Maxeon Solar Technologies(MAXN) - 2022 Q3 - Quarterly Report

Condensed Consolidated Balance Sheets Total assets increased, but a significant rise in total liabilities, driven by convertible debt and contract liabilities, led to a substantial decrease in equity Key Balance Sheet Metrics | Metric | October 2, 2022 (in thousands) | January 2, 2022 (in thousands) | | :-------------------------------- | :------------------------------- | :------------------------------- | | Total Assets | $1,256,513 | $1,056,543 | | Total Liabilities | $1,126,035 | $701,668 | | Equity attributable to the Company | $124,840 | $349,456 | Key Balance Sheet Changes (Jan 2, 2022 to Oct 2, 2022) | Key Balance Sheet Changes (Jan 2, 2022 to Oct 2, 2022) | | :----------------------------------------------------- | | Cash and cash equivalents: Increased from $166,542k to $199,085k | | Inventories: Increased from $212,820k to $300,850k | | Contract liabilities, current portion: Increased from $44,059k to $132,745k | | Convertible debt: Increased from $145,772k to $376,927k | Condensed Consolidated Statements of Operations Despite increased revenue, the company reported a higher net loss due to elevated cost of revenue and increased operating expenses Key Operating Metrics | Metric | Three Months Ended Oct 2, 2022 (in thousands) | Three Months Ended Oct 3, 2021 (in thousands) | Nine Months Ended Oct 2, 2022 (in thousands) | Nine Months Ended Oct 3, 2021 (in thousands) | | :-------------------------- | :------------------------------------------ | :------------------------------------------ | :----------------------------------------- | :----------------------------------------- | | Revenue | $275,449 | $220,488 | $736,610 | $561,800 | | Cost of revenue | $291,196 | $237,196 | $804,645 | $580,269 | | Gross loss | $(15,747) | $(16,708) | $(68,035) | $(18,469) | | Operating loss | $(56,943) | $(49,347) | $(182,342) | $(126,384) | | Net loss | $(44,478) | $(66,013) | $(191,440) | $(182,152) | | Basic Net loss per share | $(1.09) | $(1.62) | $(4.70) | $(4.97) | Condensed Consolidated Statements of Comprehensive Loss Total comprehensive loss was slightly higher than net loss, primarily due to currency translation adjustments and net changes in derivatives Comprehensive Loss Metrics | Metric | Nine Months Ended Oct 2, 2022 (in thousands) | Nine Months Ended Oct 3, 2021 (in thousands) | | :-------------------------- | :----------------------------------------- | :----------------------------------------- | | Net loss | $(191,440) | $(182,152) | | Total comprehensive loss | $(191,592) | $(182,519) | Components of Other Comprehensive (Loss) Income (Nine Months Ended Oct 2, 2022) | Components of Other Comprehensive (Loss) Income (Nine Months Ended Oct 2, 2022) | | :------------------------------------------------------------------------------ | | Currency translation adjustment: $(7,774) thousand | | Net change in derivatives: $7,621 thousand | Condensed Consolidated Statements of Equity Total equity significantly decreased, driven by accumulated deficit from net losses and the reclassification of convertible debt from equity to liability Key Equity Metrics | Metric | October 2, 2022 (in thousands) | January 2, 2022 (in thousands) | | :------------------------------- | :------------------------------- | :------------------------------- | | Total Equity | $130,478 | $354,875 |\ | Accumulated Deficit | $(444,562) | $(262,961) | Impact of ASU 2020-06 Adoption (as of January 2, 2022) | Impact of ASU 2020-06 Adoption (as of January 2, 2022) | | :----------------------------------------------------- | | Reduction in Additional Paid-In Capital: $(52,189) thousand | | Increase in Accumulated Deficit: $10,122 thousand | | Net impact on Equity: $(42,067) thousand | Condensed Consolidated Statements of Cash Flows Net cash used in operating and investing activities increased, but significant financing from new convertible debt led to a net increase in cash Key Cash Flow Metrics | Metric | Nine Months Ended Oct 2, 2022 (in thousands) | Nine Months Ended Oct 3, 2021 (in thousands) | | :------------------------------------------------- | :----------------------------------------- | :----------------------------------------- | | Net cash used in operating activities | $(36,292) | $(28,474) | | Net cash used in investing activities | $(132,031) | $(115,766) | | Net cash provided by financing activities | $213,305 | $137,527 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $45,330 | $(6,646) | Key Financing Activities (Nine Months Ended Oct 2, 2022) | Key Financing Activities (Nine Months Ended Oct 2, 2022) | | :----------------------------------------------------- | | Net proceeds from issuance of convertible debt: $188,812 thousand | | Proceeds from debt: $196,388 thousand | | Repayment of debt: $(171,141) thousand | NOTE 1. BACKGROUND AND BASIS OF PRESENTATION Maxeon Solar Technologies, Ltd. is a Singapore-incorporated public company manufacturing solar cells and panels globally, with improved liquidity from new convertible debt and seasonal revenue fluctuations Background Maxeon Solar Technologies, Ltd. is an independent, public Singaporean company manufacturing solar cells and panels globally, with significant ownership by TotalEnergies and TZE SG - Maxeon Solar Technologies, Ltd. is an independent, public company incorporated under the Laws of Singapore, trading on the NASDAQ Global Select Market under the symbol "MAXN" - Primary products are the Maxeon line of interdigitated back contact ("IBC") solar cells and panels, and the Performance line (formerly "P-Series") of shingled solar cells and panels - As of October 2, 2022, TotalEnergies's and TZE SG's ownership of the Company's outstanding common stock was approximately 24.4% and 24.0%, respectively[18] Liquidity Maxeon's unrestricted cash and equivalents increased, supplemented by short-term securities and new convertible notes, improving short-term liquidity, though long-term cash needs are uncertain Liquidity Metrics | Metric | October 2, 2022 (in millions) | January 2, 2022 (in millions) | | :-------------------------------- | :---------------------------- | :---------------------------- | | Unrestricted cash and cash equivalents | $199.1 | $166.5 | | Restricted cash | $38.5 | $25.7 | | Short-term securities | $76.0 | — | - Completed the sale of $207.0 million in aggregate principal amount of 7.50% first lien senior secured convertible notes due 2027 to TZE SG, resulting in aggregate net proceeds of approximately $186.1 million[20] - Management believes current cash, cash equivalents, and short-term securities, along with cash expected to be generated from operations, will be sufficient to meet obligations over the next 12 months[22] - Long-term cash requirements are uncertain due to dynamic markets, capital market volatility, rising inflation and interest rates, supply chain challenges, and global events, limiting visibility to quantify expected needs[23] Seasonal Trends Maxeon's business experiences seasonal fluctuations, with the majority of revenues historically realized during the last two quarters of a fiscal year due to weather and economic factors - Sales have historically reflected seasonal trends with the largest percentage of total revenues realized during the last two quarters of a fiscal year[26] - The installation of solar power components and related revenue may decline during cold and/or rainy winter months for the distributed generation market[26] Basis of Presentation Unaudited condensed consolidated financial statements are prepared in conformity with GAAP, relying on management estimates, and consolidate Maxeon, its subsidiaries, and primary beneficiary VIEs - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions[29] - The company has a 52-to-53-week fiscal year that ends on the Sunday closest to December 31[30] - The condensed consolidated financial statements incorporate the accounts of Maxeon, all subsidiaries, and variable interest entities for which the Company or a subsidiary is the primary beneficiary[31] Summary of Selected Significant Accounting Policies Effective January 1, 2022, Maxeon extended its product warranty for solar panels to 40 years in certain countries, maintaining reserves based on historical claims and industry data - Effective from January 1, 2022, the product warranty for solar panels has been extended to a 40-year warranty for certain countries, subject to certain conditions, for defects in materials and workmanship and for greater than promised declines in power performance[33] - Warranty reserves are based on the best estimate of such costs and are recognized as a cost of revenue, continuously monitored based on historical claims, lab testing, field monitoring, vendor reliability, and industry averages[35] Recently Adopted Accounting Pronouncements Maxeon adopted ASU 2020-06, reclassifying convertible debt from equity to liability, and ASU 2021-10 for government assistance disclosures with no material impact - Adopted ASU 2020-06 during the first quarter of fiscal year 2022 on a modified retrospective basis, which eliminated the bifurcation of the liability and equity components of the Green Convertible Notes into a single liability instrument[37] - The adoption of ASU 2020-06 resulted in an increase to the carrying value of the convertible debt by $42.1 million, a reduction in additional paid-in-capital by $52.2 million, and a $10.1 million cumulative effect of adoption recognized to the opening balance of accumulated deficit[37] - Adopted ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, during the first quarter of fiscal year 2022 with no material impact on its interim financial statements[38] NOTE 2. AGREEMENTS WITH SUNPOWER, TOTALENERGIES SE AND TZE Maxeon maintains significant agreements with SunPower for IBC Modules, TotalEnergies for PV modules and prepayments, and TZE for silicon wafers and convertible notes Agreements with SunPower Maxeon's Master Supply Agreement with SunPower mandates minimum IBC Module purchases through 2023 at fixed prices, with polysilicon cost adjustment provisions - Entered into a new master supply agreement with SunPower in February 2022, which terminates and replaces the previous supply agreement[42] - SunPower is required to purchase, and Maxeon is required to supply, specified amounts of IBC Modules for use in the Domestic Territory during each calendar quarter of the term, continuing until December 31, 2023[42][43] - Pricing for sales to SunPower is fixed for 2022 and 2023, based on the power output of the IBC Module, with a provision for price adjustment if polysilicon costs fluctuate above a specified threshold[43] Agreements with TotalEnergies Maxeon's supply agreement with TotalEnergies involves prepayments for PV modules, with updated pricing and repayment terms, and a new prepayment for Performance line modules - Original Total Supply Agreement (Nov 2016) for up to 200 MW, with a $88.5 million prepayment received[44] - Second Amended and Restated Initial Implementing Agreement (Feb 2021) for supply of approximately 70 MW of PV modules until December 31, 2025, with amended pricing and repayment of the prepayment difference in 12 installments from Q1 2023 to Q4 2025[46] - Received $57.1 million prepayment from Danish Fields Solar LLC (a TotalEnergies subsidiary) for Performance line modules as of October 2, 2022, with deliveries expected by Q3 2023[47] Contract Liabilities with TotalEnergies (in thousands) | Contract Liabilities with TotalEnergies (in thousands) | | :--------------------------------------------------- | | As of October 2, 2022: | | Accrued liabilities: $5,600 | | Contract liabilities, current portion: $58,900 | | Contract liabilities, net of current portion: $500 | | Other long-term liabilities: $16,700 | | As of January 2, 2022: | | Contract liabilities, current portion: $31,100 | | Contract liabilities, net of current portion: $23,800 | | Other long-term liabilities: $22,600 | Agreements with TZE Maxeon has strategic agreements with TZE, including a private placement of shares, a silicon wafer supply agreement, and the recent issuance of $207 million in 2027 convertible notes - In April 2021, the Company sold 1,870,000 ordinary shares to TZE at $18.00 per share in a private placement[51] - Entered into a silicon wafer master supply agreement with Zhonghuan Hong Kong Ltd (TZE HK) in November 2021 for P-Type G12 wafers, with deliveries commencing in 2022[52] Advances to Suppliers (TZE HK) (in thousands) | Advances to Suppliers (TZE HK) (in thousands) | | :------------------------------------------ | | As of October 2, 2022: | | Advances to suppliers, current portion: $3,900 | | As of January 2, 2022: | | Advances to suppliers, current portion: $1,800 | | Advances to suppliers, non-current portion: $700 | - Completed the sale of $207.0 million in aggregate principal amount of 7.50% first lien senior secured convertible notes due 2027 to TZE SG on August 17, 2022[54] NOTE 3. REVENUE FROM CONTRACTS WITH CUSTOMERS Maxeon recognized increased revenue from module and component sales, with contract liabilities significantly rising due to additional customer advances Revenue from Sales of Modules and Components Maxeon recognized increased revenue from module and component sales for both three and nine-month periods, with revenue recognized upon control transfer, typically at shipment or delivery Revenue from Sales of Modules and Components (in millions) | Metric | Three Months Ended Oct 2, 2022 (in millions) | Three Months Ended Oct 3, 2021 (in millions) | Nine Months Ended Oct 2, 2022 (in millions) | Nine Months Ended Oct 3, 2021 (in millions) | | :-------------------------------- | :------------------------------------------ | :------------------------------------------ | :----------------------------------------- | :----------------------------------------- | | Revenue from sales of modules and components | $275.4 | $220.5 | $736.6 | $561.8 | - Revenue is recognized for sales of modules and components at the point that control transfers to the customer, which typically occurs upon shipment or delivery, with payment terms typically between 30 and 45 days[56] Contract Assets and Liabilities Contract assets decreased while contract liabilities significantly increased, primarily due to additional customer advances, with equipment and inventory pledged as collateral Contract Assets and Liabilities (in millions) | Metric | October 2, 2022 (in millions) | January 2, 2022 (in millions) | | :-------------------- | :---------------------------- | :---------------------------- | | Contract assets | $0.6 | $1.6 | | Contract liabilities | $231.7 | $103.1 | - Contract assets decreased by $1.0 million for the nine months ended October 2, 2022, primarily due to new billings of previously unbilled receivables[57] - Contract liabilities increased by $128.6 million for the nine months ended October 2, 2022, primarily due to additional customer advances[59] - As of October 2, 2022, the Company has pledged $56.6 million equipment assets and inventory to serve as collateral for the advances from customers[58] NOTE 4. BALANCE SHEET COMPONENTS This section details specific balance sheet accounts, including increases in accounts receivable, inventories, and prepaid expenses, alongside changes in long-term assets and liabilities Accounts receivable, net Accounts receivable, net, increased, with SunPower accounting for a larger portion, and the company utilized factoring arrangements for invoices Accounts Receivable, Net (in thousands) | Metric | October 2, 2022 (in thousands) | January 2, 2022 (in thousands) | | :---------------------- | :------------------------------- | :------------------------------- | | Accounts receivable, net | $58,481 | $39,730 | - Sold accounts receivable invoices amounting to $380.0 million during the nine months ended October 2, 2022, through factoring arrangements[61] - SunPower accounted for 14.8% of gross accounts receivable as of October 2, 2022, compared to 9.7% as of January 2, 2022[63] Allowance for credit losses The allowance for credit losses decreased, primarily due to releases from expense during the nine-month period Allowance for Credit Losses (in thousands) | Metric | October 2, 2022 (in thousands) | January 2, 2022 (in thousands) | | :-------------------------- | :------------------------------- | :------------------------------- | | Balance at end of period | $724 | $940 | - Release from expense of $(0.1) million for the nine months ended October 2, 2022[64] Allowance for sales returns The allowance for sales returns decreased, mainly due to charges to expense during the nine-month period Allowance for Sales Returns (in thousands) | Metric | October 2, 2022 (in thousands) | January 2, 2022 (in thousands) | | :-------------------------- | :------------------------------- | :------------------------------- | | Balance at end of period | $80 | $225 | - Charges to (Releases from) expense of $(0.1) million for the nine months ended October 2, 2022[65] Inventories Inventories significantly increased, accompanied by a substantial rise in inventory reserves during the period Inventories (in thousands) | Metric | October 2, 2022 (in thousands) | January 2, 2022 (in thousands) | | :---------- | :------------------------------- | :------------------------------- | | Inventories | $300,850 | $212,820 | Inventory Reserves (in millions) | Inventory Reserves (in millions) | | :------------------------------- | | October 2, 2022: $30.8 | | January 2, 2022: $4.9 | Prepaid expenses and other current assets Prepaid expenses and other current assets nearly doubled, driven by derivative financial instruments and restricted cash Prepaid Expenses and Other Current Assets (in thousands) | Metric | October 2, 2022 (in thousands) | January 2, 2022 (in thousands) | | :-------------------------------- | :------------------------------- | :------------------------------- | | Prepaid expenses and other current assets | $119,794 | $61,904 | Key Components (Oct 2, 2022 vs Jan 2, 2022, in thousands) | Key Components (Oct 2, 2022 vs Jan 2, 2022, in thousands) | | :-------------------------------------------------------- | | Derivative financial instruments: $12,887 vs $3,526 | | Restricted cash: $35,968 vs $1,661 | Property, plant and equipment, net Property, plant and equipment, net, remained relatively stable, with gross assets increasing but offset by rising accumulated depreciation Property, Plant and Equipment, Net (in thousands) | Metric | October 2, 2022 (in thousands) | January 2, 2022 (in thousands) | | :-------------------------------- | :------------------------------- | :------------------------------- | | Property, plant and equipment, net | $385,750 | $386,630 | - Construction-in-process decreased from $124.5 million as of January 2, 2022, to $25.6 million as of October 2, 2022[68] Other long-term assets Other long-term assets decreased, mainly due to reduced prepayment for capital expenditure and restricted cash, partially offset by an increase in Prepaid Forward Other Long-Term Assets (in thousands) | Metric | October 2, 2022 (in thousands) | January 2, 2022 (in thousands) | | :------------------- | :------------------------------- | :------------------------------- | | Other long-term assets | $74,667 | $115,077 | Key Components (Oct 2, 2022 vs Jan 2, 2022, in thousands) | Key Components (Oct 2, 2022 vs Jan 2, 2022, in thousands) | | :-------------------------------------------------------- | | Prepaid Forward: $52,388 vs $32,250 | | Prepayment for capital expenditure: $6,286 vs $34,631 | | Restricted cash: $2,509 vs $24,029 | Accrued liabilities Accrued liabilities increased, driven by employee compensation, VAT payables, and new refund liabilities to TotalEnergies, while short-term warranty reserves decreased Accrued Liabilities (in thousands) | Metric | October 2, 2022 (in thousands) | January 2, 2022 (in thousands) | | :------------------ | :------------------------------- | :------------------------------- | | Accrued liabilities | $89,103 | $78,680 | Key Components (Oct 2, 2022 vs Jan 2, 2022, in thousands) | Key Components (Oct 2, 2022 vs Jan 2, 2022, in thousands) | | :-------------------------------------------------------- | | Employee compensation and employee benefits: $24,369 vs $18,769 | | Short-term warranty reserves: $7,067 vs $11,457 | | VAT payables: $10,699 vs $6,687 | | Refund liabilities to TotalEnergies, current portion: $5,569 vs $0 | Other long-term liabilities Other long-term liabilities slightly decreased, mainly due to reductions in refund liabilities to TotalEnergies and unrecognized tax benefits, with a slight increase in long-term warranty reserves Other Long-Term Liabilities (in thousands) | Metric | October 2, 2022 (in thousands) | January 2, 2022 (in thousands) | | :------------------------ | :------------------------------- | :------------------------------- | | Other long-term liabilities | $56,983 | $61,039 | Key Components (Oct 2, 2022 vs Jan 2, 2022, in thousands) | Key Components (Oct 2, 2022 vs Jan 2, 2022, in thousands) | | :-------------------------------------------------------- | | Long-term warranty reserves: $25,271 vs $23,762 | | Unrecognized tax benefits: $8,042 vs $9,834 | | Refund liabilities to TotalEnergies, net of current portion: $16,706 vs $22,566 | Accumulated other comprehensive loss Accumulated other comprehensive loss remained relatively stable, influenced by a larger cumulative translation adjustment loss offset by increased net unrealized gain on derivative instruments Accumulated Other Comprehensive Loss (in thousands) | Metric | October 2, 2022 (in thousands) | January 2, 2022 (in thousands) | | :-------------------------------- | :------------------------------- | :------------------------------- | | Accumulated other comprehensive loss | $(11,996) | $(11,844) | Key Components (Oct 2, 2022 vs Jan 2, 2022, in thousands) | Key Components (Oct 2, 2022 vs Jan 2, 2022, in thousands) | | :-------------------------------------------------------- | | Cumulative translation adjustment: $(26,515) vs $(18,741) | | Net unrealized gain on derivative instruments: $10,310 vs $2,689 | NOTE 5. FAIR VALUE MEASUREMENTS Maxeon measures certain assets and liabilities at fair value, primarily using Level 2 inputs, and holds held-to-maturity debt securities and non-marketable equity investments Assets and Liabilities Measured at Fair Value on a Recurring Basis Maxeon's assets and liabilities measured at fair value on a recurring basis primarily use Level 2 inputs, with total fair value assets significantly increasing - Fair value is estimated by applying a hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), Level 3 (unobservable management inputs)[74] Fair Value Assets and Liabilities (in thousands) | Metric | October 2, 2022 (in thousands) | January 2, 2022 (in thousands) | | :-------------------------------- | :------------------------------- | :------------------------------- | | Total assets measured at fair value | $65,275 | $35,776 | | Total liabilities measured at fair value | $918 | $536 | - All recurring fair value measurements utilize Level 2 inputs[75] Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis Maxeon measures certain investments and non-financial assets at fair value on a non-recurring basis when impaired, with no material items recorded during the period - No material items were recorded at fair value on a non-recurring basis as of October 2, 2022, or January 2, 2022[76] Held-to-Maturity Debt Securities Maxeon holds held-to-maturity debt securities, including Philippine government bonds and a time deposit, recorded at amortized cost with no impairment losses - Held-to-maturity debt securities include Philippine government bonds ($0.9 million as of October 2, 2022) and a $76.0 million 4-month time deposit with Deutsche Bank AG, Singapore Branch, maturing in January 2023[78][79] - These securities are recorded at amortized cost based on the ability and intent to hold them until maturity[80] - No other-than-temporary impairment loss was incurred during the period presented[80] Non-Marketable Equity Investments Maxeon's non-marketable equity investments are in privately-held companies, recognized at cost less impairment, adjusted for observable price changes Non-Marketable Equity Investments (in millions) | Metric | October 2, 2022 (in millions) | January 2, 2022 (in millions) | | :-------------------------------- | :---------------------------- | :---------------------------- | | Non-marketable equity investments | $4.0 | $4.0 | - Recognized at cost less impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment of the same issuer[81] Equity Method Investments Maxeon monitors its equity method investments for impairment, recording reductions in carrying values when necessary, indicated by Level 3 measurements - Equity method investments are monitored for impairment, with reductions in carrying values recorded when necessary[82] - Circumstances indicating an other-than-temporary decline include Level 3 measurements such as valuation in subsequent financing rounds, decreases in quoted market prices, and declines in the issuer's results of operations[82] NOTE 6. COMMITMENTS AND CONTINGENCIES Maxeon has significant purchase commitments, advances to suppliers, ongoing legal matters, and standby letters of credit, with a provision made for a new legal claim Purchase Commitments Maxeon has significant future purchase obligations for non-cancellable orders and long-term supply agreements, including a settlement with a polysilicon supplier for price escalation Future Purchase Obligations (as of October 2, 2022, in millions) | Future Purchase Obligations (as of October 2, 2022, in millions) | | :------------------------------------------------------------- | | Non-cancellable purchase orders: $149.9 | | Long-term supply agreements: $169.4 | - Reached a mutual agreement on a one-off and final settlement of $15.2 million with a polysilicon supplier for price escalation clauses, with payments to be made in equal monthly installments from August 2022 until January 2023[85] - Expects all obligations related to non-cancellable purchase orders for manufacturing equipment to be recovered through future cash flows and long-term supply agreements for inventories to be utilized in the manufacture and profitable sale of solar power products[87] Advances to Suppliers Advances to suppliers decreased, primarily for "take or pay" contracts with two main suppliers, requiring prepayments to reserve future product volumes Advances to Suppliers (in millions) | Metric | October 2, 2022 (in millions) | January 2, 2022 (in millions) | | :------------------ | :---------------------------- | :---------------------------- | | Advances to suppliers | $13.9 | $51.8 | - Agreements with vendors are structured as "take or pay" contracts, specifying future quantities and pricing of products, and requiring prepayments[89] - Two suppliers accounted for 100% of total advances to suppliers as of October 2, 2022, and January 2, 2022[89] Legal Matters Maxeon is involved in various litigation matters, with a provision made for an estimated exposure related to a new legal claim from a supplier, and SunPower indemnifies for certain claims - Received a legal claim from a supplier during the nine months ended October 2, 2022, and made a provision for the estimated exposure in "Accrued liabilities"[91] - SunPower has agreed to indemnify Maxeon for certain litigation claims to which certain subsidiaries are named the defendant or party[90] Letters of Credit and Bank Guarantees Maxeon's maximum potential payment obligations under standby letters of credit and bank guarantees increased, collateralized by restricted cash, with no anticipated significant payments Maximum Potential Payment Obligation (in millions) | Metric | October 2, 2022 (in millions) | January 2, 2022 (in millions) | | :------------------------------------------------- | :---------------------------- | :---------------------------- | | Maximum potential payment obligation under guarantee agreements | $45.2 | $31.7 | - Certain guarantee agreements are collateralized by restricted cash of $38.1 million as of October 2, 2022, and $24.1 million as of January 2, 2022[92] - The company does not believe it is probable that any amounts will be required to be paid under these guarantee agreements[92] NOTE 7. EQUITY INVESTMENTS Maxeon holds equity method investments in Huansheng JV and CCPV, an equity investment in Deca Technologies, Inc., and consolidates SPML Land, Inc. as a VIE Equity Method Investments Maxeon accounts for investments in Huansheng JV and CCPV using the equity method, with its ownership in Huansheng JV diluted due to a capital injection by TZE - Maxeon accounts for its investment in Huansheng JV using the equity method, with its equity ownership diluted from 20.0% to 16.3% in September 2021 due to TZE's capital injection[94][95] - Maxeon's investment in CCPV (25% equity ownership) was fully impaired in fiscal year 2017[96][97] Equity Method Investments (in thousands) | Equity Method Investments (in thousands) | | :--------------------------------------- | | October 2, 2022: $1,208 | | January 2, 2022: $11,230 | Equity Investments without Readily Determinable Fair Value Maxeon holds an equity investment in Deca Technologies, Inc., recognized at cost less impairment, adjusted for observable price changes in transactions Equity Investments without Readily Determinable Fair Value (in thousands) | Equity Investments without Readily Determinable Fair Value (in thousands) | | :---------------------------------------------------------------------- | | October 2, 2022: $4,000 | | January 2, 2022: $4,000 | - Investment in Deca Technologies, Inc. is recognized at cost less impairment, adjusted for observable price changes in orderly transactions[81][98] Variable Interest Entities ("VIE") Maxeon evaluates its investments in VIEs using a qualitative approach to determine if it is the primary beneficiary, based on power to direct activities and exposure to losses or benefits - An entity is considered the primary beneficiary of a VIE if it has the power to direct the activities that most significantly impact the economic performance of the VIE and the right to receive benefits from, or the obligation to absorb losses of, the VIE that could be potentially significant[101] Consolidated VIE Maxeon consolidates SPML Land, Inc. as a primary beneficiary VIE, despite owning only 40% equity, due to its power to direct activities and exposure to significant profits or losses - Maxeon consolidates SPML Land, Inc. because it is deemed the primary beneficiary, having the power to direct activities that significantly impact its economic performance and exposure to significant profits or losses[104] SPML Land, Inc. Aggregate Carrying Amounts (in millions) | SPML Land, Inc. Aggregate Carrying Amounts (in millions) | | :------------------------------------------------------- | | As of October 2, 2022: | | Total assets: $22.9 | | Total liabilities: $6.2 | | As of January 2, 2022: | | Total assets: $22.4 | | Total liabilities: $7.7 | NOTE 8. DEBT AND CREDIT SOURCES Maxeon's debt structure includes Green Convertible Notes and new 2027 Convertible Notes, with ASU 2020-06 impacting carrying values, alongside a Physical Delivery Forward and a Prepaid Forward Green Convertible Notes Maxeon issued $200.0 million in 6.5% Green Convertible Senior Notes due 2025, with their carrying amount increasing after the adoption of ASU 2020-06 - Issued $200.0 million aggregate principal amount of 6.5% Green Convertible Senior Notes due 2025[106] - The adoption of ASU 2020-06 increased the carrying amount of the Green Convertible Notes by $42.1 million to $187.8 million as of January 3, 2022, eliminating the bifurcation of liability and equity components[107] Green Convertible Notes (in millions) | Metric | October 2, 2022 (in millions) | January 2, 2022 (in millions) | | :-------------------- | :---------------------------- | :---------------------------- | | Net carrying amount | $190.4 | $145.8 | | Fair value | $293.7 | $218.5 | Physical Delivery Forward Maxeon entered into a Physical Delivery Forward transaction for ordinary shares, initially a liability-classified instrument, subsequently reclassified to equity after the Note Valuation Period - Entered into a privately negotiated forward-starting physical delivery forward transaction for approximately $60.0 million worth of ordinary shares[111] - The Physical Delivery Forward was a liability-classified financial instrument that was remeasured to fair value during the Note Valuation Period and subsequently reclassified to equity after the period ended on September 29, 2020[112] Prepaid Forward Maxeon entered into a Prepaid Forward transaction to repurchase ordinary shares, classified as an asset and remeasured to fair value each period, with changes booked in earnings - Entered into a privately negotiated forward-starting forward share purchase transaction to repurchase approximately $40.0 million worth of ordinary shares[113] - The Prepaid Forward is classified as an asset and remeasured to fair value at the end of each reporting period, with changes in fair value booked in earnings[115] Prepaid Forward (in millions) | Metric | October 2, 2022 (in millions) | January 2, 2022 (in