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SOLAREDGE TECHNOLOGIES, INC. - Quarter Report: 2017 September (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 

 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2017
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to
 
Commission File No. 001-36894
 

SOLAREDGE TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)
 
Delaware
20-5338862
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
 
 
1 HaMada Street
Herziliya Pituach 4673335, Israel
(Address of principal executive offices, zip code)
 
 
972 (9) 957-6620
 
 
(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 ☒          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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
 
Yes ☒          No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
Accelerated filer
Non-accelerated filer
☐  (Do not check if a smaller reporting company)
Smaller Reporting Company
   
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.          ☐
 
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
 
Yes ☐          No ☒
 
As of October 30, 2017, there were 43,012,847 shares of the registrant’s common stock, par value of $0.0001 per share, outstanding.


 
SOLAREDGE TECHNOLOGIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2017
INDEX
 
3
3
F-2
F-4
F-5
F-6
F-8
4
14
14
15
15
15
16
16
16
16
17
17

2

 
PART I. FINANCIAL INFORMATION
 
ITEM 1          FINANCIAL STATEMENTS
 
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES
 
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 
AS OF SEPTEMBER 30, 2017
 
IN U.S. DOLLARS
 
UNAUDITED
 
INDEX
 
 
3

SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
U.S. dollars in thousands (except share and per share data)
   
September 30,
   
December 31,
 
   
2017
   
2016
 
   
Unaudited
       
ASSETS
           
             
CURRENT ASSETS:
           
Cash and cash equivalents
 
$
149,448
   
$
104,683
 
Restricted cash
   
1,400
     
897
 
Marketable Securities
   
81,488
     
74,465
 
Trade receivables, net
   
91,694
     
71,041
 
Prepaid expenses and other accounts receivable
   
38,201
     
21,347
 
Inventories
   
62,356
     
67,363
 
                 
   Total current assets
   
424,587
     
339,796
 
                 
LONG-TERM ASSETS:
               
   Marketable securities
   
72,351
     
44,262
 
   Property, equipment and intangible assets, net
   
45,714
     
37,381
 
   Prepaid expenses and lease deposits
   
732
     
489
 
   Deferred tax assets, net
   
5,822
     
2,815
 
                 
   Total long term assets
   
124,619
     
84,947
 
                 
Total assets
 
$
549,206
   
$
424,743
 

The accompanying notes are an integral part of the condensed consolidated financial statements.
 
F - 2

SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
U.S. dollars in thousands (except share and per share data)
 
   
September 30,
   
December 31,
 
   
2017
   
2016
 
   
Unaudited
       
             
LIABILITIES AND STOCKHOLDERS' EQUITY
           
             
CURRENT LIABILITIES:
           
Trade payables, net
 
$
42,700
   
$
34,001
 
Employees and payroll accruals
   
17,640
     
13,018
 
Warranty obligations
   
12,942
     
13,616
 
Deferred revenues
   
2,743
     
1,202
 
Accrued expenses and other accounts payable
   
16,407
     
8,648
 
                 
   Total current liabilities
   
92,432
     
70,485
 
                 
LONG-TERM LIABILITIES:
               
Warranty obligations
   
58,625
     
44,759
 
Deferred revenues
   
26,858
     
18,660
 
Lease incentive obligation
   
1,838
     
2,061
 
                 
   Total long-term liabilities
   
87,321
     
65,480
 
                 
COMMITMENTS AND CONTINGENT LIABILITIES
               
                 
STOCKHOLDERS' EQUITY:
               
                 
Common stock of $0.0001 par value - Authorized: 125,000,000 shares as of September 30, 2017 (unaudited) and December 31, 2016; issued and
  outstanding: 42,862,712 and 41,259,391 shares as of September 30, 2017 (unaudited) and December 31, 2016, respectively
   
4
     
4
 
Additional paid-in capital
   
323,076
     
307,098
 
Accumulated other comprehensive loss
   
(297
)
   
(324
)
Retained earnings (accumulated deficit)
   
46,670
     
(18,000
)
                 
   Total stockholders' equity
   
369,453
     
288,778
 
                 
Total liabilities and stockholders' equity
 
$
549,206
   
$
424,743
 

The accompanying notes are an integral part of the condensed consolidated financial statements.
 
F - 3

SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
U.S. dollars in thousands (except share and per share data)
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
   
Unaudited
   
Unaudited
 
                         
Revenues
 
$
166,552
   
$
128,484
   
$
417,705
   
$
378,441
 
Cost of revenues
   
108,498
     
86,609
     
273,909
     
256,719
 
                                 
Gross profit
   
58,054
     
41,875
     
143,796
     
121,722
 
                                 
Operating expenses:
                               
                                 
Research and development, net
   
14,363
     
9,935
     
38,546
     
27,876
 
Sales and marketing
   
13,217
     
10,036
     
35,953
     
27,792
 
General and administrative
   
5,078
     
3,664
     
12,782
     
10,191
 
                                 
Total operating expenses
   
32,658
     
23,635
     
87,281
     
65,859
 
                                 
Operating income
   
25,396
     
18,240
     
56,515
     
55,863
 
                                 
Financial income, net
   
2,666
     
390
     
7,671
     
1,892
 
                                 
Income before taxes on income
   
28,062
     
18,630
     
64,186
     
57,755
 
                                 
Taxes on income (tax benefit)
   
91
     
3,014
     
(484
)
   
4,067
 
                                 
Net income
 
$
27,971
   
$
15,616
   
$
64,670
   
$
53,688
 
                                 
Net basic earnings per share of common stock
 
$
0.66
   
$
0.38
   
$
1.55
   
$
1.32
 
                                 
Net diluted earnings per share of common stock
 
$
0.61
   
$
0.35
   
$
1.44
   
$
1.21
 
                                 
Weighted average number of shares used in computing net basic earnings per share of common stock
   
42,433,648
     
40,926,887
     
41,831,400
     
40,691,402
 
                                 
Weighted average number of shares used in computing net diluted earnings per share of common stock
   
46,131,556
     
43,995,227
     
44,937,527
     
44,348,461
 

The accompanying notes are an integral part of the condensed consolidated financial statements.
 
F - 4


SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
U.S. dollars in thousands (except share and per share data)
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
   
Unaudited
   
Unaudited
 
                         
Net income
 
$
27,971
   
$
15,616
   
$
64,670
   
$
53,688
 
                                 
Other comprehensive income (loss):
                               
                                 
     Available-for-sale securities:
                               
           Changes in unrealized gains (losses), net of tax benefit
   
54
     
(92
)
   
87
     
45
 
           Reclassification adjustments for gains, net of tax expence included in net income
   
-
     
-
     
-
     
1
 
           Net change
   
54
     
(92
)
   
87
     
46
 
                                 
     Cash flow hedges:
                               
           Changes in unrealized gains, net of tax expense
   
-
     
320
     
975
     
655
 
           Reclassification adjustments for loses, net of tax expense included in net income
   
-
     
(254
)
   
(994
)
   
(421
)
           Net change
   
-
     
66
     
(19
)
   
234
 
                                 
     Foreign currency translation adjustments, net
   
16
     
(125
)
   
(41
)
   
133
 
                                 
Other comprehensive income (loss)
   
70
     
(151
)
   
27
     
413
 
                                 
Comprehensive income
 
$
28,041
   
$
15,465
   
$
64,697
   
$
54,101
 

The accompanying notes are an integral part of the condensed consolidated financial statements.
 
F - 5

 
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
U.S. dollars in thousands
 
   
Nine months ended
September 30,
 
   
2017
   
2016
 
   
Unaudited
 
Cash flows provided by operating activities:
           
Net income
 
$
64,670
   
$
53,688
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization of property, equipment and intangible assets
   
4,932
     
3,468
 
Amortization of premiums on available-for-sale marketable securities
   
1,310
     
829
 
Stock-based compensation
   
12,183
     
8,132
 
Deferred tax assets, net
   
(3,063
)
   
2,327
 
Realized losses on Cash Flow Hedges
   
-
     
2
 
                 
Changes in assets and liabilities:
               
Inventories
   
5,005
     
19,216
 
Prepaid expenses and other accounts receivable
   
(17,360
)
   
8,214
 
Trade receivables, net
   
(20,168
)
   
(38,105
)
Trade payables, net
   
8,667
     
(21,699
)
Employees and payroll accruals
   
4,509
     
(916
)
Warranty obligations
   
13,192
     
15,514
 
Deferred revenues
   
9,699
     
5,069
 
Accrued expenses and other accounts payable
   
7,537
     
2,192
 
Lease incentive obligation
   
(223
)
   
(185
)
                 
Net cash provided by operating activities
   
90,890
     
57,746
 
                 
 Cash flows used in investing activities:
               
Purchase of property and equipment
   
(13,203
)
   
(13,869
)
Decrease (increase) in restricted cash
   
(503
)
   
2,471
 
 Decrease (increase) in short and long-term lease deposits
   
(60
)
   
37
 
Investment in available-for-sale marketable securities
   
(82,469
)
   
(85,579
)
Maturities of available-for-sale marketable securities
   
46,513
     
21,654
 
                 
Net cash used in investing activities
 
$
(49,722
)
 
$
(75,286
)

The accompanying notes are an integral part of the condensed consolidated financial statements.
 
