Enphase Energy Annual Report 2018

FY2018 Annual Report · Enphase Energy

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ANNUAL
REPORT

8
1
0
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Use of Forward-Looking Statements

This presentation contains forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act
of 1995, including but not limited to statements concerning future financial performance; our business strategies, including anticipated trends,
growth and developments in markets in which we target; the anticipated market adoption of our current and future products; the capabilities and
performance of our technology and products; planned changes to our technology and products; our performance in operations, including
component supply management, product quality, and customer service. These forward-looking statements are based upon current expectations
that involve risks and uncertainties. Any statements that are not of historical fact, may be forward-looking statements. Words used such as
“anticipates,” “believes,” “continues,” “designed,” “estimates,” “expects,” “goal,” “intends,” “likely,” “may,” “ongoing,” “plans,” “projects,”
“pursuing,” “seeks,” “should,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-
looking statements contain these words. All forward-looking statements are based on our current assumptions, expectations and beliefs, and
involve substantial risks and uncertainties that may cause results, performance or achievement to materially differ from those expressed or implied
by these forward-looking statements. Therefore, you should not place undue reliance on our forward-looking statements. A detailed discussion of
risk factors that affect our business is included in the filings we make with the Securities and Exchange Commission (SEC) from time to time, including
our most recent report on Form 10-K, particularly under the heading “Risk Factors.” Copies of these filings are available on the Enphase website at
http://investor.enphase.com/sec.cfm, or on the SEC website at www.sec.gov. All forward-looking statements in this presentation are based on
information currently available to us, and we assume no obligation to update these forward-looking statements in light of new information or future
events.

Industry Information

Information regarding market and industry statistics in this presentation is based on information available to us that we believe is accurate. It is generally
based on publications that are not produced for purposes of economic analysis.

Non-GAAP Financial Metrics

•

The Company has presented certain non-GAAP financial measures in this presentation. Generally, a non-GAAP financial measure is a numerical
measure of a company’s performance, financial position, or cash flows that either excludes or includes amounts that are not normally excluded or
included in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles in the
United States of America, or GAAP. Reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure can
be found in the Appendix to this presentation. Non-GAAP financial measures presented by the Company include non-GAAP gross margin, operating
expenses, income (loss) from operations, and net loss.
These non-GAAP financial measures do not reflect a comprehensive system of accounting, differ from GAAP measures with the same captions and
may differ from non-GAAP financial measures with the same or similar captions that are used by other companies. In addition, these non-GAAP
measures have limitations in that they do not reflect all of the amounts associated with the Company’s results of operations as determined in
accordance with GAAP. As such, these non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to,
financial measures calculated in accordance with GAAP. The Company uses these non-GAAP financial measures to analyze its operating performance
and future prospects, develop internal budgets and financial goals, and to facilitate period-to-period comparisons. Enphase believes that these non-
GAAP financial measures reflect an additional way of viewing aspects of its operations that, when viewed with its GAAP results, provide a more
complete understanding of factors and trends affecting its business.

•

• As presented in the “Reconciliation of Non-GAAP Financial Measures” table in the Appendix to this presentation, each of the non-GAAP financial
measures excludes one or more of the following items for purposes of calculating non-GAAP financial measures to facilitate an evaluation of the
Company’s current operating performance and a comparison to its past operating performance:
Stock-based compensation expense. The Company excludes stock-based compensation expense from its non-GAAP measures primarily because they
are non-cash in nature. Moreover, the impact of this expense is significantly affected by the Company’s stock price at the time of an award over
which management has limited to no control.
Restructuring charges. The Company excludes restructuring charges due to the nature of the expenses being unplanned and arising outside the
ordinary course of continuing operations. These costs primarily consist of fees paid for restructuring-related management consulting services, cash-
based severance costs related to workforce reduction actions, asset write-downs of property and equipment and lease loss reserves, and other
contract termination costs resulting from restructuring initiatives.
Reserve for non-recurring legal matter. This item represents a charge taken for the potential settlement cost related to a dispute with a vendor. This
item is excluded as it relates to a specific matter and is not reflective of the Company’s ongoing financial performance.

•

• Acquisition-related expenses. This item represents expenses incurred related to the Company’s acquisition of SunPower’s microinverter business,

which are non-recurring in nature and not reflective of the Company's ongoing financial performance.

• Non-cash interest expense. The Company excludes non-cash interest expense, which consists primarily of amortization of debt issuance costs,
because the expense does not represent a cash outflow for the Company except in the period the financing was secured and such amortization
expense is not reflective of the Company’s ongoing financial performance.

Enphase Energy®, the Enphase logo, Enphase Energized, Enlighten, Ensemble, IQ 7, IQ 7A, IQ 7+, IQ 7X, IQ 7XS, IQ 8, Installer Toolkit, Service-On-The-Go and
other trademarks or service names are the trademarks of Enphase Energy, Inc. Other names are for informational purposes and may be trademarks of their
respective owners.

Badri Kothandaraman,
President and CEO

Dear fellow shareholders,

It has been nearly 18 months since I became the CEO
of our company. From the very beginning, it was crystal
clear what needed to be done. I remember being
amazed by our technology, products and the quality
mindset of our employees. Usually, this is the most
difficult part for any company to get right. Instead, the
company faced significant challenges because we were
operationally deficient in some areas and did not have
business processes for managing costs or pricing. We
had to take steps to strengthen our operations and
become a more mature company.

Enphase Energy was founded in 2006 with five key
elements to our value proposition: deliver products
that are productive, reliable, simple, smart, and safe.
Our value proposition rings as true today as when the
company was founded. However, the company has
undergone a major strategic transformation moving
from “growth at any cost” to “profitable growth.”

This letter addresses how we accomplished this
transformation and what to expect going forward.
First, a reminder of what makes our products so
amazing along with the markets we play in.

Software, semiconductor and power electronics
expertise are central to our strategy.

The brain of the Enphase microinverter
is the
semiconductor-based Application Specific Integrated
Circuit (ASIC) which enables power control and
communication to the microinverter. With every
microinverter generation, the ASIC achieves higher
levels of integration and helps to reduce the total
number of components in the microinverter. Our

current ASIC called “Heron 3”
IQ 7™
microinverter contains 3.8 million gates, while our next
generation “Swift” ASIC in the IQ 8™ microinverter
packs in 5.0 million gates.

in the

IQ microinverters
software-defined
have
architecture that allows for rapid entry into new
regions, complemented by the Enlighten™ cloud
platform for homeowners and the Installer Toolkit™
for our partners. Our microinverter system includes a
gateway device that is connected to the cloud through
the homeowner’s router or a cellular modem. This
gateway device communicates to each microinverter
through Power Line Communication (PLC) technology
via the AC power
line, thus ensuring all the
microinverters are cloud-connected Internet of Things
(IoT) devices.

Residential solar and storage are attractive markets.

Solar and storage technologies have the potential to
enable energy independence for the homeowner
through self-consumption. We estimate that the
worldwide solar residential market is more than 13GW
in 2019, with a 10% Compound Annual Growth Rate
(CAGR) from 2016 through 2022. Our served available
market is approximately 40% of this market today. The
residential storage market is also picking up a lot of
steam and is expected to be around 1.5GWh in 2019
with a 34% CAGR from 2016 through 2022 (Frost and
Sullivan Report, 2016). These volume
increases,
coupled with the residential segment catering to
customers paying retail rates, make our served
markets very attractive.

2012 TO 2016 – GROWING REVENUE TO $300M/YR
Enphase became a public company on March 30, 2012.
Roughly every five quarters since then, we released a new
generation of microinverter. This product evolution
allowed us to follow the performance curves associated
with Moore’s Law for semiconductors and solidify our
value proposition of quality and reliability. We expanded
beyond our Petaluma location: added an R&D center in
New Zealand in 2011; started European sales in 2012,
including the UK, Switzerland and Benelux; and expanded
into Australia in 2013. We shipped our 10 millionth
microinverter in November 2015.

Enphase faced an existential threat in 2016.

While we were growing our revenue, our product
innovation engine was running well, but we were not
operationally savvy in reducing product costs, managing
pricing and controlling operating expenses. As a result, we
found ourselves in a challenging situation towards the end
of 2016, when our cash dropped below the level we
needed to effectively manage our business. Something
needed to change.

2017 TO 2018 – EMPHASIZING PROFITABILITY
Fortunately, we had new investors, T.J. Rodgers and John
Doerr, who believed in the technology and injected cash
into the company in January 2017. We started the
restructuring journey, aided by leadership and business
process changes. As documented in my 2017 Letter to
Shareholders, we restructured and retooled operations.
In July 2017, we opened an R&D and Operations center in
India to take advantage of the great talent available there.

The focus was squarely on cash management and gross
margin improvement through supply chain optimization,
pricing management and IQ new product introduction. At
our Analyst Day in June 2017, we announced our financial
goals in the form of a 30-20-10 target financial model. This
set our targets for Gross Margin at 30% of Revenue,
Operating Expenses at 20% of Revenue and Operating
Income at 10% of Revenue by Q4’18. (These target levels
are tied to our non-GAAP results.)

So how did we do in 2018? Our revenue was $316.2
million, a 10% increase from 2017. For Q4’18, our results
were 30.7% non-GAAP gross margin, 21.4% non-GAAP
operating expenses, and 9.3% non-GAAP operating

income (1). We are pleased with the significant progress
towards making the 30-20-10 target financial model a
reality as we exited 2018. We ended Q4’18 with $106.2
financials represented a
million
significant accomplishment and reaffirmed customer
confidence, and it’s important to understand how we
did it.

in cash. These

There was no magic formula in making progress towards
reaching our financial goals; we did
it with a
combination of disciplined planning and rigorous
execution. In the seminal book titled Execution, Ram
Charan and Larry Bossidy state that “organizations don’t
execute unless the right people,
individually and
collectively, focus on the right details at the right time.”
On December 31, 2018, Enphase had 438 employees;
66.5% were hired since April 1, 2017, when the
company had 391 employees. While we overhauled the
transitioned
executive management
operations to cost-effective locations, we were still able
to capitalize on the expertise of our co-founders, Raghu
Belur and Martin Fornage.

team and

PERFORMANCE METRICS
Dollars
percentages

in thousands, except per-share data and

Revenue
Gross margin

Operating expense

Operating income (loss)

Net income (loss)

Basic EPS

Diluted EPS

Revenue
Gross margin

Operating expense

Operating income (loss)

Net income (loss)

Basic EPS

Diluted EPS

GAAP

Q4 2018
$ 92,289

2018
$ 316,159

2017
$ 286,166

30.5 %

25.1 %
5,003
709
0.01
0.01

29.9 %

29.4 %

19.6 %

33.3 %

1,596

$ (11,627 )

(0.12 )

(39,378 )

(45,192 )

(0.54 )

Non-GAAP (1)

Q4 2018
$ 92,289

2018
$ 316,159

2017
$ 286,166

30.7 %

21.4 %
8,565
5,092
0.05
0.04

30.2 %

23.7 %

20.0 %

25.5 %

$ 20.535

$ 10,013

0.10

(15,733 )

(20,530 )

(0.25)

(1)

See Appendix for reconciliation to comparable GAAP Measures

Reaching our gross margin targets required rigor and
discipline regarding cost and price. We ceased
destructive deal-making and chasing low margins.

We spent 2018 rolling out IQ 7™ product family, the
smallest, lightest and most powerful microinverter we
have ever made. Every region of the world where our
products are sold is now on this seventh generation
microinverter. In Q4’18, 84% of our microinverter
shipments were IQ 7.

Our average selling price (ASP) for the full microinverter
system was higher in 2018 versus 2017. We established
rules for pricing. Likewise, we were diligent about
evaluating businesses to ensure that we engage with
customers who are willing to pay for the value that
Enphase delivers. We systematically rolled out high-
IQ 7
power and high-efficiency variants of the
microinverters
variants
simultaneously improved the ASP and margin as well as
ultimately delivering a better price per watt to the
installer – a true win-win. These higher efficiency
products were sold both stand-alone and to AC Modules
(ACM) partners including Solaria and SunPower.

in 2018.

Selling

these

The 30-20-10 target financial model explicitly focuses on
profitability at the expense of market share. A financially
investors, partners,
stable Enphase
suppliers, and customers. Our Q4’18 revenue of $92.3
million is our highest since Q4’16 and our non-GAAP
gross margin improved from 18.2% in Q4’16 to 30.7% in
Q4’18.

is better

for

We would like to acknowledge key investments made in
Enphase during 2018. In February 2018, we sold
common stock for gross proceeds of approximately
$20.0 million to an entity affiliated with Isidoro Quiroga,
a prominent Chilean entrepreneur and investor. In
August 2018, we raised approximately $62.4 million from
a convertible debt offering. We subsequently used a
portion of these proceeds to repay in full our high-
interest bearing senior secured
loan with
Tennenbaum Capital Partners, LLC in January 2019.

term

We made significant improvements in our customer
experience, but we have much more to do.

Quality and customer service are the cornerstones of our
strategy and were
financial
turnaround in 2018. We began focusing on call center
metrics in the U.S., Europe and Australia.

instrumental

in our

Our average customer wait times were approximately
two minutes by the end of 2018, down from greater than
ten minutes in 2017. The key metric we used to measure
customer experience is the Net Promoter Score, or NPS,
which is calculated based on feedback from customer
likely customers or partners will
surveys on how
recommend Enphase to a friend or colleague. Our NPS in
North America was approximately 50% in Q4’18.

We introduced self-service tools such as the Service-On-
The-Go™ which allow our installer partners to submit
returns from their mobile devices. We also introduced a
Seed Stock Program, which allows installer partners to
use microinverters from their own inventory for serving
homeowners, versus waiting for a shipment from
Enphase. Finally, we launched an upgrade program for
early adopters of our microinverters. Approximately 18%
of the customers we contacted asked for some form of
an upgrade during 2018, reflecting confidence in the
considerable improvements in quality and reliability over
the years. We have seen a substantial improvement in
quality with every generation of microinverters and
consistently hear customers reaffirm this.

We are working closely with customers and suppliers
to manage supply shortages.

Nearly every customer finished the year 2018 with higher
demand than Enphase could supply. IQ 7 component
shortages constrained our revenue in the second half of
2018, and we worked closely with our customers and
partners to manage these shortages. We made the
necessary investments to increase our microinverter
supply going forward and expect additional supply to
become available in the second half of 2019.

In summary, we achieved two out of the three priorities
for 2018 which I set forth in my letter last year. We laid
the foundation for great customer experience and we
made significant progress towards the 30-20-10 target
financial model. However, we did not achieve the third
priority, which was gearing up for the launch of our
Ensemble™ Solar and Storage technology. The promise
of our grid-agnostic solution,
IQ 8
microinverter, is as vibrant today as it was a year ago. The
software and hardware complexities are more
challenging than we anticipated. A small win however,
was the shipment of our pure off-grid microinverter in
limited quantities to an IQ 8 partner in Q4’18. We believe
this demonstration of off-grid capability is a promising
precursor to future success.

including the

2019 – PRIORITIES
We believe our execution in 2018 positions us well to
take advantage of future growth opportunities. But we
need to maintain focus in order to capitalize on such
opportunities. Our top three priorities for 2019 are
highlighted below.

Customer experience matters.

long-term target

As stated before, quality and customer service constitute
customer experience. Our
is 500
defects per million (dppm) on an annual basis. We expect
to make progress towards this goal by using the Pareto
principle and 8D method of problem solving. On the
service front, we must treat our installer, distributor and
module partners right, so we can serve our homeowner
customers well. Our target is to achieve a worldwide NPS
of 60% or higher in 2019. Not only is this an area where
Enphase can continue to improve, it is an industry-wide
area of weakness. We are convinced that continued
improvements will make service a competitive strength
for Enphase.

Improve internal business processes.

There are three critical business processes we are
working on this year: Operational Business Process for
streamlining the Quote to Cash Cycle, New Product
Business Process for launching new products predictably
and Human Resources Business Process for talent
management. Although not as obvious to the outside
world, these processes are critical in improving every
aspect of Enphase for sustainable long-term profitable
growth.

Focus on the vectors for profitable top line growth.

In quarterly earnings conference calls, we outline our
four vectors for achieving profitable top line growth: IQ
7™
regional expansion, high-power and high-
performance products, ACMs, and Ensemble™ Solar and
Storage technology.

As stated before, the IQ 7 transition is almost complete.
Component shortages
limited our ability to meet
customers demand and we expect to alleviate these
shortages in the second half of 2019, allowing us to
unlock this vector.

panels, much like the IQ 7+™ and IQ 7X™ which cater to
325-400W DC panels. We have started sampling the IQ
7A product in limited quantities to one of our lead
customers.

through

improved

ACMs represent the third vector as part of our strategy
to achieve profitable top line growth. Approximately 420
different installers have used Enphase Energized™ ACMs.
This plug and play solution allows installers to be more
competitive
reduced
installation time, faster inspection and training. We
completed our acquisition of SunPower’s microinverter
business in August 2018 and began volume shipments of
our IQ 7XS™ in Q4’18, with a continuing ramp in 2019.
SunPower joins other leading module manufacturers
such as Solaria, LONGi, Panasonic, and LG in developing
Enphase Energized™ ACMs and we are excited about
strengthening these partnerships in 2019.

logistics,

Ensemble™ Solar and Storage technology represents a
complete system that provides homeowners with new
levels of choice and energy
independence. With
improved business processes as outlined above and a
high-quality robust solution for customers, we expect to
release Ensemble grid-agnostic products in a phased
manner starting in Q4’19. 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. Despite the delay, we are confident the
additional work towards releasing a complete system will
be appreciated by our customers in the long run.

FINAL THOUGHTS
The
last two years of extraordinary work by our
employees, with strong support from our customers,
partners and shareholders has enabled us to build a solid
financial foundation. This allows us to focus on building
amazing products to provide outstanding customer
experience which will drive profitable growth in the
years to come.

To be continued.

The second vector involves introducing high-power
products, including IQ 7A™, which cater to 375-450W DC

Badri Kothandaraman

ENPHASE ENERGY, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(In thousands, except per share data)
(Unaudited)

December 31,
2018

Three Months Ended
September 30,
2018

Year Ended

December 31,
2017

December 31,
2018

December 31,
2017

Gross profit (GAAP)

Stock-based compensation

Gross profit (Non-GAAP)

Gross margin (GAAP)

Stock-based compensation

Gross margin (Non-GAAP)

Operating expenses (GAAP)

Stock-based compensation (1)
Restructuring and asset impairment charges
Reserve for non-recurring legal matter
Acquisition related expenses and amortization

Operating expenses (Non-GAAP)

(1) Includes stock-based compensation as follows:

Research and development
Sales and marketing
General and administrative

Total

Income (loss) from operations (GAAP)

Stock-based compensation
Restructuring and asset impairment charges
Reserve for non-recurring legal matter
Acquisition related expenses and amortization

Income (loss) from operations (Non-GAAP)

Net income (loss) (GAAP)

Stock-based compensation
Restructuring and asset impairment charges
Reserve for non-recurring legal matter
Acquisition related expenses and amortization
Non-cash interest expense
Net income (loss) (Non-GAAP)

Net income (loss) per share, basic (GAAP)

Stock-based compensation
Restructuring and asset impairment charges
Reserve for non-recurring legal matter
Acquisition related expenses and amortization
Non-cash interest expense

Net income (loss) per share, basic (Non-GAAP)

Shares used in basic per share calculation GAAP and Non-
GAAP

Net income (loss) per share, diluted (GAAP)

Net income (loss) per share, diluted (Non-GAAP) (2)

28,165
126
28,291

25,264
330
25,594

18,989
275
19,264

94,445
1,071
95,516

56,043
1,072
57,115

30.5 %
0.2 %
30.7 %

23,162
(1,395 )
(1,540 )
—
(501 )
19,726

295
565
535
1,395

5,003
1,521
1,540
—
501
8,565

709
1,521
1,540
—
501
821
5,092

0.01
0.01
0.01
—
0.01
0.01
0.05

106,638

0.01
0.01
0.01
—
—
0.01
—
0.04

32.4 %
0.4 %
32.8 %

25,638
(3,721 )
(2,588 )
—
(710 )
18,619

878
1,151
1,692
3,721

(374 ) $
4,051
2,588
—
710
6,975

(3,470 ) $
4,051
2,588
—
710
747
4,626

(0.03 ) $
0.04
0.02
—
0.01
0.01
0.05

23.8 %
0.4 %
24.2 %

21,122
(1,174 )
(1,991 )
—
—
17,957

579
268
327
1,174

(2,133 ) $
1,449
1,991
—
—
1,307

(2,940 ) $
1,449
1,991
—
—
183
683

(0.03 ) $
0.02
0.02
—
—
—
0.01

29.9 %
0.3 %
30.2 %

92,849
(10,361 )
(4,128 )
(1,765 )
(1,614 )
74,981

2,940
3,074
4,347
10,361

1,596
11,432
4,128
1,765
1,614
20,535

(11,627 ) $
11,432
4,128
1,765
1,614
2,701
10,013

(0.12 ) $
0.11
0.04
0.02
0.02
0.03
0.10

19.6 %
0.4 %
20.0 %

95,421
(5,655 )
(16,918 )
—
—
72,848

2,573
1,157
1,925
5,655

(39,378 )
6,727
16,918
—
—
(15,733 )

(45,192 )
6,727
16,918
—
—
1,017
(20,530 )

(0.54 )
0.08
0.20
—
—
0.01
(0.25 )

102,798

85,689

99,619

82,939

(0.03 ) $
0.03
0.02
—
0.01
0.01
—
0.04

(0.03 ) $
0.02
0.02
—
—
—
—
0.01

(0.12 ) $
0.11
0.04
0.02
0.02
0.02
0.01
0.10

(0.54 )
0.08
0.20
—
—
0.01
—
(0.25 )

Shares used in diluted per share calculation GAAP
Shares used in diluted per share calculation Non-GAAP

113,888
125,589

102,798
110,900

85,689
95,620

99,619
111,696

82,939
82,939

(2)

Calculation of non-GAAP diluted net income per share for the three months and year ended December 31, 2018 excludes convertible note interest expense, net
of tax of $0.5 million and $0.7 million, respectively, from non-GAAP net income.

Enphase Energy Management System

IQ Microinverter

IQ Combiner

IQ Microinverter

IQ Combiner

AC Battery

Enlighten™ mobile app

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)

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

Commission File Number: 001-35480

Enphase Energy, Inc.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

20-4645388
(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:
Common Stock, par value $0.00001 per share

Name of each exchange on which registered
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

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

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

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 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

Non-accelerated filer

Emerging growth company

Accelerated filer

Smaller reporting 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

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

Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures

PART I

PART II

Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Consolidated Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders’ Equity (Deficit)
Notes to Consolidated Financial Statements
Selected Unaudited Quarterly Financial Information
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures

Item 9.
Item 9A.
Item 9B. Other Information

Item 10.
Item 11.
Item 12.
Item 13.
Item 14.

PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services

Item 15.
Item 16.

Exhibits, Financial Statement Schedules
Form 10-K Summary

PART IV

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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 –

•

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 –

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 –

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 –

•

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 –

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 –

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 –

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 –

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 –

•

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 –

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 –

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 –

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 –

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 –

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 –

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 –

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 –

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 –

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 –

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 –

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 –

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 –

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 –

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 –

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 –

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 –

•

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 –

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 –

•

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 –

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 –

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 –

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 –

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.

December 31,
2013

December 31,
2014

December 31,
2015

December 31,
2016

December 31,
2017

December 31,
2018

Enphase Energy, Inc.

Russell 2000 Index

Guggenheim Solar Index

100

225

104

117

132

116

– 36 –

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.

Consolidated Statement of Operations Data:

Net revenues

Cost of revenues

Gross profit

Operating expenses:

Research and development

Sales and marketing

General and administrative

Restructuring and other charges

Total operating expenses

Income (loss) from operations

Other income (expense), net:

Interest expense

Other income (expense)

Total other expense, net

Loss before income taxes

Benefit from (provision for) income taxes

Net loss attributable to common stockholders

Net loss per share attributable to common
stockholders, basic and diluted

Shares used in computing net loss per share
attributable to common stockholders, basic
and diluted

Years Ended December 31,

2018*

2017

2016

2015

2014

(in thousands, except per share data)

316,159

286,166

322,591

357,249

343,904

221,714

94,445

230,123

56,043

264,583

58,008

249,032

108,217

230,861

113,043

32,587

27,047

29,086

4,129

92,849

1,596

(9,635)

(2,190)

(11,825)

(10,229)

(1,398)

33,157

23,126

22,221

16,917

95,421

(39,378)

(7,936)

1,973

(5,963)

(45,341)

149

50,703

38,810

27,418

3,777

120,708

(62,700)

(2,773)

(514)

(3,287)

(65,987)

(1,475)

50,819

45,877

30,830

—

127,526

(19,309)

(501)

(893)

(1,394)

(20,703)

(1,379)

(11,627) $

(45,192) $

(67,462) $

(22,082) $

45,386

41,003

31,083

—

117,472

(4,429)

(1,863)

(994)

(2,857)

(7,286)

(766)

(8,052)

(0.12) $

(0.54) $

(1.34) $

(0.49) $

(0.19)

99,619

82,939

50,519

44,632

42,903

2018*

2017

2016

2015

2014

As of December 31,

(in thousands)

Consolidated Balance Sheet Data:

Cash and cash equivalents

106,237

$ 29,144

$ 17,764

$ 28,452

$ 42,032

Total assets

Warranty obligations

Debt

Total stockholders’ equity (deficit)

339,937

31,294

109,783

7,776

169,147

163,576

165,528

29,816

49,751

(9,126)

31,414

33,900

1,300

30,547

17,000

41,449

152,192

33,940

—

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 –

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 –

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 –

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 –

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):

Net revenues

Cost of revenues

Gross profit

Operating expenses:

Research and development

Sales and marketing

General and administrative

Restructuring charges

Total operating expenses

Income (loss) from operations

Other expense, net

Loss before income taxes

Income tax benefit (provision)

Net loss

Years Ended December 31,

2018*

2017

2016

316,159

286,166

221,714

94,445

230,123

56,043

32,587

27,047

29,086

4,129

92,849

1,596

(11,825)

(10,229)

(1,398)

33,157

23,126

22,221

16,917

95,421

(39,378)

(5,963)

(45,341)

149

322,591

264,583

58,008

50,703

38,810

27,418

3,777

120,708

(62,700)

(3,287)

(65,987)

(1,475)

(11,627) $

(45,192) $

(67,462)

– 41 –

Comparison of 2018, 2017 and 2016

Net Revenues

Years Ended
December 31,

Change in

Years Ended
December 31,

Change in

2018*

2017

2016

(In thousands, except percentages)

Net revenues

$ 316,159

$ 286,166

29,993

10 % $ 286,166

$ 322,591

$ (36,425)

(11) %

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

2016

(In thousands, except percentages)

Cost of revenues

$ 221,714

$ 230,123

$ (8,409)

(4)% $ 230,123

$ 264,583

$ (34,460)

Gross profit

Gross margin

94,445

56,043

38,402

69 %

56,043

58,008

(1,965)

29.9%

19.6%

18.0%

(13)%

(3)%

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 –

Research and Development

Years Ended
December 31,

Change in

Years Ended
December 31,

Change in

2018

2017

2016

(In thousands, except percentages)

Research and
development

Percentage of net
revenues

$ 32,587

$ 33,157

(570)

(2)% $ 33,157

$ 50,703

$ (17,546)

(35)%

10%

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

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

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 –

General and Administrative

Years Ended
December 31,

Change in

Years Ended
December 31,

Change in

2018

2017

2016

(In thousands, except percentages)

General and
administrative

Percentage of net
revenues

$ 29,086

$ 22,221

6,865

31 % $ 22,221

$ 27,418

(5,197)

(19)%

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

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

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 –

Other Income (Expense), Net

Years Ended
December 31,

Change in

Years Ended
December 31,

Change in

2018

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

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%

(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 –

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) $

Net cash used in investing activities

Net cash provided by financing activities

Cash Flows from Operating Activities

(19,151)

80,614

(4,121)

43,297

(32,953)

(11,795)

34,375

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 –

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 –

Contractual Obligations

The following table summarizes our outstanding contractual obligations as of December 31, 2018:

Operating leases
Term loans (1)
Estimated interest and fees related to
term loans (1)
Convertible Note due 2023 principal and
interest
Purchase obligations (2)
Total

Payments Due by Period

Total

Less Than 1
Year

2-3 Years

4-5 Years

(in thousands)

More Than 5
Years

13,631

3,284

6,340

2,755

1,252

41,524

25,317

16,207

5,965

4,445

78,000

41,104

2,600

41,104

1,520

5,200

—

70,200

—

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 –

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 –

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 –

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 Policies” of 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 –

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 –

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

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Comprehensive Loss
Consolidated Statements of Cash Flows

Consolidated Statements of Stockholders’ Equity (Deficit)

Notes to Consolidated Financial Statements

Selected Unaudited Quarterly Financial Information

Page
54

– 53 –

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 –

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 –

ENPHASE ENERGY, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

Current assets:

Cash and cash equivalents

ASSETS

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

Inventory

Prepaid expenses and other assets

Total current assets

Property and equipment, net

Intangible assets, net

Goodwill

Other assets

Total assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

Accrued liabilities

Deferred revenues, current

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

Debt, current

Total current liabilities

Long-term liabilities:

Deferred revenues, noncurrent

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

Other liabilities

Debt, noncurrent

Total liabilities

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

Additional paid-in capital

Accumulated deficit

Accumulated other comprehensive income (loss)

Total stockholders’ equity (deficit)

Total liabilities and stockholders’ equity (deficit)

See Notes to Consolidated Financial Statements.

– 56 –

December 31,

2018

2017

106,237

29,144

78,938

16,267

20,860

222,302

20,998

35,306

24,783

36,548

65,346

25,999

9,957

130,446

26,483

515

3,664

8,039

339,937

169,147

48,794

29,010

33,119

8,083

28,155

147,161

28,747

22,447

15,691

7,427

17,429

91,741

76,911

29,941

23,211

3,250

81,628

22,389

1,880

32,322

332,161

178,273

—

353,335

(346,302)

742

7,776

—

287,256

(295,727)

(656)

(9,126)

339,937

169,147

ENPHASE ENERGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

Years Ended December 31,

2018

2017

2016

Net revenues
Cost of revenues
Gross profit
Operating expenses:

Research and development
Sales and marketing
General and administrative
Restructuring charges

Total operating expenses

Income (loss) from operations
Other expense, net

Interest expense
Other income (expense)

Total other expense, net

Loss before income taxes
Income tax benefit (provision)
Net loss
Net loss per share:

Basic and diluted

Shares used in per share calculation:

Basic and diluted

316,159
221,714
94,445

286,166
230,123
56,043

32,587
27,047
29,086
4,129
92,849
1,596

(9,635)
(2,190)
(11,825)
(10,229)
(1,398)
(11,627) $

33,157
23,126
22,221
16,917
95,421
(39,378)

(7,936)
1,973
(5,963)
(45,341)
149
(45,192) $

322,591
264,583
58,008

50,703
38,810
27,418
3,777
120,708
(62,700)

(2,773)
(514)
(3,287)
(65,987)
(1,475)
(67,462)

(0.12) $

(0.54) $

(1.34)

99,619

82,939

50,519

See Notes to Consolidated Financial Statements.

– 57 –

ENPHASE ENERGY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

Net loss

Other comprehensive income (loss):

Foreign currency translation adjustments

Comprehensive loss

Years Ended December 31,

2018

2017

2016

(11,627) $

(45,192) $

(67,462)

1,398

(364)

(82)

(10,229) $

(45,556) $

(67,544)

See Notes to Consolidated Financial Statements.

