Enphase Energy, Inc. - Quarter Report: 2012 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended September 30, 2012

or

For the transition period from              to             

Commission File Number: 001-35480

Enphase Energy, Inc.

(Exact name of registrant as specified in its charter)

(707) 774-7000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of October 31, 2012, there were 40,829,676 shares of the registrant’s common stock outstanding, $0.00001 par value per share.

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ENPHASE ENERGY, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012

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PART I. FINANCIAL INFORMATION

ENPHASE ENERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

See accompanying notes to the unaudited condensed consolidated financial statements.

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ENPHASE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

See accompanying notes to the unaudited condensed consolidated financial statements.

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ENPHASE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

See accompanying notes to the unaudited condensed consolidated financial statements.

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ENPHASE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

See accompanying notes to the unaudited condensed consolidated financial statements.

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ENPHASE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes to the unaudited condensed consolidated financial statements.

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ENPHASE ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

Enphase Energy, Inc. and subsidiaries (the “Company”) designs, develops, and sells microinverter systems for the solar photovoltaic industry. The Company was incorporated in 2006 and began selling its products in 2008. The Company’s microinverter system consists of (i) an Enphase microinverter that attaches to the racking beneath solar modules and converts direct current (“DC”) power to grid-compliant alternating current (“AC”) power; (ii) an Envoy communications gateway device that collects and transmits performance information from each solar module to the Company’s hosted data center; and (iii) the Enlighten web-based software platform that collects and processes this information to enable customers to monitor and manage their solar power systems. The Company sells microinverter systems primarily to distributors who resell them to solar installers. The Company also sells directly to large installers as well as through original equipment manufacturers (“OEMs”) and strategic partners.

On April 4, 2012, the Company consummated its initial public offering (“IPO”). As a result, the following transactions were recorded in the Company’s consolidated financial statements during the second quarter of 2012:

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—The accompanying interim condensed consolidated financial statements are unaudited. These interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The December 31, 2011 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. However, the Company believes that the disclosures are adequate to ensure that the information presented is not misleading. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Prospectus filed pursuant to Rule 424(b) under the Securities Act, as amended (the “Exchange Act”) with the SEC on March 30, 2012 (the “Prospectus”).

In the opinion of management, the accompanying condensed consolidated financial statements of the Company contain all adjustments, including normal recurring adjustments, necessary to present fairly the statement of financial position as of September 30, 2012, its results of operations and statements of cash flows for the three and nine months ended September 30, 2012 and 2011, respectively. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

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The accompanying condensed consolidated financial statements reflect the application of certain significant accounting policies. There have been no material changes to the Company’s significant accounting policies that are disclosed in its audited consolidated financial statements and notes thereof as of December 31, 2011 included in its Prospectus.

3. INVENTORY

Inventory as of September 30, 2012 and December 31, 2011 consists of the following (in thousands):

During the nine months ended September 30, 2012, $1.6 million of inventory write-downs were offset by a corresponding decrease in the warranty expense related to such inventory (see Note 5). During the nine months ended September 30, 2011, $0.4 million of the inventory write-down was offset by a corresponding decrease in the warranty expense related to such inventory (see Note 5).

4. PREPAYMENT TO SUPPLIER

The Company made a prepayment of $5.0 million to its primary contract manufacturer in August 2012 for inventories to be delivered in the fourth quarter of 2012.

5. WARRANTY OBLIGATIONS

The Company’s microinverters include a limited warranty of 15 to 25 years. The potential liability is generally in the form of product replacement. Estimated warranty costs are included in cost of revenues and are accrued at the time of sale on a per unit sold basis. Such estimates are based on various factors including historical warranty claims, anticipated frequency of future warranty claims, and assumptions about the frequency of product failures, derived from results of accelerated lab testing, field monitoring and the Company’s reliability estimates. Product failure rates are estimated primarily by using field monitoring of the actual failure rates of the microinverters the Company has sold to date. Predicted failure rates are updated periodically based on field return data. Corresponding replacement costs are updated periodically to reflect changes in the actual and estimated production costs for the Company’s microinverters. The Company’s estimated costs of warranty for previously sold products may change to the extent future products are not compatible with earlier generation products under warranty.

Changes in the Company’s product warranty liability during the nine months ended September 30, 2012 and 2011 were as follows (in thousands):

During the three months ended September 30, 2012, warranty expense includes $2.9 million resulting from changes in estimates which increased warranty expense by $4.8 million related to analyses of accumulated information with respect to the estimated long-term performance and related replacement costs of our previous generation products, offset by changes in estimates which decreased warranty expense by $1.9 million resulting from decreases in estimated replacement, servicing and shipping costs.

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During the nine months ended September 30, 2012, warranty expense includes $2.5 million resulting from changes in estimates which increased warranty expense by $6.0 million related to analyses of accumulated information with respect to the estimated long-term performance and related replacement costs of our previous generation products, offset by changes in estimates which decreased warranty expense by $1.9 million resulting from decreases in estimated replacement, servicing and shipping costs and a change in estimate which decreased warranty expense by $1.6 million to reflect lower replacement costs resulting from inventory write-downs (see Note 3).

During the nine months ended September 30, 2011, warranty expense includes $0.8 million resulting from changes in estimates which increased warranty expense by $1.2 million to reflect increased estimated replacement costs for certain products and increases to other estimated cost assumptions, offset by a change in estimate which decreased warranty expense by $0.4 million to reflect lower replacement costs resulting from inventory write-downs (see Note 3).

6. DERIVATIVE INSTRUMENTS

Foreign Currency Forward Contracts—The Company operates and conducts business in foreign countries where its foreign entities use the local currency as their respective functional currency and, as a result, are exposed to movements in foreign currency exchange rates. In June 2012, the Company began to utilize foreign currency forward contracts to reduce the impact of foreign currency fluctuations related to anticipated cash receipts from expected future revenues denominated in Euros and intercompany transaction gains or losses. The foreign currency forward contracts are accounted for as derivatives whereby the fair value of the contracts is reported as other current assets or current liabilities in the accompanying condensed consolidated balance sheets, and gains and losses resulting from changes in the fair value are reported in other income (expense), net, in the accompanying condensed consolidated statements of operations.

A summary of open foreign currency forward contracts at September 30, 2012 is as follows (all open contracts are obligations for the Company to deliver the foreign currency) (in thousands):

For the three and nine months ended September 30, 2012, the Company recognized losses of $249,000 and $236,000, respectively, related to foreign currency forward contracts.

7. 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 required to be 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:

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The following table presents the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

8. LONG-TERM DEBT

The Company’s long-term debt consists of the following (in thousands):

As of September 30, 2012, the Company was a party to three debt agreements: (i) the term loan with Horizon Technology Finance Corporation (“Horizon”), (ii) the equipment financing facility with Hercules Technology Growth Capital, Inc. (“Hercules”), and (iii) the revolving line of credit under a loan and security agreement with Bridge Bank, National Association and Comerica Bank. Each of these debt agreements is described in greater detail in the Prospectus.

On November 7, 2012, the Company repaid the entire outstanding term loan balance of $7.4 million owed to Horizon and entered into a new credit facility with Hercules, pursuant to which Hercules agreed to make an initial term loan of $7.4 million and provide up to $15.6 million of additional borrowing capacity. The initial term loan will bear interest at an annual rate equal to the greater of 11.5% or the prime rate plus 8.25% with a 45-month term. All borrowings are collateralized by substantially all assets of the Company and are subject to certain financial covenants and events of default. Borrowings of additional term loans are subject to certain conditions precedent. All loans under the facility mature on August 1, 2016. As of November 13, 2012, the $23.0 million credit facility has not been drawn upon.

On November 7, 2012, the Company terminated its $33.0 million revolving line of credit under a loan and security agreement with Bridge Bank, National Association and Comerica, which did not have an outstanding balance. In its place, the Company entered into a new $50.0 million senior revolving credit facility with Wells Fargo Bank, National Association with a term of three years (the “Revolver”). The amounts available under the Revolver are based on the sum of 85% of eligible domestic accounts receivable and a percentage of inventory (valued at the lesser of 65% of cost or 85% of liquidation value). Amounts borrowed under the Revolver are secured by a first priority lien on cash, accounts receivable and inventory and a second priority lien on all of the Company’s assets, excluding its intellectual property. The Revolver contains certain financial covenants and events of default. Borrowings under the Revolver have an interest rate based on the LIBOR or prime rate plus between 250 to 425 basis points, depending on the undrawn availability under the Revolver. As of November 13, 2012, the Revolver has not been drawn upon.

9. CONVERTIBLE FACILITY

In 2011, the Company entered into a junior secured convertible loan facility, or Convertible Facility, with certain existing preferred stockholders that provided for up to $80.0 million in borrowings. Pursuant to the facility, the Company issued $20.0 million in convertible notes, or Convertible Notes, which provided the note holders the right to convert, at their election, all principal and accrued interest into shares of the Company’s common stock at a conversion price of $8.8984 per share. In addition, the Company issued to the note holders (i) 352,665 shares of common stock at $5.27 per share, and (ii) warrants to purchase 131,516 shares of the Company’s common stock at $5.27 per share that were immediately exercisable and have a contractual term of five years from the date of issuance. The Company recorded $3.1 million in debt discounts and debt issuance costs related to the transactions at the respective issuance dates.

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On March 27, 2012, the Convertible Facility was amended to provide for the automatic conversion of the principal and accrued paid-in-kind interest into common stock upon consummation of an initial public offering at a conversion price equal to the lesser of $8.8984 or the IPO price. On April 4, 2012, the convertible notes and accrued paid-in-kind interest automatically converted into 3,533,988 shares of common stock, based upon the IPO price of $6.00 per share. As a result of the conversion, the Company recorded a charge of $2.8 million to interest expense during the nine months ended September 30, 2012 for the extinguishment of debt relative to the unamortized debt issuance costs and debt discounts. Pursuant to its terms, the Convertible Facility terminated upon consummation of the IPO on April 4, 2012.

10. COMMITMENTS AND CONTINGENCIES

Contingencies—From time to time, the Company may become involved in litigation. Management is not currently aware of any litigation matters or other contingencies that could have a material adverse effect on the financial position, results of operations, or cash flows of the Company.

11. STOCKHOLDERS’ EQUITY

Reverse Stock Split—On March 8, 2012, the Company’s board of directors approved a 1-for-9.08 reverse stock split of the Company’s common stock and convertible preferred stock, which became effective on March 23, 2012 upon the filing of the Company’s amended and restated certificate of incorporation. On the effective date, (i) every 9.08 shares of authorized, issued and outstanding common stock was reduced to one share of authorized, issued and outstanding common stock, (ii) every 9.08 shares of authorized, issued and outstanding convertible preferred stock was reduced to one share of authorized, issued and outstanding convertible preferred stock, (iii) the number of shares of common stock into which each outstanding warrant or option to purchase common stock is exercisable was proportionally reduced on a 1-for-9.08 basis, (iv) the number of shares of convertible preferred stock into which each outstanding warrant to purchase convertible preferred stock is exercisable was proportionately reduced on a 1-for-9.08 basis, (v) the number of shares of common stock issuable upon conversion of each convertible note (including shares issuable related to paid-in-kind interest) was proportionately reduced on a 1-for-9.08 basis, and (vi) all per share prices, conversion prices and exercise prices were proportionately increased. All references to share numbers, share prices, conversion prices and exercise prices have been adjusted within these unaudited condensed consolidated financial statements, on a retroactive basis, to reflect this 1-for-9.08 reverse stock split.

Series A, B, C, D and E Convertible Preferred Stock

Prior to the consummation of the Company’s initial public offering on April 4, 2012, the Company had the following convertible preferred stock outstanding, all of which was converted to common stock in connection with the IPO on April 4, 2012 (see Note 1):

Warrants

Warrants to Purchase Convertible Preferred Stock

In September 2008, the Company entered into a strategic collaboration agreement with a third party, under which the third party would test and evaluate the Enphase microinverter for European certification. As part of the agreement, the third party was granted a warrant to purchase 11,013 shares of Series C convertible preferred stock at an approximate price of $11.67 per share. Exercisability of the warrant was contingent upon completion of several milestones prior to the Company’s IPO. As a result of the Company’s IPO in April 2012, the warrant expired due to non-achievement of the performance criteria.

During 2010 and 2011, the Company issued warrants to purchase up to an aggregate of 187,243 shares of Series E convertible preferred stock with a weighted-average exercise price of approximately $6.54 per share in connection with financing arrangements. The warrants were immediately exercisable upon issuance and have a contractual term of 10 years from the date of issuance. Upon the consummation of the IPO in April 2012, these warrants automatically converted into warrants to purchase 199,458 of shares of common stock. As a result, the warrants were no longer subject to fair value accounting and the Company reclassified the liability to additional paid-in capital in the second quarter of 2012. As of September 30, 2012, these warrants remained outstanding.

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The following table summarizes the changes in fair value (see Note 7) of the Company’s convertible preferred stock warrant liability and subsequent reclassification to additional paid-in capital (in thousands):

Warrants to Purchase Common Stock

In February 2010, the Company entered into a supply and services agreement with a customer. As part of the agreement, the Company issued a warrant to purchase up to 11,013 shares of the Company’s common stock at a price of $4.54 per share as a sales incentive to the customer. The customer was required to meet certain minimum purchase thresholds by March 4, 2012 in order for the warrant to become exercisable. Effective March 5, 2012, this warrant expired due to non-achievement of the performance criteria.

In connection with the Convertible Facility (see Note 9), the Company issued warrants to purchase 131,516 shares of the Company’s common stock at approximately $5.27 per share that are immediately exercisable with a contractual term of five years from the date of issuance. As of September 30, 2012, these warrants remained outstanding.

12. STOCK-BASED COMPENSATION

Equity Incentive Plans

Prior to the adoption and effectiveness of the 2011 Equity Incentive Plan (the “2011 Plan”), certain employees, officers, directors and non-employees were granted options to purchase shares of common stock and stock purchase rights under the 2006 Equity Incentive Plan (“the “2006 Plan”). In 2011, the board of directors adopted the 2011 Plan as a successor to the 2006 Plan. On March 29, 2012, the 2011 Plan became effective immediately upon the execution and delivery of the underwriting agreement for the Company’s IPO. As a result, no additional stock options or other stock awards will be granted under the 2006 Plan. All outstanding stock options and other equity awards previously granted under the 2006 Plan will remain subject to the terms of the 2006 Plan.

2006 Plan—Under the 2006 Plan, equity awards permitted to be issued include incentive stock options (“ISOs”), nonstatutory stock options (“NSOs”), and stock purchase rights. ISOs may be granted only to employees (including officers and directors who are also employees) of the Company, and NSOs and restricted stock awards may be granted to employees, officers, directors and non-employees of the Company. Equity awards granted under the 2006 Plan generally vest over a four-year period from the date of grant with a contractual term of up to 10 years. Common shares purchased under the 2006 Plan are subject to certain restrictions, including the right of first refusal by the Company for sale or transfer of these shares to outside parties. The Company’s right of first refusal terminated upon completion of the IPO (see Note 1). As of September 30, 2012 and December 31, 2011, stock options to purchase 6.4 million and 6.3 million shares of common stock, respectively, were outstanding under the 2006 Plan.

2011 Plan—Under the 2011 Plan, the Company may, initially, issue up to 2,643,171 shares of its common stock pursuant to stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards, and other forms of equity compensation, or collectively, stock awards, all of which may be granted to employees, including officers, and to non-employee directors and consultants. However, the Company considers stock options as its primary vehicle for equity compensation. Options granted under the 2011 Plan before August 2012 generally expire 10 years after the grant date and options granted in or after August 2012 generally expire seven years after the grant date. Equity awards granted under the 2011 Plan generally vest over a four-year period from the date of grant based on continued employment. The number of shares of our common stock reserved for issuance under the 2011 Plan will automatically increase, on each January 1, by 4.5% of the total number of shares of our common stock outstanding on December 31 of the preceding calendar year, or such lesser number of shares of common stock as determined by the board of directors. As of September 30, 2012, there were 336,294 shares of common stock available for issuance pursuant to future grants under the 2011 Plan.

2011 Employee Stock Purchase Plan—In 2011, the board of directors adopted the 2011 Employee Stock Purchase Plan (“ESPP”) which became effective immediately upon the execution and delivery of the underwriting agreement for the Company’s IPO on March 29, 2012. The ESPP initially authorizes the issuance of 669,603 shares of our common stock pursuant to purchase rights granted to employees. The number of shares of our common stock reserved for issuance will automatically increase, on each January 1, by 330,396 shares of our common stock or a lesser number of shares of common stock as determined by our board of directors. The ESPP is administered by the board of directors, who has delegated its authority to administer the ESPP to the compensation committee.

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The ESPP is implemented by concurrent offering periods, the duration of which may not exceed 27 months. An offering period may contain up to four interim purchase periods. Except for the first offering period, offering periods shall consist of the 24 month periods commencing on each May 1 and November 1 of a calendar year. The first offering period commenced on the effective date of the Company’s IPO and will end on April 30, 2014.

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

The board of directors may terminate or amend the ESPP, subject to stockholder approval in some circumstances. Unless terminated earlier by the board of directors, the ESPP has a term of ten years.

The first offering period began on March 29, 2012 and has a duration of 25 months consisting of four purchase periods. For the first purchase period only, eligible participants are permitted to remit catch-up amounts (up to a maximum aggregate withholding of 15 percent of their earnings during the first purchase period) to the Company at any time through October 15, 2012. As such, a mutual understanding of the key terms between the employer and employee has not yet been reached. Accordingly, the first offering period will not have a grant date for accounting purposes until October 15, 2012, and no stock-based compensation expense has been recorded as of September 30, 2012.

A summary of the Company’s stock option activity for the nine months ended September 30, 2012 is as follows (in thousands, except per share data):

Stock-Based Compensation Expense—The fair value of options granted to employees for purposes of calculating stock-based compensation expense is estimated on the grant date using the Black-Scholes option-pricing model. This valuation model requires the Company to make assumptions and judgments about the inputs used in the calculation, including the expected term (weighted-average period of time that the options granted are expected to be outstanding), the volatility of the Company’s common stock, a risk-free interest rate, and expected dividend yield. The expected term for an option grant is calculated based on the simplified method. The expected volatility is based on an average of the historical volatilities of the common stock of several entities with characteristics similar to those of the Company. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The Company’s expected dividend yield input was zero as it has not historically paid, nor does it expect in the future to pay, cash dividends on its common stock.

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The following table summarizes the components of total stock-based compensation expense included in the condensed consolidated statements of operations for the periods presented (in thousands):

The fair value of each option granted during the periods presented was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

As of September 30, 2012 and December 31, 2011, there was approximately $15.0 million and $6.5 million, respectively, of total unrecognized compensation cost related to unvested equity awards, net of expected forfeitures, which is expected to be recognized over a weighted-average period of 3.1 and 3.0 years, respectively.

13. INCOME TAXES

No provision for U.S. federal or state income taxes has been made due to cumulative losses since the commencement of operations. A provision for income taxes of $130,000 and $346,000 has been recognized for the three and nine months ended September 30, 2012, respectively, related to the Company’s subsidiaries located outside of the United States.

14. NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

In April 2012, all of the Company’s then outstanding convertible preferred stock automatically converted into common stock in connection with its IPO. For periods that ended prior to the conversion, basic and diluted net income per common share were presented in conformity with the two-class method required for participating securities.

Under the two-class method, net loss is allocated between common shares and other participating securities to the extent that the securities are required to share in the losses. The Company’s convertible preferred stock did not meet the definition of a participating security in periods of net losses as the convertible preferred stockholders did not have a contractual obligation to share in the Company’s losses. Accordingly, net losses were attributable to common stockholders. Subsequent to the Company’s IPO and the automatic conversion of the outstanding convertible preferred stock, the Company had no other participating securities and the two-class method is no longer applicable.

Basic net loss per share attributable to common stockholders is calculated by dividing net loss attributable to common stockholders by the weighted average number of shares outstanding for the period.

Diluted net loss per share attributable to common stockholders is calculated by dividing net loss attributable to common stockholders by the weighted average number of common shares and potential dilutive common share equivalents outstanding during the period if the effect is dilutive. The Company’s potentially dilutive common shares include convertible notes and convertible preferred stock prior to their conversion, outstanding stock options and warrants and non-vested restricted stock units.

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The following table presents the potential common shares outstanding at period-end that were excluded from the computation of diluted net loss per share attributable to common stockholders for the three and nine months ended September 30, 2012 and 2011, respectively, because including them would have been antidilutive (in thousands):

15. GEOGRAPHIC INFORMATION

The Company considers operating segments to be components of the Company in which separate financial information is available that is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The chief operating decision maker for the Company is the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis. The Company has one business activity, which entails the design, development, manufacture and sale of microinverter systems for the solar photovoltaic industry. There are no segment managers who are held accountable for operations, operating results or plans for levels or components below the consolidated unit level. Accordingly, the Company has determined that it has a single reporting segment and operating unit structure.

The following table presents long-lived assets by geographic region (in thousands):

Long-Lived Assets

16. RELATED PARTY TRANSACTIONS

In December 2011, the Company entered into sales transactions with customers which are majority-owned by KPCB Holdings, Inc., as nominee (“KPCB”), a related party which has a significant ownership interest in the Company, and received cash in advance from these customers. During the nine months ended September 30, 2012, the Company recognized revenues of $16.8 million, which included all previously deferred revenues under these sales transactions.

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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:

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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:

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