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SOLAREDGE TECHNOLOGIES, INC. - Quarter Report: 2020 June (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 June 30, 2020

 

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

(State or other jurisdiction of

incorporation or organization)

20-5338862

(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)

 

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.0001 per share

SEDG

NASDAQ (Global Select Market)

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 every Interactive Data File required to be submitted 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 July 30, 2020, there were 50,118,548 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 June 30, 2020

INDEX

PART I. FINANCIAL INFORMATION

3

ITEM 1Financial Statements

3

Condensed Consolidated Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019

F-2 - F-3

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2020 and 2019 (unaudited)

F-4

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019 (unaudited)

F-5

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2020 and 2019 (unaudited)

F-6 - F-7

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (unaudited)

F-8 - F-9

Notes to the Condensed Consolidated Financial Statements (unaudited)

F-10 - F-24

ITEM 2Management’s Discussion and Analysis of Financial Condition and Results of Operations

4

ITEM 3Quantitative and Qualitative Disclosures About Market Risk

19

ITEM 4Controls and Procedures

21

PART II. OTHER INFORMATION

21

ITEM 1Legal Proceedings

21

ITEM 1ARisk Factors

21

ITEM 2Unregistered Sales of Equity Securities and Use of Proceeds

22

ITEM 3Defaults upon Senior Securities

22

ITEM 4Mine Safety Disclosures

22

ITEM 5Other Information

22

ITEM 6Exhibits

23

EXHIBIT INDEX

23

2


PART I. FINANCIAL INFORMATION

ITEM 1FINANCIAL STATEMENTS

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2020

IN U.S. DOLLARS

UNAUDITED

INDEX

Page

Condensed Consolidated Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019

F-2 - F-3

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2020 and 2019 (unaudited)

F-4

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019 (unaudited)

F-5

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2020 and 2019 (unaudited)

F-6 - F-7

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (unaudited)

F-8 - F-9

Notes to the Condensed Consolidated Financial Statements (unaudited)

F-10 - F-24

3


SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)


U.S. dollars in thousands (except share and per share data)

June 30,

2020

December 31,

2019

ASSETS

 

CURRENT ASSETS:

Cash and cash equivalents

$

428,372

$

223,901

Short-term bank deposits

3,432

5,010

Restricted bank deposits

2,135

27,558

Marketable securities

113,032

91,845

Trade receivables, net of allowances of $6,273 and $2,473, respectively

181,700

298,383

Prepaid expenses and other current assets

79,867

115,268

Inventories, net

264,460

170,798

 

Total current assets

1,072,998

932,763

 

LONG-TERM ASSETS:

Marketable securities

45,684

119,176

Operating lease right-of-use assets, net

36,951

35,858

Property, plant and equipment, net

226,416

176,963

Deferred tax assets, net

19,121

16,298

Intangible assets, net

68,211

74,008

Goodwill

128,279

129,654

Other long-term assets

8,166

9,904

 

Total long-term assets

532,828

561,861

 

Total assets

$

1,605,826

$

1,494,624

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)

June 30,

2020

December 31,

2019

LIABILITIES AND STOCKHOLDERS' EQUITY

 

CURRENT LIABILITIES:

Trade payables, net

$

158,264

$

157,148

Employees and payroll accruals

48,764

47,390

Current maturities of bank loans and accrued interest

15,256

15,673

Warranty obligations

68,674

65,112

Deferred revenues and customers advances

25,625

70,815

Accrued expenses and other current liabilities

88,482

80,576

 

Total current liabilities

405,065

436,714

 

LONG-TERM LIABILITIES:

Bank loans

-

173

Warranty obligations

124,010

107,451

Deferred revenues

103,181

89,982

Operating lease liabilities

29,991

30,213

Deferred tax liabilities, net

1,112

4,461

Other long-term liabilities

17,666

13,960

 

Total long-term liabilities

275,960

246,240

 

COMMITMENTS AND CONTINGENT LIABILITIES

 

STOCKHOLDERS’ EQUITY:

 

Common stock of $0.0001 par value – Authorized: 125,000,000 shares as of June 30, 2020 and December 31, 2019; issued: 50,075,751 and 49,081,457 shares as of June 30, 2020 and December 31, 2019, respectively; outstanding: 50,075,751 and 48,898,062 shares as of June 30, 2020 and December 31, 2019, respectively.

5

5

Additional paid-in capital

511,640

475,792

Accumulated other comprehensive loss

(3,442

)

(1,809

)

Retained earnings

416,598

337,682

 

Total stockholders’ equity

924,801

811,670

 

Total liabilities and stockholders’ equity

$

1,605,826

$

1,494,624

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

June 30,

Six months ended

June 30,

2020

2019

2020

2019

 

Revenues

$

331,851

$

325,010

$

763,069

$

596,881

Cost of revenues

228,888

214,340

520,098

400,101

 

Gross profit

102,963

110,670

242,971

196,780

 

Operating expenses:

 

Research and development

38,098

29,505

74,793

55,704

Sales and marketing

20,936

22,127

45,189

42,299

General and administrative

13,964

13,685

30,149

25,376

Other operating income

-

-

(4,900

)

-

 

Total operating expenses

72,998

65,317

145,231

123,379

 

Operating income

29,965

45,353

97,740

73,401

 

Financial income (expenses), net

11,565

773

(5,040

)

(5,378

)

 

Income before income taxes

41,530

46,126

92,700

68,023

 

Income taxes

4,862

13,213

13,784

17,135

 

Net income

$

36,668

$

32,913

$

78,916

$

50,888

 

Net loss attributable to Non-controlling interests

-

215

-

1,256

 

Net income attributable to SolarEdge Technologies, Inc.

$

36,668

$

33,128

$

78,916

$

52,144

 

Net basic earnings per share of common stock attributable to SolarEdge Technologies, Inc.

$

0.74

$

0.69

$

1.59

$

1.10

 

Net diluted earnings per share of common stock attributable to SolarEdge Technologies, Inc.

$

0.70

$

0.66

$

1.51

$

1.05

 

Weighted average number of shares used in computing net basic earnings per share of common stock

49,786,586

47,683,799

49,493,173

47,353,401

 

Weighted average number of shares used in computing net diluted earnings per share of common stock

52,536,437

49,940,034

52,357,838

49,358,280

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

June 30,

Six months ended

June 30,

2020

2019

2020

2019

 

Net income

$

36,668

$

32,913

$

78,916

$

50,888

 

Other comprehensive income (loss):

 

Available-for-sale securities:

Changes in unrealized gains, net of tax

1,931

370

766

855

Reclassification adjustments for losses included in net income

-

(29

)

-

91

Net change

1,931

341

766

946

 

Cash flow hedges:

Changes in unrealized gains, net of tax

343

-

881

-

Reclassification adjustments for losses included in net income

(435

)

-

(435

)

-

Net change

(92

)

-

446

-

 

Foreign currency translation adjustments, net

109

(16

)

(2,845

)

(1,317

)

 

Total other comprehensive income (loss)

1,948

325

(1,633

)

(371

)

 

Comprehensive income

$

38,616

$

33,238

$

77,283

$

50,517

 

Comprehensive income (loss) attributable to Non-controlling interests

-

(545

)

-

304

 

Comprehensive income attributable to SolarEdge Technologies, Inc.

$

38,616

$

32,693

$

77,283

$

50,821

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 STOCKHOLDERS’ EQUITY (Unaudited)


U.S. dollars in thousands (except share and per share data)

SolarEdge Technologies, Inc. Stockholders’ Equity

Common stock

Additional paid in Capital

Accumulated

Other comprehensive

loss

Retained earnings

Total

Non-controlling

interests

Total

stockholder’ equity

Number

Amount

 

Balance as of January 1, 2019

46,052,802

$

5

$

371,794

$

(524

)

$

191,133

$

562,408

$

8,318

$

570,726

 

Issuance of Common Stock upon exercise of employee and nonemployees stock-based awards

254,515

* -

309

-

-

309

-

309

Equity based compensation expenses to employees and nonemployee

-

-

9,704

-

-

9,704

-

9,704

Issuance of Common stock upon business combination

1,194,046

* -

34,601

-

-

34,601

-

34,601

Non-controlling interests related to business combination

-

-

-

-

-

-

67,734

67,734

Change in non-controlling interests

-

-

977

-

-

977

(2,964

)

(1,987

)

Other comprehensive loss adjustments

-

-

-

(696

)

-

(696

)

(849

)

(1,545

)

Net income

-

-

-

-

19,016

19,016

(1,041

)

17,975

 

Balance as of March 31, 2019

47,501,363

$

5

$

417,385

$

(1,220

)

$

210,149

$

626,319

$

71,198

$

697,517

 

Issuance of Common Stock upon exercise of employee and nonemployees stock-based awards

466,062

-

3,455

-

-

3,455

-

3,455

Equity based compensation expenses to employees and nonemployee

-

-

11,372

-

-

11,372

-

11,372

Change in non-controlling interests

-

-

(528

)

-

-

(528

)

(65,551

)

(66,079

)

Other comprehensive income adjustments

-

-

-

325

-

325

545

870

Net income

-

-

-

-

33,128

33,128

(215

)

32,913

 

Balance as of June 30, 2019

47,967,425

$

5

$

431,684

$

(895

)

$

243,277

$

674,071

$

5,977

$

680,048

* Represents an amount less than $1.

