Enphase Energy
Annual Report 2019

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2019or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number: 001-35480 Enphase Energy, Inc.(Exact name of registrant as specified in its charter) Delaware20-4645388(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification No.)47281 Bayside ParkwayFremont, CA 94538(Address of principal executive offices, including 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:Trading Symbol(s)Name of each exchange on which registeredCommon Stock, $0.00001 par value per shareENPHThe Nasdaq Stock Market LLCSecurities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒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 duringthe 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 forthe past 90 days. Yes ☒ No ☐Table of ContentsIndicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit suchfiles). Yes x No ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or anemerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting company Emerging growth companyIf an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new orrevised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2019, based upon the closing price of $18.23 of theregistrant’s common stock as reported on the Nasdaq Global Market, was approximately $1.6 billion.As of February 14, 2020, there were 123,179,271 shares of the registrant’s common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s Proxy Statement for the 2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120days after the end of the registrant’s fiscal year ended December 31, 2019 are incorporated by reference into Part III of this Annual Report on Form 10-K. Table of ContentsEnphase Energy, Inc.Table of Contents Page PART I Item 1.Business4Item 1A.Risk Factors10Item 1B.Unresolved Staff Comments35Item 2.Properties35Item 3.Legal Proceedings35Item 4.Mine Safety Disclosures35 PART II Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities35Item 6.Selected Consolidated Financial Data38Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations40Item 7A.Quantitative and Qualitative Disclosures About Market Risk52Item 8.Financial Statements and Supplementary Data54Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure104Item 9A.Controls and Procedures104Item 9B.Other Information104 PART III Item 10.Directors, Executive Officers and Corporate Governance105Item 11.Executive Compensation105Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters105Item 13.Certain Relationships and Related Transactions, and Director Independence105Item 14.Principal Accounting Fees and Services105 PART IV Item 15.Exhibits, Financial Statement Schedules106Item 16.Form 10-K Summary109 Signatures Table of ContentsThis Annual Report on Form 10-K contains “forward-looking statements” as defined under securities laws. Forward-looking statementsinclude 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 andAnalysis of Financial Condition and Results of Operations; and other sections of this Annual Report on Form 10-K. Our actual results or experiencecould differ significantly from the forward-looking statements. Factors that could cause or contribute to these differences include those discussed inItem 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 ofthe date that they were made. These cautionary statements should be considered in connection with any written or oral forward-looking statementsthat we may issue in the future. We do not undertake any obligation to release publicly any revisions to these forward-looking statements aftercompletion of the filing of this Annual Report on Form 10-K to reflect later events or circumstances or to reflect the occurrence of unanticipatedevents.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.PART IItem 1. BusinessOur CompanyWe are a global energy technology company. We deliver smart, easy-to-use solutions that manage solar generation, storage andcommunication on one intelligent platform. We revolutionized the solar industry with our microinverter technology and we produce a fully integratedsolar-plus-storage solution. We have shipped more than 25 million microinverters, and over one million Enphase residential and commercialsystems have been deployed in more than 130 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 July2007.Industry BackgroundHistorically, traditional central inverters were the only inverter technology used for solar PV installations. In an installation consisting of atraditional central inverter, the solar PV modules are connected in series strings. In a large installation, there are multiple series strings connected inparallel. The aggregated voltage from each of these strings is then fed into a large central inverter. We believe that traditional central inverters havea number of design and performance challenges limiting innovation and their ability to reduce the cost of solar power systems, including thefollowing:•Productivity limits. If solar modules are wired using a traditional central inverter—group or “string” of modules are wired in series, and anentire string’s output is limited by the output of the lowest-performing module. Because of its string design, there is a single point of failurerisk with the traditional central inverter approach.•Reliability issues. Traditional central inverters are the single most common component of solar installations to fail, resulting in systemdowntime 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 theinstaller, both in terms of design and on-site labor. Central inverter installations require string design and calculations for safe and reliableoperation, as well as specialized equipment such as DC combiners, conduits and disconnects. In addition, the use of high-voltage directcurrent (“DC”) requires specialized knowledge and training and safety precautions to install central inverter technology. Enphase Energy, Inc. | 2019 Form 10-K | 4Table of Contents•Lack of monitoring. The majority of solar installations with central inverter technology offer limited monitoring capabilities. If a module in acentral inverter system fails or is not performing to specification, the resulting loss of energy can go unnoticed for an extended period oftime.•Safety issues. Central inverter solar PV installations have a wide distribution of high-voltage (600 volts to 1,000 volts) DC wiring. Ifdamaged, DC wires can generate sustained electrical arcs, reaching temperatures of more than 5,000 °F. This creates the risk of fire forsolar 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 toboth 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 power 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 PVinstallations due to string design limitations. As such, they experience performance loss from shading and other obstructions, can facefrequent system failures and lack the ability to effectively monitor the performance of their solar PV installation. In addition, centralinverter installations operate at high-voltage DC which bears significant fire risks. Further, due to their large size, central inverterinstallations can affect architectural aesthetics of the house or commercial building.The solar industry has started its transition from solar only systems to complete energy management solutions, which consist of solar plusstorage and load control.Our ProductsWe design, develop, manufacture and sell home energy solutions that manage energy generation, energy storage and control andcommunications on one intelligent platform. We have revolutionized the solar industry by bringing a systems approach to solar technology and bypioneering a semiconductor-based microinverter that converts energy at the individual solar module level and, combined with our proprietarynetworking and software technologies, provides advanced energy monitoring and control. This is vastly different than a central inverter systemusing string modules, with or without an optimizer, approach that only converts energy of the entire array of solar modules from a single high voltageelectrical unit and lacks intelligence about the energy producing capacity of the solar array. The Enphase Home Energy Solution with IQ™ platform,which is our current generation integrated solar, storage and energy management offering, enables self-consumption and delivers our core valueproposition 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 capabilityis built-in, with no additional equipment necessary.The Enphase Home Energy Solution with IQ™ brings a high technology, networked approach to solar generation plus energy storage, byleveraging our design expertise across power electronics, semiconductors and cloud-based software technologies. Our integrated approach toenergy solutions maximizes a home’s energy potential while providing advanced monitoring and remote maintenance capabilities. The EnphaseHome Energy Solution with IQ uses a single technology platform for seamless management of the whole solution, enabling rapid commissioningwith the Installer Toolkit™; consumption monitoring with our Envoy™ Communications Gateway with IQ Combiner+, Enphase Enlighten, a cloud-based energy management platform, and our Enphase AC Battery™. System owners can use Enphase Enlighten to monitor their home’s solargeneration, energy storage and consumption from any web-enabled device. Unlike some of our competitors, who utilize a traditional inverter, oroffer separate components of solutions, we have built-in system redundancy in both PV generation and energy storage, eliminating the risk thatcomes with a single-point of failure. Further, the nature of our cloud-based, monitored system allows for remote firmware and software updates,enabling cost-effective remote maintenance and ongoing utility compliance.The Enphase IQ 7 Micro™ and Enphase IQ 7+ Micro™, part of our seventh-generation IQ product family, support high-powered 60-cell and72-cell solar modules and integrate with alternating current (“AC”) modules. Our IQ 7X™ product addresses 96-cell photovoltaic (“PV”) modules upto 400W direct current (“DC”) and with its 97.5 percent California Energy Commission (“CEC”) efficiency rating, is ideal for integration into highpower modules. Enphase Energy, Inc. | 2019 Form 10-K | 5Table of ContentsIn the third quarter of 2019, we shipped significant volumes of IQ 7AS™ microinverters to SunPower Corporation, which integrated our IQ 7ASinto its 66-cell Next Generation Technology (“NGT”) DC modules. In November 2019, we began shipping to customers in North America our IQ™ 7Amicroinverters for solar modules up to 450 W, targeting high-power residential and commercial applications. Our customers should be able to pairthe IQ 7A microinverter with monofacial or bifacial solar modules, up to 450 W, from solar module manufacturers who are expected to introducehigh-power variants of their products in the next three years.AC Module products are integrated systems which allow installers to be more competitive through improved logistics, reduced installationtimes, faster inspection and training. We began shipping Enphase Energized™ AC Modules in North America in 2017, and continued to makesteady progress during 2019 with our AC module partners, including SunPower, Panasonic Corporation of North America and Solaria Corporation.During the third quarter of 2019, we introduced the Enphase IQ Combiner 3C™, an important component of the Enphase Home EnergySolution with IQ platform, designed to provide an uninterrupted connectivity to the Enphase Enlighten™ monitoring and service platform.Our next-generation IQ 8™ system is based upon our Always On Enphase Ensemble™ energy management technology. This system hasfive components: 1) energy generation, which is accomplished with the grid-agnostic microinverter IQ 8; 2) energy storage, which is achieved by theEncharge™ battery with capacities of 3.4 kWh and 10.1 kWh; 3) microgrid interconnect device (MID); 4) communication and control via thecombiner box with the Envoy gateway; and 5) Enlighten, which is the internet of things, or IoT, cloud software.We started accepting pre-orders of Ensemble technology products, which is focused on enabling high capacity storage for North America,through our distribution partners in November 2019. Storage is enabled by our Encharge battery, which is a modular 3.4 kWh solution. Themodularity allows for ease of installation, flexibility and scalability, while helping to streamline our supply chain. The Encharge battery will beavailable in two variants - 3.4kWh and 10.1 kWh configuration. The 3.4 kWh battery contains four IQ 8 grid-agnostic microinverters internally.After the release of the storage product, expected in the first quarter of 2020, we anticipate further revisions of Ensemble to be released in2020, with a focus on IQ 8 PV or IQ 8 solar installations. The advantage of IQ 8s on the roof will be that these grid-forming microinverters producepower from panels even during blackouts, as long as the sun is still shining. It addresses a major drawback of traditional solar installations withoutthe need for storage and is differentiated in that respect.The pure off-grid solution that Ensemble technology also addresses started shipping to our partners on IQ 8 during the fourth quarter of 2019.In December 2019, we announced two future products: the Enphase IQ 8D™ for commercial solar purposes an off-grid solar and storagesystem that are designed to support multiple applications for the Indian market.Our StrategyOur objective is to be the leading provider of energy management solutions 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 ourmomentum 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. Inaddition, 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 managementsolution 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 powerconversion efficiency above 97% and AC output power beyond 350 watts in order to pair with DC modules rated over 400 watts. Weintend to continue to leverage our semiconductor integration, power electronics expertise and manufacturing economies of scale to furtherreduce cost per watt. Enphase Energy, Inc. | 2019 Form 10-K | 6Table of Contents•Extend our technological innovation. We distinguish ourselves from other inverter companies with our systems-based and high technologyapproach, and the ability to leverage strong research and development capabilities.Customers and SalesWe currently offer solutions targeting the residential and commercial markets in the U.S., Canada, Mexico, Central American markets,Europe, Australia, New Zealand, India and certain other Asian markets. We sell our solutions primarily to solar distributors who resell to installersand integrators, who in turn integrate our products into complete solar PV installations for residential and commercial system owners. We work withmany of the leading solar and electrical distributors. In addition to our distributors, we sell directly to large installers, original equipmentmanufacturers (“OEM”), strategic partners and homeowners. Our OEM customers include solar module manufacturers who bundle our products andsolutions with their solar module products and resell to both distributors and installers. We also sell certain products and services directly to thehomeowners and the do-it-yourself market through our legacy product upgrade program or our online store. Strategic partners include a variety ofcompanies including industrial equipment suppliers and providers of solar financing solutions. In 2019, two customers accounted for approximately21% and 12% of total net revenues. Over the last three years, revenues generated from the U.S. market have represented 69% to 84% of our totalrevenue.Manufacturing, Quality Control and Key SuppliersWe outsource the manufacturing of our products to manufacturing partners. Flex Ltd. and affiliates (“Flex”) assemble and test ourmicroinverter, AC Battery and Envoy products. Prices for such services are agreed to by the parties on a quarterly basis, and we are obligated topurchase 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 SinbonIndustrial Limited manufactures our custom AC cables. In addition, we rely on several unaffiliated companies to supply certain components used inthe fabrication of our products.Our partnership with Flex provides us with strategic manufacturing capabilities and flexibility. In the beginning of the second quarter of 2019,we announced the first shipment of seventh-generation Enphase IQTM microinverters produced in Mexico as part of our expanded manufacturingagreement with Flex. We anticipate that this additional manufacturing capacity in Mexico could help us to not only mitigate tariffs, but also betterserve our customers by cutting down delivery times and diversifying our supply chain.Customer ServiceWe 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 2019,we introduced chat as a support channel in North America to help installers and homeowners solve their problems quickly. We launched Service-on-the-Go™ in Australia, which installers can use from their mobile devices to get service instantly. Our Net Promoter Score (commonly referred to as“NPS”) improved from 37% in 2018 to 52% in 2019 through multiple customer service initiatives. In 2019, the service organization achieved averagewait time of under 2 minutes.Research and DevelopmentWe devote substantial resources to research and development with the objective of developing new products and systems, adding newfeatures to existing products and systems and reducing unit costs. Our development strategy is to identify features, products and systems for bothsoftware and hardware that reduce the cost and optimize the effectiveness of our energy management solutions for our customers. We measure theeffectiveness of our research and development against metrics, including product unit cost, efficiency, reliability, power output and ease-of-use. Enphase Energy, Inc. | 2019 Form 10-K | 7Table of ContentsIntellectual PropertyWe operate in an industry in which innovation, investment in new ideas and protection of our intellectual property, or IP, rights are critical forsuccess. 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, 2019, we had 233 issuedU.S. patents, 77 issued foreign patents, 43 pending U.S. patent applications and 28 pending foreign counterpart patent applications. Our issuedpatents are scheduled to expire between years 2020 and 2038.We license certain power line communications technology and software for integration into our custom application specific integrated circuits(“ASIC”s), under a fully-paid, royalty-free license, which includes the right for us to source directly from the licensor’s suppliers or manufacturecertain ASIC hardware should the licensor fail, under certain conditions, to deliver such technology in the future. This license includes a limitedexclusivity period during which the licensor has agreed not to license the licensed technology to any third-party manufacturer of electroniccomponents or systems for use in the solar energy market. The license carries a 75-year term, subject to earlier termination upon agreement of theparties, 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 intoour 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 electroniccomponent designs and the distribution of such electronic components with our products. Other than in connection with the distribution of ourproducts, our use of such digital IP blocks is limited to certain of our business sites. The license is perpetual, subject to earlier termination by eitherparty 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 underopen source licenses. These licenses are perpetual and require us to attribute the source of the software to the original software developer, whichwe provide via our website.We continually assess the need for patent protection for those aspects of our technology, designs and methodologies and processes that webelieve provide significant competitive advantages. A majority of our patents relate to DC to AC power conversion and energy storage for alternativeenergy power systems, as well as power system monitoring, control and management systems.With respect to proprietary know-how that is not patentable and processes for which patents are difficult to enforce, we rely on trade secretprotection and confidentiality agreements to safeguard our interests. We believe that many elements of our microinverter manufacturing processinvolve proprietary know-how, technology or data that are not covered by patents or patent applications, including technical processes, testequipment designs, algorithms and procedures.We own or have rights to various registered trademarks and service marks in the U.S. and in other countries, including Enphase, EnsembleEnvoy, and Enlighten, and rely on both registration of our marks as well as common law protection where available.All of our research and development personnel have entered into confidentiality and proprietary information agreements with us. Theseagreements address intellectual property protection issues and require our employees to assign to us all of the inventions, designs and technologiesthey 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 ourtechnology 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 ormisappropriating our intellectual property or from otherwise gaining access to our technology. Enphase Energy, Inc. | 2019 Form 10-K | 8Table of ContentsSeasonalityHistorically, the majority of our revenues are from the North American and European regions which experience higher sales of our products inthe second, third and fourth quarters and have been affected by seasonal customer demand trends, including weather patterns and constructioncycles. The first quarter historically has had softer customer demand in our industry, due to these same factors. Although these seasonal factors arecommon in the solar sector, historical patterns should not be considered a reliable indicator of our future sales activity or performance.CompetitionThe 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.Competitors in the inverter market include, among others, SolarEdge Technologies, Inc., SMA Solar Technology AG, Huawei TechnologiesCo. Ltd., Fronius International GmbH, AP Systems, Generac, Yaskawa Solectria Solar, 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, becausetraditional central inverter solutions can be used as alternatives to our microinverter solution. We believe, however, that our microinverter solutionsoffer significant advantages and competitive differentiation relative to traditional central or string inverter technology, even when supplemented byDC-to-DC optimizers. Competitors in the storage market include SolarEdge Technologies, Sonnen, Tesla, LG Chem, SMA Solar Technology AG,Panasonic, Delta Electronics, Generac, and producers of battery cells and other integrated storage systems.EmployeesAs of December 31, 2019, we had 577 full-time employees. Of the full-time employees, 245 were engaged in research and development, 220in sales and marketing, 64 in general and administration and 48 in manufacturing and operations. Of these employees, 260 were in the UnitedStates, 192 in India, 74 in New Zealand, 21 in Europe, 15 in Australia, 14 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 bargainingagreement. We have not experienced any employment-related work stoppages, and we consider our relations with our employees to be good. Enphase Energy, Inc. | 2019 Form 10-K | 9Table of ContentsAvailable InformationWe file electronically with the U.S. Securities and Exchange Commission, or SEC, our Annual Reports on Form 10-K, Quarterly Reports onForm 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 Actof 1934, as amended, or the Exchange Act can be accessed on our Investor Relations website at www.investor.enphase.com. We make available,free of charge, copies of these reports as soon as reasonably practicable after filing these reports with the SEC or otherwise furnishing it to 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 withthe SEC, and any references to our websites are intended to be inactive textual references only.Item 1A. Risk FactorsWe have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition or resultsof operations. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe arenot material may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of ourcommon 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 alsorefer to the other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes.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 willcontinue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, including increasedexpenses as we continue to grow our business. If we do not manage these risks and overcome these difficulties successfully, our business willsuffer.Since we began commercial shipments of our products, our revenue, gross profit and results of operations have varied and are likely tocontinue 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 forecastour 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 thisdemand. The solar industry is an evolving industry that has experienced substantial changes in recent years, and we cannot be certain thatconsumers 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 agovernment regulated utility. For alternative methods of distributed power to succeed, businesses and consumers must adopt new purchasingpractices. The viability and continued growth in demand for solar energy solutions, and in turn, our products, may be impacted by many factorsoutside 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 sourcesand 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 solarelectricity 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 Enphase Energy, Inc. | 2019 Form 10-K | 10Table of Contents•the emergence, continuance or success of, or increased government support for, other alternative energy generation technologies andproducts.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 technologysolutions to decline rapidly. Furthermore, competition in the solar industry has increased due to the emergence of lower-cost manufacturers alongthe entire solar value chain causing further price declines, excess inventory and oversupply. These market disruptions may continue to occur andmay 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 2019, two customers accounted for approximately 21% and 12% of total net revenues. Our customers’ decisions to purchase our productsare 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 andare generally terminable by either party after a relatively short notice period. In addition, these customers may decide to no longer use, or to reducethe 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 largecustomers 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 ormore of our large customers have had from time to time, and could in the future have a material adverse effect on our business, financial conditionand results of operations.We depend upon a small number of outside contract manufacturers, and our operations could be disrupted if we encounter problemswith these contract manufacturers.We do not have internal manufacturing capabilities and rely upon a small number of contract manufacturers to build our products. Ourreliance on a small number of contract manufacturers makes us vulnerable to possible capacity constraints and reduced control over componentavailability, delivery schedules, manufacturing yields and costs. We do not have long-term supply contracts with our contract manufacturingpartners. Consequently, these manufacturers are not obligated to supply products to us for any period, in any specified quantity or at any certainprice.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 timelymanner. In addition, the facilities in which the vast majority of our products are manufactured are located outside of the U.S. We believe that thelocation of these facilities outside of the U.S. increases supply risk, including the risk of supply interruptions or reductions in manufacturing quality orcontrols.If any of our contract manufacturers were unable or unwilling to manufacture our products in required volumes and at high quality levels orrenew existing terms under supply agreements, we would have to identify, qualify and select acceptable alternative contract manufacturers. Analternative contract manufacturer may not be available to us when needed or may not be in a position to satisfy our quality or productionrequirements on commercially reasonable terms. Any significant interruption in manufacturing would require us to reduce our supply of products toour customers, which in turn would reduce our revenues, harm our relationships with our customers and cause us to forgo potential revenueopportunities. Enphase Energy, Inc. | 2019 Form 10-K | 11Table of ContentsManufacturing problems could result in delays in product shipments to customers and could adversely affect our revenue, competitiveposition and reputation.We may experience delays, disruptions or quality control problems in our manufacturing operations. Our product development, manufacturingand testing processes are complex and require significant technological and production process expertise. Such processes involve a number ofprecise steps from design to production. Any change in our processes could cause one or more production errors, requiring a temporary suspensionor delay in our production line until the errors can be researched, identified and properly addressed and rectified. This may occur particularly as weintroduce new products, modify our engineering and production techniques, and expand our capacity. In addition, our failure to maintain appropriatequality assurance processes could result in increased product failures, loss of customers, increased production costs and delays. Any of thesedevelopments could have a material adverse effect on our business, financial condition, and results of operations.A disruption could also occur in one of our contract manufacturers’ facilities 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 couldincur additional costs that would adversely affect our gross profit, and product shipments to our customers could be delayed beyond the schedulesrequested, 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. Capacityconstraints, raw materials shortages, logistics issues, labor shortages, and changes in customer requirements, manufacturing facilities or processeshave historically caused, and may in the future cause, reduced manufacturing yields, negatively impacting the gross profit on, and our productioncapacity for, those products. Moreover, an increase in the rejection and rework rate of products during the quality control process before, during orafter 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, whichimpacts 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 totime caused, and may in the future cause, temporary suspension of product lines while problems are addressed or corrected. Since our business issubstantially dependent on a limited number of product lines, any prolonged or substantial suspension could result in a material adverse effect onour revenue, gross profit, competitive position, and distributor and customer relationships.We depend on sole-source and limited-source suppliers for key components and products. If we are unable to source these componentson 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 asole source supplier or developed for us by sole source suppliers. Any of the sole-source and limited-source suppliers upon whom we rely couldexperience quality and reliability issues, stop producing our components, cease operations, or be acquired by, or enter into exclusive arrangementswith, our competitors. We generally do not have long-term supply agreements with our suppliers, and our purchase volumes may currently be toolow 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 commerciallyreasonable prices, or at all. Any such quality or reliability issue, or interruption or delay may force us to seek similar components or products fromalternative sources, which may not be available on commercially reasonable terms, or at all. Switching suppliers may require that we redesign ourproducts 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 meetscheduled product deliveries to our customers and could result in lost revenue or higher expenses and would harm our business.U.S. government actions with regard to the solar energy sector or international trade could materially harm our business, financialcondition and results of operations.The current U.S. presidential administration has created and may continue to create regulatory uncertainty in the clean energy sectorgenerally and the solar energy sector in particular. If the administration or the U.S. Congress takes action to eliminate or reduce laws, regulationsand incentives supporting solar energy, such actions may result in a decrease in demand for solar energy in the U.S. and other geographicalmarkets, which could materially harm our business, financial condition and results of operations. Enphase Energy, Inc. | 2019 Form 10-K | 12Table of ContentsOn September 24, 2018 the U.S. began assessing 10% tariffs on certain solar products manufactured in China including our microinverterproducts and related accessories which are manufactured in China. These tariffs increased to 25% in May 2019. Such tariffs could have a negativeimpact 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 toavoid them, such tariffs will continue to apply to our microinverters and other products. Such tariffs could hurt the demand for these products andmaterially harm our business, financial condition and results of operations. There is no guarantee that we will be successful in obtaining exemptionsor that any actions that we may pursue with respect to the organization and operation of our business will effectively mitigate the effects of any tariffsthat 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) couldresult 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. TheU.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 theadministration, imposes any additional border tariff or takes any other actions making it more difficult for us to sell our products across internationalboundaries, our business, financial condition and results of operations could be adversely affected.If we or our contract manufacturers are unable to obtain raw materials in a timely manner or if the price of raw materials increasessignificantly, 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, siliconand petroleum-based products. From time to time, suppliers may extend lead times, limit supplies or increase prices due to capacity constraints orother factors. Certain of our suppliers have the ability to pass along to us directly or through our contract manufacturers any increases in the price ofraw 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 mayfrom time to time enter into hedging transactions to reduce our exposure to wide fluctuations in the cost of raw materials, the availability andeffectiveness of these hedging transactions may be limited. Due to all these factors, our results of operations could be adversely affected if we or ourcontract manufacturers are unable to obtain adequate supplies of raw materials in a timely manner or at reasonable cost. In addition, from time totime, we or our contract manufacturers may need to reject raw materials that do not meet our specifications, resulting in potential delays or declinesin output. Furthermore, problems with our raw materials may give rise to compatibility or performance issues in our products, which could lead to anincrease in customer returns or product warranty claims. Errors or defects may arise from raw materials supplied by third parties that are beyond ourdetection or control, which could lead to additional customer returns or product warranty claims that may adversely affect our business and results ofoperations.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 anticipatedlevel 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 onthe continued contributions of members of our senior management team and key personnel in areas such as engineering, marketing, and sales, anyof whom would be difficult to replace. All of our employees, including our senior management, are free to terminate their employment relationshipswith us at any time. Competition for highly skilled executives and employees in the technology industry is intense and our competitors have targetedindividuals in our organization that have desired skills and experience. If we are not able to continue to attract, train and retain our leadership teamand our qualified employees necessary for our business, the progress of our product development programs could be hindered, and we could bematerially adversely affected. To help attract, retain and motivate our executives and qualified employees, we use share-based incentive awardssuch as employee stock purchase plan and non-vested share units (restricted stock units). If the value of such stock awards does not appreciate asmeasured by the performance of the price of our common stock, or if our share-based compensation otherwise ceases to be viewed as a valuablebenefit, our ability to attract, retain and motivate our executives and employees could be weakened, which could harm our results of operations.Also, if the value of our stock awards increases substantially, this could potentially create substantial personal wealth for our executives andemployees and affect our ability to retain our personnel. In addition, any future restructuring plans may adversely impact our ability to attract andretain key employees. Enphase Energy, Inc. | 2019 Form 10-K | 13Table of ContentsThe solar industry is highly competitive, and we expect to face increased competition as new and existing competitors introduceproducts, which could negatively impact our results of operations and market share.The market for solar power solutions is highly competitive. We compete primarily against central and string inverter manufacturers, as well asagainst new solutions and emerging technologies that directly compete with our business. A number of companies have developed or aredeveloping microinverters and other products that will compete directly with our solutions in the module-level power electronics market. Competitorsin the inverter market include, among others, SolarEdge Technologies, Inc., SMA Solar Technology AG, Huawei Technologies Co. Ltd., FroniusInternational GmbH, ABB Ltd., AP Systems, Generac, Yaskawa Solectria. Other existing or emerging companies may also begin offering alternativemicroinverter, DC-to-DC optimizer, energy storage, monitoring and other solutions that compete with our products. Competitors in the storagemarket include SolarEdge Technologies, Sonnen, Tesla, LG Chem, SMA Solar Technology AG, Panasonic, Delta Electronics, Generac, andproducers of battery cells and other integrated storage systems.