase IQ microinverters provide a path to substantially lower unit cost, a simplified installation process, and higher performance and enhanced features. In addition, they offer advanced grid functions that are capable of meeting worldwide regulatory requirements.
In the first quarter of 2018, we began shipping IQ 7, our seventh-generation Enphase microinverters for the Enphase Home Energy Solution with IQ, our next-generation integrated solar, storage and energy management system, to distributors in the U.S. In the second quarter of 2018, we began shipping IQ 7 to Europe, representing our entry into the German and Austrian solar markets, while expanding our presence in other solar markets such as France, Benelux, United Kingdom, and Switzerland. We also began selling IQ 7, which has a single worldwide stock keeping unit (commonly referred to as “SKU”), in Australia and New Zealand during the second quarter of 2018.
The Enphase IQ 7 Micro™ and Enphase IQ 7+ Micro™ support high-powered 60-cell and 72-cell solar modules and integrate with alternating current (“AC”) modules. During the second quarter of 2018, we began shipping the Enphase IQ 7X Micro™ to solar distributors in the U.S. The Enphase IQ 7X Micro, the higher power and higher efficiency variant of our seventh-generation family of microinverters, supports and can be integrated with 96-cell modules. In addition, during the fourth quarter of 2018, we began shipping in limited quantities, IQ 7A™, which addresses up to 450W DC modules. In addition, as the result of the completion of our acquisition of SunPower’s microinverter business in August 2018, we began volume shipments of our IQ 7XS microinverters for use in SunPower’s modules in the fourth quarter of 2018.
AC Module products are integrated systems which allow installers to be more competitive through improved logistics, reduced installation times, faster inspection and training. We began shipping Enphase Energized™ AC Modules in North America in 2017. Enphase Energized AC Modules with IQ were previously produced through our AC module partnerships with LG Electronics, Inc., Jinko Solar Technology and Waaree Energies Ltd. In 2018, we announced new AC module partnerships with SunPower, Panasonic Corporation of North America, LONGi Green Energy Technology Co., Ltd. and Solaria Corporation.
Our next-generation microinverter system, IQ 8™, is based upon our grid-agnostic “always on” Ensemble™ technology, which will allow a solar system to operate independently of the power grid is expected to be introduced in the fourth quarter of 2019. This system has four components: (i) energy generation, which is accomplished with the grid-agnostic microinverter IQ 8; (ii) energy storage, which is achieved by the Encharge™ battery with capacities of 3.3 kWh, 10 kWh and 13.2 kWh; (iii) communication and control called Enpower™, which consists of the Automatic Transfer Switch that provides fine-grained load control and the combiner box with the Envoy gateway; and (iv) Enlighten, which is the internet of things, or IoT, cloud software.

6

Table of Contents

The pure off-grid solution that Ensemble technology also addresses shipped in limited quantities to our partner on IQ 8 during the fourth quarter of 2018 and we expect to ramp production in the first half of 2019.
The Enphase AC Battery™, a key part of the Enphase Home Energy Solution, applies the modular architecture developed for our microinverter to energy storage. Solar-plus-storage, which includes our AC Battery product, is central to our product strategy. Our approach delivers low up-front costs resulting from the AC Battery’s system design and the ease and speed of installation. The AC battery balances safety and performance and is warranted for 10 years.
The Envoy™ Communications Gateway with IQ Combiner+ is installed at the system location and serves as a hub providing three critical roles: collecting and sending data to Enlighten software, receiving and distributing microinverter firmware or software updates, and managing the use of energy within the system. Homeowners can maximize the value of their solar PV system, taking advantage of self-consumption and time-of-use tariff management opportunities with an expandable platform for evolving uses of energy storage, such as residential peak shaving and grid services. One Envoy is typically sold with each solar installation and can support up to 600 Enphase microinverters, making it compatible for both residential and commercial applications.
Our Enlighten cloud-based software provides the capabilities to remotely monitor, manage, and maintain an individual system or a fleet of systems. System owners can use Enphase Enlighten to monitor their home’s solar generation, energy storage and consumption from any web-enabled device. The software collects and analyzes system performance information to enable owners and operators to realize the highest performance of their solar PV system. Two versions of the monitoring software are available: MyEnlighten™, designed for consumers, which provides performance assurance and Enlighten Manager™, available for the solar professional, which provides detailed diagnostic capabilities, as well as fleet management tools.
Key benefits of our Home Energy Solution with IQ include:
Truly Integrated. The Enphase Home Energy Solution with IQ is a fully integrated solar generation plus storage offering from one provider. Designed and manufactured to work together, the Enphase Home Energy Solution with IQ is a truly integrated home energy solution.
Higher Performance. Our microinverter system delivers higher performance by maximizing the energy production of each module. A microinverter at each module overcomes issues such as module-mismatch and soiling or shading which can have a significant impact on string inverter systems. Our microinverters also provide greater system availability with no single-point of failure. An independent analysis from PV Evolution Labs has concluded that an Enphase microinverter system yields higher performance over systems with string inverters or traditional inverters. We believe that our microinverter systems achieve higher energy production and can generate superior returns on investment relative to competitive solutions for system owners.
Simplified Design and Installation. Our all-AC infrastructure simplifies the design process and eliminates the typical costs of a complicated DC voltage system for PV or storage. In addition, our microinverters are installed on the roof and hidden from view, with minimal impact to the aesthetics of a home or building. We also offer additional tools, such as the Enphase Installer Toolkit mobile app or the Enphase IQ Combiner+™ with Enphase IQ Envoy™, which offer unmatched simplicity, reliability and ease of installation for solar installers.
Enhanced Safety. Microinverters and AC Batteries are safer because they process low voltage DC and are isolated to the module level, leading to an all-AC architecture. Our microinverter system does not contain any of the high voltages common to string inverter systems. High voltage arc faults associated with string or traditional inverters are the leading cause of fires in solar PV installations. Microinverter technology mitigates this safety risk.

7

Table of Contents

Reduced Operations and Maintenance Costs. Our microinverter system is highly reliable with one million power-on hours of testing incorporated into our microinverter design. This high reliability, plus a distributed architecture means ongoing operations and maintenance do not require emergency truck rolls, unlike string inverter or traditional inverters which have a 100% probability of failure leading to full replacement within 10 to 12 years. In addition, with module-level monitoring capabilities, remote maintenance can pinpoint issues, thus reducing any time on site. Finally, the networked-nature of our system enables us to remotely update the firmware and software of the microinverters, reducing ongoing utility compliance costs.
Our Strategy
Our objective is to be the leading provider of energy management solutions for the solar industry worldwide. Key elements of our strategy include:
Grow market share in our core markets. We intend to capitalize on our market leadership in the microinverter category and our momentum with installers and owners to expand our market share position in our core markets.
Enter new geographic markets. We intend to further increase our market share in Europe, Asia Pacific and Latin America regions. In addition, we intend to expand into new markets with new and existing products and local go-to-market capabilities.
Expand our product offerings. We continue to invest in research and development to develop all components of our energy management solution and remain committed to providing our customers and partners with best-in-class power electronics, storage solutions, communications, and load control all managed by a cloud-based energy management system.
Increase power and efficiency and reduce cost per watt. Our engineering team is focused on continuing to increase average power conversion efficiency above 97% and AC output power beyond 280 watts. We intend to continue to leverage our semiconductor integration, power electronics expertise and manufacturing economies of scale to further reduce cost per watt.
Extend our technological innovation. We distinguish ourselves from other inverter companies with our systems-based and high technology approach, and the ability to leverage strong research and development capabilities.
Customers and Sales
We currently offer solutions targeting the residential and commercial markets in the U.S., Canada, Mexico and Central American markets, Europe, Australia, New Zealand, India and certain other Asian markets. We sell our solutions primarily to solar distributors who resell to installers and integrators, who in turn integrate our products into complete solar PV installations for residential and commercial system owners. We work with many of the leading solar and electrical distributors. In addition to our distributors, we sell directly to large installers, original equipment manufacturers (“OEM”), strategic partners and homeowners. Our OEM customers include solar module manufacturers who bundle our products and solutions with their solar module products and resell to both distributors and installers. Strategic partners include a variety of companies including industrial equipment suppliers and providers of solar financing solutions. In 2018, one customer accounted for approximately 19% of total net revenues. Over the last three years, revenues generated from the U.S. market have represented 69% to 80% of our total revenue.
Manufacturing, Quality Control and Key Suppliers
We outsource the manufacturing of our products to manufacturing partners. Flex Ltd. and affiliates (“Flex”) assemble and test our microinverter, AC Battery and Envoy products. Prices for such services are agreed to by the parties on a quarterly basis, and we are obligated to purchase manufactured products and raw materials that cannot be resold upon the termination of the agreement. Flex also provides receiving, kitting, storage, transportation, inventory visibility and other value-added logistics services at locations managed by Flex. Hong Kong Sinbon Industrial Limited manufactures our custom AC cables. In addition, we rely on several unaffiliated companies to supply certain components used in the fabrication of our products.

8

Table of Contents

Our partnership with Flex provides us with strategic manufacturing capabilities and flexibility. We announced in 2018 that starting in the second quarter of 2019, Flex is expected to begin producing our products in Mexico to serve the markets in the Americas. We anticipate that this additional manufacturing capacity in Mexico could help us to not only mitigate tariffs, but also better serve our customers by cutting down delivery times.
Customer Service
We continue to cultivate an organizational focus on customer satisfaction and are committed to providing a best-in-class customer experience. We maintain high levels of customer engagement through our customer support group and the Enlighten cloud-based software portal. During 2018, we introduced self-service support tools to help installers and homeowners solve their problems quickly. We launched Service-on-the-Go™, which installers can use from their mobile devices to get service instantly. We also started tracking our Net Promoter Score (commonly referred to as “NPS”) as another tool to measure how our customers perceive us and how likely they are to recommend us to a friend or colleague.
Research and Development
We devote substantial resources to research and development with the objective of developing new products and systems, adding new features to existing products and systems and reducing unit costs. Our development strategy is to identify features, products and systems for both software and hardware that reduce the cost and optimize the effectiveness of our energy management solutions for our customers. We measure the effectiveness of our research and development against metrics, including product unit cost, efficiency, reliability, power output and ease-of-use.
Intellectual Property
We operate in an industry in which innovation, investment in new ideas and protection of our intellectual property, or IP, rights are critical for success. We protect our technology through a variety of means, including through patent, trademark, copyright and trade secrets laws in the U.S. and similar laws in other countries, confidentiality agreements and other contractual arrangements. As of December 31, 2018, we had 220 issued U.S. patents, 118 issued foreign patents, 71 pending U.S. patent applications and 70 pending foreign counterpart patent applications. Our issued patents are scheduled to expire between years 2020 and 2037.
We license certain power line communications technology and software for integration into our ASICs under a fully-paid, royalty-free license, which includes the right for us to source directly from the licensor’s suppliers or manufacture certain ASIC hardware should the licensor fail, under certain conditions, to deliver such technology in the future. This license includes a limited exclusivity period during which the licensor has agreed not to license the licensed technology to any third-party manufacturer of electronic components or systems for use in the solar energy market. The license carries a 75-year term, subject to earlier termination upon agreement of the parties, or by us in connection with the insolvency of the licensor.
We also license digital intellectual property cores, or IP blocks, for integration into and distribution with certain electronic components built into our products, including our ASICs, complex programmable logic devices, or CPLDs, and field-programmable gate arrays, or FPGAs. This is a fully-paid, non-exclusive, non-transferable, royalty-free license providing for the integration of such digital IP blocks in an unlimited number of electronic component designs and the distribution of such electronic components with our products. Other than in connection with the distribution of our products, our use of such digital IP blocks is limited to certain of our business sites. The license is perpetual, subject to earlier termination by either party upon the termination, suspension or insolvency of the other party’s business, or by the licensor upon a breach of the license agreement by us. In addition, we license open source software from third parties for integration into our Envoy products. Such open source software is licensed under open source licenses. These licenses are perpetual and require us to attribute the source of the software to the original software developer, which we provide via our website.
We continually assess the need for patent protection for those aspects of our technology, designs and methodologies and processes that we believe provide significant competitive advantages. A majority of our patents relate to DC to AC power conversion for alternative energy power systems, as well as power system monitoring, control and management systems.

9

Table of Contents

With respect to proprietary know-how that is not patentable and processes for which patents are difficult to enforce, we rely on trade secret protection and confidentiality agreements to safeguard our interests. We believe that many elements of our microinverter manufacturing process involve proprietary know-how, technology or data that are not covered by patents or patent applications, including technical processes, test equipment designs, algorithms and procedures.
All of our research and development personnel have entered into confidentiality and proprietary information agreements with us. These agreements address intellectual property protection issues and require our employees to assign to us all of the inventions, designs and technologies they develop during the course of employment with us.
We also require our customers and business partners to enter into confidentiality agreements before we disclose any sensitive aspects of our technology or business plans.
As part of our overall strategy to protect our intellectual property, we may take legal actions to prevent third parties from infringing upon or misappropriating our intellectual property or from otherwise gaining access to our technology.
Seasonality
Historically, the majority of our revenues are from the North American and European regions which experience higher sales of our products in the second, third and fourth quarters and have been affected by seasonal customer demand trends, including weather patterns and construction cycles. The first quarter historically has had softer customer demand in our industry, due to these same factors. Although these seasonal factors are common in the solar sector, historical patterns should not be considered a reliable indicator of our future sales activity or performance.
Competition
The markets for our products are highly competitive, and we compete with traditional inverter manufacturers and new technology start-ups. The principal areas in which we compete with other companies include:
Product performance and features;
Total cost of ownership;
Breadth of product line;
Local sales and distribution capabilities;
Module compatibility and interoperability;
Reliability and duration of product warranty;
Technological expertise;
Brand recognition;
Customer service and support;
Compliance with industry standards and certifications;
Compliance with current and planned local electrical codes;
Integration with storage offerings;
Size and financial stability of operations;
Size of installed base; and
Local manufacturing and product content.

10

Table of Contents

Competitors in the inverter market include, among others, SolarEdge Technologies, Inc., SMA Solar Technology AG, Huawei Technologies Co. Ltd., Fronius International GmbH and ABB Ltd., and other companies offering alternative microinverter, DC-to-DC optimizer and other power electronic solutions. We principally compete with the large, incumbent solar inverter companies, because traditional central inverter solutions can be used as alternatives to our microinverter solution. We believe, however, that our microinverter solutions offer significant advantages and competitive differentiation relative to traditional central or string inverter technology, even when supplemented by DC-to-DC optimizers. Competitors in the storage market include producers of battery cells and other integrated storage systems.
Employees
As of December 31, 2018, we had 427 full-time employees. Of the full-time employees, 179 were engaged in research and development, 157 in sales and marketing, 51 in general and administration and 40 in manufacturing and operations. Of these employees, 195 were in the United States, 140 in India, 48 in New Zealand, 21 in Europe, 16 in Australia, 6 in China and 1 in Canada.
None of our employees are represented by a labor union; however, our employees in France are represented by a collective bargaining agreement. We have not experienced any employment-related work stoppages, and we consider our relations with our employees to be good.
Available Information
We file electronically with the U.S. Securities and Exchange Commission, or SEC, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We make available on our website at www.enphase.com (under “Company-Investors-Financials-SEC Filings”), free of charge, copies of these reports as soon as reasonably practicable after filing these reports with the SEC. The contents of our websites are not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
Item 1A. Risk Factors
We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operations. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are not material may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes.
U.S. government actions with regard to the solar energy sector or international trade could materially harm our business, financial condition and results of operations.
The current U.S. presidential administration has created and may continue to create regulatory uncertainty in the clean energy sector generally and the solar energy sector in particular. If the administration or the U.S. Congress takes action to eliminate or reduce legislation, regulations and incentives supporting solar energy, such actions may result in a decrease in demand for solar energy in the U.S. and other geographical markets, which could materially harm our business, financial condition and results of operations.

11

Table of Contents

On September 24, 2018 the U.S. began assessing 10% tariffs on our microinverter products and related accessories which are manufactured in China. These tariffs are expected to increase to 25% on March 1, 2019. Such tariffs could have a negative impact on the overall demand for solar products in the U.S., and for our products in particular. Unless we obtain exemptions or take other actions to avoid them, such tariffs will continue to apply to our microinverters and other products. Such tariffs could hurt the demand for these products and materially harm our business, financial condition and results of operations. There is no guarantee that we will be successful in obtaining exemptions or that any actions that we may pursue with respect to the organization and operation of our business will effectively mitigate the effects of any tariffs that apply to our business. If we are not able to avoid or mitigate the effects of such tariffs, the tariffs (or mitigating actions we might take) could result in material additional costs to us and our suppliers, and our results of operations could be negatively impacted as a result.
Furthermore, a significant portion of our business activities are conducted in foreign countries, including Mexico, Canada and elsewhere. The U.S., Mexico and Canada are in the process of replacing the North American Free Trade Agreement (“NAFTA”) with the United States-Mexico-Canada Agreement (“USMCA”). At this time, the final version of the USMCA remains unclear. If the USMCA, or any other trade action taken by the administration, imposes any additional border tariff or takes any other actions making it more difficult for us to sell our products across international boundaries, our business, financial condition and results of operations could be adversely affected.
The rapidly changing solar industry makes it difficult to evaluate our current business and future prospects.
The rapidly changing solar industry makes it difficult to evaluate our current business and future prospects. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, including increased expenses as we continue to grow our business. If we do not manage these risks and overcome these difficulties successfully, our business will suffer.
Since we began commercial shipments of our products, our revenue, gross profit and results of operations have varied and are likely to continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. It is difficult for us to accurately forecast our future revenue and gross profit and plan expenses accordingly and, therefore, it is difficult for us to predict our future results of operations.
If demand for solar energy solutions does not grow or grows at a slower rate than we anticipate, our business will suffer.
Our microinverter and AC Battery storage systems are utilized in solar PV installations, which provide on-site distributed power generation. As a result, our future success depends on continued demand for solar energy solutions and the ability of solar equipment vendors to meet this demand. The solar industry is an evolving industry that has experienced substantial changes in recent years, and we cannot be certain that consumers and businesses will adopt solar PV systems as an alternative energy source at levels sufficient to continue to grow our business. Traditional electricity distribution is based on the regulated industry model under which businesses and consumers obtain their electricity from a government regulated utility. For alternative methods of distributed power to succeed, businesses and consumers must adopt new purchasing practices. The viability and continued growth in demand for solar energy solutions, and in turn, our products, may be impacted by many factors outside of our control, including:
market acceptance of solar PV systems based on our product platform;
cost competitiveness, reliability and performance of solar PV systems compared to conventional and non-solar renewable energy sources and products;
availability and amount of government subsidies and incentives to support the development and deployment of solar energy solutions;
the extent to which the electric power industry and broader energy industries are deregulated to permit broader adoption of solar electricity generation;
the cost and availability of key raw materials and components used in the production of solar PV systems;
prices of traditional utility-provided energy sources;
levels of investment by end-users of solar energy products, which tend to decrease when economic growth slows; and

12

Table of Contents

the emergence, continuance or success of, or increased government support for, other alternative energy generation technologies and products.
If demand for solar energy solutions does not grow, demand for our customers’ products as well as demand for our products will decrease, which would have an adverse impact on our ability to increase our revenue and grow our business.
Short-term demand and supply imbalances, especially for solar module technology, have recently caused prices for solar technology solutions to decline rapidly. Furthermore, competition in the solar industry has increased due to the emergence of lower-cost manufacturers along the entire solar value chain causing further price declines, excess inventory and oversupply. These market disruptions may continue to occur and may increase pressure to reduce prices, which could adversely affect our business and financial results.
The loss of, or events affecting, one of our major customers could reduce our sales and have a material adverse effect on our business, financial condition and results of operations.
In 2018, one customer accounted for approximately 19% of total net revenues. Our customers’ decisions to purchase our products are influenced by a number of factors outside of our control, including retail energy prices and government regulation and incentives, among others. Although we have agreements with some of our largest customers, these agreements generally do not have long-term purchase commitments and are generally terminable by either party after a relatively short notice period. In addition, these customers may decide to no longer use, or to reduce the use of, our products and services for other reasons that may be out of our control. We may also be affected by events impacting our large customers that result in their decreasing their orders with us or impairing their ability to pay for our products. The loss of, or events affecting, one or more of our large customers have had, could have and could continue to have a material adverse effect on our business, financial condition and results of operations.
The failure to successfully integrate our products with those of SunPower could have a material adverse effect on our business, financial condition and results of operations.
On August 9, 2018, we entered into a MSA with SunPower, from whom we also purchased certain intellectual property and other assets as part of the Asset Purchase Agreement (“APA”) transaction. Our failure to successfully integrate our microinverter products and software with SunPower’s solar modules could frustrate the purposes of our acquisition of SunPower’s assets, negatively impact our revenue projections, and otherwise have a material adverse effect on our business, financial condition and results of operations.
We may fail to realize some or all of the anticipated benefits of the SunPower transaction which may result in conflicts between us and SunPower.
Our ability to realize the anticipated benefits of the SunPower transaction will depend, to a large extent, on our ability to successfully execute the terms of the MSA, which could be a complex and time-consuming process. Any delay, failure or breach of obligations under the MSA could adversely impact the expected benefits of the transaction and could otherwise have a material adverse effect on our business, financial condition and results of operations.
Additionally, in connection with the APA transaction, SunPower acquired 7.5 million shares of our common stock and has the right to designate one member of our board of directors. Through its share ownership and board seat, SunPower may have the ability to directly or indirectly influence our business, and conflicts may arise between us and SunPower regarding corporate priorities and strategic objectives.
We depend upon a small number of outside contract manufacturers, and our operations could be disrupted if we encounter problems with these contract manufacturers.
We do not have internal manufacturing capabilities and rely upon a small number of contract manufacturers to build our products. Our reliance on a small number of contract manufacturers makes us vulnerable to possible capacity constraints and reduced control over component availability, delivery schedules, manufacturing yields and costs. We do not have long-term supply contracts with our contract manufacturing partners. Consequently, these manufacturers are not obligated to supply products to us for any period, in any specified quantity or at any certain price.

13

Table of Contents

The revenues that our contract manufacturers generate from our orders may represent a relatively small percentage of their overall revenues. As a result, fulfilling our orders may not be considered a priority in the event of constrained ability to fulfill all of their customer obligations in a timely manner. In addition, the facilities in which the vast majority of our products are manufactured are located outside of the U.S. We believe that the location of these facilities outside of the U.S. increases supply risk, including the risk of supply interruptions or reductions in manufacturing quality or controls.
If any of our contract manufacturers were unable or unwilling to manufacture our products in required volumes and at high quality levels or renew existing terms under supply agreements, we would have to identify, qualify and select acceptable alternative contract manufacturers. An alternative contract manufacturer may not be available to us when needed or may not be in a position to satisfy our quality or production requirements on commercially reasonable terms. Any significant interruption in manufacturing would require us to reduce our supply of products to our customers, which in turn would reduce our revenues, harm our relationships with our customers and cause us to forgo potential revenue opportunities.
Manufacturing problems could result in delays in product shipments to customers and could adversely affect our revenue, competitive position and reputation.
We may experience delays, disruptions or quality control problems in our manufacturing operations. Our product development, manufacturing and testing processes are complex and require significant technological and production process expertise. Such processes involve a number of precise steps from design to production. Any change in our processes could cause one or more production errors, requiring a temporary suspension or delay in our production line until the errors can be researched, identified and properly addressed and rectified. This may occur particularly as we introduce new products, modify our engineering and production techniques, and expand our capacity. In addition, our failure to maintain appropriate quality assurance processes could result in increased product failures, loss of customers, increased production costs and delays. Any of these developments could have a material adverse effect on our business, financial condition, and results of operations.
A disruption could also occur in our contract manufacturer’s facility due to any number of reasons, such as equipment failure, contaminated materials or process deviations, which could adversely impact manufacturing yields or delay product shipments. As a result, we could incur additional costs that would adversely affect our gross profit, and product shipments to our customers could be delayed beyond the schedules requested, which would negatively affect our revenue, competitive position and reputation.
Additionally, manufacturing yields depend on a number of factors, including the stability and manufacturability of the product design, manufacturing improvements gained over cumulative production volumes, and the quality and consistency of component parts. Capacity constraints, raw materials shortages, logistics issues, labor shortages, and changes in customer requirements, manufacturing facilities or processes have historically caused, and may in the future cause, reduced manufacturing yields, negatively impacting the gross profit on, and our production capacity for, those products. Moreover, an increase in the rejection and rework rate of products during the quality control process before, during or after manufacture would result in our experiencing lower yields, gross profit and production capacity.
Component shortages have required us and may continue to require us to incur expedited shipping costs to meet delivery schedules, which impacts our revenue and gross profit.
The risks of these types of manufacturing problems are further increased during the introduction of new product lines, which has from time to time caused, and may in the future cause, temporary suspension of product lines while problems are addressed or corrected. Since our business is substantially dependent on a limited number of product lines, any prolonged or substantial suspension could result in a material adverse effect on our revenue, gross profit, competitive position, and distributor and customer relationships.

14

Table of Contents

We depend on sole-source and limited-source suppliers for key components and products. If we are unable to source these components on a timely basis, we will not be able to deliver our products to our customers.
We depend on sole-source and limited-source suppliers for key components of our products. For example, our ASICs are purchased from a sole source supplier or developed for us by sole source suppliers. Any of the sole-source and limited-source suppliers upon whom we rely could experience quality and reliability issues, stop producing our components, cease operations, or be acquired by, or enter into exclusive arrangements with, our competitors. We generally do not have long-term supply agreements with our suppliers, and our purchase volumes may currently be too low for us to be considered a priority customer by most of our suppliers. As a result, most of these suppliers could stop selling to us at commercially reasonable prices, or at all. Any such quality or reliability issue, or interruption or delay may force us to seek similar components or products from alternative sources, which may not be available on commercially reasonable terms, or at all. Switching suppliers may require that we redesign our products to accommodate new components, and may potentially require us to re-qualify our products, which would be costly and time-consuming. Any interruption in the quality or supply of sole-source or limited-source components for our products would adversely affect our ability to meet scheduled product deliveries to our customers and could result in lost revenue or higher expenses and would harm our business.
If we or our contract manufacturers are unable to obtain raw materials in a timely manner or if the price of raw materials increases significantly, production time and product costs could increase, which may adversely affect our business.
The manufacturing and packaging processes used by our contract manufacturers depend on raw materials such as copper, aluminum, silicon and petroleum-based products. From time to time, suppliers may extend lead times, limit supplies or increase prices due to capacity constraints or other factors. Certain of our suppliers have the ability to pass along to us directly or through our contract manufacturers any increases in the price of raw materials. If the prices of these raw materials rise significantly, we may be unable to pass on the increased cost to our customers. While we may from time to time enter into hedging transactions to reduce our exposure to wide fluctuations in the cost of raw materials, the availability and effectiveness of these hedging transactions may be limited. Due to all these factors, our results of operations could be adversely affected if we or our contract manufacturers are unable to obtain adequate supplies of raw materials in a timely manner or at reasonable cost. In addition, from time to time, we or our contract manufacturers may need to reject raw materials that do not meet our specifications, resulting in potential delays or declines in output. Furthermore, problems with our raw materials may give rise to compatibility or performance issues in our products, which could lead to an increase in customer returns or product warranty claims. Errors or defects may arise from raw materials supplied by third parties that are beyond our detection or control, which could lead to additional customer returns or product warranty claims that may adversely affect our business and results of operations.
If we fail to retain our key personnel or if we fail to attract additional qualified personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.
Our future success and ability to implement our business strategy depends, in part, on our ability to attract and retain key personnel, and on the continued contributions of members of our senior management team and key technical personnel, any of whom would be difficult to replace. All of our employees, including our senior management, are free to terminate their employment relationships with us at any time. Competition for highly skilled personnel is extremely intense, and we face challenges identifying, hiring and retaining qualified personnel in many areas of our business. If we fail to retain existing or recruit new senior management and other key personnel or if we fail to attract additional qualified personnel, we may not be able to achieve our strategic objectives and our business could suffer.
Future acquisitions could materially and adversely affect our results of operations.
We may in the future seek to expand our business through further acquisitions and strategic transactions. Such transactions involve a number of risks that could harm our business or result in us not achieving anticipated benefits, including issues with integrating acquired businesses, the diversion of management time and attention, failures in due diligence or in identifying financial and legal liabilities and other risks, transaction related impairments or financial charges and the assumption of liabilities. In our future transactions, we may also decide to pay all or a portion of the transaction consideration through dilutive equity issuances, and our future acquisitions may require significant reductions in our available cash or the incurrence of indebtedness, all of which could harm our operating results.

15

Table of Contents

Our gross profit may fluctuate over time, which could impair our ability to achieve or maintain profitability.
Our gross profit has varied in the past and is likely to continue to vary significantly from period to period. Our gross profit may be adversely affected by numerous factors, some of which are beyond our control, including:
changes in customer, geographic or product mix;
increased price competition, including the impact of customer and competitor discounts and rebates;
our ability to reduce and control product costs, including our ability to make product cost reductions in a timely manner to offset declines in our product prices;
warranty costs and reserves, including changes resulting from changes in estimates related to the long-term performance of our products, product replacement costs and warranty claim rates;
loss of cost savings due to changes in component or raw material pricing or charges incurred due to inventory holding periods if product demand is not correctly anticipated;
introduction of new products;
ordering patterns from our distributors;
price reductions on older products to sell remaining inventory;
component shortages and related expedited shipping costs;
our ability to reduce production costs, such as through technology innovations, in order to offset price declines in our products over time;
changes in shipment volume;
changes in distribution channels;
excess and obsolete inventory and inventory holding charges;
expediting costs incurred to meet customer delivery requirements;
tariffs assessed on our products imported to the U.S. and elsewhere; and
fluctuations in foreign currency exchange rates.
Fluctuations in gross profit may adversely affect our ability to manage our business or achieve or maintain profitability.
We have a history of losses which may continue in the future, and we cannot be certain that we will achieve or sustain profitability.
We have incurred substantial net losses since our inception and we may continue to incur additional losses in the future. For the years ended December 31, 2018, 2017 and 2016, we incurred net losses of $11.6 million, $45.2 million and $67.5 million, respectively. At December 31, 2018, we had an accumulated deficit of $346.3 million. Our revenue growth may slow or revenue may decline for a number of reasons, many of which are outside our control, including a decline in demand for our offerings, increased competition, a decrease in the growth of the solar industry or our market share, future declines in average selling prices of our products, the impact of U.S. trade tariffs established in 2018 and expected to increase in 2019, the imposition of additional tariffs applicable to our industry or our products, or our failure to capitalize on growth opportunities. If we fail to generate sufficient revenue to support our operations, we may not be able to achieve or sustain profitability.

16

Table of Contents

We are under continuous pressure to reduce the prices of our products, which has adversely affected, and may continue to adversely affect, our gross margins.
The solar power industry has been characterized by declining product prices over time. We have reduced the prices of our products in the past, and we expect to continue to experience pricing pressure for our products in the future, including from our major customers. In addition, we have reduced our prices ahead of planned cost reductions of our products, which has adversely affected our gross margins. When seeking to maintain or increase their market share, our competitors may also reduce the prices of their products. In addition, our customers may have the ability or seek to internally develop and manufacture competing products at a lower cost than we would otherwise charge, which would add additional pressure on us to lower our selling prices. If we are unable to offset any future reductions in our average selling prices by increasing our sales volume, reducing our costs and expenses or introducing new products, our gross margins would continue to be adversely affected.
Given the general downward pressure on prices for our products driven by competitive pressure and technological change, a principal component of our business strategy is reducing the costs to manufacture our products to remain competitive. If our competitors are able to drive down their manufacturing costs faster than we can or increase the efficiency of their products, our products may become less competitive even when adjusted for efficiency, and we may be forced to sell our products at a price lower than our cost. Further, if raw materials costs and other third-party component costs were to increase, we may not meet our cost reduction targets. If we cannot effectively execute our cost reduction roadmap, we may not be able to remain price competitive, which would result in lost market share and lower gross margins.
The solar industry is highly competitive, and we expect to face increased competition as new and existing competitors introduce products, which could negatively impact our results of operations and market share.
The market for solar power solutions is highly competitive. To date, we have competed primarily against central and string inverter manufacturers, but as the solar industry rapidly grows, new solutions and technologies are emerging that will directly compete with our business. A number of companies have developed or are developing microinverters and other products that will compete directly with our solutions in the module-level power electronics market. Competitors in the inverter market include, among others, SolarEdge Technologies, Inc., SMA Solar Technology AG, Huawei Technologies Co. Ltd., Fronius International GmbH and ABB Ltd. Other existing or emerging companies may also begin offering alternative microinverter, DC-to-DC optimizer, energy storage, monitoring and other solutions that compete with our products.
Several of our existing and potential competitors are significantly larger than we are and may have greater financial, marketing, distribution, and customer support resources, and may have significantly broader brand recognition, especially in certain markets. In addition, some of our competitors have more resources and experience in developing or acquiring new products and technologies and creating market awareness for these offerings. Further, certain competitors may be able to develop new products more quickly than we can and may be able to develop products that are more reliable or that provide more functionality than ours. In addition, some of our competitors have the financial resources to offer competitive products at aggressive or below-market pricing levels, which could cause us to lose sales or market share or require us to lower prices of our products in order to compete effectively. Suppliers of solar products, particularly solar modules, have experienced eroding prices over the last several years and as a result many have faced margin compression and declining revenues. If we have to reduce our prices, or if we are unable to offset any future reductions in our average selling prices by increasing our sales volume, reducing our costs and expenses or introducing new products, our revenues and gross profit would suffer.
We also may face competition from some of our customers or potential customers who evaluate our capabilities against the merits of manufacturing products internally. Other solar module manufacturers could also develop or acquire competing inverter technology or attempt to develop components that directly perform DC-to-AC conversion in the module itself. Due to the fact that such customers may not seek to make a profit directly from the manufacture of these products, they may have the ability to manufacture competitive products at a lower cost than we would charge such customers. As a result, these customers or potential customers may purchase fewer of our systems or sell products that compete with our systems, which would negatively impact our revenue and gross profit.