– 58 –

ENPHASE ENERGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Cash flows from operating activities:

Net loss

Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:

Years Ended December 31,

2018

2017

2016

(11,627) $

(45,192) $

(67,462)

Depreciation and amortization

Provision for doubtful accounts

Asset impairment

Gain on business divestiture

Amortization of debt issuance costs

Stock-based compensation

Deferred income tax expense (benefit)

Changes in operating assets and liabilities:

Accounts receivable

Inventory

Prepaid expenses and other assets

Intangible assets

Accounts payable, accrued and other liabilities

Warranty obligations

Deferred revenues

Net cash provided by (used in) operating activities

Cash flows from investing activities:

Purchases of property and equipment

Purchases of intangible assets

Business divestitures

Acquisition

Net cash used in investing activities

Cash flows from financing activities:

Proceeds from issuance of common stock, net of issuance costs

Proceeds from debt, net of issuance costs

Proceeds from borrowings under revolving credit facility

Principal payments on debt

Payments under revolving credit facility

Proceeds from issuance of common stock under employee stock plans

Net cash provided by financing activities

Effect of exchange rate changes on cash

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents—Beginning of period

Cash and cash equivalents—End of period

Supplemental cash flow disclosure:

Cash paid for interest

Cash paid for income taxes

Supplemental disclosures of non-cash investing and financing activities:

Acquisition funded by issuance of common stock

Offering and loan costs included in accrued liabilities

Purchases of fixed assets included in accounts payable

9,667

711

1,601

—

2,701

11,432

123

(13,515)

9,732

(3,130)

(10,000)

23,082

1,478

(6,123)

16,132

9,004

476

1,681

—

1,673

6,727

(1,394)

(4,803)

5,961

(1,227)

—

(5,078)

(1,598)

5,328

(28,442)

10,638

3,097

3,190

(640)

145

10,326

651

(18,017)

8,840

(4,759)

—

8,897

867

11,274

(32,953)

(4,151)

(4,121)

(12,167)

—

(15,000)

(19,151)

19,766

68,024

—

(9,976)

—

2,800

80,614

(502)

77,093

29,144

106,237

6,343

775

19,219

— $

895

—

(678)

1,050

—

(4,121)

(11,795)

26,425

26,442

—

(10,100)

530

43,297

646

11,380

17,764

29,144

5,816

909

— $

551

16,142

23,989

10,000

—

(16,900)

1,144

34,375

(315)

(10,688)

28,452

17,764

2,704

1,146

—

518

700

See Notes to Consolidated Financial Statements.

– 59 –

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–

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

Enphase Energy, Inc. (the “Company”) is a global energy technology company, delivering smart, easy-to-use
solutions that connect solar generation, storage and communications management on one intelligent platform. The
Company revolutionized solar with its microinverter technology and produce the world’s only truly integrated solar-
plus-storage solution.

Basis of Presentation and Consolidation

The accompanying consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States (“U.S. GAAP”). The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with U.S. 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. 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.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

The Company generates revenue from sales of its 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, original equipment manufacturers (“OEMs”) and strategic partners.

On January 1, 2018, the Company 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 the Company
accounts for revenue related to its Envoy™ communications device and related Enphase Enlighten Software™, or
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 the Company’s
customers in an amount that reflects the consideration that is expected to be received in exchange for those goods
or services. The Company generates all of its revenues from contracts with its customers. A description of principal
activities from which the Company generates revenues follows.

•

Products Delivered at a Point in Time. The Company sells its products to customers in accordance with
the terms of the related customer contracts. The Company generates revenues from sales of its 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 the Company recognizes revenue for
these products when the Company transfers control of the product to the customer, which is generally
upon shipment.

– 61 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

•

Products Delivered Over Time. The sale of an Envoy communications gateway includes the Company’s
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.
The Company also sells certain communication accessories that are delivered over time. The revenue
from these products is recognized over the related service period.

The Company previously sold its Envoy communications device to certain customers under a long-term
financing arrangement. Under this financing arrangement, the Company nets the unbilled receivables against
deferred revenue.

The Company records certain contra revenue promotions as variable consideration and recognizes these

promotions at the time the related revenue is recorded.

The Company records upfront contract acquisition costs, such as sales commissions, to be capitalized and

See Note 3. “Revenue Recognition,” for additional information related to revenue recognition.

Cost of Revenues

The Company includes the following in cost of revenues: product costs, warranty, manufacturing personnel

and logistics costs, freight costs, inventory write-downs, hosting services costs related to the Company’s Enlighten
service offering, and depreciation and amortization of manufacturing test equipment. A description of principal
activities from which the Company recognizes cost of revenue is as follows.

•

Products Delivered at a Point in Time. Cost of revenue from these products is recognized when the
Company transfers control of the product to the customer, which is generally upon shipment.

Products Delivered Over Time. Cost of revenue from these products is recognized over the related
service period.

Cash and Cash Equivalents

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 deposits and money market accounts.

Fair Value of Financial Instruments

The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, accounts payable

and accrued liabilities approximate fair value because of the short maturity of those instruments.

Accounts Receivables and Contract Assets

– 62 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Allowance for Doubtful Accounts

The Company maintains allowances for doubtful accounts for uncollectible accounts receivable. Management

estimates anticipated losses from doubtful accounts based on days past due, collection history and the financial
health of customers. The following table sets forth activities in the allowance for doubtful accounts for the periods
indicated (in thousands):

Balance, at beginning of year

Net charges to expenses

Write-offs, net of recoveries

Balance, at end of year

Inventory

December 31,

2018

2017

2016

2,378

2,921

711

(951)

476

(1,019)

2,138

2,378

1,808

3,097

(1,984)

2,921

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. The Company determines cost on a first-in first-out basis. 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.

Long-Lived Assets

Property and equipment are stated at cost less accumulated depreciation. Cost includes amounts paid to
acquire or construct the asset as well as any expenditure that substantially adds to the value of or significantly
extends the useful life of an existing asset. Repair and maintenance costs are expensed as incurred. Depreciation
and amortization are computed using the straight-line method over the estimated useful lives of the assets, which
range from 3 to 10 years. Leasehold improvements are amortized over the shorter of the lease term or expected
useful life of the improvements.

Internally used software, whether purchased or developed, is capitalized at cost and amortized on a straight-
line basis over its estimated useful life. Costs associated with internally developed software are expensed until the
point at which the project has reached the development stage. Subsequent additions, modifications or upgrades to
internal-use software are capitalized only to the extent that they provide additional functionality. Software
maintenance and training costs are expensed in the period in which they are incurred. The capitalization of software
requires judgment in determining when a project has reached the development stage and the period over which the
Company expects to benefit from the use of that software.

Property, plant and equipment, including capitalized software costs, are reviewed for impairment whenever

events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be
recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated
undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The
amount of the impairment loss to be recorded is calculated by the excess of the asset’s carrying value over its fair
value. Fair value is generally determined using a discounted cash flow analysis. The Company recorded asset
impairment charges for specific assets that were no longer in use of approximately $1.6 million, $0.8 million and
$2.6 million for the years ended 2018, 2017 and 2016, respectively. The fair value of the remaining assets is in
excess of the carrying value.

– 63 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 the Company 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 the Company 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.

Goodwill

Goodwill results from the purchase consideration paid in excess of the fair value of the net assets recorded in

connection with a business acquisition. Goodwill is not amortized but is assessed for potential impairment at least
annually during the fourth quarter of each fiscal year or between annual tests if an event occurs or circumstances
change that would indicate the carrying amount may be impaired. Goodwill is tested at the reporting unit level,
which the Company has determined to be the same as the entity as a whole (entity level). Once goodwill has been
assigned to a reporting unit, it is no longer associated with a particular acquisition; therefore, all of the activities
within a reporting unit, whether acquired or organically grown, are available to support the goodwill value. Based on
management’s goodwill impairment tests, there was no impairment of goodwill in any of the years presented.

Intangible Assets

Intangible assets include patents and other purchased intangible assets. Intangible assets with finite live are

amortized on a straight-line basis, with estimated useful lives ranging from 3 to 9 years. Indefinite-lived intangible
assets are tested for impairment annually and are also tested for impairment between annual tests if an event
occurs or circumstances change that would indicate that the carrying amount may be impaired. Intangible assets
with finite live are tested for impairment whenever events or circumstances indicate that the carrying amount of an
asset (asset group) may not be recoverable. An impairment loss is recognized when the carrying amount of an
asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The amount of
the impairment loss to be recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair
value is generally determined using a discounted cash flow analysis. There was no impairment of intangible assets
in any of the years presented.

Contract Liabilities

Contract liabilities are recorded as deferred revenue on the accompanying 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.

Warranty Obligations

Microinverters Sold Through December 31, 2013

The Company’s 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, the Company employs a consistent, systematic and rational
methodology to assess the adequacy of its 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 the Company to estimate its 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).

– 64 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Estimated Failure Rates — The Company’s 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, the Company’s quality engineers use a combination of industry standard Mean
Time Between Failure (“MTBF”) estimates for individual components contained in its microinverters, third party data
collected on similar equipment deployed in outdoor environments similar to those in which the Company’s
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, the
Company continues to monitor product performance through its Enlighten monitoring platform. It typically takes
three to nine months between the date of sale and date of end-user installation. Consequently, the Company’s
ability to monitor actual failures of units sold similarly lags by three to nine months. When a microinverter fails and is
returned, the Company performs diagnostic root cause failure analysis to understand and isolate the underlying
mechanism(s) causing the failure. The Company then uses 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 the Company’s microinverters have
been sold to end users for residential applications, the Company believes that warranty claim rates will be affected
by changes over time in residential home ownership because the Company expects 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 the Company’s 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 the Company’s 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 the Company to third party freight carriers. The Company has 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 the Company’s 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, the Company also compares actual warranty results to expected

results and evaluates any significant differences. Management 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 the Company’s estimates in future periods, changes to these estimates may be
required, resulting in increases or decreases in the Company’s warranty obligations. Such increases or decreases
could be material.

Fair Value Option for Microinverters Sold Since January 1, 2014

The Company’s warranty obligations related to microinverters sold since January 1, 2014 provide the

Company the right, but not the requirement, to assign its warranty obligations to a third-party. Under ASC 825,
“Financial Instruments” (also referred to as “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. The Company 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.

– 65 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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 the Company’s credit-adjusted risk-free rate. See
Note 9. “Fair Value Measurements,” for additional information.

Warranty obligations initially recorded at fair value at the time of sale will be subsequently re-measured to fair
value at each reporting date. In addition, the fair value of the liability will be accreted over the corresponding term of
the warranty of up to 25 years using the interest method.

Warranty for Other Products

The Company offers a 5 year warranty for its Envoy communications gateway and a 10 year warranty on its
AC Battery storage solution. The warranties provide the Company with the right, but not the obligation, to assign its
warranty obligations to a third-party. As such, warranties for Envoy and AC Battery storage solution products are
accounted for under the fair value method of accounting.

Research and Development Costs

The Company expenses research and development costs as incurred.

Stock-Based Compensation

Share-based payments are required to be recognized in the Company’s consolidated statements of
operations based on their fair values and the estimated number of shares expected to vest. The Company
measures stock-based compensation expense for all share-based payment awards, including stock options made
to employees and directors, based on the estimated fair values on the date of the grant. The fair value of stock
options granted is estimated using the Black-Scholes option valuation model. The fair value of restricted stock units
granted is determined based on the price of the Company’s common stock on the date of grant. The fair value of
non-market based performance stock units granted is determined based on the date of grant or when achievement
of performance is probable. The fair value of market based performance stock units granted is determined using a
Monte Carlo model based on the date of grant or when achievement of performance is probable.

Stock-based compensation for stock options and restricted stock units (“RSUs”) is recognized on a straight-

line basis over the requisite service period. Stock-based compensation for performance stock units (“PSUs”) without
market conditions is recognized when the performance condition is probable of being achieved, and then on a
graded basis over the requisite service period. Stock-based compensation for PSUs with market conditions is
recognized on a straight-line basis over the requisite service period. Additionally, the Company estimates its
forfeiture rate annually based on historical experience and revise the estimates of forfeiture in subsequent periods if
actual forfeitures differ from those estimates.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive

income (loss). Other comprehensive income (loss) refers to gains and losses that are recorded as an element of
stockholders’ equity but are excluded from net income (loss). The Company’s other comprehensive income (loss)
consists of foreign currency translation adjustments for all periods presented.

Income Taxes

The Company records income taxes using the asset and liability method, which requires the recognition of

deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax
bases of assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. In
estimating future tax consequences, generally all expected future events other than enactments or changes in the
tax law or rates are considered. Valuation allowances are provided when necessary to reduce deferred tax assets to
the amount expected to be realized.

– 66 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company operates in various tax jurisdictions and is subject to audit by various tax authorities. The
Company follows accounting for uncertainty in income taxes which requires that the tax effects of a position be
recognized only if it is “more likely than not” to be sustained based solely on its technical merits as of the reporting
date. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which
may require periodic adjustments and which may not accurately anticipate actual outcomes.

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No.

(“ASU”) 2014-09, “Revenue from Contracts with Customers,” amending revenue recognition guidance and requiring
more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and
uncertainty of revenue and cash flows arising from contracts with customers. The amended guidance, herein
referred to as ASC 606 or Topic 606. The Company has adopted Topic 606 effective January 1, 2018, using the
modified retrospective transition method. The Company recognized the cumulative effect of applying the new
revenue standard as an adjustment to the opening balance of retained earnings on January 1, 2018. The
comparative information has not been restated and continues to be reported under the accounting standards in
effect for the period presented. See Note 2. “Summary of Significant Accounting Policies,” and Note 3. “Revenue
Recognition,” for additional accounting policy and transition disclosures.

In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and

Financial Liabilities,” which amends certain aspects of recognition, measurement, presentation, and disclosure of
financial instruments. Changes to the current guidance include the accounting for equity investments, the
presentation and disclosure requirements for financial instruments, and the assessment of valuation allowance on
deferred tax assets related to available-for-sale securities. In addition, ASU 2016-01 establishes an incremental
recognition and disclosure requirement related to the presentation of fair value changes of financial liabilities for
which the fair value option has been elected. Under this guidance, an entity would be required to separately present
in other comprehensive income the portion of the total fair value change attributable to instrument-specific credit risk
as opposed to reflecting the entire amount in earnings. The Company’ adoption of ASU 2016-01 in the first quarter
of 2018 did not have a material impact on the consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments.” ASU 2016-15 provides amendments that address eight specific cash
flow classification issues for which there exists diversity in practice: Debt prepayment or debt extinguishment costs;
settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are
insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after
a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of
corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from
equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows
and application of the predominance principle. The Company’s retrospective adoption of ASU 2016-15 in the first
quarter of 2018 did not have a material effect on the Company’s consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows,” which requires companies to

include amounts generally described as restricted cash and restricted cash equivalents in cash and cash
equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash
flows. The Company’s retrospective adoption of ASU 2016-18 in the first quarter of 2018 did not have a material
impact on the consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation.” ASU 2017-09 was
issued to provide clarity and reduce both 1) diversity in practice and 2) cost and complexity when applying the
guidance in Topic 718 to a change in the terms or conditions of a share-based payment award. ASU 2017-09
provides guidance about which changes to the terms or conditions of a share-based payment award require an
entity to apply modification accounting under Topic 718. The standard, which was adopted in the first quarter
of 2018, did not have a material impact on the consolidated financial statements.

– 67 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recently Issued Accounting Pronouncements Not Yet Effective

In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”). The guidance will require

lessees to recognize all leases, with certain exceptions, on their balance sheets, whether operating or financing,
while continuing to recognize the expenses on their income statements in a manner similar to current practice. The
guidance states that a lessee would recognize a lease liability for the obligation to make lease payments and a
right-to-use asset for the right to use the underlying asset for the lease term. The guidance will be effective for the
Company beginning January 1, 2019 and early adoption is permitted. The Company will adopt ASU 2016-02 on
January 1, 2019 and intends to elect the available practical expedients upon adoption. Upon adoption, the
Company expects the consolidated balance sheet to include a right of use asset and a corresponding lease liability
related to substantially all of the Company’s lease arrangements. We are currently evaluating the impact
ASU 2016-02 will have on the Company’s consolidated financial statements and related disclosures.

