SOLAREDGE TECHNOLOGIES, INC. 10-Q

ITEM 1. FINANCIAL STATEMENTS SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except per share data) September 30, 2023 December 31, 2022 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 551,122 $ 783,112 Marketable securities 477,275 241,117 Trade receivables, net of allowances of $ 14,930 and $ 3,202 , respectively 939,545 905,146 Inventories, net 1,177,805 729,201 Prepaid expenses and other current assets 217,720 241,082 Total current assets 3,363,467 2,899,658 LONG-TERM ASSETS: Marketable securities 436,139 645,491 Deferred tax assets, net 60,147 44,153 Property, plant and equipment, net 604,819 543,969 Operating lease right-of-use assets, net 67,331 62,754 Intangible assets, net 41,947 19,929 Goodwill 41,201 31,189 Other long-term assets 36,103 18,806 Total long-term assets 1,287,687 1,366,291 Total assets $ 4,651,154 $ 4,265,949 F - 1 SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Cont.) (in thousands, except per share data) September 30, 2023 December 31, 2022 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Trade payables, net $ 399,274 $ 459,831 Employees and payroll accruals 77,740 85,158 Warranty obligations 174,125 103,975 Deferred revenues and customers advances 22,064 26,641 Accrued expenses and other current liabilities 203,448 214,112 Total current liabilities 876,651 889,717 LONG-TERM LIABILITIES: Convertible senior notes, net 626,647 624,451 Warranty obligations 341,687 281,082 Deferred revenues 212,025 186,936 Finance lease liabilities 40,323 45,385 Operating lease liabilities 46,580 46,256 Other long-term liabilities 16,835 15,756 Total long-term liabilities 1,284,097 1,199,866 COMMITMENTS AND CONTINGENT LIABILITIES STOCKHOLDERS’ EQUITY: Common stock of $ 0.0001 par value - Authorized: 125,000,000 shares as of September 30, 2023 and December 31, 2022; issued and outstanding: 56,810,559 and 56,133,404 shares as of September 30, 2023 and December 31, 2022 , respectively 6 6 Additional paid-in capital 1,633,800 1,505,632 Accumulated other comprehensive loss ( 83,949 ) ( 73,109 ) Retained earnings 940,549 743,837 Total stockholders’ equity 2,490,406 2,176,366 Total liabilities and stockholders’ equity $ 4,651,154 $ 4,265,949 The accompanying notes are an integral part of the condensed consolidated financial statements. F - 2 SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited) (in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenues $ 725,305 $ 836,723 $ 2,660,484 $ 2,219,577 Cost of revenues 582,488 614,722 1,900,236 1,635,976 Gross profit 142,817 222,001 760,248 583,601 Operating expenses: Research and development 80,082 69,659 246,481 210,855 Sales and marketing 40,351 42,726 125,539 117,017 General and administrative 39,110 27,933 111,876 82,483 Other operating expense (income), net - ( 2,724 ) ( 1,434 ) 1,963 Total operating expenses 159,543 137,594 482,462 412,318 Operating income (loss) ( 16,726 ) 84,407 277,786 171,283 Financial income (expense), net ( 7,901 ) ( 33,146 ) 19,157 ( 52,062 ) Other income (loss), net ( 484 ) 7,654 ( 609 ) 6,810 Income (loss) before income taxes ( 25,111 ) 58,915 296,334 126,031 Income taxes 36,065 34,172 99,622 53,081 Net income (loss) $ ( 61,176 ) $ 24,743 $ 196,712 $ 72,950 Net basic earnings (loss) per share of common stock $ ( 1.08 ) $ 0.44 $ 3.49 $ 1.33 Net diluted earnings (loss) per share of common stock $ ( 1.08 ) $ 0.43 $ 3.34 $ 1.29 Weighted average number of shares used in computing net basic earnings (loss) per share of common stock 56,671,504 55,730,328 56,435,880 54,788,734 Weighted average number of shares used in computing net diluted earnings (loss) per share of common stock 56,671,504 58,747,538 59,297,423 57,886,041 The accompanying notes are an integral part of the condensed consolidated financial statements. F - 3 SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net income (loss) $ ( 61,176 ) $ 24,743 $ 196,712 $ 72,950 Other comprehensive income (loss), net of tax: Available-for-sale marketable securities 2,562 ( 9,579 ) 9,400 ( 23,647 ) Cash flow hedges ( 923 ) ( 140 ) ( 938 ) ( 4,656 ) Foreign currency translation adjustments on intra-entity transactions that are of a long-term investment nature ( 9,989 ) ( 30,799 ) ( 22,724 ) ( 66,129 ) Foreign currency translation adjustments 1,833 1,872 3,422 ( 6,515 ) Total other comprehensive loss ( 6,517 ) ( 38,646 ) ( 10,840 ) ( 100,947 ) Comprehensive income (loss) $ ( 67,693 ) $ ( 13,903 ) $ 185,872 $ ( 27,997 ) The accompanying notes are an integral part of the condensed consolidated financial statements. F - 4 SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (in thousands, except per share data) Common stock Number Amount Additional paid in Capital Accumulated other comprehensive loss Retained earnings Total Balance as of January 1, 2023 56,133,404 $ 6 $ 1,505,632 $ ( 73,109 ) $ 743,837 $ 2,176,366 Issuance of common stock upon exercise of stock-based awards 209,760 * - 75 - - 75 Stock based compensation - - 40,070 - - 40,070 Other comprehensive loss adjustments - - - ( 4,095 ) - ( 4,095 ) Net income - - - - 138,378 138,378 Balance as of March 31, 2023 56,343,164 $ 6 $ 1,545,777 $ ( 77,204 ) $ 882,215 $ 2,350,794 Issuance of common stock upon exercise of stock-based awards 171,682 * - 89 - - 89 Issuance of common stock under employee stock purchase plan 41,494 * - 10,046 - - 10,046 Stock based compensation - - 39,978 - - 39,978 Other comprehensive loss adjustments - - - ( 228 ) - ( 228 ) Net income - - - - 119,510 119,510 Balance as of June 30, 2023 56,556,340 $ 6 $ 1,595,890 $ ( 77,432 ) $ 1,001,725 $ 2,520,189 Issuance of Common Stock upon exercise of stock-based awards 254,219 * - 18 - - 18 Stock based compensation - - 37,892 - - 37,892 Other comprehensive loss adjustments - - - ( 6,517 ) - ( 6,517 ) Net loss - - - - ( 61,176 ) ( 61,176 ) Balance as of September 30, 2023 56,810,559 $ 6 $ 1,633,800 $ ( 83,949 ) $ 940,549 $ 2,490,406 * Represents an amount less than $1. F - 5 SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (in thousands, except per share data) Common stock Number Amount Additional paid in Capital Accumulated other comprehensive loss Retained earnings Total Balance as of January 1, 2022 52,815,395 $ 5 $ 687,295 $ ( 27,319 ) $ 650,058 $ 1,310,039 Issuance of common stock upon exercise of stock-based awards 270,751 * - 1,478 - - 1,478 Stock based compensation - - 34,107 - - 34,107 Issuance of common stock in a secondary public offering, net of underwriters' discounts and commissions of $27,140 and $834 of offering costs 2,300,000 1 650,525 - - 650,526 Other comprehensive loss adjustments - - - ( 18,748 ) - ( 18,748 ) Net income - - - - 33,123 33,123 Balance as of March 31, 2022 55,386,146 $ 6 $ 1,373,405 $ ( 46,067 ) $ 683,181 $ 2,010,525 Issuance of common stock upon exercise of stock-based awards 211,839 * - 164 - - 164 Issuance of common stock under employee stock purchase plan 35,105 * - 8,141 - - 8,141 Stock based compensation - - 37,171 - - 37,171 Other comprehensive loss adjustments - - - ( 43,553 ) - ( 43,553 ) Net income - - - - 15,084 15,084 Balance as of June 30, 2022 55,633,090 $ 6 $ 1,418,881 $ ( 89,620 ) $ 698,265 $ 2,027,532 Issuance of Common Stock upon exercise of stock-based awards 