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 STOCKHOLDERS’ EQUITY (Unaudited)


U.S. dollars in thousands (except share and per share data)

SolarEdge Technologies, Inc. Stockholders’ Equity

Common stock

Additional paid in Capital

Accumulated Other comprehensive loss

Retained earnings

Total

Non-controlling

interests

Total stockholder’ equity

Number

Amount

 

Balance as of January 1, 2020

48,898,062

$

5

$

475,792

$

(1,809

)

$

337,682

$

811,670

$

-

$

811,670

 

-

Issuance of Common Stock upon exercise of employee and nonemployees stock-based awards

701,431

* -

3,308

-

-

3,308

-

3,308

Equity based compensation expenses to employees and nonemployee

-

-

12,773

-

-

12,773

-

12,773

Other comprehensive loss adjustments

-

-

-

(3,581

)

-

(3,581

)

-

(3,581

)

Net income

-

-

-

-

42,248

42,248

-

42,248

 

Balance as of March 31, 2020

49,599,493

$

5

$

491,873

$

(5,390

)

$

379,930

$

866,418

$

-

$

866,418

 

Issuance of Common Stock upon exercise of employee and nonemployees stock-based awards

476,258

* -

5,806

-

-

5,806

-

5,806

Equity based compensation expenses to employees and nonemployee

-

-

13,961

-

-

13,961

-

13,961

Other comprehensive income adjustments

-

-

-

1,948

-

1,948

-

1,948

Net income

-

-

-

-

36,668

36,668

-

36,668

 

Balance as of June 30, 2020

50,075,751

$

5

$

511,640

$

(3,442

)

$

416,598

$

924,801

$

-

$

924,801

* Represents an amount less than $1.

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

F - 7


SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


U.S. dollars in thousands

Six months ended

June 30,

2020

2019

 

Cash flows provided by operating activities:

Net income

$

78,916

$

50,888

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation of property, plant and equipment

10,646

8,147

Amortization of intangible assets

4,615

4,895

Amortization of premium and accretion of discount on available-for-sale marketable securities, net

373

(12

)

Stock-based compensation expenses

26,734

21,076

Deferred income tax benefit, net

(6,424

)

(1,960

)

Other adjustments, net

(1

)

643

Changes in assets and liabilities:

Inventories, net

(94,230

)

1,723

Prepaid expenses and other assets

37,066

(2,574

)

Trade receivables, net

116,045

(56,562

)

Operating lease right-of-use assets and liabilities, net and effect of exchange rate differences

(451

)

1,466

Trade payables, net

(1,823

)

5,493

Employees and payroll accruals

1,457

5,151

Warranty obligations

20,198

28,860

Deferred revenues and customers advances

(31,834

)

11,764

Other liabilities

5,768

28,236

 

Net cash provided by operating activities

167,055

107,234

 

Cash flows from investing activities:

Proceeds from sales and maturities of available-for-sale marketable securities

89,739

68,407

Purchase of property, plant and equipment

(53,706

)

(22,244

)

Investment in available-for-sale marketable securities

(36,815

)

(63,655

)

Withdrawal from (investment in) restricted bank deposits

25,634

(203

)

Business combination, net of cash acquired

-

(38,435

)

Other investing activities

2,024

3,909

 

Net cash provided by (used in) in investing activities

$

26,876

$

(52,221

)

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

F - 8


SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Cont.)


U.S. dollars in thousands

Six months ended

June 30,

2020

2019

 

Cash flows from financing activities:

Repayment of bank loans

$

(15,119

)

$

(4,891

)

Proceeds from bank loans

15,113

216

Proceeds from issuance of shares under stock purchase plan and upon exercise of stock-based awards

9,114

3,764

Change in Non-controlling interests

-

(66,474

)

Other financing activities

(112

)

-

 

Net cash provided by (used in) financing activities

8,996

(67,385

)

 

Increase (decrease) in cash and cash equivalents

202,927

(12,372

)

Cash and cash equivalents at the beginning of the period

223,901

187,764

Effect of exchange rate differences on cash and cash equivalents

1,544

1,183

 

Cash and cash equivalents at the end of the period

$

428,372

$

176,575

 

Supplemental disclosure of non-cash activities:

Purchase of property, plant and equipment

$

8,070

$

-

Operating lease, right of use asset

$

980

$

38,374

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

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

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 of a solar PV system 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), (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 applicable solar PV system and (iv) a 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 Company and its subsidiaries sell their intelligent inverter solution products worldwide through large distributors and electrical equipment wholesalers to smaller solar installers as, well as directly to large solar installers and engineering, procurement and construction firms (“EPCs”).

The Company has expanded its activity to other areas of smart energy technology through acquisitions. The Company now offers energy solutions which include lithium-ion cells, batteries and energy storage systems (“Energy Storage”), electric vehicle, or EV components and charging capabilities (“e-Mobility”), as well as uninterrupted power supply solutions (“UPS”).

b.Recently issued and adopted pronouncements:

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB subsequently issued amendments to ASU 2016-13, which have the same effective date and transition date of January 1, 2020. This standard requires entities to estimate an expected lifetime credit loss on financial assets ranging from short-term trade accounts receivable to long-term financings and report credit losses using an expected losses model rather than the incurred losses model that was previously used, and establishes additional disclosures related to credit risks. For available-for-sale (“AFS”) debt securities with unrealized losses, the standard eliminates the concept of other-than-temporary impairments and requires allowances to be recorded instead of reducing the amortized cost of the investment.

This standard limits the amount of credit losses to be recognized for AFS debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases.

The Company adopted Topic 326 effective January 1, 2020, based on the composition of the Company’s trade receivables, investment portfolio and other financial assets, current economic conditions and historical credit loss activity. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

The condensed consolidated financial statements for the six months ended June 30, 2020 are presented under the new standard, while comparative periods presented are not adjusted and continue to be reported in accordance with the Company’s historical accounting policy (see Note 7).

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.)

c.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 disclosures in footnotes that 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.

The significant accounting policies applied in the annual consolidated financial statements of the Company as of December 31, 2019, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 27, 2020, have been applied consistently in these unaudited interim condensed consolidated financial statements, except for ASC 815 - Derivatives and Hedging (see Note 6) and the adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (see Note 7).

d.Concentrations of supply risks:

The Company depends on two contract manufacturers and several limited or single source component suppliers. 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 two contract manufacturers collectively accounted for 54.7% and 42.3% of the Company’s trade payables as of June 30, 2020 and December 31, 2019, respectively.

e.Use of estimates:

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures in the accompanying notes.

The duration, scope and effects of the ongoing COVID-19 pandemic, government and other third party responses to it, and the related macroeconomic effects, including to the Company’s business and the business of the Company’s suppliers and customers are uncertain, rapidly changing and difficult to predict. As a result, the Company’s accounting estimates and assumptions may change over time in response to this evolving situation. Such changes could result in future impairments of goodwill, intangibles, long-lived assets, inventories, incremental credit losses on receivables and AFS debt securities, or an increase in the Company’s insurance liabilities as of the time of a relevant measurement event.

f.Certain prior period amounts have been reclassified to conform to the current period presentation.

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 2:-INVENTORIES

June 30,

2020

December

31,

2019

 

Raw materials

$

101,079

$

64,714

Work in process

20,839

20,752

Finished goods

142,542

85,332

 

$

264,460

$

170,798

NOTE 3:-MARKETABLE SECURITIES

The following table summarizes the AFS marketable debt securities as of June 30, 2020:

Amortized

cost

Gross unrealized

gains

Gross unrealized

losses

Fair

value

 

 

AFS – matures within one year:

 

Corporate bonds

$

111,956

$

1,082

$

(6

)

$

113,032

 

AFS – matures after one year:

Corporate bonds

44,081

331

(143

)

44,269

Governmental bonds

1,398

17

-

1,415

45,479

348

(143

)

45,684

 

Total

$

157,435

$

1,430

$

(149

)

$

158,716

The following table summarizes the AFS marketable debt securities as of December 31, 2019:

Amortized

cost

Gross unrealized

gains

Gross unrealized

losses

Fair

value

 

 

AFS – matures within one year:

Corporate bonds

$

91,677

$

196

$

(28

)

$

91,845

 

AFS – matures after one year:

Corporate bonds

117,692

336

(250

)

117,778

Governmental bonds

1,398

-

-

1,398

119,090

336

(250

)

119,176

 

Total

$

210,767

$

532

$

(278

)

$

211,021

As of June 30, 2020, the Company did not record an allowance for credit losses for its AFS marketable debt securities (See Note 7).