17

Table of Contents

Developments in alternative technologies or improvements in distributed solar energy generation may have a material adverse effect on demand for our offerings.
Significant developments in alternative technologies, such as advances in other forms of distributed solar PV power generation, storage solutions such as batteries, the widespread use or adoption of fuel cells for residential or commercial properties or improvements in other forms of centralized power production may have a material adverse effect on our business and prospects. Any failure by us to adopt new or enhanced technologies or processes, or to react to changes in existing technologies, could result in product obsolescence, the loss of competitiveness of our products, decreased revenue and a loss of market share to competitors.
Our PV systems, including our storage solution, integrated AC Module, eighth-generation IQ microinverters and Ensemble technology, may not achieve broader market acceptance, which would prevent us from increasing our revenue and market share.
If we fail to achieve broader market acceptance of our products, including international acceptance of our anticipated eighth-generation IQ microinverters and Ensemble technology, there would be an adverse impact on our ability to increase our revenue, gain market share and achieve and sustain profitability. Our ability to achieve broader market acceptance for our products will be impacted by a number of factors, including:
our ability to produce PV systems that compete favorably against other solutions on the basis of price, quality, reliability and performance;
our ability to timely introduce and complete new designs and timely qualify and certify our products;
whether installers, system owners and solar financing providers will continue to adopt our systems, which have a relatively limited history with respect to reliability and performance;
whether installers, system owners and solar financing providers will adopt our storage solution, which is a relatively new technology with a limited history with respect to reliability and performance;
the ability of prospective system owners to obtain long-term financing for solar PV installations based on our product platform on acceptable terms or at all;
our ability to develop products that comply with local standards and regulatory requirements, as well as potential in-country manufacturing requirements; and
our ability to develop and maintain successful relationships with our customers and suppliers.
In addition, our ability to achieve increased market share will depend on our ability to increase sales to established solar installers, who have traditionally sold central or string inverters, or who currently sell DC-to-DC optimizers. These installers often have made substantial investments in design, installation resources and training in traditional central or string inverter systems or DC optimizers, which may create challenges for us to achieve their adoption of our solutions.
The reduction, elimination or expiration of government subsidies and economic incentives for on-grid solar electricity applications could reduce demand for solar PV systems and harm our business.
The market for on-grid applications, where solar power is used to supplement a customer’s electricity purchased from the utility network or sold to a utility under tariff, depends in large part on the availability and size of government and economic incentives that vary by geographic market. Because our customers’ sales are typically into the on-grid market, the reduction, elimination or expiration of government subsidies and economic incentives for on-grid solar electricity may negatively affect the competitiveness of solar electricity relative to conventional and non-solar renewable sources of electricity and could harm or halt the growth of the solar electricity industry and our business.
In general, the cost of solar power currently exceeds retail electricity rates, and we believe this tendency will continue in the near term. As a result, national, state and local government bodies in many countries, including the U.S., have provided incentives in the form of feed-in tariffs, or FiTs, rebates, tax credits and other incentives to system owners, distributors, system integrators and manufacturers of solar PV systems to promote the use of solar electricity in on-grid applications and to reduce dependency on other forms of energy. Many of these government incentives expire, phase out over time, terminate upon the exhaustion of the allocated funding, require renewal by the applicable authority or are being changed by governments due to changing market circumstances or changes to national, state or local energy policy.

18

Table of Contents

Electric utility companies or generators of electricity from other non-solar renewable sources of electricity may successfully lobby for changes in the relevant legislation in their markets that are harmful to the solar industry. Reductions in, or eliminations or expirations of, governmental incentives in regions where we focus our sales efforts could result in decreased demand for and lower revenue from solar PV systems there, which would adversely affect sales of our products. In addition, our ability to successfully penetrate new geographic markets may depend on new countries adopting and maintaining incentives to promote solar electricity, to the extent such incentives are not currently in place. Furthermore, electric utility companies may establish pricing structures or interconnection requirements that could adversely affect our sales and be harmful to the solar and distributed rooftop solar generation industry.
If we do not forecast demand for our products accurately, we may experience product shortages, delays in product shipment, excess product inventory, difficulties in planning expenses or disputes with suppliers, any of which will adversely affect our business and financial condition.
We manufacture our products according to our estimates of customer demand. This process requires us to make multiple forecasts and assumptions relating to the demand of our distributors, their end customers and general market conditions. Because we sell most of our products to distributors, who in turn sell to their end customers, we have limited visibility as to end-customer demand. We depend significantly on our distributors to provide us visibility into their end-customer demand, and we use these forecasts to make our own forecasts and planning decisions. If the information from our distributors turns out to be incorrect, then our own forecasts may also be inaccurate. Furthermore, we do not have long-term purchase commitments from our distributors or end customers, and our sales are generally made by purchase orders that may be canceled, changed or deferred without notice to us or penalty. As a result, it is difficult to forecast future customer demand to plan our operations.
If we overestimate demand for our products, or if purchase orders are canceled or shipments are delayed, we may have excess inventory that we cannot sell. We may have to make significant provisions for inventory write-downs based on events that are currently not known, and such provisions or any adjustments to such provisions could be material. We may also become involved in disputes with our suppliers who may claim that we failed to fulfill forecast or minimum purchase requirements. Conversely, if we underestimate demand, we may not have sufficient inventory to meet end-customer demand, and we may lose market share, damage relationships with our distributors and end customers and forgo potential revenue opportunities. Obtaining additional supply in the face of product shortages may be costly or impossible, particularly in the short term and in light of our outsourced manufacturing processes, which could prevent us from fulfilling orders in a timely and cost-efficient manner or at all. In addition, if we overestimate our production requirements, our contract manufacturers may purchase excess components and build excess inventory. If our contract manufacturers, at our request, purchase excess components that are unique to our products and are unable to recoup the costs of such excess through resale or return or build excess products, we could be required to pay for these excess parts or products and recognize related inventory write-downs.
In addition, we plan our operating expenses, including research and development expenses, hiring needs and inventory investments, in part on our estimates of customer demand and future revenue. If customer demand or revenue for a particular period is lower than we expect, we may not be able to proportionately reduce our fixed operating expenses for that period, which would harm our operating results for that period.
Our focus on a limited number of specific markets increases risks associated with the modification, elimination or expiration of governmental subsidies and economic incentives for on-grid solar electricity applications.
To date, we have generated the majority of our revenues from North America and expect to continue to generate a substantial amount of our revenues from North America in the future. There are a number of important incentives that are expected to phase-out or terminate in the future, which could adversely affect sales of our products. A substantial majority of our revenues come from the U.S., which has both federal and state incentives. For instance, the Renewable Energy and Job Creation Act of 2008 currently provides a 30% federal tax credit for residential and commercial solar installations through December 31, 2019 and reduced tax credits of 26% and 22% through December 31, 2020 and 2021 respectively, before being reduced to 10% for commercial installations and 0% for residential installations beginning in 2022. These tax credits could be reduced or eliminated as part of tax code changes or regulatory reform initiatives by the current Congress and presidential administration.

19

Table of Contents

In addition, net energy metering tariffs are being evaluated and, in some instances modified, which may have a negative impact on future inverter sales. We derive a significant portion of our revenues from California’s residential solar market and the existing California net energy metering tariff has been very successful in incentivizing the installation of residential solar systems. Future legislative or regulatory changes in California may discourage further growth in the residential solar market.
A number of European countries, including Germany, Belgium, Italy and the United Kingdom have adopted reductions in or concluded their net energy metering or FiT programs. Certain countries have proposed or enacted taxes levied on renewable energy. These and related developments have significantly impacted the solar industry in Europe and may adversely affect the future demand for the solar energy solutions in Europe.
We also sell our products in Australia. In 2012 Australia enacted a Renewable Energy Target (RET) that is intended to ensure that 33,000 Gigawatt-hours of Australia’s electricity comes from renewable sources by 2020. This policy supports both the installation of large-scale centralized renewable generation projects, along with small-scale systems of under 100kW each for residential and small business customers. 2018 saw the introduction of state-based incentive schemes, aimed at solar customers in the state of Victoria and battery storage in the state of South Australia. Other Australian states and territories are expected to introduce similar programs in 2019. Any change in, or failure to implement, these programs may adversely affect the demand for solar energy solutions in Australia.
U.S. federal and state tax credits, grants and other incentive programs have had a positive effect on our sales since inception. However, unless these programs are further extended or modified to allow for continued growth in the residential solar market, the phase-out of such programs could adversely affect sales of our products in the future. Reductions in incentives and uncertainty around future energy policy, including local content requirements, have negatively affected and may continue to negatively affect our business, financial condition, and results of operations as we seek to increase our business domestically and abroad. Additionally, as we further expand to other countries, changes in incentive programs or electricity policies could negatively affect returns on our investments in those countries as well as our business, financial condition, and results of operations.
Changes in current laws or regulations or the imposition of new laws or regulations, or new interpretations thereof, by federal or state agencies or foreign governments could impair our ability to compete in international markets.
Changes in current laws or regulations, or the imposition of new laws and regulations around the world, could materially and adversely affect our business, financial condition and results of operations. In addition, changes in our products or further changes in tariffs, export and import laws and implementing regulations may create delays in the introduction of new products in international markets, prevent our customers from deploying our products internationally or, in some cases, prevent the export or import of our products to certain countries altogether.
For example, several states or territories, including California, Hawaii and Queensland, Australia, have either implemented or are considering implementing new restrictions on incentives or rules regulating the installation of solar systems with which we may not be able to comply. In the event that we cannot comply with these or other new regulations or implement a solution to such noncompliance as they arise, the total market available for our microinverter products in such states, and our business as a result, may be adversely impacted.
While we are not aware of any other current or proposed export or import regulations that would materially restrict our ability to sell our products in countries where we offer our products for sale, any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by these regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. In such event, our business and results of operations could be adversely affected.

20

Table of Contents

The threat of global economic, capital markets and credit disruptions, including sovereign debt issues, pose risks for our business.
The threat of global economic, capital markets and credit disruptions pose risks for our business. These risks include slower economic activity and investment in projects that make use of our products and services. These economic developments, particularly decreased credit availability, have in the past reduced demand for solar products. For instance, the European sovereign debt crisis in recent years has caused and may continue to cause European governments to reduce, eliminate or allow to expire government subsidies and economic incentives for solar energy, which could limit our growth or cause our net sales to decline and materially and adversely affect our business, financial condition, and results of operations. These conditions, including reduced incentives, continued decreases in credit availability, as well as continued economic instability, have and may continue to adversely impact our business, financial condition and results of operations as we seek to increase our sales internationally.
Natural disasters, terrorist or cyber-attacks, or other catastrophic events could harm our operations.
Our worldwide operations could be subject to natural disasters and other business disruptions, which could harm our future revenue and financial condition and increase our costs and expenses. For example, our corporate headquarters in Fremont, California is located near major earthquake fault lines and our Petaluma, California facility is near fault lines and the sites of recent catastrophic wild fires. Further, a terrorist attack or cyber-attack, including one aimed at energy or communications infrastructure suppliers or our cloud-based monitoring service, could hinder or delay the development and sale or performance of our products. In the event that an earthquake, fire, tsunami, typhoon, terrorist or cyber-attack, or other natural, manmade or technical catastrophe were to damage or destroy any part of our facilities or those of our contract manufacturer, destroy or disrupt vital infrastructure systems or interrupt our operations or services for any extended period of time, our business, financial condition and results of operations would be materially and adversely affected.
We could be subject to breaches of our information technology systems, which could cause significant reputational, legal and financial damages.
Like many companies, we use and store a wide variety of confidential and proprietary information relating to our business. Although we make significant efforts to maintain the security and integrity of our information technology and related systems, and have implemented measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective, or that attempted security breaches or disruptions would not be successful or damaging.
We devote substantial resources to network security, data encryption, and other security measures to protect our systems and data, but these security measures cannot provide absolute security. The techniques used in attempted cyber-attacks and intrusions are sophisticated and constantly evolving, and may be difficult to detect for long periods of time. We may be unable to anticipate these techniques or implement adequate preventative measures. Although to date we have not experienced breaches of our systems that have had a material adverse effect on our business, attacks and intrusions on our systems will continue and we may experience a breach of our systems that compromises sensitive company information or customer data. In addition, hardware, software, or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. If we experience a significant data security breach, we could be exposed to reputational damage and significant costs, including to rebuild our systems, modify our products and services, defend litigation, respond to government enforcement actions, pay damages or take other remedial steps, any of which could adversely affect our business, results of operations, and financial condition.
We may also share information with contractors and third-party providers to conduct our business. Although such contractors and third-party providers typically implement encryption and authentication technologies to secure the transmission and storage of data, those third-party providers may experience a significant data security breach, which may also detrimentally affect our business, results of operations, and financial condition.

21

Table of Contents

Any unauthorized access to, or disclosure or theft of personal information we gather, store or use could harm our reputation and subject us to claims or litigation.
We receive, store and use certain personal information of our customers, and the end-users of our customers’ solar PV systems, including names, addresses, e-mail addresses, credit information and energy production statistics. We also store and use personal information of our employees. We take steps to protect the security, integrity and confidentiality of the personal information we collect, store and transmit, but there is no guarantee that inadvertent or unauthorized use or disclosure will not occur or that third parties will not gain unauthorized access to this information despite our efforts. Because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we and our suppliers or vendors may be unable to anticipate these techniques or to implement adequate preventative or mitigation measures.
Effective May 25, 2018, the European Union, or EU, implemented the General Data Protection Regulation, or GDPR, a broad data protection framework that expands the scope of current EU data protection law to non-European Union entities that process, or control the processing of, the personal information of EU subjects. The GDPR allows for the imposition of fines and corrective action on entities that improperly use or disclose the personal information of EU subjects, including through a data security breach. On June 27, 2018, the state of California enacted the California Consumer Privacy Act of 2018 or CCPA, which contains requirements similar to GDPR for the handling of personal information of California residents, commencing on January 1, 2020.
Our and our collaborators’ and contractors’ failure to fully comply with GDPR, CCPA and other laws could lead to significant fines and require onerous corrective action. In addition, data security breaches experienced by us, our collaborators or contractors could result in the loss of trade secrets or other intellectual property, public disclosure of sensitive commercial data, and the exposure of personally identifiable information (including sensitive personal information) of our employees, customers, collaborators and others.
Unauthorized use or disclosure of, or access to, any personal information maintained by us or on our behalf, whether through breach of our systems, breach of the systems of our suppliers or vendors by an unauthorized party, or through employee or contractor error, theft or misuse, or otherwise, could harm our business. If any such unauthorized use or disclosure of, or access to, such personal information was to occur, our operations could be seriously disrupted, and we could be subject to demands, claims and litigation by private parties, and investigations, related actions, and penalties by regulatory authorities. In addition, we could incur significant costs in notifying affected persons and entities and otherwise complying with the multitude of foreign, federal, state and local laws and regulations relating to the unauthorized access to, or use or disclosure of, personal information. Finally, any perceived or actual unauthorized access to, or use or disclosure of, such information could harm our reputation, substantially impair our ability to attract and retain customers and have an adverse impact on our business, financial condition and results of operations.
We may be subject to disruptions or failures in information technology systems and network infrastructures that could have a material adverse effect on our business and financial condition.
We rely on the efficient and uninterrupted operation of complex information technology systems and network infrastructures to operate our business. In addition, our Enlighten web-based monitoring service, which our installers and end-user customers use to track and monitor the performance of their solar PV systems, is dependent on cloud-based hosting services, along with the availability of WiFi or mobile data services at end-user premises. A disruption, infiltration or failure of our information technology systems, third-party cloud hosting platforms or end-user data services as a result of software or hardware malfunctions, system implementations or upgrades, computer viruses, cyber-attacks, third-party security breaches, employee error, theft or misuse, malfeasance, power disruptions, natural disasters or accidents could cause breaches of data security, failure of our Enlighten service, loss of intellectual property and critical data and the release and misappropriation of sensitive competitive information and partner, customer and employee personal data. We have been and may in the future be subject to fraud attempts from outside parties through our electronic systems (such as “phishing” e-mail communications to our finance, technical or other personnel), which could put us at risk for harm from fraud, theft or other loss if our internal controls do not operate as intended. Any of these events could harm our competitive position, result in a loss of customer confidence, cause us to incur significant costs to remedy any damages and ultimately materially adversely affect our business and financial condition.

22

Table of Contents

A drop in the retail price of electricity derived from the utility grid or from alternative energy sources, or a change in utility pricing structures, may harm our business, financial condition and results of operations.
We believe that a system owner’s decision to purchase a solar PV system is strongly influenced by the cost of electricity generated by solar PV installations relative to the retail price of electricity from the utility grid and the cost of other renewable energy sources, including electricity from solar PV installations using central inverters. Decreases in the retail prices of electricity from the utility grid would make it more difficult for all solar PV systems to compete. In particular, growth in unconventional natural gas production and an increase in global liquefied natural gas capacity are expected to keep natural gas prices relatively low for the foreseeable future. Persistent low natural gas prices, lower prices of electricity produced from other energy sources, such as nuclear power or coal-fired plants, or improvements to the utility infrastructure could reduce the retail price of electricity from the utility grid, making the purchase of solar PV systems less economically attractive and depressing sales of our products. In addition, energy conservation technologies and public initiatives to reduce demand for electricity also could cause a fall in the retail price of electricity from the utility grid. Moreover, technological developments by our competitors in the solar industry, including manufacturers of central inverters and DC-to-DC optimizers, could allow these competitors or their partners to offer electricity at costs lower than those that can be achieved from solar PV installations based on our product platform, which could result in reduced demand for our products. Additionally, as increasing adoption of distributed generation places pressure on traditional utility business models or utility infrastructure, utilities may change their pricing structures to increase the cost of installation or operation of solar distributed generation. Such measures can include grid access fees, costly or lengthy interconnection studies, limitations on distributed generation penetration levels, or other measures. If the cost of electricity generated by solar PV installations incorporating our solutions is high relative to the cost of electricity from other sources, our business, financial condition and results of operations may be harmed.
Problems with product quality or product performance may cause us to continue to incur additional warranty expenses and may damage our market reputation and cause our revenue and gross profit to decline.
We offered 15-year limited warranties for our first and second generation microinverters and have offered a limited warranty of up to 25 years on each subsequent generation microinverters, including the current generation. Our limited warranties cover defects in materials and workmanship of our microinverters under normal use and service conditions for up to 25 years following installation. As a result, we bear the risk of warranty claims long after we have sold the product and recognized revenue. Our estimated costs of warranty for previously sold products may change depending on a number of factors, including failure rates and cost of providing replacement products.
While we offer warranties of up to 25 years, our microinverters have only been in use since mid-2008, when we first commenced commercial sales of our products. Although we conduct accelerated life cycle testing to measure performance and reliability, our solutions have not been tested over the full warranty cycle and do not have a sufficient operating history to confirm how they will perform over their estimated useful life. In addition, under real-world operating conditions, which may vary by location and design, as well as insolation, soiling and weather conditions, a typical solar PV installation may perform in a different way than under standard test conditions. If our products perform below expectations or have unexpected reliability problems, we may be unable to gain or retain customers and could face substantial warranty expense.
We are required to make assumptions and apply judgments, based on our accelerated life cycle testing and the limited operating history of our products, regarding a number of factors, including the durability and reliability of our products, our anticipated rate of warranty claims and the costs of replacement of defective products. Our assumptions have proved and could in the future prove to be materially different from the actual performance of our products, which has caused and may in the future cause us to incur substantial expense to repair or replace defective products. Increases in our estimates of future warranty obligations due to actual product failure rates, field service obligations and rework costs incurred in correcting product failures have caused and could in the future cause us to materially increase the amount of warranty obligations and have had, and may have in the future, a corresponding negative impact on our results of operations.
We also depend significantly on our reputation for reliability and high-quality products and services, exceptional customer service and our brand name to attract new customers and grow our business. If our products and services do not perform as anticipated or we experience unexpected reliability problems or widespread product failures, our brand and reputation could be significantly impaired, and we may lose, or be unable to gain or retain, customers.