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 ourcompetitors have more resources and experience in developing or acquiring new products and technologies and creating market awareness forthese offerings. Further, certain competitors may be able to develop new products more quickly than we can and may be able to develop productsthat are more reliable or that provide more functionality than ours. In addition, some of our competitors have the financial resources to offercompetitive products at aggressive or below-market pricing levels, which could cause us to lose sales or market share or require us to lower pricesof our products in order to compete effectively. Suppliers of solar products, particularly solar modules, have experienced eroding prices over the lastseveral 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 tooffset any future reductions in our average selling prices by increasing our sales volume, reducing our costs and expenses or introducing newproducts, 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 ofmanufacturing products internally. Other solar module manufacturers could also develop or acquire competing inverter technology or attempt todevelop components that directly perform DC-to-AC conversion in the module itself. Due to the fact that such customers may not seek to make aprofit directly from the manufacture of these products, they may have the ability to manufacture competitive products at a lower cost than we wouldcharge such customers. As a result, these customers or potential customers may purchase fewer of our systems or sell products that compete withour systems, which would negatively impact our revenue and gross profit.Developments in alternative technologies or improvements in distributed solar energy generation may have a material adverse effect ondemand for our offerings.Significant developments in alternative technologies, such as advances in other forms of distributed solar PV power generation, storagesolutions such as batteries, the widespread use or adoption of fuel cells for residential or commercial properties or improvements in other forms ofcentralized power production may have a material adverse effect on our business and prospects. Any failure by us to adopt new or enhancedtechnologies or processes, or to react to changes in existing technologies, could result in product obsolescence, the loss of competitiveness of ourproducts, decreased revenue and a loss of market share to competitors.Our recent and planned expansion into existing and new markets could subject us to additional business, financial and competitiverisks.We currently offer solar microinverter systems targeting the residential and commercial markets throughout the world, and we intend toexpand 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; Enphase Energy, Inc. | 2019 Form 10-K | 14Table of Contents•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;•our customer service capabilities and responsiveness; and•timely hiring of the skilled employees and efficient execution of our project plan.Further, new geographic markets and larger commercial and utility-scale installation markets have different characteristics from the marketsin 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 protectionregulations, 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 theForeign 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 anddevelopment, marketing and manufacturing costs, or to otherwise effectively anticipate and manage the risks and challenges associated with ourpotential expansion into new product and geographic markets, could adversely affect our revenues and our ability to achieve or sustain profitability.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 investmentsin our infrastructure, increased our operating costs and forgone other business opportunities in order to seek opportunities in these areas and willcontinue to do so. Any new product is subject to certain risks, including component sourcing, strategic partner selection and execution, customeracceptance, competition, product differentiation, market timing, challenges relating to economies of scale in component sourcing and the ability toattract 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 apoint 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 impacton our revenue, operating results and financial stability.In the fourth quarter of 2019, we announced our eight-generation IQ microinverters and Ensemble technology. Our new product could becomplex requiring requires significant preparation, precautionary safety measures, time-consuming string calculations, extensive design expertiseand specialized installation equipment, training and knowledge. Together, these factors significantly increase complexity and cost of installation andlimit overall productivity for the installer. Our installer may not have sufficient resources or expertise necessary to sell our products at the prices, inthe volumes and within the time frames that we expect, which could hinder our ability to expand our operations and harm our revenue and operatingresults. Enphase Energy, Inc. | 2019 Form 10-K | 15Table of ContentsWe rely primarily on distributors, installers and providers of solar financing to assist in selling our products, and the failure of thesecustomers 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 ofthird-party solar finance offerings. We do not have exclusive arrangements with these third parties and, as a result, many of our customers also useor market and sell products from our competitors, which may reduce our sales. Our customers may generally terminate their relationships with us atany 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 thetime frames that we expect, or may focus their marketing and sales efforts on products of our competitors. In addition, participants in the solarindustry are becoming increasingly focused on vertical integration of the solar financing and installation process, which may lead to an overallreduction in the number of potential parties who may purchase and install our products.In addition, while we provide our distributors and installers with training and programs, including accreditations and certifications, theseprograms may not be effective or utilized consistently. In addition, new partners may require extensive training and may take significant time andresources to achieve productivity. Our partners may subject us to lawsuits, potential liability, and reputational harm if, for example, any of ourpartners misrepresent the functionality of our platform or products to customers, fail to perform services to our customers’ expectations, or violatelaws or our corporate policies. In addition, our partners may utilize our platform to develop products and services that could potentially compete withproducts and services that we offer currently or in the future. Concerns over competitive matters or intellectual property ownership could constrainthese partnerships. If we fail to effectively manage and grow our network of partners, or properly monitor the quality and efficacy of their servicedelivery, our ability to sell our products and efficiently provide our services may be impacted, and our operating results may be harmed.Our future performance depends on our ability to effectively manage our relationships with our existing customers, as well as to attractadditional customers that will be able to market and support our products effectively, especially in markets in which we have not previouslydistributed our products. Termination of agreements with current customers, failure by customers to perform as expected, or failure by us to cultivatenew customer relationships, could hinder our ability to expand our operations and harm our revenue and operating results.Our microinverter systems, including our storage solution, integrated AC Module, eighth-generation IQ microinverters and Ensembletechnology, 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 eighth-generation IQ microinvertersand Ensemble technology announced in the fourth quarter of 2019, there would be an adverse impact on our ability to increase our revenue, gainmarket share and achieve and sustain profitability. Our ability to achieve broader market acceptance for our products will be impacted by a numberof 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 historywith 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 alimited 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 onacceptable terms or at all;•our ability to develop products that comply with local standards and regulatory requirements, as well as potential in-country manufacturingrequirements; 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 havetraditionally sold central or string inverters, or who currently sell DC-to-DC optimizers. These installers often have made substantial investments indesign, installation resources and training in traditional central or string inverter systems or DC optimizers, which may create challenges for us toachieve their adoption of our solutions. Enphase Energy, Inc. | 2019 Form 10-K | 16Table of ContentsThe reduction, elimination or expiration of government subsidies and economic incentives for on-grid solar electricity applications couldreduce 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 orsold 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 economicincentives for on-grid solar electricity may negatively affect the competitiveness of solar electricity relative to conventional and non-solar renewablesources 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 aresult, national, state and local government bodies in many countries, including the U.S., have provided incentives in the form of feed-in tariffs, orFiTs, rebates, tax credits and other incentives to system owners, distributors, system integrators and manufacturers of solar PV systems to promotethe 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 bygovernments due to changing market circumstances or changes to national, state or local energy policy.Electric utility companies or generators of electricity from other non-solar renewable sources of electricity may successfully lobby for changesin the relevant legislation in their markets that are harmful to the solar industry. Reductions in, or eliminations or expirations of, governmentalincentives in regions where we focus our sales efforts could result in decreased demand for and lower revenue from solar PV systems there, whichwould adversely affect sales of our products. In addition, our ability to successfully penetrate new geographic markets may depend on new countriesadopting and maintaining incentives to promote solar electricity, to the extent such incentives are not currently in place. Furthermore, electric utilitycompanies may establish pricing structures or interconnection requirements that could adversely affect our sales and be harmful to the solar anddistributed rooftop solar generation industry.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 adverselyaffected 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 declinesin 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 productdemand 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 Enphase Energy, Inc. | 2019 Form 10-K | 17Table of Contents•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 are under continuous pressure to reduce the prices of our products, which has adversely affected, and may continue to adverselyaffect, 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 thepast, and we expect to continue to experience pricing pressure for our products in the future, including from our major customers. In addition, wehave reduced our prices ahead of planned cost reductions of our products, which has adversely affected our gross margins. When seeking tomaintain or increase their market share, our competitors may also reduce the prices of their products. In addition, our customers may have theability or seek to internally develop and manufacture competing products at a lower cost than we would otherwise charge, which would addadditional pressure on us to lower our selling prices. If we are unable to offset any future reductions in our average selling prices by increasing oursales 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 principalcomponent of our business strategy is reducing the costs to manufacture our products to remain competitive. If our competitors are able to drivedown their manufacturing costs faster than we can or increase the efficiency of their products, our products may become less competitive evenwhen 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.A drop in the retail price of electricity derived from the utility grid or from alternative energy sources, or a change in utility pricingstructures, 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 solarPV installations relative to the retail price of electricity from the utility grid and the cost of other renewable energy sources, including electricity fromsolar PV installations using central inverters. Decreases in the retail prices of electricity from the utility grid would make it more difficult for all solarPV systems to compete. In particular, growth in unconventional natural gas production and an increase in global liquefied natural gas capacity areexpected to keep natural gas prices relatively low for the foreseeable future. Persistent low natural gas prices, lower prices of electricity producedfrom other energy sources, such as nuclear power or coal-fired plants, or improvements to the utility infrastructure could reduce the retail price ofelectricity from the utility grid, making the purchase of solar PV systems less economically attractive and depressing sales of our products. Inaddition, energy conservation technologies and public initiatives to reduce demand for electricity also could cause a fall in the retail price ofelectricity from the utility grid. Moreover, technological developments by our competitors in the solar industry, including manufacturers of centralinverters and DC-to-DC optimizers, could allow these competitors or their partners to offer electricity at costs lower than those that can be achievedfrom solar PV installations based on our product platform, which could result in reduced demand for our products. Additionally, as increasingadoption of distributed generation places pressure on traditional utility business models or utility infrastructure, utilities may change their pricingstructures to increase the cost of installation or operation of solar distributed generation. Such measures can include grid access fees, costly orlengthy interconnection studies, limitations on distributed generation penetration levels, or other measures. If the cost of electricity generated bysolar PV installations incorporating our solutions is high relative to the cost of electricity from other sources, our business, financial condition andresults of operations may be harmed. Enphase Energy, Inc. | 2019 Form 10-K | 18Table of ContentsIf we do not forecast demand for our products accurately, we may experience product shortages, delays in product shipment, excessproduct inventory, difficulties in planning expenses or disputes with suppliers, any of which will adversely affect our business andfinancial condition.We manufacture our products according to our estimates of customer demand. This process requires us to make multiple forecasts andassumptions relating to the demand of our distributors, their end customers and general market conditions. Because we sell most of our products todistributors, who in turn sell to their end customers, we have limited visibility as to end-customer demand. We depend significantly on our distributorsto provide us visibility into their end-customer demand, and we use these forecasts to make our own forecasts and planning decisions. If theinformation from our distributors turns out to be incorrect, then our own forecasts may also be inaccurate. Furthermore, we do not have long-termpurchase 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 thatwe cannot sell. We may have to make significant provisions for inventory write-downs based on events that are currently not known, and suchprovisions or any adjustments to such provisions could be material. We may also become involved in disputes with our suppliers who may claim thatwe failed to fulfill forecast or minimum purchase requirements. Conversely, if we underestimate demand, we may not have sufficient inventory tomeet end-customer demand, and we may lose market share, damage relationships with our distributors and end customers and forgo potentialrevenue opportunities. Obtaining additional supply in the face of product shortages may be costly or impossible, particularly in the short term and inlight of our outsourced manufacturing processes, which could prevent us from fulfilling orders in a timely and cost-efficient manner or at all. Inaddition, 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 ofsuch excess through resale or return or build excess products, we could be required to pay for these excess parts or products and recognize relatedinventory write-downs.In addition, we plan our operating expenses, including research and development expenses, hiring needs and inventory investments, in parton our estimates of customer demand and future revenue. If customer demand or revenue for a particular period is lower than we expect, we maynot 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 ofgovernmental 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 ourrevenues 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 stateincentives. For instance, the Renewable Energy and Job Creation Act of 2008 provided a 30% federal tax credit for residential and commercial solarinstallations through December 31, 2019, which is currently reduced to a tax credit of 26% through December 31, 2020 and 22% thereafter toDecember 31, 2021 before being reduced to 10% for commercial installations and 0% for residential installations beginning on January 1, 2022.These tax credits could be reduced or eliminated as part of tax code changes or regulatory reform initiatives by the current Congress andpresidential administration.In addition, net energy metering tariffs are being evaluated and, in some instances modified, which may have a negative impact on futureinverter sales. We derive a significant portion of our revenues from California’s residential solar market and the existing California net energymetering tariff has been very successful in incentivizing the installation of residential solar power systems. Future legislative or regulatory changesin 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 theirnet energy metering or FiT programs. Certain countries have proposed or enacted taxes levied on renewable energy. These and relateddevelopments have significantly impacted the solar industry in Europe and may adversely affect the future demand for the solar energy solutions inEurope. Enphase Energy, Inc. | 2019 Form 10-K | 19Table of ContentsWe also sell our products in Australia. In 2012 Australia enacted a Renewable Energy Target (RET) that is intended to ensure that 33,000Gigawatt-hours of Australia’s electricity comes from renewable sources by 2020. This policy supports both the installation of large-scale centralizedrenewable generation projects, along with small-scale systems of under 100kW each for residential and small business customers. 2018 saw theintroduction 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 introduced similar programs in 2019. Any change in, or failure to implement, these programs may adverselyaffect 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 suchprograms could adversely affect sales of our products in the future. Reductions in incentives and uncertainty around future energy policy, includinglocal content requirements, have negatively affected and may continue to negatively affect our business, financial condition, and results ofoperations as we seek to increase our business domestically and abroad. Additionally, as we further expand to other countries, changes in incentiveprograms or electricity policies could negatively affect returns on our investments in those countries as well as our business, financial condition, andresults of operations.Changes in current laws or regulations or the imposition of new laws or regulations, or new interpretations thereof, by federal or stateagencies 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 affectour business, financial condition and results of operations. In addition, changes in our products or further changes in tariffs, export and import lawsand implementing regulations may create delays in the introduction of new products in international markets, prevent our customers from deployingour 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 consideringimplementing new restrictions on incentives or rules regulating the installation of solar power systems with which we may not be able to comply. Inthe event that we cannot comply with these or other new regulations or implement a solution to such noncompliance as they arise, the total marketavailable 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 ourproducts in countries where we offer our products for sale, any change in export or import regulations or related legislation, shift in approach to theenforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by these regulations, could result indecreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with internationaloperations. In such event, our business and results of operations could be adversely affected.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 activityand 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 continueto cause European governments to reduce, eliminate or allow to expire government subsidies and economic incentives for solar energy, whichcould limit our growth or cause our net sales to decline and materially and adversely affect our business, financial condition, and results ofoperations. 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 salesinternationally. Enphase Energy, Inc. | 2019 Form 10-K | 20Table of ContentsWe have a history of losses which may continue in the future, and we cannot be certain that we will sustain profitability.For the first year since our inception, we had net income of $161.1 million in the year ended December 31, 2019, compared to the yearsended December 31, 2018 and 2017 where we incurred net losses of $11.6 million and $45.2 million, respectively. We incurred substantial netlosses from our inception through the year ended December 31, 2018, and we may not be able to sustain profitability and may incur additionallosses in the future. At December 31, 2019, we had an accumulated deficit of $185.2 million. Our revenue growth may slow or revenue may declinefor a number of reasons, many of which are outside our control, including a decline in demand for our offerings, increased competition, a decreasein 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, theimposition of additional tariffs applicable to our industry or our products, or our failure to capitalize on growth opportunities. If we fail to generatesufficient revenue to support our operations, we may not be able to sustain profitability.Problems with product quality or product performance may cause us to continue to incur additional warranty expenses and may damageour 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 yearson each subsequent generation microinverters, including the current generation. Our limited warranties cover defects in materials and workmanshipof our microinverters under normal use and service conditions for up to 25 years following installation. As a result, we bear the risk of warrantyclaims long after we have sold the product and recognized revenue. Our estimated costs of warranty for previously sold products may changedepending 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 commercialsales of our products. Although we conduct accelerated life cycle testing to measure performance and reliability, our solutions have not been testedover 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 solarPV installation may perform in a different way than under standard test conditions. If our products perform below expectations or have unexpectedreliability 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 ourproducts, regarding a number of factors, including the durability and reliability of our products, our anticipated rate of warranty claims and the costsof replacement of defective products. Our assumptions have proved and could in the future prove to be materially different from the actualperformance 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 incorrecting 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 ourbrand name to attract new customers and grow our business. If our products and services do not perform as anticipated or we experienceunexpected reliability problems or widespread product failures, our brand and reputation could be significantly impaired, and we may lose, or beunable to gain or retain, customers. Enphase Energy, Inc. | 2019 Form 10-K | 21Table of ContentsDefects and poor performance in our products could result in loss of customers, decreased revenue and unexpected expenses, andincreases 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 arereleased. 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 maycause power overloads, potentially resulting in explosion or fire. As we develop new generations of our products and enter new markets, we facehigher risk of undetected defects because our testing protocols may not be able to fully test the products under all possible operating conditions. Inthe 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 remedyany 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 claimsagainst us that exceed any revenue or profit we receive from the affected products. We could incur significant costs and liabilities if we are sued andif damages are awarded against us. We currently maintain a moderate level of product liability insurance, and there can be no assurance that thisinsurance will provide sufficient coverage in the event of a claim. Also, we cannot predict whether we will be able to maintain this coverage onacceptable terms, if at all, or that a product liability claim would not harm our business or financial condition. Costs or payments we may make inconnection 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 theirsolar PV systems, may contain undetected errors, failures, or bugs, especially when new versions or enhancements are released. We have fromtime to time found defects in our service and new errors in our existing service may be detected in the future. Any errors, defects, disruptions inservice or other performance problems with our monitoring service could harm our reputation and may damage our customers’ businesses.Natural disasters, public health events, terrorist or cyber-attacks, or other catastrophic events could harm our operations.Our worldwide operations could be subject to natural disasters, public health events and other business disruptions, which could harm ourfuture revenue and financial condition and increase our costs and expenses. For example, our corporate headquarters in Fremont, California islocated 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 monitoringservice, 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 ourcontract manufacturer, destroy or disrupt vital infrastructure systems or interrupt our operations or services for any extended period of time, ourbusiness, financial condition and results of operations would be materially and adversely affected.We rely on third-party manufacturing facilities including for all product assembly and final testing of our products which is performed at third-party manufacturing facilities, in China and Mexico. There may be conflict or uncertainty in the countries in which we operate, including public healthissues (for example, an outbreak of a contagious disease such as 2019-Novel Coronavirus (2019-nCoV), avian influenza, measles or Ebola), safetyissues, natural disasters, fire, disruptions of service from utilities, nuclear power plant accidents or general economic or political factors. Any of theabove risks, should they occur, could result in an increase in the cost of components, production delays, general business interruptions, delays fromdifficulties in obtaining export licenses for certain technology, tariffs and other barriers and restrictions, longer payment cycles, increased taxes,restrictions on the repatriation of funds and the burdens of complying with a variety of foreign laws, any of which could ultimately have a materialadverse effect on our business. Enphase Energy, Inc. | 2019 Form 10-K | 22Table of ContentsWe could be subject to breaches of our information technology systems, which could cause significant reputational, legal and financialdamages.Like many companies, we use and store a wide variety of confidential and proprietary information relating to our business. Although we makesignificant efforts to maintain the security and integrity of our information technology and related systems, and have implemented measures tomanage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective, or thatattempted 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 thesesecurity measures cannot provide absolute security. The techniques used in attempted cyber-attacks and intrusions are sophisticated andconstantly evolving, and may be difficult to detect for long periods of time. We may be unable to anticipate these techniques or implement adequatepreventative measures. Although to date we have not experienced breaches of our systems that have had a material adverse effect on ourbusiness, attacks and intrusions on our systems will continue and we may experience a breach of our systems that compromises sensitive companyinformation or customer data. In addition, hardware, software, or applications we develop or procure from third parties may contain defects in designor manufacture or other problems that could unexpectedly compromise information security. If we experience a significant data security breach, wecould 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 ofoperations, and financial condition.We may also share information with contractors and third-party providers to conduct our business. Although such contractors and third-partyproviders typically implement encryption and authentication technologies to secure the transmission and storage of data, those third-party providersmay experience a significant data security breach, which may also detrimentally affect our business, results of operations, and financial condition.Any unauthorized access to, or disclosure or theft of personal information we gather, store or use could harm our reputation and subjectus 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, includingnames, addresses, e-mail addresses, credit information and energy production statistics. We also store and use personal information of ouremployees. We take steps to protect the security, integrity and confidentiality of the personal information we collect, store and transmit, but there isno guarantee that inadvertent or unauthorized use or disclosure will not occur or that third parties will not gain unauthorized access to thisinformation despite our efforts. Because techniques used to obtain unauthorized access or sabotage systems change frequently and generally arenot identified until they are launched against a target, we and our suppliers or vendors may be unable to anticipate these techniques or to implementadequate preventative or mitigation measures.In May 25, 2018, the European Union, or EU, implemented the General Data Protection Regulation, or GDPR, a broad data protectionframework that expands the scope of current EU data protection law to non-European Union entities that process, or control the processing of, thepersonal information of EU subjects. The GDPR allows for the imposition of fines and corrective action on entities that improperly use or disclosethe personal information of EU subjects, including through a data security breach. In June 2018, the state of California enacted the CaliforniaConsumer Privacy Act of 2018 or CCPA, which contains requirements similar to GDPR for the handling of personal information of Californiaresidents, which became effective in January 2020. The CCPA establishes a privacy framework for covered businesses, including an expansivedefinition of personal information and data privacy rights for California residents. The CCPA includes a framework with potentially severe statutorydamages and private rights of action. The CCPA requires covered companies to provide new disclosures to California consumers (as that word isbroadly defined in the CCPA), provide such consumers new ways to opt-out of certain sales of personal information, and allow for a new cause ofaction for data breaches. It remains unclear how the CCPA will be interpreted, but as currently written, it will likely impact our business activities andexemplifies the vulnerability of our business to not only cyber threats but also the evolving regulatory environment related to personal data. As weexpand our operations, the CCPA may increase our compliance costs and potential liability. Some observers have noted that the CCPA could markthe beginning of a trend toward more stringent privacy legislation in the United States. Other states are beginning to pass similar laws. Enphase Energy, Inc. | 2019 Form 10-K | 23Table of ContentsOur and our collaborators’ and contractors’ failure to fully comply with GDPR, CCPA and other laws could lead to significant fines and requireonerous corrective action. In addition, data security breaches experienced by us, our collaborators or contractors could result in the loss of tradesecrets 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. Compliance with these and any other applicableprivacy and data security laws and regulations is a rigorous and time-intensive process, and we may be required to put in place additionalmechanisms ensuring compliance with the new data protection rules. Furthermore, the laws are not consistent, and compliance with variousdifferent requirements may be costly. If we fail to comply with any such laws or regulations, we may face significant fines and penalties that couldadversely affect our business, financial condition and results of operations.Unauthorized use or disclosure of, or access to, any personal information maintained by us or on our behalf, whether through breach of oursystems, breach of the systems of our suppliers or vendors by an unauthorized party, or through employee or contractor error, theft or misuse, orotherwise, could harm our business. If any such unauthorized use or disclosure of, or access to, such personal information was to occur, ouroperations could be seriously disrupted, and we could be subject to demands, claims and litigation by private parties, and investigations, relatedactions, and penalties by regulatory authorities. In addition, we could incur significant costs in notifying affected persons and entities and otherwisecomplying 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 ofoperations.If we fail to protect, or incur significant costs in defending, our intellectual property and other proprietary rights, our business and resultsof 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 acombination of patent, trademark, copyright, trade secret and unfair competition laws, as well as confidentiality and license agreements and othercontractual provisions, to establish and protect our intellectual property and other proprietary rights. We have applied for patent and trademarkregistrations in the U.S. and in other countries, some of which have been issued. We cannot guarantee that any of our pending applications will beapproved or that our existing and future intellectual property rights will be sufficiently broad to protect our proprietary technology, and any failure toobtain 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 notavailable to the same extent as in the U.S., we may be at greater risk that our proprietary rights will be misappropriated, infringed or otherwiseviolated.To protect our unregistered intellectual property, including our trade secrets and know-how, we rely in part on trade secret laws andconfidentiality and invention assignment agreements with our employees and independent contractors. We also require other third parties who mayhave access to our proprietary technologies and information to enter into non-disclosure agreements. Such measures, however, provide only limitedprotection, and we cannot assure that our confidentiality and non-disclosure agreements will prevent unauthorized disclosure or use of ourconfidential information, especially after our employees or third parties end their employment or engagement with us, or provide us with anadequate 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 otherproprietary rights, or if such intellectual property and proprietary rights are infringed, misappropriated or otherwise violated, our business, results ofoperations 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 fromotherwise gaining access to our technology. Protecting and enforcing our intellectual property rights and determining their validity and scope couldresult in significant litigation costs and require significant time and attention from our technical and management personnel, which could significantlyharm our business. In addition, we may not prevail in such proceedings. An adverse outcome of any such proceeding may reduce our competitiveadvantage or otherwise harm our financial condition and our business. Enphase Energy, Inc. | 2019 Form 10-K | 24Table of ContentsWe may be subject to disruptions or failures in information technology systems and network infrastructures that could have a materialadverse 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 ourbusiness. In addition, our Enlighten web-based monitoring service, which our installers and end-user customers use to track and monitor theperformance of their solar PV systems, is dependent on cloud-based hosting services, along with the availability of WiFi or mobile data services atend-user premises. A disruption, infiltration or failure of our information technology systems, third-party cloud hosting platforms or end-user dataservices as a result of software or hardware malfunctions, system implementations or upgrades, computer viruses, cyber-attacks, third-partysecurity breaches, employee error, theft or misuse, malfeasance, power disruptions, natural disasters or accidents could cause breaches of datasecurity, failure of our Enlighten service, loss of intellectual property and critical data and the release and misappropriation of sensitive competitiveinformation and partner, customer and employee personal data. We have been and may in the future be subject to fraud attempts from outsideparties through our electronic systems (such as “phishing” e-mail communications to our finance, technical or other personnel), which could put us atrisk for harm from fraud, theft or other loss if our internal controls do not operate as intended. Any of these events could harm our competitiveposition, result in a loss of customer confidence, cause us to incur significant costs to remedy any damages and ultimately materially adverselyaffect our business and financial condition.The failure to successfully integrate our products with those of SunPower could have a material adverse effect on our business, financialcondition and results of operations.In August 2018, we entered into a master supply agreement (“MSA”) with SunPower, from whom we also purchased certain intellectualproperty and other assets as part of the Asset Purchase Agreement (“APA”) transaction. Our failure to successfully integrate our microinverterproducts and software with SunPower’s solar modules could frustrate the purposes of our acquisition of SunPower’s assets, negatively impact ourrevenue projections, impair goodwill, intangible assets recognized, and otherwise have a material adverse effect on our business, financial conditionand results of operations.As part of the APA transaction, we recognized $36.2 million of finite-lived intangible assets for developed technology and customerrelationship and $21.1 million of goodwill. We make assumptions and estimates in this assessment which are complex and often subjective. Ourjudgement and estimates can be affected by a variety of factors, including external factors such as industry and economic trends, and internalfactors such as changes in our business strategy or our internal forecasts. To the extent that the factors described above change, we could berequired to record additional non-cash impairment charges in the future, which could negatively affect our 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 andSunPower.Our ability to realize the anticipated benefits of the SunPower transaction will depend, to a large extent, on our ability to successfully executethe terms of the MSA, which could be a complex and time-consuming process. Any delay, failure or breach of obligations under the MSA couldadversely impact the expected benefits of the transaction and could otherwise have a material adverse effect on our business, financial conditionand results of operations.Additionally, in connection with the APA transaction, SunPower acquired 7.5 million shares of our common stock and has the right todesignate one member of our board of directors. Through its share ownership and board seat, SunPower may have the ability to directly or indirectlyinfluence our business, and conflicts may arise between us and SunPower regarding corporate priorities and strategic objectives. As ofDecember 31, 2019, SunPower held 6.5 million shares of the our common stock.