10-K/A 1 zk1719465.htm 10-K/A

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K/A
(Amendment No. 1)
 
(Mark one)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended June 30, 2016
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from_____ to____
Commission File Number: 001-36894
 
SOLAREDGE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
20-5338862
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
   
1 HaMada Street
   
Herziliya Pituach, Israel
 
4673335
(Address of Principal Executive Offices)
 
(Zip Code)
 
972 (9) 957-6620
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Common stock, par value $0.0001 per share
 
NASDAQ (Global Select Market)
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
 
Yes o    No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  
 
Yes o    No x
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
 
Yes x    No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
 
Yes x    No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 

 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
 
x   Large accelerated filer
 
o Accelerated filer
 
o Non-accelerated filer
(do not check if a
smaller reporting
company)
 
o Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 
Yes o    No x
 
The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant on December 31, 2015, the last business day of the registrant’s most recently completed second fiscal quarter was approximately $788,988,346 (assuming that the registrant’s only affiliates are its officers, directors and non-institutional 10% stockholders) based upon the closing market price on that date of $28.17 per share as reported on the Nasdaq Global Select Market.
 
As of August 11, 2016, there were 40,898,197 shares of the registrant’s common stock, par value of $0.0001 per share, outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
None.
 
EXPLANATORY NOTE

 
SolarEdge Technologies Inc. (“SolarEdge,” the “Company,” “we,” “us,” or “our”) is filing this Amendment No. 1 on Form 10-K/A (“Amendment”) to its Annual Report on Form 10-K for the year ended June 30, 2016, as filed with the Securities and Exchange Commission on August 17, 2016 (“Form 10-K”).

 
The only changes to our Form 10-K are in Item 15 “Exhibits and Financial Statement Schedules.”

 
In Item 15 we have included dates on the Section 906 certifications, as such dates were inadvertently omitted from our 10-K filing. Pursuant to the rules of the SEC, currently dated certifications from our chief executive officer and chief financial officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, are filed or furnished herewith, as applicable.

 
This Amendment No. 1 does not reflect events occurring after the filing of the Form 10-K, and does not update disclosures contained in the Form 10-K or modify or amend the Form 10-K except as specifically described in this explanatory note.

 
TABLE OF CONTENTS
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This annual report on Form 10-K contains forward-looking statements that are based on our management’s expectations, estimates, projections, beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in “Item 1. Business,” “Item 1A. Risk Factors” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk”. Forward looking statements include information concerning our possible or assumed future results of operations, business strategies, technology developments, new product developments, financing and investment plans, dividend policy, competitive position, industry and regulatory environment, potential growth opportunities and the effects of competition. Forward looking statements include statements that are not historical facts and can be identified by terms such as “anticipate,” “believe,” “could,” “seek,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or similar expressions and the negatives of those terms.
 
 Forward looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward looking statements. Given these uncertainties, you should not place undue reliance on forward looking statements. Also, forward looking statements represent our management’s beliefs and assumptions only as of the date of this filing. Important factors that could cause actual results to differ materially from our expectations include:
 
·
our limited history of profitability, which may not continue in the future;
 
·
our limited operating history, which makes it difficult to predict future results;
 
·
future demand for solar energy solutions;
 
·
changes to net metering policies or the reduction, elimination or expiration of government subsidies and economic incentives for on-grid solar energy applications;
 
·
federal, state and local regulations governing the electric utility industry with respect to solar energy;
 
·
the retail price of electricity derived from the utility grid or alternative energy sources;
 
·
interest rates and supply of capital in the global financial markets in general and in the solar market specifically;
 
·
competition, including introductions of power optimizer, inverter and solar photovoltaic (“PV”) system monitoring products by our competitors;
 
·
developments in alternative technologies or improvements in distributed solar energy generation;
 
·
historic cyclicality of the solar industry and periodic downturns;
 
·
defects or performance problems in our products;
 
·
our ability to forecast demand for our products accurately and to match production with demand;
 
·
our dependence on ocean transportation to deliver our products in a cost effective manner;
 
·
our dependence upon a small number of outside contract manufacturers;
 
·
capacity constraints, delivery schedules, manufacturing yields and costs of our contract manufacturers and availability of components;
 
·
delays, disruptions and quality control problems in manufacturing;
 
·
shortages, delays, price changes or cessation of operations or production affecting our suppliers of key components;
 
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·
business practices and regulatory compliance of our raw material suppliers;
 
·
performance of distributors and large installers in selling our products;
 
·
our customer’s financial stability, creditworthiness and debt leverage ratio;
 
·
our ability to retain key personnel and attract additional qualified personnel;
 
·
our ability to effectively design, launch, market and sell new generations of our products and services;
 
·
our ability to maintain our brand and to protect and defend our intellectual property;
 
·
our ability to retain, and events affecting, our major customers;
 
·
our ability to manage effectively the growth of our organization and expansion into new markets;
 
·
fluctuations in currency exchange rates;
 
·
unrest, terrorism or armed conflict in Israel;
 
·
general economic conditions in our domestic and international markets;
 
·
consolidation in the solar industry among our customers and distributors; and
 
·
the other factors set forth under “Risk Factors.”
 
Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
 
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PART I
 
ITEM 1.         BUSINESS
 
Introduction
 
We have invented an intelligent inverter solution that has changed the way power is harvested and managed in a solar PV system. Our direct current (“DC”) optimized inverter system maximizes power generation at the individual PV module level while lowering the cost of energy produced by the solar PV system and providing comprehensive and advanced safety features. Our system consists of our power optimizers, inverters and cloud-based monitoring platform and addresses a broad range of solar market segments, from residential solar installations to commercial and small utility-scale solar installations. Since we began commercial shipments in 2010, we have shipped approximately 3.4 gigawatts (“GW”) of our DC optimized inverter systems and our products have been installed in solar PV systems in 96 countries.
 
Historically, the solar PV industry used traditional string and central inverter architectures to harvest PV solar power. However, traditional inverter architectures result in energy losses as well as systemic challenges in design flexibility, safety and monitoring. More recently, microinverter technology was introduced in an attempt to resolve these challenges, but this technology has certain inherent limitations. We believe that our DC optimized inverter system, consisting of an inverter and distributed power optimizers, best addresses all of these challenges.
 
Our system allows for superior power harvesting and module management relative to traditional inverter systems by deploying power optimizers at each PV module while maintaining a competitive system cost by keeping the AC inversion and grid interaction centralized using a simplified DC-AC inverter. The entire system is monitored through our cloud-based monitoring platform that enables reduced system operation and maintenance (“O&M”) costs. Our system enables each PV module to operate at its own maximum power point (“MPP”), rather than a system-wide average, enabling dynamic response to real-world conditions, such as atmospheric conditions, PV module aging, soiling and shading and offering improved energy yield relative to traditional inverter systems. In addition to higher efficiency, our system’s installed cost per watt is competitive with traditional inverter systems of leading manufacturers and generally lower than comparable microinverter systems of leading manufacturers. Furthermore, our architecture allows for complex rooftop system designs and enhanced safety and reliability. Our technology and system architecture are protected by 72 awarded patents and 114 patent applications filed worldwide as of June 30, 2016.
 
We primarily sell our products directly to large solar installers and engineering, procurement and construction firms (“EPCs”) and indirectly to thousands of smaller solar installers through large distributors and electrical equipment wholesalers. Our customers include leading providers of solar PV systems to residential and commercial end users, key solar distributors and electrical equipment wholesalers as well as several PV module manufacturers that offer PV modules with our power optimizer physically embedded into their modules.
 
We were founded in 2006 and began commercial shipments in 2010. As of June 30, 2016, we have shipped approximately 12.5 million power optimizers and 513,000 inverters. More than 265,000 installations, many of which may include multiple inverters, are currently connected to, and monitored through, our cloud-based monitoring platform.
 
Limitations of Existing Technologies
 
A solar PV system consists of PV modules, which produce direct current (“DC”) power when exposed to sunlight; an inverter, which transforms the DC power into alternating current (“AC”) power that is required by the electricity grid; and associated cabling, fuse boxes and mounting hardware. Traditionally, solar PV systems connected strings of solar PV modules to one or more inverters for this energy conversion.
 
Traditional inverter architecture still constitutes the vast majority of the PV inverter market, especially for larger commercial and utility installations. However, traditional inverter architecture suffers from significant inefficiencies leading to suboptimal power generation. These challenges include:
 
Module mismatch.  Traditional inverter systems are unable to consistently produce maximum energy from PV modules. Each PV module in a system has a unique power production profile driven by differences in manufacturing and installation parameters. The architecture of traditional inverter systems does not allow each PV module to operate at its unique MPP. When PV modules are wired in series in a traditional inverter architecture, the entire string’s output is reduced, sometimes correlated directly to the output of the lowest-performing PV module on the string. Output reduction can result from subtle variations in PV module composition, atmospheric conditions, soiling, individual PV module locations and orientations, or varying levels of PV module degradation over time.
 
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Partial shading.  Many real-world factors can cause a subset of the PV modules in a system to be partially shaded, which can significantly affect the power output of the entire string. For instance, electric wires, a chimney or even adjacent solar panels may cast a shadow during particular hours of the day, or debris may accumulate. This partial shading reduces the yield of a traditional solar PV system by decreasing, or in extreme cases eliminating, power output from the shaded modules. Overall losses to system production from such partial shading can range from small to substantial.
 
Dynamic maximum power point tracking loss.  The MPP of a PV module shifts constantly throughout the day as a result of atmospheric conditions. A traditional inverter system’s inability to coordinate output on a module-by-module basis makes it difficult for the system to respond dynamically to the shifting MPP. This inability to respond to the shifting MPP can reduce the potential power output of a traditional solar PV system by 3-10%.
 
In addition to power losses, the traditional inverter architecture also has system design, installation and operational challenges, including:
 
Rooftop system design complexities.  A traditional inverter system requires each string to be of the same length, use the same type of PV modules and be positioned at the same angle toward the sun. Consequently, rooftop asymmetries and obstructions result in either wasted roof space or inefficient duplication of system components.
 
Safety hazards.  Traditional inverter systems cannot shut down the DC output voltage at the PV module level. The DC cables from these modules carry high voltages as long as the sun is shining, even when the traditional inverter or the grid connection has been shut down. This poses serious risks to installers, fire fighters and anyone else who performs work on or around the installation. Such safety hazards have recently prompted heightened safety installation and operation procedures and regulations in a growing number of geographies, compliance with which increases the cost of traditional PV systems.
 
No module level monitoring.  A traditional inverter system cannot track power output, temperature or any other attribute of a single PV module. Consequently, a system operator cannot perform remote diagnostics, track performance of PV system components or receive alerts about individual PV module status, and may be unaware of specific module-level problems or breakdowns.
 
The first generation of module level power electronics (“MLPE”) was the microinverter. This technology scaled down the traditional inverter to a size and power appropriate to a single PV module. By creating control and monitoring at the module level, microinverters solved certain challenges of the traditional inverter system architecture. However, microinverter architecture has its own limitations, such as:
 
Higher initial cost per watt and limited economies of scale.  Microinverters perform all the functionality of the traditional inverter, but at each PV module, and consequently a microinverter system has a higher initial upfront cost of components relative to traditional inverter architecture. In addition, as every PV module must have its own microinverter, the cost per watt of a microinverter system does not decrease with scale. As such, microinverters are generally more expensive than traditional inverter systems on a cost per watt basis for residential installations and not economically viable relative to traditional inverter systems for large commercial and utility installations.
 
Grid Code Compliance.  With the growing penetration of solar energy, many utilities in individual U.S. states and Europe have adopted new sets of grid codes to preserve the stability of the electric grid. These grid codes require solar PV inverters to respond dynamically to variances in grid-wide voltage, which typically requires inverter hardware and software to be reengineered. The microinverter faces significant implementation challenges in complying with many of these new grid codes primarily due to its small size. In most cases, adaptation to these new grid codes would require added costs and complexities, limiting the ability of microinverters to address some markets.
 
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The SolarEdge Solution
 
Our DC optimized inverter system maximizes power generation at the individual PV module level while lowering the cost of energy produced by the solar PV system and providing comprehensive and advanced safety features. Our solution consists of our power optimizers, inverters and cloud-based monitoring platform and addresses a broad range of solar market segments, from residential solar installations to commercial and small utility-scale solar installations.
 
The key advantages of our solution include:
 
Maximized PV module power output.  Our power optimizers provide module-level MPP tracking and real-time adjustments of current and voltage to the optimal working point of each individual PV module. This enables each PV module to continuously produce its maximum power potential independent of other modules in the same string, thus minimizing module mismatch and partial shading losses. By performing these adjustments at a very high rate, our power optimizers also solve the dynamic MPP losses associated with traditional inverters. Independent testing from Photon Laboratories as well as tests performed by PV Evolution Labs according to the National Renewable Energy Laboratory shade test have confirmed that our technology provides power harvesting that is superior to traditional inverter systems.
 
Optimized architecture with economies of scale.  Our system shifts certain functions of the traditional inverter to our power optimizers while keeping the DC to AC function and grid interaction in our inverter. As a result, our inverter is smaller, more efficient, more reliable and less expensive than inverters used in traditional inverter systems. The cost savings that we have achieved on the inverter enable our system to be priced at a cost per watt that is comparable with traditional inverter systems of leading manufacturers. As a PV system grows in size, our inverter benefits from economies of scale, making our technology viable for large commercial and utility-scale applications.
 
Enhanced system design flexibility.  Unlike a traditional inverter system that requires each string to be the same length, use the same type of PV modules and be positioned at the same angle toward the sun, our system allows significant design flexibility by enabling the installer to place PV modules in uneven string lengths and on multiple roof facets. This design flexibility:
 
increases the amount of the available roof that can be utilized for power production. Unlike traditional inverter systems, our system does not require each string to be the same length, use the same type of PV modules or be positioned at the same angle toward the sun. As a result, our system is significantly less prone to wasted roof space resulting from rooftop asymmetries and obstructions.
 
reduces the number of field change orders. For example, some installers use remote tools to estimate the size and configuration of an installation in connection with the customer acquisition process. This is especially common for high-volume residential arrays, where an exhaustive survey of rooftop obstructions would be uneconomical. In some cases, installers discover that their preliminary design, based on remote tools, cannot be implemented due to unexpected shading or other obstructions. With traditional inverter system designs, an obstructed module may require a significant system redesign and a modification of the customer contract to take into account the changed system design. Our DC optimized inverter solution enables an installer to compensate or adjust for most obstructions without materially changing the original design or requiring a modification to the customer contract.
 
Reduced balance of system costs.  Our DC optimized inverter system allows significantly longer strings to be connected to the same inverter (as compared to a traditional inverter system). This minimizes the cost of cabling, fuse boxes and other ancillary electric components. These factors together result in easier installation with shorter design times and a lower initial cost per watt, while enabling larger installations per rooftop.
 
Continuous monitoring and control to reduce operation and maintenance costs.  Our cloud-based monitoring platform provides full data visibility at the module level, string level, inverter level and system level. The data can be accessed remotely by any web-enabled device, allowing comprehensive analysis, immediate fault detection and alerts. These monitoring features reduce O&M costs for the system owner by identifying and locating faults, enabling remote testing and reducing field visits.
 
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Enhanced safety.  We have incorporated module-level safety mechanisms in our system to protect installers, electricians and firefighters. Each power optimizer is configured to reduce output to 1 volt unless the power optimizer receives a fail-safe signal from a functioning inverter. As a result, if the inverter is shut down (e.g., for system maintenance, due to malfunction, in the event of a fire or otherwise), the DC voltage throughout the system is reduced to a safe level. In recent years, new safety standards have been introduced in the U.S. and in Europe that require or encourage the installation of safety measures such as these. Our DC optimized inverters comply with the applicable safety requirements of the areas in which they are sold, providing incremental cost savings to installers by eliminating the need for additional hardware such as DC breakers, switches or fire-proof ducts required by traditional inverter systems.
 
High reliability.  Solar PV systems are typically expected to operate for at least 25 years under harsh outdoor conditions. High reliability is critical and is facilitated by systems and components that have low heat generation, solid and stable materials, and an absence of moving parts. We have designed our system to meet these stringent requirements. Our power optimizers dissipate much less heat than microinverters because no DC-AC inversion occurs at the module level. As a result, less heat is dissipated beneath the PV module, which improves lifetime expectancy and reliability of our power optimizers. Our power optimizers’ high switching frequency allows the use of ceramic capacitors with a low, fixed rate of aging and a proven life expectancy in excess of 25 years. Further, we use automotive-grade application specific integrated circuits (“ASICs”) that embed many of the required electronics into the ASIC. This reduces the number of components and consequently the potential points of failure.
 
Our Products
 
Our solution consists of a DC power optimizer, an inverter and a cloud-based monitoring platform that operate as a single integrated system:
 
SolarEdge Power Optimizer.  Our DC power optimizer is a highly reliable and efficient DC-to-DC converter which is connected by installers to each PV module or embedded by PV module manufacturers into their modules as part of the manufacturing process. Our power optimizer increases energy output from the PV module to which it is connected by continuously tracking the MPP of each module and controlling its working point. The power optimizer’s ability to track the MPP of each PV module and its ability to increase or decrease its output voltage, enables the inverter’s input voltage to remain fixed under a large variety of string configurations. This feature enhances flexibility in PV system designs, enabling use of different string lengths in a single PV system connected to the same inverter, use of PV panels situated on multiple orientations connected to the same inverter and using varied PV module types in the same string. In addition, our power optimizers monitor the performance of each PV module and communicates this data to our inverter using our proprietary power line communication. In turn, the inverter transmits this information to our monitoring server. Each power optimizer is equipped with our proprietary safety mechanism which automatically reduces the output voltage of each power optimizer to 1V unless the power optimizer receives a fail-safe signal from a functioning inverter. As a result, if the inverter is shut down (e.g., for system maintenance, due to malfunction, in the event of a fire or otherwise), the DC voltage throughout the system is reduced to a safe level.
 
Our power optimizers are designed to withstand high temperatures and harsh environmental conditions, and contain multiple bypass features that localize failures and enable continued system operation in the vast majority of cases of power optimizer failure. Our power optimizers are compatible with the vast majority of modules on the market today and carry a 25-year product warranty. Our power optimizers are designed to be used with our inverters as well as third party inverters to provide power optimization. Monitoring and safety features can also be achieved with third party inverters by adding supplemental communications hardware. During fiscal 2014, 2015 and 2016 revenues derived from the sale of power optimizers represented 48.8%, 48.8% and 50.0% of total revenues, respectively.
 
SolarEdge Inverter.  Our DC-to-AC inverters contain sophisticated digital control technology with efficient power conversion architecture resulting in superior solar power harvesting and high reliability and are designed to work exclusively with our DC power optimizers. A proprietary power line communication receiver is integrated into each inverter, receiving data from our power optimizers, storing this data and transmitting it to our monitoring server when an internet connection exists. Since each string which is equipped with our power optimizers provides fixed input voltage to our inverter, the inverter is able to operate at its highest efficiency at all times and therefore is more cost-efficient, energy efficient and reliable. Like our power optimizers, our inverters are designed to withstand harsh environmental conditions. Since the power rating of an inverter determines how many PV modules it can serve, larger installations require inverters with higher power ratings. We currently offer our second generation of inverters which come in two models: a one-phase inverter designed to address the residential market (2.2 kilowatts (“kW”) to 11.4 kW) and a three-phase inverter designed to address the residential market in certain European countries and the commercial market (4 kW to 33.3 kW). In June 2016, we introduced an extended commercial solution that consists of various inverters, sized 25kW, 27.6kW, and 33.3kW for the Europe, Middle East, Africa and Asia Pacific markets and 14.4kW and 33.3kW for the North American market. These inverters which are identical in size and enclosure as other SolarEdge inverters are designed for commercial installations, reduce the number of required inverters and increase the system return on investment. The vast majority of our inverters are sold with a 12-year warranty that is extendable to 20 or 25 years for an additional cost. During fiscal 2014, 2015 and 2016, revenues derived from the sale of inverters represented 46.6%, 48.3 % and 45.7% of total revenues, respectively.
 
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We have completed the development of and are currently ramping up shipments of our HD-Wave technology inverter. The HD-Wave inverter technology provides significant improvements in efficiency, while decreasing the magnetics and cooling components in order to reduce inverter size and cost.

StorEdge Solutions. Our StorEdge solution is a DC coupled solution that is used to increase energy independence and maximize self-consumption for homeowners by utilizing a battery which is sold separately by third party manufacturers, to store and supply power as needed. The solution is based on a single inverter for both solar PV and storage. Our StorEdge solution is designed to provide smart energy functions such as maximizing self-consumption, Time-of-Use programming for desired hours of the day, and home energy backup solutions. To optimize self-consumption, the battery is charged and discharged to meet consumption needs and reduce the amount of power purchased from the grid. With a backup solution, unused solar PV power is stored in a battery and used during a power outage or when solar PV production is insufficient. When there is a power outage, a combination of solar PV power and battery is used to power important sources such as the refrigerator, communication devices, lighting, and AC outlets. Our proprietary monitoring platform provides visibility into battery status, solar PV production, and self-consumption, while offering easy maintenance with remote access to inverter and battery software. Existing SolarEdge systems can be upgraded to our StorEdge solution.
 
SolarEdge Monitoring Software.  Our cloud-based monitoring platform collects power, voltage, current and system data sent from our inverters and power optimizers and allows users to view the data at the module level, string level, inverter level and system level from any browser or from most smart phones and tablets. The monitoring software continuously analyzes data and flags potential problems. The monitoring software includes features which are used on a routine basis by integrators, installers, maintenance staff, and system owners to improve a solar PV system’s performance by maximizing solar power harvesting and reducing O&M costs by increasing system up-time and detecting PV module performance issues more effectively. Connection to the monitoring server is completed during installation by the installer. The installer then receives full access to system data through the monitoring software and can select the amount of data to be shared with the system owner.
 
Product Roadmap
 
Our products reflect the innovation focus and capabilities of our technology departments. Our product roadmap is divided into five categories: power optimizers, inverters, monitoring services, energy storage and smart energy management
 
Power Optimizers.  We currently sell our third generation power optimizer which was designed for fully automated assembly and which is based on our third generation ASIC. A key element of our reliability strategy, and a significant differentiator relative to our competitors, is our use of proprietary ASICs to control, among other things, our power optimizer’s power conversion, safety features, and PV module monitoring. Instead of using large numbers of discrete components, our power optimizer uses a single proprietary ASIC, thus reducing the total number of components in an electrical circuit and thereby improving reliability. We are in the final stages of testing our fourth generation ASIC and we expect to begin commercial shipments of our fourth generation power optimizers in the first half of calendar 2017. In addition, we are also continuing to develop the necessary subsystems for the fifth generation ASIC which will be used in our fifth generation power optimizer. Each new ASIC generation has reduced the number of components required and meaningfully improved the efficiency of the power optimizer. The efficiency improvement reduces the energy losses which in turn reduces the amount of heat dissipation. This enables design of a more cost effective and usually smaller enclosure and also keeps the electronics cooler, thereby improving the power optimizer’s reliability.
 
