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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
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 001-34166


http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12898439&doc=11
SunPower Corporation
(Exact Name of Registrant as Specified in Its Charter)

Delaware
 
94-3008969
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
77 Rio Robles, San Jose, California
(Address of Principal Executive Offices and Zip Code)

 
95134
(Zip Code)


(408) 240-5500
(Registrant's Telephone Number, Including Area Code)

_________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 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 every Interactive Data File required to be submitted 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 such files). Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o    No  x

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of exchange on which registered
Common Stock
SPWR
NASDAQ

The total number of outstanding shares of the registrant’s common stock as of May 3, 2019 was 142,403,522.
 
 
 
 
 
d


1

Table of Contents


TABLE OF CONTENTS
 
 
Page

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



2

Table of Contents


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

SunPower Corporation
Condensed Consolidated Balance Sheets
(In thousands, except share par values)
(unaudited)
 
March 31, 2019
 
December 30, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
185,554


$
309,407

Restricted cash and cash equivalents, current portion
864


41,762

Accounts receivable, net1
156,445


175,605

Contract assets1
57,282


58,994

Inventories
334,390


308,146

Advances to suppliers, current portion
95,603


37,878

Project assets - plants and land, current portion
10,246


10,796

Prepaid expenses and other current assets
99,675


131,183

Assets held for sale2
550,073

 

Total current assets
1,490,132


1,073,771

 
 
 
 
Restricted cash and cash equivalents, net of current portion
13,345


12,594

Restricted long-term marketable securities
5,948


5,955

Property, plant and equipment, net
413,347


839,871

Operating lease right-of-use assets
32,638



Solar power systems leased and to be leased, net
74,134


92,557

Advances to suppliers, net of current portion
62,914


133,694

Long-term financing receivables, net - held for sale
19,044


19,592

Other intangible assets, net
10,858


12,582

Other long-term assets
185,371


162,033

Total assets
$
2,307,731


$
2,352,649

 
 
 
 
Liabilities and Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable1
$
347,233


$
325,550

Accrued liabilities1
190,095


235,252

Operating lease liabilities, current portion
8,502



Contract liabilities, current portion1
92,621


104,130

Short-term debt
41,838


40,074

Liabilities held for sale2
619,538



Total current liabilities
1,299,827


705,006

 
 
 
 
Long-term debt
71,593


40,528

Convertible debt1
818,832


818,356

Operating lease liabilities, net of current portion
29,490



Contract liabilities, net of current portion1
75,059


99,509

Other long-term liabilities
234,386


839,136

Total liabilities
2,529,187


2,502,535

Commitments and contingencies (Note 9)


 


Equity:
 

 
 

Preferred stock, $0.001 par value; 10,000 shares authorized; none issued and outstanding as of March 31, 2019 and December 30, 2018



Common stock, $0.001 par value, 367,500 shares authorized; 153,931 shares issued, and 142,393 shares outstanding as of March 31, 2019; 152,085 shares issued, and 141,180 shares outstanding as of December 30, 2018
142


141

Additional paid-in capital
2,469,998


2,463,370

Accumulated deficit
(2,561,561
)

(2,480,988
)
Accumulated other comprehensive loss
(4,051
)

(4,150
)
Treasury stock, at cost: 11,538 shares of common stock as of March 31, 2019; 10,905 shares of common stock as of December 30, 2018
(190,940
)

(187,069
)
Total stockholders' deficit
(286,412
)

(208,696
)
Noncontrolling interests in subsidiaries
64,956


58,810

Total deficit
(221,456
)

(149,886
)
Total liabilities and equity
$
2,307,731


$
2,352,649


1We have related-party balances for transactions made with Total S.A. and its affiliates as well as unconsolidated entities in which we have a direct equity investment. These related-party balances are recorded within the "accounts receivable, net," "contract assets," "accounts payable," "accrued liabilities," "contract liabilities, current portion," "convertible debt," and "contract liabilities, net of current portion," financial statement line items on our condensed consolidated balance sheets (see Note 2, Note 9, Note 10, and Note 11).

2Assets and liabilities held for sale relate to the expected sale of our commercial sale-leaseback portfolio. Refer to Note 4. Business Divestiture for details.



The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Table of Contents


SunPower Corporation
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
 
 
Three Months Ended
 
 
March 31, 2019
 
April 1, 2018
Revenue:
 
 
 
 
Solar power systems, components, and other1
 
$
341,442

 
$
328,860

Residential leasing
 
3,884

 
63,028

Solar services
 
2,899

 


 
348,225

 
391,888

Cost of revenue:
 


 
 
Solar power systems, components, and other1
 
380,906

 
338,423

Residential leasing
 
3,022

 
42,891

Solar services
 
1,582

 


 
385,510

 
381,314

Gross profit (loss)
 
(37,285
)
 
10,574

Operating expenses:
 


 
 
Research and development1
 
14,993

 
19,052

Sales, general and administrative
 
62,857

 
65,295

Restructuring charges (credits)
 
(665
)
 
11,177

Impairment of residential lease assets
 
9,226

 
49,092

Gain on business divestiture
 
(6,114
)
 

Total operating expenses
 
80,297

 
144,616

Operating loss
 
(117,582
)
 
