BUSINESS COMBINATION AND DIVESTITURES

Formation of SunStrong Capital Holdings, LLC ("SunStrong") Joint Venture and Transfer of Interest in Residential Lease Portfolio

We offer a solar lease program, in partnership with tax-equity investors, which provides U.S. residential customers SunPower systems under 20-year lease agreements that include system maintenance and warranty coverage. The residential leases are classified as either operating or sales-type leases (the “Residential Lease Portfolio”) in accordance with the relevant accounting guidelines. The arrangement with the tax equity investor is facilitated through the sale equity interests in a solar project company that has ownership of the residential lease assets. We retain controlling equity interests in the solar project company and the tax-equity investor acquires non-controlling equity interests with the intention of monetizing the tax attributes that will be generated by the residential lease assets. On July 10, 2018, we created SunStrong Capital Holdings, LLC (“SunStrong”) to own and operate a portion of our residential lease assets and subsequently contributed to SunStrong our controlling equity interests in the aforementioned solar project companies.

As part of our previously announced decision to sell a portion of our interest in our Residential Lease Portfolio, on November 5, 2018, we entered into a Purchase and Sale agreement (the “PSA”) with HA SunStrong Capital LLC (“HA SunStrong Parent”), a subsidiary of Hannon Armstrong, to sell 49.0% membership interests in SunStrong for cash proceeds of $10.0 million (the "Transaction"). Following the closing of the PSA, we also entered into an Amended and Restated Limited Liability Company Operating Agreement (the "Operating Agreement") with HA SunStrong Parent that results in the operation of SunStrong as a joint venture entity. In addition, we have been retained by SunStrong to provide management services, asset management services and O&M services. The services that will be provided are priced consistently with market rates for such services and the agreements are terminable by SunStrong for convenience.

In evaluating the accounting treatment for the transaction described above, we concluded that the Residential Lease Portfolio meets the definition of a business and then proceeded to assess whether SunPower has a controlling financial interest in SunStrong in accordance with the relevant consolidation accounting guidance. We have offered SunStrong certain substantive, non-standard indemnifications related to cash flow losses arising from a recapture of California property taxes on account of a change in ownership, recapture of federal tax attributes and cash flow losses from leases that do not generate the promised savings to homeowners. The maximum exposure to loss arising from the indemnifications is limited to the consideration received for the solar power systems. While our retention of certain indemnification obligations on behalf of SunStrong may require us to absorb losses that are not proportionate with our equity interests, we do not have the power to unilaterally make decisions that affect the performance of SunStrong. Under the Operating Agreement, we and HA SunStrong Parent are given equal governing rights and all major decisions, including among others, approving or modifying the budget, terminating service providers, incurring indebtedness, refinancing any existing loans, declaring distributions, commencing or settling any claims, require unanimous consent. Therefore, we concluded that we do not control SunStrong nor are we the primary beneficiary of SunStrong. Accordingly, we deconsolidated SunStrong and thereby deconsolidated the Residential Lease Portfolio including the associated non-recourse financing debt of $561.6 million as of the date of sale. We have accounted for our retained investment in SunStrong as an equity method investment and have estimated the fair value of the retained interest at $9.6 million. We computed the fair value for our retained investment consistent with the methodology and assumptions that market participants would use in their estimates of fair value. Determining the fair value involves significant estimates and assumptions. We used the income approach to estimate the fair value of our retained investment in Residential Lease Portfolio. The income approach is based on the discounted cash flow method that uses the estimates for forecasted future financial performance, including assumptions for, among others, forecasted contractual lease income, lease expenses, residual value of these lease assets and long-term discount rates, and forecasted default rates over the lease term and discount rates, some of which require significant judgment by management. These estimates are developed based on historical data and various internal estimates. Projected cash flows are then discounted to a present value employing a discount rate that properly accounts for the estimated market weighted-average cost of capital, as well as any risk unique to the subject cash flows. In addition to the cash proceeds noted above, we are entitled to additional cash and non-cash consideration that is described below.

