Forward-Looking Statements
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K This discussion contains forward-looking statements reflecting our current expectations and involves risks and uncertainties. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend," "potential" or "continue" or the negative of these terms or other comparable terminology. For example, statements regarding our expectations as to future financial performance, expense levels and liquidity sources are forward-looking statements. Our actual results and the timing of events may differ materially from those discussed in our forward-looking statements as a result of various factors, including those discussed below and those discussed in the section entitled "Risk Factors" and elsewhere in this report.

Overview
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 3,000,000 microinverters as of December 31, 2012. Our products are certified for installation in the United States, Canada, France, the United Kingdom, Italy 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. U.S. net revenues have historically comprised more than 85% of our business, with the remainder from Canada and Europe.
We have experienced significant revenue growth since our first commercial shipment in mid-2008. Our net revenues were $216.7 million, $149.5 million and $61.7 million for 2012, 2011 and 2010, respectively, which reflects deeper market penetration and broader acceptance of microinverter technology. We incurred net losses of $38.2 million, $32.3 million and $21.8 million for 2012, 2011 and 2010, respectively, as we invested significant resources to develop new product offerings and focused on critical research and development activities required to reduce product costs, increase performance and foster innovation. We also expanded our operations into new product markets and geographies and invested in our operational infrastructure to support anticipated growth. Our full-time employee headcount has grown from 153 at December 31, 2010, to 298 at December 31, 2011 and to 384 at December 31, 2012. We do not expect similar growth rates in headcount in the near term. We believe the investments we have made in our corporate infrastructure will enable us to deliver higher levels of net revenues without proportionate increases in research and development, sales and marketing, and general and administrative expenses.

Components of 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, warranty, manufacturing 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, product mix, warranty costs and sales volume fluctuations resulting from 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 proportionate increases in research and development, 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 and enhance reliability. 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 the United States and Canada. 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 to the United Kingdom 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 proportionate 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 addressable markets in the future.

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. General and administrative expense also includes facilities costs 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 proportionate 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 prior to our initial public offering of our common stock, or IPO, 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 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. As we have expanded the sale of products to customers outside the United States, we have become subject to taxation

based on the foreign statutory rates in the countries where these sales took place. As sales in foreign jurisdictions increase in the future, our effective tax rate may fluctuate accordingly. 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. In 2012, a provision for income taxes of $0.7 million has been recognized related to our foreign operations. Due to the history of losses we have generated since inception, we have recorded a full valuation allowance on our net deferred tax assets.

Summary Consolidated Statements of Operations

The following table sets forth a summary of our consolidated statements of
operations for the periods presented (in thousands):

                                   Year Ended December 31,
                              2012          2011          2010
Net revenues               $ 216,678     $ 149,523     $  61,661
Cost of revenues             161,390       120,454        55,159
Gross profit                  55,288        29,069         6,502
Operating expenses:
Research and development      35,601        25,099        14,296
Sales and marketing           25,973        17,454         6,558
General and administrative    24,875        15,228         6,365
Total operating expenses      86,449        57,781        27,219
Loss from operations         (31,161 )     (28,712 )     (20,717 )
Other expense, net            (6,406 )      (3,578 )      (1,060 )
Loss before income taxes     (37,567 )     (32,290 )     (21,777 )
Provision for income taxes      (651 )           -             -
Net loss                   $ (38,218 )   $ (32,290 )   $ (21,777 )

Comparison of 2012, 2011 and 2010

Net Revenues

2012 Compared to 2011. Net revenues increased by 45% to $216.7 million in 2012 compared to 2011. 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 1,002,000 units in 2011, to approximately 1,510,000 units in 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. During 2012, we continued to experience a modest decline in the average selling price of our microinverters. The decline in average selling price reflects and is consistent with recent trends in the solar industry.