23

Table of Contents

Defects and poor performance in our products could result in loss of customers, decreased revenue and unexpected expenses, and increases in warranty, indemnity and product liability claims arising from defective products.
Our products must meet stringent quality requirements and may contain undetected errors or defects, especially when new generations are released. Errors, defects or poor performance can arise due to design flaws, defects in raw materials or components or manufacturing difficulties, which can affect both the quality and the yield of the product. These errors or defects may be dangerous, as defective power components may cause power overloads, potentially resulting in explosion or fire. As we develop new generations of our products and enter new markets, we face higher risk of undetected defects because our testing protocols may not be able to fully test the products under all possible operating conditions. In the past, we have experienced defects in our products due to errors in the manufacturing and design process. Any actual or perceived errors, defects or poor performance in our products could result in the replacement or recall of our products, shipment delays, rejection of our products, damage to our reputation, lost revenue, diversion of our engineering personnel from our product development efforts in order to address or remedy any defects, and increases in customer service and support costs, all of which could have a material adverse effect on our business and operations.
Furthermore, defective, inefficient or poorly performing power components may give rise to warranty, indemnity or product liability claims against us that exceed any revenue or profit we receive from the affected products. We could incur significant costs and liabilities if we are sued and if damages are awarded against us. We currently maintain a moderate level of product liability insurance, and there can be no assurance that this insurance will provide sufficient coverage in the event of a claim. Also, we cannot predict whether we will be able to maintain this coverage on acceptable terms, if at all, or that a product liability claim would not harm our business or financial condition. Costs or payments we may make in connection with warranty and product liability claims or product recalls may adversely affect our financial condition and results of operations.
Our Enlighten web-based monitoring service, which our installers and end-user customers use to track and monitor the performance of their solar PV systems, may contain undetected errors, failures, or bugs, especially when new versions or enhancements are released. We have from time to time found defects in our service and new errors in our existing service may be detected in the future. Any errors, defects, disruptions in service or other performance problems with our monitoring service could harm our reputation and may damage our customers’ businesses.
If we are unable to effectively manage our operations, our business and operating results may suffer.
We have experienced, and expect to experience in the future, volatility in our sales and operations. Our historical growth and our more recent cost reduction initiatives have placed, and are expected to continue to place, significant demands on our management as well as our financial and operational resources, to:
manage a dynamic organization;
expand third-party manufacturing, testing and distribution capacity;
execute on our cost reduction efforts and product initiatives with reduced headcount;
build additional custom manufacturing test equipment;
manage an increasing number of relationships with customers, suppliers and other third parties;
manage acquired businesses or technologies and integration efforts related to acquisitions;
increase our sales and marketing efforts;
train and manage a dynamic and increasingly international employee base;
broaden our customer support capabilities; and
implement new and upgrade existing operational and financial systems.
We cannot assure you that our current and planned operations, personnel, systems, internal procedures and controls will be adequate to support our future operations. If we cannot manage our sales and operations effectively, we may be unable to take advantage of market opportunities, execute our business strategies or respond to competitive pressures, any of which could have a material adverse effect on our financial condition, results of operations, business or prospects.

24

Table of Contents

Our recent and planned expansion into new markets could subject us to additional business, financial and competitive risks.
We currently offer solar PV systems targeting the residential and commercial markets throughout the world, and we intend to expand into other international markets. Our success in new geographic and product markets will depend on a number of factors, such as:
acceptance of microinverters in markets in which they have not traditionally been used;
our ability to compete in new product markets to which we are not accustomed;
our ability to manage manufacturing capacity and production;
willingness of our potential customers to incur a higher upfront capital investment than may be required for competing solutions;
timely qualification and certification of new products;
our ability to reduce production costs in order to price our products competitively;
availability of government subsidies and economic incentives for solar energy solutions;
accurate forecasting and effective management of inventory levels in line with anticipated product demand; and
our customer service capabilities and responsiveness.
Further, new geographic markets and larger commercial and utility-scale installation markets have different characteristics from the markets in which we currently sell products, and our success will depend on our ability to properly address these differences. These differences may include:
differing regulatory requirements, including tax laws, trade laws, labor, safety, local content, recycling and consumer protection regulations, tariffs, export quotas, customs duties or other trade restrictions;
limited or unfavorable intellectual property protection;
risk of change in international political or economic conditions;
restrictions on the repatriation of earnings;
fluctuations in the value of foreign currencies and interest rates;
difficulties and increased expenses in complying with a variety of U.S. and foreign laws, regulations and trade standards, including the Foreign Corrupt Practices Act and UK Bribery Act;
potentially longer sales cycles;
generally longer payment cycles and greater difficulty in collecting accounts receivable;
higher volume requirements;
increased customer concentrations;
warranty expectations and product return policies; and
cost, performance and compatibility requirements.
Failure to address these new markets successfully, to generate sufficient revenue from these markets to offset associated research and development, marketing and manufacturing costs, or to otherwise effectively anticipate and manage the risks and challenges associated with our potential expansion into new product and geographic markets, could adversely affect our revenues and our ability to achieve or sustain profitability.

25

Table of Contents

Ordering patterns from our distributors may cause our revenue to fluctuate significantly from period to period.
Our distributors place purchase orders with us based on their assessment of end-customer demand and their forecasts. Because these forecasts may not be accurate, channel inventory held at our distributors may fluctuate significantly due to the difference between their forecasts and actual demand. As a result, distributors may adjust their purchase orders placed with us in response to changing channel inventory levels, as well as their assessment of the latest market demand trends. We have limited visibility into future end customer demand. A significant decrease in our distributors’ channel inventory in one period may lead to a significant rebuilding of channel inventory in subsequent periods, or vice versa, which may cause our quarterly revenue and operating results to fluctuate significantly. This fluctuation may cause our results to fall short of analyst or investor expectations in a certain period, which may cause our stock price to decline.
If potential owners of solar PV systems based on our product platform are unable to secure financing on acceptable terms, we could experience a reduction in the demand for our solar PV systems.
Many owners of solar PV systems depend on financing to purchase their systems. The limited use of microinverters to date, coupled with our relatively smaller size and capitalization compared to some of our competitors, could result in lenders refusing to provide the financing necessary to purchase solar PV systems based on our product platform on favorable terms, or at all. Moreover, in the case of debt financed projects, even if lenders are willing to finance the purchase of these systems, an increase in interest rates or a change in tax incentives could make it difficult for owners to secure the financing necessary to purchase a solar PV system on favorable terms, or at all. In addition, we believe that a significant percentage of owners purchase solar PV systems as an investment, funding the initial capital expenditure through a combination of upfront cash and financing. Difficulties in obtaining financing for solar PV systems on favorable terms or increases in interest rates or changes in tax incentives, could lower an investor’s return on investment in a solar PV system, or make alternative solar PV systems or other investments more attractive relative to solar PV systems based on our product platform. Any of these events could result in reduced demand for our products, which could have a material adverse effect on our financial condition and results of operations. In addition, a significant share of residential solar installations has been provided through third-party financing structures, such as power purchase or lease agreements. Our sales growth may depend on sales to developers of third-party solar finance offerings who provide solar as a service via power purchase agreements or leasing structures. The third-party finance market for residential solar in the U.S. and elsewhere is or may become highly concentrated, with a few significant finance companies and several smaller entrants. If we are unable develop relationships and gain a significant share of inverter sales to the major finance companies or new entrants, our overall sales growth could be constrained.
We rely primarily on distributors, installers and providers of solar financing to assist in selling our products, and the failure of these customers to perform as expected could reduce our future revenue.
We sell our solutions primarily through distributors, as well as through direct sales to solar equipment installers and sales to developers of third-party solar finance offerings. We do not have exclusive arrangements with these third parties and, as a result, many of our customers also use or market and sell products from our competitors, which may reduce our sales. Our customers may generally terminate their relationships with us at any time, or with short notice. Our customers may fail to devote resources necessary to sell our products at the prices, in the volumes and within the time frames that we expect, or may focus their marketing and sales efforts on products of our competitors. In addition, participants in the solar industry are becoming increasingly focused on vertical integration of the solar financing and installation process, which may lead to an overall reduction in the number of potential parties who may purchase and install our products.
Our future performance depends on our ability to effectively manage our relationships with our existing customers, as well as to attract additional customers that will be able to market and support our products effectively, especially in markets in which we have not previously distributed our products. Termination of agreements with current customers, failure by customers to perform as expected, or failure by us to cultivate new customer relationships, could hinder our ability to expand our operations and harm our revenue and operating results.

26

Table of Contents

We may fail to capture customers in the new product and geographic markets that we are pursuing.
We are pursuing opportunities in energy management and energy storage which are highly competitive markets. We have made investments in our infrastructure, increased our operating costs and forgone other business opportunities in order to seek opportunities in these areas and will continue to do so. Any new product is subject to certain risks, including component sourcing, strategic partner selection and execution, customer acceptance, competition, product differentiation, market timing, challenges relating to economies of scale in component sourcing and the ability to attract and retain qualified personnel. There can be no assurance that we will be able to develop and grow these or any other new concepts to a point where they will become profitable or generate positive cash flow. If we fail to execute on our plan with respect to new product introductions, these new potential business segments fail to translate into revenue in the quantities or timeline projected, thus, having a materially adverse impact on our revenue, operating results and financial stability.
Our success in “AC module” versions of our microinverter system will depend in part upon our ability to continue to work closely with leading solar module manufacturers.
We continue to work on variants of our microinverter systems that enable direct attachment of a microinverter to solar modules. The market success of such “AC Module” solutions will depend in part on our ability to continue to work closely with SunPower and other solar module manufacturers to design microinverters that are compatible with such direct attachment to solar modules. We may not be able to encourage solar module manufacturers to work with us on the development of such compatible solutions for a variety of reasons, including differences in marketing or selling strategy, competitive considerations, lack of competitive pricing, and technological compatibility. In addition, our ability to form effective partnerships with solar module manufacturers may be adversely affected by the substantial challenges faced by many of these manufacturers due to declining prices and revenues from sales of solar modules and the tariffs in the U.S.
If we fail to protect, or incur significant costs in defending, our intellectual property and other proprietary rights, our business and results of operations could be materially harmed.
Our success depends to a significant degree on our ability to protect our intellectual property and other proprietary rights. We rely on a combination of patent, trademark, copyright, trade secret and unfair competition laws, as well as confidentiality and license agreements and other contractual provisions, to establish and protect our intellectual property and other proprietary rights. We have applied for patent and trademark registrations in the U.S. and in other countries, some of which have been issued. We cannot guarantee that any of our pending applications will be approved or that our existing and future intellectual property rights will be sufficiently broad to protect our proprietary technology, and any failure to obtain such approvals or finding that our intellectual property rights are invalid or unenforceable could force us to, among other things, rebrand or re-design our affected products. In countries where we have not applied for patent protection or where effective intellectual property protection is not available to the same extent as in the U.S., we may be at greater risk that our proprietary rights will be misappropriated, infringed or otherwise violated.
To protect our unregistered intellectual property, including our trade secrets and know-how, we rely in part on trade secret laws and confidentiality and invention assignment agreements with our employees and independent contractors. We also require other third parties who may have access to our proprietary technologies and information to enter into non-disclosure agreements. Such measures, however, provide only limited protection, and we cannot assure that our confidentiality and non-disclosure agreements will prevent unauthorized disclosure or use of our confidential information, especially after our employees or third parties end their employment or engagement with us, or provide us with an adequate remedy in the event of such disclosure. Furthermore, competitors or other third parties may independently discover our trade secrets, copy or reverse engineer our products or portions thereof, or develop similar technology. If we fail to protect our intellectual property and other proprietary rights, or if such intellectual property and proprietary rights are infringed, misappropriated or otherwise violated, our business, results of operations or financial condition could be materially harmed.
In the future, we may need to take legal action to prevent third parties from infringing upon or misappropriating our intellectual property or from otherwise gaining access to our technology. Protecting and enforcing our intellectual property rights and determining their validity and scope could result in significant litigation costs and require significant time and attention from our technical and management personnel, which could significantly harm our business. In addition, we may not prevail in such proceedings. An adverse outcome of any such proceeding may reduce our competitive advantage or otherwise harm our financial condition and our business.

27

Table of Contents

Third parties may assert that we are infringing upon their intellectual property rights, which could divert management’s attention, cause us to incur significant costs and prevent us from selling or using the technology to which such rights relate.
Our competitors and other third parties hold numerous patents related to technology used in our industry, and claims of patent or other intellectual property right infringement or violation have been litigated against our competitors. We may also be subject to such claims and litigation. Regardless of their merit, responding to such claims can be time consuming, divert management’s attention and resources, and may cause us to incur significant expenses. While we believe that our products and technology do not infringe upon any intellectual property rights of third parties, we cannot be certain that we would be successful in defending against any such claims. Furthermore, patent applications in the U.S. and most other countries are confidential for a period of time before being published, so we cannot be certain that we are not infringing third parties’ patent rights or that we were the first to conceive or protect inventions covered by our patents or patent applications. An adverse outcome with respect to any intellectual property claim could invalidate our proprietary rights and force us to do one or more of the following:
obtain from a third-party claiming infringement a license to sell or use the relevant technology, which may not be available on reasonable terms, or at all;
stop manufacturing, selling, incorporating or using products that embody the asserted intellectual property;
pay substantial monetary damages;
indemnify our customers under some of our customer contracts; or
expend significant resources to redesign the products that use the infringing technology, or to develop or acquire non-infringing technology.
Any of these actions could result in a substantial reduction in our revenue and could result in losses over an extended period of time.
Our failure to obtain the right to use necessary third-party intellectual property rights on reasonable terms, or our failure to maintain, and comply with the terms and conditions applicable to these rights, could harm our business and prospects.
We have licensed, and in the future we may choose or be required to license, technology or intellectual property from third parties in connection with the development and marketing of our products. We cannot assure that such licenses will be available to us on commercially reasonable terms, or at all, and our inability to obtain such licenses could require us to substitute technology of lower quality or of greater cost. In addition, we incorporate open source software code in our proprietary software. Use of open source software can lead to greater risks than use of third-party commercial software, since open source licensors generally do not provide warranties or controls with respect to origin, functionality or other features of the software. Some open source software licenses require users who distribute open source software as part of their products to publicly disclose all or part of the source code in their software and make any derivative works of the open source code available for limited fees or at no cost. Although we monitor our use of open source software, open source license terms may be ambiguous, and many of the risks associated with the use of open source software cannot be eliminated. If we were found to have inappropriately used open source software, we may be required to release our proprietary source code, re-engineer our software, discontinue the sale of certain products in the event re-engineering cannot be accomplished on a timely basis, or take other remedial action. Furthermore, if we are unable to obtain or maintain licenses from third parties or fail to comply with open source licenses, we may be subject to costly third party claims of intellectual property infringement or ownership of our proprietary source code. Any of the above could harm our business and put us at a competitive disadvantage.