On August 10, 2018, SunStrong Capital Acquisition, LLC, a wholly-owned subsidiary of SunStrong (“Mezzanine Loan 1 Borrower”), and SunStrong Capital Lender LLC, a subsidiary of Hannon Armstrong, entered into a mezzanine loan agreement under which Mezzanine Loan 1 Borrower borrowed a subordinated, mezzanine loan of $110.5 million (the “Mezzanine Loan 1”) and incurred issuance costs of $1.4 million related to the loan. On August 31, 2018, we repaid a principal amount of $2.1 million that resulted in an adjusted Mezzanine Loan 1 balance, net of issuance costs, of $107.0 million. In connection with the closing of the PSA, SunStrong assumed all current and future debt service obligations associated with Mezzanine Loan 1. The assumption of such debt, although a non-cash transaction for us, was reflected in the determination of the loss recognized upon deconsolidation of the Residential Lease Portfolio.

On November 5, 2018, SunStrong Capital Acquisition OF, LLC, a wholly-owned subsidiary of SunStrong (“Mezzanine Loan 2 Borrower”), and SunStrong Capital Lender 2 LLC, a subsidiary of Hannon Armstrong, entered into a loan agreement under which, Mezzanine Loan 2 Borrower may borrow a subordinated, mezzanine loan of up to $32.0 million (the “Mezzanine Loan 2”). The borrowing facilities provided by the Mezzanine Loan 2 have been determined in consideration of the residential lease assets for which we have either completed construction or have the obligation to complete construction after November 5, 2018. On November 20, 2018, Mezzanine Loan 2 Borrower borrowed approximately $24.6 million and distributed $19.6 million of the proceeds to us. The remaining proceeds of $5.0 million represents additional consideration that is held in a reserve by SunStrong and the proceeds will be distributed to us upon completion of our contractual obligations by the second quarter of 2019. Mezzanine Loan 2 Borrower is expected to draw an additional approximately $5.6 million against the Mezzanine Loan 2 of which approximately $4.0 million is associated with residential lease assets for which construction was completed. On December 21, 2018, we received $4.6 million as a special distribution from SunStrong. The remaining amount of $1.0 million represents additional consideration related to residential lease assets for which we will provide construction services after the close of the Transaction.

On November 5, 2018, the proceeds generated from the sale of future solar renewable energy credits, along with equity interests held by SunStrong in the underlying solar project companies, were pledged to secure a warehousing loan from Credit Agricole Corporate and Investment Bank (“Credit Agricole”). Borrowed Sunshine, LLC, (“CA Loan Borrower”) formerly one of our wholly-owned subsidiaries, entered into a loan agreement with Credit Agricole on January 5, 2018 under which the CA Loan Borrower may borrow a subordinated loan of up to $170.0 million. The CA Loan Borrower expects to draw an additional amount of approximately $17.5 million of which approximately $11.8 million is associated with residential lease assets for which construction was completed. On November 29, 2018, we received $4.1 million and on December 27, 2018, we received $7.7 million as a special distribution from SunStrong. The remaining amount of approximately $5.7 million represents additional consideration related to residential lease assets for which we will provide construction services after the close of the Transaction.

Tax-equity investors are required to make contributions to the solar project companies upon achievement of certain condition precedents. Contributions of approximately $5.6 million will be distributed to us as the developer of the Residential Lease Portfolio. During the period from the date of sale and for the year ended December 30, 2018, cash proceeds of $4.2 million were received. The remaining proceeds of $1.4 million represents additional consideration related to residential lease assets for which we will provide construction services after the close of the Transaction. In addition, on December 21, 2018, we received $3.2 million as a special distribution from SunStrong for transferring our rights to the future solar renewable energy credits ("SREC") associated with the residential lease assets. The tax-equity investor contribution and the special SREC distribution was reflected in the determination of the loss recognized upon deconsolidation of the Residential Lease Portfolio.

Other costs and expenses associated with the Transaction of $2.9 million include professional services including legal, advisory and banking support. We have also recorded a liability of $5.3 million associated with our certain warranty obligations for defects in materials and workmanship related to installed systems contributed to SunStrong.

On November 28, 2018, SunStrong closed its $400.0 million Solar Asset Backed Notes, Series 2018-1 ("Notes"). The Notes were priced at a fixed interest rate of 5.68% per annum and have an anticipated repayment date in November 2028 and rated final maturity date in November 2048. The Notes were issued by a special purpose entity, SunStrong 2018-1 Issuer, LLC, an indirectly wholly-owned subsidiary of SunStrong. On December 4, 2018, we received a special cash distribution of $12.9 million.