261,016 * - 1,866 - - 1,866 Stock based compensation - - 36,632 - - 36,632 Other comprehensive loss adjustments - - - ( 38,646 ) - ( 38,646 ) Net income - - - - 24,743 24,743 Balance as of September 30, 2022 55,894,106 $ 6 $ 1,457,379 $ ( 128,266 ) $ 723,008 $ 2,052,127 * Represents an amount less than $1. The accompanying notes are an integral part of the condensed consolidated financial statements. F - 6 SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands, except per share data) Nine Months Ended September 30, 2023 2022 Cash flows from operating activities: Net income $ 196,712 $ 72,950 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 42,019 37,312 Loss (gain) from exchange rate fluctuations ( 8,170 ) 58,100 Stock-based compensation expenses 115,015 106,932 Impairment of goodwill and intangible assets - 4,008 Deferred income taxes, net ( 18,199 ) ( 3,822 ) Other items 6,915 8,594 Changes in assets and liabilities: Inventories, net ( 437,801 ) ( 188,579 ) Prepaid expenses and other assets 19,822 ( 55,478 ) Trade receivables, net ( 40,011 ) ( 377,089 ) Trade payables, net ( 53,996 ) 53,683 Employees and payroll accruals 12,099 12,119 Warranty obligations 130,863 82,025 Deferred revenues and customers advances 18,580 41,440 Accrued expenses and other liabilities, net ( 24,051 ) 67,789 Net cash used in operating activities ( 40,203 ) ( 80,016 ) Cash flows from investing activities: Investment in available-for-sale marketable securities ( 214,516 ) ( 461,491 ) Proceeds from sales and maturities of available-for-sale marketable securities 194,617 178,415 Purchase of property, plant and equipment ( 130,024 ) ( 125,085 ) Business combinations, net of cash acquired ( 16,653 ) - Purchase of intangible assets ( 10,600 ) - Disbursements for loans receivables ( 13,000 ) - Investment in privately-held companies ( 8,000 ) - Proceeds from governmental grant 6,796 - Proceeds from sale of a privately-held company - 24,175 Other investing activities 3,193 3,472 Net cash used in investing activities $ ( 188,187 ) $ ( 380,514 ) F - 7 SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Cont.) (in thousands, except per share data) Nine Months Ended September 30, 2023 2022 Cash flows from financing activities: Tax withholding in connection with stock-based awards, net $ ( 9,267 ) $ ( 4,686 ) Payments of finance lease liability ( 2,123 ) ( 2,109 ) Proceeds from secondary public offering, net of issuance costs - 650,526 Other financing activities 85 3,404 Net cash provided by (used in) financing activities ( 11,305 ) 647,135 Increase (decrease) in cash and cash equivalents ( 239,695 ) 186,605 Cash and cash equivalents at the beginning of the period 783,112 530,089 Effect of exchange rate differences on cash and cash equivalents 7,705 ( 38,365 ) Cash and cash equivalents at the end of the period $ 551,122 $ 678,329 Supplemental disclosure of non-cash activities: Purchase of intangible assets and business combinations $ 11,307 $ - Right-of-use asset recognized with a corresponding lease liability $ 17,658 $ 43,274 Purchase of property, plant and equipment $ 19,574 $ 16,008 The accompanying notes are an integral part of the condensed consolidated financial statements. F - 8 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data ) NOTE 1: GENERAL a. SolarEdge Technologies Inc. (the “Company”) and its subsidiaries design, develop, and sell an intelligent inverter solution designed to maximize power generation at the individual photovoltaic (“PV”) module level while lowering the cost of energy produced by the solar PV system and providing comprehensive and advanced safety features. The Company’s products consist mainly of (i) power optimizers designed to maximize energy throughput from each and every module through constant tracking of Maximum Power Point individually per module, (ii) inverters which invert direct current (DC) from the PV module to alternating current (AC) including the Company’s Energy Hub inverter which supports, among other things, connection to a DC-coupled battery for full or partial home backup, and optional connection to the Company's smart EV charger, (iii) a remote cloud-based monitoring platform, that collects and processes information from the power optimizers and inverters to enable customers and system owners, to monitor and manage the solar PV system (iv) a residential storage and backup solution which includes a company designed and manufactured lithium-ion DC-coupled battery that is used to increase energy independence and maximize self-consumption for homeowners including a battery, and (v) additional smart energy management solutions. The Company and its subsidiaries sell products worldwide through large distributors, electrical equipment wholesalers, as well as directly to large solar installers and engineering, procurement, and construction firms. b. The Company has expanded its activity to other areas of smart energy technology organically and through acquisitions. The Company now offers a variety of energy solutions, which include lithium-ion cells, batteries, and energy storage systems (“Energy Storage”), full powertrain kits for electric vehicles, or EVs (“e-Mobility”), as well as automated machines for industrial use (“Automation Machines”). On April 6, 2023, the Company completed the acquisition of all outstanding shares of Hark Systems Ltd. ("Hark"), a UK-based energy IoT company for the commercial and industrial ("C&I") sector, which operates under the newly established consulting segment (see note 2 ). c. Basis of Presentation: The unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). In management’s opinion, the unaudited condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. The Company’s interim period results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. The significant accounting policies applied in the annual consolidated financial statements of the Company as of December 31, 2022, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 22, 2023, have been applied consistently in these unaudited interim condensed consolidated financial statements. Certain prior year amounts have been reclassified to conform to current year presentation. d. Use of estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures in the accompanying notes. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties. e. Concentrations of supply risks: The Company depends on two contract manufacturers and several limited or single source component suppliers. Reliance on these vendors makes the Company vulnerable to possible capacity constraints and reduced control over component availability, delivery schedules, manufacturing yields, and costs. As of September 30, 2023 , and December 31, 2022 , two contract manufacturers collectively accounted for 40.9 % and 34.3 % 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 began producing and shipping cells at the end of 2022 and is expected to reach full manufacturing capacity in early 2024. 