28

Table of Contents

Our business has been and could continue to be affected by seasonal trends and construction cycles.
We have been and could continue to be subject to industry-specific seasonal fluctuations, particularly in climates that experience colder or rainier weather during the winter months, such as northern Europe, Canada, and the U.S. In general, we expect our products in the second, third, and fourth quarters will be positively affected by seasonal customer demand trends, including solar economic incentives, weather patterns and construction cycles, preceded by a seasonally softer first quarter. In the U.S., customers will sometimes make purchasing decisions towards the end of the year in order to take advantage of tax credits or for budgetary reasons. In addition, construction levels are typically slower in colder and wetter months. In European countries with FiTs, the construction of solar PV systems may be concentrated during the second half of the calendar year, largely due to the annual reduction of the applicable minimum FiT and the fact that the coldest winter months are January through March. Accordingly, our business and quarterly results of operations could be affected by seasonal fluctuations in the future.
Conversion of our Convertible Notes may dilute the ownership interest of existing stockholders or may otherwise depress the price of our common stock.
In August 2018, we issued and sold a total of $65 million convertible senior notes due 2023 (the “Convertible Notes”) in a private placement to qualified institutional buyers and an affiliate of the Company. The conversion of some or all of the Convertible Notes may dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Convertible Notes may encourage short selling by market participants because the conversion of the Convertible Notes could be used to satisfy short positions. In addition, the anticipated conversion of the Convertible Notes into shares of our common stock could depress the price of our common stock.
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our debt.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the Convertible Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt, including the Convertible Notes, and make necessary capital expenditures. If we are unable to generate cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness, including the Convertible Notes, will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of those activities or engage in these activities on desirable terms, which could result in a default on our debt obligations, including our obligations under the Convertible Notes.
We may not have the ability to raise the funds necessary to repurchase the Convertible Notes upon a fundamental change or to repay the Convertible Notes at maturity.
Holders of our Convertible Notes will have the right to require us to repurchase all or a portion of their Convertible Notes upon the occurrence of a fundamental change at 100% of the principal amount of the Convertible Notes, plus accrued and unpaid interest. Fundamental change is defined in the Indenture entered into in connection with the Convertible Note financing and consists of events such as an acquisition of a majority of our outstanding common stock, an acquisition of our company or substantially all of our assets, the approval by our stockholders of a plan of liquidation or dissolution, or our common stock no longer being listed on the Nasdaq Global Select Market, the Nasdaq Global Market or the New York Stock Exchange. Moreover, we will be required to repay the Convertible Notes in cash at their maturity in August 2023, unless earlier converted or repurchased. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Convertible Notes surrendered or repay the Convertible Notes at maturity.
We may not be able to raise additional capital to execute on our current or future business opportunities on favorable terms, if at all, or without dilution to our stockholders.
We believe that our existing cash and cash equivalents and cash flows from our operating activities will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, we may need to raise additional capital or debt financing to execute on our current or future business strategies, including to:
provide additional cash reserves to support our operations;

29

Table of Contents

invest in our research and development efforts;
expand our operations into new product markets and new geographies;
acquire complementary businesses, products, services or technologies; or
otherwise pursue our strategic plans and respond to competitive pressures, including adjustments to our business to mitigate the effects of any tariffs that might apply to us or our industry.
We do not know what forms of financing, if any, will be available to us. If financing is not available on acceptable terms, if and when needed, our ability to fund our operations, enhance our research and development and sales and marketing functions, develop and enhance our products, respond to unanticipated events and opportunities, or otherwise respond to competitive pressures would be significantly limited. In any such event, our business, financial condition and results of operations could be materially harmed, and we may be unable to continue our operations. Moreover, if we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders.
If we fail to maintain an effective system of internal controls or are unable to remediate any deficiencies in our internal controls, we might not be able to report our financial results accurately or prevent fraud; in that case, our stockholders could lose confidence in our financial reporting, which would harm our business and could negatively impact the price of our stock.
Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. In addition, Section 404 of the Sarbanes-Oxley Act requires us to establish and maintain internal control over financial reporting and disclosure controls procedures. The process of implementing our internal controls and complying with Section 404 of the Sarbanes-Oxley Act has required, and will continue to require, significant attention of management. We are required to provide an auditor’s attestation report on management’s assessment of the effectiveness of our internal control over financial reporting, under Section 404(b) of the Sarbanes-Oxley Act, in conjunction with this Annual Report on Form 10-K. If we or our independent registered public accounting firm discover a material weakness in our internal controls over financial reporting, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our stock price. To the extent any material weaknesses in our internal control over financial reporting are identified, we could be required to expend significant management time and financial resources to correct such material weaknesses or to respond to any resulting regulatory investigations or proceedings.
Our ability to use net operating losses to reduce future tax payments may be limited by provisions of the Internal Revenue Code and may be subject to further limitation as a result of future transactions.
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), contain rules that limit the ability of a company that undergoes an “ownership change,” generally defined as a more than 50 percentage point increase in the percentage of its stock owned by certain stockholders over a three-year period, to utilize its net operating loss and tax credit carryforwards and certain built-in losses recognized in the years after the ownership change. These rules generally operate by focusing on ownership changes involving stockholders who directly or indirectly own 5% or more of the stock of a company and any change in ownership arising from a new issuance of stock by the company. Generally, if an ownership change occurs, the yearly taxable income limitation on the use of net operating loss and tax credit carryforwards is equal to the product of the applicable long-term tax-exempt rate and the value of the company’s stock immediately before the ownership change. If these limitations apply, we may be unable to offset our taxable income with net operating losses, or our tax liability with credits, before these losses and credits expire. We have performed a study under Section 382 of the Code for fiscal year 2018 to assess whether an ownership change has occurred or whether there have been multiple ownership changes since we became a loss corporation under Section 382 of the Code. Based on the study, we do not anticipate these limitations will significantly impact our ability to utilize the net operating losses and tax credit carryforwards. However, it is possible that future transactions (including issuances of new shares of our common stock and sales of shares of our common stock or other equity-linked securities) will cause us to undergo one or more additional ownership changes. In that event, we generally would not be able to use our net operating losses from periods prior to this ownership change to offset future taxable income in excess of the annual limitations imposed by Sections 382 and 383 of the Code, and those attributes that are already subject to limitations (as a result of our prior ownership changes) may be subject to more stringent limitations.

30

Table of Contents

Comprehensive tax reform laws could adversely affect our business and financial condition.
The U.S. government enacted comprehensive tax legislation in 2017 (the Tax Cuts and Jobs Act of 2017, or Tax Reform Act) that includes significant changes to the taxation of business entities. These changes include (i) a permanent reduction to the corporate income tax rate from 35% to 21%, (ii) a partial limitation on the deductibility of business interest expense, (iii) a shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a territorial system (along with certain rules designed to prevent erosion of the U.S. income tax base) and (iv) a one-time tax on accumulated offshore earnings held in cash and illiquid assets, with the latter taxed at a lower rate. On December 22, 2017, the SEC issued Staff Accounting Bulletin (“SAB”) No. 118 (“SAB 118”) which provides a measurement period of no more than a year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification (“ASC”) 740 (“ASC 740”), “Income Taxes.” If our current taxable loss position should change, the Tax Reform Act could adversely affect our business and financial condition.
We are dependent on ocean transportation to deliver our products in a cost-efficient manner. If we are unable to use ocean transportation to deliver our products, our business and financial condition could be materially and adversely impacted.
We rely on commercial ocean transportation for the delivery of a large percentage of our products to our customers in North America, Europe, Australia and other markets. We also rely on more expensive air transportation when ocean transportation is not available or compatible with the delivery time requirements of our customers. Our ability to deliver our products via ocean transportation could be adversely impacted by shortages in available cargo capacity, changes by carriers and transportation companies in policies and practices, such as scheduling, pricing, payment terms and frequency of service or increases in the cost of fuel, taxes and labor; and other factors, such as labor strikes and work stoppages, not within our control. If we are unable to use ocean transportation, or are otherwise required to continue to substitute more expensive air transportation to meet delivery time requirements, our financial condition and results of operations could be materially and adversely impacted. Material interruptions in service or stoppages in transportation, whether caused by strike, work stoppage, lock-out, slowdown or otherwise, could materially and adversely impact our business, results of operations and financial condition.
The market price of our common stock may be volatile or may decline regardless of our operating performance.
The market price of our common stock has been and could be subject to wide fluctuations in response to, among other things, the risk factors described in this Annual Report on Form 10-K, and other factors beyond our control, such as fluctuations in the valuation of companies perceived by investors to be comparable to us. Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions, such as recessions, interest rate changes or international currency fluctuations, may negatively affect the market price of our common stock. In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may become the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.
Our financial results may vary significantly from quarter to quarter due to a number of factors, which may lead to volatility in our stock price.
Our quarterly revenue and results of operations have varied in the past and may continue to vary significantly from quarter to quarter. This variability may lead to volatility in our stock price as research analysts and investors respond to these quarterly fluctuations. These fluctuations are due to numerous factors, including:
seasonal and other fluctuations in demand for our products;
the timing, volume and product mix of sales of our products, which may have different average selling prices or profit margins;
changes in our pricing and sales policies or the pricing and sales policies of our competitors;
our ability to design, manufacture and deliver products to our customers in a timely and cost-effective manner and that meet customer requirements;

31

Table of Contents

our ability to manage our relationships with our contract manufacturers, customers and suppliers;
quality control or yield problems in our manufacturing operations;
the anticipation, announcement or introductions of new or enhanced products by our competitors and ourselves;
reductions in the retail price of electricity;
changes in laws, regulations and policies applicable to our business and products, particularly those relating to government incentives for solar energy applications;
the impact of tariffs on the solar industry in general and our products in particular;
unanticipated increases in costs or expenses;
the amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our business operations;
the impact of government-sponsored programs on our customers;
our exposure to the credit risks of our customers, particularly in light of the fact that some of our customers are relatively new entrants to the solar market without long operating or credit histories;
our ability to estimate future warranty obligations due to product failure rates, claim rates or replacement costs;
our ability to forecast our customer demand and manufacturing requirements, and manage our inventory;
fluctuations in our gross profit;
our ability to predict our revenue and plan our expenses appropriately;
fluctuations in foreign currency exchange rates;
announcement of acquisitions or dispositions of our assets or business operations;
changes in our management; and
analyst reports or other news articles.
The above factors are difficult to forecast, and these, as well as other factors, could materially and adversely affect our quarterly and annual results of operations. Any failure to adjust spending quickly enough to compensate for a revenue shortfall could magnify the adverse impact of this revenue shortfall on our results of operations. Moreover, our results of operations may not meet our announced guidance or the expectations of research analysts or investors, in which case the price of our common stock could decrease significantly. There can be no assurance that we will be able to successfully address these risks.
If research analysts do not publish research about our business or if they issue unfavorable commentary or downgrade our common stock, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that research analysts publish about us and our business. The price of our common stock could decline if one or more research analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business. If one or more of the research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price or trading volume to decline.

32

Table of Contents

Techniques employed by manipulative short sellers may drive down the market price of our common stock.
Short selling is the practice of selling securities that the seller does not own, but rather has borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. Short sellers hope to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s best interests for the price of the stock to decline, some short sellers publish, or arrange for the publication of, negative opinions regarding the issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short. The use of the Internet, social media, and blogging have allowed short sellers to publicly attack a company’s credibility, strategy and veracity by means of so-called “research reports” that mimic the type of investment analysis performed by legitimate securities research analysts. These short attacks have in the past led to stock price declines and significant selling activity in our common stock. Issuers with limited trading volumes or substantial retail shareholder bases can be particularly susceptible to higher volatility levels, and can be particularly vulnerable to such short attacks.
Short seller publications are not regulated by any governmental, self-regulatory organization or other official authority in the U.S., are not subject to the certification requirements imposed by the SEC in Regulation AC (Regulation Analyst Certification) and, accordingly, the opinions they express may be based on distortions of actual facts or, in some cases, outright fabrications. In light of the limited risks involved in publishing such information, and the significant profits that can be made from running successful short attacks, short sellers will likely continue to issue such reports. Such short-seller attacks may cause our stock to suffer a decline in market price.
If we fail to meet the continued listing standards of Nasdaq, our common stock may be delisted, which could have a material adverse effect on the liquidity and market price of our common stock.
Our common stock is currently traded on the Nasdaq Global Market. The Nasdaq Stock Market LLC (“Nasdaq”) has requirements that a company must meet in order to remain listed. There can be no assurance that we will continue to meet these requirements in the future. If we fail to meet any such requirements, Nasdaq may initiate delisting processes. If our common stock were to be delisted, the liquidity of our common stock would be adversely affected, and the market price of our common stock could decrease.
Our affiliated stockholders, executive officers and directors own a significant percentage of our stock, and they may take actions that our other stockholders may not view as beneficial.
Our affiliated stockholders, executive officers and directors collectively own a significant percentage of our common stock. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Also, as a result, these stockholders, acting together, may be able to control our management and affairs and matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change in control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if this change in control would benefit our other stockholders.
Sales of a substantial number of shares of our common stock in the public market by our existing stockholders could cause our stock price to fall.
Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock. All of the outstanding shares of our common stock are eligible for sale in the public market, subject in some cases to agreed limits on sale volumes and the volume limitations and manner of sale requirements of Rule 144 under the Securities Act. Sales of stock by our stockholders could have a material adverse effect on the trading price of our common stock.

33

Table of Contents

Certain holders of our securities are entitled to rights with respect to the registration of their shares under the Securities Act. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act. For instance, in December, we filed a resale registration statement related to 7.5 million shares of our common stock that were issued to SunPower upon the closing of the APA transaction. Any sales of securities by SunPower or other stockholders with registration rights could have a material adverse effect on the trading price of our common stock.
We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.
We currently do not plan to declare dividends on shares of our common stock in the foreseeable future. In addition, our term loan agreement restricts our ability to pay dividends. Consequently, an investor’s only opportunity to achieve a return on its investment in our company will be if the market price of our common stock appreciates and the investor sells its shares at a profit.
Our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.
Our certificate of incorporation and our bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions, including effecting changes in our management. These provisions include:
providing for a classified board of directors with staggered, three-year terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors;
not providing for cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
authorizing our board of directors to issue, without stockholder approval, preferred stock rights senior to those of common stock, which could be used to significantly dilute the ownership of a hostile acquiror;
prohibiting stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
requiring the affirmative vote of holders of at least 66 2/3% of the voting power of all of the then outstanding shares of voting stock, voting as a single class, to amend provisions of our certificate of incorporation relating to the management of our business, our board of directors, stockholder action by written consent, advance notification of stockholder nominations and proposals, forum selection and the liability of our directors, or to amend our bylaws, which may inhibit the ability of stockholders or an acquiror to effect such amendments to facilitate changes in management or an unsolicited takeover attempt;
requiring special meetings of stockholders may only be called by our chairman of the board, if any, our chief executive officer, our president or a majority of our board of directors, which could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and
requiring advance notification of stockholder nominations and proposals, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us.
In addition, the provisions of Section 203 of the Delaware General Corporate Law may prohibit large stockholders, in particular those owning 15% or more of our outstanding common stock, from engaging in certain business combinations, without approval of substantially all of our stockholders, for a certain period of time.
These provisions in our certificate of incorporation, our bylaws and under Delaware law could discourage potential takeover attempts, reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions.
Item 1B. Unresolved Staff Comments
None.

34

Table of Contents

Item 2. Properties
Our corporate headquarters occupy approximately 23,000 square feet in Fremont, California under a lease that expires in November 2023 and accommodates our executive offices, sales, marketing, operations, finance and administrative activities. We also occupy office buildings in Petaluma, California under leases that expires in April 2022 and accommodate our principal engineering activities. In addition, we occupy office space in Boise, Idaho, France, the Netherlands, Australia, New Zealand and India. At this time, we believe our facilities are adequate for our near term operational and business needs.
Item 3. Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising out of our operations. We are not currently involved in any material legal proceedings, and our management believes there are currently no claims or actions pending against us, the ultimate disposition of which could have a material adverse effect on our operations, financial condition, or cash flows. We may, however, be involved in material legal proceedings in the future. Such matters are subject to uncertainty and there can be no assurance that such legal proceedings will not have a material adverse effect on our business, results of operations, financial position or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
Our common stock has been traded on The Nasdaq Global Market under the symbol “ENPH” since March 30, 2012.
Holders
As of March 6, 2019, there were approximately 26 holders of record of our common stock, one of which was Cede & Co., a nominee for Depository Trust Company (“DTC”). All of the shares of our common stock held by brokerage firms, banks and other financial institutions as nominees for beneficial owners are deposited into participant accounts at DTC and are therefore considered to be held of record by Cede & Co. as one stockholder.
Dividend Policy
We have never paid any cash dividends on our common stock. We currently anticipate that we will retain any available funds to finance the growth and operation of our business and we do not anticipate paying any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
Except as previously reported in our quarterly reports on Form 10-Q and current reports on Form 8-K filed with the SEC during the year ended December 31, 2018, there were no unregistered sales of equity securities by us during the year ended December 31, 2018.

35

Table of Contents

Stock Performance Graph
This section is not “soliciting material” and is not deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934 (the Exchange Act) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, regardless of any general incorporation language in such filing.
The graph depicted below shows a comparison of cumulative total stockholder returns for our common stock, the Russell 2000 and the Guggenheim Solar Index for the period from December 31, 2013 to December 31, 2018. An investment of $100 is assumed to have been made in our common stock and in each index on December 31, 2013, all dividends were reinvested, and the relative performance of the investments are tracked through December 31, 2018. The information shown is historical and stockholder returns over the indicated period should not be considered indicative of future stockholder returns or future performance.
https://cdn.kscope.io/1c71e48d2533aab22a77e93023d2f729-performancegraph2018.jpg
 
December 31,
2013
 
December 31,
2014
 
December 31,
2015
 
December 31,
2016
 
December 31,
2017
 
December 31,
2018
Enphase Energy, Inc.
$
100

 
$
225

 
$
55

 
$
16

 
$
38

 
$
75

Russell 2000 Index
$
100

 
$
104

 
$
98

 
$
117

 
$
132

 
$
116

Guggenheim Solar Index
$
100

 
$
98

 
$
88

 
$
49

 
$
74

 
$
55


36

Table of Contents

Item 6. Selected Consolidated Financial Data
The information set forth below for the five years ended December 31, 2018 is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes thereto included in Item 8. “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K to fully understand the factors that may affect the comparability of the information presented below.
 
