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4-Traders Homepage  >  Equities  >  Nasdaq  >  Enphase Energy Inc    ENPH

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ENPHASE ENERGY : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/09/2017 | 10:13pm CEST
Forward-Looking Statements
The following discussion and analysis of our financial condition and results of
operations should be read together with our condensed consolidated financial
statements and related notes appearing elsewhere in this Quarterly Report on
Form 10-Q. This discussion contains forward-looking statements reflecting our
current expectations and involves risks and uncertainties. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"intend," "potential" or "continue" or the negative of these terms or other
comparable terminology. For example, statements regarding our expectations as to
future financial performance, expense levels and liquidity sources are
forward-looking statements. Our actual results and the timing of events may
differ materially from those discussed in our forward-looking statements as a
result of various factors, including those discussed below and those discussed
in the section entitled "Risk Factors" included in this Quarterly Report on Form
10-Q and our Annual Report on Form 10-K for the year ended December 31, 2016.
Overview
We deliver simple, innovative and reliable energy management solutions that
advance the worldwide potential of renewable energy. We were founded in March
2006 and have grown rapidly to become the market leader in the solar
microinverter category. Our technology was designed to increase energy
production, simplify design and installation, improve system uptime and
reliability, reduce fire risk, and provide a platform for intelligent energy
management. Since inception, we have shipped over 15 million microinverters
representing over 3 gigawatts of solar PV generating capacity, and more than
660,000 Enphase residential and commercial systems have been deployed in over
100 countries.
We sell our microinverter systems primarily to distributors who resell them to
solar installers. We also sell directly to large installers and through original
equipment manufacturers ("OEMs") and strategic partners.
New Products
Enphase IQ Microinverter System
In September 2016, we announced our Enphase Home Energy Solution with IQ™, our
next-generation integrated solar, storage and energy management system. The
solution features our sixth-generation microinverter system, which supports
high-powered 60 and 72-cell solar modules, integrates with AC modules from LG
and Jinko Solar, and we believe offers installers faster and simpler
installations, saving on costs. We began shipping the Enphase IQ 6 Microinverter
System in North America in the first quarter of 2017.
The Enphase IQ microinverter is a key component of the Enphase Home Energy
Solution, which can also include our Envoy™ Communications Gateway, Enphase
Enlighten™, a cloud-based energy management platform, and our Enphase AC
Battery™. System owners can use Enphase Enlighten to monitor their home's solar
generation, energy storage and consumption from any web-enabled device.
Enphase Energized AC Modules
We have also recently announced Enphase Energized AC Modules with IQ, which
utilize our sixth generation microinverters and will be produced through our AC
module partnerships with LG and Jinko Solar, among others. We began shipping
Enphase Energized AC Modules in the U.S. in the second quarter of 2017.
Enphase AC Battery™
In the third quarter of 2016, we began shipments of our Enphase AC Battery™ to
distributors in Australia and New Zealand. The Enphase AC Battery is a scalable,
modular energy storage system with a 1.2kWh energy capacity. We began shipments
to customers in the United States, France, the United Kingdom and the
Netherlands in the fourth quarter of 2016.
Operating Expense Reduction Initiatives
In the third quarter of 2016, we began implementing restructuring actions to
lower operating expenses and cost of revenues. The restructuring actions have
included reductions in our global workforce, the elimination of certain non-core
projects, consolidation of office space at our corporate headquarters and the
engagement of management consultants to assist us in making organizational and
structural changes to improve operational efficiencies and reduce expenses.