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. f. New accounting standards updates: 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 or newly effective standards were not applicable to the Company, did not have a material impact on the condensed consolidated financial statements or are not expected to have a material impact on the condensed consolidated financial statements. F - 9 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 2 : BUSINESS COMBINATIONS On April 6, 2023, the Company completed the acquisition of all outstanding shares of Hark Systems Ltd. ("Hark"), a UK-based energy IoT company for the commercial and industrial ("C&I") sector for approximately $ 18,346 in cash. Hark's platform is expected to enable the Company to offer its commercial and industrial customers expanded capabilities in energy management and connectivity, including identification of potential energy savings, detection of anomalies in assets’ energy consumption, and optimization of energy usage and carbon emissions through load orchestration and storage control. Pursuant to ASC 805, "Business Combination", the Company accounted for the Hark acquisition as a business combination using the acquisition method of accounting. Identifiable assets and liabilities of Hark, including identifiable intangible assets, were recorded based on their estimated fair values as of the date of the closing of the acquisition. The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill. The Company recorded preliminary estimates for the fair value of assets acquired and liabilities assumed as of the acquisition date. Such preliminary valuation required estimates and assumptions including, but not limited to, estimating future cash flows and direct costs in addition to developing the appropriate discount rates and current market profit margins. The Company’s management believes the fair values recognized for the assets acquired and the liabilities assumed were based on reasonable estimates and assumptions. The following table summarizes the preliminary fair values estimation of assets acquired and liabilities assumed as of the date of the acquisition: Amount Weighted Average Useful Life (In years) Cash $ 448 Net liabilities assumed ( 1,837 ) Identified intangible assets: Current technology 6,576 5 Customer relationships 283 1 Trade name 610 5 Goodwill 12,266 Total $ 18,346 Acquisition costs were immaterial and are included in general and administrative expenses in the consolidated statements of income. Goodwill generated from this acquisition was primarily attributable to the assembled workforce and expected post-acquisition synergies from combining Hark platform with the Company's product offering to its commercial and industrial customers. All of the Goodwill was assigned to the new Consulting segment (see Note 21 ). Goodwill was not deductible for tax purposes. The fair values of technology, customer relationships and trade name were derived by applying the multi-period excess earnings method, with-and-without method, and the relief-from-royalty method, respectively, all of which are under the income approach whose underlying inputs are considered Level 3. The fair values assigned to assets acquired and liabilities assumed were based on management's estimates and assumptions. The results of Hark have been included in the Company's consolidated statements of income (loss) since the acquisition date and are not material. Pro forma financial information has not been presented because the impact of the acquisition was not material to the Company's statement of income. F - 10 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 3 : MARKETABLE SECURITIES The following is a summary of available-for-sale marketable securities as of September 30, 2023 : Amortized cost Gross unrealized gains Gross unrealized losses Fair value Matures within one year: Corporate bonds $ 449,162 $ 227 $ ( 8,838 ) $ 440,551 U.S. Treasury securities 27,951 - ( 200 ) 27,751 Non-U.S. Government securities 9,123 - ( 150 ) 8,973 486,236 227 ( 9,188 ) 477,275 Matures after one year: Corporate bonds 400,408 49 ( 10,950 ) 389,507 U.S. Treasury securities 2,413 - ( 43 ) 2,370 U.S. Government agency securities 42,477 - ( 493 ) 41,984 Non-U.S. Government securities 2,401 - ( 123 ) 2,278 447,699 49 ( 11,609 ) 436,139 Total $ 933,935 $ 276 $ ( 20,797 ) $ 913,414 The following is a summary of available-for-sale marketable securities as of December 31, 2022: Amortized cost Gross unrealized gains Gross unrealized losses Fair value Matures within one year: Corporate bonds $ 222,482 $ - $ ( 4,657 ) $ 217,825 U.S. Treasury securities 15,963 - ( 284 ) 15,679 Non-U.S. Government securities 7,882 - ( 269 ) 7,613 246,327 - ( 5,210 ) 241,117 Matures after one year: Corporate bonds 657,238 80 ( 26,460 ) 630,858 U.S. Treasury securities 9,939 - ( 261 ) 9,678 Non-U.S. Government securities 5,311 - ( 356 ) 4,955 672,488 80 ( 27,077 ) 645,491 Total $ 918,815 $ 80 $ ( 32,287 ) $ 886,608 Proceeds from sales of available-for-sale marketable securities during the nine months ended September 30, 2023 and 2022 were $ 2,807 and $ 29,235 , which led to realized losses of $ 125 and $ 723 , respectively. There were no proceeds from sales of available-for-sale marketable securities during the three months ended September 30, 2023 . Proceeds from sales of available-for-sale marketable securities during the three months ended September 30, 2022 were $ 5,811 , which led to realized gains of $ 121 . As of September 30, 2023 , and December 31, 2022 , the Company did not record an allowance for credit losses for its available-for-sale marketable securities. F - 11 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 4: INVENTORIES, NET September 30, 2023 December 31, 2022 Raw materials $ 420,281 $ 503,257 Work in process 26,801 23,407 Finished goods 730,723 202,537 Total inventories, net $ 1,177,805 $ 729,201 NOTE 5: PREPAID EXPENSES AND OTHER CURRENT ASSETS September 30, 2023 December 31, 2022 Vendor non-trade receivables (1) $ 94,180 $ 147,597 Government authorities 70,951 55,670 Loan receivables (2) 8,125 - Interest from marketable securities 7,162 6,235 Prepaid expenses and other 37,302 31,580 Total prepaid expenses and other current assets $ 217,720 $ 241,082 (1) Vendor non-trade receivables derived from the sale of components to manufacturing vendors who manufacture products, components and other testing equipment 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. (2) Loan receivables is a loan to a third party. The loan will be repaid on a monthly basis with an additional agreed interest for the long term portion of the loan. See Note 8 for additional information. The loan is measured at its amortized cost and is subjected to the Company's credit risk policy as stated in the most recent 10-K filing. Expected provision for credit loss regarding this loan was immaterial. The amortized cost of the loan receivable approximates its fair value as of September 30, 2023. F - 12 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 6: INTANGIBLE ASSETS, NET Acquired intangible assets consisted of the following as of September 30, 2023 , and December 31, 2022 : September 30, 2023 December 31, 2022 Intangible assets with finite lives: Current Technology $ 33,974 $ 29,196 Customer relationships 3,058 2,958 Trade names 3,671 3,287 Assembled workforce 4,484 3,575 Patents and licenses* 22,000 1,400 Gross intangible assets 67,187 40,416 Less - accumulated amortization ( 25,240 ) ( 