ITEM 1A.
Risk Factors
Risk Factors Summary
The following summarizes the principal factors
that make an investment in our company speculative or risky, all of which are more fully described in the Risk Factors section below.
This summary should be read in conjunction with the Risk Factors section and should not be relied upon as an exhaustive summary of the
material risks facing our business. The order of presentation is not necessarily indicative of the level of risk that each factor poses
to us.
We
face risks related to our business and our industry, including those related to:
• Our ability to maintain our current level of profitability.
• The rapidly evolving and competitive nature of the solar industry.
• Demand for solar energy solutions.
• The cyclicality of the solar industry.
• Defects or performance problems in our products.
• Our dependence on a small number of outside contract manufacturers.
• Mergers in the solar industry among our current or potential customers.
• Our entry into business engagements with military bodies as our customers.
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• Conditions in Israel that may affect our operations.
• The ongoing Covid-19 pandemic.
• Fluctuations in currency exchange rates.
• Issues related to corporate social responsibility.
We face risks related to legal, compliance
and regulatory matters, including those related to:
• Changes to net metering policies.
We face risks related to intellectual property,
including those related to:
• Our ability to protect our intellectual property and other proprietary rights.
• The impairment of our goodwill or other intangible assets.
We face risks related to the ownership of
our common stock, including those related to:
• Volatility of our stock price.
• The forum selection clause contained in our certificate of incorporation.
The summary risk factors described above should
be read together with the text of the full risk factors in the Risk Factors sections and the other information set forth in this Annual
Report on Form 10-K, including our consolidated financial statements and the related notes, as well as in other documents that we file
with the SEC. The risks summarized above or described in full below are not the only risks that we face. Additional risks and uncertainties
not precisely known to us, or that we currently deem to be immaterial may also materially adversely affect our business, financial condition,
results of operations and future growth prospects.
Risk Factors
You
should carefully consider the risks described below together with the other information set forth in this report, which could materially
affect our business, financial condition and future results. The risks described below are not the only risks facing our company. Risks
and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business,
financial condition and operating results.
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Risks related to Our Business and Our Industry
We
cannot be certain that we will sustain our current level of profitability in the future.
We achieved a
net profit of $93.8 million and $169.2 million for the
years ended December 31, 2022 and 2021 respectively. A high growth rate in profitability may not be sustainable over time. For example,
our revenue and profitability for the year ended December 31, 2020 did not grow as we previously anticipated
mainly due to the adverse effects of Covid-19 on demands for our products, and on the global economy in general. In 2021, we experienced
an increase in revenues and profitability when compared to the same period in 2020 and in 2022 our revenues grew when compared to the
same period in 2021 while our net profit decreased due to reasons detailed in the Management's Discussion and Analysis Section of this
report. In the future, our revenues from both solar and non-solar business may not grow at the pace we anticipate, or may decline
for a number of 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, the short term and long term effects of Covid-19 on
our industry and business and industry trends including component shortages and supply chain disruptions due to ocean freight capacity,
shipping times and port congestions as well as other macroeconomic conditions in our domestic and international markets, inflation concerns,
rising interest rates and recessionary concerns , 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.
In addition, we expect to incur additional
costs and expenses related to the continued development and expansion of our business, including in connection with recent or future acquisitions
as well as ongoing marketing and developing our products, development of our own manufacturing facilities, expanding into new product
markets and geographies, maintaining and enhancing our research and development operations and hiring additional personnel. We do not
know whether our revenues will grow rapidly enough to absorb these costs, or the extent of these expenses or their impact on our results
of operations.
The
rapidly evolving and competitive nature of the solar industry makes it difficult to evaluate our future prospects. Our entry into other
adjacent markets through recent acquisitions is new and highly competitive and it is difficult to evaluate our future in these new markets
as well.
The rapidly evolving and competitive
nature of the solar 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. Our non-solar businesses
in adjacent markets, such as storage and e-Mobility are highly competitive markets in which we will need to compete. 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 our business continues to grow. The viability and demand for our products
may be affected by many factors beyond our control, including:
• prices of traditional carbon-based energy sources;
If
demand for solar energy solutions does not continue to grow or grows at a slower rate than anticipated, our business and results of operations
will suffer.