Years Ended December 31,
 
2018*
 
2017
 
2016
 
2015
 
2014
 
(in thousands, except per share data)
Consolidated Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Net revenues
$
316,159

 
$
286,166

 
$
322,591

 
$
357,249

 
$
343,904

Cost of revenues
221,714

 
230,123

 
264,583

 
249,032

 
230,861

Gross profit
94,445

 
56,043

 
58,008

 
108,217

 
113,043

Operating expenses:
 
 
 
 
 
 
 
 
 
Research and development
32,587

 
33,157

 
50,703

 
50,819

 
45,386

Sales and marketing
27,047

 
23,126

 
38,810

 
45,877

 
41,003

General and administrative
29,086

 
22,221

 
27,418

 
30,830

 
31,083

Restructuring and other charges
4,129

 
16,917

 
3,777

 

 

Total operating expenses
92,849

 
95,421

 
120,708

 
127,526

 
117,472

Income (loss) from operations
1,596

 
(39,378
)
 
(62,700
)
 
(19,309
)
 
(4,429
)
Other income (expense), net:
 
 
 
 
 
 
 
 
 
Interest expense
(9,635
)
 
(7,936
)
 
(2,773
)
 
(501
)
 
(1,863
)
Other income (expense)
(2,190
)
 
1,973

 
(514
)
 
(893
)
 
(994
)
Total other expense, net
(11,825
)
 
(5,963
)
 
(3,287
)
 
(1,394
)
 
(2,857
)
Loss before income taxes
(10,229
)
 
(45,341
)
 
(65,987
)
 
(20,703
)
 
(7,286
)
Benefit from (provision for) income taxes
(1,398
)
 
149

 
(1,475
)
 
(1,379
)
 
(766
)
Net loss attributable to common stockholders
$
(11,627
)
 
$
(45,192
)
 
$
(67,462
)
 
$
(22,082
)
 
$
(8,052
)
Net loss per share attributable to common stockholders, basic and diluted
$
(0.12
)
 
$
(0.54
)
 
$
(1.34
)
 
$
(0.49
)
 
$
(0.19
)
Shares used in computing net loss per share attributable to common stockholders, basic and diluted
99,619

 
82,939

 
50,519

 
44,632

 
42,903

 
As of December 31, 
 
2018*
 
2017
 
2016
 
2015
 
2014
 
(in thousands)
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
106,237

 
$
29,144

 
$
17,764

 
$
28,452

 
$
42,032

Total assets
339,937

 
169,147

 
163,576

 
165,528

 
152,192

Warranty obligations
31,294

 
29,816

 
31,414

 
30,547

 
33,940

Debt
109,783

 
49,751

 
33,900

 
17,000

 

Total stockholders’ equity (deficit)
7,776

 
(9,126
)
 
1,300

 
41,449

 
46,952

 
 
 
 
 
 
 
 
 
 
Additional Data:
 
 
 
 
 
 
 
 
 
Working capital
$
75,141

 
$
38,705

 
$
35,092

 
$
48,920

 
$
56,190

Gross margin percentage
29.9
%
 
19.6
%
 
18.0
%
 
30.3
%
 
32.9
%
 
 
*
Amounts include the impact of the adoption of Accounting Standards Codification (“ASC”) No. 606, “Revenue Recognition,” on January 1, 2018. See Note 3, “Revenue Recognition(“ASC 606” or “Topic 606”) of the notes to consolidated financial statements included in Item 8 of this Form 10-K.

37

Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. 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. For example, statements regarding our expectations as to future financial performance, expense levels and liquidity sources are forward-looking statements. 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” and elsewhere in this report.
Overview and 2018 Highlights
We are a global energy technology company, delivering smart, easy-to-use solutions that connect solar generation, storage and communications management on one intelligent platform. We revolutionized solar with our microinverter technology and produce the world’s only truly integrated solar-plus-storage solution. We have shipped more than 19 million microinverters, representing over 4 gigawatts of solar PV generating capacity, and more than 855,000 Enphase residential and commercial systems have been deployed in over 125 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. Over the last three years, revenues generated from the U.S. market have represented 69% to 80% of our total revenue.
Our first commercial shipment occurred in mid-2008. Our net revenues were $316.2 million, $286.2 million and $322.6 million for 2018, 2017 and 2016, respectively. We incurred net losses of $11.6 million, $45.2 million and $67.5 million for 2018, 2017 and 2016, respectively. As of December 31, 2018, we had $106.2 million in cash and cash equivalents and working capital of $75.1 million.
Our 2018 priorities included focusing on customer service and achieving our financial operating model. Quality and customer service are the cornerstones of our strategy and were instrumental in our turnaround in financial performance in 2018. We began by focusing on call center metrics in the U.S., Europe and Australia, and reduced the average wait time from over 10 minutes in 2017 to approximately 2 minutes by the end of 2018. We introduced self-service tools such as the Service-On-The-Go™ that allow our installers and partners to submit requests from their phone in less than 60 seconds.
Our financial operating model sets gross margin, operating expense and operating income targets expressed as a percentage of net revenue. Our financial operating model explicitly focuses on profitability rather than market share. We are pleased with the progress towards achieving our financial operating model targets for gross margin, operating expenses and operating income, which we achieved through a combination of disciplined planning and rigorous execution.
The launch of IQ 7 worldwide, the smallest, lightest and most powerful microinverter we have ever made, was a key factor in improving gross margin. Every region of the world where our products are sold is now using this seventh-generation microinverter. In the fourth quarter of 2018, 84% of our microinverter shipments were IQ 7. We systematically rolled out high-power and high-efficiency variants of the IQ 7 microinverters in 2018. Selling these variants simultaneously improved gross margin and delivered a better price per watt for the installer.
As of December 31, 2018, we had $106.2 million in cash, as compared to $29.1 million as of December 31, 2017. In February 2018, we raised $20.0 million through a private placement of common stock and also reached an agreement with our lender to defer approximately 50% of the principal payments due in 2018 under our term loans. The amount deferred in 2018 was amortized over the remaining term of the loan. On January 28, 2019, we repaid in full the remaining principal amount of the term loans of $39.5 million plus accrued interest and fees. In August 2018, we sold $65.0 million aggregate principal amount of convertible senior notes due 2023 in a private placement and received net proceeds of $62.4 million, after deducting the underwriters’ fees and other issuance costs. See Note 11. “Debt,” and Note 13. “Sale of Common Stock,” of the notes to consolidated financial statements included in Item 8 of this Form 10-K for further information.

38

Table of Contents

On August 9, 2018, we completed the purchase of assets primarily relating to SunPower’s microinverter business (the “Business”). Upon the closing of the transactions under the APA on August 9, 2018, we acquired intellectual property, technology and other assets primarily relating to the Business and assumed certain intellectual property and customer relationship of the Business for the following consideration: (i) $25.0 million payable in cash; and (ii) 7.5 million shares of our common stock issued to SunPower at closing. In addition, as conditions to the closing, we and SunPower entered into (i) a MSA under which SunPower is obligated to exclusively procure module level power electronics and related equipment for use in the U.S. residential market from us for a period of five years and (ii) a stockholders agreement to establish certain SunPower rights and obligations related to the shares issued, including SunPower’s right to appoint one person to our board of directors, certain additional transfer restrictions on the shares, and voting, standstill and other undertakings by SunPower. See Note 20. “Acquisition,” of the notes to consolidated financial statements included in Item 8 of this Form 10-K for further information.
2019 Outlook
We believe our solid execution in 2018 positions us well to take advantage of future growth opportunities, and we need to maintain our focus in order to capitalize on such opportunities. Our top three priorities for 2019 are customer experience, improvement of internal business processes and continued focus on the vectors for profitable top line growth.
Customer Experience. Quality and Customer Service constitute customer experience. On the service front, our installer, distributor and module partners are our first line of association with our ultimate customer, the homeowner and business user. Our goals are to partner better with these service providers so that we can provide exceptional serve to our homeowner. We are convinced that continued customer experience improvements can be a competitive advantage for us.
Improve Internal Business Processes. There are three critical business processes we are focusing on this year: Operational Business Process for streamlining the Quote to Cash Cycle; New Product Business Process for launching new product predictably; and Human Resource Business Process for talent management. These processes are critical in improving every aspect of our company for sustainable long-term profitable growth.
Profitable Top Line Growth. Our four vectors for our goal of achieving profitable top line growth are IQ 7 regional expansion, high-power and high-performance products, ACMs, and Ensemble Solar and Storage technology.
Our IQ 7 transition is nearly complete. Component shortages in 2018 limited our ability to meet customer demand, and we expect these shortages to alleviate in 2019 allowing us to fully realize the financial benefits of this product in the second half of 2019.
We expect to introduce high-power products, including IQ 7A, which cater to 375-450W DC panels, much like the IQ 7+ and IQ 7X which cater to 325-400W DC panels in 2019. In early 2019, we have started sampling the IQ 7A product in limited quantities to one of our lead customers.
Enphase Energized ACMs represent a significant part of our strategy to achieve profitable top line growth. This plug and play solution allow installers to be more competitive through improved logistics, reduced installation time, faster inspection and training. In the fourth quarter of 2018, we began volume shipments of our IQ 7XS™, with a continued ramp in 2019.
Ensemble Solar and Storage technology represents a complete system that provides homeowners with new levels of choice and energy independence. We expect to release Ensemble grid-agnostic products in a phased manner starting in the fourth quarter of 2019. While there will be limited financial contribution from Ensemble in 2019, we will be preparing the market, aligning customers and educating homeowners for an expected robust 2020 with this technology.
Components of Consolidated Statements of Operations
Net Revenues
We primarily generate net revenues from sales of our solutions and related accessories, which can include our AC Battery storage systems, our Envoy communications gateway and Enlighten cloud-based monitoring service as well as other accessories.

39

Table of Contents

Our revenue is affected by changes in the volume and average selling prices of our solutions and related accessories, supply and demand, sales incentives, and competitive product offerings. Our revenue growth is dependent on our ability to compete effectively in the marketplace by remaining cost competitive, developing and introducing new products that meet the changing technology and performance requirements of our customers, the diversification and expansion of our revenue base, and our ability to market our products in a manner that increases awareness for microinverter technology and differentiates us in the marketplace.
Cost of Revenues and Gross Profit
Cost of revenues is comprised primarily of product costs, warranty, manufacturing personnel and logistics costs, freight costs, depreciation and amortization of test equipment and hosting services costs. Our product costs are impacted by technological innovations, such as advances in semiconductor integration and new product introductions, economies of scale resulting in lower component costs, and improvements in production processes and automation. Certain costs, primarily personnel and depreciation and amortization of test equipment, are not directly affected by sales volume.
We outsource our manufacturing to third-party contract manufacturers and generally negotiate product pricing with them on a quarterly basis. We believe our contract manufacturing partners have sufficient production capacity to meet the anticipated demand for our products for the foreseeable future. However, shortages in the supply of certain key raw materials could adversely affect our ability to meet customer demand for our products. We contract with third parties, including one of our contract manufacturers, to serve as our logistics providers by warehousing and delivering our products in the U.S., Europe and Asia.
Gross profit may vary from quarter to quarter and is primarily affected by our average selling prices, product cost, product mix, warranty costs and sales volume fluctuations resulting from seasonality.
Operating Expenses
Operating expenses consist of research and development, sales and marketing, general and administrative and restructuring expenses. Personnel-related costs are the most significant component of each of these expense categories other than restructuring expense and include salaries, benefits, payroll taxes, sales commissions, incentive compensation and stock-based compensation.
Research and development expense include personnel-related expenses, third-party design and development costs, testing and evaluation costs, depreciation expense and other indirect costs. Research and development employees are primarily engaged in the design and development of power electronics, semiconductors, powerline communications, networking and software functionality, and storage. We devote substantial resources to research and development programs that focus on enhancements to, and cost efficiencies in, our existing products and timely development of new products that utilize technological innovation to drive down product costs, improve functionality, and enhance reliability. We intend to continue to invest appropriate resources in our research and development efforts because we believe they are critical to maintaining our competitive position.
Sales and marketing expense include personnel-related expenses, travel, trade shows, marketing, customer support and other indirect costs. We expect to continue to make the necessary investments to enable us to execute our strategy to increase our market penetration geographically and enter into new markets by expanding our customer base of distributors, large installers, OEMs and strategic partners. We currently offer solutions targeting the residential and commercial markets in the U.S., Canada, Mexico and Central American markets, Europe, Australia, New Zealand, India and certain other Asian markets. We expect to continue to expand the geographic reach of our product offerings and explore new sales channels in addressable markets in the future.
General and administrative expense include personnel-related expenses for our executive, finance, human resources, information technology and legal organization, facilities costs, and fees for professional services. Fees for professional services consist primarily of outside legal, accounting and information technology consulting costs.

40

Table of Contents

Restructuring charges are the net charges resulting from restructuring initiatives implemented in 2016‑2017 (the “2016 Plan”) and 2018 (the “2018 Plan”) to improve operational performance and reduce overall operating expenses. Under the 2016 Plan, costs included in restructuring primarily consisted of fees paid to management consultants engaged to assist us in making organizational and structural changes to improve operational efficiencies and reduce expenses, severance for workforce reduction actions, non-cash charges related to the disposition of assets and impairment of property and equipment, and the establishment of lease loss reserves. The net charge for the 2016 Plan included a gain on the divestiture of our services business. Charges related to our 2016 Plan were largely completed in 2017. Under the 2018 Plan, costs included in restructuring primarily consisted of employee severance and one-time benefits, workforce reorganization charges, non-cash charges related to impairment of property and equipment, and the establishment of lease loss reserves. See Note 10. “Restructuring,” of the notes to consolidated financial statements included in Item 8 of this Form 10-K for additional information.
Other Expense, Net
Other expense, net primarily consists of interest expense and commitment fees under our term loans and convertible notes, and non-cash interest expense related to the amortization of deferred financing costs. Other expense, net also includes gains or losses upon conversion of foreign currency transactions into U.S. dollars.
Income Tax Benefit (Provision)
We are subject to income taxes in the countries where we sell our products. Historically, we have primarily been subject to taxation in the U.S. because we have sold the majority of our products to customers in the U.S. As we have expanded the sale of products to customers outside the U.S., we have become subject to taxation based on the foreign statutory rates in the countries where these sales took place. As sales in foreign jurisdictions increase in the future, our effective tax rate may fluctuate accordingly. As of December 31, 2018, due to the history of losses we have generated in the U.S. since inception, we believe that it is more-likely-than-not that all of our U.S. and state deferred tax assets will not be realized.
Summary Consolidated Statements of Operations
The following table sets forth a summary of our consolidated statements of operations for the periods presented (in thousands):
 
Years Ended December 31,
 
2018*
 
2017
 
2016
Net revenues
$
316,159

 
$
286,166

 
$
322,591

Cost of revenues
221,714

 
230,123

 
264,583

Gross profit
94,445

 
56,043

 
58,008

Operating expenses:
 
 
 
 
 
Research and development
32,587

 
33,157

 
50,703

Sales and marketing
27,047

 
23,126

 
38,810

General and administrative
29,086

 
22,221

 
27,418

Restructuring charges
4,129

 
16,917

 
3,777

Total operating expenses
92,849

 
95,421

 
120,708

Income (loss) from operations
1,596

 
(39,378
)
 
(62,700
)
Other expense, net
(11,825
)
 
(5,963
)
 
(3,287
)
Loss before income taxes
(10,229
)
 
(45,341
)
 
(65,987
)
Income tax benefit (provision)
(1,398
)
 
149

 
(1,475
)
Net loss
$
(11,627
)
 
$
(45,192
)
 
$
(67,462
)
 
 
*
Amounts include the impact of the adoption of Accounting Standards Codification (“ASC”) No. 606, “Revenue Recognition,” on January 1, 2018. See Note 3, “Revenue Recognition(“ASC 606” or “Topic 606”) of the notes to consolidated financial statements included in Item 8 of this Form 10-K.