20,487 ) Total intangible assets, net $ 41,947 $ 19,929 * See Note 16 For the three months ended September 30, 2023 and 2022 , the Company recorded amortization expenses related to intangible assets in the amount of $ 2,663 and $ 2,464 , respectively. For the nine months ended September 30, 2023 and 2022 , the Company recorded amortization expenses related to intangible assets in the amount of $ 5,901 and $ 7,741 , respectively. Expected future amortization expenses of intangible assets as of September 30, 2023 are as follows: 2023 $ 2,351 2024 8,735 2025 7,834 2026 7,281 2027 4,134 2028 and thereafter 11,612 $ 41,947 F - 13 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 7: GOODWILL Changes in the carrying amount of goodwill for the period ended September 30, 2023 were as follows: Solar All other Total Goodwill at December 31, 2022 $ 28,768 $ 2,421 $ 31,189 Changes during the year: Acquisitions - 12,266 12,266 Foreign currency adjustments ( 1,882 ) ( 372 ) ( 2,254 ) Goodwill at September 30, 2023 $ 26,886 $ 14,315 $ 41,201 As of September 30, 2023 and December 31, 2022 there were $ 90,104 accumulated goodwill impairment losses. F - 14 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 8: OTHER LONG TERM ASSETS September 30, 2023 December 31, 2022 Cloud computing arrangements $ 9,898 $ 3,457 Severance pay fund 8,275 8,799 Investments in privately held companies (1) (2) 8,000 1,863 Loan receivables 4,875 - Prepayments 3,799 2,961 Other 1,256 1,726 Total other long term assets $ 36,103 $ 18,806 (1) In January 2023, the Company completed an investment of $ 5,500 in the common stock of a privately-held company which represents 34.8 % of its outstanding shares. The Company accounted for this investment using the equity method of accounting. The Company's share of net earnings or losses in the nine months ended September 30, 2023 was immaterial. (2) In April and July of 2023, the Company completed a total investment of $ 2,500 in the preferred stock of a privately-held company which represents 4.5 % of its outstanding shares on a fully diluted basis. The Company accounted for this investment as an equity investment without readily determinable fair values. No impairment or other adjustments related to observable price changes in orderly transactions for identical or similar investments were identified. F - 15 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 9: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES During the nine months ended September 30, 2023 , the Company instituted a foreign currency cash flow hedging program to reduce the risk of a forecasted increase in the value of foreign currency cash flows, resulting from payment of salaries in Israeli currency, the New Israeli Shekels (“NIS”). The Company hedges portions of the anticipated payroll denominated in NIS for a period of one to nine months with hedging contracts. These hedging contracts are designated as cash flow hedges, as defined by ASC 815 and are all effective hedges. As of September 30, 2023 , 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 38 million and NIS 622 million , respectively. In addition to the above-mentioned cash flow hedge transactions, the Company occasionally enters into derivative instrument arrangements to hedge the Company’s exposure to currencies other than the USD. These derivative instruments are not designated as cash flow hedges, as defined by ASC 815, and therefore all gains and losses, resulting from fair value remeasurement, were recorded immediately in the statement of income, under " Financial income (expense), net ". As of September 30, 2023, the Company entered into put and call option contracts to sell Euro ("EUR") for USD in the amount of EUR 120 million. The Company classifies cash flows related to its hedging as operating activities in its condensed consolidated statement of cash flows. The fair values of outstanding derivative instruments were as follows: Balance sheet location September 30, 2023 December 31, 2022 Derivative assets of options and forward contracts: Designated cash flow hedges Prepaid expenses and other current assets $ 87 $ - Non-designated hedges Prepaid expenses and other current assets 4,786 - Total derivative assets $ 4,873 $ - Derivative liabilities of options and forward contracts: Designated cash flow hedges Accrued expenses and other current liabilities $ ( 2,966 ) $ ( 1,874 ) Gains (losses) on derivative instruments are summarized below: Three Months Ended September 30, Nine Months Ended September 30, Affected line item 2023 2022 2023 2022 Foreign exchange contracts Non Designated Hedging Instruments Condensed Consolidated Statements of Income (loss) - Financial income (expense), net $ 5,841 $ 1,211 $ 5,841 $ 5,154 Designated Hedging Instruments Condensed Consolidated Statements of Comprehensive Income (loss) - Cash flow hedges $ ( 2,713 ) $ ( 1,399 ) $ ( 6,861 ) $ ( 8,928 ) See Note 17 for information regarding losses from designated hedging instruments reclassified from accumulated other comprehensive loss. F - 16 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 10: FAIR VALUE MEASUREMENTS In accordance with ASC 820, "Fair Value Measurement" 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 September 30, 2023 and December 31, 2022, by level within the fair value hierarchy: Fair value measurements as of Description Fair Value Hierarchy September 30, 2023 December 31, 2022 Assets: Cash and cash equivalents: Cash Level 1 $ 508,057 $ 695,004 Money market mutual funds Level 1 $ 37,885 $ 25,149 Deposits Level 1 $ 5,180 $ 62,959 Derivative instruments Level 2 $ 4,873 $ - Short-term marketable securities: Corporate bonds Level 2 $ 440,551 $ 217,825 U.S. Treasury securities Level 2 $ 27,751 $ 15,679 Non - U.S. Government securities Level 2 $ 8,973 $ 7,613 Long-term marketable securities: Corporate bonds Level 2 $ 389,507 $ 630,858 U.S. Treasury securities Level 2 $ 2,370 $ 9,678 U.S. Government agency securities Level 2 41,984 - Non - U.S. Government securities Level 2 $ 2,278 $ 4,955 Liabilities: Derivative instruments Level 2 $ ( 2,966 ) $ ( 1,874 ) NOTE 11: WARRANTY OBLIGATIONS Changes in the Company’s product warranty obligations for the three and nine months ended September 30, 2023 and 2022 , were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Balance, at the beginning of the period $ 488,587 $ 324,176 $ 385,057 $ 265,160 Additions and adjustments to cost of revenues 85,171 56,815 266,372 163,783 Usage and current warranty expenses ( 57,946 ) ( 34,852 ) ( 135,617 ) ( 82,804 ) Balance, at end of the period 515,812 346,139 515,812 346,139 Less current portion ( 174,125 ) ( 97,222 ) ( 174,125 ) ( 97,222 ) Long term portion $ 341,687 $ 248,917 $ 341,687 $ 248,917 F - 17 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 12: DEFERRED REVENUES AND CUSTOMERS ADVANCES 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. Changes in the balances of deferred revenues and customer advances during the period are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Balance, at the beginning of the period $ 232,828 $ 200,695 $ 213,577 $ 169,345 Revenue recognized ( 19,869 ) ( 12,731 ) ( 25,819 ) ( 20,974 ) Increase in deferred revenues and customer advances 21,130 