(134,042
)
Other income (expense), net:
 

 
 
Interest income
 
852

 
529

Interest expense1
 
(16,791
)
 
(25,106
)
Other, net
 
33,073

 
15,794

Other income (expense), net
 
17,134

 
(8,783
)
Loss before income taxes and equity in earnings (losses) of unconsolidated investees
 
(100,448
)
 
(142,825
)
Provision for income taxes
 
(5,797
)
 
(2,628
)
Equity in earnings (losses) of unconsolidated investees
 
1,680

 
(2,144
)
Net loss
 
(104,565
)
 
(147,597
)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests
 
14,841

 
31,623

Net loss attributable to stockholders
 
$
(89,724
)
 
$
(115,974
)
 
 
 
 
 
Basic and diluted net loss per share attributable to stockholders
 
$
(0.63
)
 
$
(0.83
)
 
 


 
 
Basic and diluted weighted-average shares
 
141,720

 
140,212


1We have related-party transactions with Total S.A. and its affiliates as well as unconsolidated entities in which we have a direct equity investment. These related-party transactions are recorded within the "revenue: solar power systems, components, and other," "cost of revenue: Solar power systems, components, and other," "operating expenses: research and development," and "other income (expense), net: interest expense" financial statement line items in our condensed consolidated statements of operations (see Note 2 and Note 10).



The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Table of Contents


SunPower Corporation
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(unaudited)

 
 
Three Months Ended
 
 
March 31, 2019
 
April 1, 2018
Net loss
 
$
(104,565
)
 
$
(147,597
)
Components of other comprehensive income (loss):
 
 
 
 
Translation adjustment
 
(21
)
 
748

Net change in derivatives (Note 12)
 
185

 
1,606

Income taxes
 
(65
)
 
(243
)
Total other comprehensive income
 
99

 
2,111

Total comprehensive loss
 
(104,466
)
 
(145,486
)
Comprehensive loss attributable to noncontrolling interests and redeemable noncontrolling interests
 
14,841

 
31,622

Comprehensive loss attributable to stockholders
 
$
(89,625
)
 
$
(113,864
)


The accompanying notes are an integral part of these condensed consolidated financial statements.


5

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SunPower Corporation
Consolidated Statements of Equity (Deficit)
(In thousands)

 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Value
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated Other
Comprehensive Income (Loss)
 
Accumulated Deficit
 
Total
Stockholders’
Equity (Deficit)
 
Noncontrolling Interests
 
Total Equity (Deficit)
Balances at December 30, 2018
 
141,178

 
$
141

 
$
2,463,370

 
$
(187,069
)
 
$
(4,150
)
 
$
(2,480,988
)
 
$
(208,696
)
 
$
58,810

 
$
(149,886
)
Net loss
 

 

 

 

 

 
(89,724
)
 
(89,724
)
 
(14,841
)
 
(104,565
)
Cumulative-effect upon adoption of ASC 842
 

 

 

 

 

 
9,151

 
9,151

 

 
9,151

Other comprehensive income
 

 

 

 

 
99

 

 
99

 

 
99

Issuance of restricted stock to employees, net of cancellations
 
1,848

 
2

 

 

 

 

 
2

 

 
2

Stock-based compensation expense
 

 

 
6,628

 

 

 

 
6,628

 

 
6,628

Contributions from noncontrolling interests
 

 

 

 

 

 

 

 
20,987

 
20,987

Purchases of treasury stock
 
(633
)
 
(1
)
 

 
(3,871
)
 

 

 
(3,872
)
 

 
(3,872
)
Balances at March 31, 2019
 
142,393

 
$
142

 
$
2,469,998

 
$
(190,940
)
 
$
(4,051
)
 
$
(2,561,561
)
 
$
(286,412
)
 
$
64,956

 
$
(221,456
)

 
 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Redeemable Noncontrolling Interests
 
Shares
 
Value
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated Other
Comprehensive Income (Loss)
 
Accumulated Deficit
 
Total
Stockholders’
Equity (Deficit)
 
Noncontrolling Interests
 
Total Equity (Deficit)
Balances at December 31, 2017
 
$
15,236

 
139,658

 
$
140

 
$
2,442,513

 
$
(181,539
)
 
$
(3,008
)
 
$
(1,669,897
)
 
$
588,209

 
$
104,179

 
$
692,388

Net loss
 
(10,500
)
 

 

 

 

 

 
(115,974
)
 
(115,974
)
 
(21,123
)
 
(137,097
)
Other comprehensive income
 

 

 

 

 

 
2,111

 

 
2,111

 

 
2,111

Issuance of restricted stock to employees, net of cancellations
 

 
1,799

 
2

 

 

 

 

 
2

 

 
2

Stock-based compensation expense
 

 

 

 
7,394

 

 

 

 
7,394

 

 
7,394

Contributions from noncontrolling interests
 
11,684

 

 

 

 

 

 

 

 
25,042

 
25,042

Distributions to noncontrolling interests
 
(2,315
)
 

 

 

 

 

 

 

 
(4,005
)
 
(4,005
)
Purchases of treasury stock
 

 
(611
)
 
(1
)
 

 
(4,526
)
 

 

 
(4,527
)
 

 
(4,527
)
Other
 

 

 

 

 

 

 
(56
)
 
(56
)
 

 
(56
)
Balances at April 1, 2018
 
$
14,105

 
140,846

 
$
141

 
$
2,449,907

 
$
(186,065
)
 
$
(897
)
 
$
(1,785,927
)
 
$
477,159

 
$
104,093

 
$
581,252



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The accompanying notes are an integral part of these consolidated financial statements.