Our revenues are primarily derived from products
utilized in solar PV installations. Thus, our future success depends on continued demand for solar energy solutions and the ability of
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, businesses, or utilities 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 continue to develop sufficiently, demand for our products will decrease,
resulting in an adverse impact on our ability to increase our revenue and grow our business.
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The
current revenues generated from our e-Mobility business are dependent on orders from a leading automotive manufacturer. The automotive
industry is facing significant shortages of components for their assembly and their slowdown in manufacturing could delay orders of our
powertrain kits.
Shortages in components in the automotive
industry, including semiconductors, due in large part to strong cross-industry demand, have presented challenges and global production
disruptions. Many leading automotive manufacturers have announced that these shortages will remain constrained and could extend into 2023.
As a result, during 2021, our leading customer announced temporary suspensions of its manufacturing due to component shortages. These
suspensions occurred again in 2022 and caused delays of orders for our powertrain units. Additional delays or suspensions may have
an adverse effect on our revenues, profitability and other financial results from this business.
Additionally,
projects in the automotive industry are long term and involve a long qualification process. Our e-Mobility business currently does not
have additional substantial projects in the pipeline beyond the project with Stellantis, which was announced in February 2021. Our inability
to enter into additional projects may have an adverse effect on our revenues, profitability and other financial results from the e-Mobility
business. In 2022, we impaired goodwill and intangible assets related to our e-Mobility business (see Notes 8 and 9 of the financial statements
for additional information).
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, or other renewable energy resources, 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:
• utility rate adjustment and customer class cost reallocation;
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 offered
by us to 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 smart energy products 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 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.
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The
market for our products is highly competitive and we expect to face increased competition as new and existing competitors introduce power
optimizers, inverters, solar PV system monitoring and other smart energy 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, microinverter manufacturers, as well as emerging
technology companies offering alternative MLPE products. Over the past few years, several new entrants to the inverter and MLPE market,
including low-cost Asian manufacturers, have announced plans to ship or have already shipped products in markets in which we sell our
products, including, with respect to sales in the United States, Australia and in Europe. We expect competition to intensify as new and
existing competitors enter the market. In addition, there are several new entrants that are proposing solution to the rapid shutdown functionality
which has become a regulatory requirement for PV rooftop solar systems in the United States. If these new technologies are successful
in offering a price competitive and technological attractive solution to the residential solar PV market, this could make it more difficult
for us to maintain market share.
Several of our existing and potential 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.
In addition, 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.
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.
The
solar 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 demand for our products. The
solar industry has undergone challenging business conditions in past years, including downward pricing pressure for PV modules, mainly
as a result of overproduction, and reductions in applicable governmental subsidies, contributing to demand decreases. Therefore, 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 or components thereof, shipment delays, rejection of our products, damage to
our reputation, lost revenue, diversion of our 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. In most cases, we offer a minimum 12-year limited warranty for our inverters, extendable to twenty-five
years for an additional cost, a 25-year limited warranty for our power optimizers and a 10-year limited warranty for our residential energy
bank battery. Our limited warranties cover defects in materials and workmanship of our products under normal use and service conditions;
therefore, 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 expenses 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. In particular, our residential energy hub battery is new on the market and we do not have
the experience in servicing this product yet.
If
one of our products were to cause injury to someone or cause property damage, or in the event that a claim is made alleging false or misleading
advertisement, unfair competition or other consumer related claims, we could potentially be exposed to product liability claims and lawsuits
which could result in significant costs and liabilities if damages are awarded against us. Further, any product liability claim we face
could be expensive to defend and could divert management’s attention. Even in litigation where we believe our liability is remote,
there is a risk that a negative finding or decision in a matter involving multiple plaintiffs or a purported class action could have a
material adverse effect on our competitive position, results of operations or financial condition.
For example, we provide warranty for the products
sold by our e-Mobility division that are installed in vehicles. If such products contain design or manufacturing defects that cause them
not to perform as expected, they may cause injury or damage to property and we may experience
product recalls, product liability and significant warranty and other expenses. 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.
We
depend upon a small number of outside contract manufacturers. Our operations could be disrupted if we encounter problems with these contract
manufacturers.
While we are manufacturing a portion of our products in Israel, we still heavily
rely upon our contract manufacturers to manufacture most of our products. We mainly rely on two contract manufacturers. Any change in
our relationship or contractual terms with our contract manufacturers, or changes in our contract manufacturers’ ability to comply
with their contractual obligations could adversely affect our financial condition and results of operations. 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. Even though we have commenced manufacturing in our facility in Israel, the expected production
volumes will not be sufficient to relieve our significant dependence on our contract manufacturers. In addition, we remain heavily dependent
on suppliers of the components needed for our manufacturing.
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The revenues that our contract manufacturers
generate from our orders represent a relatively small percentage of their overall revenues. Therefore, 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, Vietnam, Israel, Hungary and
Mexico, where the ramping up process is expected to be completed in the first half of 2023. The location of our facilities outside
of key markets such as the U.S. increases shipping time, thereby causing a long lead time between manufacturing and delivery.
If either of our contract manufacturers were
unable or unwilling to manufacture our products in required volumes and at high quality levels or continue to supply under existing terms,
we would have to identify, qualify, and select acceptable alternative contract manufacturers, which may not be available to us when needed
or may be unable to satisfy our quality or production requirements on commercially reasonable terms. 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, subject us to liquidated damages for late deliveries,
and damage our reputation with local installers and potential end-users, all of which will cause us to forego potential revenue opportunities.
Further, the ramp of a new contract manufacturer is time consuming and draining on the resources of our operations team.
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 involving several 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 identified and properly 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 costs and delays,
all of which 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 changes or shortages in raw materials or key components we use could result in sales delays,
higher costs associated with air shipments, 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 supplying, or offering at commercially reasonable prices, our
components or raw materials, cease operations or be acquired by, or enter into exclusive arrangements with our competitors. Because there
are a few suppliers of raw materials used to manufacture our products, it may be difficult to timely identify and/or qualify alternate
suppliers on commercially reasonable terms; therefore, 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 that
could harm our business or financial performance.
Managing our supplier and contractor relationships
is particularly difficult when we are introducing new products. For example, as we began to ramp assembly and production of powertrain
kits for the automotive industry, we became heavily reliant on new third-party suppliers that needed to be approved through rigorous testing
and validation processes for use in our supply chain. Once selected, it is time consuming and costly to replace such vendors. The same
is true for our residential Home Battery for which we rely on a single source for supply of the lithium ion cells. Any delay or
shortage of supply or inability to deliver the components to our manufacturing facilities 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
and could result in lost revenue or higher expenses associated with increased air shipments required to meet customer demand in a timely
manner and would harm our business. For example, we continue to experience raw material shortages due to increased lead time which may
affect our ability to timely receive certain components within the previously expected lead times. These shortages may result in a delay
in sales, higher costs associated with air shipments, cancellations of orders by customers, liquidated damages for late deliveries and
loss of market share.
Disruption
in our global supply chain and rising prices of oil and raw materials as a result of the conflict between Russia and Ukraine may adversely
affect our businesses and results of operations.
The conflict that began between Russia and
Ukraine in late February 2022, may significantly amplify already existing disruptions to our supply-chain and logistics. Specifically,
the conflict may disrupt the transit of goods by train from China to Europe, resulting in an increase in prices of certain raw materials
sourced in Russia (such as nickel and aluminum) that we use in the manufacture of our products as well as increase oil prices that will
in turn cause overall shipping costs to rise. In addition, the governments of the United States, the European Union, Japan and other jurisdictions
have announced sanctions on certain industry sectors and parties in Russia and the regions of Donetsk and Luhansk, as well as enhanced
export controls on certain products and industries. These and any additional sanctions, as well as any counter responses by the governments
of Russia or other jurisdictions, could adversely affect the global financial markets generally and levels of economic activity as well
as increase financial markets volatility. , and any additional measures or sanctions, as well as the resulting rise in prices of oil and
certain raw materials sourced in Russia may disrupt our business and results of operations and/or adversely affect the pricing of our
products.
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 revenues.
Our customers’ decisions to purchase
our products are influenced by several factors outside of our control. The agreements we have with some of our largest customers do not
have long-term purchase commitments and are generally cancellable 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 (see Note 2aa to our consolidated financial statements).
In addition, we do not have exclusive arrangements
with our third-party distributors and large installers, many of which also market and sell 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.
Mergers
in the solar industry among our current or potential customers may adversely affect our competitive position.
There has been an increase in consolidation
activities among distributors, large installers, and other strategic partners in the solar industry. For example, in October 2020, Sunrun,
a leading provider of residential solar, battery storage and energy services, acquired Vivint Solar. If this consolidation continues,
it will 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.
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Our
planned expansion into new geographic markets or new product lines or services could subject us to additional business, financial, and
competitive risks.
We have in the past, and may in the future,
evaluate opportunities to expand into new geographic markets and introduce new product offerings and services. We also may from time to
time engage in acquisitions of businesses or product lines with the potential to strengthen and expand our market position, technological
capabilities, or provide synergy opportunities. For example, we intend to continue to introduce new products targeted at large commercial
and utility-scale installations and to continue to expand into other international markets.
Our successful operation in these new markets,
or any acquired business, 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 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 and to identify and integrate any acquired businesses.
Further, we expect these new solar PV markets
and additional markets we have entered, or may enter, into to have different characteristics from the markets in which we currently sell
our products. Our success will depend on our ability to properly adapt to these differences, which include differing regulatory requirements,
such as 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, and performance and compatibility requirements. In addition, expanding
into new geographic markets will increase our exposure to existing risks, such as fluctuations in the value of foreign currencies 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 successfully develop and introduce
these new products, successfully integrate acquired businesses,
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.
If
we fail to build our non-solar businesses 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 152,500 inverters and approximately 3.6 million power
optimizers in the fiscal year ending June 30, 2015, to annual product sales exceeding 1.0 million
inverters and 23.6 million power optimizers in the year ended December 31, 2022.
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 such 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,
customer support, IT, information systems, 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 an efficient manner. If we cannot manage our growth, we may be unable to take advantage
of market opportunities, execute our business plans or 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.
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Conversely, the global pandemic and resulting
economic downturn in many regions require our ability to be flexible and decrease expenses where growth has slowed down. Our ability to
timely react to market conditions is not always in our control and any inability to do so could also adversely impact our business.
We
may not have the ability to raise the funds necessary to settle conversion of our Convertible Senior Notes or Notes in cash or to repurchase
the Notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion of the Notes
or to repurchase the Notes.
Holders of the Notes
have the right to require us to repurchase all or a portion of their Notes upon the occurrence of a fundamental change (as defined in
the Indentures governing their respective Notes) at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased,
plus accrued and unpaid special interest, if any. In addition, upon conversion of the Notes, unless we elect to deliver solely shares
of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required
to make cash payments in respect of the Notes being converted. We may not have enough available cash or be able to obtain financing
at the time we are required to make repurchases of Notes surrendered or Notes being converted. In addition, our ability to repurchase
the Notes or to pay cash upon conversions of the Notes may be limited by law, regulatory authority or agreements governing our future
indebtedness. Our failure to repurchase Notes at a time when the repurchase is required by the indenture governing such Notes or to pay
cash upon conversion of the Notes as required by such indenture would constitute a default under such indenture. A default under the indenture
governing the Notes or the fundamental change itself could also lead to a default under agreements governing our future indebtedness.
If the payment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient
funds to repay the indebtedness and repurchase the Notes or make cash payments upon conversion of the Notes.
Any
unauthorized access to, disclosure, or theft of personal information we gather, store, or use could harm our reputation and subject us
to claims or litigation.
Our business and operations may be impacted
by data security breaches and cybersecurity attacks, including attempts to gain unauthorized access to confidential data. We receive,
store, and use certain personal information of our employees, customers, and the end-users of our customers’ solar PV systems. We
take steps to protect the security, integrity, and confidentiality of the personal information we process; however, we have been subject
to cybersecurity attacks and other information technology system disruptions in the past and there is no guarantee that inadvertent or
unauthorized access, use or disclosure will not occur despite our efforts. Because techniques used to obtain unauthorized access or sabotage
systems change frequently and generally are not identified until after 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 mitigatory 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,
particularly in light of the European General Data Protection Regulation, the California Consumer Privacy Act, and China Personal Information
Protection Law (PIP) which came into effect November 1, 2021. 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.
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Third
parties, our employees, or our vendors might gain unauthorized access to our network or seek to compromise our products and services.
Occasionally, we face attempts by others,
including our own employees or vendors, to access our networks, to gain unauthorized access through the Internet, introduce malicious
software to our information technology (IT) systems, or corrupt the processes of hardware and software products that we manufacture and
services we provide. We or our products may be a target of computer hackers, organizations or malicious attackers who attempt to gain
access to our network or data centers or those of our customers or end users; steal proprietary information related to our business, products,
employees, and customers; or interrupt our systems or those of our customers or others. Occasionally, we encounter intrusions or attempts
at gaining unauthorized access to our network. To date, none have resulted in any material adverse impact to our business or operations,
although there can be no guarantee that such impacts will not be material in the future. While we seek to detect and investigate all unauthorized
attempts and attacks against our network and products, and to prevent their recurrence where practicable, we remain potentially vulnerable
to additional known or unknown threats. In addition to intentional third-party cyber-security breaches, the integrity and confidentiality
of Company and customer data may be compromised as a result of human error, product defects, or technological failures. Cyber-security
breaches, whether successful or unsuccessful, and other IT system interruptions, including those resulting from human error and technological
failures, could subject us to significant costs arising from, among others, rebuilding internal systems, reduced inventory value,
providing modifications to our products and services, defending against litigation, responding to official inquiries or actions, paying
damages, or taking other remedial steps with respect to third parties.
Our
entry into business engagements with military bodies as our customers in the lithium-ion battery and energy storage business embodies
a risk for potentially large-scale and uncapped liability.
As a result of the acquisition of our Korean
subsidiary (formerly Kokam), we sell a small portion of our products to customers who integrate our storage systems or cells and then
sell these products to military customers. Our sales to military customers often involve standard form contracts, which may not be subject
to negotiation. In particular, certain of these contracts involve unlimited damages provisions that could result in large-scale liabilities.
Our
business could be materially adversely affected as a result of the risks associated with acquisitions and investments. In particular,
we may not succeed in future acquisitions or be effective in integrating such acquisitions.
As part of our growth strategy, we have made
a number of acquisitions, and may continue to make acquisitions and investments in the future. We frequently evaluate the tactical or
strategic opportunities available related to complementary businesses, products or technologies. There can be no assurance that we will
be successful in making additional acquisitions. Even if we are successful in making additional acquisitions, integrating an acquired
company’s business into ours or investing in new technologies may result in unforeseen operating difficulties and large expenditures
and absorb significant management attention that would otherwise be available for the ongoing development of our business, both of which
may result in the loss of key customers or personnel and expose us to unanticipated liabilities. Further, we may not be able to retain
the key employees that may be necessary to operate the businesses we acquire and we may not be able to attract, in a timely manner, new
skilled employees and management to replace them.
We may not be able to consummate acquisitions
or investments that we have identified as crucial to the implementation of our strategy for other commercial or economic reasons. Further,
we may not be able to obtain the necessary regulatory approvals, including those of competition authorities and foreign investment authorities,
in countries where we seek to consummate acquisitions or make investments. For those and other reasons, we may ultimately fail to consummate
an acquisition, even if we announce the intended acquisition.
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Lithium-Ion
used in our battery cells and packs can potentially catch fire or vent smoke and cause damage or injury.
The battery cells and packs produced by
our subsidiary, and the SolarEdge Home Battery, make use of lithium-ion cells. We regularly test our products and take safety measures
when manufacturing, selling and installing battery cells and packs. However, due to the high energy density of lithium-ion cells, mishandling,
inappropriate storage or delivery, non-compliance with safety instructions or field failures can potentially cause a battery cell to rapidly
release its stored energy, which may in turn cause a thermal event that can ignite nearby materials, including other lithium-ion cells.
As the use of lithium-ion batteries becomes more widespread, these events may occur more often, causing damage to property, injury, lawsuits
and adverse publicity, which may adversely affect our reputation, results of operations or financial condition.
Conditions
in Israel affect our operations and may limit our ability to develop, produce and sell our products.
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 is the target of terrorist activity, including threats from Hezbollah militants in Lebanon,
Iranian militia in Syria, and others. Ongoing state of hostility, varying in degree such as rocket fire from the Gaza Strip, has occurred
on an irregular basis, disrupting day-to-day civilian activity and negatively affecting business conditions. 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, operate our manufacturing plant in northern
Israel, engage in research and development, or otherwise adversely affect our business or operations. In the event of war, we may be forced
to 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 instability in neighboring states results in
the establishment of fundamentalist Islamic regimes or governments more hostile to Israel, or if Egypt, Turkey, 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.
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.
Additionally,
the newly elected Israeli government has announced plans to significantly reduce the Israeli Supreme Court's judicial oversight, including
reducing its ability to strike down legislation that it deems unreasonable, and plans to increase political influence over the selection
of judges. These plans have prompted protests of Israeli citizens and criticism of leading Israeli business leaders as well as some foreign
leaders. If such government plans are eventually enacted, they may cause operational challenges for us since we are headquartered
in Israel and approximately half of our employees are located in Israel. In addition, if foreign policy is negatively impacted with regard
to Israel, this could impact our business with suppliers and customers which could in turn adversely impact our reputation, results of
operations or financial condition.
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 was eligible for certain
tax benefits provided to “Benefited Enterprises” under the Israeli Law for the Encouragement of Capital Investments, 1959
(the “Investments Law”). Beginning in January 2019, and with respect to its taxable results from 2019 onwards, our Israeli
subsidiary further elected to apply the terms of the Investments Law as per “Preferred Enterprise”
(“PE”) or “Preferred Technological Enterprise” (“PTE”). In order to remain eligible for the
tax benefits for “Benefited Enterprises” with respect to our Israeli subsidiary’s taxable results until 2018 and with
respect to its taxable results from 2019 for PE or PTE, we must continue to meet certain conditions
stipulated in the Investments Law and its regulations, as amended. If these tax benefits are reduced, cancelled, or discontinued, or if
we are held to have violated the conditions stipulated in the Law, our Israeli taxable income would be subject, in whole or in part, 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 statutory corporate tax rate for Israeli companies is 23% as of January 1, 2018 and onward. Additionally, if we
increase our activities outside of Israel through acquisitions or otherwise through our Israeli subsidiary, our existing or expanded activities
might not be eligible for inclusion in existing or future Israeli tax benefit programs. The Israeli government may furthermore independently
determine to reduce, phase out or eliminate entirely the benefit programs under the Investments 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.
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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.
Many of our directors and executive officers,
their assets, and most of our assets 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 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 of forum
non conveniens. 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 lengthy 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, judgment against many
of our directors and executive officers may be unachievable or unenforceable.
The
ongoing Covid-19 pandemic, and global measures taken in response thereto have adversely impacted, and may continue
to adversely impact, our operations and financial results.
The Covid-19 pandemic has had, and may continue
to have, a material adverse impact on our results of operations including its impact on our supply chain and inflationary pressures.
The full extent the effects Covid-19 will
have on our business depends on numerous evolving factors that we may not be able to currently accurately predict, including: the duration
and scope of the pandemic; governmental, business and individual responses to the pandemic; the effect on our customers and customer demand
for our products, disruptions or restrictions on our employees’ ability to work and travel and potential disruptions to our manufacturing
capacity, similar to the restrictions experienced by our manufacturing facility in Vietnam in
the third quarter of 2021, which would limit our ability to meet customer demand and impact our operating results.
More generally, the Covid-19 pandemic raises
the possibility of an extended global economic downturn and has caused volatility in financial markets, which may continue to adversely
affect demand for our products and could adversely affect our results and financial condition in subsequent quarters. For example, some
of our suppliers may experience delivery delays or financial difficulties, resulting in supply constraints and increased costs or delays
to our productions. Furthermore, we may experience delays in timely delivery of our products to our customers, exposing us to cancellations
of orders and/or potential liquidated damages resulting from our inability to timely delivery our products.
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The
unprecedented and continuously evolving nature of Covid-19, other pandemics or epidemics, could also have the effect of amplifying many
of the other risks described in this Item 1A, Risk Factors.
We
are dependent on ocean transportation to deliver our products in a timely and 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 ocean transportation for the delivery
of most of our products to our customers, and when unavailable, incompatible with customer delivery time requirements, or when we are
unable to accommodate accelerated delivery times due to growing customer volume demands, we rely on alternative, more expensive air transportation.
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, disruptions to ports and other shipping facilities as a result of the Covid-19 or other
epidemics and other factors 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.
While we have witnessed a reduction in shipment
rates in the fourth quarter of 2022, during the year ended December 31, 2022, we experienced an increase
in the cost of goods sold due to an increase in shipping rates that resulted from a reduction in ocean freight capacity and the reduction
in the availability of air freight that increased the demand for ocean freight. We also experienced disruptions to our logistics supply
chain caused by constraints in the global transportation system including limited availability of local ground transportation coupled
with congestion in ports and borders.
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, 60.1% of our revenues in the year ended December 31,
2022 were generated in currencies other than the U.S. Dollar. In addition, a significant portion of our operating expenses are
accrued in New Israeli Shekels (primarily related to payroll), the Euro and, to a lesser extent, the
South Korean Won (“KRW”) and other currencies. As detailed in the Foreign Currency Exchange Risk under Item 7A -Quantitative
and Qualitative Disclosures About Market Risk, our profitability is affected by movements of the U.S. dollar against the Euro, and, to
a lesser extent, the New Israeli Shekel, KRW 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 which are denominated
primarily in U.S. dollars. If there is a 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 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, New Israeli Shekel, KRW and other currencies, against the U.S. dollar
could have an adverse effect on our profitability and financial condition.
Occasionally, we may enter into derivative
financial instruments to hedge the exchange rates impacts on our assets and liabilities denominated in Israeli Shekels, Euro, KRW and
other currencies.
Our hedging activities
may also contribute to increased losses as a result of volatility in foreign currency markets. If foreign exchange currency markets continue
to be volatile, such fluctuations in foreign currency exchange rates could materially and adversely affect our profit margins and results
of operations in future periods, and may make it difficult to hedge our foreign currency exposures effectively.
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We
are subject to risks related to corporate social responsibility.
We are facing increasing scrutiny related
to our environmental, social and governance (“ESG”) practices and requested disclosures by institutional and individual investors
who are increasingly using ESG screening criteria in making investment decisions. Our disclosures on these matters or a failure to satisfy
evolving stakeholder expectations for ESG practices and reporting may potentially harm our reputation and impact relationships with investors.
Certain market participants including major institutional investors use third-party benchmarks or scores to measure our ESG practices
in making investment decisions. Furthermore, some of our customers and suppliers evaluate our ESG practices or request that we adopt certain
ESG policies as a condition of awarding contracts. In addition, our failure or perceived failure to pursue or fulfill our goals, targets
and objectives or to satisfy various reporting standards within the timelines we announce, or at all, could expose us to government enforced
actions and/or private litigation. As ESG best-practices, reporting standards and disclosure requirements continue to develop, we may
incur increasing costs related to ESG monitoring and reporting.
Complications with the
design or implementation of our new ERP system could adversely impact our business and operations.
We rely extensively on information systems
and technology to manage our business and summarize operating results. We are in the process of a multi-year implementation of a new global
enterprise resource planning (“ERP”) system. This ERP system will replace our existing operating and financial systems. The
ERP system is designed to accurately maintain the Company’s financial records, enhance operational functionality and provide timely
information to the Company’s management team related to the operation of the business. The ERP system implementation process has
required, and will continue to require, the investment of significant personnel and financial resources. We may not be able to successfully
implement the ERP system without experiencing delays, increased costs and other difficulties. If we are unable to successfully design
and implement the new ERP system as planned, our financial positions, results of operations and cash flows could be negatively impacted.
Additionally, if we do not effectively implement the ERP system as planned or the ERP system does not operate as intended, the effectiveness
of our internal control over financial reporting could be adversely affected or our ability to assess those controls adequately could