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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

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

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1.	DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

Enphase Energy, Inc. (the “Company”) is a global energy technology company. The Company delivers smart, easy-to-use solutions that manage solar generation, storage and communication on one intelligent platform. The Company revolutionized the solar industry with its microinverter technology and produces a fully integrated solar-plus-storage solution.

Basis of Presentation and Consolidation

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

Unaudited Interim Financial Information

These accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC for interim financial reporting. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring items, considered necessary to present fairly the Company’s financial condition, results of operations, comprehensive income, stockholders’ equity and cash flows for the interim periods indicated. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the operating results for the full year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Significant estimates and assumptions reflected in the financial statements include revenue recognition, allowance for doubtful accounts, stock-based compensation, inventory valuation, accrued warranty obligations, fair value of debt derivatives, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment, incremental borrowing rate for right-of-use assets and lease liability, probable loss recovery of tariff refunds, legal contingencies, and tax valuation allowance. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ materially from management’s estimates using different assumptions or under different conditions.

The worldwide spread of the COVID-19 virus has resulted in a global slowdown of economic activity which decreased demand for a broad variety of goods and services, including from our customers, while also disrupting sales channels and marketing activities for an unknown period of time and may continue to create significant uncertainty in future operational and financial performance. The Company expects this to have negative impact on its sales and its results of operations. In preparing the Company’s condensed consolidated financial statements in accordance with GAAP, the Company is required to make estimates, assumptions and judgments that affect the amounts reported in its financial statements and the accompanying disclosures. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. As of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update its estimates, judgments or revise the carrying value of its assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the Company’s financial statements.

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Summary of Significant Accounting Policies

There have been no significant changes to the Company’s significant accounting policies in Note 2. “Summary of Significant Accounting Policies,” of the notes to consolidated financial statements included in Item 8 of the Company’s 2019 Annual Report on Form 10-K other than the inclusion of the commitments and contingencies policies below.

Commitments and Contingencies

In the normal course of business, the Company is subject to loss contingencies and loss recoveries, such as legal proceedings and claims arising out of its business as well as tariff refunds. An accrual for a loss contingency or loss recovery is recognized when it is probable and the amount of loss or recovery can be reasonably estimated.

See Note 9. “Commitments and Contingencies” below for additional information.

Recently Issued Accounting Pronouncements Not Yet Effective

In August 2020, the FASB issued Account Standard Update (“ASU”) 2020-06, “Debt - Debt with Conversion and Other Options (subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (subtopic 815-40),” which reduces the number of accounting models in ASC 470-20 that require separate accounting for embedded conversion features. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost as long as no other features require bifurcation and recognition as derivatives. By removing those separation models, the effective interest rate of convertible debt instruments will be closer to the coupon interest rate. Further, the diluted net income per share calculation for convertible instruments will require the Company to use the if-converted method. The treasury stock method should no longer be used to calculate diluted net income per share for convertible instruments. The amendment will be effective for the Company beginning after December 15, 2021 and early adoption is permitted. The Company is evaluating the accounting, transition and disclosure requirements of the standard.

Recently Adopted Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” to reduce diversity in practice in accounting for the costs of implementing cloud computing arrangements that are service contracts. ASU 2018-15 allows entities to apply the guidance in the ASC 350-40, “Intangibles–Goodwill and Other–Internal-Use Software,” to determine which implementation costs are eligible to be capitalized as assets in a cloud computing arrangement that is considered a service contract. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. Entities have the option to apply the guidance prospectively to all implementation costs incurred after the date of adoption or retrospectively and are required to make certain disclosures in the interim and annual period of adoption. The Company adopted the new standard effective January 1, 2020 on a prospective basis and the adoption of this guidance did not have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with a current expected credit loss (CECL) model which will result in earlier recognition of credit losses. On January 1, 2020, the Company on a prospective basis adopted Topic 326, the measurement of expected credit losses under the CECL model is applicable to financial assets measured at amortized cost, including accounts receivable. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