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 4:-WARRANTY OBLIGATIONS

Changes in the Company’s product warranty obligations for the six months ended June 30, 2020 and 2019 were as follows:

Six months ended

June 30,

2020

2019

 

Balance, at beginning of period

$

172,563

$

121,826

Additions and adjustments to cost of revenues

47,369

46,288

Usage and current warranty expenses

(27,248

)

(17,476

)

 

Balance, at end of period

192,684

150,638

Less current portion

(68,674

)

(38,819

)

 

Long-term portion

$

124,010

$

111,819

NOTE 5:-FAIR VALUE MEASUREMENTS

In accordance with ASC 820, the Company measures its cash equivalents, foreign currency derivative contracts, and marketable securities, at fair value using the market approach valuation technique. Cash equivalents and marketable securities are classified within Level 1 or Level 2 based on whether these assets are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Foreign currency derivative contracts are classified within the Level 2 value hierarchy, as the valuation inputs are based on quoted prices and market observable data of similar instruments.

The following table sets forth the Company’s assets that were measured at fair value as of June 30, 2020 and December 31, 2019, by level within the fair value hierarchy:

Fair value measurements

as of

Fair Value

June 30,

December 31,

Description

Hierarchy

2020

2019

 

Assets:

Cash equivalents:

Money market mutual funds

Level 1

$

72,321

$

527

 

Derivative instruments asset:

Forward contracts designated as hedging instruments

Level 2

$

508

$

-

Options and forward contracts not designated as hedging

   instruments

Level 2

$

478

$

-

 

Short-term marketable securities:

Corporate bonds

Level 2

$

113,032

$

91,845

 

Long-term marketable securities:

Corporate bonds

Level 2

$

44,269

$

117,778

Governmental bonds

Level 2

$

1,415

$

1,398

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 6:-DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company accounts for derivatives and hedging based on ASC 815 (“Derivatives and Hedging”). ASC 815 requires the Company to recognize all derivatives on the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship.

To protect against the increase in value of forecasted foreign currency cash flows resulting from salary denominated in the Israeli currency, the New Israeli Shekels (“NIS”), during the six months ended June 30, 2020, the Company instituted a foreign currency cash flow hedging program. The Company hedges portions of the anticipated payroll denominated in NIS for a period of one to six months with hedging contracts.

Accordingly, when the dollar strengthens against the NIS, 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 June 30, 2020, the Company entered into forward contracts to sell U.S. dollars for NIS in the amount of $9,027.

In addition to the above-mentioned cash flow hedges transactions, the Company also entered into derivative instrument arrangements to hedge the Company’s exposure to currencies other than the U.S. dollar. These derivative instruments are not designated as cash flow hedges, as defined by ASC 815, and therefore all gains and losses, resulting from fair value remeasurement, were recorded immediately in the statement of income, as financial income (expenses), net.

As of June 30, 2020, the Company entered into forward contracts to sell Australian dollars (“AUD”) for U.S. dollars in the amount of AUD 15 million.

As of June 30, 2020, the Company entered into put and call options to sell Euro for U.S. dollars in the amount of euros 30 million.

The fair value of derivative assets as of June 30, 2020, was $986, which was recorded in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets. As of December 31, 2019, the Company had no derivative instruments (see Note 5).

For the six months ended June 30, 2020, the Company recorded unrealized gain in the amount of $446, net of tax effect, in “accumulated other comprehensive loss” related to the derivative assets designated as hedging instruments.

For the six months ended June 30, 2020, the Company recorded gain in the amount of $491, in “financial expenses, net” related to the derivative assets not designated as hedging instruments.

The Company had no gains or losses related to derivative instruments during the six months ended June 30, 2019.

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 6:-DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Cont.)

The following table provides details about reclassifications out of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2020 and 2019:

Details about Accumulated

Other Comprehensive Loss Components

Amount Reclassified from Accumulated Other

Comprehensive Loss

Affected Line Item in the

Statements of Income

2020

2019

 

Unrealized gains on cash flow hedges, net

$

99

$

-

Cost of revenues

270

-

Research and development

61

-

Sales and marketing

66

-

General and administrative

 

496

-

Total, before income taxes

 

(61

)

-

Income tax expense

 

$

435

$

-

Total, net of income taxes

NOTE 7:-CREDIT LOSSES

Effective January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, prospectively. This ASU replaces the incurred loss impairment model with an expected credit loss impairment model for financial instruments, including trade receivables. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

The amendment requires entities to consider forward-looking information to estimate expected credit losses, resulting in earlier recognition of losses for receivables that are current or not yet due, which were not considered under the previous accounting guidance. As stated above, the Company did not record a noncash cumulative effect adjustment on the opening consolidated balance sheet as of January 1, 2020, due to immateriality.

The Company is exposed to credit losses primarily through sales of products. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables.

Due to the short-term nature of such receivables, the estimate of amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances, the financial condition of customers and the Company’s historical experience with similar customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default.

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 7:-CREDIT LOSSES (Cont.)

The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible. The Company considered the current and expected future economic and market conditions surrounding COVID-19 pandemic and determined that the estimate of credit losses was not significantly impacted as of June 30, 2020. Estimates are used to determine the allowance. The allowance is based on assessment of anticipated payment and other historical, current and future information that is reasonably available.

The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of trade receivables to present the net amount expected to be collected:

Six months ended

June 30,

2020

 

Balance, at beginning of period

$

2,473

Provision for expected credit losses

4,296

Amounts written off charged against the allowance and others

(496

)

 

Balance, at end of period

$

6,273

NOTE 8:-COMMITMENTS AND CONTINGENT LIABILITIES

a.Guarantees:

As of June 30, 2020, contingent liabilities exist regarding guarantees in the amounts of $18,643, $2,160 and $75 in respect of bank loans, office rent lease agreements and other transactions, respectively.

b.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 cancelled 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 June 30, 2020, the Company had non-cancellable purchase obligations totaling approximately $335,321 out of which the Company already recorded a provision for loss in the amount of $3,811.

As of June 30, 2020, the Company had off-balance sheet contractual obligations for capital expenditures totaling approximately $80,251. These commitments reflect purchases of automated assembly lines and other machinery related to the Company’s manufacturing.

c.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.

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 8:-COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

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.

In September 2018, the Company’s German subsidiary, SolarEdge Technologies GmbH received a complaint filed by competitor SMA Solar Technology AG (“SMA”). The complaint, filed in the District Court Düsseldorf, Germany, alleges that SolarEdge's 12.5kW - 27.6kW inverters infringe two of the plaintiff’s patents. In its complaint, SMA requests inter alia an injunction and a determination for a claim for damages for sales in Germany. Plaintiff also asserts a value in dispute of 5 million Euros (approximately $5,600) for both patents. In November 2019, the first instance court accepted the claim of infringement for one of the two patents and the Company has filed an appeal to the Appeals Court Dusseldorf and challenged the validity of the allegedly infringed patent in the German Patent Court. In July 2020 the German Patent Court rendered a preliminary opinion, suggesting that the patent should be revoked in its entirety. Also in November 2019 the first instance court stayed the infringement proceedings regarding the other one of the two patents since it considered it to be highly likely that the patent would be invalid. The Company believes that it has meritorious defenses to the claims asserted and intends to vigorously defend against these lawsuits.

In May 2019, the Company was served with three lawsuits by Huawei Technologies Co., Ltd., a Chinese entity (“Huawei”), against the Company's two Chinese subsidiaries and its equipment manufacturer in China. The lawsuits, filed in the Guangzhou intellectual property court, allege infringement of three patents and ask for an injunction of manufacture, use, sale and offer for sale, and damage awards of 30 million RMB (approximately $4,250). Following the receipt of the lawsuits, the Company filed three lawsuits in China against Huawei for unauthorized use of patented technology of the Company. These lawsuits are still in process and judgements have not been rendered. The Company believes that it has meritorious defenses to the claims asserted and intends to vigorously defend against these lawsuits.

In August 2019, the Company was served with a lawsuit by certain former shareholders of S.M.R.E S.p.A (“SMRE”), against its Italian subsidiary that purchased the shares of SMRE in the tender offer which followed the SMRE Acquisition. The shareholders who tendered their shares are asking for the difference between 6 Euro per share, which is the amount they tendered their shares, and 6.77 Euro per share, for a total award of 2.7 million Euros (approximately $3,000). The Company believes it has meritorious defenses to the claims asserted and intends to vigorously defend against this lawsuit.

In December 2019, the Company received a lawsuit filed by a former consultant of the Company and its Israeli subsidiary in the amount of NIS 25.5 million (approximately $7,350) claiming damages caused relating to a terminated consulting agreement and stock options therein. The Company believes it has meritorious defenses to the claims asserted and intends to vigorously defend against this lawsuit.

NOTE 9:-STOCKHOLDERS’ EQUITY

a.Common Stock:

Number of shares

Authorized as of

Issued as of

Outstanding as of

June

30, 2020

December

31, 2019

June

30, 2020

December

31, 2019

June

30, 2020

December

31, 2019

Stock of $0.0001 par value:

Common stock

125,000,000

125,000,000

50,075,751

49,081,457

50,075,751

48,898,062

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 9:-STOCKHOLDERS’ EQUITY (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. The 2007 Plan terminated upon the Company’s IPO on March 31, 2015 and no further awards may 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 nonemployees of the Company and its Subsidiaries. As of June 30, 2020, a total of 12,828,270 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 5% of the total number of shares of capital stock outstanding on December 31st of the preceding calendar year; provided, however, that the Company’s board of directors may determine 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 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 10,000,000. As of June 30, 2020, an aggregate of 8,627,031 shares of common stock are still available for future grant under the 2015 Plan.

A summary of the activity in the stock options granted to employees and members of the board of directors for the six months ended June 30, 2020 and related information are as follows:

Number

of

Options

Weighted

average

exercise

price

Weighted

average

remaining

contractual

term

in years

Aggregate

intrinsic

Value

 

Outstanding as of December 31, 2019

2,112,009

15.44

3.58

168,229

Granted

59,558

101.81

Exercised

(568,165

)

9.84

Outstanding as of June 30, 2020

1,603,402

20.63

3.36

189,447

 

Vested and expected to vest as of June 30, 2020

1,597,973

20.43

5.88

189,113

 

Exercisable as of June 30, 2020

1,314,860

15.45

2.32

162,166

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 9:-STOCKHOLDERS’ EQUITY (Cont.)

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 six months ended June 30, 2020 was $63,632.

The weighted average grant date fair values of options granted to employees and executive directors during the six months ended June 30, 2020 was $53.65.

A summary of the activity in the RSUs granted to employees and directors for the six months ended June 30, 2020 is as follows:

Number of

RSUs

Weighted average

grant date

fair value

 

Unvested as of December 31, 2019

2,742,589

52.77

Granted

153,481

88.41

Vested

(547,706

)

41.92

Forfeited

(107,688

)

54.76

Unvested as of June 30, 2020

2,240,676

57.77

c.Employee Stock Purchase Plan (“ESPP”):

The Company adopted an ESPP. As of June 30, 2020, a total of 2,687,451 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.

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 June 30, 2020, 578,778 common stock shares had been purchased under the ESPP.

As of June 30, 2020, 2,108,673 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.

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 9:-STOCKHOLDERS’ EQUITY (Cont.)

d.Stock-based compensation expense for employees and nonemployees:

The Company recognized stock-based compensation expenses related to stock options, RSUs and PSUs granted to employees and non-employee consultants and ESPP in the condensed consolidated statement of income for the three and six months ended June 30, 2020 and 2019, as follows:

Three months ended

June 30,

Six months ended

June 30,

2020

2019

2020

2019

 

Cost of revenues

$

2,359

$

1,651

$

4,632

$

3,005

Research and development

5,847

4,176

11,225

7,666

Selling and marketing

3,445

2,722

6,637

5,126

General and administrative

2,310

2,823

4,240

5,279

 

Total stock-based compensation expense

$

13,961

$

11,372

$

26,734

$

21,076

As of June 30, 2020, there were total unrecognized compensation expenses in the amount of $131,368 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 July 1, 2020 through May 31, 2024.

NOTE 10:-EARNINGS PER SHARE

Basic net Earnings Per Share (“EPS”) is computed by dividing the net earnings attributable to SolarEdge Technologies, Inc. by the weighted-average number of shares of common stock outstanding during the period.

Diluted net EPS is computed by giving effect to all potential shares of common stock, including stock options, to the extent dilutive, all in accordance with ASC No. 260, "Earnings Per Share."

No shares were excluded from the calculation of diluted net EPS due to their anti-dilutive effect for the three and six months ended June 30, 2020.

334,096 and 289,796 shares were excluded from the calculation of diluted net earnings per share due to their anti-dilutive effect for the three and six months ended June 30, 2019, respectively.

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 10:-EARNINGS PER SHARE (Cont.)

The following table presents the computation of basic and diluted net EPS attributable to SolarEdge Technologies, Inc. for the periods presented:

Three months ended

June 30,

Six months ended

June 30,

2020

2019

2020

2019

 

Basic EPS:

Numerator:

Net income

$

36,668

$

32,913

$

78,916

$

50,888

Net loss attributable to Non-controlling interests

-

215

-

1,256

Net income attributable to SolarEdge Technologies, Inc.

$

36,668

$

33,128

$

78,916

$

52,144

 

Denominator:

Shares used in computing net earnings per share of common stock, basic

49,786,586

47,683,799

49,493,173

47,353,401

 

Diluted EPS:

Numerator:

Net income

$

36,668

$

32,913

$

78,916

$

50,888

Net loss attributable to Non-controlling interests

-

215

-

1,256

Undistributed earnings reallocated to non-vested

    stockholders

-

(220

)

-

(304

)

Net income attributable to SolarEdge Technologies, Inc.

$

36,668

$

32,908

$

78,916

$

51,840

 

Denominator:

Shares used in computing net earnings per share of common stock, basic

49,786,586

47,683,799

49,493,173

47,353,401

Weighted average effect of dilutive securities:

Non-vested PSU’S

-

(334,096

)

-

(289,796

)

Effect of stock-based awards

2,749,851

2,590,331

2,864,665

2,294,675

Shares used in computing net earnings per share of common stock, diluted

52,536,437

49,940,034

52,357,838

49,358,280

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 11:-OTHER OPERATING INCOME

At the time of the acquisition of Kokam Co., Ltd. (“Kokam”), Kokam had an outstanding claim against it for damages. The claim was settled for an amount of $4,900, which was recognized as an expense in other operating expenses in the consolidated statement of income in the year ended December 31, 2019. In March 2020, the Company was indemnified for the full amount by a major selling shareholder of Kokam. The Company recognized this as income in other operating income.

NOTE 12:-INCOME TAXES

a.Income taxes (tax benefit) are comprised as follows:

Three months ended

June 30,

Six months ended June 30,

2020

2019

2020

2019

 

Current period taxes

$

8,098

$

13,753

$

20,556

$

18,909

Deferred tax income, net and others

(3,236

)

(540

)

(6,772

)

(1,774

)

 

Taxes on income

$

4,862

$

13,213

$

13,784

$

17,135

b.Uncertain tax positions:

June 30,2020

December 31, 2019

 

Balance at January 1,

$

8,962

$

8,499

Increases related to current year tax positions

525

463

 

$

9,487

$

8,962

NOTE 13:-SEGMENT INFORMATION

Following the completion of three acquisitions during 2018 and 2019, the Company has changed its segments measurement, beginning in 2019. The purpose of the new measurement is to provide the Company’s chief operating decision maker (“CODM”) better information to assess segment performance and to make resource allocation decisions. The Company now operates in five different operating segments: Solar, Critical Power (formerly known as UPS), Energy Storage, e-Mobility and Automation Machines.

The Company's Chief Executive Officer is the CODM who makes resource allocation decisions and assesses performance based on the financial information presented on a consolidated basis, accompanied by disaggregated information about revenues and contributed profit by the operating segments.

Segment profit is comprised of gross profit for the segment less operating expenses that do not include amortization, stock based compensation expenses and certain other items.

The Company manages its assets on a group basis, not by segments, as many of its assets are shared or commingled. The Company’s CODM does not regularly review asset information by segments and, therefore, the Company does not report asset information by segment.

The Company identified one operating segment as reportable – the Solar segment. The other operating segments are insignificant individually and in the aggregate and therefore their results are presented together under “All other”.

The Solar segment includes the design, development, manufacture, and sales of an intelligent inverter solution designed to maximize power generation at the individual PV module level. The solution consists mainly of the Company’s power optimizers, inverters and cloud-based monitoring platform.

The “All other” category includes the design, development, manufacturing and sales of UPS products, energy storage products, e-Mobility products and automated machines for industries. Intersegment sales are a source of revenue for one of the operating segments included in the “All other” category.

The Company accounts for intersegment sales as if the sales were to third parties, that is, at current market prices.

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 13:-SEGMENT INFORMATION (cont.)