20,756 46,331 60,349 Balance, at the end of the period 234,089 208,720 234,089 208,720 Less current portion ( 22,064 ) ( 31,896 ) ( 22,064 ) ( 31,896 ) Long term portion $ 212,025 $ 176,824 $ 212,025 $ 176,824 The following table includes estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2023: 2023 $ 13,214 2024 11,665 2025 11,094 2026 10,898 2027 8,968 Thereafter 178,250 Total deferred revenues $ 234,089 NOTE 13: ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES September 30, 2023 December 31, 2022 Accrued expenses $ 123,935 $ 117,638 Government authorities 49,323 67,514 Operating lease liabilities 17,064 16,183 Accrual for sales incentives 6,306 6,790 Finance lease 3,034 3,263 Other 3,786 2,724 Total accrued expenses and other current liabilities $ 203,448 $ 214,112 F - 18 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 14: CONVERTIBLE SENIOR NOTES On September 25, 2020, the Company sold $ 632,500 aggregate principal amount of its 0.00 % convertible senior notes due 2025 (the “Notes”). The Notes were sold pursuant to an indenture, dated September 25, 2020 (the “Indenture”), between the Company and U.S. Bank National Association, as trustee. The Notes do not bear regular interest and mature on September 15, 2025 , unless earlier repurchased or converted in accordance with their terms. The Notes are general senior unsecured obligations of the Company. Holders may convert their Notes prior to the close of business on the business day immediately preceding June 15, 2025 in multiples of $ 1,000 principal amount, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2020 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five-business-day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the Notes for each trading day of that five consecutive trading day period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events as described in the Indenture. In addition, holders may convert their Notes, in multiples of $1,000 principal amount, at their option at any time beginning on or after June 15, 2025, and prior to the close of business on the second scheduled trading day immediately preceding the stated maturity date of the Notes, without regard to the foregoing circumstances. The initial conversion rate for the Notes was 3.5997 shares of common stock per $ 1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $ 277.80 per share of common stock, subject to adjustment upon the occurrence of certain specified events as set forth in the Indenture. Upon conversion, the Company may choose to pay or deliver, as the case may be, cash, shares of common stock, or a combination of cash and shares of common stock. In addition, upon the occurrence of a fundamental change (as defined in the Indenture), holders of the Notes may require the Company to repurchase all or a portion of their Notes, in multiples of $1,000 principal amount, at a repurchase price of 100% of the principal amount of the Notes, plus any accrued and unpaid special interest to, but excluding the fundamental change repurchase date. If certain fundamental changes referred to as make-whole fundamental changes occur, the conversion rate for the Notes may be increased. The Convertible Senior Notes consisted of the following as of September 30, 2023 and December 31, 2022: September 30, 2023 December 31, 2022 Liability: Principal $ 632,500 $ 632,500 Unamortized issuance costs ( 5,853 ) ( 8,049 ) Net carrying amount $ 626,647 $ 624,451 For the three months ended September 30, 2023 and 2022 the Company recorded amortized debt issuance costs related to the Notes in the amount of $ 733 and $ 730 , respectively. For the nine months ended September 30, 2023 and 2022 the Company recorded amortized debt issuance costs related to the Notes in the amount of $ 2,196 and $ 2,186 , respectively. As of September 30, 2023, the unamortized issuance costs of the Notes will be amortized over the remaining term of approximately 2 years. The annual effective interest rate of the Notes is 0.47 %. As of September 30, 2023, the estimated fair value of the Notes, which the Company has classified as Level 2 financial instruments, is $ 578,048 . The estimated fair value was determined based on the quoted bid price of the Notes in an over-the-counter market on the last trading day of the reporting period. As of September 30, 2023, the if-converted value of the Notes did not exceed the principal amount. F - 19 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 15: STOCK CAPITAL a. Common stock rights: Common stock confers upon its holders the right to receive notice of, and to participate in, all general meetings of the Company, where each share of common stock shall have one vote for all purposes, to share equally, on a per share basis, in bonuses, profits, or distributions out of fund legally available therefor, and to participate in the distribution of the surplus assets of the Company in the event of liquidation of the Company. b. Secondary public offering: On March 17, 2022, the Company offered and sold 2,300,000 shares of the Company’s common stock, at a public offering price of $ 295.00 per share. The shares of Common Stock were issued and sold in a registered offering pursuant to the underwriting agreement dated March 17, 2022, among the Company, Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, and Morgan Stanley & Co. LLC (the “Underwriting Agreement”). All of the offered shares were issued at closing, including 300,000 shares of Common Stock that were issued and sold pursuant to the underwriters’ option to purchase additional shares under the Underwriting Agreement, which was exercised in full on March 18, 2022. The net proceeds to the Company were $ 650,526 after deducting underwriters' discounts of $ 27,140 and commissions of $ 834 . c. Equity Incentive Plans: The Company’s 2007 Global Incentive Plan (the “2007 Plan”) was adopted by the board of directors on August 30, 2007. The 2007 Plan terminated upon the Company’s IPO on March 31, 2015 and no further awards may be granted thereunder. All outstanding awards will continue to be governed by their existing terms and 379,358 available options for future grants were transferred to the Company’s 2015 Global Incentive Plan (the “2015 Plan”) and are reserved for future issuances under the 2015 plan. The 2015 Plan became effective upon the consummation of the IPO. The 2015 Plan provides for the grant of options, restricted stock units ("RSU"), performance stock units ("PSU"), and other share-based awards to directors, employees, officers, and non-employees of the Company and its subsidiaries. As of September 30, 2023 , a total of 20,853,755 shares of common stock were reserved for issuance pursuant to stock awards under the 2015 Plan (the “Share Reserve”), an aggregate of 11,845,915 shares are still available for future grants. The Share Reserve will automatically increase on January 1 st of each year during the term of the 2015 Plan, commencing on January 1 st of the year following the year in which the 2015 Plan becomes effective, in an amount equal to 5 % of the total number of shares of capital stock outstanding on December 31 st of the preceding calendar year; provided, however, that the Company’s board of directors may