41

Table of Contents

Comparison of 2018, 2017 and 2016
Net Revenues
 
Years Ended
December 31,
 
Change in
 
Years Ended
December 31,
 
Change in
 
2018*
 
2017
 
$
 
%
 
2017
 
2016
 
$
 
%
 
(In thousands, except percentages)
Net revenues
$
316,159

 
$
286,166

 
$
29,993

 
10
%
 
$
286,166

 
$
322,591

 
$
(36,425
)
 
(11)
 %
 
 
*
Amounts include the impact of the adoption of Accounting Standards Codification (“ASC”) No. 606, “Revenue Recognition,” on January 1, 2018. See Note 3, “Revenue Recognition(“ASC 606” or “Topic 606”) of the notes to consolidated financial statements included in Item 8 of this Form 10-K.
2018 Compared to 2017. Net revenues increased by 10% in 2018, as compared to 2017, due primarily to an increase in the average selling price per inverter combined with $5.3 million of revenue earned under a joint development agreement. We sold 2.8 million microinverter units in 2018, as compared to 2.9 million units in the same period in 2017. The impact of the lower sales volume was more than offset by an increase in average selling price per microinverter due to the transition to our IQ series of microinverters and pricing management. See Note 3. “Revenue Recognition,” of the notes to consolidated financial statements.
2017 Compared to 2016. Net revenues decreased by 11% to $286.2 million in 2017, as compared to 2016. The number of microinverter units sold decreased by 6% to approximately 2.9 million units in 2017 in part due to our efforts to improve gross margins, which included foregoing low-margin sales. Net revenues decreased year-over-year primarily due to the lower volume combined with a decline in the average selling prices of our products. The decrease in net revenues was partially offset by the recognition of $2.2 million of deferred revenue resulting from a change in estimate of the service period related to sales of our Envoy product.
Cost of Revenues and Gross Margin
 
Years Ended
December 31,
 
Change in
 
Years Ended
December 31,
 
Change in
 
2018*
 
2017
 
$
 
%
 
2017
 
2016
 
$
 
%
 
(In thousands, except percentages)
Cost of revenues
$
221,714

 
$
230,123

 
$
(8,409
)
 
(4
)%
 
$
230,123

 
$
264,583

 
$
(34,460
)
 
(13
)%
Gross profit
94,445

 
56,043

 
38,402

 
69
 %
 
56,043

 
58,008

 
(1,965
)
 
(3
)%
Gross margin
29.9
%
 
19.6
%
 
 
 
 
 
19.6
%
 
18.0
%
 
 
 
 
 
 
*
Amounts include the impact of the adoption of Accounting Standards Codification (“ASC”) No. 606, “Revenue Recognition,” on January 1, 2018. See Note 3, “Revenue Recognition(“ASC 606” or “Topic 606”) of the notes to consolidated financial statements included in Item 8 of this Form 10-K.
2018 Compared to 2017. Cost of revenues decreased by 4% in 2018, as compared to 2017, primarily due to an 11% decrease in the average product cost. Gross margin increased by 10.3 percentage points for 2018, as compared to 2017. The increase in gross margin was primarily attributable to increased product margins as a result of the transition to our IQ 7 microinverter as well as our other product cost management efforts. The improvement in margin due to the $5.3 million in revenue under a joint development arrangement was offset by an increase in other cost of goods sold, including increased expedite fees and logistics costs associated with supply constraints due to industry wide component shortages. Our ability to reduce product costs and the timing of product cost reductions relative to declines in the selling prices of our products can have a significant impact on our gross margin.
2017 Compared to 2016. Cost of revenues decreased by 13% in 2017, as compared to 2016, and was primarily attributable to the transition in 2017 to our next generation IQ microinverters, which have a lower cost profile than the previous generation, as well as the decline in sales volume. Gross margin increased by 1.6 percentage points to 19.6% in 2017, as compared to 18.0% in 2016. The primary drivers of the gross margin increase were lower warranty expense and logistics costs as a percentage of net revenues in 2017 as compared to 2016.

42

Table of Contents

Research and Development
 
Years Ended
December 31,
 
Change in
 
Years Ended
December 31,
 
Change in
 
2018
 
2017
 
$
 
%
 
2017
 
2016
 
$
 
%
 
(In thousands, except percentages)
Research and development
$
32,587

 
$
33,157

 
$
(570
)
 
(2
)%
 
$
33,157

 
$
50,703

 
$
(17,546
)
 
(35
)%
Percentage of net revenues
10
%
 
12
%
 
 
 
 
 
12
%
 
16
%
 
 
 
 
2018 Compared to 2017. Research and development expense decreased by $0.6 million in 2018, as compared to the same period in 2017. The decrease is due to lower personnel-related expenses, equipment costs and professional expenses associated with the development, introduction and qualification of new products. The decrease was partially offset by higher engineering expenses. The decrease in personnel-related expenses was primarily due to a cumulative decrease in labor costs associated with moving certain functions to lower cost locations as part of restructuring actions taken in 2017 and 2018. The decrease in personnel-related expenses was partially offset by higher bonus compensation, stock-based compensation expense and travel expenses. The amount of research and development expenses may fluctuate from period to period due to the differing levels and stages of development activity.
2017 Compared to 2016. Research and development expenses decreased by $17.5 million in 2017, as compared to 2016. The decrease was primarily due to the implementation of our restructuring initiative that eliminated non-core projects resulting in an $11.5 million reduction in research and development personnel related expenses and a $5.9 million reduction in lab parts, product prototypes and professional fees.
Sales and Marketing
 
Years Ended
December 31,
 
Change in
 
Years Ended
December 31,
 
Change in
 
2018
 
2017
 
$
 
%
 
2017
 
2016
 
$
 
%
 
(In thousands, except percentages)
Sales and marketing
$
27,047

 
$
23,126

 
$
3,921

 
17
%
 
$
23,126

 
$
38,810

 
$
(15,684
)
 
(40
)%
Percentage of net revenues
9
%
 
8
%
 
 
 
 
 
8
%
 
12
%
 
 
 
 
2018 Compared to 2017. Sales and marketing expense increased by $3.9 million in 2018, as compared to 2017. The increase was primarily due to higher personnel related expenses, professional fees, equipment costs, advertising and marketing expenses and bad debt expenses. The increase was partially offset by lower facilities costs. The increase in personnel-related expenses include higher stock-based compensation expense, payroll expenses due to increasing our sales team and recruiting fees. The increase in personnel-related expenses was partially offset by lower spending on contractors and temporary employees, bonus compensation and benefits.
2017 Compared to 2016. Sales and marketing expenses decreased by $15.7 million in 2017, as compared to 2016. The decrease was primarily due to the implementation of our restructuring initiative resulting in an $8.5 million decrease in compensation costs as a result of lower headcount and a $1.2 million decrease in travel and entertainment expenses as a result of cost savings initiatives. Bad debt expense was reduced by $2.6 million in 2017 as compared to 2016, and advertising and professional fees were reduced by $2.8 million.

43

Table of Contents

General and Administrative
 
Years Ended
December 31,
 
Change in
 
Years Ended
December 31,
 
Change in
 
2018
 
2017
 
$
 
%
 
2017
 
2016
 
$
 
%
 
(In thousands, except percentages)
General and administrative
$
29,086

 
$
22,221

 
$
6,865

 
31
%
 
$
22,221

 
$
27,418

 
$
(5,197
)
 
(19
)%
Percentage of net revenues
9
%
 
8
%
 
 
 
 
 
8
%
 
8
%
 
 
 
 
2018 Compared to 2017. General and administrative expense increased by $6.9 million in 2018, as compared to 2017. The increase was primarily due to higher personnel-related expenses, additional consulting and advisory fees due to our first year of SOX compliance efforts, $1.8 million paid to resolve a dispute with a supplier, and $0.8 million of acquisition-related expenses. The increase was partially offset by lower legal fees and equipment costs. The increase in personnel-related expenses was primarily attributable to higher stock-based compensation expense, higher spending on contractors and temporary employees, salary and bonus compensation and travel expenses. The increase in personnel-related expenses was partially offset by lower employee recruitment costs.
2017 Compared to 2016. General and administrative expenses decreased by $5.2 million in 2017, as compared to 2016. The decrease was primarily due to the implementation of our restructuring initiative that eliminated non-core projects resulting in a $4.9 million reduction in general and administrative personnel related expenses, a $0.8 million reduction in facilities related expenses and a $1.0 million reduction in depreciation expense as a result of a lower fixed asset base. These decreases were partially offset by a $1.7 million increase in accounting and legal fees.
Restructuring and Other Charges
 
Years Ended
December 31,
 
Change in
 
Years Ended
December 31,
 
Change in
 
2018
 
2017
 
$
 
%
 
2017
 
2016
 
$
 
%
 
(In thousands, except percentages)
Restructuring charges
$
4,129

 
$
16,917

 
$
(12,788
)
 
(76
)%
 
$
16,917

 
$
3,777

 
$
13,140

 
348
%
Percentage of net revenues
1
%
 
6
%
 
 
 
 
 
6
%
 
1
%
 
 
 
 
2018 Compared to 2017. We implemented a restructuring plan in the third quarter of 2018 to lower our operating expenses. This plan included a realignment of our global workforce to lower cost locations and a relocation of our corporate headquarters. Restructuring charges for 2018 primarily included $2.2 million in cash-based severance and related benefits, $1.6 million in charges for assets impairment, and $0.3 million for lease loss reserves. We expect to incur additional restructuring charges in the near-term under this restructuring plan.
2017 Compared to 2016. We implemented a restructuring plan in the third quarter of 2016 to lower our operating expenses and cost of revenues that included reductions in our global workforce and the elimination of certain non-core projects. In 2017 we engaged a management consulting firm to assist us in making organizational and structural changes to improve operational efficiencies and reduce expenses. Restructuring charges in 2017 include $12.1 million of consulting services, $2.8 million in cash-based severance and related benefits and $2.0 million in charges for asset impairments and lease loss reserves.

44

Table of Contents

Other Income (Expense), Net
 
Years Ended
December 31,
 
Change in
 
Years Ended
December 31,
 
Change in
 
2018
 
2017
 
$
 
%
 
2017
 
2016
 
$
 
%
 
(In thousands, except percentages)
Other expense, net
$
(11,825
)
 
$
(5,963
)
 
$
(5,862
)
 
98
%
 
$
(5,963
)
 
$
(3,287
)
 
$
(2,676
)
 
81
%
2018 Compared to 2017. Other expense, net for 2018 includes $10.7 million of interest expense related to our term loan and convertible notes and a $2.5 million loss due foreign currency exchange and remeasurement, partially offset by $1.1 million of interest income related to higher cash balances and $0.4 million of valuation adjustments on our term loan.
2017 Compared to 2016. Other expense increased by $2.7 million in 2017, as compared to 2016, primarily due to a $5.2 million increase in net interest expense, which was partially offset by a $2.5 million increase in other income related to foreign exchange rates.
Income Tax Benefit (Provision)
 
Years Ended
December 31,
 
Change in
 
Years Ended
December 31,
 
Change in
 
2018
 
2017
 
$
 
%
 
2017
 
2016
 
$
 
%
 
(In thousands, except percentages)
Income tax benefit (provision)
$
(1,398
)
 
$
149

 
$
(1,547
)
 
**
 
$
149

 
$
(1,475
)
 
$
1,624

 
(110
)%
Effective tax rate
(13.67
)%
 
0.33
%
 
 
 
 
 
0.33
%
 
(2.24
)%
 
 
 
 
 
 
**
Not meaningful
2018 Compared to 2017. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered our U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on previously deferred foreign income. By operation of law, we applied a U.S. statutory federal income tax rate of 21% for 2018. The effective tax rate in 2018 of (13.67)% was lower than the 2018 statutory U.S. federal income tax rate due primarily to Global Low-Taxed Intangible Income (“GILTI”) inclusion, foreign taxes and compensation deduction limitations. The change in effective tax rate in 2018, compared to 2017, was primarily due to changes in valuation allowances, and foreign taxes having a greater impact on the effective tax rate and an increase in non-deductible expenses, both a result of the Act.
The income tax provision of $1.4 million in 2018, compared to the income tax benefit of $0.1 million in 2017, was primarily due to increased foreign taxes and decreased benefit from tax reform.
2017 Compared to 2016. The Company’s effective tax rates of 0.33% and (2.24)% in 2017 and 2016, respectively, differed from the statutory rate of 34% in 2017 and 2016, due primarily to changes in valuation allowance needs, foreign taxes and impact of tax reform in 2017. The income tax benefit of $0.1 million in 2017, compared to the income tax provision of $1.5 million in 2016, was primarily due to changes in foreign taxes and benefit from tax reform in 2017.
Liquidity and Capital Resources
Sources of Liquidity
As of December 31, 2018, we had $106.2 million in cash and cash equivalents and working capital of $75.1 million. Cash and cash equivalents held in the U.S. were $93.7 million and consisted primarily of U.S. Government money market mutual funds and non-interest-bearing checking 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.

45

Table of Contents

Convertible Debt. In August 2018, we sold $65.0 million aggregate principal amount of convertible senior notes due 2023 (the “Convertible Notes”). The Notes are senior, unsecured and bear interest at a rate of 4.0% per year, payable semi-annually on February 1 and August 1 of each year, beginning on February 1, 2019. The Convertible Notes will mature on August 1, 2023, unless earlier repurchased by us or converted at the option of the holders. We may not redeem the Convertible Notes prior to the maturity date, and no sinking fund is provided for the Notes. As of December 31, 2018, $65.0 million aggregate principal amount of the Notes was outstanding. See Note 11. “Debt,” of the notes to consolidated financial statements included in Item 8 of this Form 10-K.
In February 2018, we entered into a securities purchase agreement with an investor pursuant to which we, in a private placement, issued and sold to the investor 9,523,809 shares of our common stock, at a price per share of $2.10, resulting in gross proceeds of $20.0 million.
Term Loans. In July 2016, we entered into a loan and security agreement with lenders that are affiliates of Tennenbaum Capital Partners, LLC, which was subsequently amended and modified in 2017 and 2018 (“Term Loans”). As of December 31, 2018, we have $41.5 million outstanding on our term loans. As of December 31, 2018, we were in compliance with all financial and other covenants under the term loan agreement. On January 28, 2019, we repaid in full the remaining principal amount of the Term Loans of $39.5 million plus accrued interest and fees. See Note 11. “Debt,” of the notes to consolidated financial statements included in Item 8 of this Form 10-K for further discussion on the Term Loans.
We believe that our existing cash and cash equivalents and cash flows from our operating activities will be sufficient to meet our anticipated cash needs for at least the next 12 months.
Cash Flows. The following table summarizes our cash flows for the periods presented (in thousands):
 
Years Ended December 31,
 
2018
 
2017
 
2016
Net cash provided by (used in) operating activities
$
16,132

 
$
(28,442
)
 
$
(32,953
)
Net cash used in investing activities
(19,151
)
 
(4,121
)
 
(11,795
)
Net cash provided by financing activities
80,614

 
43,297

 
34,375

Cash Flows from Operating Activities
For 2018, net cash provided by operating activities of $16.1 million was primarily due to adjustments for non-cash items more than offsetting the net loss of $11.6 million. The net cash provided from changes in operating assets and liabilities in 2018 was a $23.1 million increase in accounts payable and accrued liabilities, a $9.7 million decrease in inventory and a $1.5 million increase in warranty obligations. Offsetting the cash provided was a $13.5 million increase in accounts receivable, a $10.0 million increase in intangible assets related to our acquisition of SunPower’s microinverter business, a $6.1 million decrease in deferred revenues and a $3.1 million increase in contract assets.
For 2017, net cash used in operating activities was $28.4 million, primarily resulted from a net loss of $45.2 million. The net loss was partially offset by non-cash charges including stock-based compensation of $6.7 million, depreciation and amortization of $9.0 million, asset impairment and non-cash restructuring charges of $1.1 million, and a provision for doubtful accounts of $0.5 million. Changes in net operating assets and liabilities used cash of $1.4 million.
The primary uses of cash from changes in net operating assets and liabilities in 2017 were a $6.5 million decrease in accounts payable and accrued liabilities, a $4.8 million increase in accounts receivable and a $1.6 million decrease in warranty obligations. Offsetting these uses of cash was a decrease in inventory of $6.0 million and an increase in deferred revenue of $5.3 million.
For 2016, net cash used in operating activities was $33.0 million, primarily resulted from a net loss of $67.5 million. The net loss was partially offset by non-cash charges including stock-based compensation of $10.3 million, depreciation and amortization of $10.6 million, asset impairment and restructuring charges of $3.2 million, and an increase in the provision for doubtful accounts of $3.1 million. In addition, the effect of changes in net operating assets and liabilities provided cash of $7.2 million.

46

Table of Contents

The primary sources of cash from changes in net operating assets and liabilities in 2016 were an $11.3 million increase in deferred revenue related to our Enlighten service and deferred product revenue, an $8.8 million decrease in inventory, and an $8.9 million increase in accounts payable and accrued liabilities. Offsetting these sources of cash was an increase in accounts receivable of $18.0 million and an increase in other assets of $4.8 million. The increase in accounts receivable was due to higher sales in the fourth quarter of 2016 as compared to the same period in 2015, and the increase in other assets was primarily attributable to an increase in customer financing receivables.
Cash Flows from Investing Activities
For 2018, net cash used in investing activities of $19.2 million primarily resulted from a $15.0 million payment related to the acquisition of SunPower’s microinverter business and $4.2 million for purchases of test and assembly equipment and capitalized costs related to internal-use software.
For 2017, net cash used in investing activities of $4.1 million primarily resulted from purchases of test and assembly equipment, license fees for certain technology related to ASIC development and capitalized costs related to internal-use software.
For 2016, net cash used in investing activities of $11.8 million primarily resulted from purchases of test and assembly equipment, capitalized costs related to internal-use software and license fees for certain technology related to ASIC development, partially offset by $1.1 million in proceeds from the sale of our services business.
Cash Flows from Financing Activities
For 2018, net cash provided by financing activities of $80.6 million primarily consisted of $62.4 million in net proceeds from issuance of convertible debt, $19.8 million in net proceeds from a private securities placement, $5.6 million in net proceeds from the sale of certain long-term financing receivables and $2.8 million in proceeds from exercises of stock options, partially offset by debt payments totaling $10.0 million.
For 2017, net cash provided by financing activities of $43.3 million primarily consisted of $24.2 million additional net proceeds from amending our term loan with TCP and $27.0 million in net proceeds from the issuance of common stock and $2.8 million in proceeds from the sale of certain financing receivables offset by the $10.1 million repayment associated with the termination of our revolving credit facility with Wells Fargo Bank.
For 2016, net cash provided by financing activities of $34.4 million primarily consisted of $24.2 million net proceeds from our term loan and $17.8 million in proceeds from the issuance of common stock offset by $6.9 million net reduction in borrowings under our Revolver and $0.7 million in debt issuance and equity offering costs.