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Components of Condensed Consolidated Statements of Operations
Net Revenues
We generate net revenues from sales of our microinverter systems and related
accessories, which in addition to microinverter units can also include the Envoy
communications gateway, our Enlighten cloud-based monitoring service, and our AC
Battery storage systems.
Our revenue is affected by changes in the volume and average selling prices of
our microinverter systems and related accessories, supply and demand, sales
incentives, and competitive product offerings. Our revenue growth is dependent
on our ability to compete effectively in the marketplace by remaining cost
competitive, developing and introducing new products that meet the changing
technology and performance requirements of our customers, the diversification
and expansion of our revenue base, and our ability to market our products in a
manner that increases awareness for microinverter technology and differentiates
us in the marketplace.
Cost of Revenues and Gross Profit
Cost of revenues is comprised primarily of product costs, warranty,
manufacturing personnel and logistics costs, freight costs, depreciation of test
equipment and hosting service costs. Our product costs are impacted by
technological innovations, such as advances in semiconductor integration and new
product introductions, economies of scale resulting in lower component costs,
and improvements in production processes and automation. Certain costs,
primarily personnel and depreciation of test equipment, are not directly
affected by sales volume.
We outsource our manufacturing to third-party contract manufacturers and
generally negotiate product pricing with them on a quarterly basis. We believe
our contract manufacturing partners have sufficient production capacity to meet
the anticipated demand for our products for the foreseeable future. However,
shortages in the supply of certain key raw materials could adversely affect our
ability to meet customer demand for our products. We contract with third
parties, including one of our contract manufacturers, to serve as our logistics
providers by warehousing and delivering our products in the United States,
Europe and Asia.
Gross profit may vary from quarter to quarter and is primarily affected by our
average selling prices, product cost, product mix, warranty costs and sales
volume fluctuations resulting from seasonality.
Operating Expenses
Operating expenses consist of research and development, sales and marketing,
general and administrative and restructuring expenses. Personnel-related costs
are the most significant component of each of these expense categories other
than restructuring expense and include salaries, benefits, payroll taxes, sales
commissions, incentive compensation and stock-based compensation.
Research and development expense includes personnel-related expenses,
third-party design and development costs, testing and evaluation costs,
depreciation expense and other indirect costs. Research and development
employees are primarily engaged in the design and development of power
electronics, semiconductors, powerline communications, networking and software
functionality, and storage. We devote substantial resources to research and
development programs that focus on enhancements to, and cost efficiencies in,
our existing products and timely development of new products that utilize
technological innovation to drive down product costs, improve functionality, and
enhance reliability. We intend to continue to invest appropriate resources in
our research and development efforts because we believe they are critical to
maintaining our competitive position.
Sales and marketing expense consists primarily of personnel-related expenses
such as salaries, commissions, stock-based compensation, employee benefits and
travel. It also includes trade shows, marketing, customer support and other
indirect costs. We expect to continue to make the necessary investments to
enable us to execute our strategy to increase our market penetration
geographically and enter into new markets by expanding our customer base of
distributors, large installers, OEMs and strategic partners. We currently offer
microinverter systems targeting the residential and commercial markets in the
United States, Canada, Mexico and certain Central American markets, the United
Kingdom, France, the Benelux region, certain other European markets, Australia,
New Zealand and certain other Asian markets. We expect to continue to expand the
geographic reach of our product offerings and explore new sales channels in
addressable markets in the future.

General and administrative expense consists primarily of salaries, incentive compensation, stock-based compensation and employee benefits for personnel related to our executive, finance, human resources, information

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technology and legal organizations. General and administrative expense also
includes facilities costs and fees for professional services, which consist
primarily of outside legal, accounting and information technology consulting
costs.
Restructuring expense is the net of charges and adjustments resulting from
restructuring initiatives that we began implementing in the third quarter of
2016 to improve operational performance and reduce overall operating expense.
Costs included in restructuring expense primarily consist of fees paid to
management consultants engaged to assist us in making organizational and
structural changes to improve operational efficiencies and reduce expenses,
severance for workforce reduction actions, non-cash charges related to the
disposition of assets and impairment of property and equipment, and the
establishment of lease loss reserves. See Note 6, "Restructuring" for additional
information.
Other Income (Expense), Net
Other expense, net primarily consists of interest expense and commitment fees
under our term loans and non-cash interest expense related to the amortization
of deferred financing costs. Other expense, net also includes gains or losses
upon conversion of foreign currency transactions into U.S. dollars.
Provision for Income Taxes
We are subject to income taxes in the countries where we sell our products.
Historically, we have primarily been subject to taxation in the United States
because we have sold the majority of our products to customers in the United
States. As we have expanded the sale of products to customers outside the United
States, we have become subject to taxation based on the foreign statutory rates
in the countries where these sales took place. As sales in foreign jurisdictions
increase in the future, our effective tax rate may fluctuate accordingly. Due to
the history of losses we have generated in the United States since inception, we
believe that it is more-likely-than-not that all of our U.S. and state deferred
tax assets will not be realized as of June 30, 2017.
Results of Operations for the Three and Six Months Ended June 30, 2017 and 2016
Net Revenues
                Three Months Ended                              Six Months Ended
                     June 30,               Change in               June 30,                Change in
                 2017         2016          $          %        2017         2016           $          %
                        (dollars in thousands)                          