determine that there will not be a January 1 st increase in the Share Reserve in a given year or that the increase will be less than 5% of the shares of capital stock outstanding on the preceding December 31 st . The Company granted under its 2015 Plan, PSU awards to certain employees and officers which vest upon the achievement of certain performance or market conditions subject to their continued employment with the Company . The market condition for the PSUs is based on the Company’s total shareholder return ("TSR") compared to the TSR of companies listed in the S&P 500 index over a one to three year performance period. The Company uses a Monte-Carlo simulation to determine the grant date fair value for these awards, which takes into consideration the market price of a share of the Company’s common stock on the date of grant less the present value of dividends expected during the requisite service period, as well as the possible outcomes pertaining to the TSR market condition. The Company recognizes such compensation expenses on an accelerated vesting method. The aggregate maximum number of shares of common stock that may be issued on the exercise of incentive stock options is 10,000,000 . As of September 30, 2023 , an aggregate of 8,617,974 options are still available for future grants under the 2015 Plan. F - 20 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 15: STOCK CAPITAL (Cont.) 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, 2022 339,029 $ 50.64 4.86 $ 79,414 Exercised ( 11,804 ) 15.41 - 2,789 Outstanding as of September 30, 2023 327,225 $ 51.91 4.20 $ 28,935 Vested and expected to vest as of September 30, 2023 326,961 $ 51.79 4.20 $ 28,931 Exercisable as of September 30, 2023 312,711 $ 44.70 4.08 $ 28,736 The intrinsic value is the amount by which the closing price of the Company’s common stock on September 30, 2023 of $ 129.51 or the price on the day of exercise exceeds the exercise price of the stock options multiplied by the number of in-the-money options. A summary of the activity in the RSUs and related information is as follows: Number of RSUs Weighted average grant date fair value Unvested as of December 31, 2022 1,488,515 $ 232.05 Granted 300,567 234.72 Vested ( 516,692 ) 192.22 Forfeited ( 69,939 ) 262.12 Unvested as of September 30, 2023 1,202,451 $ 248.09 A summary of the activity in the PSUs and related information is as follows: Number of PSUs Weighted average grant date fair value Unvested as of December 31, 2022 149,232 $ 295.88 Granted 32,348 314.22 Vested ( 107,165 ) 296.76 Unvested as of September 30, 2023 74,415 $ 302.58 d. Employee Stock Purchase Plan ("ESPP"): The Company adopted an ESPP effective upon the consummation of the IPO. As of September 30, 2023 , a total of 4,150,380 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 1 st 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 September 30, 2023 , 780,370 shares of common stock have been purchased under the ESPP. As of September 30, 2023 , 3,370,010 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. F - 21 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 15: STOCK CAPITAL (Cont.) e. Stock-based compensation expenses: The Company recognized stock-based compensation expenses related to all stock-based awards in the consolidated statement of income for the three and nine months ended September 30, 2023 , and 2022 , as follows: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Stock-based compensation expenses: Cost of revenues $ 5,882 $ 4,660 $ 17,732 $ 15,008 Research and development 16,481 14,553 50,962 46,357 Selling and marketing 7,739 9,341 23,640 23,089 General and administrative 6,713 7,197 22,681 22,478 Total stock-based compensation expenses $ 36,815 $ 35,751 $ 115,015 $ 106,932 Stock-based compensation capitalized: Inventory $ 655 $ 765 $ 1,666 $ 765 Other long-term assets 422 116 1,259 213 Total stock-based compensation capitalized $ 1,077 $ 881 $ 2,925 $ 978 The total tax benefit associated with stock-based compensation for the three months ended September 30, 2023 and 2022 was $ 3,124 and $ 2,646 , respectively. The tax benefit realized from stock-based compensation for the three months ended September 30, 2023 , and 2022 was $ 1,589 and $ 3,060 , respectively. The total tax benefit associated with stock-based compensation for the nine months ended September 30, 2023 , and 2022 was $ 11,422 and $ 9,182 , respectively. The tax benefit realized from stock-based compensation for the nine months ended September 30, 2023 , and 2022 was $ 7,050 and $ 8,871 , respectively. As of September 30, 2023 , there were total unrecognized compensation expenses in the amount of $ 290,401 related to non-vested equity-based compensation arrangements granted. These expenses are expected to be recognized during the period from October 1, 2023 , through August 31, 2027 . F - 22 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 16: COMMITMENTS AND CONTINGENT LIABILITIES a. Guarantees: As of September 30, 2023 , contingent liabilities exist regarding guarantees in the amounts of $ 5,804 , and $ 1,821 in respect of office rent lease agreements and other transactions, respectively. b. Contractual purchase obligations: The Company has contractual obligations to purchase goods and raw materials. These contractual purchase obligations relate to inventories and other purchase orders, which cannot be canceled without penalty. In addition, the Company acquires raw materials or other goods and services, including product components, by issuing authorizations to its suppliers to purchase materials based on its projected demand and manufacturing needs. As of September 30, 2023 , the Company had non-cancellable purchase obligations totaling approximately $ 1,116,593 , out of which the Company recorded a provision for loss in the amount of $ 13,463 . As of September 30, 2023 , the Company had contractual obligations for capital expenditures totaling approximately $ 120,572 . These commitments reflect purchases of automated assembly lines and other machinery related to the Company’s general manufacturing process and mainly to its new manufacturing site in the U.S. 