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 numberof risks that could harm our business or result in us not achieving anticipated benefits, including issues with integrating acquired businesses, thediversion of management time and attention, failures in due diligence or in identifying financial and legal liabilities and other risks, transaction relatedimpairments or financial charges and the assumption of liabilities. In our future transactions, we may also decide to pay all or a portion of thetransaction consideration through dilutive equity issuances, and our future acquisitions may require significant reductions in our available cash orthe incurrence of indebtedness, all of which could harm our operating results. Enphase Energy, Inc. | 2019 Form 10-K | 25Table of ContentsIf 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 recentcost reduction initiatives have placed, and are expected to continue to place, significant demands on our management as well as our financial andoperational 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 tosupport our future operations. If we cannot manage our sales and operations effectively, we may be unable to take advantage of marketopportunities, execute our business strategies or respond to competitive pressures, any of which could have a material adverse effect on ourfinancial condition, results of operations, business or prospects.We could be adversely affected by any violations of the FCPA, the U.K. Bribery Act, and other foreign anti-bribery laws.The U.S. Foreign Corrupt Practices Act (“FCPA”) generally prohibits companies and their intermediaries from making improper payments tonon-U.S. government officials for the purpose of obtaining or retaining business. Other countries in which we operate also have anti-bribery laws,some of which prohibit improper payments to government and non-government persons and entities, and others (e.g., the FCPA and the U.K.Bribery Act) extend their application to activities outside of their country of origin. Our policies mandate compliance with all applicable anti-briberylaws. We currently operate in, and may further expand into, key parts of the world that have experienced governmental corruption to some degreeand, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. In addition, due to the level ofregulation in our industry, our entry into new jurisdictions through internal growth or acquisitions requires substantial government contact wherenorms can differ from U.S. standards. Although, we implement policies and procedures and conduct training designed to facilitate compliance withthese anti-bribery laws, thereby mitigating the risk of violations of such laws, our employees, subcontractors, agents and partners may take actionsin violation of our policies and anti-bribery laws. Any such violation, even if prohibited by our policies, could subject us to criminal or civil penalties orother sanctions, which could have a material adverse effect on our business, financial condition, cash flows, and reputation.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 theseforecasts may not be accurate, channel inventory held at our distributors may fluctuate significantly due to the difference between their forecastsand actual demand. As a result, distributors may adjust their purchase orders placed with us in response to changing channel inventory levels, aswell as their assessment of the latest market demand trends. In addition, our distributors may change their inventory practices on short notice forany reason. We may build inventories during periods of anticipated growth, and the cancellation or deferral of product orders or overproduction dueto failure of anticipated orders to materialize could result in excess or obsolete inventory, which could result in write-downs of inventory and anadverse effect on gross margins and operating results. Enphase Energy, Inc. | 2019 Form 10-K | 26Table of ContentsFurther, we have limited visibility into future end customer demand. A significant decrease in our distributors’ channel inventory in one periodmay lead to a significant rebuilding of channel inventory in subsequent periods, or vice versa, which may cause our quarterly revenue and operatingresults to fluctuate significantly. This fluctuation may cause our results to fall short of analyst or investor expectations in a certain period, which maycause 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 couldexperience 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 ourrelatively smaller size and capitalization compared to some of our competitors, could result in lenders refusing to provide the financing necessary topurchase solar PV systems based on our product platform on favorable terms, or at all. Moreover, in the case of debt financed projects, even iflenders are willing to finance the purchase of these systems, an increase in interest rates or a change in tax incentives could make it difficult forowners to secure the financing necessary to purchase a solar PV system on favorable terms, or at all. In addition, we believe that a significantpercentage of owners purchase solar PV systems as an investment, funding the initial capital expenditure through a combination of upfront cash andfinancing. Difficulties in obtaining financing for solar PV systems on favorable terms or increases in interest rates or changes in tax incentives, couldlower an investor’s return on investment in a solar PV system, or make alternative solar PV systems or other investments more attractive relative tosolar PV systems based on our product platform. Any of these events could result in reduced demand for our products, which could have a materialadverse effect on our financial condition and results of operations. In addition, a significant share of residential solar installations has been providedthrough third-party financing structures, such as power purchase or lease agreements. Our sales growth may depend on sales to developers ofthird-party solar finance offerings who provide solar as a service via power purchase agreements or leasing structures. The third-party financemarket for residential solar in the U.S. and elsewhere is or may become highly concentrated, with a few significant finance companies and severalsmaller entrants. If we are unable develop relationships and gain a significant share of inverter sales to the major finance companies or newentrants, our overall sales growth could be constrained.Our success in “AC module” versions of our microinverter system will depend in part upon our ability to continue to work closely withleading solar module manufacturers.We continue to work on variants of our microinverter systems that enable direct attachment of a microinverter to solar modules. The marketsuccess of such “AC Module” solutions will depend in part on our ability to continue to work closely with SunPower and other solar modulemanufacturers to design microinverters that are compatible with such direct attachment to solar modules. We may not be able to encourage solarmodule manufacturers to work with us on the development of such compatible solutions for a variety of reasons, including differences in marketingor selling strategy, competitive considerations, lack of competitive pricing, and technological compatibility. In addition, our ability to form effectivepartnerships with solar module manufacturers may be adversely affected by the substantial challenges faced by many of these manufacturers dueto declining prices and revenues from sales of solar modules and the tariffs in the U.S.Third parties may assert that we are infringing upon their intellectual property rights, which could divert management’s attention, causeus 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 otherintellectual 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 toincur significant expenses. While we believe that our products and technology do not infringe upon any intellectual property rights of third parties, wecannot be certain that we would be successful in defending against any such claims. Furthermore, patent applications in the U.S. and most othercountries are confidential for a period of time before being published, so we cannot be certain that we are not infringing third parties’ patent rights orthat we were the first to conceive or protect inventions covered by our patents or patent applications. An adverse outcome with respect to anyintellectual 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 reasonableterms, or at all;•stop manufacturing, selling, incorporating or using products that embody the asserted intellectual property; Enphase Energy, Inc. | 2019 Form 10-K | 27Table of Contents•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-infringingtechnology.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, andcomply 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 inconnection with the development and marketing of our products. We cannot assure that such licenses will be available to us on commerciallyreasonable terms, or at all, and our inability to obtain such licenses could require us to substitute technology of lower quality or of greater cost. Inaddition, we incorporate open source software code in our proprietary software. Use of open source software can lead to greater risks than use ofthird-party commercial software, since open source licensors generally do not provide warranties or controls with respect to origin, functionality orother features of the software. Some open source software licenses require users who distribute open source software as part of their products topublicly 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 orat no cost. Although we monitor our use of open source software, open source license terms may be ambiguous, and many of the risks associatedwith the use of open source software cannot be eliminated. If we were found to have inappropriately used open source software, we may berequired to release our proprietary source code, re-engineer our software, discontinue the sale of certain products in the event re-engineeringcannot be accomplished on a timely basis, or take other remedial action. Furthermore, if we are unable to obtain or maintain licenses from thirdparties or fail to comply with open source licenses, we may be subject to costly third party claims of intellectual property infringement or ownership ofour proprietary source code. Any of the above could harm our business and put us at a competitive disadvantage.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 orrainier 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 andconstruction cycles, preceded by a seasonally softer first quarter. In the U.S., customers will sometimes make purchasing decisions towards the endof the year in order to take advantage of tax credits or for budgetary reasons. In addition, construction levels are typically slower in colder and wettermonths. 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 ofour common stock.In August 2018, we issued and sold a total of $65.0 million aggregate principal amount of our convertible senior notes due 2023 (the “Notesdue 2023”) in a private placement to qualified institutional buyers and an affiliate of the Company. In May 2019, we entered into separately andprivately negotiated transactions with certain holders of the Notes due 2023 resulting in the repurchase and exchange of $60.0 million aggregateprincipal amount of the notes in consideration for the issuance of shares of common stock and separate cash payments. As of December 31, 2019,$5.0 million aggregate principal amount of the Notes due 2023 were outstanding.In June 2019, we issued and sold a total of $132.0 million aggregate principal amount of our convertible senior notes due 2024 (the “Notesdue 2024” and together with the Notes due 2023, the “Convertible Notes”). Enphase Energy, Inc. | 2019 Form 10-K | 28Table of ContentsThe conversion of some or all of the Convertible Notes may dilute the ownership interests of existing stockholders. Any sales in the publicmarket of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, theexistence of the Convertible Notes may encourage short selling by market participants because the conversion of the Convertible Notes could beused to satisfy short positions. In addition, the anticipated conversion of the Convertible Notes into shares of our common stock could depress theprice of our common stock.Servicing our debts requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our debts.Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the ConvertibleNotes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our businessmay not continue to generate cash flow from operations in the future sufficient to service our debts, including the Convertible Notes, and makenecessary capital expenditures. If we are unable to generate cash flow, we may be required to adopt one or more alternatives, such as sellingassets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance ourindebtedness, including the Convertible Notes, will depend on the capital markets and our financial condition at such time. We may not be able toengage in any of those activities or engage in these activities on desirable terms, which could result in a default on our debt obligations, includingour 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 theNotes due 2024 and the Notes due 2023 at maturity.Holders of our Notes due 2024 will have the right to require us to repurchase all or a portion of their convertible notes upon the occurrence ofa fundamental change at 100% of the principal amount of the Notes due 2024, plus accrued and unpaid interest. Fundamental change is defined inthe Notes due 2024 Indenture entered into in connection with the Notes due 2024 financing and consists of events such as an acquisition of amajority of our outstanding common stock, an acquisition of our company or substantially all of our assets, the approval by our stockholders of a planof liquidation or dissolution, or our common stock no longer being listed on the Nasdaq Global Select Market or the Nasdaq Global Market. We maynot have enough available cash or be able to obtain financing at the time we are required to make such repurchase of the Notes due 2024.Similarly, holders of our Notes due 2023 will have the right to require us to repurchase all or a portion of their convertible notes upon theoccurrence of a fundamental change at 100% of the principal amount of the Notes due 2023, plus accrued and unpaid interest. Fundamentalchange is defined in the Notes due 2023 Indenture entered into in connection with the Notes due 2023 financing and consists of events such as anacquisition of a majority of our outstanding common stock, an acquisition of our company or substantially all of our assets, the approval by ourstockholders of a plan of liquidation or dissolution, or our common stock no longer being listed on the Nasdaq Global Select Market or the NasdaqGlobal Market. Moreover, we will be required to repay the Notes due 2023 in cash at their maturity, 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 the Notes due2023 surrendered or repay the Notes due 2023 at maturity.If we do not have enough available cash at the time we are required to make the required repurchases of the Convertible Notes, we may berequired to undertake one or more actions, such as selling assets, attempting to restructure the Convertible Notes or other debt, or obtainingadditional capital on terms that may be onerous or highly dilutive. Any such actions could have a material adverse effect on our business, financialcondition or results of operations. Enphase Energy, Inc. | 2019 Form 10-K | 29Table of ContentsThe convertible note hedge and warrant transactions and/or their early termination may affect the value of our common stock.In connection with the offering of the Notes due 2024, we entered into privately negotiated convertible note hedge transactions pursuant towhich we have the option to purchase approximately the same number of shares of our common stock initially issuable upon conversion of theNotes due 2024, at a price approximately the same as the initial conversion price of the Notes due 2024. These transactions are expected to reducethe potential dilution with respect to our common stock upon conversion of the Notes due 2024. Separately, we also entered into privately negotiatedwarrant transactions to acquire the same number of shares of our common stock initially issuable upon conversion of the Notes due 2024 (subject tocustomary anti-dilution adjustments) at an initial strike price of approximately $25.23 per share. If the market value per share of our common stock,as measured under the warrants, exceeds the strike price of the warrants, the warrants will have a dilutive effect on the ownership interests ofexisting stockholders and on our earnings per share, unless we elect, subject to certain conditions, to settle the warrants in cash. However, we maynot have enough available cash or be able to obtain financing at the time of settlement.In addition, the existence of the convertible note hedge and warrant transactions may encourage purchasing and selling share of our commonstock, or other of our securities and instruments, in open market and/or privately negotiated transactions in order to modify hedge positions. Any ofthese activities could adversely affect the value of our common stock and the value of the Notes due 2024.Changes in current accounting methods, standards, or regulations applicable to the Convertible Notes due 2024 could have a materialimpact on our reported financial results, future financial results, future cash flows, and/or our stock price.Under Accounting Standards Codification (“ASC”) 470-20, “Debt with Conversion and Other Options,” an entity must separately account forthe liability and equity components of convertible debt instruments, such as the Notes due 2024, that may be settled entirely or partially in cash uponconversion, in a manner that reflects the issuer’s economic interest cost. Accordingly, we have included the equity component in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet at the issuance date, and we have treated the value of the equitycomponent as debt discount for the liability component. We are required to amortize the debt discount as non-cash interest expense over the termof the Notes due 2024, which could adversely affect our reported or future financial results or the trading price of our common stock.In addition, we use the treasury stock method for convertible debt instruments (such as the Notes due 2024) that may be settled entirely orpartly in cash, and the effect of which is that any shares issuable upon conversion of the notes are not included in the calculation of diluted earningsper share except to the extent that the conversion value of such notes exceeds their principal amount. Under the treasury stock method, for dilutedearnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle suchexcess conversion value, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the futurewill continue to permit use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuableupon conversion of the Notes due 2024, then our diluted earnings per share will be adversely affected.Accounting Standards Update (“ASU”) 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and CashPayments,” clarifies how certain cash receipts and payments should be classified in the statement of cash flows, including the cash settlement forour Notes due 2024. Upon cash settlement, repayment of the principal amount will be bifurcated between cash outflows for operating activities forthe portion related to accreted interest attributable to debt discounts arising from the difference between the coupon interest rate and the effectiveinterest rate, and financing activities for the remainder. This will require us to classify the $36.4 million of accreted interest as cash used in operatingactivities in our consolidated statement of cash flows upon cash settlement, which could adversely affect our future cash flow from operations.We may not be able to raise additional capital to execute on our current or future business opportunities on favorable terms, if at all, orwithout 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 anticipatedcash 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 futurebusiness strategies, including to:•provide additional cash reserves to support our operations; Enphase Energy, Inc. | 2019 Form 10-K | 30Table of Contents•invest in our research and development efforts;•expand our operations into new product markets and new geographies;•acquire complementary businesses, products, services or technologies; or•otherwise pursue our strategic plans and respond to competitive pressures, including adjustments to our business to mitigate the effectsof 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 besignificantly 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 mightnot be able to report our financial results accurately or prevent fraud; in that case, our stockholders could lose confidence in ourfinancial 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 ofimplementing our internal controls and complying with Section 404 of the Sarbanes-Oxley Act has required, and will continue to require, significantattention of management. We are required to provide an auditor’s attestation report on management’s assessment of the effectiveness of ourinternal control over financial reporting, under Section 404(b) of the Sarbanes-Oxley Act, in conjunction with this Annual Report on Form 10-K. If weor our independent registered public accounting firm discover a material weakness in our internal controls over financial reporting, the disclosure ofthat fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our stock price. To the extent anymaterial weaknesses in our internal control over financial reporting are identified, we could be required to expend significant management time andfinancial resources to correct such material weaknesses or to respond to any resulting regulatory investigations or proceedings.Our business is subject to potential tax liabilities.We are subject to income tax, indirect tax or other tax claims by tax agencies in jurisdictions in which we conduct business. Significantjudgment is required in determining our worldwide provision for income taxes. Tax laws are dynamic and subject to change as new laws are passedand new interpretations of the law are issued or applied. The Tax Cuts and Jobs Act of 2017 (the Tax Reform Act) contains many significantchanges to the U.S. federal income tax laws, which the consequences of which could have a material impact on the value of our deferred tax assetsand could increase our future U.S. income tax expense. As additional guidance is issued by the applicable taxing authorities and as new accountingtreatment is clarified, we may report additional adjustments in the period if new information becomes available. We have a significant amount ofdeferred tax assets and a portion of the deferred tax assets related to net operating losses or tax credits could be subject to limitations under theInternal Revenue Code Section 382 or 383, separate return loss year rules. The limitations could reduce our ability to utilize our net operating lossesor tax credits before the expiration of the tax attributes. Tax law changes or the limitations could be material and could materially affect our taxobligations and effective tax rate.In the ordinary course of our business, there are many transactions and calculations where the ultimate income tax, indirect tax, or other taxdetermination is uncertain. Although we believe our tax estimates are reasonable, we cannot assure that the final determination of any tax auditsand litigation will not be materially different from that which is reflected in historical tax provisions and accruals. Should additional taxes be assessedas a result of an audit, assessment or litigation, there could be a material adverse effect on our cash, tax provisions and net income (loss) in theperiod or periods for which that determination is made. Enphase Energy, Inc. | 2019 Form 10-K | 31Table of ContentsWe are dependent on ocean transportation to deliver our products in a cost-efficient manner. If we are unable to use ocean transportationto 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 thedelivery time requirements of our customers. Our ability to deliver our products via ocean transportation could be adversely impacted by shortages inavailable cargo capacity, changes by carriers and transportation companies in policies and practices, such as scheduling, pricing, payment termsand 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 ourcontrol. If we are unable to use ocean transportation, or are otherwise required to continue to substitute more expensive air transportation to meetdelivery time requirements, our financial condition and results of operations could be materially and adversely impacted. Material interruptions inservice or stoppages in transportation, whether caused by strike, work stoppage, lock-out, slowdown or otherwise, could materially and adverselyimpact 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 factorsdescribed in this Annual Report on Form 10-K, and other factors beyond our control, such as fluctuations in the valuation of companies perceived byinvestors to be comparable to us. Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continueto affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operatingperformance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions, suchas 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 maybecome the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’sattention from other business concerns, which could seriously harm our business.Our stock price has been volatile and may continue to be volatile.The trading price of our common stock has been, and is likely to continue to be, volatile and could be subject to wide fluctuations in responseto various factors, some of which are beyond our control. In addition, the trading prices of the securities of solar companies in general have beenhighly volatile, and the volatility in market price and trading volume of securities is often unrelated or disproportionate to the financial performance ofthe companies issuing the securities. Factors affecting the market price of our common stock, some of which are beyond our control, include:•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 customerrequirements;•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 forsolar energy applications;•the impact of tariffs on the solar industry in general and our products in particular;•unanticipated increases in costs or expenses; Enphase Energy, Inc. | 2019 Form 10-K | 32Table of Contents•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 tothe 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;•a relatively high percentage of non-institutional investors in our shareholder base, which may result in higher volatility to our stock due tomore frequent trading by shareholders without a long-term investment horizon; and•actions by research analysts, such as if they issue unfavorable commentary or downgrade our common stock or cease publishing reportsabout us or our business.The above factors are difficult to forecast, and these, as well as other factors, could materially and adversely affect our quarterly and annualresults of operations. Any failure to adjust spending quickly enough to compensate for a revenue shortfall could magnify the adverse impact of thisrevenue shortfall on our results of operations. Moreover, our results of operations may not meet our announced guidance or the expectations ofresearch analysts or investors, in which case the price of our common stock could decrease significantly. There can be no assurance that we will beable to successfully address these risks.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 ofbuying 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 betweenthe sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than itreceived 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 thepublication of, negative opinions regarding the issuer and its business prospects in order to create negative market momentum and generate profitsfor themselves after selling a stock short. The use of the Internet, social media, and blogging have allowed short sellers to publicly attack acompany’s credibility, strategy and veracity by means of so-called “research reports” that mimic the type of investment analysis performed bylegitimate securities research analysts. These short attacks have in the past led to stock price declines and significant selling activity in our commonstock. Issuers with limited trading volumes or substantial retail shareholder bases can be particularly susceptible to higher volatility levels, and canbe 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 notsubject to the certification requirements imposed by the SEC in Regulation AC (Regulation Analyst Certification) and, accordingly, the opinions theyexpress may be based on distortions of actual facts or, in some cases, outright fabrications. In light of the limited risks involved in publishing suchinformation, 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. Enphase Energy, Inc. | 2019 Form 10-K | 33Table of ContentsOur affiliated stockholders, executive officers and directors own a significant percentage of our stock, and they may take actions thatour other stockholders may not view as beneficial.Our affiliated stockholders, executive officers and directors collectively own a significant percentage of our common stock. This significantconcentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages inowning stock in companies with controlling stockholders. Also, as a result, these stockholders, acting together, may be able to control ourmanagement and affairs and matters requiring stockholder approval, including the election of directors and approval of significant corporatetransactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may havethe effect of delaying or preventing a change in control, including a merger, consolidation or other business combination involving us, ordiscouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if this change in control would benefitour other stockholders.Sales of a substantial number of shares of our common stock in the public market by our existing stockholders could cause our stockprice 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, coulddepress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We areunable to predict the effect that sales may have on the prevailing market price of our common stock. All of the outstanding shares of our commonstock 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 salerequirements of Rule 144 under the Securities Act. Sales of stock by our stockholders could have a material adverse effect on the trading price ofour common stock.Certain holders of our securities are entitled to rights with respect to the registration of their shares under the Securities Act. Registration ofthese shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act. For instance,in December in 2018, we filed a resale registration statement related to 7.5 million shares of our common stock that were issued to SunPower uponthe closing of the APA transaction. Any sales of securities by SunPower or other stockholders with registration rights could have a material adverseeffect 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 yourinvestment 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 agreementrestricts our ability to pay dividends. Consequently, an investor’s only opportunity to achieve a return on its investment in our company will be if themarket 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 themarket 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. Theseprovisions could also make it more difficult for stockholders to elect directors and take other corporate actions, including effecting changes in ourmanagement. These provisions include:•providing for a classified board of directors with staggered, three-year terms, which could delay the ability of stockholders to change themembership 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, whichcould 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 ourstockholders; Enphase Energy, Inc. | 2019 Form 10-K | 34Table of Contents•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, votingas a single class, to amend provisions of our certificate of incorporation relating to the management of our business, our board ofdirectors, stockholder action by written consent, advance notification of stockholder nominations and proposals, forum selection and theliability of our directors, or to amend our bylaws, which may inhibit the ability of stockholders or an acquiror to effect such amendments tofacilitate 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, ourpresident or a majority of our board of directors, which could delay the ability of our stockholders to force consideration of a proposal or totake action, including the removal of directors; and•requiring advance notification of stockholder nominations and proposals, which may discourage or deter a potential acquiror fromconducting 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 owning15% or more of our outstanding common stock, from engaging in certain business combinations, without approval of substantially all of ourstockholders, for a certain period of time.These provisions in our certificate of incorporation, our bylaws and under Delaware law could discourage potential takeover attempts, reducethe 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 wouldbe without these provisions.Item 1B. Unresolved Staff CommentsNone.Item 2. PropertiesOur corporate headquarters occupy approximately 23,000 square feet in Fremont, California under a lease that expires in November 2023and accommodates our executive offices, sales, marketing, operations, finance and administrative activities. We also occupy office buildings inPetaluma, California under leases that expires in April 2022 and accommodate our principal engineering activities. In addition, we occupy officespace in Boise, Idaho, France, Netherlands, Australia, New Zealand and India. At this time, we believe our facilities are adequate for our near termoperational and business needs.Item 3. Legal ProceedingsFrom time to time, we may be involved in litigation relating to claims arising out of our operations. We are not currently involved in any materiallegal proceedings, and our management believes there are currently no claims or actions pending against us, the ultimate disposition of which couldhave a material adverse effect on our operations, financial condition, or cash flows. We may, however, be involved in material legal proceedings inthe future. Such matters are subject to uncertainty and there can be no assurance that such legal proceedings will not have a material adverseeffect on our business, results of operations, financial position or cash flows.Item 4. Mine Safety DisclosuresNot applicable.PART IIItem 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesCommon StockOur common stock, $0.00001 par value per share, has been traded on The Nasdaq Global Market under the symbol “ENPH” since March 30,2012. Enphase Energy, Inc. | 2019 Form 10-K | 35Table of ContentsHoldersAs of February 14, 2020, there were approximately 22 holders of record of our common stock, one of which was Cede & Co., a nominee forDepository Trust Company (“DTC”). All of the shares of our common stock held by brokerage firms, banks and other financial institutions asnominees for beneficial owners are deposited into participant accounts at DTC and are therefore considered to be held of record by Cede & Co. asone stockholder.Dividend PolicyWe have never paid any cash dividends on our common stock. We currently anticipate that we will retain any available funds to invest in thegrowth and operation of our business and we do not anticipate paying any cash dividends in the foreseeable future.Recent Sales of Unregistered SecuritiesExcept as previously reported in our quarterly reports on Form 10-Q and current reports on Form 8-K filed with the SEC during the yearended December 31, 2019, there were no unregistered sales of equity securities by us during the year ended December 31, 2019. Enphase Energy, Inc. | 2019 Form 10-K | 36Table of ContentsStock Performance GraphThis section is not “soliciting material” and is not deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934 (theExchange Act) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under theSecurities 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 theGuggenheim Solar Index for the period from December 31, 2014 to December 31, 2019. An investment of $100 is assumed to have been made inour common stock and in each index on December 31, 2014, all dividends were reinvested, and the relative performance of the investments aretracked through December 31, 2019. The information shown is historical and stockholder returns over the indicated period should not beconsidered indicative of future stockholder returns or future performance. December 31, 2014 December 31, 2015 December 31, 2016 December 31, 2017 December 31, 2018 December 31, 2019Enphase Energy, Inc.