Discontinued Operations

9 Months Ended

Sep. 27, 2020

Discontinued Operations and Disposal Groups [Abstract]

Discontinued Operations

Discontinued Operations

Maxeon Solar Separation Transaction

On August 26, 2020, the Company completed the Spin-Off of Maxeon Solar, consisting of certain non-U.S. operations and assets of our former SunPower Technologies business unit. The Spin-Off was completed by way of a pro rata Distribution of all of the then-issued and outstanding ordinary shares, no par value, of Maxeon Solar to holders of record of the Company’s common stock as of the close of business on August 17, 2020.

Immediately after the Distribution, Maxeon Solar and Tianjin Zhonghuan Semiconductor Co., Ltd., a PRC joint stock limited company (“TZS”), completed the previously announced transaction in which Zhonghuan Singapore Investment and Development Pte. Ltd., a Singapore private limited company and an affiliate of TZS, purchased from Maxeon Solar, for $298.0 million, 8,915,692 additional ordinary shares of Maxeon Solar (the “TZS Investment”), representing approximately 28.848% of the outstanding ordinary shares of Maxeon Solar after giving effect to the Spin-Off and the TZS Investment.

Shortly after the Spin-Off, Maxeon Solar paid us $125.0 million for the transfer of certain intellectual property and reimbursement of transaction expenses in accordance with the Separation and Distribution Agreement entered into between us and Maxeon Solar in connection with the Spin-Off.

In connection with the Spin-Off, we and Maxeon Solar entered into various ancillary agreements that provide a framework for the relationships between the parties going forward, including a tax matters agreement, an employee matters agreement, a transition services agreement, a brand framework agreement, a cross license agreement, a product collaboration agreement and a supply agreement (collectively, the “Ancillary Agreements”). For the descriptions of the Ancillary Agreements and the full text of such agreements, refer to our Current Report on Form 8-K and exhibits filed with the SEC on August 27, 2020.

Under the transition services agreement, Maxeon Solar and SunPower will provide various administrative services and assets to each other through August 26, 2021 with an option to extend for up to an additional 180 days. Services to be provided include, among others, certain services related to finance, accounting, business technology, human resources, facilities, document management and record retention, relationship and strategy management, module operations, and technical and quality support. In consideration for such services, Maxeon Solar and SunPower will each pay fees to the other for the services provided, and those fees will generally be in amounts intended to allow the party providing services to recover all of its direct and indirect costs incurred in providing those services, plus a standard markup, and subject to a 25% increase following an extension of the initial term (unless otherwise mutually agreed to by the parties). During the three and nine months ended September 27, 2020, we recorded $2.1 million of income associated with the transition services agreement. This was offset by $0.2 million of services provided by Maxeon Solar to us, resulting in a net reduction of operating expenses of $1.9 million, presented separately within operating expenses on the condensed consolidated statement of operations.

The product collaboration agreement provides a framework for the development of next-generation Maxeon 7 panels, flex panels, single solar panels, and any other products that are agreed to by the parties. Each project that will occur under the agreement will be governed by written plans that will be agreed to by the parties. These plans will include agreed-upon budgets, cost allocations and resource responsibilities of the parties and will last a maximum of 2 years. Both parties will have the sole right to manufacture the products developed under the agreement within the 50 states of the United States, the District of Columbia and Canada (the “Collaboration Territory”). Maxeon Solar will have the exclusive right to manufacture the products outside of the Collaboration Territory. For a period that will not be longer than two years commencing on the effective date or approval of a development plan for each developed product (the “Exclusivity Period”), SunPower will have the exclusive right to sell, and Maxeon Solar will have the exclusive right to supply, each developed product in specified markets. For one year after the Exclusivity Period for each developed product, neither party will be permitted to enter into an exclusive supply relationship with a third party for the relevant developed product within those markets. In addition, after the Exclusivity Period, if either party intends to enter into a supply agreement for the developed product, the other party has a right of first offer or refusal. Any new intellectual property arising from the agreement will be owned by Maxeon Solar, subject to a sole license to SunPower within the Collaboration Territory during the Exclusivity Period, and which will become non-exclusive after the Exclusivity Period. During the three and nine months ended September 27, 2020, we recorded an amount of $3.6 million reimbursable from Maxeon Solar under the product collaboration agreement, which is presented as a reduction of our R&D expense on the condensed consolidated statement of operations.

The supply agreement, which reflects good faith negotiations between the parties, provides that SunPower will purchase from Maxeon Solar certain designated products for use in residential and commercial solar applications in the Domestic Territory (as defined in the supply agreement). The supply agreement has a two-year term, subject to customary early termination provisions. Under the supply agreement, SunPower is required to purchase certain minimum volumes of products during each calendar quarter of the term. For the remainder of 2020, the minimum volumes are specifically enumerated for different types of products, and for each subsequent period, the minimum volumes will be established based on SunPower’s forecasted requirements, subject to certain limitations. The parties will be subject to reciprocal penalties for failing to purchase or supply, as applicable, the minimum product volumes. The purchase price for each product will be fixed for 2020 and 2021 based on the power output (in watts) of the relevant product. For subsequent periods, the purchase price will be set based on a formula and fixed for the covered period.

The Spin-Off meets the criteria for classification as “discontinued operations” in accordance with the guidance in ASC 205-20. Since Maxeon Solar was a major line of SunPower's business and formerly our global cell and module manufacturing platform, our global sales platform in Europe, and our distributed generation and power plant operations, the disposal has a strategic shift that has major impacts on SunPower's current and historical financial results. Thus, in accordance with the guidance, SunPower no longer consolidates the financial results of Maxeon Solar within its financial results of continuing operations. For all the periods prior to the Spin-Off, the financial results of Maxeon Solar are presented as net earnings from discontinued operations on the condensed consolidated statement of operations and assets and liabilities of discontinued operations on the condensed consolidated balance sheets.

The following table presents the assets and liabilities of Maxeon Solar as of December 29, 2019 presented as assets and liabilities of discontinued operations on the condensed consolidated balance sheet:

(In thousands)	December 29, 2019
Assets:
Current Assets:
Cash and cash equivalents	$	120,956
Restricted cash and cash equivalents, current portion	—
Restricted short-term marketable securities	6,187
Accounts receivable, net	98,598
Contract assets, current portion	—
Inventories	194,852
Advances to suppliers, current portion	75,545
Prepaid expenses and other current assets	34,489
Total current assets of discontinued operations	530,627
Property, plant and equipment, net	267,866
Operating lease right-of-use assets	10,559
Advances to suppliers, net of current portion	13,993
Other long-term assets	53,395
Total assets of discontinued operations	$	876,440
Liabilities:
Current Liabilities:
Accounts payable	$	234,697
Accrued and other current liabilities1	87,614
Contract liabilities, current portion	47,096
Short-term debt and current portion of long-term debt	60,383
Total current liabilities of discontinued operations	431,694
Long-term debt	1,487
Convertible debt, net of current portion	—
Contract liabilities, net of current portion	35,616
Other long-term liabilities	46,526
Total liabilities of discontinued operations	$	524,755

The following table presents financial results of Maxeon Solar presented as discontinued operations in the Company's income statement in the corresponding periods:

	Three Months Ended				Nine Months Ended
(In thousands)	September 27, 2020		September 29, 2019		September 27, 2020		September 29, 2019
Net revenues1	$	63,272	$	189,916	$	357,164	$	569,856
Gross income (loss)1	(30,820)		2,756		(26,609)		(46,637)
Operating expenses2	33,177		30,601		92,581		82,191
Operating loss	(63,997)		(27,845)		119,191		(128,828)
Loss before income taxes and equity in earnings (losses) of unconsolidated investees	(70,761)		(29,417)		(125,599)		(131,181)
Provision for income taxes	6,137		(2,450)		3,191		(7,169)
Equity in earnings (losses) of unconsolidated investees	58		(807)		(586)		(1,334)
Net loss from discontinued operations, net of taxes	(64,566)		(32,674)		(122,994)		(139,684)
Net income from discontinued operations attributable to noncontrolling interests and redeemable noncontrolling interests	(258)		(987)		(1,313)		(3,057)
Net loss from discontinued operations attributable to stockholders	$	(64,824)	$	(33,661)	$	(124,307)	$	(142,741)

1 Excludes intersegment revenue and gross margin from sale of photovoltaic modules to SunPower prior to the Spin-Off, which is eliminated in consolidation.

2 Operating expenses include separation costs classified within discontinued operations.

The following table presents significant non-cash items and capital expenditures of discontinued operations:

	Nine Months Ended
(In thousands)	September 27, 2020		September 29, 2019
Depreciation and amortization	$	31,143	$	34,759
Stock-based compensation	6,401		5,246
Equity in losses of unconsolidated investees	586		1,334
Gain from sale of investments	—		6,275
Purchases of property, plant and equipment	10,707		31,523
Aged supplier financing balances reclassified from accounts payable to short-term debt	63,111		22,852

BUSINESS DIVESTITURE

Sale of Operations and Maintenance Business

In the third quarter of fiscal 2019, we signed a Membership Interest and Purchase Agreement ("MIPA") with NovaSource Power Services ("NovaSource”) to sell certain operation and maintenance assets and related liabilities for total consideration of $36.3 million. The transaction closed on May 14, 2020 upon the satisfaction of agreed conditions precedent to closing, and payment was received from NovaSource at that time.

Upon closing, we received net cash consideration of $16.0 million after an estimated $5.3 million working capital adjustment, as well as hold-backs totaling in aggregate $15.0 million for certain retained obligations and contracts not novated as of closing. We assessed the recoverability of these holdbacks and included our best estimate of the amount recoverable in the future, in our calculation of net gain on sale. The final net consideration is subject to final working capital adjustments that are expected to be agreed and finalized with NovaSource during the fourth quarter of fiscal 2020, which are not expected to materially impact the gain recognized in the second quarter of fiscal 2020. Additionally, we also agreed to retain and subcontract certain O&M contracts for selected large utility scale power plant projects in North America at a fixed price to NovaSource. The contracts were deemed loss-making on the closing date and accordingly, we recorded a liability for the expected loss to be recognized for these contracts that will be amortized over the expected period of loss of 3 years. In the third quarter of fiscal 2020, we recorded final working capital adjustments as agreed upon with NovaSource which had an immaterial impact on the consolidated financial statements.

In evaluating the accounting treatment for this sale, the transaction was considered the sale of a business as defined in ASC 805, Business Combinations. We recorded a gain of $10.5 million, which was recorded "gain on business divestiture" in our condensed consolidated statements of operations for the nine months ended September 27, 2020. We recorded $2.1 million of tax expense related to the sale during the nine months ended September 27, 2020. We also recorded $2.7 million of transaction expenses, which were expensed as incurred and included within “sales, general and administrative expenses” in our condensed consolidated statement of operations for the nine months ended September 27, 2020.

The assets and liabilities of our O&M business that were sold in the transaction are summarized below:

(In thousands)
Accounts receivable	$	5,693
Contract assets, current portion	3,239
Prepaid expenses, other current assets, and cash	4,786
Other long-term assets	634
Total assets	14,352
Accounts payable	3,434
Contract liabilities, current portion	4,204
Other current liabilities	808
Other long-term liabilities	2,245
Total liabilities	10,691
Net assets	$	3,661

Net proceeds received were as follows:

(In thousands)
Purchase price	$	36,300
Holdback receivables, including contracts not novated	(15,000)
Working capital adjustment, upon close	(5,324)
Net proceeds received	$	15,976

Net gain on sale for the nine months ended September 27, 2020 was as follows:

(In thousands)	Nine Months Ended
	September 27, 2020
Net proceeds received	$	15,976
Estimated receivable from amount held back for retained obligations	7,199
Liabilities for loss-making contracts retained	(6,026)
Book value of net assets sold	(3,661)
Working capital adjustment, post close	(3,030)
Net gain on sale	$	10,458