SOLAREDGE TECHNOLOGIES, INC. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Consolidated Financial Statements Reports of Independent Registered Public Accounting Firm (PCAOB ID: 1281 ) F-2 Consolidated Balance Sheets as of December 31, 2022 and 2021 F-5 Consolidated Statements of Income for the year ended December 31, 2022, 2021 and 2020 F-7 Consolidated Statements of Comprehensive Income for the year ended December 31, 2022, 2021 and 2020 F-8 Statements of Changes in Stockholders’ Equity for the year ended December 31, 2022, 2021 and 2020 F-9 Consolidated Statements of Cash Flows for the year ended December 31, 2022, 2021 and 2020 F-10 Notes to Consolidated Financial Statements F-12 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of SolarEdge Technologies Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of SolarEdge Technologies Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 22, 2023 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates. F - 2 Description of the Matter As described in Notes 2w and 13 to the consolidated financial statements, as of December 31, 2022, the warranty obligation was $385,057 thousand. Substantially all of the Company's warranty obligations are related to the solar business. The Company's products include a warranty of up to 12 years for inverters and up to 25 years for its power optimizers. In order to predict the failure rate of each product, the Company established a reliability model based on the estimated mean time between failures ("MTBF") and an additional model to capture non-systematic failures. Predicted failure rates are updated periodically based on new product versions and analysis of the root cause of actual failures, as are warranty related replacement costs. Auditing the management’s warranty obligations valuation of the solar business was complex and subject to judgment due to the significant estimations required in calculating its amount. In particular, the warranty obligations are subject to significant assumptions such as product failure rates, the average cost of products replacements and other warranty related costs. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the accounting for warranty obligations of solar business, including controls over management's review of the significant assumptions and data underlying the warranty obligations valuation. To test the Company’s warranty obligations our substantive audit procedures included, among others, look back analysis and testing the accuracy and completeness of the underlying data used in management's warranty obligations valuation assessment. We assessed the accuracy of historical data used in estimating forecasted failure rates, repair replacement ratios and other warranty related costs and compared them to actual warranty claims. /s/ Kost Forer Gabbay & Kasierer A Member of Ernst & Young Global We have served as the Company's auditor since 2007. Tel-Aviv, Israel February 22, 2023 F - 3 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of SolarEdge Technologies Inc. Opinion on Internal Control Over Financial Reporting We have audited SolarEdge Technologies Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, SolarEdge Technologies Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and our report dated February 22, 2023 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, proj ections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Kost Forer Gabbay & Kasierer A Member of Ernst & Young Global Tel-Aviv, Israel February 22, 2023 F - 4 SOLAREDGE TECHNOLOGIES INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) December 31, 2022 2021 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 783,112 $ 530,089 Marketable securities 241,117 167,728 Trade receivables, net of allowances of $ 3,202 and $ 2,626 , respectively 905,146 456,339 Inventories, net 729,201 380,143 Prepaid expenses and other current assets 241,082 176,992 Total current assets 2,899,658 1,711,291 LONG-TERM ASSETS: Marketable securities 645,491 482,228 Deferred tax assets, net 44,153 27,572 Property, plant and equipment, net 543,969 410,379 Operating lease right-of-use assets, net 62,754 47,137 Intangible assets, net 19,929 58,861 Goodwill 31,189 129,629 Other long-term assets 18,806 33,856 Total long-term assets 1,366,291 1,189,662 Total assets $ 4,265,949 $ 2,900,953 The accompanying notes are an integral part of the consolidated financial statements. F - 5 SOLAREDGE TECHNOLOGIES INC. CONSOLIDATED BALANCE SHEETS (Cont.) (in thousands, except per share data) December 31, 2022 2021 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Trade payables, net $ 459,831 $ 252,068 Employees and payroll accruals 85,158 74,465 Warranty obligations 103,975 71,480 Deferred revenues and customers advances 26,641 17,789 Accrued expenses and other current liabilities 214,112 109,379 Total current liabilities 889,717 525,181 LONG-TERM LIABILITIES: Convertible senior notes, net 624,451 621,535 Warranty obligations 281,082 193,680 Deferred revenues 186,936 151,556 Finance lease liabilities 45,385 40,508 Operating lease liabilities 46,256 38,912 Other long-term liabilities 15,756 19,542 Total long-term liabilities 1,199,866 1,065,733 COMMITMENTS AND CONTINGENT LIABILITIES STOCKHOLDERS’ EQUITY: Common stock of $ 0.0001 par value - Authorized: 125,000,000 shares as of December 31, 2022 and December 31, 2021; issued and outstanding: 56,133,404 and 52,815,395 shares as of December 31, 2022 and December 31, 2021, respectively 6 5 Additional paid-in capital 1,505,632 687,295 Accumulated other comprehensive loss ( 73,109 ) ( 27,319 ) Retained earnings 743,837 650,058 Total stockholders’ equity 2,176,366 1,310,039 Total liabilities and stockholders’ equity $ 4,265,949 $ 2,900,953 The accompanying notes are an integral part of the consolidated financial statements. F - 6 SOLAREDGE TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) Year ended December 31, 2022 2021 2020 Revenues $ 3,110,279 $ 1,963,865 $ 1,459,271 Cost of revenues 2,265,631 1,334,547 997,912 Gross profit 844,648 629,318 461,359 Operating expenses: Research and development 289,814 219,633 163,123 Sales and marketing 159,680 119,000 95,985 General and administrative 112,496 82,196 63,119 Goodwill impairment and other operating expenses (income), net 116,538 1,350 ( 3,429 ) Total operating expenses 678,528 422,179 318,798 Operating income 166,120 207,139 142,561 Financial income (expense), net 3,316 ( 19,915 ) 21,105 Other income 7,719 - - Income before income taxes 177,155 187,224 163,666 Income taxes 83,376 18,054 23,344 Net income $ 93,779 $ 169,170 $ 140,322 Net basic earnings per share of common stock $ 1.70 $ 3.24 $ 2.79 Net diluted earnings per share of common stock $ 1.65 $ 3.06 $ 2.66 Weighted average number of shares used in computing net basic earnings per share of common stock 55,087,770 52,202,182 50,217,330 Weighted average number of shares used in computing net diluted earnings per share of common stock 58,100,649 55,971,030 52,795,476 The accompanying notes are an integral part of the consolidated financial statements. F - 7 SOLAREDGE TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands, except per share data) Year ended December 31, 2022 2021 2020 Net income $ 93,779 $ 169,170 $ 140,322 Other comprehensive income (loss), net of tax: Net change related to available-for-sale securities ( 20,740 ) ( 4,949 ) ( 24 ) Net change related to cash flow hedges ( 2,635 ) 874 - Foreign currency translation adjustments on intra-entity transactions that are of a long-term investment nature ( 20,540 ) ( 17,420 ) - Foreign currency translation adjustments, net ( 1,875 ) ( 9,681 ) 5,690 Total other comprehensive income (loss) ( 45,790 ) ( 31,176 ) 5,666 Comprehensive income $ 47,989 $ 137,994 $ 145,988 The accompanying notes are an integral part of the consolidated financial statements. F - 8 SOLAREDGE TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share data) SolarEdge Technologies, Inc. Stockholders’ Equity Common stock Additional paid in Capital Accumulated other comprehensive Income (loss) Retained earnings Total Number Amount Balance as of December 31,2019 48,898,062 $ 5 $ 475,792 $ ( 1,809 ) $ 337,682 $ 811,670 Issuance of common stock upon exercise of stock-based awards 2,579,004 * - 16,671 - - 16,671 Issuance of Common stock under employee stock purchase plan 83,870 * - 7,783 - - 7,783 Stock based compensation - - 67,309 - - 67,309 Equity component of convertible senior notes, net - - 36,336 - - 36,336 Other comprehensive gain adjustments - - - 5,666 - 5,666 Net income - - - - 140,322 140,322 Balance as of December 31,2020 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 1,204,861 * - 6,486 - - 6,486 Issuance of Common stock under employee stock purchase plan 49,598 * - 10,661 - - 10,661 Stock based compensation - - 102,593 - - 102,593 Other comprehensive loss adjustments - - - ( 31,176 ) - ( 31,176 ) Net income - - - - 169,170 169,170 Balance as of December 31,2021 52,815,395 $ 5 $ 687,295 $ ( 27,319 ) $ 650,058 $ 1,310,039 Issuance of common stock upon exercise of stock-based awards 940,880 * - 4,030 - - 4,030 Issuance of Common stock under employee stock purchase plan 77,129 * - 17,863 - - 17,863 Stock based compensation - - 145,919 - - 145,919 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 - - - ( 45,790 ) - ( 45,790 ) Net income - - - - 93,779 93,779 Balance as of December 31,2022 56,133,404 $ 6 $ 1,505,632 $ ( 73,109 ) $ 743,837 $ 2,176,366 * Represents an amount less than $1. The accompanying notes are an integral part of the consolidated financial statements. F - 9 SOLAREDGE TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, except per share data) Year ended December 31, 2022 2021 2020 Cash flows from operating activities : Net income $ 93,779 $ 169,170 $ 140,322 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property, plant and equipment 40,580 29,359 22,355 Amortization of intangible assets 9,096 10,176 9,479 Amortization of debt discount and debt issuance costs 2,916 2,903 3,185 Amortization of premium and accretion of discount on available-for-sale marketable securities, net 9,310 9,462 1,168 Impairment of goodwill and intangible assets 118,492 - - Stock-based compensation expenses 145,539 102,593 67,309 Gain from sale of privately held company ( 7,719 ) - - Deferred income taxes, net ( 11,055 ) ( 12,045 ) ( 2,738 ) Exchange rate fluctuations and other items, net 10,052 20,697 3,860 Changes in assets and liabilities: Inventories, net ( 341,085 ) ( 43,051 ) ( 149,661 ) Prepaid expenses and other assets ( 64,991 ) ( 39,444 ) ( 3,276 ) Trade receivables, net ( 457,610 ) ( 247,723 ) 86,538 Trade payables, net 194,524 91,709 3,333 Employees and payroll accruals 26,238 26,519 18,315 Warranty obligations 120,169 60,524 32,274 Deferred revenues and customers advances 44,376 29,936 ( 21,438 ) Accrued expenses and other liabilities, net 98,673 3,344 11,630 Net cash provided by operating activities 31,284 214,129 222,655 Cash flows from investing activities : Proceed from sales and maturities of available-for-sale marketable securities 231,210 202,188 141,839 Purchase of property, plant and equipment ( 169,341 ) ( 149,251 ) ( 126,790 ) Investment in available-for-sale marketable securities ( 507,171 ) ( 579,377 ) ( 223,705 ) Investment in a privately-held company - ( 16,643 ) - Proceeds from sale of a privately-held company 24,362 - - Withdrawal from (investment in) bank deposits, net - 60,096 ( 54,752 ) Withdrawal from (investment in) restricted bank Deposits, net ( 242 ) 798 25,267 Other investing activities 4,138 ( 2,022 ) 1,504 Net cash used in investing activities $ ( 417,044 ) $ ( 484,211 ) $ ( 236,637 ) F - 10 SOLAREDGE TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.) (in thousands, except per share data) Year ended December 31, 2022 2021 2020 Cash flows from financing activities : Proceeds from secondary public offering, net of issuance costs $ 650,526 $ - $ - Repayment of bank loans ( 138 ) ( 16,073 ) ( 15,595 ) Proceeds from exercise of stock-based award 4,030 6,486 16,671 Tax withholding in connection with stock-based awards, net 3,023 ( 4,283 ) 4,829 Proceeds from issuance of convertible senior notes, net - - 617,869 Proceeds from bank loans - - 16,944 Other financing activities ( 2,834 ) ( 1,308 ) ( 234 ) Net cash provided by (used in) financing activities 654,607 ( 15,178 ) 640,484 Increase (decrease) in cash and cash equivalents 268,847 ( 285,260 ) 626,502 Cash and cash equivalents at the beginning of the period 530,089 827,146 223,901 Effect of exchange rate differences on cash and cash equivalents ( 15,824 ) ( 11,797 ) ( 23,257 ) Cash and cash equivalents at the end of the period $ 783,112 $ 530,089 $ 827,146 Supplemental disclosure of non-cash activities : Right-of-use asset recognized with corresponding lease liability $ 46,004 $ 20,526 $ 29,623 Purchase of property, plant and equipment $ 16,016 $ 10,781 $ 5,612 Supplemental disclosure of cash flow information : Cash paid for income taxes $ 74,689 $ 45,977 $ 38,990 The accompanying notes are an integral part of the consolidated financial statements. F - 11 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) NOTE 1: GENERAL 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 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. 