$100 $25 $7 $17 $33 $183Russell 2000 Index$100 $94 $113 $127 $112 $138Guggenheim Solar Index$100 $90 $50 $76 $56 $93 Enphase Energy, Inc. | 2019 Form 10-K | 37Table of ContentsItem 6. Selected Consolidated Financial DataThe information set forth below for the five years ended December 31, 2019 is not necessarily indicative of results of future operations, andshould be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and theconsolidated financial statements and related notes thereto included in Item 8. “Financial Statements and Supplementary Data,” of this AnnualReport on Form 10-K to fully understand the factors that may affect the comparability of the information presented below.’We adopted Accounting Standards Codification (“ASC”) No. 606, “Revenue Recognition” (“ASC 606” or “Topic 606”) and applied the modifiedretrospective method to all contracts that were not completed as of January 1, 2018. Financial data for the fiscal years ended December 31, 2017,2016 and 2015 have not been adjusted to reflect the adoption of ASC 606. Years Ended December 31, 2019 2018 2017 2016 2015 (in thousands, except per share data)Consolidated Statement of Operations Data: Net revenues$624,333 $316,159 $286,166 $322,591 $357,249Cost of revenues403,088 221,714 230,123 264,583 249,032Gross profit221,245 94,445 56,043 58,008 108,217Operating expenses: Research and development40,381 32,587 33,157 50,703 50,819Sales and marketing36,728 27,047 23,126 38,810 45,877General and administrative38,808 29,086 22,221 27,418 30,830Restructuring charges2,599 4,129 16,917 3,777 —Total operating expenses118,516 92,849 95,421 120,708 127,526Income (loss) from operations102,729 1,596 (39,378) (62,700) (19,309)Other expense, net Interest income2,513 1,058 276 75 20Interest expense(9,691) (10,693) (8,212) (2,848) (521)Other (expense) income, net(5,437) (2,190) 1,973 (514) (893)Total other expense, net(12,615) (11,825) (5,963) (3,287) (1,394)Income (loss) before income taxes90,114 (10,229) (45,341) (65,987) (20,703)Income tax benefit (provision)71,034 (1,398) 149 (1,475) (1,379)Net income (loss)$161,148 $(11,627) $(45,192) $(67,462) $(22,082)Net income (loss) per share: Basic$1.38 $(0.12) $(0.54) $(1.34) $(0.49)Diluted$1.23 $(0.12) $(0.54) $(1.34) $(0.49)Shares used in per share calculation: Basic116,713 99,619 82,939 50,519 44,632Diluted131,644 99,619 82,939 50,519 44,632 Enphase Energy, Inc. | 2019 Form 10-K | 38Table of Contents As of December 31, 2019 2018 2017 2016 2015 (in thousands)Consolidated Balance Sheet Data: Cash, cash equivalents and restrictedcash$296,109 $106,237 $29,144 $17,764 $28,452Total assets713,223 339,937 169,147 163,576 165,528Warranty obligations37,098 31,294 29,816 31,414 30,547Debt105,543 109,783 49,751 33,900 17,000Total stockholders’ equity272,212 7,776 (9,126) 1,300 41,449 Additional Data: Working capital$300,346 $75,141 $38,705 $35,092 $48,920Gross margin percentage35.4% 29.9% 19.6% 18.0% 30.3% Enphase Energy, Inc. | 2019 Form 10-K | 39Table of ContentsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsForward-Looking StatementsThe following discussion and analysis of our financial condition and results of operations should be read together with our consolidatedfinancial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-lookingstatements reflecting our current expectations and involves risks and uncertainties. In some cases, you can identify forward-looking statements byterminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential” or “continue” or thenegative of these terms or other comparable terminology. Such statements, include but are not limited to statements regarding our expectations asto future financial performance, expense levels, liquidity sources, the capabilities and performance of our technology and products and plannedchanges, timing of new product releases, our business strategies, including anticipated trends, growth and developments in markets in which wetarget, the anticipated market adoption of our current and future products, performance in operations, including component supply management,product quality and customer service, and the anticipated benefits and risks relating to the transaction with SunPower Corporation. Our actualresults and the timing of events may differ materially from those discussed in our forward-looking statements as a result of various factors, includingthose discussed below and those discussed in the section entitled “Risk Factors” included in this report.Overview and 2019 HighlightsWe are a global energy technology company. We deliver smart, easy-to-use solutions that manage solar generation, storage andcommunication on one intelligent platform. We revolutionized the solar industry with our microinverter technology and we produce a fully integratedsolar-plus-storage solution. We have shipped more than 25 million microinverters, and over one million Enphase residential and commercialsystems have been deployed in more than 130 countries.We sell our solutions primarily to distributors who resell them to solar installers. We also sell directly to large installers, OEMs, strategicpartners and homeowners. Our revenue for the second half of 2019 was positively impacted by the scheduled phase-down of the investment taxcredit for solar projects under Section 48(a) (the “ITC”) of the Internal Revenue Code of 1986, as amended (the “Code”). The historical ITCpercentage was 30% through 2019, and the ITC percentage decreased to 26% of the basis of a solar energy system that began construction during2020, 22% for 2021, and zero for residential and 10% for commercial if construction begins after 2021 or if the solar energy system is placed intoservice after 2023. As a result, several of our customers explored opportunities to purchase products in 2019 to take advantage of safe harborguidance from the IRS published in June 2018, allowing them to preserve the historical 30% investment tax credit for solar equipment purchased in2019 for solar projects that are completed after December 31, 2019. These safe harbor purchases positively affected our revenues in the secondhalf of 2019 and $49.9 million deferred revenue as of December 31, 2019 relates to safe harbor purchases to be shipped in the first quarter of 2020.Our net revenues were $624.3 million, $316.2 million and $286.2 million for 2019, 2018 and 2017, respectively. We earned net income of$161.1 million for 2019 compared to net losses of $11.6 million and $45.2 million for 2018 and 2017, respectively. As of December 31, 2019, wehad $251.4 million in cash and cash equivalents, $44.7 million in restricted cash and $300.3 million of working capital.Our 2019 priorities included focusing on providing great customer service, high quality products, scaling business processes and profitabletop line growth, and development of our Ensemble technology. Quality and customer service are the cornerstones of our strategy and wereinstrumental in our turnaround in financial performance in 2018 and 2019. We began by focusing on call center metrics in the U.S., Europe andAustralia, and reduced the average wait time from over 10 minutes in 2017 to 2 minutes in 2018 to under 2 minutes by the end of 2019. Weintroduced self-service tools such as the Service-On-The-Go™ that allow our installers and partners to submit requests from their phone in less than60 seconds.The launch of our IQ 7 series microinverter worldwide, the smallest, lightest and most powerful microinverter we have ever made, was a keyfactor in improving gross margin. Every region of the world where our products are sold is now using this seventh-generation microinverter. Duringyear ended December 31, 2019, 98% of our microinverter shipments were IQ 7. We systematically rolled out high-power and high-efficiency variantsof the IQ 7 microinverters in 2018. Selling these variants simultaneously improved gross margin and delivered a better price per watt for the installer. Enphase Energy, Inc. | 2019 Form 10-K | 40Table of ContentsOn January 28, 2019, we repaid in full the remaining principal amount of the Term Loans of approximately $39.5 million plus accrued interestand fees owed to lenders affiliated with Tennenbaum Capital Partners, LLC.On May 30, 2019, we entered into separately and privately negotiated transactions with certain holders of our 4.0% Convertible Senior Notesdue 2023 (“Notes due 2023”) resulting in the repurchase and exchange, as of June 5, 2019, of $60.0 million aggregate principal amount of thenotes in consideration for the issuance of 10,801,080 shares of common stock and separate cash payments totaling $6.0 million.On June 5, 2019, we issued $132.0 million aggregate principal amount of our 1.0% Convertible Senior Notes due 2024 (the “Notes due2024”) in a private placement. The Notes due 2024 are general unsecured obligations and bear interest at a rate of 1.0% per year, payable semi-annually on June 1 and December 1 of each year, beginning on December 1, 2019. The Notes due 2024 will mature on June 1, 2024, unless earlierrepurchased by us or converted at the option of the holders. Further information relating to the Notes due 2024 may be found in Note 11, “Debt,” ofthe notes to consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K and below under “Liquidity and CapitalResources.”2020 OutlookWe believe our solid execution in 2019 positions us well to take advantage of future growth opportunities, and we need to maintain our focusin order to capitalize on such opportunities. Our top three priorities for 2020 are (i) providing a remarkable customer experience, (ii) introduction ofnew products and expansion of our markets, and (iii) focus on enhancements to our comprehensive digital platform.Customer Experience. Quality and Customer Service constitute customer experience. This has remained a priority for three years running.On the service front, our installer, distributor and module partners are our first line of association with our ultimate customer, the homeowner andbusiness user. Our goals are to partner better with these service providers so that we can provide exceptional high quality service to ourhomeowner. We are convinced that continued reinforcement of customer experience improvements can be a competitive advantage for us.Introduce New Products and Expand our Market. We are focused on residential solar in a dozen countries providing serviceable availablemarket (‘SAM’) of approximately $3.3 billion in 2019. We also plan to introduce new products in 2020 which will take our SAM to $12.5 billion in 2022which will comprise of residential solar, residential storage, small commercial solar and off-grid solar and storage.Expand our Digital Presence. We are focused on generating revenue through digitalization of the business-to-business and business-to-customer process of the partner and customer journey. Future key focus is to expand our digital presence through enhancing our online store,increasing the use of the online store significantly, and releasing a comprehensive digital platform.Components of Consolidated Statements of OperationsNet RevenuesWe primarily generate net revenues from sales of our microinverter solutions and related accessories, which can include our AC Batterystorage systems, our Envoy communications gateway and Enlighten cloud-based monitoring service as well as other accessories.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 byremaining cost competitive, developing and introducing new products that meet the changing technology and performance requirements of ourcustomers, the diversification and expansion of our revenue base, and our ability to market our products in a manner that increases awareness formicroinverter technology and differentiates us in the marketplace. Enphase Energy, Inc. | 2019 Form 10-K | 41Table of ContentsCost of Revenues and Gross ProfitCost of revenues is comprised primarily of product costs, warranty, manufacturing personnel and logistics costs, freight costs, depreciationand amortization of test equipment and hosting services costs. Our product costs are impacted by technological innovations, such as advances insemiconductor integration and new product introductions, economies of scale resulting in lower component costs, and improvements in productionprocesses and automation. Certain costs, primarily personnel and depreciation and amortization of test equipment, are not directly affected by salesvolume.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 theforeseeable future. However, shortages in the supply of certain key raw materials could adversely affect our ability to meet customer demand for ourproducts. We contract with third parties, including one of our contract manufacturers, to serve as our logistics providers by warehousing anddelivering 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, customer mix,warranty costs and sales volume fluctuations resulting from seasonality.Operating ExpensesOperating 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 includesalaries, 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 evaluationcosts, depreciation expense and other indirect costs. Research and development employees are primarily engaged in the design and developmentof power electronics, semiconductors, powerline communications, networking and software functionality, and storage. We devote substantialresources to research and development programs that focus on enhancements to, and cost efficiencies in, our existing products and timelydevelopment of new products that utilize technological innovation to drive down product costs, improve functionality, and enhance reliability. Weintend to continue to invest appropriate resources in our research and development efforts because we believe they are critical to maintaining ourcompetitive 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 geographicallyand enter into new markets by expanding our customer base of distributors, large installers, OEMs and strategic partners. We currently offersolutions targeting the residential and commercial markets in the U.S., Canada, Mexico, Central American markets, Europe, Australia, NewZealand, India and certain other Asian markets. We expect to continue to expand the geographic reach of our product offerings and explore newsales channels in addressable markets in the future.General and administrative expense include personnel-related expenses for our executive, finance, human resources, information technologyand legal organizations, facilities costs, and fees for professional services. Fees for professional services consist primarily of outside legal,accounting and information technology consulting costs.Restructuring charges are the net charges resulting from restructuring initiatives implemented in 2018-2019 (the “2018 Plan”) to improveoperational performance and reduce overall operating expenses. Under the 2018 Plan, costs included in restructuring primarily consisted ofemployee 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 Part II,Item 8 of this Annual Report on Form 10-K for additional information.Other Expense, NetOther expense, net primarily consists of interest expense and fees under our convertible notes and term loans, and non-cash interest expenserelated to the accretion of debt discount and amortization of deferred financing costs. Other expense, net also includes interest income on our cashbalance and gains or losses upon conversion of foreign currency transactions into U.S. dollars. Enphase Energy, Inc. | 2019 Form 10-K | 42Table of ContentsIncome Tax (Provision) BenefitWe 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 theU.S., we have become subject to taxation based on the foreign statutory rates in the countries where these sales took place. As sales in foreignjurisdictions increase in the future, our effective tax rate may fluctuate accordingly. We regularly assess the ability to realize deferred tax assetsbased on the weight of all available evidence, including such factors as the history of recent earnings and expected future taxable income on ajurisdiction by jurisdiction basis. During the fourth quarter of fiscal year 2019, after considering these factors, we determined that the positiveevidence overcame any negative evidence, primarily due to cumulative income in recent years, and the expectation of sustained profitability infuture periods and concluded that it was more likely than not that the US federal and state deferred tax assets were realizable. As a result, wereleased the valuation allowance against all of the U.S. federal and state deferred tax assets during the fourth quarter of fiscal year 2019.Summary Consolidated Statements of OperationsThe following table sets forth a summary of our consolidated statements of operations for the periods presented (in thousands): Years Ended December 31, 2019 2018 2017Net revenues$624,333 $316,159 $286,166Cost of revenues403,088 221,714 230,123Gross profit221,245 94,445 56,043Operating expenses: Research and development40,381 32,587 33,157Sales and marketing36,728 27,047 23,126General and administrative38,808 29,086 22,221Restructuring charges2,599 4,129 16,917Total operating expenses118,516 92,849 95,421Income (loss) from operations102,729 1,596 (39,378)Other expense, net Interest income2,513 1,058 276Interest expense(9,691) (10,693) (8,212)Other (expense) income, net(5,437) (2,190) 1,973Total other expense, net(12,615) (11,825) (5,963)Income (loss) before income taxes90,114 (10,229) (45,341)Income tax benefit (provision)71,034 (1,398) 149Net income (loss)$161,148 $(11,627) $(45,192)Results of OperationsIn this section, we discuss the results of our operations for the year ended December 31, 2019 compared to the year ended December 31,2018. For a discussion of the year ended December 31, 2018 compared to the year ended December 31, 2017, please refer to Part II, Item 7,"Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2018. Enphase Energy, Inc. | 2019 Form 10-K | 43Table of ContentsNet Revenues Years Ended December 31, Change in 2019 2018 $ % (In thousands, except percentages)Net revenues$624,333 $316,159 $308,174 97%Net revenues increased by 97% in 2019, as compared to 2018, due primarily to an increase in the number of units shipped as well asincrease in the average selling price per microinverter unit. We sold 6.2 million microinverter units in 2019, as compared to 2.8 million units in 2018.The increase in average selling price per microinverter was due to the better product mix and customer mix yielding 98% of our shipment being fromIQ7 series microinverter coupled with improved pricing management. See Note 3. “Revenue Recognition,” of the notes to consolidated financialstatements.Cost of Revenues and Gross Margin Years Ended December 31, Change in 2019 2018 $ % (In thousands, except percentages)Cost of revenues$403,088 $221,714 $181,374 82%Gross profit221,245 94,445 126,800 134%Gross margin35.4% 29.9% Cost of revenues increased by 82% in 2019, as compared to 2018, primarily due to higher volume of microinverter units sold and expeditedfreight costs, partially offset by a decrease in the unit cost of our products as a result of our cost reduction efforts. Gross margin increasedby 5.5 percentage points for the year ended December 31, 2019, as compared to the same period in 2018. The increase in gross margin wasprimarily attributable to higher product margins as a result our IQ 7 family of microinverters, which has a unit lower cost than previous models ofmicroinverters, as well as our overall pricing and cost management efforts. IQ 7 sales represented 98% of our total microinverter sales for the yearended December 31, 2019, as compared to 50% of our total microinverter sales in in the same period in 2018.Research and Development Years Ended December 31, Change in 2019 2018 $ % (In thousands, except percentages)Research and development$40,381 $32,587 $7,794 24%Percentage of net revenues6% 10% Research and development expense increased by $7.8 million in 2019, as compared to 2018. The increase is due to $6.0 million of higherpersonnel-related expenses and $1.4 million of outside consulting services associated with the development, introduction and qualification of newproducts. The increase in personnel-related expenses was primarily due to hiring employees in New Zealand, India and US, increasing totalcompensation costs, including stock-based compensation and travel expenditures. The amount of research and development expenses mayfluctuate from period to period due to the differing levels and stages of development activity. Enphase Energy, Inc. | 2019 Form 10-K | 44Table of ContentsSales and Marketing Years Ended December 31, Change in 2019 2018 $ % (In thousands, except percentages)Sales and marketing$36,728 $27,047 $9,681 36%Percentage of net revenues6% 9% Sales and marketing expense increased by $9.7 million in 2019, as compared to 2018. The increase was primarily due to $8.1 million ofhigher personnel related expenses as result of our efforts to improve customer experience by hiring additional employees to reduce the average waittime, $1.3 million of higher amortization of developed technology, patents and licensed technology acquired from SunPower in August 2018, as wellas other professional services and business activities to increase business growth. The increase in personnel-related expenses included higheremployee compensation, including stock-based compensation, bonus and sales commissions, as well as higher travel expenses associated withincreased headcount.General and Administrative Years Ended December 31, Change in 2019 2018 $ % (In thousands, except percentages)General and administrative$38,808 $29,086 $9,722 33%Percentage of net revenues6% 9% General and administrative expense increased by $9.7 million in 2019, as compared to 2018. The increase was primarily due to $7.8 millionincrease in personnel-related expenses due to higher headcount in India and U.S., $1.0 million increase in professional advisory fees primarily dueto our first year of being subject to auditor attestation requirements under the Sarbanes-Oxley Act of 2002 in connection with our 2018 financialstatements audit, $1.4 million increase in legal fees as well as $0.9 million increase in facilities costs as a result of our business growth. Theincrease was partially offset by $1.8 million paid to resolve a dispute with a supplier and acquisition-related costs of $0.8 million in 2018 that did notrecur in 2019. The increase in personnel-related expenses was primarily attributable to higher stock-based compensation expense, salary andbonus compensation, as well as higher spending for contractors.Restructuring Charges Years Ended December 31, Change in 2019 2018 $ % (In thousands, except percentages)Restructuring charges$2,599 $4,129 $(1,530) (37)%Percentage of net revenues0.4% 1% We implemented a restructuring plan in the third quarter of 2018 to lower our operating expenses. This plan included a realignment of ourglobal workforce to lower cost locations and a relocation of our corporate headquarters. Although we will continue to make business and processimprovements, our formal restructuring efforts were completed in 2019, and we do not expect to incur substantial restructuring charges in the near-term under this restructuring plan.Restructuring charges for 2019 primarily included $1.6 million in cash-based severance and related benefits and $1.1 million in non-cashcharges for impaired assets, partially offset by $0.1 million for lease loss reserves due to adoption of ASC 842, Leases. Restructuring charges for2018 primarily included $2.2 million in cash-based severance and related benefits, $1.6 million in charges for impaired assets, and $0.3 million forlease loss reserves. Enphase Energy, Inc. | 2019 Form 10-K | 45Table of ContentsOther Income (Expense), Net Years Ended December 31, Change in 2019 2018 $ % (In thousands, except percentages)Interest income$2,513 $1,058 $1,455 138 %Interest expense(9,691) (10,693) 1,002 (9)%Other (expense) income, net(5,437) (2,190) (3,247) 148 %Total other expense, net$(12,615) $(11,825) $(790) 7 %Interest income of $2.5 million for the year ended December 31, 2019 increased, as compared to $1.1 million for the year ended December31, 2018, primarily due to interest earned on a higher average cash balance.Interest expense of $9.7 million for the year ended December 31, 2019 primarily includes $4.6 million related to the coupon interest incurred,debt discount and amortization of debt issuance costs with our Notes due 2024, interest expense of $2.7 million related to the repayment of our termloan, interest expense of $1.5 million related to coupon interest incurred and amortization of debt issuance costs associated with Notes due 2023,and $0.9 million of interest expense related to long-term financing receivable recorded as debt. Interest expense of $10.7 million for the year endedDecember 31, 2018 primarily includes interest expense related to our Term Loans and coupon interest incurred and amortization of debt issuancecosts associated with Notes due 2023.Other income (expense), net, of $5.4 million for the year ended December 31, 2019 primarily relates to the $6.0 million fees paid for therepurchase and exchange of our Notes due 2023, partially offset by $0.6 million net gain related to foreign currency exchange and remeasurement.Other income (expense), net of $2.2 million for the year ended December 31, 2018 includes $2.5 million loss due to foreign currency exchange andremeasurement, partially offset by a $0.4 million of valuation adjustments on our term loan.Income Tax (Provision) Benefit Years Ended December 31, Change in 2019 2018 $ % (In thousands, except percentages)Income tax benefit (provision)$71,034 $(1,398) $72,432 **Effective tax rate78.83% (13.67)% **Not meaningfulThe income tax benefit of $71.0 million for the year ended December 31, 2019 increased compared to the income tax provision of $1.4 millionin 2018, was primarily due to release of valuation allowance, partially offset by increased foreign income taxes. See Note 15. “Income Taxes,” of thenotes to consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information.Liquidity and Capital ResourcesSources of LiquidityAs of December 31, 2019, we had $251.4 million in cash and cash equivalents, $44.7 million in restricted cash and working capital of$300.3 million. Cash, cash equivalents and restricted cash held in the U.S. were $289.8 million and consisted primarily of U.S. government moneymarket mutual funds and both interest-bearing and non-interest-bearing deposits, with the remainder held in various foreign subsidiaries. Restrictedcash represents cash held by us in the form of a certificate of deposit collateralized under a letter of credit we issued to a customer. We consideramounts held outside the U.S. to be accessible and have provided for the estimated U.S. income tax liability associated with our foreign earnings.Term LoansOn January 28, 2019, we repaid in full the remaining principal amount of the Term Loans of approximately $39.5 million plus accrued interestand fees owed to lenders affiliated with Tennenbaum Capital Partners, LLC. Enphase Energy, Inc. | 2019 Form 10-K | 46Table of ContentsConvertible NotesNotes due 2023. In August 2018, we issued $65.0 million aggregate principal amount of convertible senior notes in a private placement(“Notes due 2023”). The Notes due 2023 are general unsecured obligations and bear interest at a rate of 4.0% per year, payable semi-annually onFebruary 1 and August 1 of each year, beginning on February 1, 2019. The Notes due 2023 will mature on August 1, 2023, unless earlierrepurchased by us or converted at the option of the holders. On May 30, 2019, we entered into separately and privately negotiated transactions withcertain holders of the Notes due 2023 resulting in the repurchase and exchange, as of June 5, 2019, of $60.0 million aggregate principal amount ofthe notes in consideration for the issuance of 10,801,080 shares of common stock and separate cash payments totaling $6.0 million. As ofDecember 31, 2019, we had $5.0 million aggregate principal amount of our Notes due 2023 outstanding.Notes due 2024. In June 2019, we issued $132.0 million aggregate principal amount of convertible senior notes in a private placement(“Notes due 2024”). The Notes due 2024 are general unsecured obligations and bear interest at a rate of 1.0% per year, payable semi-annually onJune 1 and December 1 of each year, beginning on December 1, 2019. The Notes due 2024 will mature on June 1, 2024, unless earlierrepurchased by us or converted at the option of the holders at a conversion price of $20.50 per share. As of December 31, 2019, we had$132.0 million aggregate principal amount of our Notes due 2024 outstanding.The Notes due 2024 may be converted on any day prior to the close of business on the business day immediately preceding December 1,2023, in multiples of $1,000 principal amount, at the option of the holder under any of the following circumstances: (1) during any calendar quartercommencing after the calendar quarter ending on September 30, 2019 (and only during such calendar quarter), if the last reported sale price of theour common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including,the last trading day of the immediately preceding calendar quarter is greater than or equal to $26.6513 (130% of the conversion price) on eachapplicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the“trading price” (as defined in the relevant indenture) per $1,000 principal amount of notes for each trading day of the measurement period was lessthan 98% of the product of the last reported sale price of the our common stock and the conversion rate on each such trading day; or (3) upon theoccurrence of specified corporate events. Upon conversion of any of the notes, we will pay or deliver, as the case may be, cash, shares of commonstock or a combination of cash and common stock, at our election.In connection with the offering of the Notes due 2024, we entered into privately-negotiated convertible note hedge transactions in order toreduce the potential dilution to our common stock upon any conversion of the Notes due 2024. The total cost of the convertible note hedgetransactions was approximately $36.3 million. Also, concurrently with the offering of the Notes due 2024, we entered into privately-negotiatedwarrant transactions whereby we issued warrants to acquire shares of our common stock at a strike price of $25.2320 rather than the Notes due2024 conversion price of $20.5010. We received approximately $29.8 million from the sale of the warrants.As of February 21, 2020, the Notes due 2024 were not converted into equity, therefore, we had not purchased any shares under theconvertible note hedge and the warrants had not been exercised and remain outstanding. If holders of the Notes due 2024 are able to convert thedebt to equity, and exercise that right, we have asserted our intent and ability to settle the $132.0 million aggregate principal amount of the Notesdue 2024 in cash. See Note 11, “Debt,” of the notes to consolidated financial statements included in Part II, Item 8 of this Annual Report on Form10-K for more information relating to the convertible note hedge transactions and warrants.We believe that our existing cash and cash equivalents and cash flows from our operating activities will be sufficient to meet our anticipatedcash needs for at least the next 12 months.Cash Flows. The following table summarizes our cash flows for the periods presented: Years Ended December 31, 2019 2018 2017 (In thousands) Net cash provided by (used in) operating activities$139,067 $16,132 $(28,442)Net cash used in investing activities(14,788) (19,151) (4,121)Net cash provided by financing activities65,850 80,614 43,297Effect of exchange rate changes on cash(257) (502) 646Net increase in cash, cash equivalents and restricted cash$189,872 $77,093 $11,380 Enphase Energy, Inc. | 2019 Form 10-K | 47Table of ContentsCash Flows from Operating ActivitiesFor the year ended December 31, 2019, net cash provided by operating activities was $139.1 million compared to net cash provided byoperating activities of $16.1 million in 2018, an increase of $122.9 million year-over-year. The $122.9 million increase in net cash provided byoperating activities in 2019 compared to 2018, was primarily due to higher profitability in 2019 of $172.8 million higher net income, partially offset byhigher net non-cash benefit of $49.7 million. The higher net non-cash benefit of $49.7 million in 2019, compared to 2018, is comprised of $73.4million higher deferred income tax benefit due to the release of the valuation allowance against our deferred tax assets, $0.5 million lower provisionfor doubtful accounts and $0.5 million lower asset impairment, partially offset by higher non-cash charges for $8.7 million higher stock-basedcompensation, $6.0 million fees paid for repurchase and exchange of convertible notes due 2023, $2.2 million financing fees on extinguishment ofTerm Loans, $4.5 million higher depreciation on property and equipment and $3.4 million higher non-cash interest expense primarily due to debtdiscount on Notes due 2024. The changes in the working capital year-over-year was neutral as our growth in deferred revenue of $78.4 million,including $49.9 million of safe harbor prepayments, was offset by our growth in accounts receivable of $55.2 million and inventory of $25.5 million in2019, compared to 2018.Cash Flows from Investing ActivitiesFor the year ended December 31, 2019, net cash used in investing activities was $14.8 million, primarily from purchases of test andassembly equipment to expand our supply capacity and related facility improvements, and capitalized costs related to internal-use software. For theyear ended December 31, 2019, purchases of property and equipment totaled $14.8 million, compared to purchases in 2018 of $4.2 million, anincrease in purchases of $10.6 million year-over-year. For the year ended December 31, 2018, cash used in investing activities included$15.0 million payment related to the acquisition of SunPower’s microinverter business. In 2019, we did not acquire any businesses.Cash Flows from Financing ActivitiesFor the year ended December 31, 2019, net cash provided by financing activities of $65.9 million was primarily from $127.4 million netproceeds from the issuance of our Notes due 2024, $29.8 million from sale of warrants, $5.0 million net proceeds from employee stock optionexercises and issuance of common stock under our employee stock incentive program, partially offset by $45.9 million repayment of our term loanand long-term financing receivable recorded as debt, $36.3 million purchase of bond hedges related to our Notes due 2024, $6.0 million fee paid torepurchase and exchange $60.0 million of Notes due 2023 and $8.2 million payment of employee withholding taxes related to net share settlementof equity awards. For the year ended December 31, 2018, net cash provided by financing activities of $80.6 million was primarily from net proceedsof $62.4 million received from issuance of convertible debt, $19.8 million in net proceeds from sales of common stock, $5.6 million in net proceedsfrom the sale of certain long-term financing receivables and $2.8 million net proceeds from issuance of common stock under our employee stockincentive program, partially offset by $10.0 million in debt payments.Contractual ObligationsThe following table summarizes our outstanding contractual obligations as of December 31, 2019. Payments Due by Period Total 2020 2021-2022 2023-2024 Beyond 2024 (In thousands)Operating leases$15,170 $4,156 $7,165 $3,109 $740Notes due 2023 principal and interest5,800 200 400 5,200 —Notes due 2024 principal and interest137,958 1,320 2,640 133,998 —Purchase obligations (1)99,520 99,520 — — —Total$258,448 $105,196 $10,205 $142,307 $740 (1)Purchase obligations include amounts related to component inventory that our primary contract manufacturer procures on our behalf inaccordance with our production forecast as well as other inventory related purchase commitments. The timing of purchases in future periodscould differ materially from estimates presented above due to fluctuations in demand requirements related to varying sales levels as well aschanges in economic conditions. Enphase Energy, Inc. | 2019 Form 10-K | 48Table of ContentsOff-Balance Sheet ArrangementsAs of December 31, 2019, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.Critical Accounting PoliciesThe preparation of our consolidated financial statements and related notes requires us to make judgments, estimates and assumptions thataffect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We have basedour estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results ofwhich 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 consolidatedfinancial statements included in Part II, Item 8 of this Annual Report on Form 10-K. An accounting policy is considered to be critical if it requires anaccounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if differentestimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, couldmaterially impact the consolidated financial statements. We believe the following critical accounting policies reflect the more significant estimatesand assumptions used in the preparation of our consolidated financial statements.Revenue RecognitionWe generate revenue from sales of our solutions, which include microinverter units and related accessories, an Envoy communicationsgateway, the cloud-based Enlighten monitoring service, and AC Battery storage solutions to distributors, large installers, OEMs and strategicpartners.On January 1, 2018, we adopted Accounting Standards Codification (“ASC”) No. 606, “Revenue Recognition” (“ASC 606” or “Topic 606”) andapplied the modified retrospective method to all contracts that were not completed as of January 1, 2018. The most significant impacts uponadoption of Topic 606 were how we account for revenue related to our Envoy communications device and related Enlighten service and the timing ofwhen certain sales incentives are recognized. The full consideration for these products represents a single performance obligation and is deferredand 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 theconsideration that is expected to be received in exchange for those goods or services. We generate all of our revenues from contracts with ourcustomers. 