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, 2016, 2017 and 2018 and balance sheet data as of
December 31, 2017 and 2018 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, 2014 and 2015 and our consolidated balance sheet data as of December 31, 2014, 2015
and 2016 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.
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For the years ended, or as of, December 31,
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2014
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2015
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2016
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2017
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2018
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(In thousands of $, except share and per share data, and operating data and percentages)
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Statement of operations data:
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Net revenues
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2,960,627
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3,467,626
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2,853,078
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3,390,393
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3,744,512
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Income from operations
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366,314
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247,371
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93,164
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269,345
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364,657
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Net income
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243,887
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173,316
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65,275
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102,983
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242,431
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Net income attributable to Canadian Solar Inc.
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239,502
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171,861
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65,249
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99,572
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237,070
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Earnings per share, basic
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4.40
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3.08
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1.13
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1.71
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4.02
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Shares used in computation, basic
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54,408,037
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55,728,903
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57,524,349
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58,167,004
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58,914,540
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Earnings per share, diluted
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4.11
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2.93
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1.12
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1.69
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3.88
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Shares used in computation, diluted
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59,354,615
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60,426,056
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58,059,063
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61,548,158
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62,291,670
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Other financial data:
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Gross margin
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19.6
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%
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16.6
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%
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14.6
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%
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18.8
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%
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20.7
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%
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Operating margin
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12.4
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%
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7.1
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%
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3.3
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%
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7.9
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%
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9.7
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%
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Net margin
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8.2
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%
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5.0
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%
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2.3
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%
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3.0
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%
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6.5
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%
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For the years ended, or as of, December 31,
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2014
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2015
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2016
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2017
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2018
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(In thousands of $, except share and per share data, and operating data and percentages)
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Selected operating data:
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Solar power products sold (in MW)
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MSS segment
(1)
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2,436.4
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4,085.0
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5,138.1
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6,538.8
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5,916.1
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Energy segment
(2)
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376.2
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298.8
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65.7
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354.3
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901.1
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Total
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2,812.6
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4,383.8
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5,203.8
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6,893.1
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6,817.2
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Average selling price (in $ per watt)
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Solar module
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0.67
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0.58
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0.51
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0.40
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0.34
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Balance Sheet Data:
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Net current assets (liabilities)
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366,621
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(392,231
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69,697
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(22,709
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125,964
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Total assets
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3,068,115
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4,413,928
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5,406,606
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5,889,627
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4,892,658
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Net assets
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729,574
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832,510
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899,390
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1,059,775
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1,272,845
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Long-term borrowings
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134,300
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606,577
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493,455
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404,341
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393,614
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Convertible notes
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145,691
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146,674
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125,569
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126,476
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127,428
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Common shares
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675,236
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677,103
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701,283
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702,162
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702,931
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Number of shares outstanding
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55,161,856
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55,965,443
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57,830,149
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58,496,685
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59,180,624
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(1)
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Numbers
are calculated after inter-segmentation elimination and represent solar power products sold to third parties.
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(2)
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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. We believe that the solar power market and industry may from time
to time experience oversupply. When this occurs, 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, may be adversely affected. Although our shipments of solar modules increased year-over-year in 2016 and 2017, they slightly decreased in 2018. The average selling
prices for our solar modules declined from the previous year in each of 2016, 2017 and 2018. Over the past several quarters, oversupply conditions across the value chain and foreign trade disputes
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 for solar power products, demand and the average selling price for our products could be materially
and adversely affected.
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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, 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:
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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;
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the availability of government subsidies and incentives to support the development of the solar power industry;
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the availability and cost of capital, including long-term debt and tax equity, for solar power projects;
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the success of other alternative energy technologies, such as wind power, hydroelectric power, geothermal power and biomass fuel;
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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;
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capital expenditures by end users of solar power products and services, which tend to decrease when the economy slows; and
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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. Currently, demand for solar power products and services 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 MSS and energy segments may be
subject to significant fluctuation due to a number of factors, including the unpredictability of the timing of the development and sale of our solar power projects and 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, sells and/or operates and maintains 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 their development, we either sell our solar power projects to third party buyers, or operate them under power purchase agreements, or PPAs, or other contractual arrangements with utility
companies or grid operators. Revenues from our energy segment decreased by $869.5 million, or 0.89 times, from $975.9 million for the year ended December 31, 2015 to
$106.4 million for the year ended December 31, 2016, and then increased by $571.0 million, or 5.4 times, to $677.5 million for the year ended December 31,
2017, and further then increased by
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$898.1 million,
or 1.3 times, to $1,575.6 million for the year ended December 31, 2018. We intend to monetize the majority of our current portfolio of solar power projects
in operation with an estimated resale value of approximately $1.2 billion as of February 28, 2019. We also intend to monetize certain of our projects before they reach their respective
COD. However, there is no assurance whether or when we will be able to 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 the unpredictability of
the timing of the development and sale of our solar power projects, 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 MSS 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. Higher interest rates could increase the cost of existing funding and present an
obstacle for future 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
plans 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 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 as compared to bond yields, and increase the cost of debt financing for solar power projects in countries
with a higher perceived sovereign credit risk.
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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 MSS segment has accounted for the majority of our net revenues, contributing 96.2%, 80.0% and 57.9% of our net revenues in
2016, 2017 and 2018, 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, operating solar power projects and sale of electricity.
While
we plan to continue to monetize our current portfolio of solar power projects in operation, we also intend to grow our energy segment by developing and selling or operating more
solar projects, including those that we develop and those that we acquire from third-parties. As we do, we will be increasingly exposed to the risks associated with these activities. 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:
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the uncertainty of being able to sell the projects, receive full payment for them upon completion, or receive payment in a
timely manner;
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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;
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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;
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delays or denial of required regulatory approvals by relevant government authorities;
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diversion of significant management attention and other resources; and
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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. 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 June 1, 2018 announcement by
the National Development and Reform Commission, or the NDRC, that it intended to reduce subsidies for ground mounted and distributed PV projects and to decrease China's FIT policy has adversely
impacted the solar markets. It is likely that this trend will continue, and that, eventually, subsidies for solar energy will be phased out completely.
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While solar power projects may continue to offer attractive internal rates of return, it is unlikely that these rates 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 for solar energy, 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 subsidies 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 2016, 2017
and 2018, a decrease in solar power tariffs in many markets placed downward pressure on the price of solar systems in those and other markets. In addition, reductions in oil and coal prices may reduce
the demand for and the prices of solar power products and services. Our growth and profitability depend on the demand for and the prices of solar power products and services. If we experience negative
market and industry conditions 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 antidumping 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 antidumping and countervailing duty orders in one or more of
the markets in which we sell our products. In the past, we have been subject to the imposition of antidumping 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., the EU and Canada are important markets for us. Ongoing proceedings relating to past, and the imposition of any new, antidumping 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.
Our project development and construction activities may not be successful, projects under development may not
receive required permits, property rights, EPC agreements, 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 and permitting and may incur 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:
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securing land rights and related permits, including satisfactory environmental assessments;
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receipt of required land use and construction permits and approvals;
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receipt of rights to interconnect to the electric grid;
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availability of transmission capacity, potential upgrade costs to the transmission grid and other system constraints;
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payment of interconnection and other deposits (some of which are non-refundable);
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negotiation of satisfactory EPC agreements; and
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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:
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delays in obtaining and maintaining required governmental permits and approvals;
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potential challenges from local residents, environmental organizations, and others who may not support the project;
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unforeseen engineering problems; subsurface land conditions; construction delays; cost over-runs; labor, equipment and materials supply
shortages or disruptions (including labor strikes);
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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
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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 our
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 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.
The development of solar power projects can take many months or years to complete and may be delayed for reasons beyond our control. It often
requires 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
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become
constrained in our ability to simultaneously fund our other business operations and invest in other projects.
In
contrast to producing 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 and 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 prices, 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. Failure to enter into PPAs on terms favorable to us, or at all, 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. We expect our future projects will also have long-term PPAs or similar offtake arrangements such as FIT programs. If, for any reason, any of the purchasers of power under these
contracts are unable or unwilling to fulfill their related contractual obligations, they refuse to accept delivery of the power delivered thereunder or they otherwise terminate them prior to their
expiration, 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 of a counterparty default.
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 own projects and those
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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 the related 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. The average selling price of our
solar modules decreased from $0.67 per watt in 2014 to $0.58 per watt in 2015, $0.51 per watt in 2016, $0.40 per watt in 2017 and $0.34 per watt in 2018. Although 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 may not 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 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, Deutsche Solar AG, or Deutsche Solar, and Jiangxi LDK Solar
Hi-Tech Co., Ltd., or LDK.
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
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scheduled
delivery dates. These advance payments were made without collateral and are to be credited against the purchase prices payable by us. As of December 31, 2018, the balance of the
advance payments that we have made to GCL, Deutsche Solar and LDK totaled $23.3 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 these
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 termination notices for the 2007 Supply Contract and the 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. 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 the Jiangxi Xinyu Intermediate People's Court, or the 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 had been waived by LDK under the 2015 Settlement Agreement. In
May 2017, the Xinyu Intermediate Court made a judgment in favor of LDK's receiver, revoking the 2015 Settlement Agreement and requiring CSI Cells to pay RMB 58.5 million to LDK's
receiver and bear court expenses of RMB 0.8 million. We recorded a $8.6 million provision in the first quarter of 2017 and we appealed the judgment. In November 2017, the Jiangxi
High People's Court, or Jiangxi High Court, dismissed our appeal and upheld the original judgment. We then appealed this judgment to the Supreme People's Court of The People's Republic of China, or
the Supreme Court. In January 2018, the Supreme Court put our appeal on record pending examination but later dismissed our request for retrial. In March 2018, LDK's receiver applied to
the Xinyu Intermediate Court for compulsory execution of its judgment. In April 2018, the Xinyu Intermediate Court deducted RMB59.5 million from our accounts in execution of
its judgment.
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
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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, regulations and policies at the national, regional and local levels of
government in the markets where we do business. Any changes to these laws, 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 subject to a variety of laws and regulations in the markets where we do business, some of which may conflict with each other and all of
which are subject to change. These laws and regulations include 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, including antidumping and
countervailing duty orders, which could increase the prices of our products and make us less competitive in some countries. See "Imposition of antidumping 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 countries 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 MSS 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 government energy policies, law and regulation supporting the creation of wholesale energy markets are 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.
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Regulatory
changes in a jurisdiction where we are developing a solar power project may make the continued development of the project infeasible or economically disadvantageous and any
expenditure that we have previously made on the 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-corruption 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 in countries in which
we conduct activities. We face significant liabilities if we fail to comply with these laws. 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 or other applicable anticorruption 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, results of operation, 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 evolving quickly, 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.
In our MSS segment, we face intense competition from a large number of competitors, including non-China-based companies such as First
Solar, Inc., or First Solar, and SunPower Corporation, or SunPower, and China-based companies 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, 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
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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.
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 in which 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 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, sale, distribution and delivery of our products and services expose us to a number of risks,
including:
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fluctuating sources of revenues;
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difficulties in staffing and managing overseas operations;
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fluctuations in foreign currency exchange rates;
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differing regulatory and tax regimes across different markets;
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the increased cost of understanding local markets and trends and developing and maintaining an effective marketing and distribution presence in
various countries;
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-
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the difficulty of providing customer service and support in various countries;
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the difficulty of managing our sales channels effectively as we expand beyond distributors to include direct sales to systems integrators, end
users and installers;
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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;
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the difficulties and costs of complying with the different commercial, legal and regulatory requirements in the overseas markets in which
we operate;
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any failure to develop appropriate risk management and internal control structures tailored to overseas operations;
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any inability to obtain, maintain or enforce intellectual property rights;
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any unanticipated changes in prevailing economic conditions and regulatory requirements; and
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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 to Asia and other regions, respectively. However, in 2016, Europe and other regions contributed 9.6% while the Americas contributed 38.7% and Asia contributed 46.9% of our
revenues; in 2017, Europe and other regions contributed 10.5% while the Americas contributed 32.7% and Asia contributed 56.8% of our revenues; and in 2018, Europe and other regions contributed 18.6%
while the Americas contributed 39.4% and Asia contributed 42.0% of our revenues. 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 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
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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 EU and the decision of U.S. President Donald Trump, to impose punitive tariffs on goods imported from China and renegotiate certain trade arrangements, such as the North American Free Trade
Agreement. 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. The dismissal was subsequently affirmed by the
circuit court in December 2013. The lawsuit in Canada is still on-going. 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 our
application for leave to appeal. The class action is at the merits stage and the common issues trial is scheduled to proceed in October 2019. See "Item 8. Financial
InformationA. Consolidated Statements and Other Financial InformationLegal and Administrative Proceedings." If the case goes to trial, the Canadian action could require
significant management time and attention and result in significant legal expenses. There is no guarantee that we will not become party to additional lawsuits. 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 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:
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-
the average selling prices of our solar power products and services;
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the timing of completion of construction of our solar power projects;
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the timing and pricing of project sales;
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changes in payments from power purchasers of solar power plants already in operation;
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the rate and cost at which we are able to expand our internal production capacity;
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the availability and cost of solar cells and wafers from our suppliers and toll manufacturers;
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the availability and cost of raw materials, particularly high-purity silicon;
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changes in government incentive programs and regulations, particularly in our key and target markets;
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the unpredictable volume and timing of customer orders;
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the loss of one or more key customers or the significant reduction or postponement of orders;
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the availability and cost of external financing for on-grid and off-grid solar power applications;
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acquisition and investment costs;
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the timing of successful completion of customer acceptance testing of our solar power projects;
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geopolitical turmoil and natural disasters within any of the countries in which we operate;
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foreign currency fluctuations, particularly in British pounds, Renminbi, Canadian dollars, Japanese yen and Euros;
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our ability to establish and expand customer relationships;
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changes in our manufacturing costs;
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the timing of new products or technology introduced or announced by our competitors;
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fluctuations in electricity rates due to changes in fossil fuel prices or other factors;
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allowances for doubtful accounts and advances to suppliers;
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inventory write-downs;
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impairment of property, plant and equipment;
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impairment of project assets;
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impairment of investments in affiliates;
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depreciation charges relating to under-utilized assets;
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loss on firm purchase commitments under long-term supply agreements;
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construction progress of solar power projects and related revenue recognition; and
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antidumping and countervailing duty costs and/or antidumping 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.
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Fluctuations in exchange rates could adversely affect our business, including our financial condition and
results of operations.
The majority of our sales in 2016, 2017 and 2018 were denominated in U.S. dollars, Renminbi and Japanese yen, with the remainder in other
currencies such as Euros,
Brazilian reals and Canadian dollars. Our Renminbi costs and expenses are primarily related to the sourcing of solar cells, silicon wafers and silicon, other raw materials, including aluminium and
silver paste, toll manufacturing fees, labor costs and local overhead expenses within the PRC. From time to time, we enter into loan arrangements with commercial banks that are denominated primarily
in Renminbi, U.S. dollars and Japanese yen. Most of our cash and cash equivalents and restricted cash are denominated in Renminbi. Fluctuations in exchange rates, particularly between the
U.S. dollar, Renminbi, British pound, Canadian dollar, Japanese yen and Euro, may result in foreign exchange gains or losses. We recorded net foreign exchange gain of $25.4 million and
net foreign exchange loss of $23.4 million in 2016 and 2017, respectively, and net foreign exchange gain of $6.5 million in 2018.
The
value of the Renminbi against the U.S. dollar, the 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 track against a basket of foreign currencies. This
change 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 the 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, 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 the requirement to
provide collateral when entering 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.
While these contracts are intended to reduce the effects of fluctuations in foreign currency exchange rates, our hedging strategy does not mitigate the longer-term impacts of changes to foreign
exchange rates. We do not enter into these contracts for trading purposes or speculation, and we believe all these contracts are entered into as hedges of underlying transactions. Nonetheless, these
contracts involve costs and risks of their own in the form of transaction costs, credit requirements and counterparty risk. Also, the effectiveness of our hedging program may be limited due to cost
effectiveness, cash management, exchange rate visibility and associated management judgment on exchange rate movement, and downside protection. We recorded gains on change in foreign currency
derivatives of $4.8 million in 2016, losses on change in foreign currency derivatives of $2.6 million in 2017 and $18.4 million in 2018. The gains or losses on change in foreign
currency derivatives are related to our hedging program. If our hedging program is not successful, or if we change our hedging activities in the future, we may experience significant unexpected
expenses from fluctuations in exchange rates.
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.
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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 tax laws (e.g., in connection with
fundamental U.S. international tax reform); changes in U.S. GAAP; expiration of 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.
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 several 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 solar power projects. Demand from some 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:
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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;
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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;
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delays or denial of required regulatory approvals by relevant government authorities;
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diversion of significant management attention and other resources; and
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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 in manufacturing capacity and solar project development.
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
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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 extend existing or 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 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:
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our future financial condition, results of operations and cash flows;
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general market conditions for financing activities by manufacturers of solar power products; and
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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 project financing 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:
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limit our ability to satisfy our debt obligations;
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increase our vulnerability to adverse general economic and industry conditions;
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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;
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limit our flexibility in planning for or reacting to changes in our businesses and the industry in which we operate;
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place us at a competitive disadvantage compared with our competitors that have less debt;
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limit, along with the financial and other restrictive covenants of our indebtedness, among other things, our ability to borrow additional
funds; and
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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.
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
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short-term
borrowings come from Chinese banks, we are exposed to lending policy changes by the Chinese banks. As of December 31, 2018, we had outstanding short-term borrowings of
$550.7 million with Chinese banks.
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 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 significant 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 material suppliers. In 2018, we
purchased a significant portion of the silicon wafers used in our solar modules from third parties. Our major silicon wafer suppliers in 2018 included GCL and Zhenjiang Rende New Energy Science
Technology Co., Ltd., or ZJ Rende. Our major suppliers of solar cells in 2018 included Inventec Corporation, or Inventec, and Zhejiang Fortune Energy Co., Ltd. These
suppliers may not always be able to meet our quantity requirements, or keep pace with the price
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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 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-effective way, 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.
We warrant, for a period of ten years, that our solar products will be free from defects in materials and workmanship.
We
also warrant that, for a period of 25 years, our standard solar modules will maintain the following performance levels:
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during the first year, the actual power output of the module will be no less than 97% of the labeled power output;
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from the second year to the 24th year, the actual annual power output decline of the module will be no more than 0.7%; and
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by the end of the 25th year, the actual power output of the module will be no less than 80% of the labeled power output.
In
recent years, we have lengthened this warranty against decline in performance to 30 years for our Dymond module and bifacial module products.
We
believe that 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
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products
have not been and cannot be tested in an environment simulating the up-to-30-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 30 years after the sale of our products.
For
solar power projects built by us, we also 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.
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 (after adjusting for actual solar irradiation). 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 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. 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.
Our annual solar cell, solar wafer and ingot production capacity was 6.3 GW, 5.0 GW and 1.65 GW, respectively, as of
December 31, 2018. 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 these areas 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 result in no yield or cause 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.
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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 modules, cells,
ingots and wafers can cause a percentage of the solar modules, cells, ingots 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, tornados, droughts, power losses and similar events beyond our control that would affect our
facilities. A disruption in any step of 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
qualified technical 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 qualified 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 16.9%, 27.7% and 31.9% of our net revenues in 2016, 2017 and 2018, 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:
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reduced, delayed or cancelled orders from one or more of our significant customers;
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the loss of one or more of our significant customers;
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a significant customer's failure to pay for our products on time; and
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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.
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There are a limited number of purchasers of utility scale quantities of electricity and entities that have
the ability to interconnect projects to the grid, 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, normally 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, 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 solar power plants should this become necessary. Additionally, these possible purchasers
may have a role in connecting our projects to the grid to allow the flow of electricity. Furthermore, if the financial condition of these utilities and/or power purchasers deteriorates, or government
policies or regulations to which they are subject and which compel them to source renewable energy supplies change, demand for electricity produced by our plants or the ability to connect to the grid
could be negatively impacted. For example, Pacific Gas and Electric Company, or PG&E, a California-based utility and customer that has entered into interconnection agreements, or IAs, and PPAs with
us, recently filed for bankruptcy protection. The IAs require PG&E to, among
other things, reimburse us for certain network upgrade costs advanced by us during the development of our solar power plants and the PPAs require PG&E to, among other things, pay for certain of the
electricity generated by our solar power plants. Depending on a variety of factors, including future decisions of PG&E and the bankruptcy court, PG&E may not meet, or may be delayed in meeting, its
obligations to us under the IAs and PPAs, which could result in a decrease or delay in our revenues. Any decision by PG&E to meet, or fail to meet, its obligations may also be subject to applicable
regulatory requirements, including those of the Federal Energy Regulatory Commission. 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 could reduce revenues to us from our 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 the PPAs, our
revenues and our decisions regarding development of additional projects in the energy segment may be adversely affected.
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 or death. 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, 2019, Dr. Shawn Qu, our founder, Chairman, President and Chief Executive Officer, beneficially owned
13,887,085 common shares, or 23.4% of our outstanding shares. As a result, Dr. Qu has substantial influence over our business, including decisions regarding mergers and
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acquisition,
consolidations, 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 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
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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, 2019, we had 1,205 patents and 538 patent applications pending in the
PRC for products that contribute a relatively small percentage of our net revenues. We have seven U.S. patents, including one design patent, and five European patents,
including four design patents. We have registered the "Canadian Solar" trademark in the U.S., Australia, Canada, Europe, South Korea, Japan, the United Arab Emirates, Hong Kong, Singapore, India,
Argentina, Brazil, Peru and more than 20 other countries and we have applied for registration of the "Canadian Solar" trademark in a number of other countries. As of March 31, 2019, we
had 69 registered trademarks and 21trademark applications pending in the PRC, and 96registered trademarks and 11 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 damage, 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 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.
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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 U. S. Securities and Exchange Commission, or 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, 2018, 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 we have substantial operations within the PRC and the
PCAOB is currently unable to conduct inspections of the work of our independent registered public accounting firm as it relates to those operations without the approval of the Chinese authorities, our
independent registered public accounting firm is not currently inspected fully by the PCAOB. This lack of PCAOB inspections in the PRC prevents the PCAOB from regularly evaluating our independent
registered public accounting firm's audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
On
May 24, 2013, PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulatory Commission, or the CSRC,
and the Ministry of Finance which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in the United States and China.
On inspection, it appears that the PCAOB continues to be in discussions with the Mainland China regulators CSRC and the Ministry of Finance to permit joint inspections in the PRC of audit firms that
are registered with PCAOB in relation to the audit of and audit Chinese companies that trade on U.S. exchanges. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting
continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. The joint statement reflects a
heightened interest in this issue. However, it remains unclear what further actions the SEC and PCAOB will take and its impact on Chinese companies listed in the U.S..
Inspections
of other firms that the PCAOB has conducted outside the PRC 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. The inability of the PCAOB to conduct full inspections of auditors in the PRC makes it more difficult to evaluate the
effectiveness of our independent registered public accounting firm's audit procedures or quality control procedures as compared to auditors outside the PRC that are subject to PCAOB inspections.
Investors may lose
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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.
In late 2012, the SEC commenced administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley
Act of 2002 against the mainland Chinese affiliates of the "Big Four" accounting firms (including the mainland Chinese affiliate of our independent registered public accounting firm). A first instance
trial of the 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 Chinese
accounting firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On
February 6, 2015, before a review by the Commissioner had taken place, the Chinese accounting firms reached a settlement with the SEC
whereby the proceedings were stayed. Under the settlement, the SEC accepted that future requests by the SEC for the production of documents would normally be made to the CSRC. The Chinese accounting
firms would receive requests matching those under Section 106 of the Sarbanes-Oxley Act of 2002, and would be required to abide by a detailed set of procedures with respect to such requests,
which in substance would require them to facilitate production via the CSRC. The CSRC for its part initiated a procedure whereby, under its supervision and subject to its approval, requested classes
of documents held by the accounting firms could be sanitized of problematic and sensitive content so as to render them capable of being made available by the CSRC to US regulators.
Under
the terms of the settlement, the underlying proceeding against the four PRC-based accounting firms was deemed dismissed with prejudice at the end of four years starting from the
settlement date, which was on February 6, 2019. Despite the final ending of the proceedings, the presumption is that all parties will continue to apply the same procedures: i.e. the SEC
will continue to make its requests for the production of documents to the CSRC, and the CSRC will normally process those requests applying the sanitisation procedure. We cannot predict whether, in
cases where the CSRC does not authorize production of requested documents to the SEC, the SEC will further challenge the four PRC-based accounting firms' compliance with U.S. law. If additional
challenges are imposed on the Chinese affiliates of the "big four" accounting firms, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange
Act.
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 common shares from Nasdaq, or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of
our common shares in the U.S.
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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.
The increase or decrease in tax benefits from local tax bureau could affect our total PRC taxes payments,
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
and December 29, 2018. 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 they satisfy other applicable statutory requirements.
Certain
of our PRC subsidiaries, such as CSI New Energy Holding Co., Ltd., or CSI New Energy Holding, Canadian Solar Manufacturing (Luoyang) Inc., or
CSI Luoyang Manufacturing, were once HNTEs and enjoyed preferential enterprise income tax rates. These benefits have, however, expired. In 2018, only Suzhou Sanysolar Materials
Technology Co., Ltd., or Suzhou Sanysolar, CSI Cells Co., Ltd., or CSI Cells, Canadian Solar Manufacturing (Changshu) Inc., or CSI Changshu Manufacturing, Changshu
Tegu New Material Technology Co., Ltd., or Changshu Tegu, Suzhou Gaochuangte New Energy Development Co., Ltd., or Suzhou Gaochuangte, and Changshu
Tlian Co., Ltd., or Changshu Tlian, were HNTEs and enjoyed preferential enterprise income tax rates.
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, 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 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,
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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 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.
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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.
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, the approval of or the record-filing with, certain
government authorities, including the Ministry of Commerce or its local counterparts, is required. 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 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.
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
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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, 2017, the market price of our common shares ranged from $1.95 to $51.8 per share. From January 1,
2018 to December 31, 2018, the market price of our common shares ranged from $11.37 to $17.97 per share. The closing market price of our common shares on December 31, 2018 was $14.34 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, projected 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.
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, 2018, we had 59,180,624 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 debt financing, we have issued warrants and may issue additional warrants to purchase our common shares. To the extent these warrants are exercised and the common shares sold into
the market, the market price of our common shares could decline.
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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 of 1933, or 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. 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. 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.
If a United States person is treated as owning at least 10% of our shares, such person may be subject to
adverse United States federal income tax consequences.
If a United States person is treated as owning (directly, indirectly or constructively) at least 10% of the value or voting power of our shares,
such person may be treated as a "United States shareholder" with respect to each "controlled foreign corporation," or CFC, in our group. Where our group includes one or more United States
subsidiaries, in certain circumstances we could be treated as a CFC and certain of our non-United States subsidiaries could be treated as CFCs (regardless of whether we are
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or
are not treated as a CFC). We believe we and certain of our non-United States subsidiaries may be treated as CFCs for our taxable year ended December 31, 2018.
A
United States shareholder of a CFC may be required to annually report and include in its United States taxable income its pro rata share of "Subpart F income," "global
intangible low-taxed income" and investments in United States property by CFCs, whether or not we make any distributions. An individual that is a United States shareholder with respect to a CFC
generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a United States shareholder that is a United States corporation. A failure to comply with these
reporting obligations may subject a United States shareholder to significant monetary penalties and may prevent starting of the statute of limitations with respect to such shareholder's United States
federal income tax return for the year for which reporting was due. We do not intend to monitor whether we or any of our non-United States subsidiaries are treated as CFCs or whether any investor is
treated as a United States shareholder with respect to us or any of our CFC subsidiaries or to furnish to any United States shareholders information that may be necessary to comply with the
aforementioned reporting and tax paying obligations. A United States investor should consult its own advisor regarding the potential application of these rules in its particular circumstances.
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, 2018. However, because our PFIC status for 2019 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, 2019
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 an average
of the quarterly values of the assets) during such year is attributable to assets that produce or are held for the production of passive income. There are exceptions for income derived in the conduct
of certain active businesses, including for income earned from commodities transactions. There is authority to suggest that income earned from our electricity generation business may qualify under the
active business exception, but this authority is unclear. 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.
Changes
in the composition of our income or composition of our assets may cause us to be more likely to be a PFIC. The determination of whether we are 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 our 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. Among other matters, if our market capitalization declines, we may be more likely to be a PFIC because
our liquid assets and cash (which are for this purpose considered assets that produce passive income) may then represent a greater percentage of our overall assets. Further, while we believe our
classification methodology and valuation approach is reasonable, it is possible that the IRS may challenge our
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methodology
or valuation of our goodwill and other unbooked intangibles, which may result in our being or becoming a PFIC for the current or a future taxable year.
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."
ITEM 4.
INFORMATION ON THE COMPANY
A.
History and Development of the Company
Our legal and commercial name is Canadian Solar Inc. We were incorporated under the laws of the Province of Ontario, Canada in October 2001. We
changed our jurisdiction by continuing under the Canadian federal corporate statute, the Canada Business Corporations Act, or CBCA, effective June 1, 2006. As a result, we are governed by the
CBCA. See "C. Organizational Structure" for additional information on our corporate structure, including a list of our major subsidiaries.
Our
principal executive office and principal place of business is located at 545 Speedvale Avenue West, Guelph, Ontario, Canada N1K 1E6. Our telephone number at this
address is (1-519) 837-1881 and our fax number is (1-519) 837-2550. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue,
New York, New York 10011.
All
inquiries to us should be directed at the address and telephone number of our principal executive office set forth above. Our website is www.canadiansolar.com. The information
contained on or accessible through our website does not form part of this annual report.
We
made capital expenditures of $1,111.5 million, $310.7 million and $316.3 million in 2016, 2017 and 2018, respectively. Our capital expenditures were primarily to
maintain and increase our ingot, wafer, cell and module manufacturing capacity and to develop and construct solar power systems. For more details, see "Item 5. Operating and Financial Review
and ProspectsB. Liquidity and Capital ResourcesCapital Expenditures."
Proposed Going-Private Transaction
Our board of directors received a preliminary non-binding proposal letter dated December 9, 2017 from Dr. Qu, our chairman,
president and chief executive officer, to acquire all of our outstanding common shares not owned by Dr. Qu and his wife, in a going private transaction for $18.47 in cash per common share, or
Proposed Transaction.
On
December 12, 2017, our board of directors formed a special committee of independent and disinterested directors, consisting of four independent directors, Messrs. Robert
McDermott, Lars-Eric Johansson, Harry Ruda and Andrew Wong, to consider the Proposed Transaction, with the aid of Barclays Capital Canada Inc. as its independent financial advisor, Weil,
Gotshal & Manges LLP as its U.S. legal counsel and Osler, Hoskin & Harcourt LLP as its Canadian legal counsel.
On
November 5, 2018, the special committee recommend to our board that the special committee be dissolved and that our board cease its review of the Proposed Transaction and not
undertake a review of any future "going private" transaction proposed by Dr. Qu unless the board receives reasonable evidence that the future transaction is fully financed.
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B.
Business Overview
Overview
We are one of the world's largest solar power companies and a leading vertically-integrated provider of solar power products, services and
system solutions with operations in North America, South America, Europe, Africa, the Middle East, Australia and Asia.
We
design, develop and manufacture solar ingots, wafers, cells, modules and other solar power products. Our solar power products include standard solar modules and specialty solar
products. We are incorporated in Canada and conduct most of our manufacturing operations in China and south-east Asia. Our products include a range of solar modules built to general specifications for
use in a wide range of residential, commercial and industrial solar power generation systems. Specialty solar products consist of customized solar modules that our customers incorporate into their own
products and complete specialty products, such as portable solar home systems. We sell our products primarily under our "Canadian Solar" brand name.
In
recent years, we have increased our investment in, and management attention on, our energy segment. Our energy segment primarily comprises solar power project development and sale,
operating solar power projects and sales of electricity. Our energy segment contributed 3.8%, 20.0% and 42.1% of our net revenues in 2016, 2017 and 2018, respectively. While we plan to continue to
monetize our current portfolio of solar power projects in operation, we also intend to grow our energy segment by building up our project pipeline and increasing the EPC services which we provide to
customers. In March 2015, we acquired Recurrent Energy, LLC, or Recurrent, a leading solar energy developer with solar power projects located principally in California and Texas, and
thereby significantly increased our solar project pipeline. As of February 28, 2019, our late-stage solar project pipeline, which refers to projects that have FITs or PPAs and which are
expected to be built within the next two to four years, totaled approximately 2.9 gigawatt peak, or GWp, with 1,210 megawatt peak, or MWp, in the U.S., 476.2 MWp in Brazil,
368 MWp in Mexico, 295.1 MWp in Japan, 100 MWp in China and additional 450.1 MWp in Australia, Argentina, Canada, Taiwan, the Philippines, India, Malaysia, Italy and South
Korea. In addition to our late-stage solar project pipeline, as of February 28, 2019, we had a portfolio of solar power projects in operation totaling 986.3 MWp with an estimated resale
value of approximately $1.2 billion. For those projects that are subject to U.S. tax equity deals, only the value of the class B shares held by us was included in such estimate of
resale value. See "Sales, Marketing and CustomersEnergy SegmentSolar Project Development and Sale" and "Sales, Marketing and
CustomersEnergy SegmentOperating Solar Power Projects and Sales of Electricity" for a description of the status of our solar power projects in operation.
We
believe that we offer one of the broadest crystalline silicon solar power product lines in the industry. Our product lines range from modules of medium power output to high
efficiency, high-power output multi-crystalline and mono-crystalline modules, as well as a range of specialty products. We currently sell our products to a diverse customer base in various markets
worldwide, including China, Japan, the U.S., Germany, Brazil, Netherlands, Australia, U.A.E, Canada, India and the United Kingdom. Our customers are primarily distributors, system integrators,
project developers and installers/EPC companies.
We
employ a flexible vertically integrated business model that combines internal manufacturing capacity with direct material purchases of both cells and wafers. We believe this approach
has benefited us by lowering the cost of materials of our solar module products. We also believe that this approach provides us with greater flexibility to respond to short-term demand increases.
As
of December 31, 2018, we had:
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-
8.88 GW of total annual solar module manufacturing capacity, approximately 1.35 MW of which is located in South East Asia, 50MW
in Brazil and the rest in China;
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-
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6.3 GW of total annual solar cell manufacturing capacity, approximately 1.3 GW of which is located in South East Asia and the
rest in China;
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5.0 GW of total annual wafer manufacturing capacity located in China; and
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1.65 GW of total annual ingot manufacturing capacity located in China.
We
plan to expand our module and cell manufacturing capacities to 11.2 GW and 9.3 GW, respectively, by December 31, 2019.
We
intend to use substantially all of the silicon wafers that we manufacture to supply our own solar cell plants and to use substantially all of the solar cells that we manufacture to
produce our own solar module products. We also intend to use some of the solar modules we produce in our energy segment. Our solar module manufacturing costs in China, including purchased polysilicon,
wafers and cells, decreased from $0.33 per watt in December 2016, to $0.32 per watt in December 2017 and to $0.20 per watt in December 2018. We expect to continue to
decrease the manufacturing costs for our production of wafers, cells and modules.
We
continue to focus on reducing our manufacturing costs by improving solar cell conversion efficiency, enhancing manufacturing yields and reducing raw material costs. In
January 2009, we established a new solar cell efficiency research center to develop more efficient cell structures, and we have been making ongoing improvements in solar cell conversion
efficiency and product cost control. We began shipping new products, such as higher efficiency modules, in late 2011. We have successfully developed and launched additional new high-efficiency cells
and modules in the past few years and expect to increase the sales volumes of these products in the future.
Our Products and Services
Our business consists of the following two business segments: MSS segment and energy segment. Our MSS segment primarily involves the design,
development, manufacturing and sale of a wide range of solar power products, including standard solar modules, specialty solar products and solar system kits. The MSS segment also provides EPC and O&M
services. Our energy segment primarily consists of solar power project development and sale, operating solar power projects and sales of electricity.
Products Offered in Our MSS Segment
Our standard solar modules are arrays of interconnected solar cells in weatherproof encapsulation. We produce a wide variety of standard solar
modules, ranging from 3W to over 410W in power and using multi-crystalline or mono-crystalline cells in several different design patterns, including shingled cells. Our mainstream solar modules
include standard CS6K(60 full cells), CS6U(72 full cells), CS3K(120 half-cells), CS3U(144 half-cells), Dymond CS6X-P-FG(72 full cells, double-glass), Dymond
CS3U-P-FG(144 half-cells, double-glass), BiKu CS3U-B-FG(144 half-cells, bifacial), HiKu CS3W(144 half-cells), HiDM CS1H(60 format, shingled cells) modules, and HiKu which
utilizes the industry's first 166mmx166mm sized multi-crystalline solar wafers and achieves over 400W.
The mainstream modules are designed for residential, commercial and utility applications. The small modules are for specialty applications.
We
launched our Quartech modules in March 2013. Quartech modules use 4-busbar solar cell technology which improves module reliability and efficiency. CS6P
(6 × 10 cell layout) Quartech modules have power output between 255 W and 270 W, which enables us to offer customers modules with high power. We launched and
started shipping Dymond modules in October 2014. Dymond modules are designed with double-glass encapsulation, which is more reliable for harsh environments and ready for 1500V
solar systems.
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We
launched and started shipping SmartDC modules in September 2015. SmartDC modules feature an innovative integration of our module technology and power optimization for grid-tied
PV applications. By replacing the traditional junction-box, SmartDC modules eliminate module power mismatch, mitigate shading losses and optimize power output at module-level. SmartDC modules also
provide module-level data to minimize operational costs and to permit effective system management.
In
March 2016, we launched our new Quintech SuperPower mono-crystalline modules. Quintech SuperPower mono-crystalline modules are made of cells with PERC technology and
significantly improve module efficiency and reliability. CS6K (6 × 10 cell layout aligned with mainstream dimensions) Quintech SuperPower mono modules have a power output
between 285 W and 300 W with high efficiency and high reliability. We started commercial production of Quintech CS6K and CS6U modules in 2016. These modules have features such as
5 busbar cells, standardized module dimensions and cell and module improvements, resulting in higher wattage production and better performance. These modules are intended for broad base
introduction, which covers mono-crystalline cells, multi-crystalline cells and mono-crystalline PERC cells.
At
the beginning of 2015, we started commercial production of Onyx cells with our in-house developed black silicon technology, Onyx technology. Onyx technology employs a nano-texturing
process to make the multi-crystalline cell almost fully black, increasing cell efficiency and module wattage at the same time. We started increasing the production volume of Onyx cells in 2016, which
have been incorporated into our Quartech and Quintech module families.
In
July 2016, we launched the 1500V System Voltage crystalline solar module portfolio. The 1500V System Voltage crystalline module provides a robust and cost-efficient system
solution by adding more modules in a string, which decreases the number of combiner boxes, direct current homeruns and trenching. This unique product design improves the overall system performance and
efficiency and reduces labor cost and installation time.
In
2017, we launched the Ku module series which results in 100% improvement in failure redundancy with innovative cell matrix interconnection technology. The module power output is
enhanced by up to 10 Watt per module while reducing the module working temperature. We developed P4 cell technology, which is multi-crystalline PERC technology. The combination of
P4 cell and Ku module technologies enable us to offer customer higher wattage and more reliable multi crystalline module products. We also launched and shipped HDM (High Density Module)
product to some markets this year. The HDM offers high wattage, high module efficiency and pleasant aesthetics for residential applications.
In
2018, we launched the BiKu modules which are bifacial designed and can generate additional electricity from the backside of the module. These modules have more shading tolerance and a
much lower hot spot risk thanks to the innovative design on the bifacial cell and double glass module. At the end of 2018, we began the mass production of the HiKu module, the first commercially
available multi-crystalline module exceeding 400 watts with significant leveraged cost of energy, or LCOE, advantages. In 2018, we launched the HiDM module, which is an upgrade of the HDM
module and uses shingled cells to increase both module wattage and efficiency. We also launched P5 technology, which is based on casted mono technology developed in house, and will boost cell
and module efficiencies close to mono while retaining all the advantages of multi technology, such as LID, LeTID and lower cost.
Our
standard solar modules are designed to endure harsh weather conditions and to be transported and installed easily. We sell our standard solar modules primarily under our
brand name.
Our specialty solar products are mainly solar inverters, energy storage systems, or ESS, Maple solar systems, and solar pump systems.
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Solar inverters are on grid inverters to generate electricity from solar modules. Our inverter products cover 1.5kW to 60kW power levels and are available in
13 regions and countries globally.
ESS
works together with rooftop solar power systems to guarantee 24-hour electric power supply. Our 5kW CAMEL, an all-in-one energy storage system, is designed with compactly integrated
appearance, and supports 5.7 kWh LFP, or lithium iron phosphate, batteries with long life time. Our 3kW/5kW CAMEL Split energy storage system comprises a separate hybrid inverter and compatible
LFP batteries. The Split ESS provides more flexible installation.
The
Maple solar system is an economical, safe and clean energy solution for families who burn kerosene for lighting. The Maple solar system includes a solar panel, energy-efficient
light-emitting diode, or LED, lights, Li-ion batteries and multiple cell phone charger plugs. It can be used as a regular light at home or for camping, as a SOS signal in emergency, and as a mobile
power bank for consumer electronics, such as mobile phones or other 5 V DC electronic devices.
The
solar pump system is designed to provide convenient water for areas lacking electricity and water. It is mainly constructed with PV modules, a mounting structure, combiner box,
inverter, water pump, float switch and water tank. By taking advantage of renewable solar energy, it is environmental-friendly, efficient and economical for various water lifting applications such as
irrigation, desertification control, livestock breeding, water diversion and mountain afforestation.
A solar system kit is a ready-to-install package consisting of solar modules produced by us and components, such as inverters, racking system
and other accessories, supplied by third parties. We began selling solar system kits in 2010 and in 2018 sold them primarily to customers in Japan, Europe and China.
Our MSS segment started to provide EPC services in 2018. And our MSS segment provided EPC services in Australia market in 2018. Our O&M services
include inspections, repair and replacement of plant equipment and site management and administrative support services for solar power projects in operation. We started to provide O&M services in the
second half of 2012. In 2018, we provided O&M services primarily in the North American, Europe, Australia and Japan markets.