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2.	REVENUE RECOGNITION

Disaggregated Revenue

The Company has one business activity, which is the design, manufacture and sale of solutions for the solar photovoltaic (“PV”) industry. Disaggregated revenue by primary geographical market and timing of revenue recognition for the Company’s single product line are as follows:

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	Three Months Ended September 30,								Nine Months Ended September 30,
	2020				2019				2020				2019
	(In thousands)
Primary geographical markets:
United States	$	139,924			$	150,686			$	420,315			$	328,281
International	38,579				29,371				89,271				86,020
Total	$	178,503			$	180,057			$	509,586			$	414,301
Timing of revenue recognition:
Products delivered at a point in time	$	166,729			$	170,152			$	475,707			$	384,888
Products and services delivered over time	11,774				9,905				33,879				29,413
Total	$	178,503			$	180,057			$	509,586			$	414,301

Contract Balances

Receivables, and contract assets and contract liabilities from contracts with customers are as follows:

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	September 30, 2020				December 31, 2019
	(In thousands)
Receivables	$	122,386			$	145,413
Short-term contract assets (Prepaid expenses and other assets)	16,973				15,055
Long-term contract assets (Other assets)	48,792				42,087
Short-term contract liabilities (Deferred revenues)	41,738				81,783
Long-term contract liabilities (Deferred revenues)	115,757				100,204

The Company receives payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets include deferred product costs and commissions associated with the deferred revenue and will be amortized along with the associated revenue. The Company had no asset impairment charges related to contract assets in the three and nine months ended September 30, 2020.

Significant changes in the balances of contract assets (prepaid expenses and other assets) during the period are as follows (in thousands):

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Contract Assets
Balance on December 31, 2019	$	57,142
Amount recognized	(12,942		)
Increase	21,565
Balance as of September 30, 2020	$	65,765

Contract liabilities are recorded as deferred revenue on the accompanying condensed consolidated balance sheets and include payments received in advance of performance obligations under the contract and are realized when the associated revenue is recognized under the contract.

Significant changes in the balances of contract liabilities (deferred revenues) during the period are as follows (in thousands):

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Contract Liabilities
Balance on December 31, 2019	$	181,987
Revenue recognized	(78,614		)
Increase due to billings	54,122
Balance as of September 30, 2020	$	157,495

Remaining Performance Obligations

Estimated revenue expected to be recognized in future periods related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period are as follows:

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	September 30, 2020
	(In thousands)
Fiscal year:
2020 (remaining three months)	$	11,888
2021	39,344
2022	34,296
2023	28,483
2024	23,259
Thereafter	20,225
Total	$	157,495

3.	OTHER FINANCIAL INFORMATION

Accounts Receivable, Net

The Company receives payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional.

Accounts receivable, net consist of the following:

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	September 30, 2020				December 31, 2019
	(In thousands)
Accounts receivable	$	122,734			$	145,977
Allowance for doubtful accounts	(348		)		(564		)
Accounts receivable, net	$	122,386			$	145,413

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Allowance for Doubtful Accounts

The Company maintains allowances for doubtful accounts for uncollectible accounts receivable. Management estimates anticipated losses from doubtful accounts based on financial health of customers, days past due, collection history and existing economic conditions. The following table sets forth activities in the allowance for doubtful accounts for the periods indicated.

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	Three Months Ended				Nine Months Ended
	September 30, 2020
	(In thousands)
Balance, at beginning of the period	$	296			$	564
Net charges to expenses	70				254
Write-offs, net of recoveries	(18		)		(470		)
Balance, at end of the period	$	348			$	348

Inventory

Inventory consist of the following:

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	September 30, 2020				December 31, 2019
	(In thousands)
Raw materials	$	7,148			$	4,197
Finished goods	30,387				27,859
Total inventory	$	37,535			$	32,056

Accrued Liabilities

Accrued liabilities consist of the following:

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	September 30, 2020				December 31, 2019
	(In thousands)
Salaries, commissions, incentive compensation and benefits	$	5,494			$	5,524
Customer rebates and sales incentives	19,965				24,198
Freight	3,861				4,908
Operating lease liabilities, current	4,245				3,170
Other	18,638				9,292
Total accrued liabilities	$	52,203			$	47,092

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4.	GOODWILL AND INTANGIBLE ASSETS

The Company’s goodwill and purchased intangible assets as of September 30, 2020 and December 31, 2019 are as follows:

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	September 30, 2020												December 31, 2019
	Gross				Accumulated Amortization				Net				Gross				Accumulated Amortization				Net
	(In thousands)
Goodwill	$	24,783			$	—			$	24,783			$	24,783			$	—			$	24,783
Intangible assets:
Other indefinite-lived intangibles	$	286			$	—			$	286			$	286			$	—			$	286
Intangible assets with finite lives:
Developed technology	13,100				(4,730		)		8,370				13,100				(3,093		)		10,007
Customer relationships	23,100				(4,917		)		18,183				23,100				(2,814		)		20,286
Total purchased intangible assets	$	36,486			$	(9,647	)		$	26,839			$	36,486			$	(5,907	)		$	30,579

Amortization expense related to finite-lived intangible assets are as follows:

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	Three Months Ended September 30,								Nine Months Ended September 30,
	2020				2019				2020				2019
	(In thousands)
Developed technology, and patents and licensed technology	$	545			$	546			$	1,637			$	1,638
Customer relationships	702				636				2,103				1,907
Total amortization expense	$	1,247			$	1,182			$	3,740			$	3,545

Amortization of developed technology, patents and licensed technology is recorded to sales and marketing expense. The developed technology acquired from the Company’s acquisition of SunPower Corporation’s (“SunPower”) microinverter business in August 2018 was embedded in the microinverters that SunPower sold to its customers. The Company does not actively use the developed technology acquired from SunPower and holds the developed technology to prevent others from using it. Accordingly, the Company accounts for the developed technology as a defensive intangible asset and amortizes the associated value over a period of six years from the date of acquisition.

The master supply agreement (“MSA”) entered into with SunPower in August 2018 provides the Company with the exclusive right to supply SunPower with module level power electronics for a period of five years, with options for renewals. The exclusivity arrangement extends throughout the term of the MSA, which comprises all of the expected cash flows from the customer relationship intangible asset, and was a condition to, and was an essential part of the acquisition of SunPower’s microinverter business by the Company. As the fair value ascribed to the customer relationship intangible asset represents payments to a customer, the Company amortizes the value of the customer relationship intangible asset as a reduction to revenue using a pattern of economic benefit method over a useful life of nine years.

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5.	WARRANTY OBLIGATIONS

The Company’s warranty activities were as follows:

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	Three Months Ended September 30,								Nine Months Ended September 30,
	2020				2019				2020				2019
	(In thousands)
Warranty obligations, beginning of period	$	37,907			$	32,994			$	37,098			$	31,294
Accruals for warranties issued during period	1,939				1,571				4,229				3,741
Changes in estimates	3,869				3,884				7,294				5,387
Settlements	(3,274		)		(3,780		)		(9,122		)		(8,282		)
Increase due to accretion expense	832				562				2,410				1,663
Other	2,506				(607		)		1,870				821
Warranty obligations, end of period	43,779				34,624				43,779				34,624
Less: current portion	(10,760		)		(8,757		)		(10,760		)		(8,757		)
Noncurrent	$	33,019			$	25,867			$	33,019			$	25,867

Changes in Estimates

For the three and nine months ended September 30, 2020, the Company recorded additional warranty expense of $3.9 million and $7.3 million, respectively, based on continuing analysis of field performance data and diagnostic root-cause failure analysis primarily relating to its prior generation products.

6.	FAIR VALUE MEASUREMENTS

The accounting guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:

•	Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of such assets or liabilities do not entail a significant degree of judgment.

