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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-Q
 
 
 
 
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
or
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/bb573eaf192853baf93836acc410b456-enpha12.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, including zip code)
(707) 774-7000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.00001 par value per share
 
ENPH
 
Nasdaq Global Market
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   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   No  
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 the 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

Non-accelerated filer

 
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark 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  
As of July 28, 2020, there were 126,007,389 shares of the registrant’s common stock outstanding, $0.00001 par value per share.
 



ENPHASE ENERGY, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
ENPHASE ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
 
As of
 
June 30,
2020
 
December 31,
2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
607,254

 
$
251,409

Restricted cash

 
44,700

Accounts receivable, net of allowances of $296 and $564 at June 30, 2020 and December 31, 2019, respectively
89,504

 
145,413

Inventory
31,186

 
32,056

Prepaid expenses and other assets
29,257

 
26,079

Total current assets
757,201

 
499,657

Property and equipment, net
32,972

 
28,936

Operating lease, right of use asset
11,462

 
10,117

Intangible assets, net
28,086

 
30,579

Goodwill
24,783

 
24,783

Other assets
49,551

 
44,620

Deferred tax assets, net
93,872

 
74,531

Total assets
$
997,927

 
$
713,223

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
24,135

 
$
57,474

Accrued liabilities
46,691

 
47,092

Deferred revenues, current
40,256

 
81,783

Warranty obligations, current (includes $6,917 and $6,794 measured at fair value at June 30, 2020 and December 31, 2019, respectively)
10,170

 
10,078

Debt, current
102,271

 
2,884

Total current liabilities
223,523

 
199,311

Long-term liabilities:
 
 
 
Deferred revenues, noncurrent
110,977

 
100,204

Warranty obligations, noncurrent (includes $14,215 and $13,012 measured at fair value at June 30, 2020 and December 31, 2019, respectively)
27,737

 
27,020

Other liabilities
12,340

 
11,817

Debt, noncurrent
253,174

 
102,659

Total liabilities
627,751

 
441,011

Commitments and contingencies (Note 9)


 


Stockholders’ equity:
 
 
 
Common stock, $0.00001 par value, 200,000 shares and 150,000 shares authorized; and 125,979 shares and 123,109 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively
1

 
1

Additional paid-in capital
534,867

 
458,315

Accumulated deficit
(163,539
)
 
(185,181
)
Accumulated other comprehensive loss
(1,153
)
 
(923
)
Total stockholders’ equity
370,176

 
272,212

Total liabilities and stockholders’ equity
$
997,927

 
$
713,223



See Notes to Condensed Consolidated Financial Statements.

 
Enphase Energy, Inc. | 2020 Form 10-Q | 1


ENPHASE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Net revenues
$
125,538

 
$
134,094

 
$
331,083

 
$
234,244

Cost of revenues
77,151

 
88,775

 
202,021

 
155,586

Gross profit
48,387

 
45,319

 
129,062

 
78,658

Operating expenses:
 
 
 
 
 
 
 
Research and development
13,192

 
9,604

 
25,068

 
18,128

Sales and marketing
12,371

 
9,054

 
24,143

 
16,487

General and administrative
11,970

 
8,583

 
24,285

 
18,463

Restructuring charges

 
631

 

 
999

Total operating expenses
37,533

 
27,872

 
73,496

 
54,077

Income from operations
10,854

 
17,447

 
55,566

 
24,581

Other expense, net
 
 
 
 
 
 
 
Interest income
282

 
593

 
1,373

 
804

Interest expense
(5,952
)
 
(1,351
)
 
(9,107
)
 
(5,102
)
Other (expense) income, net
653

 
(5,480
)
 
(271
)
 
(5,961
)
Change in fair value of derivatives
(59,692
)
 

 
(44,348
)
 

Total other expense, net
(64,709
)
 
(6,238
)
 
(52,353
)
 
(10,259
)
Income (loss) before income taxes
(53,855
)
 
11,209

 
3,213

 
14,322

Income tax benefit (provision)
6,561

 
(591
)
 
18,429

 
(939
)
Net income (loss)
$
(47,294
)
 
$
10,618

 
$
21,642

 
$
13,383

Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.38
)
 
$
0.09

 
$
0.17

 
$
0.12

Diluted
$
(0.38
)
 
$
0.08

 
$
0.16

 
$
0.11

Shares used in per share calculation:
 
 
 
 
 
 
 
Basic
125,603

 
113,677

 
124,567

 
110,951

Diluted
125,603

 
130,737

 
138,910

 
129,400


See Notes to Condensed Consolidated Financial Statements.