F - 6


SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Cont.)
U.S. dollars in thousands
   
Nine months ended
September 30,
 
   
2017
   
2016
 
   
Unaudited
 
Cash flows from financing activities:
           
Issuance costs related to initial public offering
 
$
-
   
$
(194
)
Proceeds from issuance of shares upon exercise of options
   
3,795
     
1,774
 
                 
Net cash provided by  financing activities
   
3,795
     
1,580
 
                 
Increase (decrease)  in cash and cash equivalents
   
44,963
     
(15,960
)
Cash and cash equivalents at the beginning of the period
   
104,683
     
106,150
 
Effect of exchange rate differences on cash and cash equivalents
   
(198
)
   
(176
)
                 
Cash and cash equivalents at the end of the period
 
$
149,448
   
$
90,014
 

The accompanying notes are an integral part of the condensed consolidated financial statements.
 
F - 7

SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
U.S. dollars in thousands (except share and per share data)
 
NOTE 1:-
GENERAL

a.
SolarEdge Technologies, Inc. (the "Company") and its subsidiaries design, develop, and sell an intelligent inverter solution designed to maximize power generation at the individual photovoltaic ("PV") module level while lowering the cost of energy produced by the solar PV system and providing comprehensive and advanced safety features. The Company's products consist mainly of (i) power optimizers designed to maximize energy throughput from each and every module through constant tracking of Maximum Power Point individually per module, (ii) inverters which invert direct current (DC) from the PV module to alternating current (AC) and (iii) a related cloud-based monitoring platform, that collects and processes information from the power optimizers and inverters of a solar PV system to enable customers and system owners as applicable, to monitor and manage the solar PV systems. (iv) storage solution that is used to increase energy independence and maximize self-consumption for homeowners by utilizing a battery that is sold separately by third-party manufacturers, to store and supply power as needed (the "StorEdge solution"). The StorEdge solution is designed to provide smart energy functions such as maximizing self-consumption, Time-of-Use programming for desired hours of the day, and home energy backup solutions. In addition, the Company offers several communication and smart energy management solutions.

The Company and its subsidiaries sell their products worldwide directly to large solar installers and engineering, procurement and construction firms ("EPCs"), as well as through large distributors and electrical equipment wholesalers to smaller solar installers.

b.
Recent accounting pronouncements:

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory ("ASU 2015-11"). The new standard applies only to inventory for which cost is determined by methods other than last-in, first-out and the retail inventory method, which includes inventory that is measured using first-in, first-out or average cost. Inventory within the scope of ASU 2015-11 is required to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We adopted ASU 2015-11 during the first quarter of 2017, which did not have a material impact on our results of operations, cash flows or financial position.
 
In May 2017, the FASB issued ASU 2017-09, "Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting."  ASU 2017-09 was issued to provide clarity and reduce both 1) diversity in practice and 2) cost and complexity when applying the guidance in Topic 718 to a change in the terms or conditions of a share-based payment award.  ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718.  The amendments in ASU 2017-09 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.  Early adoption is permitted, including adoption in any interim period.  The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. The adoption of this standard will not have a material impact on the consolidated financial statements.

In May 2014, the FASB issued a new standard related to revenue recognition. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued several amendments to the standard, including clarification on identifying performance obligations. The guidance permits two methods of modification: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company will adopt the new standard effective January 1, 2018. The Company currently anticipates adopting the standard using the modified retrospective method. We are in the process of finalizing our analysis of the impact this guidance will have on our consolidated financial statements, related disclosures, and our internal controls over financial reporting.

F - 8

 
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
U.S. dollars in thousands (except share and per share data)
 
NOTE 1:-
GENERAL (Cont.)
 
c.
The significant accounting policies applied in the Company's audited 2016 consolidated financial statements and notes thereto included in the Company's Transition Report on Form 10-KT for transition period from July 1, 2016 to December 31, 2016 (the "2016 Form 10-KT") are applied consistently in these financial statements.

d.
Basis of Presentation:

The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with Article 10 of Regulation S-X, "Interim Financial Statements" and the rules and regulations for Form 10-Q of the Securities and Exchange Commission (the "SEC"). Pursuant to those rules and regulations, the Company has condensed or omitted certain information and footnote disclosure it normally includes in its annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP").

In management's opinion, the Company has made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present its condensed consolidated financial position, results of operations and cash flows. The Company's interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the 2016 consolidated financial statements and notes thereto included in the Company's Transition Report on Form 10-KT for transition period from July 1, 2016 to December 31, 2016 filed with the SEC on February 21, 2017. There have been no changes in the significant accounting policies from those that were disclosed in the audited consolidated financial statements for the transition period from July 1, 2016 to December 31, 2016 included in the 2016 Form 10-KT.

e.
The Company depends on two contract manufacturers and several limited or single source component suppliers. Currently, the Company has entered into an agreement with a third manufacturer and is in the process of transitioning manufacturing from one manufacturer to another. During this transition period the Company mainly relies on one contract manufacturer. Reliance on these vendors makes the Company vulnerable to possible capacity constraints and reduced control over component availability, delivery schedules, manufacturing yields and costs.

These vendors collectively account for 43.3% and 61.0% of the Company's total trade payables as of September 30, 2017 (unaudited) and December 31, 2016, respectively.

The Company has the right to offset its payables to one of its contract manufacturers against vendor non-trade receivables. As of September 30, 2017 (unaudited), a total of $3,393 of these receivables met the criteria for net recognition and were offset against the corresponding accounts payable balances for this contract manufacturer in the accompanying condensed Consolidated Balance Sheets.

F - 9

 
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
U.S. dollars in thousands (except share and per share data)

NOTE 1:-
GENERAL (Cont.)

f.
Derivative financial instruments:

To protect against the increase in value of forecasted foreign currency cash flows resulting from salary and lease payments of its Israeli facilities denominated in the Israeli currency, the New Israeli Shekel ("NIS"), during the nine months ended September 30, 2017, the Company instituted a foreign currency cash flow hedging program. The Company hedges portions of the anticipated payroll and lease payments denominated in NIS for a period of one to six months with hedging contracts. Accordingly, when the dollar strengthens against the foreign currencies, the decline in present value of future foreign currency expenses is offset by losses in the fair value of the hedging contracts. Conversely, when the dollar weakens, the increase in the present value of future foreign currency cash flows is offset by gains in the fair value of the hedging contracts. These hedging contracts are designated as cash flow hedges, as defined by ASC 815 and are all effective hedges.

As of September 30, 2017 (unaudited), the Company entered into forward contracts and put and call options to sell U.S. dollars for Euros in the amount of 1.5 million Euro and 4.5 million Euro, respectively. These hedging contracts do not contain any credit-risk-related contingency features. See Note 4 for information on the fair value of these hedging contracts.

The fair value of the Company's outstanding derivative instruments is as follows:

   
Balance as of
September 30,
   
Balance as of
December 31,
 
   
2017
   
2016
 
   
(unaudited)
       
Derivative assets:
           
Derivatives not designated as cash flow hedging instruments:
           
Foreign exchange option contracts
 
$
1
   
$
-
 
Derivatives designated as cash flow hedging instruments:
               
Foreign exchange forward contracts
   
-
     
19
 
                 
Derivative liabilities:
               
Derivatives not designated as cash flow hedging instruments:
               
Foreign exchange option contracts
   
(301
)
   
-
 
Foreign exchange forward contracts
   
(107
)
   
-
 
                 
Total
 
$
(407
)
 
$
19
 

The Company recorded the fair value of derivative assets and liabilities, net in "Accrued expenses and other accounts payable" and "Prepaid expenses and other accounts receivable" on the Company's consolidated balance sheets as of September 30, 2017 (unaudited) and December 31, 2016, respectively.

F - 10

 
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
U.S. dollars in thousands (except share and per share data)
 
NOTE 1:-
GENERAL (Cont.)

The net increase in unrealized gains (losses) recognized in "accumulated other comprehensive income (loss)" on derivatives, net of tax effect, is as follows:
 
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
    (unaudited)     (unaudited)  
                         
Derivatives designated as cash flow hedging instruments:
                       
Foreign exchange forward contracts
 
$
-
   
$
320
   
$
975
   
$
655
 
 
 The net gains reclassified from "accumulated other comprehensive income (loss)" into the company's consolidated statements of income, are as follows:
 
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
    (unaudited)     (unaudited)  
                         
Derivatives designated as cash flow hedging instruments:
                       
Foreign exchange forward contracts
 
$
-
   
$
254
   
$
994
   
$
421
 
 
The Company recorded in the financial income, net, a net loss related to derivatives not qualified as hedging instruments of $492 and $170 during the three months ended September 30, 2017 (unaudited)  and 2016 (unaudited), respectively and $1,164 and $245 during the nine months ended September 30, 2017 (unaudited)  and 2016 (unaudited), respectively.

g.
Accumulated other comprehensive income:

The following table summarizes the changes in accumulated balances of other comprehensive income (loss), net of taxes, for the three months ended September 30, 2017 (unaudited):

   
Unrealized gains (losses) on available-for-sale marketable securities
   
Unrealized gains (losses) on cash flow hedges
   
Unrealized gains (losses) on foreign currency translation
   
Total
 
                         
Beginning balance
 
$
(103
)
 
$
-
   
$
(264
)
 
$
(367
)
Other comprehensive income (loss) before reclassifications
   
54
     
-
     
16
     
70
 
                                 
Ending balance
 
$
(49
)
 
$
-
   
$
(248
)
 
$
(297
)

F - 11

 
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
U.S. dollars in thousands (except share and per share data)
 
NOTE 1:-
GENERAL (Cont.)

