ITEM 3.
KEY INFORMATION
A.
Selected Financial Data
Selected Consolidated Financial and Operating Data
The following selected statement of operations data for the years ended December 31, 2014, 2015 and 2016 and balance sheet data as of
December 31, 2015 and 2016 have been derived from our consolidated financial statements, which are included elsewhere in this annual report on Form 20-F. You should read the selected
consolidated financial and operating data in conjunction with those financial statements and the related notes and "Item 5. Operating and Financial Review and Prospects" included elsewhere in
this annual report on Form 20-F.
Our
selected consolidated statement of operations data for the years ended December 31, 2012 and 2013 and our consolidated balance sheet data as of December 31, 2012, 2013
and 2014 were derived from our consolidated financial statements that are not included in this annual report.
All
of our financial statements are prepared and presented in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. Our historical results are not
necessarily indicative of results for any future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended, or as of, December 31,
|
|
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
|
|
(In thousands of $, except share and per share data, and operating data
and percentages)
|
|
Statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
1,294,829
|
|
|
1,654,356
|
|
|
2,960,627
|
|
|
3,467,626
|
|
|
2,853,078
|
|
Income (loss) from operations
|
|
|
(142,516
|
)
|
|
130,816
|
|
|
366,314
|
|
|
247,371
|
|
|
93,164
|
|
Net income (loss)
|
|
|
(195,155
|
)
|
|
45,565
|
|
|
243,887
|
|
|
173,316
|
|
|
65,275
|
|
Net income (loss) attributable to Canadian Solar Inc.
|
|
|
(195,469
|
)
|
|
31,659
|
|
|
239,502
|
|
|
171,861
|
|
|
65,249
|
|
Earnings (loss) per share, basic
|
|
|
(4.53
|
)
|
|
0.68
|
|
|
4.40
|
|
|
3.08
|
|
|
1.13
|
|
Shares used in computation, basic
|
|
|
43,190,778
|
|
|
46,306,739
|
|
|
54,408,037
|
|
|
55,728,903
|
|
|
57,524,349
|
|
Earnings (loss) per share, diluted
|
|
|
(4.53
|
)
|
|
0.63
|
|
|
4.11
|
|
|
2.93
|
|
|
1.12
|
|
Shares used in computation, diluted
|
|
|
43,190,778
|
|
|
50,388,284
|
|
|
59,354,615
|
|
|
60,426,056
|
|
|
58,059,063
|
|
Other financial data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
7.0
|
%
|
|
16.7
|
%
|
|
19.6
|
%
|
|
16.6
|
%
|
|
14.6
|
%
|
Operating margin
|
|
|
(11.0
|
)%
|
|
7.9
|
%
|
|
12.4
|
%
|
|
7.1
|
%
|
|
3.3
|
%
|
Net margin
|
|
|
(15.1
|
)%
|
|
2.8
|
%
|
|
8.2
|
%
|
|
5.0
|
%
|
|
2.3
|
%
|
3
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended, or as of, December 31,
|
|
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
|
|
(In thousands of $, except share and per share data, and operating data
and percentages)
|
|
Selected operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Solar power products sold (in MW)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Module segment
(1)
|
|
|
1,528.9
|
|
|
1,809.0
|
|
|
2,436.4
|
|
|
4,085.0
|
|
|
5,138.1
|
|
Energy segment
(2)
|
|
|
14.2
|
|
|
85.0
|
|
|
376.2
|
|
|
298.8
|
|
|
65.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,543.1
|
|
|
1,894.0
|
|
|
2,812.6
|
|
|
4,383.8
|
|
|
5,203.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average selling price (in $ per watt)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Solar module
|
|
|
0.77
|
|
|
0.67
|
|
|
0.67
|
|
|
0.58
|
|
|
0.51
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current assets (liabilities)
|
|
|
(98,046
|
)
|
|
(59,003
|
)
|
|
366,621
|
|
|
(392,231
|
)
|
|
69,697
|
|
Total assets
|
|
|
2,259,313
|
|
|
2,453,735
|
|
|
3,068,115
|
|
|
4,413,928
|
|
|
5,406,606
|
|
Net assets
|
|
|
301,583
|
|
|
401,498
|
|
|
729,574
|
|
|
832,510
|
|
|
899,390
|
|
Long-term borrowings
|
|
|
214,563
|
|
|
151,392
|
|
|
134,300
|
|
|
606,577
|
|
|
493,455
|
|
Convertible notes
|
|
|
|
|
|
|
|
|
145,691
|
|
|
146,674
|
|
|
125,569
|
|
Common shares
|
|
|
502,562
|
|
|
561,242
|
|
|
675,236
|
|
|
677,103
|
|
|
701,283
|
|
Number of shares outstanding
|
|
|
43,242,426
|
|
|
51,034,343
|
|
|
55,161,856
|
|
|
55,965,443
|
|
|
57,830,149
|
|
-
(1)
-
Numbers
are calculated after inter-segmentation elimination and represent solar power products sold to third parties.
-
(2)
-
Numbers
are calculated after inter-segmentation elimination.
B.
Capitalization and Indebtedness
Not
applicable.
C.
Reasons for the Offer and Use of Proceeds
Not applicable.
D.
Risk Factors
Risks Related to Our Company and Our Industry
We may be adversely affected by volatile solar power market and industry conditions; in particular, the
demand for our solar power products and services may decline, which may reduce our revenues and earnings.
Our business is affected by conditions in the solar power market and industry. In 2010, as the effects of the global financial crisis subsided,
demand for solar power products increased and many manufacturers increased their production capacity accordingly. In 2011, a decrease in payments to solar power producers in the form of feed-in
tariffs, or FITs, and other reimbursements, a reduction in available financing and an excess supply of solar modules worldwide put severe downward pressure on solar module prices in European and other
markets. In December 2016, the National Development and Reform Commission, or the NDRC, announced the reduction in FITs for utility-scale solar plants. The administration of
U.S. President Donald Trump is also expected to have less favorable policies for clean energy industries. As a result, many solar power project developers, solar system installers and solar
power product distributors that purchase solar power products, including solar modules from manufacturers like us, were adversely affected and their financial condition weakened. Although our
shipments of solar modules increased year-over-year in 2014, 2015 and 2016, average selling prices for our solar modules declined. Over the past several quarters, oversupply conditions across the
value
4
Table of Contents
chain,
difficult economic conditions in Europe and foreign trade disputes in the U.S., Europe, India and China have affected industry-wide demand and put pressure on average selling prices, resulting
in lower revenue for many industry participants. If the supply of solar modules grows faster than demand, and if governments continue to reduce financial support for the solar industry and impose
trade
barriers, demand for our products, as well as our average selling price, could be materially and adversely affected.
The
solar power market is still at a relatively early stage of development and future demand for solar power products and services is uncertain. Market data for the solar power industry
is not as readily available as for more established industries, where trends are more reliably assessed from data gathered over a longer period of time. In addition, demand for solar power products
and services in our targeted markets, including Europe, the U.S., Japan, China, Canada, Brazil and India may not develop or may develop to a lesser extent than we anticipate. Many factors may affect
the viability of solar power technology and the demand for solar power products, including:
-
-
the cost-effectiveness, performance and reliability of solar power products and services, including our solar power projects, compared to
conventional and other renewable energy sources and products and services;
-
-
the availability of government subsidies and incentives to support the development of the solar power industry;
-
-
the availability and cost of capital, including long-term debt and tax equity, for solar power projects;
-
-
the success of other alternative energy technologies, such as wind power, hydroelectric power, geothermal power and biomass fuel;
-
-
fluctuations in economic and market conditions that affect the viability of conventional and other renewable energy sources, such as increases
or decreases in the prices of oil, gas and other fossil fuels;
-
-
capital expenditures by end users of solar power products and services, which tend to decrease when the economy slows; and
-
-
the availability of favorable regulation for solar power within the electric power industry and the broader energy industry.
If
solar power technology is not suitable for widespread adoption or if sufficient demand for solar power products and services does not develop or takes longer to develop than we
anticipate, our revenues may suffer and we may be unable to sustain our profitability. Demand in Europe generally remains weak as a result of reductions in FITs in Germany and the elimination of FITs
in Italy, the two largest European markets over the past several years. Although demand in other regions, including China, Japan, the U.S. and India, as well as many other emerging markets in Asia,
the Middle East and Africa, has offset the decline in European demand, we cannot assure you that this demand will be sustainable or that any recent positive trends in supply or demand balance
will persist.
The operating results of our energy segment and the mix of revenues from our module and energy segments may
be subject to significant fluctuation due to a number of factors, including our inability to find third party buyers for our solar power projects in a timely manner, on favorable terms and conditions,
or at all.
Our energy segment develops, constructs, maintains, sells and/or operates solar power projects primarily in Canada, Japan, the U.S., China,
Brazil, India, Mexico, the United Kingdom and Australia. Our solar project development activities have grown over the past several years through a combination of organic growth and
acquisitions. After completing the development of solar power projects, we either sell them to third party buyers, or operate them under power purchase agreements, or PPAs, or
5
Table of Contents
other
contractual arrangements with utility companies or grid operators. Revenues from our energy segment increased by $922.8 million, or 16.4 times, from $56.4 million for the
year ended December 31, 2012 to $979.2 million for the year ended December 31, 2015, but then decreased by $868.7 million, or 88.7%, to $110.6 million for the year
ended December 31, 2016. We intend to monetize the majority of our current portfolio of solar power projects in operation that have an estimated resale value of approximately
$1.6 billion as of February 28, 2017. However, there is no assurance whether and when we
can find suitable buyers for these projects, receive full payment for them in a timely manner or otherwise realize their estimated resale value.
The
operating results of our energy segment may be subject to significant period-over-period fluctuations for a variety of reasons, including but not limited to changes in market
conditions after we have committed to projects, availability of project financing and changes in government regulations and policies, all of which may result in the cancellation of or delays in the
development of projects, inability to monetize or delays in monetizing projects, or changes in amounts realized on monetization of projects. If a project is canceled, abandoned or deemed unlikely to
occur, we will charge all prior capital costs as an operating expense in the quarter in which such determination is made, which could materially adversely affect operating results.
Further,
the mix of revenues from our module and energy segments can fluctuate dramatically from quarter to quarter, which may adversely affect our margins and financial results in any
given period.
Any
of the foregoing may cause us to miss our financial guidance for a given period, which could adversely impact the market price for our common stock and our liquidity.
The execution of our growth strategy depends upon the continued availability of third-party financing
arrangements for our customers, which is affected by general economic conditions. Tight credit markets could depress demand or prices for solar power products and services, hamper our expansion and
materially affect our results of operations.
Most solar power projects, including our own, require financing for development and construction with a mixture of equity and third party
funding. The cost of capital affects both the demand and price of solar power systems. A high cost of capital may materially reduce the internal rate of return for solar power projects and therefore
put downward pressure on the prices of both solar systems and solar modules, which typically comprise a major part of the cost of solar power projects.
Furthermore,
solar power projects compete for capital with other forms of fixed income investments such as government and corporate bonds. Some classes of investors compare the returns
of solar power projects with bond yields and expect a similar or higher internal rate of return, adjusted for risk and liquidity. On December 14, 2016, the Federal Reserve raised interest rates
by a quarter of a percentage point to between 0.5% and 0.7%, marking the first time the Federal Reserve has raised rates since December 2015. On March 15, 2017, the Federal Reserve
further raised interest rates by 25 basis points to a range of 0.75% to 1.00%. Higher interest rates could increase the cost of existing funding and present an obstacle for potential funding that
would otherwise spur the growth of the solar power industry. In addition, higher bond yields could result in increased yield expectations for solar power projects, which would result in lower system
prices. In the event that suitable funding is unavailable, our customers may be unable to pay for products they have agreed to purchase. It may also be difficult
to collect payments from customers facing liquidity challenges due to either customer defaults or financial institution defaults on project loans. Constricted credit markets may impede our expansion
and materially and adversely affect our results of operations. Concerns about government deficits and debt in the EU have increased bond spreads in certain solar markets, such as Greece, Spain, Italy
and Portugal. The cash flow of a solar power project is often derived from government-funded or government-backed FITs. Consequently, the availability and cost of funding solar power
6
Table of Contents
projects
is determined in part based on the perceived sovereign credit risk of the country where a particular project is located. Therefore, credit agency downgrades of nations in the EU or elsewhere
could decrease the credit available for solar power projects, increase the expected rate of return compared to bond yields, and increase the cost of debt financing for solar power projects in
countries with a higher perceived sovereign credit risk.
In
light of the uncertainty in the global credit and lending environment, we cannot make assurances that financial institutions will continue to offer funding to solar power project
developers at reasonable costs. An increase in interest rates or a decrease in funding of capital projects within the global financial market could make it difficult to fund solar power systems and
potentially reduce the demand for solar modules and/or reduce the average selling prices for solar modules, which may materially and adversely affect our business, results of operations, financial
condition and prospects.
Our future success depends partly on our ability to expand the pipeline of our energy segment in several key
markets, which exposes us to a number of risks and uncertainties.
Historically, our module segment has accounted for the majority of our net revenues, including 59.0%, 71.8% and 96.1% in 2014, 2015 and 2016,
respectively. However, we have, in recent years, increased our investment in and management attention on our energy segment, which primarily consists of solar power project development and sale, EPC
and development services, O&M services and operating solar power projects and sales of electricity.