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, alleged 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 $ 5,830 ) for both patents. The Company challenged the validity of both patents and the first patent was invalidated and SMA’s appeal on the matter was denied in January 2023. In August 2021, the German Patent Court rendered SMA's second patent invalid, and this invalidity has been appealed by SMA. In May 2023 the Federal Supreme Court as final instance in the nullity proceedings revoked the second patent, and SMA withdrew its infringement complaint. On July 28, 2022, the Company and its subsidiary SolarEdge Technologies Ltd were served with complaints filed by Ampt LLC ("Ampt") in the International Trade Commission (the “Commission”) pursuant to Section 337 of the Tariff Act of 1930, as amended, and related lawsuits in the District Court for the District of Delaware alleging patent infringement against the Company. On May 9, 2023, Ampt and the Company entered into a settlement agreement pursuant to which the parties agreed to dismiss all proceedings related to the complaints, and the parties have granted each other 10-year cross-licenses for certain intellectual property. As of September 30, 2023 , an immaterial amount for legal claims was recorded in accrued expenses and other current liabilities. F - 23 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 17: ACCUMULATED OTHER COMPREHENSIVE LOSS The following table summarizes the changes in accumulated balances of other comprehensive gain (loss), net of taxes: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Unrealized gains (losses) on available-for-sale marketable securities Beginning balance $ ( 18,611 ) $ ( 18,777 ) $ ( 25,449 ) $ ( 4,709 ) Revaluation 3,216 ( 12,424 ) 11,579 ( 31,064 ) Tax on revaluation ( 654 ) 2,694 ( 2,257 ) 6,522 Other comprehensive income (loss) before reclassifications 2,562 ( 9,730 ) 9,322 ( 24,542 ) Reclassification - 166 107 1,010 Tax on reclassification - ( 15 ) ( 29 ) ( 115 ) Losses reclassified from accumulated other comprehensive income (loss) - 151 78 895 Net current period other comprehensive income (loss) 2,562 ( 9,579 ) 9,400 ( 23,647 ) Ending balance $ ( 16,049 ) $ ( 28,356 ) $ ( 16,049 ) $ ( 28,356 ) Unrealized gains (losses) on cash flow hedges Beginning balance $ ( 1,776 ) $ ( 3,642 ) $ ( 1,761 ) $ 874 Revaluation ( 2,896 ) ( 1,569 ) ( 7,321 ) ( 10,094 ) Tax on revaluation 183 170 460 1,166 Other comprehensive income (loss) before reclassifications ( 2,713 ) ( 1,399 ) ( 6,861 ) ( 8,928 ) Reclassification 1,910 1,422 6,316 4,833 Tax on reclassification ( 120 ) ( 163 ) ( 393 ) ( 561 ) Losses reclassified from accumulated other comprehensive income (loss) 1,790 1,259 5,923 4,272 Net current period other comprehensive income (loss) ( 923 ) ( 140 ) ( 938 ) ( 4,656 ) Ending balance $ ( 2,699 ) $ ( 3,782 ) $ ( 2,699 ) $ ( 3,782 ) Foreign currency translation adjustments on intra-entity transactions that are of a long-term investment in nature Beginning balance $ ( 50,695 ) $ ( 52,750 ) $ ( 37,960 ) $ ( 17,420 ) Revaluation ( 9,989 ) ( 30,799 ) ( 22,724 ) ( 66,129 ) Ending balance $ ( 60,684 ) $ ( 83,549 ) $ ( 60,684 ) $ ( 83,549 ) Unrealized gains (losses) on foreign currency translation Beginning balance $ ( 6,350 ) $ ( 14,451 ) $ ( 7,939 ) $ ( 6,064 ) Revaluation 1,833 1,872 3,422 ( 6,515 ) Ending balance $ ( 4,517 ) $ ( 12,579 ) $ ( 4,517 ) $ ( 12,579 ) Total $ ( 83,949 ) $ ( 128,266 ) $ ( 83,949 ) $ ( 128,266 ) F - 24 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 17: ACCUMULATED OTHER COMPREHENSIVE LOSS (Cont.) The following table summarizes the reclassification out of "Accumulated other comprehensive loss", net of taxes: Details about Accumulated Other Comprehensive Loss Components Three Months Ended September 30, Nine Months Ended September 30, Affected Line Item in the Statement of Income 2023 2022 2023 2022 Unrealized gains (losses) on available-for-sale marketable securities $ - $ ( 166 ) $ ( 107 ) $ ( 1,010 ) Financial income (expense), net - 15 29 115 Income taxes $ - $ ( 151 ) $ ( 78 ) $ ( 895 ) Total, net of income taxes Unrealized gains (losses) on cash flow hedges, net ( 219 ) ( 157 ) ( 734 ) ( 542 ) Cost of revenues ( 1,138 ) ( 808 ) ( 3,789 ) ( 2,841 ) Research and development ( 256 ) ( 242 ) ( 791 ) ( 662 ) Sales and marketing ( 297 ) ( 215 ) ( 1,002 ) ( 788 ) General and administrative $ ( 1,910 ) $ ( 1,422 ) $ ( 6,316 ) $ ( 4,833 ) Total, before income taxes 120 163 393 561 Income taxes ( 1,790 ) ( 1,259 ) ( 5,923 ) ( 4,272 ) Total, net of income taxes Total reclassifications for the period $ ( 1,790 ) $ ( 1,410 ) $ ( 6,001 ) $ ( 5,167 ) NOTE 18: OTHER OPERATING EXPENSE (INCOME) The following table presents the expenses ( income ) recorded in the three and nine months ended September 30, 2023, and 2022: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Impairment of goodwill and intangible assets $ - $ - $ - $ 4,008 Sale of assets - ( 2,705 ) ( 1,434 ) ( 2,705 ) Impairment of property, plant and equipment - ( 19 ) - 660 Total other operating expense (income), net $ - $ ( 2,724 ) $ ( 1,434 ) $ 1,963 F - 25 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 19: INCOME TAXES The effective tax rate for the three months ended September 30, 2023 , and 2022 was ( 143.6 )% and 58.0 % , respectively. The change in effective tax rate in the three months ended September 30, 2023 compared to the corresponding period in 2022 is mainly due to the IRC Section 174 R&D capitalization, and other expenses not recognized for GILTI purposes, which did not decrease in line with the decrease in our taxable income, as well as unfavorable impact of losses in foreign subsidiaries where we do not anticipate a future tax benefit. The effective tax rate for the nine months ended September 30, 2023 and 2022 was 33.6 % and 42.1 % , respectively. The lower tax rate in the nine months ended September 30, 2023 compared to the corresponding period in 2022 is mainly due to the fact that the Company's income before tax, most of which is subject to tax rates lower than the US statutory rate, increased. Conversely, the IRC Section 174 R&D capitalization, and other expenses not recognized for GILTI purposes, did not increase in the same proportion. As of September 30, 2023 , and December 31, 2022 , unrecognized tax benefits were $ 3,155 and $ 2,756 , respectively. If recognized, such benefits would favorably affect the Company’s effective tax rate. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The total amount of penalties and interest were immaterial as of September 30, 2023 , and December 31, 2022 . In August 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “IRA”), which includes several incentives intended to promote clean energy, battery and energy storage, electrical vehicles, and other solar products, and is expected to impact our business and operations. As part of such incentives the IRA, will among other things, extend the investment tax credit (“ITC”) through 2034 and is therefore expected to increase the demand for solar products. The IRA is expected to further incentivize residential and commercial solar customers and developers due to the inclusion of a tax credit for qualifying energy projects of up to 30%. Since these regulations are new and their implementation is still pending administrative guidance from the Internal Revenue Service and U.S. Treasury Department, the Company will be examining the benefits that may be available to it, such as the availability of tax credits for domestic manufacturers, in the coming months. During the third quarter, the Company began manufacturing inverters in the U.S. . F - 26 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 20: EARNINGS (LOSS) PER SHARE The following table presents the computation of basic and diluted earnings (loss) per share (“EPS”): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Basic: Numerator: Net income (loss) $ ( 61,176 ) $ 24,743 $ 196,712 $ 72,950 Denominator: Shares used in computing net EPS of common stock, basic 56,671,504 55,730,328 56,435,880 54,788,734 Diluted: Numerator: Net income (loss) attributable to common stock, basic $ ( 61,176 ) $ 24,743 $ 196,712 $ 72,950 Notes due 2025 - 551 1,608 1,651 Net income (loss) attributable to common stock, diluted $ ( 61,176 ) $ 25,294 $ 