millions) | | :-------------------- | :---------------------------- | :---------------------------- | | Carrying amount | $52.4 | $32.3 | - Remeasurement to fair value for the nine months ended October 2, 2022, was a gain of $20.1 million[115] 2027 Convertible debt Maxeon sold $207.0 million in 7.5% first lien senior secured convertible notes due 2027 to TZE SG, with interest payable in cash, PIK Notes, or ordinary shares - Completed the sale of $207.0 million aggregate principal amount of 7.5% first lien senior secured convertible notes due 2027 to TZE SG on August 17, 2022[116] - Interest accrues at 7.5% per annum, payable semi-annually, with the initial 3.5% in cash and the remaining 4.0% payable in cash, PIK Notes, or ordinary shares at the Company's election[116] - Initial conversion price of $23.13 per ordinary share, with a conversion rate of 43.2301 ordinary shares for $1,000 principal amount[117] 2027 Convertible Debt (in millions) | Metric | October 2, 2022 (in millions) | | :-------------------- | :---------------------------- | | Net carrying amount | $186.5 | | Face value | $207.0 | | Fair value | $200.8 | Other Debt and Credit Sources Maxeon has a $50.0 million revolving credit agreement with Standard Chartered Bank Malaysia Berhad, with most other debt facilities terminated in fiscal year 2021 - Revolving Credit agreement for $50.0 million through Standard Chartered Bank Malaysia Berhad, with $49.9 million outstanding as of October 2, 2022[121] - A loss on extinguishment of debt of $5.1 million was recognized during the three and nine months ended October 3, 2021, due to the termination of certain debt facilities[122] NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS Maxeon uses derivative financial instruments, primarily foreign currency option and forward contracts, for hedging cash flow and transaction exposures, recognizing a net gain in OCL Derivative Financial Instruments Overview Maxeon's derivative financial instruments, mainly foreign currency option and forward contracts, are measured at fair value using Level 2 inputs, with a net gain recognized in OCL for cash flow hedges Derivative Financial Instruments (in thousands) | Metric | October 2, 2022 (in thousands) | January 2, 2022 (in thousands) | | :-------------------- | :------------------------------- | :------------------------------- | | Derivative assets | $12,887 | $3,526 | | Derivative liabilities | $918 | $536 | - All hedge instruments measured at fair value on a recurring basis utilize Level 2 inputs under the fair value hierarchy[124] - For the nine months ended October 2, 2022, a net gain on derivatives of $7.6 million was recognized in Accumulated Other Comprehensive Loss (OCL)[125] Foreign Currency Exchange Risk Maxeon manages foreign currency exchange risk using designated derivatives to hedge forecasted revenues and expenses, and non-designated forward contracts for balance sheet exposure - Uses foreign currency option contracts and foreign currency forward contracts designated as cash flow hedges to hedge certain forecasted revenue transactions denominated in Euros and Australian dollars[127] - As of October 2, 2022, had outstanding cash flow hedge option contracts and forward contracts with a notional value of $233.5 million[128] - Held foreign currency forward contracts with an aggregate notional value of $29.9 million as of October 2, 2022, for non-designated derivatives hedging balance sheet exposure[130] Credit Risk Maxeon is exposed to credit losses from nonperformance by derivative counterparties but mitigates this risk by engaging with high-quality financial institutions and continuous assessment - Exposed to credit losses in the event of nonperformance by the counterparties to option and forward contracts[131] - Mitigates credit risk by entering into derivative contracts with high-quality financial institutions and limiting credit exposure to any single counterparty[131] NOTE 10. INCOME TAXES Maxeon reported income tax expense primarily due to current year income tax in profitable jurisdictions, with unrecognized tax benefits decreasing due to the expiry of statutes of limitations Income Tax Expense Overview Maxeon's income tax expense was driven by current year income tax in profitable jurisdictions and prior year deferred income tax true-ups, with provisions based on a projected annual effective tax rate - Income tax expense of $2.4 million for the three months ended October 2, 2022, primarily due to current year income tax expense in profitable jurisdictions and prior year deferred income tax true-ups[132] - Provision for income taxes is computed based on a projected annual effective tax rate while excluding loss jurisdictions which cannot be benefited[133] Unrecognized Tax Benefits Unrecognized tax benefits decreased, mainly due to the expiry of statutes of limitations, as the company regularly assesses its tax positions amidst complex global tax regulations Unrecognized Tax Benefits (in millions) | Metric | October 2, 2022 (in millions) | January 2, 2022 (in millions) | | :------------------------ | :---------------------------- | :---------------------------- | | Unrecognized tax benefits | $8.0 | $9.8 | - The reduction in unrecognized tax benefits was mainly due to the expiry of statute of limitations in certain jurisdictions[135] - The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations, including legislative, regulatory, and judicial developments, transfer pricing, and withholding taxes[136] NOTE 11. NET LOSS PER SHARE Maxeon reported basic and diluted net loss per share, with potentially dilutive