Even
though we intend to monetize our current portfolio of solar power projects in operation, in the future, we still intend to grow our energy segment by developing and selling or
operating more solar projects, including both those that we develop and those we acquire from third-parties. As we do, we will be increasingly exposed to the risks associated with these businesses.
Further, our future success largely depends on our ability to expand our solar power project pipeline. The risks and uncertainties associated with our energy segment, and our ability to expand our
solar power project pipeline include:
-
-
the uncertainty of being able to sell the projects, receive full payment for them upon completion, or receive payment in a
timely manner;
-
-
the need to raise significant additional funds to develop greenfield or purchase late-stage solar power projects, which we may be unable to
obtain on commercially reasonable terms or at all;
-
-
delays and cost overruns as a result of a number of factors, many of which are beyond our control, including delays in regulatory approvals,
construction, grid-connection and customer acceptance testing;
-
-
delays or denial of required regulatory approvals by relevant government authorities;
-
-
diversion of significant management attention and other resources; and
-
-
failure to execute our project pipeline expansion plan effectively.
If
we are unable to successfully expand our energy segment, and, in particular, our solar power project pipeline, we may be unable to expand our business, maintain our competitive
position, improve our profitability and generate cash flows.
Governments may revise, reduce or eliminate subsidies and economic incentives for solar energy, which could
cause demand for our products to decline.
The market for on-grid applications, where solar power supplements the electricity a customer purchases from the utility network or sells to a
utility under a FIT, depends largely on the availability and size of government subsidy programs and economic incentives. At present, the cost of solar power exceeds retail electricity rates in many
locations. Government incentives vary by geographic market.
7
Table of Contents
Governments
in many countries, most notably China, Germany, Italy, the Czech Republic, the U.S., Japan, Canada (Ontario), South Korea, India, France, Australia and the United Kingdom, have
provided incentives in the form of FITs, rebates, tax credits, renewable portfolio standards and other incentives. These governments have implemented mandates to end-users, distributors, system
integrators and manufacturers of solar power products to promote the use of solar energy in on-grid applications and to reduce dependency on other forms of energy. Some of these government mandates
and economic incentives have been or are scheduled to be reduced or eliminated altogether. For example, the NDRC announced reductions in FITs for utility-scale solar projects in December 2016.
It is likely that this trend will continue, possibly until subsidies for solar energy are phased out completely.
While
solar power projects may continue to offer attractive internal rates of return, it is unlikely internal rates of return will be as high as they were in the past. If internal rates
of return fall below an acceptable rate for project investors, and governments continue to reduce or eliminate subsidies, this may cause a decrease in demand and considerable downward pressure on
solar systems and therefore negatively impact both solar module prices and the value of our solar power projects. The reduction, modification or elimination of government mandates and economic
incentives in one or more of our markets could therefore materially and adversely affect the growth of such markets or result in increased price competition, either of which could cause our revenues
to decline and harm our financial results.
General global economic conditions may have an adverse impact on our operating performance and results
of operations.
The demand for solar power products and services is influenced by macroeconomic factors, such as global economic conditions, demand for
electricity, supply and prices of
other energy products, such as oil, coal and natural gas, as well as government regulations and policies concerning the electric utility industry, the solar and other alternative energy industries and
the environment. As a result of global economic conditions, some governments may implement measures that reduce the FITs and other subsidies designed to benefit the solar industry. During 2014, 2015
and 2016, a decrease in solar power tariffs in many markets placed downward pressure on the price of solar systems in most regions. In addition, reductions in oil and coal prices may reduce the demand
for and the prices of solar power products and services. For instance, in recent months, oil prices globally have experienced high volatility. We cannot assure you that such volatility will not have a
material adverse effect on the demand for and prices of our products. Our growth and profitability depend on the demand for and the prices of solar power products and services. If these negative
market and industry trends continue and demand for solar power projects and solar power products and services weakens as a result, our business and results of operations may be adversely affected.
Imposition of anti-dumping and countervailing duty orders or safeguard measures in one or more markets may
result in additional costs to our customers, which could materially or adversely affect our business, results of operations, financial conditions and future prospects.
We have been in the past, and may be in the future, subject to the imposition of anti-dumping and countervailing duty orders in one or more of
the markets in which we sell our products. In particular, we have been subject to the imposition of anti-dumping and countervailing duty orders in the U.S., the EU and Canada and have, as a result,
been party to lengthy proceedings related thereto. See "Item 8. Financial InformationA. Consolidated Statements and Other Financial InformationLegal and
Administrative Proceedings." The U.S., EU and Canada are important markets for us. Ongoing proceedings relating to, and the imposition of any new, anti-dumping and countervailing duty orders or
safeguard measures in these markets may result in additional costs to us and/or our customers, which may materially and adversely affect our business, results of operations, financial conditions and
future prospects.
8
Table of Contents
Our project development and construction activities may not be successful, projects under development may not
receive required permits, property rights, PPAs, interconnection and transmission arrangements, and financing or construction of projects may not commence or continue as scheduled, all of which could
increase our costs, delay or cancel a project, and have a material adverse effect on our revenue and profitability.
The development and construction of solar power projects involve known and unknown risks. We may be required to invest significant amounts of
money for land and interconnection rights, preliminary engineering, permitting, legal and other expenses before we can determine whether a project is feasible. Success in developing a particular
project is contingent upon, among other things:
-
-
securing land rights and related permits, including satisfactory environmental assessments;
-
-
receipt of required land use and construction permits and approvals;
-
-
receipt of rights to interconnect to the electric grid;
-
-
availability of transmission capacity, potential upgrade costs to the transmission grid and other system constraints;
-
-
payment of interconnection and other deposits (some of which are non-refundable);
-
-
negotiation of satisfactory EPC agreements; and
-
-
obtaining construction financing, including debt, equity and tax credits.
In
addition, successful completion of a particular project may be adversely affected by numerous factors, including:
-
-
delays in obtaining and maintaining required governmental permits and approvals;
-
-
potential challenges from local residents, environmental organizations, and others who may not support the project;
-
-
unforeseen engineering problems; subsurface land conditions; construction delays; cost over-runs; labor, equipment and materials supply
shortages or disruptions (including labor strikes);
-
-
additional complexities when conducting project development or construction activities in foreign jurisdictions, including compliance with the
U.S. Foreign Corrupt Practices Act and other applicable local laws and customs; and
-
-
force majeure events, including adverse weather conditions and other events beyond our control.
If
we are unable to complete the development of a solar power project or we fail to meet any agreed upon system-level capacity or energy output guarantees or warranties (including
25 year power output performance guarantees) or other contract terms, or our projects cause grid interference or other damage, the EPC or other agreements related to the project may be
terminated and/or we may be subject to significant damages, penalties and other obligations relating to the project, including obligations to repair, replace or supplement materials for
the project.
We
may enter into fixed-price EPC agreements in which we act as the general contractor for our customers in connection with the installation of their solar power systems. All essential
costs are estimated at the time of entering into the EPC agreement for a particular project, and these costs are reflected in the overall fixed price that we charge our customers for the project.
These cost estimates are preliminary and may or may not be covered by contracts between us and the subcontractors, suppliers and other parties involved in the project. In addition, we require
qualified, licensed subcontractors to install most of our solar power systems. Shortages of skilled labor could significantly delay a project or otherwise increase our costs. Should miscalculations in
planning a project occur, including those due to unexpected increases in commodity prices or labor costs, or delays in execution
9
Table of Contents
occur
and we are unable to increase the EPC sales price commensurately, we may not achieve our expected margins or our results of operations may be adversely affected.
Developing and operating solar power projects exposes us to different risks than producing
solar modules.
In recent years, we have placed a greater focus on our energy segment, which includes the development of solar power projects. These projects
can take many months or years to complete and may be delayed for reasons beyond our control. They often require us to make significant up-front payments for, among other things, land rights and
permitting in advance of commencing construction, and revenue from these projects may not be recognized for several additional months following contract signing. Any inability or significant delays in
entering into sales contracts with customers after making such up-front payments could adversely affect our business and results of operations. Furthermore, we may become constrained in our ability to
simultaneously fund our other business operations and the investment in these projects.
In
contrast to developing solar modules, developing solar power projects requires more management attention to negotiate the terms of our engagement and monitor the progress of the
projects which may divert management's attention from other matters. Our revenue and liquidity may be adversely affected to the extent the market for solar power projects weakens or we are not able to
successfully complete the customer acceptance testing due to technical difficulties, equipment failure, or adverse weather, and we are unable to sell our solar power projects at prices and on terms
and timing that are acceptable to us.
Our
energy segment also includes operating solar power projects and selling electricity to the local or national grid or other power purchasers. As a result, we are subject to a variety
of risks associated with intense market competition, changing regulations and policies, insufficient demand for solar power, technological advancements and the failure of our power generation
facilities.
We face a number of risks involving PPAs and project-level financing arrangements, including failure or delay
in entering into PPAs, defaults by counterparties and contingent contractual terms such as price adjustment, termination, buy-out, acceleration or other clauses, all of which could materially and
adversely affect our energy segment, financial condition, results of operations and cash flows.
We may not be able to enter into PPAs for our solar power projects due to intense competition, increased supply of electricity from other
sources, reduction in retail electricity price, changes in government policies or other factors. There is a limited pool of potential buyers for electricity generated by our solar power plants since
the transmission and distribution of electricity is either monopolized or highly concentrated in most jurisdictions. The willingness of buyers to purchase electricity from an independent power
producer may be based on a number of factors and not solely on pricing and surety of supply. If we cannot enter into PPAs on terms favorable to us, or at all, it would negatively impact our revenue
and our decisions regarding the development of additional power plants. We may experience delays in entering into PPAs for some of our solar power projects or may not be able to replace an expiring
PPA with a contract on equivalent terms and conditions, or otherwise at prices that permit operation of the related facility on a profitable basis. Any delay in entering into PPAs may adversely affect
our ability to enjoy the cash flows generated by such projects. If we are unable to replace an expiring PPA with an acceptable new PPA, the affected site may temporarily or permanently cease
operations, which could materially and adversely affect our financial condition, results of operations and cash flows.
Substantially
all of the electric power generated by our solar power projects will be sold under long-term PPAs with public utilities, licensed suppliers or commercial, industrial or
government end users and we expect our future projects will also have long-term PPAs or similar offtake arrangements such as tariff programs. If, for any reason, any of the purchasers of power under
these contracts are
10
Table of Contents
unable
or unwilling to fulfill their related contractual obligations or if they refuse to accept delivery of power delivered thereunder or if they otherwise terminate such agreements prior to the
expiration thereof, our assets, liabilities, business, financial condition, results of operations and cash flows could be materially and adversely affected. Further, to the extent any of our power
purchasers are, or are controlled by, governmental entities, our facilities may be subject to legislative or other political action that may impair their contractual performance or contain contractual
remedies that do not provide adequate compensation in the event a counterparty defaults.
Some
of our PPAs are subject to price adjustments over time. If the price under any of our PPAs is reduced below a level that makes a project economically viable, our financial
conditions, cash flow and results of operations could be materially and adversely affected. Further, some of our long-term PPAs do not include inflation-based price increases. Certain of the PPAs for
our projects and those for
projects that we have acquired and may acquire in the future contain or may contain provisions that allow the offtake purchaser to terminate or buy out the project or require us to pay liquidated
damages upon the occurrence of certain events. If these provisions are exercised, our financial condition, results of operations and cash flows could be materially and adversely affected.
Additionally, certain of the project-level financing arrangements for projects allow, and certain of the projects that we may acquire in the future may allow, the lenders or investors to accelerate
the repayment of the financing arrangement in the event that a PPA is terminated or if certain operating thresholds or performance measures are not achieved within specified time periods. Certain of
our PPAs and project-level financing arrangements include, and in the future may include, provisions that would permit the counterparty to terminate the contract or accelerate maturity in the event we
own, directly or indirectly, less than 50% of the combined voting power or, in some cases, if we cease to be the majority owner, directly or indirectly, of the applicable project subsidiary. The
termination of any of our PPAs or the acceleration of the maturity of any of our financing arrangements as a result of a change-in-control event could have a material adverse effect on our financial
condition, results of operations and cash flows.
If the supply of solar wafers and cells increases in line with increases in the supply of polysilicon, then
the corresponding oversupply of solar wafers, cells and modules may cause substantial downward pressure on the prices of our products and reduce our revenues and earnings.
Silicon production capacity has expanded rapidly in recent years. As a result of this expansion, coupled with the global economic downturn, the
solar industry has experienced an oversupply of high-purity silicon since the beginning of 2009. This has contributed to an oversupply of solar wafers, cells and modules and resulted in substantial
downward pressure on prices throughout the value chain. Demand for solar power products remained soft through 2012 but began to pick up in the second half of 2013, and continued to grow in 2014, 2015
and 2016. The average selling price of our solar modules decreased from $0.67 per watt in 2013 and 2014 to $0.58 per watt in 2015 and $0.51 per watt in 2016, in large part because the increase in the
supply of solar cells and modules was greater than the increase in the demand, thereby putting pressure on solar power products across all stages of the value chain. While we believe that there is a
relative balance between capacity and demand at low prices due to industry consolidation, increases in solar module production in excess of market demand may result in further downward pressure on the
price of solar wafers, cells and modules, including our products. Increasing competition could also result in us losing sales or market share. Moreover, due to fluctuations in the supply and price of
solar power products throughout the value chain, we cannot assure you that we will be able, on an ongoing basis, to procure silicon, wafers and cells at reasonable costs if any of the above risks
materializes. If we are unable, on an ongoing basis, to procure silicon, solar wafers and solar cells at reasonable prices or mark up the price of our solar modules to cover our manufacturing and
operating costs, our revenues and margins will be adversely impacted, either due to higher costs compared to our competitors or due to further write-downs of inventory, or both. In
11
Table of Contents
addition,
our market share could decline if our competitors are able to price their products more competitively.
Long-term supply agreements may make it difficult for us to adjust our raw material costs should prices
decrease. Also, if we terminate any of these agreements, we may not be able to recover all or any part of the advance payments we have made to these suppliers and we may be subject
to litigation.
We have entered into a number of long-term supply agreements with several silicon and wafer suppliers in order to secure a stable supply of raw
materials to meet our production requirements. These suppliers included GCL-Poly Energy Holdings Limited, or GCL, Neo Solar Power Corp., or Neo Solar, Deutsche Solar AG, or Deutsche Solar, Jiangxi LDK
Solar Hi-Tech Co., Ltd., or LDK, and a UMG-Si supplier.
In
2009 and thereafter, we amended our agreements with certain of these suppliers to adjust the purchase price to prevailing market prices at the time we place a purchase order and to
reduce the quantity of products that we were required to purchase. Under our supply agreements with certain suppliers, and consistent with historical industry practice, we make advance payments prior
to scheduled delivery dates. These advance payments are made without collateral and are credited against the purchase prices payable by us. As of December 31, 2016, the balance of the advance
payments that we have made to GCL, Deutsche Solar and LDK totaled $22.1 million.
Under
our 12-year wafer supply agreement with Deutsche Solar, we purchased the contracted volume for 2009 but did not purchase the contracted volumes for 2010 and 2011. The agreement
contains a provision stating that, if we do not order the contracted volume in a given year, Deutsche Solar can invoice us for the difference at the full contract price. We believe that the
take-or-pay provisions of the agreement are void under German law. In December 2011, Deutsche Solar gave notice to us to terminate the agreement with immediate effect. Deutsche Solar stated
that the reason for the termination was an alleged breach of the agreement by us. In the notice, Deutsche Solar reserved its right to claim damages of €148.6 million in court.
As a result of the termination, we reclassified the accrued loss on firm purchase commitments reserve of $27.9 million as of December 31, 2011 to loss contingency accruals. In addition,
we made a full bad debt allowance of $17.4 million against the balance of advance payments to Deutsche Solar. The accrued amount of $27.9 million represents our best estimate for our
loss contingency. Deutsche Solar did not specify the basis for its claimed damages of €148.6 million in the notice.
In
2007, we entered into a three-year agreement, or the 2007 Supply Contract, with LDK under which we purchased specified quantities of silicon wafers and LDK converted our reclaimed
silicon feedstock
into wafers. In June 2008, we entered into two 10-year wafer supply agreements, or the 2008 Supply Contracts, with LDK, under which we agreed to purchase specified volumes of wafers at
pre-determined prices each year, commencing January 1, 2009. In April 2010, we gave LDK a termination notice for the 2007 Supply Contract and 2008 Supply Contracts on the grounds that
they refused to deduct from the selling price the deposits paid by us previously. We also initiated arbitration proceedings against LDK under the supply contracts, seeking a refund of the initial
deposits that we paid to them. On October 19, 2015, we reached a settlement agreement with LDK, or the 2015 Settlement Agreement. We have already paid the required amounts and fulfilled our
obligations under the 2015 Settlement Agreement. See "Item 8. Financial InformationA. Consolidated Statements and Other Financial InformationLegal and Administrative
Proceedings." We recorded a charge of $20.8 million related to the 2015 Settlement Agreement in general and administrative expense in the third quarter of 2015. On May 19, 2016, we
received a copy of a bill of complaint from Xinyu Intermediate Court, in which LDK's receiver applied to the court for an order to revoke the 2015 Settlement Agreement pursuant to PRC bankruptcy law,
and requested us to pay an amount that LDK's receiver alleged to have been waived by LDK under the 2015 Settlement Agreement. On December 1, 2016, Xinyu Intermediate Court heard this case, and
a decision is now pending.
12
Table of Contents
We
have in the past entered into long-term supply agreements for silicon wafers or solar cells with fixed price and quantity terms. If, during the term of these agreements, the price of
materials decreases significantly and we are unable to renegotiate favorable terms with our suppliers, we may be placed at a competitive disadvantage compared to our competitors, and our earnings
could decline. In addition, if demand for our solar power products decreases, yet our supply agreements require us to purchase more silicon wafers and solar cells than required to meet customer
demand, we may incur costs associated with carrying excess inventory. To the extent that we are not able to pass these increased costs on to our customers, our business, cash flows, financial
condition and results of operations may be materially and adversely affected. If our suppliers file lawsuits against us for early termination of these contracts, such events could be costly, may
divert management's attention and other resources away from our business, and could have a material and adverse effect on our reputation, business, financial condition, results of operations
and prospects.
We are subject to numerous laws and regulations at the national, regional and local levels of government in
the areas where we do business. Any changes to these regulations and policies may present technical, regulatory and economic barriers to the purchase and use of solar power products, solar projects
and solar electricity, which may significantly reduce demand for our products and services or otherwise adversely affect our financial performance.
We are expanding our international operations and are subject to a variety of laws and regulations, some of which may conflict with each other
and all of which are subject to change,
including energy regulations, export and import restrictions, tax laws and regulations, environmental regulations, labor laws and other government requirements, approvals, permits and licenses. We
also face trade barriers and trade remedies such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase the prices of our products and make us less
competitive in some countries. See "Imposition of anti-dumping and countervailing duty orders or safeguard measures in one or more markets may result in additional costs to our customers,
which could materially or adversely affect our business, results of operations, financial conditions and future prospects."
In
the counties where we do business, the market for solar power products, solar projects and solar electricity is heavily influenced by national, state and local government regulations
and policies concerning the electric utility industry, as well as policies disseminated by electric utilities. These regulations and policies often relate to electricity pricing and technical
interconnection of customer-owned electricity generation, and could deter further investment in the research and development of alternative energy sources as well as customer purchases of solar power
technology, which could result in a significant reduction in the potential demand for our solar power products, solar projects and solar electricity.
In
our module segment, we expect that our solar power products and their installation will continue to be subject to national, state and local regulations and policies relating to
safety, utility interconnection and metering, construction, environmental protection, and other related matters. Any new regulations or policies pertaining to our solar power products may result in
significant additional expenses to us, our resellers and customers, which could cause a significant reduction in demand for our solar power products.
In
our energy segment, we are subject to numerous national, regional and local laws and regulations. Changes in applicable energy laws or regulations, or in the interpretations of these
laws and regulations, could result in increased compliance costs or the need for additional capital expenditures. If we fail to comply with these requirements, we could also be subject to civil or
criminal liability and the imposition of fines. Further, national, regional or local regulations and policies could be changed to provide for new rate programs that undermine the economic returns for
both new and existing projects by charging additional, non-negotiable fixed or demand charges or other fees or reductions in the number of projects allowed under net metering policies. National,
regional or local
13
Table of Contents
government
energy policies, law and regulation supporting the creation of wholesale energy markets is currently, and may continue to be, subject to challenges, modifications and restructuring
proposals, which may result in limitations on the commercial strategies available to us for the sale of our power.
Regulatory
changes in a jurisdiction where we are developing a project may make the continued development of the project infeasible or economically disadvantageous and any expenditure we
have made to date on such project may be wholly or partially written off. Any of these changes could significantly increase the regulatory related compliance and other expenses incurred by the
projects and could significantly reduce or entirely eliminate any potential revenues that can be generated by one or more of the projects or result in significant additional expenses to us, our
offtakers and customers, which could materially and adversely affect our business, financial condition, results of operations and cash flows.
We
also face regulatory risks imposed by various transmission providers and operators, including regional transmission operators and independent system operators, and their corresponding
market rules. These regulations may contain provisions that limit access to the transmission grid or allocate scarce transmission capacity in a particular manner, which could materially and adversely
affect our business, financial condition, results of operations and cash flows.
We
are also subject to the Foreign Corrupt Practices Act of 1977, or the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the
U.S. Travel Act, the USA PATRIOT Act, and other anti-bribery and anti-money laundering laws in countries in which we conduct activities. We face significant liabilities if we fail to comply
with the FCPA and other anticorruption laws that prohibit companies and their employees and third-party intermediaries from authorizing, offering, or providing, directly or indirectly, improper
payments or benefits to foreign government officials, political parties, and private-sector recipients for the purpose of obtaining or retaining business. We may have direct or indirect interactions
with officials and employees of government agencies or state-owned or affiliated entities. For example, in China, we may contract with and sell electricity to the national grid, a state-owned
enterprise. In other countries where we develop, acquire or sell solar projects, we need to obtain various approvals, permits and licenses from the local or national governments. We can be held liable
for the illegal activities of our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize such activities. Any violation of the FCPA, other applicable
anticorruption laws, and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions,
which could have a material adverse effect on our business, financial condition, cash flows and reputation. In addition, responding to any enforcement action may result in the diversion of
management's attention and resources, significant defense costs and other professional fees.
Because the markets in which we compete are highly competitive and quickly evolving, because many of our
competitors have greater resources than we do or are more adaptive, and because we have a limited track record in our energy segment, we may not be able to compete successfully and we may not be able
to maintain or increase our market share.
We face intense competition in our module and energy segments. We have a large number of competitors in our solar modules business, including
non-China-based competitors such as First Solar, Inc., or First Solar, and SunPower Corporation, or SunPower, and China-based competitors such as Trina Solar Limited, or Trina, JinkoSolar
Holding Co., Limited, or Jinko, JA Solar Co., Limited, or JA Solar, and Hanwha Q Cells Co., Ltd., or Hanwha Q Cells. Some of our competitors are developing
or are currently producing products based on new solar power technologies that may ultimately have costs similar to or lower than our projected costs. These include products based on thin film PV
technology, which requires either no silicon or significantly less silicon to produce than crystalline silicon solar modules, such as the ones that we produce, and is less susceptible to increases in
silicon costs. Some of our competitors have longer operating histories, greater name and brand recognition,
14
Table of Contents
access
to larger customer bases, greater resources and significantly greater economies of scale than we do. In addition, some of our competitors may have stronger relationships or may enter into
exclusive relationships with some of the key distributors or system integrators to whom we sell our products. As a result, they may be able to respond more quickly to changing customer demands or
devote greater resources to the development, promotion and sales of their products. Some of our competitors have more diversified product offerings, which may better position them to withstand a
decline in demand for solar power products. Some of our competitors are more vertically integrated than we are, from upstream silicon wafer manufacturing to solar power system integration. This may
allow them to capture higher margins or have lower costs. In addition, new competitors or alliances among existing competitors could emerge and rapidly acquire significant market share. If we fail to
compete successfully, our business will suffer and we may not be able to maintain or increase our market share.
For
our energy segment, we compete in a more diversified and complicated landscape since the commercial and regulatory environments for solar power project development and operation vary
significantly from region to region and country to country. Our primary competitors are local and international developers and operators of solar power projects. Some of our competitors may have
advantages over us in terms of greater experience or resources in the operation, financing, technical support and management of solar power projects, in any particular markets or in general. We only
started developing solar power projects and growing our energy segment in recent years.
Our
energy segment has a global footprint and develops solar power projects primarily in Canada, Japan, the U.S., China, Brazil, India, Mexico, the United Kingdom and Australia.
There is no guarantee that we can compete successfully in the markets we currently operate or the ones we plan to enter in the future. For example, in certain of our target markets, such as China,
state-owned and private companies have emerged to take advantage of the significant market opportunity created by attractive financial incentives and favorable regulatory environment provided by the
governments. State-owned companies may have stronger relationships with local governments in certain regions and private companies may be more focused and experienced in developing solar power
projects in the markets where we compete. Accordingly, we need to continue to be able to compete against both state-owned and private companies in these markets. Our energy segment also provides EPC
and/or O&M services in China, Canada, Australia and other countries. We face intense competition from other service providers in those markets.
Since
our energy segment includes electricity generation and sale, we believe that our primary competitors in the electricity generation markets in which we operate are the incumbent
utilities that supply energy to our potential customers under highly regulated rate and tariff structures. We compete with these conventional utilities primarily based on price, predictability of
price, reliability of delivery and the ease with which customers can switch to electricity generated by our solar energy projects.
As
the solar power and renewable energy industry grows and evolves, we will also face new competitors who are not currently in the market. Our failure to adapt to changing market
conditions and to compete successfully with existing or new competitors will limit our growth and will have a material adverse effect on our business and prospects.
We face risks associated with the marketing, distribution and sale of our solar power products and services
internationally.
The international marketing, distribution and sale of our products expose us to a number of risks,
including:
-
-
fluctuating sources of revenues;
-
-
difficulties in staffing and managing overseas operations;
-
-
fluctuations in foreign currency exchange rates;
15
Table of Contents
-
-
differing regulatory and tax regimes across different markets;
-
-
the increased cost of understanding local markets and trends and developing and maintaining an effective marketing and distribution presence in
various countries;
-
-
the difficulty of providing customer service and support in various countries;
-
-
the difficulty of managing our sales channels effectively as we expand beyond distributors to include direct sales to systems integrators, end
users and installers;
-
-
the difficulty of managing the development, construction and sale of our solar power projects on a timely and profitable basis as a result of
technical difficulties, commercial disputes with our customers and changes in regulations, among other factors;
-
-
the difficulties and costs of complying with the different commercial, legal and regulatory requirements in the overseas markets in which
we operate;
-
-
any failure to develop appropriate risk management and internal control structures tailored to overseas operations;
-
-
any inability to obtain, maintain or enforce intellectual property rights;
-
-
any unanticipated changes in prevailing economic conditions and regulatory requirements; and
-
-
any trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase the prices of our
products and make us less competitive in some countries.
If
we are unable to effectively manage these risks, our ability to expand our business abroad could suffer.
Our
revenue sources have fluctuated significantly over recent years. For example, in 2008, 89.5% of our revenues were attributable to Europe, while only 4.6% and 5.9% were attributable
to the Americas and Asia and others, respectively. However, in 2015, the Americas contributed 50.5% and Asia contributed 39.9% of our revenues, while Europe and other regions contributed 9.6%; and in
2016, the Americas contributed 38.7% and Asia contributed 46.9% of our revenues, while Europe and other regions contributed 14.4%. As we shift the focus of our operations between different regions of
the world, we have limited time to prepare for and address the risks identified above. Furthermore, some of these risks, such as currency fluctuations, will increase as our revenue contribution from
certain global regions becomes more prominent. This may adversely influence our financial performance.
Our future business depends in part on our ability to make strategic acquisitions, investments and
divestitures and to establish and maintain strategic relationships, and our failure to do so could have a material and adverse effect on our market penetration and revenue growth.
We frequently look for and evaluate opportunities to acquire other businesses, make strategic investments or establish strategic relationships
with third parties to improve our market position or expand our products and services. When market conditions permit and opportunities arise, we may also consider divesting part of our current
business to focus management attention and improve our operating efficiency. Investments, strategic acquisitions and relationships with third parties could subject us to a number of risks, including
risks associated with integrating their personnel,
operations, services, internal controls and financial reporting into our operations as well as the loss of control of operations that are material to our business. If we divest any material part of
our business, particularly our upstream manufacturing business or downstream energy business, we may not be able to benefit from our investment and experience associated with that part of the business
and may be subject to intensified concentration risks with less flexibility to respond to market fluctuations. Moreover, it could be expensive to make strategic acquisitions, investments, divestitures
and establish and maintain relationships, and we may be subject to the risk of non-performance by a counterparty, which may in
16
Table of Contents
turn
lead to monetary losses that materially and adversely affect our business. We cannot assure you that we will be able to successfully make strategic acquisitions and investments and successfully
integrate them into our operations, or make strategic divestitures or establish strategic relationships with third parties that will prove to be effective for our business. Our inability to do so
could materially and adversely affect our market penetration, our revenue growth and our profitability.
Our significant international operations expose us to a number of risks, including unfavorable political,
regulatory, labor and tax conditions in the countries where we operate.
We intend to continue to extend our global reach and capture market share in various global markets. In doing so, we will be exposed to various
risks, including political, regulatory, labor and tax risks. However, many perceive globalization to be in retreat and protectionism on the rise, as evidenced by the decision of Great Britain to leave
the European Union and the election of Donald Trump as the president of U.S., who has threatened to impose punitive tariffs on goods imported from China. If trade tensions increase among the U.S.,
China and other countries, it may have a material adverse effect on our international operations. Furthermore, we may need to make substantial investments in our overseas operations, both initially
and on an ongoing basis, in order to attain longer-term sustainable returns. These investments could negatively impact our financial performance before sustainable profitability is recognized.
We face risks related to private securities litigation.
Our company and certain of our directors and executive officers were named as defendants in class action lawsuits in the U.S. and Canada
alleging that our financial disclosures during 2009 and early 2010 were false or misleading and in violation of U.S. federal securities laws and Ontario
securities laws, respectively. The lawsuits in the U.S. were consolidated into one class action, which was dismissed with prejudice by the district court in March 2013, and subsequently
affirmed by the circuit court in December 2013. The lawsuit in Canada continues. As a preliminary matter, we challenged the Ontario Court's jurisdiction to hear the plaintiff's claim, but this
motion was unsuccessful. In September 2014, the plaintiff obtained an order granting him leave to assert the statutory cause of action under the Ontario Securities Act for certain of his
misrepresentation claims. In January 2015, the plaintiff obtained an order for class certification in respect of the claims for which he obtained leave to assert the statutory cause of action
under the Ontario Securities Act, for certain negligent misrepresentation claims and for oppression remedy claims advanced under the Canada Business Corporations Act, or CBCA. The Court dismissed
CSI's application for leave to appeal. The class action has moved to the merits stage. See "Item 8. Financial InformationA. Consolidated Statements and Other Financial
InformationLegal and Administrative Proceedings." There is no guarantee that we will not become party to additional lawsuits. If the case goes to trial, the Canadian action could require
significant management time and attention and result in significant legal expenses. In addition, we are generally obligated, to the extent permitted by law, to indemnify our directors and officers who
are named defendants in these lawsuits. If we were to lose a class action lawsuit, we may be required to pay judgments or settlements and incur expenses in aggregate amounts that could have a material
and adverse effect on our financial condition or results of operations.
Our quarterly operating results may fluctuate from period to period.
Our quarterly operating results may fluctuate from period to period based on a number of factors,
including:
-
-
the average selling prices of our solar power products and services;
-
-
the timing of completion of construction of our solar power projects;
-
-
the timing and pricing of project sales;
17
Table of Contents
-
-
changes in payments from power purchasers of solar power plants already in operation;
-
-
the rate and cost at which we are able to expand our internal production capacity;
-
-
the availability and cost of solar cells and wafers from our suppliers and toll manufacturers;
-
-
the availability and cost of raw materials, particularly high-purity silicon;
-
-
changes in government incentive programs and regulations, particularly in our key and target markets;
-
-
the unpredictable volume and timing of customer orders;
-
-
the loss of one or more key customers or the significant reduction or postponement of orders;
-
-
the availability and cost of external financing for on-grid and off-grid solar power applications;
-
-
acquisition and investment costs;
-
-
the timing of successful completion of customer acceptance testing of our solar power projects;
-
-
geopolitical turmoil and natural disasters within any of the countries in which we operate;
-
-
foreign currency fluctuations, particularly in Euro, RMB, Canadian dollar and Japanese yen;
-
-
our ability to establish and expand customer relationships;
-
-
changes in our manufacturing costs;
-
-
the timing of new products or technology introduced or announced by our competitors;
-
-
fluctuations in electricity rates due to changes in fossil fuel prices or other factors;
-
-
allowances for doubtful accounts and advances to suppliers;
-
-
inventory write-downs;
-
-
long-lived asset impairment;
-
-
depreciation charges relating to under-utilized assets;
-
-
loss on firm purchase commitments under long-term supply agreements;
-
-
construction progress of solar power projects and related revenue recognition; and
-
-
anti-dumping and countervailing duty costs and/or anti-dumping and countervailing duty true-up charges.
We
base our planned operating expenses in part on our expectations of future revenues. A significant portion of our expenses will be fixed in the short-term. If our revenues for a
particular quarter are lower than we expect, we may not be able to reduce our operating expenses proportionately, which would harm our operating results for the quarter. As a result, our results of
operations may fluctuate from quarter to quarter and our interim and annual financial results may differ from our historical performance.
Fluctuations in exchange rates could adversely affect our business, including our financial condition and
results of operations.
The majority of our sales in 2014, 2015 and 2016 were denominated in U.S. dollars, Canadian dollars and Japanese yen, with the remainder
in other currencies such as Renminbi, Euros and Australian dollars. Our Renminbi costs and expenses are primarily related to the sourcing of solar cells, silicon wafers and silicon, other raw
materials, toll manufacturing fees, labor costs and local overhead expenses within the PRC. From time to time, we enter into loan arrangements with Chinese
18
Table of Contents
commercial
banks that are denominated primarily in Renminbi or U.S. dollars. Most of our cash and cash equivalents and restricted cash are denominated in Renminbi. Fluctuations in exchange
rates, particularly between the U.S. dollar, Euro, British pound, Renminbi, Canadian dollar and Japanese yen, may result in foreign exchange gains or losses. We recorded net foreign exchange
losses of $32.2 million in 2014, and net foreign exchange gain of $22.9 million and $25.4 million in 2015 and 2016, respectively.
The
value of the Renminbi against the U.S. dollar, Euro and other currencies is affected by, among other things, changes in China's political and economic conditions and China's
foreign exchange policies. In late 2005, China amended its policy of tracking the value of the Renminbi to the U.S. dollar to instead fluctuate against a basket of foreign currencies, which
caused the Renminbi to appreciate significantly against the U.S. dollar over the following three years. In June 2010, the PRC government announced that it would allow greater flexibility
for the Renminbi to fluctuate against the U.S. dollar, which resulted in further appreciation of the Renminbi, although in 2014, the value of the Renminbi depreciated against the
U.S. dollar. In 2015, the PRC government changed the way it calculates the mid-point price of Renminbi against the U.S. dollar, requiring the market-makers who submit for the
People's Bank of China's reference rates to consider the previous day's closing spot rate and foreign-exchange demand and supply, as well as changes in major currency rates. This change resulted in
further depreciation of the Renminbi against the U.S. dollar. In 2016, the Renminbi continued to depreciate against the U.S. dollar, in response to which the Chinese government imposed
restrictions on capital outflows. In October 2016, the International Monetary Fund added the Renminbi into the Special Drawing Rights currency basket. However, the status of the Renminbi as an
international currency is still being tested by the market. We cannot provide any assurances that the policy of the PRC government will not affect or the manner in which it may affect the exchange
rate between the Renminbi and the U.S. dollar or other foreign currencies in the future.
Since
2008, we have hedged part of our foreign currency exposures against the U.S. dollar using foreign currency forward or option contracts. In addition to collateral
requirements to enter into hedging contracts, there are notional limits on the size of the hedging transactions that we may enter into with any particular counterparty at any given time. The
effectiveness of our hedging program may be limited due to cost effectiveness, cash management, exchange rate visibility and downside protection. We recorded gains on change in foreign currency
derivatives of $19.7 million in 2014, losses on change in foreign currency derivatives of $3.7 million in 2015, and gains on change in foreign currency derivatives of $4.8 million
in 2016. The gains or losses on change in foreign currency derivatives are related to our hedging program.
Volatility
in foreign exchange rates will hamper, to some extent, our ability to plan our pricing strategy. To the extent that we are unable to pass along increased costs resulting from
exchange rate fluctuations to our customers, our profitability may be adversely impacted. As a result, fluctuations in foreign currency exchange rates could have a material and adverse effect on our
financial condition and results of operations.
A change in our effective tax rate can have a significant adverse impact on our business.
A number of factors may adversely impact our future effective tax rates, such as the jurisdictions in which our profits are determined to be
earned and taxed; changes in the valuation of our deferred tax assets and liabilities; adjustments to provisional taxes upon finalization of various tax returns; adjustments to the interpretation of
transfer pricing standards; changes in available tax credits; changes in stock-based compensation expenses; changes in tax laws or the interpretation of such tax laws (for example, proposals
for fundamental U.S. international tax reform); changes in U.S. GAAP; expiration or the inability to renew tax rulings or tax holiday incentives; and the repatriation of
non-U.S. earnings for which we have not previously provided for U.S. taxes. A change in our effective tax rate due to any of these factors may adversely influence our future results
of operations.
19
Table of Contents
Seasonal variations in demand linked to construction cycles and weather conditions may influence our results
of operations.
Our business is subject to seasonal variations in demand linked to construction cycles and weather conditions. Purchases of solar power products
and services tend to decrease during the winter months in our key markets, such as Canada, due to adverse weather conditions that can complicate the installation of solar power systems and negatively
impact the construction schedules of our solar power projects. Demand from other countries, such as the U.S. and China, may also be subject to significant seasonality. Seasonal variations could
adversely affect our results of operations and make them more volatile and unpredictable.
Our future success depends partly on our ability to maintain and expand our solar components manufacturing
capacity, which exposes us to a number of risks and uncertainties.
Our future success depends partly on our ability to maintain and expand our solar components manufacturing capacity. If we are unable to do so,
we may be unable to expand our business, maintain our competitive position, and improve our profitability. Our ability to expand our solar components production capacity is subject to risks and
uncertainties, including:
-
-
the need to raise significant additional funds to purchase raw materials and to build additional manufacturing facilities, which we may be
unable to obtain on commercially reasonable terms or at all;
-
-
delays and cost overruns as a result of a number of factors, many of which are beyond our control, including delays in equipment delivery
by vendors;
-
-
delays or denial of required regulatory approvals by relevant government authorities;
-
-
diversion of significant management attention and other resources; and
-
-
failure to execute our expansion plan effectively.
If
we are unable to maintain and expand our internal production capacity, we may be unable to expand our business as planned. Moreover, even if we do maintain and expand our production
capacity, we
might still not be able to generate sufficient customer demand for our solar power products to support the increased production levels.
We may be unable to generate sufficient cash flows or have access to external financing necessary to fund
planned operations and make adequate capital investments.
We anticipate that our operating and capital expenditures requirements may increase. To develop new products, support future growth, achieve
operating efficiencies and maintain product quality, we may need to make significant capital investments in manufacturing technology, facilities and capital equipment, research and development, and
product and process technology. We also anticipate that our operating costs may increase as we expand our manufacturing operations, hire additional personnel, increase our sales and marketing efforts,
invest in joint ventures and acquisitions, and continue our research and development efforts with respect to our products and manufacturing technologies.
Our
operations are capital intensive. We rely on working capital financing substantially from Chinese banks for our manufacturing operations. We cannot guarantee that we will continue to
be able to obtain new working capital financing on commercially reasonable terms or at all. See "Our dependence on Chinese banks to extend our existing loans and provide additional loans
exposes us to funding risks, which may materially and adversely affect our operations." Also, even though we are a publicly-traded company, we may not be able to raise capital via public equity and
debt issuances due
20
Table of Contents
to
market conditions and other factors, many of which are beyond our control. Our ability to obtain external financing is subject to a variety of uncertainties,
including:
-
-
our future financial condition, results of operations and cash flows;
-
-
general market conditions for financing activities by manufacturers of solar power products; and
-
-
economic, political and other conditions in the PRC and elsewhere.
If
we are unable to obtain funding in a timely manner and on commercially acceptable terms, our growth prospects and future profitability may be adversely affected.
Construction
of our solar power projects may require us to obtain project financing. If we are unable to obtain project financing, or if it is only available on terms which are not
acceptable to us, we may be unable to fully execute our business plan. In addition, we generally expect to sell our projects to tax-oriented, strategic industry and other investors. Such investors may
not be available or may only have limited resources, in which case our ability to sell our projects may be hindered or delayed and our business, financial condition, and results of operations may be
adversely affected. There can be no assurance that we will be able to generate sufficient cash flows, find other sources of capital to fund our operations and solar power projects, make adequate
capital investments to remain competitive in terms of technology development and cost efficiency required by our projects. If adequate funds and alternative resources are not available on acceptable
terms, our ability to fund our operations, develop and construct solar power projects, develop and expand our manufacturing operations and distribution network, maintain our research and development
efforts or otherwise respond to competitive pressures would be significantly impaired. Our inability to do the foregoing could have a material and adverse effect on our business and results
of operations.
We have substantial indebtedness and may incur substantial additional indebtedness in the future, which could
adversely affect our financial health and our ability to generate sufficient cash to satisfy our outstanding and future debt obligations.
We have substantial indebtedness and may incur substantial additional indebtedness in the future, which could adversely affect our financial
health and our ability to generate sufficient cash to satisfy our outstanding and future debt obligations. Our substantial indebtedness could have important consequences to us and our shareholders.
For example, it could:
-
-
limit our ability to satisfy our debt obligations;
-
-
increase our vulnerability to adverse general economic and industry conditions;
-
-
require us to dedicate a substantial portion of our cash flow from operations to servicing and repaying our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital expenditures and for other general corporate purposes;
-
-
limit our flexibility in planning for or reacting to changes in our businesses and the industry in which we operate;
-
-
place us at a competitive disadvantage compared with our competitors that have less debt;
-
-
limit, along with the financial and other restrictive covenants of our indebtedness, among other things, our ability to borrow additional
funds; and
-
-
increase the cost of additional financing.
In
the future, we may from time to time incur substantial additional indebtedness and contingent liabilities. If we incur additional debt, the risks that we face as a result of our
already substantial indebtedness and leverage could intensify.
21
Table of Contents
Our
ability to generate sufficient cash to satisfy our outstanding and future debt obligations will depend upon our future operating performance, which will be affected by prevailing
economic conditions and financial, business and other factors, many of which are beyond our control. We cannot assure you that we will be able to generate sufficient cash flow from operations to
support the repayment of our current indebtedness. If we are unable to service our indebtedness, we will be forced to adopt an alternative strategy that may include actions such as reducing or
delaying capital expenditures, selling assets, restructuring or refinancing our indebtedness or seeking equity capital. These strategies may not be instituted on satisfactory terms, if at all. In
addition, certain of our financing arrangements impose operating and financial restrictions on our business, which may negatively affect our ability to react to changes in market conditions, take
advantage of business opportunities we believe to be desirable, obtain future financing, fund required capital expenditures, or withstand a continuing or future downturn in our business. Any of these
factors could materially and adversely affect our ability to satisfy our debt obligations.
We must comply with certain financial and other covenants under the terms of our debt instruments and the
failure to do so may put us in default under those instruments.
Many of our loan agreements include financial covenants and broad default provisions. The financial covenants primarily include current ratios,
quick ratios, debt to asset ratios, contingent liability ratios and minimum equity requirements, which, in general, govern our existing long-term debt and debt we may incur in the future. These
covenants could limit our ability to plan for or react to market conditions or to meet our capital needs in a timely manner and complying with these covenants may require us to curtail some of our
operations and growth plans. In addition, any global or regional economic deterioration may cause us to incur significant net losses or force us to assume considerable liabilities, which would
adversely impact our ability to comply with the financial and other covenants of our outstanding loans. If our creditors refuse to grant waivers for any non-compliance with these covenants, such
non-compliance will constitute an event of default which may accelerate the amounts due under the applicable loan agreements. Some of our loan agreements also contain cross-default clauses, which
could enable creditors under our debt instruments to declare an event of default should there be an event of default on our other loan agreements. We cannot assure you that we will be able to remain
in compliance with these covenants in the future. We may not be able to cure future violations or obtain waivers of non-compliance on a timely basis. An event of default under any agreement governing
our existing or future debt, if not cured by us or waived by our creditors, could have a material adverse effect on our liquidity, financial condition and results of operations.
Our dependence on Chinese banks to extend our existing loans and provide additional loans exposes us to
funding risks, which may materially and adversely affect our operations.
We require significant cash flow and funding to support our operations. As a result, we rely on short-term borrowings to provide working capital
for our daily operations. Since the majority of our short-term borrowings come from Chinese banks, we are exposed to lending policy changes by the Chinese banks. In 2014, 2015 and 2016, we
successfully extended our short-term borrowings and, as of December 31, 2016, we had outstanding short-term borrowings of $611.7 million with Chinese banks. Between January 1,
2017 and March 31, 2017, we obtained new borrowings of approximately $364.9 million from Chinese banks, including $48.1 million with due dates beyond December 31, 2017.
Also, between January 1, 2017 and March 31, 2017, we renewed existing bank facilities of approximately $325.3 million from Chinese banks with due dates beyond
December 31, 2017.
If
the Chinese government changes its macroeconomic policies and forces Chinese banks to tighten their lending practices, or if Chinese banks are no longer willing to provide financing
to solar power companies, including us, we may not be able to extend our short-term borrowings or make additional
22
Table of Contents
borrowings
in the future. As a result, we may not be able to fund our operations to the same extent as in previous years, which may have a material and adverse effect on our operations.
Cancellations of customer orders may make us unable to recoup any prepayments made to suppliers.
In the past, we were required to make prepayments to certain suppliers, primarily suppliers of machinery, silicon raw materials, solar ingots,
wafers and cells. Although we require certain customers to make partial prepayments, there is generally a lag between the due date for the prepayment of purchased machinery, silicon raw materials,
solar ingots, wafers and cells and the time that our customers make prepayments. In the event that our customers cancel their orders, we may not be able to recoup prepayments made to suppliers, which
could adversely influence our financial condition and results of operations.
Credit terms offered to some of our customers expose us to the credit risks of such customers and may
increase our costs and expenses, which could in turn materially and adversely affect our revenues, liquidity and results of operations.
We offer unsecured short-term or medium-term credit to some of our customers based on their creditworthiness and market conditions. As a result,
our claims for payments and sales credits rank as unsecured claims, which expose us to credit risk if our customers become insolvent or bankrupt.
From
time to time, we sell our products to high credit risk customers in order to gain early access to emerging or promising markets, increase our market share in existing key markets or
because of the prospects of future sales with a rapidly growing customer. There are high credit risks in doing business with these customers because they are often small, young and high-growth
companies with significant unfunded working capital, inadequate balance sheets and credit metrics and limited operating histories. If these customers are not able to obtain satisfactory working
capital, maintain adequate cash flow, or obtain construction financing for the projects where our solar products are used, they may be unable to pay for the products for which they have ordered or of
which they have taken delivery. Our legal recourse under such circumstances may be limited if the customer's financial resources are already constrained or if we wish to continue to do business with
that customer. Revenue recognition for this type of customer is deferred until cash is received. If more customers to whom we extend credit are unable to pay for our products, our revenues, liquidity
and results of operations could be materially and adversely affected.
Our dependence on a limited number of suppliers of silicon wafers, cells and silicon, and the limited number
of suppliers for certain other components, such as silver metallization paste, solar module back-sheet, and ethylene vinyl acetate encapsulant, could prevent us from delivering our products to our
customers in the required quantities or in a timely manner, which could result in order cancellations and decreased revenues.
We purchase silicon raw materials, silicon wafers and solar cells, from a limited number of third-party suppliers. Purchases from GCL, our
largest supplier of raw materials by dollar amount of purchases, accounted for approximately 19.6%, 23.4% and 18.9% of our total raw materials purchases in 2014, 2015 and 2016, respectively.
In
2016, we purchased the majority of the silicon wafers used in our solar modules from third parties. Our major silicon wafer suppliers were GCL (which accounted for 58.2% of our
silicon wafer purchases) and Yichang CSG Polysilicon Co., Ltd., or Yichang. Our major suppliers of solar cells in 2016 included Inventec Corporation, or Inventec, and Motech
Industries, Inc., or Motech. These suppliers may not always be able to meet our quantity requirements, or keep pace with the price reductions or quality improvements, necessary for us to price
our products competitively. Supply may also be
interrupted by accidents, disasters or other unforeseen events beyond our control. The failure of a supplier, for whatever reason, to supply silicon wafers, solar cells, silicon raw materials or other
23
Table of Contents
essential
components that meet our quality, quantity and cost requirements in a timely manner could impair our ability to manufacture our products or increase our costs. The impact could be more
severe if we are unable to access alternative sources on a timely basis or on commercially reasonable terms, and could prevent us from delivering our products to our customers in the required
quantities and at prices that are profitable. Problems of this kind could cause order cancellations, reduce our market share, harm our reputation and cause legal disputes with our customers.
We are developing and commercializing higher conversion efficiency cells, but we may not be able to
mass-produce these cells in a cost effective way, if at all.
Higher efficiency cell structures are becoming an increasingly important factor in cost competitiveness and brand recognition in the solar power
industry. Such cells may yield higher power outputs at the same cost to produce as lower efficiency cells, thereby lowering the manufactured cost per watt. The ability to manufacture and sell solar
modules made from such cells may be an important competitive advantage because solar system owners can obtain a higher yield of electricity from the modules that have a similar infrastructure,
footprint and system cost compared to systems with modules using lower efficiency cells. Higher conversion efficiency solar cells and the resulting higher output solar modules are one of the
considerations in maintaining a price premium over thin-film products. However, while we are making the necessary investments to develop higher conversion efficiency solar power products, there is no
assurance that we will be able to commercialize some or any of these products in a cost effective way, or at all. In the near term, such products may command a modest premium. In the longer term, if
our competitors are able to manufacture such products and we cannot do the same at all or in a cost efficient manner, we will be at a competitive disadvantage, which will likely influence our product
pricing and our financial performance.
We may be subject to unexpected warranty expense that may not be adequately covered by our insurance
policies.
Our warranty against defects in materials and workmanship is for ten years and, effective June 2015, we warrant that, for a period of
25 years, our polycrystalline modules will maintain the following performance levels:
-
-
during the first year, the actual power output of the module will be no less than 97.5% of the labeled power output;
-
-
from the second year to the 24th year, the actual annual power output decline will be no more than 0.7%; and
-
-
by the end of the 25th year, the actual power output of the module will be no less than 80.7% of the labeled power output.
Effective
June 2015, we warrant that, for a period of 25 years, our monocrystalline modules will maintain the following performance
levels:
-
-
during the first year, the actual power output of the module will be no less than 97% of the labeled power output;
-
-
from the second year to the 24th year, the actual annual power output decline will be no more than 0.7%; and
-
-
by the end of the 25th year, the actual power output of the module will be no less than 80.2% of the labeled power output.
24
Table of Contents
In
addition, effective August 2016, we lengthened the warranty against decline in our Dymond modules to 30 years. We warrant that, for a period of 30 years, our
Dymond polycrystalline modules will maintain the following performance levels:
-
-
during the first year, the actual power output of the module will be no less than 97.5% of the labeled power output;
-
-
from the second year to the 29th year, the actual annual power output decline will be no more than 0.5%; and
-
-
by the end of the 30th year, the actual power output of the module will be no less than 83% of the labeled power output.
Effective
August 2016, we warrant that, for a period of 30 years, our Dymond monocrystalline modules will maintain the following performance
levels:
-
-
during the first year, the actual power output of the module will be no less than 97% of the labeled power output;
-
-
from the second year to the sixth year, the actual annual power output decline will be no more than 0.7%; from the seventh year to the
29th year, the actual annual power output decline will be no more than 0.5%; and
-
-
by the end of the 30th year, the actual power output of the module will be no less than 81.5% of the labeled power output.
We
believe our warranty periods are consistent with industry practice. Due to the long warranty period, we bear the risk of extensive warranty claims long after we have shipped our
products and recognized revenue. We began selling specialty solar products in 2002 and began selling standard solar modules in 2004. Any increase in the defect rate of our products would require us to
increase our warranty reserves and would have a corresponding negative impact on our results of operations. Although we conduct quality testing and inspection of our solar module products, our solar
module products have not been and cannot be tested in an environment simulating the up-to-25-year warranty periods. In particular, unknown issues may surface after extended use. These issues could
potentially affect our market reputation and adversely affect our revenues, giving rise to potential warranty claims by our customers. As a result, we may be subject to unexpected warranty costs and
associated harm to our financial results as long as 25 years after the sale of our products. In addition, for solar power projects built by us, we provide a limited workmanship or balance of
system warranty against defects in engineering, design, installation and construction under normal use, operation and service conditions for a period of up to five years following the energizing of
the solar power plant. In resolving claims under the workmanship or balance of system warranty, we have the option of remedying through repair, refurbishment or replacement of equipment. We have also
entered into similar workmanship warranties with our suppliers to back up our warranties. See "Item 5. Operating and Financial Review and ProspectsA. Operating
ResultsCritical Accounting PoliciesWarranty Costs."
As
part of our energy business, before commissioning solar power projects, we conduct performance testing to confirm that the projects meet the operational and capacity expectations set
forth in the agreements. In limited cases, we also provide for an energy generation performance test designed to demonstrate that the actual energy generation for up to the first three years meets or
exceeds the modeled energy expectation. In the event that the energy generation performance test performs below expectations, the appropriate party (EPC contractor or equipment provider) may
incur liquidated damages capped at a percentage of the contract price.
We
have entered into agreements with a group of insurance companies with high credit ratings to back up our warranties. Under the terms of the insurance policies, which are designed to
match the terms of our solar module product warranty policy, the insurance companies are obliged to reimburse
25
Table of Contents
us,
subject to certain maximum claim limits and certain deductibles, for the actual product warranty costs that we incur under the terms of our solar module product warranty policy. We record the
insurance premiums initially as prepaid expenses and amortize them over the respective policy period of one year. Each prepaid policy provides insurance against warranty costs for panels sold within
that policy year. However, potential warranty claims may exceed the scope or amount of coverage under this insurance and, if they do, they could materially and adversely affect our business.
We may not continue to be successful in developing and maintaining a cost-effective solar cell, wafer and
ingot manufacturing capability.
We plan to continue expanding our in-house solar cell, wafer and ingot manufacturing capabilities to support our solar module manufacturing
business. Our annual solar cell production capacity was at 2.44 GW as of December 31, 2016. Our annual solar wafer and ingot production capacity was 1.0 GW and 0.4 GW,
respectively, as of December 31, 2016. To remain competitive going forward, we intend to expand our annual solar cell, wafer and ingot production capacity to meet expected growth in demand for
our solar modules. However, we only have limited and recent operating experience in this area and may face significant product development challenges. Manufacturing solar cells, wafers and ingots is a
complex process and we may not be able to produce a sufficient quality of these items to meet our solar module manufacturing standards. Minor deviations in the manufacturing process can cause
substantial decreases in yield and in some cases cause no yield output or production to be suspended. We will need to make capital expenditures to purchase manufacturing equipment for solar cell,
wafer and ingot production and will also need to make significant investments in research and development to keep pace with technological advances in solar power technology. Any failure to
successfully develop and maintain cost-effective manufacturing capability may have a material and adverse effect on our business and prospects. For example, we have in the past purchased a large
percentage of solar cells from third parties. This negatively affected our margins compared with those of our competitors since it is less expensive to produce cells internally than to purchase them
from third parties. Because third party solar cell purchases are usually made in a period of high demand, prices tend to be higher and availability reduced.
Although
we intend to continue direct purchasing of solar cells, wafers and ingots and toll manufacturing arrangements through a limited number of strategic partners, our relationships
with our suppliers may be disrupted if we engage in the large-scale production of solar cells, wafers and ingots ourselves. If our suppliers discontinue or reduce the supply of solar cells, wafers and
ingots to us, through direct sales or through toll manufacturing arrangements, and we are not able to compensate for the loss or reduction by manufacturing our own solar cells, wafers and ingots, our
business and results of operations may be adversely affected.
We may not achieve acceptable yields and product performance as a result of manufacturing problems.
We need to continuously enhance and modify our solar module, cell, wafer and ingot production capabilities in order to improve yields and
product performance. Microscopic impurities such as dust and other contaminants, difficulties in the manufacturing process, disruptions in the supply of utilities or defects in the key materials and
tools used to manufacture solar module, cell, ingot and wafers can cause a percentage of the solar module, cell, ingot and wafers to be rejected, which would negatively affect our yields. We may
experience manufacturing difficulties that cause production delays and lower than expected yields.
Problems
in our facilities, including but not limited to production failures, human errors, weather conditions, equipment malfunction or process contamination, may limit our ability to
manufacture products, which could seriously harm our operations. We are also susceptible to floods, droughts, power losses and similar events beyond our control that would affect our facilities. A
disruption in any step of
26
Table of Contents
the
manufacturing process will require us to repeat each step and recycle the silicon debris, which would adversely affect our yields and manufacturing cost.
If we are unable to attract, train and retain technical personnel, our business may be materially and
adversely affected.
Our future success depends, to a significant extent, on our ability to attract, train and retain technical personnel. Recruiting and retaining
capable personnel, particularly those with expertise in the solar power industry, are vital to our success. There is substantial competition for qualified technical personnel, and there can be no
assurance that we will be able to attract or retain sufficient technical personnel. If we are unable to attract and retain qualified employees, our business may be materially and adversely affected.
Our dependence on a limited number of customers and our lack of long-term customer contracts in our solar
modules business may cause significant fluctuations or declines in our revenues.
We sell a substantial portion of our solar module products to a limited number of customers, including distributors, system integrators, project
developers and installers/EPC companies. Our top five customers by revenues collectively accounted for approximately 33.6%, 26.8% and 16.9% of our net revenues in 2014, 2015 and 2016, respectively. We
anticipate that our dependence on a limited number of customers will continue for the foreseeable future. Consequently, any of the following events may cause material fluctuations or declines in
our revenues:
-
-
reduced, delayed or cancelled orders from one or more of our significant customers;
-
-
the loss of one or more of our significant customers;
-
-
a significant customer's failure to pay for our products on time; and
-
-
a significant customer's financial difficulties or insolvency.
As
we continue to expand our business and operations, our top customers continue to change. We cannot assure that we will be able to develop a consistent customer base.
There are a limited number of purchasers of utility-scale quantities of electricity, which exposes us and our
utility-scale solar power projects to additional risk.
Since the transmission and distribution of electricity is either monopolized or highly concentrated in most jurisdictions, there are a limited
number of possible purchasers for utility-scale quantities of electricity in a given geographic location, including transmission grid operators, state and investor-owned power companies, public
utility districts and cooperatives. As a result, there is a concentrated pool of potential buyers for electricity generated by our solar power plants and projects, which may restrict our ability to
negotiate favorable terms under new PPAs and could impact our ability to find new customers for the electricity generated by our generation facilities should this become necessary. Furthermore, if the
financial condition of these utilities and/or power purchasers deteriorates or government policies or regulations to which they are currently subject that compel them to source renewable energy
supplies change, demand for electricity produced by our plants could be negatively impacted. In addition, provisions in our PPAs or applicable laws may provide for the curtailment of delivery of
electricity for various reasons, including preventing damage to transmission systems, system emergencies, force majeure or economic reasons. Such curtailment would reduce revenues to us from PPAs. If
we cannot enter into PPAs on terms favorable to us, or at all, or if the purchaser under our PPAs were to exercise its curtailment or other rights to reduce purchases or
payments under such arrangements, our revenues and our decisions regarding development of additional projects in the energy segment may be adversely affected.
27
Table of Contents
Product liability claims against us could result in adverse publicity and potentially significant monetary
damages.
We, along with other solar power product manufacturers, are exposed to risks associated with product liability claims if the use of our solar
power products results in injury. Since our products generate electricity, it is possible that users could be injured or killed by our products due to product malfunctions, defects, improper
installation or other causes. Although we carry limited product liability insurance, we may not have adequate resources to satisfy a judgment if a successful claim is brought against us. The
successful assertion of product liability claims against us could result in potentially significant monetary damages and require us to make significant payments. Even if the product liability claims
against us are determined in our favor, we may suffer significant damage to our reputation.
Our founder, Dr. Shawn Qu, has substantial influence over our company and his interests may not be
aligned with the interests of our other shareholders.
As of March 31, 2017, Dr. Shawn Qu, our founder, Chairman, President and Chief Executive Officer, beneficially owned
13,649,339 common shares, or 23.5% of our outstanding shares. As a result, Dr. Qu has substantial influence over our business, including decisions regarding mergers and acquisition,
consolidations and the sale of all or substantially all of our assets, the election of directors and other significant corporate actions. This concentration of ownership may discourage, delay or
prevent a change in control of our company, which could deprive our other shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the
price of our common shares.
We may be exposed to infringement, misappropriation or other claims by third parties, which, if determined
adversely to us, could require us to pay significant damage awards.
Our success depends on our ability to develop and use our technology and know-how and sell our solar power products and services without
infringing the intellectual property or other rights of third parties. The validity and scope of claims relating to solar power technology patents involve complex scientific, legal and factual
questions and analyses and are therefore highly uncertain. We may be subject to litigation involving claims of patent infringement or the violation of intellectual property rights of third parties.
Defending intellectual property suits, patent opposition proceedings and related legal and administrative proceedings can be both costly and time-consuming and may significantly divert the efforts and
resources of our technical and management personnel. Additionally, we use both imported and China-made equipment in our production lines, sometimes without sufficient supplier guarantees that our use
of such equipment does not infringe third-party intellectual property rights. This creates a potential source of litigation or infringement claims. An adverse determination in any such litigation or
proceedings to which we may become a party could subject us to significant liability to third parties or require us to seek licenses from third parties, pay ongoing royalties, redesign our products or
subject us to injunctions prohibiting the manufacture and sale of our products or the use of our technologies. Protracted litigation could also defer customers or potential customers or limit their
purchase or use of our products until such litigation is resolved.
Compliance with environmental laws and regulations can be expensive, and noncompliance with these regulations
may result in adverse publicity and potentially significant monetary damages, fines and the suspension or even termination of our business operations.
We are required to comply with all national and local environmental regulations. Our business generates noise, wastewater, gaseous wastes and
other industrial waste in our operations
and the risk of incidents with a potential environmental impact has increased as our business has expanded. We believe that we substantially comply with all relevant environmental laws and regulations
and have all necessary and material environmental permits to conduct our business as it is presently conducted. However, if
28
Table of Contents
more
stringent regulations are adopted in the future, the costs of complying with these new regulations could be substantial. If we fail to comply with present or future environmental regulations, we
may be required to pay substantial fines, suspend production or cease operations.
Our
solar power products must comply with the environmental regulations of the jurisdictions in which they are installed, and we may incur expenses to design and manufacture our products
to comply with such regulations. If compliance is unduly expensive or unduly difficult, we may lose market share and our financial results may be adversely affected. Any failure by us to control our
use or to restrict adequately the discharge, of hazardous substances could subject us to potentially significant monetary damages, fines or suspensions of our business operations.
We may not be successful in establishing our brand name in important markets and the products we sell under
our brand name may compete with the products we manufacture on an original equipment manufacturer, or OEM, basis for our customers.
We sell our products primarily under our own brand name but also on an OEM basis. In certain markets, our brand may not be as prominent as other
more established solar power product vendors, and there can be no assurance that the brand names "Canadian Solar," or "CSI" or any of our possible future brand names will gain acceptance among
customers. Moreover, because the range of products that we sell under our own brands and those we manufacture for our OEM customers may be substantially similar, we may end up directly or indirectly
competing with our OEM customers, which could negatively affect our relationship with them.
Failure to protect our intellectual property rights in connection with new solar power products may undermine
our competitive position.
As we develop and bring to market new solar power products, we may need to increase our expenditures to protect our intellectual property. Our
failure to protect our intellectual property rights may undermine our competitive position. As of March 31, 2017, we had 642 patents and 288 patent applications pending in the PRC
for products that contribute a relatively small percentage of our net revenues. We have seven U.S. patents. We also have three patents in Europe. We have registered the "Canadian Solar"
trademark in the U.S., Australia, Canada, Europe, South Korea, Japan, the United Arab Emirates, Hong Kong and Peru and we have applied for registration of the "Canadian Solar" trademark in a number of
other countries. As of March 31, 2017, we had 63 registered trademarks and one trademark application pending in the PRC, and 50 registered trademarks and 17 trademark
applications pending outside of China. These intellectual property rights afford only limited protection and the actions we take to protect our rights as we develop new solar power products may not be
adequate. Policing the unauthorized use of proprietary technology can be difficult and expensive. In addition, litigation, which can be costly and divert management attention, may be necessary to
enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others.
We have limited insurance coverage and may incur significant losses resulting from operating hazards, product
liability claims or business interruptions.
Our operations involve the use, handling, generation, processing, storage, transportation and disposal of hazardous materials, which may result
in fires, explosions, spills and other unexpected or dangerous accidents causing personal injuries or death, property damages, environmental damages and business interruption. Although we currently
carry third-party liability insurance against property damages, the policies for this insurance are limited in scope and may not cover all claims relating to personal injury, property or environmental
damage arising from incidents on our properties or relating to our operations. See "Item 4. Information on the CompanyB. Business OverviewInsurance." Any
29
Table of Contents
occurrence
of these or other incidents which are not insured under our existing insurance policies could have a material adverse effect on our business, financial condition or results
of operations.
We
are also exposed to risks associated with product liability claims in the event that the use of our solar power products results in injury. See "Product liability claims
against us could result in adverse publicity and potentially significant monetary damages." Although we carry limited product liability insurance, we may not have adequate resources to satisfy a
judgment if a successful claim is brought against us.
In
addition, the normal operation of our manufacturing facilities may be interrupted by accidents caused by operating hazards, power supply disruptions, equipment failure, as well as
natural disasters. While our manufacturing plants in China and elsewhere are covered by business interruption insurance, any significant damage or interruption to these plants could still have a
material and adverse effect on our results of operations.
If our internal control over financial reporting or disclosure controls and procedures are not effective,
investors may lose confidence in our reported financial information, which could lead to a decline in our share price.
We are subject to the reporting obligations under U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley
Act of 2002, has adopted rules requiring every public company to include a management report on its internal control over financial reporting in its annual report, which contains management's
assessment of the effectiveness of its internal control over financial reporting. In addition, an independent registered public accounting firm must report on the effectiveness of our internal
controls over financial reporting. As of December 31, 2016, our management concluded that our internal control over financial reporting was effective. However, we cannot assure you that
material weaknesses in our internal controls over financial reporting will not be identified in the future. Any material weaknesses in our internal controls could cause us not to meet our periodic
reporting obligations in a timely manner or result in material misstatements in our financial statements. Material weaknesses in our internal controls over financial reporting could also cause
investors to lose confidence in our reported financial information, leading to a decline in the market price of our common shares.
The audit report included in our annual report on Form 20-F was prepared by auditors who are not
inspected by the Public Company Accounting Oversight Board and, as a result, you are deprived of the benefits of such inspection.
The independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as auditors
of companies that are traded publicly in the U.S. and a firm registered with the Public Company Accounting Oversight Board (United States), or the PCAOB, is required by the laws of the
U.S. to undergo regular inspections by the PCAOB to assess its compliance with the laws of the U.S. and professional standards. Because our auditors are located in the PRC, a jurisdiction where
the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditors are not currently inspected by the PCAOB.
Inspections
of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms' audit procedures and quality control procedures, which may be addressed
as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor's audits and its quality control
procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
The
inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor's audit procedures or quality control
procedures as compared to auditors outside of China that are subject to PCAOB inspections. As a result, investors may lose
30
Table of Contents
confidence
in our reported financial information and procedures and the quality of our financial statements.
If additional remedial measures are imposed on the big four PRC-based accounting firms, including our
independent registered public accounting firm, in administrative proceedings brought by the SEC alleging the firms' failure to meet specific criteria set by the SEC, with respect to requests for the
production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.
Beginning in 2011, the Chinese affiliates of the "big four" accounting firms (including our independent registered public accounting firm) were
affected by a conflict between the U.S. and Chinese law. Specifically, for certain U.S. listed companies operating and audited in the PRC, the SEC and the PCAOB sought to obtain access to the
audit work papers and related documents of the Chinese affiliates of the "big four" accounting firms. The accounting firms were, however, advised and directed that, under Chinese law, they could not
respond directly to the requests of the SEC and the PCAOB and that such requests, and similar requests by foreign regulators for access to such papers in China, had to be channeled through the China
Securities Regulatory Commission, or CSRC.
In
late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the
"big four" accounting firms (including our independent registered public accounting firm). A first instance trial of these proceedings in July 2013 in the SEC's internal administrative court
resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms, including a temporary suspension of their right to practice before the SEC.
Implementation of the latter penalty was
postponed pending review by the SEC Commissioners. On February 6, 2015, before a review by the Commissioner had taken place, the firms reached a settlement with the SEC. Under the settlement,
the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required
to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If the firms fail to follow these procedures and meet
certain other specified criteria, the SEC retains the authority to impose a variety of additional remedial measures, including, as appropriate, an automatic six-month bar on a firm's ability to
perform certain audit work, commencement of new proceedings against a firm or, in extreme cases, the resumption of the current administrative proceeding against all four firms.
In
the event that the SEC restarts administrative proceedings, depending upon the final outcome, listed companies in the U.S. with major PRC operations may find it difficult or
impossible to retain auditors in respect of their operations in the PRC, which could result in their financial statements being determined to not be in compliance with the requirements of the
Securities Exchange Act of 1934, as amended, or the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against the firms may cause investor
uncertainty regarding China-based, U.S.-listed companies and the market price of their shares may be adversely affected.
If
our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public
accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a
determination could ultimately lead to the delisting of our shares from the NASDAQ Stock Market LLC, or Nasdaq, or deregistration from the SEC, or both, which would substantially reduce or
effectively terminate the trading of our shares in the U.S.
31
Table of Contents
Risks Related to Doing Business in China
The enforcement of the labor contract law and increases in labor costs in the PRC may adversely affect our
business and our profitability.
The Labor Contract Law came into effect on January 1, 2008, and was later revised on December 28, 2012; the Implementation Rules
and the amendment thereunder became effective on September 18, 2008 and July 1, 2013, respectively. The Labor Contract Law and the Implementation Rules imposed stringent requirements on
employers with regard to executing written employment contracts, hiring temporary employees, dismissing employees, consultation with the labor union and employee assembly, compensation upon
termination and overtime work, collective bargaining and labor dispatch business. In addition, under the Regulations on Paid Annual Leave for Employees, which came into effect on January 1,
2008, and their Implementation Measures, which were promulgated and became effective on September 18, 2008, employees who have served for more than one year with an employer are entitled to a
paid vacation ranging from five to 15 days, depending on their length of service. Employees who waive such vacation time at the request of the employer must be compensated for each vacation day
waived at a rate equal to three times their normal daily salary. According to the Interim Provisions on Labor Dispatching, which came into effect on March 1, 2014, the number of dispatched
workers used by an employer shall not exceed 10% of its total number of workers. Our labor costs are expected to continue to increase due to these new laws and regulations. Higher labor costs and
labor disputes with our employees stemming from these new rules and regulations could adversely affect our business, financial condition, and results of operations.
In recent years, our subsidiaries have lost certain tax benefits and we expect to pay additional PRC taxes as
a result, which could have a material and adverse impact on our financial condition and results of operations.
The Enterprise Income Tax Law, or the EIT Law, came into effect in China on January 1, 2008 and was amended on February 24, 2017.
Under the EIT Law, both foreign-invested enterprises and domestic enterprises are subject to a uniform enterprise income tax rate of 25%. The EIT Law provides for preferential tax treatment for
certain categories of industries and projects that are strongly supported and encouraged by the state. For example, enterprises qualified as a "High and New Technology Enterprise," or HNTE, are
entitled to a 15% enterprise income tax rate provided that such HNTE satisfies other applicable statutory requirements.
Certain
of our PRC subsidiaries, such as CSI New Energy Holding Co., Ltd. (formerly, CSI Solar Manufacture Inc.), or CSI New Energy Holding, CSI
Cells Co., Ltd., or CSI Cells, Canadian Solar Manufacturing (Luoyang) Inc., or CSI Luoyang Manufacturing, Canadian Solar Manufacturing (Changshu) Inc., or CSI Changshu
Manufacturing, once enjoyed preferential tax benefits, such as a reduced enterprise income tax rate of 12.5%, however, these benefits were expired. In 2016, only our partially owned subsidiary, Suzhou
Sanysolar Materials Technology Co., Ltd., or Suzhou Sanysolar, which was qualified as an HNTE and satisfied applicable statutory requirements, enjoyed a reduced enterprise income tax
rate of 15%. In 2017, Suzhou Sanysolar, CSI Cells and CSI Changshu Manufacturing are qualified as HNTE and are expected to enjoy a reduced enterprise income tax rate of 15%, subject to applicable
statutory requirements. Our wholly-owned subsidiary, Canadian Solar Sunenergy
(Baotou) Co., Ltd. is now applying for preferential tax benefits. As most of the preferential tax benefits enjoyed by our PRC subsidiaries expired, their effective tax rates increased
significantly.
There are significant uncertainties regarding our tax liabilities with respect to our income under the
EIT Law.
We are a Canadian company with a significant portion of our manufacturing operations in China. Under the EIT Law and its implementation
regulations, both of which became effective on January 1, 2008, enterprises established outside China whose "de facto management body" is located in China are considered PRC tax residents and
will generally be subject to the uniform 25% enterprise income tax
32
Table of Contents
rate
on their global income. Under the implementation regulations, the term "de facto management body" is defined as substantial and overall management and control over aspects such as the production
and business, personnel, accounts and properties of an enterprise. The Circular on Identification of China-controlled Overseas-registered Enterprises as Resident Enterprises on the Basis of Actual
Management Organization, or Circular 82, further provides certain specific criteria for determining whether the "de facto management body" of a PRC-controlled offshore incorporated enterprise
is located in the PRC. The criteria include whether (a) the premises where the senior management and the senior management bodies responsible for the routine production and business management
of the enterprise perform their functions are mainly located within the PRC, (b) decisions relating to the enterprise's financial and human resource matters are made or subject to approval by
organizations or personnel in the PRC, (c) the enterprise's primary assets, accounting books and records, company seals, and board and shareholders' meeting minutes are located or maintained in
the PRC and (d) 50% or more of voting board members or senior executives of the enterprise habitually reside in the PRC. Although Circular 82 only applies to offshore enterprises
controlled by enterprises or enterprise groups located within the PRC, the determining criteria set forth in the Circular 82 may reflect the tax authorities' general position on how the "de
facto management body" test may be applied in determining the tax resident status of offshore enterprises. As the tax resident status of an enterprise is subject to the determination by the PRC tax
authorities, uncertainties remain with respect to the interpretation of the term "de facto management body" as applicable to our offshore entities. As a substantial number of the members of our
management team are located in China, we may be considered as a PRC tax resident under the EIT Law and, therefore, subject to the uniform 25% enterprise income tax rate on our global income, but
dividends received by us from our PRC subsidiaries may be exempt from the income tax. If our global income is subject to PRC enterprise income tax at the rate of 25%, our financial condition and
results of operation may be materially and adversely affected.
Dividends paid by us to our non-PRC shareholders and gains on the sale of our common shares by our non-PRC
shareholders may be subject to PRC enterprise income tax liabilities or individual income tax liabilities.
Under the EIT Law and its implementation regulations, dividends paid to a non-PRC investor are generally subject to a 10% PRC withholding tax,
if such dividends are derived from sources within China and the non-PRC investor is considered to be a non-resident enterprise without any establishment or place within China or if the dividends paid
have no connection with the non-PRC investor's establishment or place within China, unless such tax is eliminated or reduced under an applicable tax treaty. Similarly, any gain realized on the
transfer of shares by such investor is also subject to a 10% PRC withholding tax if such gain is regarded as income derived from sources within China, unless such tax is eliminated or reduced under an
applicable tax treaty.
The
implementation regulations of the EIT Law provide that (a) if the enterprise that distributes dividends is domiciled in the PRC, or (b) if gains are realized from
transferring equity interests of enterprises domiciled in the PRC, then such dividends or capital gains shall be treated as China-sourced income.
Currently
there are no detailed rules applicable to us that govern the procedures and specific criteria for determining the meaning of being "domiciled" in the PRC. As a result, it is
not clear how the concept of domicile will be interpreted under the EIT Law. Domicile may be interpreted as the jurisdiction where the enterprise is incorporated or where the enterprise is a tax
resident. As a result, if we are considered a PRC "resident enterprise" for tax purposes, it is possible that the dividends we pay with respect to our common shares to non-PRC enterprises, or the gain
non-PRC enterprises may realize from the transfer of our common shares or our convertible notes, would be treated as income
33
Table of Contents
derived
from sources within China and be subject to the PRC withholding tax at a rate of 10% or a lower applicable treaty rate for enterprises.
Under
the Law of the People's Republic of China on Individual Income Tax, or the IIT Law, individual income tax is payable on PRC-source dividend income. The implementation regulations
of the IIT Law provide that income from dividends derived from companies, enterprises and other economic organizations in China as well as income realized from transfer of properties in China is
considered derived from sources inside China, regardless of whether the place of payment was inside China. Therefore, if we are treated as a company in China for tax purposes, any dividends we pay to
our non-PRC individual shareholders as well as any gains realized by our non-PRC individual shareholders or our non-PRC individual note holders from the transfer of our common shares or our
convertible
notes may be regarded as China-sourced income and, consequently, be subject to PRC withholding tax at a rate of up to 20% or a lower applicable treaty rate for individuals. The investment returns of
our non-PRC investors may be materially and adversely affected if any dividends we pay, or any gains realized on a transfer of our common shares, are subject to PRC tax.
We face uncertainty from the PRC State Administration of Taxation's Announcement on Several Issues Concerning
the Enterprise Income Tax on Indirect Property Transfer by Non-Resident Enterprises.
The PRC State Administration of Taxation, or the SAT, issued the Circular on Strengthening the Management of Enterprise Income Tax Collection of
Income Derived by Non-resident Enterprises from Equity Transfers, or Circular 698, on December 10, 2009. Under Circular 698, an overseas investor (actual controlling party) who
"indirectly transfers" the equity of a PRC resident enterprise, is required to report such transfer to the PRC tax authority if certain statutory requirements are satisfied. In March 2015, the
SAT issued the Announcement on Several Issues Concerning the Enterprise Income Tax on Indirect Property Transfer by Non-Resident Enterprises, or Announcement 7, which further regulated and
strengthened the administration of enterprise income tax on indirect transfer of properties such as equity in a Chinese resident enterprise, and the above stipulations of Circular 698 were
repealed simultaneously.
Under
Announcement 7, where a non-resident enterprise indirectly transfers properties, such as equity of Chinese resident enterprises, without any reasonable commercial purposes with the
aim of avoiding payment of enterprise income tax, such indirect transfer shall be reclassified as a direct transfer of equity of a Chinese resident enterprise. Properties such as equity in Chinese
resident enterprises mentioned in Announcement 7 mean the properties, or Chinese taxable properties, which are directly held by non-resident enterprises and subject the transfer income to
enterprise income tax in China according to the provisions of Chinese tax law. Indirect transfers of Chinese taxable properties are transactions which transfer the equity and other similar interests
(hereinafter referred to as "equity") of enterprises abroad that directly or indirectly hold Chinese taxable properties (not including Chinese resident enterprises registered abroad). To
estimate reasonable commercial purposes, all arrangements related to the indirect transfer of Chinese taxable properties must be considered comprehensively and certain factors, such as whether the
main value of the equity of enterprises abroad is directly or indirectly from the Chinese taxable properties, must be comprehensively analyzed. Except for the circumstances stipulated therein, the
overall arrangements related to the indirect transfer of Chinese taxable properties that fall in any of the following circumstances simultaneously are deemed as having no reasonable commercial
purposes: (a) more than 75% of the equity of enterprises abroad is directly or indirectly from Chinese taxable properties; (b) more than 90% of the total assets (not including
cash) of enterprises abroad are directly or indirectly composed of investment in the territory of China at any time in the year before the indirect transfer of Chinese taxable properties, or more than
90% of the income of enterprises abroad is directly or indirectly from the territory of China in the year before the indirect transfer of Chinese taxable properties; (c) although the
enterprises abroad and their subordinate enterprises directly or indirectly hold Chinese taxable properties have
34
Table of Contents
registered
in the host country (region) in order to satisfy the organization form required by law, the functions actually performed and the risks undertaken are limited and are not sufficient to prove
the economic essence; or (d) the burden of income tax of indirect transfer of Chinese taxable properties payable abroad is lower than the possible burden of taxation in China as for the direct
transfer of Chinese taxable properties. However, a non-resident enterprise's income obtained from indirect transfer of Chinese taxable properties by purchasing and selling equity of the same listed
enterprise abroad in the open market will not be taxed under Announcement 7.
There
is uncertainty as to the application of Announcement 7 and it is understood that the relevant PRC tax authorities have jurisdiction regarding reasonable commercial purposes. As a
result, we may become at risk of being taxed under Announcement 7 and we may be required to expend valuable resources to comply with Announcement 7 or to establish that we should not be taxed under
Announcement 7, which may materially adversely affect our financial condition and results of operations.
We
do not believe that the transfer of our common shares or the convertible notes by our non-PRC shareholders would be treated as an indirect transfer of equity in our PRC subsidiaries
subject to Announcement 7. However, there is uncertainty as to the interpretation and application of Announcement 7 by the PRC tax authorities in practice. If you are required to pay PRC tax on
the transfer of our common shares or convertible notes, your investment in us may be materially and adversely affected. In addition, we cannot predict how Announcement 7 will affect our
financial condition or results of operations.
Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.
Certain of our revenues and expenses are denominated in Renminbi. If our revenues denominated in Renminbi increase or our expenses denominated
in Renminbi decrease in the future, we may need to convert a portion of our revenues into other currencies to meet our foreign currency obligations. Under China's existing foreign exchange
regulations, our PRC subsidiaries are able to pay dividends in foreign currencies without prior approval from the State Administration of Foreign Exchange, or SAFE, by complying with certain
procedural requirements. However, we cannot assure you that the PRC government will not take further measures in the future to restrict access to foreign currencies for current account transactions.
Foreign
exchange transactions by our PRC subsidiaries under most capital accounts continue to be subject to significant foreign exchange controls and require the approval of or
registration with PRC governmental authorities. In particular, if we finance our PRC subsidiaries by means of additional
capital contributions, certain government authorities, including the Ministry of Commerce or its local counterparts, must approve these capital contributions. These limitations could affect the
ability of our PRC subsidiaries to obtain foreign exchange through equity financing.
Uncertainties with respect to the Chinese legal system could materially and adversely affect us.
We conduct a significant portion of our manufacturing operations through our subsidiaries in China. These subsidiaries are generally subject to
laws and regulations applicable to foreign investment in China and, in particular, laws applicable to wholly foreign-owned enterprises and joint venture companies. The PRC legal system is based on
written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded
to various forms of foreign investments in China. However, since these laws and regulations are relatively new and the PRC legal system is still developing, the implementation and enforcement of many
laws, regulations and rules may be inconsistent, which may limit legal protections available to us. In addition, any litigation in China may
35
Table of Contents
be
protracted and may result in substantial costs and divert our resources and the attention of our management.
Risks Related to Our Common Shares
We may issue additional common shares, other equity or equity-linked or debt securities, which may materially
and adversely affect the price of our common shares. Hedging activities may depress the trading price of our common shares.
We may issue additional equity, equity-linked or debt securities for a number of reasons, including to finance our operations and business
strategy (including in connection with acquisitions, strategic collaborations or other transactions), to satisfy our obligations for the repayment of existing indebtedness, to adjust our ratio of debt
to equity, to satisfy our obligations upon the exercise of outstanding warrants or options or for other reasons. Any future issuances of equity securities or equity-linked securities could
substantially dilute the interests of our existing shareholders and may materially and adversely affect the price of our common shares. We cannot predict the timing or size of any future issuances or
sales of equity, equity-linked or debt securities, or the effect, if any, that such issuances or sales, may have on the market price of our common shares. Market conditions could require us to accept
less favorable terms for the issuance of our securities in the future.
The market price for our common shares may be volatile.
The market price for our common shares has been highly volatile and subject to wide fluctuations. During the period from November 9,
2006, the first day on which our common shares were listed on Nasdaq, until December 31, 2016, the market price of our common shares ranged from $1.95 to $51.8 per share. From January 1,
2016 to December 31, 2016, the market price of our common shares ranged from $10.25 to $28.8 per share. The closing market price of our common shares on December 30, 2016 was $12.18 per
share. The market price of our common shares may continue to be volatile and subject to wide fluctuations in response to a wide variety of factors, including
the following:
-
-
announcements of technological or competitive developments;
-
-
regulatory developments in our target markets affecting us, our customers or our competitors;
-
-
actual or anticipated fluctuations in our quarterly operating results;
-
-
changes in financial estimates by securities research analysts;
-
-
changes in the economic performance or market valuations of other solar power companies;
-
-
the departure of executive officers and key research personnel;
-
-
patent litigation and other intellectual property disputes;
-
-
litigation and other disputes with our long-term suppliers;
-
-
fluctuations in the exchange rates between the U.S. dollar, Euro, Japanese yen, British pound, Canadian dollar and Renminbi;
-
-
the release or expiration of lock-up or other transfer restrictions on our outstanding common shares; and
-
-
sales or anticipated sales of additional common shares.
In
addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies.
These market fluctuations may also have a material and adverse effect on the price of our common shares.
36
Table of Contents
Substantial future sales of our common shares in the public market, or the perception that such sales could
occur, could cause the price of our common shares to decline.
Sales of our common shares in the public market, or the perception that such sales could occur, could cause the market price of our common
shares to decline. As of December 31, 2016, we had 57,830,149 common shares outstanding. The number of common shares outstanding and available for sale will increase when our employees
and former employees who are holders of restricted share units and options to acquire our common shares become entitled to the underlying shares under the terms of their units or options. In addition,
in connection with a $180 million senior loan facility, we issued warrants to purchase up to 1,348,040 of our common shares at an exercise price of $24.48 per share in October 2015, and
we issued additional warrants to purchase up to 940,171 of our common shares at an exercise price of $28.08 per share in December 2015. The warrant holders are entitled to request to
participate in any public offering of our common shares for which we undertake any marketing efforts. To the extent these shares are sold into the market, the market price of our common shares
could decline.
Your right to participate in any future rights offerings may be limited, which may cause dilution to
your holdings.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make these rights
available in the U.S. unless we register the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. We are under
no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause a registration statement to be declared effective. Moreover, we may not be
able to establish an exemption from registration under the
Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.
Our articles of continuance contain anti-takeover provisions that could adversely affect the rights of
holders of our common shares.
The following provisions in our amended articles of continuance may deprive our shareholders of the opportunity to sell their shares at a
premium over the prevailing market price by delaying or preventing a change of control of our company:
-
-
Our board of directors has the authority, without approval from the shareholders, to issue an unlimited number of preferred shares in one or
more series. Our board of directors may establish the number of shares to be included in each such series and may fix the designations, preferences, powers and other rights of the shares of a series
of preferred shares.
-
-
Our board of directors is entitled to fix and may change the number of directors within the minimum and maximum number of directors provided
for in our articles. Our board of directors may appoint one or more additional directors to hold office for a term expiring no later than the close of the next annual meeting of shareholders, subject
to the limitation that the total number of directors so appointed may not exceed one-third of the number of directors elected at the previous annual meeting of shareholders.
You may have difficulty enforcing judgments obtained against us.
We are a corporation organized under the laws of Canada and a substantial portion of our assets are located outside of the U.S. A substantial
portion of our current business operations is conducted in the PRC. In addition, a majority of our directors and officers are nationals and residents of countries other than the U.S. and a substantial
portion of the assets of these persons are located outside the U.S. As a result, it may be difficult for you to effect service of process within the U.S. upon these persons.
37
Table of Contents
It
may also be difficult for you to enforce judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and
directors, many of whom are not residents of the U.S. and whose assets are located in significant part outside of the U.S. In addition, there is uncertainty as to whether the courts of Canada or the
PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the U.S. or any state. In addition,
it is uncertain whether such Canadian or PRC courts would be competent to hear original actions brought in Canada or the PRC against us or such persons predicated upon the securities laws of the U.S.
or any state.
We may be classified as a passive foreign investment company, which could result in adverse
United States federal income tax consequences to United States Holders of our common shares.
Based on the current value of our assets and the composition of our income and assets, we do not believe we were a passive foreign investment
company, or PFIC, for United States federal income tax purposes for our taxable year ended December 31, 2016. However, because our PFIC status for 2017 or any future taxable year may
depend, in part, on the manner in which we operate our renewable energy generation assets, we cannot assure you that we will not be a PFIC for our current taxable year ending December 31, 2017
or any future taxable year. A non-United States corporation such as ourselves will be treated as a PFIC for United States federal income tax purposes for any taxable year if, applying
applicable look-through rules, either (a) at least 75% of its gross income for such year is passive income or (b) at least 50% of the value of its assets (determined based on a quarterly
average) during such year is attributable to assets that produce or are held for the production of passive income. The determination of PFIC status is based on an annual determination that cannot be
made until the close of a taxable year, involves extensive factual investigation, including ascertaining the fair market value of all of our assets on a quarterly basis and the character of each item
of income that we earn, and is subject to uncertainty in several respects. In particular, the application of the PFIC rules to certain of our business lines is complex and unclear, and we cannot
guarantee that the United States Internal Revenue Service, or IRS, will agree with any positions that we ultimately take. Accordingly, we cannot assure you that we will not be treated as a PFIC
for any taxable year or that the IRS will not take a contrary position.
The
determination of whether we will be a PFIC for any taxable year may depend in part upon the value of our goodwill and other unbooked intangibles not reflected on our balance sheet
(which may depend upon the market value of the common shares from time to time, which may be volatile) and also may be affected by how, and how quickly, we spend our liquid assets. Further, while we
believe our classification methodology and valuation approach is reasonable, it is possible that the IRS may challenge our classification or valuation of our goodwill and other unbooked intangibles.
If
we are a PFIC for any taxable year during which a United States Holder (as defined in "Item 10. Additional InformationE.
TaxationUnited States Federal Income Taxation") holds a common share, certain adverse United States federal income tax consequences could apply to such United States
Holder. See "Item 10. Additional InformationE. TaxationUnited States Federal Income TaxationPassive Foreign Investment Company."