2011 Compared to 2010. Net revenues increased by 142% to $149.5 million in 2011compared to 2010. 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 142% from approximately 414,000 units in 2010, to approximately 1,002,000 units in 2011. 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 Margin

                     Year Ended December 31,           Change in           Year Ended December 31,           Change in
                       2012            2011           $          %           2011             2010          $          %
                          (In thousands, except percentages)                    (In thousands, except percentages)
Cost of revenues  $    161,390      $ 120,454     $ 40,936       34 %   $    120,454       $ 55,159     $ 65,295      118 %
Gross profit            55,288         29,069       26,219       90 %         29,069          6,502       22,567      347 %
Gross margin              25.5 %         19.4 %                                 19.4 %         10.5 %

2012 Compared to 2011. Cost of revenues increased by 34% in 2012, as compared to 2011. 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 increased by 90% in 2012, as compared to 2011, primarily due to increased revenue. Gross margin increased by 6 percentage points to 25.5% in 2012, as compared to 19.4% in 2011. The increase was primarily driven by a 8 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 semiconductor integration, and improved efficiencies on increased production volume. In addition, gross margin improved by 2 percentage points in 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 4 percentage point reduction to gross margin due to a net increase in warranty expense primarily attributable to changes in estimates to warranty obligations associated with our previous generation products.

2011 Compared to 2010. Cost of revenues increased by 118% in 2011, as compared to 2010. 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 increased by 347% in 2012, as compared to 2011, primarily due to increased revenue. Gross margin increased by 9 percentage points to 19.4% in 2011 compared to 10.5% in 2010. Substantially all of this increase in gross margin was driven by sales of our higher-margin third generation microinverter, which became available in June 2011and has a lower per unit manufacturing cost than our second generation microinverter. The increase in gross margin was partially offset by a 2 percentage point increase in usage of expedited air-freight for finished goods and an 1 percentage point increase in warranty expense.

Research and Development

                      Year Ended December 31,           Change in           Year Ended December 31,           Change in
                        2012             2011          $          %           2011             2010          $          %
                           (In thousands, except percentages)                    (In thousands, except percentages)
Research and
development        $     35,601       $ 25,099     $ 10,502       42 %   $     25,099       $ 14,296     $ 10,803       76 %
Percentage of net
revenues                     16 %           17 %                                   17 %           23 %

2012 Compared to 2011. Research and development expenses increased by $10.5 million in 2012 as compared to 2011, primarily due to a $7.8 million increase in personnel-related costs as a result of increases in research and development headcount. The increase in headcount reflects our continuing investment in enhancements of existing products, as well as efforts to bring new products to market. In addition, the use of outside services for the development of new products and depreciation and amortization related to research and development equipment increased by $1.6 million and $1.0 million, respectively, as compared to the prior year period.

2011 Compared to 2010. Research and development expenses increased by $10.8 million in 2011 as compared to 2010, primarily due to a $7.1 million increase in personnel-related costs as a result of increases in research and development headcount. The increase in headcount reflects our continuing investment in enhancements of existing products as well as efforts to bring new products to market, including our third generation microinverter. In addition, depreciation and amortization related to research and development equipment and the use of outside services for the development of new products increased by $2.2 million and $1.4 million, respectively, as compared to the prior year period. Sales and Marketing

                      Year Ended December 31,          Change in           Year Ended December 31,           Change in
                        2012             2011          $         %           2011             2010          $          %
                           (In thousands, except percentages)                   (In thousands, except percentages)
Sales and
marketing          $     25,973       $ 17,454     $ 8,519       49 %   $     17,454       $  6,558     $ 10,896      166 %
Percentage of net
revenues                     12 %           12 %                                  12 %           11 %

2012 Compared to 2011. Sales and marketing expenses increased by $8.5 million in 2012 as compared to 2011, primarily due to increases in sales and marketing headcount to support higher sales volumes and international expansion. Personnel-related costs increased by $6.5 million, which included a $2.4 million increase due to additions in sales and marketing headcount for international locations. Costs related to trade shows, the use of outside services and facilities related costs contributed an additional $1.0 million to the increase in 2012. In addition, bad debt expense increased by $0.9 million in 2012 as compared to 2011.

2011 Compared to 2010. Sales and marketing expenses increased by $10.9 million in 2011 as compared to 2010, primarily due to increases in sales and marketing headcount to support higher sales volumes and international expansion. Personnel-related costs increased by $8.1 million, which included a $2.3 million increase due to additions in sales and marketing headcount for international locations. In addition, costs related to trade shows, the use of outside services and other facilities related costs contributed an additional $1.2 million, $1.1 million and $0.5 million, respectively, to the increase in 2011.