The following table presents information on reportable segments profit (loss) for the periods ended June 30, 2020:

Three months ended

June 30, 2020

Six months ended

June 30, 2020

Solar

All other

Solar

All other

 

Revenues

$

310,048

$

22,290

$

717,695

$

45,861

Cost of revenues

205,346

19,238

470,161

40,691

Gross profit

104,702

3,052

247,534

5,170

Research and development

26,374

5,852

53,457

10,060

Sales and marketing

15,020

2,179

33,643

4,322

General and administrative

8,718

2,927

17,874

8,018

Segments profit (loss)

$

54,590

$

(7,906

)

$

142,560

$

(17,230

)

The following table presents information on reportable segments profit (loss) for the periods ended June 30, 2019:

Three months ended

June 30, 2019

Six months ended

June 30, 2019

Solar

All other

Solar

All other

Revenues

$

306,746

$

18,264

$

559,814

$

37,067

Cost of revenues

193,528

15,536

359,842

31,869

Gross profit

113,218

2,728

199,972

5,198

Research and development

22,280

3,039

42,512

5,481

Sales and marketing

17,149

2,307

32,349

4,017

General and administrative

7,577

2,556

14,069

4,501

Segments profit (loss)

$

66,212

$

(5,174

)

$

111,042

$

(8,801

)

The following table presents information on reportable segments reconciliation to consolidated revenues for the periods presented:

Three months ended

June 30,

Six months ended

June 30,

2020

2019

2020

2019

 

Solar segment revenues

$

310,048

$

306,746

$

717,695

$

559,814

All other segment revenues

22,290

18,264

45,861

37,067

Intersegment revenues

(487

)

-

(487

)

-

Consolidated revenues

$

331,851

$

325,010

$

763,069

$

596,881

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 13:-SEGMENT INFORMATION (cont.)

The following table presents information on reportable segments reconciliation to consolidated operating income for the periods presented:

Three months ended

June 30,

Six months ended

June 30,

2020

2019

2020

2019

 

Solar segment profit

$

54,590

$

66,212

$

142,560

$

111,042

All other segment loss

(7,906

)

(5,174

)

(17,230

)

(8,801

)

Segments operating profit

46,684

61,038

125,330

102,241

Amounts not allocated to segments:

Stock based compensation expenses

(13,961

)

(11,372

)

(26,734

)

(21,076

)

Amortization

(2,651

)

(3,291

)

(5,336

)

(5,262

)

Legal settlement (see Note 11)

-

-

4,900

-

Cost of products adjustments

-

(319

)

(313

)

(1,001

)

Other unallocated expenses

-

(703

)

-

(1,501

)

Adjustments:

Intersegment profit

(107

)

-

(107

)

-

 

Consolidated operating income

$

29,965

$

45,353

$

97,740

$

73,401

 

F - 24


ITEM 2MANAGEMENT’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 product development, financing and investment plans, 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:

the duration, scope and effects of the ongoing COVID-19 pandemic, government and other third party responses to it and the related macroeconomic effects, including to our business and the business of our suppliers and customers;

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 energy applications;

changes in the U.S. trade environment, including the imposition of import tariffs;

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 photovoltaic (“PV”) system monitoring products by our competitors;

developments in alternative technologies or improvements in distributed solar energy generation;

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;

4


our dependence on ocean transportation to deliver our products in a cost effective manner;

our dependence upon a small number of outside contract manufacturers and limited or single source suppliers;

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 customers’ 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;

our ability to integrate acquired businesses;

fluctuations in global 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.

Overview

We are a leading provider of an optimized inverter solution that has changed the way power is harvested and managed in a solar photovoltaic system, known as PV system. Our direct current or DC optimized inverter system maximizes power generation at the individual PV module level while lowering the cost of energy produced by the solar PV system, for improved return on investment, or RoI. Additional benefits of the DC optimized inverter system include comprehensive and advanced safety features, improved design flexibility, and improved operating and maintenance, or O&M with module-level and remote monitoring. The typical SolarEdge optimized inverter system consists of power optimizers, inverters, a communication device which enables access to a cloud based monitoring platform and in many cases, additional smart energy management solutions. SolarEdge’s solutions addresses a broad range of solar market segments, from residential solar installations to commercial and small utility-scale solar installations.

5


Since introducing the optimized inverter solution in 2010, SolarEdge has expanded its activity to other areas of smart energy technology, both through organic growth and through acquisitions. SolarEdge now offers energy solutions which include not only residential, commercial and small utility scale PV systems but also product offerings in the areas of energy storage systems, or Energy Storage System or ESS and backup, electric vehicle, or EV components and charging capabilities, home energy management, grid services and virtual power plants, lithium-ion batteries and uninterrupted power supply, known as UPS solutions.

As part of our non-organic growth, we have completed three acquisitions during 2018 and 2019, each of which address our growth in the area of smart energy technology and power optimization.

In July 2018, we acquired the assets of a business for the development, manufacturing and sale of UPSs, (“Critical Power Division”).

In October 2018, we closed an acquisition of Kokam Co., Ltd. (“Kokam”), a provider of lithium-ion cells, batteries and energy reliable, safe, high-performance storage solutions that is headquartered in South Korea.

During 2019, we completed the acquisition of approximately 99.9% of SolarEdge Automation Machines SPA (“Automation Machines Division”) and SolarEdge eMobility SPA (“e-Mobility Division”) (formerly S.M.R.E Spa and I.E.T Spa, respectively). Our Automation Machines Division manufactures automated machinery for industries and our e-Mobility Division develops end-to-end e-Mobility solutions for electric and hybrid vehicles used in motorcycles and light commercial vehicles. These solutions include integrated, high-performing powertrains with e-motor, motor drive, gearbox, battery, BMS, chargers, vehicle control units and software for electric vehicles.

COVID-19 Impact

We are continuously and closely monitoring the evolving impact of COVID-19 on our operations and business. Our first priority continues to be to protect and support our employees through this period while maintaining company operations and support of our customers with as few disruptions as possible. Given that we have employees in many countries world-wide, we follow the guidance from local applicable authorities and health officials in each region in which we do business. In our headquarters located in Herziliya, Israel, we have been able to continue partial work from the office throughout the stay at home orders and beginning mid-April, we brought employees who were working from home back to the office, while complying with social distancing orders and in some cases, working in alternating shifts so as to reduce populated office areas. Our manufacturing facilities in Korea and Italy and our contract manufacturers facilities in China, Vietnam and Hungary have remained operational and at almost full capacity throughout the first quarter and the second quarter of 2020. Our customer support centers are working at full capacity, primarily from home. Our operations and operating expenses have not been significantly impacted by these adjustments.

The actions taken around the world to slow the spread of COVID-19 have impacted the installation rate of PV systems which we are closely tracking through our monitoring portal globally and per country. While the COVID-19 pandemic did not have a material adverse impact on our financial results for the first quarter of fiscal 2020, we saw and reported on a decline in installations in certain regions such as the United States and Italy beginning with the outbreak of the COVID-19 pandemic in March, 2020. This decline translated into reduced revenues in the second quarter of 2020 when compared to the first quarter of 2020 which were consistent with our guidance in our first quarter earnings release. In certain cases we accommodated customers in certain regions who requested to cancel or delay the supply of their orders.

6


As anticipated, our second quarter revenues of $331.9 million, a decline from $431.2 million in the prior quarter, reflect the reduced installations which we reported in the first quarter earnings release, primarily in the United States, which we attribute to the stay at home orders which impacted many installers. While installations rates in the United States continue to be at a rate slightly lower than the same period last year, we have seen a gradual increase of installations since May. Despite Covid-19, installations of SolarEdge PV systems in some European countries continued to increase over the past few months and the result is that our revenues reflect higher sales in certain European countries as compared to the first quarter of 2020.

Our management and board are continuously examining our plans for 2020 and reacting to the economic downturn, high unemployment rates in many countries and negative impact on businesses generally. As we reported in our Form 10Q for the quarter ended March 31, 2020, we have taken the following actions in order to mitigate the negative impacts of COVID-19 on our business, operating results and financial condition: We have reviewed our business plan for 2020 and made certain adjustments in order to accommodate expectations that revenues will be impacted in the forthcoming quarters. These adjustments include substantial reduction of new hiring as well as elimination of redundant positions, which reductions were implemented in the past quarter. The impact of these reductions will be reflected in our third quarter 2020 financial results. In addition we have carefully scrutinized our spending and management of operations including a review of all of our variable expenses in order to identify activities than can be reduced and costs that can be re-negotiated such as consulting and facility related costs. We have also reviewed our research and development projects and prioritized projects with higher revenue potential or infrastructure project over projects with lower expected return. In addition, effective April 1, 2020 our senior executives who had already waived their 2020 base salary increases also voluntarily reduced their 2019 base salaries by an additional 20%. Our directors also agreed, effective April 1, 2020 to reduce the cash portion of their compensation by 20% and the Company has temporarily put on hold most plans for expanding its workforce and suspended planned salary increases. These measures are reviewed by management on a quarterly basis and to date, remain in place.

We are a leader in the global module-level power electronics (“MLPE”) market. As of June 30, 2020, we have shipped approximately 58.5 million power optimizers and 2.4 million inverters. Over 1.6 million installations, many of which may include multiple inverters, are currently connected to, and monitored through, our cloud‑based monitoring platform. As of June 30, 2020, we have shipped approximately 19.5 GW of our DC optimized inverter systems.

Our revenues for the three months ended June 30, 2020 and 2019 were $331.9 million and $325.0 million, respectively. Gross margin was 31.0% and 34.1% for the three months ended June 30, 2020 and 2019, respectively. Net income was $36.7 million and $33.1 million for the three months ended June 30, 2020 and 2019, respectively.