 
Enphase Energy, Inc. | 2020 Form 10-Q | 2


ENPHASE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Net income (loss)
$
(47,294
)
 
$
10,618

 
$
21,642

 
$
13,383

Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(62
)
 
(249
)
 
(230
)
 
(328
)
Comprehensive income (loss)
$
(47,356
)
 
$
10,369

 
$
21,412

 
$
13,055


See Notes to Condensed Consolidated Financial Statements.

 
Enphase Energy, Inc. | 2020 Form 10-Q | 3


ENPHASE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
(In thousands)
(Unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Common stock and paid-in capital
 
 
 
 
 
 
 
Balance, beginning of period
$
433,543

 
$
357,024

 
$
458,316

 
$
353,336

Cumulative-effect adjustment to additional paid in capital(1)

 
1

 

 
27

Issuance of common stock from exercise of equity awards
2,867

 
958

 
4,846

 
2,622

Payment of withholding taxes related to net share settlement of equity awards
(9,385
)
 
(735
)
 
(43,652
)
 
(2,090
)
Conversion of convertible notes due 2023, net

 
58,857

 

 
58,857

Equity component of convertible notes
116,300

 
35,089

 
116,300

 
35,089

Cost of convertible notes hedge related to the convertible notes
(117,108
)
 
(36,313
)
 
(117,108
)
 
(36,313
)
Sale of warrants related to the convertible notes
96,351

 
29,818

 
96,351

 
29,818

Stock-based compensation expense and other
12,300

 
5,104

 
19,815

 
8,457

Balance, end of period
$
534,868

 
$
449,803

 
$
534,868

 
$
449,803

 
 
 
 
 
 
 
 
Accumulated deficit
 
 
 
 
 
 
 
Balance, beginning of period
$
(116,245
)
 
$
(343,563
)
 
$
(185,181
)
 
$
(346,302
)
Cumulative-effect adjustment to accumulated deficit(1) and other

 
(1
)
 

 
(27
)
Net income (loss)
(47,294
)
 
10,618

 
21,642

 
13,383

Balance, end of period
$
(163,539
)
 
$
(332,946
)
 
$
(163,539
)
 
$
(332,946
)
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
 
 
 
 
Balance, beginning of period
$
(1,091
)
 
$
663

 
$
(923
)
 
$
742

Foreign currency translation adjustments
(62
)
 
(249
)
 
(230
)
 
(328
)
Balance, end of period
$
(1,153
)
 
$
414

 
$
(1,153
)
 
$
414

Total stockholders' equity, ending balance
$
370,176

 
$
117,271

 
$
370,176

 
$
117,271

 
 
(1)
Includes the adoption of Accounting Standards Update (“ASU”) 2018-07, “Compensation - Stock Compensation: Improvements to Non-employee Share-Based Payment Accounting” on January 1, 2019.

See Notes to Condensed Consolidated Financial Statements.

 
Enphase Energy, Inc. | 2020 Form 10-Q | 4


ENPHASE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended
June 30,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
21,642

 
$
13,383

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
7,985

 
7,694

Provision for doubtful accounts
185

 
207

Non-cash interest expense
8,094

 
2,266

Financing fees on extinguishment of debt

 
2,152

Fees paid for repurchase and exchange of convertible notes due 2023

 
6,000

Stock-based compensation
19,815

 
8,224

Change in fair value of derivatives
44,348

 

Deferred income taxes
(19,567
)
 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
56,166

 
(19,104
)
Inventory
870

 
(3,827
)
Prepaid expenses and other assets
(9,534
)
 
(9,568
)
Accounts payable, accrued and other liabilities
(35,389
)
 
16,805

Warranty obligations
809

 
1,699

Deferred revenues
(30,771
)
 
5,904

Net cash provided by operating activities
64,653

 
31,835

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(7,804
)
 
(3,176
)
Net cash used in investing activities
(7,804
)
 
(3,176
)
Cash flows from financing activities:
 
 
 
Issuance of convertible notes, net of issuance costs
312,420

 
128,040

Purchase of convertible note hedges
(89,056
)
 
(36,313
)
Sale of warrants
71,552

 
29,819

Fees paid for repurchase and exchange of convertible notes due 2023

 
(6,000
)
Principal payments and financing fees on debt
(1,633
)
 
(45,122
)
Proceeds from exercise of equity awards and employee stock purchase plan
4,846

 
2,622

Payment of withholding taxes related to net share settlement of equity awards
(43,652
)
 
(2,090
)
Net cash provided by financing activities
254,477

 
70,956

Effect of exchange rate changes on cash and cash equivalents
(181
)
 
107

Net increase in cash and cash equivalents
311,145

 
99,722

Cash, cash equivalents and restricted cash—Beginning of period
296,109

 
106,237

Cash and cash equivalents—End of period
$
607,254

 
$
205,959

 
 
 
 
Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Purchases of fixed assets included in accounts payable
$
1,636

 
$
1,194

Accrued interest payable unpaid upon exchange of convertible notes due 2023
$

 
$
833



See Notes to Condensed Consolidated Financial Statements.

 
Enphase Energy, Inc. | 2020 Form 10-Q | 5


ENPHASE ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Enphase Energy, Inc. (the “Company”) is a global energy technology company. The Company delivers smart, easy-to-use solutions that manage solar generation, storage and communication on one intelligent platform. The Company revolutionized the solar industry with its microinverter technology and produces a fully integrated solar-plus-storage solution.
Basis of Presentation and Consolidation
The accompanying condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States (“U.S.”), or GAAP. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Unaudited Interim Financial Information
These accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC for interim financial reporting. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring items, considered necessary to present fairly the Company’s financial condition, results of operations, comprehensive income (loss), stockholders’ equity and cash flows for the interim periods indicated. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the operating results for the full year.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Significant estimates and assumptions reflected in the financial statements include revenue recognition, allowance for doubtful accounts, stock-based compensation, inventory valuation, accrued warranty obligations, fair value of debt derivatives, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment, incremental borrowing rate for right-of-use assets and lease liability, legal contingencies, and tax valuation allowance. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ materially from management’s estimates using different assumptions or under different conditions.
The worldwide spread of the COVID-19 virus has resulted in a global slowdown of economic activity which decreased demand for a broad variety of goods and services, including from our customers, while also disrupting sales channels and marketing activities for an unknown period of time and may continue to create significant uncertainty in future operational and financial performance. The Company expects this to result in negative impact on its sales and its results of operations. In preparing the Company’s condensed consolidated financial statements in accordance with GAAP, the Company is required to make estimates, assumptions and judgments that affect the amounts reported in its financial statements and the accompanying disclosures. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. As of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update its estimates, judgments or revise the carrying value of its assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the Company’s financial statements.

 
Enphase Energy, Inc. | 2020 Form 10-Q | 6

ENPHASE ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Summary of Significant Accounting Policies
There have been no significant changes to the Company’s significant accounting policies in Note 2. “Summary of Significant Accounting Policies,” of the notes to consolidated financial statements included in Item 8 of the Company’s 2019 Annual Report on Form 10-K.
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” to reduce diversity in practice in accounting for the costs of implementing cloud computing arrangements that are service contracts. ASU 2018-15 allows entities to apply the guidance in the ASC 350-40, “Intangibles–Goodwill and Other–Internal-Use Software,” to determine which implementation costs are eligible to be capitalized as assets in a cloud computing arrangement that is considered a service contract. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. Entities have the option to apply the guidance prospectively to all implementation costs incurred after the date of adoption or retrospectively and are required to make certain disclosures in the interim and annual period of adoption. The Company adopted the new standard effective January 1, 2020 on a prospective basis and the adoption of this guidance did not have a material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with a current expected credit loss (CECL) model which will result in earlier recognition of credit losses. On January 1, 2020, the Company on a prospective basis adopted Topic 326, the measurement of expected credit losses under the CECL model is applicable to financial assets measured at amortized cost, including accounts receivable. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
2.
REVENUE RECOGNITION
Disaggregated Revenue
The Company has one business activity, which is the design, manufacture and sale of solutions for the solar photovoltaic (“PV”) industry. Disaggregated revenue by primary geographical market and timing of revenue recognition for the Company’s single product line are as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
 
(In thousands)
Primary geographical markets:
 
 
 
 
 
 
 
