SOLAREDGE TECHNOLOGIES, INC. 10-Q

ITEM 1. FINANCIAL STATEMENTS SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except per share data) September 30, 2022 December 31, 2021 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 678,329 $ 530,089 Marketable securities 202,598 167,728 Trade receivables, net of allowances of $ 4,283 and $ 2,626 , respectively 785,325 456,339 Inventories, net 561,352 380,143 Prepaid expenses and other current assets 224,169 176,992 Total current assets 2,451,773 1,711,291 LONG-TERM ASSETS: Marketable securities 688,753 482,228 Deferred tax assets, net 38,268 27,572 Property, plant and equipment, net 491,433 410,379 Operating lease right-of-use assets, net 62,535 47,137 Intangible assets, net 46,286 58,861 Goodwill 108,860 129,629 Other long-term assets 15,638 33,856 Total long-term assets 1,451,773 1,189,662 Total assets $ 3,903,546 $ 2,900,953 The accompanying notes are an integral part of the condensed consolidated financial statements. F - 2 SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Cont.) (in thousands, except per share data) September 30, 2022 December 31, 2021 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Trade payables, net $ 311,565 $ 252,068 Employees and payroll accruals 71,905 74,465 Warranty obligations 97,222 71,480 Deferred revenues and customers advances 31,896 17,789 Accrued expenses and other current liabilities 181,892 109,379 Total current liabilities 694,480 525,181 LONG-TERM LIABILITIES: Convertible senior notes, net 623,721 621,535 Warranty obligations 248,917 193,680 Deferred revenues 176,824 151,556 Finance lease liabilities 45,509 40,508 Operating lease liabilities 46,398 38,912 Other long-term liabilities 15,570 19,542 Total long-term liabilities 1,156,939 1,065,733 COMMITMENTS AND CONTINGENT LIABILITIES STOCKHOLDERS’ EQUITY: Common stock of $ 0.0001 par value - Authorized: 125,000,000 shares as of September 30, 2022 and December 31, 2021; issued and outstanding: 55,894,106 and 52,815,395 shares as of September 30, 2022 and December 31, 2021, respectively 6 5 Additional paid-in capital 1,457,379 687,295 Accumulated other comprehensive loss ( 128,266 ) ( 27,319 ) Retained earnings 723,008 650,058 Total stockholders’ equity 2,052,127 1,310,039 Total liabilities and stockholders’ equity $ 3,903,546 $ 2,900,953 The accompanying notes are an integral part of the condensed consolidated financial statements. F - 3 SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Revenues $ 836,723 $ 526,404 $ 2,219,577 $ 1,411,950 Cost of revenues 614,722 353,843 1,635,976 943,123 Gross profit 222,001 172,561 583,601 468,827 Operating expenses: Research and development 69,659 55,666 210,855 155,307 Sales and marketing 42,726 29,383 117,017 85,752 General and administrative 27,933 21,098 82,483 60,317 Other operating expenses (income), net ( 2,724 ) - 1,963 1,350 Total operating expenses 137,594 106,147 412,318 302,726 Operating income 84,407 66,414 171,283 166,101 Financial expense, net ( 33,025 ) ( 5,751 ) ( 52,785 ) ( 13,591 ) Other income 7,533 - 7,533 - Income before income taxes 58,915 60,663 126,031 152,510 Income taxes 34,172 7,615 53,081 24,294 Net income $ 24,743 $ 53,048 $ 72,950 $ 128,216 Net basic earnings per share of common stock $ 0.44 $ 1.01 $ 1.33 $ 2.46 Net diluted earnings per share of common stock $ 0.43 $ 0.96 $ 1.29 $ 2.32 Weighted average number of shares used in computing net basic earnings per share of common stock 55,730,328 52,355,867 54,788,734 52,056,233 Weighted average number of shares used in computing net diluted earnings per share of common stock 58,747,538 55,929,000 57,886,041 55,955,441 The accompanying notes are an integral part of the condensed consolidated financial statements. F - 4 SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net income $ 24,743 $ 53,048 $ 72,950 $ 128,216 Other comprehensive income (loss), net of tax: Net change related to available-for-sale securities ( 9,579 ) 29 ( 23,647 ) ( 1,847 ) Net change related to cash flow hedges ( 140 ) 308 ( 4,656 ) 619 Foreign currency translation adjustments on intra-entity transactions that are of a long-term investment nature ( 30,799 ) ( 12,272 ) ( 66,129 ) ( 14,168 ) Foreign currency translation adjustments, net 1,872 ( 3,664 ) ( 6,515 ) ( 7,596 ) Total other comprehensive loss ( 38,646 ) ( 15,599 ) ( 100,947 ) ( 22,992 ) Comprehensive income (loss) $ ( 13,903 ) $ 37,449 $ ( 27,997 ) $ 105,224 The accompanying notes are an integral part of the condensed consolidated financial statements. F - 5 SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (in thousands, except per share data) Common stock Additional Accumulated other Number Amount paid in Capital comprehensive loss Retained earnings Total Balance as of January 1, 2022 52,815,395 $ 5 $ 687,295 $ ( 27,319 ) $ 650,058 $ 1,310,039 Issuance of common stock upon exercise of stock-based awards 270,751 * - 1,478 - - 1,478 Stock based compensation - - 34,107 - - 34,107 Issuance of common stock in a secondary public offering, net of underwriters' discounts and commissions of $ 27,140 and $ 834 of offering costs 2,300,000 1 650,525 - - 650,526 Other comprehensive loss adjustments - - - ( 18,748 ) - ( 18,748 ) Net income - - - - 33,123 33,123 Balance as of March 31, 2022 55,386,146 $ 6 $ 1,373,405 $ ( 46,067 ) $ 683,181 $ 2,010,525 Issuance of Common Stock upon exercise of stock-based awards 211,839 * - 164 - - 164 Issuance of Common stock under employee stock purchase plan 35,105 * - 8,141 - - 8,141 Stock based compensation - - 37,171 - - 37,171 Other comprehensive loss adjustments - - - ( 43,553 ) - ( 43,553 ) Net income - - - - 15,084 15,084 Balance as of June 30, 2022 55,633,090 $ 6 $ 1,418,881 $ ( 89,620 ) $ 698,265 $ 2,027,532 Issuance of Common Stock upon exercise of stock-based awards 261,016 * - 1,866 - - 1,866 Stock based compensation - - 36,632 - - 36,632 Other comprehensive loss adjustments - - - ( 38,646 ) - ( 38,646 ) Net income - - - - 24,743 24,743 Balance as of September 30, 2022 55,894,106 $ 6 $ 1,457,379 $ ( 128,266 ) $ 723,008 $ 2,052,127 * Represents an amount less than $1. The accompanying notes are an integral part of the consolidated financial statements. F - 6 SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (in thousands, except per share data) Common stock Additional Accumulated other Number Amount paid in Capital comprehensive income (loss) Retained earnings Total Balance as of January 1, 2021 51,560,936 $ 5 $ 603,891 $ 3,857 $ 478,004 $ 1,085,757 Cumulative effect of adopting ASU 2020-06 - - ( 36,336 ) - 2,884 ( 33,452 ) Issuance of Common Stock upon exercise of stock-based awards 405,239 * - 5,008 - - 5,008 Stock based compensation - - 23,153 - - 23,153 Other comprehensive loss adjustments - - - ( 10,618 ) - ( 10,618 ) Net income - - - - 30,076 30,076 Balance as of March 31, 2021 51,966,175 $ 5 $ 595,716 $ ( 6,761 ) $ 510,964 $ 1,099,924 Issuance of Common Stock upon exercise of stock-based awards 297,801 * - 5,500 - - 5,500 Stock based compensation - - 24,052 - - 24,052 Other comprehensive income adjustments - - - 3,225 - 3,225 Net income - - - - 45,092 45,092 Balance as of June 30, 2021 52,263,976 $ 5 $ 625,268 $ ( 3,536 ) $ 556,056 $ 1,177,793 Issuance of Common Stock upon exercise of stock-based awards 255,514 * - 656 - - 656 Stock based compensation - - 26,185 - - 26,185 Other comprehensive loss adjustments - - - ( 15,599 ) - ( 15,599 ) Net income - - - - 53,048 53,048 Balance as of September 30, 2021 52,519,490 $ 5 $ 652,109 $ ( 19,135 ) $ 609,104 $ 1,242,083 * Represents an amount less than $1. The accompanying notes are an integral part of the condensed consolidated financial statements. F - 7 SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands, except per share data) Nine Months Ended September 30, 2022 2021 Cash flows from operating activities: Net income $ 72,950 $ 128,216 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation of property, plant and equipment 29,571 21,492 Amortization of intangible assets 7,741 7,487 Amortization of debt discount and debt issuance costs 2,186 2,175 Amortization of premium and accretion of discount on available-for-sale marketable securities, net 7,864 6,301 Impairment of goodwill and intangible assets 4,008 - Stock-based compensation expenses 106,932 73,390 Gain from sale of privately held company ( 7,533 ) - Deferred income taxes, net ( 3,822 ) ( 6,686 ) Loss (gain) from sale and disposal of assets ( 485 ) 2,013 Exchange rate fluctuations and other items, net 64,662 13,086 Changes in assets and liabilities: Inventories, net ( 188,579 ) 30,678 Prepaid expenses and other assets ( 55,478 ) ( 14,977 ) Trade receivables, net ( 377,089 ) ( 206,131 ) Trade payables, net 53,683 ( 22,959 ) Employees and payroll accruals 12,119 14,321 Warranty obligations 82,025 42,368 Deferred revenues and customers advances 41,440 13,723 Other liabilities, net 67,789 20,055 Net cash provided by (used in) operating activities ( 80,016 ) 124,552 Cash flows from investing activities: Proceed from sales and maturities of available-for-sale marketable securities 178,415 174,817 Purchase of property, plant and equipment ( 125,085 ) ( 94,135 ) Investment in available-for-sale marketable securities ( 461,491 ) ( 511,615 ) Investment in a privately-held company - ( 16,643 ) Proceeds from sale of a privately-held company 24,175 - Withdrawal from bank deposits, net - 50,020 Payment for asset acquisition, net of cash acquired - ( 2,996 ) Other investing activities 3,472 2,593 Net cash used in investing activities $ ( 380,514 ) $ ( 397,959 ) The accompanying notes are an integral part of the condensed consolidated financial statements. F - 8 SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Cont.) (in thousands, except per share data) Nine Months Ended September 30 , 2022 2021 Cash flows from financing activities: Proceeds from secondary public offering, net of issuance costs $ 650,526 $ - Repayment of bank loans ( 104 ) ( 16,219 ) Proceeds from exercise of stock-based awards 3,508 6,128 Tax withholding in connection with stock-based awards, net ( 4,686 ) ( 8,402 ) Other financing activities ( 2,109 ) ( 939 ) Net cash provided by (used in) financing activities 647,135 ( 19,432 ) Increase (decrease) in cash and cash equivalents 186,605 ( 292,839 ) Cash and cash equivalents at the beginning of the period 530,089 827,146 Effect of exchange rate differences on cash and cash equivalents ( 38,365 ) ( 7,719 ) Cash and cash equivalents at the end of the period $ 678,329 $ 526,588 Supplemental disclosure of non-cash activities: Right-of-use asset recognized with a corresponding lease liability $ 43,274 $ 2,253 The accompanying notes are an integral part of the condensed consolidated financial statements. F - 9 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data ) NOTE 1: GENERAL a. SolarEdge Technologies, Inc. (the “Company”) and its subsidiaries design, develop, and sell an intelligent inverter solution designed to maximize power generation at the individual photovoltaic (“PV”) module level while lowering the cost of energy produced by the solar PV system and providing comprehensive and advanced safety features. The Company’s products consist mainly of (i) power optimizers designed to maximize energy throughput from each and every module through constant tracking of Maximum Power Point individually per module, (ii) inverters which invert direct current (DC) from the PV module to alternating current (AC) including the Company’s future ready energy hub inverter which supports, among other things, connection to a DC- coupled battery for backup capabilities, (iii) a remote cloud-based monitoring platform, that collects and processes information from the power optimizers and inverters to enable customers and system owners, to monitor and manage the solar PV system (iv) a residential storage and backup solution which includes a company designed and manufactured lithium-ion DC-coupled battery that is used to increase energy independence and maximize self-consumption for homeowners including a battery, and (v) additional smart energy management solutions. The Company and its subsidiaries sell products worldwide through large distributors, electrical equipment wholesalers, as well as directly to large solar installers and engineering, procurement, and construction firms. b. The Company has expanded its activity to other areas of smart energy technology organically and through acquisitions. The Company now offers a variety of energy solutions, which include lithium-ion cells, batteries, and energy storage systems (“Energy Storage”), full powertrain kits for electric vehicles, or EVs (“e-Mobility”), as well as automated machines for industrial use (“Automation Machines”). In June 2022, the Company decided to discontinue its stand-alone uninterrupted power supply solutions or UPS (“Critical Power”). The Company determined that the discontinuance of the Critical Power business does not represent a strategic shift that will have a major effect on the Company's operations and financial results and therefore it did not meet the criteria for discontinued operations classification. c. Basis of Presentation: The unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). In management’s opinion, the unaudited condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. The Company’s interim period 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, 2021, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 22, 2022, have been applied consistently in these unaudited interim condensed consolidated financial statements. Certain prior year amounts have been reclassified to conform to current year presentation. d. Use of estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures in the accompanying notes. The duration, scope and effects of the ongoing Covid-19 pandemic and the conflict in Ukraine, 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 available-for-sale marketable debt securities, or an increase in the Company’s insurance liabilities as of the time of a relevant measurement event. F - 10 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) e. Concentrations of supply risks: The Company depends on two contract manufacturers and several limited or single source component suppliers, including, Samsung SDI, that provides lithium-ion battery cells required for the Company's residential storage solution. Reliance on these vendors makes the Company vulnerable to possible capacity constraints and reduced control over component availability, delivery schedules, manufacturing yields, and costs. As of September 30, 2022, and December 31, 2021, two contract manufacturers collectively accounted for 30.1 % and 27.9 % of the Company’s total trade payables, net, respectively. In the second quarter of 2022, the Company announced the opening of “Sella 2”, a two gigawatt-hour (GWh) Li-Ion battery cell manufacturing facility located in South Korea. Sella 2 is currently in testing phase with ramp-up expected during the fourth quarter of 2022. Sella 2, is the Company's second owned manufacturing facility following the opening of the Company's manufacturing facility in the North of Israel, “Sella 1” in 2020 that produces power optimizers and inverters for the Company's solar activities. f. New accounting pronouncements not yet adopted: From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or other standard setting bodies are adopted by the Company as of the specified effective date. The Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption. g. Recently issued and adopted pronouncements: In October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805). This ASU requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. At the acquisition date, the acquirer applies the revenue model as if it had originated the acquired contracts. The ASU is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. Adoption of the ASU should be applied prospectively. Early adoption is also permitted, including adoption in an interim period. The Company elected to early adopt ASU 2021-08 on January 1, 2022, and will apply this new guidance to all business combinations consummated subsequent to this date. Currently, this ASU has no impact on our consolidated financial statements. In November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. Under ASU 2021-10, the accounting entities with transactions with a government that are accounted for by analogy to a grant or contribution accounting model are required to annually disclose certain information regarding the transaction including: (i) nature and related accounting policy used; (ii) line items on the balance sheet and income statement affected by the transactions; (iii) amounts applicable to each line item; and (iv) significant terms and conditions. This guidance is effective for financial statements issued for annual periods beginning after December 15, 2021. The adoption of this ASU will have a minor impact on the disclosures to the annual consolidated financial statements. F - 11 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 2: MARKETABLE SECURITIES The following is a summary of available-for-sale marketable securities as of September 30, 2022: Amortized cost Gross unrealized gains Gross unrealized losses Fair value Available-for-sale – matures within one year: Corporate bonds $ 203,445 $ - $ ( 4,049 ) $ 199,396 Governmental bonds 3,254 - ( 52 ) 3,202 206,699 - ( 4,101 ) 202,598 Available-for-sale – matures after one year: Corporate bonds 683,804 - ( 30,753 ) 653,051 Governmental bonds 36,901 - ( 1,199 ) 35,702 720,705 - ( 31,952 ) 688,753 Total $ 927,404 $ - $ ( 36,053 ) $ 891,351 The following is a summary of available-for-sale marketable securities as of December 31, 2021: Amortized cost Gross unrealized gains Gross unrealized losses Fair value Available-for-sale – matures within one year: Corporate bonds $ 160,462 $ 23 $ ( 320 ) $ 160,165 Governmental bonds 7,576 - ( 13 ) 7,563 168,038 23 ( 333 ) 167,728 Available-for-sale – matures after one year: Corporate bonds 474,412 9 ( 5,580 ) 468,841 Governmental bonds 13,506 - ( 119 ) 13,387 487,918 9 ( 5,699 ) 482,228 Total $ 655,956 $ 32 $ ( 6,032 ) $ 649,956 As of September 30, 2022, and December 31, 2021, the Company did not record an allowance for credit losses for its available-for-sale marketable securities. F - 12 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 3: INVENTORIES, NET September 30, 2022 December 31, 2021 Raw materials $ 432,766 $ 247,386 Work in process 15,529 13,863 Finished goods 113,057 118,894 $ 561,352 $ 380,143 NOTE 4: INVESTMENT IN PRIVATELY-HELD COMPANY On January 31, 2021, the Company completed an investment of $ 11,643 in the preferred stock of AutoGrid Systems, Inc. ("AutoGrid"), a privately held company. On February 1, 2021, the Company signed on a preferred stock purchase agreement for an additional investment of $ 5,000 in AutoGrid's preferred stock (the "second investment"). On April 28, 2021, the Company completed the second investment. The Company accounted for the AutoGrid investment as an equity investment without readily determinable fair values. The Company’s non-marketable equity securities had a carrying value of $ 16,643 as of December 31, 2021. Investments in privately-held companies are included within other long-term assets on the consolidated balance sheets. On July 20, 2022, the Company completed the sale of its investment in AutoGrid for proceeds of $ 24,175 , thus recognizing a gain of $ 7,533 which was recorded in the statement of income under "Other income". No impairment or other adjustments related to observable price changes in orderly transactions for identical or similar investments were identified up to the date of the sale. F - 13 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 5: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES During the nine months ended September 30, 2022 , the Company instituted a foreign currency cash flow hedging program to protect against a forecasted increase in value of foreign currency cash flows resulting from salary denominated in Israeli currency, the New Israeli Shekels (“NIS”). The Company hedges portions of the anticipated payroll denominated in NIS for a period of one to nine 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 September 30, 2022 , the Company entered into forward contracts and put and call options to sell U.S. dollars (“USD”) for NIS in the amount of approximately NIS 334 million and NIS 10 million , respectively. In addition to the above-mentioned cash flow hedge transactions, the Company also entered into derivative instrument arrangements to hedge the Company’s exposure to currencies other than the USD. 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, under " Financial expense, net ". The Company classifies cash flows related to its hedging as operating activities in its condensed consolidated statement of cash flows. As of September 30, 2022 , the Company entered into forward contracts to sell Australian dollars (“AUD”) for USD in the amount of AUD 4 million . As of September 30, 2022 , the Company entered into forward contracts to sell Euro for USD in the amount of € 9 million . The fair values of outstanding derivative instruments were as follows: Balance sheet location September 30, 2022 December 31, 2021 Derivative assets of options and forward contracts: Designated cash flow hedges Prepaid expenses and other current assets $ - $ 992 Non-designated hedges Prepaid expenses and other current assets 1,813 3,017 Total derivative assets $ 1,813 $ 4,009 Derivative liabilities of options and forward contracts: Designated cash flow hedges Accrued expenses and other current liabilities $ ( 4,269 ) $ - Non-designated hedges Accrued expenses and other current liabilities - ( 169 ) Total derivative liabilities $ ( 4,269 ) $ ( 169 ) F - 14 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) Gains (losses) on derivative instruments recognized in our income statements are summarized below: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Affected line item Foreign exchange contracts Non Designated Hedging Instruments $ 1,211 $ 3,350 $ 5,154 $ 7,706 Financial expenses, net See Note 13 for information regarding gains (losses) from designated hedging instruments reclassified from accumulated other comprehensive loss. Gains (losses) on derivative instruments recognized in the consolidated comprehensive income (loss) statements were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Foreign exchange contracts: Designated Hedging Instruments $ ( 1,399 ) $ 1,006 $ ( 8,928 ) $ 1,719 F - 15 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 6: FAIR VALUE MEASUREMENTS In accordance with ASC 820, the Company measures its cash equivalents and marketable securities, at fair value using the market approach valuation technique. Cash equivalents and marketable securities are classified within Level 1 and Level 2, respectively, because 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 September 30, 2022 and December 31, 2021, by level within the fair value hierarchy: Fair value measurements as of Description Fair Value Hierarchy September 30, 2022 December 31, 2021 Assets: Cash equivalents: Cash Level 1 $ 552,800 $ 508,389 Money market mutual funds Level 1 $ 94,581 $ 21,680 Deposits Level 1 $ 30,948 $ 20 Derivative instruments Level 2 $ 1,813 $ 4,009 Short-term marketable securities: Corporate bonds Level 2 $ 199,396 $ 160,165 Governmental bonds Level 2 $ 3,202 $ 7,563 Long-term marketable securities: Corporate bonds Level 2 $ 653,051 $ 468,841 Governmental bonds Level 2 $ 35,702 $ 13,387 Liabilities: Derivative instruments Level 2 $ ( 4,269 ) $ ( 169 ) NOTE 7: WARRANTY OBLIGATIONS Changes in the Company’s product warranty obligations for the three and nine months ended September 30, 2022 and 2021, were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Balance, at the beginning of the period $ 324,176 $ 232,167 $ 265,160 $ 204,994 Additions and adjustments to cost of revenues 56,815 43,068 163,783 109,382 Usage and current warranty expenses ( 34,852 ) ( 28,172 ) ( 82,804 ) ( 67,313 ) Balance, at end of the period 346,139 247,063 346,139 247,063 Less current portion ( 97,222 ) ( 67,096 ) ( 97,222 ) ( 67,096 ) Long term portion $ 248,917 $ 179,967 $ 248,917 $ 179,967 F - 16 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 8: DEFERRED REVENUES Deferred revenues consist of deferred cloud-based monitoring services, communication services, warranty extension services and advance payments received from customers for the Company’s products. Deferred revenues are classified as short-term and long-term deferred revenues based on the period in which revenues are expected to be recognized. Significant changes in the balances of deferred revenues during the period are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Balance, at the beginning of the period $ 200,695 $ 144,253 $ 169,345 $ 140,020 Revenue recognized ( 12,731 ) ( 10,667 ) ( 37,855 ) ( 46,259 ) Increase in deferred revenues and customer advances 20,756 19,622 77,230 59,447 Balance, at the end of the period 208,720 153,208 208,720 153,208 Less current portion ( 31,896 ) ( 16,939 ) ( 31,896 ) ( 16,939 ) Long term portion $ 176,824 $ 136,269 $ 176,824 $ 136,269 The following table includes estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2022: 2022 $ 11,697 2023 23,044 2024 10,466 2025 9,648 2026 9,047 Thereafter 144,818 Total deferred revenues $ 208,720 NOTE 9: ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES September 30, 2022 December 31, 2021 Accrued expenses $ 112,388 $ 57,158 Government authorities 40,189 22,631 Operating lease liabilities 15,307 12,728 Provision for legal claims 39 11,622 Accrual for sales incentives 5,558 3,048 Other 8,411 2,192 $ 181,892 $ 109,379 F - 17 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 10: CONVERTIBLE SENIOR NOTES On September 25, 2020, the Company sold $ 632,500 aggregate principal amount of its 0.00 % convertible senior notes due 2025 (the “Notes”). The Notes were sold pursuant to an indenture, dated September 25, 2020 (the “Indenture”), between the Company and U.S. Bank National Association, as trustee. The Notes do not bear regular interest and mature on September 15, 2025 , unless earlier repurchased or converted in accordance with their terms. The Notes are general senior unsecured obligations of the Company. Holders may convert their Notes prior to the close of business on the business day immediately preceding June 15, 2025 in multiples of $ 1,000 principal amount, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2020 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five-business-day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the Notes for each trading day of that five consecutive trading day period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events as described in the Indenture. In addition, holders may convert their Notes, in multiples of $1,000 principal amount, at their option at any time beginning on or after June 15, 2025, and prior to the close of business on the second scheduled trading day immediately preceding the stated maturity date of the Notes, without regard to the foregoing circumstances. The initial conversion rate for the Notes was 3.5997 shares of common stock per $ 1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $ 277.80 per share of common stock, subject to adjustment upon the occurrence of certain specified events as set forth in the Indenture. Upon conversion, the Company may choose to pay or deliver, as the case may be, cash, shares of common stock, or a combination of cash and shares of common stock. In addition, upon the occurrence of a fundamental change (as defined in the Indenture), holders of the Notes may require the Company to repurchase all or a portion of their Notes, in multiples of $1,000 principal amount, at a repurchase price of 100% of the principal amount of the Notes, plus any accrued and unpaid special interest to, but excluding the fundamental change repurchase date. If certain fundamental changes referred to as make-whole fundamental changes occur, the conversion rate for the Notes may be increased. The Convertible Senior Notes consisted of the following as of September 30, 2022 and December 31, 2021: September 30, 2022 December 31, 2021 Liability: Principal $ 632,500 $ 632,500 Unamortized issuance costs ( 8,779 ) ( 10,965 ) Net carrying amount $ 623,721 $ 621,535 For the three months ended September 30, 2022 and 2021 the Company recorded amortized debt issuance costs related to the Notes in the amount of $ 730 and $ 726 , respectively. For the nine months ended September 30, 2022 and 2021 the Company recorded amortized debt issuance costs related to the Notes in the amount of $ 2,186 and $ 2,175 , respectively. As of September 30, 2022, the unamortized issuance costs of the Notes will be amortized over the remaining term of approximately 3.0 years. The annual effective interest rate of the Notes is 0.47 %. As of September 30, 2022, the estimated fair value of the Notes, which the Company has classified as Level 2 financial instruments, is $ 691,190 . The estimated fair value was determined based on the quoted bid price of the Notes in an over-the-counter market on the last trading day of the reporting period. As of September 30, 2022, the if-converted value of the Notes did not exceed the principal amount. F - 18 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 11: STOCK CAPITAL a. Common stock rights: Common stock confers upon its holders the right to receive notice of, and to participate in, all general meetings of the Company, where each share of common stock shall have one vote for all purposes, to share equally, on a per share basis, in bonuses, profits, or distributions out of fund legally available therefor, and to participate in the distribution of the surplus assets of the Company in the event of liquidation of the Company. b. Secondary public offering: On March 17, 2022, the Company offered and sold 2,300,000 shares of the Company’s common stock, at a public offering price of $ 295.00 per share. The shares of Common Stock were issued and sold in a registered offering pursuant to the underwriting agreement dated March 17, 2022, among the Company, Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, and Morgan Stanley & Co. LLC (the “Underwriting Agreement”). All of the offered shares were issued at closing, including 300,000 shares of Common Stock that were issued and sold pursuant to the underwriters’ option to purchase additional shares under the Underwriting Agreement, which was exercised in full on March 18, 2022. The net proceeds to the Company were $ 650,526 after deducting underwriters' discounts of $ 27,140 and commissions of $ 834 . c. Equity 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 grants 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, restricted stock units ("RSU"), performance stock units ("PSU"), and other share-based awards to directors, employees, officers, and non-employees of the Company and its subsidiaries. As of September 30, 2022, a total of 18,047,085 shares of common stock were reserved for issuance pursuant to stock awards under the 2015 Plan (the “Share Reserve”) , an aggregate of 9,802,734 shares are still available for future grants. The Share Reserve will automatically increase on January 1 st of each year during the term of the 2015 Plan, commencing on January 1 st 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 31 st of the preceding calendar year; provided, however, that the Company’s board of directors may determine that there will not be a January 1 st 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 31 st . The Company granted under its 2015 Plan, PSU awards to certain employees and officers which vest upon the achievement of certain performance or market conditions subject to their continued employment with the Company. The market condition for the PSUs is based on the Company’s total shareholder return ("TSR") compared to the TSR of companies listed in the S&P 500 index over a one to three year performance period. The Company uses a Monte-Carlo simulation to determine the grant date fair value for these awards, which takes into consideration the market price of a share of the Company’s common stock on the date of grant less the present value of dividends expected during the requisite service period, as well as the possible outcomes pertaining to the TSR market condition. The Company recognizes such compensation expenses on an accelerated vesting method. 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 September 30, 2022, an aggregate of 8,617,974 options are still available for future grants under the 2015 Plan. F - 19 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) A summary of the activity in stock options and related information is as follows: Number of options Weighted average exercise price Weighted average remaining contractual term in years Aggregate intrinsic Value Outstanding as of December 31, 2021 474,280 $ 44.68 5.22 $ 112,479 Exercised ( 123,420 ) 28.42 - - Forfeited or expired ( 243 ) 5.01 - - Outstanding as of September 30, 2022 350,617 $ 50.43 5.07 $ 65,030 Vested and expected to vest as of September 30, 2022 349,682 $ 50.22 5.10 $ 64,916 Exercisable as of September 30, 2022 298,440 $ 36.94 4.75 $ 58,637 The aggregate intrinsic value in the tables above 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. A summary of the activity in the RSUs and related information is as follows: Number of RSUs Weighted average grant date fair value Unvested as of December 31, 2021 1,759,972 $ 189.25 Granted 259,198 299.66 Vested ( 620,186 ) 128.46 Forfeited ( 115,327 ) 209.13 Unvested as of September 30, 2022 1,283,657 $ 214.73 A summary of the activity in the PSUs and related information is as follows: Number of PSUs Weighted average grant date fair value Unvested as of December 31, 2021 108,595 $ 296.40 Granted 39,263 293.04 Unvested as of September 30, 2022 147,858 $ 295.51 d. Employee Stock Purchase Plan: The Company adopted an ESPP effective upon the consummation of the IPO. As of September 30, 2022, a total of 3,662,737 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 15 % of their salaries to purchase common stock up to an aggregate limit of $ 15 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. F - 20 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) As of September 30, 2022, 696,852 shares of common stock had been purchased under the ESPP. As of September 30, 2022, 2,965,885 shares of common stock 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. e. Stock-based compensation expenses: The Company recognized stock-based compensation expenses related to all stock-based awards in the consolidated statement of income for the three and nine months ended September 30, 2022, and 2021, as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Cost of revenues $ 4,660 $ 4,289 $ 15,008 $ 14,370 Research and development 14,553 11,949 46,357 30,552 Selling and marketing 9,341 5,737 23,089 16,952 General and administrative 7,197 4,210 22,478 11,516 Total stock-based compensation expenses $ 35,751 $ 26,185 $ 106,932 $ 73,390 The Company capitalized stock-based compensation as part of inventories and prepaid expenses for the three and nine months ended September 30, 2022, in the amount of $ 881 and $ 977 , respectively. In 2021 the Company did not capitalize any stock- based compensation expenses. The total tax benefit associated with share-based compensation for the three months ended September 30, 2022 and 2021 was $ 2,646 and $ 3,791 , respectively. The tax benefit realized from share-based compensation for the three months ended September 30, 2022 , and 2021 was $ 3,060 and $ 4,720 , respectively. The total tax benefit associated with share-based compensation for the nine months ended September 30, 2022 , and 2021 was $ 9,182 and $ 10,249 , respectively. The tax benefit realized from share-based compensation for the nine months ended September 30, 2022 , and 2021 was $ 8,871 and $ 10,400 , respectively. As of September 30, 2022 , there were total unrecognized compensation expenses in the amount of $ 279,982 related to non-vested equity-based compensation arrangements granted under the Company’s plans and non-plan awards. These expenses are expected to be recognized during the period from October 1, 2022 , through August 31, 2026 . F - 21 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 12: COMMITMENTS AND CONTINGENT LIABILITIES a. Guarantees: As of September 30, 2022, contingent liabilities exist regarding guarantees in the amounts of $ 5,924 , $ 2,767 , and $ 1,321 in respect of office rent lease agreements, projects with customers, 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 and other purchase orders, which cannot be canceled without penalty. In addition, the Company acquires raw materials or other goods and services, including product components, by issuing authorizations to its suppliers to purchase materials based on its projected demand and manufacturing needs. As of September 30, 2022 , the Company had non-cancelable purchase obligations totaling approximately $ 1,639,157 , out of which the Company recorded a provision for loss in the amount of $ 5,874 . As of September 30, 2022 , the Company had contractual obligations for capital expenditures totaling approximately $ 69,158 . These commitments reflect purchases of automated assembly lines and other machinery related to the Company’s manufacturing process as well as capital expenditures associated with the construction of Sella 2 , the Company’s second lithium-ion cell and battery factory in Korea. 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. 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. SMA asserted a value in dispute of EUR 5.5 million (approximately $ 5,411 ) for both patents. The Company challenged the validity of both patents. With respect to one of the claims, in October 2020, the German Patent Court rendered the SMA patent invalid and this invalidity has been appealed by SMA. With respect to the other claim, in November 2019, the first instance court stayed the infringement proceedings since it considered it to be highly likely that the second SMA patent would also be rendered invalid. The Company believes that it has meritorious defenses to the claims asserted and intends to vigorously defend against the remaining lawsuit. In May 2019, the Company was served with three lawsuits by Huawei Technologies Co., Ltd., a Chinese entity (“Huawei”), against its two Chinese subsidiaries and equipment manufacturer in China. In May 2022, the Company announced that it had agreed on a global patent license agreement with Huawei. The agreement includes a cross license that covers patents relating to both companies’ products and resulted in the settlement of all pending patent litigation between the companies. 