Our revenues for the six months ended June 30, 2020 and 2019 were $763.1 million and $596.9 million, respectively. Gross margin was 31.8% and 33.0% for the six months ended June 30, 2020 and 2019, respectively. Net income was $78.9 million and $52.1 million for the six months ended June 30, 2020 and 2019, respectively.

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 PV 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

June 30,

Six Months Ended

June 30,

2020

2019

2020

2019

Inverters shipped

141,689

160,117

343,698

290,789

Power optimizers shipped

3,515,906

3,730,519

8,576,297

6,759,621

Megawatts shipped (1)

1,442

1,335

3,292

2,479


(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.

7


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 income data for each of the periods indicated.

Three Months Ended

June 30,

Six Months Ended

June 30,

2020

2019

2020

2019

(In thousands)

(In thousands)

Revenues

$

331,851

$

325,010

$

763,069

$

596,881

Cost of revenues

228,888

214,340

520,098

400,101

Gross profit

102,963

110,670

242,971

196,780

Operating expenses:

Research and development

38,098

29,505

74,793

55,704

Sales and marketing

20,936

22,127

45,189

42,299

General and administrative

13,964

13,685

30,149

25,376

Other operating income

-

-

(4,900

)

-

Total operating expenses

72,998

65,317

145,231

123,379

Operating income

29,965

45,353

97,740

73,401

Financial expenses (income), net

(11,565

)

(773

)

5,040

5,378

Income before taxes on income

41,530

46,126

92,700

68,023

Taxes on income

4,862

13,213

13,784

17,135

Net income

$

36,668

$

32,913

$

78,916

$

50,888

Net loss attributable to non-controlling interests

-

215

-

1,256

Net income attributable to SolarEdge Technologies, Inc.

$

36,668

$

33,128

$

78,916

$

52,144

Comparison of the Three Months Ended June 30, 2020 and 2019

Revenues

Three Months Ended

June 30,

Three Months Ended

June 30,

2019 to 2020

2020

2019

Change

(in thousands)

Revenues

$

331,851

$

325,010

$

6,841

2.1

%

Revenues increased by $6.8 million, or 2.1%, for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019, primarily due to increased sales in Europe and to a lesser extent, price increases on products sold in the U.S. intended to offset the increase in imposed tariffs on China-made products effective June 1, 2019.

Similar to the same quarter last year, revenues from outside of the U.S. comprised 62.0% of our revenues for the three months ended June 30, 2020 compared to 61.6% for the three months ended June 30, 2019.

8


Given the continued adverse effect of the COVID 19 pandemic on the economy in the United States which led to reduced installations, we expect that our third quarter revenues from the U.S. will be lower than in the third quarter of 2019 while we expect continued strength in revenues from Europe and rest of world.

The number of power optimizers recognized as revenues increased by approximately 115,500 units, or 3.2%, from approximately 3.6 million units in the three months ended June 30, 2019 to approximately 3.7 million units in the three months ended June 30, 2020. The number of inverters recognized as revenues decreased by approximately 17,600 units, or 11.0%, from approximately 159,300 units in the three months ended June 30, 2019 to approximately 141,700 units in the three months ended June 30, 2020. Our ASP per watt for solar products shipped decreased by $0.027, or 11.3%, in the three months ended June 30, 2020 as compared to the three months ended June 30, 2019. This reduction is primarily attributed to an increased rate of revenues driven from the sale of commercial products that are characterized with lower ASP per watt, a higher rate of revenues driven from outside the United States that are usually characterized by lower ASP due to a more competitive marketplace, and the devaluation of foreign currencies compared to the U.S. dollar. This ASP erosion was partially offset by increased prices in the U.S. intended to offset the increase in imposed tariffs on China-made products beginning in June 2019.

Cost of Revenues and Gross Profit

Three Months Ended

June 30,

Three Months Ended

June 30,

2019 to 2020

2020

2019

Change

(in thousands)

Cost of revenues

$

228,888

$

214,340

$

14,548

6.8

%

Gross profit

$

102,963

$

110,670

$

(7,707

)

(7.0

)%

Cost of revenues increased by $14.5 million, or 6.8%, in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019, primarily due to:

an increase of $8.7 million in other production costs, which include an accrual for possible raw material write offs resulting from our reduced manufacturing forecast (triggered by lower demand) which may result in rendering these raw materials obsolete as well as other expenses related to reduced manufacturing volumes due to COVID-19;

Increased shipment and logistics costs of $5.0 million attributed to the change in custom tariff rates on Chinese made products imported into the U.S. from 10% to 25% in June 2019 offset by a decrease in air shipment expenses which was enabled due to higher inventory levels. High inventory levels were a result of lower demand coupled with sufficient manufacturing capacity.

increased personnel-related costs of $2.9 million related to the expansion of our operations and support headcount which grew in parallel to our growing install base worldwide; and

These increases were partially offset by a decrease in warranty expenses and warranty accruals of $3.2 million associated with various cost reductions on the different elements of our warranty expenses which include the cost of the products, shipment and other related expenses.

We anticipate that our cost of revenues per unit will remain similar in the third quarter of 2020 given our outlook for similar geographic and product mix.

Gross profit as a percentage of revenue decreased from 34.1% in the three months ended June 30, 2019 to 31.0% in the three months ended June 30, 2020, primarily due to:

increased shipment and logistics costs resulting from increased customs tariffs in the U.S;

9


lower gross profit from our Critical Power, e-Mobility and Automation Machines Divisions;

an increase in other production costs and inventory valuation accruals as well as other expenses related to reduced manufacturing volumes due to COVID-19;

the arithmetic effect from the increase in selling prices in the U.S. intended to offset the increase in tariffs on Chinese made products and the same increase in cost of goods sold as a result of the increased tariffs; and

increased actual support costs related to our warranty obligations.

These factors were partially offset by:

increased profit from units sold due to a combination of stable selling prices and cost reductions in the manufacturing process of such products; and

decreased warranty accruals due to various cost reductions on the different elements of our warranty expenses which include the cost of the products, shipment and other related expenses.

We expect that gross margin as a percent of revenues will remain stable in the third quarter of 2020 as a result of factors related to the impacts of COVID-19 and due to expectation of a similar geographic and product mix of our revenues which will be inclined towards Europe and rest of the world.

In light of the uncertain impact of COVID-19 on the rate of growth of our newly acquired businesses, accounting estimates and assumptions related to goodwill, intangible and other assets may change over time in response to uncertain circumstances related to this evolving situation. Such changes could result in future impairments of goodwill, intangible and other assets.

Research and Development

Three Months Ended

June 30,

Three Months Ended

June 30,

2019 to 2020

2020

2019

Change

(in thousands)

Research and development

$

38,098

$

29,505

$

8,593

29.1

%

Research and development expenses increased by $8.6 million, or 29.1%, in the three months ended June 30, 2020 as compared to the three months ended June 30, 2019, primarily due to:

an increase in personnel-related costs of $5.5 million resulting from an increase in our research and development headcount as well as salary expenses associated with employee equity-based compensation. The increase in headcount reflects an investment in enhancements of existing products and research and development expenses associated with bringing new products to the market; and

increased expenses related to consultants and sub-contractors in an amount of $2.2 million.

10


We expect that our research and development expenses in the third quarter will remain similar compared to the second quarter primarily due to cost reduction activities initiated in response to COVID-19 and the continued virtual halt in travel and travel related expenses.

Sales and Marketing

Three Months Ended

June 30,

Three Months Ended

June 30,

2019 to 2020

2020

2019

Change

(in thousands)

Sales and marketing

$

20,936

$

22,127

$

(1,191

)

(5.4

)%

Sales and marketing expenses decreased by $1.2 million, or 5.4%, in the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily due to:

expenses related to marketing activities that decreased by $1.3 million due to the cancellation or postponement of marketing activities, exhibitions and shows, which changes were triggered by COVID-19; and

expenses related to travel decreased by $ 1.2 million, also as a result of Covid-19.

These were partially offset by:

increased personnel-related costs of $0.6 million as a result of an increase in headcount supporting our growth in the U.S., Europe and Asia, as well as salary expenses associated with employee equity-based compensation; and

increased consultants and sub-contractors expenses, other overhead and amortization costs of $0.8 million.

We expect sales and marketing expenses to continue to be at a similar level in the third quarter of 2020 primarily due to cancellation of marketing events, cost reduction activities initiated in response to COVID-19 and the reduction of expenses related to travel and related expenses.

General and Administrative

Three Months Ended

June 30,

Three Months Ended

June 30,

2019 to 2020

2020

2019

Change

(in thousands)

General and administrative

$

13,964

$

13,685

$

279

2.0

%

General and administrative expenses increased by $0.3 million or 2.0%, in the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

While we did provide payment extensions to certain customers, most of these payments have now been made and we did not experience significant customer defaults on payments or incur substantial losses related to customer bankruptcies. We continue to be cautious in the way we provide credit to our customers. In the third quarter of 2020, we may still incur customer defaults on payments and other bad debts as a result of the impact of the economic downturn caused by COVID-19 on our customers. If that happens, these write-offs would be reflected in our general and administrative expenses in future fiscal quarters.

11


Financial expenses (income), net

Three Months Ended

June 30,

Three Months Ended

June 30,

2019 to 2020

2020

2019

Change

(in thousands)

Financial expenses (income), net

$

(11,565

)

$

(773

)

$

(10,792

)

1,396

%

Financial income was $11.6 million in the three months ended June 30, 2020 compared to financial income of $0.8 million in the three months ended June 30, 2019, primarily due to an increase of $11.3 million in foreign exchange fluctuations, mainly between each of the Euro, the New Israeli Shekel, the Australian Dollar and the South Korean Won against the U.S. Dollar.

Taxes on Income

Three Months Ended

June 30,

Three Months Ended

June 30,

2019 to 2020

2020

2019

Change

(in thousands)

Taxes on income

$

4,862

$

13,213

$

(8,351

)

(63.2

)%

Taxes on income decreased by $8.4 million, or 63.2%, in the three months ended June 30, 2020 as compared to the three months ended June 30, 2019, primarily due to:

a decrease of $4.6 million of current tax expenses related to the decrease of income before taxes, worldwide;

an increase of $2.2 million in deferred tax assets (presented as tax benefit), net

Given the impact of the economic downturn caused by COVID-19, we expect our profitability to decrease in the coming quarters. Such decrease will likely result in a decrease in our tax expenses related to taxes on income.

12


Net Income

Three Months Ended

June 30,

Three Months Ended

June 30,

2019 to 2020

2020

2019

Change

(in thousands)

Net income

$

36,668

$

32,913

$

3,755

11.4

%

As a result of the factors discussed above, net income increased by $3.8 million, or 11.4%, in the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

13


Comparison of the Six Months Ended June 30, 2020 and 2019

Revenues

Six Months Ended

June 30,

Six Months Ended

June 30,

2019 to 2020

2020

2019

Change

(In thousands)

Revenues

$

763,069

$

596,881

$

166,188

27.8

%

Revenues increased by $166.2 million, or 27.8%, for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, primarily due to (i) an increase in the number of inverters and power optimizers sold, with significant growth in revenues coming from Europe and from the U.S., mainly during the first quarter of 2020; and (ii) price increases on products sold in the U.S. intended to offset the increase in imposed tariffs on China made products in June 2019. Revenues from outside of the U.S. comprised 51.0% of our revenues for the six months ended June 30, 2020 compared to 59.2% for the six months ended June 30, 2019. The number of power optimizers recognized as revenues increased by approximately 1.9 million units, or 28.2%, from approximately 6.6 million units in the six months ended June 30, 2019 to approximately 8.5 million units in the six months ended June 30, 2020. The number of inverters recognized as revenues increased by approximately 47,400 units, or 16.3%, from approximately 291,400 units in the six months ended June 30, 2019 to approximately 338,800 units in the six months ended June 30, 2020. However, the devaluation of foreign currencies compared to the U.S. Dollar, negatively impacted our U.S. Dollar denominated ASP. In addition, revenues from sale of commercial products that are characterized with lower ASP per watt increased during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019. Overall, and primarily due to the factors detailed above, our ASP per watt for for solar products shipped decreased by $0.009, or 4.0%, in the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

Cost of Revenues and Gross Profit

Six Months Ended

June 30,

Six Months Ended

June 30,

2019 to 2020

2020

2019

Change

(In thousands)

Cost of revenues

$

520,098

$

400,101

$

119,997

30.0

%

Gross profit

$

242,971

$

196,780

$

46,191

23.5

%

Cost of revenues increased by $120.0 million, or 30.0%, in the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, primarily due to:

an increase in the volume of products sold;

increased customs tariffs, shipment and logistics costs of $32.8 million attributed to the change in tariff rates on Chinese made products imported into the U.S. from 10% to 25% in June 2019 as well as an increase in shipment costs due to increased product demand.

an increase in other production costs of $17.3, which include an accrual for possible raw material write offs resulting from our reduced manufacturing forecast (triggered by lower demand) which may result in rendering these raw materials obsolete as well as other expenses related to reduced manufacturing volumes due to COVID-19; and

an increase in personnel-related costs of $7.0 million related to the expansion of our operations and support headcount which grew in parallel to our growing install base worldwide and in connection with entering into the machinery and integrated powertrain markets.

14


Gross profit as a percentage of revenue decreased from 33.0% in the six months ended June 30, 2019 to 31.8% in the six months ended June 30, 2020, primarily due to:

increased shipment and logistics costs resulted from our growth, new customs tariff rules in the U.S. and an increase in air shipments during the first quarter of 2020;

the arithmetic effect from the increase in selling prices in the U.S. intended to offset the increase in tariffs on Chinese made products imported into the U.S. from 10% to 25% in June 2019;

an increase in other production costs;

increased actual support costs related to our warranty obligations; and

lower gross profit from our Critical Power, e-Mobility and Automated Machines Divisions;

These were partially offset by:

general economies of scale in our personnel-related costs and other costs associated with our support and operations departments;

increased profit on the units sold due to a combination of stable selling prices and cost reductions in the manufacturing process of these products; and

decreased warranty accruals due to various cost reductions on the different elements of our warranty expenses which include the cost of the products, shipment and other related expenses.

Research and Development

Six Months Ended

June 30,

Six Months Ended

June 30,

2019 to 2020

2020

2019

Change

(In thousands)

Research and development

$

74,793

$

55,704

$

19,089

34.3

%

Research and development increased by $19.1 million, or 34.3%, in the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, primarily due to:

an increase in personnel-related costs of $13.8 million resulting from an increase in our research and development headcount as well as salary expenses associated with employee equity-based compensation. The increase in headcount reflects an investment in enhancements of existing products and research and development expenses associated with bringing new products to the market;

increased expenses related to consultants and sub-contractors in an amount of $2.3 million; and

increased expenses related to other overhead costs in an amount of $1.9 million.

Sales and Marketing

Six Months Ended

June 30,

Six Months Ended

June 30,

2019 to 2020

2020

2019

Change

(In thousands)

Sales and marketing

$

45,189

$

42,299

$

2,890

6.8

%

15


Sales and marketing expenses increased by $2.9 million, or 6.8%, in the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, primarily due to:

increased personnel-related costs of $4.5 million as a result of an increase in headcount supporting our growth in the U.S., Europe and Asia, as well as salary expenses associated with employee equity-based compensation; and

increased expenses related to other overhead costs and other expenses in an amount of $0.9 million.

These factors were partially offset by:

decreased expenses related to marketing activities in an amount of $1.5 million; and

decreased expenses related to travel in an amount of $ 1.2 million.

General and Administrative

Six Months Ended

June 30,

Six Months Ended

June 30,

2019 to 2020

2020

2019

Change

(In thousands)

General and administrative

$

30,149

$

25,376

$

4,773

18.8

%

General and administrative expenses increased by $4.8 million, or 18.8%, in the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, primarily due to increased expenses related to an accrual for doubtful debts in an amount of $3.7 million.

Other operating income

Six Months Ended

June 30,

Six Months Ended

June 30,

2019 to 2020

2020

2019

Change

(In thousands)

Other operating income

$

4,900

$

-

$

4,900

N/A

Other operating income increased by $4.9 million, in the six months ended June 30, 2020 compared to the six months ended June 30, 2019, due to the payment to us out of escrow of $5 million relating to a matter settled in arbitration for Kokam in the fourth quarter of 2019, for which we had indemnification.

Financial Expenses (Income), Net

Six Months Ended

June 30,

Six Months Ended

June 30,

2019 to 2020

2020

2019

Change

(In thousands)

Financial expenses (income), net

$

5,040

$

5,378

$

(338

)

(6.3

)%

16


Financial expenses slightly decreased by $0.3 million, or 6.3% in the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to:

an increase of $1.7 million related to income in foreign exchange fluctuations of lease agreement liabilities as part of the adoption of Accounting Standards Update No. 2016-02, (Topic 842) "Leases; and

an increase of $0.5 million in finance income related to hedging transactions.

These factors were partially offset by an increase of $1.7 million in other financial expenses and bank charges.