The following table summarizes the changes in accumulated balances of other comprehensive income (loss), net of taxes, for the nine months ended September 30, 2017 (unaudited):

   
Unrealized gains (losses) on available-for-sale marketable securities
   
Unrealized gains (losses) on cash flow hedges
   
Unrealized gains (losses) on foreign currency translation
   
Total
 
                         
Beginning balance
 
$
(136
)
 
$
19
   
$
(207
)
 
$
(324
)
Other comprehensive income (loss) before reclassifications
   
87
     
975
     
(41
)
   
1,021
 
Losses (gains) reclassified from accumulated other comprehensive income (loss)
   
-
     
(994
)
   
-
     
(994
)
Net current period other comprehensive income (loss)
   
87
     
(19
)
   
(41
)
   
27
 
                                 
Ending balance
 
$
(49
)
 
$
-
   
$
(248
)
 
$
(297
)
 
The following table summarizes the changes in accumulated balances of other comprehensive income (loss), net of taxes, for the three months ended September 30, 2016 (unaudited):
  
 
Unrealized gains (losses) on available-for-sale marketable securities
   
Unrealized gains (losses) on cash flow hedges
   
Unrealized gains (losses) on foreign currency translation
   
Total
 
                         
Beginning balance
 
$
57
   
$
243
   
$
(29
)
 
$
271
 
Other comprehensive income (loss) before reclassifications
   
(92
)
   
320
     
(125
)
   
103
 
Losses (gains) reclassified from accumulated other comprehensive income (loss)
   
-
     
(254
)
   
-
     
(254
)
Net current period other comprehensive income (loss)
   
(92
)
   
66
     
(125
)
   
(151
)
                                 
Ending balance
 
$
(35
)
 
$
309
   
$
(154
)
 
$
120
 


F - 12

 
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
U.S. dollars in thousands (except share and per share data)

NOTE 1:-
GENERAL (Cont.)

The following table summarizes the changes in accumulated balances of other comprehensive loss, net of taxes, for the nine months ended September 30, 2016 (unaudited):

   
Unrealized gains (losses) on available-for-sale marketable securities
   
Unrealized gains (losses) on cash flow hedges
   
Unrealized gains (losses) on foreign currency translation
   
Total
 
                         
Beginning balance
 
$
(81
)
 
$
75
   
$
(287
)
 
$
(293
)
Other comprehensive income (loss) before reclassifications
   
45
     
655
     
133
     
833
 
Losses (gains) reclassified from accumulated other comprehensive income (loss)
   
1
     
(421
)
   
-
     
(420
)
Net current period other comprehensive income (loss)
   
46
     
234
     
133
     
413
 
                                 
Ending balance
 
$
(35
)
 
$
309
   
$
(154
)
 
$
120
 

The following table provides details about reclassifications out of accumulated other comprehensive income (loss):

Details about Accumulated Other Comprehensive Income (Loss) Components
 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
 
Affected Line Item in the Statements of Income
   
Three months ended
September 30,
   
   
2017
   
2016
   
   
(unaudited)
   
Unrealized gains on cash flow hedges, net
 
$
-
   
$
32
 
Cost of revenues
     
-
     
152
 
Research and development, net
     
-
     
39
 
Sales and marketing
     
-
     
31
 
 General and administrative
                      
     
-
     
254
 
Total, before income taxes
                      
     
-
     
-
 
Taxes on income (benefit)
                      
   
$
-
   
$
254
 
Total, net of income taxes

F - 13

 
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
U.S. dollars in thousands (except share and per share data)
 
NOTE 1:-
GENERAL (Cont.)

The following table provides details about reclassifications out of accumulated other comprehensive income (loss):

Details about Accumulated Other Comprehensive Income (Loss) Components
 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
 
Affected Line Item in the Statements of Income
   
Nine months ended
September 30,
   
   
2017
   
2016
   
   
(unaudited)
   
Unrealized gains on cash flow hedges, net
 
$
-
   
$
(1
)
Financial income
     
166
     
62
 
 Cost of revenues
     
570
     
267
 
Research and development, net
     
151
     
72
 
Sales and marketing
     
153
     
53
 
General and administrative
                      
     
1,040
     
453
 
Total, before income taxes
                      
     
(46
)
   
(33
)
Taxes on income (benefit)
                      
   
$
994
   
$
420
 
Total, net of income taxes
 
NOTE 2:-
INVENTORIES

   
September 30,
2017
   
December 31,
2016
 
   
(unaudited)
       
             
Raw materials
 
$
18,476
   
$
10,053
 
Finished goods
   
43,880
     
57,310
 
                 
   
$
62,356
   
$
67,363
 


F - 14

SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
U.S. dollars in thousands (except share and per share data)
 
NOTE 3:-
WARRANTY OBLIGATIONS

Changes in the Company's product warranty liability for the nine months ended September 30, 2017 and 2016 were as follows:

   
Nine months ended
September 30,
 
   
2017
   
2016
 
   
(unaudited)
 
             
Balance, at beginning of period
 
$
58,375
   
$
40,894
 
Additions and adjustments to cost of revenues
   
23,758
     
24,441
 
Usage and current warranty expenses
   
(10,566
)
   
(8,927
)
                 
Balance, at end of period
   
71,567
     
56,408
 
Less current portion
   
(12,942
)
   
(15,103
)
                 
Long term portion
 
$
58,625
   
$
41,305
 


NOTE 4:-
FAIR VALUE MEASUREMENTS

The Company applies ASC 820 ("Fair Value Measurements and Disclosures"), with respect to fair value measurements of all financial assets and liabilities.

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.

A three-tiered fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

Level 1-
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2-
Include other inputs that are directly or indirectly observable in the marketplace.
Level 3-
Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

F - 15

 
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
U.S. dollars in thousands (except share and per share data)

NOTE 4:-
FAIR VALUE MEASUREMENTS (Cont.)

The following table sets forth the Company's assets and liabilities that were measured at fair value as of September 30, 2017 (unaudited) by level within the fair value hierarchy:

 
 
Balance as of
   
Fair value measurements
 
Description
 
September 30,
2017
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
Cash equivalents:
                       
Money market mutual funds
 
$
11,669
   
$
11,669
     
-
     
-
 
                                 
Foreign exchange option contracts not designated as hedging instruments
 
$
1
     
-
   
$
1
     
-
 
                                 
Short-term marketable securities:
                               
Corporate bonds
 
$
74,743
     
-
   
$
74,743
     
-
 
Governmental bonds
 
$
6,745
     
-
   
$
6,745
     
-
 
                                 
Long-term marketable securities:
                               
Corporate bonds
 
$
66,256
     
-
   
$
66,256
     
-
 
Governmental bonds
 
$
6,095
     
-
   
$
6,095
     
-
 
                                 
Liabilities:
                               
Foreign exchange option contracts not designated as hedging instruments
 
$
(301
)
   
-
   
$
(301
)
   
-
 
Foreign exchange forward contracts not designated as hedging instruments
 
$
(107
)
   
-
   
$
(107
)
   
-
 


F - 16

 
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
U.S. dollars in thousands (except share and per share data)

NOTE 4:-
FAIR VALUE MEASUREMENTS (Cont.)

The following table sets forth the Company's assets that were measured at fair value as of December 31, 2016 by level within the fair value hierarchy:

 
 
Balance as of
   
Fair value measurements
 
Description
 
December 31,
2016
   
Level 1
   
Level 2
   
Level 3
 
                         
Cash equivalents:
                       
Money market mutual funds
 
$
6,510
   
$
6,510
     
-
     
-
 
                                 
Derivative instruments asset
 
$
19
     
-
   
$
19
     
-
 
                                 
Short-term marketable securities:
                               
Corporate bonds
 
$
71,719
     
-
   
$
71,719
     
-
 
Governmental bonds
 
$
2,746
     
-
   
$
2,746
     
-
 
                                 
Long-term marketable securities:
                               
Corporate bonds
 
$
39,279
     
-
   
$
39,279
     
-
 
Governmental bonds
 
$
4,983
     
-
   
$
4,983
     
-
 

In addition to the assets and liabilities described above, the Company's financial instruments also include cash and cash equivalents, restricted and short-term deposits, trade receivables, other accounts receivable, trade payables, accrued expenses and other payables. The fair value of these financial instruments was not materially different from their carrying values on September 30, 2017 due to the short-term maturity of these instruments.
 
NOTE 5:-
COMMITMENTS AND CONTINGENT LIABILITIES

a.
Guarantees:

As of September 30, 2017 (unaudited), contingent liabilities exist regarding guarantees in the amount of $1,134, $57 and $181 in respect of office rent lease agreements, customs transactions and credit card limits, respectively.

b.
Royalty and Governmental commitments:

The Company's Israeli subsidiary receives research and development grants from the Israel Innovation Authority (the IIA). In consideration for the research and development grants received from the IIA, the Company has undertaken to pay royalties as a percentage of revenues from products developed from research and development projects financed. If the Company will not generate sales of products developed with funds provided by the IIA, the Company is not obligated to pay royalties or repay the grants.