(dollars in thousands) Net revenues $ 74,704 $ 79,185 $ (4,481 ) (6 )% $ 129,455 $ 143,306 $ (13,851 ) (10 )%



Three Months Ended June 30, 2017 and 2016
Net revenues decreased by 6% for the three months ended June 30, 2017 compared
to the same period in 2016 due to lower average selling prices combined with a
decrease in units sold. We sold 775,000 microinverter units in the three months
ended June 30, 2017 versus 796,000 units in the same period in 2016. The average
revenue per watt of microinverter systems sold declined by approximately 9% for
the three months ended June 30, 2017, as compared to the same period in 2016.
Six Months Ended June 30, 2017 and 2016
Net revenues decreased by 10% for the six months ended June 30, 2017 compared to
the same period in 2016 due to a decrease in microinverter systems sold and
lower average selling prices. We sold 1,348,000 microinverter units in the six
months ended June 30, 2017 versus 1,407,000 units in the same period in 2016.
Volumes were negatively affected by the unusually wet weather in California in
the first quarter of 2017, which is a significant market for us. The average
revenue per watt of microinverter systems sold declined by approximately 12% for
the six months ended June 30, 2017, as compared to the same period in 2016. We
expect average selling prices for microinverter systems to continue to decline
in the future, which may negatively affect net revenues.


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Cost of Revenues and Gross Profit

                    Three Months Ended                                   

Six Months Ended

                         June 30,                 Change in                  June 30,                   Change in
                    2017          2016          $            %          2017          2016            $            %
                              (dollars in thousands)                               (dollars in thousands)
Cost of revenues $  61,157     $ 65,049     $ (3,892 )       (6 )%   $ 108,861     $ 117,410     $ (8,549 )        (7 )%
Gross profit        13,547       14,136         (589 )       (4 )%      20,594        25,896       (5,302 )       (20 )%
Gross margin          18.1 %       17.9 %        0.2 %                    15.9 %        18.1 %       (2.2 )%


Three Months Ended June 30, 2017 and 2016
Cost of revenues decreased by 6% for the three months ended June 30, 2017
compared to the same period in 2016. The decrease in cost of revenues was
primarily attributable to a decrease in the average cost per watt of
microinverter systems and lower volume. Gross margin increased by 0.2 percentage
points for the three months ended June 30, 2017 compared to the same period in
2016. The increase in gross margin was primarily due to a greater decrease in
the average cost per watt of our microinverter systems than the average revenue
per watt and lower overhead and warranty expense in the three months ended June
30, 2017 as compared to the same period last year.
Six Months Ended June 30, 2017 and 2016
Cost of revenues decreased by 7% for the six months ended June 30, 2017 compared
to the same period in 2016. The decrease in cost of revenues was primarily
attributable to a decrease in the average cost per watt of microinverter systems
and lower volume partially offset by the impact of a decrease in the discount
factor used in our mark-to-market method of accounting for eligible warranties.
Gross margin decreased by 2.2 percentage points for the six months ended June
30, 2017 compared to the same period in 2016. The primary drivers of the
decrease in gross margin were average revenue per watt of our microinverter
systems decreasing more than the average cost per watt, and the absorption of
fixed overhead costs and warranty charges on a lower revenue base, partially
offset by lower overhead costs as a result of our restructuring initiatives. Our
ability to reduce product costs and the timing of product cost reductions
relative to declines in average selling prices can have a significant impact on
our gross margin.
Research and Development
                      Three Months Ended                                     Six Months Ended
                           June 30,                   Change in                  June 30,                 Change in
                      2017            2016          $            %          2017          2016          $            %
                                (dollars in thousands)                                (dollars in thousands)
Research and
development      $    7,947        $ 13,091     $ (5,144 )      (39 )%   $  17,552     $ 26,157     $ (8,605 )      (33 )%