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SunPower Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)

 
 
Three Months Ended
 
 
March 31, 2019
 
April 1, 2018
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(104,565
)

$
(147,597
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 

 
Depreciation and amortization
 
24,190


39,833

Stock-based compensation
 
5,666


7,053

Non-cash interest expense
 
2,415


4,443

Dividend from equity method investee
 


5,399

Equity in (earnings) losses of unconsolidated investees
 
(1,680
)

2,144

Unrealized gain on equity investment
 
(33,000
)
 

Gain on business divestiture
 
(6,114
)
 

Gain on sale of equity investment, net
 


(15,576
)
Deferred income taxes
 
2,048


(344
)
Impairment of residential lease assets
 
9,226


49,092

Other, net
 


972

Changes in operating assets and liabilities1:
 
 

 
Accounts receivable
 
12,196


13,924

Contract assets
 
1,712


(23,561
)
Inventories
 
(41,718
)

(34,195
)
Project assets
 
776


20,484

Prepaid expenses and other assets
 
11,727


10,885

Operating lease right-of-use assets

 
2,603

 

Long-term financing receivables, net
 
(1,611
)

(38,114
)
Advances to suppliers
 
13,055


5,149

Accounts payable and other accrued liabilities
 
(28,819
)

(100,156
)
Contract liabilities
 
(14,578
)

(33,097
)
Operating lease liabilities
 
(2,559
)
 

Net cash used in operating activities
 
(149,030
)

(233,262
)
Cash flows from investing activities:
 
 

 
Purchases of property, plant and equipment
 
(6,548
)

(8,859
)
Cash paid for solar power systems, leased, net
 


(23,787
)
Cash paid for solar power systems
 
(27,600
)
 
(2,604
)
Proceeds from business divestitures
 
9,677

 

Dividend from equity method investee
 


2,694

Proceeds from sale of equity method investment
 


27,282

Cash paid for investments in unconsolidated investees
 


(6,349
)
Net cash used in investing activities
 
(24,471
)

(11,623
)
Cash flows from financing activities:
 
 

 
Proceeds from bank loans and other debt
 
67,979


49,794

Repayment of bank loans and other debt
 
(58,372
)

(51,052
)
Proceeds from issuance of non-recourse residential financing, net of issuance costs
 
22,255


32,687

Repayment of non-recourse residential financing
 


(3,781
)
Contributions from noncontrolling interests and redeemable noncontrolling interests attributable to residential projects
 
20,987


36,726

Distributions to noncontrolling interests and redeemable noncontrolling interests attributable to residential projects
 


(5,422
)
Proceeds from issuance of non-recourse power plant and commercial financing, net of issuance costs
 


9,104

Repayment of non-recourse power plant and commercial financing
 


(890
)
Settlement of contingent consideration arrangement
 
(2,448
)
 

Purchases of stock for tax withholding obligations on vested restricted stock
 
(3,872
)

(4,526
)
Net cash provided by financing activities
 
46,529


62,640

Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents
 
112


477

Net decrease in cash, cash equivalents, restricted cash and restricted cash equivalents
 
(126,860
)

(181,768
)
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period2
 
363,763


544,337

Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period2
 
$
236,903


$
362,569

 
 
 
 
 
Non-cash transactions:
 
 
 
 
Costs of solar power systems, leased, sourced from existing inventory
 
$


$
14,354

Costs of solar power systems, leased, funded by liabilities
 
$


$
5,835

Costs of solar power systems sourced from existing inventory
 
$
16,406

 
$

Costs of solar power systems funded by liabilities
 
$
4,553

 
$

Costs of solar power systems under sale-leaseback financing arrangements, sourced from project assets
 
$


$
9,791

Property, plant and equipment acquisitions funded by liabilities
 
$
10,792


$
12,768

Contractual obligations satisfied with inventory
 
$


$
17,517

Assumption of debt by buyer upon sale of equity interest
 
$


$
27,321

Right-of-use assets obtained in exchange of lease obligations3
 
$
81,525

 
$


1"Operating assets and liabilities" balances included assets and liabilities classified as held for sale as of March 31, 2019 (see Note 4. Business Divestiture).

2"Cash, cash equivalents, restricted cash and restricted cash equivalents" balance consisted of "cash and cash equivalents", "restricted cash and cash equivalents, current portion" and "restricted cash and cash equivalents, net of current portion" financial statement line items on the condensed consolidated balance sheets for the respective periods. Such balances also included restricted cash and cash equivalents classified as held for sale as of March 31, 2019 (see Note 4. Business Divestiture).

3Amounts for the three months ended March 31, 2019 include the transition adjustment for the adoption of ASC 842 and amounts classified as held for sale.

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Notes to the Condensed Consolidated Financial Statements

Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization
 
SunPower Corporation (together with its subsidiaries, "SunPower," "we," "us," and "our") is a leading global energy company that delivers complete solar solutions to residential, commercial, and power plant customers worldwide through an array of hardware, software, and financing options and through solar power solutions, operations and maintenance ("O&M") services, and "Smart Energy" solutions. SunPower's Smart Energy initiative is designed to add layers of intelligent control to homes, buildings and grids - all personalized through easy-to-use customer interfaces. Of all the solar cells commercially available to the mass market, we believe our solar cells have the highest solar power conversion efficiency, a measurement of the amount of sunlight converted by the solar cell into electricity. SunPower is a majority-owned subsidiary of Total Solar International SAS ("Total"), formerly Total Energies Nouvelles Activités USA, a subsidiary of Total S.A. ("Total S.A.") (see "Note 2. Transactions with Total and Total S.A").

Liquidity

Challenging industry conditions and a competitive environment extended throughout fiscal 2018 and the first quarter of fiscal 2019. Our net losses, resulting in a net use of our available cash, continued in the first quarter of fiscal 2019 and are expected to continue through the remainder of fiscal 2019. Despite the challenging industry conditions, including uncertainty around the regulatory environment, we believe that our cash and cash equivalents, including cash expected to be generated from operations, will be sufficient to meet our obligations over the next 12 months from the date of the issuance of our financial statements. We have been successful in our ability to divest certain investments and non-core assets, such as the divestiture of our equity interest in 8point3 Energy Partners LP, the sale of certain assets and intellectual property related to the production of microinverters, the sale of membership interests in our Residential Lease Portfolio, and the sale of membership interests in our Commercial Sale-Leaseback Portfolio (Note 4. Business Divestiture). Additionally, we have secured other sources of financing in connection with our liquidity needs, as well as realizing cash savings resulting from restructuring actions and cost reduction initiatives (Note 11. Debt and Credit Sources). We continue to focus on improving our overall operating performance and liquidity, including managing cash flow and working capital.

We also have the ability to enhance our available cash by borrowing up to $95.0 million under a revolving credit facility (the "Revolver") with Credit Agricole Corporate and Investment Bank ("Credit Agricole") pursuant to a Letter Agreement executed by us and Total S.A. on May 8, 2017 (the "Letter Agreement") through August 26, 2019, the expiration date of the Letter Agreement.

Although we have historically been able to generate liquidity, we cannot predict, with certainty, the outcome of our actions to generate liquidity as planned.

Basis of Presentation and Preparation
    
Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of SunPower and our wholly-owned subsidiaries, and have been prepared by us in accordance with generally accepted accounting principles in the United States ("United States" or "U.S.," and such accounting principles, "U.S. GAAP") for interim financial information, and include the accounts of SunPower, all of our subsidiaries and special purpose entities, as appropriate under U.S. GAAP. All intercompany transactions and balances have been eliminated in consolidation. The financial information included herein is unaudited, and reflects all adjustments which are, in the opinion of our management, of a normal recurring nature and necessary for a fair statement of the results for the periods presented. The December 30, 2018 consolidated balance sheet data were derived from SunPower’s audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2018, as filed with the Securities and Exchange Commission ("SEC") on February 13, 2019, but do not include all disclosures required by U.S. GAAP. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in SunPower's Annual Report on Form 10-K for the fiscal year ended December 30, 2018. The operating results for the fiscal quarter ended March 31, 2019 are not necessarily indicative of the results that may be expected for fiscal year 2019, or for any other future period.
Certain prior period balances have been reclassified to conform to the current period presentation in our condensed consolidated financial statements and the accompanying notes.

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We have a 52-to-53-week fiscal year that ends on the Sunday closest to December 31. Accordingly, every fifth or sixth year will be a 53-week fiscal year. Both fiscal 2019 and 2018 are 52-week fiscal years. The first quarter of fiscal 2019 ended on March 31, 2019, while the first quarter of fiscal 2018 ended on April 1, 2018.

Management Estimates

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires our management to make estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes. Significant estimates in these condensed consolidated financial statements include revenue recognition, specifically the nature and timing of satisfaction of performance obligations, standalone selling price of performance obligations and variable consideration; allowances for doubtful accounts receivable; recoverability of financing receivables related to residential leases; inventory and project asset write-downs; stock-based compensation; long-lived asset impairment, specifically estimates for valuation assumptions including discount rates and future cash flows; economic useful lives of property, plant and equipment, and intangible assets, fair value of investments including an equity investment for which we apply the fair value option and other financial instruments; residual value of solar power systems, including those subject to residential operating leases; valuation of contingencies such as accrued warranty; the incremental borrowing rate used in discounting of lease liabilities; the fair value of indemnities provided to customers and other parties, and income taxes and tax valuation allowances. Actual results could materially differ from those estimates.