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. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements are prepared according to United States generally accepted accounting principles (“U.S. GAAP”). a. Principles of consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions and balances including profit from intercompany sales not yet realized outside the Company have been eliminated upon consolidation. b. 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 - 12 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) c. Financial statements in U.S. dollars: A major part of the Company’s operations is carried out in the United States, Israel and certain other countries. The functional currency of these entities is the U.S. dollar. Financing activities, including cash investments are primarily made in U.S. dollars. Accordingly, monetary accounts maintained in currencies other than the U.S. dollar are translated into U.S. dollars in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) No. 830 “Foreign Currency Matters”. All transaction gains and losses of the re-measurement of monetary balance sheet items are reflected in the statements of income as financial income or expenses, as appropriate. The financial statements of other Company’s subsidiaries whose functional currency is other than the U.S. dollar have been translated into U.S dollars. Assets and liabilities have been translated using the exchange rates in effect as of the balance sheet date. Statements of income amounts have been translated using the date of the transaction or at the average exchange rate to for the relevant period. The resulting translation adjustments are reported as a component of stockholders’ equity in accumulated other comprehensive income (loss). Gains and losses arising from intercompany foreign currency transactions that are of a long-term investment in nature are reported in the same manner as translation adjustments. d. Cash and cash equivalents: Cash equivalents are short-term, highly liquid investments that are readily convertible to cash, with original maturities of three months or less at the date acquired. e. Short-term bank deposits: Short-term bank deposits are deposits with an original maturity of more than three months and less than a year from the date of investment and which do not meet the definition of cash equivalents. The deposits are presented according to their term deposits. f. Restricted bank deposits: Short-term restricted bank deposits possess an original maturity of more than three months and less than a year from the date of investment. Long-term restricted bank deposits possess an original maturity of more than one year from the date of investment. Restricted bank deposits are primarily used as collateral for the Company's office leases and credit cards. g. Marketable Securities: Marketable securities consist of corporate and governmental bonds. The Company determines the appropriate classification of marketable securities at the time of purchase and re-evaluates such designation at each balance sheet date. In accordance with FASB ASC No. 320 “Investments - Debt and Equity Securities”, the Company classifies marketable securities as available-for-sale. Available-for-sale ("AFS") securities are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate component of stockholders’ equity, net of taxes. Realized gains and losses on sales of marketable securities, as determined on a specific identification basis, are included in financial income (expenses), net. The amortized cost of marketable securities is adjusted for amortization of premium and accretion of discount to maturity, both of which, together with interest, are included in financial income (expenses), net. F - 13 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) The Company classifies its marketable securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Marketable securities with maturities of 12 months or less are classified as short-term and marketable securities with maturities greater than 12 months are classified as long-term. On each reporting period, the Company evaluates whether declines in fair value below carrying value are due to expected credit losses, as well as the ability and intent to hold the investment until a forecasted recovery occurs, in accordance with ASC 326. Allowance for credit losses on AFS debt securities are recognized as a charge in financial income (expenses), net, on the consolidated statements of income, and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive income (loss) in stockholders' equity. The Company has not recorded credit losses for the years ended December 31, 2022, 2021 and 2020. The Company determines realized gains or losses on sale of marketable securities on a specific identification method and records such gains or losses in financial income (expenses), net on the consolidated statements of income. h. Investment in privately-held companies: The Company's equity investments are investments in equity securities of privately-held companies, that are not traded and therefore not supported with observable market prices. The Company elected to account for its equity investments without readily determinable market values that either (i) do not meet the definition of in-substance common stock or (ii) do not provide the Company with control or significant influence using Accounting Standards Update (“ASU”) 2016-01. The Company adjusts the carrying value of its investments to fair value upon observable transactions for identical or similar investments of the same issuer. The Company periodically evaluates the carrying value of the investments in privately-held companies when events and circumstances indicate that the carrying amount of the investment may not be recovered. The maximum loss the Company can incur for its investments is their carrying value. The Company may determine the fair value by reviewing equity valuation reports, current financial results, long-term plans of the privately-held companies, the amount of cash that the privately-held companies have on-hand, the ability to obtain additional financing and overall market conditions in which the privately-held companies operate or based on the price observed from the most recent completed financing. All gains and losses on investments in privately-held companies, realized and unrealized, are recognized in other income. i. Trade receivables: Trade receivables are stated net of credit losses allowance. The Company is exposed to credit losses primarily through sales of products. The allowance against gross trade receivables reflects the current expected credit loss inherent in the receivables portfolio determined based on the Company’s methodology. The Company’s methodology is based on historical collection experience, customer creditworthiness, current and future economic condition and market condition. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Trade receivables are written off after all reasonable means to collect the full amount have been exhausted. F - 14 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) 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: Year Ended December 31, 2022 Balance, at beginning of the period $ 2,626 Increase in provision for expected credit losses 679 Amounts written off charged against the allowance and others ( 103 ) Balance, at end of the period $ 3,202 j. Inventories: Inventories are stated at the lower of cost or net realizable value. Cost includes depreciation, labor, material and overhead costs. Inventory reserves are provided to cover risks arising from slow-moving items or technological obsolescence. The Company periodically evaluates the quantities on hand relative to historical, current and projected sales volume. Based on this evaluation, an impairment charge is recorded when required to write-down inventory to its net realizable value. Cost of finished goods and raw materials is determined using the moving average cost method. k. Property, plant and equipment: Property, plant and equipment are stated at cost, net of accumulated depreciation and government grants. Assets under construction represent the construction or development stage of property and equipment that have not yet been placed in service for the Company's intended use. Depreciation is calculated by the straight-line method over the estimated useful life of the assets, at the following rates: % Buildings and plants 2.5 - 5.7 (mainly 2.5 ) Computers and peripheral equipment 14.3 - 33.3 (mainly 33.3 ) Office furniture and equipment 7 - 25 (mainly 7 ) Machinery and equipment 9 - 33.3 (mainly 10 ) Laboratory and testing equipment 7 - 20 (mainly 10 ) Leasehold improvements over the shorter of the lease term or useful economic life l. Government assistance In 2020, SolarEdge Ltd, a wholly owned subsidiary of the Company, entered into an agreement with the Israeli Ministry of Economy and Industry to partially subsidize the construction of Sella 1, a factory for production of inverters and optimizers, in the amount of approximately $ 7,000 . In 2020, SolarEdge Korea (formerly Kokam), a wholly owned subsidiary of the Company, entered into an agreement with Chungcheongbuk-do province of South Korea to partially subsidize the construction of Sella 2, a factory for production of lithium-ion cells and batteries, in the amount of approximately $ 12,000 . F - 15 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) The assistance is in the form of a cash subsidy, which the government will pay as a grant upon the satisfaction of predetermined construction completion milestones. When the defined milestones are reached and the right to receive a subsidy amount becomes virtually certain, the amount of the grant is recorded as a reduction of the related asset's value under “Property, plant and equipment, net”. The Company recorded reduction of property, plant and equipment in the amount of $ 7,359 and $ 4,842 for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, the Company has a right to receive of $ 9,233 that has yet to be paid which was recorded under “Prepaid expenses and other current assets”. m . Leases: The Company determines if an arrangement is a lease at inception. Contracts containing a lease are further evaluated for classification as an operating or finance lease. In determining the leases classification the Company assesses among other criteria: (i) 75% or more of the remaining economic life of the underlying asset is a major part of the remaining economic life of that underlying asset; and (ii) 90% or more of the fair value of the underlying asset comprises substantially all of the fair value of the underlying asset. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities and long-term operating lease liabilities in the Company’s consolidated balance sheets. Finance leases are included in property, plant and equipment, net, other current liabilities, and long-term finance lease liabilities in the Company’s consolidated balance sheets. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. For leases with terms greater than 12 months, the Company records the ROU asset and liability at commencement date based on the present value of lease payments according to their term. The Company uses incremental borrowing rates based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The ROU asset also includes any lease payments made and excludes lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expenses are recognized on a straight-line basis over the lease term or the useful life of the leased asset. In addition, the carrying amount of the ROU and lease liabilities are remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset. n. Business Combination: The Company allocates the fair value of the purchase price to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair value. The excess of the fair value of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired technology and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which does not exceed one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the finalization of the measurement period, any subsequent adjustments are recorded to earnings. F - 16 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) o. Intangible Assets: Acquired identifiable finite-lived intangible assets are amortized on a straight-line basis or accelerated method over the estimated useful lives of the assets. The basis of amortization approximates the pattern in which the assets are utilized, over their estimated useful lives. The Company routinely reviews the remaining estimated useful lives of finite-lived intangible assets. In case the Company reduces the estimated useful life for any asset, the remaining unamortized balance is amortized or depreciated over the revised estimated useful life (see Note 8). p. Impairment of long-lived assets: The Company’s long-lived assets to be held and used, including ROU assets and identifiable intangible assets that are subject to amortization, other than goodwill, are reviewed for impairment in accordance with ASC 360 “Property, Plants and Equipment”, whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset (or asset group) to the future undiscounted cash flows expected to be generated by the assets (or asset group). If such evaluation indicates that the carrying amount of the asset (or asset group) is not recoverable, the assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds their fair value (see Note 8). For the years ended December 31, 2022, 2021 and 2020, the Company recorded impairment charges of $ 29,037 , $ 2,209 and $ 1,471 , under Goodwill impairment and other operating expenses (income), net, respectively. q. Goodwill: Goodwill reflects the excess of the consideration transferred, including the fair value of any contingent consideration and any non-controlling interest in the acquiree, over the assigned fair values of the identifiable net assets acquired. Goodwill is not amortized, and is assigned to reporting units and tested for impairment at least on an annual basis, in the fourth quarter of the fiscal year. The goodwill impairment test is performed according to the following principles: (1) An initial qualitative assessment may be performed to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. (2) If the Company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying amount, a quantitative impairment test is performed. An impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value is recognized (see Note 9). For the year ended December 31, 2022, the Company recorded impairment charges of goodwill in the amount of $ 90,104 . For the years ended December 31, 2021 and 2020, the Company did not record any impairment charges. F - 17 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) r. Cloud computing arrangements: In 2021, due to the growing size and complexity of the Company, the Company decided to implement a new global enterprise resource planning ("ERP") system, which will replace the Company's existing operating and financial systems. During the year ended December 31, 2022, the Company began implementing a cloud-based ERP system. The implementation is expected to occur in phases over the next several years. The Company incurs costs to implement cloud computing arrangements ("CCA") that are hosted by third party vendors. Implementation costs associated with CCA are capitalized when incurred during the application development phase until the software is ready for its intended use. The costs are then amortized on a straight-line basis over the contractual term of the cloud computing arrangement and are recognized as an operating expense within the consolidated statements of income. Capitalized amounts related to such arrangements are recorded within other long-term assets in the consolidated balance sheets. Cash payments for CCA implementation costs are classified as cash outflows from operating activities. For the year ended December 31, 2022, the Company has capitalized implementation costs related to its upcoming ERP conversion in the amount of $ 3,457 and presented it under other long-term assets in the consolidated balance sheet. s. Severance pay: The employees of the Company’s Israeli subsidiary are included under Section 14 of the Severance Pay Law, 1963, under which these employees are entitled only to monthly deposits made in their name with insurance companies, at a rate of 8.33% of their monthly salary. These payments cause the Company to be released from any future obligation under the Israeli Severance Pay Law to make severance payments in respect of those employees; therefore, related assets and liabilities are not presented in the consolidated balance sheets. If applicable, severance costs are recorded in each entity in accordance with local laws and regulations. For the years ended December 31, 2022, 2021 and 2020, the Company recorded $ 17,202 , $ 14,231 and $ 10,598 in severance expenses related to its employees, respectively. t. Derivatives and Hedging: 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 year ended December 31, 2022, the Company instituted a foreign currency cash flow hedging program whereby 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. F - 18 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) The Company al so 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 a financial income (expense), net.. The Company classifies cash flows related to its hedging as operating activities in its consolidated statement of cash flows. u. Revenue recognition: Revenues are recognized in accordance with ASC 606; revenue from contracts with customers is recognized when control of the promised goods or services is transferred to the customers, in an amount that the Company expects in exchange for those goods or services. The Company’s products and services consist mainly of (i) power optimizers, (ii) inverters, (iii) residential batteries, (iv) a related cloud-based monitoring platform, (v) communication services, (vi) warranty extension services, (vii) Lithium-ion cells and other storage solutions (viii) EV components, and (ix) automated machinery for manufacturing lines. The Company recognizes revenue under the core principle that transfer of control to the Company’s customers should be depicted in an amount reflecting the consideration the Company expects to receive in revenue. In order to achieve that core principle, the Company applies the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when the performance obligation is satisfied. (1) Identify the contract with a customer A contract is an agreement or purchase order between two or more parties that creates enforceable rights and obligations. In evaluating the contract, the Company analyzes the customer’s intent and ability to pay the amount of promised consideration (credit risk) and considers the probability of collecting substantially all of the consideration. The Company determines whether collectability is reasonably assured on a customer-by-customer basis pursuant to its credit review policy. The Company typically sells to customers with whom it has a long-term business relationship and a history of successful collection. For a new customer, or when an existing customer substantially expands its commitments, the Company evaluates the customer’s financial position, the number of years the customer has been in business, the history of collection with the customer, and the customer’s ability to pay, and typically assigns a credit limit based on that review. (2) Identify the performance obligations in the contract At a contract’s inception, the Company assesses the goods or services promised in a contract with a customer and identifies the performance obligations. The main performance obligations are the provisions of the following: providing of the Company’s products; cloud based monitoring services; extended warranty services and communication services. Depending on the shipping terms agreed with the customer, the Company may perform shipping and handling activities after the customer obtains control of the goods and revenue is recognized. The Company has elected to account for shipping and handling costs as activities to fulfill the promise to transfer the goods. As a result of this accounting policy election, the Company does not consider shipping and handling activities after the customer obtains control of the goods as promised services to its customers. F - 19 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) (3) Determine the transaction price The transaction price is the amount of consideration to which the Company is entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. Generally, the Company does not provide price protection, stock rotation, and/or right of return. The Company determines the transaction price for all satisfied and unsatisfied performance obligations identified in the contract from contract inception to the beginning of the earliest period presented. Rebates or discounts on goods or services are accounted for as variable consideration. The rebate or discount program is applied retrospectively for future purchases. Provisions for rebates, sales incentives, and discounts to customers are accounted for as reductions in revenue in the same period the related sales are recorded. Accrual for rebates for direct customers is presented net of receivables. Accrual for sale incentives related to non-direct customers is presented under accrued expenses and other current liabilities. The Company accrued $ 176,706 and $ 152,717 for rebates and sales incentives as of December 31, 2022 and 2021, respectively. When a contract provides a customer with payment terms of more than a year, the Company considers whether those terms create variability in the transaction price and whether a significant financing component exists. As of December 31, 2022, the Company has not provided payment terms of more than a year. The performance obligations that extend for a period greater than one year are those that include a financial component: (i) warranty extension services, (ii) cloud-based monitoring, and (iii) communication services. The Company recognizes financing component expenses in its consolidated statement of income in relation to advance payments for performance obligations that extend for a period greater than one year. These financing component expenses are reflected in the Company’s deferred revenues balance. (4) Allocate the transaction price to the performance obligations in the contract The Company performs an allocation of the transaction price to each separate performance obligation, in proportion to their relative standalone selling prices. (5) Recognize revenue when a performance obligation is satisfied Revenue is recognized when or as performance obligations are satisfied by transferring control of a promised good or service to a customer. Control either transfers over time or at a point in time, which affects when revenue is recorded. Revenues from sales of products are recognized based on the transfer of control, which includes but is not limited to, the agreed International Commercial terms, or “INCOTERMS”. Revenues related to warranty extension services, cloud-based monitoring, and communication services are recognized over time on a straight-line basis. 