General and Administrative

                      Year Ended December 31,          Change in           Year Ended December 31,          Change in
                        2012             2011          $         %           2011             2010          $         %
                           (In thousands, except percentages)                   (In thousands, except percentages)
General and
administrative     $     24,875       $ 15,228     $ 9,647       63 %   $     15,228       $  6,365     $ 8,863      139 %
Percentage of net
revenues                     11 %           10 %                                  10 %           10 %

2012 Compared to 2011. General and administrative expenses increased by $9.6 million in 2012 as compared to 2011, primarily due to a $3.6 million increase in personnel-related costs as a result of increases in general and administrative headcount and a $2.8 million increase in accounting, legal and other professional services incurred to assist us with building an infrastructure to support operating as a public company. In addition, depreciation and amortization and facilities costs contributed $2.4 million to the increase due to increased capital expenditures and facilities costs incurred to support our increased headcount and the expansion of our operations. The remaining $0.8 million of the increase was attributable to insurance and other corporate expenses.

2011 Compared to 2010. General and administrative expenses increased by $8.9 million in 2011 as compared to 2010, primarily due to a $4.7 million increase in personnel-related costs as a result of increases in general and administrative headcount and a $2.5 million increase in accounting, legal and other professional services incurred to assist us with building an infrastructure to support public company requirements. In addition, depreciation and amortization and facilities costs contributed $1.7 million to the increase in 2011 compared to 2010 as a result of increased capital expenditures and facilities costs incurred to support our increased headcount and the expansion of our operations. Other Income (Expense), Net

Year Ended December 31, Change in Year Ended December 31, Change in 2012 2011 $ % 2011 2010 $ %

2012 Compared to 2011. Other expense increased by $2.8 million in 2012 as compared to 2011. The increase was attributable to a $3.4 million increase in interest expense from write-offs of deferred financing costs and debt discount as a result of the early extinguishment of convertible debt and term loans and the termination of a revolving line of credit. In addition, foreign currency losses contributed $0.4 million to the increase. The increases were partially offset by a $0.8 million decrease in the fair value of our convertible preferred stock warrant prior to the liability being reclassified as equity upon our IPO. 2011 Compared to 2010. Other expense increased by $2.5 million in 2011 as compared to 2010. This increase was primarily due to an increase in interest expense from higher debt balances and non-cash interest charges. Non-cash interest charges totaled $1.8 million and $0.1 million for 2011 and 2010, respectively, and consisted of amortization of debt discounts as well as paid-in-kind interest on our convertible notes.

Liquidity and Capital Resources

Prior to our IPO in April 2012, we funded our operations primarily through private placements of convertible preferred stock and convertible notes, and proceeds from term loans. On April 4, 2012, we completed our IPO, in which we issued and sold 10,315,151 shares of our common stock and received net proceeds of approximately $53.8 million. As of December 31, 2012, we had $45.3 million in cash and cash equivalents, which are held primarily in bank deposits and money market accounts, and $61.1 million in working capital. The following table summarizes our cash flows for the periods indicated:

                                                  Year Ended December 31,
                                             2012          2011          2010
                                                      (In thousands)
Net cash used in operating activities     $ (44,645 )   $    (367 )   $ (17,852 )
Net cash used in investing activities       (12,990 )     (14,662 )      (3,262 )
Net cash provided by financing activities    51,436        26,482        52,465

Net Cash Used in Operating Activities

We have experienced negative operating cash flows as we invested significant resources to develop new product offerings and focused on critical research and development activities required to reduce product costs, increase performance and foster innovation. In addition, we used cash to expand our operations into new product markets and geographies and invested in our operational infrastructure to support the growth of our business.
For 2012, net cash used in operating activities was $44.6 million primarily resulting from a net loss of $38.2 million. The net loss was partially offset by non-cash items including, depreciation and amortization of $5.6 million, stock-based compensation of $4.8 million and interest expense of $4.8 million. In addition, the effect of changes in net operating assets and liabilities resulted in the use of cash totaling $22.2 million.
The primary use of cash from changes in net operating assets and liabilities was attributable to an $18.6 million decrease in deferred revenues, which was primarily due to shipments of products during 2012 for which upfront payments of $23.0 million were received from customers in December 2011, as discussed below. In addition, other uses of cash from changes in net operating assets and liabilities included an $11.0 million increase in accounts receivable and an $8.6 million increase in inventory-related purchases, both consistent with the overall growth of our business in 2012 as compared to 2011. Offsetting these . . .