In connection with the sale transactions, we recognized a $62.3 million net loss on the sale within "Loss on sale and impairment of residential lease assets" in our Consolidated Statements of Operations for the year ended December 30, 2018.

The assets, liabilities and equity of the Residential Lease Portfolio on the disposal date were as follows:



(In thousands)	At Disposal Date
Cash and equivalents¹	$	16,333
Restricted cash and equivalents, current portion¹	9,127
Accounts receivable, net	23,430
Prepaid expenses and other current assets	26,097
Restricted cash and equivalents, net of current portion ¹	65,947
Property, plant and equipment, net	871
Solar power systems leased and to be leased, net	262,756
Long term financing receivables, net - held for sale	388,180
Other long-term assets	17,633
Total assets	810,374

Accounts payable	—
Accrued liabilities	1,726
Contract liabilities, current portion	1,660
Contract liabilities, net of current portion	25,477
Short-term debt	8,969
Long-term debt	445,661
Other long-term liabilities	11,164
Redeemable noncontrolling interests in subsidiaries	15,375
Noncontrolling interests in subsidiaries	61,865
Total liabilities and equity	571,897
Net assets related to sale	$	238,477

The net consideration recognized from the sale is as follows:



(In thousands)
Proceeds from sale of membership interest in SunStrong ¹	$	10,000
Assumption of Mezzanine Loan 1 by SunStrong	106,958
Net proceeds from first draw on Mezzanine Loan 2 ¹	19,560
Special distributions and tax-equity contribution ¹	36,190
Construction service and Mezzanine Loan 2 reserve proceeds	13,596
Other costs and expenses related to sale ¹	(2,879		)
Net consideration recognized from sale	$	183,425

¹Cash consideration received, net of other costs and expenses, and cash, cash equivalents and restricted cash sold, is reflected as a cash outflow from the sale of our equity interest in the residential lease portfolio on the Consolidated Statements of Cash Flows.

The net loss on sale for the year ended December 30, 2018 is presented in the following table.



(In thousands)
Net consideration recognized from sale	$	183,425
SunPower retained equity	9,649
Net assets related to sale	(238,477		)
Warranty obligation	(5,308		)
Obligations to complete leases under construction	(11,616		)
Net loss on sale	$	(62,327	)

Acquisition of SolarWorld Americas Inc.

On April 16, 2018, we entered into a Sale and Purchase Agreement (the "Sale and Purchase Agreement") pursuant to which we agreed to purchase all of SolarWorld AG's shares of stock in SolarWorld Americas Inc. ("SolarWorld Americas"), and SolarWorld Industries Deutschland GmbH’s partnership interest in SolarWorld Industries America LP. On August 21, 2018, we terminated the Sale and Purchase Agreement and entered into an Asset Purchase Agreement with SolarWorld Americas, pursuant to which we agreed to purchase certain assets of SolarWorld Americas in exchange for consideration of $26.0 million in cash, subject to certain closing and post-closing adjustments and other contingent payments. In connection with the termination of the Sale and Purchase Agreement, we have recognized an expense of $20.0 million for the quarter ended September 30, 2018 in sales, general and administrative expense. On October 1, 2018, we completed the acquisition of certain assets of SolarWorld Americas, including its Hillsboro, Oregon facility and a significant portion of its manufacturing workforce of more than 200 employees. The acquisition will provide us with U.S. manufacturing capability to serve the U.S. market demand and SolarWorld Americas provides a platform for us to implement our commercial P-Series solar panel manufacturing technology and selected R&D activities.

The acquisition was accounted for under the acquisition method of accounting, with SunPower identified as the acquirer. The purchase consideration consisted of $26.0 million in cash paid according to the following schedule: (i) $2.0 million upon entering into the Sale and Purchase Agreement, (ii) $15.0 million upon closing, and (iii) $9.0 million six months following closing. In addition, the acquisition agreement provides for additional purchase consideration based on the residual asset value as of 120 days post-close (the "RAV Payment") and earn-out payments should any funds be received in association with the outcome of anti-dumping and countervailing duties trade cases (the "AD/CVD"). Recovery of any funds related to the AD/CVD trade cases, net of legal fees, shall be distributed to us and SolarWorld Americas pursuant to the terms of the Asset Purchase Agreement. Accordingly, we recorded contingent liabilities totaling $4.1 million for the estimated fair value of the RAV and AD/CVD earn-out payments. We also recorded a contingent asset of $3.2 million representing the estimated fair value of the contingent consideration we are entitled to as of the acquisition date.

Concurrent with the close of the Asset Purchase Agreement, we and SolarWorld Americas also entered into (i) supply agreement under which SolarWorld Americas agreed to purchase a minimum purchase commitment of 18 MW of solar cells for a period of three months following closing, and (ii) module facility lease agreement for a period of three months for the purpose of manufacturing SolarWorld Americas solar products. Based on the expected revenue from the solar cells sales and rental lease income from SolarWorld Americas and the unavoidable costs associated with these contracts including among others, payroll, direct materials and utilities, we determined the contracts to be below market-based terms and recorded an onerous contact liability of $7.9 million as of the acquisition date.

The operating results of SolarWorld Americas, which have been included in our consolidated financial statements since the closing date of the acquisition, have not been significant. The aggregate amount of consideration paid was allocated to SolarWorld America's net tangible assets based on their estimated fair values as of October 1, 2018. We engaged a third-party valuation expert to assist in determining the fair value of SolarWorld's tangible assets and contingent consideration. Tangible assets consist of land, building, site improvements and manufacturing equipment. The fair values of the tangible assets were determined using a combination of cost and market approaches based on estimated replacement costs, recent and comparable transactions and adjustments for economic obsolescence, customization and marketability. The fair values of the contingent consideration were determined using an income approach based on a real option method to value the RAV Payment and a scenario-based method which considered the estimated probability-weighted recovery and discount rate that captures a market participant's view of the risk associated with the expected payments for the AD/CVD earn-out payment.

Of the total purchase price of $30.1 million, consisting of cash consideration of $26.0 million and contingent consideration of $4.1 million described above, $37.4 million was attributed to property, plant and equipment, $3.1 million was attributed to contingent assets related to the AD/CVD Trade cases and the remaining $10.4 million was primarily attributed to the net liabilities assumed. No goodwill was recognized in connection with the transaction.

Divestment of Microinverter Business

On August 9, 2018, we completed the sale of certain assets and intellectual property related to the production of microinverters to Enphase Energy, Inc. ("Enphase") in exchange for $25.0 million in cash and 7.5 million shares of Enphase common stock (the “Closing Shares”), pursuant to an Asset Purchase Agreement (the "Purchase Agreement") entered into on June 12, 2018. We received the Closing Shares and $15.0 million cash payment upon closing, and received the final $10.0 million cash payment of the purchase price on December 10, 2018.

In connection with the closing of the Purchase Agreement, we and Enphase entered into a master supply agreement ("MSA") under which we will exclusively procure module-level power electronics and related equipment for use in the U.S. residential market from Enphase for a period of five years. The MSA contains certain minimum volume and pricing commitments and exclusivity provisions, the breach of which would entitle Enphase to certain liquidated damages. The initial term of the MSA is through December 31, 2023, and the MSA term shall automatically be extended for successive two-year periods unless either party provides written notice of non-renewal. The MSA also includes customary provisions relating to requirements forecasting, warranty, liability, and quality assurance provisions. In accordance with our consideration of the terms of this arrangement and analysis of market pricing for products covered by the MSA, we believe the MSA is consistent with market-based terms observed in the module-level power electronics market.

In addition, in connection with the closing of the Purchase Agreement, we and Enphase also entered in a Stockholders Agreement to establish certain of our rights and obligations related to the Closing Shares, including our right to appoint one person to the Enphase board of directors, a six-month lock up period, certain additional transfer restrictions on the Closing Shares, registration rights, and voting, standstill and other undertakings by us.

Upon closing of this transaction, we recognized a gain which is summarized in the following table:



	As of
(In thousands)	August 9, 2018
Cash consideration	$	25,000
Closing shares	42,600
Less transaction costs	(1,743		)
Total consideration	65,857
Assets sold	(6,510		)
Gain on business divestiture	$	59,347

We utilized the quoted price in active markets for the acquired Enphase common stock (a Level 1 input under the fair value measurement standards) to value the Closing Shares. For the year ended December 30, 2018, we recognized a $59.3 million gain on business divestiture included on our Consolidated Statements of Operations.