United States
$
100,791

 
$
99,909

 
$
280,391

 
$
177,595

International
24,747

 
34,185

 
50,692

 
56,649

Total
$
125,538

 
$
134,094

 
$
331,083

 
$
234,244

 
 
 
 
 
 
 
 
Timing of revenue recognition:
 
 
 
 
 
 
 
Products delivered at a point in time
$
114,299

 
$
124,336

 
$
308,978

 
$
214,736

Products and services delivered over time
11,239

 
9,758

 
22,105

 
19,508

Total
$
125,538

 
$
134,094

 
$
331,083

 
$
234,244



 
Enphase Energy, Inc. | 2020 Form 10-Q | 7

ENPHASE ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Contract Balances
Receivables, and contract assets and contract liabilities from contracts with customers are as follows:
 
June 30,
2020
 
December 31,
2019
 
(In thousands)
Receivables
$
89,504

 
$
145,413

Short-term contract assets (Prepaid expenses and other assets)
16,416

 
15,055

Long-term contract assets (Other assets)
46,960

 
42,087

Short-term contract liabilities (Deferred revenues)
40,256

 
81,783

Long-term contract liabilities (Deferred revenues)
110,977

 
100,204


The Company receives payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets include deferred product costs and commissions associated with the deferred revenue and will be amortized along with the associated revenue. The Company had no asset impairment charges related to contract assets in the three and six months ended June 30, 2020.
Significant changes in the balances of contract assets (prepaid expenses and other assets) during the period are as follows (in thousands):
Contract Assets
 
Balance on December 31, 2019
$
57,142

Amount recognized
(8,439
)
Increase
14,673

Balance as of June 30, 2020
$
63,376


Contract liabilities are recorded as deferred revenue on the accompanying condensed consolidated balance sheets and include payments received in advance of performance obligations under the contract and are realized when the associated revenue is recognized under the contract.
Significant changes in the balances of contract liabilities (deferred revenues) during the period are as follows (in thousands):
Contract Liabilities
 
Balance on December 31, 2019
$
181,987

Revenue recognized
(66,841
)
Increase due to billings
36,087

Balance as of June 30, 2020
$
151,233



 
Enphase Energy, Inc. | 2020 Form 10-Q | 8

ENPHASE ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Remaining Performance Obligations
Estimated revenue expected to be recognized in future periods related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period are as follows:
 
June 30,
2020
 
(In thousands)
Fiscal year:
 
2020 (remaining six months)
$
21,679

2021
36,389

2022
31,357

2023
25,564

2024
20,373

Thereafter
15,871

Total
$
151,233


3.
OTHER FINANCIAL INFORMATION
Accounts Receivable, Net
The Company receives payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional.
Accounts receivable, net consist of the following:
 
June 30,
2020
 
December 31,
2019
 
(In thousands)
Accounts receivable
$
89,800

 
$
145,977

Allowance for doubtful accounts
(296
)
 
(564
)
Accounts receivable, net
$
89,504

 
$
145,413


Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for uncollectible accounts receivable. Management estimates anticipated losses from doubtful accounts based on financial health of customers, days past due, collection history and existing economic conditions. The following table sets forth activities in the allowance for doubtful accounts for the periods indicated.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
(In thousands)
Balance, at beginning of the period
$
374

 
$
564

Net charges to expenses
81

 
185

Write-offs, net of recoveries
(159
)
 
(453
)
Balance, at end of the period
$
296

 
$
296



 
Enphase Energy, Inc. | 2020 Form 10-Q | 9

ENPHASE ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Inventory
Inventory consist of the following:
 
June 30,
2020
 
December 31,
2019
 
(In thousands)
Raw materials
$
5,800

 
$
4,197

Finished goods
25,386

 
27,859

Total inventory
$
31,186

 
$
32,056


Accrued Liabilities
Accrued liabilities consist of the following:
 
June 30,
2020
 
December 31,
2019
 
(In thousands)
Salaries, commissions, incentive compensation and benefits
$
3,607

 
$
5,524

Customer rebates and sales incentives
20,741

 
24,198

Freight
2,640

 
4,908

Operating lease liabilities, current
3,570

 
3,170

Other
16,133

 
9,292

Total accrued liabilities
$
46,691

 
$
47,092


4.
GOODWILL AND INTANGIBLE ASSETS
The Company’s goodwill and purchased intangible assets as of June 30, 2020 and December 31, 2019 are as follows:
 