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 (see Note 14). F - 20 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) v. Cost of revenues: Cost of revenues includes the following: product costs consisting of purchases from contract manufacturers and other suppliers, direct and indirect manufacturing costs, shipping and handling, support, warranty expenses, provision for losses related to slow moving and dead inventory, personnel and logistics costs. Shipping and handling costs, which amounted to $ 257,753 , $ 116,574 and $ 101,597 , for the years ended December 31, 2022, 2021 and 2020, respectively, are included in the cost of revenues in the consolidated statements of income. Shipping and handling costs include custom tariff charges and all other costs associated with the distribution of finished goods from the Company’s point of sale directly to its customers. w. Warranty obligations: The Company provides a product warranty for its solar segment related products as follows: a standard 10 -year limited warranty for its residential batteries, a standard 12 -year limited warranty for the majority of its inverters, that is extendable up to 25 years for an additional cost and a 25 -year limited warranty for power optimi z ers. The Company maintains reserves to cover the expected costs that could result from the standard warranty. The warranty liability is in the form of product replacement and associated costs. Warranty reserves are based on the Company’s best estimate of such costs and are included in cost of revenues. The reserve for the related warranty expenses is based on various factors including assumptions about the frequency of warranty claims on product failures, derived from results of accelerated lab testing, field monitoring, analysis of the history of product field failures, and the Company’s reliability estimates. The Company has established a reliability measurement system based on the units’ estimated mean time between failure, or MTBF, a metric that equates to a steady-state failure rate per year for each product generation. The MTBF predicts the expected failure rate of each product within the Company's products installed base during the expected product warranted lifetime. The Company performs accelerated life cycle testing, which simulates the service life of the product in a short period of time. The accelerated life cycle tests incorporate test methodologies derived from standard tests used by solar module vendors to evaluate the period over which solar modules wear out. Corresponding replacement costs are updated periodically to reflect changes in the Company’s actual and estimated production costs for its products, rate of usage of refurbished units as a replacement of faulty units, and other costs related to logistic and subcontractors’ services associated with the replacement products. In addition, through the collection of actual field failure statistics, the Company has identified several additional failure causes that are not included in the MTBF model. Such causes, which mostly consist of design errors, workmanship errors caused during the manufacturing process and, to a lesser extent, replacement of non-faulty units by installers, result in generating additional replacement costs to the replacement costs projected under the MTBF model. For other products, the Company accrues for warranty costs based on the Company’s best estimate of product and associated costs. The Company’s other products are sold with a standard limited warranty that typically range in duration from one to ten years. Warranty obligations are classified as short-term and long-term obligations based on the period in which the warranty is expected to be claimed. F - 21 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) x. Convertible senior notes: Effective January 1, 2021, the Company early adopted ASU 2020-06 using the modified retrospective approach. The Notes are accounted for as a single liability measured at its amortized cost, as no other embedded features require bifurcation and recognition as derivatives. Adoption of the new standard resulted in an increase of retained earnings in the amount of $ 2,884 , a decrease of an additional paid-in capital in the amount of $ 36,336 , an increase of convertible senior notes, net, in the amount of $ 45,282 and a decrease of deferred tax liabilities, net, in the amount of $ 11,830 . The impact of adoption of this standard on the Company’s earnings per share was immaterial. The Company’s Convertible Senior Notes are included in the calculation of diluted Earnings Per Share (“EPS”) if the assumed conversion into common shares is dilutive, using the “if-converted” method. This involves adding back the periodic non-cash interest expense net of tax associated with the Notes to the numerator and by adding the shares that would be issued in an assumed conversion (regardless of whether the conversion option is in or out of the money) to the denominator for the purposes of calculating diluted EPS, unless the Notes are antidilutive (see Note 21). y. Advertising costs Advertising costs are expensed when incurred and are included in sales and marketing expenses in the consolidated statements of income. The Company incurred advertising expenses of $ 11,090 , $ 6,323 , and $ 4,199 for the years ended December 31, 2022, 2021, and 2020, respectively. z. Research and development costs: Research and development costs, are charged to the consolidated statement of income as incurred. aa. Concentrations of credit risks: Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term bank deposits, restricted bank deposits, marketable securities, trade receivables, derivative instruments and other accounts receivable. Cash and cash equivalents, short-term bank deposits and restricted bank deposits are mainly invested in major banks in the U.S., Israel, Germany and Korea. Management believes that the financial institutions that hold the Company’s investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments. The Company's debt marketable securities include investments in highly-rated corporate debentures (located mainly in U.S., Canada, France, UK, Cayman Islands and other countries) and governmental bonds . The financial institutions that hold the Company's debt marketable securities are major financial institutions located in the United States. The Company believes its debt marketable securities portfolio is a diverse portfolio of highly-rated securities and the Company's investment policy limits the amount the Company may invest in an issuer (see Note 2g.). The trade receivables of the Company derive from sales to customers located primarily in the United States and Europe. The Company performs ongoing credit evaluations of its customers for the purpose of determining the appropriate allowance for credit losses (see Note 2i.). The Company generally does not require collaterals, however, in certain circumstances, the Company may require letters of credit, other collateral, or additional guarantees. From time to time, the Company may purchase trade credit insurance. F - 22 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) The Company had one major customer (customers with attributable revenues that represents more than 10% of total revenues) for the year ended December 31, 2022, two major customers for the year ended December 31, 2021, and one major customer for the year ended December 31, 2020 that accounted for approximately 18.5 %, 30.9 %% and 14.8 % of the Company’s consolidated revenues, respectively. All of the revenues from these customers were generated in the solar segment. The Company had three major customers (customer with a balance that represents more than 10% of total trade receivables, net) as of December 31, 2022 and two major customers for the year ended December 31, 2021 that accounted in the aggregate for approximately 42.2 % and 39.3 %, of the Company’s consolidated trade receivables, net, respectively. ab. 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 December 31, 2022 and 2021, two contract manufacturers collectively accounted for 34.3 % 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 in the ramp-up phase, that is expected to continue throughout 2023. Sella 2 is the Company's second owned manufacturing facility following the establishment of Sella 1 in 2020. Sella 1 is the Company's manufacturing facility in the North of Israel that produces power optimizers and inverters for the Company's solar activities. ac. Fair value of financial instruments: The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: The carrying value of cash and cash equivalents, short-term bank deposits, restricted bank deposits, trade receivables, net, long term bank loans and current maturities, prepaid expenses and other current assets, trade payables, net, employee and payroll accruals and accrued expenses and other current liabilities approximate their fair values due to the short-term maturities of such instruments. Assets measured at fair value on a recurring basis as of December 31, 2022 and 2021 are comprised of money market funds, derivative instruments and marketable securities (see Note 12). The Company applies ASC 820 “Fair Value Measurements and Disclosures”, with respect to fair value measurements of all financial assets and liabilities. Fair value is an exit price, representing the amount that would be received for the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. F - 23 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) A three-tiered fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value: Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 - Include other inputs that are directly or indirectly observable in the marketplace. Level 3 - Unobservable inputs which are supported by little or no market activity. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ad. Stock-based compensation: The Company uses the closing trading price of its common stock on the day before the grant date as the fair value of awards of restricted stock units ("RSUs"), and performance stock units that are based on the Company's financial performance targets ("PSUs"). The compensation expense for RSUs is recognized using a straight-line attribution method over the requisite employee service period while compensation expense for PSUs is recognized using an accelerated amortization model. The Company estimates the forfeitures at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-vesting forfeitures. 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 Company selected the Black-Scholes-Merton option-pricing model as the most appropriate fair value method for its stock-option awards and Employee Stock Purchase Plan (“ESPP”). The option-pricing model requires a number of assumptions, of which the most significant are the fair market value of the underlying common stock, expected stock price volatility, and the expected option term. Expected volatility for stock-option awards and ESPP was calculated based upon the Company’s stock prices. The expected term of options granted is based upon historical experience and represents the period between the options’ grant date and the expected exercise or expiration date. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The Company does not use dividend yield rate since the Company has not declared or paid any dividends on its common stock and does not expect to pay any dividends in the foreseeable future. A modification of the terms of a stock-based award is treated as an exchange of the original award for a new award with total compensation cost equal to the grant-date fair value of the original award plus the incremental value of the modification to the award. F - 24 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) The fair value for options granted to employees and ESPP in the years ended December 31, 2022, 2021 and 2020, is estimated at the date of grant using the following assumptions: Year ended December 31, 2022 2021 2020 Employee Stock Options (1) Risk-free interest - 0.43 % 1.73 % Dividend yields - 0 % 0 % Volatility - 60.74 % 58.98 % Expected option term in years - 5.48 6.00 Estimated forfeiture rate - 0 % 0 % ESPP Risk-free interest 1.64 % - 4.70 % 0.03 % - 0.10 % 0.09 % - 1.63 % Dividend yields 0 % 0 % 0 % Volatility 71.28 % - 71.97 % 48.39 % - 76.05 % 55.95 % - 92.57 % Expected term 6 months 6 months 6 months PSU Risk-free interest 1.77 % - - Dividend yields 0 % - - Volatility 67.42 % - - Expected term 1 - 3 years - - (1) No new options were granted in 2022. ae. Earnings per share Basic net 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, to the extent dilutive, including stock options, RSUs, PSUs, shares to be purchased under the Company’s ESPP, and the Notes due 2025, all in accordance with ASC No. 260, "Earnings Per Share." af. Income taxes: The Company and its subsidiaries account for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 prescribes the use of the liability method, whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent the Company believes they will not be realized. The Company considers all available evidence, including historical information, long range forecast of future taxable income and evaluation of tax planning strategies. Amounts recorded for valuation allowance can result from a complex series of judgments about future events and can rely on estimates and assumptions. Tax has not been recorded for (a) taxes that would apply in the event of disposal of investments in subsidiaries, as it is generally the Company’s intention to hold these investments, not to realize them; and (b) taxes that would apply on the distribution of unremitted earnings from foreign subsidiaries, as these are retained for reinvestment in the Group. F - 25 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) The Company accounts for uncertain tax positions in accordance with ASC 740-10 two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% (cumulative probability) likely to be realized upon ultimate settlement. ag. New accounting pronouncements not yet effective: 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. ah. 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 the Company's 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 has a minor impact on the disclosures to the annual consolidated financial statements. ai. Certain prior period amounts have been reclassified to conform to the current period presentation. F - 26 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) NOTE 3: MARKETABLE SECURITIES The following is a summary of available-for-sale marketable securities at December 31, 2022: Amortized cost Gross unrealized gains Gross unrealized losses Fair value Available-for-sale – matures within one year: Corporate bonds $ 222,482 $ - $ ( 4,657 ) $ 217,825 Governmental bonds 23,845 - ( 553 ) 23,292 246,327 - ( 5,210 ) 241,117 Available for-sale – matures after one year: Corporate bonds 657,238 80 ( 26,460 ) 630,858 Governmental bonds 15,250 - ( 617 ) 14,633 672,488 80 ( 27,077 ) 645,491 Total $ 918,815 $ 80 $ ( 32,287 ) $ 886,608 The following is a summary of available-for-sale marketable securities at 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 Proceeds from maturity of available-for-sale marketable securities during the years ended December 31, 2022, 2021 and 2020, were $ 201,974 , $ 187,375 and $ 141,839 , respectively. Proceeds from sales of available-for-sale marketable securities during the year ended December 31, 2022 were $ 29,236 , which led to realized losses of $ 434 . Proceeds from sales of available-for-sale marketable securities during the year ended December 31, 2021 were $ 14,813 , which led to realized losses of $ 16 . The Company had no proceeds from sales of available-for sale, marketable securities during the year ended December 31, 2020, therefore no realized gains or losses from the sale of available-for-sale marketable securities were recognized. F - 27 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) NOTE 4: INVENTORIES, NET As of December 31, 2022 2021 Raw materials $ 503,257 $ 247,386 Work in process 23,407 13,863 Finished goods 202,537 118,894 $ 729,201 $ 380,143 The Company recorded inventory write-downs of $ 10,170 , $ 7,142 and $ 8,864 for the years ended December 31, 2022, 2021 and 2020, respectively. NOTE 5: PREPAID EXPENSES AND OTHER CURRENT ASSETS As of December 31, 2022 2021 Vendor non-trade receivables (*) $ 147,597 $ 71,041 Government authorities 55,670 63,440 Prepaid expenses and other 37,815 42,511 $ 241,082 $ 176,992 (*) Vendor non-trade receivables derived from the sale of components to manufacturing vendors who manufacture products for the Company. The Company purchases these components directly from other suppliers. The Company does not reflect the sale of these components to the contract manufacturers in its revenues (see Note 19b). NOTE 6: PROPERTY, PLANT AND EQUIPMENT, NET As of December 31, 2022 2021 Cost: Land $ 13,070 $ 13,829 Buildings and plants 152,218 62,519 Computers and peripheral equipment 46,376 44,960 Office furniture and equipment 10,911 10,772 Laboratory and testing equipment 58,454 41,365 Machinery and equipment 315,155 201,406 Leasehold improvements 85,147 73,991 Assets under construction and payments on account 47,168 112,037 Gross property, plant and equipment 728,499 560,879 Less - accumulated depreciation 184,530 150,500 Total property, plant and equipment, net $ 543,969 $ 410,379 Depreciation expenses for the years ended December 31, 2022, 2021 and 2020, were $ 40,580 , $ 29,359 and $ 22,355 , respectively. F - 28 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) NOTE 7: LEASES The following table summarizes the Company’s lease-related assets and liabilities recorded in the consolidated balance sheets: Description Classification on the consolidated Balance Sheet 2022 2021 Assets: Operating lease assets, net of lease incentive obligation Operating lease right-of use assets, net $ 62,754 $ 47,137 Finance lease assets Property, plant and equipment, net 52,934 41,758 Total lease assets $ 115,688 $ 88,895 Liabilities: Operating leases short term Accrued expenses and other current liabilities $ 16,183 $ 12,728 Finance leases short term Accrued expenses and other current liabilities 3,263 1,875 Operating leases long term Operating lease liabilities 46,256 38,912 Finance leases long term Finance lease liabilities 45,385 40,508 Total lease liabilities $ 111,087 $ 94,023 The following table presents certain information related to the operating and finance leases: Year ended December 31, 2022 2021 Finance leases: Finance lease cost $ 4,196 $ 2,065 Weighted average remaining lease term in years 16.28 16.43 Weighted average annual discount rate 2.30 % 1.93 % Operating leases: Operating lease cost $ 15,901 $ 14,890 Weighted average remaining lease term in years 8.33 10.25 Weighted average annual discount rate 2.17 % 1.68 % The following table presents supplemental cash flows information related to the lease costs for operating and finance leases: Year ended December 31, 2022 2021 Cash paid for amounts included in measurement of lease liabilities: Operating cash flows for operating leases $ 16,343 $ 14,890 Operating cash flows for finance leases $ 420 $ 523 Financing cash flows for finance leases $ 2,834 $ 1,293 F - 29 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) The following table reconciles the undiscounted cash flows for each of the first five years and the total of the remaining years of the operating and finance lease liabilities recorded in the consolidated balance sheets: Operating Leases Finance Leases 2023 $ 16,330 $ 3,298 2024 14,746 3,369 2025 7,338 3,539 2026 4,246 3,539 2027 3,285 4,083 Thereafter 22,085 40,445 Total lease payments $ 68,030 $ 58,273 Less amount of lease payments representing interest ( 5,591 ) ( 9,625 ) Present value of future lease payments $ 62,439 $ 48,648 Less current lease liabilities ( 16,183 ) ( 3,263 ) Long-term lease liabilities $ 46,256 $ 45,385 F - 30 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) NOTE 8: INTANGIBLE ASSETS, NET In June 2022, the Company decided to discontinue its stand-alone uninterrupted power supply activities or UPS (“Critical Power”). The Company recorded a loss in the amount of $ 1,226 pertaining to Critical Power's current technology and customer relationships. In October 2022, following the e-Mobility and Automation Machines reporting unit’s goodwill analysis, an impairment test for long-lived assets was performed. The test included comparing the sum of the estimated undiscounted future cash flow attributable to the identified assets group and its carrying amounts, and recognizing an impairment for the amount to which the carrying amount exceeds the fair value of the assets groups. As a result, the Company recorded a current technology impairment of $ 26,917 related to e-Mobility's asset group and a $ 245 trade name impairment related to Automation Machines' asset group. The impairments are recorded under Goodwill impairment and other operating expenses (income), net in the consolidated statement of income. Acquired intangible assets consisted of the following as of December 31, 2022, and 2021: As of December 31, 2022 2021 Intangible assets with finite lives: Current Technology $ 29,196 $ 74,976 Customer relationships 2,958 3,946 Trade names 3,287 3,929 Assembled workforce 3,575 3,575 Patents 1,400 1,400 Gross intangible assets 40,416 87,826 Less - accumulated amortization ( 20,487 ) ( 28,965 ) Total intangible assets, net $ 19,929 $ 58,861 Amortization expenses for the years ended December 31, 2022 , 2021 and 2020 , were $ 9,096 , $ 10,176 and $ 9,479 , respectively. Expected future amortization expenses of intangible assets as of December 31, 2022 are as follows: 2023 $ 5,736 2024 5,717 2025 3,890 2026 3,826 2027 558 2028 and thereafter 202 $ 19,929 F - 31 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) NOTE 9: GOODWILL Goodwill is tested for impairment annually in the fourth quarter of each year and is examined between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. In June 2022, the Company decided to discontinue its stand-alone Critical Power activities . The Company recorded a loss in the amount of $ 2,782 pertaining to Critical Power's goodwill. The Company completed its annual goodwill impairment test in the fourth quarter of 2022 for all reporting units and determined the following: Qualitative assessment of the Company’s storage reporting unit was performed in order to determine w hether it is necessary to conduct the quantitative goodwill impairment test . Based on the results, the Company believes that it is more likely than not that the fair value of said reporting unit is greater than its carrying value and therefore a quantitative goodwill impairment test was not performed, and no goodwill impairment was recorded. Due to impairment indicators of the e-Mobility reporting unit, which include, among other things, a shift in the Company's strategy that may result in a decline of the projected growth forecasted at the time of acquisition, the Company performed a quantitative goodwill impairment test. As a result, the Company recorded goodwill impairment in the amount of $ 80,534 which is presented under Goodwill impairment and other operating expenses (income), net in the consolidated statement of income. In addition, a quantitative test has also been performed for the Automation Machines reporting unit due to indicators of impairment identified, which include, amo ng other things, managerial changes and a decline in the overall financial performance compared with past projections. As a result, the Company recorded goodwill impairment in the amount of $ 6,788 , which was recorded under Goodwill impairment and other operating expenses (income), net in the consolidated statement of income. The fair value of the reporting units was estimated using a discounted cash flow analysis. When performing this analysis, the Company also considered multiples of earnings from comparable public companies. The decline in fair value primarily resulted from an increased discount rate and reduced estimated future cash flows. The following summarizes the goodwill activity for the year ended December 31, 2022 , and 2021 : Solar All other Total Goodwill at December 31, 2020 $ 33,255 $ 107,224 $ 140,479 Changes during the year: Foreign currency adjustments ( 2,750 ) ( 8,100 ) ( 10,850 ) Goodwill at December 31, 2021 30,505 99,124 129,629 Changes during the year: Foreign currency adjustments ( 1,737 ) ( 6,599 ) ( 8,336 ) Accumulated impairment losses - ( 90,104 ) ( 90,104 ) Goodwill at December 31, 2022 $ 28,768 $ 2,421 $ 31,189 As of December 31, 2022 there were $ 90,104 accumulated goodwill impairment losses. As of December 31, 2021 and 2020 there were no accumulated goodwill impairment losses. F - 32 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) NOTE 10: 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 . On July 20, 2022, the Company completed the sale of its investment in AutoGrid for proceeds of $ 24,362 , thus recognizing a gain of $ 7,719 which was recorded in the statement of income under "Other income". Investments in privately-held companies are included within other long-term assets in the consolidated balance sheets. As of December 31, 2022 , the Company had no investments in privately-held companies. As of December 31, 2021 , the carrying value of investments in privately-held companies was $ 16,643 . 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. NOTE 11: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES As of December 31, 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 194 million and NIS 18 million , respectively. The fair values of outstanding derivative instruments were as follows: Balance sheet location December 31 , 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 - 3,017 Total derivative assets $ - $ 4,009 Derivative liabilities of options and forward contracts: Designated cash flow hedges Accrued expenses and other current liabilities $ ( 1,874 ) $ - Non-designated hedges Accrued expenses and other current liabilities - ( 169 ) Total derivative liabilities $ ( 1,874 ) $ ( 169 ) Gains (losses) on derivative instruments recognized in the consolidated statements of income are summarized below: Year ended December 31, 2022 2021 2020 Affected line item Foreign exchange contracts Non Designated Hedging Instruments $ 4,716 $ 9,417 $ ( 4,013 ) Financial income (expense), net See Note 20 for information regarding gains (losses) from designated hedging instruments reclassified from accumulated other comprehensive loss. F - 33 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) Gains (losses) on derivative instruments recognized in the consolidated statements of comprehensive income were as follows: Year ended December 31 2022 2021 2020 Foreign exchange contracts: Designated Hedging Instruments $ ( 8,965 ) $ 3,289 $ 966 As of December 31, 2022, the Company estimates that all of the net derivative losses related to the Company's foreign exchange cash flow hedges included in accumulated other comprehensive loss will be reclassified into earnings within the next 12 months. NOTE 12: 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 and cash equivalents are classified within Level 1 because these assets are valued using quoted market prices. Marketable securities and foreign currency derivative contracts are classified within level 2 due to these assets being valued by alternative pricing sources and models utilizing market observable inputs. The following table sets forth the Company’s assets that were measured at fair value as of December 31, 2022 and 2021 by level within the fair value hierarchy: Fair Value Hierarchy Fair value measurements as of Description December 31, 2022 December 31, 2021 Assets: Cash and cash equivalents: Cash Level 1 $ 695,004 $ 508,389 Money market mutual funds Level 1 $ 25,149 $ 21,680 Deposits Level 1 $ 62,959 $ 20 Derivative instruments Level 2 $ - $ 4,009 Short-term marketable securities: Corporate bonds Level 2 $ 217,825 $ 160,165 Governmental bonds Level 2 $ 23,292 $ 7,563 Long-term marketable securities: Corporate bonds Level 2 $ 630,858 $ 468,841 Governmental bonds Level 2 $ 14,633 $ 13,387 Liabilities: Derivative instruments Level 2 $ ( 1,874 ) $ ( 169 ) In addition to assets and liabilities that are recorded at fair value on a recurring basis, impairment indicators may subject goodwill and long-lived assets to nonrecurring fair value measurements. The implied fair values of the e-Mobility and Automation Machines reporting units were estimated using the discounted cash flow approach (see Notes 8 and 9). The inputs to these models are considered Level 3. F - 34 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) NOTE 13: WARRANTY OBLIGATIONS Changes in the Company’s product warranty obligations for the years ended December 31, 2022 , 2021 and 2020 were as follows: December 31, 2022 2021 2020 Balance, at the beginning of the period $ 265,160 $ 204,994 $ 172,563 Additions and adjustments to cost of revenues 239,401 150,684 102,832 Usage and current warranty expenses ( 119,504 ) ( 90,518 ) ( 70,401 ) Balance, at end of the period 385,057 265,160 204,994 Less current portion ( 103,975 ) ( 71,480 ) ( 62,614 ) Long term portion $ 281,082 $ 193,680 $ 142,380 NOTE 14: 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 : December 31, 2022 2021 2020 Balance, at the beginning of the period $ 169,345 $ 140,020 $ 160,797 Revenue recognized ( 23,017 ) ( 26,093 ) ( 72,046 ) Increase in deferred revenues and customer advances 67,249 55,418 51,269 Balance, at the end of the period 213,577 169,345 140,020 Less current portion ( 26,641 ) ( 17,789 ) ( 24,648 ) Long term portion $ 186,936 $ 151,556 $ 115,372 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 December 31, 2022 : 2023 $ 26,641 2024 10,891 2025 10,160 2026 9,691 2027 7,565 Thereafter 148,629 Total deferred revenues $ 213,577 F - 35 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) NOTE 15: ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES As of December 31, 2022 2021 Accrued expenses $ 117,638 $ 57,158 Government authorities 67,514 22,631 Operating lease liabilities 16,183 12,728 Accrual for sales incentives 6,790 3,048 Provision for legal claims 43 11,622 Other 5,944 2,192 Total accrued expenses and other current liabilities $ 214,112 $ 109,379 NOTE 16: 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 “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, if any, to, but excluding, the repurchase date. If certain fundamental changes referred to as make-whole fundamental changes occur, the conversion rate for the Notes may be increased. F - 36 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) The Convertible Senior Notes consisted of the following as of December 31, 2022 and 2021: As of December 31, 2022 2021 Liability: Principal $ 632,500 $ 632,500 Unamortized issuance costs ( 8,049 ) ( 10,965 ) Net carrying amount $ 624,451 $ 621,535 Effective January 1, 2021, the Company early adopted ASU 2020-06 using the modified retrospective approach and therefore the Company did not record amortized debt discount costs related to the Notes in the years ended December 31, 2022 and 2021. For the year ended December 31, 2020, the Company recorded amortized debt discount costs related to the Notes in the amount of $ 2,480 . For the years ended December 31, 2022 , 2021 and 2020 the Company recorded amortized debt issuance costs related to the Notes in the amount of $ 2,916 , $ 2,903 and $ 3,185 , respectively . As of December 31, 2022, the issuance costs of the Notes will be amortized over the remaining term of approximately 2.7 years. The annual effective interest rate of the liability component following the adoption of ASU 2020-06 is 0.47 %. As of December 31, 2022, the estimated fair value of the Notes, which the Company has classified as Level 2 financial instruments, is $ 831 . 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 December 31, 2022, the if-converted value of the Notes exceeded the principal amount by $ 12,452 . NOTE 17: OTHER LONG TERM LIABILITIES As of December 31, 2022 2021 Tax liabilities $ 3,830 $ 5,105 Accrued severance pay 9,848 10,632 Other 2,078 3,805 $ 15,756 $ 19,542 F - 37 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) NOTE 18: 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 December 31, 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 9,410,816 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. In 2021, the Company has also committed to issuing additional shares, which are subject to resale registration rights and which carry certain performance conditions (including business performance targets and a continued service relationship with the Company) and are treated as PSUs for accounting purposes. F - 38 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) 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 December 31, 2022, an aggregate of 8,617,974 options are still available for future grants under the 2015 Plan. 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 ( 135,008 ) 29.77 - - Forfeited or expired ( 243 ) 5.01 - - Outstanding as of December 31, 2022 339,029 $ 50.64 4.86 $ 79,414 Vested and expected to vest as of December 31, 2022 338,345 $ 50.45 4.85 $ 79,315 Exercisable as of December 31, 2022 300,865 $ 38.52 4.58 $ 73,875 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. The total intrinsic value of options exercised during the years ended December 31, 2022, 2021 and 2020 was $ 37,948 , $ 65,668 , and $ 251,564 , respectively. There were no options granted in 2022. The weighted average grant date fair value of options granted to employees and directors during the years ended December 31, 2021 and 2020, was $ 168.71 and $ 62.11 , respectively. 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 January 1, 2022 1,759,972 $ 189.25 Granted 683,548 266.06 Vested ( 805,872 ) 131.79 Forfeited ( 149,133 ) 214.65 Unvested as of December 31, 2022 1,488,515 $ 232.05 F - 39 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) 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 January 1, 2022 108,595 $ 296.40 Granted 40,637 294.48 Unvested as of December 31, 2022 149,232 $ 295.88 d. Employee Stock Purchase Plan: The Company adopted an ESPP effective upon the consummation of the IPO. As of December 31, 2022 , 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. As of December 31, 2022 , 738,876 shares of common stock had been purchased under the ESPP. As of December 31, 2022 , 2,923,861 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 years ended December 31, 2022, 2021 and 2020, as follows: Year ended December 31, 2022 2021 2020 Cost of revenues $ 21,818 $ 18,743 $ 11,082 Research and development 63,211 45,424 27,048 Selling and marketing 31,017 22,834 19,413 General and administrative 29,493 15,592 9,766 Total stock-based compensation expenses $ 145,539 $ 102,593 $ 67,309 For the year ended December 31, 2022, the Company capitalized $ 380 stock-based compensation related to the ERP implementation within other long-term assets in the consolidated balance sheets for the year ended December 31, 2022. In 2021 and 2020 the Company did not capitalize any stock-based compensation expenses. F - 40 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) The total tax benefit associated with share-based compensation for the year ended December 31, 2022, 2021 and 2020 was $ 7,747 , $ 19,113 and $ 7,847 , respectively. The tax benefit realized from share-based compensation for the year ended December 31, 2022, 2021 and 2020 was $ 10,171 , $ 13,379 and $ 11,263 , respectively. As of December 31, 2022 , there were total unrecognized compensation expenses in the amount of $ 343,473 related to non-vested equity-based compensation arrangements granted. These expenses are expected to be recognized during the period from October 1, 2022 through November 30, 2026. NOTE 19: COMMITMENTS AND CONTINGENT LIABILITIES a. Guarantees: As of December 31, 2022, contingent liabilities exist regarding guarantees in the amounts of $ 5,655 and $ 1,372 in respect of office rent lease agreements and customs 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 December 31, 2022, the Company had non-cancelable purchase obligations totaling approximately $ 1,590,229 , out of which the Company recorded a provision for loss in the amount of $ 7,002 . As of December 31, 2022, the Company had contractual obligations for capital expenditures totaling approximately $ 73,955 . 