47

Table of Contents

Contractual Obligations
The following table summarizes our outstanding contractual obligations as of December 31, 2018:
 
Payments Due by Period
 
Total
 
Less Than 1 Year
 
2-3 Years
 
4-5 Years
 
More Than 5 Years
 
(in thousands)
Operating leases
$
13,631

 
$
3,284

 
$
6,340

 
$
2,755

 
$
1,252

Term loans (1)
41,524

 
25,317

 
16,207

 

 

Estimated interest and fees related to term loans (1)
5,965

 
4,445

 
1,520

 

 

Convertible Note due 2023 principal and interest
78,000

 
2,600

 
5,200

 
70,200

 

Purchase obligations (2)
41,104

 
41,104

 

 

 

Total
$
180,224

 
$
76,750

 
$
29,267

 
$
72,955

 
$
1,252

 
 
(1)
On January 28, 2019, we repaid in full the remaining principal amount of the Term Loans of $39.5 million plus accrued interest and fees. See Note 11. “Debt,” of the notes to consolidated financial statements included in Item 8 of this Form 10-K.
(2)
Purchase obligations include amounts related to component inventory that our primary contract manufacturer procures on our behalf in accordance with our production forecast as well as other inventory related purchase commitments. The timing of purchases in future periods could differ materially from estimates presented above due to fluctuations in demand requirements related to varying sales levels as well as changes in economic conditions.
As of 2018, the liability recorded for uncertain tax positions, including associated interest and penalties, was approximately $1.3 million. Since the ultimate amount and timing of cash settlements cannot be predicted due to the high degree of uncertainty, liabilities for uncertain tax positions are excluded from the contractual obligations table. See Note 15. “Income Taxes,” of the notes to consolidated financial statements included in Item 8 of this Form 10-K.
Off-Balance Sheet Arrangements
As of December 31, 2018, 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
The preparation of our consolidated financial statements and related notes requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We have based our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
For a description of our significant accounting policies, see Note 2. “Summary of Significant Accounting Policies,” of the notes to consolidated financial statements included in Item 8 of this Form 10-K. An accounting policy is considered 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 consolidated financial statements. We believe the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our consolidated financial statements.
Revenue Recognition
We generate revenue from sales of our solutions, which include microinverter units and related accessories, an Envoy communications gateway, the cloud-based Enlighten monitoring service, and AC Battery storage solutions to distributors, large installers, OEMs and strategic partners.

48

Table of Contents

On January 1, 2018, we adopted Accounting Standards Codification (“ASC”) No. 606, “Revenue Recognition” (“ASC 606” or “Topic 606”) and applied the modified retrospective method to all contracts that were not completed as of January 1, 2018. The most significant impacts upon adoption of Topic 606 were how we account for revenue related to our Envoy communications device and related Enlighten service and the timing of when certain sales incentives are recognized. The full consideration for these products represents a single performance obligation and is deferred and recognized over the estimated service period.
Revenues are recognized when control of the promised goods or services are transferred to our customers in an amount that reflects the consideration that is expected to be received in exchange for those goods or services. We generate all of our revenues from contracts with our customers. A description of principal activities from which we generate revenues are as follows.
Products Delivered at a Point in Time. We sell our products to customers in accordance with the terms of the related customer contracts. We generate revenues from sales of our solutions, which include microinverter units and related accessories, an Envoy communications gateway and Enlighten service, communications accessories and AC Battery storage solutions to distributors, large installers, OEMs and strategic partners. Microinverter units, microinverter accessories, and AC Battery storage solutions are delivered to customers at a point in time, and we recognize revenue for these products when we transfer control of the product to the customer, which is generally upon shipment.
Products Delivered Over Time. The sale of an Envoy communications gateway includes our Enlighten cloud-based monitoring service. The full consideration for these products represents a single performance obligation and is deferred at the sale date and recognized over the estimated service period. We also sell certain communication accessories that are delivered over time. The revenue from these products is recognized over the related service period.
We previously sold Envoy communications device to certain customers under a long-term financing arrangement. Under this financing arrangement, we net the unbilled receivables against deferred revenue.
We record certain contra revenue promotions as variable consideration and recognizes these promotions at the time the related revenue is recorded.
We record upfront contract acquisition costs, such as sales commissions, to be capitalized and amortized over the estimated life of the asset. For contracts that have a duration of less than one year, we follow the Topic 606 practical expedient and expense these costs when incurred. Commissions related to our sale of monitoring hardware and service are capitalized and amortized over the period of the associated revenue.
See Note 3. “Revenue Recognition,” of the notes to consolidated financial statements included in Item 8 of this Form 10-K for additional information related to revenue recognition.
Inventory
Inventory is valued at the lower of cost or market. Market is current replacement cost (by purchase or by reproduction, dependent on the type of inventory). In cases where market exceeds net realizable value (i.e., estimated selling price less reasonably predictable costs of completion and disposal), inventories are stated at net realizable value. Market is not considered to be less than net realizable value reduced by an allowance for an approximately normal profit margin. We determine cost on a first-in first-out basis. Certain factors could affect the realizable value of its inventory, including customer demand and market conditions. Management assesses the valuation on a quarterly basis and writes down the value for any excess and obsolete inventory based upon expected demand, anticipated sales price, effect of new product introductions, product obsolescence, customer concentrations, product merchantability and other factors. Inventory write-downs are equal to the difference between the cost of inventories and market. The impact of changes in the inventory valuation allowance for 2018, 2017 and 2016 were not material.

49

Table of Contents

Warranty Obligations
Microinverters Sold Through December 31, 2013
Our warranty accrual provides for the replacement of microinverter units that fail during the product’s warranty term (15 years for first and second generation microinverters and up to 25 years for third and fourth generation microinverters). On a quarterly basis, we employ a consistent, systematic and rational methodology to assess the adequacy of our warranty liability. This assessment includes updating all key estimates and assumptions for each generation of product, based on historical results, trends and the most current data available as of the filing date. The key estimates and assumptions used in the warranty liability are thoroughly reviewed by management on a quarterly basis. The key estimates used by us to estimate our warranty liability are: (1) the number of units expected to fail over time (i.e., failure rate); (2) the number of failed units expected to result in warranty claims over time (i.e., claim rate); and (3) the per unit cost of replacement units, including outbound shipping and limited labor costs, expected to be incurred to replace failed units over time (i.e., replacement cost).
Estimated Failure Rates — Our Quality and Reliability department has primary responsibility to determine the estimated failure rates for each generation of microinverter. To establish initial failure rate estimates for each generation of microinverter, our quality engineers use a combination of industry standard Mean Time Between Failure (“MTFB”) estimates for individual components contained in that generation of microinverters, third party data collected on similar equipment deployed in outdoor environments similar to those in which our microinverters are installed, and rigorous long term reliability and accelerated life cycle testing which simulates the service life of the microinverter in a short period of time. As units are deployed into operating environments, we continue to monitor product performance through our Enlighten monitoring platform. It typically takes three to nine months between the date of sale and date of end-user installation. Consequently, our ability to monitor actual failures of units sold similarly lags by three to nine months. When a microinverter fails and is returned, we perform diagnostic root cause failure analysis to understand and isolate the underlying mechanism(s) causing the failure. We then use the results of this analysis (combined with the actual, cumulative performance data collected on those units prior to failure through Enlighten) to draw conclusions with respect to how or if the identified failure mechanism(s) will impact the remaining units deployed in the installed base.
Estimated Claim Rates — Warranty claim rate estimates are based upon assumptions with respect to expected customer behavior over the warranty period. As the vast majority of our microinverters have been sold to end users for residential applications, we believe that warranty claim rates will be affected by changes over time in residential home ownership because we expect that subsequent homeowners are less likely to file claims than the homeowners who originally purchase the microinverters.
Estimated Replacement Costs — Three factors are considered in our analysis of estimated replacement cost: (1) the estimated cost of replacement microinverters; (2) the estimated cost to ship replacement microinverters to end users; and (3) the estimated labor reimbursement expected to be paid to third party installers performing replacement services for the end user. Because our warranty provides for the replacement of defective microinverters over long periods of time (between 15 and 25 years, depending on the generation of product purchased), the estimated per unit cost of current and future product generations is considered in the estimated replacement cost. Estimated costs to ship replacement units are based on observable, market-based shipping costs paid by us to third party freight carriers. We have a separate program that allows third-party installers to claim fixed-dollar reimbursements for labor costs they incur to replace failed microinverter units for a limited time from the date of original installation. Included in our estimated replacement cost is an analysis of the number of fixed-dollar labor reimbursements expected to be claimed by third party installers over the limited offering period.
In addition to the key estimates noted above, we also compare actual warranty results to expected results and evaluate any significant differences. We may make additional adjustments to the warranty provision based on performance trends or other qualitative factors. If actual failure rates, claim rates, or replacement costs differ from our estimates in future periods, changes to these estimates may be required, resulting in increases or decreases in our warranty obligations. Such increases or decreases could be material.

50

Table of Contents

Fair Value Option for Microinverters Sold Since January 1, 2014
Our warranty obligations related to microinverters sold since January 1, 2014 provide us the right, but not the requirement, to assign our warranty obligations to a third-party. Under ASC 825, “Financial Instruments” (also referred to as the “fair value option”), an entity may choose to elect the fair value option for such warranties at the time it first recognizes the eligible item. We made an irrevocable election to account for all eligible warranty obligations associated with microinverters sold since January 1, 2014 at fair value. This election was made to reflect the underlying economics of the time value of money for an obligation that will be settled over an extended period of up to 25 years.
We estimate the fair value of warranty obligations by calculating the warranty obligations in the same manner as for sales prior to January 1, 2014 and applying an expected present value technique to that result. The expected present value technique, an income approach, converts future amounts into a single current discounted amount. In addition to the key estimates of failure rates, claim rates and replacement costs, we used certain inputs that are unobservable and significant to the overall fair value measurement. Such additional assumptions included compensation comprised of a profit element and risk premium required of a market participant to assume the obligation and a discount rate based on our credit-adjusted risk-free rate. See Note 9. “Fair Value Measurements,” of the notes to consolidated financial statements included in Item 8 of this Form 10-K for additional information.
Business Combinations
Assets acquired and liabilities assumed as part of a business acquisition are generally recorded at their fair value at the date of acquisition. The excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining fair value of identifiable assets, particularly intangibles, and liabilities acquired also requires us to make estimates, which are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset. Accounting for business acquisitions requires us to make judgments as to whether a purchase transaction is a multiple element contract, meaning that it includes other transaction components. This judgment and determination affect the amount of consideration paid that is allocable to assets and liabilities acquired in the business purchase transaction.
Adoption of New and Recently Issued Accounting Pronouncements
Refer to Note 2. “Summary of Significant Accounting Policiesof the notes to consolidated financial statements included in Item 8 of this Form 10-K for a discussion of adoption of new and recently issued accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
We operate and conduct business in foreign countries where our foreign entities use the local currency as their respective functional currency and, as a result, are exposed to movements in foreign currency exchange rates. More specifically, we face foreign currency exposure primarily from the effect of fluctuating exchange rates on payables and receivables relating to transactions that are denominated in Euros, Indian Rupee and Australian and New Zealand Dollars. These payables and receivables primarily arise from sales to customers and intercompany transactions. We also face currency exposure that arises from translating the results of our European, Indian, Australian and New Zealand operations, including sales and marketing and research and development expenses, to the U.S. dollar at exchange rates that have fluctuated from the beginning of a reporting period.
We have utilized foreign currency forward contracts to reduce the impact of foreign currency fluctuations related to anticipated cash receipts from expected future revenues denominated in Euros and intercompany transaction gains or losses. The contracts we enter into typically have maturities of less than one year. We do not enter into derivative financial instruments for trading or speculative purposes. Any foreign currency forward contracts are accounted for as derivatives whereby the fair value of the contracts is reported as other current assets or current liabilities, and gains and losses resulting from changes in the fair value are reported in other income (expense), net, in the accompanying consolidated statements of operations. We were not party to any foreign currency contracts as of December 31, 2017, and we did not enter into any foreign currency forward contracts during 2018.

51

Table of Contents

As of December 31, 2018 and 2017, we had no outstanding foreign currency forward contracts with maturities of less than one year. In each year ended December 31, 2018 and 2017, we recorded no net gains related to foreign currency forward contracts. In year ended December 31, 2016, we recorded $0.1 million net gains related to foreign currency forward contracts.

52

Table of Contents

Item 8. Financial Statements and Supplementary Data
ENPHASE ENERGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2018 AND 2017,
AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
 
Page

53

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of Enphase Energy, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Enphase Energy, Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2019, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, effective January 1, 2018, the Company adopted Revenue From Contracts With Customers (Topic 606), using the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ DELOITTE & TOUCHE LLP

San Francisco, California
March 15, 2019

We have served as the Company’s auditor since 2010.

54

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Enphase Energy, Inc.:
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Enphase Energy, Inc. and subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018, of the Company and our report dated March 15, 2019 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of a new accounting standard.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP

San Francisco, California
March 15, 2019

55

Table of Contents

ENPHASE ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
 
December 31,
 
2018
 
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
106,237

 
$
29,144

Accounts receivable, net of allowances of $2,138 and $2,378 at December 31, 2018 and December 31, 2017, respectively
78,938

 
65,346

Inventory
16,267

 
25,999

Prepaid expenses and other assets
20,860

 
9,957

Total current assets
222,302

 
130,446

Property and equipment, net
20,998

 
26,483

Intangible assets, net
35,306

 
515

Goodwill
24,783

 
3,664

Other assets
36,548

 
8,039

Total assets
$
339,937

 
$
169,147

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
48,794

 
$
28,747

Accrued liabilities
29,010

 
22,447

Deferred revenues, current
33,119

 
15,691

Warranty obligations, current (includes $4,288 and $2,240 measured at fair value at December 31, 2018 and December 31, 2017, respectively)
8,083

 
7,427

Debt, current
28,155

 
17,429

Total current liabilities
147,161

 
91,741

Long-term liabilities:
 
 
 
Deferred revenues, noncurrent
76,911

 
29,941

Warranty obligations, noncurrent (includes $7,469 and $7,551 measured at fair value at December 31, 2018 and December 31, 2017, respectively)
23,211

 
22,389

Other liabilities
3,250

 
1,880

Debt, noncurrent
81,628

 
32,322

Total liabilities
332,161

 
178,273

Commitments and contingent liabilities (Note 12)


 


Stockholders’ equity (deficit):
 
 
 
Preferred stock, $0.00001 par value, 10,000 shares authorized; none issued and outstanding

 

Common stock, $0.00001 par value, 150,000 shares and 125,000 shares authorized; and 107,035 and 85,914 shares issued and outstanding at December 31, 2018 and December 31, 2017, respectively
1

 
1

Additional paid-in capital
353,335

 
287,256

Accumulated deficit
(346,302
)
 
(295,727
)
Accumulated other comprehensive income (loss)
742

 
(656
)
Total stockholders’ equity (deficit)
7,776

 
(9,126
)
Total liabilities and stockholders’ equity (deficit)
$
339,937

 
$
169,147

See Notes to Consolidated Financial Statements.

56

Table of Contents

ENPHASE ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
Years Ended December 31,
 
2018
 
2017
 
2016
Net revenues
$
316,159

 
$
286,166

 
$
322,591

Cost of revenues
221,714

 
230,123

 
264,583

Gross profit
94,445

 
56,043

 
58,008

Operating expenses:
 
 
 
 
 
Research and development
32,587

 
33,157

 
50,703

Sales and marketing
27,047

 
23,126

 
38,810

General and administrative
29,086

 
22,221

 
27,418

Restructuring charges
4,129

 
16,917

 
3,777

Total operating expenses
92,849

 
95,421

 
120,708

Income (loss) from operations
1,596

 
(39,378
)
 
(62,700
)
Other expense, net
 
 
 
 
 
Interest expense
(9,635
)
 
(7,936
)
 
(2,773
)
Other income (expense)
(2,190
)
 
1,973

 
(514
)
Total other expense, net
(11,825
)
 
(5,963
)
 
(3,287
)
Loss before income taxes
(10,229
)
 
(45,341
)
 
(65,987
)
Income tax benefit (provision)
(1,398
)
 
149

 
(1,475
)
Net loss
$
(11,627
)
 
$
(45,192
)
 
$
(67,462
)
Net loss per share:
 
 
 
 
 
Basic and diluted
$
(0.12
)
 
$
(0.54
)
 
$
(1.34
)
Shares used in per share calculation:
 
 
 
 
 
Basic and diluted
99,619

 
82,939

 
50,519


See Notes to Consolidated Financial Statements.

57

Table of Contents

ENPHASE ENERGY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
 
Years Ended December 31,
 
2018
 
2017
 
2016
Net loss
$
(11,627
)
 
$
(45,192
)
 
$
(67,462
)
Other comprehensive income (loss):
 
 
 
 
 
Foreign currency translation adjustments
1,398

 
(364
)
 
(82
)
Comprehensive loss
$
(10,229
)
 
$
(45,556
)
 
$
(67,544
)

See Notes to Consolidated Financial Statements.

58

Table of Contents

ENPHASE ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Years Ended December 31,
 
2018
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
 
Net loss
$
(11,627
)
 
$
(45,192
)
 
$
(67,462
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
 
Depreciation and amortization
9,667

 
9,004

 
10,638

Provision for doubtful accounts
711

 
476

 
3,097

Asset impairment
1,601

 
1,681

 
3,190

Gain on business divestiture

 

 
(640
)
Amortization of debt issuance costs
2,701

 
1,673

 
145

Stock-based compensation
11,432

 
6,727

 
10,326

Deferred income tax expense (benefit)
123

 
(1,394
)
 
651

Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
(13,515
)
 
(4,803
)
 
(18,017
)
Inventory
9,732

 
5,961

 
8,840