Inverters.  Our inverter roadmap is intended to serve three purposes: (i) expand addressable market by developing new and larger inverters designed specifically for larger commercial installations and utility-scale projects; (ii) improve the electronics to increase the total power throughput without changing the existing enclosure, thereby reducing the actual cost per watt and increasing economies of scale and (iii) improve ease of installation by integrating additional functionality required in certain installations in order to reduce costs of additional hardware and labor costs. As part of our inverter roadmap, we plan to apply our HD-Wave technology to three-phase inverters and we are in the development process for doing so.
 
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Monitoring Services.  Our cloud-based monitoring platform is continuously growing by the amount of data aggregated. We are continuously developing tools to accommodate our growth and further enhance our service offering. Specifically, we plan to increase data compression in order to enable support for a rapidly increasing number of field systems while using low-cost equipment. In addition, we plan to improve our reporting systems and enable users to obtain self-generated customized reports. We also expect to expand algorithms that detect and pinpoint problems that can affect power production in field systems. We further plan to add more capabilities through our public application program interface to allow users to build and integrate our system into their own systems and to allow users to build and share useful applications based on monitoring data gathered by our software.
 
Energy Storage and Shifting.  SolarEdge is working to continue to expand its third-party battery compatibility for the residential market. For the commercial market, we plan to expand our StorEdge product offering to the commercial and industrial sector.
 
Smart Energy Management. There are currently two separate energy technology industries that exist today, solar energy production and building automation technology. We believe that inverters will be taking on an expanded role in energy management and automation, and in conjunction with this assumption we are developing building automation products that can combine both of these industries. This line of products, when used with the SolarEdge solution, will be designed to allow system owners to increase self-consumption by shifting energy usage to match peak solar PV production as well as offer a convenient, wireless control option over various building and home devices. An example of this solution, would be using excess solar PV energy to heat water or the ability to remotely turn on or off certain power sources such as lighting or electrical appliances. The introduction of these products is dependent upon certification and region specific needs and as such, cannot yet be specified.
 
Sales and Marketing Strategy
 
Since commencing sales activities in early 2010, our strategy has been to focus on markets where electricity prices, irradiance and government policies make solar PV installations economically viable. Today, our products have been installed in 96 countries, including the U.S., Canada, Belgium, France, Germany, Italy, the Netherlands, the United Kingdom, Israel, Australia Japan, Singapore and China.
 
We target our sales and marketing efforts to the largest distributors, electrical equipment wholesalers, EPC contractors and installers in each of the countries where we operate. In the U.S., Germany, Italy, the United Kingdom and Australia, our products are carried and actively sold by most of the top solar PV distributors as well as the largest electrical distribution companies that are active in solar PV. We anticipate that an increasing percentage of solar PV equipment sales will also occur through electrical equipment wholesalers who sell to a broad range of electrical contractors, and we are focused on cultivating these global relationships. As of June 30, 2016, according to the data available on our monitoring portal, approximately 13,009 installers around the world have installed SolarEdge solar PV systems, including an average of approximately 330 new installers per month since the beginning of fiscal 2016. We also sell our power optimizers to several PV module manufacturers that offer PV modules with our power optimizer physically embedded into their modules.
 
Additionally, we have a number of programs focused on educating installers and other industry professionals about our technology, and we use a combination of road shows, webinars and partner trainings to show them how best to design, sell and implement our technology in their projects.
 
Our Customers
 
We derive a significant portion of our revenues from key solar distributors, electrical equipment wholesalers and large installers in the U.S. and worldwide. In fiscal 2016, three of our customers (two distributors and one large installer) represented32.5% of our revenues. We fill orders primarily as they are received and as such, do not have significant backlog.
 
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Training and Customer Support
 
We offer our installer base a comprehensive package of customer support and training services which include pre-sales support, ongoing trainings, and technical support before, during, and after installation. We also provide customized support programs to PV module manufacturers, large installers and distributors to help prioritize and track support issues, thereby enabling short cycle times for issue resolution. In 2016, we conducted approximately 281 training events in 20 countries, with an aggregate of approximately 7,003 attendees.
 
We offer a wide variety of training, including hands-on and on-demand video sessions and online product and training materials. We support our commercial system customers with design consulting throughout their sales process and installation. Our technical support organization includes local expert teams, call centers in the USA, Germany, Australia, Netherlands and Israel, and an online service portal. Our toll-free call centers are open Monday through Friday from 9:00 a.m. to 8:00 p.m. in every region in which we sell our products. In addition, customers can open and track support cases 24/7 utilizing our online portal. All support cases are monitored via a customer relationship management system in order to ensure service, track closure of all customer issues and further improve our customer service. Our call centers have access to our cloud-based monitoring platform database, which enables real-time remote diagnostics.
 
Customer service and satisfaction has been a key component of our business and we expect it to continue to be integral to our success in the future. We maintain high levels of customer engagement through our call centers in California, Germany and Israel. In addition to our call centers, we have field service engineers located in the geographies where we are active, and support our customers with commissioning of large projects, introduction of new technologies and features and on-the-job training of new installers. As of June 30, 2016, our customer support and training organization consisted of 91 employees worldwide.
 
Our Technology
 
We have drawn on our expertise in the fields of power electronics, magnetic design, mechanical and heat dissipation capabilities, control loops and algorithms and power line communications to design and develop what we believe to be the most advanced commercial solutions for harvesting power from solar PV systems. Our advanced technologies are explained in more detail below.
 
Power optimizers
 
Our power optimizers are DC/DC step up/step down (buck-boost) converters designed and developed to operate in harsh outdoor environments at very high conversion efficiency. Our power optimizers include proprietary power electronics customized to efficiently convert power from the PV module to the inverter. The conversion topology and components are all designed for the power optimizer specifications and verified for consistent performance and reliability in numerous lab tests and simulations.
 
A key factor in the performance of our power optimizer is determined by the digital control algorithms and closed-loop mechanism. The power optimizer’s control is built into our advanced ASIC which is responsible for all critical digital control functions of the power optimizer, including detailed power analysis, digital control of the power conversion subsystem and power line communications and networking. Since each power optimizer handles the power and voltage of a single module, we are able to reach a high degree of semiconductor integration by leveraging low cost silicon in standard semiconductor packages. As a result, much of the functionality of our power optimizer can be integrated into a standard ASIC instead of discrete electronic components, resulting in lower costs and higher reliability.
 
The ASIC performs the critical power analysis and power conversion control functions of the power optimizer. The power analysis function processes the status and working parameters at the power optimizer’s input and output and together with advanced digital control and state machine logic, controls the power conversion function. In addition, our digital control system uses technology that allows the solar PV installation to anticipate and adapt to changing operating conditions and protect against system anomalies.
 
Each power optimizer in the array is connected to the inverter by a power line communications networking link. Our power line communications link uses a proprietary networking technology that we developed utilizing the existing DC wiring between the power optimizers and the inverter to transmit and receive data between these devices.
 
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Inverters
 
Our inverter is designed for single-stage DC/AC conversion. Using our inverter in combination with the power optimizers will allow the control loop to maintain a fixed DC voltage level at its input thereby allowing for longer, uneven and multi-faceted strings while also enabling custom, cost efficient and reliable inverter design and component selection. All of the power components, as well as the main magnetic components for our inverters, can then be optimized for DC/AC inversion at high efficiency.
 
The digital control algorithms of our inverters are implemented using programmable digital signal processors which allow for flexibility and adaptation of control loops for various grids and for the requirements and standards of various grid operators across geographies. We have already implemented the control mechanisms necessary to support advanced grid codes and standards that are required to support high penetration of solar energy into the grid.
 
Manufacturing
 
We have designed our manufacturing processes to produce high quality products at competitive costs. The strategy is threefold: outsource, automate and localize. We have entered into outsourcing contracts with two of the world’s leading global electronics manufacturing service providers, Jabil Circuit, Inc. and Flextronics Industrial Ltd. By using these contract manufacturers rather than building our own manufacturing infrastructure, we are able to access advanced manufacturing equipment, processes, skills and capacity on a “capital light” budget. Our contract manufacturers are responsible for funding the capital expenses incurred in connection with the manufacture of our products, except with regard to end of line testing equipment and other specific manufacturing equipment utilized in assembling our products or sub-components. We expect to continue this funding arrangement in the future, with respect to any expansions to such existing lines. Further, contracting with global providers such as Jabil and Flextronics gives us added flexibility to manufacture certain products in China, closer to target markets in Asia and the North American west coast and other products in Hungary, closer to target markets in Europe and the North American east coast, potentially increasing responsiveness to customers while reducing costs and delivery times.
 
We have completed the development of our first proprietary automated assembly line for use at the Hungary Flextronics manufacturing plant and it is in operation and manufacturing approximately 4,000 power optimizers per day. This automated assembly line can also be replicated and deployed to additional production facilities. We are investing resources in additional automated assembly lines as well as in automated machinery for subassembly of certain components used in our products, and we will own and be responsible for funding all of the capital expenses related thereto. The current and expected capital expenses associated with these automated assembly lines and other machinery are not significant and will be funded out of our cash flows. In addition, we are in the process of designing an automatic assembly line for the production of embedded optimizers.
 
We source our raw materials through various component manufacturers and invest resources in continued cost reduction efforts as well as verifying second and third sources so as to limit dependence on sole suppliers.
 
Reliability and Quality Control
 
Our power optimizers are either connected to each PV module by installers, or embedded in each PV module by PV module manufacturers. Our power optimizers are designed to be as reliable as the PV module itself and capable of withstanding the same operating and environmental conditions.
 
Our reliability methodology includes a multi-level plan with design analysis, sub-system testing of critical components by Accelerated Life Testing, and integrative testing of design prototypes by Highly Accelerated Life Testing and large sample groups. As part of our reliability efforts, we subject components to industry standard conditions and tests including in accelerated life chambers that simulate burn-in, thermal cycling, damp-heat and other stresses. We also test complete products in stress tests and in the field. Our rigorous testing processes have helped us to develop highly reliable products.
 
In order to verify the quality of each of our products when it leaves the manufacturing plant, each component, sub-assembly, and final product are tested multiple times during production. These tests include Automatic Optical Inspection, In-Circuit Testing, Board- and Component-Level Functional Testing, Safety Testing and Integrative Stress Testing. We employ a serial number-driven manufacturing process auditing and traceability system that allows us to control production line activities, verify correct manufacturing processes and to achieve item-specific traceability.
 
As a part of our quality and reliability approach, failed products from the field are returned and subjected to root cause analysis, the results of which are used to improve our product and manufacturing processes and further reduce our field failure rate.
 
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Certifications
 
Our products and systems comply with the applicable regulatory requirements of the jurisdictions in which they are sold as well as all other major markets around the world, collectively covering approximately 80% of the global solar PV market as measured by MW capacity shipped. These include safety regulations, electromagnetic compatibility standards and grid compliance.
 
Research and Development
 
We devote substantial resources to research and development with the objective of developing new products and systems, adding new features to existing products and systems and reducing unit costs of our products and systems. Our development strategy is to identify features, products and systems for both software and hardware that reduce the cost and improve the effectiveness of our solutions for our customers. We measure the effectiveness of our research and development by metrics including product unit cost, efficiency, reliability, power output and ease of use.
 
We have a strong research and development team with wide-ranging experience in power electronics, semiconductors, power line communications and networking, and software engineering. In addition, many members of our team have expertise in solar technologies. As of June 30, 2016, our research and development organization had a headcount of 244 people. Our research and development expense, net totaled, $18.3 million $22.0 million and $33.2 million for fiscal 2014, 2015 and 2016, respectively.
 
Intellectual Property
 
The success of our business depends, in part, on our ability to maintain and protect our proprietary technologies, information, processes and know-how. We rely primarily on patent, trademark, copyright and trade secrets laws in the U.S. and similar laws in other countries, confidentiality agreements and procedures and other contractual arrangements to protect our technology. As of June 30, 2016, we had 53 issued U.S. patents, 19 issued non-U.S. patents, 57 patent applications pending for examination in the U.S. and 57 patent applications pending for examination in other countries, all of which are related to U.S. applications. A majority of our patents relate to DC power optimization and DC to AC conversion for alternative energy power systems, power system monitoring and control and management systems. Our issued patents are scheduled to expire between 2027 and 2036. We continually assess opportunities to seek patent protection for those aspects of our technology, designs and methodologies and processes that we believe provide significant competitive advantages.
 
We rely on trade secret protection and confidentiality agreements to safeguard our interests with respect to proprietary know-how that is not patentable and processes for which patents are difficult to enforce. We believe that many elements of our manufacturing processes involve proprietary know-how, technology or data that are not covered by patents or patent applications, including technical processes, test equipment designs, algorithms and procedures.
 
All of our research and development personnel are required to enter into confidentiality and proprietary information agreements with us. These agreements address intellectual property protection issues and require our employees to assign to us all of the inventions, designs and technologies they develop during the course of employment with us.
 
Our customers and business partners are required to enter into confidentiality agreements before we disclose any sensitive aspects of our technology or business plans.
 
Competition
 
The markets for our products are competitive, and we compete with manufacturers of traditional inverters and manufacturers of other MLPE. The principal areas in which we compete with other companies include:
 
product and system performance and features;
 
total cost of ownership;
 
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PV module compatibility and interoperability;
 
reliability and duration of product warranty;
 
customer service and support;
 
breadth of product line;
 
local sales and distribution capabilities;
 
compliance with applicable certifications and grid codes;
 
size and financial stability of operations; and
 
size of installed base.
 
Our DC optimized inverter system competes principally with products from traditional inverter manufacturers, such as SMA Solar Technology AG, ABB Ltd. and Huawei Technologies Co. Ltd. as well as from new Chinese inverter manufacturers. In the North American residential market, we compete with traditional inverter manufacturers, as well, as microinverter manufacturers such as Enphase Energy, Inc. In addition, several new entrants to the MLPE market, including low-cost Asian manufacturers, have recently announced plans to ship or have already shipped similar products. We believe that our DC optimized inverter system offers significant technology and cost advantages that reflect a competitive differentiation over traditional inverter systems and microinverter technologies.
 
Government Incentives
 
U.S. federal, state, and local government bodies, as well as non-U.S. government bodies, provide incentives to owners, end users, distributors and manufacturers of solar PV systems to promote solar electricity in the form of rebates, tax credits and other financial incentives such as system performance payments, payments for renewable energy credits associated with renewable energy generation and exclusion of solar PV systems from property tax assessments. The market for on-grid applications, where solar power is used to supplement a customer’s electricity purchased from the utility network or sold to a utility under tariff, often depends in large part on the availability and size of these government subsidies and economic incentives, which vary by geographic market and from time to time. In general, the amount and availability of these incentives and subsidies to encourage the development of solar PV energy have been declining and are expected to continue to decline.
 
Seasonality
 
The solar energy market is subject to seasonal and quarterly fluctuations affected by weather. For example, during the winter months in Europe and the northeastern U.S. where the climate is particularly cold and snowy, it is typical to see a decline in PV installations and this decline can impact the timing of orders for our products.
 
Employees
 
As of June 30, 2016, we had 608 full-time employees. Of these full-time employees, 244 were engaged in research and development, 143 in sales and marketing, 175 in operations and support and 46 in general and administrative capacities. Of our employees, 376 were based in Israel, 94 were based in the U.S., 47 were based in China, 33 were based in Germany and an additional 58 were based elsewhere.
 
None of our employees are represented by a labor union. We have not experienced any employment related work stoppages, and we consider relations with our employees to be good.
 
Corporate Information
 
We were incorporated in Delaware in 2006. Our principal executive offices are located at 1 HaMada Street, Herziliya Pituach 4673335, Israel and our telephone number at this address is 972 (9) 957-6620. Our website is www.solaredge.com.
 
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We file annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (the “SEC”), pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”). You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-732-0330. Our reports, proxy statements and other documents filed electronically with the SEC are available at the website maintained by the SEC at www.sec.gov.
 
We also make available, free of charge on the Investor Relations portion of our website at www.solaredge.com, our annual, quarterly, and current reports, and, if applicable, amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the SEC. We also make available on the Investor Relations portion of our website at www.solaredge.com our earnings presentation and other important information, which we encourage you to review.

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ITEM 1A.   RISK FACTORS
 
Risk factors which could cause actual results to differ from our expectations and which could negatively impact our financial condition and results of operations are discussed below and elsewhere in this annual report. The risks and uncertainties described below are not the only ones we face. If any of the risks or uncertainties described below or any additional risks and uncertainties actually occur, our business, results of operations and financial condition could be materially and adversely affected. In particular, forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. See “Special Note Regarding Forward-Looking Statements.”
 
Risks Related to Our Business and Our Industry
 
We cannot be certain that we will sustain profitability in the future.
 
We incurred net losses of $21.4 million for fiscal 2014, and we achieved a net profit of $21.1 million and $76.6 million in fiscal 2015 and 2016, respectively. We expect to incur additional costs and expenses related to the continued development and expansion of our business, including in connection with marketing and developing our products, expanding into new product markets and geographies, maintaining and enhancing our research and development operations and hiring additional personnel. In addition, as a public company, we incur significant additional legal, accounting and other expenses that we did not incur as a private company. We do not know whether our revenues will grow rapidly enough to absorb these costs, and our limited operating history makes it difficult to assess the extent of these expenses or their impact on our results of operations.
 
Further, revenue growth may slow or revenue may decline for a number of possible reasons, many of which are outside our control, including a decline in demand for our products, increased competition, a decrease in the growth of the solar industry or our market share, or our failure to continue to capitalize on growth opportunities. If we fail to maintain sufficient revenue to support our operations, we may not be able to sustain profitability.
 
Our limited operating history makes it difficult to evaluate our current business and future prospects.
 
We have only been in existence since 2006 and our first full fiscal year of commercial shipments was 2011. Much of our growth has occurred in recent periods. Our limited operating history, combined with the rapidly evolving and competitive nature of our industry, makes it difficult to evaluate our current business and future prospects. In addition, we have limited insight into emerging trends that may adversely affect our business, financial condition, results of operations and prospects. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, including unpredictable and volatile revenues and increased expenses as we continue to grow our business. The viability and demand for solar energy solutions, and in turn, our products, may be affected by many factors outside of our control, including:
 
 
cost competitiveness, reliability and performance of solar PV systems compared to conventional and non-solar renewable energy sources and products;
 
 
availability and amount of government subsidies and incentives to support the development and deployment of solar energy solutions;
 
 
the extent to which the electric power industry and broader energy industries are deregulated to permit broader adoption of solar electricity generation;
 
 
prices of traditional carbon-based energy sources;
 
 
levels of investment by end-users of solar energy products, which tend to decrease when economic growth slows; and
 
 
the emergence, continuance or success of, or increased government support for, other alternative energy generation technologies and products.
 
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If we do not manage these risks and overcome these difficulties successfully, our business will suffer.
 
If demand for solar energy solutions does not continue to grow or grows at a slower rate than we anticipate, our business will suffer.
 
Our solution is utilized in solar PV installations. As a result, our future success depends on continued demand for solar energy solutions and the ability of solar equipment vendors to meet this demand. The solar industry is an evolving industry that has experienced substantial changes in recent years, and we cannot be certain that consumers and businesses, with respect to distributed solar solutions, or utilities, with respect to utility-scale solar projects, will adopt solar PV systems as an alternative energy source at levels sufficient to grow our business. If demand for solar energy solutions fails to develop sufficiently, demand for our products will decrease, which would have an adverse impact on our ability to increase our revenue and grow our business.
 
The reduction, elimination or expiration of government subsidies and economic incentives for on-grid solar electricity applications could reduce demand for solar PV systems and harm our business.
 
Federal, state, local and foreign government bodies provide incentives to owners, end users, distributors, system integrators and manufacturers of solar PV systems to promote solar electricity in the form of rebates, tax credits and other financial incentives such as system performance payments, payments of renewable energy credits associated with renewable energy generation and exclusion of solar PV systems from property tax assessments. The market for on-grid applications, where solar power is used to supplement a customer’s electricity purchased from the utility network or sold to a utility under tariff, often depends in large part on the availability and size of government and economic incentives that vary by geographic market. Because our customers’ sales are typically into the on-grid market, the reduction, elimination or expiration of government subsidies and economic incentives for on-grid solar electricity may negatively affect the competitiveness of solar electricity relative to conventional and non-solar renewable sources of electricity, and could harm or halt the growth of the solar electricity industry and our business. These subsidies and incentives may expire on a particular date, end when the allocated funding is exhausted or be reduced or terminated as solar energy adoption rates increase or as a result of legal challenges, the adoption of new statutes or regulations or the passage of time. These reductions or terminations often occur without warning.
 
In addition, several jurisdictions have adopted renewable portfolio standards, which mandate that a certain portion of electricity delivered by utilities to customers come from a set of eligible renewable energy resources by a certain compliance date. Some programs further specify that a portion of the renewable energy quota must be from solar electricity. Under some programs, a utility can receive a “credit” for renewable energy produced by a third party by either purchasing the electricity directly from the producer or paying a fee to obtain the right to renewable energy generated but used by the generator or sold to another party. A renewable energy credit allows the utility to add this electricity to its renewable portfolio requirement total without actually expending the capital for generating facilities. However, there can be no assurances that such policies will continue. For example, in May 2014, Ohio froze renewable portfolio requirements at current levels. Proposals to extend compliance deadlines, reduce targets or repeal standards have also been introduced in a number of states. Reduction or elimination of renewable portfolio standards or successful efforts to meet current standards could harm or halt the growth of the solar PV industry and our business.
 
Changes to net metering policies may significantly reduce demand for electricity from solar PV systems and harm our business.
 
Our business benefits from favorable net metering policies in several U.S. states, Canadian provinces and European countries in which our customers operate. Net metering allows a solar PV system owner to pay his or her local electric utility only for power usage net of production from the solar PV system, transforming the conventional relationship between customers and traditional utilities. System owners receive credit for the energy that the solar installation generates to offset energy usage at times when the solar installation is not generating energy. Under a net metering program, the customer typically pays for the net energy used or receives a credit against future bills at the retail rate if more energy is produced than consumed. In some locations, customers are also reimbursed by the electric utility for net excess generation on a periodic basis.
 
Most U.S. states have adopted some form of net metering. However, net metering programs have recently come under regulatory scrutiny in some U.S. states due to challenges alleging that net metering policies inequitably shift costs onto non-solar ratepayers by allowing solar ratepayers to sell electricity at rates that are too high for utilities to recoup their fixed costs. We cannot assure you that the programs will not be significantly modified going forward.
 
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If the value of the credit that customers receive for net metering is significantly reduced, end-users may be unable to recognize the same level of cost savings associated with net metering that current end-users enjoy. The absence of favorable net metering policies or of net metering entirely, or the imposition of new charges that only or disproportionately affect end-users that use net metering would significantly limit demand for solar PV systems that are sold by our customers and could have a material adverse effect on our business, financial condition, results of operations and future growth.
 
Existing electric utility industry regulations, and changes to regulations, may present technical, regulatory and economic barriers to the purchase and use of solar PV systems that may significantly reduce demand for our products or harm our ability to compete.
 
Federal, state, local and foreign government regulations and policies concerning the electric utility industry, and internal policies and regulations promulgated by electric utilities, heavily influence the market for electricity generation products and services. These regulations and policies often relate to electricity pricing and the interconnection of customer-owned electricity generation, and governments and utilities continuously modify these regulations and policies. These regulations and policies could deter purchases of renewable energy products, including solar PV systems sold by our customers. This could result in a significant reduction in the potential demand for our products. For example, utilities commonly charge fees to larger, industrial customers for disconnecting from the electric grid or for having the capacity to use power from the electric grid for back-up purposes. These fees could increase the cost to use solar PV systems sold by our customers and make them less desirable, thereby harming our business, prospects, financial condition and results of operations. In addition, depending on the region, electricity generated by solar PV systems competes most effectively with expensive peak-hour electricity from the electric grid, rather than the less expensive average price of electricity. Modifications to the utilities’ peak hour pricing policies or rate design, such as to a flat rate, could require the price of solar PV systems and their component parts to be lower in order to compete with the price of electricity from the electric grid.
 
Changes in current laws or regulations applicable to us or the imposition of new laws and regulations in the U.S., Europe or other jurisdictions in which we do business could have a material adverse effect on our business, financial condition and results of operations. Any changes to government or internal utility regulations and policies that favor electric utilities could reduce the competitiveness of solar PV systems sold by our customers and cause a significant reduction in demand for our products and services. For example, regulators in certain U.S. states have been asked to consider proposals to assess fees on consumers purchasing energy from solar PV systems or imposing a new charge that would disproportionately impact solar PV system owners who utilize net metering, either of which would increase the cost of solar PV energy to those consumers and could reduce demand for our products. Any similar government or utility policies adopted in the future that discourage the growth of solar PV systems could reduce demand for our products and services and adversely impact our growth. In addition, changes in our products or changes in export and import laws and implementing regulations may create delays in the introduction of new products in international markets, prevent our customers from deploying our products internationally or, in some cases, prevent the export or import of our products to certain countries altogether. Any such event could have a material adverse effect on our business, financial condition and results of operations.
 
A drop in the retail price of electricity derived from the utility grid or from alternative energy sources may harm our business, financial condition, results of operations and prospects.
 
Decreases in the retail prices of electricity from the utility grid would make the purchase of solar PV systems less economically attractive and would likely lower sales of our products. The price of electricity derived from the utility grid could decrease as a result of:
 
•      construction of a significant number of new power generation plants, including plants utilizing natural gas, nuclear, coal, renewable energy or other generation technologies;

•      relief of transmission constraints that enable local centers to generate energy less expensively;
  
•      reductions in the price of natural gas;
 
•      utility rate adjustment and customer class cost reallocation;
 
•      energy conservation technologies and public initiatives to reduce electricity consumption;
 
•      development of smart-grid technologies that lower the peak energy requirements of a utility generation facility;
 
•      development of new or lower-cost energy storage technologies that have the ability to reduce a customer’s average
 
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•      cost of electricity by shifting load to off-peak times; and
 
•       development of new energy generation technologies that provide less expensive energy.

Moreover, technological developments in the solar components industry could allow our competitors and their customers to offer electricity at costs lower than those that can be achieved by us and our customers, which could result in reduced demand for our products.
 
If the cost of electricity generated by solar PV installations incorporating our systems is high relative to the cost of electricity from other sources, our business, financial condition and results of operations may be harmed.
 
An increase in interest rates or tightening of the supply of capital in the global financial markets could make it difficult for end-users to finance the cost of a solar PV system and could reduce the demand for solar systems and thus demand for our products.
 
Many end-users depend on financing to fund the initial capital expenditure required to develop, build or purchase a solar PV system. As a result, an increase in interest rates, or a reduction in the supply of project debt financing or tax equity investments, could reduce the number of solar projects that receive financing or otherwise make it difficult for our customers or their customers, the end-users to secure the financing necessary to develop, build, purchase or install a solar PV system on favorable terms, or at all, and thus lower demand for our products which could limit our growth or reduce our net sales. In addition, we believe that a significant percentage of end-users install solar PV systems as an investment, funding the initial capital expenditure through financing. An increase in interest rates could lower such end-user’s return on investment on a solar PV system, increase equity return requirements or make alternative investments more attractive relative to solar PV systems, and, in each case, could cause such end-users to seek alternative investments.
 
The market for our products is highly competitive and we expect to face increased competition as new and existing competitors introduce power optimizer, inverter and solar PV system monitoring products, which could negatively affect our results of operations and market share.
 
The market for solar PV solutions is highly competitive. We principally compete with traditional inverter manufacturers as well as microinverter manufacturers. Currently, our DC optimized inverter system competes with products from traditional inverter manufacturers, and microinverter manufacturers, as well as emerging technology companies offering alternative optimizer, or other MLPE products. Several new entrants to the inverter and MLPE market including low-cost Asian manufacturers, have recently announced plans to ship or have already shipped products in markets in which we sell our products. We expect competition to intensify as new and existing competitors enter the market.
 
Several of our existing and potential competitors are significantly larger, have greater financial, marketing, distribution, customer support and other resources, are longer established, and have better brand recognition. Further, certain competitors may be able to develop new products more quickly than us, may partner with other competitors to provide combined technologies and competing solutions and may be able to develop products that are more reliable or that provide more functionality than ours. In addition, some of our competitors have the financial resources to offer competitive products at aggressive or below-market pricing levels, which could cause us to lose sales or market share or require us to lower prices for our products in order to compete effectively. If we have to reduce our prices by more than we anticipated, or if we are unable to offset any future reductions in our average selling prices by increasing our sales volume, reducing our costs and expenses or introducing new products, our revenues and gross profit would suffer.
 
Developments in alternative technologies or improvements in distributed solar energy generation may have a material adverse effect on demand for our offerings.
 
Significant developments in alternative technologies, such as advances in other forms of distributed solar PV power generation, storage solutions, such as batteries, the widespread use or adoption of fuel cells for residential or commercial properties or improvements in other forms of centralized power production, may have a material adverse effect on our business and prospects. Any failure by us to adopt new or enhanced technologies or processes, or to react to changes in existing technologies, could result in product obsolescence, the loss of competitiveness of our products, decreased revenue and a loss of market share to competitors.
 
Our industry has historically been cyclical and experienced periodic downturns.
 
Our future success partly depends on continued demand for solar PV systems in the end-markets we serve, including the residential and commercial sectors in the United States and Europe. The solar industry has historically been cyclical and has experienced periodic downturns which may affect the demand for equipment that we manufacture. The solar industry has undergone challenging business conditions in recent years, including downward pricing pressure for PV modules, mainly as a result of overproduction, and reductions in applicable governmental subsidies, contributing to demand decreases. Although the solar industry is experiencing a slow recovery, there is no assurance that the solar industry will not suffer significant downturns in the future, which will adversely affect demand for our solar products and our results of operations.
 
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Defects or performance problems in our products could result in loss of customers, reputational damage and decreased revenue, and we may face warranty, indemnity and product liability claims arising from defective products.
 
Although our products meet our stringent quality requirements, they may contain undetected errors or defects, especially when first introduced or when new generations are released. Errors, defects or poor performance can arise due to design flaws, defects in raw materials or components or manufacturing difficulties, which can affect both the quality and the yield of the product. Any actual or perceived errors, defects or poor performance in our products could result in the replacement or recall of our products, shipment delays, rejection of our products, damage to our reputation, lost revenue, diversion of our engineering personnel from our product development efforts and increases in customer service and support costs, all of which could have a material adverse effect on our business, financial condition and results of operations.
 
Furthermore, defective components may give rise to warranty, indemnity or product liability claims against us that exceed any revenue or profit we receive from the affected products. We offer a minimum 12-year limited warranty for our inverters and a 25-year limited warranty for our power optimizers. Our limited warranties cover defects in materials and workmanship of our products under normal use and service conditions. As a result, we bear the risk of warranty claims long after we have sold products and recognized revenue. While we do have accrued reserves for warranty claims, our estimated warranty costs for previously sold products may change to the extent future products are not compatible with earlier generation products under warranty. Our warranty accruals are based on our assumptions and we do not have a long history of making such assumptions. As a result, these assumptions could prove to be materially different from the actual performance of our systems, causing us to incur substantial unanticipated expense to repair or replace defective products in the future or to compensate customers for defective products. Our failure to accurately predict future claims could result in unexpected volatility in, and have a material adverse effect on, our financial condition.
 
If one of our products were to cause injury to someone or cause property damage, including as a result of product malfunctions, defects or improper installation, then we could be exposed to product liability claims. We could incur significant costs and liabilities if we are sued and if damages are awarded against us. Further, any product liability claim we face could be expensive to defend and could divert management’s attention. The successful assertion of a product liability claim against us could result in potentially significant monetary damages, penalties or fines, subject us to adverse publicity, damage our reputation and competitive position and adversely affect sales of our products. In addition, product liability claims, injuries, defects or other problems experienced by other companies in the residential solar industry could lead to unfavorable market conditions for the industry as a whole, and may have an adverse effect on our ability to attract new customers, thus harming our growth and financial performance.
 
If we do not forecast demand for our products accurately, we may experience product shortages, delays in product shipment, excess product inventory, or difficulties in planning expenses, which will adversely affect our business and financial condition.
 
Our products are manufactured according to our estimates of customer demand, which requires us to make multiple forecasts and assumptions relating to demand from solar PV installers and distributors, their end customers and general market conditions. Because we sell a large portion of our products to larger solar installers and various distributors, who in turn sell to local installers, who in turn sell to their end customers, the system owner, we have limited visibility as to end customer demand and it is difficult to forecast future end-user demand to plan our operations. If we overestimate demand for our products, or if purchase orders are cancelled or shipments are delayed, we may have excess inventory that we cannot sell. Conversely, if we underestimate demand, we may not have sufficient inventory to meet end customer demand or to ramp up production at our contract manufacturers in a timely manner, or we could incur additional costs, lose market share, damage relationships with our distributors and end customers and forego potential revenue opportunities. For example, in fiscal 2014, unexpectedly high customer demand forced us to shorten transportation time from our factories in China and Hungary by using air freight rather than less expensive ocean freight.
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We are dependent on ocean transportation to deliver our products in a cost efficient manner. If we are unable to use ocean transportation to deliver our products, our business and financial condition could be materially and adversely impacted.
 
We rely on commercial ocean transportation for the delivery of a large percentage of our products to our customers in North America. We also rely on more expensive air transportation when ocean transportation is not available or compatible with the delivery time requirements of our customers. Our ability to deliver our products via ocean transportation could be adversely impacted by shortages in available cargo capacity, changes by carriers and transportation companies in policies and practices, such as scheduling, pricing, payment terms and frequency of service or increases in the cost of fuel, taxes and labor, and other factors, such as labor strikes and work stoppages, not within our control. If we are unable to use ocean transportation and are required to substitute more expensive air transportation, our financial condition and results of operations could be materially and adversely impacted. In the first calendar quarter of 2015, contentious negotiations between the Pacific Maritime Association and the International Longshore & Warehouse Union resulted in port slowdowns caused port congestion and major delays in the transfer of cargo in the United States West Coast. Accordingly, in the quarter ended March 31, 2015 we shipped a higher percentage of our products to our customers in North America via air transportation. Material interruptions in service or stoppages in transportation, such as the aforementioned dispute, whether caused by strike, work stoppage, lock-out, slowdown or otherwise, could materially and adversely impact our business, results of operations and financial condition.
 
We depend upon a small number of outside contract manufacturers. Our operations could be disrupted if we encounter problems with these contract manufacturers.
 
We do not have internal manufacturing capabilities, and currently rely upon two contract manufacturers to build all of our products. Our reliance on a small number of contract manufacturers makes us vulnerable to possible capacity constraints and reduced control over component availability, delivery schedules, manufacturing yields and costs.
 
The revenues that our contract manufacturers generate from our orders represent a relatively small percentage of their overall revenues. As a result, fulfilling our orders may not be considered a priority in the event of constrained ability to fulfill all of their customer obligations in a timely manner. In addition, the facilities in which our products are manufactured are located outside of the U.S., currently in China and Hungary. The location of these facilities outside of key markets such as the U.S. increases shipping time, thereby causing a long lead time between manufacturing and delivery.
 
If any of our contract manufacturers were unable or unwilling to manufacture our products in required volumes and at high quality levels or renew existing terms under supply agreements, we would have to identify, qualify and select acceptable alternative contract manufacturers. An alternative contract manufacturer may not be available to us when needed or may not be in a position to satisfy our quality or production requirements on commercially reasonable terms, including price. Any significant interruption in manufacturing would require us to reduce our supply of products to our customers or increase our shipping costs to make up for delays in manufacturing, which in turn could reduce our revenues, harm our relationships with our customers and damage our reputation with local installers and potential end-users and cause us to forego potential revenue opportunities.
 
We may experience delays, disruptions or quality control problems in our manufacturing operations.
 
Our product development, manufacturing and testing processes are complex and require significant technological and production process expertise. Such processes involve a number of precise steps from design to production. Any change in our processes could cause one or more production errors, requiring a temporary suspension or delay in our production line until the errors can be researched, identified and properly addressed and rectified. This may occur particularly as we introduce new products, modify our engineering and production techniques, and/or expand our capacity. In addition, our failure to maintain appropriate quality assurance processes could result in increased product failures, loss of customers, increased warranty reserve, increased production and logistics costs and delays. Any of these developments could have a material adverse effect on our business, financial condition, and results of operations.
 
We depend on a limited number of suppliers for key components and raw materials in our products to adequately meet anticipated demand. Due to the limited number of such suppliers, any cessation of operations or production or any shortage, delay, price change, imposition of tariffs or duties or other limitation on our ability to obtain the components and raw materials we use could result in sales delays, cancellations and loss of market share.
 
We depend on limited or single source suppliers for certain key components and raw materials used to manufacture our products, making us susceptible to quality issues, shortages and price changes. Any of these limited or single source suppliers could stop producing our components or supplying our raw materials, cease operations or be acquired by, or enter into exclusive arrangements with, one or more of our competitors. As a result, these suppliers could stop selling to us at commercially reasonable prices, or at all. Because there are a limited number of suppliers of solar PV system components and raw materials used to manufacture our products, it may be difficult to quickly identify alternate suppliers or to qualify alternative components or raw materials on commercially reasonable terms, and our ability to satisfy customer demand may be adversely affected. Transitioning to a new supplier or redesigning a product to accommodate a new component manufacturer would result in additional costs and delays. These outcomes could harm our business or financial performance.
 
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Any interruption in the supply of limited source components or raw materials for our products would adversely affect our ability to meet scheduled product deliveries to our customers, could result in lost revenue or higher expenses and would harm our business.
 
Failure by our contract manufacturers or our component or raw material suppliers to use ethical business practices and comply with applicable laws and regulations may adversely affect our business.
 
We do not control our contract manufacturers or suppliers or their business practices. Accordingly, we cannot guarantee that they follow ethical business practices such as fair wage practices and compliance with environmental, safety and other local laws. A lack of demonstrated compliance could lead us to seek alternative manufacturers or suppliers, which could increase our costs and result in delayed delivery of our products, product shortages or other disruptions of our operations. Violation of labor or other laws by our manufacturers or suppliers or the divergence of a supplier’s labor or other practices from those generally accepted as ethical in the U.S. or other markets in which we do business could also attract negative publicity for us and harm our business.
 
Our results of operations may fluctuate from quarter to quarter, which could make our future performance difficult to predict and could cause our results of operations for a particular period to fall below expectations, resulting in a decline in the price of our common stock.
 
Our quarterly results of operations are difficult to predict and may fluctuate significantly in the future. We have experienced seasonal and quarterly fluctuations in the past as a result of seasonal fluctuations in our customers’ business. For example, our customers’ and end-users’ ability to install solar energy systems is affected by weather, as for example during the winter months in Europe and the northeastern U.S. Such installation delays can impact the timing of orders for our products. Further, given that we are an early-stage company operating in a rapidly growing industry, the true extent of these fluctuations may have been masked by our recent growth rates and consequently may not be readily apparent from our historical results of operations and may be difficult to predict. Our financial performance, sales, working capital requirements and cash flow may fluctuate, and our past quarterly results of operations may not be good indicators of future performance. Any substantial decrease in revenues would have an adverse effect on our financial condition, results of operations, cash flows and stock price.
 
We rely on distributors and large installers to assist in selling our products, and the failure of these customers to perform as expected could reduce our future revenue.
 
We currently sell a substantial percentage of our products through distributors, who in turn sell to local installers, and through direct sales to large installers. We do not have exclusive arrangements with these third party distributors and large installers. Many of our distributors also market and sell products from our competitors, and all of our large installer customers also use products from our competitors. These distributors and large installers may terminate their relationships with us at any time and with little or no notice. Further, these distributors and large installers may fail to devote resources necessary to sell our products at the prices, in the volumes and within the time frames that we expect, or may focus their marketing and sales efforts on products of our competitors. Termination of agreements with current distributors or large installers, failure by these distributors or large installers to perform as expected, or failure by us to cultivate new distributor or large installer relationships, could hinder our ability to expand our operations and harm our revenue and results of operations.

If we fail to retain our key personnel or if we fail to attract additional qualified personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.
 
Our future success and ability to implement our business strategy depends, in part, on our ability to attract and retain key personnel, and on the continued contributions of members of our senior management team and key technical personnel, each of whom would be difficult to replace. All of our employees, including our senior management, are free to terminate their employment relationships with us at any time. Competition for highly skilled individuals with technical expertise is extremely intense, and we face challenges identifying, hiring and retaining qualified personnel in many areas of our business. Integrating new employees into our team could prove disruptive to our operations, require substantial resources and management attention and ultimately prove unsuccessful. An inability to retain our senior management and other key personnel or to attract additional qualified personnel could limit or delay our strategic efforts, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
 
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The requirements of being a public company may strain our resources and divert management’s attention
 
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the listing requirements of the NASDAQ Global Select Market, and other applicable securities rules and regulations. Compliance with these rules and regulations requires significant legal and financial compliance and demands on our systems and resources and makes some activities more difficult, time-consuming or costly than if we were a private company. As certain additional securities rules and regulations become applicable to us, our legal and financial compliance costs may increase. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations and maintain effective disclosure controls and procedures and internal control over financial reporting. To maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight are required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and results of operations. We may need to hire more employees in the future which would increase our costs and expenses.
 
If we fail to protect, or incur significant costs in defending, our intellectual property and other proprietary rights, our business and results of operations could be materially harmed.
 
Our success depends to a significant degree on our ability to protect our intellectual property and other proprietary rights. We rely on a combination of patent, trademark, copyright, trade secret and unfair competition laws, as well as confidentiality and license agreements and other contractual provisions, to establish and protect our intellectual property and other proprietary rights. We have applied for patents in the U.S., Europe and China, some of which have been issued. We cannot guarantee that any of our pending applications will be approved or that our existing and future intellectual property rights will be sufficiently broad to protect our proprietary technology, and any failure to obtain such approvals or finding that our intellectual property rights are invalid or unenforceable could force us to, among other things, rebrand or re-design our affected products. In countries where we have not applied for patent protection or where effective intellectual property protection is not available to the same extent as in the U.S., we may be at greater risk that our proprietary rights will be misappropriated, infringed or otherwise violated.
 
Third parties may assert that we are infringing upon their intellectual property rights, which could divert management’s attention, cause us to incur significant costs and prevent us from selling or using the technology to which such rights relate.
 
Our competitors and other third parties hold numerous patents related to technology used in our industry. From time to time we may also be subject to claims of intellectual property right infringement and related litigation, and, if we gain greater recognition in the market, we face a higher risk of being the subject of claims that we have violated others’ intellectual property rights. Regardless of their merit, responding to such claims can be time consuming, can divert management’s attention and resources and may cause us to incur significant expenses in litigation or settlement. While we believe that our products and technology do not infringe in any material respect upon any valid intellectual property rights of third parties, we cannot be certain that we would be successful in defending against any such claims. If we do not successfully defend or settle an intellectual property claim, we could be liable for significant monetary damages and could be prohibited from continuing to use certain technology, business methods, content or brands. To avoid a prohibition, we could seek a license from the applicable third party, which could require us to pay significant royalties, increasing our operating expenses. If a license is not available at all or not available on reasonable terms, we may be required to develop or license a non-violating alternative, either of which could require significant effort and expense. If we cannot license or develop a non-violating alternative, we would be forced to limit or stop sales of our offerings and may be unable to effectively compete. Any of these results would adversely affect our business, financial condition and results of operations.
 
We may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could result in litigation and adversely affect our business.
 
We enter into agreements with our employees pursuant to which they agree that any inventions created in the scope of their employment or engagement are assigned to us or owned exclusively by us, depending on the jurisdiction, without the employee retaining any rights. A significant portion of our intellectual property has been developed by our employees in the course of their employment for us. Under the Israeli Patent Law, 5727-1967 (the “Patent Law”), inventions conceived by an employee during the scope of his or her employment with a company are regarded as “service inventions,” which belong to the employer, absent a specific agreement between the employee and employer giving the employee service invention rights. The Patent Law also provides that if there is no such agreement between an employer and an employee, the Israeli Compensation and Royalties Committee (the “Committee”), a body constituted under the Patent Law, shall determine whether the employee is entitled to remuneration for his or her inventions. Recent decisions by the Committee and the Israeli Supreme Court have created uncertainty in this area, as the Israeli Supreme Court held that employees may be entitled to remuneration for their service inventions despite having specifically waived any such rights. Further, the Committee has not yet determined the method for calculating this Committee-enforced remuneration. Although our employees have agreed that any rights related to their inventions are owned exclusively by us, we may face claims demanding remuneration in consideration for such acknowledgement. As a consequence of such claims, we could be required to pay additional remuneration or royalties to our current and/or former employees, or be forced to litigate such claims, which could negatively affect our business.
 
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The loss of, or events affecting, one of our major customers could reduce our sales and have a material adverse effect on our business, financial condition and results of operations.
 
For fiscal 2016, three of our major customers in the U.S. together, accounted for 32.5% of our revenues. Our next five largest customers for fiscal 2016, together, accounted for 22 % of our revenues. Our customers’ decisions to purchase our products are influenced by a number of factors outside of our control, including retail energy prices and government regulation and incentives, among others. In addition, these customers may decide to no longer use our products and services for other reasons which may be out of our control. Although we have agreements with some of our largest customers, these agreements do not have long-term purchase commitments and are generally terminable by either party after a relatively short notice period. The loss of, or events affecting, one or more of these customers could have a material adverse effect on our business, financial condition and results of operations. For example, in April 2016 one of our customers, SunEdison (SUNEQ), filed for reorganization under Chapter 11 of the U.S. bankruptcy laws.

Consolidations in the solar industry among our current or potential customers or distributors may adversely affect our competitive position. 
 
            There has been an increase in consolidation activity among distributors, large installers and other strategic partners in the solar industry. For example, in July 2016 SunEdison (SUNEQ) announced its intention to purchase Vivint Solar for $2 billion, in March 2016 Vivint Solar announced it is terminating the merger due to SunEdison’s “willful breach of the merger agreement”. In June 2016, Tesla Motors (TSLA) announced that it has submitted a proposal to acquire all of the outstanding shares of common stock of SolarCity Corporation (SCTY). This trend could further increase our reliance on a small number of customers for a significant portion of our sales and may negatively impact our competitive position in the solar market.

Our planned expansion into new markets could subject us to additional business, financial and competitive risks.
 
In fiscal 2016, we sold our products to approximately 220 direct customers in 45 countries, including the U.S., Canada, Belgium, France, Germany, Israel, Italy, the Netherlands, the United Kingdom, Australia, Japan and China. We intend to introduce new products targeted at large commercial and utility-scale installations and to expand into other international markets. Our success in these new product and geographic markets will depend on a number of factors, including our ability to develop solutions to address the requirements of the large commercial and utility-scale solar PV markets, timely qualification and certification of new products for large commercial and utility-scale solar PV installations, acceptance of power optimizers in solar PV markets in which they have not traditionally been used and our ability to manage increased manufacturing capacity and production.
 
Further, these solar PV markets have different characteristics from the markets in which we currently sell products, and our success will depend on our ability to adapt properly to these differences. These differences may include differing regulatory requirements, including tax laws, trade laws, labor regulations, tariffs, export quotas, customs duties or other trade restrictions, limited or unfavorable intellectual property protection, international political or economic conditions, restrictions on the repatriation of earnings, longer sales cycles, warranty expectations, product return policies and cost, performance and compatibility requirements. In addition, expanding into new geographic markets will increase our exposure to presently existing risks, such as fluctuations in the value of foreign currencies and difficulties and increased expenses in complying with U.S. and foreign laws, regulations and trade standards, including the Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”).
 
Failure to develop and introduce these new products successfully or to otherwise manage the risks and challenges associated with our potential expansion into new product and geographic markets could adversely affect our revenues and our ability to sustain profitability.
 
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If we fail to manage our recent and future growth effectively, we may be unable to execute our business plan, maintain high levels of customer service or adequately address competitive challenges.
 
We have experienced significant growth in recent periods with our annual product sales growing rapidly from approximately 8,400 inverters and approximately 181,000 power optimizers in fiscal 2011, our first full fiscal year of commercial shipments, to annual product sales exceeding 224,000 inverters and 5.7 million power optimizers in fiscal 2016. We intend to continue to expand our business significantly within existing and new markets. This growth has placed, and any future growth may place, a significant strain on our management, operational and financial infrastructure. In particular, we will be required to expand, train and manage our growing employee base and scale and otherwise improve our IT infrastructure in tandem with that headcount growth. Our management will also be required to maintain and expand our relationships with customers, suppliers and other third parties and attract new customers and suppliers, as well as manage multiple geographic locations.
 
Our current and planned operations, personnel, IT and other systems and procedures might be inadequate to support our future growth and may require us to make additional unanticipated investment in our infrastructure. Our success and ability to further scale our business will depend, in part, on our ability to manage these changes in a cost-effective and efficient manner. If we cannot manage our growth, we may be unable to take advantage of market opportunities, execute our business strategies or respond to competitive pressures. This could also result in declines in quality or customer satisfaction, increased costs, difficulties in introducing new offerings or other operational difficulties. Any failure to effectively manage growth could adversely impact our business and reputation.
 
Covenants in our credit facility may limit our flexibility in responding to business opportunities and competitive developments and increase our vulnerability to adverse economic or industry conditions.
 
We have a revolving line of credit from Silicon Valley Bank (“SVB”). The SVB credit facility restricts our ability to take certain actions such as borrow money, grant liens, pay dividends, dispose of assets, or engage in certain transactions. Our credit agreement with SVB also requires us to maintain certain EBITDA and liquidity levels. These restrictions may limit our flexibility in responding to business opportunities, competitive developments and adverse economic or industry conditions. In addition, our obligations under the credit facility are secured by substantially all of our assets, including all of our intellectual property, which limits our ability to provide collateral for additional financing. Nevertheless, we and our subsidiaries may incur substantial additional debt in the future and any debt instrument we enter into in the future may contain similar restrictions or collateral packages. A breach of any of these covenants, or a failure to pay principal or interest when due, could result in a variety of adverse consequences, including the acceleration of our indebtedness. Our assets and cash flow may not be sufficient to fully repay borrowings if some or all of our indebtedness is accelerated. Acceleration could result in the foreclosure by the lenders on our assets that secure the credit facility.
 
Furthermore, there can be no assurance that we will be able to enter into new debt instruments on acceptable terms. If we are unable to satisfy financial covenants and other terms under existing or new credit arrangements or obtain waivers or forbearance from our lenders or if we are unable to obtain refinancing or new financings for our working capital, equipment and other needs on acceptable terms if and when needed, our business would be adversely affected.
 
Fluctuations in currency exchange rates may negatively impact our financial condition and results of operations.
 
Although our financial results are reported in U.S. dollars, U.S. dollar revenues accounted for 76.0 % of our revenues in fiscal 2016. In addition, a significant portion of our operating expenses are accrued in New Israeli Shekels (primarily related to payroll) and, to a lesser extent, the Euro and other currencies. Our profitability is affected by movements of the U.S. dollar against the Euro, and, to a lesser extent, the New Israeli Shekel and other currencies in which we generate revenues, incur expenses and maintain cash balances. Foreign currency fluctuations may also affect the prices of our products. Our prices are denominated primarily in U.S. dollars. If there is a significant devaluation of a particular currency, the prices of our products will increase relative to the local currency and may be less competitive. Despite our efforts to minimize foreign currency risks, primarily by entering into forward hedging transactions to sell Euro for U.S. dollars at a predefined rate, and maintaining cash balances in New Israeli Shekels, significant long-term fluctuations in relative currency values, in particular a significant change in the relative values of the Euro and, to a lesser extent, the New Israeli Shekel and other currencies, against the U.S. dollar could have an adverse effect on our profitability and financial condition.
 
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Any unauthorized access to, or disclosure or theft of personal information we gather, store or use could harm our reputation and subject us to claims or litigation.
 
We receive, store and use certain personal information of our customers, and the end-users of our customers’ solar PV systems, including names, addresses, e-mail addresses, credit information and energy production statistics. We also store and use personal information of our employees. We take steps to protect the security, integrity and confidentiality of the personal information we collect, store and transmit, but there is no guarantee that inadvertent or unauthorized use or disclosure will not occur or that third parties will not gain unauthorized access to this information despite our efforts. Because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we and our suppliers or vendors may be unable to anticipate these techniques or to implement adequate preventative or mitigation measures.
 
Unauthorized use or disclosure of, or access to, any personal information maintained by us or on our behalf, whether through breach of our systems, breach of the systems of our suppliers or vendors by an unauthorized party, or through employee or contractor error, theft or misuse, or otherwise, could harm our business. If any such unauthorized use or disclosure of, or access to, such personal information were to occur, our operations could be seriously disrupted and we could be subject to demands, claims and litigation by private parties, and investigations, related actions, and penalties by regulatory authorities. In addition, we could incur significant costs in notifying affected persons and entities and otherwise complying with the multitude of foreign, federal, state and local laws and regulations relating to the unauthorized access to, or use or disclosure of, personal information. Finally, any perceived or actual unauthorized access to, or use or disclosure of, such information could harm our reputation, substantially impair our ability to attract and retain customers and have an adverse impact on our business, financial condition and results of operations.
 
We could be adversely affected by any violations of the FCPA, the U.K. Bribery Act and other foreign anti-bribery laws.
 
The FCPA generally prohibits companies and their intermediaries from making improper payments to foreign government officials for the purpose of obtaining or retaining business. Other countries in which we operate also have anti-bribery laws, some of which prohibit improper payments to government and non-government persons and entities. Our policies mandate compliance with these anti-bribery laws. However, we currently operate in and intend to further expand into, many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. In addition, due to the level of regulation in our industry, our entry into certain jurisdictions requires substantial government contact where norms can differ from U.S. standards. It is possible that our employees, subcontractors, agents and partners may take actions in violation of our policies and anti-bribery laws. Any such violation, even if prohibited by our policies, could subject us to criminal or civil penalties or other sanctions, which could have a material adverse effect on our business, financial condition, cash flows and reputation.
 
Risks Related to Operations in Israel
 
Conditions in Israel affect our operations and may limit our ability to develop, produce and sell our products.
 
Although we are incorporated in Delaware, our headquarters and research and development center are located in Israel. Accordingly, political, economic and military conditions in Israel directly affect us. Israel has been involved in a number of armed conflicts and has been the target of terrorist activity. Ongoing state of hostility, varying in degree such as rocket fire from the Gaza Strip, including against civilian targets, has occurred on an irregular basis, disrupting day-to-day civilian activity and negatively affecting business conditions. Israel also faces threats from Hezbollah militants in Lebanon, and others. We cannot predict whether or when such armed conflicts or attacks may occur or the extent to which such events may impact us. Any future armed conflict, political instability or violence in the region may impede our ability to manage our business effectively or to engage in research and development, or may otherwise adversely affect our business or operations. In the event of war, we and our Israeli subcontractors and suppliers may cease operations, which may cause delays in the distribution and sale of our products. Some of our directors, executive officers and employees in Israel are obligated to perform annual reserve duty in the Israeli military and are subject to being called for additional active duty under emergency circumstances. In the event that our principal executive office is damaged as a result of hostile action, or hostilities otherwise disrupting the ongoing operation of our offices, our ability to operate could be materially adversely affected.
 
Additionally, several countries, principally in the Middle East, restrict doing business with Israeli companies, and additional countries and groups may impose similar restrictions if hostilities in Israel or political instability in the region continue or increase. If recent regime changes and civil wars in neighboring states result in the establishment of fundamentalist Islamic regimes or governments more hostile to Israel, or if Egypt or Jordan abrogates its respective peace treaty with Israel, Israel could be subject to additional political, economic and military confines, and our operations and ability to sell our products to countries in the region could be materially adversely affected. These restrictions may limit materially our ability to obtain manufactured components and raw materials or to sell our products.
 
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Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or significant downturn in the economic or financial condition of Israel, could have a material adverse effect on our business, financial condition and results of operations.
  
The tax benefits that are available to us under Israeli law require us to meet various conditions and may be terminated or reduced in the future, which could increase our costs and taxes.
 
Our Israeli subsidiary is eligible for certain tax benefits provided to “Benefited Enterprises” under the Israeli Law for the Encouragement of Capital Investments, 1959 (the “Investment Law”.) In order to remain eligible for the tax benefits for “Benefited Enterprises” we must continue to meet certain conditions stipulated in the Investment Law and its regulations, as amended. If these tax benefits are reduced, cancelled or discontinued, our Israeli taxable income would be subject to regular Israeli corporate tax rates and we may be required to refund any tax benefits that we have already received, plus interest and penalties thereon. The standard corporate tax rate for Israeli companies was increased to 26.5% in 2014 and 2015 and decreased back to 25% in 2016 and thereafter. Additionally, if we increase our activities outside of Israel through acquisitions, for example, our expanded activities might not be eligible for inclusion in future Israeli tax benefit programs. The Israeli government may furthermore independently determine to reduce, phase out or eliminate entirely the benefit programs under the Investment Law, regardless of whether we then qualify for benefits under those programs at the time, which would also adversely affect our global tax rate and our results of operations.
 
The terms of Israeli government grants that we have received restrict our ability to transfer technologies outside of Israel, and we may be required to pay penalties in such a case or upon the sale of our Company.
 
In fiscal 2016, we received a total of $0.2 million from the Office of the Chief Scientist in the Israel Ministry of Economy (“OCS”). We do not expect to receive additional grants from the OCS in fiscal 2016. The terms of the previous grants require us to pay royalties at a rate of 4% to 4.5% on sales of products developed under these grants, up to the total grant amount, linked to the U.S. dollar and bearing interest at an annual rate of LIBOR applicable to dollar deposits. Even after payment in full, we will still be required to comply with the requirements of the Israeli Encouragement of Industrial Research and Development Law, 1984 (the “R&D Law”), and related regulations, with respect to those past grants. When a company develops know-how, technology or products under an OCS grant, the grant terms and the R&D Law restrict the transfer outside of Israel of such know-how without the prior approval of the OCS. Consequently, if aspects of our technologies are deemed to have been developed with OCS funding, the discretionary approval of an OCS committee would be required for any transfer to third parties outside of Israel of know-how related to those aspects of our technologies. The OCS may impose conditions on any arrangement under which it permits us to transfer technology or development out of Israel or may not grant such approval at all.
 
Any transfer of OCS-supported technology or know-how outside of Israel may require payment of significant amounts to the OCS, depending on the value of the transferred technology or know-how, the amount of OCS support, the time of completion of the OCS-supported research project and other factors. These restrictions and requirements for payment may impair our ability to sell our technology assets outside of Israel. Furthermore, the consideration available to our shareholders in a transaction involving the transfer outside of Israel of technology or know-how developed with OCS funding (such as a merger or similar transaction) would be reduced by any amounts that we are required to pay to the OCS.
 
It may be difficult to enforce a judgment of a U.S. court against our officers and directors, to assert U.S. securities laws claims in Israel or to serve process on our officers and directors.
 
The majority of our directors and executive officers reside outside of the U.S., and most of our assets and most of the assets of these persons are located outside of the U.S. Consequently, a judgment obtained against any of these persons, including a judgment based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the U.S. It also may be difficult for you to effect service of process on these persons in the U.S. or to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws on the grounds that Israel is not the most appropriate forum in which to bring such a claim. In addition, even if an Israeli court hears a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proven as a fact by expert witnesses, which can be a time consuming and costly process. Further, an Israeli court may not enforce a judgment awarded by a U.S. or other non-Israeli court. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel that addresses these matters. As a result of the difficulty associated with enforcing a judgment against any of these persons in Israel, you may not be able to obtain or enforce a judgment against many of our directors and executive officers.
 
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Risks Related to the Ownership of Our Common Stock
 
We cannot assure you that our stock price will not decline or not be subject to significant volatility.
 
The trading price of our common stock has been volatile since our initial public offering. Since shares of our common stock were sold in our initial public offering in March 2015 at a price of $18.00 per share, during fiscal year 2016, the reported high and low prices of our common stock has ranged from $15.02 to $38.11 per share. The price of our stock may change in response to fluctuations in our results of operations in future periods and also may change in response to other factors, including factors specific to companies in our industry, many of which are beyond our control. As a result, our share price may experience significant volatility and may not necessarily reflect the value of our expected performance. Among other factors that could affect our stock price are:
 
·
the addition or loss of significant customers;

·
changes in laws or regulations applicable to our industry, products or services;

·
speculation about our business in the press or the investment community;

·
price and volume fluctuations in the overall stock market;

·
volatility in the market price and trading volume of companies in our industry or companies that investors consider comparable;

·
share price and volume fluctuations attributable to inconsistent trading levels of our shares;

·
our ability to protect our intellectual property and other proprietary rights;

·
sales of our common stock by us or our significant stockholders, officers and directors;

·
the expiration of contractual lock-up agreements;

·
the development and sustainability of an active trading market for our common stock;

·
success of competitive products or services;

·
the public’s response to press releases or other public announcements by us or others, including our filings with the Securities and Exchange Commission (the “SEC”), announcements relating to litigation or significant changes to our key personnel;

·
the effectiveness of our internal controls over financial reporting;

·
changes in our capital structure, such as future issuances of debt or equity securities;

·
our entry into new markets;

·
tax developments in the U.S., Europe or other markets;

·
strategic actions by us or our competitors, such as acquisitions or restructurings; and

·
changes in accounting principles.

                Further, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. In addition, the stock prices of many renewable energy companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may cause the market price of our common stock to decline. In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial cost and divert our management’s attention from other business concerns, which could seriously harm our business.
 
26

 
 
The price of our common stock could decline if securities analysts or other third parties publish inaccurate or unfavorable research about us or if one or more of our analysts ceases to cover us or to regularly publish reports about us.
 
The trading of our common stock is likely to be influenced by the reports and research that industry or securities analysts publish about us, our business, our market or our competitors. If one or more securities or industry analysts downgrades our common stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more securities or industry analysts ceases to cover the Company or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
 
Provisions in our certificate of incorporation and by-laws may have the effect of delaying or preventing a change of control or changes in our management.
 
Our certificate of incorporation and by-laws contain provisions that could depress the trading price of our common stock by discouraging, delaying or preventing a change of control of our Company or changes in our management that the stockholders of our Company may believe advantageous. These provisions include:
 
·
authorizing “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;

·
providing for a classified board of directors with staggered, three-year terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors;

·
not providing for cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

·
limiting the ability of stockholders to call a special stockholder meeting;

·
prohibiting stockholders from acting by written consent;

·
establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings;

·
the removal of directors only for cause and only upon the affirmative vote of the holders of at least 662/3% in voting power of all the then-outstanding shares of common stock of the Company entitled to vote thereon, voting together as a single class;

·
providing that our board of directors is expressly authorized to amend, alter, rescind or repeal our by-laws; and

·
requiring the affirmative vote of holders of at least 662/3% of the voting power of all of the then outstanding shares of common stock, voting as a single class, to amend provisions of our certificate of incorporation relating to the management of our business, our board of directors, stockholder action by written consent, advance notification of stockholder nominations and proposals, calling special meetings of stockholders, forum selection and the liability of our directors, or to amend, alter, rescind or repeal our by-laws.

In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law (“DGCL”), which generally prohibits a Delaware corporation from engaging in a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder becomes an “interested” stockholder.
 
27

 
Our certificate of incorporation includes a forum selection clause, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
 
Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for any stockholder (including any beneficial owner) to bring (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or employees to us or to our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL or our certificate of incorporation or by-laws, or (iv) any action asserting a claim governed by the internal affairs doctrine, will be a state court located within the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware); in all cases subject to the court’s having personal jurisdiction over the indispensable parties named as defendants. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have notice of and consented to the foregoing provisions. This forum selection provision may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us. It is also possible that, notwithstanding the forum selection clause that is included in our certificate of incorporation, a court outside of Delaware could rule that such a provision is inapplicable or unenforceable.
  
We do not intend to pay any cash dividends on our common stock in the foreseeable future.
 
We have never declared or paid any dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws and provisions of our debt instruments and organizational documents, after taking into account our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant. As a result, capital appreciation in the price of our common stock, if any, may be your only source of gain on an investment in our common stock.
 
If we fail to establish and maintain an effective system of integrated internal controls, we may not be able to report our financial results accurately, which could have a material adverse effect on our business, financial condition and results of operations.
 
Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that will need to be evaluated frequently. Section 404 of the Sarbanes-Oxley Act requires public companies to conduct an annual review and evaluation of their internal controls and requires attestations of the effectiveness of internal controls by independent auditors. We need to implement substantial control systems and procedures in order to satisfy the reporting requirements under the Exchange Act and applicable NASDAQ Global Select Market requirements, among other items. Establishing these internal controls will be costly and may divert management’s attention.
 
Evaluation by us of our internal controls over financial reporting may identify material weaknesses that may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of NASDAQ Global Select Market rules. There also could be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements also could suffer if we or our independent registered public accounting firm were to report a material weakness in our internal controls over financial reporting. This could have a material adverse effect on our business, financial condition and results of operations and could also lead to a decline in the price of our common stock.
 
28


 
ITEM 1B.      UNRESOLVED STAFF COMMENTS
 
Not applicable.

ITEM 2.         PROPERTIES
 
Our corporate headquarters are located in Herziliya Pituach, Israel, in an office consisting of approximately 56,000 square feet of office, testing and product design space. We have a ten-year lease on our corporate headquarters, which expires on December 31, 2024.
 
In addition to our corporate headquarters, we lease approximately 27,000 square feet of general office space in Fremont, California, under a lease that will expire on March 31, 2020. We also lease sales and support office space in China, Germany, Netherlands, Italy, France, Australia, UK, Japan, and Bulgaria.
 
We outsource all manufacturing to manufacturing partners, and currently do not own or lease any manufacturing facilities.
 
We believe that our existing properties are in good condition and are sufficient and suitable for the conduct of our business for the foreseeable future. To the extent our needs change as our business grows, we expect that additional space and facilities will be available on commercially reasonable terms.
 
ITEM 3.         LEGAL PROCEEDINGS
 
In the normal course of business, we may from time to time be named as a party to various legal claims, actions and complaints. It is impossible to predict with certainty whether any resulting liability would have a material adverse effect on our financial position, results of operations or cash flows.
 
On January 9, 2015, a patent infringement lawsuit was filed by Beacon Power LLC, a Delaware limited liability company (“Beacon”), against the Company and a third party in the United States District Court for the Western District of Texas, San Antonio Division which alleges infringement by the Company of two U.S. patents. On March 9, 2015, the Company and Beacon entered into a patent purchase agreement under which the Company agreed to purchase all rights in the aforementioned patents and Beacon agreed to dismiss all outstanding claims against the Company. In July 2015, the Company completed the acquisition.
 
ITEM 4.
MINE SAFETY DISCLOSURES
 
Not applicable.
 
29


PART II
 
ITEM 5.         MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
 
Our common stock, par value $0.0001 per share, began trading on the NASDAQ Global Select Market on March 26, 2015, where prices are quoted under the symbol “SEDG”.
 
Holders of Record
 
As of June 30, 2016, there were 57 holders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number stockholders represented by these record holders.
 
Price Range of Our Common Stock
 
The following table set for the high and low sales prices for our common stock in fiscal year 2016, in each case as regularly on the NASDAQ Global Select Market:
 
   
Price Range
 
   
High
   
Low
 
Fiscal Year 2015
           
Third Quarter (March 26 – March 31)
 
$
22.50
   
$
19.49
 
Fourth Quarter (March 31 – June 30)
 
$
43.00
   
$
21.71
 
                 
Fiscal Year 2016
               
First Quarter (July 1 – September 30)
 
$
38.11
   
$
15.60
 
Second Quarter (October 1 – December 31)
 
$
29.50
   
$
15.02
 
Third Quarter (January 1 – March 31)
 
$
30.50
   
$
21.92
 
Fourth Quarter (March 31 – June 30)
 
$
28.80
   
$
17.10
 
 
Dividend Policy
 
We have never declared or paid any dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. In addition, the terms of our debt instruments prohibit us from paying cash dividends on our common stock. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws and provisions of our debt instruments and organizational documents, after taking into account our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
 
On March 25, 2015, our registration statement on Form S-1 (No. 333-202159) was declared effective for our initial public offering and on March 31, 2015, we consummated the initial public offering consisting of 8,050,000 shares of our common stock at a public offering price of $18.00 per share. The offering terminated after the sale of all securities registered in the offering. Goldman, Sachs & Co. and Deustche Bank Securities Inc. acted as joint book-running managers for the offering. Needham & Company, Canaccord Genuity Inc. and Roth Capital Partners acted as co-managers. As a result of the offering, we received total net offering proceeds of $131.2 million, after deducting total expenses of $13.7 million, consisting of underwriting discounts and commissions of $10.1 million and offering related expenses of $3.6 million. No payments for such expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities, or (iii) any of our affiliates.
 
30

 
We maintain our funds received in cash and cash equivalents and available-for-sale marketable securities. Our principal use of proceeds from the initial public offering is for general corporate purposes, including working capital and expansion of our business into additional markets. The funds have not been used to make payments directly or indirectly to (i) any of the Company’s officers or directors or their associates, (ii) any persons owning 10% or more of any class of the Company’s equity securities, (iii) any of the Company’s affiliates, or (iv) others.
 
Purchases of Equity Securities by the Issuer and Affiliated Purchases
 
There were no purchases of equity securities by the issuer and affiliated purchases during the fiscal year ended June 30, 2016.

Performance Graph
 
The following graph compares the cumulative total shareholder return on our common stock from March 26, 2015 (using the price of which our shares of common stock were initially sold to the public) to June 30, 2016 to that of the total return of the Nasdaq Composite Index and the MAC Global Solar Energy Index. The comparison assumes $100 was invested in our common stock on March 26, 2015 and in each of the forgoing indices on March 26, 2015 and assumes the reinvestment of dividends. This graph is furnished and not “filed” with the Securities and Exchange Commission or “soliciting material” under the Securities Exchange Act of 1934 and shall not be incorporated by reference into any such filings, irrespective of any general incorporation contained in such filing.
 

31

 
ITEM 6.          SELECTED FINANCIAL DATA
 
Selected Financial Data
 
The selected consolidated statement of operations data for each of fiscal 2014, 2015 and 2016 and the selected consolidated balance sheet data as of June 30, 2015 and 2016 are derived from our audited consolidated financial statements included elsewhere in this annual report. The selected consolidated statement of operations data for fiscal 2012 and 2013 and the selected consolidated balance sheet data as of June 30, 2012, 2013 and 2014 are derived from our audited financial statements not included in this annual report. Our historical results are not necessarily indicative of our results to be expected in any future period. These selected financial data should be read together with our consolidated financial statements and the related notes, as well as the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this annual report.
 
   
Fiscal Year Ended June 30,
 
   
2012
   
2013
   
2014
   
2015
   
2016
 
   
(In thousands)
 
Consolidated Statements of Operations Data:
                             
Revenues
 
$
75,351
   
$
79,035
   
$
133,217
   
$
325,078
   
$
489,843
 
Cost of revenues
   
76,028
     
74,626
     
111,246
     
243,295
     
337,887
 
Gross profit (loss)
   
(677
)
   
4,409
     
21,971
     
81,783
     
151,956
 
Operating expenses:
                                       
Research and development, net
   
13,783
     
15,823
     
18,256
     
22,018
     
33,231
 
Sales and marketing
   
9,926
     
12,784
     
17,792
     
24,973
     
34,833
 
General and administrative
   
3,074
     
3,262
     
4,294
     
6,535
     
12,133
 
Total operating expenses
   
26,783
     
31,869
     
40,342
     
53,526
     
80,197
 
Operating income (loss)
   
(27,460
)
   
(27,460
)
   
(18,371
)
   
28,257
     
71,759
 
Financial income (expenses)
   
(287
)
   
(612
)
   
(2,787
)
   
(5,077
)
   
471
 
Other expenses
   
     
     
     
104
     
 
Income (loss) before taxes on income
   
(27,747
)
   
(28,072
)
   
(21,158
)
   
23,076
     
72,230
 
Taxes on income (tax benefit)
   
36
     
108
     
220
     
1,955
     
(4,379
)
Net income (loss)
 
$
(27,783
)
 
$
(28,180
)
 
$
(21,378
)
 
$
21,121
     
76,609
 
Net basic earnings (loss) per share of common stock
 
$
(10.30
)
 
$
(10.28
)
 
$
(7.64
)
 
$
0.30
   
$
1.92
 
Net diluted earnings (loss) per share of common stock
 
$
(10.30
)
 
$
(10.28
)
 
$
(7.64
)
 
$
0.27
   
$
1.73
 
Weighted average number of shares used in computing net basic earnings (loss) per share of common stock
   
2,698,093
     
2,741,370
     
2,798,894
     
11,902,911
     
39,987,935
 
Weighted average number of shares used in computing net diluted earnings (loss) per share of common stock
   
2,698,093
     
2,741,370
     
2,798,894
     
15,269,448
     
44,376,075
 
 
   
Fiscal Year Ended June 30,
 
   
2012
   
2013
   
2014
   
2015
   
2016
 
   
(In thousands)
 
Consolidated Balance Sheet Data:
                             
Cash and cash equivalents
 
$
19,437
   
$
13,142
   
$
9,754
   
$
144,750
   
$
74,032
 
Available-for-sale marketable securities
                                   
111,609
 
Total assets
   
55,894
     
49,086
     
74,998
     
305,658
     
397,438
 
Total debt
   
3,515
     
12,823
     
20,244
     
-
     
-
 
Total stockholders’ equity (deficiency)
 
$
(87,990
)
 
$
(115,014
)
 
$
(135,294
)
 
$
166,944
   
$
256,108
 
 
32

 
Key Operating Metrics
 
We regularly review a number of metrics, including the key operating metrics set forth in the table below, to evaluate our business, measure our performance, identify trends affecting our business, formulate projections and make strategic decisions.
 
   
Fiscal Year Ended June 30,
 
   
2014
 
2015
   
2016
 
Inverters shipped
   
61,999
     
150,428
     
223,589
 
Power optimizers shipped
   
1,357,251
     
3,533,528
     
5,738,546
 
Megawatts shipped(1)
   
365
     
920
     
1,615
 


(1)
Calculated based on the aggregate nameplate capacity of inverters shipped during the applicable period. Nameplate capacity is the maximum rated power output capacity of an inverter as specified by the manufacturer. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Performance Measures”
 
33

 
ITEM 7.         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the sections of this Annual Report on Form 10-K captioned “Selected Consolidated Financial Data and Other Data” and “Business” and our consolidated financial statements and the related notes to those statements included elsewhere in this Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the sections of this annual report captioned “Special Note Regarding Forward-Looking Statements” and “Risk Factors”.
 
Overview
 
We are a leading provider of intelligent inverter solutions that are changing the way power is harvested and managed in solar PV systems. Our DC optimized inverter solution maximizes power generation at the individual PV module level while lowering the cost of energy produced by the solar PV system. Our systems allow for superior power harvesting and module management by deploying power optimizers at each PV module while maintaining a competitive system cost by using a simplified DC-AC inverter. Our systems are monitored through our cloud-based monitoring platform that enables lower system operating and maintenance (“O&M”) costs. We believe that these benefits, along with our comprehensive and advanced safety features, are highly valued by our customers.
 
We are a leader in the global module level power electronics (“MLPE”) market according to GTM Research, and as of June 30, 2016, we have shipped approximately 12.5 million power optimizers and 513,000 inverters. Approximately 265,000 installations, many of which may include multiple inverters, are currently connected to, and monitored through, our cloud-based monitoring platform. As of June 30, 2016, we have shipped approximately 3.4 GW of our DC optimized inverter systems. Our products have sold in approximately 55 countries, and are installed in solar PV systems in 96 countries.
 
We primarily sell our products directly to large solar installers, EPCs and indirectly to thousands of smaller solar installers through large distributors and electrical equipment wholesalers. Our sales strategy focuses on top-tier customers in markets where electricity prices, irradiance (amount of sunlight), and government policies make solar PV installations economically viable. We also sell our power optimizers to several PV module manufacturers that offer PV modules with our power optimizer physically embedded into their modules.
 
In fiscal 2016, we sold our products to approximately 220 direct customers in 45 countries and as of June 30, 2016, approximately 163,989 indirect customers had registered with us through our cloud-based monitoring platform. In fiscal 2016, three customers accounted for revenues of above 10% each, together comprising an aggregate of 32.5% of our sales. Of these customers, two are distributors.
 
We were founded in 2006 with the goal of addressing the lost power generation potential that is inherent in the use of traditional solar PV inverter technology, thereby increasing the return on investment in solar PV systems. The following is a chronology of some of our key milestones:
 
In 2010, we commenced commercial shipments of our power optimizers and inverters to Europe after contracting with Flextronics (Israel) Ltd. (with its affiliates, “Flextronics”) to initiate production in Israel.
 
In 2011, we commenced sales in the U.S. and expanded our manufacturing capacity by contracting with Jabil Circuit, Inc. to open a larger manufacturing site in Guangzhou, China.
 
In 2011, we introduced our second generation power optimizer, based on our second generation ASIC, with a power rating of up to 500 watts and a substantially reduced number of components.
 
In 2012, we shipped our millionth power optimizer and increased our sales personnel presence in the U.S. market.
 
In 2013, we opened an additional manufacturing site with Flextronics in Hungary to accommodate our accelerated growth, replacing the Flextronics manufacturing site in Israel.
 
34

 
In 2013, we introduced our third generation power optimizer, based on our third generation ASIC, with a power rating of up to 700 watts and improved heat dissipation capabilities for high reliability and lower cost.
 
In March 2015, we completed our initial public offering and started to trade on the NASDAQ Global Select Market under the ticker SEDG.
 
In September 2015, we released information about the development of our new HD-Wave inverter technology. 
 
In January 2016, we announced the immediate international availability of our StorEdge™ solution
 
In February 2016, we shipped our ten millionth power optimizer.
 
In June 2016, we received the Intersolar Award in the Photovoltaics category for our HD-Wave technology inverter and began shipments of our HD-Wave inverter.
 
We have achieved substantial growth since we commenced commercial shipments in fiscal 2010. Our revenues were $133.2 million, $325.1 million and 489.8 million for fiscal 2014, 2015 and 2016, respectively. Gross margins were 16.5%, 25.2% and 31.0%, for fiscal 2014, 2015 and 2016, respectively. Net loss was $ $21.4 million for fiscal 2014, and net profits were $21.1 million and $76.6 million for fiscal 2015 and 2016, respectively.
 
We continue to focus on our long-term growth. We believe that our market opportunity is large and that the transition from traditional inverter architecture to DC optimized inverter architecture as the architecture of choice for distributed solar installations globally will continue. We believe that we are well positioned to benefit from this market trend. We intend to continue to invest in sales and marketing to acquire new customers in our existing markets, grow internationally and drive additional revenue. We also plan to expand our product offerings to further penetrate the large commercial and utility segments. We expect to continue to invest in research and development to enhance our product offerings and develop new, cost effective solutions.
 
We believe that our strategy results in a lean operating base with low expenses that will enable profitability on lower revenues relative to our competitors. We believe that our sales and marketing, research and development and general and administrative costs will decrease as a percentage of revenue in the long-term as we continue to grow due to economies of scale. With this increased operating leverage, we expect our gross and operating margins to increase in the long-term.
 
Performance Measures
 
In managing our business and assessing financial performance, we supplement the information provided by the financial statements with other operating metrics. These operating metrics are utilized by our management to evaluate our business, measure our performance, identify trends affecting our business and formulate projections. We use metrics relating to yearly shipments (inverters shipped, power optimizers shipped and megawatts shipped) to evaluate our sales performance and to track market acceptance of our products from year to year. We use metrics relating to monitoring (systems monitored and megawatts monitored) to evaluate market acceptance of our products and usage of our solution.
 
We provide the “megawatts shipped” metric, which is calculated based on nameplate capacity shipped, to show adoption of our system on a nameplate capacity basis. Nameplate capacity shipped is the maximum rated power output capacity of an inverter and corresponds to our financial results in that higher total capacities shipped are generally associated with higher total revenues. However, revenues increase with each additional unit, not necessarily each additional MW of capacity, sold. Accordingly, we also provide the “inverters shipped” and “power optimizers shipped” operating metrics.
 
Key Components of Our Results of Operations
 
The following discussion describes certain line items in our Consolidated Statements of Operations.
 
35

 
Revenues
 
We generate revenues from the sale of DC optimized inverter systems for solar PV installations which include power optimizers, inverters and our cloud-based monitoring platform. Our customer base includes large solar installers, distributors, wholesalers, EPCs and PV module manufacturers.
 
Our revenues are affected by changes in the volume and average selling prices of our DC optimized inverter systems. The volume and average selling price of our systems is driven by the supply and demand for our products, changes in the product mix between our residential and commercial products, the customer mix between large and small customers, the geographical mix of our sales, sales incentives, end-user government incentives, seasonality and competitive product offerings.
 
Our revenue growth is dependent on our ability to expand our market share in each of the geographies in which we compete, expand our global footprint to new evolving markets, grow our production capabilities to meet demand and to continue to develop and introduce new and innovative products that address the changing technology and performance requirements of our customers.
 
Cost of Revenues and Gross Profit
 
Cost of revenues consists primarily of product costs, including purchases from our contract manufacturers and other suppliers as well as costs related to shipping, customer support, product warranty, personnel, depreciation of test and manufacturing equipment, hosting services for our cloud-based monitoring platform and other logistics services. Our product costs are affected 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. Some of these costs, primarily personnel and depreciation of test and manufacturing equipment, are not directly affected by sales volume.
 
We outsource our manufacturing to third-party manufacturers and negotiate product pricing on a quarterly basis. Our third-party manufacturers are responsible for funding the capital expenses incurred in connection with the manufacture of our products, except with regard to end of line testing equipment and the automated assembly lines for our power optimizers, as further described below (which resulted in capital expenditures of $2.8 million and $5.2 million for fiscal 2015 and 2016, respectively). We expect to continue this funding arrangement in the future, with respect to any expansions to such existing lines. We also procure strategic and critical components from various approved vendors on behalf of our contract manufacturers. At times, higher than anticipated demand has exceeded the production capacities of these manufacturers. In 2014 and early 2015, for example, such production shortfalls, as well as shortages in the supply of certain raw materials, required us to use air freight, rather than less expensive ocean freight, to deliver the majority of our products. The expansion of current manufacturing sites by our contract manufacturers allowed us to reduce these expenses in fiscal 2015 as well as to build sufficient inventory to continue our growth without the need to ship substantial amounts of products by air. In 2016 we managed to continuously increase the efficiency of our supply chain, reduce our reliance on air freight to a minimum and use ocean freight for the majority of our shipments. We believe that continued expansion of the current manufacturing sites by our contract manufacturers, and the development and deployment of our proprietary automated assembly line (described below), will provide sufficient manufacturing capacity to meet our forecasted demands with minimal shipment of products by air freight.
 
We completed development of our first proprietary automated assembly line for our power optimizers and have ordered an additional four lines for the automated manufacturing of our power optimizers. We expect to continue to invest in additional automated assembly lines in the future. We have designed and are responsible for funding all of the capital expenses associated with existing and future automated assembly lines. The current and expected capital expenses associated with these automated assembly lines will be funded out of our cash flows.
 
Key components of our logistics supply channel consist of third party distribution centers in the U.S and Europe. Finished goods are either shipped to our customers directly from our contract manufacturers or shipped to third party distribution centers and then finally shipped to our customers.
 
Cost of revenues also includes our operations and support departments’ costs. The operations department is responsible for production management such as planning, procurement, supply chain, production methodologies and machinery planning, logistics management and manufacturing support to our contract manufacturers as well as the quality assurance of our products. Our support department provides customer and technical support at various levels through our call centers around the world as well as second and third level support services which are provided by support personnel located in our headquarters. Our full-time employee headcount in our operations and support departments has grown from 57 as of June 30, 2014 to 106 as of June 30, 2015 to 175 as of June 30, 2016.
 
Gross profit may vary from quarter to quarter and is primarily affected by our average selling prices, product costs, product mix, customer mix, geographical mix, shipping method, warranty costs and seasonality.
 
36

 
Operating Expenses
 
Operating expenses consist of research and development, sales and marketing and general and administrative expenses. Personnel-related costs are the most significant component of each of these expense categories and include salaries, benefits, payroll taxes, commissions and stock-based compensation. Our full-time employee headcount in our research and development, sales and marketing and general and administrative departments has grown from 239 as of June 30, 2014 to 334 as of June 30, 2015 to 434 as of June 30, 2016. We expect to continue to hire significant numbers of new employees to support our growth. The timing of these additional hires could materially affect our operating expenses in any particular period, both in absolute dollars and as a percentage of revenue. We expect to continue to invest substantial resources to support our growth and anticipate that each of the following categories of operating expenses will increase in absolute dollar amounts for the foreseeable future.
               
Research and development expenses, net
 
Research and development expenses, net include personnel-related expenses such as salaries, benefits, stock-based compensation and payroll taxes. Our research and development employees are engaged in the design and development of power electronics, semiconductors, software and power line communications and networking. Our research and development expenses also include third-party design and consulting costs, materials for testing and evaluation, ASIC development and licensing costs, depreciation expense and other indirect costs. We devote substantial resources to ongoing 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, thereby maintaining our competitive position.
 
Research and development expenses are presented net of the amount of any grants we receive for research and development in the period in which we receive the grant. We previously received grants and other funding from the Binational Industrial Research and Development Foundation and the OCS. Certain of those grants require us to pay royalties on sales of certain of our products, which are recorded as cost of revenues.
 
Sales and marketing expenses
 
Sales and marketing expenses consist primarily of personnel-related expenses such as salaries, sales commissions, benefits, payroll taxes and stock-based compensation. These expenses also include travel, fees of independent consultants, trade shows, marketing, costs associated with the operation of our sales offices and other indirect costs. The expected increase in sales and marketing expenses is due to an expected increase in the number of sales and marketing personnel and the expansion of our global sales and marketing footprint, enabling us to increase our penetration of new markets. While most of our sales in fiscal 2012 were in Europe, sales in the U.S. have grown steadily since fiscal 2012. Revenues generated in the U.S. represented 73.3% and 68.2% of our revenues in fiscal 2015 and 2016, respectively. Sales in Europe, which represented most of our sales until fiscal 2013 also increased in absolute numbers in fiscal 2015 and 2016 and represented 20.1% and 22.7 % of our revenues in fiscal 2015 and 2016, respectively. We currently have a sales presence in the U.S., Canada, France, Germany, Italy, the Netherlands, the United Kingdom, Israel, Turkey Japan, Australia and China. We intend to continue to expand our sales presence to additional countries.
 
General and administrative expenses
 
General and administrative expenses consist primarily of salaries, employee benefits, payroll taxes and stock-based compensation related to our executives, finance, human resources, information technology and legal organizations, travel expenses, facilities costs fees for professional services and registration fees related to being a publicly traded company. Professional services consist of audit, legal, remuneration to board members, tax, insurance, information technology and other costs.
 
37

 
Non-Operating Expenses
 
Financial income (expenses)
 
Financial income (expenses) consist primarily of interest income, interest expense, gains or losses from foreign currency fluctuations and hedging transactions and gains or losses related to re-measurement of warrants granted in relation to long-term debt incurred by the Company in December 2012.
 
Interest income consists of interest from our investment in available for sale marketable securities.
 
Interest expense consists of interest and other charges paid to SVB in connection with our revolving line of credit, and interest on our term loan from Kreos, which was fully repaid on January 26, 2015.
 
Gains or losses related to re-measurement of warrants granted in relation to long-term debt incurred by the Company in December 2012 are not expected to occur in the future as the warrants were fully exercised on June 18, 2015.
 
Our functional currency is the U.S. Dollar. With respect to our subsidiaries, other than our Israeli subsidiary, the functional currency is the applicable local currency. Financial expenses, net is net of financial income which consists primarily of the effect of foreign exchange differences between the U.S. Dollar and the New Israeli Shekel, the Euro and other currencies, related to our monetary assets and liabilities, and the realization of gain from hedging transactions.
 
Taxes on income
 
We are subject to income taxes in the countries where we operate.
 
From incorporation through the end of fiscal 2014, we experienced operating losses and consequently accumulated a significant amount of operating loss carryforwards in several jurisdictions. By the end of fiscal 2015, we fully utilized our unused operating loss carryforwards with respect to U.S. federal tax obligations. In fiscal 2015, we recorded an income tax expense of $1.7 million for federal and state taxes in the U.S. In fiscal 2016, we recorded a net income tax expenses of $0.4 million for federal and state tax in the U.S, which consist $1.8 million current income tax expenses and $1.4 million deferred tax asset.
 
SolarEdge Technologies Ltd., our Israeli subsidiary, is taxed under Israeli law. Income not eligible for benefits under the Investment Law is taxed at the corporate tax rate. The corporate tax rate in Israel was 26.5% in fiscal 2014 and 2015. A recent amendment of the Israeli Income Tax Ordinance decreased the corporate tax rate to 25% commencing on January 1, 2016. However, the effective tax rate payable by a company that derives income from a “Benefited Enterprise” or a “Preferred Enterprise”, as defined under the Investment Law, may be considerably less. Capital gains derived by an Israeli company are subject to tax at the prevailing corporate tax rate.
 
Our subsidiaries are subject to taxes in each of the countries in which they operate. All of our products are developed and manufactured by our subsidiary, SolarEdge Technologies Ltd., which sells our products to its customers as well as to other entities in the SolarEdge group, which then sell them to their customers. All intercompany sales of products and services are paid for or reimbursed pursuant to transfer price policies established for each of the countries in which we operate, consistent with arm’s length profit levels.
 
Due to our history of losses from inception through the end of fiscal 2014, we have recorded a full valuation allowance on our deferred tax assets. In fiscal 2015, the first fiscal year in which we were profitable, we used a portion of our carryforward losses from previous years in Israel and California. In fiscal 2016, we continued being profitable, stopped recording valuation allowances and started recording deferred tax assets in the amount of $5.0 million in Israel, most of which is related to operating loss carryforward.
 
Results of Operations
 
The following tables set forth our consolidated statement of operations for fiscal 2014, 2015 and 2016. We have derived this data from our consolidated financial statements included elsewhere in this annual report. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this this annual report. The results of historical periods are not necessarily indicative of the results of operations for any future period.
 
38

 
   
Fiscal Year Ended June 30,
   
2014 to 2015
   
2015 to 2016
 
   
2014
   
2015
   
2016
   
Change
   
Change
 
   
(In thousands)
 
Revenues
 
$
133,217
   
$
325,078
   
$
489,843
   
$
191,861
     
144.0
%
 
$
164,765
     
50.7
%
Cost of revenues
   
111,246
     
243,295
     
337,887
     
132,049
     
118.7
%
   
94,592
     
38.9
%
Gross profit
   
21,971
     
81,783
     
151,956
     
59,812
     
272.2
%
   
70,173
     
85.8
%
Operating expenses:
                                                       
Research and development, net
   
18,256
     
22,018
     
33,231
     
3,762
     
20.6
%
   
11,213
     
50.9
%
Sales and marketing
   
17,792
     
24,973
     
34,833
     
7,181
     
40.4
%
   
9,860
     
39.5
%
General and administrative
   
4,294
     
6,535
     
12,133
     
2,241
     
52.2
%
   
5,598
     
85.7
%
Total operating expenses
   
40,342
     
53,526
     
80,197
     
13,184
     
32.7
%
   
26,671
     
49.8
%
Operating income (loss)
   
(18,371
)
   
28,257
     
71,759
     
46,628
     
N/A
     
43,502
     
154.0
%
Financial income (expenses)
   
(2,787
)
   
(5,077
)
   
471
     
(2,290
)
   
82.2
%
   
5,548
     
N/A
 
Other expenses
   
-
     
104
     
-
     
104
     
N/A
     
(104
)
   
N/A
 
Income (loss) before taxes on income
   
(21,158
)
   
23,076
     
72,230
     
44,234
     
N/A
     
49,154
     
213.0
%
Taxes on income (tax benefit)
   
220
     
1,955
     
(4,379
)
   
1,735
     
788.6
%
   
(6,334
)
   
N/A
 
Net income (loss)
 
$
(21,378
)
 
$
21,121
   
$
76,609
   
$
42,499
     
N/A
   
$
55,488
     
262.7
%

Comparison of fiscal year 2015 and 2016
 
Revenues
 
   
Fiscal Year Ended
June 30,
   
2015 to 2016
 
   
2015
   
2016
   
Change
 
   
(In thousands)
 
Revenues
 
$
325,078
   
$
489,843
   
$
164,765
     
50.7
%
 
Revenues increased by $164.8 million, or 50.7%, in fiscal 2016 as compared to fiscal 2015, primarily due to an increase in the number of systems sold worldwide with the U.S. being the largest market. The number of power optimizers sold increased by approximately 2.2 million units, or 62.1%, from approximately 3.5 million units in fiscal 2015 to approximately 5.7 million units in fiscal 2016. The number of inverters sold increased by approximately 72,000 units, or 47.4%, from approximately 152,000 units in fiscal 2015 to approximately 224,000 units in fiscal 2016. The increase in the number of units sold was mainly attributable to an increase in the number of systems sold in the U.S. market and certain countries in Europe. In general, our increase in revenues in fiscal 2016 was attributable to rapid expansion in the U.S. market. Our blended average selling price per watt for units shipped decreased by $0.048, or 13.5%, in fiscal 2016 as compared to fiscal 2015, primarily due to increased sales of our commercial products which are characterized with lower average selling price per watt and a change in our customer mix, which included larger portion of sales to distribution channels and large customers to whom we provide volume discounts.
 
39

 
Cost of Revenues and Gross Profit
 
   
Fiscal Year Ended
June 30,
   
2015 to 2016
 
   
2015
   
2016
   
Change
 
   
(In thousands)
 
Cost of revenues
 
$
243,295
   
$
337,887
   
$
94,592
     
38.9
%
Gross profit
 
$
81,783
   
$
151,956
   
$
70,173
     
85.8
%
 
Cost of revenues increased by $94.6 million, or 38.9%, in fiscal 2016 as compared to fiscal 2015, primarily due to (i) an increase in the volume of products sold; (ii) an increase in personnel-related costs resulting from an increase in our operations and support headcount; (iii) increased warranty expenses -associated with the increase in our install base; and (iv) an inventory write off of $1.0 million related to unrecognized revenues from a customer that filed for bankruptcy. These increases were offset by reductions derived from increased efficiency in our supply chain including a decrease in shipping costs associated with the minimal use of air freight. Gross profit as a percentage of revenue increased from 25.2% fiscal 2015 to 31.0% in fiscal 2016 primarily due to reductions in per unit production costs, cost increased efficiency in our supply chain including the use of more ocean freight shipments rather than air shipments, lower costs associated with warranty product replacements, and general economies of scale in our personnel-related costs and other costs associated with our support and operations departments.
 
Operating Expenses:
 
Research and Development, Net
 
   
Fiscal Year Ended
June 30,
   
2015 to 2016
 
   
2015
   
2016
   
Change
 
   
(In thousands)
 
Research and development, net
 
$
22,018
   
$
33,231
   
$
11,213
     
50.9
%
 
Research and development, net increased by $11.2 million, or 50.9%, in fiscal 2016 as compared to fiscal 2015, primarily due to an increase in personnel related costs of $8.0 million as a result of an increased headcount of engineers. The increase in headcount reflects our continuing investment in enhancements of existing products as well as development associated with bringing new products to market. Expenses related to consultants and sub-contractors, other directly related overhead costs, depreciation related to lab equipment and materials consumption for development increased by, $0.7 million, $0.7 million, $0.6 million and $0.4 million, respectively, in fiscal 2016 as compared to fiscal 2015. In addition, grants received from the OCS decreased by $0.8 million in fiscal 2016 as compared to fiscal 2015.
 
Sales and Marketing
 
   
Fiscal Year Ended
June 30,
   
2015 to 2016
 
   
2015
   
2016
   
Change
 
   
(In thousands)
 
Sales and marketing
 
$
24,973
   
$
34,833
   
$
9,860
     
39.5
%
 
Sales and marketing expenses increased by $9.9 million, or 39.5%, in fiscal 2016 as compared to fiscal 2015, primarily due to an increase in personnel related costs of $7.3 million as a result of an increase in headcount supporting our growth in the U.S. and Europe. In addition, expenses associated with our worldwide sales offices, travel and other directly related overhead costs, costs related to trade shows and marketing activities and the use of third party vendors, increased by $1.5 million, $0.9 million and $0.2 million, respectively, in fiscal 2016 as compared to fiscal 2015.
 
40

 
General and Administrative
 
   
Fiscal Year Ended
June 30,
   
2015 to 2016
 
   
2015
   
2016
   
Change
 
   
(In thousands)
 
General and administrative
 
$
6,535
   
$
12,133
   
$
5,598
     
85.7
%
 
General and administrative expenses increased by $5.6 million, or 85.7%, in fiscal 2016 as compared to fiscal 2015, primarily due to an increase in personnel-related costs of $3.3 million related to (i) higher headcount in the legal, finance, human resources, and information technology department functions required of a fast-growing public company and (ii) increased expenses related to equity-based compensation and changes in management compensation. In addition, costs related to accounting, tax, legal and information systems consulting, costs related to being a public company, travel and other directly related overhead costs and costs related to the accrual of doubtful debts increased by $0.9 million, $0.9 million, $0.3 million, and $0.2 million, respectively, in the fiscal 2016 as compared to the fiscal 2015.
 
Financial Income (Expenses)
 
   
Fiscal Year Ended
June 30,
   
2015 to 2016
 
   
2015
   
2016
   
Change
 
   
(In thousands)
 
Financial Income (Expenses)
 
$
(5,077
)
 
$
471
   
$
5,548
     
N/A
 
 
Financial income was $0.5 million in fiscal 2016 as compared to financial expenses of $5.1 million in fiscal 2015, primarily due to $6.7 expenses related to re-measurement of certain warrants granted to Kreos in relation to the Kreos Loan in fiscal 2015, and expenses related tointerest expenses on a term loan received from Kreos Capital IV (Expert Fund) Limited (“Kreos”) in December 2012 (the “Kreos Loan”) and the revolving line of credit from SVB (described below) as compared to no such expenses in the fiscal 2016 due to full repayment of the Kreos Loan and exercise of the warrants by Kreos. Additionally, income of $1.9 million generated from hedging transactions and foreign exchange fluctuations between the Euro and the New Israeli Shekel against the U.S. Dollar in fiscal 2015 as compared to $0.2 million in fiscal 2016 and $0.7 million interest income, net of accretion (amortization) of discount (premium) on marketable securities and time deposits were generated in fiscal 2016 compared to $0.1 million in fiscal 2015.
 
Other expenses
 
   
Fiscal Year Ended
June 30,
   
2015 to 2016
 
   
2015
   
2016
   
Change
 
   
(In thousands)
 
Other expenses
 
$
104
     
-
   
$
(104
)
   
N/A
 
 
Other expenses of $104 recorded in fiscal 2015 are related to the disposal of furniture and other equipment related to the move to our new offices in Israel.
 
Taxes on Income (tax benefit)
 
   
Fiscal Year Ended
June 30,
   
2015 to 2016
 
   
2015
   
2016
   
Change
 
   
(In thousands)
 
Taxes on income (tax benefit)
 
$
1,955
   
$
(4,379
)
 
$
(6,334
)
   
N/A
 
 
Tax benefits were $4.4 million in fiscal 2016 compared to taxes on income of $2.0 million in fiscal 2015, primarily due to the recognizing of a $6.4 million deferred tax asset for the first time in fiscal 2016 and an increase of $0.1 million in current tax expenses for fiscal 2016 as compared to fiscal 2015.
 
41

 
Net Income
 
   
Fiscal Year Ended
June 30,
   
2015 to 2016
 
   
2015
   
2016
   
Change
 
   
(In thousands)
 
Net income
 
$
21,121
   
$
76,609
   
$
55,488
     
262.7
%
 
 Net income was $76.6 million in fiscal 2016 as compared to a net income of $21.1 million in fiscal 2015.
 
Comparison of fiscal 2014 and 2015
 
Revenues
 
   
Fiscal Year Ended
June 30,
   
2014 to 2015
 
   
2014
   
2015
   
Change
 
   
(In thousands)
 
Revenues
 
$
133,217
   
$
325,078
   
$
191,861
     
144.0
%
 
Revenues increased by $191.9 million, or 144.0%, in fiscal 2015 as compared to fiscal 2014, primarily due to an increase in the number of systems sold worldwide with the U.S. being the largest market. The number of power optimizers sold increased by approximately 2.2 million units, or 169.5%, from approximately 1.3 million units in fiscal 2014 to approximately 3.5 million units in fiscal 2015. The number of inverters sold increased by approximately 91,000 units, or 148.8%, from approximately 61,000 units in fiscal 2014 to approximately 152,000 units in fiscal 2015. The increase in the number of units sold was mainly attributable to an increase in the number of systems sold in the U.S. market and certain countries in Europe. In general, our increase in revenues in fiscal 2015 was attributable to rapid expansion in the U.S. market. Our blended average selling price per watt for units shipped decreased by $0.017, or 4.5%, in fiscal 2015 as compared to fiscal 2014, primarily due to a change in our customer mix, which included larger portion of sales to large customers to whom we provide volume discounts.
 
Cost of Revenues and Gross Profit
 
   
Fiscal Year Ended
June 30,
   
2014 to 2015
 
   
2014
   
2015
   
Change
 
   
(In thousands)
 
Cost of revenues
 
$
111,246
   
$
243,295
   
$
132,049
     
118.7
%
Gross profit
 
$
21,971
   
$
81,783
   
$
59,812
     
272.2
%
 
Cost of revenues increased by $132.0 million, or 118.7%, in fiscal 2015 as compared to fiscal 2014, primarily due to an increase in the number of units sold, an increase in personnel related costs as a result of an increase in our operations and support headcount and an increase in spending on air shipments. Gross profit as a percentage of revenue increased from 16.5% fiscal 2014 to 25.2% in fiscal 2015. Product costs generally decreased at a rate consistent with our blended selling price. In addition, costs associated with air shipments decreased, as a percentage of revenues, as did costs associated with our warranty expenses, warranty provisions, personnel related costs and other costs associated with our support and operations departments.
 
42

 
Operating Expenses:
 
Research and Development, Net
 
   
Fiscal Year Ended
June 30,
   
2014 to 2015
 
   
2014
   
2015
   
Change
 
   
(In thousands)
 
Research and development, net
 
$
18,256
   
$
22,018
   
$
3,762
     
20.6
%
 
Research and development, net increased by $3.8 million, or 20.6%, in fiscal 2015 as compared to fiscal 2014, primarily due to an increase in personnel related costs of $2.3 million as a result of an increased headcount of engineers. The increase in headcount reflects our continuing investment in enhancements of existing products as well as development associated with bringing new products to market. In addition, expenses related to materials consumption for development, consultants and sub-contractors and other directly related overhead costs increased by $0.9 million, $0.6 million and $0.5 million, respectively, in fiscal 2015 as compared to fiscal 2014. These amounts were partially offset by $0.5 million received pursuant to a grant from the OCS during fiscal 2015 as compared to fiscal 2014.
 
Sales and Marketing
 
 
Fiscal Year Ended
June 30,
 
2014 to 2015
 
 
2014
 
2015
 
Change
 
 
(In thousands)
 
Sales and marketing
 
$
17,792
   
$
24,973
   
$
7,181
     
40.4
%
 
Sales and marketing expenses increased by $7.2 million, or 40.4%, in fiscal 2015 as compared to fiscal 2014, primarily due to an increase in personnel related costs of $5.4 million as a result of an increase in headcount supporting our growth in the U.S. and Europe. In addition, expenses associated with our worldwide sales offices, travel and other directly related overhead costs and costs related to trade shows and marketing activities and the use of third party vendors, increased by $0.8 million, $0.7 million and $0.3 million, respectively, in fiscal 2015 as compared to fiscal 2014.
 
General and Administrative
 
   
Fiscal Year Ended
June 30,
   
2014 to 2015
 
   
2014
   
2015
   
Change
 
   
(In thousands)
 
General and administrative
 
$
4,294
   
$
6,535
   
$
2,241
     
52.2
%
 
General and administrative expenses increased by $2.2 million, or 52.2%, in fiscal 2015 as compared to fiscal 2014, primarily due to an increase in personnel related costs of $1.5 million as a result of an increase in headcount as part of our ongoing efforts to enhance the legal, finance, human resources, recruiting and information technology functions required of a growing company and increased expenses related to bonuses and equity-based compensation. In addition, costs related to accounting, tax, legal and information systems consulting and costs related to being a public company increased by $0.4 million and 0.3 million, respectively, in the fiscal 2015 as compared to fiscal 2014.
 
43

 
Financial Expenses
 
   
Fiscal Year Ended
June 30,
   
2014 to 2015
 
   
2014
   
2015
   
Change
 
   
(In thousands)
 
Financial expenses
 
$
2,787
   
$
5,077
   
$
2,290
     
82.2
%
 
Financial expenses increased by $2.3 million in fiscal 2015 as compared to fiscal 2014, primarily due to increased expenses of $5.4 million related to the remeasurement of certain warrants, which were fully exercised on June 18, 2015 and $0.3 million related to an early prepayment fee related to long term debt. These amounts were partially offset by gains associated with hedging transactions of the U.S. Dollar against the Euro and New Israeli Shekel in the amount of $1.7 million in fiscal 2015, compared to a loss of $0.2 million in fiscal 2014, a decrease of $1.1 million in interest expenses due to the full repayment of our borrowings under our revolving line of credit and other long term debt as well as a decrease of $0.4 million in expenses from foreign exchange fluctuations and bank charges.
 
Other expenses
 
   
Fiscal Year Ended
June 30,
   
2014 to 2015
 
   
2014
   
2015
   
Change
 
   
(In thousands)
 
Other expenses
   
-
   
$
104
   
$
104
     
N/A
 
 
Other expenses of $104,000 recorded in fiscal 2015 are related to the disposal of furniture and other equipment related to the move to our new offices in Israel.
 
Taxes on Income
 
   
Fiscal Year Ended
June 30,
   
2014 to 2015
 
   
2014
   
2015
   
Change
 
   
(In thousands)
 
Taxes on income
 
$
220
   
$
1,955
   
$
1,735
     
788.6
%
 
Taxes on income increased by $1.7 million in fiscal 2015 as compared to fiscal 2014, primarily due to tax payments and tax accruals with respect to U.S. federal taxes and taxes in certain U.S. states in which we operate.
 
Net Income (loss)
 
   
Fiscal Year Ended
June 30,
   
2014 to 2015
 
   
2014
   
2015
   
Change
 
   
(In thousands)
 
Net income (loss)
 
$
(21,378
)
 
$
21,121
   
$
42,499
     
N/A
 
 
As a result of the factors discussed above, the Company reached profitability in fiscal 2015. Net income was $21.1 million in fiscal 2015 as compared to a net loss of $21.4 million in fiscal 2014.
 
44

 
Liquidity and Capital Resources
 
The following table shows our cash flows from operating activities, investing activities and financing activities for the stated periods:
 
   
Fiscal Year Ended June 30,
 
 
2014
   
2015
   
2016
 
   
(In thousands)
 
Net cash provided by (used in) operating activities
 
$
(17,845
)
 
$
12,054
   
$
52,427
 
Net cash used in investing activities
   
(3,147
)
   
(13,937
)
   
(125,837
)
Net cash provided by financing activities
   
17,676
     
136,953
     
2,779
 
Increase (decrease) in cash and cash equivalents
 
$
(3,316
)
 
$
135,070
   
$
(70,631
)
 
As of June 30, 2016, our cash and cash equivalents were $74.0 million. This amount does not include $111.6 million invested in available for sale marketable securities and $0.9 million of restricted cash (primarily held to secure letters of credit to vendors and bank guarantees securing office lease payments). On March 31, 2015, we consummated our initial public offering in which we sold 8,050,000 shares of our common stock at a price of $18.00 per share, resulting in net proceeds of $131.2 million, after deducting underwriting discounts and commissions and $3.6 million in offering expenses. As of June 30, 2016, we maintain the net proceeds received from our initial public offering as well as cash provided by operating activities in cash and cash equivalents and in available-for-sale marketable securities. Our principal uses of cash are funding our operations and other working capital requirements. We believe that cash provided by operating activities as well as our cash and cash equivalents, including the net proceeds from our initial public offering will be sufficient to meet our anticipated cash needs for at least the next 12 months.
 
Operating Activities
 
During fiscal 2016, cash provided by operating activities was $52.4 million derived mainly from a net income of $76.6 million that included $13.5 million of non-cash expenses. An increase of $19.3 million in warranty obligations, $8.6 million in deferred revenues and $3.3 million accruals for employees and a decrease of $10.5 million in prepaid expenses and other receivables was offset by an increase of $37.3 million in trade receivables, $7.4 million in inventories, $6.4 million in deferred tax assets and a decrease of $28.3 million in trade payables and other accounts payable.
 
For fiscal 2015, cash provided by operating activities was $12.1 million derived mainly from a net income in the amount of $21.1 million that included $9.7 million of non-cash expenses. An increase of $46.3 million in trade payables and other accounts payable, $13.7 million in warranty obligations, $4.0 million in deferred revenues and $1.7 million in accruals for employees was offset by an increase of $48.5 million in inventories, $19.6 million in prepaid expenses and other receivables and $16.3 million in trade receivables.
 
For fiscal 2014, cash used in operating activities was $17.8 million mainly due to a net loss of $21.4 million that included $3.5 million of non-cash expenses. Although revenue grew 68.6% during fiscal 2014, we incurred a deficit in working capital while extending payments to our vendors to match collections from our customers and inventory management. Increases in fiscal 2014 compared to fiscal 2013 of $9.9 million in trade receivables, $7.4 million in prepaid expenses and other receivables and $10.7 million in inventories, were offset by an increase of $19.4 million in trade payables, $7.8 million increase in warranty obligations and another $1.3 million in accruals for employees and other accounts payable.
 
Investing Activities
 
During fiscal 2016, net cash used in investing activities was $125.8 million, of which $118.5 million was invested in available-for-sale marketable securities, $15.7 million related to capital investments in laboratory equipment, end of line testing equipment, automated assembly lines, manufacturing tools and leasehold improvements and $0.8 million related to intangible assets investment. This was offset by $6.4 million from the maturities of available-for-sale marketable securities and a $2.8 million repayment of a security deposit held to secure payments under our previous office lease and the expiration of a letter of credit, which was issued by us to one of our contract manufacturers.
 
45

 
During fiscal 2015, net cash used in investing activities was $13.9 million, of which $11.8 million related to capital investments in laboratory equipment, end of line testing equipment, manufacturing tools and leasehold improvements, $2.0 million related to security deposits held to secure letters of credit to vendors and bank guarantees securing office lease payments, and $0.1 million related to an increase of long term deposits.
 
During fiscal 2014, net cash used in investing activities was $3.1 million, mostly attributed to capital investments in laboratory equipment, end of line testing equipment and manufacturing tools.
 
Financing Activities
 
For fiscal 2016, net cash provided by financing activities was $2.8 million, of which $3.0 million related to cash received from the exercise of employee and non-employee stock options, offset by $0.2 million attributed to issuance costs related to initial public offering.
 
For fiscal 2015, net cash provided by financing activities was $137.0 million, of which $131.4 million was net proceeds from our initial public offering, $24.7 million was net proceeds from our Series E convertible preferred stock issuance, $23.0 million was from short-term borrowings under our revolving line of credit with SVB and $0.1 million was proceeds from exercise of employee stock options, offset by $36.3 million of repayment of the revolving line of credit with SVB and $5.9 million of repayment of a term loan.
 
For fiscal 2014, net cash provided by financing activities was $17.7 million, of which $10.7 million was net proceeds from our Series D-2 and Series D-3 convertible preferred stock issuances in fiscal 2014 and $9.4 million was from short-term borrowings under our $20 million revolving line of credit with SVB, offset by $2.4 million of repayment of the Kreos term loan.
 
Debt Obligations
 
$20 million Revolving Line of Credit.
 
 In June 2011, we entered into an agreement with SVB for a revolving line of credit, which permitted borrowings of up to $20 million subject to certain limitations based on our accounts receivable and inventories. Interest was payable at a prime rate plus margin of 0.75% to 2.75%. The average interest rate on our outstanding borrowings during fiscal 2014 was 4.9%. In October, 2014, we had entirely repaid the revolving line of credit with SVB.
 
$40 Million Revolving Line of Credit
 
In February 2015, we amended and restated an agreement with SVB for a revolving line of credit, which permits aggregate borrowings of up to $40 million in an amount not to exceed 80% of the eligible accounts receivable and bears interest, payable monthly, at SVB’s prime rate plus a margin of 0.5% to 2.0%. The revolving line of credit will terminate, and outstanding borrowings will be payable, on December 31, 2016. As of June 30, 2016, we had no outstanding borrowings under our $40 million revolving line of credit with SVB.
 
In connection with the amended and restated revolving line of credit, we granted SVB security interests in substantially all of our assets, including a first-priority security interest in our trade receivables, cash and cash equivalents (the “SVB Priority Collateral”). The agreement contains certain financial covenants requiring us to maintain EBITDA and liquidity at specified levels. Specifically, we are required to maintain negative Adjusted EBITDA (defined in accordance with US GAAP as (a) net income, plus (b) the extent deducted in the calculation of net income, interest, taxes, depreciation and amortization, plus (c) to the extent deducted in the calculation of net income, non-cash stock-based compensation) of no greater than ($1,500,000) as of March 31, 2015, and positive Adjusted EBITDA of at least (i) $1,500,000 as of June 30, 2015, (ii) $3,500,000 as of September 30, 2015 and December 31, 2015, (iii) $1,500,000 as of March 31, 2016 and (iv) $3,500,000 for the fiscal year ended June 30, 2016 and for each calendar quarter thereafter. In addition, we are required to maintain liquidity (defined as our unrestricted and unencumbered cash, plus availability under the revolving line of credit) of $6,750,000. The amended and restated revolving line of credit also contains covenants that restrict our ability to borrow money, grant liens, pay dividends, dispose of assets or engage in business combinations. As of June 30, 2016, the company met all covenants related to this revolving credit line.
 
46

 
Term Loan
 
On December 28, 2012, we entered into a term loan agreement with Kreos, providing for a term loan of up to $10 million, which was fully drawn on the closing date. The borrowings under the term loan were primarily used to finance working capital needs. On January 26, 2015, we repaid the entire outstanding balance of the Kreos term loan.
 
Interest on the term loan was payable monthly at a rate of 11.90% per year, compounded on a monthly basis. Principal is paid in 33 equal monthly installments from September 1, 2013 through May 1, 2016, the last of which was prepaid in advance pursuant to the terms of the term loan. Payments of principal and interest on the term loan were in Euros.
 
             In connection with the term loan agreement, we granted Kreos 563,014 D-1 Warrants to purchase Series D-1 convertible preferred shares at an exercise price of $2.309. The D-1 Warrants were exercised on June 18, 2015 and we issued to Kreos 154,768 shares of common stock. We believe that cash provided by operating activities as well as our cash and cash equivalents, including the net proceeds from our initial public offering and available borrowings under our currently undrawn revolving credit line with SVB as further described above will be sufficient to meet our anticipated cash needs for at least the next 12 months. In the future, we expect our operating and capital expenditures to increase as we expand our business and grow our revenue, which results in increased accounts receivable and inventory balances, and increased headcount. Our ability to generate cash from operations is subject to substantial risks described under the caption “Risk Factors.” If any of these risks materialize, we may be unable to generate or sustain positive cash flow from operating activities or raise additional capital. We would then be required to use existing cash and cash equivalents to support our working capital and other cash requirements. If additional sources of liquidity are required to support our working capital requirements or operational expansion, we may seek to raise funds through debt financing or from other sources in the future, but we can provide no assurance that these transactions could be consummated on terms acceptable to us or at all. Failure to raise sufficient capital when needed could have a material adverse effect on our business, results of operations and financial position.
 
Contractual Obligations
 
The following table summarizes our outstanding contractual obligations as of June 30, 2016:
 
   
Payment Due By Period
 
   
Total
   
Less
Than
1 Year
   
1 – 3
Years
   
4 – 5
Years
   
More
Than
5 Years
 
   
(In thousands)
 
Operating leases(1)
   
15,144
     
2,404
     
4,209
     
3,314
     
5,217
 
Purchase commitments under agreements(2)
   
83,142
     
83,142
     
-
     
-
     
-
 
Total
   
98,286
     
85,546
     
4,209
     
3,314
     
5,217
 
 

(1)
Represents future minimum lease commitments under non-cancellable operating lease agreements through which we lease our operating facilities.
 
(2)
Represents non-cancelable amounts associated with our manufacturing contracts. Such purchase commitments are based on our forecasted manufacturing requirements and typically provide for fulfillment within agreed-upon or commercially standard lead-times for the particular part or product. The timing and amounts of payments represent our best estimates and may change due to business needs and other factors.
 
Off-Balance Sheet Arrangements
 
In fiscal 2014, 2015 and 2016 we did not have any off-balance sheet arrangements.
 
Critical Accounting Policies and Significant Management Estimates
 
We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the U.S. (“GAAP”) The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.
 
47

 
Revenue Recognition
 
We generate revenues from the sale of DC optimized inverter systems for solar PV installations which include our power optimizers, inverters and cloud-based monitoring platform. Our worldwide customer base includes large solar installers, distributors, EPCs and PV module manufacturers. Our products are fully functional at the time of shipment to the customer and do not require production, modification or customization. We recognize revenues when all of the following conditions are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price is fixed or determinable and (iv) collectability is reasonably assured. Provisions for rebates, sales incentives, and discounts to customers are accounted for as reductions in revenue in the same period that the related sales are recorded.
 
We generally sell our products to our customers pursuant to a customer’s standard purchase order and our customary terms and conditions. We do not offer rights to return our products other than for normal warranty conditions, and as such revenue is recorded upon shipment of products to customers and transfer of title and risk of loss under standard commercial terms. We evaluate the creditworthiness of our customers to determine that appropriate credit limits are established prior to the acceptance and shipment of an order.
 
Prior to May 2013, we provided our full web-based monitoring platform free of charge for a limited period of time after which the customer could elect whether to continue and receive a basic service for free or subscribe for a full line of services. Revenues associated with our web-based monitoring platform were recognized ratably over the term of 18 to 36 months (the free of charge period) and revenues associated with the basic functionality were recognized ratably over 25 years. Since May 2013, we have provided our full web-based monitoring platform free of charge and revenues associated with the service since that date are being recognized ratably over 25 years. In the absence of vendor-specific objective evidence or third party comparable pricing for such service, management determines the revenue levels of this service based on the costs associated with providing the service plus appropriate margins that reflect management’s best estimate of the selling price. Since May 2013, these revenues were minimal and we do not expect this to become a significant source of revenue in the near future.
 
Product Warranty
 
We provide a standard limited product warranty against defects in materials and workmanship under normal use and service conditions. Our standard warranty period is 25 years for our power optimizers, 12 years for our inverters and 10 years for our storage interface. In certain cases, customers can purchase extended warranties for inverters that increase the warranty period to up to 25 years.
 
Our products are designed to meet the warranty periods and our reliability procedures cover component selection, design, accelerated life cycle tests and end of manufacturing line testing. However, since our history in selling power optimizers and inverters is substantially shorter than the warranty period, the calculation of warranty provisions is inherently uncertain.
 
We accrue for estimated warranty costs at the time of sale based on anticipated warranty claims and actual historical warranty claims experience. Warranty provisions are computed on a per-unit sold basis, are based on our best estimate of such costs and are included in our cost of revenues. The warranty obligation is determined based on actual and predicted failure rates of the products, cost of replacement and service and delivery costs incurred to correct a product failure. Our warranty obligation requires management to make assumptions regarding estimated failure rates and replacement costs.
 
In order to predict the failure rate of each of our products, we have established a reliability model based on the estimated mean time between failures (“MTBF”). The MTBF represents the average elapsed time predicted for each product unit between failures during operation. Applying the MTBF failure rate over our install base for each product type and generation allows us to predict the number of failed units over the warranty period and estimates the costs associated with the product warranty. Predicted failure rates are updated periodically based on data returned from the field and new product versions, as are replacement costs which are updated to reflect changes in our actual production costs for our products, labor costs and actual logistics costs.
 
48

 
Since the MTBF model does not take into account additional non-systematic failures such as failures caused by workmanship or manufacturing or design-related issues, and since warranty claims are at times opened for cases in which the error has been triggered by an improper installation, we have developed a supplemental model to predict such cases and recognize the associated expenses ratably over the expected claim period. This model, which is based on actual root cause analysis of returned products, identification of the causes of claims and time until each identified problem is revealed, allows us to better predict actual warranty expenses and is updated periodically based on our experience, taking into account the installed base of approximately 12.5 million power optimizers and approximately 513,000 inverters as of June 30, 2016.
 
If actual warranty costs differ significantly from these estimates, adjustments may be required in the future, which could adversely affect our gross profit and results of operations. Warranty obligations are classified as short term and long term warranty obligations based on the period in which the warranty is expected to be claimed. The warranty provision (short and long term) was $18.2 million, $31.9 million and $51.2 million in fiscal 2014, 2015 and 2016, respectively.
 
Inventory Valuation
 
Our inventories comprise sellable finished goods, raw materials bought on behalf of our contract manufacturers and faulty units returned under our warranty policy.
 
Sellable finished goods and raw material inventories are valued at the lower of cost or market, based on the moving average cost method. Certain factors could affect the realizable value of our inventories, including market and economic conditions, technological changes, existing product changes (mainly due to cost reduction activities) and new product introductions. We consider historic usage, expected demand, anticipated sales price, the effect of new product introductions, product obsolescence, product merchantability and other factors when evaluating the value of inventories. Inventory write-downs are equal to the difference between the cost of inventories and their estimated fair market value. Inventory write-downs are recorded as cost of revenues in the accompanying statements of operations and were, $1.1 million, $1.0 million and $2.5 million in fiscal 2014, 2015 and 2016, respectively.
 
Faulty products returned under our warranty policy are often refurbished and used as replacement units in warranty cases. As we do not yet have sufficient history of refurbish utilization rates, such products are written off upon receipt.
 
We do not believe that there is a reasonable likelihood that there will be a material change in the future estimates or assumptions that we use to record inventory at the lower of cost or market. However, if estimates regarding customer demand are inaccurate or changes in technology affect demand for certain products in an unforeseen manner, we may be exposed to losses that could be material.
 
Stock-Based Compensation Expense
 
We account for stock-based compensation granted to employees, non-employee directors and independent contractors in accordance with ASC 718, “Compensation — Stock Compensation” and ASC 505-50, “Equity-Based Payments to Non-Employees,” which require the measurement and recognition of compensation expense for all stock-based payment awards based on fair value.
 
The fair value of each option award is estimated on the grant date using the Black-Scholes-Merton option-pricing model. The stock-based compensation expense, net of forfeitures, is recognized using a straight-line basis over the requisite service period of the award, which is generally four years. Estimated forfeitures are based on actual historical pre-vesting forfeitures.
 
Key Assumptions
 
The Black-Scholes-Merton option-pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, the expected volatility of the price of our common stock, the expected term of the option, risk-free interest rates and the expected dividend yield of our common stock. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future. These assumptions are estimated as follows:
 
Fair value of our common stock.  Because our stock was not publicly traded prior to March 26, 2015, for periods prior to our initial public offering we have estimated the fair value of our common stock by using, among other factors, third party valuations at the time of grant of the option by considering a number of objective and subjective factors, including data from other comparable companies, issuance of convertible preferred stock to unrelated third parties, operating and financial performance, the lack of liquidity of capital stock and general and industry specific economic outlook. The fair value of the underlying common stock was determined by the management until such time as the Company’s common stock is listed on an established stock exchange or national market system. Since the completion of our initial public offering, we have valued our common stock by reference to the trading price of our common stock in the public market.
 
49

 
Expected term.  The expected term represents the period that our stock-based awards are expected to be outstanding. For stock option awards that were at the money when granted, we have based our expected term on the simplified method available under SAB 110, as we do not have sufficient historical experience for determining the expected term of the stock option awards granted. For stock option awards that were in the money when granted1 prior to the time that our common stock traded in the public market, we use an expected term that we believe is appropriate under these circumstances, which does not produce a materially different result than determining the expected term for our stock options that were granted with an exercise price at least equal to the then current fair market value of our common stock.
 
Risk-free rate.  The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected terms of the options for each option group.
 
Dividend yield.  We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.
 
If any of the assumptions used in the Black-Scholes-Merton model change significantly, future stock-based compensation awards for employees may differ materially compared with the awards granted previously.
 
The following table presents the assumptions used to estimate the fair value of options granted to employees during the periods presented:
 
   
Fiscal Year Ended June 30,
 
   
2014
   
2015
   
2016
 
                   
Expected term (in years)
 
6.02 – 6.27 years
   
5.50 – 6.27 years
   
5.50 – 6.11 years
 
Expected volatility
   
46.3% - 55.8
%
   
46.5% - 55.1
%
   
55.45% - 56.03
%
Risk-free rate
   
1.62 – 1.94
%
   
1.39% - 2.06
%
   
1.39% - 1.97
%
Dividend yield
   
0.00
%
   
0.00
%
   
0.00
%
 
During fiscal 2014, 2015 and 2016, we incurred a non-cash stock-based compensation expense of $1,082,000, $2,956,000 and $9,044,000, respectively. We expect to continue to grant stock options in the future, and to the extent that we do, our actual share-based compensation expense for employees and consultants recognized will likely increase.
 
50

 
ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates, customer concentrations and interest rates. We do not hold or issue financial instruments for trading purposes.
 
Foreign Currency Exchange Risk
 
Approximately 31.8% and 22.0% of our revenues for fiscal 2015 and fiscal 2016, respectively, were earned in non-U.S. dollar denominated currencies, principally the Euro. Our expenses are generally denominated in the currencies in which our operations are located, primarily the U.S. dollar and New Israeli Shekel, and to a lesser extent the Euro and British pound sterling. Our New Israeli Shekel-denominated expenses consist primarily of personnel and overhead costs. Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. A hypothetical 10% change in foreign currency exchange rates between the Euro and the U.S. dollar would increase or decrease our net income by $9.5 million for fiscal 2016. A hypothetical 10% change in foreign currency exchange rates between the New Israeli Shekel and the U.S. dollar would increase or decrease our net income by $3.2 million for fiscal 2016.
 
For purposes of our consolidated financial statements, local currency assets and liabilities are translated at the rate of exchange to the U.S. dollar on the balance sheet date and local currency revenues and expenses are translated at the exchange rate as of the date of the transaction or at the average exchange rate to the U.S. dollar during the reporting period.
 
To date, we have used derivative financial instruments, specifically foreign currency forward contracts, to manage exposure to foreign currency risks by hedging a portion of our account receivable balances denominated in Euros expected to be paid within six months. Our foreign currency forward contracts are expected to mitigate exchange rate changes related to the hedged assets. We do not use derivative financial instruments for speculative or trading purposes.
 
We had cash and cash equivalents of $9.8 million, $144.8 million, and $74.0 million at June 30, 2014, June 30, 2015 and June 30, 2016, respectively, which was held for working capital purposes. In addition, we had available-for-sale marketable securities with an estimated fair value of $111.6 million on June 30, 2016. Since most of our investments and cash and cash equivalents are held in U.S. dollar-denominated money market funds, we believe that our cash and cash equivalents do not have any material exposure to changes in exchange rates.
 
Interest Rate Risk
 
As of June 30, 2016, we had no outstanding borrowings.
 
Concentrations of Major Customers
 
Our trade accounts receivables potentially expose us to a concentration of credit risk with our major customers. For fiscal 2016, three major customers accounted for 32.5% of total revenues, and as of June 30, 2016 these same customers accounted for approximately 35.4% of our consolidated trade receivables balance. We currently do not foresee a credit risk associated with these receivables. In fiscal 2015 and 2014, one major customer accounted for 24.6% and 19.1%, of our total revenues, respectively.
 
Inflation
 
We do not believe that inflation had a material effect on our business, financial condition or results of operations in the last three years. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
 
Commodity Price Risk
 
We are subject to risk from fluctuating market prices of certain commodity raw materials, including copper, which are used in our products. Prices of these raw materials may be affected by supply restrictions or other market factors from time to time, and we do not enter into hedging arrangements to mitigate commodity risk. Significant price changes for these raw materials could reduce our operating margins if we are unable to recover such increases from our customers, and could harm our business, financial condition and results of operations.
 
51

 
ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
Consolidated Financial Statements
 
Reports of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets as of June 30, 2016 and 2015
F-5
Consolidated Statements of Operations and Comprehensive Income (loss) for the years ended June 30, 2016, 2015 and 2014
F-7
Statements of Changes in Stockholders’ Equity (deficiency) for the years ended June 30, 2016, 2015 and 2014
F-9
Consolidated Statements of Cash Flows for the years ended June 30, 2016, 2015 and 2014
F-11
Notes to Consolidated Financial Statements
F-13

Unaudited Quarterly Results of Operations
 
The following table sets forth our unaudited quarterly consolidated statement of operations data for each of the eight quarters ended June 30, 2016. The data presented below has been prepared on the same basis as the audited consolidated financial statements included elsewhere in this this annual report and, in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this this annual report. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.
 
   
Three Months Ended
 
   
Sept. 30,
2014
   
Dec. 31,
2014
   
Mar. 31,
2015
   
June 30,
2015
   
Sept. 30,
2015
   
Dec. 31,
2015
   
Mar. 31,
2016
   
June 30,
2016
 
   
(In thousands, unaudited)
 
Revenues
 
$
66,969
   
$
73,290
   
$
86,399
   
$
98,420
   
$
115,054
   
$
124,832
   
$
125,205
   
$
124,752
 
Cost of revenues
   
52,939
     
57,509
     
62,698
     
70,149
     
81,527
     
86,250
     
84,471
     
85,639
 
Gross profit
   
14,030
     
15,781
     
23,701
     
28,271
     
33,527
     
38,582
     
40,734
     
39,113
 
Operating expense
                                                               
Research and development, net
   
5,059
     
4,768
     
5,490
     
6,701
     
6,991
     
8,299
     
8,709
     
9,232
 
Sales and marketing
   
5,461
     
5,658
     
6,422
     
7,432
     
8,244
     
8,833
     
8,826
     
8,930
 
General and administrative
   
1,159
     
1,121
     
1,990
     
2,265
     
3,418
     
2,188
     
3,460
     
3,067
 
Total operating expenses
   
11,679
     
11,547
     
13,902
     
16,398
     
18,653
     
19,320
     
20,995
     
21,229
 
Operating income
   
2,351
     
4,234
     
9,799
     
11,873
     
14,874
     
19,262
     
19,739
     
17,884
 
Financial income (expenses)
   
516
     
(458
)
   
(3,436
)
   
(1,699
)
   
(72
)
   
(959
)
   
2,029
     
(527
)
Other expenses
   
-
     
-
     
-
     
104
     
-
     
-
     
-
     
-
 
Income before taxes on income
   
2,867
     
3,776
     
6,363
     
10,070
     
14,802
     
18,303
     
21,768
     
17,357
 
Taxes on income (tax benefit)
   
347
     
401
     
398
     
809
     
370
     
(5,802
)
   
969
     
84
 
Net income
 
$
2,520
   
$
3,375
   
$
5,965
   
$
9,261
   
$
14,432
   
$
24,105
   
$
20,799
   
$
17,273
 
 
ITEM 9.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
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ITEM 9A.      CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of June 30, 2016. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
 
Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
 
Management assessed our internal control over financial reporting as of June 30, 2016, the end of our 2016 fiscal year. Management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management’s assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment.
 
Based on this assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.
 
Our independent registered public accounting firm, Ernst & Young, independently assessed the effectiveness of the company’s internal control over financial reporting, as stated in the firm’s attestation report, which is incorporated by reference into Part II, Item 8 of this Form 10-K.
 
Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Changes in Internal Control over Financial Reporting
 
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM 9B.      OTHER INFORMATION
 
None.
 
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PART III
 
ITEM 10.       DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
Our Executive Officers
 
Name
 
Age(1)
 
Position(s) Held
Guy Sella
 
52
 
Chief Executive Officer and Chairman of the Board
Ronen Faier
 
45
 
Chief Financial Officer
Rachel Prishkolnik
 
48
 
Vice President, General Counsel & Corporate Secretary
Zvi Lando
 
51
 
Vice President, Global Sales
Lior Handelsman
 
42
 
Vice President, Marketing and Product Strategy
Yoav Galin
 
43
 
Vice President, Research & Development
Meir Adest
 
40
 
Vice President, Core Technologies
 

(1) As of June 30, 2016.
 
Guy Sella is a co-founder of SolarEdge and has served as Chairman of the board of directors and Chief Executive Officer since 2006. Prior to founding SolarEdge, Mr. Sella was a partner at Star Ventures, a leading venture capital firm, where he led investments in several startups, including AeroScout, Inc. (acquired by Stanley Black & Decker, Inc.) and Vidyo, Inc. Previously, Mr. Sella acted as the director of technology for the Israeli National Security Council and as the secretary for the National Committee for Cyber Protection. Mr. Sella also served as the head of the Electronics Research Department (“ERD”), one of Israel’s national labs, which is tasked with developing innovative and complex systems. Mr. Sella holds a B.S. in Engineering from the Technion, Israel’s Institute of Technology in Haifa. Mr. Sella brings to our board of directors demonstrated senior leadership skills, expertise from years of experience in electronics industries, and historical knowledge of our Company from the time of its founding.
 
Ronen Faier joined SolarEdge in 2011 as our Chief Financial Officer. Prior to joining SolarEdge, Mr. Faier served from 2008 to 2010 as the chief financial officer of Modu Ltd, a privately owned Israeli company, which entered into voluntary liquidation proceedings in Israel in December 2010. Between 2004 and 2007, Mr. Faier held several senior finance positions, including chief financial officer at M-Systems prior to its acquisition by SanDisk Corporation in 2006. Previously, Mr. Faier served as corporate controller of VocalTec Communications Ltd. Mr. Faier holds a CPA (Israel) license, an MBA (with Honors) from Tel Aviv University and a B.A. in Accounting and Economics from the Hebrew University in Jerusalem.
 
Rachel Prishkolnik joined SolarEdge in 2010 as our Vice President, General Counsel and Corporate Secretary. Prior to joining SolarEdge, Mrs. Prishkolnik served as the vice president, general counsel & corporate secretary of Gilat Satellite Networks Ltd. At Gilat she held various positions beginning as legal counsel in 2001 and becoming corporate secretary in 2004 and vice president, general counsel in 2007. Prior to Gilat, she worked at the law firm of Jeffer, Mangels, Butler & Marmaro LLP in Los Angeles. Before that, Mrs. Prishkolnik worked at Kleinhendler & Halevy (currently GKH Law Offices.) in Tel Aviv. Mrs. Prishkolnik holds an LLB law degree from the Faculty of Law at the Tel Aviv University and a B.A. from Wesleyan University in Connecticut. She is licensed to practice law and is a member of the Israeli Bar.
 
Zvi Lando joined SolarEdge in 2009 as our Vice President, Global Sales. Mr. Lando had previously spent 16 years at Applied Materials, based in Santa Clara, California, where he held several positions, including process engineer for metal disposition and chemical vapor deposition systems, business manager for the Process Diagnostic and Control Group, vice president, and general manager of the Baccini Cell Systems Division in the Applied Materials Solar Business Group. Mr. Lando holds a B.S. in Chemical Engineering from the Technion, Israel’s Institute of Technology in Haifa, and is the author of several publications in the field of chemical disposition.
 
Lior Handelsman co-founded SolarEdge in 2006 and currently serves as our Vice President, Marketing and Product Strategy where he is responsible for SolarEdge’s marketing activities, product management and business development. Previously, Mr. Handelsman served as Vice President, Product Strategy and Business Development, from 2009 through 2013 and Vice President, Product Development, from our founding through 2009. Mr. Handelsman also served as acting Vice President, Operations, from 2008 through 2010. Prior to co-founding SolarEdge, Mr. Handelsman spent 11 years at the ERD, where he held several positions including research and development power electronics engineer, head of the ERD’s power electronics group and manager of several large-scale development projects and he was a branch head in his last position at the ERD. Mr. Handelsman holds a B.S. in Electrical Engineering (cum laude) and an MBA from the Technion, Israel’s Institute of Technology in Haifa.
 
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Yoav Galin co-founded SolarEdge in 2006 and has served since our founding as our Vice President, Research & Development where he is responsible for leading the execution of our technology strategy, building and managing the technology team and overseeing research and development of SolarEdge’s innovative PV power harvesting products. Prior to joining SolarEdge, Mr. Galin served for 11 years at the ERD. During this period, Mr. Galin held various research and development and management positions, including his last position at the ERD where he led a project and its development team of over 30 hardware and software engineers. He was also responsible for overseeing the research and development of future technologies. Mr. Galin holds a B.S. in Electrical Engineering from Tel Aviv University.
 
             Meir Adest co-founded SolarEdge in 2006 and has served since 2007 as our Vice President, Core Technologies where he is responsible for SolarEdge’s certification and long-term reliability of SolarEdge products and research of future technologies. Prior to co-founding SolarEdge, Mr. Adest spent 7 years at the ERD, where he held a number of positions, starting as an embedded software engineer for mission-critical systems, progressing to the position of a software team leader, managing a large-scale techno-operational project, and finally managing a multi-disciplinary section with approximately 25 hardware and software engineers. Mr. Adest holds a B.Sc in mathematics, physics, and computer science from the Hebrew University in Jerusalem.
 
Our Board of Directors

The following table sets forth certain information concerning our directors:

Name
 
Age (1)
 
Position(s) Held
Guy Sella
 
52
 
Chief Executive Officer and Chairman of the Board
Dan Avida
 
52
 
Director*
Yoni Cheifetz
 
56
 
Director*
Marcel Gani
 
63
 
Director*
Doron Inbar
 
66
 
Director*
Avery More
 
61
 
Director*
Tal Payne
 
44
 
Director*
 

(1)   As of June 30, 2016
 
*           Our board of directors has determined that this director is independent under the standards of the NASDAQ Global Select Market.
 
Guy Sella.  Please see Item 1 of Part I, “ITEM 1. Business—Executive Officers of the Registrant.”
 
Dan Avida has served as a member of our board of directors since 2007. Mr. Avida is a partner at Opus Capital. Before joining Opus Capital in 2005, Mr. Avida served for four years as president and chief executive officer at Decru Inc., a pioneering storage security company that Mr. Avida co-founded in 2001. Between 1989 and 1999 Mr. Avida was employed by Electronics for Imaging, Inc. (NASDAQ:EFII), where he held a number of positions and ultimately served as chairman and chief executive officer. Prior to Electronics for Imaging, Mr. Avida served as an officer in the Israel Defense Forces. Mr. Avida holds a B.Sc. in Computer Engineering (summa cum laude) from the Technion, the Israel Institute of Technology. Mr. Avida’s historical knowledge of our company and years of experience in working with innovative companies in the United States and Israel provide a valuable perspective to the board of directors.

Yoni Cheifetz has served as a member of our board of directors since 2010. Since 2006, Mr. Cheifetz has served as a Partner at Lightspeed Venture Partners, where he focuses on investment activity in Israel in areas of interest, including the Internet, general media, mobile, communications, software, semiconductors and cleantech. Prior to joining Lightspeed Venture Partners, Mr. Cheifetz was a partner with Star Ventures from 2003 to 2006. Before joining Star Ventures, Mr. Cheifetz was a serial entrepreneur and the founder, CEO and Chairman of several privately held software companies most of which have been acquired. Mr. Chiefetz holds a B.Sc. in Applied Mathematics from Tel Aviv University and a M.Sc. in Applied Mathematics and Computer Science from the Weizmann Institute of Science. Mr. Cheifetz’s historical knowledge of our company and extensive experience in working with technology companies qualify him to serve as a member of our board of directors.
 
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Marcel Gani has served as a member of our board of directors since 2015. From 2005 to 2009, Mr. Gani lectured at Santa Clara University, where he taught classes on accounting and finance. In 1997, Mr. Gani joined Juniper Networks, Inc. where he served as chief financial officer and executive vice president from December 1997 to December 2004, and as chief of staff from January 2005 to March 2006. Prior to joining Juniper, Mr. Gani served as chief financial officer at various companies, including NVIDIA Corporation, Grand Junction Networks, Primary Access Corporation and Next Computers. Mr. Gani served as corporate controller at Cypress Semiconductor from 1991 to 1992. Prior to joining Cypress Semiconductor, Mr. Gani worked at Intel Corporation from 1978 to 1991. Mr. Gani holds a B.A. in Applied Mathematics from Ecole Polytechnique Federal and an M.B.A. from University of Michigan, Ann Arbor. Mr. Gani serves on the board of directors of Infinera, where he is a member of the audit committee and the chairman of the compensation committee. Mr. Gani brings valuable financial and business experience to our board through his years of experience as a chief financial officer with public companies and experience as a director of other public companies.
 
Doron Inbar has been a venture partner at Carmel Ventures, an Israeli‑based venture capital firm that invests primarily in early stage companies in the fields of software, communications, semiconductors, internet, media, and consumer electronics, since 2006. Previously, Mr. Inbar served as the president of ECI Telecom Ltd., a global telecom networking infrastructure provider, from November 1999 to December 2005 and its chief executive officer from February 2000 to December 2005. Mr. Inbar joined ECI Telecom Ltd. in 1983 and during his first eleven years with the company, served in various positions at its wholly‑owned U.S. subsidiary, ECI Telecom, Inc., in the U.S., including executive vice president and General Manager. In July 1994, Mr. Inbar returned to Israel to become vice president, corporate budget, control and subsidiaries of ECI Telecom Ltd. In June 1996, Mr. Inbar was appointed senior vice president and chief financial officer of ECI Telecom Ltd., and he became executive vice president of ECI Telecom Ltd. in January 1999. Mr. Inbar has served on the board of directors of Alvarion Ltd. (NASDAQ: ALVR), a company that designs and sells broadband wireless and Wi‑Fi products, since September 2009 and is a member of its audit and compensation committees and serves as chairman of its nominating and governance Committee. Mr. Inbar also serves on the board of directors of SolarEdge Technologies Inc., an innovative start up in the photovoltaic industry, as chairman of the board of Archimedes Global Ltd., a company which provides health insurance and health provision in East Europe, and on the board of directors of MaccabiDent Ltd., the largest chain of dental service clinics in Israel. In 2012, Mr. Inbar joined the board of directors of Comverse Technology Inc. (NASDAQ: CNSI), where he is a member of the audit committee and corporate governance committee. Mr. Inbar serves also as a board member and management consultant at Degania Medical Ltd., a medical device designer and manufacturer, and as a board member and management advisor to the board of Tzinorot Ltd. Previously, Mr. Inbar served as chairman of the board of C‑nario Ltd., a global provider of digital signage software solutions, chairman of the board of Followap Ltd., which was sold to Neustar, Inc. in November 2006, and chairman of the board of Enure Networks Ltd. Mr. Inbar holds a B.A. in Economics and Business Administration from Bar‑Ilan University, Israel.
 
Avery More has served as a member of our board of directors since 2006. Mr. More was the sole seed investor in the Company through his fund, ORR Partners I, L.P., and has participated in all successive rounds. Mr. More joined Menlo Ventures in 2013 as a venture partner, and focuses on investments in technology companies. Prior to joining Menlo Ventures, Mr. More was the president and chief executive officer of CompuCom Systems Inc. from 1989 to 1993. Mr. More currently serves on the board of directors of Vidyo, Inc., QualiSystems Ltd., Takipi BuzzStream, AppDome and Dome9. Mr. More has specific attributes that qualify him to serve as a member of our board of directors, including his historical knowledge of our company and his experience as a director of other private and public technology companies.
 
Tal Payne has served as a member of our board of directors since 2015. Tal Payne brings over 15 years of financial management experience, serving as Chief Financial Officer in Check Point Software Technologies Ltd. (“Check Point”) since joining in 2008 and as Chief Financial and Operations Officer since 2015. Prior to joining Check Point, Ms. Payne served as Chief Financial Officer at Gilat Satellite Networks, Ltd., where she held the role of Vice President of Finance for over five years. Ms. Payne began her career as a CPA in public accounting at PricewaterhouseCoopers. Ms. Payne holds a B.A. in Economics and Accounting and an Executive M.B.A., both from Tel Aviv University. Ms. Payne is a certified public accountant. Ms. Payne brings valuable financial and business experience to our board through her years of experience as a chief financial officer with publicly traded companies.
 
Committees of our Board of Directors
 
Our board of directors has established audit, compensation, and nominating and corporate governance committees. The composition, duties and responsibilities of these committees are set forth below. Our board of directors may from time to time establish certain other committees to facilitate the management of the Company.
 
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Audit Committee
 
Our board of directors has established an audit committee, which operates under a written charter that is available on our website at http://investors.solaredge.com and that satisfies the applicable standards of the SEC and the listing requirements of NASDAQ. The audit committee’s responsibilities include, but are not limited to: (1) appointing, compensating, retaining, evaluating, terminating and overseeing our outside auditor; (2) at least annually, reviewing the independence of our outside auditor; (3) reviewing with our independent registered public accounting firm the matters required to be reviewed by applicable auditing requirements; (4) approving in advance all audit and permissible non‑audit services to be performed by our independent registered public accounting firm; (5) meeting to review and discuss with management and the outside auditor the annual audited and quarterly financial statements of the Company and the independent auditor’s reports related to the financial statements; (6) receiving reports from management regarding, and reviewing and discussing the adequacy and effectiveness of, the Company’s disclosure controls and procedures; (7) establishing and overseeing procedures for the confidential anonymous submission of concerns regarding questionable accounting, internal controls, auditing and federal securities law matters;(8) establishing and periodically reviewing policies and procedures for the review, approval and ratification of related person transactions; and (9) oversee the preparation of the report of the audit committee that SEC rules require to be included in our annual proxy statement.
 
Our audit committee consists of Marcel Gani, Tal Payne and Doron Inbar, with Marcel Gani serving as chairman. Rule 10A‑3 of the Exchange Act and NASDAQ Global Select Market rules require us to have one independent audit committee member upon the listing of our common stock on the NASDAQ Global Select Market, a majority of independent directors within 90 days of the date of listing and all independent audit committee members within one year of the date of listing. We comply with the independence requirements. Our board of directors has determined that Marcel Gani and Tal Payne each qualify as an “audit committee financial expert” as defined by applicable SEC rules and has the requisite financial sophistication as defined under the applicable NASDAQ Global Select Market rules and regulations.
 
Compensation Committee
 
Our board of directors has established a compensation committee, which operates under a written charter that is available on our website at http://investors.solaredge.com and that satisfies the applicable standards of the SEC and the listing requirements of NASDAQ. The compensation committee’s responsibilities include, but are not limited to: (1) overseeing our overall compensation philosophy, policies and programs; (2) reviewing and approving corporate goals and objectives relevant to the compensation of our Chief Executive Officer, evaluating the Chief Executive Officer’s performance in light of those goals and objectives, approving grants of equity awards to the Chief Executive Officer and recommending to the independent directors the Chief Executive Officer’s compensation based on this evaluation; (2) overseeing the evaluation of other executive awards and approving equity awards to these officers, and setting their compensation based upon the recommendation of the Chief Executive Officer; (3) reviewing and approving the design of other benefit plans pertaining to executive officers; (4) reviewing and approving employment agreements and other similar arrangements between us and our executive officers; and (4) overseeing preparation of the report of the compensation committee to the extent required by SEC rules to be included in our annual meeting proxy statement.
 
Our compensation committee consists of Avery More, Marcel Gani, Dan Avida and Doron Inbar, with Avery More serving as chairman. The composition of our compensation committee meets the requirements for independence under current rules and regulations of the SEC and the NASDAQ Global Select Market. Each member of the compensation committee is also a non‑employee director, as defined pursuant to Rule 16b‑3 promulgated under the Exchange Act, and an outside director, as defined pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended.
 
Nominating and Corporate Governance Committee
 
Our board of directors has established a nominating and corporate governance committee, which operates under a written charter that is available on our website at http://investors.solaredge.com and that satisfies the applicable standards of the SEC and the listing requirements of NASDAQ. The nominating and corporate governance committee’s responsibilities include, but are not limited to: (1) identifying individuals qualified to become members of our board of directors, consistent with criteria approved by our board of directors; (2) assessing the contributions and independence of incumbent directors in determining whether to recommend them for reelection to the board; (3) developing and recommending to our board of directors a set of corporate governance guidelines and principles; (4) establishing procedures for the consideration of board candidates recommended by the Company’s stockholders; (5) recommending to the board candidates to be elected by the board to fill vacancies and newly created directorships and candidates for election or reelection at each annual stockholders’ meeting; (6) periodically reviewing the board’s leadership structure, size, composition and functioning; (7) overseeing succession planning for positions held by executive offices; (8) overseeing the evaluation of the board and its committees; and (9) annually reviewing the compensation of directors for service on the board and its committees and recommend changes in compensation to the board as appropriate.
 
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Our nominating and corporate governance committee consists of Avery More, Yoni Cheifetz and Dan Avida, with Avery More serving as chairman. The composition of our nominating and corporate governance committee meets the requirements for independence under current rules and regulations of the SEC and the NASDAQ Global Select Market.
 
Compensation Committee Interlocks and Insider Participation
 
None of the members of our compensation committee is, or was in fiscal 2016, an officer or employee of the Company. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.
 
Director Compensation for Fiscal 2016
 
Director Compensation Table
 
The following table sets forth the total cash and equity compensation paid to our non‑employee directors for their service on our board of directors and committees of our board of directors during fiscal 2016.  Mr. Sella is not eligible to receive any additional compensation for serving on our board of directors. His compensation for serving as our Chief Executive Officer is disclosed in the “—Summary Compensation Table” below.
 
Name
 
Fees
Earned or
Paid in
Cash ($)(1)
   
Stock
Awards ($)
   
Option
Awards ($)
   
Non‑Equity
Incentive Plan
Compensation ($)
   
Nonqualified
Deferred
Compensation
Earnings ($)
   
All Other
Compensation ($)
   
Total ($)
 
Dan Avida (2)
   
40,000
     
-
     
     
     
     
     
40,000
 
Yoni Cheifetz(3)
   
-
     
-
     
     
     
     
     
 
Marcel Gani (4)
   
55,000
     
-
     
     
     
     
     
55,000
 
Doron Inbar (5)
   
40,000
     
-
     
     
     
     
     
40,000
 
Avery More(6)
   
50,000
     
-
     
     
     
     
     
50,000
 
Tal Payne (7)
   
35,000
     
-
     
     
     
     
     
35,000
 
 
 
(1) Amounts in this column reflect the amount of pro-rated annual retainers for board and committee service, as detailed below. See “Director Compensation Program
 
(2) Mr. Avida was granted 11,240 restricted stock units, 4,496 of which were unvested as of June 30, 2016.
 
(3) Mr. Cheifetz was granted 11,240 restricted stock units, 4,496 of which were unvested as of June 30, 2016.
 
(4) Mr. Gani was granted 11,240 restricted stock units, 4,496 of which were unvested as of June 30, 2016.
 
(5) In January 2011, Mr. Inbar was granted an option to purchase 223,333 shares of our common stock at $2.01. As of June 30, 2016, all of the 223,333 options are outstanding. In addition, in March 2015, Mr. Inbar was granted 11,240 restricted stock units, 4,496 of which were unvested as of June 30, 2016.
 
(6) Mr. More was granted 11,240 restricted stock units, 4,496 of which were unvested as of June 30, 2016.
 
(7) Mrs. Payne was granted 11,240 restricted stock units, 4,496 of which were unvested as of June 30, 2016.
 
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Director Compensation Program
 
Each of our non‑employee directors is eligible to receive compensation for his or her service on our board of directors consisting of annual cash retainers and equity awards. Specifically, as of July 1, 2016, our non‑employee directors are entitled to receive the following annual retainers for their service on our board of directors, which are in four equal quarterly installments and prorated for any partial year of service on our board of directors. Directors serving as chair of a committee do not also receive compensation as a general member of such committee.
 
Position
 
Retainer ($)
Board Member 
 
40,000
Audit Committee Chair 
 
20,000
Compensation Committee Chair 
 
15,000
Nominating and Corporate Governance Committee Chair 
 
10,000
Audit Committee Member 
 
10,000
Compensation Committee Member 
 
7,500
Nominating and Corporate Governance Committee Member 
 
5,000
 
The equity awards for our non‑employee directors consist of (i) an initial equity award in the form of restricted stock units, granted upon the individual’s initial appointment to our board of directors, with a grant date value of $150,000, and (ii) an annual equity award in the form of restricted stock units with a grant date value of $100,000, subject to proration, for directors whose commencement of board service is in the midst of a particular year. The initial restricted stock unit awards vest in equal annual installments over three years and annual restricted stock unit awards vest in full on the earlier of: (i) after one year after their grant; and (ii) at the annual shareholders meeting following their grant (or the balance of this period in which the award is granted, in the case of pro‑rated annual awards), subject in each case to continued board service through the applicable vesting date. As of July 1, 2016, all equity awards granted to directors will automatically accelerate upon death or disability.
 
Our directors are reimbursed for travel, food, lodging and other expenses directly related to their activities as directors. Our directors are also entitled to the protection provided by the indemnification provisions in our by‑laws. Our board of directors may revise the compensation arrangements for our directors from time to time.
 
Code of Business Conduct and Ethics
 
We have adopted a Code of Business Conduct and Ethics that applies to our directors and an Employee Code of Conduct that applies to our officers and employees, including our principal executive, financial and accounting officers, or persons performing similar functions. These Codes are published on our corporate governance website located at http://investors.solaredge.com/phoenix.zhtml?c=253935&p=irol-govHighlights. We intend to disclose future amendments to certain provisions of our Code, or waivers of such provisions granted to executive officers and directors, on the website within four business days following the date of such amendment or waiver.
 
     Section 16(a) Beneficial Ownership Reporting Compliance
 
     Section 16(a) of the Securities Exchange Act of 1934 and SEC rules require our directors, executive officers and persons who own more than 10% of any class of our common stock to file reports of their ownership and changes in ownership of our common stock with the SEC. Statements of Changes of Beneficial Ownership of Securities on Form 4 are generally required to be filed within two business days of a change in beneficial ownership of securities. Based solely on our review of the reports filed during fiscal 2016, and on written representations from such reporting persons, we determined that all of our directors and reporting officers failed to timely file one Form 4, each with respect to the vesting of RSUs that had been reported as granted.
 
Procedures for Nomination of Directors by Stockholders
 
The Company identifies new director candidates through a variety of sources. The nominating and corporate governance committee will consider director candidates recommended by stockholders in the same manner it considers other candidates, as described below. Stockholders seeking to recommend candidates for consideration by the nominating and corporate governance committee should submit a recommendation in writing describing the candidate’s qualifications and other relevant biographical information and provide confirmation of the candidate’s consent to serve as director. Please submit this information to the Corporate Secretary at1 Hamada Street Herziliya Pituach, Israel, 4673335.
 
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Stockholders may also propose director nominees by adhering to the advance notice procedure included in our bylaws. In order to be timely under our bylaws, notice of stockholder proposals related to stockholder nominations for the election of directors (or stockholder proposals not related to director nominations) must be received by the Corporate Secretary of the Company in the case of an annual meeting of the stockholders, no later than the close of business on the 90th day nor earlier than the close of business on the 120th day prior to the first anniversary date of the preceding year’s annual meeting of stockholders. If the next annual meeting is called for a date that is more than 30 days before or more than 30 days after that anniversary date, or if no annual meeting was held in the preceding year, notice by the stockholder in order to be timely must be received no earlier than the close of business on the 120th day prior to such annual meeting nor later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the date on which public announcement is first made by the Company of the date of such meeting.
 
Stockholder nominations for the election of directors at a special meeting of the stockholders must be received by the Corporate Secretary of the Company no earlier than the close of business on the 120th day prior to such special meeting nor later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of such special meeting.
 
A stockholder’s notice to the Corporate Secretary of the Company must be in proper written form and must include the information and consents required by our bylaws related to the stockholder giving the notice, the beneficial owner (if any) on whose behalf the nomination or proposal is made and each person whom the stockholder proposes to nominate for election as a director or the business desired to be brought before the meeting.
 
A copy of the full text of the bylaw provisions discussed above may be obtained by writing to the Corporate Secretary of the Company at 1 Hamada Street Herziliya Pituach, Israel, 4673335.
 
Director Qualifications
 
The nominating and corporate governance committee and the board believe that candidates for director should have certain minimum qualifications, including, without limitation:
 
· demonstrated business acumen and leadership, and high levels of accomplishment;
· ability to exercise sound business judgment and to provide insight and practical wisdom based on experience;
· commitment to understand the Company and its business, industry and strategic objectives;’
· integrity and adherence to high personal ethics and values, consistent with our Code of Business Conduct and Ethics;
· ability to read and understand financial statements and other financial information pertaining to the Company;
· commitment to enhancing stockholder value;
· willingness to act in the interest of all stockholders; and
· for non-employee directors, independence under NASDAQ listing standards and other applicable rules and regulations.
 
Other requirements, such as industry experience or experience in a particular business discipline, that are expected to contribute to the Board’s overall effectiveness and meet the needs of the board of directors and its committees may be considered. The Company values diversity on a company-wide basis and seeks to achieve a diversity of occupational and personal backgrounds on the board of directors, but has not adopted a specific policy regarding board diversity.
 
Compensation Committee Report
 
This report shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act or under the Exchange Act, except to the extent the Company specifically incorporates this report by reference, and shall not otherwise be deemed filed under such Acts.
 
The compensation committee has reviewed and discussed the below Compensation Discussion and Analysis with management and its independent consultant and, based on the review and discussions, recommended to our board that this Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.
 
The Compensation Committee,
 
Avery More, Chairman
Dan Avida
Marcel Gani
Doron Inbar
 
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ITEM 11.  EXECUTIVE COMPENSATION
 
COMPENSATION DISCUSSION AND ANALYSIS
 
Compensation Strategy
 
 The main objectives of our pay-for-performance compensation program are to: