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ENPH > SEC Filings for ENPH > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for ENPHASE ENERGY, INC.

Form 10-Q for ENPHASE ENERGY, INC.


13-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements reflecting our current expectations and involves risks and uncertainties. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend," "potential" or "continue" or the negative of these terms or other comparable terminology. For example, statements regarding our expectations as to future financial performance, expense levels and liquidity sources are forward-looking statements. Our actual results and the timing of events may differ materially from those discussed in our forward-looking statements as a result of various factors, including those discussed below and those discussed in the section entitled "Risk Factors" included in this Quarterly Report on Form 10-Q and our prospectus filed pursuant to Rule 424(b) under the Securities Act, as amended, with the Securities and Exchange Commission, or SEC, on March 30, 2012, or the Prospectus.

Overview

We deliver microinverter technology for the solar industry that increases energy production, simplifies design and installation, improves system uptime and reliability, reduces fire safety risk and provides a platform for intelligent energy management. We were founded in March 2006 and have grown rapidly to become the market leader in the microinverter category. Since our first commercial shipment in mid-2008, we have sold over 2.6 million microinverter units as of September 30, 2012. Our products have been installed in all 50 U.S. states, eight Canadian provinces, Italy, United Kingdom, France, and the Benelux region.

We sell our microinverter systems primarily to distributors who resell them to solar installers. We also sell directly to large installers and through original equipment manufacturers ("OEMs") and strategic partners. A substantial majority of our revenue has been generated by sales within North America. We anticipate that the majority of our 2012 net revenues will continue to come from North America, with the balance from Europe.

We continue to experience significant revenue growth. Our net revenues were $60.8 million and $44.7 million for the three months ended September 30, 2012 and 2011, respectively, and $159.1 million and $92.4 million for the nine months ended September 30, 2012 and 2011, respectively, reflecting deeper market penetration and broader acceptance of microinverter technology. We incurred net losses of $8.9 million and $7.2 million for the three months ended September 30, 2012 and 2011, respectively, and $30.5 million and $26.8 million for the nine months ended September 30, 2012 and 2011, respectively, as we invested significant resources to develop new product offerings, expand our operations into new product markets and geographies, and focus on critical

research and development activities required to enhance product quality and foster innovation. While we will continue to focus on new product development and market expansion activities, we expect the growth in our workforce to moderate in the near term. As of September 30, 2012, we had 384 full-time employees, compared to 286 full-time employees at September 30, 2011, an increase of 34%. However, our workforce only increased by 4% from the second quarter ended June 30, 2012. We believe the investments we have made in our corporate infrastructure will enable us to deliver higher levels of net revenues without material increases in sales and marketing, and general and administrative expenses.

On April 4, 2012, we consummated our initial public offering ("IPO"). As a result, the following transactions were recorded in our condensed consolidated financial statements in the second quarter of 2012:

we issued 10,315,151 shares of common stock (including exercise of the full over-allotment by the underwriters of 1,345,454 shares of common stock), at an offering price of $6.00 per share, for gross proceeds of $61.9 million. Certain related parties, who owned convertible preferred and common stock and held convertible notes, purchased 2,500,000 shares of the total amount of shares issued of our common stock at the $6.00 offering price. The net proceeds from the sale of the shares were $53.8 million, after deducting the underwriters' discounts and commissions of $3.3 million and other estimated offering costs of $4.8 million;

the 22,220,856 outstanding shares of our convertible preferred stock ($93.6 million carrying value) automatically converted into 25,171,017 shares of common stock;

the convertible preferred stock warrant liability ($0.9 million carrying value) was reclassified to additional paid-in capital and the warrants to purchase 187,243 shares of convertible preferred stock became warrants to purchase 199,458 shares of common stock;

the outstanding balance of principal and accrued paid-in-kind interest thereon for our convertible notes ($21.2 million gross carrying value) automatically converted into 3,533,988 shares of common stock at a conversion price equal to the initial public offering price of $6.00 per share;


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the aggregate debt issuance costs and debt discounts of $2.8 million related to our convertible facility were written-off to interest expense as a result of the conversion of the outstanding notes and the automatic termination of our $80.0 million convertible facility; and

we filed an amended and restated certificate of incorporation, which authorized 100,000,000 shares of common stock and 10,000,000 shares of preferred stock.

Components of Condensed Consolidated Statements of Operations

Net Revenues

We generate net revenues from sales of our microinverter systems, which include microinverter units, an Envoy communications gateway device, and our Enlighten web-based monitoring service. We sell to distributors, large installers, OEMs and strategic partners.