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 infringed on two of the plaintiff’s patents. SMA asserted a value in dispute of EUR 5.5 million (approximately $ 5,866 ) 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, the invalidity was appealed by SMA and in January 2023, the German Supreme Court upheld the finding of invalidity. 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. In August 2021, the German Patent Court rendered SMA's second patent invalid, and this invalidity has been appealed by SMA and a hearing is pending. The Company believes that it has meritorious defenses to these claims and intends to vigorously defend against the remaining lawsuit. 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, in 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. On November 3, 2022, the Company received notice that a class action lawsuit was filed in the U.S District Court or 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, detailed above. On February 14, 2023, the lawsuit was voluntarily withdrawn by the plaintiffs and dismissed by the court. F - 41 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) NOTE 20: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Unrealized gains (losses) on available-for-sale marketable securities Unrealized gains (losses) on cash flow hedges Foreign currency translation adjustments on intra-entity transactions that are of a long-term investment in nature Unrealized gains (losses) on foreign currency translation Total Beginning balance as of January 1, 2020 $ 264 $ — $ — $ ( 2,073 ) $ ( 1,809 ) Revaluation 45 1,101 — 5,690 6,836 Tax on revaluation ( 69 ) ( 135 ) — ( 204 ) Other comprehensive income (loss) before reclassifications ( 24 ) 966 — 5,690 6,632 Reclassification — ( 1,101 ) — — ( 1,101 ) Tax on reclassification — 135 — — 135 Gains reclassified from accumulated other comprehensive income — ( 966 ) — — ( 966 ) Net current period other comprehensive income (loss) ( 24 ) — — 5,690 5,666 Ending balance as of December 31, 2020 $ 240 $ — $ — $ 3,617 $ 3,857 Revaluation ( 6,283 ) 3,735 ( 17,420 ) ( 9,681 ) ( 29,649 ) Tax on revaluation 1,346 ( 446 ) — — 900 Other comprehensive income (loss) before reclassifications ( 4,937 ) 3,289 ( 17,420 ) ( 9,681 ) ( 28,749 ) Reclassification ( 16 ) ( 2,742 ) — — ( 2,758 ) Tax on reclassification 4 327 — — 331 Gains reclassified from accumulated other comprehensive income ( 12 ) ( 2,415 ) — — ( 2,427 ) Net current period other comprehensive income (loss) ( 4,949 ) 874 ( 17,420 ) ( 9,681 ) ( 31,176 ) Ending balance as of December 31, 2021 $ ( 4,709 ) $ 874 $ ( 17,420 ) $ ( 6,064 ) $ ( 27,319 ) Revaluation ( 26,944 ) ( 9,890 ) ( 20,540 ) ( 1,875 ) ( 59,249 ) Tax on revaluation 5,583 925 — — 6,508 Other comprehensive loss before reclassifications ( 21,361 ) ( 8,965 ) ( 20,540 ) ( 1,875 ) ( 52,741 ) Reclassification 736 7,024 — — 7,760 Tax on reclassification ( 115 ) ( 694 ) — — ( 809 ) Losses reclassified from accumulated other comprehensive income 621 6,330 — — 6,951 Net current period other comprehensive loss ( 20,740 ) ( 2,635 ) ( 20,540 ) ( 1,875 ) ( 45,790 ) Ending balance as of December 31, 2022 $ ( 25,449 ) $ ( 1,761 ) $ ( 37,960 ) $ ( 7,939 ) $ ( 73,109 ) F - 42 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) The following table provides details about reclassifications out of accumulated other comprehensive income (loss) for the years ended December 31, 2022, 2021 and 2020: Details about Accumulated Other Comprehensive Income (Loss) Components Amount Reclassified from Accumulated Other Comprehensive Income (Loss) Affected Line Item in the Statement of Income 2022 2021 2020 Unrealized gains (losses) on available-for-sale marketable securities $ ( 736 ) $ 16 $ - Financial income (expenses), net 115 ( 4 ) - Income taxes $ ( 621 ) $ 12 $ - Total, net of income taxes Unrealized gains (losses) on cash flow hedges ( 801 ) 333 189 Cost of revenues ( 4,142 ) 1,645 623 Research and development ( 959 ) 334 136 Sales and marketing ( 1,122 ) 430 153 General and administrative $ ( 7,024 ) $ 2,742 $ 1,101 Total, before income taxes 694 ( 327 ) ( 135 ) Income taxes ( 6,330 ) 2,415 966 Total, net of income taxes Total reclassifications for the period $ ( 6,951 ) $ 2,427 $ 966 F - 43 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) NOTE 21: EARNINGS PER SHARE The following table presents the computation of basic and diluted EPS attributable to SolarEdge Technologies Inc.: Year ended December 31, 2022 2021 2020 Basic EPS: Numerator: Net income $ 93,779 $ 169,170 $ 140,322 Denominator: Shares used in computing net earnings per share of common stock, basic 55,087,770 52,202,182 50,217,330 Diluted EPS: Numerator: Net income attributable to common stock, basic $ 93,779 $ 169,170 $ 140,322 Notes due 2025 2,203 2,134 - Net income attributable to common stock, diluted $ 95,982 $ 171,304 $ 140,322 Denominator: Shares used in computing net earnings per share of common stock, basic 55,087,770 52,202,182 50,217,330 Notes due 2025 2,276,818 2,276,818 - Effect of stock-based awards 736,061 1,492,030 2,578,146 Shares used in computing net earnings per share of common stock, diluted 58,100,649 55,971,030 52,795,476 Shares excluded from the calculation of diluted net EPS due to their anti-dilutive effect 207,980 132,133 715,510 F - 44 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) NOTE 22: GOODWILL IMPAIRMENT AND OTHER OPERATING EXPENSES (INCOME), NET Year ended December 31, 2022 2021 2020 Impairment of goodwill 1 $ 90,104 $ - $ - Impairment of long-lived assets 2 29,037 2,209 1,471 Sale of assets ( 2,603 ) - - SolarEdge Korea (formerly Kokam) purchase escrow 3 - ( 859 ) ( 4,900 ) Total goodwill impairment and other operating expenses (income) $ 116,538 $ 1,350 $ ( 3,429 ) 1 In June 2022, the Company decided to discontinue its stand-alone Critical Power activities. The Company recorded a loss related to its Critical Power business in the amount of $ 2,782 ( see Note 9 ). In addition, in October 2022, as a result of an impairment test performed on the e-Mobility and Automation Machines reporting units, the Company recorded a loss of $ 80,534 and $ 6,788 , respectively (see Note 9). 2 In October 2022, the Company recorded a loss of $ 26,917 and $ 245 as a result of an impairment test performed on e-Mobility and Automation Machines, respectively, a loss of $ 1,226 due to the discontinuance of Critical Power activities (see Note 8) and other miscellaneous items. 3 I n the year ended December 31, 2021, the Company received a payment of $ 859 out of the SolarEdge Korea (formerly Kokam) acquisition escrow, with regards to a working capital adjustment. In the year ended December 31, 2020, the Company was indemnified for an amount of $ 4,900 out of the escrow, with regards to a legal claim of SolarEdge Korea (formerly Kokam) that was settled in arbitration. F - 45 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) NOTE 23: INCOME TAXES a. Tax rates in the U.S: The Company is subject to U.S. federal tax at the rate of 21 %. On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into law making significant changes to U.S. income tax law. These changes include, but are not limited to, a corporate tax rate decrease from 35 % to 21 % effective for tax years 2018 onwards and created new taxes on certain foreign-sourced earnings and certain related-party payments - the Global Intangible Low Taxed Income (“GILTI”). Furthermore, changes introduced by the Tax Act to Section 174 of the Internal Revenue Code, that came into effect on January 1, 2022, require 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), thereby increasing taxable income and payable tax. The Tax Act required the Company to pay U.S. income taxes on accumulated foreign subsidiaries earnings not previously subject to U.S. income tax at a rate of 15.5 % to the extent of foreign cash and certain other net current assets and 8 % on the remaining earnings. The total tax liability was calculated to approximately $ 8,500 , which will be paid over the eight-year period provided in the Tax Act (ending 2024). b. Corporate tax in Israel: The taxable income of Israeli companies is subject to corporate tax at the rate of 23 %. The Israeli subsidiary is also eligible for tax benefits as further described in note 23.j. c. Carryforward tax losses: As of December 31, 2022, the foreign subsidiaries have carryforward tax losses of $ 83,391 which does not have an expiration date. d. Deferred taxes: Deferred taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. F - 46 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) Significant components of the Company’s deferred tax liabilities and assets are as follows: December 31, 2022 2021 Deferred tax assets, net: Research and Development carryforward expenses $ 9,335 $ 2,479 Carryforward tax losses (1) 19,916 19,635 Stock based compensation expenses 9,863 12,140 Deferred revenue 8,954 8,078 L ease liabilities 6,520 11,168 Inventory Impairment 627 1,326 Allowance and other reserves 30,242 10,229 Total Gross deferred tax assets, net $ 85,457 $ 65,055 Less, Valuation Allowance ( 23,777 ) ( 14,648 ) Total deferred tax assets, net $ 61,680 $ 50,407 Deferred tax liabilities, net: Intercompany transactions $ ( 6,292 ) $ ( 6,099 ) R ight-of-use assets ( 6,618 ) ( 10,486 ) Purchase price allocation ( 4,617 ) ( 6,406 ) Total deferred tax liabilities, net $ ( 17,527 ) $ ( 22,991 ) Recorded as: Deferred tax assets, net $ 44,153 $ 27,572 Deferred tax liabilities, net - ( 156 ) Net deferred tax assets $ 44,153 $ 27,416 (1) Related to deferred tax assets that would only be realizable upon the generation of net income in certain foreign jurisdictions. The Company’s Israeli subsidiary’s tax-exempt profit from Benefited Enterprises (as defined in note 23.j) is permanently reinvested, Therefore, deferred taxes have not been provided for such tax-exempt income. The Company may incur additional tax liability in the event of intercompany dividend distributions by some of its subsidiaries. Such additional tax liability in respect of these subsidiaries has not been provided for in the Financial Statements as the Company’s management and the Board of Directors has determined that the Company intends to reinvest earnings of its subsidiaries indefinitely. e. Uncertain tax positions are comprised as follows: December 31, 2022 2021 2020 Balance, at the beginning of the period $ 2,192 $ 10,564 $ 9,532 Increases related to current year tax positions 564 635 757 Increase for tax positions related to prior years - - 275 Decreases related to prior year tax positions - ( 9,007 ) - Balance, at end of the period $ 2,756 $ 2,192 $ 10,564 F - 47 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) The total amount of gross unrecognized tax benefits above would affect the Company's effective tax rate, if recognized. 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 not material as of December 31, 2022 , 2021 and 2020 . It is reasonably possible that the Company’s gross unrecognized tax benefits will decrease by an insignificant amount in the next 12 months, primarily due to the lapse of the statute of limitations. f. Income before income taxes are comprised as follows: Year ended December 31, 2022 2021 2020 Domestic $ 47,324 $ 13,659 $ 33,909 Foreign 129,831 173,565 129,757 Income before income taxes $ 177,155 $ 187,224 $ 163,666 g. Income taxes (tax benefit) are comprised as follows: Year ended December 31, 2022 2021 2020 Current taxes: Domestic $ 56,957 $ ( 7,872 ) $ 1,842 Foreign 37,473 37,564 24,936 Total current taxes 94,430 29,692 26,778 Deferred taxes: Domestic ( 8,954 ) ( 3,682 ) 2,794 Foreign ( 2,100 ) ( 7,956 ) ( 6,228 ) Total deferred taxes ( 11,054 ) ( 11,638 ) ( 3,434 ) Income taxes, net $ 83,376 $ 18,054 $ 23,344 h. Reconciliation of theoretical tax expense to actual tax expense: The differences between the statutory tax rate of the Company and the effective tax rate are result of a variety of factors, including different effective tax rates applicable to non-US subsidiaries that have tax rates different than the Company tax rate, tax benefits relating to stock-based compensation and adjustments to valuation allowances on deferred tax assets on such subsidiaries. F - 48 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) A reconciliation between the theoretical tax expense and the actual tax expense as reported in the consolidated statements of income is as follows: Year ended December 31, 2022 2021 2020 Statutory tax rate 21 % 21 % 21 % Effect of: Income tax at rate other than the U.S. statutory tax rate ( 10.8 ) % ( 7.4 ) % ( 6.9 ) % Losses and timing differences for which valuation allowance was provided 5.2 % 2.7 % 4.4 % Prior year income taxes (benefit) 2.9 % ( 4.4 ) % ( 0.4 ) % R&D Capitalization and other effects of TCJA 18.9 % 0.1 % - % Disallowable and allowable deductions 13.2 % 2.0 % ( 2.6 ) % Other individually immaterial income tax items, net ( 3.3 ) % ( 4.4 ) % ( 1.3 ) % Effective tax rate 47.1 % 9.6 % 14.2 % i. Tax assessments: The Israeli tax authorities issued a tax order for tax year 2016 and tax assessments for tax years 2017 and 2018 against the Company’s Israeli subsidiary, challenging the subsidiary's positions on several issues. The Israeli subsidiary has protested the order before the Central District Court in Israel and appealed the tax assessments. The Company believes it has adequately provided for these items, however adverse results could have a material impact on the Company’s financial statements. As of December 31, 2022, the Company and certain of its subsidiaries filed U.S. federal and various state and foreign income tax returns. The statute of limitations relating to the consolidated U.S. federal income tax return is closed for all tax years up to and including 2018. The statute of limitations related to tax returns of the Company’s Israeli subsidiary for all tax years up to and including 2015 has lapsed. The statute of limitations related to tax returns of the Company’s other subsidiaries has lapsed for part of the tax years, which differs between the different subsidiaries. j. Tax benefits for Israeli companies under the Law for the Encouragement of Capital Investments, 1959 (the “Investments Law”): The Israeli subsidiary elected tax year 2012 as a "Year of Election" for “Benefited Enterprise” status under the Investments Law. According to the Investments Law, the Israeli subsidiary elected to participate in the alternative benefits program which provides certain benefits, including tax exemptions and reduced tax rates (which depend on, inter alia, the geographic location in Israel). Income not eligible for Benefited Enterprise benefits is taxed at a regular corporate tax rate. Upon meeting the requirements under the Investments Law, undistributed income derived from Benefited Enterprise from productive activity will be exempt from tax for two years from the year in which the Israeli subsidiary first has taxable income (“exempt period”), provided that 12 years have not passed from the beginning of the year of election. On October 24, 2018, the Company’s Israeli subsidiary received an approval from the Israeli Tax Authorities confirming the applicability of the two-year tax exemption as provided in the Investments Law until December 31, 2018. As of December 31, 2018, approximately $ 289,900 was derived from tax exempt profits earned by the Israeli subsidiary “Benefited Enterprises” in the two tax years exempt period, tax years 2017 - 2018. The Company has determined that such tax-exempt income will not be distributed as dividends and intends to reinvest the amount of its tax-exempt income earned by the Israeli subsidiary. Accordingly, no provision for deferred income taxes has been provided on income attributable to the Israeli subsidiary “Benefited Enterprises” as such income is essentially permanently reinvested. F - 49 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) If the Israeli subsidiary’s retained tax-exempt income is distributed, the income would be taxed at the applicable corporate tax rate which depends on the foreign ownership in each tax year. Through December 31, 2022, the Israeli subsidiary had generated income under the provision of the Investments Law. Pursuant to amendment 73 to the Investments Law (the “2017 Amendment"), a preferred enterprise located in development area A will be subject to a tax rate of 7.5 % instead of 9 % effective from January 1, 2017 and thereafter (the tax rate applicable to preferred enterprises located in other areas remains at 16 %). The 2017 Amendment also prescribes special tax tracks for preferred technological enterprises (“PTE”), which are subject to rules that were issued by the Ministry of Finance. On June 14, 2017, the Encouragement of Capital Investments Regulations (Preferred Technological Income and Capital Gain for Technological Enterprise), 2017 (the “Regulations”) were published. The Regulations describe, inter alia, the mechanism used to determine the calculation of the benefits under the PTE regime. According to these regulations, a company that complies with the terms under the PTE regime may be entitled to certain tax benefits with respect to income generated during the company’s regular course of business and derived from the preferred intangible asset, excluding income derived from intangible assets used for marketing and income attributed to production activity. A PTE, which is located in the center of Israel will be subject to tax at a rate of 12 % on profits deriving from intellectual property, or 6% if its annual revenues exceed NIS 10 billion. The Israeli subsidiary notified the ITA of its election to implement the PTE with effect from January 1, 2019, and its PTE income was subject to a 12% tax rate in the years 2019-2021, and in 2022 to a 6% tax rate as the group surpassed NIS 10 billion revenues threshold. Tax Benefits for Research and Development: Israeli tax law (section 20A to the Israeli Tax Ordinance (New Version), 1961) allows, a tax deduction for research and development expenses, including capital expenses, for the year in which they are paid. Such expenses must relate to scientific research in industry, agriculture, transportation or energy, and must be approved by the relevant Israeli government ministry, determined by the field of research. As for expenses incurred in scientific research that is not approved by the relevant Israeli government ministry, they will be deductible over a three-year period starting from the tax year in which they are paid. The Company’s Israeli subsidiary intends to submit a formal request to the relevant Israeli government ministry in order to obtain such approval for 2019 - 2021. k. Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969: The Company’s Israeli subsidiary claims currently to be qualified as ‘industrial company’ as defined by this law and as such, is entitled to certain tax benefits, consisting mainly of accelerated depreciation and amortization of patents and certain other intangible property. F - 50 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) NOTE 24: FINANCIAL INCOME (EXPENSE), NET Year ended December 31, 2022 2021 2020 Exchange rate (loss) gain, net $ ( 1,547 ) $ ( 22,493 ) $ 33,065 Interest income on marketable securities 10,551 2,973 3,750 Convertible note ( 2,916 ) ( 2,903 ) ( 3,185 ) Hedging 4,716 9,417 ( 4,013 ) Financing component expenses related to ASC 606 ( 7,038 ) ( 5,771 ) ( 4,887 ) Bank charges ( 1,584 ) ( 1,991 ) ( 2,048 ) Interest income, net 1,402 183 67 Other ( 268 ) 670 ( 1,644 ) Total financial income (expenses), net $ 3,316 $ ( 19,915 ) $ 21,105 NOTE 25: SEGMENT, GEOGRAPHIC AND PRODUCT INFORMATION a. Segment Information: Following the discontinuation of Critical Power in June 2022, the Company operates in four different operating segments: Solar, Energy Storage, e-Mobility and Automation Machines. 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 (“financing component”), 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 and impairment of purchased 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. F - 51 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) 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: Year ended December 31, 2022 2021 2020 Solar All other Solar All other Solar All other Revenues $ 2,921,175 $ 188,490 $ 1,787,280 $ 176,167 $ 1,357,261 $ 102,804 Cost of revenues 2,050,147 181,923 1,136,896 169,582 882,420 95,280 Gross profit 871,028 6,567 650,384 6,585 474,841 7,524 Research and development 196,381 29,016 143,173 30,506 110,567 25,417 Sales and marketing 118,154 9,687 85,309 9,930 66,823 8,562 General and administrative 69,631 13,001 53,156 13,536 41,723 10,389 Segments profit (loss) $ 486,862 $ ( 45,137 ) $ 368,746 $ ( 47,387 ) $ 255,728 $ ( 36,844 ) The following table presents information on reportable segments reconciliation to consolidated revenues for the periods presented: Year ended December 31, 2022 2021 2020 Solar segment revenues $ 2,921,175 $ 1,787,280 $ 1,357,261 All other segment revenues 188,490 176,167 102,804 Revenues from financing component 614 418 - Inter-segment revenues - - ( 794 ) Consolidated revenues $ 3,110,279 $ 1,963,865 $ 1,459,271 The following table presents information on reportable segments reconciliation to consolidated operating income for the periods presented: Year ended December 31, 2022 2021 2020 Solar segment profit $ 486,862 $ 368,746 $ 255,728 All other segment loss ( 45,137 ) ( 47,387 ) ( 36,844 ) Segments operating profit 441,725 321,359 218,884 Amounts not allocated to segments: Stock based compensation expenses ( 145,539 ) ( 102,593 ) ( 67,309 ) Amortization and depreciation of acquired assets ( 9,478 ) ( 10,812 ) ( 9,336 ) Impairment of goodwill and long-lived assets ( 119,141 ) - - Disposal of assets related to Critical Power ( 4,314 ) - - Other unallocated income (expenses), net 2,867 ( 815 ) 322 Consolidated operating income $ 166,120 $ 207,139 $ 142,561 F - 52 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) b. Revenues by geographic, based on Customers’ location: Year ended December 31, 2022 2021 2020 United States $ 1,133,798 $ 786,019 $ 613,090 Europe(*) 528,197 297,684 233,583 Germany 449,160 191,066 118,350 Netherlands 382,226 222,103 199,498 Italy 330,565 181,644 74,598 Rest of the world 286,333 285,349 220,152 Total revenues $ 3,110,279 $ 1,963,865 $ 1,459,271 (*) Except for Germany, Netherlands and Italy c. Revenues by type: Year ended December 31, 2022 2021 2020 Inverters $ 1,137,142 $ 828,101 $ 641,799 Optimizers 1,135,040 828,542 625,465 Residential batteries 429,119 19,531 - e-Mobility components and telematics 94,446 68,946 13,399 Communication 72,812 24,111 41,771 Others 241,720 194,634 136,837 Total revenues $ 3,110,279 $ 1,963,865 $ 1,459,271 d. Long-lived assets by geographic location: As of December 31, 2022 2021 Israel $ 333,740 $ 271,700 Korea 201,731 118,209 China 34,230 30,412 Europe 21,282 21,547 Other 15,740 15,649 Total long-lived assets (*) $ 606,723 $ 457,517 (*) Long-lived assets are comprised of property and equipment, net and Operating lease right-of-use assets, net. F - 53 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) (in thousands, except per share data) NOTE 26: SUBSEQUENT EVENTS In January 2023, the Company entered into an agreement to acquire Hark Systems Ltd. ("Hark"), a UK-based energy IoT company for the C&I sector. Hark's platform will enable the Company to grow its commercial and industrial energy management portfolio and offer additional services to its C&I customers. The acquisition is still subject to certain customary closing conditions and regulatory approvals and is expected to close during the second quarter of 2023. F - 54 ITEM 9 . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable.