Enphase Demands Secrecy in Accounting Fraud Suit
New filing language also reveals understated lease liability and an ominous product quality warning,
March 17, 2021
Following fraud allegations in a report published by a short seller, Enphase Energy (ENPH), which sells home energy conversion and storage solutions, warns in its 2020 10-K that the “manipulative attacks” are likely to persist:

“...short sellers have issued such reports on our stock and will likely continue to issue such reports.”

The warning is of particular interest in the context of Enphase’s related legal trouble. The 2020 10-K includes a handful of new legal proceedings— a class action shareholder suit alleging Enphase misled investors— though the “books and records” suit appears most concerning to investors. In this case, shareholders are demanding Enphase open its books so shareholders can look for accounting fraud:

“...to compel the company to permit Mr. Olochwoszcz to inspect certain of our books and records (the “Section 220 Litigation”). The complaint alleges that our company has wrongfully refused to produce documents in response to Mr. Olochwoszcz’s demand and seeks a court order compelling us to permit inspection and copying of certain of our books and records…”

Enphase discloses it has received similar requests from four other shareholders. On February 2, 2020, four of the five shareholders and Enphase entered into an agreement that trades company documents for secrecy:

“...The parties agreed to the limited intervention, a confidentiality agreement, and a stay of the Section 220 Litigation in connection with a document production agreement between the Company and four of the five demanding stockholder”

Rather than hiding something nefarious, Enphase would likely argue the confidentiality agreement is necessary to protect sensitive corporate information from competitors. The company did not provide an update on the shareholder who did not agree to view certain documents in return for confidentiality. It did leave investors to wonder about the impact of Enphase’s mounting legal trouble in 2020 and beyond:

“The outcome of the pending lawsuits and any other related lawsuits is necessarily uncertain...and we may not prevail.”

Separately, Enphase also disclosed that it discounts operating leases by 7.7%. This rate is significantly higher than Enphase’s solar, inverter, and energy storage peers, which report the following discount rates in their most recent filings:

-Solar Edge (SEDG): 1.68%
-Generac (GNRC): 4.48%
-Tesla (TSLA): 5.8%

Using an inflated discount rate hide’s a firm’s true liabilities from investors.

Enphase has $23.9 million in future operating lease obligations. The present value of those obligations, according to Enphase, is $19.8 million. If we use the blended average discount rate for Enphase’s peer group— 3.9%— we calculate a lease liability of $20.9 million. It means Enphase is understating its lease liabilities by approximately $1.1 million, or 4.6% of its future operating lease obligations.

Lastly, Enphase offers a web-based platform homeowners can access to track and monitor the performance of their solar photovoltaic (PV) systems. In its 2020 10-K, Enphase includes new language warning that the system may be unreliable:

“Despite testing by us, real or perceived errors, failures or bugs in our customer solutions, software or technology or the technology or software we license from third parties, including open source software, may not be found until our customers use our products. Real or perceived errors, failures or bugs in our products could result in negative publicity, loss of or delay in market acceptance of our products, harm to our brand, weakening of our competitive position or claims by customers for losses sustained by them.”

The internet is littered with relatively minor complaints regarding system reporting issues and the like. The warning takes on a greater degree of importance in the context of the short seller warning and the company’s customer concentration issue. Enphase generated 29% of its revenue from a single customer in 2020. Product bugs can have an outsized impact on companies that have an outsized reliance on a single customer.
Related: SEDG, GNRC, TSLA, FSLR
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