Our revenue is affected by changes in the volume and average selling prices of our microinverter systems, driven by supply and demand, sales incentives, and competitive product offerings. Our revenue growth is dependent on our ability to market our products in a manner that increases awareness for microinverter technology, the continual development and introduction of new products to meet the changing technology and performance requirements of our customers, and the diversification and expansion of our revenue base.

Cost of Revenues and Gross Profit

Cost of revenues is comprised primarily of product costs consisting of purchases from our contract manufacturers and other suppliers, warranty, personnel and logistics costs, depreciation and amortization of test equipment and hosting services costs. Our product costs are impacted by technological innovations, such as advances in semiconductor integration and new product introductions, economies of scale resulting in lower component costs, and improvements in production processes and automation. Certain costs, primarily personnel and depreciation and amortization of test equipment, are not directly affected by sales volume.

We outsource our manufacturing to third-party contract manufacturers and generally negotiate product pricing with them on a quarterly basis. In addition, a contract manufacturer also serves as our logistics provider by warehousing and delivering our products in North America and Europe. We believe our contract manufacturing partners have sufficient production capacity to meet the growing demand for our products for the foreseeable future. However, shortages in the supply of certain key raw materials could adversely affect our ability to meet customer demand for our products.

Gross profit may vary from quarter to quarter and is primarily affected by our average selling prices, product cost and mix, warranty costs and seasonality.

Operating Expenses

Operating expenses consist of research and development, sales and marketing and general and administrative expenses. Personnel-related costs are the most significant component of each of these expense categories and include salaries, benefits, payroll taxes, recruiting costs, sales commissions and stock-based compensation. We believe the investments we have made in our corporate infrastructure will enable us to deliver higher levels of net revenues without material increases in sales and marketing, and general and administrative expenses.

Research and development expense includes personnel-related expenses such as salaries, stock-based compensation and employee benefits. Research and development employees are engaged in the design and development of power electronics, semiconductors, powerline communications and networking and software functionality. Research and development expense also includes third-party design and development costs, testing and evaluation costs, depreciation expense and other indirect costs. We devote substantial resources in ongoing research and development programs that focus on enhancements to and cost efficiencies in our existing products and timely development of new products that utilize technological innovation to drive down product costs. We intend to continue to invest substantial resources in our research and development efforts because we believe they are critical to maintaining our competitive position.

Sales and marketing expense consists primarily of personnel-related expenses such as salaries, commissions, stock-based compensation, employee benefits and travel. It also includes trade shows, marketing, customer support and other indirect costs. We expect to continue to make the necessary investments to enable us to execute our strategy to increase our market penetration geographically and into new markets by expanding our customer base of distributors, large installers, OEMs and strategic partners. Historically, substantially all of our sales have been in North America. We began selling into France, Italy and the Benelux region in the fourth quarter of 2011 and commenced volume shipments to such regions in the second quarter of 2012. In addition, we opened a sales office in the United Kingdom during the second quarter of 2012 and began shipping products in the third quarter of 2012. We believe the investments we have made in sales and marketing to date will enable us to deliver higher levels of net revenues without material increases from current levels of sales and marketing expenses. However, we expect to continue to expand the geographic reach of our product offerings and explore new sales channels in strategic markets in the future.


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General and administrative expense consists primarily of salaries, stock-based compensation and employee benefits for personnel related to our executive, finance, human resources, information technology and legal organizations, facilities cost, and fees for professional services. Professional services consist primarily of outside legal, accounting and information technology consulting costs. We believe the investments we have made in our corporate infrastructure to date will enable us to deliver higher levels of net revenues without material increases from current levels of general and administrative expenses.

Other Income (Expense), Net

Other income (expense), net includes interest income on invested cash balances and interest expense on amounts outstanding under our credit and convertible note facilities and non-cash interest expense related to the amortization of debt discounts and deferred financing costs. Other income (expense), net also includes mark-to-market adjustments to record our preferred stock warrants at fair value, which were issued in conjunction with credit facilities, as well as losses or gains on conversion of non-U.S. dollar transactions into U.S. dollars and foreign currency forward contracts.

Provision (Benefit) for Income Taxes

We are subject to income taxes in the countries where we sell our products. Historically, we have primarily been subject to taxation in the United States because we have sold the vast majority of our products to customers in the United States. We anticipate that as we expand the sale of products to customers outside the United States in the future, we will become subject to taxation based on the foreign statutory rates in the countries where these sales took place and our effective tax rate may fluctuate accordingly. We have not recorded any U.S. federal or state income tax provision for any of the periods presented because we have experienced operating losses since inception. Due to the history of losses we have generated since inception, we have recorded a full valuation allowance on our deferred tax assets.

Critical Accounting Policies and Significant Management Estimates

Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S., or GAAP. In connection with the preparation of our condensed consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

We consider an accounting policy to be critical if it is important to our financial condition and results of operations, and if it entails significant judgment, subjectivity and complexity on the part of management in its application. We consider the following to be our critical accounting policies:

Revenue recognition;

Inventory valuation;

Product warranty; and

Stock-based compensation.

For a complete description of our critical accounting policies that involve our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements, refer to the Prospectus under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Significant Management Estimates."


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Results of Operations for the Three and Nine Months Ended September 30, 2012 and 2011

Net Revenues

Three Months Ended Nine Months Ended
September 30, Change in September 30, Change in
2012 2011 $ % 2012 2011 $ %
(In thousands, except percentages)

Net revenues $ 60,813 $ 44,728 $ 16,085 36 % $ 159,110 $ 92,389 $ 66,721 72 %

Three Months Ended September 30, 2012 and 2011

Net revenues increased by 36% for the three months ended September 30, 2012, compared to the same period in the prior year. The increase in net revenues was primarily due to the increase in the overall volume of our products shipped. The number of microinverter units sold increased by 51% from approximately 286,000 units in the three months ended September 30, 2011, to approximately 431,000 units in the three months ended September 30, 2012. The overall increase in units sold was attributable primarily to sales of our third generation microinverter, which was introduced during the second quarter of 2011. In addition, the increase in unit sales was driven by deeper penetration of our existing customer base, the addition of new customers, and broader acceptance of our products resulting from, among other factors, investments made in sales and marketing.

Nine Months Ended September 30, 2012 and 2011

Net revenues increased by 72% for the nine months ended September 30, 2012, compared to the same period in the prior year. The increase in net revenues was primarily due to the increase in the overall volume of our products shipped. The number of microinverter units sold increased by 83% from approximately 614,000 units in the nine months ended September 30, 2011, to approximately 1,125,000 units in the nine months ended September 30, 2012. The overall increase in units sold was attributable primarily to sales of our third generation microinverter, which was introduced during the second quarter of 2011. In addition, the increase in unit sales was driven by deeper penetration of our existing customer base, the addition of new customers, and broader acceptance of our products resulting from, among other factors, investments made in sales and marketing.

Cost of Revenues and Gross Profit



                                    Three Months Ended                                    Nine Months Ended
                                       September 30,               Change in                September 30,               Change in
                                    2012           2011            $          %          2012           2011           $           %
                                                                     (In thousands, except percentages)
Cost of revenues                  $  44,489      $ 36,185      $   8,304       23 %    $ 119,878      $ 76,391      $ 43,487        57 %
Gross profit                         16,324         8,543          7,781       91 %       39,232        15,998        23,234       145 %
Gross profit percentage                  27 %          19 %                                   25 %          17 %

Three Months Ended September 30, 2012 and 2011

Cost of revenues increased by 23% for the three months ended September 30, 2012, compared to the same period in the prior year. The increase in cost of revenues was primarily due to an increase in the number of microinverter units sold to customers, consistent with the overall increase in net revenues as described above. Gross profit percentage increased by 8 percentage points during the three months ended September 30, 2012, compared to the same period in the prior year. The increase was attributable to a 5 percentage point increase from a larger mix of our higher-margin third generation microinverter, which has a lower per unit manufacturing cost than our second generation microinverter. The lower per unit cost was achieved primarily through design enhancements, which resulted in a higher level of product integration, and improved efficiencies on increased production volume. In addition, gross profit percentage improved by 5 percentage points in the third quarter of 2012 as a result of a reduction in usage of expedited air-freight for finished goods due to improvements in delivery scheduling. These increases were partially offset by a 2 percentage point reduction to gross profit percentage due to a net increase in warranty expense primarily attributable to changes in estimated replacement costs as well as the estimated long-term performance of our previous generation products.

Nine Months Ended September 30, 2012 and 2011

Cost of revenues increased by 57% for the nine months ended September 30, 2012, compared to the same period in the prior year. The increase in cost of revenues was primarily due to an increase in the number of microinverter units sold to customers, consistent with the overall increase in net revenues as described above. Gross profit percentage increased by 8 percentage points during the nine months ended September 30, 2012, compared to the same period in the prior year. The increase was primarily driven by a 7 percentage point increase from a larger mix of our higher-margin third generation microinverter, which has a lower per unit manufacturing cost than our second generation microinverter. The lower per unit cost was achieved primarily through design


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enhancements, which resulted in a higher level of product integration, and improved efficiencies on increased production volume. In addition, gross profit percentage improved by 2 percentage points in the nine months ended September 30, 2012 as a result of a reduction in usage of expedited air-freight for finished goods due to improvements in delivery scheduling. These increases were partially offset by a 1 percentage point reduction to gross profit percentage due to a net increase in warranty expense primarily attributable to changes in estimated replacement costs as well as the estimated long-term performance of our previous generation products.

Research and Development



                                     Three Months Ended                                 Nine Months Ended
                                        September 30,              Change in              September 30,              Change in
                                      2012          2011           $         %          2012          2011           $         %
                                                                 (In thousands, except percentages)
Research and development           $   10,571      $ 6,431      $ 4,140       64 %    $ 27,068      $ 17,919      $ 9,149       51 %
Percentage of net revenues                 17 %         14 %                                17 %          19 %

Three Months Ended September 30, 2012 and 2011

The increase in research and development expenses in the three months ended September 30, 2012, as compared to the same period in the prior year, was primarily attributable to a $2.1 million increase in personnel-related costs as we increased our headcount to support continued investment in our future product offerings. The remaining increase was due to third-party development costs for semiconductor design and other projects.

Nine Months Ended September 30, 2012 and 2011

The increase in research and development expenses in the nine months ended September 30, 2012, as compared to the same period in the prior year, was primarily attributable to a $6.1 million increase in personnel-related costs as we increased our headcount to support continued investment in our future product offerings. In addition, expenditures related to the use of outside services to develop our new products increased by $2.1 million. The remaining increase was due to higher depreciation costs from test equipment acquired for use in development and facilities related costs.

Sales and Marketing



                                      Three Months Ended                                 Nine Months Ended
                                         September 30,              Change in              September 30,              Change in
                                      2012           2011           $         %          2012          2011           $         %
                                                                  (In thousands, except percentages)
Sales and marketing                 $   7,039       $ 4,567      $ 2,472       54 %    $ 18,448      $ 11,842      $ 6,606       56 %
Percentage of net revenues                 12 %          10 %                                12 %          13 %

Three Months Ended September 30, 2012 and 2011

The increase in sales and marketing expenses in the three months ended September 30, 2012, as compared to the same period in the prior year, resulted primarily from increased staffing levels to support higher sales volumes and international expansion. Personnel-related costs increased by $1.7 million as a result of increases in sales and marketing headcount. The remaining increase was primarily due to expenses related to industry trade shows and increased promotional activities.

Nine Months Ended September 30, 2012 and 2011

The increase in sales and marketing expenses in the nine months ended September 30, 2012, as compared to the same period in the prior year, resulted primarily from increased staffing levels to support higher sales volumes and international expansion. Personnel-related costs increased by $5.1 million as a result of increases in sales and marketing headcount. The remaining increase was primarily due to expenses related to industry trade shows and increased promotional activities.

General and Administrative



                                       Three Months Ended                                 Nine Months Ended
                                          September 30,              Change in              September 30,              Change in
                                       2012           2011           $         %          2012          2011           $         %
                                                                   (In thousands, except percentages)
General and administrative           $   6,911       $ 3,980      $ 2,931       74 %    $ 18,698      $ 11,119      $ 7,579       68 %
Percentage of net revenues                  11 %           9 %                                12 %          12 %


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Three Months Ended September 30, 2012 and 2011

The increase in general and administrative expenses in the three months ended September 30, 2012, as compared to same period in the prior year, was primarily attributable to increases in personnel-related costs of $1.0 million due to additions to general and administrative headcount, professional service fees associated with accounting and legal services normally provided in connection with regulatory filings of a public company of $0.8 million, facilities-related costs of $0.7 million, board of director fees and director and officer liability insurance of $0.3 million.

Nine Months Ended September 30, 2012 and 2011

The increase in general and administrative expenses in the three months ended September 30, 2012, as compared to the same period in the prior year, was primarily attributable to increases in personnel-related costs of $2.7 million due to additions to general and administrative headcount. In addition, professional service fees associated with accounting services, legal services and services related to post-implementation of our new ERP system increase by $2.2 million. The remaining increase consists of facilities-related costs of $2.0 million and board of director fees and director and officer liability insurance of $0.6 million.

Other Expense, Net

Three Months Ended Nine Months Ended
September 30, Change in September 30, Change in
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