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 communicationsgateway and Enlighten service, communications accessories and AC Battery storage solutions to distributors, large installers, OEMs andstrategic partners. Microinverter units, microinverter accessories, and AC Battery storage solutions are delivered to customers at a pointin time, and we recognize revenue for these products when we transfer control of the product to the customer, which is generally uponshipment.•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 overthe estimated service period of 6 years. We also sell certain communication accessories that are delivered over time. The revenue fromthese products is recognized over the related service period, which is typically 5 or 12 years.We previously sold Envoy communications device to certain customers under a long-term financing arrangement. Under this financingarrangement, 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 isrecorded. Enphase Energy, Inc. | 2019 Form 10-K | 49Table of ContentsWe 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 Part II, Item 8 of this Annual Report on Form10-K for additional information related to revenue recognition.InventoryInventory is valued at the lower of cost or market. Market is current replacement cost (by purchase or by reproduction, dependent on the typeof inventory). In cases where market exceeds net realizable value (i.e., estimated selling price less reasonably predictable costs of completion anddisposal), inventories are stated at net realizable value. Market is not considered to be less than net realizable value reduced by an allowance for anapproximately 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 anyexcess 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 ofinventories and market. The impact of changes in the inventory valuation allowance for 2019, 2018 and 2017 were not material.Warranty ObligationsMicroinverters Sold Through December 31, 2013Our warranty accrual provides for the replacement of microinverter units that fail during the product’s warranty term (15 years for first andsecond 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 andassumptions for each generation of product, based on historical results, trends and the most current data available as of the filing date. The keyestimates and assumptions used in the warranty liability are thoroughly reviewed by management on a quarterly basis. The key estimates used byus 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 toresult in warranty claims over time (i.e., claim rate); and (3) the per unit cost of replacement units, including outbound shipping and limited laborcosts, 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 foreach generation of microinverter. To establish initial failure rate estimates for each generation of microinverter, our quality engineers use acombination of industry standard Mean Time Between Failure (“MTFB”) estimates for individual components contained in that generation ofmicroinverters, third party data collected on similar equipment deployed in outdoor environments similar to those in which our microinverters areinstalled, and rigorous long term reliability and accelerated life cycle testing which simulates the service life of the microinverter in a short period oftime. As units are deployed into operating environments, we continue to monitor product performance through our Enlighten monitoring platform. Ittypically takes three to nine months between the date of sale and date of end-user installation. Consequently, our ability to monitor actual failures ofunits sold similarly lags by three to nine months. When a microinverter fails and is returned, we perform diagnostic root cause failure analysis tounderstand 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 identifiedfailure mechanism(s) will impact the remaining units deployed in the installed base.Estimated Claim Rates — Warranty claim rate estimates are based upon observed historical trends and assumptions with respect toexpected customer behavior over the warranty period. As the vast majority of our microinverters have been sold to end users for residentialapplications, we believe that warranty claim rates will be affected by changes over time in residential home ownership because we expect thatsubsequent homeowners are less likely to file claims than the homeowners who originally purchase the microinverters. Enphase Energy, Inc. | 2019 Form 10-K | 50Table of ContentsEstimated Replacement Costs — Three factors are considered in our analysis of estimated replacement cost: (1) the estimated cost ofreplacement microinverters; (2) the estimated cost to ship replacement microinverters to end users; and (3) the estimated labor reimbursementexpected to be paid to third party installers performing replacement services for the end user. Because our warranty provides for the replacement ofdefective microinverters over long periods of time (typically between 15 and 25 years, depending on the generation of product purchased), theestimated per unit cost of current and future product generations is considered in the estimated replacement cost. Estimated costs to shipreplacement units are based on observable, market-based shipping costs paid by us to third party freight carriers. We have a separate program thatallows third-party installers to claim fixed-dollar reimbursements for labor costs they incur to replace failed microinverter units for a limited time fromthe date of original installation. Included in our estimated replacement cost is an analysis of the number of fixed-dollar labor reimbursementsexpected 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 significantdifferences. We may make additional adjustments to the warranty provision based on performance trends or other qualitative factors. If actual failurerates, claim rates, or replacement costs differ from our estimates in future periods, changes to these estimates may be required, resulting inincreases or decreases in our warranty obligations. Such increases or decreases could be material.Fair Value Option for Microinverters Sold Since January 1, 2014Our warranty obligations related to microinverters sold since January 1, 2014 provide us the right, but not the requirement, to assign ourwarranty obligations to a third-party. Under ASC 825, “Financial Instruments” (also referred to as the “fair value option”), an entity may choose toelect the fair value option for such warranties at the time it first recognizes the eligible item. We made an irrevocable election to account for alleligible warranty obligations associated with microinverters sold since January 1, 2014 at fair value. This election was made to reflect the underlyingeconomics 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 futureamounts into a single current discounted amount. In addition to the key estimates of failure rates, claim rates and replacement costs, we usedcertain inputs that are unobservable and significant to the overall fair value measurement. Such additional assumptions included compensationcomprised 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 Part II, Item 8 of thisAnnual Report on Form 10-K for additional information.Business CombinationsAssets 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 ofidentifiable assets, particularly intangibles, and liabilities acquired also requires the Company to make estimates, which are based on all availableinformation 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 toassets and liabilities acquired in the business purchase transaction. Enphase Energy, Inc. | 2019 Form 10-K | 51Table of ContentsIntangible AssetsIntangible assets include patents and other purchased intangible assets. Intangible assets with finite lives are amortized on a straight-linebasis, with estimated useful lives ranging from 3 to 9 years. Indefinite-lived intangible assets are tested for impairment annually and are also testedfor 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 lives are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (assetgroup) may not be recoverable. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cashflows 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’scarrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. There was no impairment of intangibleassets in any of the years presented.Income TaxesWe record income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for theexpected tax consequences of temporary differences between the tax bases of assets and liabilities for financial reporting purposes and amountsrecognized for income tax purposes. In estimating future tax consequences, generally all expected future events other than enactments or changesin the tax law or rates are considered. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected tobe realized.We assess the realizability of the deferred tax assets to determine release of valuation allowance as necessary. In the event we determinethat it is more likely than not that we would be able to realize deferred tax assets in the future in excess of our net recorded amount, an adjustmentto the valuation allowance for the deferred tax asset would increase income in the period such determination was made. Likewise, should it bedetermined that additional amounts of the net deferred tax asset will not be realized in the future, an adjustment to increase the deferred tax assetvaluation allowance will be charged to income in the period such determination is made.We operate in various tax jurisdictions and is subject to audit by various tax authorities. We follow accounting for uncertainty in income taxeswhich 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 asof the reporting date. We consider many factors when evaluating and estimating its tax positions and tax benefits, which may require periodicadjustments and which may not accurately anticipate actual outcomes.Item 7A. Quantitative and Qualitative Disclosures About Market RiskForeign Currency Exchange RiskWe operate and conduct business in foreign countries where our foreign entities use the local currency as their respective functional currencyand, as a result, are exposed to movements in foreign currency exchange rates. More specifically, we face foreign currency exposure primarily fromthe effect of fluctuating exchange rates on payables and receivables relating to transactions that are denominated in Euros, Indian Rupee andAustralian and New Zealand Dollars. These payables and receivables primarily arise from sales to customers and intercompany transactions. Wealso face currency exposure that arises from translating the results of our European, Indian, Australian and New Zealand operations, including salesand marketing and research and development expenses, to the U.S. dollar at exchange rates that have fluctuated from the beginning of a reportingperiod.We do not enter into derivative financial instruments for trading or speculative purposes. We did not enter into any foreign currency forwardcontracts during 2019 and 2018. Any foreign currency forward contracts entered in the future are accounted for as derivatives whereby the fairvalue of the contracts is reported as other current assets or current liabilities, and gains and losses resulting from changes in the fair value arereported in other income (expense), net, in the accompanying consolidated statements of operations.Credit RiskFinancial instruments that subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.We maintain a substantial portion of our cash balances in non-interest-bearing and interest-bearing deposits and money market accounts. Webelieve that these financial institutions are financially sound and, accordingly, are subject to minimal credit risk. Our net revenues are primarilyconcentrated among a limited number Enphase Energy, Inc. | 2019 Form 10-K | 52Table of Contentsof customers. We monitor the financial condition of our customers and perform credit evaluations whenever considered necessary. We maintain anallowance for doubtful accounts for estimated potential credit losses. See Note 16 for information on Concentration of “Credit Risk and MajorCustomers” of the notes to consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.Interest Rate RiskWe had cash, cash equivalents and restricted cash of $296.1 million and $106.2 million as of December 31, 2019 and 2018, respectively,consisting of both non-interest bearing and interest-bearing deposits, and money market accounts. Such interest-earning instruments carry adegree of interest rate risk, but the risk is limited due to the duration of our short term investments. To date, fluctuations in interest income have notbeen significant. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments tomanage our interest rate risk exposure. We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes ininterest rates.Our cash flow exposure due to changes in interest rates related to our debt is limited as our Notes due 2024 and Notes due 2023 have fixedinterest rates of 1.0% and 4.0%, respectively. The fair value of the Convertible Notes may increase or decrease for various reasons, includingfluctuations in the market price of our common stock, fluctuations in market interest rates and fluctuations in general economic conditions. Basedupon the quoted market price as of December 31, 2019, the fair value of our Notes due 2024 was approximately $190.9 million. Notes due 2023 arenot actively traded. Enphase Energy, Inc. | 2019 Form 10-K | 53Table of ContentsItem 8. Financial Statements and Supplementary DataENPHASE ENERGY, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTSAS OF DECEMBER 31, 2019 AND 2018,AND FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017 PageReport of Independent Registered Public Accounting Firm55Consolidated Balance Sheets59Consolidated Statements of Operations60Consolidated Statements of Comprehensive Income (Loss)61Consolidated Statements of Stockholders’ Equity (Deficit)62Consolidated Statements of Cash Flows64Notes to Consolidated Financial Statements66Selected Unaudited Quarterly Financial Information102 Enphase Energy, Inc. | 2019 Form 10-K | 54Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Stockholders and the Board of Directors of Enphase Energy, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Enphase Energy, Inc. and subsidiaries (the "Company") as of December31, 2019 and 2018, the related consolidated statements of operations, comprehensive loss, stockholders' equity (deficit), and cash flows, for each ofthe three years in the period ended December 31, 2019, 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, 2019 and 2018, and theresults of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accountingprinciples 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), theCompany's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — IntegratedFramework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2020,expressed an unqualified opinion on the Company's internal control over financial reporting.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on theCompany's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to beindependent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of theSecurities 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 toobtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our auditsincluded performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, andperforming procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts anddisclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis forour opinion.Critical Audit MattersThe critical audit matters communicated below are matters arising from the current-period audit of the financial statements that werecommunicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financialstatements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alterin any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providingseparate opinions on the critical audit matters or on the accounts or disclosures to which they relate.Warranty Obligations – Microinverters - Refer to Notes 2, 8 and 9 to the consolidated financial statementsCritical Audit Matter DescriptionThe Company’s warranty obligation provides for the replacement of microinverter units that fail during the product’s warranty term of 15 to 25years. The estimated warranty liability is developed for each generation of product and requires management to estimate, among other factors, (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 (i.e., replacement cost), all of which consider historical results, trends and the most currentdata available when the financial statements are available to be issued. The Company’s warranty liability for all microinverter units sold afterJanuary 1, 2014 is measured at fair value by applying both of the following to the liability that results from the 3 factors discussed above: (1)compensation comprised of a profit element and risk premium required for a market participant to assume the obligation and (2) a discount ratebased on the Company’s credit adjusted risk free rate. Enphase Energy, Inc. | 2019 Form 10-K | 55Table of ContentsGiven the limited operating history of the products relative to the warranty term and the subjectivity of estimating the projected failure rates ofreported and unreported warranty claims, performing audit procedures to evaluate whether the expected failure rates were appropriately determinedas of December 31, 2019, required a high degree of auditor judgment and an increased extent of effort.How the Critical Audit Matter Was Addressed in the AuditOur audit procedures related to the estimated failure rates used in determining the warranty obligation included the following, among others:•We tested the effectiveness of controls utilized in the review of the warranty obligation calculation, including controls over the determinationof estimated failure rates.•We evaluated the methods and assumptions used by management to estimate the failure rates used as part of the calculation of thewarranty obligation by:–Testing the underlying data that served as the basis for the Company’s failure rate analysis, which include historical claims andhistorical product sales, in order to evaluate the various assumptions and historical data consisting of failure of individualcomponents contained in its microinverters.–Reviewing third party data compiled on similar products in order to challenge management’s assumptions and identify supporting orcontradictory evidence.–Comparing management’s prior-year assumptions of expected failures to actual warranty claims received during the current year toidentify potential bias in the determination of the failure rate estimates used in the warranty obligation recorded.–Developing independent estimates of the future failure rates for product families by utilizing data analytics and compared them tomanagement assumptions.Income Taxes - Valuation Allowance – Refer to Notes 2 and 15 to the consolidated financial statementsCritical Audit Matter DescriptionThe Company recognizes deferred income taxes for differences between the financial statement and tax bases of assets and liabilities atenacted statutory tax rates in effect for the years in which the differences are expected to reverse. Valuation allowances are provided to reducedeferred tax assets to the amount that is more likely than not to be realized. In determining the need for a valuation allowance, managementconsiders, among other matters, the nature, frequency and amount of recent losses, the duration of statutory carryforward periods, and tax planningstrategies and the weight given to positive and negative evidence is commensurate with the extent to which the evidence may be objectivelyverified. As of December 31, 2019, the Company determined that it was more-likely-than not that its domestic deferred tax assets would berealized. The factors that the Company weighted most heavily in their analysis were a history of income and projected future taxable income.Therefore, the Company recorded an income tax benefit of $92.9 million for the year-ended December 31, 2019 associated with a reduction in thevaluation allowance.Given the determination that it is more likely than not that sufficient taxable income will be generated in the future to realize deferred taxassets requires management to make significant judgments and estimates related to projected future taxable income. Performing audit proceduresto evaluate the reasonableness of management’s estimates of projected future taxable income required a high degree of auditor judgment and anincreased extent of effort, including the need to involve our income tax specialists.How the Critical Audit Matter Was Addressed in the AuditOur audit procedures related to positive and negative evidence surrounding managements projected future taxable income and thedetermination of whether it is more likely than not that the Company would have U.S. income sufficient to realize the benefit of its deferred taxassets included the following, among others:•We tested the effectiveness of controls over deferred tax assets, including management’s controls over the estimates of projected futuretaxable income and the determination of whether it is more likely than not that the deferred tax assets will be realized.•We evaluated the reasonableness of the methods, assumptions, and judgments used by management to determine whether a valuationallowance was necessary. Enphase Energy, Inc. | 2019 Form 10-K | 56Table of Contents•With the assistance of our income tax specialists, we evaluated the nature of each of the deferred tax assets, including their expirationdates and their projected utilization when compared to projections of future taxable income.•We tested historical pretax book income at December 31, 2019, adjusted for permanent differences, including the change from a 3-yearcumulative loss position to a 3-year cumulative income position that occurred in the fourth quarter of 2019.•We evaluated management’s ability to accurately estimate projected future taxable income by comparing actual results to management’shistorical estimates and evaluating whether there have been any changes that would affect management’s ability to continue accuratelyestimating taxable income.•We tested the reasonableness of management’s estimates of projected future taxable income by comparing the estimates to internalcommunications to management and the Board of Directors, and historical taxable income, as adjusted for nonrecurring items./s/ DELOITTE & TOUCHE LLPSan Francisco, CaliforniaFebruary 21, 2020We have served as the Company’s auditor since 2010. Enphase Energy, Inc. | 2019 Form 10-K | 57Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Stockholders and the Board of Directors of Enphase Energy, Inc.Opinion on Internal Control over Financial ReportingWe have audited the internal control over financial reporting of Enphase Energy, Inc. and subsidiaries (the “Company”) as of December 31,2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reportingas of December 31, 2019, 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), theconsolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated February 21, 2020expressed an unqualified opinion on those financial statements.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over FinancialReporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a publicaccounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federalsecurities 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 toobtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our auditincluded obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Acompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance thattransactions 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 thecompany; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of thecompany’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 anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate./s/ DELOITTE & TOUCHE LLPSan Francisco, CaliforniaFebruary 21, 2020 Enphase Energy, Inc. | 2019 Form 10-K | 58Table of ContentsENPHASE ENERGY, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except par value) As of December 31, 2019 December 31, 2018ASSETS Current assets: Cash and cash equivalents$251,409 $106,237Restricted cash44,700 —Accounts receivable, net of allowances of $564 and $2,138 at December 31, 2019 and December 31, 2018,respectively145,413 78,938Inventory32,056 16,267Prepaid expenses and other assets26,079 20,860Total current assets499,657 222,302Property and equipment, net28,936 20,998Operating lease, right of use asset10,117 —Intangible assets, net30,579 35,306Goodwill24,783 24,783Other assets44,620 36,548Deferred tax assets, net74,531 —Total assets$713,223 $339,937LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable$57,474 $48,794Accrued liabilities47,092 29,010Deferred revenues, current81,783 33,119Warranty obligations, current (includes $6,794 and $4,288 measured at fair value at December 31, 2019 andDecember 31, 2018, respectively)10,078 8,083Debt, current2,884 28,155Total current liabilities199,311 147,161Long-term liabilities: Deferred revenues, noncurrent100,204 76,911Warranty obligations, noncurrent (includes $13,012 and $7,469 measured at fair value at December 31, 2019and December 31, 2018, respectively)27,020 23,211Other liabilities11,817 3,250Debt, noncurrent102,659 81,628Total liabilities441,011 332,161Commitments and contingent liabilities (Note 12) Stockholders’ equity: Common stock, $0.00001 par value, 150,000 shares and 150,000 shares authorized; and 123,109 shares and107,035 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively1 1Additional paid-in capital458,315 353,335Accumulated deficit(185,181) (346,302)Accumulated other comprehensive income (loss)(923) 742Total stockholders’ equity272,212 7,776Total liabilities and stockholders’ equity$713,223 $339,937See Notes to Consolidated Financial Statements. Enphase Energy, Inc. | 2019 Form 10-K | 59Table of ContentsENPHASE ENERGY, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data) Years Ended December 31, 2019 2018 2017Net revenues$624,333 $316,159 $286,166Cost of revenues403,088 221,714 230,123Gross profit221,245 94,445 56,043Operating expenses: Research and development40,381 32,587 33,157Sales and marketing36,728 27,047 23,126General and administrative38,808 29,086 22,221Restructuring charges2,599 4,129 16,917Total operating expenses118,516 92,849 95,421Income (loss) from operations102,729 1,596 (39,378)Other expense, net Interest income2,513 1,058 276Interest expense(9,691) (10,693) (8,212)Other (expense) income, net(5,437) (2,190) 1,973Total other expense, net(12,615) (11,825) (5,963)Income (loss) before income taxes90,114 (10,229) (45,341)Income tax benefit (provision)71,034 (1,398) 149Net income (loss)$161,148 $(11,627) $(45,192)Net income (loss) per share: Basic$1.38 $(0.12) $(0.54)Diluted$1.23 $(0.12) $(0.54)Shares used in per share calculation: Basic116,713 99,619 82,939Diluted131,644 99,619 82,939See Notes to Consolidated Financial Statements. Enphase Energy, Inc. | 2019 Form 10-K | 60Table of ContentsENPHASE ENERGY, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(In thousands) Years Ended December 31, 2019 2018 2017Net income (loss)$161,148 $(11,627) $(45,192)Other comprehensive income (loss): Foreign currency translation adjustments(1,665) 1,398 (364)Comprehensive income (loss)$159,483 $(10,229) $(45,556)See Notes to Consolidated Financial Statements. Enphase Energy, Inc. | 2019 Form 10-K | 61Table of ContentsENPHASE ENERGY, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)(In thousands) Common Stock AdditionalPaid-In Capital AccumulatedIncome (Deficit) AccumulatedOtherComprehensiveIncome (Loss) TotalStockholders’Equity (Deficit) Shares Amount Balance at December 31, 201662,269 $1 $252,126 $(250,535) $(292) $1,300Issuance of common stock fromexercise of equity awards andemployee stock purchase plan1,752 — 531 — — 531Issuance of common stock, net ofoffering costs21,893 — 26,425 — — 26,425Issuance of warrants— — 1,447 — — 1,447Stock-based compensation— — 6,727 — — 6,727Net loss— — — (45,192) — (45,192)Foreign currency translationadjustment— — — — (364) (364)Balance at December 31, 201785,914 $1 $287,256 $(295,727) $(656) $(9,126)Cumulative-effect adjustment toaccumulated deficit related to theadoption of ASC 606— — — (38,948) — (38,948)Issuance of common stock fromexercise of equity awards andemployee stock purchase plan3,185 — 2,806 — — 2,806Issuance of common stock, net ofoffering costs9,524 — 19,766 — — 19,766Issuance of common stock related toacquisition7,500 — 32,319 — — 32,319Exercise of warrants912 — — — — —Stock-based compensation— — 11,188 — — 11,188Net loss— — — (11,627) — (11,627)Foreign currency translationadjustment— — — — 1,398 1,398Balance at December 31, 2018107,035 $1 $353,335 $(346,302) $742 $7,776Cumulative-effect adjustment toaccumulated deficit related to theadoption of ASU 2018-07— — 27 (27) — —Issuance of common stock fromexercise of equity awards andemployee stock purchase plan5,273 — 4,985 — — 4,985Payment of withholding taxes related tonet share settlement of equity awards— — (8,198) — — (8,198)Conversion of convertible notes due2023, net10,801 — 58,857 — — 58,857Equity component of convertible notesdue 2024, net— — 35,387 — — 35,387Cost of convertible notes hedge relatedto the convertible notes due 2024— — (36,313) — — (36,313)Sale of warrants related to theconvertible notes due 2024— — 29,818 — — 29,818Stock-based compensation— — 20,417 — — 20,417Net income— — — 161,148 — 161,148Foreign currency translationadjustment— — — — (1,665) (1,665)Balance at December 31, 2019123,109 $1 $458,315 $(185,181) $(923) $272,212 Enphase Energy, Inc. | 2019 Form 10-K | 62Table of ContentsSee Notes to Consolidated Financial Statements. Enphase Energy, Inc. | 2019 Form 10-K | 63Table of ContentsENPHASE ENERGY, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Years Ended December 31, 2019 2018 2017Cash flows from operating activities: Net income (loss)$161,148 $(11,627) $(45,192)Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization14,119 9,667 9,004Provision for doubtful accounts217 711 476Asset impairment1,124 1,601 1,681Non-cash interest expense6,081 2,701 1,673Financing fees on extinguishment of debt2,152 — —Fees paid for repurchase and exchange of convertible notes due 20236,000 — —Stock-based compensation20,176 11,432 6,727Deferred income taxes(73,375) 123 (1,394)Changes in operating assets and liabilities: Accounts receivable(68,745) (13,515) (4,803)Inventory(15,789) 9,732 5,961Prepaid expenses and other assets(14,293) (3,130) (1,227)Intangible assets— (10,000) —Accounts payable, accrued and other liabilities22,200 23,082 (5,078)Warranty obligations5,804 1,478 (1,598)Deferred revenues72,248 (6,123) 5,328Net cash provided by (used in) operating activities139,067 16,132 (28,442)Cash flows from investing activities: Purchases of property and equipment(14,788) (4,151) (4,121)Acquisition— (15,000) —Net cash used in investing activities(14,788) (19,151) (4,121)Cash flows from financing activities: Issuance of convertible notes due 2024, net of issuance costs127,413 — —Purchase of convertible note hedges(36,313) — —Sale of warrants29,818 — —Fees paid for repurchase and exchange of convertible notes due 2023(6,000) — —Principal payments and financing fees on debt(45,855) (9,976) —Proceeds from issuance of common stock, net of issuance costs— 19,766 26,425Proceeds from debt, net of issuance costs— 68,024 26,442Payments under revolving credit facility— — (10,100)Proceeds from exercise of equity awards and employee stock purchase plan4,985 2,800 530Payment of withholding taxes related to net share settlement of equity awards(8,198) — —Net cash provided by financing activities65,850 80,614 43,297Effect of exchange rate changes on cash and cash equivalents(257) (502) 646Net increase in cash, cash equivalents, and restricted cash189,872 77,093 11,380Cash, cash equivalents and restricted cash—Beginning of period106,237 29,144 17,764Cash, cash equivalents and restricted cash—End of period$296,109 $106,237 $29,144 Enphase Energy, Inc. | 2019 Form 10-K | 64Table of Contents Years Ended December 31, 2019 2018 2017Reconciliation of cash, cash equivalents, and restricted cash to the consolidatedbalance sheets Cash and cash equivalents251,409 106,237 29,144Restricted cash44,700 — —Total cash, cash equivalents, and restricted cash$296,109 $106,237 $29,144 Supplemental cash flow disclosure: Cash paid for interest$2,689 $6,343 $5,816Cash paid for income taxes$1,755 $775 $909 Supplemental disclosures of non-cash investing and financing activities: Acquisition funded by issuance of common stock$— $19,219 $—Purchases of fixed assets included in accounts payable$672 $895 $551Accrued interest payable unpaid upon exchange of convertible notes due 2023$833 $— $—See Notes to Consolidated Financial Statements. Enphase Energy, Inc. | 2019 Form 10-K | 65Table of ContentsENPHASE ENERGY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1.DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATIONDescription of BusinessEnphase Energy, Inc. (the “Company”) is a global energy technology company. The Company delivers smart, easy-to-use solutions thatmanage solar generation, storage and communication on one intelligent platform. The Company revolutionized the solar industry with itsmicroinverter technology and produces a fully integrated solar-plus-storage solution.Basis of Presentation and ConsolidationThe accompanying consolidated financial statements are presented in accordance with accounting principles generally accepted in the UnitedStates (“U.S.”), or GAAP. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Allintercompany balances and transactions have been eliminated in consolidation.Use of EstimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reportedamounts of income and expenses during the reporting period. Significant estimates and assumptions reflected in the financial statements includerevenue recognition, inventory valuation, accrued warranty obligations, incremental borrowing rate for right-of-use assets and lease liability, and taxvaluation allowance. These estimates are based on information available as of the date of the financial statements; therefore, actual results coulddiffer materially from management’s estimates using different assumptions or under different conditions.2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESRevenue RecognitionThe Company generates revenue from sales of its solutions, which include microinverter units and related accessories, an Envoycommunications gateway, the cloud-based Enlighten monitoring service, and AC Battery storage solutions to distributors, large installers, originalequipment 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 significantimpacts upon adoption of Topic 606 were how the Company accounts for revenue related to its Envoy™ communications device and relatedEnphase Enlighten Software™, or Enlighten, service and the timing of when certain sales incentives are recognized. The full consideration for theseproducts 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 thatreflects the consideration that is expected to be received in exchange for those goods or services. The Company generates all of its revenues fromcontracts 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 customercontracts. The Company generates revenues from sales of its solutions, which include microinverter units and related accessories, anEnvoy 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 aredelivered to customers at a point in time, and the Company recognizes revenue for these products when the Company transfers controlof the product to the customer, which is generally upon shipment. Enphase Energy, Inc. | 2019 Form 10-K | 66Table of Contents•Products Delivered Over Time. The sale of an Envoy communications gateway includes the Company’s Enlighten cloud-based monitoringservice. The full consideration for these products represents a single performance obligation and is deferred at the sale date andrecognized over the estimated service period of 6 years. The Company also sells certain communication accessories that are deliveredover time. The revenue from these products is recognized over the related service period, which is typically 5 or 12 years.The Company previously sold its Envoy communications device to certain customers under a long-term financing arrangement. Under thisfinancing 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 relatedrevenue is recorded.The Company records upfront contract acquisition costs, such as sales commissions, to be capitalized and amortized over the estimated lifeof the asset. For contracts that have a duration of less than one year, the Company follows the Topic 606 practical expedient and expenses thesecosts when incurred. Commissions related to the Company’s sale of monitoring hardware and service are capitalized and amortized over the periodof the associated revenue, which is 6 years.See Note 3. “Revenue Recognition,” for additional information related to revenue recognition.Cost of RevenuesThe 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 ofmanufacturing 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 theproduct 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 EquivalentsThe Company considers all highly liquid investments, such as certificates of deposit and money market instruments with maturities of twelvemonths or less at the time of acquisition to be cash equivalents. For all periods presented, its cash balances consist of amounts held in non-interest-bearing and interest-bearing deposits and money market accounts.Restricted CashRestricted cash represents cash held as certificate of deposit collateralized under a letter of credit issued to a customer. The letter of credit isrequired as a performance security in a face amount equal to the aggregate purchase price of the executed sales agreement. The letter of creditwas issued per the terms of the executed sales agreement with a customer for safe harbor prepayment and the Company has collateralized acertificate of deposit under this letter of credit in an amount of $44.7 million, which was reflected as restricted cash on the Company’s consolidatedbalance sheet as of December 31, 2019.Fair Value of Financial Instruments The carrying amounts of the Company’s cash, cash equivalents and restricted cash, accounts receivable, accounts payable and accruedliabilities approximate fair value because of the short maturity of those instruments.Accounts Receivables and Contract AssetsThe Company receives payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the rightto consideration becomes unconditional. Contract assets include deferred product costs and commissions associated with the deferred revenueand will be amortized along with the associated revenue. Enphase Energy, Inc. | 2019 Form 10-K | 67Table of ContentsAllowance for Doubtful AccountsThe Company maintains allowances for doubtful accounts for uncollectible accounts receivable. Management estimates anticipated lossesfrom doubtful accounts based on days past due, collection history and the financial health of customers. The following table sets forth activities inthe allowance for doubtful accounts for the periods indicated. December 31, 2019 2018 2017 (In thousands)Balance, at beginning of year$2,138 $2,378 $2,921Net charges to expenses217 711 476Write-offs, net of recoveries(1,791) (951) (1,019)Balance, at end of year$564 $2,138 $2,378InventoryInventory is valued at the lower of cost or market. Market is current replacement cost (by purchase or by reproduction, dependent on the typeof inventory). In cases where market exceeds net realizable value (i.e., estimated selling price less reasonably predictable costs of completion anddisposal), inventories are stated at net realizable value. Market is not considered to be less than net realizable value reduced by an allowance for anapproximately normal profit margin. The Company determines cost on a first-in first-out basis. Management assesses the valuation on a quarterlybasis and writes down the value for any excess and obsolete inventory based upon expected demand, anticipated sales price, effect of new productintroductions, product obsolescence, customer concentrations, product merchantability and other factors. Inventory write-downs are equal to thedifference between the cost of inventories and market.Long-Lived AssetsProperty and equipment are stated at cost less accumulated depreciation. Cost includes amounts paid to acquire or construct the asset aswell as any expenditure that substantially adds to the value of or significantly extends the useful life of an existing asset. Repair and maintenancecosts are expensed as incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of theassets, which range from 3 to 10 years. Leasehold improvements are amortized over the shorter of the lease term or expected useful life of theimprovements.Internal-use software, whether purchased or developed, is capitalized at cost and amortized on a straight-line basis over its estimated usefullife. 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 internal-use software requiresjudgment in determining when a project has reached the development stage and the period over which the Company expects to benefit from theuse of that software.Property, plant and equipment, including internal-use software, are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss would be recognized when the carryingamount 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 generallydetermined using a discounted cash flow analysis. The Company recorded asset impairment charges for specific assets that were no longer in useof approximately $1.1 million, $1.6 million and $0.8 million for the years ended 2019, 2018 and 2017, respectively. There were no events orchanges in circumstances that may indicate the carrying amount of remaining assets is not recoverable. Enphase Energy, Inc. | 2019 Form 10-K | 68Table of ContentsBusiness CombinationsAssets 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 ofidentifiable assets, particularly intangibles, and liabilities acquired also requires the Company to make estimates, which are based on all availableinformation 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 toassets and liabilities acquired in the business purchase transaction.GoodwillGoodwill results from the purchase consideration paid in excess of the fair value of the net assets recorded in connection with a businessacquisition. Goodwill is not amortized but is assessed for potential impairment at least annually during the fourth quarter of each fiscal year orbetween annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Goodwill is tested at thereporting unit level, which the Company has determined to be the same as the entity as a whole (entity level). The Company first performsqualitative assessment to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying value. If, afterassessing the qualitative factors, we determine that it is more likely than not that the fair value of our reporting unit is less than its carrying value, animpairment analysis will be performed.Qualitative factors include industry and market consideration, overall financial performance, share price trends and market capitalization andCompany-specific events. The Company determined, after performing a qualitative review of its reporting unit, that it is more likely than not that thefair value of our reporting unit exceeds its carrying value. Accordingly, there was no indication of impairment in the years ended 2019, 2018 and2017 and no quantitative goodwill impairment test was performed.Intangible AssetsIntangible assets include patents and other purchased intangible assets. Intangible assets with finite lives are amortized on a straight-linebasis, with estimated useful lives ranging from 3 to 9 years. Indefinite-lived intangible assets are tested for impairment annually and are also testedfor 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 lives are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (assetgroup) may not be recoverable. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cashflows 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’scarrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. There was no impairment of intangibleassets in any of the years presented.Contract LiabilitiesContract liabilities are recorded as deferred revenue on the accompanying consolidated balance sheets and include payments received inadvance of performance obligations under the contract and are realized when the associated revenue is recognized under the contract. Enphase Energy, Inc. | 2019 Form 10-K | 69Table of ContentsWarranty ObligationsMicroinverters Sold Through December 31, 2013The Company’s warranty accrual provides for the replacement of microinverter units that fail during the product’s warranty term (typically 15years for first and second generation microinverters and up to 25 years for third and fourth generation microinverters). On a quarterly basis, theCompany employs a consistent, systematic and rational methodology to assess the adequacy of its warranty liability. This assessment includesupdating all key estimates and assumptions for each generation of product, based on historical results, trends and the most current data availableas 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).Estimated Failure Rates — The Company’s Quality and Reliability department has primary responsibility to determine the estimated failurerates for each generation of microinverter. To establish initial failure rate estimates for each generation of microinverter, the Company’s qualityengineers use a combination of industry standard Mean Time Between Failure (“MTBF”) estimates for individual components contained in itsmicroinverters, third party data collected on similar equipment deployed in outdoor environments similar to those in which the Company’smicroinverters are installed, and rigorous long term reliability and accelerated life cycle testing which simulates the service life of the microinverter ina short period of time. As units are deployed into operating environments, the Company continues to monitor product performance through itsEnlighten monitoring platform. It typically takes three to nine months between the date of sale and date of end-user installation. Consequently, theCompany’s ability to monitor actual failures of units sold similarly lags by three to nine months. When a microinverter fails and is returned, theCompany performs diagnostic root cause failure analysis to understand and isolate the underlying mechanism(s) causing the failure. The Companythen uses the results of this analysis (combined with the actual, cumulative performance data collected on those units prior to failure throughEnlighten) to draw conclusions with respect to how or if the identified failure mechanism(s) will impact the remaining units deployed in the installedbase.Estimated Claim Rates — Warranty claim rate estimates are based upon observed historical trends and assumptions with respect toexpected customer behavior over the warranty period. As the vast majority of the Company’s microinverters have been sold to end users forresidential applications, the Company believes that warranty claim rates will be affected by changes over time in residential home ownershipbecause the Company expects that subsequent homeowners are less likely to file claims than the homeowners who originally purchase themicroinverters.Estimated Replacement Costs — Three factors are considered in the Company’s analysis of estimated replacement cost: (1) the estimatedcost of replacement microinverters; (2) the estimated cost to ship replacement microinverters to end users; and (3) the estimated laborreimbursement expected to be paid to third party installers performing replacement services for the end user. Because the Company’s warrantyprovides for the replacement of defective microinverters over long periods of time (between 15 and 25 years, depending on the generation ofproduct 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 replacefailed microinverter units for a limited time from the date of original installation. Included in the Company’s estimated replacement cost is ananalysis 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 anysignificant differences. Management may make additional adjustments to the warranty provision based on performance trends or other qualitativefactors. If actual failure rates, claim rates, or replacement costs differ from the Company’s estimates in future periods, changes to these estimatesmay be required, resulting in increases or decreases in the Company’s warranty obligations. Such increases or decreases could be material. Enphase Energy, Inc. | 2019 Form 10-K | 70Table of ContentsFair Value Option for Microinverters Sold Since January 1, 2014The Company’s warranty obligations related to microinverters sold since January 1, 2014 provide the Company the right, but not therequirement, to assign its warranty obligations to a third-party. Under ASC 825, “Financial Instruments” (also referred to as “fair value option”), anentity may choose to elect the fair value option for such warranties at the time it first recognizes the eligible item. The Company made an irrevocableelection to account for all eligible warranty obligations associated with microinverters sold since January 1, 2014 at fair value. This election wasmade 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.The Company estimates the fair value of warranty obligations by calculating the warranty obligations in the same manner as for sales prior toJanuary 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 includedcompensation comprised of a profit element and risk premium required of a market participant to assume the obligation and a discount rate basedon 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. Inaddition, 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 ProductsThe Company offers a 5‑year warranty for its Envoy communications gateway and a 10‑year warranty on its AC Battery storage solution. Thewarranties provide the Company with the right, but not the obligation, to assign its warranty obligations to a third-party. As such, warranties forEnvoy and AC Battery storage solution products are accounted for under the fair value method of accounting.Research and Development CostsThe Company expenses research and development costs as incurred. Research and development expense consists primarily of productdevelopment personnel costs, including salaries and benefits, stock-based compensation, other professional costs and allocated facilities costs.Stock-Based CompensationShare-based payments are required to be recognized in the Company’s consolidated statements of operations based on their fair values andthe estimated number of shares expected to vest. The Company measures stock-based compensation expense for all share-based paymentawards, including stock options made to employees and directors, based on the estimated fair values on the date of the grant. The fair value ofstock options granted is estimated using the Black-Scholes option valuation model. The fair value of restricted stock units granted is determinedbased 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 isdetermined based on the date of grant or when achievement of performance is probable. The fair value of market‑based performance stock unitsgranted 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 requisiteservice period. Stock-based compensation for performance stock units (“PSUs”) without market conditions is recognized when the performancecondition is probable of being achieved, and then on a graded basis over the requisite service period. Stock-based compensation for PSUs withmarket conditions is recognized on a straight-line basis over the requisite service period. Additionally, the Company estimates its forfeiture rateannually based on historical experience and revise the estimates of forfeiture in subsequent periods if actual forfeitures differ from those estimates.Leases Enphase Energy, Inc. | 2019 Form 10-K | 71Table of ContentsThe Company determines if an arrangement is or contains a lease at inception. Operating lease assets represent the Company’s right to usean underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments over the lease term.Operating lease assets and liabilities are recognized based on the present value of the remaining lease payments discounted using theCompany’s incremental borrowing rate. Operating lease assets also include initial direct costs incurred and prepaid lease payments, minus anylease incentives. The Company’s lease terms include options to extend or terminate the lease when it is reasonably certain that the Company willexercise that option. Lease expense is recognized on a straight-line basis over the lease term.The Company combines the lease and non-lease components in determining the operating lease assets and liabilities.Foreign Currency TranslationThe Company and most of its subsidiaries use their respective local currency as their functional currency. Accordingly, foreign currency assetsand liabilities are translated using exchange rates in effect at the end of the period. Aggregate exchange gains and losses arising from thetranslation of foreign assets and liabilities are included in accumulated other comprehensive income (loss) in stockholders' equity. Foreignsubsidiaries that use the U.S. dollar as their functional currency remeasure monetary assets and liabilities using exchange rates in effect at the endof the period. In addition, transactions that are denominated in non-functional currency are remeasured using exchange rates in effect at the end ofthe period. Exchange gains and losses arising from the remeasurement of monetary assets and liabilities are included in other income (expense),net in the consolidated statements of operations. Non-monetary assets and liabilities are carried at their historical values.Comprehensive Income (Loss)Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). Other comprehensiveincome (loss) refers to gains and losses that are recorded as an element of stockholders’ equity but are excluded from net income (loss). TheCompany’s other comprehensive income (loss) consists of foreign currency translation adjustments for all periods presented.Income TaxesThe Company records income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilitiesfor the expected tax consequences of temporary differences between the tax bases of assets and liabilities for financial reporting purposes andamounts recognized for income tax purposes. In estimating future tax consequences, generally all expected future events other than enactments orchanges in the tax law or rates are considered. Valuation allowances are provided when necessary to reduce deferred tax assets to the amountexpected to be realized.The Company assesses the realizability of the deferred tax assets to determine release of valuation allowance as necessary. In the event theCompany determines that it is more likely than not that we would be able to realize deferred tax assets in the future in excess of our net recordedamount, an adjustment to the valuation allowance for the deferred tax asset would increase income in the period such determination was made.Likewise, should it be determined that additional amounts of the net deferred tax asset will not be realized in the future, an adjustment to increasethe deferred tax asset valuation allowance will be charged to income in the period such determination is made.The Company operates in various tax jurisdictions and is subject to audit by various tax authorities. The Company follows accounting foruncertainty 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 basedsolely on its technical merits as of the reporting date. The Company considers many factors when evaluating and estimating its tax positions and taxbenefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Enphase Energy, Inc. | 2019 Form 10-K | 72Table of ContentsRecently Adopted Accounting PronouncementsIn February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic842).” ASU 2016-02 requires an entity to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Theguidance requires lessees to recognize all leases, with certain exceptions, on their balance sheets, whether operating or financing, while continuingto recognize the expenses on their income statements in a manner similar to current practice. The guidance states that a lessee must recognize alease 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. OnJanuary 1, 2019, the Company adopted ASU 2016-02 using the modified retrospective transition option of applying the new standard at theadoption date for all leases with terms greater than 12 months. The Company elected certain practical expedients upon adoption and as such didnot reassess the following: 1) whether any expired or existing contracts are or contain leases; 2) lease classification for any expired or existingleases; 3) initial direct costs for any expired or existing leases; 4) whether existing or expired land easements are or contain leases; and 5) regardingthe lease term, from a hindsight perspective, whether or not the Company is reasonably certain to exercise the lease options. However, theCompany will evaluate new or modified land easements under the new guidance after the commencement date. The Company also elected thepractical expedient to not separate lease and non-lease components. The adoption of ASU 2016-02 on January 1, 2019 resulted in an increase inoperating leases, right of use asset of $8.4 million, an increase in other liabilities of $6.8 million, an increase in accrued liabilities and other of$1.5 million and a decrease in other assets of $0.1 million on the Company’s consolidated balance sheets with no impact on the Company’sconsolidated statements of operations.In June 2018, the FASB issued ASU 2018-07, “Compensation - Stock Compensation: Improvements to Non-employee Share-BasedPayment Accounting.” ASU 2018-07 was issued to provide guidance on share-based payments granted to non-employees in exchange for goods orservices 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. TheCompany adopted ASU 2018-07 on January 1, 2019 using the modified retrospective basis. The adopted standard did not have a material impacton the consolidated financial statements.Recently Issued Accounting Pronouncements Not Yet EffectiveIn August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud ComputingArrangement That Is a Service Contract,” to reduce diversity in practice in accounting for the costs of implementing cloud computing arrangementsthat are service contracts. ASU 2018-15 allows entities to apply the guidance in the ASC 350-40, “Intangibles–Goodwill and Other–Internal-UseSoftware,” to determine which implementation costs are eligible to be capitalized as assets in a cloud computing arrangement that is considered aservice contract. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Earlyadoption is permitted, including adoption in any interim period. Entities have the option to apply the guidance prospectively to all implementationcosts incurred after the date of adoption or retrospectively and are required to make certain disclosures in the interim and annual period of adoption.We will adopt the new standard effective January 1, 2020 and do not expect the adoption of this guidance to have a material impact on ourconsolidated financial statements.In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on FinancialInstruments,” which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13replaces the existing incurred loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition ofcredit losses. We will adopt the new standard effective January 1, 2020 and do not expect the adoption of this guidance to have a material impacton our consolidated financial statements. Enphase Energy, Inc. | 2019 Form 10-K | 73Table of Contents3.REVENUE RECOGNITIONDisaggregated RevenueThe Company has one business activity, which is the design, manufacture and sale of solutions for the solar photovoltaic (“PV”) industry.Disaggregated revenue by primary geographical market and timing of revenue recognition for the Company’s single product line are as follows: Years Ended December 31, 2019 2018 (In thousands)Primary geographical markets: United States$523,577 $219,600International100,756 96,559Total$624,333 $316,159 Timing of revenue recognition: Products delivered at a point in time$584,556 $270,778Products and services delivered over time39,777 45,381Total$624,333 $316,159Contract BalancesReceivables, and contract assets and contract liabilities from contracts with customers are as follows: December 31, 2019 December 31, 2018 (In thousands)Receivables$145,413 $78,938Short-term contract assets (Prepaid expenses and other assets)15,055 13,516Long-term contract assets (Other assets)42,087 34,148Short-term contract liabilities (Deferred revenues)81,783 33,119Long-term contract liabilities (Deferred revenues)100,204 76,911The Company receives payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the rightto consideration becomes unconditional. Contract assets include deferred product costs and commissions associated with the deferred revenueand will be amortized along with the associated revenue. The Company had no asset impairment charges related to contract assets in the yearsended December 31, 2019.Significant changes in the balances of contract assets (prepaid expenses and other assets) during the period are as follows (in thousands):Contract Assets Balance on December 31, 2018$47,664Amount recognized(15,144)Increase24,622Balance as of December 31, 2019$57,142 Enphase Energy, Inc. | 2019 Form 10-K | 74Table of ContentsContract liabilities are recorded as deferred revenue on the accompanying consolidated balance sheets and include payments received inadvance of performance obligations under the contract and are realized when the associated revenue is recognized under the contract.For the year ended December 31, 2019, contract liabilities include $49.9 million of safe harbor cash prepayments from its customers forproducts to be delivered in 2020, which represents the amount equal to the aggregate purchase price of the executed sales agreement. Of the$49.9 million, a letter of credit of $44.7 million was issued for the benefit of one customer and the Company has collateralized under the letter ofcredit a certificate of deposit of $44.7 million.Significant changes in the balances of contract liabilities (deferred revenues) during the period are as follows (in thousands):Contract Liabilities Balance on December 31, 2018$110,030Revenue recognized(39,777)Increase due to billings61,825Increase due to safe harbor prepayments49,909Balance as of December 31, 2019$181,987Remaining Performance ObligationsEstimated revenue expected to be recognized in future periods related to performance obligations that are unsatisfied or partially unsatisfiedat the end of the reporting period are as follows: December 31, 2019 (In thousands)Fiscal year: 2020$81,783202130,665202225,633202319,841202414,650Thereafter9,415Total$181,987Estimated revenue expected to be recognized in fiscal year 2020 of $81.8 million includes $44.5 million of safe harbor prepayments fromcustomers in the fourth quarter of 2019 for product delivery to the customer in the first quarter of 2020. Remaining $5.4 million of safe harborprepayments from customers in the fourth quarter of 2019 for product delivery to the customer in the first quarter of 2020 relates to the sale ofEnvoy communications gateway which will be recognized ratably over the service period.4. INVENTORYInventory consist of the following: December 31, 2019 December 31, 2018 (In thousands)Raw materials$4,197 $970Finished goods27,859 15,297Total inventory$32,056 $16,267 Enphase Energy, Inc. | 2019 Form 10-K | 75Table of Contents5.PROPERTY AND EQUIPMENT, NETProperty and equipment consist of the following: Estimated Useful Life December 31, 2019 2018 (Years) (In thousands)Equipment and machinery3-10 $48,114 $43,566Furniture and fixtures5-10 2,404 2,239Computer equipment3-5 1,698 2,958Capitalized software costs3-5 11,656 12,114Leasehold improvements3-10 8,713 8,482Construction in process 8,446 3,536Total 81,031 72,895Less accumulated depreciation and amortization (52,095) (51,897)Property and equipment, net $28,936 $20,998Depreciation expense for property and equipment for the years ended December 31, 2019, 2018 and 2017 was $7.3 million, $8.3 million and$8.6 million, respectively.As of December 31, 2019 and 2018, unamortized capitalized software costs were $0.8 million and $0.7 million, respectively.6.GOODWILL AND INTANGIBLE ASSETSThe Company’s goodwill and purchased intangible assets as of December 31, 2019 and December 31, 2018 are as follows: December 31, 2019 December 31, 2018 Gross AccumulatedAmortization Net Gross AccumulatedAmortization Net (In thousands)Goodwill$24,783 $— $24,783 $24,783 $— $24,783 Intangible assets: Other indefinite-livedintangibles$286 $— $286 $286 $— $286Intangible assets withfinite lives: Patents and licensedtechnology— — — 1,665 (1,665) —Developed technology13,100 (3,093) 10,007 13,100 (909) 12,191Customer relationships23,100 (2,814) 20,286 23,100 (271) 22,829Total purchasedintangible assets$36,486 $(5,907) $30,579 $38,151 $(2,845) $35,306In August 2018, the Company acquired certain finite-lived intangible assets in its acquisition of SunPower Corporation’s (“SunPower”)microinverter business, primarily developed technology and customer relationships pursuant to an Asset Purchase Agreement (“APA”). SeeNote 20. “Acquisition,” of the notes to consolidated financial statements included in Item 8 of the Company’s 2019 Annual Report on Form 10-K foradditional information related to this acquisition. Enphase Energy, Inc. | 2019 Form 10-K | 76Table of ContentsAmortization expense related to finite-lived intangible assets are as follows: Years Ended December 31, 2019 2018 (In thousands)Developed technology, and patents and licensed technology$2,184 $1,409Customer relationships2,543 271Total amortization expense$4,727 $1,680Amortization of developed technology, patents and licensed technology is recorded to sales and marketing expense. The developedtechnology acquired from the Company’s acquisition of SunPower’s microinverter business was embedded in the microinverters that SunPowersold to its customers. The Company does not actively use the developed technology acquired from SunPower and holds the developed technologyto prevent others from using it. Accordingly, the Company accounts for the developed technology as a defensive intangible asset and amortizes theassociated value over a period of six years from the date of acquisition.The master supply agreement (“MSA”) entered into with SunPower in August 2018 provides the Company with the exclusive right to supplySunPower with module level power electronics for a period of five years, with options for renewals. The exclusivity arrangement extends throughoutthe term of the MSA, which comprises all of the expected cash flows from the customer relationship intangible asset, and was a condition to, andwas an essential part of the acquisition of SunPower’s microinverter business by the Company. As the fair value ascribed to the customerrelationship intangible asset represents payments to a customer, the Company amortizes the value of the customer relationship intangible asset asa reduction to revenue using a pattern of economic benefit method over a useful life of nine years.7.ACCRUED LIABILITIESAccrued liabilities consist of the following: December 31, 2019 December 31, 2018 (In thousands)Salaries, commissions, incentive compensation and benefits$5,524 $4,107Customer rebates and sales incentives24,198 8,527Freight4,908 7,286Operating lease liabilities, current3,170 —Other9,292 9,090Total accrued liabilities$47,092 $29,010 Enphase Energy, Inc. | 2019 Form 10-K | 77Table of Contents8.WARRANTY OBLIGATIONSThe Company’s warranty activities were as follows: Years Ended December 31, 2019 2018 2017 (In thousands)Warranty obligations, beginning of period$31,294 $29,816 $31,414Accruals for warranties issued during period5,244 3,040 3,797Changes in estimates8,591 6,515 (732)Settlements(10,881) (8,579) (7,037)Increase due to accretion expense2,326 1,989 2,053Other524 (1,487) 321Warranty obligations, end of period37,098 31,294 29,816Less: current portion(10,078) (8,083) (7,427)Noncurrent$27,020 $23,211 $22,389The Company began selling its IQ series microinverters in 2017, sales of which totaled approximately 9.6 million units through 2019, and soldapproximately 15.7 million units of prior generation microinverters from 2008 through 2019. IQ 7 sales represented 98% of the Company’s totalmicroinverter sales for the year ended December 31, 2019.Changes in EstimatesOn a quarterly basis, the Company uses the best and most complete underlying information available, following a consistent, systematic andrational methodology to determine its warranty obligations. The Company considers all available evidence to assess the reasonableness of all keyassumptions underlying its estimated warranty obligations for each generation of microinverter. The changes in estimates discussed below resultedfrom consideration of new or additional information becoming available and subsequent developments. Changes in estimates included in the tableabove were comprised of the following:2019In 2019, the Company recorded a $5.5 million increase to warranty expense related to cost increases primarily driven by increased U.S. tariffsannounced during 2019 for its products manufactured in China. The Company also recorded additional warranty expense of $3.1 million based oncontinuing analysis of field performance data and diagnostic root-cause failure analysis primarily relating to its second and third generation products,partially offset by improved failure rates for its IQ7 series.2018In 2018, the Company recorded a $0.9 million increase to warranty expense related to cost increases primarily for backwards compatibilitycables, supply constrained inventory components as well as tariffs. The Company also recorded additional warranty expense of $3.3 million basedon continuing analysis of field performance data and diagnostic root-cause failure analysis primarily relating to its second and third generationproducts. In addition, the Company recorded an increase of $2.1 million related to increased estimated claim rates and an increase to warrantyexpense of $0.2 million for labor reimbursement costs expected to be paid to third party installers performing replacement services. These increaseswere partially offset by a $1.5 million reduction to warranty expense, presented as “Other” in the table above, related to changes in the discountrates for fair value accounting. Enphase Energy, Inc. | 2019 Form 10-K | 78Table of Contents2017In 2017, primarily in the fourth quarter, the Company recorded the impact of product-cost reduction initiatives for its sixth generationmicroinverters, which are backwards compatible with previous microinverter generations and will be used to fulfill future warranty obligations for allmicroinverter 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 tobe paid to third party installers performing replacement services for its second‑generation product. In addition, the Company recorded additionalwarranty expense of $3.9 million based on continuing analysis of field performance data and diagnostic root-cause failure analysis primarily relatingto its second‑generation product.9.FAIR VALUE MEASUREMENTSThe accounting guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilitiesrecorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions thatmarket 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 whenmeasuring 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 tothe 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. Sincevaluations are based on quoted prices that are readily and regularly available in an active market, valuation of such assets or liabilities donot 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 thefair value hierarchy. Fair ValueHierarchy December 31, 2019 December 31, 2018 (In thousands)Warranty obligations Current $6,794 $4,288Non-current 13,012 7,469Total warranty obligations measured at fair valueLevel 3 $19,806 $11,757Fair Value Option for Warranty Obligations Related to Microinverters Sold Since January 1, 2014The Company estimates the fair value of warranty obligations by calculating the warranty obligations in the same manner as for sales prior toJanuary 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 additionalassumptions included a discount rate based on the Company’s credit-adjusted risk-free rate and compensation comprised of a profit element andrisk premium required of a market participant to assume the obligation. Enphase Energy, Inc. | 2019 Form 10-K | 79Table of ContentsThe following table provides information regarding changes in nonfinancial liabilities related to the Company’s warranty obligations measuredat fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods indicated. Years Ended December 31, 2019 2018 2017 (In thousands)Balance at beginning of period$11,757 $9,791 $10,332Accruals for warranties issued during period5,244 3,040 3,591Changes in estimates6,167 2,455 (4,551)Settlements(6,212) (4,030) (1,956)Increase due to accretion expense2,326 1,989 2,053Other524 (1,488) 322Balance at end of period$19,806 $11,757 $9,791Quantitative and Qualitative Information about Level 3 Fair Value MeasurementsAs of December 31, 2019 and December 31, 2018, the significant unobservable inputs used in the fair value measurement of the Company’sliabilities designated as Level 3 are as follows: Percent Used(Weighted Average)Item Measured at Fair Value Valuation Technique Description of Significant UnobservableInput December 31, 2019 December 31, 2018Warranty obligations for microinverterssold since January 1, 2014 Discounted cash flows Profit element and risk premium 14% 16% Credit-adjusted risk-free rate 16% 19%Sensitivity of Level 3 Inputs - Warranty ObligationsEach of the significant unobservable inputs is independent of the other. The profit element and risk premium are estimated based onrequirements of a third-party participant willing to assume the Company’s warranty obligations. The credit‑adjusted risk‑free rate (“discount rate”) isdetermined by reference to the Company’s own credit standing at the fair value measurement date. Increasing the profit element and risk premiuminput by 100 basis points would result in a $0.2 million increase to the liability. Decreasing the profit element and risk premium by 100 basis pointswould result in a $0.2 million reduction of the liability. Increasing the discount rate by 100 basis points would result in a $0.8 million reduction of theliability. Decreasing the discount rate by 100 basis points would result in a $0.9 million increase to the liability.10.RESTRUCTURINGRestructuring expense consist of the following: Years Ended December 31, 2019 2018 2017 (In thousands)Redundancy and employee severance and benefit arrangements$1,575 $2,228 $2,827Asset impairments1,124 1,601 522Consultants engaged in restructuring activities— — 12,100Lease loss reserves(100) 300 1,468Total restructuring charges$2,599 $4,129 $16,917 Enphase Energy, Inc. | 2019 Form 10-K | 80Table of Contents2018 PlanIn the third quarter of 2018, the Company began implementing restructuring actions (the “2018 Plan”) to lower its operating expenses. Therestructuring actions include reorganization of the Company’s global workforce, elimination of certain non-core projects and consolidation offacilities. The Company completed its restructuring activities under the 2018 Plan in 2019.The following table provides information regarding changes in the Company’s 2018 Plan accrued restructuring balance for the periodsindicated. Redundancy andEmployee Severanceand Benefits Lease Loss Reservesand ContractualObligations Total (In thousands)Balance as of December 31, 2018$904 $288 $1,192Charges2,699 — 2,699Cash payments(1,610) — (1,610)Non-cash settlement and other(1,993) (288) (2,281)Balance as of December 31, 2019$— $— $—The following table presents the details of the Company’s restructuring charges under the 2018 Plan for the period indicated: Years Ended December 31, 2019 2018 (In thousands)Redundancy and employee severance and benefit arrangements$1,575 $2,228Asset impairments1,124 1,636Lease loss reserves(100) 340Total restructuring charges$2,599 $4,2042016 PlanIn the third quarter of 2016, the Company began implementing restructuring actions (the “2016 Plan”) to lower its operating expenses. Therestructuring actions have included reductions in the Company’s global workforce, the elimination of certain non-core projects, consolidation ofoffice space at the Company’s corporate headquarters and the engagement of management consultants to assist the Company in makingorganizational and structural changes to improve operational efficiencies and reduce expenses. The Company completed its restructuring activitiesunder the 2016 Plan in 2017. Enphase Energy, Inc. | 2019 Form 10-K | 81Table of ContentsThe following table provides information regarding changes in the Company’s 2016 Plan accrued restructuring balance for the periodsindicated. Employee Severanceand Benefits Lease LossReserves andContractualObligations Total (In thousands)Balance as of December 31, 2017229 1,094 1,323Charges and adjustments— (40) (40)Cash payments and receipts, net(229) 537 308Balance as of December 31, 2018— $1,591 1,591Other (1)— (1,591) (1,591)Balance as of December 31, 2019$— $— $— (1)Adoption of ASU 2016-02.11.DEBTThe following table provides information regarding the Company’s long-term debt. December 31, 2019 December 31, 2018 (In thousands)Convertible notes Notes due 2024$132,000 $—Less: unamortized discount and issuance costs(35,815) —Carrying amount of Notes due 202496,185 — Notes due 20235,000 65,000Less: unamortized issuance costs(143) (2,361)Carrying amount of Notes due 20234,857 62,639 Term loan— 41,524Less: unamortized discount and issuance costs— (1,059)Carrying amount of term loan— 40,465 Sale of long-term financing receivable recorded as debt4,501 6,679Total carrying amount of debt105,543 109,783Less: current portion term loan— (25,417)Less: current portion of long-term financing receivable recorded as debt(2,884) (2,738)Long-term debt$102,659 $81,628 Enphase Energy, Inc. | 2019 Form 10-K | 82Table of ContentsConvertible Senior Notes due 2024On June 5, 2019, the Company issued $132.0 million aggregate principal amount of 1.0% convertible senior notes due 2024 (the “Notes due2024”). The Notes due 2024 are general unsecured obligations and bear interest at an annual rate of 1.0% per year, payable semi-annually onJune 1 and December 1 of each year, beginning December 1, 2019. The Notes due 2024 are governed by an indenture between the Company andU.S. Bank National Association, as trustee. The Notes due 2024 will mature on June 1, 2024, unless earlier repurchased by the Company orconverted 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 thenotes. The Notes due 2024 may be converted, under certain circumstances as described below, based on an initial conversion rate of48.7781 shares of common stock per $1,000 principal amount (which represents an initial conversion price of $20.5010 per share). The conversionrate for the Notes due 2024 will be subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued andunpaid interest. In addition, upon the occurrence of a make-whole fundamental change (as defined in the relevant indenture), the Company will, incertain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its notes in connection withsuch make-whole fundamental change. The Company received approximately $128.0 million in net proceeds, after deducting the initial purchasers’discount, from the issuance of the Notes due 2024.The Notes due 2024 may be converted on any day prior to the close of business on the business day immediately preceding December 1,2023, in multiples of $1,000 principal amount, at the option of the holder under any of the following circumstances: (1) during any calendar quartercommencing after the calendar quarter ending on September 30, 2019 (and only during such calendar quarter), if the last reported sale price of theCompany’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, andincluding, the last trading day of the immediately preceding calendar quarter is greater than or equal to $26.6513 (130% of the conversion price) oneach applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) inwhich the “trading price” (as defined in the relevant indenture) per $1,000 principal amount of notes for each trading day of the measurement periodwas less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;or (3) upon the occurrence of specified corporate events. On and after December 1, 2023 until the close of business on the second scheduledtrading day immediately preceding the maturity date of June 1, 2024, holders may convert their notes at any time, regardless of the foregoingcircumstances. Upon the occurrence of a fundamental change (as defined in the relevant indenture), holders may require the Company torepurchase all or a portion of their Notes due 2024 for cash at a price equal to 100% of the principal amount of the notes to be repurchased plus anyaccrued and unpaid interest to, but excluding, the fundamental change repurchase date.Upon conversion of any of the notes, the Company will pay or deliver, as the case may be, cash, shares of common stock or a combination ofcash and common stock, at the Company’s election.In accounting for the issuance of the Notes due 2024, on June 5, 2019, the Company separated the Notes due 2024 into liability and equitycomponents. The carrying amount of the liability component of approximately $95.6 million was calculated by using a discount rate of 7.75%, whichwas the Company’s borrowing rate on the date of the issuance of the notes for a similar debt instrument without the conversion feature. Thecarrying amount of the equity component of approximately $36.4 million, representing the conversion option, was determined by deducting the fairvalue of the liability component from the par value of the Notes due 2024. The equity component of the Notes due 2024 is included in additionalpaid-in capital in the consolidated balance sheet and is not remeasured as long as it continues to meet the conditions for equity classification. Thedifference between the principal amount of the Notes due 2024 and the liability component (the “debt discount”) is amortized to interest expenseusing the effective interest method over the term of the Notes due 2024.The Company separated the Notes due 2024 into liability and equity components, this resulted in a tax basis difference associated with theliability component that represents a temporary difference. The Company recognized the deferred taxes of $0.3 million for the tax effect of thattemporary difference as an adjustment to the equity component included in additional paid-in capital in the consolidated balance sheet. Enphase Energy, Inc. | 2019 Form 10-K | 83Table of ContentsDebt issuance costs for the issuance of the Notes due 2024 were approximately $4.6 million, consisting of initial purchasers' discount andother issuance costs. In accounting for the transaction costs, the Company allocated the total amount incurred to the liability and equity componentsusing the same proportions as the proceeds from the Notes due 2024. Transaction costs attributable to the liability component wereapproximately $3.3 million, were recorded as debt issuance cost (presented as contra debt in the consolidated balance sheet) and are beingamortized to interest expense over the term of the Notes due 2024. The transaction costs attributable to the equity component wereapproximately $1.3 million and were netted with the equity component in stockholders’ equity. As of December 31, 2019, the unamortized deferredissuance cost for the Notes due 2024 was $2.9 million on the consolidated balance sheet.The following table presents the total amount of interest cost recognized relating to the Notes due 2024: Year Ended December 31,2019 (In thousands)Contractual interest expense$759Amortization of debt discount3,492Amortization of debt issuance costs375Total interest cost recognized$4,626The effective interest rate on the liability component Notes due 2024 was 7.75% for the years ended December 31, 2019, which remainunchanged from the date of issuance. The remaining unamortized debt discount was $32.9 million as of December 31, 2019, will be amortized overapproximately 4.4 years.The Company carries the Notes due 2024 at face value less unamortized discount and issuance costs on its condensed consolidated balancesheet. The fair value of the Notes due 2024 was determined to be $190.9 million based on the closing trading prices per $100 principal amount as ofthe last day of trading for the period. The Company considers the fair value of the Notes due 2024 to be a Level 2 measurement as they are notactively traded.Convertible Note Hedge and Warrant TransactionsIn connection with the offering of the Notes due 2024, the Company entered into privately-negotiated convertible note hedge transactionspursuant to which the Company has the option to purchase a total of approximately 6.4 million shares of its common stock (subject to anti-dilutionadjustments), which is the same number of shares initially issuable upon conversion of the notes, at a price of $20.5010 per share, which is theinitial conversion price of the Notes due 2024. The total cost of the convertible note hedge transactions was approximately $36.3 million. Theconvertible note hedge transactions are expected generally to reduce potential dilution to the Company’s common stock upon any conversion of theNotes due 2024 and/or offset any cash payments the Company is required to make in excess of the principal amount of converted notes, as thecase may be. As of December 31, 2019, the Company had not purchased any shares under the convertible note hedge transactions.Additionally, the Company separately entered into privately-negotiated warrant transactions (the “Warrants”) whereby the Company soldwarrants to acquire approximately 6.4 million shares of the Company’s common stock (subject to anti-dilution adjustments) at an initial strike price of$25.2320 per share. The Company received aggregate proceeds of approximately $29.8 million from the sale of the Warrants. If the market valueper share of the Company’s common stock, as measured under the Warrants, exceeds the strike price of the Warrants, the Warrants will have adilutive effect on the Company’s earnings per share, unless the Company elects, subject to certain conditions, to settle the Warrants in cash. Takentogether, the purchase of the convertible note hedges and the sale of the Warrants are intended to reduce potential dilution from the conversion ofthe Notes due 2024 and to effectively increase the overall conversion price from $20.5010 to $25.2320 per share. The Warrants are onlyexercisable on the applicable expiration dates in accordance with the Warrants. Subject to the other terms of the Warrants, the first expiration dateapplicable to the Warrants is September 1, 2024, and the final expiration date applicable to the Warrants is April 22, 2025. As of December 31,2019, the Warrants had not been exercised and remained outstanding.Given that the transactions meet certain accounting criteria, the convertible note hedge transactions and the warrants are recorded instockholders’ equity, and they are not accounted for as derivatives and are not remeasured each reporting period. Enphase Energy, Inc. | 2019 Form 10-K | 84Table of ContentsConvertible Senior Notes due 2023In August 2018, the Company sold $65.0 million aggregate principal amount of 4.0% convertible senior notes due 2023 (the “Notes due2023”) in a private placement. On May 30, 2019, the Company entered into separately and privately negotiated transactions with certain holders ofthe Notes due 2023 resulting in the repurchase and exchange, as of June 5, 2019, of $60.0 million aggregate principal amount of the notes inconsideration for the issuance of 10,801,080 shares of common stock and separate cash payments totaling $6.0 million. As of December 31, 2019,$5.0 million aggregate principal amount of the Notes due 2023 remain outstanding.The remaining outstanding Notes due 2023 are general unsecured obligations and bear interest at a rate of 4.0% per year, payable semi-annually on February 1 and August 1 of each year. The Notes due 2023 are governed by an indenture between the Company and U.S. BankNational Association, as trustee. The remaining outstanding Notes due 2023 will mature on August 1, 2023, unless earlier repurchased by theCompany or converted at the option of the holders. The Company may not redeem the remaining Notes due 2023 prior to the maturity date, and nosinking fund is provided for such notes. The remaining Notes due 2023 are convertible, at a holder’s election, in multiples of $1,000 principalamount, into shares of the Company’s common stock based on the applicable conversion rate. The initial conversion rate for such notes is180.0180 shares of common stock per $1,000 principal amount of notes (which is equivalent to an initial conversion price of approximately $5.56 pershare). The conversion rate and the corresponding conversion price are subject to adjustment upon the occurrence of certain events but will not beadjusted for any accrued and unpaid interest. Holders of the remaining Notes due 2023 who convert their notes in connection with a make-wholefundamental change (as defined in the applicable indenture) are, under certain circumstances, entitled to an increase in the conversion rate.Additionally, in the event of a fundamental change, holders of the remaining Notes due 2023 may require the Company to repurchase all or aportion of their notes at a price equal to 100% of the principal amount of notes, plus any accrued and unpaid interest, including any additionalinterest to, but excluding, the repurchase date. Holders may convert all or any portion of their Notes due 2023 at their option at any time prior to theclose of business on the business day immediately preceding the maturity date, in multiples of $1,000 principal amount.During the year ended December 31, 2019, the Company recognized $6.0 million inducement cost in other expense, net on the Company’sconsolidated statement of operations and reclassed $2.0 million of deferred issuance costs, offset by $0.8 million in accrued interest in additionalpaid in capital on the Company’s consolidated balance sheet as of December 31, 2019 related to the exchange of $60.0 million aggregate principalamount of the Notes due 2023 consummated by the Company on June 5, 2019.The following table presents the amount of interest cost recognized relating to the contractual interest coupon and the amortization of debtissuance costs of the Notes due 2023. Years Ended December 31, 2019 2018 (In thousands)Contractual interest expense$1,226 $975Amortization of debt issuance costs245 193Total interest costs recognized$1,471 $1,168Term LoanIn July 2016, the Company entered into a Loan and Security Agreement (the “Original Term Loan Agreement”) with lenders that are affiliatesof Tennenbaum Capital Partners, LLC. 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 provided for a $25.0 million secured termloan to the Company (the “New Term Loan”), which is in addition to the $25.0 million secured term loan borrowed by the Company under theOriginal Term Loan Agreement (together with the “New Term Loan” the “Term Loans”).On January 28, 2019, the Company repaid in full the remaining principal amount of the Term Loans of approximately $39.5 million plusaccrued interest and fees. Enphase Energy, Inc. | 2019 Form 10-K | 85Table of ContentsENPHASE ENERGY, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)Sale of Long-Term Financing ReceivablesThe Company entered into an agreement with a third party in the fourth quarter of 2017 to sell certain current and future receivables at adiscount. 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 was relieved in January 2019 asthe underlying receivables were settled. During the year ended December 31, 2018, the third party made three additional purchases of receivablesthat resulted in total net proceeds to the Company of $5.6 million. These transactions were recorded as debt on the accompanying consolidatedbalance sheets, and the total associated debt balance will be relieved by September 2021 as the underlying receivables are settled. After the initialpurchase, 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, 2019, all purchasesrelating to this option had been made, and the liability has been relieved. See Note 9. “Fair Value Measurements,” for additional information.12.COMMITMENTS AND CONTINGENT LIABILITIESOperating LeasesThe Company leases office facilities under noncancelable operating leases that expire on various dates through 2028, some of which mayinclude options to extend the leases for up to 12 years.The components of lease expense are presented as follows: Year Ended December 31,2019 (In thousands)Operating lease costs$4,041The components of lease liabilities are presented as follows: December 31, 2019 (In thousands)Operating lease liabilities, current (Accrued liabilities)$3,170Operating lease liabilities, noncurrent (Other liabilities)9,542Total operating lease liabilities$12,712 Supplemental lease information: Weighted average remaining lease term5.5 yearsWeighted average discount rate8.6%Supplemental cash flow and other information related to operating leases, are as follows: Year Ended December 31,2019 (In thousands)Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases$3,636 Non-cash investing activities: Lease liabilities arising from obtaining right-of-use assets$4,834 Enphase Energy, Inc. | 2019 Form 10-K | 86Table of ContentsUndiscounted cash flows of operating lease liabilities as of December 31, 2019 are as follows: Lease Amounts (In thousands)Year: 2020$4,15620214,23820222,92720232,18820249212025 and thereafter740Total lease payments15,170Less: imputed lease interest(2,458)Total lease liabilities$12,712As previously disclosed in the Company’s Annual Report on Form 10-K and under the previous lease accounting standard ASC 840,“Leases,” the aggregate future minimum lease payments under the Company’s noncancelable operating leases, as of December 31, 2018, are asfollows: Lease Amounts (In thousands)Year: 2019$3,73820203,53220213,27620221,8102023945Thereafter1,252Total14,553Sublease income to be recognized in the future under noncancelable subleases(922)Net operating lease minimum payments$13,631Purchase ObligationsThe Company has contractual obligations related to component inventory that its primary contract manufacturer procures on its behalf inaccordance with its production forecast as well as other inventory related purchase commitments. As of December 31, 2019, these purchaseobligations totaled approximately $99.5 million.Letter of CreditsAs of December 31, 2019, we had a standby letter of credit in the aggregate amount of $44.7 million, primarily in connection with one of ourcustomer contracts. The letter of credit serves as a performance security for product delivery to the customer in 2020 and will expire April 30, 2020.The Company has collateralized under the letter of credit a certificate of deposit of $44.7 million. No amounts have been drawn against this letter ofcredit. Further information relating to the letter of credit may be found in Note 3, “Revenue Recognition,” of the notes to consolidated financialstatements included in Part II, Item 8 of this Annual Report on Form 10-K. Enphase Energy, Inc. | 2019 Form 10-K | 87Table of ContentsLitigationFrom time-to-time, the Company may be involved in litigation relating to claims arising out of its operations. The Company is not currentlyinvolved in any material legal proceedings; however, the Company may be involved in material legal proceedings in the future. Such matters aresubject to uncertainty and there can be no assurance that such legal proceedings will not have a material effect on its business, results ofoperations, financial position or cash flows.13.SALE OF COMMON STOCKIn February 2018, the Company entered into a Securities Purchase Agreement with an investor pursuant to which the Company, in a privateplacement, 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 sharesof common stock and gross proceeds of $10.0 million.14.STOCK-BASED COMPENSATIONDescription of Equity Incentive Plans2006 PlanUnder the Company’s 2006 Equity Incentive Plan (the “2006 Plan”), equity awards granted generally vest over a 4‑year period from the dateof grant with a contractual term of up to 10 years. As of December 31, 2019, there were less than 0.1 million shares of options outstanding underthe 2006 Plan. No further stock options or other stock awards may be granted under the 2006 Plan.2011 PlanUnder the 2011 Equity Incentive Plan (the “2011 Plan”), the Company could initially issue up to 2,643,171 shares of its common stockpursuant to stock options, stock appreciation rights (“SARS”), restricted stock awards (“RSA”), RSUs, PSUs, and other forms of equitycompensation, or collectively, stock awards, all of which may be granted to employees, including officers, and to non-employee directors andconsultants. Options granted under the 2011 Plan before August 1, 2012 generally expire 10 years after the grant date and options grantedthereafter generally expire 7 years after the grant date. Equity awards granted under the 2011 Plan generally vest over a 4-year period from thedate of grant based on continued employment. The number of shares of the Company’s common stock authorized for issuance under the 2011 Planautomatically increases on each January 1 by 4.5% of the total number of shares of the Company’s common stock outstanding on December 31 ofthe preceding calendar year, or such lesser number of shares of common stock as determined by the board of directors. As of December 31, 2019,4,355,838 shares remained available for issuance pursuant to future grants under the 2011 Plan. On January 1, 2020, the shares available forissuance under the 2011 Plan automatically increased by 5,539,886 shares.2011 Employee Stock Purchase PlanThe 2011 Employee Stock Purchase Plan (“ESPP”) became effective immediately upon the execution and delivery of the underwritingagreement for the Company’s initial public offering on March 29, 2012. The ESPP authorized the issuance of 669,603 shares of the Company’scommon stock pursuant to purchase rights granted to employees. The number of shares of common stock reserved for issuance will automaticallyincrease, 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 theCompany’s common stock outstanding on December 31 of the preceding calendar year, as determined by the Company’s board of directors. At theAnnual Meeting of Stockholders held on May 18, 2017 the Company’s stockholders approved a one-time amendment to the Company’s ESPP toincrease the aggregate number of shares available for purchase by 400,000 shares and to increase the annual automatic minimum increase inshares reserved for issuance from 330,396 to 700,000 shares effective January 1, 2018. As of December 31, 2019, 936,020 shares remainedavailable for future issuance under the ESPP. On January 1, 2020, the shares available for issuance under the ESPP automatically increased by700,000 shares. Enphase Energy, Inc. | 2019 Form 10-K | 88Table of ContentsENPHASE ENERGY, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)The ESPP is implemented by concurrent offering periods and each offering period may contain up to four interim purchase periods. Ingeneral, 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 employeesto purchase the Company’s common stock through payroll deductions, which may not exceed 15% of the employee’s total compensation subject tocertain 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 ofpurchase 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 periodto 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. Thereset feature, when triggered, will be accounted for as a modification to the original offering, resulting in additional expense to be recognized overthe 24-month period of the new offering. During any calendar year, participants may not purchase shares of common stock having a value greaterthan $25,000, based on the fair market value per share of the common stock at the beginning of an offering period.Valuation of Equity AwardsStock OptionsThe fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the followingassumptions:•Expected term—The expected term of the option awards represents the period of time between the grant date of the option awards andthe 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 asnecessary 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 amaturity 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 expectedterm.The following table presents the weighted-average grant date fair value of options granted for the periods presented and the assumptionsused to estimate those values using a Black-Scholes option pricing model. Years Ended December 31, 2019 2018 2017Weighted average grant date fair value$9.16 $2.83 $0.76Expected term (in years)3.8 4.0 4.4Expected volatility89.1% 88.5% 83.9%Annual risk-free rate of return2.1% 2.6% 1.8%Dividend yield—% —% —%Restricted Stock UnitsThe fair value of the Company’s restricted stock units (“RSU”) awards granted is based upon the closing price of the Company’s stock priceon the date of grant. Enphase Energy, Inc. | 2019 Form 10-K | 89Table of ContentsPerformance Stock UnitsThe fair value of the Company’s non-market performance stock units (“PSU”) awards granted was based upon the closing price of theCompany’s stock price on the date of grant. The fair value of awards of the Company’s PSU awards containing market conditions was determinedusing a Monte Carlo simulation model based upon the terms of the conditions, the expected volatility of the underlying security, and other relevantfactors.Stock-based Compensation ExpenseStock-based compensation expense for all stock-based awards expected to vest is measured at fair value on the date of grant and recognizedratably over the requisite service period. The following table summarizes the components of total stock-based compensation expense included inthe consolidated statements of operations for the periods presented. Years Ended December 31, 2019 2018 2017 (In thousands)Cost of revenues$1,650 $1,071 $1,072Research and development4,897 2,940 2,573Sales and marketing5,678 3,074 1,157General and administrative7,216 4,347 1,925Restructuring735 — —Total$20,176 $11,432 $6,727The following table summarizes the various types of stock-based compensation expense for the periods presented. Years Ended December 31, 2019 2018 2017 (In thousands)Stock options, RSUs, and PSUs$19,216 $10,691 $5,559Employee stock purchase plan960 741 1,168Total$20,176 $11,432 $6,727As of December 31, 2019, there was approximately $31.5 million of total unrecognized stock-based compensation expense related tounvested equity awards, which are expected to be recognized over a weighted-average period of 2.3 years. Enphase Energy, Inc. | 2019 Form 10-K | 90Table of ContentsEquity Awards ActivityStock OptionsThe following is a summary of stock option activity. Number ofSharesOutstanding Weighted-AverageExercise Priceper Share Weighted-AverageRemainingContractualTerm AggregateIntrinsicValue (1) (In thousands) (Years) (In thousands)Outstanding at December 31, 20168,730 $4.55 Granted4,500 1.22 Exercised(425) 0.51 $544Canceled(4,379) 6.91 Outstanding at December 31, 20178,426 $1.77 Granted213 4.43 Exercised(1,346) 1.75 5,096Canceled(521) 2.94 Outstanding at December 31, 20186,772 $1.76 Granted43 14.58 Exercised(2,616) 1.22 31,093Canceled(102) 4.07 Outstanding at December 31, 20194,097 $2.18 4.3 $98,103Vested and expected to vest at December 31, 20194,097 $2.18 4.3 $98,103Exercisable at December 31, 20192,887 $2.44 4.1 $68,397 (1)The intrinsic value of options exercised is based upon the value of the Company’s stock at exercise. The intrinsic value of optionsoutstanding, vested and expected to vest, and exercisable as of December 31, 2019 is based on the closing price of the Company’s stock fairvalue on December 31, 2019 or the earlier of the last trading day prior to December 31, 2019, if December 31, 2019 is a non-trading day. TheCompany’s stock fair value used in this computation was $26.13 per share.The following table summarizes information about stock options outstanding at December 31, 2019. Options Outstanding Options ExercisableRange of Exercise Prices Number ofShares Weighted-AverageRemainingLife Weighted-AverageExercisePrice Number ofShares Weighted-AverageExercisePrice (In thousands) (Years) (In thousands) $0.64 —– $1.11 774 5.0 $0.82 518 $0.78$1.29 —– $1.29 1,000 4.7 1.29 563 1.29$1.31 —– $1.31 1,309 4.3 1.31 975 1.31$1.37 —– $7.50 867 3.2 4.18 702 4.57$7.68 —– $14.58 147 3.4 11.45 129 11.02Total 4,097 4.3 $2.18 2,887 $2.44 Enphase Energy, Inc. | 2019 Form 10-K | 91Table of ContentsRestricted Stock UnitsThe following is a summary of RSU activity. Number ofSharesOutstanding Weighted-AverageFair Valueper Share atGrant Date Weighted-AverageRemainingContractualTerm AggregateIntrinsicValue (1) (In thousands) (Years) (In thousands)Outstanding at December 31, 2016606 $9.33 Granted5,418 1.46 Vested(885) 3.81 $932Canceled(1,634) 1.90 Outstanding at December 31, 20173,505 $2.03 Granted3,152 4.45 Vested(1,399) 2.75 6,657Canceled(906) 2.17 Outstanding at December 31, 20184,352 $3.52 Granted2,112 11.50 Vested(1,707) 3.87 27,156Canceled(494) 4.81 Outstanding at December 31, 20194,263 $7.19 1.3 $111,387Expected to vest at December 31, 20194,263 $7.19 1.3 $111,387 (1)The intrinsic value of RSUs vested is based upon the value of the Company’s stock when vested. The intrinsic value of RSUs outstandingand expected to vest as of December 31, 2019 is based on the closing price of the Company’s stock on December 31, 2019 or the earlier ofthe last trading day prior to December 31, 2019, if December 31, 2019 is a non-trading day. The Company’s stock fair value used in thiscomputation was $26.13 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 Offerexpired on May 1, 2017. Pursuant to the Offer, the Company accepted elections to exchange options to purchase 2,362,470 shares of commonstock and issued replacement awards of RSUs for 733,559 shares of common stock. As the transaction approximated a value-for-value exchange, itdid not have a material impact on the Company’s stock-based compensation expense. Enphase Energy, Inc. | 2019 Form 10-K | 92Table of ContentsPerformance Stock UnitsThe following is a summary of PSU activity. Number ofSharesOutstanding Weighted-AverageFair Valueper Share atGrant Date Weighted-AverageRemainingContractualTerm AggregateIntrinsicValue (1) (In thousands) (Years) (In thousands)Outstanding at December 31, 2017— Granted1,477 $4.65 Vested— Canceled(147) Outstanding at December 31, 20181,330 $4.66 Granted1,052 9.48 Vested(1,063) 4.62 $10,818Canceled(364) 5.16 Outstanding at December 31, 2019955 $9.83 0.2 $24,952 (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 andexpected to vest as of December 31, 2019 is based on the closing price of the Company’s stock on December 31, 2019 or the earlier of thelast trading day prior to December 31, 2019, if December 31, 2019 is a non-trading day. The Company’s stock fair value used in thiscomputation was $26.13 per share.Stock-based compensation expense is measured at the grant date based on the fair value of the award. During the first quarter of 2019 theCompany issued PSU grants of 1.0 million shares, of which 0.5 million shares include market conditions. Each grantee is granted a target award ofPSUs and may earn between 0% and 200% of the target award depending on the Company’s performance against the performance goals. Thegrant 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 ona straight-line basis over the requisite service period. The weighted average estimated fair value of the PSUs without market conditions was$8.80 per share, and the weighted average estimated fair value of the PSUs with market conditions, based on the Monte Carlo model, was$10.70 per share.Employee Stock Purchase PlanA summary of ESPP activity for the years presented is as follows: (in thousands, except per share data): Years Ended December 31, 2019 2018 2017Proceeds from common stock issued under ESPP$1,692 $397 $313Shares of common stock issued315 439 478Weighted-average price per share$5.37 $0.90 $0.65 Enphase Energy, Inc. | 2019 Form 10-K | 93Table of ContentsENPHASE ENERGY, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)15.INCOME TAXESThe domestic and foreign components of income (loss) before income taxes consisted of the following: Years Ended December 31, 2019 2018 2017 (In thousands)United States$85,520 $(14,322) $(47,882)Foreign4,594 4,093 2,541Income (loss) before income taxes$90,114 $(10,229) $(45,341)The income taxes (benefit) provision for the years presented is as follows: Years Ended December 31, 2019 2018 2017 (In thousands)Current: Federal$— $— $—State327 42 21Foreign1,589 1,233 1,224 1,916 1,275 1,245Deferred: Federal(56,959) (35) (1,092)State(17,458) (21) (21)Foreign1,467 179 (281) (72,950) 123 (1,394)Income taxes (benefit) provision$(71,034) $1,398 $(149)A reconciliation of the income tax (benefit) provision and the amount computed by applying the statutory federal income tax rate of 21% in2019 and 2018 and 34% in 2017 to income (loss) before income taxes for the years presented is as follows: Years Ended December 31, 2019 2018 2017 (In thousands)Income tax (benefit) provision at statutory federal rate$18,929 $(2,148) $(15,416)State taxes, net of federal benefit(17,197) 17 (64)Change in valuation allowance(71,300) 8,198 (20,571)Foreign tax rate and tax law differential1,206 313 (133)Tax credits(1,803) (378) (382)Stock-based compensation(8,072) (953) 761Other permanent items31 235 479Other nondeductible/nontaxable items2,765 (5,112) 930Uncertain tax positions504 107 106Tax law changes— — 34,141GILTI1,086 917 —Section 162(m)2,817 202 —Income tax (benefit) provision$(71,034) $1,398 $(149) Enphase Energy, Inc. | 2019 Form 10-K | 94Table of ContentsENPHASE ENERGY, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)A summary of significant components of the Company’s deferred tax assets and liabilities as of December 31, 2019 and 2018 is as follows (inthousands): December 31, 2019 2018Deferred tax assets: Allowances and reserves$10,726 $10,022Net operating loss and tax credit carryforwards54,369 71,568Stock-based compensation3,753 3,662Deferred revenue16,736 19,562Fixed assets and intangibles2,720 3,836Sec. 163(j) interest carryforward— 2,064Other1,109 2,084Subtotal89,413 112,798Less valuation allowance— (98,631)Total deferred tax assets, net of valuation allowance89,413 14,167Deferred tax liabilities: Goodwill(1,368) (1,070)Unremitted foreign earnings(5) (16)Deferred cost of goods sold(14,374) (12,655)Total deferred tax liabilities(15,747) (13,741)Net deferred tax asset$73,666 $426The Company's accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of the Company'sdeferred tax assets. Assessing the realizability of deferred tax assets is dependent upon several factors, including the likelihood and amount, if any,of future taxable income in relevant jurisdictions during the periods in which those temporary differences become deductible. The Company'smanagement forecasts taxable income by considering all available positive and negative evidence including its history of operating income or lossesand its financial plans and estimates which are used to manage the business. These assumptions require significant judgment about future taxableincome. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income arereduced.In the fourth quarter of fiscal year 2019, the Company's management determined, based on the Company's recent history of earnings coupledwith its forecasted profitability, that it is more likely than not that all of deferred tax assets will be realized in the foreseeable future. Accordingly, inthe fourth quarter of fiscal year 2019, the Company released $92.9 million of the valuation allowance on its deferred tax assets, related to its federaland state deferred tax assets.The Company has net operating loss carryforwards for federal and California income tax purposes of approximately $147.4 million and$78.9 million, respectively, as of December 31, 2019. The federal and state net operating loss carryforwards, if not utilized, will expire beginning in2028.The Company has approximately $12.4 million of federal research credit and $11.3 million of state research credit carryforwards. The federalcredits 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 inownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The Company has completed a Section 382 analysisthrough December 31, 2019, which indicated no such change has occurred through December 31, 2019.The accounting for uncertain tax positions prescribes a recognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken in a tax return. The Company is required to recognize in the financialstatements 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 theposition. The Company recorded a net charge for unrecognized tax benefits in 2019 of $0.3 million. Enphase Energy, Inc. | 2019 Form 10-K | 95Table of ContentsENPHASE ENERGY, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)The Company does not have any tax positions for which it is reasonably possible the total amount of gross unrecognized tax benefits willincrease or decrease over the next year. The unrecognized tax benefits may increase or change during the next year for items that arise in theordinary course of business.A tabular reconciliation of the total amounts of unrecognized tax benefits for the years presented is as follows (in thousands): Years Ended December 31, 2019 2018 2017Unrecognized tax benefits—at beginning of year$6,325 $6,106 $6,016Decreases in balances related to tax positions taken in prior years(370) — (135)Increases in balances related to tax positions taken in current year771 329 306Lapses in statutes of limitations(137) (110) (81)Unrecognized tax benefits—at end of year$6,589 $6,325 $6,106The Company includes interest and penalties related to unrecognized tax benefits within the benefit from (provision for) income taxes. As ofyears ended December 31, 2019 and 2018, the total amount of gross interest and penalties accrued in each year was immaterial. Both theunrecognized tax benefits and the associated interest and penalties that are not expected to result in payment or receipt of cash within one year areclassified as other non-current liabilities in the consolidated balance sheets. In connection with tax matters, the Company’s interest and penaltyexpense recognized in 2019, 2018 and 2017 in the consolidated statements 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 2019and by California state authorities for the years 2006 through 2019 due to use and carryovers of net operating losses and credits.16.CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERSThe Company is potentially subject to financial instrument concentration of credit risk through its cash and cash equivalents and accountsreceivable. The Company places its cash and cash equivalents with high quality institutions and performs periodic evaluations of their relative creditstanding.Accounts receivable can be potentially exposed to a concentration of credit risk with its major customers. As of December 31, 2019, amountsdue from three customers represented approximately 34%, 14% and 11% of the total accounts receivable balance. As of December 31, 2018,amounts due from two customers represented 22% and 13% of the total accounts receivable balance.In 2019, two customers accounted for approximately 21% and 12% of total net revenues. In 2018, one customer accounted for approximately19% of total net revenues. In 2017, two customers accounted for approximately 15% and 11% of total net revenues.17.NET INCOME (LOSS) PER SHAREBasic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stockoutstanding during the period. Diluted net income (loss) per share is computed in a similar manner, but it also includes the effect of potentialcommon shares outstanding during the period, when dilutive. Potential common shares include Stock Options, RSUs, PSUs, shares to bepurchased under the Company’s ESPP, the Notes due 2023, the Notes due 2024 and warrants issued in conjunction with the Notes due 2024. Thedilutive effect of potentially dilutive common shares is reflected in diluted earnings per share by application of the treasury stock method for stockoptions, RSUs, PSUs, warrants, Notes due 2024 and shares to be purchased under the ESPP, and by application of the if-converted method for theNotes due 2023. To the extent these potential common shares are antidilutive, they are excluded from the calculation of diluted net income (loss)per share. Enphase Energy, Inc. | 2019 Form 10-K | 96Table of ContentsThe following table presents the computation of basic and diluted net income (loss) per share for the periods presented. Years Ended December 31, 2019 2018 2017 (In thousands, except per share data)Numerator: Net income (loss)$161,148 $(11,627) $(45,192)Notes due 2023 interest and financing costs, net1,088 — —Adjusted net income (loss)$162,236 $(11,627) $(45,192) Denominator: Shares used in basic per share amounts: Weighted average common shares outstanding116,713 99,619 82,939 Shares used in diluted per share amounts: Weighted average common shares outstanding116,713 99,619 82,939Effect of dilutive securities: Employee stock-based awards8,964 — —Warrants— — —Notes due 2024451 — —Notes due 20235,516 — —Weighted average common shares outstanding for diluted calculation131,644 99,619 82,939 Basic and diluted net income (loss) per share Net income (loss) per share, basic$1.38 $(0.12) $(0.54)Net income (loss) per share, diluted$1.23 $(0.12) $(0.54)The following outstanding shares of common stock equivalents were excluded from the calculation of the diluted net income (loss) per shareattributable to common stockholders because their effect would have been antidilutive. Years Ended December 31, 2019 2018 2017 (In thousands)Employee stock options27 7,710 8,433RSUs and PSUs158 5,273 3,029Warrants to purchase common stock300 — 1,083Notes due 2023— 11,701 —Total485 24,684 12,545Diluted earnings per shares for the year ended December 31, 2019 includes the dilutive effect of stock options, RSUs, PSUs, and shares tobe purchased under the ESPP, the Notes due 2023 and Notes due 2024. Certain common stock issuable under stock options, RSUs, PSUs andwarrants issued in conjunction with the Notes due 2024 have been omitted from the diluted net income per share calculation because includingsuch shares would have been antidilutive. Enphase Energy, Inc. | 2019 Form 10-K | 97Table of ContentsSince the Company has the intent and ability to settle the aggregate principal amount of the Notes due 2024 in cash and any excess inshares of the Company’s common stock, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversionspread on diluted net income per share, if applicable. In order to compute the dilutive effect, the number of shares included in the denominator ofdiluted net income per share is determined by dividing the conversion spread value of the “in-the-money” Notes due 2024 by the Company’saverage share price during the period and including the resulting share amount in the diluted net income per share denominator. The conversionspread will have a dilutive impact on net income per share of common stock when the average market price of the Company’s common stock for agiven period exceeds the conversion price of $20.5010 per share for the Notes due 2024. The Company’s weighted average common stock pricesince the issuance of the Notes due 2024 was above the conversion price, resulting in an impact on the diluted net income per share.Diluted earnings per shares for the years ended December 31, 2018 and 2017, excludes potential common stock issuable under stockoptions, RSUs, PSUs, and shares to be purchased under the ESPP and the Notes due 2023, as the Company incurred a net loss during theseperiods and including such shares would have been antidilutive.18.SEGMENT AND GEOGRAPHIC INFORMATIONThe Company’s chief operating decision maker is the Chief Executive Officer. The Chief Executive Officer reviews financial informationpresented on a consolidated basis. The Company has one business activity, which entails the design, development, manufacture and sale ofsolutions for the solar photovoltaic industry. There are no segment managers who are held accountable for operations, operating results or plans forlevels or components below the consolidated unit level. Accordingly, management has determined that the Company has a single operating andreportable segment.The following tables present net revenues (based on the destination of shipments) and long-lived assets by geographic region as of and forthe periods presented (in thousands):Net Revenues Years Ended December 31, 2019 2018 2017 (In thousands)United States$523,577 $219,600 $199,565International100,756 96,559 86,601Total$624,333 $316,159 $286,166Long-Lived Assets December 31, 2019 2018 (In thousands)United States$16,754 $13,146China4,635 5,504Mexico3,510 —Other4,037 2,348Total$28,936 $20,998 Enphase Energy, Inc. | 2019 Form 10-K | 98Table of Contents19.RELATED PARTYThe Company sells products to SunPower under the August 2018 MSA. As of December 31, 2019 and 2018, SunPower via its wholly ownedsubsidiary, held 6.5 million shares and 7.5 million shares, respectively, of the Company’s common stock. Revenue recognized under the MSA forthe years ended December 31, 2019 and 2018 was $70.9 million and $12.4 million, respectively, net of amortization of the customer relationshipintangible asset (see Note 6. “Goodwill and Intangible Assets”). As of December 31, 2019 and 2018, the Company had accounts receivable of$15.9 million and $10.3 million, respectively, from SunPower. As of December 31, 2019, the Company received $5.2 million as a safe harborprepayment from SunPower in the fourth quarter of 2019 for product delivered in the first quarter of 2020.In 2018, a member of the Company’s board of directors and one of its principal stockholders, Thurman John Rodgers, purchased $5.0 millionaggregate principal amount of the Notes due 2023 in a concurrent private placement. As of both December 31, 2019 and December 31, 2018,$5.0 million aggregate principal amount of the Notes due 2023 were outstanding. See Note 11. “Debt” for additional information related to thispurchase. Enphase Energy, Inc. | 2019 Form 10-K | 99Table of ContentsENPHASE ENERGY, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)20.ACQUISITIONOn August 9, 2018, the Company completed its acquisition of SunPower’s microinverter business pursuant to an APA by which the Companyacquired certain assets and liabilities of SunPower relating to the research and development and manufacturing of microinverters. The acquisitionwas accounted for as a business combination and, accordingly, the total purchase price was allocated to the preliminary net tangible and intangibleassets 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 becomesthe exclusive supplier of MLPEs for SunPower’s residential business in the U.S. for a period of five years. The resulting customer relationshipintangible 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 (inthousands):Cash consideration $25,000Common stock issued 32,319Total $57,319The fair value of the Company’s 7.5 million shares of common stock issued, valued at $32.3 million, was determined based on the closingmarket price of the Company’s common stock on the acquisition date, less a discount of 14% to 30% (depending on the year) for lack ofmarketability 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 onthe 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 (inthousands):Intangible assets $36,200Goodwill 21,119Net assets acquired $57,319The excess of the consideration paid over the fair values assigned to the assets acquired and liabilities assumed represents the goodwillresulting from the acquisition. The $21.1 million of goodwill recognized is attributable primarily to the benefits the Company expects to derive fromenhanced 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. Thefair values of assets acquired are preliminary and may be subject to change within the measurement period as the fair value assessments arefinalized.The following table shows the fair value of the separately identifiable intangible assets at the time of acquisition and the period over whicheach intangible asset will be amortized: Preliminary FairValue Useful Life (In thousands) (Years)Developed technology $13,100 6Customer relationship 23,100 9Total identifiable intangible assets $36,200 Enphase Energy, Inc. | 2019 Form 10-K | 100Table of ContentsENPHASE ENERGY, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)The developed technology acquired is embedded in the microinverters that SunPower sells to its customers. The Company already hasdeveloped microinverter technology and the Company will supply its microinverters to SunPower through the term of the MSA. The Company doesnot intend to actively use the developed technology acquired from SunPower but does plan to hold the developed technology to prevent others fromusing it. Therefore, the Company will account for the developed technology as a defensive intangible asset. The Company expects to realize thebenefits of the developed technology over the period of time in which the Company will supply microinverters to SunPower. The Company doesexpect changes in microinverter technology during the life of the customer relationship with SunPower and expects to benefit from preventingcompetitors’ access to the technology over a period of six years, therefore, the Company will amortize the value of the developed technologyintangible asset over a period of six years.The MSA was negotiated together with the APA and provides the Company with the exclusive right to supply SunPower with MLPEs for aperiod of five years, with options for renewals. The exclusivity arrangement extends throughout the term of the MSA, which comprises all of theexpected cash flows from the customer relationship intangible asset, and was a condition to, and was an essential part of the acquisition of themicroinverter business by the Company. As the fair value ascribed to the customer relationship intangible asset represents payments to acustomer, the Company will amortize the value of the customer relationship intangible asset as a reduction to revenue using a pattern of economicbenefit method over a useful life of nine years.The table below shows estimated fair values of the assets acquired funded by cash and issuance of common stock at the acquisition date: Cash PurchasePrice Issuance ofCommon Stock Total Consideration % of TotalConsideration (In thousands)Developed technology and goodwill$15,000 $19,219 $34,219 60%Customer relationship10,000 13,100 23,100 40%Total consideration$25,000 $32,319 $57,319 100%The Company allocated $10.0 million of the $25.0 million paid of the cash purchase price to cash flows from operating activities and theremaining $15.0 million to cash used in investing activities in the consolidated statements of cash flows for the year ended December 31, 2018. Theallocation 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 investingactivities 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 financialinformation for the SunPower microinverter business as the business was part of SunPower and did not have discrete financial information prior tothe acquisition. Inclusion of such information would require the Company to make estimates and assumptions regarding the acquired businesshistorical financial results that the Company believes may ultimately prove inaccurate. Enphase Energy, Inc. | 2019 Form 10-K | 101Table of ContentsSELECTED UNAUDITED QUARTERLY FINANCIAL INFORMATIONThe following tables show a summary of the Company’s quarterly financial information for each of the four quarters of 2019 and 2018 (inthousands, except per share data): Three Months Ended March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019Net revenues$100,150 $134,094 $180,057 $210,032Cost of revenues66,811 88,775 115,351 132,151Gross profit33,339 45,319 64,706 77,881Operating expenses: Research and development8,524 9,604 11,085 11,168Sales and marketing7,433 9,054 9,551 10,690General and administrative9,880 8,583 9,895 10,450Restructuring charges368 631 469 1,131Total operating expenses26,205 27,872 31,000 33,439Income from operations7,134 17,447 33,706 44,442Other expense, net Interest Income211 593 894 815Interest expense(3,751) (1,351) (2,286) (2,303)Other income (expense)(481) (5,480) (943) 1,467Total other expense, net(4,021) (6,238) (2,335) (21)Income before income taxes3,113 11,209 31,371 44,421Income tax benefit (provision)(348) (591) (272) 72,245Net income$2,765 $10,618 $31,099 $116,666Net income per share, basic$0.03 $0.09 $0.25 $0.95Net income per share, diluted$0.02 $0.08 $0.23 $0.88 Enphase Energy, Inc. | 2019 Form 10-K | 102Table of Contents Three Months Ended March 31, 2018 June 30, 2018 September 30, 2018 December 31, 2018Net revenues$69,972 $75,896 $78,002 $92,289Cost of revenues51,657 53,195 52,738 64,124Gross profit18,315 22,701 25,264 28,165Operating expenses: Research and development7,620 9,462 8,165 7,340Sales and marketing6,227 6,828 7,375 6,617General and administrative6,943 6,969 7,510 7,664Restructuring charges— — 2,588 1,541Total operating expenses20,790 23,259 25,638 23,162Income (loss) from operations(2,475) (558) (374) 5,003Other expense, net Interest income93 154 321 490Interest expense(2,385) (2,423) (2,790) (3,095)Other expense, net(126) (572) (379) (1,113)Total other expense, net(2,418) (2,841) (2,848) (3,718)Income (loss) before income taxes(4,893) (3,399) (3,222) 1,285Provision for income taxes(235) (339) (248) (576)Net income (loss)$(5,128) $(3,738) $(3,470) $709Net income (loss) per share, basic$(0.06) $(0.04) $(0.03) $0.01Net income (loss) per diluted share$(0.06) $(0.04) $(0.03) $0.01 Enphase Energy, Inc. | 2019 Form 10-K | 103Table of ContentsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresWe carried out an evaluation required by the Exchange Act, under the supervision and with the participation of our principal executive officerand 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 principalfinancial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required tobe disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules and forms and to provide reasonable assurance that such information isaccumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allowtimely decisions regarding required disclosures.Management’s Report on Internal Control over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financial reporting in providing reasonableassurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles, as defined in Rule 13a-15(f) of the Exchange Act. Management has assessed the effectiveness of ourinternal control over financial reporting as of December 2019 based on criteria set forth in Internal Control – Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (2013). As a result of this assessment, management concluded that, as ofDecember 2019, 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 Annual Report onForm 10-K.Changes in Internal Control over Financial ReportingThere were no changes in our internal control over financial reporting that occurred during the most recent quarter ended December 2019that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Limitations on ControlsOur disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance ofachieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures or our internalcontrol over financial reporting will prevent or detect all errors and fraud. Any control system, no matter how well designed and operated, is basedupon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controlscan provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, withinthe Company have been detected.Item 9B. Other InformationNone. Enphase Energy, Inc. | 2019 Form 10-K | 104Table of ContentsPART IIIItem 10. Directors, Executive Officers and Corporate GovernanceThe information required regarding our directors is incorporated by reference from the information contained in the section entitled “Proposal1-Election of Directors” in our definitive Proxy Statement for the 2020 Annual Meeting of Stockholders (our “Proxy Statement”), a copy of which willbe filed with the Securities and Exchange Commission on or before April 30, 2020.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 informationcontained in the section entitled “Delinquent Section 16(a) Reports” in our Proxy Statement.The information required with respect to procedures by which security holders may recommend nominees to our board of directors, and thecomposition of our Audit Committee, and whether we have an “audit committee financial expert,” is incorporated by reference from the informationcontained in the section entitled “Information Regarding the Board of Directors and Corporate Governance” in our Proxy Statement.Code of ConductWe have a written code of conduct that applies to all our executive officers, directors and employees. Our Code of Conduct is available on ourwebsite at http://investor.enphase.com/corporate-governance. A copy of our Code of Conduct may also be obtained free of charge by writing to ourSecretary, Enphase Energy, Inc., 47281 Bayside Parkway, Fremont, CA 94538. If we make any substantive amendments to our Code of Conduct orgrant any waiver from a provision of the Code of Conduct to any executive officer or director, we intend to promptly disclose the nature of theamendment or waiver on our website.Item 11. Executive CompensationThe information required regarding the compensation of our directors and executive officers is incorporated by reference from the informationcontained in the sections entitled “Executive Compensation,” “Director Compensation” and “Compensation Committee Interlocks and InsiderParticipation” in our Proxy Statement.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required regarding security ownership of our 5% or greater stockholders and of our directors and executive officers isincorporated 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 InformationThe information required regarding securities authorized for issuance under our equity compensation plans is incorporated by reference fromthe information contained in the section entitled “Equity Compensation Plan Information” in our Proxy Statement.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required regarding related transactions is incorporated herein by reference from the information contained in the sectionentitled “Transactions With Related Persons” and, with respect to director independence, the section entitled “Proposal 1-Election of Directors” inour Proxy Statement.Item 14. Principal Accounting Fees and ServicesThe information required is incorporated by reference from the information contained in the sections entitled “Principal Accountant Fees andServices” and “Pre-Approval Policies and Procedures” in the section entitled “Proposal 3-Ratification of Selection of Independent Registered PublicAccounting Firm” in our Proxy Statement. Enphase Energy, Inc. | 2019 Form 10-K | 105Table of ContentsPART IVItem 15. Exhibits, Financial Statement SchedulesConsolidated Financial StatementsThe information concerning our consolidated financial statements, and Report of Independent Registered Public Accounting Firm required bythis Item is incorporated by reference herein to the section of this Annual Report on Form 10-K in Part II, Item 8, Consolidated Financial Statementsand Supplementary Data.No schedules are provided because they are not applicable, not required under the instructions, or the requested information is shown in thefinancial statements or related notes thereto.Exhibits Incorporation by ReferenceExhibitNumber Exhibit Description Form SEC File No. Exhibit Filing Date FiledHerewith2.1 Asset Purchase Agreement Among SunPower Corporation andEnphase Energy, Inc. dated June 12, 2018. 8-K 001-35480 2.1 6/12/2018 3.1 Amended and Restated Certificate of Incorporation of EnphaseEnergy, Inc. 8-K 001-35480 3.1 4/6/2012 3.2 Certificate of Amendment of the Amended and RestatedCertificate of Incorporation of Enphase Energy, Inc. 10-Q 001-35480 3.1 8/9/2017 3.3 Certificate of Amendment of the Amended and RestatedCertificate of Incorporation of Enphase Energy, Inc. 10-Q 001-35480 2.1 8/6/2018 3.4 Amended and Restated Bylaws of Enphase Energy, Inc. S-1/A 333-174925 3.5 3/12/2012 4.1 Specimen Common Stock Certificate of Enphase Energy, Inc. S-1/A 333-174925 4.1 3/12/2012 4.2 Indenture, dated August 17, 2018, between Enphase Energy,Inc. and U.S. Bank National Association. 8-K 001-35480 4.1 8/17/2018 4.3 Form of 4.00% Convertible Senior Note due 2023 (included inExhibit 4.2). 8-K 001-35480 4.1 8/17/2018 4.4 Indenture, dated June 5, 2019, between Enphase Energy, Inc.and U.S. Bank National Association. 8-K 001-35480 4.1 6/5/2019 4.5 Form of 1.00% Convertible Senior Note due 2024 (included inExhibit 4.4). 8-K 001-35480 4.1 6/5/2019 4.6 Description of Registrant’s Securities Registered Pursuant toSection 12 of the Securities Exchange Act of 1934. X10.1+ Form of Indemnification Agreement by and between EnphaseEnergy, Inc. and each of its directors and officers. S-1/A 333-174925 10.1 8/24/2011 10.2+ 2006 Equity Incentive Plan, as amended, and relateddocuments. S-8 333-181382 99.1 5/14/2012 10.3+ 2011 Equity Incentive Plan, as amended, and forms ofagreement thereunder. DEF 14A 001-35480 Appendix A 3/18/2016 10.4+ 2011 Employee Stock Purchase Plan, as amended. DEF 14A 001-35480 Appendix A 3/31/2017 Enphase Energy, Inc. | 2019 Form 10-K | 106Table of Contents Incorporation by ReferenceExhibitNumber Exhibit Description Form SEC File No. Exhibit Filing Date FiledHerewith10.5† Cooperation Agreement “AC cabling system for solar micro-inverter” by and among Enphase Energy, Inc., and PhoenixContact GmbH & Co. KG and Phoenix Contact USA, Inc., datedDecember 7, 2010. S-1 333-174925 10.16 6/15/2011 10.6 Amendment No. 2 to the Cooperation Agreement andAmendment No. 1 by and among Enphase Energy, Inc.,Phoenix Contact GmbH & Co. KG and Phoenix Contact USA,Inc., dated September 1, 2016. 10-Q 001-35480 10.3 11/2/2016 10.7 Flextronics Logistics Services Agreement by and betweenEnphase Energy, Inc. and Flextronics America, LLC, dated May1, 2009. S-1 333-174925 10.17 6/15/2011 10.8 Amendment #1 to the Flextronics Logistics Services Agreement,by and between Enphase Energy, Inc. and Flextronics America,LLC, dated July 28, 2016. 10-Q 001-35480 10.4 11/2/2016 10.9 Flextronics Manufacturing Services Agreement by and betweenEnphase Energy, Inc. and Flextronics Industrial, Ltd., datedMarch 1, 2009, as amended. S-1 333-174925 10.18 6/15/2011 10.10 Master Development and Production Agreement by andbetween Enphase Energy, Inc. and Fujitsu MicroelectronicsAmerica, Inc., dated August 19, 2009. 10-Q 001-35480 10.1 5/6/2015 10.11 License and Technology Transfer Agreement by and betweenEnphase Energy, Inc. and Ariane Controls, Inc., datedDecember 21, 2007. S-1 333-174925 10.20 6/15/2011 10.12 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. S-1 333-174925 10.21 6/15/2011 10.13+ Non-employee Director Compensation Policy. 10-Q 001-35480 10.28 5/8/2013 10.14+ Offer Letter by and between Enphase Energy, Inc. and DavidRanhoff, dated December 1, 2017. 8-K 001-35480 10.1 12/5/2017 10.15+ Severance and Change in Control Benefit Plan. 10-Q 001-35480 10.50 5/8/2013 10.16 Securities Purchase Agreement, by and among EnphaseEnergy, Inc. and the purchasers identified on Exhibit A thereto,dated January 9, 2017. 8-K 001-35480 10.1 1/10/2017 10.17+ Offer Letter by and between Enphase Energy, Inc. and EricBranderiz, dated December 1, 2018. 10-Q 001-35480 10.1 8/6/2018 10.18 Securities Purchase Agreement, dated August 14, 2018, by andbetween Enphase Energy, Inc. and the Rodgers MasseyRevocable Trust dtd 4/4/11. 8-K 001-35480 10.2 8/17/2018 10.19 2019 Performance Bonus Program Summary. 8-K 001-35480 10.1 2/6/2019 10.20 Stockholders Agreement, dated as of August 9, 2018, by andbetween Enphase Energy, Inc. and SunPower Corporation. SC 13D 005-86790 SC 13D 8/20/2018 Enphase Energy, Inc. | 2019 Form 10-K | 107Table of Contents Incorporation by ReferenceExhibitNumber Exhibit Description Form SEC File No. Exhibit Filing Date FiledHerewith10.21† Master Supply Agreement, dated August 9, 2018, betweenEnphase Energy, Inc. and SunPower Corporation. 8-K/A 001-35480 99.1 10/23/2018 10.22† Amendment No. 1 to Master Supply Agreement, datedDecember 10, 2018, by and between Enphase Energy, Inc. andSunPower Corporation. 10-K 001-34166 10.74 2/14/2019 10.23 Bayside Parkway Lease by and between Enphase Energy, Inc.and Dollinger Bayside Associates, dated April 12, 2018. 10-K 001-35480 10.45 3/15/2019 10.24 Form of Convertible Note Hedge Transaction Confirmation. 8-K 001-35480 10.2 6/5/2019 10.25 Form of Warrant Confirmation. 8-K 001-35480 10.3 6/5/2019 10.26+ Offer Letter, dated January 16, 2018, and 2019 Merit FocalReview, dated May 10, 2019, to Jeffery McNeil. 10-Q 001-35480 10.4 7/30/2019 21.1 List of Subsidiaries of the Registrant X23.1 Consent of Deloitte & Touche LLP, Independent RegisteredPublic Accounting Firm X24.1 Power of Attorney (incorporated by reference to the signaturepage of this Annual Report on Form 10-K). X31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). X31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). X32.1* Certification of Chief Executive Officer and Chief FinancialOfficer pursuant to 18 U.S.C. Section 1350 as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X101.INS XBRL Instance Document. X101.SCH XBRL Taxonomy Extension Schema Document. X101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. X101.DEF XBRL Taxonomy Extension Definition Linkbase Document. X101.LAB XBRL Taxonomy Extension Label Linkbase Document. X101.PRE XBRL Taxonomy Extension Presentation Document. X104 Cover Page Interactive Data File (formatted as Inline XBRL andcontained in Exhibits 101) X +Management compensatory plan or arrangement.†Confidential treatment has been granted for certain portions of this exhibit. Omitted information has been filed separately with the Securitiesand 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 adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by Enphase Energy, Inc. for purposes of Section 18of the Securities Exchange Act of 1934, as amended. Enphase Energy, Inc. | 2019 Form 10-K | 108Table of ContentsItem 16. Form 10-K SummaryNot ApplicableSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized on February 21, 2020. Enphase Energy, Inc. By:/s/ BADRINARAYANAN KOTHANDARAMAN Badrinarayanan Kothandaraman President and Chief Executive OfficerPOWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints BadrinarayananKothandaraman and Eric Branderiz, jointly and severally, as his true and lawful attorneys-in-fact and agents, with full power of substitution andresubstitution, 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 Form10-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 bedone in and about the premises hereby ratifying and confirming all that said attorneys-in-fact and agents, or his substitute or substitutes, maylawfully 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 ofthe registrant and in the capacities on the dates indicated.Signature Title Date /s/ BADRINARAYANAN KOTHANDARAMAN President and Chief Executive Officer(Principal Executive Officer) February 21, 2020Badrinarayanan Kothandaraman /s/ ERIC BRANDERIZ Executive Vice President and Chief Financial Officer(Principal Financial Officer) February 21, 2020Eric Branderiz /s/ MANDY YANG Vice President, Chief Accounting Officer and Treasurer(Principal Accounting Officer) February 21, 2020Mandy Yang /s/ STEVEN J. GOMO Director February 21, 2020Steven J. Gomo /s/ BENJAMIN KORTLANG Director February 21, 2020Benjamin Kortlang /s/ RICHARD MORA Director February 21, 2020Richard Mora /s/ THURMAN JOHN RODGERS Director February 21, 2020Thurman John Rodgers Enphase Energy, Inc. | 2019 Form 10-K | 109Exhibit 4.6DESCRIPTION OF CAPITAL STOCKGeneralEnphase Energy, Inc., or the Company, is authorized to issue up to 150,000,000 shares of common stock, $0.00001 par value per share, orcommon stock, and 10,000,000 shares of preferred stock, $0.00001 par value per share, or preferred stock.The following summary description is based on the provisions of our certificate of incorporation, our amended and restated bylaws and theapplicable provisions of the Delaware General Corporation Law. This information may not be complete in all respects and is qualified entirely byreference to the provisions of our certificate of incorporation, our amended and restated bylaws and the Delaware General Corporation Law. Ourcertificate of incorporation and our amended and restated bylaws are filed as exhibits to this Annual Report on Form 10-K to which this Descriptionof Capital Stock is an exhibit.Common stockGeneral. The following is a description of our common stock, which is the only security of the Company registered pursuant to Section 12 ofthe Securities Exchange Act of 1934, as amended, or the Exchange Act.Dividend rights. Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding sharesof our common stock are entitled to receive dividends out of funds legally available if our board of directors, in its discretion, determines to declaredividends and then only at the times and in the amounts that our board of directors may determine.Voting rights. Each holder of common stock is entitled to one vote for each share of common stock held on all matters submitted to a vote ofstockholders. Our certificate of incorporation does not provide for the right of stockholders to cumulate votes for the election of directors. Ourcertificate of incorporation establishes a classified board of directors, which is divided into three classes with staggered three-year terms. Only oneclass of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respectivethree-year terms. These provisions in our amended and restated certificate of incorporation could discourage potential takeover attempts. See “Anti-Takeover Effects of Delaware Law and Our Charter Documents” below.No preemptive or similar rights. Our common stock is not entitled to preemptive rights and is not subject to conversion or redemptionprovisions. The rights, preferences and privileges of the holders of our common stock are subject to, and may be adversely affected by, the rights ofthe holders of any series of our preferred stock that we may designate and issue in the future.Right to receive liquidation distributions. Upon our dissolution, liquidation or winding-up, the assets legally available for distribution to ourstockholders are distributable ratably among the holders of our common stock, subject to prior satisfaction of all outstanding debt and liabilities andthe preferential rights and payment of liquidation preferences, if any, on any outstanding shares of preferred stock.The rights of the holders of our common stock are subject to, and may be adversely affected by, the rights of holders of shares of any preferredstock that we may designate and issue in the future.Preferred stockWe are authorized, subject to limitations prescribed by Delaware law, to issue up to 10,000,000 shares of preferred stock in one or moreseries established by our board of directors. Our board of directors is authorized to establish from time to time the number of shares to be includedin each series and to fix the designation, powers, preferences and rights of the shares of each series and any of its qualifications, limitations orrestrictions. Our board of directors can also increase or decrease the number of shares of any series, but not below the number of shares of thatseries then outstanding, without any further vote or action by our stockholders. Our board of directors may authorize the issuance of preferred stockwith voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock. The issuance ofpreferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have theeffect of delaying, deferring, discouraging or preventing a change in control of the Company and may adversely affect the market price of ourcommon stock and the voting and other rights of the holders of our common stock.Anti-Takeover Effects of Delaware Law and Our Charter Documents Some of the provisions of Delaware law may have the effect of delaying, deferring, discouraging or preventing another person from acquiringcontrol of the Company.We are subject to Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in anybusiness combination with any interested stockholder for a period of three years after the date that such stockholder became an interestedstockholder, with the following exceptions:•before such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in thestockholder becoming an interested stockholder;•upon closing of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned atleast 85% of the voting stock of the corporation outstanding at the time the transaction began, excluding for purposes of determining thevoting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned by (1) persons whoare directors and also officers and (2) employee stock plans in which employee participants do not have the right to determine confidentiallywhether shares held subject to the plan will be tendered in a tender or exchange offer; or•on or after such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of thestockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by theinterested stockholder.In general, Section 203 defines business combination to include the following:•any merger or consolidation involving the corporation and the interested stockholder;•any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;•subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to theinterested stockholder;•any transaction involving the corporation that has the effect of increasing the proportionate share of the stock or any class or series of thecorporation beneficially owned by the interested stockholder; or•the receipt by the interested stockholder of the benefit of any loss, advances, guarantees, pledges or other financial benefits by or throughthe corporation.In general, Section 203 defines an “interested stockholder” as an entity or person who, together with the person’s affiliates and associates,beneficially owns, or within three years prior to the time of determination of interested stockholder status did own, 15% or more of the outstandingvoting stock of the corporation.A Delaware corporation may “opt out” of these provisions with an express provision in its original certificate of incorporation or an expressprovision in its certificate of incorporation or bylaws resulting from a stockholders’ amendment approved by at least a majority of the outstandingvoting shares. We have not elected to “opt out” of these provisions. The statute could prohibit or delay mergers or other takeover or change incontrol attempts and, accordingly, may discourage attempts to acquire us. Certain provisions in our certificate of incorporation and our amended andrestated bylaws could have an effect of delaying, deferring or preventing a change in control.Choice of ForumOur certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for any derivativeaction or proceeding brought on our behalf, any action asserting a breach of fiduciary duty owed by any director, officer or employee to us or ourstockholders, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law or any action asserting a claimagainst us that is governed by the internal affairs doctrine. However, several lawsuits involving other companies have been brought challenging thevalidity of choice of forum provisions in certificates of incorporation, and it is possible that a court could rule that such provision is inapplicable orunenforceable.Exhibit 21.1SUBSIDIARIES OF REGISTRANTEnphase Energy Australia Pty. Ltd., an Australian corporation.Enphase Energy Canada, Inc., a Canadian corporation.Enphase Energy S.A.S., a French corporation.Enphase Energy NL B.V., a Dutch private limited liability company.Enphase Energy New Zealand Limited, a New Zealand corporation.Enphase International LLC, a Delaware corporationEnphase Solar Energy Private Limited, an Indian private company.Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in Registration Statement No. 333-230716, 333-228775, 333-228774, 333-224101, 333-216886, 333-209315 and 333-195694 on Form S-3 and Registration Statement Nos. 333-230314, 333-224103, 333-216986, 333-210037, 333-202630, 333-194749, 333-187057, and 333-181382 on Form S-8 of our reports dated February 21, 2020, relating to the financial statements of Enphase Energy,Inc. and the effectiveness of Enphase Energy, Inc.'s internal control over financial reporting appearing in this Annual Report on Form 10-K for theyear ended December 31, 2019./s/ DELOITTE & TOUCHE LLP San Francisco, CaliforniaFebruary 21, 2020Exhibit 31.1CERTIFICATIONI, Badrinarayanan Kothandaraman, certify that:1.I have reviewed this Form 10-K of Enphase Energy, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period coveredby this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as definedin Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15(d)-15(f)) for the registrant and have:a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this report is being prepared;b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles;c.evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; andd.disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant'smost recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, the registrant's internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting.Date: February 21, 2020 /s/ BADRINARAYANAN KOTHANDARAMAN Badrinarayanan Kothandaraman President and Chief Executive Officer(Principal Executive Officer)Exhibit 31.2CERTIFICATIONI, Eric Branderiz, certify that:1.I have reviewed this Form 10-K of Enphase Energy, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period coveredby this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as definedin Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15(d)-15(f)) for the registrant and have:a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this report is being prepared;b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles;c.evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; andd.disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant'smost recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, the registrant's internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting.Date: February 21, 2020 /s/ ERIC BRANDERIZ Eric Branderiz Executive Vice President and Chief Financial Officer(Principal Financial Officer)Exhibit 32.1CERTIFICATIONPursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and Section1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Badrinarayanan Kothandaraman, President and Chief ExecutiveOfficer of Enphase Energy, Inc. (the “Company”), and Eric Branderiz, Executive Vice President and Chief Financial Officer of the Company, eachhereby certifies that, to the best of his or her knowledge:1. The Company’s Annual Report on Form 10-K for the period ended December 31, 2019, to which this Certification is attached as Exhibit 32.1 (the“Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.In Witness Whereof, the undersigned have set their hands hereto as of the 21st day of February, 2020./s/ BADRINARAYANAN KOTHANDARAMAN /s/ ERIC BRANDERIZBadrinarayanan Kothandaraman Eric BranderizPresident and Chief Executive Officer Executive Vice President and Chief Financial OfficerThis certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to beincorporated by reference into any filing of Enphase Energy, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in suchfiling.

Continue reading text version or see original annual report in PDF format above