June 30, 2020
 
December 31, 2019
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
 
(In thousands)
Goodwill
$
24,783

 
$

 
$
24,783

 
$
24,783

 
$

 
$
24,783

 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Other indefinite-lived intangibles
$
286

 
$

 
$
286

 
$
286

 
$

 
$
286

Intangible assets with finite lives:
 
 

 
 
 
 
 
 
 
 
Developed technology
13,100

 
(4,185
)
 
8,915

 
13,100

 
(3,093
)
 
10,007

Customer relationships
23,100

 
(4,215
)
 
18,885

 
23,100

 
(2,814
)
 
20,286

Total purchased intangible assets
$
36,486

 
$
(8,400
)
 
$
28,086

 
$
36,486

 
$
(5,907
)
 
$
30,579



 
Enphase Energy, Inc. | 2020 Form 10-Q | 10

ENPHASE ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Amortization expense related to finite-lived intangible assets are as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
 
(In thousands)
Developed technology, and patents and licensed technology
$
546

 
$
546

 
$
1,092

 
$
1,092

Customer relationships
700

 
635

 
1,401

 
1,271

Total amortization expense
$
1,246

 
$
1,181

 
$
2,493

 
$
2,363


Amortization of developed technology, patents and licensed technology is recorded to sales and marketing expense. The developed technology acquired from the Company’s acquisition of SunPower Corporation’s (“SunPower”) microinverter business in August 2018 was embedded in the microinverters that SunPower sold to its customers. The Company does not actively use the developed technology acquired from SunPower and holds the developed technology to prevent others from using it. Accordingly, the Company accounts for the developed technology as a defensive intangible asset and amortizes the associated value over a period of six years from the date of acquisition.
The master supply agreement (“MSA”) entered into with SunPower in August 2018 provides the Company with the exclusive right to supply SunPower with module level power electronics for a period of five years, with options for renewals. The exclusivity arrangement extends throughout the term of the MSA, which comprises all of the expected cash flows from the customer relationship intangible asset, and was a condition to, and was an essential part of the acquisition of SunPower’s microinverter business by the Company. As the fair value ascribed to the customer relationship intangible asset represents payments to a customer, the Company amortizes the value of the customer relationship intangible asset as a reduction to revenue using a pattern of economic benefit method over a useful life of nine years.
5.
WARRANTY OBLIGATIONS
The Company’s warranty activities were as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
 
(In thousands)
Warranty obligations, beginning of period
$
37,501

 
$
31,042

 
$
37,098

 
$
31,294

Accruals for warranties issued during period
766

 
1,312

 
2,290

 
2,170

Changes in estimates
1,748

 
699

 
3,425

 
1,503

Settlements
(2,578
)
 
(2,206
)
 
(5,848
)
 
(4,502
)
Increase due to accretion expense
804

 
550

 
1,578

 
1,101

Other
(334
)
 
1,597

 
(636
)
 
1,428

Warranty obligations, end of period
37,907

 
32,994

 
37,907

 
32,994

Less: current portion
(10,170
)
 
(7,468
)
 
(10,170
)
 
(7,468
)
Noncurrent
$
27,737

 
$
25,526

 
$
27,737

 
$
25,526


Changes in Estimates
For the three and six months ended June 30, 2020, the Company recorded additional warranty expense of $1.7 million and $3.4 million, respectively, based on continuing analysis of field performance data and diagnostic root-cause failure analysis primarily relating to its prior generation products.