F - 17

SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
U.S. dollars in thousands (except share and per share data)
 
NOTE 5:-
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

Royalties are payable at the rate of 4% to 4.5% from the time of commencement of sales of all of these products until the cumulative amount of the royalties paid equals 100% of the dollar-linked amounts of the grants received, plus interest at LIBOR rate.

As of September 30, 2017 (unaudited), the Company redeemed all obligations and no provision was recorded.

c.
Contractual purchase obligations:

The Company has contractual obligations to purchase goods and raw materials. These contractual purchase obligations relate to inventories held by contract manufacturers and purchase orders initiated by the contract manufacturers and suppliers, which cannot be canceled without penalty. The Company utilizes third parties to manufacture its products. In addition, it acquires raw materials or other goods and services, including product components, by issuing to suppliers authorizations to purchase based on its projected demand and manufacturing needs.

As of September 30, 2017 (unaudited), the Company had non-cancelable purchase obligations totaling approximately $158,018 out of which the Company already recorded a provision for loss in the amount of $1,086.

d.
Legal claims:

From time to time, the Company may be involved in various claims and legal proceedings. The Company reviews the status of each matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Company accrues a liability for the estimated loss. These accruals are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter.
 
NOTE 6:-
STOCK CAPITAL

a.
Common Stock:
 
   
Authorized
   
Issued and outstanding
 
   
Number of shares
 
   
September 30,
2017
   
December 31,
2016
   
September 30,
2017
   
December 31,
2016
 
 
(unaudited)
         
(unaudited)
       
                                 
Stock of $0.0001 par value:
                               
Common stock
   
125,000,000
     
125,000,000
     
42,862,712
     
41,259,391
 


F - 18

 
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
U.S. dollars in thousands (except share and per share data)

NOTE 6:-
STOCK CAPITAL (Cont.)

b.
Stock Incentive plans:

The Company's 2007 Global Incentive Plan (the "2007 Plan") was adopted by the board of directors on August 30, 2007. On March 31, 2015, once the Company completed its Initial Public Offering ("IPO"), the 2007 Plan has been terminated and no further awards will be granted thereunder. All outstanding awards will continue to be governed by their existing terms and 379,358 available options for future grant were transferred to the Company's 2015 Global Incentive Plan (the "2015 Plan") and are reserved for future issuances under the 2015 plan.

The 2015 Plan became effective upon the consummation of the IPO. The 2015 Plan provides for the grant of options, RSUs and other share-based awards to directors, employees, officers and consultants of the Company and its Subsidiaries. As of September 30, 2017 (unaudited), a total of 5,890,087 (unaudited) shares of common stock were reserved for issuance under the 2015 Plan (the "Share Reserve").
 
The Share Reserve will automatically increase on January 1st of each year during the term of the 2015 Plan commencing on January 1st of the year following the year in which the 2015 Plan becomes effective in an amount equal to five percent (5%) of the total number of shares of capital stock outstanding on December 31st of the preceding calendar year; provided, however, that our board of directors may provide that there will not be a January 1st increase in the Share Reserve in a given year or that the increase will be less than five percent (5%) of the shares of capital stock outstanding on the preceding December 31st. 
 
The aggregate maximum number of shares of common stock that may be issued on the exercise of incentive stock options is ten million (10,000,000).

As of September 30, 2017 (unaudited), an aggregate of 2,583,240 shares of common stock are still available for future grant under the 2015 Plan.
 
F - 19

 
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
U.S. dollars in thousands (except share and per share data)
 
NOTE 6:-
STOCK CAPITAL (Cont.)

c.
Options granted to employees and members of the board of directors:

 A summary of the activity in the share options granted to employees and members of the board of directors for the nine months ended September 30, 2017 (unaudited) and related information follows:

               
Weighted
       
               
average
       
         
Weighted
   
remaining
       
   
Number
   
average
   
contractual
   
Aggregate
 
   
of
   
exercise
   
term
   
intrinsic
 
   
Options
   
price
   
in years
   
Value
 
                         
Outstanding as of December 31, 2016
   
4,864,469
     
5.05
     
6.24
   
$
39,585
 
Granted
   
445,680
     
14.64
                 
Exercised
   
(1,077,256
)
   
2.48
                 
Forfeited or expired
   
(8,919
)
   
5.18
                 
Outstanding as of September 30, 2017
   
4,223,974
     
6.72
     
6.33
   
$
92,201
 
                                 
Vested and expected to vest as of September 30, 2017
   
4,123,214
     
6.63
     
6.30
   
$
90,365
 
                                 
Exercisable as of September 30, 2017
   
2,889,086
     
4.79
     
5.54
   
$
68,653
 

The aggregate intrinsic value represents the total intrinsic value (the difference between the fair value of the Company's common stock as of the last day of each period and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the last day of each period. The total intrinsic value of options exercised during the nine months ended on September 30, 2017 (unaudited) was $22,678.

The weighted average grant date fair values of options granted to employees and executive directors during the nine months ended September 30, 2017 (unaudited) was $7.94.

d.
A summary of the activity in the RSUs granted to employees and members of the board of directors for the nine months ended September 30, 2017 (unaudited) is as follows:

   
No. of
RSUs
   
Weighted average
grant date
fair value
 
Unvested as of December 31, 2016
   
1,515,018
   
$
19.74
 
Granted
   
628,210
     
16.39
 
Vested
   
(403,668
)
   
20.59
 
Forfeited
   
(91,779
)
   
17.86
 
Unvested as of September 30, 2017
   
1,647,781
   
$
18.27
 

 
F - 20

 
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
U.S. dollars in thousands (except share and per share data)
 
NOTE 6:-
STOCK CAPITAL (Cont.)

e.          Options and RSUs issued to non-employee consultants:

The Company has granted options and RSUs to purchase common shares to non-employee consultants as of September 30, 2017 (unaudited) as follows:

   
Outstanding
         
Exercisable
   
   
as of
         
as of
   
Issuance
 
September 30,
   
Exercise
   
September 30,
 
Exercisable
Date
 
2017
   
price
   
2017
 
Through
July 31, 2008
   
33,333
   
$
0.87
     
33,333
 
July 31, 2018
October 24, 2012
   
2,000
     
2.46
     
2,000
 
October 24, 2022
January 23, 2013
   
3,333
     
3.03
     
3,333
 
January 23, 2023
January 27, 2014
   
1,228
     
3.51
     
506
 
January 27, 2024
May 1, 2014
   
2,000
     
3.51
     
1,750
 
May 1, 2024
September 17, 2014
   
6,498
     
3.96
     
5,040
 
September 17, 2024
October 29, 2014
   
3,335
     
5.01
     
557
 
October 29, 2024
August 19, 2015
   
12,167
     
0.00
     
-
   
November 8, 2015
   
1,709
     
0.00
     
-
   
April 18, 2016
   
1,459
     
0.00
     
-
   
July 11, 2016
   
1,667
     
0.00
     
-
   
September 21, 2016
   
4,000
     
15.34
     
1,000
 
September 21, 2026
September 21, 2016
   
5,250
     
0.00
     
-
   
March 15, 2017
   
7,500
     
0.00
     
-
   
March 15, 2017
   
8,000
     
13.70
     
500
 
March 15, 2027
March 27, 2017
   
4,000
   
$
0.00
     
-
   
                             
     
97,479
             
48,019
   

The Company had accounted for its options and RSUs granted to non-employee consultants under the fair value method of ASC 505-50.

In connection with the grant of stock options and RSUs to non‑employee consultants, the Company recorded stock compensation expenses in the nine months ended September 30, 2017 (unaudited) and 2016 (unaudited) in the amounts $582 and $195, respectively.

f.
Employee Stock Purchase Plan ("ESPP"):
 
The Company adopted an Employee Stock Purchase Plan (the "ESPP") effective upon the consummation of the IPO. As of September 30, 2017 (unaudited), a total of 1,301,154 shares were reserved for issuance under this plan. The number of shares of common stock reserved for issuance under the ESPP will increase automatically on January 1st of each year, for ten years, by the lesser of 1% of the total number of shares of the Company's common stock outstanding on December 31st of the preceding calendar year or 487,643 shares. However, the Company's board of directors may reduce the amount of the increase in any particular year at their discretion, including a reduction to zero.
 
F - 21

SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
U.S. dollars in thousands (except share and per share data)
 
NOTE 6:-
STOCK CAPITAL (Cont.)
 
The ESPP is implemented through an offering every six months. According to the ESPP, eligible employees may use up to 10% of their salaries to purchase common stock shares up to an aggregate limit of $10 per participant for every six months plan. The price of an ordinary share purchased under the ESPP is equal to 85% of the lower of the fair market value of the ordinary share on the subscription date of each offering period or on the purchase date.
 
As of September 30, 2017 (unaudited), 185,173 common stock shares had been purchased under the ESPP.
 
As of September 30, 2017 (unaudited), 1,115,981 common stock shares were available for future issuance under the ESPP.
 