Products and Services Offered in Our Energy Segment
We develop, build and sell solar power projects. Our solar project development activities have grown over the past several years through a
combination of organic growth and acquisitions. Our global solar power project business develops projects primarily in Canada, Japan, the U.S., China, Brazil, India, Mexico, the United Kingdom
and Australia. We have a team of experts who specialize in project development, evaluations, system designs, engineering, managing, project coordination and organizing financing. Our project sales
team actively identifies and pursues suitable buyers for our solar power projects. See "Sales, Marketing and CustomersEnergy SegmentSolar Project Development and
Sale" for a description of the status of our solar power projects.
We operate certain of our solar plants and generate income from the sale of electricity. Although most of our solar power projects are developed
for sale, we may operate them for a period of time before they are sold. As of February 28, 2019, we had a fleet of solar power plants in operation with an aggregate capacity of approximately
986.3 MWp.
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Supply Chain Management
MSS Segment
Our MSS segment depends on our ability to obtain a stable and cost-effective supply of polysilicon, solar ingots, wafers and cells. Our silicon
wafer agreements set forth price and quantity information, delivery terms and technical specifications. While these agreements usually set forth specific price terms, most of them also include
mechanisms to adjust the prices, either upwards or downwards, based on market conditions. Over the years, we have entered into a number of long-term supply agreements with various silicon and wafer
suppliers in order to secure a stable supply of raw materials to meet our production requirements. These suppliers included GCL, Deutsche Solar and LDK. 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 are 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. In 2018, we purchased a significant portion of the silicon wafers used in our solar modules from third parties. Our
largest silicon wafer supplier was GCL, and we have recently extended our silicon wafer purchase contract with GCL through 2019. Since 2011, the supply of polysilicon and silicon wafers has generally
exceeded demand. This is particularly true for polysilicon. Polysilicon prices decreased from approximately $20.6 per kilogram at December 31, 2014 to $13.7 per kilogram at December 31,
2015; increased starting in the third quarter of 2016, reaching approximately $19.7 per kilogram by December 31, 2017, but decreased significantly to $9.0 per kilogram by December 31,
2018. We plan to continue to diversify our external wafer and polysilicon suppliers.
We
purchase solar cells from a number of international and local suppliers, in addition to manufacturing our own solar cells and having toll manufacturing arrangements with our solar
cell suppliers. Our solar cell agreements set forth price and quantity information, delivery terms and technical specifications. These agreements generally provide for a period of time during which we
can inspect the product and request the seller to make replacements for damaged goods. We generally require the seller to bear the costs and risks of transporting solar cells until they have been
delivered to the location specified in the agreement. In 2018, our largest supplier of solar cells was Inventec. As we expand our business, we expect to increase our solar cell manufacturing capacity
and diversify our solar cell supply channel to ensure we have the flexibility to adapt to future changes in the supply of, and demand for, solar cells.
For
risks relating to the long-term agreements with our raw material suppliers, see "Item 3. Key InformationD. Risk FactorsRisks Related to Our Company
and Our IndustryLong-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."
Energy Segment
Our MSS segment supplies part of the solar modules used in our energy segment. For the solar power projects that we develop, we have the option
of either using our own engineering and operation teams or hiring third-party contractors to build and operate the projects prior to sale.
Manufacturing, Construction and Operation
MSS Segment
We assemble our solar modules by interconnecting multiple solar cells by tabbing and stringing them into a desired electrical configuration. We
lay the interconnected cells, laminate them in a
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vacuum,
cure them by heating and package them in a protective lightweight anodized aluminum frame. We seal and weatherproof our solar modules to withstand high levels of ultraviolet radiation,
moisture and extreme temperatures.
We
selectively use automated equipment to enhance the quality and consistency of our finished products and to improve the efficiency of our manufacturing processes. Key equipment in our
manufacturing process includes automatic laminators, simulators and solar cell testers. The design of our assembly lines provides flexibility to adjust the ratio of automated equipment to skilled
labor in order to maximize quality and efficiency.
Energy Segment
We develop, construct, maintain, sell and/or operate solar power projects primarily in Canada, Japan, the U.S., China, Brazil, India, Mexico,
the United Kingdom and Australia. We engage in all aspects of the development and operation of solar power projects, including project selection, design, permitting, engineering, procurement,
construction, installation, monitoring, operation and maintenance. We also provide EPC services to third-parties.
Our
solar power projects development process primarily consists of the following stages:
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Market due diligence and project selection.
We search for project
opportunities globally with the goal of maintaining a robust and geographically diversified project portfolio. Our business team closely monitors the global solar power projects market and gathers
market intelligence to identify project development opportunities. Our development team prepares market analysis reports, financial models and feasibility studies to guide us in evaluating and
selecting solar power projects. As we consider undertaking new solar power projects, we weigh a number of factors including location, local policies and regulatory environment, financing costs and
potential internal rate of returns.
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Project financing.
We typically include project financing plans in our
financial models and feasibility studies. We finance our projects through our working capital and debt financing from local banks or international financing sources that require us to pledge
project assets.
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Permitting and approval.
We either obtain the permits and approvals
necessary for solar projects ourselves or we acquire projects that have already received the necessary permits and approvals. The permitting and approval process for solar power projects varies from
country to country and often from region to region within a country.
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Project design, engineering, procurement and construction.
Our engineering
team generally designs solar power projects to optimize performance while minimizing construction and operational costs and risks. The engineering design process includes the site layout and
electrical design as well choosing the appropriate technology, in particular module and inverter types. We use solar modules produced by us and by third-party manufacturers, and procure inverters and
other equipment from third-party suppliers. In China, we generally construct solar projects through Gaochuangte, our affiliate in which we owned a 40% equity interest before June 30, 2017 and
an 80% owned subsidiary since July 1, 2017.
Currently,
we operate and maintain solar power plants primarily in the U. S., China, Japan, India and Mexico. We enter into grid-connection agreements and/or PPAs with the local grid
companies. After a project is connected to the grid, we regularly inspect, monitor and manage the project site with the intention to maximize the utilization rate, rate of power generation and system
life of the project.
We
operate a monitoring center in Guelph, Ontario, Canada, which adopts the global monitoring platform (CSEye) to manage system alarms and reports. Our proprietary algorithms analyze the
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performance
of the third party power plants that we operate and maintain on a daily basis and identify potential problems. For example, they raise alarms when inverters or strings are
under-performing.