 
Enphase Energy, Inc. | 2020 Form 10-Q | 11

ENPHASE ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


6.
FAIR VALUE MEASUREMENTS
The accounting guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of such assets or liabilities do not entail a significant degree of judgment.
Level 2—Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
Level 1. The Company considers all highly liquid investments, such as certificates of deposit and money market instruments with maturities of three months or less at the time of acquisition to be cash equivalents. For all periods presented, its cash balances consist of amounts held in non-interest-bearing and interest-bearing deposits and money market accounts and are within Level 1 of the fair value hierarchy because they are valued using quoted market prices for identical instruments in active markets. As of June 30, 2020, cash and cash equivalents balance includes money market funds of $598.5 million.
Level 2.
Convertible Notes due 2025 Derivatives
On March 9, 2020, the Company issued $320 million aggregate principal amount of 0.25% convertible senior notes due 2025 (the “Notes due 2025”). Concurrently with the issuance of Notes due 2025, the Company entered into privately-negotiated convertible note hedge and warrant transactions which in combination are intended to reduce the potential dilution from the conversion of the Notes due 2025. On May 20, 2020, at the Company’s annual meeting of stockholders, the stockholders approved an amendment to its certificate of incorporation to increase the number of authorized shares of the Company’s common stock. As a result, the Company satisfied the share reservation condition (as defined in the relevant indenture associated with the Notes due 2025). The Company will now be able to settle the Notes due 2025, convertible notes hedge and warrants through payment or delivery, as the case may be, of cash, shares of its common stock or a combination thereof, at the Company’s election. Accordingly, on May 20, 2020, the embedded derivative liability, convertible notes hedge and warrants liability were remeasured at a fair value of $116.3 million, $117.1 million and $96.4 million, respectively, and were then reclassified to additional paid-in-capital in the condensed consolidated balance sheet in the second quarter of 2020 and are no longer remeasured as long as they continue to meet the conditions for equity classification. See Note 8. “Debt” for additional information related to these transactions.
The fair value of the Convertible notes embedded derivative was estimated using Binomial Lattice model and the fair value of Convertible notes hedge and Warrants liability was estimated using Black-Scholes-Merton model. The significant observable inputs, either directly or indirectly, and assumptions used in the models to calculate the fair value of the derivatives include the Company’s common stock price, exercise price of the derivatives, risk-free interest rate, volatility, annual coupon rate and remaining contractual term.

 
Enphase Energy, Inc. | 2020 Form 10-Q | 12

ENPHASE ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Notes due 2025 and Notes due 2024. The Company carries the Notes due 2025 and Notes due 2024 (as defined below) at face value less unamortized discount and issuance costs on its condensed consolidated balance sheets. The fair value of the Notes due 2025 and Notes due 2024 of $288.9 million and $350.5 million, respectively, was determined based on the closing trading prices per $100 principal amount as of the last day of trading for the period. The Company considers the fair value of the Notes due 2025 and Notes due 2024 to be a Level 2 measurement as they are not actively traded.
Level 3.
Warranty Obligations.
The following table presents the Company’s warranty obligation that were measured at fair value on a recurring basis and its categorization within the fair value hierarchy.
 
June 30,
2020
 
December 31, 2019
 
(In thousands)
 
Level 3
 
Level 3
Liabilities:
 
 
 
Warranty obligations
 
 
 
Current
$
6,917

 
$
6,794

Non-current
14,215

 
13,012

Total warranty obligations measured at fair value
21,132

 
19,806

Total liabilities measured at fair value
$
21,132

 
$
19,806


Fair Value Option for Warranty Obligations Related to Microinverters Sold Since January 1, 2014
The Company estimates 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, the Company used certain Level 3 inputs which are unobservable and significant to the overall fair value measurement. Such additional assumptions included a discount rate based on the Company’s credit-adjusted risk-free rate and compensation comprised of a profit element and risk premium required of a market participant to assume the obligation.
The following table provides information regarding changes in nonfinancial liabilities related to the Company’s warranty obligations measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods indicated.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
 
(In thousands)
Balance at beginning of period
$
20,425

 
$
12,065

 
$
19,806

 
$
11,757

Accruals for warranties issued during period
766

 
1,312

 
2,290

 
2,170

Changes in estimates
983

 
519

 
1,598

 
860

Settlements
(1,511
)
 
(1,188
)
 
(3,504
)
 
(2,460
)
Increase due to accretion expense
804

 
550

 
1,578

 
1,101

Other
(335
)
 
1,598

 
(636
)
 
1,428

Balance at end of period
$
21,132

 
$
14,856

 
$
21,132

 
$
14,856



 
Enphase Energy, Inc. | 2020 Form 10-Q | 13

ENPHASE ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Quantitative and Qualitative Information about Level 3 Fair Value Measurements
As of June 30, 2020 and December 31, 2019, the significant unobservable inputs used in the fair value measurement of the Company’s liabilities designated as Level 3 are as follows:
 
 
 
 
 
 
Percent Used
(Weighted Average)
Item Measured at Fair Value
 
Valuation Technique
 
Description of Significant Unobservable Input
 
June 30,
2020
 
December 31,
2019
Warranty obligations for microinverters sold since January 1, 2014
 