Three Months Ended June 30, 2017 and 2016
Research and development expense decreased by 39% for the three months ended
June 30, 2017 compared to the same period in 2016. The decrease is primarily due
to the implementation our restructuring initiative that eliminated non-core
projects resulting in a $2.8 million reduction in research and development
personnel related expenses and a $2.2 million reduction in lab parts, product
prototypes and professional fees.
Six Months Ended June 30, 2017 and 2016
Research and development expense decreased by 33% for the six months ended June
30, 2017 compared to the same period in 2016. The decrease is primarily due to
the implementation our restructuring initiative that eliminated non-core
projects resulting in a $5.2 million reduction in research and development
personnel related expenses and a $3.4 million reduction in lab parts, product
prototypes and professional fees. The amount of research and development expense
may fluctuate from period to period due to the differing levels and stages of
research and development activity.

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Sales and Marketing
                         Three Months Ended                                     Six Months Ended
                              June 30,                   Change in                  June 30,                 Change in
                          2017           2016          $            %          2017          2016          $            %
                                   (dollars in thousands)                                (dollars in thousands)

Sales and marketing $ 6,274 $ 9,987 $ (3,713 ) (37 )% $ 12,732 $ 20,202 $ (7,470 ) (37 )%



Three Months Ended June 30, 2017 and 2016
Sales and marketing expense decreased by 37% for the three months ended June 30,
2017 compared to the same period in 2016. The decrease is primarily due to the
implementation our restructuring initiative that eliminated non-core projects
resulting in a $2.9 million reduction in sales and marketing personnel related
expenses. Spending on advertising activities and professional services decreased
by $0.6 million in the second quarter of 2017 as compared to the second quarter
of 2016.
Six Months Ended June 30, 2017 and 2016
Sales and marketing expense decreased by 37% for the six months ended June 30,
2017 compared to the same period in 2016. The decrease is primarily due to the
implementation our restructuring initiative that eliminated non-core projects
resulting in a $5.4 million reduction in sales and marketing personnel related
expenses. Spending on advertising activities and professional services decreased
by $1.3 million in the six months ended June 30, 2017 as compared to the same
period in 2016. Additionally, bad debt expense was $0.6 million higher in the
six months ended June 30, 2016 than in the current period.
General and Administrative
                      Three Months Ended                                     Six Months Ended
                           June 30,                   Change in                  June 30,                 Change in
                       2017           2016          $            %          2017          2016          $            %
                                (dollars in thousands)                                (dollars in thousands)
General and
administrative   $    4,964         $ 6,846     $ (1,882 )      (27 )%   $  10,797     $ 14,413     $ (3,616 )      (25 )%


Three Months Ended June 30, 2017 and 2016
General and administrative expense decreased by 27% for the three months ended
June 30, 2017 compared to the same period in 2016. The decrease is primarily due
to the implementation of our restructuring initiative that eliminated non-core
projects resulting in a $1.2 million reduction in general and administrative
personnel related expenses, a $0.3 million reduction in facilities related
expenses and a $0.3 million reduction in depreciation expense as a result of a
lower fixed asset base.
Six Months Ended June 30, 2017 and 2016
General and administrative expense decreased by 25% for the six months ended
June 30, 2017 compared to the same period in 2016. The decrease is primarily due
to the implementation of our restructuring initiative that eliminated non-core
projects resulting in a $2.5 million reduction in general and administrative
personnel related expenses, a $0.3 million reduction in professional services
and a $0.6 million reduction in depreciation expense as a result of a lower
fixed asset base.

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Restructuring Charges
                           Three Months Ended                                      Six Months Ended
                                June 30,                  Change in                    June 30,                     Change in
                           2017            2016          $          %              2017              2016          $           %
                                    (dollars in thousands)                                  (dollars in thousands)

Restructuring charges $ 3,609 $ - $ 3,609 N/A $ 10,856 $ - $ 10,856 N/A



Three Months Ended June 30, 2017 and 2016
We implemented a restructuring plan in 2016 to lower operating expenses and cost
of revenues that included reductions in our global workforce and the elimination
of certain non-core projects. In 2017 we engaged a management consulting firm to
assist us in making organizational and structural changes to improve operational
efficiencies and reduce expenses. Restructuring charges for the three months
ended June 30, 2017 include $3.0 million of consulting services and a net $0.6
million in adjustments to cash-based severance and related benefits, contract
termination costs and lease loss reserves.
Six Months Ended June 30, 2017 and 2016
We implemented a restructuring plan in 2016 to lower operating expenses and cost
of revenues that included reductions in our global workforce and the elimination
of certain non-core projects. In 2017 we engaged a management consulting firm to
assist us in making organizational and structural changes to improve operational
efficiencies and reduce expenses. Restructuring charges for the six months ended
June 30, 2017 include $7.0 million of consulting services, $1.7 million in
cash-based severance and related benefits and $2.1 million in charges for asset
impairments and lease loss reserves. We expect to incur additional fees for
management consulting services in the near-term.
Other Income (Expense), Net
                    Three Months Ended                                   Six Months Ended
                         June 30,                  Change in                 June 30,                Change in
                     2017          2016          $           %           2017         2016          $           %
                              (dollars in thousands)                             (dollars in thousands)
Other income
(expense), net   $    (1,992 )   $  (591 )   $ (1,401 )      237 %   $   (3,071 )   $   (62 )   $ (3,009 )   4,853%


Three Months Ended June 30, 2017 and 2016
Other expense, net was $2.0 million for three months ended June 30, 2017 versus
$0.6 million of other expense, net, for the same period in 2016. Interest
expense increased by $1.9 million due to our term loan, and other income was
$0.1 million due to net gains related to foreign currency exchange and
remeasurement for the three months ended June 30, 2017 as compared to a net loss
of $0.4 million for the same period in 2016.
Six Months Ended June 30, 2017 and 2016
Other expense net was $3.1 million for six months ended June 30, 2017 versus
$3.0 million in the same period in 2016. Interest expense increased by $3.9
million due to our term loan, which was offset by net gains related to foreign
currency exchange and remeasurement of $1.1 million for the six months ended
June 30, 2017 as compared to $0.3 million in the same period last year.
Liquidity and Capital Resources
As of June 30, 2017, we had $31.0 million in cash and cash equivalents and
working capital of $58.2 million. Cash and cash equivalents held in the United
States were $24.1 million and consisted primarily of U.S. Government money
market mutual funds and non-interest bearing checking deposits, with the
remainder held in various foreign subsidiaries. We consider amounts held outside
the U.S. to be accessible and have provided for the estimated U.S. income tax
liability associated with our foreign earnings.
Although we have taken actions to improve our liquidity and help us achieve
profitability, the solar market is volatile, and we are subject to market
dynamics that are beyond our control. As disclosed in our Form 10-K for the year
ended December 31, 2016, we concluded that substantial doubt exists as to our
ability to continue as a going concern within the next year. The accompanying
consolidated financial statements for the three and six months