In June 2018, the FASB issued ASU 2018-07, “Compensation - Stock Compensation: Improvements to Non-
employee Share-Based Payment Accounting.” ASU 2018-07 was issued to provide to provide guidance on share-
based payments granted to non-employees in exchange for goods or services used or consumed in an entity’s own
operations and supersedes the guidance in ASC 505-50, “Equity-Based Payments to Non-Employees.”
ASU 2018-07 aligns much of the guidance on measuring and classifying non-employee awards with that of awards
to employees, specifically 1) equity-classified non-employee share-based payment awards are no longer measured
at the earlier of the date at which a commitment for performance; 2) aligns accounting for non-employee share-
based payment awards with performance conditions with accounting for employee share-based payment awards
under Topic 718 by requiring entities to consider the probability of satisfying performance conditions; 3) eliminates
the reassessment of classification upon vesting and instead, requires the non-employee share-based payment
awards to continue to be subject to Topic 718 unless they are modified after the good has been delivered, the
service has been rendered, or any other conditions necessary to earn the right to benefit from the instruments have
been satisfied, and the non-employee is no longer providing goods or services, consistent with the treatment of
employee awards; and 4) allows entities to make an award-by-award election to use either the expected term
(consistent with employee share-based payment awards) or the contractual term for non-employee awards. The
guidance is effective for annual periods beginning after December 15, 2018, and interim periods within those annual
periods. Early adoption is permitted, including in an interim period for which financial statements have not been
issued, but not before an entity adopts ASC 606. The Company adopted ASU 2018-07 on January 1, 2019 on a
modified retrospective basis and does not expect the adoption of ASU 2018-07 to have a material impact to
accumulated deficit upon adoption.

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 is currently evaluating the impact this update will have on its consolidated financial statements.

3. REVENUE RECOGNITION

On January 1, 2018, the Company adopted Topic 606 and applied the modified retrospective method to all

contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1,
2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under
the accounting standards in effect in the prior period. The Company recorded a net reduction to opening equity of
$38.9 million on January 1, 2018 for the cumulative effect of adopting Topic 606. The impact to net revenues from
the adoption of Topic 606 for the year ended December 31, 2018 was a net increase of $2.3 million.

– 68 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in accounting policies as a result of adopting Topic 606 and nature of goods

The most significant impacts upon adoption of Topic 606 were how the Company accounts for revenue

related to its Envoy communications device and related Enlighten service and the timing of when certain sales
incentives are recognized. Under ASC 605, “Revenue Recognition,” the Company’s Envoy communications device
and Enlighten service were considered two units of accounting, and the portion of the consideration related to the
hardware was recognized at the time of sale with the remaining consideration deferred and recognized over the
estimated service period. Under ASC 606 the full consideration for these products represents a single performance
obligation and is deferred and recognized over the estimated service period. This treatment resulted in a gross
increase to deferred revenue of $77.5 million, an increase in deferred costs of $43.4 million and a net increase in
accumulated deficit of $34.1 million upon adoption of ASC 606.

The Company previously sold its Envoy communications device to certain customers under a long-term

financing arrangement. Under ASC 605, this arrangement resulted in the recording of both deferred revenue and
unbilled receivables on the Company’s consolidated balance sheets. The Company’s opening entries related to
ASC 606 included the netting of approximately $6.4 million of unbilled receivables against deferred revenue. Thus,
the $77.5 million increase to deferred revenue noted above was partially offset by a $6.4 million reclassification of
unbilled receivables to deferred revenue.

Under ASC 605 the Company recorded certain contra revenue promotions at the later of the date revenue

was recognized or the date at which the promotional offer was extended. Under ASC 606 all such contra revenue
programs are treated as variable consideration and recognized at the time the related revenue is recorded. This
change in timing resulted in an increase in accrued liabilities of approximately $5.6 million and an increase to
accumulated deficit of the same amount upon adoption of ASC 606. This change in timing is not expected to have a
material impact in subsequent periods.

Topic 606 requires 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, the
Company follows the Topic 606 practical expedient and expenses these costs when incurred. Commissions related
to the Company’s sale of monitoring hardware and service are capitalized and amortized over the period of the
associated revenue, which is 6.5 years. This treatment resulted in an increase in deferred costs of approximately
$0.8 million and a decrease in accumulated deficit of the same amount upon adoption of ASC 606.

Products Delivered at a Point in Time. The Company sells its products to customers in accordance with the
terms of the related customer contracts. The Company generates revenues from sales of its 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 in accordance with Topic 606, the Company recognizes revenue
for these products when the Company transfers control of the product to the customer, which is generally
upon shipment.

Products Delivered Over Time. The sale of an Envoy communications gateway includes the Company’s
Enlighten cloud-based monitoring service. Under Topic 606 the full consideration for these products
represents a single performance obligation and is deferred at the sale date and recognized ratably over the
estimated service period, which is 6.5 years.

The Company also sells certain communication accessories that are delivered over time. The revenue from

these products is recognized over the related service period, which is typically 5 or 12 years.

– 69 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Disaggregation of Revenue

The Company has one business activity, which is the design, manufacture and sale of solutions for the solar

photovoltaic (“PV”) industry. The following table provides information about disaggregated revenue by primary
geographical market and timing of revenue recognition for the Company’s single product line (in thousands):

Primary geographical markets:

United States

International

Total

Timing of revenue recognition:

Products delivered at a point in time

Products and services delivered over time

Total

Contract Balances

December 31,
2018

219,600

96,559

316,159

270,778

45,381

316,159

As of December 31, 2018, receivables, and contract assets and contract liabilities from contracts with

customers consist of the following (in thousands):

Receivables

Short-term contract assets (Prepaid expenses and other assets)

Long-term contract assets (Other assets)

Short-term contract liabilities (Deferred revenues)

Long-term contract liabilities (Deferred revenues)

December 31,
2018

78,938

13,516

34,148

33,119

76,911

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 year ended
December 31, 2018. Contract liabilities are recorded as deferred revenue on the accompanying 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) and contract assets (prepaid

expenses and other assets) during the period are as follows (in thousands):

Contract Liabilities

Balance on January 1, 2018

Revenue recognized

Increase due to billings

Balance as of December 31, 2018

Contract Assets

Balance on January 1, 2018

Amount recognized

Increase

Balance as of December 31, 2018

– 70 –

116,830

(45,381)

38,581

110,030

47,862

(14,964)

14,766

47,664

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Remaining Performance Obligations

The following table includes 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 (in thousands).

Years

2019

2020

2021

2022

2023

Thereafter

Total

December 31,
2018

33,119

26,303

20,124

15,084

9,282

6,118

110,030

Practical Expedients and Exemptions

The Company generally expenses sales commissions related to products delivered at a point in time when

the commissions are incurred because the amortization period would have been less than one year. The Company
records these costs as sales and marketing expense. The Company expenses shipping and handling costs as
incurred.

Impact of Adoption of Topic 606

In accordance with Topic 606, the disclosure of the impact of adoption to the Company’s consolidated

statements of operations and consolidated balance sheets was as follows (in thousands):

Net revenues

Cost of revenues

Gross profit

Operating expenses:

Research and development

Sales and marketing

General and administrative

Restructuring charges

Total operating expenses

Income (loss) from operations

Other expense, net

Interest expense

Other expense

Total other expense, net

Loss before income taxes

Income tax provision

Net loss

Net loss per share:

Basic and diluted

Shares used in per share calculation:

Basic and diluted

Year Ended December 31, 2018

As Reported

Adjustments

316,159

(2,251) $

221,714

94,445

32,587

27,047

29,086

4,129

92,849

1,596

(9,635)

(2,190)

(11,825)

(10,229)

(1,398)

(13)

(2,238)

—

(117)

—

(117)

(2,121)

—

(2,121)

—

Without
Adoption of
Topic 606

313,908

221,701

92,207

32,587

26,930

29,086

4,129

92,732

(525)

(9,635)

(2,190)

(11,825)

(12,350)

(1,398)

(11,627) $

(2,121) $

(13,748)

(0.12) $

(0.02) $

(0.14)

99,619

—

99,619

– 71 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

As Reported

Adjustments

20,860

(10,788) $

36,548

29,010

33,119

76,911

(346,302)

(28,766)

(4,257)

(20,800)

(50,044)

35,547

Without
Adoption of
Topic 606

10,072

7,782

24,753

12,319

26,867

(310,755)

Prepaid expenses and other

Other assets

Accrued liabilities

Deferred revenues, current

Deferred revenues, noncurrent

Accumulated deficit

INVENTORY

Inventory as of December 31, 2018 and 2017 consists of the following (in thousands):

Raw materials

Finished goods

Total inventory

December 31,

2018

2017

970

15,297

16,267

2,341

23,658

25,999

5. PROPERTY AND EQUIPMENT, NET

As of December 31, 2018 and 2017, property and equipment consist of the following (in thousands):

Equipment and machinery

Furniture and fixtures

Computer equipment

Capitalized software costs

Leasehold improvements

Construction in process

Total

Less accumulated depreciation and amortization

Property and equipment, net

Estimated Useful
Life (Years)

December 31,

2018

2017

3-10

5-10

3-5

3-10

43,566

41,148

2,239

2,958

12,114

8,482

3,536

72,895

(51,897)

20,998

2,188

2,627

11,749

8,537

4,672

70,921

(44,438)

26,483

Depreciation expense for property and equipment for the years ended December 31, 2018, 2017 and 2016

was $8.3 million, $8.6 million and $10.0 million, respectively.

As of December 31, 2018 and 2017, unamortized capitalized software costs were $0.7 million and

$1.1 million, respectively.

– 72 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. GOODWILL AND INTANGIBLE ASSETS

The following table presents the details of the Company’s goodwill and purchased intangible assets as of

December 31, 2018 and 2017 (in thousands):

Goodwill

3,664

21,119

— $

24,783

3,664

— $

3,664

December 31, 2018

December 31, 2017

Gross

Additions

Accumulated
Amortization

Net

Gross

Accumulated
Amortization

Net

Intangible assets:

Other indefinite-lived
intangibles

Intangible assets with finite
live:

Patents and licensed
technology

Developed technology

Customer relationships

286

— $

286

— $

286

1,665

—

(1,665)

—

1,665

(1,436)

—

13,100

23,100

(909)

(271)

12,191

22,829

—

229

—

515

Total purchased intangible
assets

1,951

36,200

(2,845) $

35,306

1,951

(1,436) $

In July 2014, the Company purchased certain patents related to system interconnection and photovoltaic AC

module construction. The patents were amortized over their legal life of 3 years. In October 2015, the Company
licensed certain technology related to application specific integrated circuits (“ASIC”) development for a 3 year
term, which is also its estimated useful life. As of December 31, 2018, these patents were fully amortized.

In August 2018, the Company acquired certain finite-lived intangible assets in its acquisition of SunPower
Corporation’s (“SunPower”) microinverter business pursuant to an Asset Purchase Agreement (“APA”), primarily
developed technology and customer relationships. See Note 20. “Acquisition,” for additional information related to
this acquisition.

Amortization expense related to finite-lived intangible assets for the years ended December 31, 2018, 2017
and 2016 was $1.4 million, $0.4 million and $0.7 million, respectively. Amortization expense of $1.4 million for the
year ended December 31, 2018 includes $0.3 million as a reduction to revenue, related to customer relationships.

7. ACCRUED LIABILITIES

As of December 31, 2018 and 2017 accrued liabilities consists of the following (in thousands):

Salaries, commissions, incentive compensation and benefits

Customer rebates and sales incentives

Freight

Other

Total accrued liabilities

December 31,

2018

2017

4,107

8,527

7,286

9,090

3,608

8,988

3,853

5,998

29,010

22,447

– 73 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. WARRANTY OBLIGATIONS

The Company’s warranty activities during the years ended December 31, 2018, 2017 and 2016 were as

follows (in thousands):

Warranty obligations, beginning of period

Accruals for warranties issued during period

Changes in estimates

Settlements

Increase due to accretion expense

Other

Warranty obligations, end of period

Less current portion

Noncurrent

Years Ended December 31,

2018

2017

2016

29,816

31,414

30,547

3,040

6,515

(8,579)

1,989

(1,487)

31,294

(8,083)

3,797

(732)

(7,037)

2,053

321

29,816

(7,427)

23,211

22,389

4,130

2,562

(8,523)

1,772

926

31,414

(8,596)

22,818

The Company sold approximately 1.0 million first and second generation microinverters from 2008 through

mid-2012. The Company has sold approximately 3.9 million third generation microinverters since mid-2012 through
mid-2015. The Company has sold approximately 10.7 million of its fourth generation microinverters, which were
introduced in mid-2013 and are still being sold. The Company began selling its IQ series microinverters in 2017,
sales of which totaled approximately 3.5 million units.

Changes in Estimates

On a quarterly basis, the Company uses the best and most complete underlying information available,

following a consistent, systematic and rational methodology to determine its warranty obligations. The Company
considers all available evidence to assess the reasonableness of all key assumptions underlying its estimated
warranty obligations for each generation of microinverter. The changes in estimates discussed below resulted from
consideration of new or additional information becoming available and subsequent developments. Changes in
estimates included in the table above were comprised of the following:

2018

In 2018, the Company recorded a $0.9 million increase to warranty expense related to cost increases
primarily for backwards compatibility cables, supply constrained inventory components as well as tariffs. The
Company also recorded additional warranty expense of $3.3 million based on continuing analysis of field
performance data and diagnostic root-cause failure analysis primarily relating to its second and third generation
products. In addition, the Company recorded an increase of $2.1 million related to increased estimated claim rates
and an increase to warranty expense of $0.2 million for labor reimbursement costs expected to be paid to third party
installers performing replacement services. These increases were partially offset by a $1.5 million reduction to
warranty expense, presented as “Other” in the table above, related to changes in the discount rates for fair value
accounting.

2017

In 2017, primarily in the fourth quarter, the Company recorded the impact of further product-cost reduction

initiatives for its sixth generation microinverters, which are backwards compatible with previous microinverter
generations and will be used to fulfill future warranty obligations for all microinverter generations in the field. This
resulted in a $2.2 million decrease to warranty expense related to estimated future replacement costs. The
Company also recorded, primarily in the third quarter, a decrease to warranty expense of $1.9 million for labor
reimbursement costs expected to be paid to third party installers performing replacement services for its
second generation product as a result of a change in its reimbursement policy. In addition, the Company recorded
additional warranty expense of $3.9 million based on continuing analysis of field performance data and diagnostic
root-cause failure analysis primarily relating to its second generation product.

– 74 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2016

In 2016, primarily in the fourth quarter, the Company recorded the impact of product-cost reduction initiatives
for its sixth generation microinverters, which are backwards compatible with previous microinverter generations and
will be used to fulfill future warranty obligations for all microinverter generations in the field. This resulted in a
$2.1 million decrease to warranty expense related to estimated future replacement costs. This decrease was offset
by an increase to warranty expense of $1.5 million for an increase in labor reimbursement costs expected to be paid
to third party installers performing replacement services for its second generation product. In addition, the
Company recorded additional warranty expense of $3.0 million based on continuing analysis of field performance
data and diagnostic root-cause failure analysis primarily relating to its second generation product.

9. 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.

The following table presents the Company’s liabilities that were measured at fair value on a recurring basis

and its categorization within the fair value hierarchy at December 31, 2018 and 2017 (in thousands):

Warranty obligations

Third party option to purchase receivables at a discount

Fair Value
Hierarchy

Level 3

Years Ended December 31,

2018

2017

11,757

—

9,791

700

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.

– 75 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 (in thousands):

Balance at beginning of period

Accruals for warranties issued during period

Changes in estimates

Settlements

Increase due to accretion expense

Other

Balance at end of period

Years Ended December 31,

2018

2017

2016

9,791

10,332

3,040

2,455

(4,030)

1,989

(1,488)

3,591

(4,551)

(1,956)

2,053

322

6,182

4,091

(1,616)

(1,023)

1,772

926

11,757

9,791

10,332

Third Party Option to Purchase Receivables at a Discount

The Company entered into an agreement with a third party in the fourth quarter of 2017 to sell certain current

and future receivables at a discount. The buyer had the option to purchase certain additional future receivables at
various fixed discounts. This option was valued using the discounted cash flow methodology based on the
counterparty credit-adjusted-risk-free rate and recorded as a liability. As of December 31, 2018, all purchases
relating to this option had been made, and the liability has been relieved. As of December 31, 2017, $0.7 million
relating to this option was recorded as a liability with corresponding offset to debt on the Company’s consolidated
balance sheets.

Quantitative and Qualitative Information about Level 3 Fair Value Measurements

As of December 31, 2018, the significant unobservable inputs used in the fair value measurement of the

Company’s liabilities designated as Level 3 are as follows:

Item Measured at Fair Value

Valuation Technique

Description of Significant Unobservable Input

Warranty obligations for
microinverters sold since
January 1, 2014

Discounted cash flows

Profit element and risk premium

Credit-adjusted risk-free rate

Percent Used
(Weighted-
Average)

16.25%

18.75%

As of December 31, 2017, the significant unobservable inputs used in the fair value measurement of the

Company’s liabilities designated as Level 3 are as follows:

Item Measured at Fair Value

Valuation Technique

Description of Significant Unobservable Input

Warranty obligations for
microinverters sold since
January 1, 2014

Third party option to
purchase receivables at a
discount

Discounted cash flows

Profit element and risk premium

Credit-adjusted risk-free rate

Discounted cash flows

Counter party credit-adjusted risk-free rate

Percent Used
(Weighted-
Average)

17%

– 76 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $0.1 million increase to the liability. Decreasing the profit element and risk
premium by 100 basis points would result in a $0.1 million reduction of the liability. Increasing the discount rate by
100 basis points would result in a $0.4 million reduction of the liability. Decreasing the discount rate by 100 basis
points would result in a $0.5 million increase to the liability.

10. RESTRUCTURING

Years Ended December 31,

2018

2017

2016

Redundancy and employee severance and benefit arrangements

2,228

2,827

Asset impairments

Consultants engaged in restructuring activities

Lease loss reserves

Gain on business divestiture

Total restructuring

2018 Plan

1,601

—

300

—

522

12,100

1,468

—

4,129

16,917

1,263

2,575

—

579

(640)

3,777

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 expects to complete this
restructuring in 2019.

The following table presents the details of the Company’s restructuring charges under the 2018 Plan for the

periods indicated (in thousands):

Redundancy and employee severance and benefit arrangements

Asset impairments

Lease loss reserves

Total restructuring

Year Ended
December 31,
2018

2,228

1,636

340

4,204

The following table provides information regarding changes in the Company’s 2018 Plan accrued

restructuring balance for the periods indicated (in thousands):

Charges

Cash payments

Non-cash settlement and other

Balance as of December 31, 2018

Redundancy
and Employee
Severance and
Benefits

Lease Loss
Reserves and
Contractual
Obligations

2,228

340

(1,336)

(61)

904

288

Total

2,568

(1,397)

1,192

– 77 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2016 Plan

In the third quarter of 2016, the Company began implementing restructuring actions (the “2016 Plan”) to lower

its operating expenses. The restructuring actions have included reductions in the Company’s global workforce, the
elimination of certain non-core projects, consolidation of office space at the Company’s corporate headquarters and
the engagement of management consultants to assist the Company in making organizational and structural
changes to improve operational efficiencies and reduce expenses. The Company substantially completed its
restructuring activities under the 2016 Plan in 2017.

The following table presents the details of the Company’s restructuring charges under the 2016 Plan for the

periods indicated (in thousands):

Years Ended December 31,

2018

2017

2016

Employee severance and benefit arrangements

Asset impairments

Consultants engaged in restructuring activities

Lease loss reserves and contract termination costs

Gain on business divestiture

Total restructuring

— $

2,827

(35)

—

(40)

—

522

12,100

1,468

—

(75) $

16,917

The following table provides information regarding the computation of the Company’s gain on business

divestiture included in restructuring and other (in thousands) for the year ended December 31, 2016:

Consideration

Identifiable assets

Contingent consideration

Gain on business divestiture

The following table provides information regarding changes in the Company’s 2016 Plan accrued

restructuring balance for the periods indicated (in thousands):

1,263

2,575

—

579

(640)

3,777

1,375

(979)

244

640

Balance as of December 31, 2016

Charges

Cash payments

Balance as of December 31, 2017

Charges and adjustments

Cash payments and receipts, net

Balance as of December 31, 2018

Employee
Severance and
Benefits

Lease Loss
Reserves and
Contractual
Obligations

198

484

2,827

(2,796)

229

—

(229)

13,568

(12,958)

1,094

(40)

537

Total

682

16,395

(15,754)

1,323

(40)

308

— $

1,591

– 78 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. DEBT

Long-term debt was comprised of the following at December 31, 2018 and 2017 (in thousands):

Convertible Notes due 2023

Less unamortized issuance costs

Carrying amount of Convertible Notes due 2023

Term loan

Less unamortized discount and issuance costs

Carrying amount of term loan

Sale of long-term financing receivable recorded as debt

Less value of future purchase option

Carrying amount of sale of long-term financing receivable recorded as debt

Total carrying amount of debt

Less current portion term loan

Less current portion of long-term financing receivable recorded as debt

Long-term debt

Convertible Notes

December 31,

2018

2017

65,000

(2,361)

62,639

41,524

(1,059)

40,465

6,679

—

6,679

109,783

(25,417)

(2,738)

81,628

—

50,000

(2,111)

47,889

2,562

(700)

1,862

49,751

(15,715)

(1,714)

32,322

In August 2018, the Company sold $60.0 million aggregate principal amount of convertible senior notes due

2023 (the “Convertible Notes”) in a private placement. Additionally, an individual who is a member of the Company’s
Board of Directors and a stockholder, Thurman John Rodgers, purchased $5.0 million aggregate principal amount of
convertible senior notes due 2023 (the “Affiliate Notes” and together with the Convertible Notes, the “Notes”) in a
concurrent private placement. The Company received net proceeds of $62.4 million, after deducting the
underwriters’ fees of approximately $2.0 million and other issuance costs of approximately $0.6 million.

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 Notes will mature on August 1, 2023,
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 are convertible, at a holder’s election, in multiples of $1,000 principal amount, into shares of the

Company’s common stock based on the applicable conversion rate. The initial conversion rate for the Notes is
180.0180 shares of common stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion
price of approximately $5.5600 per share). The conversion rate and the corresponding conversion price are subject
to adjustment upon the occurrence of certain events but will not be adjusted for any accrued and unpaid interest.
Holders of the Notes who convert their Notes in connection with a make-whole fundamental change (as defined in
the Indenture entered into in connection with the Convertible Notes) are, under certain circumstances, entitled to an
increase in the conversion rate. Additionally, in the event of a fundamental change, holders of the Notes may require
the Company to repurchase all or a portion of their Notes at a price equal to 100% of the principal amount of Notes,
plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchase date.
Holders may convert all or any portion of their Notes at their option at any time prior to the close of business on the
business day immediately preceding the maturity date, in multiples of $1,000 principal amount.

As of December 31, 2018, there were unamortized issuance costs and debt discounts of approximately

$2.4 million, which were recorded as a direct deduction from the Notes on the consolidated balance sheets.

– 79 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Term Loan

In July 2016, the Company entered into a Loan and Security Agreement (the “Original Term Loan Agreement”)
with lenders that are affiliates of Tennenbaum Capital Partners, LLC (the “Lenders” or “TCP”). Under the agreement,
the Lenders committed to advance a term loan in an aggregate principal amount of up to $25.0 million with a
maturity date of July 1, 2020. The Company borrowed the entire $25.0 million of term loan commitments on the loan
closing date. Monthly payments due through June 30, 2017 were interest only, followed by consecutive equal
monthly payments of principal plus accrued interest that were to begin on July 1, 2017 and continue through the
maturity date. The term loan provided for an interest rate per annum equal to the higher of (i) 10.25% or (ii) LIBOR
plus 9.5625%, subject to a 1.0% reduction if the Company achieves minimum levels of Revenue and EBITDA (each
as defined in the Original Term Loan Agreement) for the twelve-consecutive month period ending June 30, 2017 as
set forth in the Original Term Loan Agreement. In addition, the Company paid a commitment fee of 3.3% of the loan
amount upon closing and a closing fee of 10.0% of the loan amount is payable in four equal installments at each
anniversary of the closing date. The Company could elect to prepay the loan by incurring a prepayment fee between
1% and 3% of the principal amount of the term loan depending on the timing and circumstances of prepayment.

In February 2017, the Company entered into an Amended and Restated Loan and Security Agreement (the
“Loan Agreement”) that amended and restated the Original Term Loan Agreement. The Loan Agreement provides
for a $25.0 million secured term loan to the Company (the “New Term Loan”), which is in addition to the
$25.0 million secured term loan borrowed by the Company under the Original Term Loan Agreement (together with
the “New Term Loan” the “Term Loans”). The New Term Loan had the same July 1, 2020 maturity date that was
applicable to the Original Term Loan Agreement. The New Term Loan was fully drawn at closing, with approximately
$10.3 million of the proceeds used to repay existing combined principal and interest due under the Company’s
Revolver with Wells Fargo Bank N.A. (“Wells Fargo”). Upon the repayment of loans under the Wells Fargo Revolver,
the Wells Fargo Revolving Credit Agreement was terminated. The Company used the remainder of the proceeds
from the New Term Loan for general corporate purposes.

Monthly payments under the Term Loans through February 28, 2018 were interest only, followed by

consecutive equal monthly payments of principal plus accrued interest beginning on March 1, 2018 and continuing
through the maturity date. Interest on the Term Loans was the greater of (a) 10.3125%, and (b) a fluctuating rate of
interest per annum equal to the three-month LIBOR Rate (rounded up to the nearest 1/16th of one percent) plus
9.25%. In addition, the Company paid a commitment fee of 3.0% of the New Term Loan amount upon closing and a
closing fee of 4.0% of the New Term Loan amount, which is payable with the closing fee under the Original Term
Loan Agreement in four equal installments at each anniversary of the closing date of the Original Term Loan
Agreement. The Company may elect to prepay the Term Loans by incurring a prepayment fee between 1% and 3%
of the principal amount of the Term Loans depending on the timing and circumstances of prepayment.

On February 28, 2018, the Company entered into a Second Amendment to the Term Loans. The Second
Amendment decreased the amount of principal repayments required under the Loan Agreement by 50% for the
period from March 1, 2018 through December 31, 2018 and provided that the Company shall not prepay any part of
the Term Loans during that same period without the Collateral Agent’s prior written consent.

The Term Loans were secured by a first-priority security interest on substantially all assets of the Company;

provided, however, that the security interest in the Company’s intellectual property may be released if the Company
satisfies certain requirements. The Company’s obligations under the Term Loans were not guaranteed by any of the
Company’s existing subsidiaries, nor have any existing subsidiaries of the Company pledged any of their assets to
secure the Term Loans.

– 80 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Loan Agreement required that (i) at all times from the closing date to and including March 31, 2018, the

Company, and any future guarantors, have Unrestricted Cash (as defined in the Loan Agreement) of at least
$10.0 million; (ii) at all times from the closing date to and including March 31, 2018, that the aggregate amount of
Consolidated Unrestricted Cash, plus the value of Consolidated Receivables, plus the value of Consolidated
Inventory (each as defined in the Loan Agreement) divided by the outstanding principal amount of Term Loans, shall
equal or exceed 1.5; and (iii) at all times from April 1, 2018 and thereafter, that the aggregate amount of
Consolidated Unrestricted Cash, plus the value of Consolidated Receivables, plus the value of Consolidated
Inventory divided by the outstanding principal amount of Term Loans, shall equal or exceed 1.75. In addition, the
Loan Agreement was subject to customary affirmative and negative covenants including restrictions on creation of
liens, dispositions of assets, mergers, changing the nature of its business and dividends and other distributions, in
each case subject to certain exceptions. The Loan Agreement also contained certain customary events of default
including, but not limited to, failure to pay interest, principal and fees or other amounts when due, material breach of
any representation or warranty, covenant defaults, cross defaults to other material indebtedness, events of
bankruptcy and the occurrence of a material adverse change (as defined in the agreement) to the Company’s
business. The Term Loan Agreement offered TCP customary rights and remedies in any event of default, including
the ability to declare all amounts outstanding immediately due and payable.

As of December 31, 2018, the estimated schedule of principal payments due on the Term Loans was as

follows (in thousands):

Year Due

2019

2020

Total

Principal
Payments

25,317

16,207

41,524

On January 28, 2019, the Company repaid in full the remaining principal amount of the Term Loans of

$39.5 million plus accrued interest and fees.

Warrants

In connection with the New Term Loan, the Company issued to the Lenders warrants to purchase an
aggregate of approximately 1.2 million shares of the Company’s Common Stock at an exercise price of $1.05 per
share. The warrants have a term of seven years and contain a “cashless exercise” feature that allows the holder to
exercise the warrant without a cash payment upon the terms set forth therein.

The Company estimated the fair value of the warrants by using the Black-Scholes approach and the following

assumptions: stock price of $1.56 per share; strike price of $1.05 per share; volatility of 85.9%, risk-free rate of
2.23%; dividend yield of 0%; and a term of seven years. The resulting fair value was used to allocate the proceeds
from the Term Loan between liability and equity components.

The Company classified the warrants as equity and allocated the proceeds from the New Term Loan and

warrants using the relative fair value method. Using this method, the Company allocated $1.4 million to the
warrants, which was recorded as equity. This amount represents debt discount that will be amortized to interest
expense over the term of the loan. The Lenders converted the warrants into approximately 0.9 million shares of the
Company’s common stock in a cashless exercise in the first quarter of 2018.

– 81 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Sale of Long-Term Financing Receivables

The Company entered into an agreement with a third party in the fourth quarter of 2017 to sell certain current
and future receivables at a discount. In December 2017, the third party made an initial purchase of receivables that
resulted in net proceeds to the Company of $2.8 million. This transaction was recorded as debt on the
accompanying consolidated balance sheets, and the debt balance will be relieved by January 2019 as the
underlying receivables are settled. During the year ended December 31, 2018, the third party made three additional
purchases of receivables that resulted in total net proceeds to the Company of $5.6 million. These transactions
were recorded as debt on the accompanying consolidated balance sheets, and the total associated debt balance
will be relieved by September 2021 as the underlying receivables are settled. After the initial purchase, the buyer
had the option to purchase certain additional future receivables at various fixed discounts. This option was valued at
$0.7 million and was recorded as a liability with a corresponding offset to debt as of December 31, 2017. As of
December 31, 2018, all purchases relating to this option had been made, and the liability has been relieved. See
Note 9. “Fair Value Measurements,” for additional information.

Revolving Credit Facility

The Company had a $50.0 million revolving credit facility (the “Revolver”) with Wells Fargo Bank, N.A. that

was entered into in November 2012. The Revolver was fully repaid and terminated in February 2017.

12. COMMITMENTS AND CONTINGENT LIABILITIES

Operating Leases

The Company leases office facilities under noncancelable operating leases that expire on various dates
through 2028. The terms of the lease agreements generally provide for rental payments on a graduated basis, and
certain leases require the Company to pay its portion of executory costs such as taxes, insurance, and operating
expenses. The Company recognizes rent expense on a straight-line basis over the lease term.

Rent expense for the years ended December 31, 2018, 2017 and 2016 was $3.2 million, $2.8 million and

$3.8 million, respectively.

The Company’s minimum lease payments under noncancelable operating leases, exclusive of executory

costs, as of December 31, 2018 are as follows (in thousands):

Fiscal year due:

2019

2020

2021

2022

2023

Thereafter

Total operating lease minimum payments

Sublease income to be recognized in the future under noncancelable subleases

Net operating leases

Purchase Obligations

Minimum
Lease
Payments

3,738

3,532

3,276

1,810

945

1,252

14,553

(922)

13,631

The Company has contractual obligations related to component inventory that its primary contract
manufacturer procures on its behalf in accordance with its production forecast as well as other inventory related
purchase commitments. As of December 31, 2018, these purchase obligations totaled approximately $41.1 million.

– 82 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Contingencies

From time-to-time, the Company may be involved in litigation relating to claims arising out of its operations.

The Company is not currently involved in any material legal proceedings; however, the Company may 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 its business, results of operations, financial
position or cash flows.

13. SALE OF COMMON STOCK

In February 2018, the Company entered into a Securities Purchase Agreement with an investor pursuant to

which the Company, in a private placement, issued and sold to the investor 9.5 million shares of the Company’s
common stock at a price per share of $2.10, for gross proceeds of $20.0 million.

In January 2017, the Company completed a private placement of securities that resulted in the issuance of

approximately 10.8 million shares of common stock and gross proceeds of $10.0 million.

In December 2016, the Company entered into an At Market Issuance Sales Agreement (ATM) under which it

could sell shares of its common stock up to a gross aggregate offering price of $17.0 million. During the three
months ended March 31, 2017 the Company sold approximately 11.1 million shares of common stock under the
ATM and received net proceeds of approximately $16.6 million.

14. STOCK-BASED COMPENSATION

Description of Equity Incentive Plans

2006 Plan

Under the Company’s 2006 Equity Incentive Plan (the “2006 Plan”), equity awards granted generally vest
over a 4 year period from the date of grant with a contractual term of up to 10 years. As of December 31, 2018,
there were 1.6 million shares of options outstanding under the 2006 Plan. No further stock options or other stock
awards may be granted under the 2006 Plan.

2011 Plan

Under the 2011 Equity Incentive Plan (the “2011 Plan”), the Company could initially issue up to

2,643,171 shares of its common stock pursuant to stock options, stock appreciation rights (“SARS”), restricted stock
awards (“RSA”), RSUs, PSUs, and other forms of equity compensation, or collectively, stock awards, all of which
may be granted to employees, including officers, and to non-employee directors and consultants. Options granted
under the 2011 Plan before August 1, 2012 generally expire 10 years after the grant date and options granted
thereafter generally expire 7 years after the grant date. Equity awards granted under the 2011 Plan generally vest
over a 4-year period from the date of grant based on continued employment. The number of shares of the
Company’s common stock authorized for issuance under the 2011 Plan automatically increases on each January 1
by 4.5% of the total number of shares of the Company’s common stock outstanding on December 31 of the
preceding calendar year, or such lesser number of shares of common stock as determined by the board of
directors. As of December 31, 2018, 1,319,960 shares remained available for issuance pursuant to future grants
under the 2011 Plan. On January 31, 2019, the shares available for issuance under the 2011 Plan automatically
increased by 4,816,556 shares.

– 83 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2011 Employee Stock Purchase Plan

The 2011 Employee Stock Purchase Plan (“ESPP”) became effective immediately upon the execution and

delivery of the underwriting agreement for the Company’s initial public offering on March 29, 2012. The ESPP
authorized the issuance of 669,603 shares of the Company’s common stock pursuant to purchase rights granted to
employees. The number of shares of common stock reserved for issuance will automatically increase, on each
January 1, by a lesser of (i) 330,396 shares of the Company’s common stock or (ii) 1.0% of the total number of
shares of the Company’s common stock outstanding on December 31 of the preceding calendar year, as
determined by the Company’s board of directors. At the Annual Meeting of Stockholders held on May 18, 2017 the
Company’s stockholders approved a one-time amendment to the Company’s ESPP to increase the aggregate
number of shares available for purchase by 400,000 shares and to increase the annual automatic minimum
increase in shares reserved for issuance from 330,396 to 700,000 shares effective January 1, 2018. As of
December 31, 2018, 551,203 shares remained available for future issuance under the ESPP. On January 31, 2019,
the shares available for issuance under the ESPP automatically increased by 700,000 shares.

The ESPP is implemented by concurrent offering periods and each offering period may contain up to
four interim purchase periods. In general, offering periods consists of the 24-month periods commencing on each
May 15 and November 15 of a calendar year.

Generally, all full-time employees, including executive officers, are eligible to participate in the ESPP. The
ESPP permits eligible employees to purchase the Company’s common stock through payroll deductions, which may
not exceed 15% of the employee’s total compensation subject to certain limits. Stock may be purchased under the
plan at a price equal to 85% of the fair market value of the Company’s stock on either the date of purchase or the
first day of an offering period, whichever is lower. A two year look-back feature in the Company’s ESPP causes an
offering period to reset if the fair value of the Company’s common stock on a purchase date is less than that on the
initial offering date for that offering period. The reset feature, when triggered, will be accounted for as a modification
to the original offering, resulting in additional expense to be recognized over the 24-month period of the new
offering. During any calendar year, participants may not purchase shares of common stock having a value greater
than $25,000, based on the fair market value per share of the common stock at the beginning of an offering period.

Valuation of Equity Awards

Stock Options

The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-

pricing model with the following assumptions:

•

Expected term—The expected term of the option awards represents the period of time between the grant
date of the option awards and the date the option awards are either exercised, converted or canceled,
including an estimate for those option awards still outstanding. The Company used the simplified method,
as permitted by the SEC for companies with a limited history of stock option exercise activity, to determine
the expected term for its option grants.

Expected volatility—The expected volatility was calculated based on the Company’s historical stock
prices, supplemented as necessary with historical volatility of the common stock of several peer
companies with characteristics similar to those of the Company.

Risk-free interest rate—The risk-free interest rate was based on the U.S. Treasury yield curve in effect at
the time of grant and with a maturity that approximated the Company’s expected term.

Dividend yield—The dividend yield was based on the Company’s dividend history and the anticipated
dividend payout over its expected term.

– 84 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the weighted-average grant date fair value of options granted for the periods

presented and the assumptions used to estimate those values using a Black-Scholes option pricing model:

Weighted average grant date fair value

Expected term (in years)

Expected volatility

Annual risk-free rate of return

Dividend yield

Restricted Stock Units

Years Ended December 31,

2018

2017

2016

2.83

4.0

88.5%

2.6%

—%

0.76

4.4

83.9%

1.8%

—%

1.29

4.5

80.0%

1.1%

—%

The fair value of the Company’s RSU awards granted is based upon the closing price of the Company’s stock

price on the date of grant.

Performance Stock Units

The fair value of the Company’s non-market PSU awards granted was based upon the closing price of the

Company’s stock price on the date of grant. The fair value of awards of the Company’s PSU awards containing
market conditions was determined using a Monte Carlo simulation model based upon the terms of the conditions,
the expected volatility of the underlying security, and other relevant factors.

Stock-based Compensation Expense

Stock-based compensation expense for all stock-based awards expected to vest is measured at fair value on

the date of grant and recognized ratably over the requisite service period. The following table summarizes the
components of total stock-based compensation expense included in the consolidated statements of operations for
the periods presented (in thousands):

Cost of revenues

Research and development

Sales and marketing

General and administrative

Total

Years Ended December 31,

2018

2017

2016

1,071

1,072

2,940

3,074

4,347

2,573

1,157

1,925

1,188

3,879

2,144

3,115

11,432

6,727

10,326

The following table summarizes the various types of stock-based compensation expense for the periods

presented (in thousands):

Stock options, RSUs, and PSUs

Employee stock purchase plan

Total

Years Ended December 31,

2018

2017

2016

10,691

5,559

741

1,168

11,432

6,727

8,384

1,942

10,326

As of December 31, 2018, there was approximately $17.1 million of total unrecognized stock-based
compensation expense related to unvested equity awards expected to be recognized over a weighted-average
period of 2.5 years.

No income tax benefit has been recognized relating to stock-based compensation expense and no tax

benefits have been realized from exercised stock options for the three years ended December 31, 2018.

– 85 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Equity Awards Activity

Stock Options

The following is a summary of stock option activity for the three years ended December 31, 2018 (in

thousands, except per share data):

Number of
Shares
Outstanding

Weighted-
Average
Exercise Price
per Share

Weighted-
Average
Remaining
Contractual
Term
(in years)

Aggregate
Intrinsic
Value (1)

Outstanding at December 31, 2015

8,170

Granted

Exercised

Canceled

Outstanding at December 31, 2016

Granted

Exercised

Canceled

Outstanding at December 31, 2017

Granted

Exercised

Canceled

Outstanding at December 31, 2018
Vested and expected to vest at December 31, 2018

Exercisable at December 31, 2018

2,440

(375)

(1,505)

8,730

4,500

(425)

(4,379)

8,426

213

(1,346)

(521)

6,772

4,645

5.36

2.12

0.39

6.01

4.55

1.22

0.51

6.91

1.77

4.43

1.75

2.94

1.76

1.87

729

544

5,096

21,547

14,670

4.2

3.5

(1)

The intrinsic value of options exercised is based upon the value of the Company’s stock at exercise. The
intrinsic value of options outstanding, vested and expected to vest, and exercisable as of December 31, 2018
is based on the closing price of the Company’s stock fair value on December 31, 2018 or the earlier of the last
trading day prior to December 31, 2018, if December 31, 2018 is a non-trading day. The Company’s stock fair
value used in this computation was $4.73 per share.

The following table summarizes information about stock options outstanding at December 31, 2018:

Range of Exercise Prices

$0.27 —– $0.79

$0.79 —– $1.29

$1.31 —– $1.31

$1.37 —– $2.61

$2.76 —– $12.57

Total

Options Outstanding

Options Exercisable

Number of
Shares
(in thousands)

Weighted-
Average
Remaining
Life
(in years)

Weighted-
Average
Exercise
Price

1,551

1,352

1,751

1,388

730

6,772

2.9

5.9

5.3

3.0

3.6

4.2

0.49

1.22

1.31

1.87

6.32

1.76

Number of
Shares
(in thousands)

1,349

433

1,167

1,150

546

4,645

Weighted-
Average
Exercise
Price

0.45

1.21

1.31

1.86

7.15

1.87

– 86 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Units

The following is a summary of RSU activity for the three years ended December 31, 2018 (in thousands,

except per share data):

Weighted-
Average
Fair Value
per Share at
Grant Date

Weighted-
Average
Remaining
Contractual
Term
(in years)

Number of
Shares
Outstanding

Aggregate
Intrinsic
Value (1)

Outstanding at December 31, 2015

1,313

Granted

Vested

Canceled

Outstanding at December 31, 2016

Granted

Vested

Canceled

Outstanding at December 31, 2017

Granted

Vested

Canceled

Outstanding at December 31, 2018

Expected to vest at December 31, 2018

(464)

(297)

606

5,418

(885)

(1,634)

3,505

3,152

(1,399)

(906)

4,352

4,351

9.31

1.99

9.06

8.32

9.33

1.46

3.81

1.90

2.03

4.45

2.75

2.17

3.52

875

932

6,657

1.4

20,586

20,581

(1)

The intrinsic value of RSUs vested is based upon the value of the Company’s stock when vested. The intrinsic
value of RSUs outstanding and expected to vest as of December 31, 2018 is based on the closing price of the
Company’s stock on December 31, 2018 or the earlier of the last trading day prior to December 31, 2018, if
December 31, 2018 is a non-trading day. The Company’s stock fair value used in this computation was
$4.73 per share.

On April 3, 2017, the Company commenced a Tender Offer (the “Offer”) to exchange out of the money stock

options for RSUs. The Offer expired on May 1, 2017. Pursuant to the Offer, the Company accepted elections to
exchange options to purchase 2,362,470 shares of common stock and issued replacement awards of RSUs for
733,559 shares of common stock. As the transaction approximated a value-for-value exchange, it did not have a
material impact on the Company’s stock-based compensation expense.

– 87 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Performance Stock Units

The following is a summary of PSU activity for the year ended December 31, 2018 (in thousands, except per

share data):

Outstanding at December 31, 2017

Granted

Vested

Canceled

Outstanding at December 31, 2018

Expected to vest at December 31, 2018

Weighted-
Average
Fair Value
per Share at
Grant Date

Weighted-
Average
Remaining
Contractual
Term
(in years)

Aggregate
Intrinsic
Value (1)

Number of
Shares
Outstanding

—

1,477

4.65

—

(147)

1,330

4.66

0.3

6,291

(1)

The intrinsic value of PSUs vested is based upon the value of the Company’s stock when vested. The intrinsic
value of PSUs outstanding and expected to vest as of December 31, 2018 is based on the closing price of the
Company’s stock on December 31, 2018 or the earlier of the last trading day prior to December 31, 2018, if
December 31, 2018 is a non-trading day. The Company’s stock fair value used in this computation was
$4.73 per share.

Stock-based compensation expense is measured at the grant date based on the fair value of the award.
During the second quarter of 2018 the Company issued PSU grants of 1.44 million shares, of which 720 thousand
shares include market conditions. Each grantee is granted a target award of PSUs and may earn between 0% and
150% of the target award depending on the Company’s performance against the performance goals. The grant date
fair value of PSUs without market conditions is recognized as expense when the performance condition is probable
of being achieved, and then on a graded basis over the requisite service period. The grant date fair value of PSUs
with market conditions is recognized as expense on a straight-line basis over the requisite service period. The
weighted average estimated fair value of the PSUs without market conditions was $4.57 per share, and the
weighted average estimated fair value of the PSUs with market conditions, based on the Monte Carlo model, was
$4.54 per share.

Employee Stock Purchase Plan

A summary of ESPP activity for the years presented is as follows: (in thousands, except per share data):

Proceeds from common stock issued under ESPP

Shares of common stock issued

Weighted-average price per share

15. INCOME TAXES

Years Ended December 31,

2018

2017

2016

397

439

0.90

313

478

0.65

999

659

1.52

The domestic and foreign components of loss before income taxes consisted of the following (in thousands):

United States

Foreign

Loss before income taxes

Years Ended December 31,

2018

2017

2016

(14,322) $

(47,882) $

(67,631)

4,093

2,541

1,644

(10,229) $

(45,341) $

(65,987)

– 88 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The provision for (benefit from) income taxes for the years presented is as follows (in thousands):

Years Ended December 31,

2018

2017

2016

Current:

Federal

State

Foreign

Deferred:

Federal

State

Foreign

— $

1,233

1,275

(35)

(21)

179

123

1,224

1,245

(1,092)

(21)

(281)

(1,394)

Provision for (benefit from) income taxes

1,398

(149) $

—

785

821

594

654

1,475

A reconciliation of the provision for (benefit from) income taxes and the amount computed by applying the
statutory federal income tax rate of 21% in 2018 and 34% in 2017 and 2016 to loss before income taxes for the
years presented is as follows (in thousands):

Income tax benefit at statutory federal rate

(2,148) $

(15,416) $

(22,435)

Years Ended December 31,

2018

2017

2016

State taxes, net of federal benefit

Change in valuation allowance

Foreign tax rate and tax law differential

Tax credits

Stock-based compensation

Other permanent items

Other nondeductible/nontaxable items

Uncertain tax positions

Tax law changes

GILTI

Section 162(m)

8,198

313

(378)

(953)

235

(5,112)

107

—

917

202

(64)

(20,571)

(133)

(382)

761

479

930

106

34,141

—

21,370

(1,179)

1,775

776

920

158

—

Provision for (benefit from) income taxes

1,398

(149) $

1,475

– 89 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of significant components of the Company’s deferred tax assets and liabilities as of December 31,

2018 and 2017 is as follows (in thousands):

Deferred tax assets:

Allowances and reserves

Net operating loss and tax credit carryforwards

Stock-based compensation

Deferred revenue

Fixed assets and intangibles

Sec. 163(j) interest carryforward

Other

Subtotal

Less valuation allowance

Total deferred tax assets, net of valuation allowance

Deferred tax liabilities:

Goodwill

Unremitted foreign earnings

Deferred cost of goods sold

Total deferred tax liabilities

Net deferred tax asset

December 31,

2018

2017

10,022

71,568

3,662

19,562

3,836

2,064

2,084

112,798

(98,631)

14,167

(1,070)

(16)

(12,655)

(13,741)

426

9,748

66,243

2,528

7,210

4,369

—

278

90,376

(88,789)

1,587

(992)

(10)

—

(1,002)

585

Accounting for income taxes requires that companies assess whether valuation allowances should be

established against their deferred tax assets based on consideration of all available evidence, both positive and
negative, using a “more likely than not” standard. This assessment considers, among other matters, the nature,
frequency and amount of recent losses, the duration of statutory carryforward periods, and tax planning strategies.
In making such judgments, significant weight is given to evidence that can be objectively verified. Due to the history
of losses the Company has generated in the U.S. since inception, the Company believes that it is more-likely-than-
not that all of its U.S. and state deferred tax assets will not be realized as of December 31, 2018. Therefore, the
Company has maintained a full valuation allowance on its U.S. and state deferred tax assets at December 31, 2018;
this is an increase of $9.8 million. Should the Company determine that it would be able to realize its deferred tax
assets in the foreseeable future, an adjustment to the deferred tax assets may cause a material increase to income
in the period such determination is made. Significant management judgment is required in determining the period in
which the reversal of a valuation allowance should occur.

On December 22, 2017, H.R. 1 (the “Act”) was enacted and included broad tax reforms. The Act reduced the

U.S. corporate tax rate from 35% to 21% effective January 1, 2018. The rate change resulted in a $28.3 million
reduction in the Company’s 2017 deferred tax asset balance from 2016. Tax law changes created the ability for
federal indefinite lived assets to be generated in the years following 2017. As such, an income tax benefit was
recorded to reduce the domestic indefinite lived liability that is now partially offset by indefinite lived deferred tax
assets. The Company has elected to treat taxes on Global Intangible Low Tax Income (“GILTI”) as period costs. The
Act also imposed a deemed repatriation of foreign earnings previously considered deferred for U.S. tax purposes.
The Company had previously recorded a deferred tax liability for such unremitted earnings that were not considered
permanently reinvested in the foreign jurisdictions. As of December 31, 2017, the Company has recognized the
previously deferred federal liability in accordance with the Act. As of December 31, 2018, the Company continues to
include deferred tax liabilities for potential future tax consequences of remitting such earnings, such as foreign
withholding and state taxes.

The Company has net operating loss carryforwards for federal and California income tax purposes of
approximately $193.4 million and $101.2 million, respectively, as of December 31, 2018. The federal and state net
operating loss carryforwards, if not utilized, will expire beginning in 2028.

– 90 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company has approximately $11.8 million of federal research credit and $12.1 million of state research

credit carryforwards. The federal credits begin to expire in 2026 and the state credits can be carried forward
indefinitely.

Utilization of some of the federal and state net operating loss and credit carryforwards are subject to annual

limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state
provisions. The Company has completed a Section 382 analysis through December 31, 2018, which indicated no
such change has occurred through December 31, 2018.

The accounting for uncertain tax positions prescribes a recognition threshold and measurement attribute for

the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
The Company is required to recognize in the financial statements the impact of a tax position, if that position is
more-likely-than-not of being sustained on audit, based on the technical merits of the position. The Company
recorded a net charge for unrecognized tax benefits in 2018 of $0.2 million.

The Company does not have any tax positions for which it is reasonably possible the total amount of gross

unrecognized tax benefits will increase or decrease over the next year. The unrecognized tax benefits may increase
or change during the next year for items that arise in the ordinary course of business.

A tabular reconciliation of the total amounts of unrecognized tax benefits for the years presented is as follows

(in thousands):

Unrecognized tax benefits—at beginning of year

Decreases in balances related to tax positions taken in prior years

Increases in balances related to tax positions taken in current year

Lapses in statutes of limitations

Unrecognized tax benefits—at end of year

Years Ended December 31,

2018

2017

2016

6,106

6,016

5,482

—

329

(110)

(135)

306

(81)

—

571

(37)

6,325

6,106

6,016

The Company includes interest and penalties related to unrecognized tax benefits within the benefit from

(provision for) income taxes. As of years ended December 31, 2018 and 2017, the total amount of gross interest
and penalties accrued in each year was immaterial. Both the unrecognized tax benefits and the associated interest
and penalties that are not expected to result in payment or receipt of cash within one year are classified as other
non-current liabilities in the consolidated balance sheets. In connection with tax matters, the Company’s interest and
penalty expense recognized in 2018, 2017 and 2016 in the consolidated statement of operations was immaterial.

The Company’s tax returns continue to remain effectively subject to examination by U.S. federal authorities

for the years 2006 through 2018 and by California state authorities for the years 2006 through 2018 due to use and
carryovers of net operating losses and credits.

16. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

The Company is potentially subject to financial instrument concentration of credit risk through its cash and
cash equivalents and accounts receivable. The Company places its cash and cash equivalents with high quality
institutions and performs periodic evaluations of their relative credit standing.

Accounts receivable can be potentially exposed to a concentration of credit risk with its major customers. As

of December 31, 2018, amounts due from two customers represented approximately 22% and 13% of the total
accounts receivable balance. As of December 31, 2017, amounts due from one customer represented 22% of the
total accounts receivable balance.

In 2018, one customer accounted for approximately 19% of total net revenues. In 2017, two customers

accounted for approximately 15% and 11% of total net revenues. In 2016, one customer accounted for
approximately 18% of total net revenues.

– 91 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17. NET LOSS PER SHARE

Basic net loss per share is computed by dividing net loss by the weighted average number of shares of

common stock outstanding during the period. Diluted loss per share is computed in a similar manner, but it also
includes the effect of potential common shares outstanding during the period, when dilutive. Potential common
shares include outstanding in-the-money stock options, RSUs, PSUs, shares to be purchased under the Company’s
ESPP, warrants to purchase common stock, and the Notes. The dilutive effect of potentially dilutive common shares
is reflected in diluted earnings per share by application of the treasury stock method. To the extent these potential
common shares are antidilutive, they are excluded from the calculation of diluted net loss per share.

The following table presents the computation of basic and diluted net loss per share for the periods presented

(in thousands, except per share data):

Numerator:

Net loss

Denominator:

Years Ended December 31,

2018

2017

2016

(11,627) $

(45,192) $

(67,462)

Weighted average common shares outstanding

99,619

82,939

50,519

Net loss per share, basic and diluted

(0.12) $

(0.54) $

(1.34)

As the Company incurred a net loss for all periods presented, potential dilutive securities from employee stock

options, RSUs, PSUs, shares to be purchased under the Company’s ESPP, warrants to purchase common stock,
and the Notes have been excluded from the diluted net loss per share computations because the effect of including
such shares would have been anti-dilutive.

The following outstanding shares of common stock equivalents were excluded from the calculation of the
diluted net loss per share attributable to common stockholders because their effect would have been anti-dilutive (in
thousands):

Employee stock options

RSUs and PSUs

Warrants to purchase common stock

Convertible notes

Total

Years Ended December 31,

2018

2017

2016

7,710

5,273

—

11,701

24,684

8,433

3,029

1,083

—

12,545

8,981

906

—

9,887

18. SEGMENT AND GEOGRAPHIC INFORMATION

The Company’s chief operating decision maker is the Chief Executive Officer. The Chief Executive Officer
reviews financial information presented on a consolidated basis. The Company has one business activity, which
entails the design, development, manufacture and sale of solutions for the solar photovoltaic industry. There are no
segment managers who are held accountable for operations, operating results or plans for levels or components
below the consolidated unit level. Accordingly, management has determined that the Company has a single
operating and reportable segment.

– 92 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present net revenues (based on the destination of shipments) and long-lived assets by

geographic region as of and for the periods presented (in thousands):

Net Revenues

United States

International

Total

Long-Lived Assets

United States

China

Other

Total

19. RELATED PARTY

Years Ended December 31,

2018

219,600

96,559

316,159

2017

199,565

86,601

286,166

2016

259,080

63,511

322,591

December 31,

2018

2017

13,146

16,899

5,504

2,348

7,164

2,420

20,998

26,483

In August 2018, the Company and SunPower, which at December 31, 2018, holds 7.5 million shares of the
Company’s common stock, as well as the ability to appoint a board member to the Company’s board of directors,
entered into a Master Supply Agreement (“MSA”). Pursuant to the terms of the MSA, the Company becomes the
exclusive supplier of module level power electronics (“MLPEs”) for SunPower’s residential business in U.S. for a
period of five years. Revenue recognized under the MSA for the year ended December 31, 2018 was $12.4 million.
At December 31, 2018, the Company had account receivables of $10.3 million from SunPower. There are no
special terms or payment arrangements under the MSA. See Note 20. “Acquisition,” for additional information
related to this MSA.

In August 2018, a member of the Company’s board of directors and a stockholder, Thurman John Rodgers,

purchased $5.0 million aggregate principal amount of the Notes in a concurrent private placement. As of
December 31, 2018, $5.0 million aggregate principal amount of the Notes were outstanding. See Note 11. “Debt,”
for additional information related to this purchase.

20. ACQUISITION

On August 9, 2018, the Company completed its acquisition of SunPower’s microinverter business pursuant to

an APA by which the Company acquired certain assets and liabilities of SunPower relating to the research and
development and manufacturing of microinverters. The acquisition was accounted for as a business combination
and, accordingly, the total purchase price was allocated to the preliminary net tangible and intangible assets and
liabilities based on their preliminary fair values on the acquisition date.

In conjunction with the APA, the Company entered into an MSA with SunPower. Pursuant to the terms of the
MSA, the Company becomes the exclusive supplier of MLPEs for SunPower’s residential business in the U.S. for a
period of five years. The resulting customer relationship intangible is accounted for as a distinct transaction from the
acquired business.

The acquisition date fair value of the consideration transferred was approximately $57.3 million, which

consisted of the following (in thousands):

Cash consideration

Common stock issued

Total

25,000

32,319

57,319

– 93 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The fair value of the Company’s 7.5 million shares of common stock issued, valued at $32.3 million, was
determined based on the closing market price of the Company’s common stock on the acquisition date, less a
discount of 14% to 30% (depending on the year) for lack of marketability as the shares issued are subject to a
restriction that limits their trade or transfer with a lock-up period of six months and restrictions on the number of
shares that can be transferred by SunPower in each six-month period following the lock-up period.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities

assumed at the acquisition date (in thousands):

Intangible assets

Goodwill

Net assets acquired

36,200

21,119

57,319

The excess of the consideration paid over the fair values assigned to the assets acquired and liabilities

assumed represents the goodwill resulting from the acquisition. The $21.1 million of goodwill recognized is
attributable primarily to the benefits the Company expects to derive from enhanced scale and efficiency to better
serve its markets. Goodwill is expected to be deductible over the next 15 years for income tax purposes.

The fair values assigned to tangible and identifiable intangible assets acquired are based on management’s

estimates and assumptions. The fair values of assets acquired are preliminary and may be subject to change within
the measurement period as the fair value assessments are finalized.

The following table shows the fair value of the separately identifiable intangible assets at the time of

acquisition and the period over which each intangible asset will be amortized:

Developed technology

Customer relationship

Total identifiable intangible assets

Preliminary fair
value
(in thousands)

Useful life
(in years)

13,100

23,100

36,200

The developed technology acquired is embedded in the microinverters that SunPower sells to its customers.

The Company already has developed microinverter technology and the Company will supply its microinverters to
SunPower through the term of the MSA. The Company does not intend to actively use the developed technology
acquired from SunPower but does plan to hold the developed technology to prevent others from using it. Therefore,
the Company will account for the developed technology as a defensive intangible asset. The Company expects to
realize the benefits of the developed technology over the period of time in which the Company will supply
microinverters to SunPower. The Company does expect changes in microinverter technology during the life of the
customer relationship with SunPower and expects to benefit from preventing competitors’ access to the technology
over a period of six years, therefore, the Company will amortize the value of the developed technology intangible
asset over a period of six years.

The SunPower microinverter business’ contributions to revenue and income for the period from the date of

acquisition to December 31, 2018 were not material. The MSA was negotiated together with the APA and provides
the Company with the exclusive right to supply SunPower with MLPEs 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 the microinverter business by the Company. As the fair value ascribed to the customer
relationship intangible asset represents payments to a customer, the Company will amortize 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.

– 94 –

ENPHASE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below shows estimated fair values of the assets acquired funded by cash and issuance of common

stock at the acquisition date (in thousands):

Developed technology and goodwill

Customer relationship

Total consideration

Cash Purchase
Price

Issuance of
Common Stock

Total
Consideration

% of Total
Consideration

15,000

19,219

10,000

13,100

25,000

32,319

34,219

23,100

57,319

60%

40%

100%

The Company allocated $10.0 million of the $25.0 million paid of the cash purchase price to cash flows from

operating activities and the remaining $15.0 million to cash used in investing activities in the consolidated
statements of cash flows for the year ended December 31, 2018. The allocation was based on the valuation of the
customer relationship relative to the overall consideration. In addition, the Company disclosed $19.2 million from
issuance of common stock and $15.0 million of cash purchase price paid for the developed technology and goodwill
as investing activities in the consolidated statements of cash flows for the year ended December 31, 2018.

During 2018, total acquisition-related costs were approximately $0.8 million, which were included in general

and administrative expenses.

The Company determined it is impractical to include such pro forma information given the difficulty in
obtaining the historical financial information for the SunPower microinverter business as the business was part of
SunPower and did not have discrete financial information prior to the acquisition. Inclusion of such information
would require the Company to make estimates and assumptions regarding the acquired business historical financial
results that the Company believes may ultimately prove inaccurate.

– 95 –

SELECTED UNAUDITED QUARTERLY FINANCIAL INFORMATION

The following tables show a summary of the Company’s quarterly financial information for each of the four

quarters of 2018 and 2017 (in thousands, except per share data):

Net revenues

Cost of revenues

Gross profit

Operating expenses:

Research and development

Sales and marketing

General and administrative

Restructuring charges

Total operating expenses

Income (loss) from operations

Other expense, net

Income (loss) before income taxes

Provision for income taxes

Net income (loss)

Net income (loss) per share, basic

Net income (loss) per share, diluted

Year Ended December 31, 2018*

March 31

June 30

September 30

December 31

69,972

75,896

78,002

51,657

18,315

7,620

6,227

6,943

—

20,790

(2,475)

(2,418)

(4,893)

(235)

53,195

22,701

9,462

6,828

6,969

—

23,259

(558)

(2,841)

(3,399)

(339)

52,738

25,264

8,165

7,375

7,510

2,588

25,638

(374)

(2,848)

(3,222)

(248)

(5,128) $

(3,738) $

(3,470) $

(0.06) $

(0.04) $

(0.03) $

92,289

64,124

28,165

7,340

6,617

7,664

1,541

23,162

5,003

(3,718)

1,285

(576)

709

0.01

Net revenues

Cost of revenues

Gross profit

Operating expenses:

Research and development

Sales and marketing

General and administrative

Restructuring charges

Total operating expenses

Loss from operations

Other expense, net

Loss before income taxes

Income tax benefit (provision)

Net loss

Net loss per share, basic and diluted

Year Ended December 31, 2017

March 31

June 30

September 30

December 31

54,751

74,704

77,038

47,703

7,048

9,605

6,458

5,833

7,247

29,143

(22,095)

(1,079)

(23,174)

(131)

61,157

13,547

7,947

6,274

4,964

3,609

22,794

(9,247)

(1,992)

(11,239)

(854)

60,577

16,461

7,397

5,453

5,441

4,071

22,362

(5,901)

(1,137)

(7,038)

184

(23,305) $

(12,093) $

(0.30) $

(0.14) $

(6,854) $

(0.08) $

79,674

60,685

18,989

8,208

4,940

5,983

1,991

21,122

(2,133)

(1,755)

(3,888)

948

(2,940)

(0.03)

– 96 –

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation required by the Exchange Act, under the supervision and with the participation

of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of the end of the period
covered by this report. Based on this evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were effective to provide reasonable assurance that
information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms and to provide reasonable assurance that such information is accumulated and
communicated to our management, including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosures.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting

in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles, as defined in Rule
13a-15(f) of the Exchange Act. Management has assessed the effectiveness of our internal control over financial
reporting as of December 2018 based on criteria set forth in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013). As a result of this assessment,
management concluded that, as of December 2018, our internal control over financial reporting was effective. The
Company’s independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on our
internal control over financial reporting, which appears in Part II, Item 8 of this Form 10-K.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the most recent

quarter ended December 2018 that materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

Limitations on Controls

Our disclosure controls and procedures and internal control over financial reporting are designed to provide

reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that
our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors
and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and
can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of
controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, within the Company have been detected.

Item 9B. Other Information

None.

– 97 –

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required regarding our directors is incorporated by reference from the information contained

in the section entitled “Proposal 1-Election of Directors” in our definitive Proxy Statement for the 2019 Annual
Meeting of Stockholders (our “Proxy Statement”), a copy of which will be filed with the Securities and Exchange
Commission on or before April 30, 2019.

The information required regarding our executive officers is incorporated by reference from the information

contained in the section entitled “Management” in our Proxy Statement.

The information required regarding Section 16(a) beneficial ownership reporting compliance is incorporated
by reference from the information contained in the section entitled “Section 16(a) Beneficial Ownership Reporting
Compliance” in our Proxy Statement.

The information required with respect to procedures by which security holders may recommend nominees to

our board of directors, and the composition of our Audit Committee, and whether we have an “audit committee
financial expert,” is incorporated by reference from the information contained in the section entitled “Information
Regarding the Board of Directors and Corporate Governance” in our Proxy Statement.

Code of Conduct

We have a written code of conduct that applies to all our executive officers, directors and employees. Our

Code of Conduct is available on our website at http://investor.enphase.com/corporate-governance.cfm. A copy of
our Code of Conduct may also be obtained free of charge by writing to our Secretary, Enphase Energy, Inc., 47281
Bayside Parkway, Fremont, CA 94538. If we make any substantive amendments to our Code of Conduct or grant
any waiver from a provision of the Code of Conduct to any executive officer or director, we intend to promptly
disclose the nature of the amendment or waiver on our website.

Item 11. Executive Compensation

The information required regarding the compensation of our directors and executive officers is incorporated by
reference from the information contained in the sections entitled “Executive Compensation,” “Director Compensation”
and “Compensation Committee Interlocks and Insider Participation” in our Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters

The information required regarding security ownership of our 5% or greater stockholders and of our directors

and executive officers is incorporated by reference from the information contained in the section entitled “Security
Ownership of Certain Beneficial Owners and Management” in our Proxy Statement.

Equity Compensation Plan Information

The information required regarding securities authorized for issuance under our equity compensation plans is

incorporated by reference from the information contained in the section entitled “Equity Compensation Plan
Information” in our Proxy Statement.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required regarding related transactions is incorporated herein by reference from the information
contained in the section entitled “Transactions With Related Persons” and, with respect to director independence, the
section entitled “Proposal 1-Election of Directors” in our Proxy Statement.

Item 14. Principal Accounting Fees and Services

The information required is incorporated by reference from the information contained in the sections entitled
“Principal Accountant Fees and Services” and “Pre-Approval Policies and Procedures” in the section entitled “Proposal
3-Ratification of Selection of Independent Registered Public Accounting Firm” in our Proxy Statement.

– 98 –

Item 15. Exhibits, Financial Statement Schedules

Consolidated Financial Statements

PART IV

The information concerning our consolidated financial statements, and Report of Independent Registered
Public Accounting Firm required by this Item is incorporated by reference herein to the section of this Annual Report
on Form 10-K in Item 8, Consolidated Financial Statements and Supplementary Data.

No schedules are provided because they are not applicable, not required under the instructions, or the requested

information is shown in the financial statements or related notes thereto.

Exhibits

Exhibit
Number

Exhibit Description

Form

SEC File No.

Exhibit

Filing
Date

Filed
Herewith

Incorporation by Reference

2.1

3.1

3.2

3.3

3.4

4.1

4.2

4.3

10.1+

10.2+

10.3+

10.4+

10.5

10.6

10.7

Asset Purchase Agreement Among SunPower
Corporation and Enphase Energy, Inc. dated June
12, 2018.

Amended and Restated Certificate of Incorporation
of Enphase Energy, Inc.

8-K

Certificate of Amendment of the Amended and
Restated Certificate of Incorporation of Enphase
Energy, Inc.

Amended and Restated Bylaws of Enphase
Energy, Inc.

Specimen Common Stock Certificate of Enphase
Energy, Inc.

Indenture, dated August 17, 2018, between
Enphase Energy, Inc. and U.S. Bank National
Association.

Form of 4.00% Convertible Senior Note due 2023
(included in Exhibit 4.2).

Form of Indemnification Agreement by and
between Enphase Energy, Inc. and each of its
directors and officers.

2006 Equity Incentive Plan, as amended, and
related documents.

2011 Equity Incentive Plan, as amended, and
forms of agreement thereunder.

2011 Employee Stock Purchase Plan, as
amended.

Redwood Business Park NNN Lease by and
between Enphase Energy, Inc. and Sequoia Center
LLC, dated June 3, 2011 (1400 North McDowell
Boulevard), as amended.

First Amendment to Redwood Business Park NNN
Lease (1400 North McDowell Blvd), between
Enphase Energy, Inc. & Sequoia Center LLC dated
January 12, 2012.

Second Amendment to Redwood Business Park
NNN Lease (1400 North McDowell Blvd), between
Enphase Energy, Inc. & Sequoia Center LLC dated
January 13, 2014.

001-35480

2.1

6/12/2018

001-35480

10-Q

001-35480

10-Q

001-35480

S-1/A

333-174925

S-1/A

333-174925

3.1

2.1

3.5

4.1

4/6/2012

8/9/2017

8/6/2018

3/12/2012

8-K

001-35480

4.1

8/17/2018

001-35480

4.1

8/17/2018

S-1/A

333-174925

10.1

8/24/2011

S-8

333-181382

99.1

5/14/2012

333-181382

99.2

5/14/2012

DEF 14A

001-35480

Appendix
A

3/31/2017

S-1

333-174925

10.14

6/15/2011

10-K

001-35480

10.8

3/4/2015

10-K

001-35480

10.9

3/4/2015

– 99 –

Exhibit
Number

Exhibit Description

Form

SEC File No.

Exhibit

Filing
Date

Filed
Herewith

Incorporation by Reference

10.8

10.9

10.10

10.11

10.12

10.13

10.14†

10.15

10.16

10.17

10.18

10.19

10.20

10.21

10.22

10.23+

10.24+

Third Amendment to Redwood Business Park NNN
Lease (1400 North McDowell Blvd), between
Enphase Energy, Inc. & Sequoia Center LLC dated
September 25, 2014.

Fourth Amendment to Redwood Business Park
NNN Lease (1400 North McDowell Blvd), between
Enphase Energy, Inc. & Sequoia Center LLC dated
December 30, 2014.

Redwood Business Park NNN Lease by and
between Enphase Energy, Inc. and Sequoia Center
LLC, dated June 3, 2011 (1420 North McDowell
Boulevard), as amended.

First Amendment to Redwood Business Park NNN
Lease (1420 North McDowell Blvd), between
Enphase Energy, Inc. & Sequoia Center LLC dated
January 12, 2012.

Second Amendment to Redwood Business Park
NNN Lease (1420 North McDowell Blvd), between
Enphase Energy, Inc. & Sequoia Center LLC,
dated July 3, 2012.

Third Amendment to Redwood Business Park NNN
Lease (1420 North McDowell Blvd), between
Enphase Energy, Inc. & Sequoia Center LLC dated
May 14, 2014.

Cooperation Agreement “AC cabling system for
solar micro-inverter” by and among Enphase
Energy, Inc., and Phoenix Contact GmbH & Co.
KG and Phoenix Contact USA, Inc., dated
December 7, 2010.

Amendment No. 2 to the Cooperation Agreement
and Amendment No. 1 by and among Enphase
Energy, Inc., Phoenix Contact GmbH & Co. KG
and Phoenix Contact USA, Inc., dated September
1, 2016.

Flextronics Logistics Services Agreement by and
between Enphase Energy, Inc. and Flextronics
America, LLC, dated May 1, 2009.

Amendment #1 to the Flextronics Logistics
Services Agreement, by and between Enphase
Energy, Inc. and Flextronics America, LLC, dated
July 28, 2016.

Flextronics Manufacturing Services Agreement by
and between Enphase Energy, Inc. and Flextronics
Industrial, Ltd., dated March 1, 2009, as amended.

Master Development and Production Agreement by
and between Enphase Energy, Inc. and Fujitsu
Microelectronics America, Inc., dated August 19,
2009.

License and Technology Transfer Agreement by
and between Enphase Energy, Inc. and Ariane
Controls, Inc., dated December 21, 2007.

Software License Agreement by and between PVI
Solutions, Inc. (subsequently known as Enphase
Energy, Inc.) and DCD, Digital Core Design, dated
May 8, 2007, as amended.

Master License Agreement between Enphase
Energy, Inc. and Flextronics Industrial, Ltd., dated
June 9, 2017.

Non-employee Director Compensation Policy.

Offer Letter by and between Enphase Energy, Inc.
and David Ranhoff, dated December 1, 2017.

10-K

001-35480

10.10

3/4/2015

10-K

001-35480

10.11

3/4/2015

S-1

333-174925

10.15

6/15/2011

10-K

001-35480

10.13

3/4/2015

10-Q

001-35480

10.40

11/13/2012

10-K

001-35480

10.15

3/4/2015

S-1

333-174925

10.16

6/15/2011

10-Q

001-35480

10.3

11/2/2016

S-1

333-174925

10.17

6/15/2011

10-Q

001-35480

10.4

11/2/2016

S-1

333-174925

10.18

6/15/2011

10-Q

001-35480

10.1

5/6/2015

S-1

333-174925

10.20

6/15/2011

S-1

333-174925

10.21

6/15/2011

001-35480

10.1

8/9/2017

001-35480

10.28

5/8/2013

001-35480

10.1

12/5/2017

10-Q

8-K

– 100 –

Exhibit
Number
10.25+
10.26+

10.27†

10.28†

10.29†

10.30

10.31

10.32

10.33

10.34

10.35

10.36

10.37

10.38+

10.39

Exhibit Description

2018 Performance Bonus Program Summary.

Severance and Change in Control Benefit Plan.

Supply Agreement, by and between Enphase
Energy, Inc. and Dow Corning Corporation, dated
April 22, 2014.

First Amendment to the Supply Agreement, by and
between Enphase Energy, Inc. and Dow Corning
Corporation, dated August 1, 2014.

Second Amendment to the Supply Agreement, by
and between Enphase Energy, Inc. and Dow
Corning Corporation, dated August 1, 2014.

Loan and Security Agreement by and among
Enphase Energy, Inc., Tennenbaum Special
Situations Fund IX, LLC, the lenders identified on
the signature pages thereto and Obsidian Agency
Services, Inc., as administrative agent and
collateral agent for the lenders, dated July 8, 2016.

First Amendment to Loan and Security Agreement,
by and among Enphase Energy, Inc., Tennenbaum
Special Situations Fund IX, LLC, the lenders
identified on the signature pages thereto and
Obsidian Agency Services, Inc., as administrative
agent and collateral agent for the lenders, dated
December 30, 2016.

Amended and Restated Loan and Security
Agreement, by and among Enphase Energy, Inc.,
the lenders party thereto, Cortland Capital Market
Services LLC, as administrative agent, and
Obsidian Agency Services, Inc., as collateral agent,
dated February 10, 2017.

Form of Warrant under Amended and Restated
Loan and Security Agreement, by and among
Enphase Energy, Inc., the lenders party thereto,
Cortland Capital Market Services LLC, as
administrative agent, and Obsidian Agency
Services, Inc., as collateral agent, dated
February 10, 2017.

Securities Purchase Agreement, by and among
Enphase Energy, Inc. and the purchasers identified
on Exhibit A thereto, dated January 9, 2017.

Second Amendment to Amended and Restated
Loan and Security Agreement by and among
Enphase Energy Inc., each Lender identified, and
Obsidian Agency Services, Inc., as collateral agent
for Lenders and Cortland Capital Market Services
LLC, dated February 28, 2018.

Security Agreement by and among Enphase
Energy, Inc. and Flextronics Industrial, LTD and
Flextronics Americas, LLC, dated December 30,
2016.

Securities Purchase Agreement by and among
Enphase Energy Inc., and the purchasers identified
on Exhibit A thereto, dated February 4, 2018.

Offer Letter by and between Enphase Energy, Inc.
and Eric Branderiz, dated December 1, 2018.

Purchase Agreement, dated August 14, 2018, by
and between Enphase Energy, Inc. and Credit
Suisse Securities (USA) LLC, as representative of
the several Initial Purchasers named therein.

Incorporation by Reference

Form

8-K

10-Q

SEC File No.

Exhibit

001-35480

10.1

10.50

Filed
Herewith

Filing
Date

3/9/2018

5/8/2013

10-Q

001-35480

10.2

8/5/2015

10-Q

001-35480

10.3

8/5/2015

10-Q

001-35480

10.4

8/5/2015

10-Q

001-35480

10.2

11/2/2016

10-K

001-35480

10.37

3/16/2017

10-K

001-35480

10.38

3/16/2017

10-K

001-35480

10.39

3/16/2017

8-K

001-35480

10.1

1/10/2017

8-K

001-35480

10.1

3/5/2018

10-K

001-35480

10.41

3/16/2017

8-K

001-35480

10.1

2/5/2018

10-Q

001-35480

10.1

8/6/2018

8-K

001-35480

10.1

8/17/2018

– 101 –

Exhibit Description

Form

SEC File No.

Exhibit

Filing
Date

Filed
Herewith

Incorporation by Reference

Exhibit
Number

10.40

Securities Purchase Agreement, dated August 14,
2018, by and between Enphase Energy, Inc. and
the Rodgers Massey Revocable Trust dtd 4/4/11.

10.41

2019 Performance Bonus Program Summary.

10.42

†

10.43

†

10.44

10.45

21.1

23.1

24.1

31.1

31.2

32.1*

Stockholders Agreement, dated as of August 9,
2018, by and between Enphase Energy, Inc. and
SunPower Corporation.

Master Supply Agreement, dated August 9, 2018,
between Enphase Energy, Inc. and SunPower
Corporation.

Amendment No. 1 to Master Supply Agreement,
dated December 10, 2018, by and between
Enphase Energy, Inc. and SunPower Corporation.

Bayside Parkway Lease by and between Enphase
Energy, Inc. and Dollinger Bayside Associates,
dated April 12, 2018.

List of Subsidiaries of the Registrant

Consent of Deloitte & Touche LLP, Independent
Registered Public Accounting Firm

Power of Attorney (incorporated by reference to the
signature page of this Annual Report on Form 10-
K).

Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a).

Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a).

Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section
1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document.

101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

101.DEF

101.LAB

101.PRE

XBRL Taxonomy Extension Calculation Linkbase
Document.

XBRL Taxonomy Extension Definition Linkbase
Document.

XBRL Taxonomy Extension Label Linkbase
Document.

XBRL Taxonomy Extension Presentation
Document.

8-K

001-35480

10.2

8/17/2018

001-35480

10.1

2/6/2019

SC 13D

005-86790

SC 13D

8/20/2018

SC 13D

005-86790

SC 13D

8/20/2018

10-K

001-34166

10.74

2/14/2019

+ Management compensatory plan or arrangement.

† Confidential treatment has been granted for certain portions of this exhibit. Omitted information has been filed

separately with the Securities and Exchange Commission.

The certifications attached as Exhibit 32.1 accompany this quarterly report on Form 10-K pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed
“filed” by Enphase Energy, Inc. for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

Item 16. Form 10-K Summary

Not Applicable

– 102 –

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has

duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 15, 2019.

SIGNATURES

Enphase Energy, Inc.

By:

/s/ BADRINARAYANAN KOTHANDARAMAN

Badrinarayanan Kothandaraman

President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below

constitutes and appoints Badrinarayanan Kothandaraman and Eric Branderiz, jointly and severally, as his true and
lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file
the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by

the following persons on behalf of the registrant and in the capacities on the dates indicated.

Signature

Title

Date

/s/ BADRINARAYANAN KOTHANDARAMAN

Badrinarayanan Kothandaraman

President and Chief Executive Officer
(Principal Executive Officer)

/s/ ERIC BRANDERIZ

Eric Branderiz

/s/ MANDY YANG

Mandy Yang

Vice President and Chief Financial Officer
(Principal Financial Officer)

Vice President, Chief Accounting Officer and
Treasurer
(Principal Accounting Officer)

/s/ STEVEN J. GOMO

Director

Steven J. Gomo

/s/ BENJAMIN KORTLANG

Director

Benjamin Kortlang

/s/ RICHARD MORA

Director

Richard Mora

/s/ THURMAN JOHN RODGERS

Director

Thurman John Rodgers

March 15, 2019

– 103 –

Enphase Energy, Inc.

Corporate Headquarters
47281 Bayside Parkway
Fremont, California 94538
enphase.com
707.774.7000

Investor Relations
investor.enphase.com
ir@enphaseenergy.com
707.763.4784 x7354

Transfer Agent and Registrar
American Stock Transfer & Trust Company, LLC
Operations Center
6201 15th Avenue
Brooklyn, New York 11219
astfinancial.com
800.937.5449

Independent Registered Public Accounting Firm
Deloitte & Touche LLP

Stock Exchange Listing
Enphase Energy, Inc. common stock trades on
the NASDAQ Global Market under the
symbol ENPH

Financial and investor information is available on the company’s Investor Relations website at investor.enphase.com