securities excluded from diluted EPS calculation due to their anti-dilutive effect from the net loss Net Loss Per Share Attributable to Stockholders | Metric | Three Months Ended Oct 2, 2022 | Three Months Ended Oct 3, 2021 | Nine Months Ended Oct 2, 2022 | Nine Months Ended Oct 3, 2021 | | :------------------------------------ | :----------------------------- | :----------------------------- | :---------------------------- | :---------------------------- | | Net loss attributable to stockholders | $(44,691) | $(65,363) | $(191,723) | $(181,188) | | Basic and diluted net loss per share | $(1.09) | $(1.62) | $(4.70) | $(4.97) | - Potentially dilutive securities (restricted stock units, Green Convertible Notes, and 2027 Notes) were excluded from the computation of diluted net loss per share because their effect was anti-dilutive due to the net loss attributable to stockholders[137] NOTE 12. SEGMENT AND GEOGRAPHICAL INFORMATION Maxeon operates as a single operating and reportable segment, with the United States being the largest geographical market and SunPower accounting for significant sales - The company operates in a single operating segment and a single reportable segment[138] Revenue by Geography (in thousands) | Revenue by Geography (in thousands) | | :---------------------------------- | | Nine Months Ended Oct 2, 2022: | | United States: $266,367 | | France: $58,355 | | Italy: $90,490 | | Rest of the world: $321,398 | | Total revenue: $736,610 | | Nine Months Ended Oct 3, 2021: | | United States: $170,029 | | France: $75,340 | | Italy: $58,096 | | Rest of the world: $258,335 | | Total revenue: $561,800 | - Sales to SunPower amounted to $68.9 million during the three months ended October 2, 2022[140] NOTE 13. RESTRUCTURING Maxeon initiated two restructuring plans related to the closure of manufacturing facilities in France, with total restructuring expense recorded for the nine months ended October 2, 2022 May 2021 Restructuring Plan This plan, initiated in fiscal year 2021, aimed to reduce costs and improve cash flow through the closure of a France-based manufacturing facility, expected to be completed by fiscal year 2022 - Adopted in fiscal year 2021 to reduce costs and focus on improving cash flow, primarily related to the closure of the France-based manufacturing facility[141] - The restructuring activities are expected to be completed by fiscal year 2022[141] May 2021 Restructuring Plan Charges (Nine Months Ended Oct 2, 2022, in thousands) | May 2021 Restructuring Plan Charges (Nine Months Ended Oct 2, 2022, in thousands) | | :-------------------------------------------------------------------------------- | | Severance and benefits: $(432) | | Cost of disposal and retirement of property, plant and equipment: $37 | | Total: $(395) | June 2022 Restructuring Plan Adopted in fiscal year 2022, this plan also focuses on cost reduction and cash flow improvement, specifically related to the closure of the module factory in Porcelette, France - Adopted in fiscal year 2022 to reduce costs and focus on improving cash flow, primarily related to the closure of the module factory in Porcelette, France[142] - The restructuring activities are expected to be completed by the first half of 2023[142] June 2022 Restructuring Plan Charges (Nine Months Ended Oct 2, 2022, in thousands) | June 2022 Restructuring Plan Charges (Nine Months Ended Oct 2, 2022, in thousands) | | :--------------------------------------------------------------------------------- | | Severance and benefits: $1,989 | | Cost of disposal and retirement of property, plant and equipment: $69 | | Total: $2,058 | NOTE 14. COMMON STOCK Maxeon completed a public offering and private placement to TZE, issuing ordinary shares and raising net proceeds, with shares reserved for future issuance under equity compensation plans Common Stock Issuance In April 2021, Maxeon completed a public offering and a private placement to TZE, issuing a total of 9,916,025 ordinary shares and raising approximately $169.7 million in net proceeds - In April 2021, the Company completed a public offering and a private placement to TZE, issuing a total of 9,916,025 shares[146][147] - The net proceeds from the Offering and the TZE Private Placement were approximately $169.7 million[148] Voting Rights - Common Stock All common stockholders are entitled to one vote per share on all matters submitted to be voted on by the company's stockholders - All common stockholders are entitled to one vote per share on all matters submitted to be voted on by the company's stockholders[149] Dividends - Common Stock Common stockholders are entitled to equal per share dividends when declared by the Board of Directors, subject to restrictions imposed by certain debt agreements - All common stockholders are entitled to receive equal per share dividends when and if declared by the Board of Directors[150] - Certain debt agreements place restrictions on the company and its subsidiaries' ability to pay cash dividends[150] Shares Reserved for Future Issuance Under Equity Compensation Plans As of October 2, 2022, 3.3 million shares of common stock were reserved for future issuance under equity compensation plans, a slight decrease from January 2, 2022 Shares Reserved for Future Issuance (in thousands) | Metric | October 2, 2022 (in thousands) | January 2, 2022 (in thousands) | | :------------------------------------------------- | :------------------------------- | :------------------------------- | | Shares reserved for future issuance under equity compensation plans | 3,281 | 3,363 |