•	Level 2—Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

•	Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

Level 1. The Company considers all highly liquid investments, such as certificates of deposit and money market instruments with maturities of three months or less at the time of acquisition to be cash equivalents. For all periods presented, its cash balances consist of amounts held in non-interest-bearing and interest-bearing deposits and money market accounts and are within Level 1 of the fair value hierarchy because they are valued using quoted market prices for identical instruments in active markets. As of September 30, 2020, cash and cash equivalents balance includes money market funds of $651.6 million.

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Level 2.

Convertible Notes due 2025 Derivatives

On March 9, 2020, the Company issued $320 million aggregate principal amount of 0.25% convertible senior notes due 2025 (the “Notes due 2025”). Concurrently with the issuance of Notes due 2025, the Company entered into privately-negotiated convertible note hedge and warrant transactions which in combination are intended to reduce the potential dilution from the conversion of the Notes due 2025. On May 20, 2020, at the Company’s annual meeting of stockholders, the stockholders approved an amendment to its certificate of incorporation to increase the number of authorized shares of the Company’s common stock. As a result, the Company satisfied the share reservation condition (as defined in the relevant indenture associated with the Notes due 2025). The Company will now be able to settle the Notes due 2025, convertible notes hedge and warrants through payment or delivery, as the case may be, of cash, shares of its common stock or a combination thereof, at the Company’s election. Accordingly, on May 20, 2020, the embedded derivative liability, convertible notes hedge and warrants liability were remeasured at a fair value of $116.3 million, $117.1 million and $96.4 million, respectively, and were then reclassified to additional paid-in-capital in the condensed consolidated balance sheet in the second quarter of 2020 and are no longer remeasured as long as they continue to meet the conditions for equity classification. See Note 8. “Debt” for additional information related to these transactions.

The fair value of the Convertible notes embedded derivative was estimated using Binomial Lattice model and the fair value of Convertible notes hedge and Warrants liability was estimated using Black-Scholes-Merton model. The significant observable inputs, either directly or indirectly, and assumptions used in the models to calculate the fair value of the derivatives include the Company’s common stock price, exercise price of the derivatives, risk-free interest rate, volatility, annual coupon rate and remaining contractual term.

Notes due 2025 and Notes due 2024. The Company carries the Notes due 2025 and Notes due 2024 (as defined below) at face value less unamortized discount and issuance costs on its condensed consolidated balance sheets. The fair value of the Notes due 2025 and Notes due 2024 of $506.9 million and $408.8 million, respectively, was determined based on the closing trading prices per $100 principal amount as of the last day of trading for the period. The Company considers the fair value of the Notes due 2025 and Notes due 2024 to be a Level 2 measurement as they are not actively traded.

Level 3.

Warranty Obligations.

The following table presents the Company’s warranty obligation that were measured at fair value on a recurring basis and its categorization within the fair value hierarchy.

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	September 30, 2020				December 31, 2019
	(In thousands)
	Level 3				Level 3
Liabilities:
Warranty obligations
Current	$	7,560			$	6,794
Non-current	18,188				13,012
Total warranty obligations measured at fair value	25,748				19,806
Total liabilities measured at fair value	$	25,748			$	19,806

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Fair Value Option for Warranty Obligations Related to Microinverters Sold Since January 1, 2014

The Company estimates the fair value of warranty obligations by calculating the warranty obligations in the same manner as for sales prior to January 1, 2014 and applying an expected present value technique to that result. The expected present value technique, an income approach, converts future amounts into a single current discounted amount. In addition to the key estimates of failure rates, claim rates and replacement costs, the Company used certain Level 3 inputs which are unobservable and significant to the overall fair value measurement. Such additional assumptions included a discount rate based on the Company’s credit-adjusted risk-free rate and compensation comprised of a profit element and risk premium required of a market participant to assume the obligation.

The following table provides information regarding changes in nonfinancial liabilities related to the Company’s warranty obligations measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods indicated.

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	Three Months Ended September 30,								Nine Months Ended September 30,
	2020				2019				2020				2019
	(In thousands)
Balance at beginning of period	$	21,132			$	14,856			$	19,806			$	11,757