Taxes on Income

Six Months Ended

June 30,

Six Months Ended

June 30,

2019 to 2020

2020

2019

Change

(In thousands)

Taxes on income

$

13,784

$

17,135

$

(3,351

)

(19.6

)%

Taxes on income decreased by $3.4 million, or 19.6% in the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to an increase of $4.8 million in deferred tax assets (presented as tax benefit), net. This increase was partially offset by an increase of $2.2 million in current tax expenses, net, mainly related to an increase in profit before Tax;

Net Income

Six Months Ended

June 30,

Six Months Ended

June 30,

2019 to 2020

2020

2019

Change

(In thousands)

Net income

$

78,916

$

50,888

$

28,028

55.1

%

As a result of the factors discussed above, net income increased by $28.0 million, or 55.1% in the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

17


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 June 30,

Six Months Ended June 30,

2020

2019

2020

2019

(In thousands)

Net cash provided by operating activities

$

59,310

$

50,784

$

167,055

$

107,234

Net cash provided by (used in) investing activities

$

46,800

$

(35,176

)

$

26,876

$

(52,221

)

Net cash provided by (used in) financing activities

$

5,681

$

(64,755

)

$

8,996

$

(67,385

)

Increase (decrease) in cash and cash equivalents

$

111,791

$

(49,147

)

$

202,927

$

(12,372

)

As of June 30, 2020, our cash and cash equivalents were $428.4 million. This amount does not include $158.7 million invested in available for sale marketable securities, $2.1 million invested in restricted bank deposits and $3.4 million invested in short-term bank deposits. Our principal uses of cash are funding our operations and other working capital requirements. As of June 30, 2020, we have open commitments for capital expenditures in an amount of approximately $80.3 million. These commitments reflect purchases of automated assembly lines and other machinery related to our manufacturing operations. 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 including the self-funding of our capital expenditure commitments.

To the extent that revenues decrease over the coming few quarters due to the economic downturn caused by the global pandemic, we expect that our cash balances will also decrease. This will be compounded by our continued investment in research and development activities including the establishment of a lithium-ion factory in Korea which is continuing as planned and the support of our other non-solar businesses as they grow. We carefully oversee our cash resources and believe that our strong balance sheet positions us well to manage the coming quarters despite any temporary decline in revenues.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into law. Section 2302 of the CARES Act provides that employers may defer the deposit and payment of the employer's portion of Social Security taxes imposed under section 3111(a) of the Internal Revenue Code. As permitted under the CARES Act, we deferred payment of social security taxes through the end of 2020 (with 50% of the deferred amount due December 31, 2021 and the remaining of 50% amount due December 31, 2022). This deferral is expected to provide approximately $1.2 million in additional liquidity during 2020.

Operating Activities

For the six months, ended June 30, 2020, cash provided by operating activities was $167.1 million derived mainly from net income of $78.9 million that included $35.9 million of non-cash expenses, a decrease of $116.0 million in trade receivables and $37.1 million in prepaid expenses and other accounts receivable, an increase of $5.8 million in accrued expenses and other accounts payable, $20.2 million in warranty obligations, and $1.5 million accruals for employees. This was offset by a decrease of $31.8 million in deferred revenues, $1.8 million in trade payables, an increase of $94.2 million in inventories, and $0.5 million in operating lease liabilities.

For the six months ended June 30, 2019, cash provided by operating activities was $107.2 million, derived mainly from net income of $50.9 million that included $32.8 million of non-cash expenses, an increase of $28.9 million in warranty obligations, $28.2 million in accrued expenses and other accounts payable, $11.8 million of deferred revenues, $5.5 million in trade payables, $5.1 million in accruals for employees, $1.5 in operating lease liabilities and a decrease of $1.7 million in inventories, which were offset by an increase of $56.6 million in trade receivables, net, and $2.6 million in prepaid expenses and other assets.

18


As a result of the economic downturn triggered by COVID-19, we expect a lower volume of orders in the second half of 2020 relative to pre-COVID-19 orders, and in light of purchase obligations and manufacturing commitments incurred by us prior to the outbreak of COVID-19, our inventory levels may further increase in the second half of 2020 resulting in consumption of cash for operating activities.

Investing Activities

During the six months ended June 30, 2020 net cash provided by investing activities was $26.9 million, of which $89.7 million from sales and maturities of available-for-sale marketable securities which we sold in order to maintain high cash balances to mitigate risks associated with COVID-19, $25.6 million from the withdrawal from restricted bank deposits and $2.1 million related to other investing activities. This was offset by $36.8 million which was invested in available-for-sale marketable securities and $53.7 million was related to capital investments in laboratory equipment, end of line testing equipment, automated assembly lines, manufacturing tools and leasehold improvements.

During the six months ended June 30, 2019, net cash used in investing activities was $52.2 million, of which $63.7 million was invested in available-for-sale marketable securities, $38.4 million was utilized for the SMRE acquisition and $22.2 million was related to capital investments in laboratory equipment, end of line testing equipment, automated assembly lines, manufacturing tools and leasehold improvements. This was offset by $68.4 million from proceeds from sales and the maturities of available-for-sale marketable securities and a decrease of $3.7 million in bank deposits.

Financing Activities

For the six months ended June 30, 2020, net cash provided by financing activities was $9.0 million, of which, $15.2 million related to proceeds from new bank loans of Kokam and $9.1 million attributed to cash received from the exercise of employee and non-employee stock-based awards. This was offset by $15.2 million used for repayment of loans we acquired as part of the Kokam Acquisition and $0.1 million, which was related to other financing activities.

For the six months ended June 30, 2019, net cash used in financing activities was $67.4 million, of which $66.5 million was related to the purchase of non-controlling interests in Kokam and SMRE and $4.7 million was used for repayment of loan obligations we acquired as part of the Kokam and SMRE Acquisitions. This was offset by $3.8 million attributed to cash received from the exercise of employee and non-employee stock options.

Debt Obligations

   During the six months ended June 30, 2020, Kokam redeemed all outstanding loans and entered into new bank loans in an aggregate amount of $15.3 million. The new bank loans mature in two installments through December 31, 2020, with annual interest rate of 1.64%. As of June 30, 2020, the aggregate outstanding amount of the new bank loans was $15.2 million.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 3QUANTITATIVE 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.

19


Foreign Currency Exchange Risk

Approximately 45.6% and 54.8% of our revenues for the six months ended June 30, 2020 and 2019, 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 and Korean Won. 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 six months ended June 30, 2020, between the Euro and the U.S. Dollar would increase or decrease our net income by $36.1 million for the six months ended June 30, 2020. A hypothetical 10% change in foreign currency exchange rates during the six months ended June 30, 2020, between the New Israeli Shekel and the U.S. Dollar would increase or decrease our net income by $8.2 million for the six months ended June 30, 2020. A hypothetical 10% change in foreign currency exchange rates during the six months ended June 30, 2020, between the Korean Won and the U.S. Dollar would increase or decrease our net income by $9.6 million for the six months ended June 30, 2020.

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 portions of the anticipated payroll payments denominated in New Israeli Shekels (“NIS”). Our foreign currency forward contracts are expected to mitigate exchange rate changes related to the hedged assets. Those hedging contracts are designated as cash flow hedges.

In addition, we also entered into derivative instrument arrangements to hedge the Company’s exposure to currencies other than the U.S. dollar, mainly forward contracts to sell Australian dollars (“AUD”) for U.S. dollars and options contracts to sell Euro for U.S. dollars. These derivative instruments are not designated as cash flow hedges.

Concentrations of Major Customers

Our trade accounts receivables potentially expose us to a concentration of credit risk with our major customers. As of June 30, 2020, none of our customers accounted for more than 10% of our consolidated trade receivables, net balance. We currently do not foresee a credit risk associated with these receivables other than the amount included in our financial statements.

Credit risk as well as associated risks of defaults on payments and other bad debts could increase as a result of the impact of the economic downturn caused by COVID-19 on our customers.

20


ITEM 4CONTROLS 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 the end of the period covered by this report. 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.

Changes in Internal Control over Financial Reporting

Following the adoption of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) on January 1, 2020, we implemented changes to our processes related to credit losses and the related control activities. There were changes to our internal control over financial reporting related to the adoption of this new standard.

Based on an evaluation by our chief executive officer and chief financial officer, such officers concluded that there have been no other 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.

We have not experienced any material impact to our internal controls over financial reporting despite the fact that many of our employees were working remotely during the first quarter and to a lesser extent during the second quarter, due to the COVID-19 pandemic. We are continuously monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.

PART II. OTHER INFORMATION

ITEM 1LEGAL 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), including the matters described in Item 3 – “Legal Proceedings” of our Annual Report on Form 10-K for the period ended December 31, 2019. 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 1ARISK FACTORS

There have been no material changes to our “Risk Factors” as discussed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019 and in Part II, Item 1A, "Risk Factors," in our quarterly report on Form 10Q for the quarter ended March 31, 2020.

21


ITEM 2UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5OTHER INFORMATION

None.

22


ITEM 6EXHIBITS

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)

 

31.1

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)

Filed with this report.

31.2

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a).

Filed with this report.

32.1

Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Filed with this report.

32.2

Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Filed with this report.

101

The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.

Filed with this report.

104

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 formatted in Inline XBRL

Included in Exhibit 101.

 

23


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.

SOLAREDGE TECHNOLOGIES, INC.

 

Date: August 6, 2020

/s/ Zivi Lando

Zivi Lando

Chief Executive Officer

(Principal Executive Officer)

 

Date: August 6, 2020

/s/ Ronen Faier

Ronen Faier

Chief Financial Officer

(Principal Financial and Accounting Officer)

24