Discounted cash flows
 
Profit element and risk premium
 
15%
 
14%
 
 
Credit-adjusted risk-free rate
 
16%
 
16%
Sensitivity of Level 3 Inputs - Warranty Obligations
Each of the significant unobservable inputs is independent of the other. The profit element and risk premium are estimated based on requirements of a third-party participant willing to assume the Company’s warranty obligations. The credit‑adjusted risk‑free rate (“discount rate”) is determined by reference to the Company’s own credit standing at the fair value measurement date. Increasing the profit element and risk premium input by 100 basis points would result in a $0.2 million increase to the liability. Decreasing the profit element and risk premium by 100 basis points would result in a $0.2 million reduction of the liability. Increasing the discount rate by 100 basis points would result in a $0.9 million reduction of the liability. Decreasing the discount rate by 100 basis points would result in a $1.0 million increase to the liability.
7.
RESTRUCTURING
Restructuring expense consist of the following:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
 
(In thousands)
Redundancy and employee severance and benefit arrangements
$

 
$
631

 
$

 
$
1,099

Lease loss reserves

 

 

 
(100
)
Total restructuring charges
$

 
$
631

 
$

 
$
999


2018 Plan
In the third quarter of 2018, the Company began implementing restructuring actions (the “2018 Plan”) to lower its operating expenses. The restructuring actions include reorganization of the Company’s global workforce, elimination of certain non-core projects and consolidation of facilities. The Company completed its restructuring activities under the 2018 Plan in 2019.

 
Enphase Energy, Inc. | 2020 Form 10-Q | 14

ENPHASE ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


8.
DEBT
The following table provides information regarding the Company’s long-term debt.
 
June 30,
2020
 
December 31,
2019
 
(In thousands)
Convertible notes
 
 
 
Notes due 2025
$
320,000

 
$

Less: unamortized discount and issuance costs
(72,000
)
 

Carrying amount of Notes due 2025
248,000

 

 
 
 
 
Notes due 2024
132,000

 
132,000

Less: unamortized discount and issuance costs
(32,301
)
 
(35,815
)
Carrying amount of Notes due 2024
99,699

 
96,185

 
 
 
 
Notes due 2023
5,000

 
5,000

Less: unamortized issuance costs
(122
)
 
(143
)
Carrying amount of Notes due 2023
4,878

 
4,857

 
 
 
 
Sale of long-term financing receivable recorded as debt
2,868

 
4,501

Total carrying amount of debt
355,445

 
105,543

Less: current portion of convertible notes and long-term financing receivable recorded as debt
(102,271
)
 
(2,884
)
Long-term debt
$
253,174

 
$
102,659


Convertible Senior Notes due 2025
On March 9, 2020, the Company issued $320.0 million aggregate principal amount of the Notes due 2025. The Notes due 2025 are general unsecured obligations and bear interest at an annual rate of 0.25% per year, payable semi-annually on March 1 and September 1 of each year, beginning September 1, 2020. The Notes due 2025 are governed by an indenture between the Company and U.S. Bank National Association, as trustee. The Notes due 2025 will mature on March 1, 2025, unless earlier repurchased by the Company or converted at the option of the holders. The Company may not redeem the notes prior to the maturity date, and no sinking fund is provided for the notes. The Notes due 2025 may be converted, under certain circumstances as described below, based on an initial conversion rate of 12.2637 shares of common stock per $1,000 principal amount (which represents an initial conversion price of $81.54 per share). The conversion rate for the Notes due 2025 will be subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest. In addition, upon the occurrence of a make-whole fundamental change (as defined in the relevant indenture), the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its notes in connection with such make-whole fundamental change. The Company received approximately $313.0 million in net proceeds, after deducting the initial purchasers’ discount, from the issuance of the Notes due 2025.

 
Enphase Energy, Inc. | 2020 Form 10-Q | 15

ENPHASE ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The Notes due 2025 may be converted prior to the close of business on the business day immediately preceding September 1, 2024, in multiples of $1,000 principal amount, at the option of the holder only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in the relevant indenture) per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On and after September 1, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date of March 1, 2025, holders may convert their notes at any time, regardless of the foregoing circumstances. Upon the occurrence of a fundamental change (as defined in the relevant indenture), holders may require the Company to repurchase all or a portion of their Notes due 2025 for cash at a price equal to