Summary of Significant Accounting Policies
    
Lease Accounting

Effective December 31, 2018, we adopted Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), as amended ("ASC 842"). For additional information on the changes resulting from the new standard and the impact to our financial results on adoption, refer to the section Recently Adopted Accounting Pronouncements below.
Arrangements with SunPower as a lessee
We determine if an arrangement is a lease at inception. Our operating lease agreements are primarily for real estate and are included within operating lease right-of-use ("ROU") assets and operating lease liabilities on the consolidated balance sheets. We elected the practical expedient to combine our lease and related non-lease components for all our leases.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. ROU assets also include any lease prepayments made and exclude lease incentives. Many of our lessee agreements include options to extend the lease, which we do not include in our minimum lease terms unless they are reasonably certain to be exercised. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.
Sale-Leaseback Arrangements
We enter into sale-leaseback arrangements under which solar power systems are sold to third parties and subsequently leased back by us over lease terms of up to 25 years. At the end of the lease term, we have the option to purchase the systems at fair value or may be required to remove the systems and return them to the third parties.
We classify our sale-leaseback arrangements of solar power systems as operating leases or sales-type leases, in accordance with the underlying accounting guidance on leases.
For all sale-leaseback arrangements classified as operating leases, the deferred profit on the sale of the underlying systems is recognized over the term of the lease. Sale-leaseback arrangements classified as sales-type leases or failed sale, are accounted for under the financing method, the proceeds received from the sale of the solar power systems are recorded by us as financing liabilities. The financing liabilities are subsequently reduced by our payments to lease back the solar power systems, less interest expense calculated based on our incremental borrowing rate adjusted to the rate required to prevent negative amortization. Refer Note 4, Business Divestiture, for details of the sale of our commercial sale-leaseback portfolio during the quarter ended March 31, 2019.

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Arrangements with SunPower as a lessor

Solar Services

We offer solar services, in partnership with third-party financial institutions, which allows our residential customers to obtain continuous access to SunPower solar systems under contracts for terms of up to 20 years. Solar services revenue is primarily comprised of revenue from such contracts wherein we provide continuous access to an operating solar system to third parties.

We begin to recognize revenue on solar services when permission to operate ("PTO") is given by the local utility company, system is interconnected and operation commences. We recognize revenue evenly over the time that we satisfy our performance obligations over the initial term of the solar services contracts. Solar services contracts typically have an initial term of 20 years. After the initial contract term, our customers may request an extension of the term of the contract on prevailing market terms, or request to remove the system. Otherwise, the contract will automatically renew and continue on a month-to-month basis.

We also apply for and receive Solar Renewable Energy Credits ("SRECs") associated with the energy generated by our solar energy systems and sell them to third parties in certain jurisdictions. SREC revenue is estimated net of any variable consideration related to possible liquidated damages if we were to deliver fewer SRECs than contractually committed, and is generally recognized upon delivery of the SRECs to the counterparty.

We typically provide a system output performance warranty, separate from our standard solar panel product warranty, to our solar services customers. In connection with system output performance warranties, we agree to pay liquidated damages in the event the system does not perform to the stated specifications, with certain exclusions. The warranty excludes system output shortfalls attributable to force majeure events, customer curtailment, irregular weather, and other similar factors. In the event that the system output falls below the warrantied performance level during the applicable warranty period, and provided that the shortfall is not caused by a factor that is excluded from the performance warranty, the warranty provides that we will pay the customer an amount based on the value of the shortfall of energy produced relative to the applicable warrantied performance level. Such liquidated damages represent a form of variable consideration and are estimated at contract inception and updated at each reporting period and recognized over time as customers receive and consume the benefits of the solar services.

There are rebate programs offered by utilities in various jurisdictions and are issued directly to homeowners and based on the lease agreements, the homeowners assign these rights to rebate to us. These rights to rebate are considered non-cash consideration, measured based on the utilities' rebates from the installed solar panels on the homeowners' roofs and recognized over the lease term.
We capitalize incremental costs incurred to obtain a contract in prepaid and other assets on the condensed consolidated balance sheets. These amounts are amortized on a straight-line basis over the term of the solar services contracts, and are included in cost of revenue in the consolidated statements of operations.

Recently Adopted Accounting Pronouncements

In October 2018, the Financial Accounting Standard Board ("FASB") issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which permits the use of Overnight Index Swap Rate based on the Secured Overnight Financing Rate as a fifth U.S. benchmark interest rate for purposes of hedge accounting. The new guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years and should be applied prospectively for qualifying new or re-designated hedging relationships entered into after December 31, 2018. We adopted the new guidance on December 31, 2018. The adoption did not have an impact on our consolidated financial statements.

In February 2016, the FASB issued ASC 842, which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASC 842 requires lessees to recognize a lease liability and a ROU asset for virtually all of their leases (other than leases that meet the definition of a short-term lease). ASC 842 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. In July 2018, the FASB issued several ASUs to clarify and improve certain aspects of the new lease standard including, among many other things, the rate implicit in the lease, lessee reassessment of lease classification, variable payments that depend on an index or rate, methods of transition including an optional transition method to continue recognizing and disclosing leases entered into prior to the adoption date under current GAAP ("ASC 840"). In

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December 2018, the FASB issued ASU 2018-20, Leases (Topic 842) Narrow-Scope Improvements for Lessors, related to sales taxes and other similar taxes collected from lessees, certain lessor costs paid by lessees to third parties, and related to recognition of variable payments for contracts.
 
On December 31, 2018, we adopted ASC 842 using the optional transitional method for all leases that existed at or commenced before that date. We elected to apply the practical expedients in ASC 842-10-65-1 (f) and (g), and therefore:

1)
did not reassess expired contracts for presence of lease components therein and if it was already concluded that such contracts had lease components then the classification of the respective lease components therein have not been re-assessed;
2)
did not re-assess initial direct costs for any existing leases;
3)
used hindsight for determining the lease term for all leases whereon ASC 842 has been applied;
4)
elected to not separate the lease and non-lease components;
5)
elected to not apply the recognition and measurement requirements of the new guidance to short-term leases;
6)
did not assess whether existing or expired land easements that were not previously assessed under legacy guidance on leases are or contain a lease under the new guidance;

The adoption of ASC 842 had a material impact on our condensed consolidated balance sheet as the standard requires us to recognize an ROU asset and lease liability on our condensed consolidated balance sheet as of December 31, 2018, for all existing leases other than those to which we have applied the short-term lease practical expedient.

Upon adoption, we made the following changes to our accounting policies:

Solar leases no longer meet the criteria for lease accounting as our contracts do not allow the customer to direct the use of the underlying solar system. Instead, we will now account for these arrangements as contracts with customers pursuant to ASC Topic 606 and recognize revenue ratably based on contractual lease cash flows over the lease term;
All operating lease arrangements, other than short term leases, are now recorded on the balance sheet as a ROU asset with a corresponding lease liability;

Further, arrangements that involve the lease-back of solar systems sold to a financier will continue to be accounted for as a failed sale and result in the recording of a financing liability.

Impact to Condensed Consolidated Financial Statements

The below table shows the impact of adoption of ASC 842 on our condensed consolidated financial statements as of December 31, 2018:
(In thousands)
 
December 31, 2018
 
Adoption of ASC 842
 
December 31, 2018
Assets:
 
 
 
 
 
 
Prepaid expenses and other current assets
 
$
131,183

 
$
(4,433
)
 
$
126,750

Operating lease right-of-use assets
 

 
81,525

 
81,525

Other long-term assets
 
162,033

 
(14,028
)
 
148,005

Current Liabilities:
 
 
 
 
 
 
Accrued liabilities
 
235,252

 
(2,455
)
 
232,797

Operating lease liabilities
 

 
11,499

 
11,499

Contract liabilities, current portion
 
104,130

 
(2,079
)
 
102,051

Non-current liabilities:
 
 
 
 
 
 
Operating lease liabilities, net of current portion
 

 
70,132

 
70,132

Contract liabilities, net of current portion
 
99,509

 
(19,928
)
 
79,581

Other long-term liabilities
 
839,136

 
(3,256
)
 
835,880

Equity:
 
 
 
 
 
 
Accumulated deficit
 
$
(2,480,988
)
 
$
9,151

 
$
(2,471,837
)


Recent Accounting Pronouncements Not Yet Adopted


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In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13) and subsequent amendment to the initial guidance: ASU 2018-19 (collectively, Topic 326). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. Topic 326 is effective for us no later than the first quarter of fiscal 2020 with early adoption permitted. We are evaluating the potential impact of this ASU on our consolidated financial statements and disclosures.

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which 1) clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606; 2) adds unit-of-account guidance in Topic 808 to align with the guidance in Topic 606; and 3) requires that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer. This ASU is effective for us no later than the first quarter of 2020 on a retrospective basis with early adoption permitted. We are evaluating the potential impact of this ASU on our consolidated financial statements and disclosures.

In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, which broadens the scope of the private company alternative to include all common control arrangements that meet specific criteria (not just leasing arrangements) and also eliminates the requirement that entities consider indirect interests held through related parties under common control in their entirety when assessing whether a decision-making fee is a variable interest. This ASU is effective for us no later than the first quarter of 2020 on a retrospective basis with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. We are evaluating the potential impact of this ASU on our consolidated financial statements and disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles Goodwill and Other Internal-Use Software (Subtopic 350-40) requiring a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets. This ASU is effective for us no later than the first quarter of 2020 with early adoption permitted. This ASU can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are evaluating the potential impact of this standard on our consolidated financial statements and disclosures.

In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. This ASU is effective for us no later than the first quarter of 2020 with early adoption permitted. We are evaluating the potential impact of this standard on our consolidated financial statements and disclosures.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) which changes the fair value measurement disclosure requirements of ASC 820. The guidance adds and clarifies certain disclosure requirements for fair value measurements with the objective of improving the effectiveness of disclosures in the notes to financial statements. This ASU is effective for us no later than the first quarter of 2020 with early adoption permitted. We are evaluating the potential impact of this standard on our consolidated financial statements and disclosures.

Note 2. TRANSACTIONS WITH TOTAL AND TOTAL S.A.

In June 2011, Total completed a cash tender offer to acquire 60% of our then outstanding shares of common stock at a price of $23.25 per share, for a total cost of approximately $1.4 billion. In December 2011, we entered into a Private Placement Agreement with Total (the "Private Placement Agreement"), under which Total purchased, and we issued and sold, 18.6 million shares of our common stock for a purchase price of $8.80 per share, thereby increasing Total's ownership to approximately 66% of our outstanding common stock as of that date. As of March 31, 2019, through the increase of our total outstanding common stock due to the exercise of warrants and issuance of restricted and performance stock units, Total's ownership of our outstanding common stock was approximately 55%.

Supply Agreements

In November 2016, we and Total entered into a four-year, up to 200 megawatts ("MW") supply agreement to support the solarization of certain Total facilities. The agreement covers the supply of 150 MW of Maxeon 2 (formally known as E-Series) panels with an option to purchase up to another 50 MW of P-Series solar panels. In March 2017, we received a prepayment totaling $88.5 million. The prepayment is secured by certain of our assets located in the United States and in Mexico.

We recognize revenue for the solar panels supplied under this arrangement consistent with our revenue recognition policy for solar power components at a point in time when control of such products transfers to the customer, which generally occurs upon shipment or delivery depending on the terms of the contracts. In the second quarter of fiscal 2017, we started to supply Total with solar panels under the supply agreement and as of March 31, 2019, we had $18.6 million of "contract liabilities, current portion" and $41.3 million of "contract liabilities, net of current portion" on our condensed consolidated balance sheets related to the aforementioned supply agreement (see Note 9. Commitments and Contingencies").

In March 2018, we and Total, each through certain affiliates, entered into an agreement whereby we agreed to sell 3.42 MW of photovoltaic ("PV") modules to Total for a development project in Chile. This agreement provided for payment from Total in the amount of approximately $1.3 million, 10% of which was paid upon execution of the agreement.

On January 7, 2019, we and Total, each through certain affiliates, entered into an agreement whereby we agreed to sell 3.7 MW of PV modules to Total for a ground-mounted PV installation in Dubai. This agreement provided for payment from Total in the amount of approximately $1.35 million, 10% of which was received after execution of the agreement.

On March 4, 2019, we and Total, each through certain affiliates, entered into an agreement whereby we agreed to sell 10 MW of PV modules to Total for commercial rooftop PV installations in Dubai. This agreement provided for payment from Total in the amount of approximately $3.16 million, 10% of which is paid in April 2019.

Amended and Restated Credit Support Agreement

In June 2016, we and Total S.A. entered into an Amended and Restated Credit Support Agreement (the "Credit Support Agreement"), which amended and restated the Credit Support Agreement dated April 28, 2011, by and between us and Total S.A., as amended. Under the Credit Support Agreement, Total S.A. agreed to enter into one or more guarantee agreements (each a "Guaranty") with banks providing letter of credit facilities to us. At any time until December 31, 2018, Total S.A. will, at our request, guarantee the payment to the applicable issuing bank of our obligation to reimburse a draw on a letter of credit and pay interest thereon in accordance with the letter of credit facility between such bank and us. Such letters of credit must be issued no later than December 31, 2018 and expire no later than March 31, 2020. Total S.A. is required to issue and enter into a Guaranty requested by us, subject to certain terms and conditions. In addition, Total will not be required to enter into the Guaranty if, after giving effect to our request for a Guaranty, the sum of (a) the aggregate amount available to be drawn under all guaranteed letter of credit facilities, (b) the amount of letters of credit available to be issued under any guaranteed facility, and (c) the aggregate amount of draws (including accrued but unpaid interest) on any letters of credit issued under any guaranteed facility that have not yet been reimbursed by us, would exceed $500.0 million in the aggregate. Such maximum amounts of credit support available to us can be reduced upon the occurrence of specified events.

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In consideration for the commitments of Total S.A. pursuant to the Credit Support Agreement, we are required to pay Total S.A. a guaranty fee for each letter of credit that is the subject of a Guaranty under the Credit Support Agreement and was outstanding for all or part of the preceding calendar quarter. The Credit Support Agreement terminated on December 31, 2018, and we decided not to renew it.

In addition to the Credit Support Agreement, we and Total S.A. entered into the Letter Agreement in May 2017 to facilitate the issuance by Total S.A. of one or more guaranties of our payment obligations of up to $100.0 million (the "Support Amount") under the Revolver; See "Note 11. Debt and Credit Sources" for additional information on the Revolver. In consideration for the commitments of Total S.A. pursuant to the Letter Agreement, we are required to pay a guarantor commitment fee of 0.50% per annum for the unutilized Support Amount and a guaranty fee of 2.35% per annum of the Guaranty outstanding. The maturity date of the Letter Agreement is August 26, 2019.

Affiliation Agreement

We and Total have entered into an Affiliation Agreement that governs the relationship between Total and us (the "Affiliation Agreement"). Until the expiration of a standstill period specified in the Affiliation Agreement (the "Standstill Period"), and subject to certain exceptions, Total, Total S.A., and any of their respective affiliates and certain other related parties (collectively, the "Total Group") may not effect, seek, or enter into discussions with any third party regarding any transaction that would result in the Total Group beneficially owning our shares in excess of certain thresholds, or request us or our independent directors, officers or employees, to amend or waive any of the standstill restrictions applicable to the Total Group. The Standstill Period ends when Total holds less than 15% ownership of us.

The Affiliation Agreement imposes certain limitations on the Total Group's ability to seek to effect a tender offer or merger to acquire 100% of the outstanding voting power of us and imposes certain limitations on the Total Group's ability to transfer 40% or more of the outstanding shares or voting power of us to a single person or group that is not a direct or indirect subsidiary of Total S.A. During the Standstill Period, no member of the Total Group may, among other things, solicit proxies or become a participant in an election contest relating to the election of directors to our Board of Directors.

The Affiliation Agreement provides Total with the right to maintain its percentage ownership in connection with any new securities issued by us, and Total may also purchase shares on the open market or in private transactions with disinterested stockholders, subject in each case to certain restrictions.

The Affiliation Agreement also imposes certain restrictions with respect to the ability of us and our board of directors to take certain actions, including specifying certain actions that require approval by the directors other than the directors appointed by Total and other actions that require stockholder approval by Total.

Research & Collaboration Agreement

We and Total have entered into a Research & Collaboration Agreement (the "R&D Agreement") that establishes a framework under which the parties engage in long-term research and development collaboration ("R&D Collaboration"). The R&D Collaboration encompasses a number of different projects, with a focus on advancing our technology position in the crystalline silicon domain, as well as ensuring our industrial competitiveness. The R&D Agreement enables a joint committee to identify, plan and manage the R&D Collaboration.

Upfront Warrant

In February 2012, we issued a warrant (the "Upfront Warrant") to Total S.A. to purchase 9,531,677 shares of our common stock with an exercise price of $7.8685, subject to adjustment for customary anti-dilution and other events. The Upfront Warrant, which was governed by a Private Placement Agreement and a Compensation and Funding Agreement, dated February 28, 2012, as amended, was exercisable at any time for seven years after its issuance, provided that, so long as at least $25.0 million in aggregate of our convertible debt remains outstanding, such exercise would not cause any "person," including Total S.A., to, directly or indirectly, including through one or more wholly-owned subsidiaries, become the "beneficial owner" (as such terms are defined in Rule 13d-3 and Rule 13d-5 under the Securities Exchange Act of 1934, as amended) (the "Exchange Act"), of more than 74.99% of the voting power of our common stock at such time, a circumstance which would trigger the repurchase or conversion of our existing convertible debt. The Upfront Warrant expired by its terms on February 27, 2019.


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0.75% Debentures Due 2018

In May 2013, we issued $300.0 million in principal amount of the 0.75% debentures due 2018. An aggregate principal amount of $200.0 million of the 0.75% debentures due 2018 were acquired by Total. The 0.75% debentures due 2018 were convertible into shares of our common stock at any time based on an initial conversion price equal to $24.95 per share, which provided Total the right to acquire up to 8,017,420 shares of our common stock. The applicable conversion rate could adjust in certain circumstances, including a fundamental change, as described in the indenture governing the 0.75% debentures due 2018. On June 1, 2018, the 0.75% senior convertible debentures due 2018 were redeemed at maturity with proceeds from the Term Credit Agreement (the “Term Credit Agreement”) with Credit Agricole Corporate and Investment Bank (“Credit Agricole”) and as of December 30, 2018 were no longer issued or outstanding. On June 19, 2018, we completed the divestiture of our equity interest in the 8point3 Group, and received, after the payment of fees and expenses, merger proceeds of approximately $359.9 million in cash. Immediately following the transaction, we repaid our loan under the Term Credit Agreement in full with the proceeds of the divestiture, retaining the excess proceeds.

0.875% Debentures Due 2021

In June 2014, we issued $400.0 million in principal amount of our 0.875% senior convertible debentures due 2021 (the "0.875% debentures due 2021"). An aggregate principal amount of $250.0 million of the 0.875% debentures due 2021 were acquired by Total. The 0.875% debentures due 2021 are convertible into shares of our common stock at any time based on an initial conversion price equal to $48.76 per share, which provides Total the right to acquire up to 5,126,775 shares of our common stock. The applicable conversion rate may adjust in certain circumstances, including a fundamental change, as described in the indenture governing the 0.875% debentures due 2021.

4.00% Debentures Due 2023

In December 2015, we issued $425.0 million in principal amount of our 4.00% senior convertible debentures due 2023 (the "4.00% debentures due 2023"). An aggregate principal amount of $100.0 million of the 4.00% debentures due 2023 were acquired by Total. The 4.00% debentures due 2023 are convertible into shares of our common stock at any time based on an initial conversion price equal to $30.53 per share, which provides Total the right to acquire up to 3,275,680 shares of our common stock. The applicable conversion rate may adjust in certain circumstances, including a fundamental change, as described in the indenture governing the 4.00% debentures due 2023.

Joint Solar Projects with Total and its Affiliates

We enter into various EPC and O&M agreements relating to solar projects, including EPC and O&M services agreements relating to projects owned or partially owned by Total and its affiliates. As of March 31, 2019, we had an insignificant amount of "Contract assets" and $5.3 million of "Accounts receivable, net" on our Condensed Consolidated Balance Sheets related to projects in which Total and its affiliates have a direct or indirect material interest.

In connection with a co-development solar project among us, Total, and an independent third party, we sold 25% of our ownership interests in the co-development solar project to Total. The amount received from Total was immaterial in fiscal 2018. We intend to sell an additional