SOLAREDGE TECHNOLOGIES, INC. - Quarter Report: 2020 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Commission File No. 001-36894

(Exact name of registrant as specified in its charter)

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.

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).

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.

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).

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

ITEM 1FINANCIAL STATEMENTS

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2020

IN U.S. DOLLARS

UNAUDITED

INDEX

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

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

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

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

---

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

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

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

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

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

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

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

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

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

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

* Represents an amount less than $1.

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

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

---

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

* Represents an amount less than $1.

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

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

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U.S. dollars in thousands

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

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

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

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U.S. dollars in thousands

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

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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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).

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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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.

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

NOTE 2:-INVENTORIES

NOTE 3:-MARKETABLE SECURITIES

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

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

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

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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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:

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:

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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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.

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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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:

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.

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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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:

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.

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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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:

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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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:

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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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:

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.

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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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:

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.

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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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:

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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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:

b.Uncertain tax positions:

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.

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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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:

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

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

SOLAREDGE TECHNOLOGIES, INC.

AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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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:

 

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:

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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;

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future demand for solar energy solutions;

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changes to net metering policies or the reduction, elimination or expiration of government subsidies and economic incentives for on‑grid solar energy applications;

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

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federal, state and local regulations governing the electric utility industry with respect to solar energy;

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the retail price of electricity derived from the utility grid or alternative energy sources;

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interest rates and supply of capital in the global financial markets in general and in the solar market specifically;

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competition, including introductions of power optimizer, inverter and solar photovoltaic (“PV”) system monitoring products by our competitors;

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

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historic cyclicality of the solar industry and periodic downturns;

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defects or performance problems in our products;

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our ability to forecast demand for our products accurately and to match production with demand;

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

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

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capacity constraints, delivery schedules, manufacturing yields and costs of our contract manufacturers and availability of components;

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delays, disruptions and quality control problems in manufacturing;

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shortages, delays, price changes or cessation of operations or production affecting our suppliers of key components;

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business practices and regulatory compliance of our raw material suppliers;

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performance of distributors and large installers in selling our products;

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our customers’ financial stability, creditworthiness and debt leverage ratio;

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our ability to retain key personnel and attract additional qualified personnel;

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our ability to effectively design, launch, market and sell new generations of our products and services;

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our ability to maintain our brand and to protect and defend our intellectual property;

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our ability to retain, and events affecting, our major customers;

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our ability to manage effectively the growth of our organization and expansion into new markets;

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our ability to integrate acquired businesses;

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fluctuations in global currency exchange rates;

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unrest, terrorism or armed conflict in Israel;

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general economic conditions in our domestic and international markets;

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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.

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.

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.

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.

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

Revenues

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.

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

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:

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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;

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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.

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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:

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

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

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

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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

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increased actual support costs related to our warranty obligations.

These factors were partially offset by:

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

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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

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:

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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

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

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

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:

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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

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

These were partially offset by:

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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

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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

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.

Financial expenses (income), net

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

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:

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

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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.

Net Income

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.

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

Revenues

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

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:

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an increase in the volume of products sold;

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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.

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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

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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.

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:

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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;

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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;

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an increase in other production costs;

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increased actual support costs related to our warranty obligations; and

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

These were partially offset by:

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

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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

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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

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:

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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;

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

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

Sales and Marketing

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:

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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

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

These factors were partially offset by:

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

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

General and Administrative

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

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

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:

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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

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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

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

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.

Liquidity and Capital Resources

The following table shows our cash flow from operating activities, investing activities, and financing activities for the stated periods:

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.

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.

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.

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.

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.

ITEM 6EXHIBITS

 

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.