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ended June 30, 2017 are presented on a going concern basis and do not include
any adjustments that might result from the outcome of this uncertainty.
Information about the actions we have taken and are taking to mitigate our
liquidity constraints is presented below.
Actions we have taken to reduce our operating expenses include a reduction in
our global workforce in the third quarter of 2016 and a second reduction in
January 2017. We have eliminated certain projects that did not have a near-term
return on investment, consolidated office space at our headquarters, divested
our services business and engaged a management consulting firm to help us
improve operational efficiencies. We expect the cumulative impact of these
actions to decrease our ongoing annual operating expenses by approximately 35%.
For the six months ended June 30, 2017, we achieved a combined $19.7 million in
savings for research and development, sales and marketing and general and
administrative expenses over the same period in 2016, which was partially offset
by increased restructuring charges of $10.9 million.
Sources of Liquidity
We have taken and are taking actions to improve our liquidity, including raising
funds in the capital markets. In 2016, we completed a public
offering of 13,000,000 shares of our common stock. Including the subsequent
over-allotment, we sold approximately 15 million shares and realized net
proceeds of approximately $16.2 million.
In December 2016, we entered into an At The Market Issuance Sales Agreement
(ATM) under which we could sell shares of our common stock up to a gross
aggregate offering price of $17.0 million. We realized the full $17.0 million of
gross proceeds available under the ATM during the three months ended March 31,
2017.
In January 2017, we completed a private placement of common stock that resulted
in gross proceeds of $10.0 million.
In July 2016, we entered into a loan and security agreement (the "Original Term
Loan Agreement") with lenders that are affiliates of Tennenbaum Capital
Partners, LLC ("TCP"), which has subsequently been amended and modified as
discussed below and in Note 7, "Debt." Under the agreement, the lenders
committed to advance a term loan in an aggregate principal amount of up to $25.0
million with a maturity date of July 1, 2020. We drew down the $25.0 million
term loan commitment at closing.
Payments under the original agreement were interest only through June 30, 2017,
followed by consecutive equal monthly payments of principal plus accrued
interest that were to begin on July 1, 2017 and continue through the maturity
date. The Original Term Loan Agreement provides for an interest rate per
annum equal to the higher of (i) 10.25% or (ii) LIBOR plus 9.5625%, subject to a
1.0% reduction if we achieve minimum levels of Revenue and EBITDA (each as
defined in the Original Term Loan Agreement) for the twelve-consecutive month
period ending June 30, 2017. In addition, we paid a commitment fee of 3.3% of
the loan amount upon closing and a closing fee of 10.0% of the loan amount is
payable in four equal installments at each anniversary of the closing date. We
may elect to prepay the loan by incurring a prepayment fee between 1% and 3% of
the principal amount of the term loan depending on the timing and circumstances
of prepayment.
The term loan was secured by a second-priority security interest on
substantially all our assets except intellectual property. The Original Term
Loan Agreement does not contain any financial covenants, but is subject to
customary affirmative and negative covenants including restrictions on creation
of liens, dispositions of assets, dividends, mergers, or changing the nature of
its business, in each case, subject to certain customary exceptions. In
addition, the Term Loan Agreement contains certain customary events of default
including, but not limited to, failure to pay interest, principal and fees or
other amounts when due, material breach of any representation or warranty,
covenant defaults, cross defaults to other material indebtedness, events of
bankruptcy and the occurrence of a material adverse change (as defined in the
agreement) to our business. The Original Term Loan Agreement offers TCP typical
rights and remedies in any event of default, including the ability to declare
all amounts outstanding immediately due and payable. We do not expect the lender
to declare default under any event, including the material adverse change
clause.
In 2016 we had a $50.0 million revolving credit facility with Wells Fargo Bank,
N.A. ("Wells Fargo") that was entered into on November 7, 2012, as first amended
on February 14, 2014. On December 18, 2015, we entered into an amended and
restated revolving credit agreement with Wells Fargo (the "Revolver") which
extended the maturity date from November 7, 2016 to November 7, 2019 and added
an uncommitted accordion feature that could increase the size of the facility by
$25.0 million, subject to certain approvals and meeting certain criteria.
In February 2017, we amended our loan and security agreement with TCP to provide
an additional $25 million in principal (the "New Term Loan Agreement"). We
simultaneously terminated our revolving credit facility with Wells Fargo Bank,
N.A., and the combined principal and interest balance of $10.3 million was fully
repaid. The new term

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loan is secured by a first-priority security interest on substantially all our
assets except intellectual property and has the same July 1, 2020 maturity date
as the original TCP loan, both of which are now interest only until February
2018.
The New Term Loan Agreement requires that (i) at all times from the closing date
to and including March 31, 2018, we have Unrestricted Cash (as defined in the
New Term Loan Agreement) of at least $10.0 million; (ii) at all times from the
closing date to and including March 31, 2018, that the aggregate amount of
Consolidated Unrestricted Cash, plus the value of Consolidated Receivables, plus
the value of Consolidated Inventory (each as defined in the New Term Loan
Agreement) divided by the outstanding principal amount of both term loans, shall
equal or exceed 1.5; and (iii) at all times from April 1, 2018 and thereafter,
that the aggregate amount of Consolidated Unrestricted Cash, plus the value of
Consolidated Receivables, plus the value of Consolidated Inventory divided by
the outstanding principal amount of both term loans, shall equal or exceed 1.75.
In addition, the New Term Loan Agreement is subject to customary affirmative and
negative covenants including restrictions on creation of liens, dispositions of
assets, mergers, changing the nature of its business and dividends and other
distributions, in each case subject to certain exceptions. The New Term Loan
Agreement also contains certain customary events of default including, but not
limited to, failure to pay interest, principal and fees or other amounts when
due, material breach of any representation or warranty, covenant defaults, cross
defaults to other material indebtedness, events of bankruptcy and the occurrence
of a material adverse change (as defined in the agreement) to our business. The
New Term Loan Agreement offers TCP typical rights and remedies in any event of
default, including the ability to declare all amounts outstanding immediately
due and payable. We expect to be in compliance with the financial covenants
noted above, and we do not expect the lender to declare default under any event,
including the material adverse change clause. See Note 7. "Debt."
The following table summarizes our cash flows for the periods indicated:
                                                         Six Months Ended
                                                             June 30,
                                                        2017          2016
                                                          (In thousands)
Net cash used in operating activities                $ (24,325 )   $ (7,991 )
Net cash used in investing activities                   (3,515 )     (8,188 )

Net cash provided by (used in) financing activities 40,735 (3,900 ) Effect of exchange rate changes on cash

                    294         (130 )

Net increase (decrease) in cash and cash equivalents 13,189 (20,209 )



Operating Activities
For the six months ended June 30, 2017, net cash used in operating activities of
$24.3 million was primarily attributable to a net loss of $35.4 million offset
by non-cash charges of $11.7 million and net cash outflows from changes in
operating assets and liabilities of $0.6 million. Non-cash charges included $3.6
million of stock-based compensation, $4.6 million of depreciation and
amortization, $0.7 million provision for doubtful accounts and a net $1.8
million in asset impairment and restructuring charges.
The primary driver of cash outflows from changes in operating assets and
liabilities was a $14.1 million decrease in accounts payable resulting from
timing of vendor payments that led to a decrease in average days payable
outstanding of approximately 47% and an increase in prepaid expenses and other
assets of $5.3 million. Cash outflows from changes in operating assets and
liabilities was mostly offset by a $11.1 million decrease in inventory, a $3.9
million decrease in accounts receivable and a $3.6 million increase in deferred
revenue.
For the six months ended June 30, 2016, net cash used in operating activities
of $8.0 million was primarily attributable to a net loss of $35.5 million offset
by non-cash charges of $12.5 million and net cash inflows from changes in our
operating assets and liabilities of $15.0 million. Non-cash charges
included $5.7 million of stock-based compensation, $5.4 million of depreciation
and amortization and a $1.3 million provision for doubtful accounts.
The primary driver of cash inflows from changes in operating assets and
liabilities was a $15.3 million increase in accounts payable, accrued and other
liabilities resulting from timing of vendor payments. Also contributing to cash
inflows was an increase in deferred revenue related to our cloud-based
monitoring service of $6.6 million and a decrease in inventory of $1.5 million,
which was attributable to improved working capital

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management. Cash outflows from changes in operating assets and liabilities
included a $4.2 million increase in accounts receivable as a result of higher
sales in the second quarter of 2016 compared to the fourth quarter of 2015,
a $3.7 million increase in prepaid expenses and other assets attributable to
deferral of costs for certain sales arrangements with extended payment terms and
a $0.5 million decrease to warranty obligations.
Investing Activities
For the six months ended June 30, 2017, net cash used in investing activities of
$3.5 million primarily resulted from purchases of test and assembly equipment
and capitalized costs related to internal-use software.
For the six months ended June 30, 2016, net cash used in investing activities
of $8.2 million primarily resulted from purchases of test and assembly
equipment, capitalized costs related to internal-use software and license fees
for certain technology related to ASIC development.
Financing Activities
For the six months ended June 30, 2017, net cash provided by financing
activities of $40.7 million consisted of net proceeds from sales of common stock
of $26.5 million, which included proceeds from the private placement and ATM
offering described above and net proceeds from the term loan of $24.2 million,
offset by the repayment of principal on our revolving credit facility of $10.1
million.
For the six months ended June 30, 2016, net cash used by financing activities of
$3.9 million was primarily due to net repayments under our Revolver of $4.6
million, which was offset by $0.8 million in proceeds received from the issuance
of common stock under employee stock plans.
Contractual Obligations
There were no material changes during the six months ended June 30, 2017 to our
contractual commitments as presented in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of our 2016 Form 10-K other than
the termination of our revolving credit facility and additional term debt as
described in Note 7. "Debt."
Off-Balance Sheet Arrangements
As of June 30, 2017, we did not have any off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Critical Accounting Policies
Our condensed consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the U.S., or GAAP. In connection
with the preparation of our condensed consolidated financial statements, we are
required to make assumptions and estimates about future events and apply
judgments that affect the reported amounts of assets, liabilities, revenue,
expenses and related disclosures. We base our assumptions, estimates and
judgments on historical experience, current trends and other factors that
management believes to be relevant at the time our consolidated financial
statements are prepared. On a regular basis, we review the accounting policies,
assumptions, estimates and judgments to ensure that our consolidated financial
statements are presented fairly and in accordance with GAAP. However, because
future events and their effects cannot be determined with certainty, actual
results could differ from our assumptions and estimates. To the extent that
there are material differences between these estimates and actual results, our
future financial statement presentation, financial condition, results of
operations and cash flows will be affected.
We consider an accounting policy to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, and if different estimates that reasonably
could have been used, or changes in the accounting estimates that are reasonably
likely to occur periodically, could materially impact the consolidated financial
statements.
There have been no significant changes during the six months ended June 30, 2017
to the items that we disclosed as our critical accounting policies and estimates
in Management's Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the year ended December 31,
2016.

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Recently Issued Accounting Pronouncements Not Yet Effective
See Note 1, Description of Business and Basis of Presentation, of the Notes to
Condensed Consolidated Financial Statements under Item 1 for recently issued
accounting pronouncements not yet effective.


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Sales 2017 289 M
EBIT 2017 -26,3 M
Net income 2017 -48,2 M
Debt 2017 26,0 M
Yield 2017 -
P/E ratio 2017 -
P/E ratio 2018
EV / Sales 2017 0,34x
EV / Sales 2018 0,40x
Capitalization 73,3 M
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Number of Analysts 7
Average target price 1,58 $
Spread / Average Target 82%
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Badrinarayanan Kothandaraman Chief Operating Officer
Humbert Garcia Chief Financial Officer & Vice President
Martin Fornage Chief Technology Officer
Ben Kortlang Independent Director
Steven J. Gomo Independent Director
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