In accordance with ASC No. 718, the ESPP is compensatory and as such results in recognition of compensation cost.
 
g.
Stock-based compensation expense for employees and consultants:
 
The Company recognized stock-based compensation expenses related to stock options and RSUs granted to employees and non-employees and ESPP in the condensed consolidated statement of operations for the three and nine months ended on September 30, 2017 (unaudited) and 2016 (unaudited), as follows:
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
                         
Cost of revenues
 
$
538
   
$
384
   
$
1,548
   
$
940
 
Research and development
   
1,423
     
927
     
3,908
     
2,398
 
Selling and marketing
   
1,439
     
850
     
3,673
     
2,422
 
General and administrative
   
1,137
     
939
     
3,054
     
2,372
 
                                 
Total stock-based compensation expense
 
$
4,537
   
$
3,100
   
$
12,183
   
$
8,132
 

As of September 30, 2017 (unaudited), there was a total unrecognized compensation expense of $37,860 related to non‑vested equity‑based compensation arrangements granted under the Company's Plans. These expenses are expected to be recognized during the period from October 1, 2017 through August 31, 2021.

F - 22

SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
U.S. dollars in thousands (except share and per share data)
 
NOTE 7:-
BASIC AND DILUTED NET EARNINGS PER SHARE

Basic net earnings per share is computed by dividing the net earnings by the weighted-average number of shares of common stock outstanding during the period.

The total weighted average number of shares related to the outstanding stock options, excluded from the calculation of diluted net earnings per share due to their anti-dilutive effect was 235,845 for the three months ended September 30, 2016 (unaudited).
No shares related to the outstanding stock options, were excluded from the calculation of diluted net earnings per share for the three months ended September 30, 2017 (unaudited).

The total weighted average number of shares related to the outstanding stock options, excluded from the calculation of diluted net earnings per share due to their anti-dilutive effect was 263,355 and 87,281 for the nine months ended September 30, 2017 (unaudited) and 2016 (unaudited), respectively.

The following table presents the computation of basic and diluted net earnings per share for the periods presented (in thousands, except per share data):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
   
(unaudited)
   
(unaudited)
 
Numerator:
                       
Net income
   
27,971
     
15,616
     
64,670
     
53,688
 
                                 
Denominator:
                               
Shares used in computing net earnings per share of common stock, basic
   
42,433,648
     
40,926,887
     
41,831,400
     
40,691,402
 
Effect of stock-based awards
   
3,697,908
     
3,068,340
     
3,106,127
     
3,657,059
 
Shares used in computing net earnings per share of common stock,  diluted
   
46,131,556
     
43,995,227
     
44,937,527
     
44,348,461
 
                                 
Basic net income per share
 
$
0.66
   
$
0.38
   
$
1.55
   
$
1.32
 
Diluted net income per share
 
$
0.61
   
$
0.35
   
$
1.44
   
$
1.21
 
 
NOTE 8:-        INCOME TAXES

a.
Corporate tax in Israel:

On May 28, 2017, the Israeli government legislated new regulations regarding the "Preferred Technological Enterprise" regime, under which a company that complies with certain criteria is entitled to lower corporate tax rates. The Company expects that its operations in Israel will comply with the criteria of the Preferred Technological Enterprise regime. Therefore, the Company will utilize the tax benefits under this regime after the end of the utilization of the current zero corporate tax rate benefit period under its Approved and Beneficiary Enterprise status. Under the new legislation, the Company's taxable income will be subject to a corporate tax rate of 12%.

F - 23


SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
U.S. dollars in thousands (except share and per share data)
 
NOTE 8:-        INCOME TAXES (Cont.)

b.
Taxes on income (tax benefit) are comprised as follows:

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
   
(unaudited)
   
(unaudited)
 
                         
Current year taxes
 
$
878
   
$
835
   
$
2,906
   
$
1,741
 
Deferred tax income and others
   
(787
)
   
2,179
     
(3,390
)
   
2,326
 
                                 
Taxes on income (tax benefit)
 
$
91
   
$
3,014
   
$
(484
)
 
$
4,067
 
 
c.
Deferred income taxes:

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company's deferred tax liabilities and assets are as follows:

   
September 30,
   
December 31,
 
   
2017
   
2016
 
   
(Unaudited)
       
             
Assets in respect of:
           
             
Research and Development carryforward expenses- temporary differences
 
$
2,934
   
$
908
 
Stock based compensation
   
1,528
     
1,039
 
Other reserves
   
1,360
     
868
 
                 
Net deferred tax assets
 
$
5,822
   
$
2,815
 

During fiscal year 2016, the Company determined that the positive evidence outweighs the negative evidence for deferred tax assets and concluded that these deferred tax assets are realizable on a "more likely than not" basis. This determination was mainly due to expected future results of positive operations and earnings history.

d.
Uncertain tax positions:

The Company recognized a total liability for uncertain tax positions in the amount of $471 as of September 30, 2017.

F - 24

SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
U.S. dollars in thousands (except share and per share data)
 
NOTE 9:-
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

a.
For the three month period ended September 30, 2017 (unaudited), the Company had two major customers that accounted for 21.60% of its consolidated revenues. For the three month period ended September 30, 2016 (unaudited) the Company had one major customer that accounted for 12.38% of its consolidated revenues.

For the nine month period ended September 30, 2017 (unaudited) and 2016 (unaudited), the Company had one major customer that accounted for 12.48% and 12.40% of its consolidated revenues, respectively.

b.
As of September 30, 2017, (unaudited) two customers accounted for approximately 31.19% and as of December 31, 2016, one customer accounted for approximately 20.15%, of the Company's net accounts receivable, respectively.

 
F - 25

 
ITEM 2          MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-Looking Statements
 
Statements contained in this Form 10-Q or statements incorporated by reference from documents we have filed with the Securities and Exchange Commission may contain forward-looking statements that are based on our management’s expectations, estimates, projections, beliefs and assumptions in accordance with information currently available to our management. Forward-looking statements should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part 1, Item 1 of this report. This discussion contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, technology developments, new products and services, financing and investment plans, dividend policy, competitive position, industry and regulatory environment, potential growth opportunities and the effects of competition. Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipate,” “believe,” “could,” “seek,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or similar expressions and the negatives of those terms.
 
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Given these uncertainties, you should not place undue reliance on forward looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this filing. Important factors that could cause actual results to differ materially from our expectations include:
 
·
our limited history of profitability, which may not continue in the future;
 
·
our limited operating history, which makes it difficult to predict future results;
 
·
future demand for solar energy solutions;
 
·
changes to net metering policies or the reduction, elimination or expiration of government subsidies and economic incentives for on‑grid solar electricity applications;
 
·
Regulatory uncertainty in the U.S.  and in other regions in which we sell our products,with respect to the clean energy sector (including the solar energy sector in particular), including but not limited to, uncertainties arising out of the U.S withdrawal from the Paris Climate Accord and potential changes in trade policies between the United States and China;
 
·
changes in, or uncertainty with respect to, import tariffs imposed by the U.S. on certain non-U.S. manufacturers with respect to imported solar cells and modules;
 
·
federal, state and local regulations governing the electric utility industry with respect to solar energy;
 
·
the retail price of electricity derived from the utility grid or alternative energy sources;
 
·
interest rates and supply of capital in the global financial markets in general and in the solar market specifically;
 
·
competition, including introductions of power optimizer, inverter and solar PV system monitoring products by our competitors;
 
·
developments in alternative technologies or improvements in distributed solar energy generation;
 
4

 
·
historic cyclicality of the solar industry and periodic downturns;
 
·
defects or performance problems in our products;
 
·
our ability to forecast demand for our products accurately and to match production with demand;
 
·
our dependence on ocean transportation to deliver our products in a cost effective manner;
 
·
we depend on two contract manufacturers and several limited or single source component suppliers; we have recently entered into an agreement with an additional contract manufacturer and are in the process of ramping up manufacturing with the new manufacturer. During this ramp up period we will mainly rely on one contract manufacturer;
 
·
capacity constraints, delivery schedules, manufacturing yields and costs of our contract manufacturers and availability of components;
 
·
delays, disruptions and quality control problems in manufacturing;
 
·
shortages, delays, price changes or cessation of operations or production affecting our suppliers of key components;
 
·
business practices and regulatory compliance of our raw material suppliers;
 
·
performance of distributors and large installers in selling our products;
 
·
our customer’s financial stability, creditworthiness and debt leverage ratio;
 
·
our ability to retain key personnel and attract additional qualified personnel;
 
·
our ability to effectively design, launch, market and sell new generations of our products and services;
 
·
our ability to maintain our brand and to protect and defend our intellectual property;
 
·
our ability to retain, and events affecting, our major customers;
 
·
our ability to manage effectively the growth of our organization and expansion into new markets;
 
·
fluctuations in currency exchange rates;
 
·
unrest, terrorism or armed conflict in Israel;
 
·
general economic conditions in our domestic and international markets;
 
·
consolidation in the solar industry among our customers and distributors; and
 
·
the other factors set forth under “Item 1A. Risk Factors” in “Part II-OTHER INFORMATION” section of this report.
 
Except as required by law, we assume no obligation to update these forward looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward looking statements, even if new information becomes available in the future.
 
5

 
Overview
 
We have invented an intelligent inverter solution that has changed the way power is harvested and managed in a solar photovoltaic (“PV”) system. Our direct current (“DC”) optimized inverter system is designed to maximize power generation at the individual PV module level while lowering the cost of energy produced by the solar PV system and providing comprehensive and advanced safety features. Supporting increased PV proliferation, our system consists of power optimizers, inverters, communication and smart energy management solutions, and a cloud-based monitoring platform. Our solutions address a broad range of solar market segments, from residential solar installations to commercial and small utility-scale solar installations.  We believe that these benefits, along with our comprehensive and advanced safety features, are highly valued by our customers.
 