198,320 $ 74,601 Denominator: Shares used in computing net EPS of common stock, basic 56,671,504 55,730,328 56,435,880 54,788,734 Notes due 2025 - 2,276,818 2,276,818 2,276,818 Effect of stock-based awards - 740,392 584,725 820,489 Shares used in computing net EPS of common stock, diluted 56,671,504 58,747,538 59,297,423 57,886,041 Earnings (loss) per share: Basic $ ( 1.08 ) $ 0.44 $ 3.49 $ 1.33 Diluted $ ( 1.08 ) $ 0.43 $ 3.34 $ 1.29 Shares excluded from the calculation of net diluted due to their anti-dilutive effect 3,349,756 138,916 1,251,243 181,802 F - 27 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 21: SEGMENT INFORMATION Following the discontinuation of Critical Power in June 2022, the Company operates in five different operating segments: Solar, Energy Storage, e-Mobility, Automation Machines, and the newly formed Consulting segment. The Company’s Chief Executive Officer, who is the chief operating decision maker (“CODM”), makes resource allocation decisions and assesses performance based on financial information presented on a consolidated basis, accompanied by disaggregated information about revenues and contributed profit by the operating segments. The Company does not allocate to its operating segments revenue recognized due to advance payments received for performance obligations that extend for a period greater than one year, related to ASC 606, “Revenue from Contracts with Customers”. Segment profit is comprised of gross profit for the segment less operating expenses that do not include amortization of purchased intangible assets, impairments of goodwill and intangible assets, stock based compensation expenses, and certain other items. The Company manages its assets on a group basis, not by segments, as many of its assets are shared or co-mingled. The Company’s CODM does not regularly review asset information by segments and, therefore, the Company does not report asset information by segment. The Company identified one operating segment as reportable – the Solar segment. The other operating segments are insignificant individually and therefore their results are presented together under “All other”. The Solar segment includes the design, development, manufacturing, and sales of an intelligent inverter solution designed to maximize power generation at the individual PV module level and a residential storage solution, compatible with the Company’s Energy Hub inverter, intended to store and supply power for back-up and to maximize self-consumption. The Solar segment solution consists mainly of the Company’s power optimizers, inverters, batteries, and cloud‑based monitoring platform . The “All other” category includes the design, development, manufacturing, and sales of energy storage products, e-Mobility products, automated machines, and consulting services. The following tables present information on reportable segments profit (loss) for the period presented: Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023 Solar All other Solar All other Revenues $ 676,410 $ 48,680 $ 2,532,275 $ 127,605 Cost of revenues 514,289 59,780 1,723,337 153,927 Gross profit (loss) 162,121 ( 11,100 ) 808,938 ( 26,322 ) Research and development 56,293 6,979 174,218 20,370 Sales and marketing 30,514 1,777 95,795 5,367 General and administrative 29,637 2,756 79,525 9,522 Segments profit (loss) $ 45,677 $ ( 22,612 ) $ 459,400 $ ( 61,581 ) F - 28 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 21: SEGMENT INFORMATION (Cont.) Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022 Solar All other Solar All other Revenues $ 788,610 $ 47,954 $ 2,084,206 $ 134,931 Cost of revenues 565,403 42,594 1,484,303 125,883 Gross profit 223,207 5,360 599,903 9,048 Research and development 47,943 6,861 140,215 23,378 Sales and marketing 30,996 2,202 85,220 8,059 General and administrative 17,534 2,795 49,779 10,209 Segments profit (loss) $ 126,734 $ ( 6,498 ) $ 324,689 $ ( 32,598 ) The following table presents information on reportable segments reconciliation to consolidated revenues for the periods presented: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Solar revenues $ 676,410 $ 788,610 $ 2,532,275 $ 2,084,206 All other revenues 48,680 47,954 127,605 134,931 Revenues from finance component 215 159 604 440 Consolidated revenues $ 725,305 $ 836,723 $ 2,660,484 $ 2,219,577 The following table presents information on reportable segments reconciliation to consolidated operating income for the periods presented: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Solar segment profit $ 45,677 $ 126,734 $ 459,400 $ 324,689 All other segment loss ( 22,612 ) ( 6,498 ) ( 61,581 ) ( 32,598 ) Segments operating profit 23,065 120,236 397,819 292,091 Amounts not allocated to segments: Stock based compensation expenses ( 36,815 ) ( 35,751 ) ( 115,015 ) ( 106,932 ) Amortization related to business combinations ( 2,750 ) ( 2,559 ) ( 6,164 ) ( 8,039 ) Impairment of goodwill and intangible assets - - - ( 4,008 ) Disposal of assets related to Critical Power - - - ( 4,314 ) Sale of Critical Power assets - 1,559 - 1,559 Other unallocated expenses (income), net ( 226 ) 922 1,146 926 Consolidated operating income (expense) $ ( 16,726 ) $ 84,407 $ 277,786 $ 171,283 NOTE 22: SUBSEQUENT EVENTS 1. On November 1, 2023, the Company announced the approval by the Board of Directors of a share repurchase program which authorizes the repurchase of up to $ 300 million of the Company’s common stock. Under the share repurchase program, repurchases can be made using a variety of methods, which may include open market purchases, block trades, privately negotiated transactions, accelerated share repurchase programs and/or a non-discretionary trading plan or other means, including through 10b5-1 trading plans, all in compliance with the rules of the SEC and other applicable legal requirements. The timing, manner, price and amount of any common share repurchases under the share repurchase program are determined by the Company in its discretion and depend on a variety of factors, including legal requirements, price and economic and market conditions. The program does not obligate the Company to acquire any amount of common stock, it may be suspended, extended, modified, discontinued or terminated at any time at the Company’s discretion without prior notice, and will expire on December 31, 2024. 2. In October 2023, the Company decided to discontinue its light commercial e-Mobility ("LCV") activity related to the supply of products to its sole customer. 3. On November 3, 2023, Daphne Shen, a purported stockholder of the Company, filed a proposed class action complaint for violation of federal securities laws, individually and putatively on behalf of all others similarly situated, in the U.S District Court of the Southern District of New York against the Company, the Company’s CEO and the Company’s CFO. The complaint alleges that the Company violated various securities laws and seeks class certification, damages, interest, attorneys’ fees, and other relief. Due to the early stage of this proceeding, we cannot reasonably estimate the potential range of loss, if any. The Company disputes the allegations of wrongdoing and intends to vigorously defend against them. F - 29