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 $ 7,197 ) claiming damages caused relating to a terminated consulting agreement and stock options therein. The claim was recently settled with no payment due by the Company. On July 28, 2022, the Company was served with complaints filed by Ampt LLC in the International Trade Commission (the “Commission”) pursuant to Section 337 of the Tariff Act of 1930, as amended and the District Court for the District of Delaware alleging patent infringement against the Company and its subsidiary SolarEdge Technologies Ltd. On October 24, 2022, the complaint filed in the District Court of Delaware was administratively stayed until the Commission's action is resolved. The Company believes that it has meritorious defenses to the complaints and intend to vigorously defend against them. As of September 30, 2022, an immaterial amount for legal claims was recorded in accrued expenses and other current liabilities. F - 22 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 13: ACCUMULATED OTHER COMPREHENSIVE LOSS The following table summarizes the changes in accumulated balances of other comprehensive gain (loss), net of taxes: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Unrealized gains (losses) on available-for-sale marketable securities Beginning balance $ ( 18,777 ) $ ( 1,636 ) $ ( 4,709 ) $ 240 Revaluation ( 12,424 ) 6 ( 31,064 ) ( 2,340 ) Tax on revaluation 2,694 35 6,522 505 Other comprehensive income (loss) before reclassifications ( 9,730 ) 41 ( 24,542 ) ( 1,835 ) Reclassification 166 ( 16 ) 1,010 ( 16 ) Tax on reclassification ( 15 ) 4 ( 115 ) 4 Gains (losses) reclassified from accumulated other comprehensive income (loss) 151 ( 12 ) 895 ( 12 ) Net current period other comprehensive income (loss) ( 9,579 ) 29 ( 23,647 ) ( 1,847 ) Ending balance $ ( 28,356 ) $ ( 1,607 ) $ ( 28,356 ) $ ( 1,607 ) Unrealized gains (losses) on cash flow hedges Beginning balance $ ( 3,642 ) $ 311 $ 874 $ - Revaluation ( 1,569 ) 1,146 ( 10,094 ) 1,956 Tax on revaluation 170 ( 140 ) 1,166 ( 237 ) Other comprehensive income (loss) before reclassifications ( 1,399 ) 1,006 ( 8,928 ) 1,719 Reclassification 1,422 ( 794 ) 4,833 ( 1,251 ) Tax on reclassification ( 163 ) 96 ( 561 ) 151 Gains (losses) reclassified from accumulated other comprehensive income (loss) 1,259 ( 698 ) 4,272 ( 1,100 ) Net current period other comprehensive income (loss) ( 140 ) 308 ( 4,656 ) 619 Ending balance $ ( 3,782 ) $ 619 $ ( 3,782 ) $ 619 Foreign currency translation adjustments on intra-entity transactions that are of a long-term investment in nature Beginning balance $ ( 52,750 ) $ ( 1,896 ) $ ( 17,420 ) $ - Revaluation ( 30,799 ) ( 12,272 ) ( 66,129 ) ( 14,168 ) Ending balance $ ( 83,549 ) $ ( 14,168 ) $ ( 83,549 ) $ ( 14,168 ) Unrealized gains (losses) on foreign currency translation Beginning balance $ ( 14,451 ) $ ( 315 ) $ ( 6,064 ) $ 3,617 Revaluation 1,872 ( 3,664 ) ( 6,515 ) ( 7,596 ) Ending balance $ ( 12,579 ) $ ( 3,979 ) $ ( 12,579 ) $ ( 3,979 ) Total $ ( 128,266 ) $ ( 19,135 ) $ ( 128,266 ) $ ( 19,135 ) F - 23 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) The following table summarizes the changes in "Accumulated other comprehensive loss", net of taxes: Details about Accumulated Other Comprehensive Loss Components Three Months Ended September 30, Nine Months Ended September 30, Affected Line Item in the Statement of Income 2022 2021 2022 2021 Unrealized gains (losses) on available-for-sale marketable securities $ ( 166 ) $ 12 $ ( 1010 ) $ 16 Financial expense, net 15 - 115 ( 4 ) Income taxes $ ( 151 ) $ 12 $ ( 895 ) $ 12 Total, net of income taxes Unrealized gains (losses) on cash flow hedges, net ( 157 ) 97 ( 542 ) 152 Cost of revenues ( 808 ) 476 ( 2,841 ) 751 Research and development ( 242 ) 97 ( 662 ) 153 Sales and marketing ( 215 ) 124 ( 788 ) 196 General and administrative $ ( 1,422 ) $ 794 $ ( 4,833 ) $ 1252 Total, before income taxes 163 ( 96 ) 561 ( 152 ) Income taxes ( 1,259 ) 698 ( 4,272 ) 1,100 Total, net of income taxes Total reclassifications for the period $ ( 1,410 ) $ 710 $ ( 5,167 ) $ 1,112 NOTE 14: OTHER OPERATING EXPENSES The following table presents the expenses recorded in the three and nine months ended September 30, 2022, and 2021: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Impairment of goodwill and intangible assets (1) $ - $ - $ 4,008 $ - Write-off of property, plant and equipment ( 19 ) - 660 2,209 Sale of property, plant and equipment ( 1,146 ) - ( 1,146 ) - Sale of Critical Power assets ( 1,559 ) - ( 1,559 ) - Kokam purchase escrow (2) - - - ( 859 ) Total other operating expenses (income) $ ( 2,724 ) $ - $ 1,963 $ 1,350 (1) In June 2022, the Company decided to discontinue its stand-alone Critical Power activities. The Company recorded an impairment of goodwill and intangible assets related to its Critical Power business in an amount of $ 4,008 , see also Note 1b. (2) In the nine months ended September 30, 2021, the Company received a payment of $ 859 out of the Kokam acquisition escrow, with regards to a working capital adjustment. F - 24 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 15: INCOME TAXES The effective tax rate for the three months ended September 30, 2022, and 2021 was 58.0 % and 12.6 %, respectively, and for the nine months ended September 30, 2022, and 2021 the effective tax rate was 42.1 % and 15.9 %, respectively. The increase in the effective tax rate in the current year, is primarily due to the change to Section 174 of the U.S Internal Revenue Code, which came into effect on January 1, 2022. The change requires taxpayers to amortize research and development expenditures over five years (if expensed by a U.S. entity) or fifteen years (if expensed by non-U.S. entities). This change resulted in an increase in the Company’s taxable income and Global Intangible Low Taxed Income (“GILTI”) tax. In addition, the change in the Company's tax rate resulted from a different allocation of income among the Company’s U.S., Israeli, and foreign subsidiaries, and lower tax benefits relating to stock-based compensation. As of September 30, 2022, and December 31, 2021, unrecognized tax benefits were $ 2,561 and $ 2,192 , respectively. If recognized, such benefits would favorably affect the Company’s effective tax rate. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The total amount of penalties and interest were immaterial as of September 30, 2022, and December 31, 2021. In August 2022, the U.S. government signed into law the Inflation Reduction Act of 2022 (the “IRA”), which, among other things, revised U.S. tax law by, including a new corporate alternative minimum tax (the “CAMT”) of 15 % on certain large corporations, imposing a 1 % excise tax on stock buybacks, and providing incentives to address climate change, including the introduction of advanced manufacturing production tax credits, that may be relevant to the company's products, if they will be manufactured in the US. The provisions of the IRA are generally effective for tax years beginning after 2022. Given the complexities of the IRA, which is pending technical guidance and regulations from the Internal Revenue Service and U.S. Treasury Department, the Company is in the process of evaluating provisions included under the IRA and its impact to the Company’s consolidated financial statements. F - 25 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 16: EARNINGS PER SHARE The following table presents the computation of basic and diluted earnings per share (“EPS”): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Basic EPS: Numerator: Net income $ 24,743 $ 53,048 $ 72,950 $ 128,216 Denominator: Shares used in computing net EPS of common stock, basic 55,730,328 52,355,867 54,788,734 52,056,233 Diluted EPS: Numerator: Net income attributable to common stock, basic $ 24,743 $ 53,048 $ 72,950 $ 128,216 Notes due 2025 551 525 1,651 1,575 Net income attributable to common stock, diluted $ 25,294 $ 53,573 $ 74,601 $ 129,791 Denominator: Shares used in computing net EPS of common stock, basic 55,730,328 52,355,867 54,788,734 52,056,233 Notes due 2025 2,276,818 2,276,818 2,276,818 2,276,818 Effect of stock-based awards 740,392 1,296,315 820,489 1,622,390 Shares used in computing net EPS of common stock, diluted 58,747,538 55,929,000 57,886,041 55,955,441 Shares excluded from the calculation of diluted net EPS due to their anti-dilutive effect 138,916 243,689 181,802 169,597 F - 26 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 17: SEGMENT, GEOGRAPHIC AND PRODUCT INFORMATION The Company operates in five different operating segments: Solar, Energy Storage, e-Mobility, Critical Power and Automation Machines. In June 2022, the Company decided to discontinue its stand-alone Critical Power activities, see also Note 1b. The Company's Chief Executive Officer, who is the chief operating decision maker (“CODM”), makes resource allocation decisions and assesses performance based on financial information presented on a consolidated basis, accompanied by disaggregated information about revenues and contributed profit by the operating segments. The Company does not allocate to its operating segments revenue recognized due to advance payments received for performance obligations that extend for a period greater than one year, related to Accounting Standard Codification 606, “Revenue from Contracts with Customers” (ASC 606). Segment profit is comprised of gross profit for the segment less operating expenses that do not include amortization of purchased intangible assets, impairments of goodwill and intangible assets, 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 co-mingled. 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 therefore their results are presented together under “All other”. The Solar segment includes the design, development, manufacturing, and sales of an intelligent inverter solution designed to maximize power generation at the individual PV module level and a residential storage solution, compatible with the Company’s energy hub inverter, intended to store and supply power for back-up and to maximize self-consumption. The Solar segment solution consists mainly of the Company’s power optimizers, inverters, batteries, and cloud‑based monitoring platform. The “All other” category includes the design, development, manufacturing, and sales of energy storage products, e-Mobility products, UPS products, and automated machines. The following table presents information on reportable segments profit (loss) for the period presented: Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022 Solar All other Solar All other Revenues $ 788,610 $ 47,954 $ 2,084,206 $ 134,931 Cost of revenues 565,403 42,594 1,484,303 125,883 Gross profit 223,207 5,360 599,903 9,048 Research and development 47,943 6,861 140,215 23,378 Sales and marketing 30,996 2,202 85,220 8,059 General and administrative 17,534 2,795 49,779 10,209 Segments profit (loss) $ 126,734 $ ( 6,498 ) $ 324,689 $ ( 32,598 ) F - 27 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021 Solar All other Solar All other Revenues $ 476,838 $ 49,455 $ 1,284,574 $ 127,080 Cost of revenues 302,081 45,132 799,163 122,536 Gross profit 174,757 4,323 485,411 4,544 Research and development 34,657 8,853 102,151 22,376 Sales and marketing 21,127 2,290 60,758 7,340 General and administrative 14,054 2,863 39,094 9,783 Segments profit (loss) $ 104,919 $ ( 9,683 ) $ 283,408 $ ( 34,955 ) The following table presents information on reportable segments reconciliation to consolidated revenues for the periods presented: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Solar revenues $ 788,610 $ 476,838 $ 2,084,206 $ 1,284,574 All other revenues 47,954 49,455 134,931 127,080 Revenues from finance component 159 111 440 296 Consolidated revenues $ 836,723 $ 526,404 $ 2,219,577 $ 1,411,950 The following table presents information on reportable segments reconciliation to consolidated operating income for the periods presented: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Solar segment profit $ 126,734 $ 104,919 $ 324,689 $ 283,408 All other segment loss ( 6,498 ) ( 9,683 ) ( 32,598 ) ( 34,955 ) Segments operating profit 120,236 95,236 292,091 248,453 Amounts not allocated to segments: Stock based compensation expenses ( 35,751 ) ( 26,185 ) ( 106,932 ) ( 73,390 ) Amortization related to business combinations ( 2,559 ) ( 2,785 ) ( 8,039 ) ( 8,007 ) Impairment of goodwill and intangible assets - - ( 4,008 ) - Disposal of assets related to Critical Power - - ( 4,314 ) - Sale of Critical Power assets 1,559 - 1,559 - Other unallocated income (expenses), net 922 148 926 ( 955 ) Consolidated operating income $ 84,407 $ 66,414 $ 171,283 $ 166,101 NOTE 18: SUBSEQUENT EVENTS On November 3, 2022, the Company received notice that a class action lawsuit was filed in the U.S District Court of the Southern District of New York against the Company, SolarEdge Technologies Ltd., the Company’s CEO and the Company’s CFO, by a purported stockholder of the Company, alleging violations of the Federal Securities Act in connection with complaints filed against the Company by Ampt LLC, the details for which can be found under “Note 12- Commitments and Contingent Liabilities”. The Company believes the allegations contained in this new action are without merit and intends to vigorously defend against them. F - 28