Our revenues for the three months ended September 30, 2017 and 2016 were $166.6 million and $128.5 million, respectively. Gross margin was 34.9% and 32.6% for the three months ended September 30, 2017 and 2016, respectively. Net income was $28.0 million and $15.6 million for the three months ended September 30, 2017 and 2016, respectively.
 
Our revenues for the nine months ended September 30, 2017 and 2016 were $417.7 million and $378.4 million, respectively. Gross margin was 34.4% and 32.2% for the nine months ended September 30, 2017 and 2016, respectively. Net income was $64.7 million and $53.7 million for the nine months ended September 30, 2017 and 2016, respectively.
 
As of September 30, 2017, we have shipped approximately 20.6 million power optimizers and 856,000 inverters. Approximately 492,000  installations, many of which may include multiple inverters, are currently connected to, and monitored through, our cloud‑based monitoring platform. As of September 30, 2017, we have shipped approximately 5.9 GW of our DC optimized inverter systems. Our products are sold in approximately 47 countries, and are installed in solar PV systems in more than 120 countries.
 
Key Operating Metrics
 
In managing our business and assessing financial performance, we supplement the information provided by the financial statements with other operating metrics. These operating metrics are utilized by our management to evaluate our business, measure our performance, identify trends affecting our business and formulate projections. We use metrics relating to shipments (inverters shipped, power optimizers shipped and megawatts shipped) to evaluate our sales performance and to track market acceptance of our products. We use metrics relating to monitoring (systems monitored) to evaluate market acceptance of our products and usage of our solution.
 
We provide the “megawatts shipped” metric, which is calculated based on nameplate capacity shipped, to show adoption of our system on a nameplate capacity basis. Nameplate capacity shipped is the maximum rated power output capacity of an inverter and corresponds to our financial results in that higher total capacities shipped are generally associated with higher total revenues. However, revenues increase with each additional unit, not necessarily each additional MW of capacity, sold. Accordingly, we also provide the “inverters shipped” and “power optimizers shipped” operating metrics.
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
Inverters shipped          
   
89,737
     
63,360
     
222,518
     
173,674
 
Power optimizers shipped          
   
2,041,115
     
1,645,708
     
5,285,272
     
4,550,570
 
Megawatts shipped (1)          
   
676
     
466
     
1,695
     
1,310
 
 
(1)
Calculated based on the aggregate nameplate capacity of inverters shipped during the applicable period. Nameplate capacity is the maximum rated power output capacity of an inverter as specified by the manufacturer.
 
6

 
Results of Operations
 
The results of operations presented below should be reviewed in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this report.
 
The following table sets forth selected consolidated statements of operations data for each of the periods indicated.
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
   
(In thousands)
   
(In thousands)
 
Revenues          
 
$
166,552
   
$
128,484
   
$
417,705
   
$
378,441
 
Cost of revenues          
   
108,498
     
86,609
     
273,909
     
256,719
 
Gross profit          
   
58,054
     
41,875
     
143,796
     
121,722
 
Operating expenses:
                               
Research and development, net          
   
14,363
     
9,935
     
38,546
     
27,876
 
Sales and marketing          
   
13,217
     
10,036
     
35,953
     
27,792
 
General and administrative          
   
5,078
     
3,664
     
12,782
     
10,191
 
Total operating expenses          
   
32,658
     
23,635
     
87,281
     
65,859
 
Operating income          
   
25,396
     
18,240
     
56,515
     
55,863
 
Financial income, net          
   
2,666
     
390
     
7,671
     
1,892
 
Income before taxes on income          
   
28,062
     
18,630
     
64,186
     
57,755
 
Taxes on income (tax benefit)          
   
91
     
3,014
     
(484
)
   
4,067
 
Net income          
 
$
27,971
   
$
15,616
   
$
64,670
   
$
53,688
 
 
Comparison of the Three Months Ended September 30, 2017 and 2016
 
Revenues
 
   
 
Three Months Ended
September 30,
   
Three Months Ended
September 30,
2016 to 2017
 
   
2017
   
2016
   
Change
 
   
(In thousands)
 
Revenues          
 
$
166,552
   
$
128,484
   
$
38,068
     
29.6
%
 
Revenues increased by $38.1 million, or 29.6%, for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, due to an increase in the number of units sold outside of the U.S. Specifically, non-U.S. revenues comprised 51% of our revenues in the three months ended September 30, 2017 as compared to 33% in the three months ended September 30, 2016, with significant growth in revenues coming from Germany and the Netherlands as well as from non-U.S. markets outside of Europe The number of power optimizers sold increased by approximately 0.4 million units, or 24.8%, from approximately 1.6 million units in the three months ended September 30, 2016 to approximately 2.0 million units in the three months ended September 30, 2017. The number of inverters sold increased by approximately 23,800 units, or 37.2%, from approximately 64,000 units in the three months ended September 30, 2016 to approximately 87,800 units in the three months ended September 30, 2017. Our blended average selling price per watt for units shipped decreased by $0.02, or 7.3%, in the three months ended September 30, 2017 as compared to the three months ended September 30, 2016, primarily due to: (i) an increase in sales of commercial products that are characterized by lower average selling prices per watt; (ii) price erosion in the overall inverter market; and (iii) a change in our customer mix, which includes a higher portion of sales to large customers to whom we provide volume discounts.
 
7

 
Cost of Revenues and Gross Profit
 
   
Three Months Ended
September 30,
   
Three Months Ended
September 30,
2016 to 2017
 
   
2017
   
2016
   
Change
 
   
(In thousands)
 
Cost of revenues          
 
$
108,498
   
$
86,609
   
$
21,889
     
25.3
%
Gross profit          
 
$
58,054
   
$
41,875
   
$
16,179
     
38.6
%
 
Cost of revenues increased by $21.9 million, or 25.3%, in the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, primarily due to: (i) an increase in the volume of products sold; (ii) increased warranty expenses and warranty accruals of $1.9 million associated with the rapid increase in our install base; (iii) increased  shipment and logistical costs of $3.9 million attributed, in part to the growth in volumes shipped, and to an increase in air shipments caused by  industry wide component shortages; (iv) increased personnel-related costs of $2.2 million connected to the expansion of our operations and increased support headcount which is growing in parallel with our growing install base worldwide. Gross profit as a percentage of revenue increased from 32.6%, in the three months ended September 30, 2016, to 34.9%, in the three months ended September 30, 2017, primarily due to reductions in per unit production costs that exceeded price erosion of our products, increased efficiency in our supply chain and general economies of scale in our personnel-related costs and other costs associated with our support and operations departments.
 
Operating Expenses:
 
Research and Development, Net
 
   
Three Months Ended
September 30,
   
Three Months Ended
September 30,
2016 to 2017
 
   
2017
   
2016
   
Change
 
   
(In thousands)
 
Research and development, net          
 
$
14,363
   
$
9,935
   
$
4,428
     
44.6
%
 
Research and development, net increased by $4.4 million, or 44.6%, in the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, primarily due to an increase in personnel-related costs of $3.0 million resulting from an increase in our research and development headcount and salary adjustments. The increase in headcount reflects our continued investment in enhancing our existing products as well as activities associated with bringing new products to market. The increase is also attributed to: the use of external consultants; overhead costs; deprecation expenses; and materials consumption, which increased by $0.5 million, $0.4 million, $0.3 million and $0.2 million, respectively, in the three months ended September 30, 2017, as compared to the three months ended September 30, 2016.
 
Sales and Marketing
 
   
Three Months Ended
September 30,
   
Three Months Ended
September 30,
2016 to 2017
 
   
2017
   
2016
   
Change
 
   
(In thousands)
 
Sales and marketing          
 
$
13,217
   
$
10,036
   
$
3,181
     
31.7
%
 
Sales and marketing expenses increased by $3.2 million, or 31.7%, in the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, primarily due to an increase in personnel-related costs of $2.4 million related to an increase in headcount associated with supporting our sales in the U.S., Europe and Asia, as well as salary increases. In addition, expenses related to trade shows and marketing activities; other overhead costs and travel expenses; and expenses related to external consultants and sub-contractors, increased by $0.4 million, $0.3 million and $0.1 million, respectively, in the three months ended September 30, 2017, as compared to the three months ended September 30, 2016.
 
8

 
General and Administrative
 
   
Three Months Ended
September 30,
   
Three Months Ended
September 30,
2016 to 2017
 
   
2017
   
2016
   
Change
 
   
(In thousands)
 
General and administrative          
 
$
5,078
   
$
3,664
   
$
1,414
     
38.6
%
 
General and administrative expenses increased by $1.4 million, or 38.6%, in the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, primarily due to an increase in personnel-related costs of $0.8 million related to: (i) higher headcount in the legal, finance, human resources, and information system department functions required for a fast-growing public company; and (ii) increased expenses related to equity-based compensation. In addition, legal expenses increased by $0.8 million mainly due to legal proceedings initiated by us during the third quarter. This increase was offset by a decrease in costs related to the accrual of doubtful debts in the amount of $0.2 million in the three months ended September 30, 2017, as compared to the three months ended September 30, 2016.
 
  Financial income (expenses), net
 
   
Three Months Ended
September 30,
   
Three Months Ended
September 30,
2016 to 2017
 
   
2017
   
2016
   
Change
 
   
(In thousands)
 
Financial income, net          
 
$
2,666
   
$
390
   
$
2,276
     
583.6
%
 
Financial income increased by $2.3 million, or 583.6%, in the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, primarily due to an increase of $2.3 million in foreign exchange fluctuations between the Euro and the New Israeli Shekel against the US Dollar in the three months ended September 30, 2017, as compared to the three months ended September 30, 2016. In addition, financial income increased by $0.3 million due to an increase in interest income, net of accretion (amortization) of discount (premium) on marketable securities in the three months ended September 30, 2017, as compared to the three months ended September 30, 2016. These increases in financial income were offset by an increase of $0.3 million in costs related to hedging transactions in the three months ended September 30, 2017, as compared to the three months ended September 30, 2016.
 
 Taxes on Income
 
   
Three Months Ended
September 30,
   
Three Months Ended
September 30,
2016 to 2017
 
   
2017
   
2016
   
Change
 
   
(In thousands)
 
Taxes on income          
 
$
91
   
$
3,014
   
$
(2,923
)
   
(97.0
)%
 
Taxes on income decreased by $2.9 million in the three months ended September 30, 2017, as compared to  the three months ended September 30, 2016, primarily due to an increase of $3.1 million in deferred tax assets in the three months ended September 30, 2017, as compared to the three months ended September 30, 2016. This was offset by an increase of $0.2 million in current tax expenses in the three months ended September 30, 2017, as compared to the three months ended September 30, 2016.
 
9

 
Net Income
 
   
Three Months Ended
September 30,
   
Three Months Ended
September 30,
2016 to 2017
 
   
2017
   
2016
   
Change
 
   
(In thousands)
 
Net income          
 
$
27,971
   
$
15,616
   
$
12,355
     
79.1
%
 
As a result of the factors discussed above, net income increased by $12.4 million, or 79.1%, in the three months ended September 30, 2017, as compared to the three months ended September 30, 2016.
 
Comparison of the Nine Months Ended September 30, 2017 and 2016
 
Revenues
 
   
Nine Months Ended
September 30,
   
Nine Months Ended
September 30,
2016 to 2017
 
   
2017
   
2016
   
Change
 
   
(In thousands)
 
Revenues          
 
$
417,705
   
$
378,441
   
$
39,264
     
10.4
%
 
Revenues increased by $39.3 million, or 10.4%, for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, due to an increase in the number of units sold primarily outside of the U.S. Specifically, revenues generated from outside the United States comprised 45.3% of our revenues for the nine months ended September 30, 2017, as compared to 34.2% for the nine months ended September 30, 2016.
 
The number of power optimizers sold increased by approximately 0.6 million units, or 13.9%, from approximately 4.6 million units in the nine months ended September 30, 2016, to approximately 5.2 million units in the nine months ended September 30, 2017. The number of inverters sold increased by approximately 40,900 units, or 23.2%, from approximately 176,400 units in the nine months ended September 30, 2016 to approximately 217,300 units in the nine months ended September 30, 2017. Our blended average selling price per watt for units shipped decreased by $0.03, or 10.5%, in the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, primarily due to: (i) increased volumes of commercial products that are characterized by lower average selling prices per watt; (ii) decreased prices in the overall inverter market; and (iii) a change in our customer mix, which included a higher portion of sales to large customers to whom we provide volume discounts.
 
Cost of Revenues and Gross Profit
 
   
Nine Months Ended
September 30,
   
Nine Months Ended
September 30,
2016 to 2017
 
   
2017
   
2016
   
Change
 
   
(In thousands)
 
Cost of revenues          
 
$
273,909
   
$
256,719
   
$
17,190
     
6.7
%
Gross profit          
 
$
143,796
   
$
121,722
   
$
22,074
     
18.1
%
 
Cost of revenues increased by $17.2 million, or 6.7%, in the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, primarily due to (i) an increase in the volume of products sold ; (ii) an increase in shipment and logistical costs of $4.1 million attributed, in part to the growth in volumes shipped, and to an increase in the portion of air shipments used as a result of an industry wide component shortage; and (iii) an increase in personnel-related costs of $6.1 million due to the expansion of our operations and increased support headcount which is growing in parallel with our growing install base worldwide. Gross profit as a percentage of revenue increased from 32.2% in the nine months ended September 30, 2016, to 34.4% in the nine months ended September 30, 2017, primarily due to: (i) cost reductions in per unit product costs which exceeded price erosions of our products; (ii) increased efficiency in our supply chain due to our increased volumes; (iii) lower costs associated with our warranty and warranty provisions; and (iv) general economies of scale in our personnel-related costs and other costs associated with our support and operations departments.
 
10

 
Operating Expenses:
 
Research and Development, Net
 
   
Nine Months Ended
September 30,
   
Nine Months Ended
September 30,
2016 to 2017
 
   
2017
   
2016
   
Change
 
   
(In thousands)
 
Research and development, net          
 
$
38,546
   
$
27,876
   
$
10,670
     
38.3
%
 
Research and development, net increased by $10.7 million, or 38.3%, in the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, primarily due to an increase in personnel-related costs of $7.5 million triggered by increased headcount. The increase in headcount reflects our continued investment in enhancing our existing products as well as development associated with bringing new products to market. In addition, use of contractors and subcontractors; depreciation of lab equipment; other directly related overhead and travels costs; and material consumption, increased by $1.2 million, $0.8 million, $0.7 million and $0.5 million, respectively, in the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016.
 
Sales and Marketing
 
   
Nine Months Ended
September 30,
   
Nine Months Ended
September 30,
2016 to 2017
 
   
2017
   
2016
   
Change
 
   
(In thousands)
 
Sales and marketing          
 
$
35,953
   
$
27,792
   
$
8,161
     
29.4
%
 
Sales and marketing expenses increased by $8.2 million, or 29.4%, in the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, primarily due to an increase in personnel-related costs of $6.2 million resulting from an increase in headcount supporting our growth in the U.S., Europe and Asia. In addition, expenses related to the use of contractors and subcontractors; trade shows and marketing activities; expenses associated with our worldwide sales offices; other directly related overhead  and travel expenses; and depreciation, increased by $0.7 million, $0.6 million, $0.4 million $0.2 million and $0.1 million, respectively, in the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016.
 
General and Administrative
 
   
Nine Months Ended
September 30,
   
Nine Months Ended
September 30,
2016 to 2017
 
   
2017
   
2016
   
Change
 
   
(In thousands)
 
General and administrative          
  $
12,782
   
$
10,191
   
$
2,591
     
25.4
%
 
General and administrative expenses increased by $2.6 million, or 25.4%, in the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, primarily due to an increase in personnel-related costs of $1.5 million related to (i) higher headcount in the legal, finance, human resources, and information technology department functions required for a fast-growing public company and (ii) increased expenses related to equity-based compensation, changes in management compensation and growth in vacation accruals, which resulted from changes in compensation packages of employees. In addition, costs related to use of contractors and subcontractors increased by $0.6 million due to a legal proceeding initiated by us and accrual for a doubtful account increased by $0.5 million,  in the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016.
 
11

 
Financial Income (Expenses), Net
 
 
 
 
Nine Months Ended
September 30,
   
Nine Months Ended
September 30,
2016 to 2017
 
   
2017
   
2016
   
Change
 
   
(In thousands)
 
Financial income, net          
 
$
7,671
   
$
1,892
   
$
5,779
     
305.4
%
 
Financial income increased by $5.8 million, or 305.4%, in the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, primarily due to an increase of $5.9 million in foreign exchange fluctuations between the Euro and the New Israeli Shekel against the U.S. Dollar in the nine months ended September 30, 2017, as compared to the three months ended September 30, 2016. In addition, financial income increased by $0.8 due to an increase in interest income, net of accretion (amortization) of discount (premium) on marketable securities in the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. These increases in financial income were offset by an increase of $0.9 million in costs related to hedging transactions in the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016.
 
 Taxes on Income (Tax Benefit)
 
   
Nine Months Ended
September 30,
   
Nine Months Ended
September 30,
2016 to 2017
 
   
2017
   
2016
   
Change
 
   
(In thousands)
 
Taxes on income (tax benefit)          
 
$
(484
)
 
$
4,067
   
$
(4,551
)
   
N/A
 
 
Tax benefits amounted to $0.5 million in the nine months ended September 30, 2017, as compared to taxes on income of $4.1 million in the nine months ended September 30, 2016, primarily due to an increase of $5.4 million in deferred tax assets in the nine months ended September 30, 2017 and a $0.3 million of tax credit related to previous years’ activity. This was offset by an increase of $1.1 million in taxes on income during the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016.
 
Net Income
 
   
Nine Months Ended
September 30,
   
Nine Months Ended
September 30,
2016 to 2017
 
   
2017
   
2016
   
Change
 
   
(In thousands)
 
Net income          
 
$
64,670
   
$
53,688
   
$
10,982
     
20.5
%
 
As a result of the factors discussed above, net income increased by $11.0 million, or 20.5% in the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016.
 
12

 
Liquidity and Capital Resources
 
The following table shows our cash flow from operating activities, investing activities and financing activities for the stated periods:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
   
(In thousands)
 
Net cash provided by operating activities
 
$
33,599
   
$
24,369
   
$
90,890
   
$
57,746
 
Net cash provided by (used in) investing activities
   
649
     
(8,486
)
   
(49,722
)
   
(75,286
)
Net cash provided by financing activities
   
1,672
     
273
     
3,795
     
1,580
 
Increase (decrease) in cash and cash equivalents
 
$
35,920
   
$
16,156
   
$
44,963
   
$
(15,960
)
 
As of September 30, 2017, our cash and cash equivalents were $149.4 million. This amount does not include $153.8 million invested in available-for-sale marketable securities and $1.4 million of restricted cash (primarily held to secure bank guarantees securing certain office lease obligations). We believe that cash provided by operating activities as well as our cash and cash equivalents will be sufficient to meet our anticipated cash needs for at least the next 12 months.
 
Operating Activities
 
For the nine months ended September 30, 2017, cash provided by operating activities was $90.9 million, derived mainly from a net income of $64.7 million, $15.4 million of non-cash expenses, an increase of $16.0 million in trade payables and other accounts payable, $13.2 million in warranty obligations, $9.7 million of deferred revenues, $4.5 million in accruals for employees and a decrease of  $5.0 million in inventories. The cash from operating activities was offset by an increase of $20.2 million in trade receivables, net and $17.4 million in prepaid expenses and other receivables.
 
For the nine months ended September 30, 2016, cash used in operating activities was $57.7 million derived mainly from a net income of $53.7 million, $14.8 million of non-cash expenses, a decrease of $19.2 million in inventories, $8.2 million in prepaid expenses and other receivables, and an increase of  $15.5 million in warranty obligations and $5.1 million in deferred revenues. The cash from operating activities was offset by an increase of $38.1 million in trade receivables and a deacrese of $19.7 million in trade payables and other accounts payable and $1.0 million in accruals for employees.
 
Investing Activities
 
During the nine months ended September 30, 2017, net cash used in investing activities was $49.7 million, of which $82.5 million was invested in available-for-sale marketable securities, $13.2 million related to capital investments in laboratory equipment, end of line testing equipment, automated assembly lines, manufacturing tools and leasehold improvements and $0.5 million was related to an increase in restricted cash and a short and long-term lease deposit. This was offset by $46.5 million from the maturities of available-for-sale marketable securities.
 
During the nine months ended September 30, 2016, net cash used in investing activities was $75.3 million, of which $85.6 million was invested in available-for-sale marketable securities and $13.9 million related to capital investments in laboratory equipment, end of line testing equipment, manufacturing tools and leasehold improvements. This was offset by $21.7 million from the maturities of available-for-sale marketable securities and a decrease of $2.5 million in restricted cash.
 
 Financing Activities
 
For the nine months ended September 30, 2017, net cash provided by financing activities was $3.8 million, all attributed to cash received from the exercise of employee and non-employee stock options.
 
For the nine months ended September 30, 2016, net cash provided by financing activities was $1.6 million, of which $1.8 million was related to cash received from the exercise of employee and non-employee stock options, offset by $0.2 million attributed to issuance costs related to our initial public offering.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements.
 
13

 
ITEM 3          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates, customer concentrations and interest rates. We do not hold or issue financial instruments for trading purposes.
 
Foreign Currency Exchange Risk
 
Approximately 40.3% and 26.1% of our revenues for the nine months ended September 30, 2017 and 2016, respectively, were earned in non‑U.S. Dollar denominated currencies, principally the Euro. Our expenses are generally denominated in the currencies in which our operations are located, primarily the U.S. Dollar and New Israeli Shekel, and to a lesser extent the Euro. Our New Israeli Shekel‑denominated expenses consist primarily of personnel and overhead costs. Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. A hypothetical 10% change in foreign currency exchange rates during the nine months ended September 30, 2017, between the Euro and the U.S. Dollar would increase or decrease our net income by $14.0 million for the nine months ended September 30, 2017. A hypothetical 10% change in foreign currency exchange rates during the nine months ended September 30, 2017, between the New Israeli Shekel and the U.S. Dollar would increase or decrease our net income by $5.1 million for the nine months ended September 30, 2017.
 
For purposes of our consolidated financial statements, local currency assets and liabilities are translated at the rate of exchange to the U.S. Dollar on the balance sheet date and local currency revenues and expenses are translated at the exchange rate as of the date of the transaction or at the average exchange rate to the U.S. Dollar during the reporting period.
 
To date, we have used derivative financial instruments, specifically foreign currency forward contracts, to manage exposure to foreign currency risks by hedging a portion of our account receivable balances denominated in Euros expected to be paid within three months. Our foreign currency forward contracts are expected to mitigate exchange rate changes related to the hedged assets. We do not use derivative financial instruments for speculative or trading purposes.
 
We had cash and cash equivalents of $149.5 million and available-for-sale marketable securities with an estimated fair value of $153.8 million on September 30, 2017, which securities were held for working capital purposes. We do not enter into investments for trading or speculative purposes. Since most of our cash and cash equivalents are held in U.S. Dollar‑denominated money market funds, we believe that our cash and cash equivalents do not have any material exposure to changes in exchange rates.
 
Concentrations of Major Customers
 
Our trade accounts receivables potentially expose us to a concentration of credit risk with our major customers. As of September 30, 2017, two major customers accounted for approximately 31.2% of our consolidated trade receivables balance. We currently do not foresee a credit risk associated with these receivables.
 
ITEM 4          CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2017. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
 
Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective and operating to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and to provide reasonable assurance that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
 
14

 
Changes in Internal Control over Financial Reporting
 
Based on an evaluation by our chief executive officer and chief financial officer, such officers concluded that there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II. OTHER INFORMATION
 
ITEM 1          LEGAL PROCEEDINGS
 
In the normal course of business, we may from time to time be named as a party to various legal claims, actions and complaints (including as a result of initiating such legal claims, action or complaints on behalf of the Company). It is impossible to predict with certainty whether any resulting liability from any such legal claims, actions or complaints would have a material adverse effect on our financial position, results of operations or cash flows.
 
ITEM 1A          RISK FACTORS
 
There have been no material changes to the risk factors as described in Part I, Item 1A, "Risk Factors," in our Annual Report on Form 10-KT for the year ended December 31, 2016 other than the supplemental risk factors set forth below:
 
We rely on a limited number of contract manufacturers and, for a period of time, will rely on one contract manufacturer for some manufacturing.
 
We depend on two contract manufacturers and several limited or single source component suppliers; we have recently entered into an agreement with a new contract manufacturer and are in the process of ramping up manufacturing with this new manufacturer. During this ramp up period we will be relying on one contract manufacturer. Any change in our relationship with our contract manufacturers or changes to contractual terms of our agreements with the contract manufacturers could adversely affect our financial condition and results of operations.
 
Changes in the U.S. trade environment, including the imposition of import tariffs, could adversely affect the amount or timing of our revenues, results of operations or cash flows.
 
On October 31, 2017, the U.S. International Trade Commission (“ITC”) announced its intended recommendations with respect to regulation of the U.S. solar industry, including the imposition of import tariffs of up to 35% on solar cells and modules imported into the U.S. from certain countries.  Once a formal recommendation has been delivered to President Trump, he will have up to 60 days to determine what action to take with respect to such recommendations.  He may adopt the recommendations or do nothing at all.  In addition, certain solar companies have filed a petititon with the ITC under Section 201 of the U.S. Trade Act of 1974, which petititon seeks various remedies including the imposition of import tariffs on solar cells and modules that are substantially higher than the tariffs recommended by the ITC, as well as certain restrictions on the import of solar cells and modules.  Significant uncertainty currently exists with respect to these matters, including uncertainty about the nature and timing of any changes and what countries may be affected.  An adverse determination by the ITC or the imposition of remedies with respect to the Section 201 action could result in a wide range of impacts to the U.S. solar industry and the global manufacturing market.  Tariffs or similar taxes or duties, or other remedies that may be imposed, could materially increase the price of solar systems in the U.S. or harm the industry generally, thereby making the use of solar less economically feasible and decreasing demand for our products.  These outcomes could adversely affect the amount or timing of our revenues, results of operations or cash flows, and continuing uncertainty could cause sales volatility, price fluctuations or supply shortages or cause our customers to advance or delay their purchase of our products.
 
15

 
ITEM 2          UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.
 
ITEM 3          DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4          MINE SAFETY DISCLOSURES
 
Not applicable.
 
ITEM 5          OTHER INFORMATION
 
None.
 
16

 
ITEM 6          EXHIBITS
 
Exhibit
No.
Description
Incorporation by Reference
(where a report is indicated below, that
document has been previously filed with
the SEC and the applicable exhibit is
incorporated by reference thereto)
Filed with this report.
Filed with this report.
Filed with this report
Filed with this report.
101.INS
XBRL Instance Document
Filed with this report.
101.SCH
XBRL Taxonomy Extension Schema Document
Filed with this report.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
Filed with this report.
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
Filed with this report.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
Filed with this report.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
Filed with this report.

 
17


SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
Date: November 8, 2017
SOLAREDGE TECHNOLOGIES, INC.
 
/s/ Guy Sella
 
 
Guy Sella
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
 
 
Date: November 8, 2017
 
/s/ Ronen Faier          
 
 
 
Ronen Faier
Chief Financial Officer
(Principal Financial and Accounting Officer)
 
 
18