UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

 

FORM 20-F

 

 

 

¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: December 31, 2016

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

¨SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report       

 

For the transition period from         to       

 

Commission file number: 1- 33208

 

 

 

HANWHA Q CELLS CO., LTD.

(Exact name of Registrant as specified in its charter)

 

 

 

Not Applicable   Cayman Islands
(Translation of Registrant’s name into English)   (Jurisdiction of Incorporation or Organization)

 

Hanwha Building, 86 Cheonggyecheon-ro, Jung-gu, Seoul, Korea

(Address of Principal Executive Offices)

 

Mr. Jung Pyo Seo

Chief Financial Officer

Telephone: +82-2-729-2930

Fax: +82-2-729-1372

Hanwha Building,

86 Cheonggyecheon-ro,

Jung-gu, Seoul, Korea

(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

American Depositary Shares

Ordinary Shares, par value $0.0001 per share

  Nasdaq Global Market

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

4,181,107,925 Ordinary Shares, par value $0.0001 per share, as of December 31, 2016

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨Yes x No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ¨ Yes x No

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

  

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
    Emerging growth company ¨

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP x  

International Financial Reporting Standards as issued

by the International Accounting Standards Board ¨

  Other ¨

 

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

Item 17 ¨ Item 18 ¨

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12,13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ¨ Yes ¨ No

 

 

 

 

Table of Contents

 

ITEM 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS 6
ITEM 2 OFFER STATISTICS AND EXPECTED TIMETABLE 6
ITEM 3 KEY INFORMATION 6
ITEM 4 INFORMATION ON THE COMPANY 38
ITEM 4A UNRESOLVED STAFF COMMENTS 56
ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS 56
ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 80
ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 91
ITEM 8 FINANCIAL INFORMATION 95
ITEM 9 THE OFFER AND LISTING 100
ITEM 10 ADDITIONAL INFORMATION 101
ITEM 11 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 108
ITEM 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 109
ITEM 13 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 110
ITEM 14 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 110
ITEM 15 CONTROLS AND PROCEDURES 110
ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT 112
ITEM 16B CODE OF ETHICS 112
ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES 112
ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 113
ITEM 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 113
ITEM 16F CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 114
ITEM 16G CORPORATE GOVERNANCE 114
ITEM 16H MINE SAFETY DISCLOSURE 115
ITEM 17 FINANCIAL STATEMENTS 116
ITEM 18 FINANCIAL STATEMENTS 116
ITEM 19 EXHIBITS 116

 

 2 

 

 

INTRODUCTION

 

Unless otherwise indicated, references in this annual report to:

 

  · “ADSs” are to American depositary shares, each of which represents fifty ordinary shares. Effective as of June 15, 2015, we changed the ratio of the ADSs to ordinary shares from one ADS representing five ordinary shares to one ADS representing fifty ordinary shares. The number and ratio of the ADSs to ordinary shares has been adjusted retrospectively for all periods presented in this annual report to reflect the current ratio of the ADSs to ordinary shares of one ADS representing fifty ordinary shares;

 

  · “AUD” are to Australian Dollar, the official currency of Australia;

 

  · “BNEF” are to Bloomberg New Energy Finance;

 

  · “BSF” are to the back surface field;

 

  · “China” or the “PRC” are to the People’s Republic of China, excluding, for the purpose of this annual report only, Taiwan and the special administrative regions of Hong Kong and Macau;

 

  · “conversion efficiency” are to the ability of photovoltaic (“PV”) products to convert sunlight into electricity, and “conversion efficiency rates” are commonly used in the PV industry to measure the percentage of light energy from the sun that is actually converted into electricity;

 

  · “cost per watt” are to the method by which the cost of PV products are commonly measured in the PV industry. A PV product is priced based on the number of watts of electricity it can generate;

  

  · “EUR” are to Euros, the official currency of the European Union;

 

  · “GW” are to gigawatt, representing 1,000,000,000 watts, a unit of power-generating capacity or consumption;

 

  · “Hanwha Chemical” are to Hanwha Chemical Corporation, a corporation with limited liability incorporated under the laws of Korea, which owns 100% of Hanwha Solar;

 

  · “Hanwha Q CELLS Hong Kong” are to Hanwha Q CELLS Hong Kong Limited;

 

  · “Hanwha Q CELLS Qidong” are to Hanwha Q CELLS (Qidong) Co., Ltd., our wholly-owned operating subsidiary in China;

 

  · “Hanwha Solar” are to Hanwha Solar Holdings Co., Ltd., a holding company incorporated in the Cayman Islands that currently owns approximately 94.0% of our outstanding ordinary shares;

 

  · “Hanwha SolarOne” are to Hanwha SolarOne Co., Ltd., our previous name prior to our name change in February 2015 to Hanwha Q CELLS Co., Ltd., and its consolidated subsidiaries, without including Q CELLS, which will be used to describe historical results of operations and financial condition of Hanwha SolarOne Co., Ltd and its consolidated subsidiaries prior to the acquisition of Q CELLS;

 

  · “JPY” are to the legal currency of Japan;

 

 3 

 

  

  · “Korea” are to the Republic of Korea;

 

  · “KRW” are to the legal currency of the Republic of Korea;

 

  · “MW” refers to megawatt, representing 1,000,000 watts, a unit of power-generating capacity or consumption;

 

  · “MYR” are to the legal currency of Malaysia;

 

  · “PERC” are to the passivated emitter rear contact;

 

  · “PID” are to potential induced degradation, which is a phenomenon that occurs when ions are driven between the semiconductor material and other elements of the module (e.g., glass, mount and frame), causing the module’s power output capacity to degrade faster than the standard impairment rate.

 

  · “PV” are to photovoltaic. The photovoltaic effect is a process by which sunlight is converted into electricity;

 

  · “RMB” and “Renminbi” are to the legal currency of China;

 

  · “series A convertible preference shares” are to our series A convertible preference shares, par value $0.0001 per share;

 

  · “shares” or “ordinary shares” are to our ordinary shares, par value $0.0001 per share. For the purpose of computing and reporting our outstanding ordinary shares and our basic or diluted earnings per share we do not consider outstanding: (i) the remaining 20,062,348 ordinary shares we issued to Hanwha Solar in connection with Hanwha Solar’s purchase of 36,455,089 ordinary shares of our company in September 2010 and (ii) the ADSs which have been reserved by our company to allow for the participation in the ADS program by our employees pursuant to our equity incentive plans from time to time;

 

  · “Q CELLS” are to Hanwha Q CELLS Investment Co., Ltd., a holding company incorporated in the Cayman Islands, and its consolidated subsidiaries, including Hanwha Q CELLS GmbH, Hanwha Q CELLS Malaysia Sdn. Bhd. and Hanwha Q CELLS Australia Pty Ltd., collectively; it does not include certain affiliates that have “Q CELLS” in their names, including Hanwha Q CELLS Japan Co., Ltd., Hanwha Q CELLS USA Corp. and Hanwha Q CELLS Korea Corp., which are not consolidated subsidiaries of Hanwha Q CELLS Investment Co., Ltd. and have not been acquired by us;

 

  · “W” are to watt, a unit of power-generating capacity or consumption;

 

  · “we,” “us,” “our,” “our company,” the “company,” the “Group” and “Hanwha Q CELLS” refer to Hanwha Q CELLS Co., Ltd., formerly known as Hanwha SolarOne, and its consolidated subsidiaries; and

 

  · “$” and “U.S. dollars” are to the legal currency of the United States.

 

On December 26, 2006, we completed our initial public offering and listed the ADSs on the Nasdaq Global Market, which are traded under the symbol “HQCL.”

 

On January 29, 2008, we offered $172.5 million 3.50% convertible senior notes due 2018 (“2018 Convertible Notes”), to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (“Securities Act”), and received net proceeds of $167.9 million. Concurrently with the offering of these convertible notes, we offered 901,961 ADSs, representing 45,098,055 ordinary shares, to facilitate the convertible notes offering. We did not receive any proceeds, other than the par value of the ADSs, from such offering of ADSs. A portion of these ADSs were subsequently repurchased as described below.

 

From July 17, 2008 to August 12, 2008, we issued and sold 542,109 ADSs with an aggregate sale price of $73.9 million.

 

 4 

 

 

From September 17, 2009 to November 18, 2009, we issued and sold 388,839 ADSs with an aggregate sale price of $23.1 million.

 

In September 2010, we issued and sold to Hanwha Solar 36,455,089 ordinary shares for an aggregate sale price of $78.2 million. Concurrently with this offering, we issued 30,672,689 ordinary shares to Hanwha Solar at par value of the ordinary shares and subsequently issued an additional 14,407,330 ordinary shares at par value, which shares were to remain outstanding so long as and to the extent that the 901,961 ADSs we issued to facilitate our convertible notes offering in January 2008 remain outstanding. A portion of these ordinary shares were subsequently repurchased as described below. At the same time, Hanwha Solar completed the acquisitions from Good Energies II LP and Yonghua Solar Power Investment Holding Ltd., the company owned by Mr. Yonghua Lu, our former chairman, of a total of 120,407,700 ordinary shares and 128,101 ADSs of our company, representing all of the ordinary shares and ADSs held by them. Hanwha Solar, a holding company incorporated in the Cayman Islands, is a wholly-owned subsidiary of Hanwha Chemical, a leading chemical producer publicly traded on the Korea Exchange whose principal activities are the production of chemical, solar energy, construction, automotive and electronic materials and products.

 

In November 2010, we issued and sold 920,000 ADSs with an aggregate sale price of $82.8 million. In order for Hanwha Solar to maintain after this offering the same level of beneficial ownership in our company before this offering, we also issued and sold to Hanwha Solar 45,981,604 ordinary shares for an aggregate sale price of $82.8 million.

 

In October 2011, we repurchased and cancelled 500,554 ADSs and the ordinary shares represented by such ADSs, which were issued pursuant to a share issuance and repurchase agreement, dated January 23, 2008, to facilitate our convertible notes offering in January 2008, from Morgan Stanley & Co. International PLC. We also repurchased and cancelled 25,017,671 ordinary shares, which were issued pursuant to a share issuance and repurchase agreement dated September 16, 2010, from Hanwha Solar. These ADSs and ordinary shares were repurchased at par value of $0.005 per ADS and $0.0001 per ordinary share.

 

In 2012, we repurchased our 2018 convertible notes in a total principal amount of $71.9 million.

 

From November 15, 2013 to January 29, 2014, we issued and sold 671,696 ADSs with an aggregate sale price of $21.5 million.

 

In January and April 2015, we repurchased our 2018 convertible notes in a total principal amount of $86,075,000 pursuant to the holders’ exercise of the put right under the terms of the 2018 convertible notes. After these repurchases pursuant to the exercise of the put right, none of the 2018 convertible notes remains outstanding.

 

In February 2015, we issued 3,701,145,330 ordinary shares to Hanwha Solar in exchange for the transfer of 100% of the outstanding share capital of Q CELLS by Hanwha Solar to us and Q CELLS became a wholly-owned subsidiary of us. As a result of the transaction, Hanwha Solar’s ownership of our ordinary shares increased from approximately 45.7% to approximately 94.0%. In connection with the transaction, we changed our name from “Hanwha SolarOne Co., Ltd.” to “Hanwha Q CELLS Co., Ltd.” and our ticker from “HSOL” to “HQCL” on February 9, 2015.

 

 

 5 

 

 

PART I

 

ITEM 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

 

Not applicable.

 

ITEM 2 OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3 KEY INFORMATION

 

A. Selected Financial Data

 

Following the consummation of the combination of Hanwha SolarOne and Q CELLS on February 6, 2015, Q CELLS was determined as the accounting acquirer in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations.” Consequently, the financial statements of Q CELLS are treated as our historical financial statements for all periods prior to the consummation of the combination of Hanwha SolarOne and Q CELLS on February 6, 2015.

 

The following selected consolidated financial data have been derived from our and Q CELLS’ audited consolidated financial statements. Our selected consolidated statement of operations data for the years ended December 31, 2015 and 2016 and our consolidated balance sheet data as of December 31, 2015 and 2016 have been derived from our audited consolidated financial statements for the years ended December 31, 2015 and 2016 included elsewhere in this annual report. Q CELLS’ selected consolidated statement of operations data for the year ended December 31, 2014 has been derived from its audited consolidated financial statements for the relevant periods included elsewhere in this annual report. Q CELLS’ selected consolidated statement of operations data for the period from September 12, 2012 to December 31, 2012 and the year ended December 31, 2013 and its consolidated balance sheet date as of December 31, 2012, December 31, 2013 and December 31, 2014 have been derived from its audited consolidated financial statements, which is not included or incorporated by reference in this annual report.

 

The following selected consolidated financial information are qualified by reference to our and Q CELLS’ financial statements referred to above and the related notes. Our and Q CELLS’ consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results do not necessarily indicate our results expected for any future periods. 

 

 6 

 

  

   From   Year Ended December 31, 
   September 12
to December
31, 2012(1)
   2013   2014   2015   2016 
   Q CELLS   Q CELLS   Q CELLS   Hanwha Q
CELLS(2)
   Hanwha Q
CELLS
 
   ($)   ($)   ($)   ($)   ($) 
   (In millions, except number of shares and per share data) 
Consolidated Statements of Operations Data                         
Net revenues  $65.6   $530.1   $773.1   $1,800.8   $2,425.9 
Cost of revenues   72.3    451.7    653.2    1,466.8    1,985.6 
Gross profit   (6.7)   78.4    119.9    334.0    440.3 
Operating expenses   23.6    111.9    107.0    256.1    248.2 
Operating income (loss)   (30.3)   (33.5)   12.9    77.9    192.1 
Income (loss) before income taxes   (18.9)   (47.6)   4.4    53.9    123.2 
Income tax expense (benefit)       0.4    1.4    10.1    (4.3)
Net income (loss)   (18.9)   (48.0)   3.0    43.8    127.5 
Net income (loss) per share (diluted)   (0.02)   (0.03)   0.00    0.01    0.03 
Basic number of shares    1,232,949,935    1,693,522,340    3,701,145,330    4,120,689,668    4,159,297,541 

 

 

(1) Q CELLS was incorporated on September 12, 2012 and commenced its operations on October 16, 2012 following the acquisition of business from Q Cells SE, which was in the bankruptcy proceedings. Therefore, the results of operations of Q CELLS for 2012 (as described herein) covers only the period between September 12, 2012 (the date of the incorporation) and December 31, 2012 and, as such, are not comparable to the results of operations of Q CELLS in the subsequent periods.

 

(2) Our results of operations for 2015 represent Q CELLS’ (but not Hanwha SolarOne’s) results of operations for the period from January 1, 2015 to February 5, 2015 and our consolidated results of operations for the period from February 6, 2015 to December 31, 2015 following the consummation of the combination of Hanwha SolarOne and Q CELLS on February 6, 2015.

 

 7 

 

  

   As of December 31, 
   2012   2013   2014   2015   2016 
   Q CELLS   Q CELLS   Q CELLS   Hanwha Q
CELLS
   Hanwha Q
CELLS
 
   ($)   ($)   ($)   ($)   ($) 
   (In millions) 
Consolidated Balance Sheet Data                         
Cash and cash equivalents  $61.9   $257.7   $156.7   $200.0   $390.0 
Other current assets   146.4    340.4    427.8    1,370.7    961.5 
Total current assets   208.3    598.1    584.7    1,570.7    1,351.5 
Property, plant, and equipment   160.5    144.9    147.8    877.3    755.5 
Other non-current assets   33.4    28.4    33.7    99.5    102.1 
Total non-current assets   193.9    173.3    181.5    976.8    857.6 
Total assets   402.2    771.4    766.2    2,547.5    2,209.1 
                          
Short-term borrowings, current portion of long-term borrowings and current portion of obligations under capital leases   31.0    10.7    8.0    416.7    527.9 
Other current liabilities   98.0    262.9    226.6    1,113.8    602.4 
Total current liabilities   129.0    273.6    234.8    1,530.5    1,130.3 
Long-term borrowings and long-term notes, net of current portion   156.2    210.6    283.5    653.5    643.7 
Other long-term liabilities   23.0    19.8    18.2    23.3    26.9 
Total long-term liabilities   179.2    230.5    301.7    676.8    670.6 
Total liabilities   308.2    504.1    536.5    2,207.3    1,800.9 
Total stockholders’ equity   93.9    267.4    229.7    340.2    408.2 
Total liabilities and stockholders’ equity  $402.2   $771.4   $766.2   $2,547.5    2,209.1 

 

Other Financial Data

 

   Year Ended December 31, 
   2013   2014   2015   2016 
   Q CELLS   Q CELLS   Hanwha Q
CELLS
   Hanwha Q
CELLS
 
Gross margin   14.8%   15.5%   18.5%   18.1%
Operating margin   (6.3)%   1.7%   4.3%   7.9%
Net margin   (9.1)%   0.4%   2.4%   5.3%

 

   Year Ended December 31, 
   2013   2014   2015   2016 
   Q CELLS   Q CELLS   Hanwha Q
CELLS
   Hanwha Q
CELLS
 
   ($)   ($)   ($)   ($) 
   (In millions) 
Depreciation, amortization and impairment  $35.6   $37.4   $83.3   $94.1 
Acquisition of fixed assets and intangible assets  $15.4   $45.6   $200.0   $174.9 

 

 8 

 

 

Other Operating Data

 

   Year Ended December 31, 
   2013   2014   2015   2016 
   Q CELLS   Q CELLS   Hanwha Q
CELLS
   Hanwha Q
CELLS
 
   (MW)   (MW)   (MW)   (MW) 
Amount of PV modules shipped   622.8    967.1    2,956.1    4,583.0 

 

   Year Ended December 31, 
   2013   2014   2015   2016 
   Q CELLS   Q CELLS   Hanwha Q
CELLS
   Hanwha Q
CELLS
 
   ($/W)   ($/W)   ($/W)   ($/W) 
Average selling price of PV modules  $0.75   $0.72   $0.58   $0.53 

 

B. Capitalization and Indebtedness

 

Not Applicable.

 

C. Reasons for the Offer and Use of Proceeds

 

Not Applicable.

 

D. Risk Factors 

 

Risks Related to Our Business and Industry

 

Global demand for our PV products and associated average selling price of our PV products have been, and may continue to be, adversely affected by volatile market and industry trends.

 

Demand for our PV products has been affected by global economic conditions, capital markets fluctuations and availability of government subsidies. Although solar power generation has reached grid parity in certain markets, the economic feasibility of solar power still depends substantially on government policies toward the renewable energy industry, which can cause unexpected changes in demand and fluctuation in pricing within and between end markets. For example, in the United States, a major solar market, solar PV projects face great uncertainties after the recent presidential election and change of administration, which has been focused on conventional and fossil-fuel based energy solutions.

 

In the second half of 2016, the PV industry experienced a significant decline in average selling prices for PV products, as compared to the first half of 2016 due to a sharp collapse in demand in the China market, which triggered a cascading sharp decline in average selling prices across global markets. In addition, many tier-1 PV companies, including us, installed a significant amount of new cell and module production capacity, thereby creating an oversupply, which resulted in reductions in the prevailing market prices of PV products. The current oversupply condition is anticipated to last throughout this year, and if demand for PV products does not grow sufficiently to absorb the current oversupply, our revenue and profitability may be adversely affected. As a result, we may continue to be unprofitable in the next few quarters and for the full year basis.

 

Increases in the prices of raw materials, including polysilicon and silicon wafers, may adversely impact our business and results of operations.

 

Raw materials used in the production of solar cells and modules include silicon-related materials, silver paste and aluminum frames, among others. Among them, silicon-related materials such as polysilicon and silicon wafers are the most important raw materials and highest cost items used in the production of our PV products. Prior to mid-2008, there was an industry-wide shortage of polysilicon. In late 2008 and 2009, however, newly available polysilicon capacity has significantly increased supply of polysilicon, which resulted in a downward pricing trend for polysilicon. According to BNEF, spot prices for polysilicon ranged between $12.76 per kilogram and $17.66 per kilogram, ending the year at $14.97 per kilogram as of December 26, 2016.

 

While we anticipate the uptrend of polysilicon price in the fourth quarter of 2016 will be more subdued in 2017, as it has dropped by 6.4% to $14.01 per kilogram in the first quarter of 2017, there is no guarantee that the price of polysilicon will continue to decline or remain at its current levels, especially if the global solar power market regains its growth momentum. Increases in the price of polysilicon have in the past increased our production costs, and any significant price increase in the future may adversely affect our business and results of operations.

 

 9 

 

 

The reduction or elimination of government subsidies and economic incentives for solar energy applications could have a material adverse effect on our business and prospects.

 

The growth of the market for solar energy and PV products depends in large part on the availability and size of government subsidies and economic incentives. The reduction or elimination of government subsidies and economic incentives may adversely impact the growth of the solar energy and PV products markets, which could decrease demand for our products and reduce our revenue.

 

Despite increased levels of solar penetration in many markets, the pure generation cost of solar energy currently exceeds the marginal cost of power furnished by the fossil-energy-fueled electric utility grid in many countries. As a result, federal, state and local governmental bodies in many countries, most notably Japan, the United States, China, Germany, the United Kingdom and France, have provided subsidies and economic incentives in the form of rebates, tax credits and other incentives to end users, distributors, system integrators and manufacturers of PV products to promote the use of solar energy and to reduce dependency on conventional sources of energy generation. However, a number of these government economic incentives are set to be reduced and may be reduced further, or eliminated, for political, financial or other reasons, which will be difficult for us to predict. For instance, in line with the falling levelized cost of electricity (LCOE), the German government continuously reduced feed-in tariffs since 2009. With residential LCOE of approximately 0.10 €/kWh PV electricity in Germany is now considerably cheaper than consuming electricity from the grid (0.27 €/kWh-0.31 €/kWh). Only excess electricity is supplied to the grid at a feed-in tariff of approximately 0.12 €/kWh. The Japanese government reduced feed-in tariffs applicable to systems of 10 kW or more from JPY32 per kWh for the fiscal year of 2014 to JPY21 per kWh for the fiscal year of 2017. For systems of 10 kW or less, the feed-in tariff rate per kWh was reduced from JPY37 for the fiscal year of 2014 to JPY28 per kWh, or JPY30, if obligated to use an output control system, for the fiscal year of 2017. See “Item 4. Information on the Company—B. Business Overview—Regulation”. Japan and Germany accounted for 11.7% and 1.8% of our net revenues in 2016, respectively.

 

Political changes or fiscal difficulties in a particular country could result in significant reductions or eliminations of subsidies or economic incentives. For example, the results of the 2016 United States presidential election may create regulatory uncertainty in the renewable energy industry, including the solar energy industry, and our business, financial condition, and results of operations could be adversely affected as a result. Members of the current United States administration have made public statements that indicate that the administration may not be supportive of various clean energy programs and initiatives designed to curtail climate change, and that it may be supportive of reducing the corporate tax rate and overturning or modifying policies of or regulations enacted by the prior administration that placed limitations on coal and gas electricity generation, mining, and/or exploration. The United States accounted for 51.6% of our net revenues in 2016.

 

If we are unable to compete in the highly competitive PV market, our revenue and profits may decrease and we may lose market share.

 

The PV market is highly competitive and we face competition from a number of global PV companies, such as JinkoSolar Holding Co., Ltd., Canadian Solar Inc., Trina Solar Limited, JA Solar Holdings Co., Ltd., First Solar, Inc. and SunPower Corporation. We believe that the principal competitive factors in the markets for our PV cells and modules are:

 

  · price;

 

  · product offerings and quality of products including conversion efficiency;

 

  · strength of supply chain and distribution network;

 

  · manufacturing capacity and capacity utilization;

 

  · manufacturing cost;

 

  · corporate financial stability;

 

  · after-sales services; and

 

  · brand name recognition.

 

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Some of our current and potential competitors may have longer operating histories, access to larger customer bases and resources and greater economies of scale than we do. In particular, many of our competitors are developing and manufacturing solar energy products based on new technologies that may ultimately have costs similar to, or lower than, our projected costs. In addition, our competitors may be able to respond more quickly to changing customer demands or devote more resources to the development, promotion and sales of their products than we can. Furthermore, competitors with more diversified product offerings may be better positioned to withstand a fluctuation in the demand for PV products.

 

In addition, our competitors owned or controlled by local persons or entities may be more competitive when obtaining government support, local financing or otherwise expanding in the respective local markets. It is possible that new competitors or alliances among existing competitors could emerge and rapidly acquire significant market share, which would adversely affect our business. If we fail to compete successfully, our business would suffer and we may lose or be unable to gain market share and our financial condition and results of operations would be materially and adversely affected.

 

Declines in the prices of other energy sources, including oil and natural gas, could have a material adverse effect on the demand for PV products and our business and prospects.

 

The PV market in general competes with conventional power generation as well as other sources of renewable energy. Electricity is generated from a variety of sources, primarily including coal, natural gas, hydro power, nuclear power, oil and wind. The demand for PV products are affected by the prices of these fossil fuels and other renewable energy resources. Prices of some of these energy resources, in particular oil and natural gas, have historically shown significant volatility due to various factors, including global economic conditions and demand for energy resources, the level of investment by government and private enterprises in exploration and production activities and the degree of success of such activities in increasing the global supply, government regulations and policies concerning the energy sector and political developments in resource-producing countries or regions.

 

For example, the market prices of oil and natural gas significantly declined in 2014 and 2015 due to, among other factors, an increase in supply from shale explorations in the United States, as well as continued high level of production in the Middle East and Russia, and weak global economic conditions for growth. While market prices of oil and natural gas noticeably rebounded in 2016, they are still below pre-2014 prices. Any further decline in the prices of oil and natural gas could negatively affect the demand for PV products by reducing the cost of generating electricity from these sources and by undermining government and public support for the use of renewable energy sources.

 

If prices for conventional and other renewable energy resources decline or if these resources enjoy greater policy support than solar power, the PV market and our business and prospects could be materially and adversely affected.

 

Our success depends on our ability to respond to rapid market changes in the PV industry by developing new technologies and offering additional products and services, which could expose us to a number of risks and uncertainties.

 

The PV industry is characterized by rapid changes in the diversity and complexity of technologies, products and services. In particular, the ongoing evolution of technological standards requires products with improved features, such as higher cell efficiency, higher module power output and improved aesthetics. As a result, we expect that we will need to continuously develop or obtain access to more advanced technologies in order for us to respond to competitive market conditions and customer demands. In addition, such advanced technologies typically lead to declining average selling prices for products using older technologies or make our current products less competitive or obsolete. As a result, the profitability of any given product, and our overall profitability, may decrease over time.

 

In addition, we will need to invest significant financial resources in research and development to maintain our competitiveness and keep pace with technological advances in the PV industry. However, commercial acceptance by customers of new products we offer may not occur at the rate or level that we anticipate, and we may not be able to successfully enhance existing products to effectively and economically meet customer demands, thus impairing the return from our investments. We may also be required under the applicable accounting standards to recognize a charge for the impairment of assets to the extent our existing products become uncompetitive or obsolete, or if any new products fail to achieve commercial acceptance. Any such charge may have a material adverse effect on our financial condition and results of operations.

 

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If we are not able to bring quality products and services to market in a timely and cost-effective manner and successfully market and sell these products and services, our ability to continue increasing market share, as well as our results of operations and profitability, will be materially and adversely affected.

 

Existing regulations and policies governing the electric utility industry, as well as changes to regulations and policies affecting PV products, may adversely affect the demand for our products and materially reduce our revenue and profit.

 

The electric utility industry is subject to extensive regulation and the market for PV products is heavily influenced by these regulations, as well as the policies promulgated by electric utilities. These regulations and policies often affect electricity pricing and technical interconnection of end-user power generation. As the market for solar and other alternative energy sources continues to evolve, these regulations and policies are being modified and may continue to be modified. Customer purchases of solar and other alternative energy sources may be significantly affected by these regulations and policies, which could significantly reduce demand for our products and materially reduce our revenue and profit.

 

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Moreover, we expect that our PV products and their installation will be subject to oversight and regulation in accordance with national and local ordinances relating to building codes, safety, environmental protection, utility interconnection and metering and related matters in various countries. We also have to comply with the requirements of individual localities and design equipment to comply with varying standards applicable in the jurisdictions where we conduct business. Any new government regulations or utility policies pertaining to our PV products may result in significant additional expenses to us, our distributors and end users and, as a result, could cause a significant reduction in demand for our PV products, as well as materially and adversely affect our financial condition and results of operations.

 

Changes in international trade policies and international barriers to trade may materially and adversely affect our ability to export our products worldwide.

 

In response to increasing trade tensions in the international solar market, especially in the United States and the European Union solar markets, we are undertaking efforts to avoid or alleviate the impacts from the present and foreseeable anti-dumping and countervailing duty proceedings. However, we cannot guarantee that these efforts will be successful due to potential policy changes or other changes in the activities and practices of the various national trade authorities responsible for enforcement of anti-dumping and countervailing duties. We note below major anti-dumping and countervailing duty proceedings and other restrictive practices relevant to us in the United States and the European Union:

 

United States. In October 2011, a trade action was filed with the U.S. Department of Commerce (“USDOC”) and the U.S. International Trade Commission (“USITC”) by SolarWorld Americas, Inc., formerly known as SolarWorld Industries America, Inc. until October 2014, accusing Chinese producers of crystalline silicon photovoltaic (“CSPV”) cells of selling their products produced in China into the United States at less than fair value, or dumping, and of receiving countervailable subsidies from the Chinese authorities. 

 

On October 9, 2012, the USDOC issued final affirmative determinations in the anti-dumping and countervailing duty investigations. On November 7, 2012, the USITC ruled that imports of CSPV cells from Chinese producers had caused material injury to the U.S. CSPV industry. Finally, on December 7, 2012, the USDOC issued anti-dumping and countervailing duty orders. Consequently, imports of solar panels from Hanwha Q CELLS Qidong are subject to a combined effective anti-dumping and countervailing duty deposit rate of 29.18%, of which 15.24% is attributable to the countervailing duty. Imports of solar panels from Hanwha Q CELLS Hong Kong were subject to a combined effective rate of 254.66%, which is comprised of an anti-dumping duty of 239.42% and a countervailing duty of 15.24%.

 

Actual anti-dumping and countervailing duties ultimately due are determined by the USDOC after its review of actual transactions. Such reviews are normally initiated annually in the anniversary month (December) of the publication of the anti-dumping and countervailing duty orders upon request, and covers the preceding one-year period. In December 2013, the U.S. CSPV industry requested administrative reviews in both the anti-dumping and countervailing duty cases and the resulting reviews were initiated by the USDOC on February 3, 2014. The U.S. CSPV industry requested that Hanwha Q CELLS Qidong be reviewed in both the anti-dumping and countervailing duty cases.

 

In the course of those reviews, based on the USDOC’s regulations, the U.S. CSPV industry withdrew its requests for the anti-dumping and countervailing duty reviews of Hanwha Q CELLS Qidong. Consequently, its anti-dumping and countervailing duty rates remained unchanged and the previous anti-dumping duty deposits paid on entries into the United States made from May 25, 2012 to November 30, 2013 were to be liquidated at the deposit rate in effect at the time of entry. Similarly, countervailing duty deposits paid on entries into the United States made from March 26 to December 31, 2012 were to be liquidated at the deposit rate in effect at the time of entry. Additionally, the USDOC was not requested to review Hanwha Q CELLS Qidong’s anti-dumping duty entries made during the period from December 1, 2013 to November 30, 2015 or of its countervailing duty entries made during the period from January 1, 2013 to December 31, 2014. Consequently, these entries were to be liquidated at the deposit rates in effect at the time of entry.

 

On December 31, 2013, SolarWorld Americas, Inc. filed new anti-dumping cases against similar CSPV products from China and Taiwan and a new countervailing duty case against China. These new cases sought anti-dumping and countervailing duties against (i) CSPV products with cells with any stage of production in China, if the cells are assembled in China, regardless of the country of origin of the cells, and (ii) CSPV products containing cells of Taiwanese origin. The USDOC and USITC initiated investigations on January 21, 2014.

 

 

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In its final determinations in these investigations, the USDOC found that PRC and Taiwanese exporters were selling subject CSPV products to the United States at less than fair value (the “Anti-Dumping Investigation”) and/or that PRC exporters were receiving actionable subsidies (the “Countervailing Investigation”). The USITC published its final determination on February 10, 2015 that the U.S. CSPV industry was materially injured as a result of these imports, and the USDOC published final orders on February 18, 2015, requiring importers of subject CSPV products, including products imported from Hanwha Q CELLS Qidong and Hanwha Q CELLS Hong Kong, to pay anti-dumping duty and/or countervailing duty deposits for their entries of subject CSPV products into the United States.

 

In connection with the USDOC’s Anti-Dumping Investigation of subject CSPV products from China, the USDOC applied an anti-dumping duty deposit rate of 52.13% to Hanwha Q CELLS Qidong and Hanwha Q CELLS Hong Kong as “separate rate” companies, based on the USDOC’s findings with respect to the other Chinese exporters selected for individual examination. In connection with the USDOC’s Anti-Dumping Investigation of subject CSPV products from Taiwan, the USDOC applied an anti-dumping duty deposit rate of 19.50% to Hanwha Q CELLS Qidong and Hanwha Q CELLS Hong Kong as “all other” companies, based on the USDOC’s findings with respect to other Taiwanese exporters selected for individual examination. Moreover, in connection with the Countervailing Investigation and final order, the USDOC applied a countervailing duty deposit rate of 38.43% to Hanwha Q CELLS Qidong and Hanwha Q CELLS Hong Kong as “all-other” companies, which is based on the USDOC’s findings with respect to the other Chinese exporters selected for individual examination.

 

Moreover, entries of subject CSPV products made before the USITC’s final determination are potentially subject to different anti-dumping and countervailing duty rates than those identified in the USDOC final orders. In connection with the Countervailing Investigation, U.S. Customs and Border Protection (“CBP”) has continued to suspend liquidation of unliquidated countervailing duty deposits of 26.89% for entries of subject cells from the PRC entering the United States on or after June 10, 2014 (the date on which USDOC published its preliminary countervailing duty determination) but before October 8, 2014 (the date on which USDOC instructed CBP to discontinue the suspension of liquidation). 

 

Similarly, in connection with the Anti-Dumping Investigations, CBP will continue to suspend liquidation of unliquidated anti-dumping duty deposits of 42.33% for entries of CSPV products from China and 24.23% for entries of CSPV products from Taiwan entering the United States on or after July 31, 2014 (the date on which USDOC published its preliminary anti-dumping duty determination) but before January 28, 2015 (the date provisional measures expires).

 

Because Hanwha Q CELLS Qidong and Hanwha Q CELLS Hong Kong are not subject to the first administrative review, which was initiated on April 7, 2016, their entries made during the respective periods subject to the reviews will be liquidated at the deposit rates in effect at the time of entry. The ultimate liability for entries made during these periods (which is the liability of the importer of record) will be assessed based on liquidation instructions issued by the USDOC on July 8, 2016.

 

On March 6, 2017, at Hanwha’s request, the USDOC initiated a “changed circumstances” review, and preliminarily found that Hanwha Q CELLS Qidong is the successor-in-interest to SolarOne Qidong for purposes of the anti-dumping duty orders on solar cells and solar products from the PRC and (a) Q CELLS Hong Kong is the successor-in-interest to SolarOne Hong Kong for purposes of the anti-dumping duty order on solar products from the PRC. If the USDOC’s final results affirm that finding, the successor entities would be entitled to the predecessor entities’ cash deposit rates with respect to U.S. entries of merchandise subject to the orders. As with the preliminary results, the USDOC continues to find that (a) Q CELLS Qidong is the successor-in-interest to SolarOne Qidong for purposes of the anti-dumping duty orders on solar cells and solar products from the PRC; and (b) Q CELLS Hong Kong is the successor-in-interest to SolarOne Hong Kong for purposes of the anti-dumping duty order on solar products from the PRC.

 

The final results, released on April 13, 2017, provide that the USDOC will instruct CBP to suspend liquidation of entries of solar products and solar cells exported by Hanwha Q CELLS Qidong at the anti-dumping duty cash-deposit rates applicable to SolarOne Qidong. Those cash deposit rates are 13.18% and 30.06% respectively. In addition, the USDOC will instruct CBP to suspend liquidation of entries of solar products exported by Q CELLS Hong Kong at the anti-dumping duty cash-deposit rate applicable to SolarOne Hong Kong. That cash deposit rate is 30.06%.

 

With the recent presidential election and change of administration, there is a risk that additional barriers to entry of our products in the United States may be proposed or enacted, whether through legislation or judicial or administrative action. Any such actions could materially and adversely affect our results of operations.

 

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European Union. On September 6 and November 8, 2012, the European Commission initiated an anti-dumping proceeding and an anti-subsidy proceeding concerning imports of CSPV modules and key components, such as cells and wafers, originating in China. On July 27, 2013, the European Union and Chinese trade negotiators announced that an agreement had been reached pursuant to which Chinese manufacturers, including Hanwha SolarOne, would limit the export of solar panels and cells to the European Union and for no less than a minimum price, in exchange for the European Union agreeing to forgo the imposition of anti-dumping duties on these solar panels from China. The offer was approved by the European Commission on August 2, 2013, and the final version was published on December 5, 2013. The Chamber of Commerce for Import and Export of Machinery and Electronic Product of China allocated the quota between PV companies, and Hanwha SolarOne was allocated a portion of the quota, which amounted to 324.73 MW of modules and 7.52 MW of cells in 2014 and 225.73 MW of modules and 5.22 MW of cells in 2015. The duties were imposed for a period of two years. They remained in force while the European Commission carried out an expiry review and other reviews published on December 5, 2015. On March 3, 2017, the European Commission finished the expiry review and concluded that the undertaking and the duties will remain in place for another 18 months. At the same time, the European Commission initiated a new interim review with the goal to change the mechanism by which the minimum import price is derived. The results are expected to be published by December 3, 2017. Solar panels and cells imported in excess of the annual quota will be subject to anti-dumping and anti-subsidy duties. This price undertaking and annual quota have also resolved the parallel anti-subsidy investigation. For companies that violate the price undertaking or the quota, or which do not form part of the agreement, definitive duties will be levied as per the definitive anti-dumping and anti-subsidy regulations that were published on December 5, 2013. Finally, wafers have been excluded from the scope of both the anti-dumping and anti-subsidy measures. In connection with the implementation of the undertaking, the European Commission conducted an on-spot verification at Hanwha Q CELLS Qidong from July 17, 2014 to July 18, 2014 and another on-spot verification at SolarOne GmbH from October 30, 2014 to October 31, 2014. On May 22, 2015, we received communication from the European Commission regarding the verifications confirming our compliance with the undertaking, as well as some further practical instructions. On June 8, 2015, we provided our responses to those instructions and on October 22, 2015 received follow-up questions on some of our responses. On October 30, 2015, we provided clarifications in response to the follow-up inquiry. As of the date of this annual report, we have not received any further written decision from the European Commission regarding the verifications.

 

In May 2015, having determined that sufficient prima facie evidence existed for the initiation of an investigation pursuant to the relevant European Union regulation, the European Commission initiated an investigation of a number of Chinese manufacturers including us, and conducted an anti-circumvention review to ascertain whether a circumvention of anti-dumping and countervailing duty measures imposed by the European Union on imports of PV modules and cells from China, Malaysia and Taiwan has taken place. If the European Commission establishes that the circumvention of the existing anti-dumping and countervailing duty has taken place, the duties will be imposed in respect of imports consigned from Malaysia and Taiwan. The review is not targeted specifically against us. However, in order to ensure that no duties are imposed in respect of products produced at our production facilities in Malaysia, on June 17, 2015, we claimed an exemption from any possible countervailing and anti-dumping duties in respect of the products consigned from Malaysia. On February 12, 2016, the European Commission officially published the outcome of its investigation regarding the possible circumvention of the existing trade defense measures through Malaysia and Taiwan and extended the definitive anti-dumping duty to imports of PV modules and cells from Malaysia and Taiwan, whether declared as originating in Malaysia and in Taiwan or not. While the import duties have generally been imposed on PV modules and cells imported from Malaysia and Taiwan, Hanwha Q CELLS Malaysia Sdn. Bhd., our wholly-owned subsidiary in Malaysia, has been explicitly exempted from this regulation as one of five companies from Malaysia.

 

On December 5, 2015, the European Commission initiated expiry reviews and a partial interim review, with the aim of examining whether the continued imposition of the measures on cells is still in the European Union’s interest, and of the anti-dumping and the countervailing measures applicable to imports of PV modules and cells from China. Given that the European Commission has opened expiry reviews into the measures in force on imports of solar panels from China, the duties, the undertaking and the minimum import price will remain in force until the reviews are finished. Expiry reviews can only keep the measures in force exactly as they are (including the undertaking) or remove the measures altogether. Whereas interim reviews may result in an adoption of certain measures. The European Commission decided to open an interim review at the same time to look at changing the measures in force. The review was opened as there was prima facie evidence that the circumstances on the basis of which the original measures were imposed had changed. Whereas the review was limited to looking at whether it is in the interest of the European Union to maintain the measures currently in force on solar cells.

 

On December 20, 2016, in order to describe details of the proceedings and outline conclusions on the results of the investigations, the European Commission published a general disclosure document on the expiry review and a partial interim review of the countervailing measures applicable to imports of CSPV modules and key components (i.e. cells) originating in or consigned from China. In view of the conclusions reached by the European Commission with regard to the continuation and the likelihood of recurrence of subsidization and of continuation of injury, it followed that, in accordance with Article 18(2) of the basic regulation, the countervailing measures applicable to imports of CSPV modules and key components (i.e. cells) originating in consigned from the PRC, imposed by Regulation (EU) No 1239/2013, should be maintained. Accordingly, the European Commission has proposed the extension of existing trade duties on Chinese solar products for a further two years. On March 3, 2017, the European Commission published in the Official Journal of the European Union its decision that the anti-dumping and anti-subsidy duties on cells and modules imported from China will be extended by 18 months, instead of the originally proposed 24 months.

 

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In addition, it is also possible that anti-dumping duty, countervailing duty or other import restrictive proceedings may be initiated in other jurisdictions. For example, in December 2014, Canada initiated anti-dumping and countervailing duty investigations against certain PV modules and laminates originating in or exported from China. In June 2015, Canada made a final determination imposing anti-dumping and countervailing duties and subjecting our PV modules produced in China to an anti-dumping duty rate of 154.4% and a countervailing duty rate of RMB0.34 per Watt. In another case, the Ministry of Economy of the Republic of Turkey published on July 1, 2016, an initiation notice for an anti-dumping investigation against PV panels and modules originating from China. On April 1, 2017, the Turkish ministry published its final findings and Hanwha Q CELLS Qidong, was assessed an anti-dumping duty of $20 per square meter, and other non-respondents were assessed $25 per square meter.

 

We cannot guarantee that in proceedings involving us, we will get the most favorable anti-dumping duty or countervailing duty rates in comparison with our competitors. In addition, if such proceedings were successfully pursued in jurisdictions where we export the majority of our products, our business, financial condition and results of operations and prospects could be materially and adversely affected. Violations of laws of anti-dumping and countervailing duty can result in significant additional duties imposed on exports of our products into these countries, which could increase our costs of accessing future additional markets.

 

The imposition of anti-dumping or countervailing duties on our raw materials, including polysilicon, could materially increase our cost of production and have a material adverse effect on our business and results of operations.

 

European Union Anti-subsidy. On April 29, 2016, the Ministry of Commerce of the People’s Republic of China released Announcement No.14 of the year, and decided to carry out a final review investigation on the anti-subsidy measures applied to imported solar energy polycrystalline silicon products made in the European Union from May 1, 2016. In accordance with relevant stipulations set out in the People’s Republic of China Anti-subsidy Regulations, the Ministry of Commerce issued questionnaires to relevant interested parties concerning this case on June 3, 2016. Later, the interested parties submitted completed questionnaires. As of the date of this annual report, the case has not yet been finally adjudicated.

 

European Union Anti-dumping. On April 29, 2016, the Ministry of Commerce of the People’s Republic of China released Announcement No. 16 of the year, and decided to carry out a final review investigation on the anti-dumping measures applied to imported solar energy polycrystalline silicon products made in the European Union from May 1, 2016. In accordance with relevant stipulations set out in the People’s Republic of China Anti-dumping Regulations, the Ministry of Commerce issued questionnaires to relevant interested parties concerning this case on June 3, 2016. Later, the interested parties submitted completed questionnaires. As of the date of this annual report, the case has not yet been finally adjudicated.

 

Korea Anti-dumping. On January 20, 2014, the Ministry of Commerce of the People’s Republic of China released Announcement No. 5 of the year, and decided to charge anti-dumping duties on solar energy polycrystalline silicon imported from the United States and Korea from January 20, 2014.

 

On February 14, 2016, Jiangsu Zhongneng Silicon Technology Development Co., Ltd., Jiangxi Saiwei LDK Photovoltaic Silicon Technology Co., Ltd., China Silicon Corporation Ltd. and Chongqing Daquan New Energy Co., Ltd. submitted an application to the Ministry of Commerce, protesting that after the final judgment, the dumping of solar energy polycrystalline silicon exported from Korea to China was strengthened, having exceeded the anti-dumping duty rate decided in the final judgment, and they requested to carry out an interim review on the dumping and dumping range of the anti-dumping measures applied to the solar energy polycrystalline silicon imported from Korea.

 

In light of Article 49 of the People’s Republic of China Anti-Dumping Regulations and relevant stipulations set out in the Provisional Regulations on Interim Review on Dumping and Dumping Range, the Ministry of Commerce carried out a review of relevant information, including the qualification of the applicants, the exporting price and normal value of the product under investigation as well as the necessity of performing anti-dumping measures according to the previous measure level. The Ministry of Commerce requested the industrial applicants in China to supplement relevant evidentiary materials, and the applicants submitted relevant documents within stipulated period.

 

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On November 1, 2016, the Ministry of Commerce informed the Korean Embassy in China of the application for interim review on dumping and dumping range, and transferred the open text of the Application for Interim Review and non-confidential summary of the confidential information. Relevant interested parties submitted comments on the filing of the interim review case.

 

Through review, the Ministry of Commerce considered that the Application complied with the statutory conditions set out in the People’s Republic of China Anti-Dumping Regulations and the Provisional Regulations on Interim Review on Dumping and Dumping Range. On November 22, 2016, the Ministry of Commerce decided to carry out an interim review on dumping and dumping range on the anti-dumping measures applied to the solar energy polycrystalline silicon imported from Korea. As of the date of this annual report, the review remains in process.

 

Any competitive advantage arising from our significant manufacturing capacity outside of China can be reduced if our competitors successfully expand their manufacturing facilities outside of China.

 

We believe one of our competitive strengths is our significant manufacturing capacity outside of China that can effectively address potential risks arising from the current trade disputes between China and the United States or the European Union. However, some of our key competitors, including Trina Solar Limited, JinkoSolar Holding Co., Ltd. and Canadian Solar, Inc., have expanded their manufacturing facilities outside of China as a means to circumvent potentially adverse effects from anti-dumping and countervailing duties imposed on PV products manufactured in China. If these recently commissioned solar manufacturing facilities are completed successfully and achieve a competitive manufacturing cost, our competitive advantage of having significant manufacturing capacity outside of China may be reduced.

 

A recent petition filed with the U.S. International Trade Commission calling for new tariffs on solar cells and minimum prices for solar modules imported from outside the United States could harm our ability to sell our products inside the United States, and thereby materially and adversely affect our business prospects, results of operations and financial condition.

 

On April 26, 2017, Suniva, Inc., a U.S. corporation that has filed for bankruptcy protection, filed a petition with U.S. International Trade Commission (“ITC”), calling for new tariffs on solar cells and minimum prices for solar modules imported into the United States from anywhere in the world.

 

The petitioner is seeking duties of 40 cents per watt on imported cells and a floor price of 78 cents per watt on modules.

 

The petition was filed under Section 201 under The United States Trade Act of 1974, 19 U.S.C. § 2251. Under the statute, after a petition is filed, the ITC has 120 days to review. The ITC must generally make its finding within 120 days of receipt of a Section 201 petition, and must transmit its report to the President of the United States, together with any relief recommendations, within 180 days after receipt of the petition. If the ITC finding is affirmative, it must recommend a remedy to the President, who determines what action, if any, will be taken. No assurances can be given as to the outcome of the proceedings, which could include tariff increases, minimum prices and quantitative restrictions. If tariffs are imposed on those solar cells and modules manufactured in Malaysia and Korea that we import into the United States, our ability to sell those products inside the United States would be impaired, thereby materially and adversely affecting our business prospects, results of operations and financial condition.

 

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Our future success substantially depends on our ability to manage our production effectively, improve our product quality and reduce our manufacturing costs. Our ability to achieve such goals is subject to a number of risks and uncertainties.

 

Our future success substantially depends on our ability to manage our production effectively, improve our product quality and reduce our manufacturing costs. Our efforts to reduce our manufacturing costs include lowering our silicon and auxiliary material costs and improving manufacturing productivity and processes, which may require us to achieve economies of scale by expanding our manufacturing capacity. However, we may not be able to expand our manufacturing capacity as planned, if we encounter unanticipated difficulties such as any failure to obtain the necessary financing or government approval. Even if we do expand our manufacturing capacity, there may not be sufficient customer demand for our solar power products to support our increased production levels. In that case, the overall utilization rate of our production facility will decline, which would negatively impact our profit.

 

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We have, in the past, halted expansion in response to reduced demand. For example, one of our subsidiaries, Hanwha Q CELLS Technology Co., Ltd. (“Hanwha Q CELLS Technology”), owns approximately 639,785 square meters of land which is currently undeveloped. If such land is identified by competent government agencies as idle land under the applicable PRC laws, Hanwha Q CELLS Technology may be subject to a fine of up to 20% of the land premium of such land or, if the land is determined to be idle for over two years, the relevant government agencies may reclaim the land. As of the date of this annual report, we have not received any official complaint or notice regarding this land from relevant government agencies. In addition, since we have halted expansion, our construction plans have been adversely affected and we may need to negotiate with the construction company to develop a new construction plan. If we are unable to reach a resolution, we may be engaged in legal proceedings to resolve the dispute.

 

We also continue to explore ways to improve the quality of our PV products including the improvement of conversion efficiency rates of our PV products. Additional research and development efforts will be required before our products in development may be manufactured and sold at a commercially viable level. We cannot guarantee that such efforts will improve the efficiency of manufacturing processes or yield improved products that are commercially viable.

 

If we are unable to achieve these goals, we may be unable to decrease our costs per watt, maintain our competitive position or improve our operating margins. Our ability to achieve such goals is subject to significant risks and uncertainties, including:

 

  · our ability to maintain our quality level and keep pace with changes in technology;

 

  · our ability to source various raw materials on reasonable terms and timely basis;

 

  · our ability to adjust inventory levels to respond to rapidly changing market demand;

 

  · our ability to successfully utilize our assets to meet opportunities without incurring excessive costs;

 

  · delays in obtaining or denial of required approvals by relevant government authorities; and

 

  · diversion of significant management attention and other resources to other matters.

 

If we are unable to establish or successfully make improvements to our manufacturing facilities, improve our product quality or reduce our manufacturing costs, or if we encounter any of the risks described above, we may be unable to improve our business as planned.

  

We depend on a limited number of customers and countries for a high percentage of our revenues and the loss of, or a significant reduction in orders from, any of these customers or countries, if not immediately replaced, would significantly reduce our revenue and decrease our operating margins.

 

We currently sell a substantial portion of our PV products and services to a limited number of customers and countries. Customers that accounted for a significant portion of our total net revenues in 2016 included NextEra Energy Resources, LLC, Hanwha Q CELLS Japan Co., Ltd., Hanwha Q CELLS Korea Corp., Clenera, LLC, Adani Group, Azure Power, Capital Dynamics, SolarCity, Renew Akshay Urja Private Limited and SunEnergy1, LLC. Our five largest customers accounted for an aggregate of 55.8% of our net revenues in 2016.

 

In 2016, the United States, Japan, India and Turkey accounted for 51.6%, 11.7%, 9.6% and 7.4% of our net revenues, respectively, and were the top four countries in terms of percentage contribution to our net revenues. The loss of sales to any one of these customers or countries would have a significant negative impact on our business.

 

Sales to our customers are mostly made through non-exclusive arrangements. Any one of the following events may cause material fluctuations or declines in our net revenues and have a material adverse effect on our financial condition and results of operations:

 

  · reduction, delay or cancellation of orders from one or more of our significant customers;

 

  · selection by one or more of our significant customers of our competitors’ products;

 

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  · loss of one or more of our significant customers and our failure to identify additional or replacement customers, including as a result of the insolvency or bankruptcy of our customers;

 

  · any adverse change in local policies toward solar projects in countries where we receive most orders;

 

  · any adverse change in the bilateral or multilateral trade relationships among China, Malaysia, Korea, Japan, the United States and European countries, particularly Germany;

 

  · any duty imposed on import of PV products as a result of anti-dumping measures or other measures against unfair trade practices; and

 

  · failure of any of our significant customers to make timely payment for our products.

 

We expect our operating results to continue to depend on sales to a relatively small number of customers or countries for a high percentage of our revenue for the foreseeable future, as well as the ability of these customers to sell PV products and services that incorporate our PV products.

 

Furthermore, our customer relationships have been developed over a relatively short period of time. We cannot be certain that these customers will continue to generate significant revenue for us in the future or if these customer relationships will continue to develop. If our relationships with customers do not continue to develop, we may not be able to expand our customer base or maintain or increase our customers and revenue.

 

We may be unable to collect payments from our customers on a timely basis or at all. If such collection problems occur, our business may suffer and our results of operations may be materially and adversely affected.

 

We face payment collection difficulties with respect to certain customers. For example, on June 8, 2012, we submitted an arbitration request to the Guangzhou Arbitration Commission requiring Guangdong Guo Hua New Energy Investment Co., Ltd. (“Guo Hua”), the owner of a PV project for which we acted as an engineering, procurement and construction (“EPC”) contractor, to pay a total amount of RMB92 million ($14.2 million) for overdue payment of the EPC contract price, accrued interest, damages and legal costs in accordance with the EPC contract. On August 5, 2012, Guo Hua filed a counterclaim to the Guangzhou Arbitration Commission alleging that we substantially breached the EPC contract, and Guo Hua requested termination of the EPC contract and demanded us to pay a total amount of approximately RMB187 million ($28.9 million) for breach of contract. On September 11, 2014, the Guangzhou Arbitration Commission issued their arbitral award which dismissed Guo Hua’s counterclaim for approximately RMB187 million and ordered Guo Hua to pay us RMB78.2 million ($12.1 million) plus interest for late payment at the rate of 8.33% per month since December 20, 2010 until the RMB78.2 million is fully paid. On January 13, 2015, we filed an application to the Guangdong Heyuan Court to enforce such arbitral award, and two days later, the Guangdong Heyuan Court ordered Guo Hua to perform its obligations under the arbitral award. Guo Hua failed to do so. On December 7, 2015, the Guangdong Heyuan Court ordered the evaluation and auction of Guo Hua’s assets to enforce the arbitral award. As of the date of this annual report, the evaluation is still on-going. We are also claiming that Guo Hua’s shareholders should be held jointly liable for a part of the arbitral award. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal and Administrative Proceedings”. There is no assurance that we will prevail in similar claims against our customers for payment collections and if we fail to succeed in such claims, we may not be able to recover the fees due to us, which may have a material adverse effect on our results of operations.

 

We enter into framework agreements with many of our customers that set forth our customers’ purchase goals and the general conditions under which our sales are to be made. However, such framework agreements are only binding to the extent a purchase order for a specific amount of our products is issued. In addition, certain key sales terms of the framework agreements may be adjusted from time to time, and we have in the past re-negotiated some of our framework agreements which enabled us to address, without resorting to formal disputes, disagreements with our customers relating to the volume, delivery schedules and pricing terms contained in such agreements. However, it may not always be in our best interests to re-negotiate our framework agreements and disagreements on terms may escalate into formal disputes that could cause us to experience order cancellations or harm our reputation.

 

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Our dependence on a limited number of suppliers for a substantial majority of silicon-related materials may prevent us from delivering our products in a timely manner to our customers in the required quantities, which could result in order cancellations, decreased revenue and loss of market share.

 

In 2016, our three largest silicon materials suppliers supplied in the aggregate 77.4% of our total silicon materials purchases. Currently, our principal silicon wafer suppliers include GCL Silicon Technology Holdings Limited, HuanTai Silicon Science & Technology Co. Ltd. and Green Energy Technology, Inc. If we fail to develop or maintain our relationships with these or our other suppliers and we are unable to obtain these materials from alternative sources in a timely manner or on commercially reasonable terms, we may be unable to manufacture our products in a timely manner or at a reasonable cost, or at all, and as a result, we may not be able to deliver our products to our customers in the required quantities, at competitive prices and on acceptable terms of delivery. Problems of this kind could cause us to experience order cancellations, increased manufacturing costs, decreased revenue and loss of market share. In addition, some of our suppliers have a limited operating history and limited financial resources, and the contracts we entered into with these suppliers do not clearly provide for adequate remedies to us in the event any of these suppliers is not able to, or otherwise does not, deliver, in a timely manner or at all, any materials it is contractually obligated to deliver. Suppliers typically require a significant amount of capital to fund their operating activities, expand their manufacturing facilities, and conduct research and development activities. The inability of our suppliers to access capital or the insolvency of our suppliers could lead to their failure to deliver silicon materials to us. Any disruption in the supply of silicon materials to us may adversely affect our business, financial condition and results of operations.

 

Our failure to obtain sufficient quantities of silicon-related materials in a timely manner could disrupt our operations, prevent us from operating at full capacity or limit our ability to expand as planned, which would reduce, and limit the growth of, our manufacturing output and revenue.

 

We depend on the timely delivery by our suppliers of silicon-related materials in sufficient volumes. Until mid-2008, there was an industry-wide shortage of silicon-related materials. Currently, the market is experiencing an over-capacity of silicon-related materials. While we do not believe a shortage of silicon-related materials will reoccur in the short term because of current market conditions and the expansion of silicon and silicon wafer manufacturing capacity in recent years, we cannot guarantee that market conditions will not again rapidly change or we will always be able to obtain sufficient quantities of silicon-related materials in a timely manner and at commercially reasonable prices. We may experience actual shortages of silicon-related materials or late or failed delivery for the following reasons:

 

  · the terms of our silicon and silicon wafer contracts with, or purchase orders to, our suppliers may be altered or cancelled as a result of our ongoing re-negotiations with them;

 

  · there are a limited number of silicon and silicon wafer suppliers, and many of our competitors also purchase silicon-related materials from these suppliers and may have longer and stronger relationship with these suppliers than we do;

 

  · some of our silicon and silicon wafer suppliers do not manufacture silicon themselves, but instead purchase their requirements from other vendors. It is possible that these suppliers will not be able to obtain sufficient silicon or silicon wafers to satisfy their contractual obligations to us; and

 

  · our purchase of silicon-related materials is subject to the business risk of our suppliers, one or more of which may go out of business for any one of a number of reasons beyond our control in the current economic environment.

 

If we fail to obtain delivery of silicon-related materials in amounts and according to time schedules that we expect, we may be forced to reduce production, which will adversely affect our revenues. Our failure to obtain the required amounts of silicon-related materials on time and at commercially reasonable prices could substantially limit our ability to meet our contractual obligations to deliver PV products to our customers. Any failure by us to meet such obligations could have a material adverse effect on our reputation, retention of customers, market share, business and results of operations and may subject us to claims from our customers and other disputes.

 

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We currently have a significant amount of debt outstanding and may incur additional indebtedness. Our substantial indebtedness may limit our future financing capabilities and could adversely affect our business, financial condition and results of operations.

 

The principal amount of our total bank borrowings outstanding was $947.2 million as of December 31, 2016 of which $377.4 million were short-term bank borrowings and $149.8 million were the current portion of long-term bank borrowings. In addition, we had $100.0 million in long-term notes and MYR 838 million ($186.9 million, translated at the foreign exchange rate of $0.223 per one MYR) in principal amount of long-term loan from the Malaysian government with a book value of $124.4 million as of December 31, 2016. We may also incur additional indebtedness. Our debt could have a significant impact on our future operations and cash flow, including:

 

  · making it more difficult for us to fulfill payment and other obligations under our outstanding debt;

 

  · triggering an event of default, if we fail to comply with any of our payment or other obligations contained in our debt agreements and fail to obtain waivers, which could result in a cross-default causing all or a substantial portion of our debt to become immediately due and payable and other penalties;

 

  · reducing the availability of cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes, and adversely affecting our ability to obtain additional financing for these purposes; and

 

  · potentially increasing the cost of any additional financing.

 

Our ability to meet our payment and other obligations under our outstanding debt depends on our ability to generate cash flow in the future or to refinance such debt. We may not be able to generate sufficient cash flow from operations to enable us to meet our obligations under our outstanding debt and to fund other liquidity needs. If we are not able to generate sufficient cash flow to meet such obligations, we may need to refinance or restructure our debt, sell our assets, reduce or delay our capital investments, or seek additional equity or debt financing. We cannot guarantee that future financing will be available in amounts or on terms acceptable to us, if at all. In addition, the incurrence of additional indebtedness would result in increased interest rate risk and debt service obligations, and could result in operating and financing covenants that would further restrict our operations and limit our ability to obtain the financing required to fund future capital expenditures and working capital. As a result, our ability to plan for, or react effectively to, changing market conditions may be adversely and materially affected.

 

In addition, a significant portion of our outstanding debt has been guaranteed by Hanwha Chemical in the past. However, the ability of Hanwha Chemical to guarantee our future financings is subject to various uncertainties, including its own financial condition and potential regulatory restrictions. If Hanwha Chemical cannot guarantee our future financings, our ability to obtain external financing could be adversely affected.

 

We require a significant amount of capital to fund our operations as well as meet future capital and investment requirements. If we cannot obtain additional capital when we need it, our operations, growth prospects and future profitability may be materially and adversely affected.

 

We typically require a significant amount of capital to fund our operations. We expect that our capital expenditures in 2017 would amount to approximately $50 million, which will be primarily used to fund manufacturing technology upgrades and research and development. We also require cash generally to meet future capital requirements, which are difficult to plan in the rapidly changing PV industry. While we plan to fund our future capital and investment requirements with cash from operations, bank borrowings and other forms of financing, if necessary, we cannot guarantee that future financing will be available on satisfactory terms, or at all. Our ability to obtain external financing in the future is subject to a variety of uncertainties, including:

 

  · our future financial condition, results of operations and cash flows;

 

  · general market conditions for financing activities by manufacturers of PV and related products; and

 

  · economic, political and other conditions in the PRC, Korea, the United States, Germany, Malaysia and elsewhere in the world.

  

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If we are unable to obtain necessary financing in a timely manner or on commercially acceptable terms, or at all, our growth prospects and future profitability may decrease materially.

 

Certain of our loan agreements and other debt instruments contain financial covenants that require the borrower or its guarantor to maintain certain financial ratios, and the failure to maintain such ratios could result in the acceleration of the maturity of our debt.

 

Certain of our subsidiaries have outstanding bank loans and other debt instruments that require such subsidiary or its guarantor, Hanwha Chemical, to maintain certain financial ratios that are tested semi-annually. Such debt instruments also contain standard cross-default provisions under which an event of default under one such instrument would trigger a right to accelerate payment under another instrument.

 

There have been a few instances where these financial ratios have not been met at the relevant measurement dates. In such cases, we have obtained waivers from the lenders to cure such defaults and avoid cross-acceleration of other debt instruments. In the future, we or our guarantor may similarly fail to maintain such financial ratios or violate other covenants contained in such debt instruments, and may not be able to obtain waivers for or otherwise cure such defaults, which may cause our indebtedness to become immediately due and payable.

 

Our future success also depends on our ability to make strategic acquisitions and investments and to establish and maintain strategic alliances, and failure to do so could have a material adverse effect on our market penetration, revenue growth and profitability. In addition, such strategic acquisitions, alliances and investments themselves entail significant risks that could materially and adversely affect our business.

 

Strategic acquisitions, investments and alliances with third parties may be expensive to implement and could also subject us to a number of risks, including risks associated with sharing proprietary information and loss of control of operations that are material to our business. We may assume unknown liabilities or other unanticipated events or circumstances through acquisitions and investments. Moreover, strategic acquisitions, investments and alliances subject us to the risk of non-performance by counterparties to such arrangements, which may in turn lead to monetary losses that materially and adversely affect our business. As a result, we may not be able to successfully make such strategic acquisitions and investments or to establish strategic alliances with third parties that will be effective or beneficial for our business. Any difficulty or failure we face in this regard could have a material adverse effect on our market penetration, results of operations and profitability.

 

Problems with product quality or product performance could result in a decrease in customers and revenue, unexpected expenses and loss of market share. In addition, product liability or warranty claims against us could result in adverse publicity and potentially significant monetary damages.

 

We provide long-term warranties for our PV products that are standard in the solar industry. Prior to 2012, Hanwha SolarOne’s PV products were typically sold with a two to five year warranty for technical defects, a 10-year limited performance warranty against declines of greater than 10%, and a 25-year limited warranty against declines of greater than 20%, in their initial power generation capacity. From January 1, 2012, the standard warranty of Hanwha SolarOne provided a 12-year warranty against technical defects, and a 25-year linear warranty, which guaranteed: (i) no less than 97% of the nominal power generation capacity for multicrystalline PV modules and 96% of the nominal power generation capacity for monocrystalline PV modules in the first year, (ii) an annual output degradation of no more than 0.7% thereafter, and (iii) by the end of the 25th year, the actual power output shall be no less than 82% of initial power generation capacity.

 

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Since February 2015, we have offered our products with two sub-brands, which were consolidated in March 2017. For our products with the Hanwha SolarOne brand, we provide a material and workmanship warranty for PV modules for a period of 12 years. Under the 25-year linear warranty, we guarantee no less than 97.5% of the nominal power generation capacity for its typical multicrystalline PV modules in the first year, and an annual output degradation of no more than 0.7% thereafter. By the end of the 25th year, the actual power output shall be no less than 82% of the nominal power generation capacity. For our products with the Q CELLS brand, we provide material and workmanship warranty for its PV products for a period of 12 years and provide performance warranty for its PV modules for a period of 25 years. Under the 25-year performance warranty, in the first year, we guarantee no less than 97% of the nominal power generation capacity for its PV modules and an annual output degradation of no more than 0.6% thereafter. By the end of the 25th year, the actual power output shall be no less than 83% of the nominal power generation capacity. Our warranties may be transferred to third parties who purchase our PV modules.

 

Since our products have been in use for only a relatively short period, our assumptions regarding the durability and reliability of our products may not be accurate. In particular, the performance of newly developed products may be especially difficult to predict. We consider various factors when determining the likelihood of product defects, including an evaluation of our quality controls, technical analysis, industry information on comparable companies and our own experience. We estimate the amount of our warranty obligation primarily based on the results of technical analyses, our historical warranty claims experience, the warranty accrual practices of comparable companies, and the expected failure rate and future costs to service failed products. The estimate of warranty costs is affected by the estimated and actual product failure rates, the costs to repair or replace failed products and potential service and delivery costs incurred in correcting a product failure. Based on the considerations above and management’s ability and intention to provide repairs, replacements or refunds for defective products, we have accrued warranty costs for identified specific issues, primarily an issue in 2013 with the connectivity of a junction box that transfers electricity generated by our PV modules to the grid, based on the estimated cost of the expected remediation efforts to a specific issue. For the remaining population, we accrue warranty costs for Q CELLS brand based on 0.5% of the production costs of PV modules produced in 2013 or later (or 2.5% for production prior to 2013; production in 2013 and later are expected to involve a lower occurrence rate due to (i) improved testing methods to reduce the occurrence of PID, (ii) enhanced certified testing with extended test procedures and (iii) a permanent quality monitoring of production) and warranty costs for Hanwha SolarOne brand against technical defects based on 1% of revenue for PV modules. No warranty cost accrual has been recorded for Hanwha SolarOne brand’s 10-year or 20 to 25-year warranties for decline from initial power generation capacity. Starting from April 1, 2016, the Group has unified the estimate of accrual for the 12-year warranty against technical defects based on 0.5% of revenue for PV modules and no warranty cost accrual has been recorded for the 25-year warranties for decline from initial power generation capacity. 

 

We incurred $11.0 million in warranty costs in 2016 and our accrued warranty costs totaled $61.2 million as of December 31, 2016.

 

If our PV modules fail to perform to the standards of the performance guarantee, we could incur substantial expenses and substantial cash outlays to repair, replace or provide refunds for the under-performing products, which could negatively impact our overall cash position. In addition, we may also suffer increased accounts receivables, as customers in certain circumstances may refuse to accept and pay for defective products. Any increase in the defect rate of our products would increase the amount of our warranty costs and we may not have adequate warranty provision to cover such warranty costs, which would have a negative impact on our results of operations. We may also incur significant expenses to defend any claims based on the warranty against defects.

 

For example, on September 30, 2014, a European customer initiated arbitration proceedings against Hanwha Q CELLS Qidong, one of our subsidiaries, under the rules of the London Court of International Arbitration. In its initial pleading, the European customer alleged that certain solar modules it purchased from Hanwha Q CELLS Qidong between 2009 and 2011 were defective, claiming total damages of approximately $240 million, comprised of purchase price adjustments and damages, as well as indemnification against any liability arising from the European customer’s sale of such modules to end customers. On November 7, 2014, Hanwha Q CELLS Qidong filed its response to the European customer’s request for arbitration. On December 10, 2014, the European customer filed its statement of case. On January 23, 2015, Hanwha Q CELLS Qidong filed its statement of defense, and through much of the first half of 2015 the European customer and Hanwha Q CELLS Qidong exchanged and responded to document requests. On September 30, 2015, the parties agreed to enter into settlement discussions and implement a temporary “standstill” of all proceedings in the arbitration. The merits hearing, which had been scheduled for May 2016, was also adjourned. As of the date of this annual report, the parties’ “standstill” remains in place. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal and Administrative Proceedings

 

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In addition, we purchase silicon-related materials and other components that we use in our products from third parties. Unlike PV modules, which are subject to certain uniform international standards, silicon-related materials generally do not have uniform international standards, and it is often difficult to determine whether product defects are caused by defects in silicon, silicon wafers or other components of our products or other reasons. Even assuming that our product defects are caused by defects in raw materials, we may not be able to recover our warranty costs from our suppliers because the agreements we enter into with our suppliers typically contain no or only limited warranties. The possibility of future product failures could cause us to incur substantial expense to provide refunds or resolve disputes with regard to warranty claims through litigation, arbitration or other means, or damage our market reputation and cause our sales to decline.

 

As with other PV product manufacturers, we are exposed to risks associated with product liability claims if the use of the PV products we sell results in injury, death or damage to property. We cannot predict whether product liability claims will be brought against us in the future or the effect of any resulting negative publicity on our business. We have limited insurance coverage and may incur losses resulting from business interruptions or product liability claims.

 

One of our existing shareholders has substantial influence over our company and its interests may not always be aligned with the interests of our other shareholders.

 

Hanwha Solar owns approximately 94.0% of our outstanding share capital, as of the date of this annual report. Hanwha Solar has substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions, and has appointed a majority of our directors. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for its shares as part of a sale of our company and might reduce the price of the ADSs. In addition, without the consent of Hanwha Solar, we may be prevented from entering into transactions that could be beneficial to us. Hanwha Solar may cause us to take actions that are opposed by other shareholders as its interests may differ from those of other shareholders. Hanwha Group, a business group that controls Hanwha Solar, also has several subsidiaries in the solar industry. We depend to a certain extent on the support of Hanwha Group. For example, entities of Hanwha Group are our existing customers and we may also source raw materials from entities of Hanwha Group in the future. If Hanwha Group reduces its shareholding in our company or chooses to devote resources to other priorities, such as other companies in which it holds interests, including other companies in the solar industry, for any reason and not to us, our results of operations could be adversely affected. How Hanwha Group positions our company among its subsidiaries and other investments could have a material impact on our results of operations. Hanwha Group’s strategic plan involving our company may not always be aligned with the interests of our other shareholders.

 

Our business involves a significant number of related party transactions.

 

We are party to significant number of related party transactions between us and other member companies of Hanwha Group under which we, among other things, purchase raw materials and sell our PV products for distribution. Such transactions may be challenged by tax authorities if such transactions are viewed as having been made on terms that were not on an arm’s-length basis. Furthermore, in some instances we may not be able to discontinue such related party transactions even if we have better business opportunities with non-affiliated parties. If the related party transactions we are engaged in do not benefit us as other available alternative transactions with non-affiliates would, our business may be materially and adversely affected.

 

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Our failure to protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights may be costly.

 

We rely primarily on patents, trademarks, trade secrets, copyrights and other contractual restrictions to protect our intellectual property. Nevertheless, these afford only limited protection and the actions we take to protect our intellectual property rights may not be adequate. In particular, implementation of intellectual property-related laws in certain countries in which we operate our business, including China, has historically been lacking, primarily because of ambiguities in the relevant laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in these countries may not be as effective as in the United States or other developed countries. Policing unauthorized use of our proprietary technologies can be difficult and expensive. In addition, litigation 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 also cannot assure you that the outcome of any such litigation would be in our favor. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation. Furthermore, any such litigation may be costly and may divert management attention away from our business as well as require us to expend other resources. We have no insurance coverage against litigation costs and would have to bear all costs arising from such litigation to the extent we are unable to recover them from other parties. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.

 

We may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely against us, could disrupt our business and subject us to significant liability to third parties, as well as have a material adverse effect on our financial condition and results of operations.

 

Our success depends, in large part, on our ability to use and develop our technologies and know-how without infringing the intellectual property rights of third parties. As we continue to market and sell our products internationally, and as disputes involving intellectual property become more common, we face a higher risk of being the subject of claims for intellectual property infringement, as well as having indemnification relating to other parties’ proprietary rights held to be invalid. Our current or potential competitors, many of which have substantial resources and have made substantial investments in competing technologies, may have or may obtain patents that will prevent, limit or interfere with our ability to make, use or sell our products in the European Union, the United States, Japan, the PRC or other countries. The validity and scope of claims relating to PV technology patents involve complex, scientific, legal and factual questions and analysis and, therefore, may be highly uncertain. In addition, the defense of intellectual property claims, including patent infringement suits, 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. Furthermore, an adverse determination in any such litigation or proceeding to which we may become a party could cause us to:

 

  · pay damage awards;

 

  · seek licenses from third parties;

 

  · pay ongoing royalties;

 

  · redesign our products; or

 

  · be restricted by injunctions.

 

each of which could effectively prevent us from pursuing some or all of our business and result in our customers or potential customers deferring or limiting their purchase or use of our products, which could have a material adverse effect on our financial condition and results of operations.

 

We may not be able to obtain sufficient patent protection on the technologies embodied in the PV products we currently manufacture and sell, which could reduce our competitiveness and increase our expenses.

 

Although we rely primarily on trade secret laws and contractual restrictions to protect the technologies in the PV cells and PV modules we currently manufacture and sell, our success and ability to compete in the future may also depend to a significant degree on obtaining patent protection for our proprietary technologies. As of the date of this annual report, we had been granted 76 patents and utility models and 31 applications for patents and utility models pending in China, 43 patents and 71 patent applications pending in Germany and 66 patents and 42 patent applications pending in other countries.

 

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Because the protections afforded by our patents are effective only in the jurisdiction where we have registered our patents, our competitors and other companies may independently develop substantially equivalent technologies or otherwise gain access to our proprietary technologies, and obtain patents for such technologies in other jurisdictions, including the countries in which we sell our products. Moreover, our patent applications may not result in issued patents, and even if they do result in issued patents, the patents may not have claims of the scope we seek. In addition, any issued patents may be challenged, invalidated or declared unenforceable. As a result, our present and future patents may provide only limited protection for our technologies, and may not be sufficient to provide competitive advantages to us.

 

We depend on our key personnel, and our business and growth may be severely disrupted if we lose their services or fail to recruit new qualified personnel.

 

Our future success depends substantially on the continued services of some of our directors and key executives. If we lose the services of one or more of our current directors and executive officers, we may not be able to replace them readily, if at all, with suitable or qualified candidates, and may incur additional time and expenses to recruit, retain and integrate new directors and executive officers, particularly those with significant PV industry experience similar to our current directors and executive officers, which could severely disrupt our business and growth. In particular, Seong Woo Nam, Chairman and Chief Executive Officer, Jung Pyo Seo, Director and Chief Financial Officer and Dong Kwan Kim, Director and Chief Commercial Officer have been crucial to the development of our strategic direction. In addition, if any of our directors or executives joins a competitor or forms a competing company, we may lose some of our customers. Each of our executive officers has entered into an employment agreement with us, which contains confidentiality and non-competition provisions. However, if any disputes arise between these executive officers and us, it is not clear the extent to which any of these agreements could be enforced outside of the United States, where most of these executive officers reside and hold some of their assets. Furthermore, as we expect to continue to expand our operations and develop new products, we will need to continue attracting and retaining experienced management and key research and development personnel.

 

Competition for personnel in the PV industry is intense, and the availability of suitable and qualified candidates is limited. In particular, we compete to attract and retain qualified research and development personnel with other PV technology companies, universities and research institutions. Competition for these individuals could cause us to offer higher compensation and other benefits in order to attract and retain them, which could have a material adverse effect on our financial condition and results of operations. We may also be unable to attract or retain the personnel necessary to achieve our business objectives, and any failure in this regard could severely disrupt our business and growth.

 

Any failure to achieve and maintain effective internal control could have a material adverse effect on our business, results of operations and the market price of the ADSs.

 

The United States Securities and Exchange Commission (“SEC”), as required by Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), adopted rules requiring most public companies to include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal control over financial reporting. In addition, when a company meets the SEC’s criteria, an independent registered public accounting firm must report on the effectiveness of the company’s internal control over financial reporting.

 

Our management and independent registered public accounting firm have concluded that the internal control over financial reporting of Hanwha Q CELLS Co., Ltd. as of December 31, 2016 was effective. However, we cannot guarantee that in the future our management or our independent registered public accounting firm will not identify material weaknesses during the Section 404 of the Sarbanes-Oxley Act audit process or for other reasons. In addition, because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. As a result, if we fail to maintain effective internal control over financial reporting or should we be unable to prevent or detect material misstatements due to error or fraud on a timely basis, investors could lose confidence in the reliability of our financial statements, which in turn could harm our business, results of operations and negatively impact the market price of the ADSs, and harm our reputation. Furthermore, we have incurred and expect to continue to incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.

 

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We have limited insurance coverage and may incur losses resulting from business interruptions or product liability claims.

 

We are subject to risk of explosion and fires, as highly flammable gases, such as silane and nitrogen gas, are generated in our manufacturing processes. While we have not experienced to date any major explosion or fire, the risks associated with these gases cannot be completely eliminated. In addition, natural disasters such as floods or earthquakes, or other unanticipated catastrophic events, including power interruption, telecommunications failures, equipment failures, break-ins, terrorist attacks or acts of war, could significantly disrupt our ability to manufacture our products and operate our business. If any of our production facilities or material equipment were to experience any significant damage or downtime, we might be unable to meet our production targets and our business could suffer. Although we have obtained business interruption insurance, the coverage of such insurance is limited and it may not be able to fully cover losses caused by the business interruption.

 

We are also exposed to risks associated with product liability claims in the event that the use of the PV products we sell results in injury, death or damage to property. Due to limited historical experience, we are unable to predict whether product liability claims will be brought against us in the future or the effect of any resulting adverse publicity on our business. Moreover, we only have limited product liability insurance and may not have adequate resources to satisfy a judgment in the event of a successful claim 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, which could materially and adversely affect our business, financial condition and results of operations.

 

Any environmental claims or failure to comply with any present or future environmental regulations may require us to spend additional funds and may materially and adversely affect our financial condition and results of operations.

 

We are subject to a variety of laws and regulations relating to the use, storage, discharge and disposal of chemical byproducts of, and water used in, our manufacturing operations and research and development activities, including toxic, volatile and otherwise hazardous chemicals and wastes. Although we have not suffered material environmental claims in the past, failure to comply with any present or future regulations could result in the assessment of damages or imposition of fines against us, suspension of production or a cessation of our operations. New regulations could also require us to acquire costly equipment or to incur other significant expenses. Any failure by us to control the use of, or to adequately restrict the discharge of, hazardous substances could subject us to potentially significant monetary damages and fines or suspension of our business, as well as adversely affect our financial condition and results of operations.

 

The use of certain hazardous substances, such as lead, in various products is also coming under increasingly stringent governmental regulation. Increased environmental regulation in this area could adversely impact the manufacture and sale of solar modules that contain lead and could require us to make unanticipated environmental expenditures. For example, the European Union Directive 2002/96/EC on Waste Electrical and Electronic Equipment (the “WEEE Directive”) requires manufacturers of certain electrical and electronic equipment to be financially responsible for the collection, recycling, treatment and disposal of specified products placed on the market in the European Union. In addition, European Union Directive 2002/95/EC on the Restriction of the use of Hazardous Substances in electrical and electronic equipment (the “RoHS Directive”) restricts the use of certain hazardous substances, including lead, in specified products. Other jurisdictions are considering adopting similar legislation. Failure to comply with the WEEE and RoHS Directives could result in fines and penalties, inability to sell our PV products in the European Union, competitive disadvantages and loss of net sales, all of which could have a material adverse effect on our business, financial condition and results of operations.

 

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Our significant international operations expose us to a number of risks, and if we are unable to effectively manage these risks, our business may be materially and adversely affected.

 

We operate our primary manufacturing facilities in China and Malaysia, our executive headquarters relocated to Korea from China and we have significant research and development operations in Germany. We sell our PV products and engage in PV downstream business internationally in all major markets, including the United States, Japan, the European Union, China and India. Our significant international operations, including the production, marketing, distribution and sale of our PV products and services in many different countries expose us to a number of risks, including:

 

  · fluctuations in currency exchange rates among various currencies, including the U.S. dollar, Renminbi, Euro, Japanese Yen, Malaysian Ringgit and Korean Won;

 

  · difficulty and costs relating to compliance with different commercial, legal, regulatory and tax requirements in various countries in which we operate;

 

  · difficulty in engaging and retaining distributors and agents who are knowledgeable about, and can function effectively in, various countries and markets;

 

  · increased costs associated with maintaining marketing, sales and customer service activities in various countries;

 

  · difficulty in, and increased cost of, managing supply chains and logistics across various countries;

 

  · inability to obtain, maintain or enforce intellectual property rights; and

 

  · 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 conduct or expand our business globally would be impaired, which may in turn have a material adverse effect on our business, financial condition, results of operations and prospects.

 

Fluctuations in exchange rates could adversely affect our business as well as result in foreign currency exchange losses.

 

Our consolidated financial statements are presented in U.S. dollars and have been prepared from the local currency-denominated financial results, assets and liabilities of us and our subsidiaries globally, which were translated as necessary into U.S. dollars. Accordingly, our consolidated financial results and assets and liabilities may be materially affected by fluctuations in exchange rates, particularly among the U.S. dollar, Renminbi, Euro, Japanese Yen, Korean Won and Malaysian Ringgit. A substantial portion of our sales is denominated in U.S. dollars, Euros and Japanese Yen, while a substantial portion of our costs and expenses is denominated in Renminbi. To the extent that we incur costs in one currency and make revenue in another, our profit margins may be affected by changes in the exchange rates between the two currencies. Exchange rate fluctuations can also affect the value of our assets and liabilities denominated in other currencies, which include our long-term loan from the Malaysian government denominated in Malaysian Ringgit. In recent years, the exchange rates among Renminbi, the U.S. dollar, the Japanese Yen, the Korean Won and the Euro have fluctuated significantly and we cannot predict the impact of future exchange rate fluctuations on our financial condition and results of operations, and we may incur net foreign currency losses in the future.

 

To the extent our foreign currency receivables are not matched with our foreign currency payables, we have entered into economic hedging transactions to mitigate the impact of short-term foreign currency fluctuations on our results of operations. Although the impact of exchange rate fluctuations has in the past been partially mitigated by such transactions, our results of operations have historically been affected by exchange rate fluctuations and may continue to be affected. The effectiveness of our hedging transactions may be limited and we may not be able to successfully hedge all of our exposure. In addition, our estimates of future revenues that are denominated in foreign currencies may not be accurate, which could result in foreign exchange losses. Any default by the counterparties to these hedging transactions could also adversely affect our financial condition and results of operations.

 

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Adverse changes in political, economic and regulatory policies in countries where we have significant operations could have a material adverse effect on our business.

 

Substantially all of our operations are conducted in China, Malaysia, Germany and Korea and some of our sales are made in these countries. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by political, economic and regulatory developments in these countries. Such developments include the introduction of new or more stringent labor and environmental regulations, increase in tax, increase in restrictions on the conduct of business and changes in interest rates, among others. Other political uncertainties include the risks of war, terrorism, nationalization and expropriation.

 

Restrictions on currency exchange may limit our ability to receive and use our revenue effectively.

 

A portion of our revenue and expenses are denominated in Renminbi. The Renminbi is currently convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans. Currently, Hanwha Q CELLS Qidong may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without the approval of the State Administration of Foreign Exchange (“SAFE”). However, the relevant PRC government authorities may limit or eliminate our ability to purchase foreign currencies in the future. Since a significant amount of our future revenue will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside China that are denominated in foreign currencies.

 

Foreign exchange transactions by Hanwha Q CELLS Qidong under the capital account continue to be subject to significant foreign exchange controls and require the approval of or need to register with PRC governmental authorities, including SAFE. In particular, if Hanwha Q CELLS Qidong borrows foreign currency loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance Hanwha Q CELLS Qidong by means of additional capital contributions, these capital contributions must be approved by certain government authorities, including the National Development and Reform Commission (“NDRC”), the Ministry of Commerce or their respective local counterparts. These limitations could affect the ability of Hanwha Q CELLS Qidong to obtain foreign exchange through debt or equity financing.

 

In addition, our operations in Malaysia are affected by foreign exchange policies of Malaysia which support the monitoring of capital flows into and out of the country in order to preserve its financial and economic stability. The foreign exchange policies are administered by the Foreign Exchange Administration, an arm of Bank Negara Malaysia which is the central bank of Malaysia. Under the current regulations issued by Bank Negara Malaysia, non-residents are free to repatriate any amount of funds in Malaysia at any time, including capital, divestment proceeds, profits, dividends, rental, fees and interest arising from investment in Malaysia, subject to the applicable reporting requirements, and any withholding tax. However, in the event Bank Negara Malaysia introduces any restrictions in the future, we may be affected in our ability to repatriate dividends or distributions from our Malaysian subsidiaries.

 

We face risks related to health epidemics and other outbreaks.

 

Adverse public health epidemics or pandemics could disrupt business and the economics of the PRC and other countries where we do business. In 2009, there were outbreaks of swine flu, caused by H1N1 virus, in certain regions of the world, including China. In the past few years, there were reports on the occurrences of avian flu in various parts of China, including a few confirmed human cases. In April 2013, there were reports of cases of H7N9 avian flu in southeast China, including deaths in Shanghai and Zhejiang Province. Any future outbreak of severe acute respiratory syndrome, avian flu, swine flu, or other similar adverse public developments in China may, among other things, significantly disrupt our business, including limiting our ability to travel or ship our products within or outside China and forcing us to temporary close our manufacturing facilities. Furthermore, an outbreak may severely restrict the level of economic activity in affected areas, which may in turn materially and adversely affect our financial condition and results of operations. For instance, in 2015, there occurred an outbreak of Middle East respiratory syndrome in Korea which claimed 38 lives as of December 31, 2015 and adversely affected the country’s economic activity of the year.

 

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You may have difficulty enforcing judgments obtained against us.

 

We are a Cayman Islands company headquartered in Korea and substantially all of our assets are located outside of the United States. Substantially all of our current operations are conducted in the PRC, Germany, Malaysia and Korea. In addition, most of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts 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 the Cayman Islands, the PRC, Germany, Malaysia or Korea would recognize or enforce judgments of U.S. courts based on certain civil liability provisions of U.S. securities laws.

 

Labor laws in the jurisdictions where we operate may adversely affect our results of operations.

 

We are subject to the local labor and employment laws of various jurisdictions in which we operate. For example, in Germany, our employees are covered by various labor laws that provide employees, through works councils, with rights of information and consultation with respect to specific matters involving their employer’s business and operations, including downsizing or closure of facilities and employment terminations. The German worker protection laws could impair our flexibility in streamlining or restructuring our business operations in Germany. In China, as required by PRC regulations, we participate in various employee benefit plans that are organized by municipal and provincial governments, including housing, pension, medical and unemployment benefit plans. We are required under PRC law to make contributions to the employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time. Members of the retirement plan are entitled to a pension equal to a fixed proportion of their salaries. In Malaysia, we employ a substantial number of foreign nationals as temporary workers and the employment of such foreign nationals requires approval by the Ministry of Home Affairs of Malaysia, which may impose conditions on the number, positions, duration of employment and the country of origin of the foreign workers.

 

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Our business benefits from certain PRC government incentives. Expiration of, or changes to, these incentives could have a material adverse effect on our results of operations.

 

On March 16, 2007, the PRC government promulgated the Law of the People’s Republic of China on the Enterprise Income Tax (the “EIT”), which took effect on January 1, 2008. Under the EIT, domestically owned enterprises and foreign invested enterprises (“FIEs”) are subject to a uniform tax rate of 25%. While the EIT equalizes the tax rates for FIEs and domestically owned enterprises, preferential tax treatment continues to be granted to companies in certain encouraged sectors, and entities classified as “high and new technology enterprises” are entitled to a 15% EIT rate, whether domestically owned enterprises or FIEs. Hanwha Q CELLS Qidong was approved to be qualified as a “high and new technology enterprise” on October 21, 2008. The “high and new technology enterprise” status is valid for a period of three years from the date of issuance of the certificate and is subject to an annual self-review process whereby a form is submitted to relevant tax authority for approval to use a beneficial income tax rate. If there are significant changes in the business operations, manufacturing technologies or other criteria that cause the enterprise to no longer meet the criteria as a “high and new technology enterprise,” such status will be terminated from the year of such change. On October 31, 2014, Hanwha Q CELLS Qidong obtained a certificate for the renewal of its status as a “high and new technology enterprise” by the PRC government. While we believe that the company will not be liable for this tax position due to the expiration of the statute of limitations, if Hanwha Q CELLS Qidong fails to qualify as a “high and new technology enterprise” in future periods, our income tax expenses would increase, which could have a material and adverse effect on our net income and results of operations.

 

Any reduction or elimination of the preferential tax treatments currently enjoyed by us may significantly increase our income tax expense and materially reduce our net income, which could have a material adverse effect on our financial condition and results of operations.

 

Limitations on the ability of our Chinese operating subsidiary to pay dividends or other distributions to us could have a material adverse effect on our ability to conduct our business.

 

We are a holding company and conduct substantially all of our business in China through our Chinese operating subsidiary, Hanwha Q CELLS Qidong, which is a limited liability company established in China. The payment of dividends, if any, by entities organized in China is subject to limitations. In particular, regulations in the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with PRC accounting standards and regulations. Hanwha Q CELLS Qidong is also required to set aside at least 10% of its annual after-tax profit based on PRC accounting standards each year to its general reserves until the cumulative amount of such reserves reaches 50% of its registered capital. These reserves are not distributable as cash dividends. In addition, Hanwha Q CELLS Qidong is required to allocate a portion of its after-tax profit to its staff welfare and bonus fund at the discretion of its board of directors. Moreover, if Hanwha Q CELLS Qidong incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.

 

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We face uncertainties with respect to application of PRC tax rules on indirect transfers of equity interests in a PRC resident enterprise.

 

On February 3, 2015, the State Administration of Taxation issued the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises (“Bulletin 7”), which partially replaced previous rules under the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises (“Circular 698”) issued by the State Administration of Taxation on December 10, 2009. Pursuant to Bulletin 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be recharacterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to Bulletin 7, “PRC taxable assets” include assets attributed to an establishment in China, immoveable properties located in China and equity investments in PRC resident enterprises, in respect of which gains from their transfer by a direct holder, being a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. When determining whether there is a “reasonable commercial purpose” of the transaction arrangement, features to be taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprise derives from PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have real commercial nature which is evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure; the replicability of the transaction by direct transfer of PRC taxable assets; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. In respect of an indirect offshore transfer of assets of a PRC establishment, the resulting gain is to be included with the enterprise income tax filing of the PRC establishment or place of business being transferred, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immoveable properties located in China or to equity investments in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Where the payer fails to withhold any or sufficient tax, the transferor shall declare and pay such tax to the tax authority by itself within the statutory time limit. Late payment of applicable tax will subject the transferor to default interest. Bulletin 7 does not apply to transactions of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction through a public stock exchange.

 

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There is uncertainty as to the application of Bulletin 7, or previous rules under Circular 698. Especially as Bulletin 7 is lately promulgated, it is not clear how it will be implemented. If we transfer our equity interest in our PRC subsidiaries or when our non-resident investors transfer their shares, we or our non-resident investors may be taxed under Bulletin 7 and may be required to expend valuable resources to comply with Bulletin 7 or to establish that we or our non-resident investors should not be taxed under Bulletin 7, which may have an adverse effect on our financial condition and results of operations or such non-resident investors’ investment in us.

 

Risks Related to Our Ordinary Shares and ADSs

 

The market price of the ADSs may be volatile.

 

The market price of the ADSs has exhibited, and may continue to exhibit, significant volatility. The closing price of our ADSs ranged from a low of $7.71 per ADS to a high of $22.34 per ADS in 2016.

 

Numerous factors, including many over which we have no control, may have a significant impact on the market price of the ADSs, including, among other things:

 

  · actual or anticipated fluctuations in our quarterly operating results;

 

  · announcements by other companies in our industry relating to their operations, strategic initiatives, financial condition or financial performance or to our industry in general;

 

  · changes in financial estimates or other material comments by securities analysts relating to us, our competitors or our industry in general;

 

  · regulatory developments in our target markets affecting us, our customers or our competitors;

 

  · changes in the economic performance or market valuations of other PV technology companies;

 

  · 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 and other fossil fuels;

 

  · changes in international trade policies and international barriers to trade;

 

  · announcements of acquisitions or consolidations involving industry competitors or industry suppliers;

 

  · sales or perceived sales of additional ordinary shares or ADSs;

 

  · addition or departure of our executive officers and key research personnel;

 

  · announcements regarding legal proceedings, including patent litigation, or the issuance of patents to us or our competitors;

 

  · announcements of studies and reports relating to the conversion efficiencies of our products or those of our competitors; and

 

  · announcements of technological or competitive developments.

 

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In addition, the stock market in recent years has experienced extreme price and trading volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations may adversely affect the price of the ADSs, regardless of our operating performance.

 

Future issuances of ordinary shares, ADSs or equity-related securities may depress the trading price of the ADSs.

 

Any issuance of equity securities could dilute the interests of our existing shareholders and could substantially decrease the trading price of the ADSs. We may issue equity securities through public offerings or private placements in the future for a number of reasons, including to finance our operations and business strategy (including in connection with acquisitions, strategic collaborations or other transactions), to adjust our ratio of debt to equity and to satisfy our obligations upon the exercise of outstanding warrants or options or for other reasons.

 

Sales of a substantial number of ADSs or other equity-related securities in the public market could depress the market price of the ADSs, and impair our ability to raise capital through the sale of additional equity securities. We cannot predict the effect that future sales of the ADSs or other equity-related securities would have on the market price of the ADSs. In addition, the price of the ADSs could be affected by possible sales of the ADSs by investors who view the convertible notes as a more attractive means of obtaining equity participation in our company and by hedging or arbitrage trading activity that we expect to develop involving our convertible notes.

 

Our articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.

 

Our amended and restated memorandum and articles of association contain provisions which may limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to allot, issue, grant options, rights or warrants over or otherwise dispose of shares of our company with or without preferred, deferred, qualified or other special rights or restrictions, whether with regard to dividend, voting, return of capital or otherwise and to such persons, at such times and on such other terms as they think proper, and this would allow our board of directors to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of the ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.

 

We may amend the deposit agreement without consent from holders of ADSs and, if such holders disagree with our amendments, their choices will be limited to selling the ADSs or withdrawing the underlying ordinary shares.

 

We may agree with the depositary to amend the deposit agreement without consent from holders of ADSs. If an amendment increases fees to be charged to ADS holders or otherwise prejudices any substantial right of ADS holders, it will not become effective until 30 days after the depositary notifies ADS holders of the amendment. At the time an amendment becomes effective, ADS holders are considered, by continuing to hold their ADSs, to have agreed to the amendment and to be bound by the amended deposit agreement. If holders of ADSs do not agree with an amendment to the deposit agreement, their choices will be limited to selling the ADSs or withdrawing the underlying ordinary shares. No assurance can be given that a sale of ADSs could be made at a price satisfactory to the holder in such circumstances.

 

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Holders of ADSs have fewer rights than shareholders and must act through the depositary to exercise those rights.

 

Holders of ADSs do not have the same rights as our shareholders and may only exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under our amended and restated memorandum and articles of association, the minimum notice period required to convene an annual general meeting or any extraordinary general meeting calling for the passing of a special resolution is twenty days and the minimum notice period required to convene any other extraordinary general meeting is fourteen days. When a general meeting is convened, you may not receive sufficient notice of the general meeting to permit you to withdraw the ordinary shares underlying your ADSs to allow you to cast your vote with respect to such shares in respect of any specific matter. If requested in writing by us, the depositary will mail a notice of such a meeting to you. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but you may not receive the voting materials in time to ensure that you can instruct the depositary to vote the shares underlying your ADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if the shares underlying your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting.

 

You may be subject to limitations on transfers of your ADSs.

 

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

 

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings and you may not receive cash dividends if it is impractical to make them available to you.

 

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register the rights and the securities to which the rights relate under the Securities Act of 1933, as amended (the “Securities Act”), or an exemption from the registration requirements is available. Also, under the deposit agreement, the depositary will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act, or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, in the event we conduct any rights offering in the future, the depositary may not make such rights available to you or may dispose of such rights and make the net proceeds available to you. As a result, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

 

In addition, the depositary for the ADS facility has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. As a result, the depositary may decide not to make the distribution and you will not receive such distribution.

 

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We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than that under U.S. law, ADS holders may have less protection for their shareholder rights than such holders would under U.S. law.

 

Our corporate affairs are governed by our amended and restated memorandum and articles of association as may be amended from time to time, the Cayman Islands Companies Law (as amended) and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as that from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

 

In addition, most of our directors and officers are nationals and residents of countries other than the United States. Substantially all of our assets and a substantial portion of the assets of these persons are located outside the United States.

 

There are uncertainties as to whether Cayman Islands courts would:

 

  · recognize or enforce against us or our directors, judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws; and

 

  · entertain original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature.

 

There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.

 

As a result of all of the above, our public shareholders and ADS holders may have more difficulty in protecting their interests in the face of actions taken against management, members of the board of directors or controlling shareholders than they would as shareholders or ADS holders of a U.S. public company.

 

As a foreign private issuer, we are permitted to, and we will, rely on exemptions from certain Nasdaq corporate governance standards applicable to domestic U.S. issuers. This may afford less protection to holders of our ordinary shares and the ADSs.

 

We are exempted from certain corporate governance requirements of Nasdaq by virtue of being a foreign private issuer. We are required to provide a brief description of the significant differences between our corporate governance practices and the corporate governance practices required to be followed by domestic U.S. companies listed on Nasdaq. The standards applicable to us are considerably different from the standards applied to domestic U.S. issuers. For instance, we are not required to:

 

  · have a majority of the board be independent (although all of the members of the audit committee must be independent under the Securities Exchange Act of 1934, as amended (the “Exchange Act”));

 

  · have a compensation committee or a nominations committee consisting entirely of independent directors;

 

  · have director nominees be selected, or recommended for the board’s selection, either by independent directors or a nominations committee consisting entirely of independent directors;

 

  · obtain shareholder approval prior to the issuance of securities when the issuance will result in a change of control of us; or

 

  · obtain shareholder approval prior to the issuance of securities involving the sale or issuance of 20% or more of our ordinary shares for less than the greater of book or market value of the shares.

 

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We intend to rely on these exemptions. As a result, you may not be provided with the benefits of certain corporate governance requirements of Nasdaq.

 

We may be classified as a passive foreign investment company for U.S. federal income tax purposes, which could result in adverse U.S. federal income tax consequences to U.S. investors.

 

We do not believe we were a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes for our taxable year ended December 31, 2016 and do not expect to become a PFIC for the current taxable year or the foreseeable future. Our actual PFIC status for the current taxable year, however, will not be determinable until the close of the current taxable year ending December 31, 2017, and accordingly, there is no guarantee that we will not be a PFIC for the current taxable year or any future taxable year.

 

A non-U.S. corporation, such as our company, is considered to be a PFIC for any taxable year if either (1) at least 75% of its gross income is passive income; or (2) at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income. Because PFIC status depends on the composition of a company’s income and assets, and the market value of its assets and of its shares from time to time, and the application of rules that are not always clear, there can be no assurance that we will not be classified as a PFIC for any taxable year.

 

If we are a PFIC for any taxable year during which a U.S. investor holds the ADSs or ordinary shares, such U.S. investor will generally be subject to materially adverse tax consequences including being subject to greater amounts of tax on gains and certain distributions as well as increased tax reporting obligations. U.S. investors should consult their own tax advisors about the circumstances that may cause us to be classified as a PFIC and the consequences if we are classified as a PFIC.

 

We do not currently intend to pay dividends on our ordinary shares and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of the ADSs.

 

We do not currently intend to pay any cash dividends on our ordinary shares for the foreseeable future. We currently intend to retain all of our available funds and any future earnings to operate and expand our business. The payment of any future dividends will be determined by our board of directors in light of conditions then existing, including our operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

 

ITEM 4 INFORMATION ON THE COMPANY

 

A. History and Development of the Company

 

Hanwha SolarOne

 

Hanwha SolarOne commenced operations through Hanwha Q CELLS Qidong, formerly known as Hanwha SolarOne (Qidong) Co., Ltd., in August 2004. In anticipation of its initial public offering, Hanwha SolarOne, formerly known as Solarfun Power Holdings Co., Ltd. until December 20, 2010, was incorporated in the Cayman Islands on May 12, 2006 as the listing vehicle. In December 2006, Hanwha SolarOne conducted its initial public offering and the ADSs were listed on the Nasdaq Global Market under the symbol “SOLF.”

 

In September 2010, through a series of transactions with Hanwha SolarOne and its former shareholders, Hanwha Solar became Hanwha SolarOne’s largest shareholder. Hanwha SolarOne changed its name from “Solarfun Power Holdings Co., Ltd.” to “Hanwha SolarOne Co., Ltd.” on December 20, 2010 and its ticker from “SOLF” to “HSOL” on February 15, 2011. Hanwha Solar, a company that engages in solar business, is a wholly-owned subsidiary of Hanwha Chemical, a leading chemical producer publicly traded on the Korea Exchange whose principal activities are the production of chemicals, solar energy, construction, automotive and electronic materials and products.

 

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Q CELLS

 

Q CELLS commenced its operation as Q-Cells AG in 1999 followed by an initial public offering in Germany in 2005 and a subsequent name change in 2008 to Q Cells SE. In 2009, it commenced the production of PV cells at its Malaysian facility. After a bankruptcy filing in Germany in April 2012 by Q Cells SE, its production facilities in Germany and Malaysia, as well as its research and development organization and certain marketing subsidiaries, were acquired in October 2012 by Hanwha Solar.

 

Hanwha SolarOne’s Acquisition of Q CELLS

 

In February 2015, we issued 3,701,145,330 ordinary shares to Hanwha Solar in exchange for the transfer of 100% of the outstanding share capital of Q CELLS by Hanwha Solar to us and Q CELLS became our wholly-owned subsidiary. As a result of the transaction, Hanwha Solar’s ownership of our ordinary shares increased from approximately 45.7% to approximately 94.0%. In connection with the transaction, we changed our name from “Hanwha SolarOne Co., Ltd.” to “Hanwha Q CELLS Co., Ltd.” and our ticker from “HSOL” to “HQCL” on February 9, 2015.

 

The transaction is accounted for as a reverse acquisition under the acquisition method of accounting, in accordance with ASC 805, “Business Combinations”. Q CELLS is determined as the accounting acquirer. Consequently, the historical consolidated financial statements for all periods prior to the consummation of the transaction only reflect the historical consolidated financial statements of Q CELLS.

 

Our principal executive offices are located at Hanwha Building, 86 Cheonggyecheon-ro, Jung-gu, Seoul, Korea. Our telephone number at this address is +82 (0)2 729-2930 and our fax number is +82 (0)2 729-1372. Our registered office in the Cayman Islands is at the offices of Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.

 

Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website is http://www.hanwha-qcells.com. The information contained on our website does not constitute a part of this annual report. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.

 

Capital Expenditures and Investment

 

As of December 31, 2016, we had annual production capacities of 4,150 MW for PV modules, 4,150 MW for PV cells, 950 MW for silicon wafers and 1,550 MW for silicon ingots.

 

We made capital expenditures of $174.9 million in 2016 which were used primarily to construct new PV module processing facilities in Malaysia and Korea, as well as to automate our existing manufacturing lines in China and upgrade our PV cell manufacturing facilities in Malaysia. We expect our capital expenditures will amount to approximately $50 million in 2017, which will be primarily used to fund on-going capital equipment upgrades in Malaysia and China and for research and development activities. We plan to fund our capital expenditure and investment requirements primarily with cash from operations in 2017. We will actively review our capital expenditure and investment plans on a regular basis and make appropriate changes in accordance with our business environment.

 

B. Business Overview

 

Overview

 

We are a global, leading solar energy company involved in the manufacturing of solar cells and modules. We manufacture a variety of PV cells and PV modules at our manufacturing facilities in China and Malaysia, using advanced manufacturing process technologies including those developed at our research and development facilities in Germany. We sell PV cells and PV modules directly to utility companies, system integrators and also through third-party distributors. We supply our solar products across the world mainly to the United States, Japan, India, and Turkey, with sales to those countries comprising over 80% of our 2016 net revenues. We are also growing a nascent engineering, procurement and construction (“EPC”) group that is focusing on markets in Europe, Turkey and Australia, in addition to the United States.

 

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As of December 31, 2016, we had annual nameplate capacities of 4,150 MW for PV cells and 4,150 MW for PV modules. We have continuously improved process technology and product quality since we commenced our commercial production in 2005. Our Q.ANTUM multicrystalline (a product line utilizing passivated emitter rear contact technology) and standard BSF multicrystalline PV cells achieved average conversion efficiency rates of 19.6% and 18.7%, respectively, each based on the commercially produced PV cells in December 2016.

 

Our net revenues in 2016 amounted to $2,425.9 million, among which $576.3 million, or 23.8%, was derived from sales to related parties. We recorded net income of $127.5 million in 2016 and had accumulated earnings of $107.3 million, long-term borrowings and long-term notes (including the current position) of $794.2 million and short-term bank borrowings of $377.4 million as of December 31, 2016.

  

Our Products and Services

 

Our principal products include PV cells, PV modules, silicon ingots and silicon wafers. Substantially all of the ingots, wafers and PV cells we produce are used for our own PV module production. We also engage in PV downstream business by developing solar power projects and providing EPC and operation and management services.

 

The following tables set forth Q CELLS’ and our net revenues from principal products and services and related percentage data for the periods indicated:
 

   For the Year Ended December 31, 
   2014   2015   2016 
   Q CELLS   Hanwha Q CELLS(1)   Hanwha Q CELLS 
   Net
Revenues ($)
   % of Net
Revenues
   Net
Revenues ($)
   % of Net
Revenues
   Net
Revenues ($)
   % of Net
Revenues
 
   (In millions, except percentages) 
PV Module   695.2    89.9%   1,575.0    87.5%   2,370.7    97.7%
Module Processing Service           18.1    1.0%        
Other PV Products:                              
PV Cells   19.4    2.5%   11.6    0.6%   13.1    0.5%
Ingots and Wafers           14.4    0.8%   14.2    0.6%
PV Downstream Business   57.5    7.4%   177.8    9.9%   19.0    0.8%
Others(2)   1.0    0.1%   3.9    0.2%   9.0    0.4%
Total Net Revenues   773.1    100.0%   1,800.8    100.0%   2,425.9    100.0%

   

 

(1) Our revenues in 2015 include Q CELLS’ revenues from January 1 through February 5, 2015 and our consolidated revenues from February 6 through December 31, 2015.
(2) Includes sales of scrap and packaging materials.

  

PV Products

 

A PV module is an assembly of PV cells that have been electrically interconnected and laminated in a durable and weather-proof package. We have been selling a wide range of PV modules, which range in power between 260 W and 280 W for 60-cell modules, and 315 W and 335 W for 72-cell modules in 2016.

 

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The following table sets forth the types of PV modules we currently manufacture with the specifications indicated:

 

PV Module Manufactured with:   Manufacturing Facility   Dimensions (mm)   Weight (Kg)   Power (W)  
BSF Multicrystalline Cell   China   1972 x 992 x 40   23.0±0.5   300 – 325  
BSF Multicrystalline Cell   China   1670 x 1000 x 32   18.5±0.5   255 – 275  
BSF Multicrystalline Cell   China   1636 x 988 x 32   18.0±0.5   250 – 270  
Q.ANTUM Multicrystalline Cell   China   1348 x 1000 x 32   15.0   215 – 220  
Q.ANTUM Multicrystalline Cell   Korea(1)/Malaysia   1994 x 1000 x 35   24.0   335 – 345  
Q.ANTUM Multicrystalline Cell   Korea(1)/Malaysia   1670 x 1000 x 32   18.8   275 – 285  
Q.ANTUM Multicrystalline Cell   Korea(1)   1670 x 1000 x 40   20.0   275 – 285  

  

 

(1)We purchase assembled modules from an affiliated company, Hanwha Q CELLS Korea Corp., then resell to our customer under our brand and warranty.

 

Almost all of the PV modules that we sell are produced from the PV cells manufactured by us or our affiliated company, Hanwha Q Cells Korea Corp. In 2015, we had third-party module processing service providers that produced a portion of our PV modules using PV cells manufactured by us. The majority of contracts with such service providers expired in December 2015, and the remaining contracts expired in June 2016. 

 

A PV cell is a semiconductor device that converts sunlight into electricity by a process known as the photovoltaic effect. PV cells consist of a light-absorbing layer mounted on a substrate, together with top and back electrical contact points, much like a household battery. The key technical efficiency measurement of PV cells is the conversion efficiency rate. All things being equal, the higher the conversion efficiency rate, the lower the production cost of PV modules per watt because more power can be packed into a given size and module form factor. We use almost all of the PV cells that we manufacture to assemble our PV modules. The following table sets forth specifications of types of PV cells we currently produce:

 

PV Cell Type   Manufacturing
Facility
  Dimensions(1)
(mm x mm)
  Conversion
Efficiency Rate
(in 2016) (%)
  Thickness
(m)
  Maximum Power
per Cell (W)
Multicrystalline
Silicon Q.ANTUM Cell
  Malaysia  

156 x 156

156.75 x 156.75

  18.4 – 20.0   180 – 200   4.87
                     
Multicrystalline
BSF Silicon Cell
  China  

156 x 156

156.75 x 156.75

  18.2 – 19.0   180 – 200   4.62

 

 

(1) We enlarged cell dimensions during 2016 in an effort to maximize our module power outputs. As of December 31, 2016, all of our multicrystalline silicon cells were produced in 156.75 mm by 156.75 mm size.

 

We believe our PV cells and modules are competitive with other products in the PV market in terms of efficiency and quality. We expect to continue improving the conversion efficiency, module power, and cost competitiveness of our solar products as we continue to devote significant financial and human resources in our various research and development programs. We introduced solar modules with anti-PID features before 2013, by improving the materials used for encapsulation and upgrading the technology of cells used in modules. Q CELLS also succeeded in 2014 in the commercial production of multicrystalline PERC cells, which have higher conversion efficiency rate than traditional BSF cells, at its German facilities and started marketing them under its “Q.ANTUM” brand, which are currently mass-produced from our cell and module manufacturing facilities in Malaysia.

 

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We also manufacture silicon ingots and wafers through Hanwha Q CELLS Technology, our wholly-owned subsidiary that commenced operations in October 2007. As of December 31, 2016, we had annual production capacities of 1,550 MW for ingots and 950 MW for silicon wafers. The silicon ingots and wafers manufactured by Hanwha Q CELLS Technology are generally used for manufacturing our own PV cells.

 

Raw Materials Supply Management

 

Manufacturing of our solar products requires reliable supplies of various raw materials, including silicon wafers, ethylene vinyl acetate, triphenyltin, tempered glass, connecting bands, welding bands, silica gel, aluminum alloy and junction boxes. We believe it is important to secure a stable supply of raw materials, while not being overly dependent on a limited number of supply sources. The aggregate purchase amount attributable to our three largest polysilicon suppliers and our three largest silicon wafer suppliers in 2016 were 46.7% and 48.2% of our total polysilicon and silicon wafer purchases, respectively. We seek to maintain multiple supply sources of raw materials to the extent practicable and have not in the past experienced any material disruption of our manufacturing process due to insufficient supply of raw materials.

 

We maintain different inventory levels of our raw materials, depending on the type of product and the lead time required for additional supplies when needed. We seek to maintain reasonable inventory levels that achieve a balance between our efforts to reduce our storage costs and optimize working capital on one hand, and the need to ensure that we have access to adequate supplies in a timely manner on the other. We had $76.0 million of raw materials in inventory as of December 31, 2016.

 

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Silicon-based Raw Materials

 

Among the various raw materials required for our manufacturing process, silicon wafers are the most important for producing PV cells. A silicon wafer is a flat piece of crystalline silicon that can be processed into a PV cell. We currently use 6-inch wafers in our production. We produce a portion of our silicon wafer supplies internally through Hanwha Q CELLS Technology. In 2016, silicon wafers produced internally accounted for approximately 34.8% of our total silicon wafer supplies. We purchase some of these supplies through the trading department of Hanwha Corporation. We procure the remainder of our silicon wafer supplies from third-party suppliers either on a purchase order basis or under multi-year supply agreements. Our multi-year supply agreements have terms ranging from one to seven years and generally provide for adjustments to the purchase price to reflect changes in market conditions or through mutual agreement. We may also procure a small portion of silicon wafer supplies through spot market purchases. Currently, our principal silicon wafer suppliers include GCL Silicon Technology Holdings Limited, HuanTai Silicon Science & Technology Co. Ltd and Green Energy Technology, Inc.

 

The key raw material for our internal production of silicon ingots and wafers is polysilicon. Currently, our principal polysilicon supplier is Hanwha Chemical.

 

Other Raw Materials

 

In addition to silicon and silicon wafers, we use a variety of other raw materials for our production. As part of our continuing cost control efforts, we source a significant portion of these raw materials locally. We believe that our policy to use primarily locally sourced raw materials and our continuing price negotiations with our local raw material suppliers have contributed significantly to our operating margins. The use of locally sourced raw materials also shortens our lead order time and provides us with better access to technical and other support from our suppliers.

 

Production and Project Development

 

Production Facilities

 

We manufacture PV cells and PV modules through Hanwha Q CELLS Malaysia Sdn. Bhd., our wholly-owned subsidiary in Malaysia, with facilities occupying a gross floor area of 255,000 square meters in Cyberjaya, Malaysia, and through Hanwha Q CELLS Qidong, our wholly-owned PRC subsidiary, with facilities occupying a gross floor area of 173,220 square meters in Qidong, Jiangsu Province, China. As of December 31, 2016, we had annual production capacities of 4,150 MW for PV modules, 4,150 MW for PV cells, 950 MW for silicon wafers and 1,550 MW for silicon ingots.

 

We manufacture our silicon ingots and wafers through Hanwha Q CELLS Technology, one of our wholly-owned subsidiaries, with facilities occupying a gross floor area of approximately 104,479 square meters in Lianyungang, Jiangsu Province, China. As of December 31, 2016, Hanwha Q CELLS Technology had annual production capacities of 1,550 MW for silicon ingots and 950 MW for silicon wafers. We produce multicrystalline silicon wafers with a dimension of 156 mm x 156 mm and a thickness of 180 microns.

 

In the second quarter of 2016, as part of our plans to fully optimize our manufacturing cost structure and operational efficiency, we sold our 100% equity interest in the module manufacturing facility located in Eumseong, Korea to Hanwha Q CELLS Korea Corp. for $58.5 million in cash in exchange for the assumption of all outstanding assets and liabilities.

 

The table below sets forth our PV product manufacturing nameplate capacity at our manufacturing facilities as of December 31, 2016:

 

Products  Facilities locations  Rated manufacturing capacity per annum
as of December 31, 2016 (in MW)
 
PV Cell  Cyberjaya, Malaysia   1,750 
         
   Qidong, China   2,400 
         
PV Module  Cyberjaya, Malaysia   1,750 
         
   Qidong, China   2,400 
         
Silicon Wafers  Lianyungang, China   950 
         
Silicon Ingots  Lianyungang, China   1,550 

 

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We set our production plans on an annual, semi-annual and monthly basis in accordance with anticipated demand and make weekly adjustments to our production schedule based on actual orders received.

 

Production Process

 

The following diagram shows the general production stages for our PV cells:

 

 

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The following diagram shows the production procedures for our PV modules:

 

 

Quality Control and Certifications

 

Our finished PV cells and PV modules are inspected and tested according to standardized procedures. In addition, we have established multiple inspection points at key production stages to identify product defects during the production process. Unfinished products that are found to be below standard are repaired or replaced. Our quality control procedures also include raw material quality inspection and testing. Moreover, we provide regular training and specific guidelines to our operators to ensure that production processes meet our quality inspection and other quality control procedures.

 

We maintain several certifications for our quality control procedures, which demonstrate our compliance with international and domestic operating standards. We believe that our quality control procedures are enhanced by the use of sophisticated production system designs and a high degree of automation in our production process. The certifications that we currently maintain include ISO 9001:2008 quality management system certification for the process of design, production and sale of our PV modules, ISO 14001:2004 environmental management system certification, ISO 50001: 2011 energy management systems certification, OHSAS 18001:2007 occupational health and safety management system certification, IEC certification for our PV modules and UL certification. The IEC certification is issued by independent institutes TÜV and VDE in Germany to certify our PV modules are qualified under IEC 61215 and IEC 61730 safety test standards and consistent production quality inspections are performed periodically. Maintaining this certification has greatly enhanced our sales in European countries, as well as countries in Asia, the Middle East and South Africa. We obtained UL certification issued by Underwriters Laboratories Inc. and Canadian Standard Association, independent product-safety testing and certification organizations in the United States and Canada, which enables us to sell our products to customers in the North America. Furthermore, in the United States, our modules have been certified by the California Energy Commission, the state’s primary energy policy and planning agency. We obtained a certification issued by KEMCO, an independent product-safety testing and certification organization in Korea, which enables us to sell our products to customers in Korea. We obtained an MCS certificate which enables us to sell products to the United Kingdom and Clean Energy Council listing for the Australian market. We also obtained a JPEC listing and passed JET qualification for entry into the Japan market. Further, our PV lab was recognized by VDE and CSA as a Test Data Acceptable Program, which means that our lab is qualified to conduct IEC and UL1703 testing by itself and reflects our lab’s capabilities and management.

 

Sales and Distribution

 

We sell our PV modules directly to utility companies, system integrators and through third-party global distributors. Our customers include international solar power system integrators and distributors. Our system integrator customers provide value-added services and typically design and sell complete systems that use our PV modules.

 

Almost all the silicon ingots, silicon wafers and PV cells we produce are internally consumed in our manufacturing process, except for a small portion of such products that are sold to third parties.

 

We currently sell a substantial portion of our PV products and services to a limited number of customers and countries. Customers that accounted for a significant portion of our total net revenues in 2016 included NextEra Energy Resources, LLC, Hanwha Q CELLS Japan Co., Ltd., Hanwha Q CELLS Korea Corp., Clenera, LLC, Adani Group, Azure Power, Capital Dynamics, SolarCity, Renew Akshay Urja Private Limited and SunEnergy1, LLC. Our five largest customers accounted for an aggregate of 55.8% of our net revenues in 2016.

 

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We have wholly-owned subsidiaries in Australia, the United States, Canada, Turkey and Chile that engage in the marketing and distribution of our PV products and related customer service. We also market and distribute our PV products through Hanwha Q CELLS Japan Co., Ltd., Hanwha Q CELLS USA Corp. and Hanwha Q CELLS Korea Corp., which are subsidiaries of Hanwha Corporation and not our consolidated subsidiaries.

 

The following table sets forth Q CELLS’ and our net revenues by geographic region based on the location of the customers, and the percentage contribution of each of these regions to the net revenues, for the periods indicated: 

 

   Year Ended December 31, 
   2014   2015   2016 
   Q CELLS   Hanwha Q CELLS(1)   Hanwha Q CELLS 
   Net   % of Net   Net   % of Net   Net   % of Net 
Region  Revenues ($)   Revenues   Revenues ($)   Revenues   Revenues ($)   Revenues 
   (In millions, except percentages) 
United States   59.3    7.7%   519.4    28.8%   1,251.2    51.6%
Japan   55.4    7.2%   192.5    10.7%   284.0    11.7%
India   3.7    0.5%   128.2    7.1%   231.8    9.6%
Turkey   0.3    0.0%   120.3    6.7%   178.4    7.4%
Korea   327.7    42.4%   204.6    11.4%   155.4    6.4%
PRC   3.9    0.5%   140.9    7.8%   126.0    5.1%
Europe   291.8    37.7%   360.8    20.0%   81.1    3.3%
Others   31.0    4.0%   134.1    7.4%   118.0    4.9%
Total   773.1    100.0%   1,800.8    100.0%   2,425.9    100.0%

  

 

(1)Our revenues in 2015 include Q CELLS’ revenues from January 1 through February 5, 2015 and our consolidated revenues from February 6 through December 31, 2015.

 

We seek to further diversify our geographic presence and customer base in order to achieve a balanced and sustainable growth. In order to realize synergies from the combination of Hanwha SolarOne and Q CELLS, we have implemented coordinated sales and distribution operations, capitalizing on the diverse geographic footprint of each entity’s marketing network.

 

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Warranty

 

We provide long-term warranties for our PV products that are standard in the solar industry. Prior to 2012, Hanwha SolarOne’s PV products were typically sold with a two to five year warranty for technical defects, and a 10-year limited performance warranty against declines of greater than 10%, and a 25-year limited warranty against declines of greater than 20%, from their initial power generation capacity. From January 1, 2012, the standard warranty of Hanwha SolarOne provided a 12-year warranty against technical defects, and a 25-year linear warranty, which guaranteed: (i) no less than 97% of the nominal power generation capacity for multicrystalline PV modules and 96% of the nominal power generation capacity for monocrystalline PV modules in the first year, (ii) an annual output degradation of no more than 0.7% thereafter, and (iii) by the end of the 25th year, the actual power output shall be no less than 82% of initial power generation capacity.

 

Since 2015, we have offered our products with two sub-brands. For our products bearing the Hanwha SolarOne brand, we provide a material and workmanship warranty for PV modules for a period of 12 years. Under the 25-year linear warranty, we guarantee no less than 97.5% of the nominal power generation capacity for its typical multicrystalline PV modules in the first year, and an annual output degradation of no more than 0.7% thereafter. By the end of the 25th year, we warranty that the actual power output be no less than 82% of the nominal power generation capacity. For our products bearing the Q CELLS brand, we provide a material and workmanship warranty for PV products for a period of 12 years, and a performance warranty for PV modules for a period of 25 years. Under the 25-year performance warranty, in the first year, we guarantee no less than 97% of the nominal power generation capacity for PV modules and an annual output degradation of no more than 0.6% thereafter. By the end of the 25th year, we warranty that the actual power output be no less than 83% of the nominal power generation capacity. Our warranties may be transferred to third parties who purchase our PV modules.

 

Since our products have been in use for only a relatively short period of time, our assumptions regarding the durability and reliability of our products may not be accurate. In particular, the performance of newly developed products may be especially difficult to predict. We consider various factors when determining the likelihood of product defects, including an evaluation of our quality controls, technical analysis, industry information on comparable companies and our own experience. We estimate the amount of our warranty obligation primarily based on the results of technical analyses, our historical warranty claims experience, the warranty accrual practices of comparable companies, and the expected failure rate and future costs to service failed products. The estimate of warranty costs is affected by the estimated and actual product failure rates, the costs to repair or replace failed products and potential service and delivery costs incurred in correcting a product failure. Based on the considerations above and management’s ability and intention to provide repairs, replacements or refunds for defective products, we have accrued warranty costs for identified specific issues, primarily an issue in 2013 with the connectivity of a junction box that transfers electricity generated by our PV modules to the grid, based on the estimated cost of the expected remediation efforts to a specific issue. For the remaining population, we accrue warranty costs for the Q CELLS brand based on 0.5% of the production costs of PV modules produced in 2013 or later (or 2.5% for production prior to 2013; production in 2013 and later are expected to involve a lower occurrence rate due to (i) improved testing methods to reduce PID, (ii) enhanced certified testing with extended test procedures and (iii) permanent quality monitoring of production) and warranty costs for Hanwha SolarOne brand against technical defects based on 1% of revenue for PV modules. No warranty cost accrual has been recorded for Hanwha SolarOne brand’s ten year or 20 to 25-year warranties for decline from initial power generation capacity. Upon the successful completion of the alignment of the quality control standards and global quality management process between the Q CELLS brand and the SolarOne brand, we unified the brands. Starting from April 1, 2016, the estimate of accrual for the 12-year warranty against technical defects based on 0.5% of revenue for PV modules and no warranty cost accrual has been recorded for the 25-year warranties for decline from initial power generation capacity. The basis for the warranty accrual will be reviewed periodically based on actual experience. We do not sell extended warranty coverage that is separately priced or optional.

 

We incurred $11.0 million in warranty costs in 2016 and our accrued warranty costs totaled $61.2 million as of December 31, 2016.

 

Research and Development and Intellectual Property

 

The PV industry is characterized by rapidly evolving technology advancements. Achieving fast and continual technology improvements is of critical importance to maintaining our competitive advantage. Our research and development efforts concentrate on lowering production costs per watt by increasing the conversion efficiency rate of our products and reducing silicon usage by reducing the thickness of PV cells. Our research and development department works closely with our manufacturing department to lower production costs by improving our production efficiency and also with universities and research institutes to develop new technology and products.

 

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We have been developing advanced technologies to improve the conversion efficiency and reduce the production cost of our PV products. Our primary research and development center is located at Thalheim, Germany, which employed 205 highly trained researchers as of December 31, 2016. In the past, Q CELLS has developed and commercialized a wide range of products and standard production processes. For example, Q CELLS’ engineers developed the 6-inch solar cell, the 3-busbar layout and the full-square monocrystalline solar cell. Q CELLS also succeeded in 2014 in the commercial production of multicrystalline PERC cells, which have a higher conversion efficiency rate than traditional BSF cells, at its German facilities, and started marketing them under our “Q.ANTUM” brand. Our research and development expenses were $49.2 million in 2016.

 

Our intellectual property is an essential element of our business. We rely on patent, copyright, trademark, trade secret and other intellectual property law, as well as non-competition and confidentiality agreements with our employees, suppliers, business partners and others, to protect our intellectual property rights.

 

As of the date of this annual report, we had been granted 76 patents and utility models and 31 applications for patents and utility models pending in China, 43 patents and 71 patent applications pending in Germany and 66 patents and 42 patent applications pending in other countries. Our issued patents and pending patent applications relate primarily to process technologies for manufacturing PV cells. We are the owner of “SolarOne” and “Q CELLS” trademarks and have registered them in major markets where we sell our PV products. We also registered “Shuo Wang” in Chinese character, our trademark for our secondary class modules, with the China Trademark Office, which allows us to use this trademark in China.

 

We rely on trade secret protection and confidentiality agreements to protect our proprietary information and know-how. Our management and each of our research and development personnel have entered into a standard annual employment contract, which includes confidentiality undertakings and an acknowledgement and agreement that all inventions, designs, trade secrets, works of authorship, developments and other processes generated by them on our behalf are our property, and assigns to us any ownership rights that they may claim in those works. Our supply contracts with our customers also typically include confidentiality undertakings. Despite these precautions, it may be possible for third parties to obtain and use intellectual property that we own or license without consent. Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may materially and adversely affect our business, financial condition, results of operations and prospects. See “Item 3.D. Risk Factors—Risks Related to Our Business and Industry—Our failure to protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights may be costly.”

 

Competition

 

Due to various government incentive programs implemented in China, Europe, the United States, Japan and other countries in recent years, the global PV market has been rapidly evolving and has become highly competitive. In particular, a large number of manufacturers have entered the solar market.

 

We face competition from a number of global PV companies, including Trina Solar Limited, JinkoSolar Holding Co., Ltd., Canadian Solar Inc., JA Solar Holdings Co., Ltd., First Solar, Inc. and SunPower Corporation. In the upstream and midstream markets, we compete primarily on the basis of the conversion efficiency, quality, performance and appearance of our products, price, strength of supply chain and distribution network, after-sales service and brand image. In the downstream markets, we compete primarily on the basis of the financing capabilities, sales and marketing network, knowledge and understanding of local regulatory requirements and track records and reputation in the relevant local market. Some of our competitors may have longer operating histories and significantly greater financial or technological resources than we do and enjoy greater brand recognition. Some of our competitors are vertically integrated and produce upstream silicon and silicon wafers, mid-stream PV cells and modules and downstream solar application systems, which provide them with greater synergies to achieve lower production costs. During periods when there was a supply shortage of silicon and silicon wafers, we competed intensely with our competitors in obtaining adequate supplies of silicon and silicon wafers.

 

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Moreover, many of our competitors are developing next-generation products based on new PV technologies, including advanced thin film technologies, which, if successful, will compete with the crystalline silicon technology we currently use in our manufacturing processes. Through our research collaborations, we are also seeking to develop new technologies and products. If we fail to develop new technologies and products in a timely manner, we may lose our competitive advantage.

 

We, like other solar energy companies, also face competition from conventional and other renewable energy industries, such as the petroleum, natural gas and coal industries. The production cost per watt of solar energy is generally higher than other types of energy absent various forms of governmental incentives and policy supports. As a result, we cannot guarantee that solar energy will be able to compete with other energy industries, especially if there is a reduction or termination of government incentives and other forms of support.

 

Environmental Matters

 

Our manufacturing processes generate noise, waste water, gaseous wastes and other industrial wastes. Our manufacturing facilities are subject to various pollution control regulations with respect to noise and air pollution and the disposal of waste and hazardous materials. We are also subject to periodic inspections by local environmental protection authorities. We have established a pollution control system and installed various equipment to process and dispose of our industrial waste and hazardous materials. We also maintain an ISO 14001 environmental management system certification, which is issued by the International Organization for Standardization to demonstrate our compliance with international environmental standards. We have not been subject to any material proceedings or fines for environmental violations.

 

Insurance

 

We maintain property insurance for our equipment, automobiles, facilities and inventory. A significant portion of our fixed assets are covered by these insurance policies. We also maintain business interruption insurance, product liability insurance, product quality guarantee insurance and export credit insurance. We believe our insurance coverage is customary and standard for companies of comparable size in the PV industry. However, our existing insurance policies may not be sufficient to insulate us from all losses and liabilities that we may incur.

 

Regulation

 

This section sets forth a summary of the most significant regulations or requirements that affect our business activities in major markets and countries where we have significant operations, including China, the United States, the European Union, Germany, Japan and Malaysia.

 

China

 

Renewable Energy Law and Other Government Directives

 

Since early 2005, the public policy of China has generally encouraged and supported the development and use of solar and other renewable energy by enacting various laws, directives, measures and rules that establish financial incentives, preferential loans, tax preferences, subsidies, and feed-in tariffs. Following is a summary of those policies enacted in the past three years.

 

In June 2015, the National Energy Administration, the PRC Ministry of Industry and Information Technology and the PRC Certification and Accreditation Administration, jointly issued the Opinion on Promoting the Application of Advanced PV Products and Industry Upgrading, which requires higher technical standards for PV products, including (1) at least 15.5% and 16% PV conversion efficiency for polycrystalline silicon and monocrystalline silicon cell modules, (2) at least 28% PV conversion efficiency for high concentration PV products, and (3) at least 8%, 11%, 11% and 10% PV conversion efficiency for silicon-based, copper indium gallium selenide solar cells (“CIGS”), cadmium telluride (“CdTe”) and other types of thin-film cell modules, respectively. In addition, the attenuation rate of polycrystalline silicon, monocrystalline silicon and thin-film cell modules must not be higher than 2.5%, 3% and 5%, respectively, in the first year, thereafter not higher than 0.7% per year, and ending with 20% at most during the whole project life cycle. The attenuation rate of high concentration PV modules must not be higher than 2% in the first year, thereafter not higher than 0.5% per year, and ending with 10% at most during the whole project life cycle.

 

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In February 2016, the National Energy Administration (the “NDRC”), the PRC Ministry of Industry and Information Technology jointly promulgated the Guiding Opinions on Promoting the Development of "Internet Plus" Smart Energy, which encourages construction of smart PV power generation plants based on an internet cloud platform to realize the smart renewable energy power generation, as well as structuring of a real-time subsidy mechanism to PV power generation based on internet.

 

In March 2016, the NDRC released the Measures for the Administration of Full Purchase of Renewable Energy Power Generation, which requires that the grid enterprises shall, under the premise of safety, fully purchase electric power produced with renewable energy that has been connected to the power grid, and promotes the fullest use of electric power generated from renewable energy.

 

In April 2016, the Ministry of Industry and Information Technology promulgated the Administrative Measures for Industrial Energy Conservation, according to which, industrial enterprises are encouraged to create "green factories" and develop and utilize technologies including distributed photovoltaic power generation to develop and use green, clean and low-carbon energy.

 

In June 2016, the National Energy Administration announced the Circular regarding Implementation Plan on Construction of PV Power Generation in 2016, which among other things, states that the planned capacity of new PV power generation in 2016 is 18.1 million kilowatts.

 

In July 2016, the Standing Committee of the National People’s Congress promulgated the Energy Conservation Law, which encourages the installation and use of renewable energy systems, including solar energy in new buildings.

 

In December 2016, the State Council promulgated the Circular on Issuing the Comprehensive Work Plan for Energy Conservation and Emission Reduction in the 13th Five-Year Plan Period, which promotes the use of distributed photovoltaic power generation systems on building roofs, application of renewable energy in industry zones and substitution of coal with renewable energy during the 13th Five-Year Plan Period.

 

Regulation of Foreign Businesses

 

The principal regulation governing foreign ownership of solar photovoltaic businesses in the PRC is the Foreign Investment Industrial Guidance Catalogue (effective as of April 10, 2015) (the “Guidance Catalogue”). Under the Guidance Catalogue, manufacturing of solar batteries, manufacturing of equipment specially for producing solar cells, manufacturing of equipment of PV power generation, and construction and operation of solar power stations fall into the category of encouraged foreign investment industry.

 

Tax

 

PRC enterprise income tax is calculated based on taxable income determined under PRC accounting principles. On March 16, 2007, the National People’s Congress of the PRC passed the EIT, which took effect as of January 1, 2008. In accordance with the EIT, a unified enterprise income tax rate of 25% and unified tax deduction standards are applied equally to both domestic-invested enterprises and foreign-invested enterprises, such as Hanwha Q CELLS Qidong. Enterprises established prior to March 16, 2007 eligible for preferential tax treatment in accordance with the former tax laws and administrative regulations, under the regulation of the State Council, gradually became subject to the new tax rate over a five-year transition period that started on the date of effectiveness of the EIT. In accordance with the Notice of the State Council on the Implementation of the Transitional Preferential Policies in respect of Enterprise Income Tax, foreign-invested enterprises established prior to March 16, 2007 and eligible for preferential tax treatment, such as Hanwha Q CELLS Qidong, continued to enjoy the preferential tax treatment in the manner and during the period as former laws and regulations provided until such period expired. While the EIT equalizes the tax rates for FIEs and domestically owned enterprises, preferential tax treatment continues to be granted to companies in certain encouraged sectors and to companies classified as “high and new technology enterprises,” which enjoy a tax rate of 15% as compared to the uniform tax rate of 25%. Hanwha Q CELLS Qidong was approved to be qualified as a “high and new technology enterprise” on October 21, 2008. The “high and new technology enterprise” status is valid for a period of three years from the date of issuance of a “high and new technology enterprise” certificate. On October 31, 2014, Hanwha Q CELLS Qidong obtained a certificate for the renewal of its status as a “high and new technology enterprise” by the PRC government. In addition, Hanwha Q CELLS Qidong was required to perform an annual self-assessment of compliance as a “high and new technology enterprise.” If there is any significant change in the company’s business operations, manufacturing technologies or other areas that cause it to no longer qualify as a “high and new technology enterprise”, such status will be terminated from the year of such change.

 

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From 2005 until the end of 2009, Hanwha Q CELLS Qidong was also exempt from the 3% local income tax applicable to foreign-invested enterprises in Jiangsu Province. In addition, under relevant PRC tax rules and regulations, Hanwha Q CELLS Qidong was entitled to a two-year income tax exemption on income generated from additional investment in the production capacity of Hanwha Q CELLS Qidong resulting from our contribution to Hanwha Q CELLS Qidong of funds we received through issuances of series A convertible preference shares in a private placement in June and August 2006, and was entitled to a reduced tax rate of 12.5% for the three years thereafter. In addition, our subsidiaries, Hanwha Q CELLS Technology and Solar Shanghai, are subject to an enterprise income tax rate of 25% from 2008 onwards.

 

On February 3, 2015, the State Administration of Taxation issued Bulletin 7, which partially replaced previous rules under Circular 698 issued by the State Administration of Taxation on December 10, 2009. Pursuant to Bulletin 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be recharacterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to Bulletin 7, “PRC taxable assets” include assets attributed to an establishment in China, immoveable properties located in China, and equity investments in PRC resident enterprises, in respect of which gains from their transfer by a direct holder, being a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. When determining whether there is a “reasonable commercial purpose” of the transaction arrangement, features to be taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprise derives from PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have real commercial nature which is evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure; the replicability of the transaction by direct transfer of PRC taxable assets; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. In respect of an indirect offshore transfer of assets of a PRC establishment, the resulting gain is to be included with the enterprise income tax filing of the PRC establishment or place of business being transferred, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immoveable properties located in China or to equity investments in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Where the payer fails to withhold any or sufficient tax, the transferor shall declare and pay such tax to the tax authority by itself within the statutory time limit. Late payment of applicable tax will subject the transferor to default interest. Bulletin 7 does not apply to transactions of sale of shares by investors through a public stock exchange, where such shares were acquired from a transaction through a public stock exchange.

 

Pursuant to the Provisional Regulation of China on Value-Added Tax and their implementing rules, all entities and individuals that are engaged in the sale of goods, the provision of repairs and replacement services and the importation of goods in China are generally required to pay value-added tax at a rate of 17% of the gross sales proceeds received, less any deductible value-added tax already paid or borne by the taxpayer. Furthermore, when exporting goods, the exporter is entitled to a portion of or all the refund of value-added tax that it has already paid or borne. Our imported raw materials that are used for manufacturing export products and are deposited in bonded warehouses are exempt from import value-added tax.

 

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Foreign Currency Exchange

 

Foreign currency exchange in China is primarily governed by the following regulations:

 

  · Foreign Exchange Administration Rules (1996), as amended; and
  · Regulations of Settlement, Sale and Payment of Foreign Exchange (1996).

 

Under the Foreign Exchange Administration Rules, the Renminbi is convertible for current account items, including distribution of dividends, payment of interest, trade and service-related foreign exchange transactions. Conversion of Renminbi for capital account items, such as direct investment, loan, securities investment and repatriation of investment, however, is still subject to the approval of SAFE.

 

Under the Regulations of Settlement, Sale and Payment of Foreign Exchange, foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after valid commercial documents are provided and, in the case of capital account item transactions, after obtaining the approval from SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by the Ministry of Commerce, SAFE and the NDRC.

 

Dividend Distribution

 

The principal regulations governing distribution of dividends paid by wholly foreign-owned enterprises include:

 

  · Wholly Foreign-Owned Enterprise Law (1986), as amended; and
  · Wholly Foreign-Owned Enterprise Law Implementation Rules (1990), as amended.

 

Under these regulations, wholly foreign-owned enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned enterprises in China are required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to its general reserves until the accumulated amount of such reserves reaches 50% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.

 

United States

 

In the United States, various policy mechanisms have been used by the federal and state governments to accelerate the adoption of solar power. Examples of financial mechanisms intended to encourage demand for PV products include capital cost rebates, performance-based incentives, feed-in tariffs, tax credits and net metering. Some of these government mandates and economic incentives are scheduled to be reduced or expire, or could be eliminated altogether.

 

Capital cost rebates provide funds to purchasers of PV products based on the cost and size of such purchaser’s solar power system. Performance-based incentives provide funding to purchasers of PV products based on the energy produced by their solar power system. Under net metering, a customer with its own generation may be able to generate more energy than is needed to serve its own requirements. During these periods, the customer provides the excess electricity back to the grid and receives a credit on its retail electric bill based upon the retail rates for such electricity. Feed-in tariffs pay electric generators for solar power system generation based on energy produced, at a rate generally guaranteed for a period of time, which is usually above the retail rate for electricity and is intended to provide a stable, long-term (usually 10-20 year) contractual revenue stream for project owners.

 

Tax incentive programs exist in the United States at both the federal and state levels and can take the form of investment and production tax credits, accelerated depreciation and sales and property tax exemptions and abatements. At the federal level, investment tax credits for business and residential solar systems have gone through several cycles of enactment and expiration. With the passage of the Energy Policy Act of 2005, the Solar Investment Tax Credit (“ITC”) was created. It allowed owners of solar energy systems to recoup 30% of the total cost of a solar energy system, subject to caps for residentials. In October 2008, the U.S. Congress extended the 30% federal energy investment tax credit for both residential and commercial solar installations for eight years and eliminated the cap for residentials, through December 31, 2016, after which such investment tax credit was set to decrease to 10% for commercial solar installations and 0% for residential solar installations. In December 2015, the U.S. Congress further extended investment tax credits for solar systems: for utilities and commercial solar systems, 30% until 2019, 26% in 2020, 22% in 2021 and 10% in 2022; and for residential solar systems, 30% until 2019, 26% in 2020 and 22% in 2021. The investment tax credit is regarded as one of the primary economic drivers of solar installations in the United States. Although its extension through 2022 for utilities and commercial systems and 2021 for residential systems has improved medium-to-long term demand visibility in the United States, the continuing policy support with gradual decrease of the investment tax credits rate over an extended period underscores the need for solar systems’ cost to continue to decline toward grid parity.

 

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In addition to the mechanisms described above, new market development mechanisms to encourage the use of renewable energy sources continue to emerge. For example, the majority of states in the United States have adopted renewable portfolio standards which mandate that a certain portion of electricity delivered over the grid come from eligible renewable energy resources. Under a renewable portfolio standard, regulated utilities and other load serving entities are required to procure a specified percentage of their total electricity supply to serve end-user customers from eligible renewable resources, such as solar generating facilities, by a specified date. Some programs may further require that a specified portion of the total percentage of renewable energy must come from solar generating facilities. Renewable portfolio standards legislation and implementing regulations vary significantly from state to state, particularly with respect to the required percentage of renewable energy credits. 

 

Europe

 

In Europe, renewable energy targets, in conjunction with feed-in tariffs, have contributed to the growth in PV solar markets. Renewable energy targets prescribe how much energy consumption must come from renewable sources, while feed-in tariff policies are intended to support new supply development by providing investor certainty. A 2009 European Union directive on renewable energy, which replaced an earlier 2001 directive, sets varying targets for all European Union member states in support of the directive’s goal of a 20% share of energy from renewable sources in the European Union by 2020, and requires national action plans that establish clear pathways for the development of renewable energy sources.

 

Germany’s renewable energy policy has had a strong solar power focus, which contributed to Germany’s surpassing Japan in 2004 as the leading solar power market in terms of annual installation growth. The renewable energy laws in Germany require electricity transmission grid operators to connect various renewable energy sources to their electricity transmission grids and to purchase all electricity generated by such sources at guaranteed feed-in tariffs. The feed-in tariffs for residential solar projects in Germany are currently €0.1071-0.1270/kWh for systems below 11 kWp and €0.1214-0.0849/kWh for systems between 11 kWp to 100 kWp. The German government also introduced a subsidy for battery storage devices for PV systems, which came into effect on May 1, 2013 and shall provide subsidies until December 31, 2018. The subsidy covers until June 30, 2016 up to 25% of fundable costs of systems of up to 30 kW and shall be reduced degressively to up to 10% until December 31, 2018. Additional regulatory support measures include investment cost subsidies, low-interest loans and tax relief to end users of renewable energy.

 

However, following years of strong growth in solar power installations, the German government started to let the feed-in tariff mechanism phase out for PV systems >100 kWp in 2016 and replaced it with a tender system. Effective on April 1, 2012, the German government amended the Renewable Energy Act to implement staged reductions to the feed-in tariff and to exclude new PV systems above 10 MW from being eligible for the feed-in tariff. Also, a “Market Integration Model” was introduced, which allows for systems above 10 kW and up to 1 MW to be paid a feed-in tariff for only 90% of electricity produced with the remaining electricity being either self-consumed or sold on the free market. Systems below 10 kWp currently receive a feed-in tariff of 0.1270/kWh. Compared to the grid electricity price of 0.28-0.31/kWh, it is obvious that self-consumption of the produced electricity is more attractive than feeding the electricity into the grid.

 

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Further amendments of the Renewable Energy Act became effective on August 1, 2014, introducing further degression of the feed-in-tariff and obligations to direct marketing of energy produced by new PV systems above 10 MW. As a result of the further reductions to the feed-in tariff and other effects, the German market stagnated in 2015 (1.46 GW) and 2016 (1.52 GW), according to the German Federal Network Agency. However, in 2017, the market is expected to grow again to 1.6-1.9 GW fueled by the self-consumption in residential and small commercial segments, as well as low prices in tender auctions for utility scale installations.

 

Japan

 

Japan adopted the Renewables Portfolio Standard Act in 2002, which established minimum amounts of electricity generated from new energy sources that should be used by electric utilities. In addition, since 2012, in the aftermath of the tsunami in 2011, Japan has refocused its policies towards encouraging the growth of renewable energy, including the use of solar PV, by imposing a feed-in tariff scheme. Under this scheme, utilities are required to purchase electricity generated from renewable energy sources on a fixed-period contract for a fixed price. The rate and period are decided every year by an independent committee of the government. The costs incurred by the utility in purchasing renewable energy shall be transferred to all electricity consumers on a nationwide equal surcharge. For the fiscal year 2014 (ending in March 2015), the tariff rate per kW was set at JPY32 for systems of 10 kW or more and JPY37 for systems less than 10 kW, and is scheduled to decrease annually thereafter. In May 2016, the Japanese government adopted amendments to its feed-in tariff scheme, in response to the disproportionate share of subsidies granted to solar projects and to relieve financial burdens placed on electricity customers that amounted to JPY2.3 trillion in 2016. Under the revised feed-in tariff scheme, subsidies for the 2017 fiscal year (ending in March 2018), will be JPY21 per kWh for systems over 10 kW and JPY28 per kWh for systems less than 10 kW (JPY30 per kWh, if obligated to use an output control system). The amended scheme also introduced new authorization procedures including the submission of a project feasibility study.

 

Malaysia

 

Various environmental legislation (acts, rules, regulations and orders) regulations of Malaysia are particularly relevant to our day-to-day business activities in Malaysia. There are related to the prevention, abatement, control of pollution and enhancement of the environment. It restricts the discharge of wastes into the environment in contravention of the acceptable conditions. These prescribe industrial effluent standards, levels of emission from stationary sources, and list the applicable types of waste and spell out their prescribed method of treatment, disposal and transportation.

 

Malaysia’s environmental legislation also requires that environmental assessment be carried out at the planning stage of expansion of an existing facility, if the operation falls within the criteria for prescribed activities. In response to the quantitative increase in environmental pollution, Malaysia is increasing enforcement by gradually introducing stiffer regulatory controls and expanding and strengthening the structures of environmental administration. It is therefore incumbent upon us to properly implement environmental measures to comply with Malaysian law.

 

All labor relations including but not limited to contracts of service, payment of wages, employment of women, rest day, hours of work, termination, lay-off and retirement benefits and keeping of registers of employee at our Malaysian facilities are governed by Malaysian law. We must also comply with an occupational safety and health law and its subsidiary legislations which regulate and secure the safety, health and general welfare of persons at work, for protecting others against risks to safety or health in connection with the activities of persons at work.

 

Local employees registered with the Social Security Organization are insured in the manner provided under Malaysian law, where, for example, upon injuries occurring in the course of the employment, insured employees or their dependents are entitled to benefits. The employer The employer shall insured their foreign workers under the Foreign Workers Health Insurance Protection Scheme (“SPIKPA”) and Foreign Workers Compensation Scheme (“FWCS”). Both schemes protect the welfare and interests of foreign workers in Malaysia. SPIKPA provides for medical protection while reducing the financial burden of the employer in the event of hospitalization and surgical due to illnesses or accidents of foreign workers. FWCS provides the compensation benefits to a foreign worker with valid employment document for injuries sustained or death due to an accident arising out of or during his course of employment which it is mandatory for employers to insure all their foreign workers under the scheme. These insurance companies who have been appointed and approved by the Ministry of Human Resources are liable to pay compensation and any expenses incurred in the treatment and rehabilitation of a workman for personal injuries by accident or accidental death arising out of and in the course of employment.

 

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C. Organizational Structure

 

The following diagram illustrates our corporate structure as of April 28, 2017.

 

 

 

 

D. Property, Plant and Equipment 

 

Our corporate headquarters are located in Seoul, Korea. Our primary manufacturing facilities for the production of PV cells and modules are located in Cyberjaya, Malaysia and Qidong, Jiangsu Province, China. We also have research and development facilities in Thalheim, Germany, manufacturing facilities for silicon ingots and wafers in Lianyungang, Jiangsu Province, China, office facilities in Seoul, Korea and office and research and development facilities in Shanghai, China. In 2016, our rental expenses were $3.9 million.

 

The following table sets forth certain information regarding our primary property and facilities owned or leased by us as of December 31, 2016:

 

Location   Land   Building  
    Size   Own or lease   Usage   Size   Own or lease   Usage   Productive
Capacity(1)
Cyberjaya, Malaysia   255,000
square meters
  Lease term being negotiated with the Malaysian government   Office and
manufacturing
facilities
  30,000
square meters
  Owned   Office and manufacturing
facilities
 

Cell: 1,750 MW

Module: 1,750 MW

Qidong, China   259,219
square meters
  Land use right expiring between 2053 and 2061   Office and
manufacturing
facilities
  173,220
square meters
  Owned   Office and
manufacturing
facilities
 

Cell: 2,400 MW

Module: 2,400 MW

        24,500
square meters
  Owned   Manufacturing
facilities
 
Thalheim, Germany   359,000
square meters
  Owned   Office,
research and
development
  111,900
square meters
  Owned   Office,
research and
development
  For R&D activities
Lianyungang, China   976,905
square meters
  Land use right expiring in 2055   Office and
manufacturing
facilities
  76,500
square meters
  Owned   Office and
manufacturing
facilities
 

Ingot: 1,550 MW

Wafer: 950 MW

 

Seoul, Korea

 

 

 

 

 

 

 

 

 

1,718.7 square meters

 

 

Leased(2)

  Office   n/a

   

 

(1) Production capacity figures only include that of commercial production activities.
(2) The lease will be renewed in May 2017.

 

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We believe that our existing facilities are adequate and suitable to meet our present needs. As of December 31, 2016, we had annual production capacities of 4,150 MW for PV cells, 4,150 MW for PV modules, 1,550 MW for silicon ingots and 950 MW for silicon wafers.

 

We expect that our capital expenditures in 2017 will amount to approximately $50 million, which will be primarily used to fund manufacturing technology upgrades and certain R&D related expenditures. We will actively review our capital expenditure plan on a regular basis and make appropriate changes in accordance with our business environment.

 

ITEM 4A UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

A. Operating Results 

 

The following discussion should be read in conjunction with the rest of this annual report, including the section entitled “Selected Consolidated Financial and Operating Data” and our consolidated financial statements and notes thereto contained elsewhere in this annual report. The results discussed below are not necessarily indicative of the results to be expected in any future periods.

 

Overview

 

We are a global, leading solar energy company involved in manufacturing of solar cells and modules. We manufacture a variety of PV cells and PV modules at our manufacturing facilities in Malaysia and China using advanced manufacturing process technologies including those developed at our research and development facilities in Germany. We supply our solar products across the world, mainly to the United States, Japan, India and Turkey, with sales to those countries comprising over 80% of our 2016 net revenue. We sell PV cells and PV modules directly to utility companies, system integrators and also through third-party distributors. We are also growing a nascent engineering, procurement and construction (“EPC”) group that is focusing on markets in Europe, Turkey and Australia, in addition to the United States.

 

We shipped 2,956 MW and 4,583.0 MW of PV modules in 2015 and 2016, respectively. The average selling price of our PV modules was $0.58 per watt in 2015 and $0.53 per watt in 2016. Q CELLS shipped 967.1 MW of PV modules in 2014. The average selling price of Q CELLS’ PV modules was $0.72 per watt in 2014.

 

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Our net revenues in 2016 and 2015 were $2,425.9 million and $1,800.8 million, respectively. We recorded net income of $127.5 million in 2016 and $43.8 million in 2015. Q CELLS’ net revenues in 2014 were $773.1 million. Q CELLS recorded net income of $3.0 million in 2014. As of December 31, 2016, we had accumulated earnings of $107.3 million and had total borrowings of $1,071.6 million and long-term notes of $100.0 million outstanding.

 

In April 2015, we entered into a solar module supply agreement with NextEra Energy Resources, LLC, a subsidiary of NextEra Energy, Inc., under which Hanwha Q CELLS America Inc., one of our wholly-owned subsidiaries, agreed to provide 1.54 GW of solar modules to NextEra Energy Resources and its affiliates for an aggregate purchase price of $896.9 million (excluding delivery charges) between the fourth quarter of 2015 and the fourth quarter of 2016.

 

 Key Factors Affecting Our Financial Performance

 

The most significant factors affecting our financial performance are:

 

  · industry supply and demand;

 

  · government subsidies and trade sanctions;

 

  · average selling price of our PV products;

 

  · price and availability of silicon and silicon wafers;

 

  · manufacturing capacity and capacity utilization;

 

  · process technologies;

 

  · new strategic initiatives; and

 

  · fluctuations in foreign exchange rates.

 

Industry Supply and Demand

 

Our business, revenue growth and profitability are materially impacted by the overall supply and demand of the PV industry.

 

In the second half of 2009, our industry experienced a high level of supply and demand imbalance due to substantial manufacturing overcapacity throughout 2008 and 2009, mainly from China-based solar manufacturers, and sharp demand collapse from European countries such as Germany and Spain, as these countries significantly reduced or eliminated government incentives for solar installation affected by the global credit crisis of 2008. This state of oversupply resulted in a steady decline in selling prices of PV products over the next few years and adversely affected the overall profitability of the broader PV industry, which caused some of the PV manufacturers to reduce production or shut down capacity, as well as consolidations among them and even bankruptcies for some of the players starting from the second half of 2011.

 

Since then, global demand growth for PV products accelerated due to newly introduced favorable government subsidies and economic incentives in certain key PV markets such as Japan, China, the United States and some of the emerging markets that have helped create a more geographically diversified demand for PV products. The growth of the PV industry during this period has helped it gain economies of scale such that the levelized cost of electricity generated from solar power is competitive with traditional sources of power in certain regions of the United States and Western Europe.

 

After multi years of industry growth and improvement in corporate profitability, we believe our industry entered a new phase of oversupply beginning in the second half of 2016, as many Asian companies, including our company, brought new cell and module manufacturing capacities online. During this period, the blended module spot price has fallen by 31% to $0.38 per watt as of the year-end of 2016 from a year ago according to a study by GTM Research.

 

Despite the near term challenge from industry oversupply, we believe that our industry will continue to grow as solar power becomes a more economically viable energy solution on an unsubsidized basis in many countries. Such growth can be accelerated by further reduction in silicon materials prices and overall balance of systems costs.

 

With the recent presidential election in the United States and change of administration, we expect that U.S. government support for the energy industry may focus more on fossil-fuel-based and other conventional sources of supply. If this occurs, the demand for our products may decline.

 

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Government Subsidies and Trade Sanctions

 

We believe that the growth of the market for solar energy and PV products depends in large part on the availability and size of government subsidies and economic incentives. The cost of solar energy still exceeds the cost of power furnished by the electric utility grid in many countries. As a result, federal, state and local governmental bodies in many countries, most notably Japan, Germany, Spain, Italy, the United States, Australia, China, Korea, France and the Czech Republic, have provided subsidies and economic incentives in the form of rebates, tax credits and other incentives to end users, distributors, system integrators and manufacturers of PV products to promote the use of solar energy and to reduce dependency on the conventional sources of energy. Accordingly, demand for PV modules in our targeted or potential markets is affected significantly by government subsidies and economic incentives.

 

Since 2012, the United States and the European Union have imposed trade sanctions against PV products manufactured in China, including anti-dumping and countervailing duties imposed in the United States and the minimum import price and quota in the European Union. These measures have negatively affected sales in the United States and Europe of our PV products manufactured in China. See “Item 3.D. Risk Factors—Risks Related to Our Business and Industry—Changes in international trade policies and international barriers to trade may materially and adversely affect our ability to export our products worldwide.” On the other hand, these measures contributed to the increase in sales in these markets of our PV products manufactured in Malaysia because these products faced less competition in these markets.

 

With the recent change of administration in the United States, we expect U.S. government support for the energy industry may focus more on fossil-fuel-based and other conventional sources of supply. If this occurs, the demand for our products may decline. We also expect that new legislation, policies, legal and administrative actions may be proposed or enacted that could curtail subsidies that benefit our products and that additional sanctions could be imposed that could materially and adversely affect demand for our products and our results of operations. See “Item 3.D. Risk Factors—Risks Related to Our Business and Industry—A recent petition filed with the U.S. International Trade Commission calling for new tariffs on solar cells and minimum prices for solar modules imported from outside the United States could harm our ability to sell our products inside the United States, and thereby materially and adversely affect our business prospects, results of operations and financial condition.”

 

In addition, the Chinese government has imposed anti-dumping duties on certain imports of solar grade polysilicon products imported from the United States and Korea since January 2014 and the European Union since May 2014. See, “Risk Factors—Risks Related to Our Business and Industry—The imposition of anti-dumping or countervailing duties on our raw materials, including polysilicon, could materially increase our cost of production and have a material adverse effect on our business and results of operations.” While these tariffs did not materially increase our cost of production in 2016, we cannot guarantee that these tariffs will not have a material and adverse effect in the future.

 

Average Selling Price of Our PV Products

 

Pricing of PV products is principally affected by manufacturing costs, including the costs of silicon and silicon wafers, as well as the overall demand in the PV industry. Increased economies of scale and advancement of process technologies over the past decade have also led to a reduction in manufacturing costs and the prices of PV products.

 

We generally price our products based on the prevailing market price at the time our customers issue purchase orders, taking into account the size of the purchase order, the strength and history of our relationship with each customer and our capacity utilization.

 

The average selling price of our PV modules was $0.53 per watt in 2016 and $0.58 per watt in 2015. The average selling price of Q CELLS’ PV modules was $0.72 per watt in 2014. The changes in the average selling prices of our PV modules primarily reflected the prevailing market trend.

 

Price and Availability of Silicon and Silicon Wafers 

 

Since the fourth quarter of 2008, the market prices for silicon and silicon wafers have been decreasing significantly. The rapid declines in the prices of silicon and silicon wafers coupled with decreases in demand for PV products have hampered our ability to pass on to our customers the cost of silicon wafers procured at higher prices during the earlier period of supply shortage and put downward pressure on the value of our inventory of raw materials and products. As a result, our write-down of inventories amounted to $0.9 million in 2016, down from $10.2 million in the year ago period.

 

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Due to the continuous significant decrease in prices of silicon and silicon wafers since 2009, we have continued to re-negotiate all of our multi-year supply agreements. After re-negotiation, the terms of price of such multi-year agreements were generally subject to review either periodically or upon significant changes in prices on the spot market, and the unit price of the silicon-related materials has been lowered in general. However, because the oversupply situation of silicon materials worsened since 2012, some of our previous multi-year suppliers are facing difficulties in continuing their business: some of our suppliers shut down their factories for certain period of time since 2012 and some of them are in a liquidation process. We may not receive our prepayments made under those prior multi-year agreements if those suppliers become bankrupt. Some of our multi-year agreement suppliers have the difficulties in supplying us with silicon materials with fixed quantity or qualified materials and we have instituted legal proceedings against them. See “Item 3.D. Risk Factors—Risks Related to Our Business and Industry—We may be subject to legal proceedings in connection with the multi-year supply agreements we entered into previously and such proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our management personnel” and “Item 3.D. Risk Factors—Risks Related to Our Business and Industry—Prepayments we have provided to our silicon and silicon wafer suppliers expose us to the credit and performance risks of such suppliers and may not be recovered.”

 

We also acquire a small portion of our polysilicon and silicon wafers through spot market purchases. The prices we pay for silicon and silicon wafers in spot market purchases vary according to the prevailing market price, which have been, and may continue to be, subject to significant fluctuations.

 

Manufacturing Capacity and Capacity Utilization

 

Capacity and capacity utilization are key factors in growing our net revenues and gross profit. In order to accommodate the growing demand for our products, we significantly expanded our manufacturing capacity in the past. An increase in capacity, if fully utilized, has a significant positive effect on our financial results, both by allowing us to produce and sell more PV products and achieve higher net revenues, and by lowering our average manufacturing costs per unit as a result of increased economies of scale. However, when our manufacturing capacity is underutilized, we will not be able to realize such benefits but rather it increases our fixed costs while our production volume does not increase and our financial results could be adversely affected. In addition, regardless of the capacity of a particular manufacturing facility, our capacity utilization may vary greatly depending on the mix of products we produce at any particular time.

 

We produced 3,862 MW of PV cells and 3,458 MW of PV modules in 2016 and 3,244 MW of PV cells and 3,197 MW of PV modules in 2015. Q CELLS produced 97 MW and 132 MW of PV modules in 2014. The following tables set forth Q CELLS’ and our production volume of silicon ingots, silicon wafers, PV cells and PV modules for the periods indicated: 

 

   Year Ended December 31, 
   2014   2015   2016 
Products  Q CELLS   Hanwha Q
CELLS(1)
   Hanwha Q
CELLS(3)
 
       (MW)     
Volume of ingots produced   -    1,246    1,453 
Volume of wafer produced   -    1,188    1,428 
Volume of PV cells produced   1,175    3,244    3,862 
Volume of PV modules produced   132    3,197(2)   3,458 

 

 

(1) Includes Q CELLS’ production volume from January 1 through February 5, 2015 and our combined production volume from February 6 through December 31, 2015.
(2) Includes 907 MW of PV modules processed by others in 2015.
(3) Excludes PV cells and modules produced by our affiliated company, Hanwha Q CELLS Korea, Corp.

 

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As of December 31, 2016, we had annual nameplate capacities of 4,150 MW for PV cells, 4,150 MW for PV modules, 1,550 MW for silicon ingots and 950 MW for silicon wafers.

 

 Process Technologies

 

Advancements of process technologies improve the quality of PV products and enhance their conversion efficiencies. High conversion efficiencies reduce the manufacturing cost per watt of PV products and could thereby contribute to increased profitability. For this reason, solar energy companies, including us, are continuously developing advanced process technologies for large-scale manufacturing in addition to the efforts to reduce costs to maintain and improve profit margins.

 

We have continuously improved the process technology and product quality since we commenced our commercial production in November 2005. Both Q CELLS and Hanwha SolarOne introduced solar modules with anti-PID features by 2013, by improving the materials used for encapsulation and upgrading the technology of cells used in modules. In 2014, Q CELLS also successfully commenced its commercial production of multicrystalline PERC cells, which have higher conversion efficiency rate than traditional BSF cells, and started marketing them under its “Q.ANTUM” brand. Our advanced ingot growing and wafer sewing process technologies have also improved our productivity and increased the efficiency of our raw material usage, both of which have led to the lowering of the cost per watt of our products and improved our profit margins. Based on these efforts, in December 2016, our Q.ANTUM multicrystalline and BSF multicrystalline PV cells achieved average conversion efficiency rates of 19.6% and 18.7%, respectively, each based on the monthly average conversion efficiency rates of commercially produced PV cells. See “Item 3.D. Risk Factors—Risks Related to Our Business and Industry—Our future success substantially depends on our ability to manage our production effectively, improve our product quality and reduce our manufacturing costs. Our ability to achieve such goals is subject to a number of risks and uncertainties.”

 

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Fluctuations in Foreign Exchange Rates

 

Our consolidated financial statements are presented in U.S. dollars and have been prepared from the local currency-denominated financial results, assets and liabilities of us and our subsidiaries globally, which were translated as necessary into U.S. dollars. Accordingly, our consolidated financial results and assets and liabilities may be materially affected by fluctuations in exchange rates, particularly among the U.S. dollar, Renminbi, Euro, Japanese Yen, Korean Won and Malaysian Ringgit. A substantial portion of our sales is denominated in U.S. dollars, Euros and Japanese Yen, while a substantial portion of our costs and expenses is denominated in Renminbi, Malaysian Ringgit, Korean Won and Euro. To the extent that we incur costs in one currency and make revenue in another, our profit margins may be affected by changes in the exchange rates between the two currencies. Exchange rate fluctuations can also affect the value of our assets and liabilities denominated in other currencies, which include our long-term loan from the Malaysian government denominated in Malaysian Ringgit.

 

To the extent our foreign currency receivables are not matched with our foreign currency payables, we have entered into economic hedging transactions to mitigate the impact of short-term foreign currency fluctuations on our results of operations. Although the impact of exchange rate fluctuations has in the past been partially mitigated by such transactions, our results of operations have historically been affected by exchange rate fluctuations and may continue to be affected.

 

Net Revenues

 

We currently generate substantial majority of the net revenues from the production and sale of PV modules. We also generate a small portion of our net revenues from the sale of PV cells, PV kit system sales and scrap materials to third parties, as well as from PV downstream business, such as solar power project development, engineering, procurement and construction services and operation and management services.

 

Substantially all of the silicon ingots, silicon wafers and PV cells we produce are used for our own PV module production. Since our business strategy is focused on increasing our own output of PV modules on a cost-efficient basis, we plan to continue to use the substantial majority of our PV cells in manufacturing our PV modules.

 

We record revenues net of all value-added taxes imposed by governmental authorities and collected by us from customers concurrent with revenue-producing transactions. In the event we pay the shipping costs on behalf of our customers, we include the shipping costs passed on to our customers in our net revenues.

 

We currently sell a substantial portion of our PV products and services to a limited number of customers and countries. Customers that accounted for a significant portion of our total net revenues in 2016 included NextEra Energy Resources, LLC, Hanwha Q CELLS Japan Co., Ltd., Hanwha Q CELLS Korea Corp., Clenera, LLC, Adani Group, Azure Power, Capital Dynamics, SolarCity, Renew Akshay Urja Private Limited and SunEnergy1, LLC. Our five largest customers accounted for an aggregate of 55.8% of our net revenues in 2016.

 

Geographically, the United States, Japan, India and Turkey accounted for 51.6%, 11.7%, 9.6% and 7.4% of our net revenues in 2016, respectively. Although we anticipate that our dependence on a limited number of customers in a few concentrated geographic regions, including Europe, Japan, the United States and China, will continue for the foreseeable future, we are actively expanding our customer base and geographic coverage through various marketing efforts, especially in other developing PV markets, such as Korea, India, Australia, Turkey and Latin America.

 

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Sales to our customers are typically made through non-exclusive, short-term arrangements.

 

Cost of Revenues and Operating Expenses

 

The following table sets forth our and Q CELLS’ cost of revenues and operating expenses and these amounts calculated as percentages of the net revenues for the periods indicated.

 

   Year Ended December 31, 
   2014   2015   2016 
   Q CELLS   Hanwha Q CELLS(1)   Hanwha Q CELLS 
   Amount
($)
   % of Net
Revenues
   Amount
($)
   % of Net
Revenues
   Amount
($)
   % of Net
Revenues
 
   (In millions, except percentages) 
Cost of revenues   653.2    84.5%   1,466.8    81.5%   1,985.6    81.9%
Operating expenses:                              
Selling expenses   31.6    4.1%   94.1    5.2%   120.1    5.0%
General and administrative expenses   48.0    6.2%   91.7    5.1%   78.2    3.2%
Research and development expenses   27.4    3.5%   48.3    2.7%   49.2    2.0%
Restructuring charges           22.0    1.2%   0.7    0.0%
Total operating expenses   107.0    13.8%   256.1    14.2%   248.2    10.2%

 

 

(1) Includes Q CELLS’ cost of revenues and operating expenses from January 1 through February 5, 2015 and our consolidated cost of revenues and operating expenses from February 6 through December 31, 2015.

 

Cost of Revenues

 

Our cost of revenues includes the cost of raw materials used for our PV module and PV cell production, such as silicon and silicon wafers, other direct raw materials and components including ethylene vinyl acetate, triphenyltin, tempered glass, connecting bands, welding bands, silica gel, aluminum alloy and junction boxes, inventory write-down as a result of reduced cost or market assessment and a regular provision for obsolescence, and provisions for doubtful collection of advance to suppliers. We expect the cost of silicon and silicon wafers, our primary raw material for the manufacturing of PV products, to continue constituting a substantial portion of our cost of revenues in the foreseeable future. Future increases or decreases in our suppliers’ cost of silicon wafers may also contribute to fluctuations in cost of revenues.

 

Silicon and silicon wafers are the most important raw materials for our products. We record the purchase price of silicon and silicon wafers and other raw materials initially as inventory in our consolidated balance sheets, and then transfer this amount to our cost of revenues when the raw materials are consumed in our manufacturing process and the finished products are sold and delivered. In the past, certain silicon suppliers required prepayments from us in advance of delivery. We classify such prepayments as advances to suppliers and record such prepayments under either non-current assets or current assets in our consolidated balance sheets. If the creditworthiness of the suppliers deteriorates and we believe the suppliers will be unable to fulfill their supply obligations, we recognize provision for losses on advances as cost of revenue.

 

Other items contributing to our cost of revenues are labor, which includes salaries and benefits for personnel directly involved in manufacturing activities, manufacturing overhead, which consists of utility, maintenance of production equipment, and other support expenses associated with the manufacturing of our PV products, and depreciation and amortization of manufacturing equipment and facilities.

 

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Operating Expenses

 

Our operating expenses primarily consist of selling expenses, general and administrative expenses, research and development expenses and restructuring charges.

 

Selling Expenses

 

Our selling expenses primarily consist of warranty costs, shipping and handling costs for products sold, advertising and other promotional expenses, commissions paid to sales agents and salaries, commissions, traveling expenses and benefits for our sales and marketing personnel.

 

We incurred $11.0 million in warranty costs in 2016 and $16.3 million in warranty costs in 2015 and our accrued warranty costs totaled $61.2 million as of December 31, 2016. In 2014, Q CELLS incurred $7.1 million in warranty costs. As of December 31, 2014, Q CELLS’ accrued warranty costs totaled $27.5 million. For an extended discussion of warranties, see “Item 4. Information on Company – B. Business Overview – Warranty”.

 

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General and Administrative Expenses

 

Our general and administrative expenses primarily consist of salaries and benefits of our administrative staff, depreciation charges of fixed assets used for administrative purposes, as well as administrative office expenses including consumables, traveling expenses and insurance.

 

Research and Development Expenses

 

Our research and development expenses primarily consist of salaries and benefits of our research and development staff, other expenses including depreciation, materials used for research and development purposes, and the travel expenses incurred by our research and development staff or otherwise in connection with our research and development activities. We expense our research and development costs as incurred. We believe that research and development is critical to our strategic objectives of enhancing our technologies, reducing manufacturing costs and meeting the changing requirements of our customers. Following our acquisition of Q CELLS, we centralized our research and development activities by coordinating Hanwha SolarOne’s and Q CELLS’ research activities through our technology and innovation headquarters in Germany, which we expect would lead to more cost-effective research and development activities.

 

Restructuring Charges

 

In January 2015, we announced restructuring plans to restructure our global operations. This decision includes the shutdown of its production facilities in Thalheim, Germany and the transfer of machineries used for production to the production site in Malaysia. This plan resulted in a downsizing of the workforce in Germany, which was communicated in March 2015, and an alternate use for certain assets that cannot be transferred. The Group estimated that it recognized aggregate charges pursuant to the restructuring plan of up to $22.0 million and $0.7 million in 2015 and 2016, respectively, consisting of severance and other one-time termination benefits, cost to relocate long-lived assets, repayments of government subsidies and other costs.

 

Taxation

 

Cayman Islands Profits Tax

 

Under Cayman Islands law, our company is not subject to income, corporation or capital gains tax, and no withholding tax is imposed upon the payment of dividends.

 

PRC Enterprise Income Tax

 

PRC enterprise income tax is calculated based on taxable income determined under PRC accounting principles. On March 16, 2007 the National People’s Congress of the PRC passed the EIT, which took effect as of January 1, 2008. On December 6, 2007, the State Council of the PRC issued Implementation Regulations regarding the EIT, which took effect as of January 1, 2008. In accordance with the EIT and its Implementation Regulations, a unified enterprise income tax rate of 25% and unified tax deduction standards are applied equally to both domestic-invested enterprises and foreign-invested enterprises such as Hanwha Q CELLS Qidong. Enterprises established prior to March 16, 2007 and eligible for preferential tax treatment in accordance with the former tax laws and administrative regulations, under the regulations of the State Council, gradually became subject to the new tax rate over a five-year transition period starting from the date of effectiveness of the EIT. In accordance with the Notice of the State Council on the Implementation of the Transitional Preferential Policies in respect of Enterprise Income Tax, foreign-invested enterprises established prior to March 16, 2007 and eligible for preferential tax treatment, such as Hanwha Q CELLS Qidong, continue to enjoy the preferential tax treatment in the manner and during the period as former laws and administrative regulations provided until such period expires. While the EIT equalizes the tax rates for FIEs and domestically owned enterprises, preferential tax treatment continues to be granted to companies in certain encouraged sectors and to companies classified as “high and new technology enterprises,” which enjoy a tax rate of 15% as compared to the uniform tax rate of 25%. Hanwha Q CELLS Qidong was approved to be qualified as a “high and new technology enterprise” on October 21, 2008. The “high and new technology enterprise” status is valid for period of three years from the date of issuance of a “high and new technology enterprise” certificate. If there is any significant change in the company’s business operations, manufacturing technologies or other areas that cause it to no longer qualify as a “high and new technology enterprise”, such status will be terminated from the year of such change.

 

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Germany, Korea, Malaysia and China

 

We are also subject to corporate income taxes in Germany, Malaysia, Korea, Australia, Chile and Turkey among which we have significant operations in Germany, Korea, Malaysia and China. The following table sets forth the income tax rates applicable to us as of the dates indicated:

 

   Dec. 31, 2014   Dec. 31, 2015   Dec. 31, 2016 
Germany   29.13%   29.13%   29.13%
Malaysia   25.00%   25.00%   25.00%
Korea   N/A    22.00%   22.00%
China   N/A    25.00%   25.00%

 

Critical Accounting Policies and Estimates

 

We prepare our consolidated financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of, among other things, assets, liabilities, revenue and expenses. We base our estimates on our own historical experience and on various other factors that we believe to be relevant under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Some of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our financial statements as their application places the most significant demands on our management’s judgment. Starting from January 1, 2016, the estimated useful life of machinery in Malaysia has been changed to 10 years as part of the Group’s unification of the estimated useful life of tangible assets. In addition, starting from April 1, 2016, we unified our estimate of accrual for the 12-year warranty against technical defects based on 0.5% of revenue for PV modules and no warranty cost accrual has been recorded for the 25-year warranties for decline from initial power generation capacity. 

 

Reverse Acquisition

 

On February 6, 2015, we completed the acquisition of Q CELLS from Hanwha Solar in an all-stock transaction (the “Transaction”). The Transaction is accounted for as a reverse acquisition under the acquisition method of accounting, in accordance with ASC 805, “Business Combinations”. Q CELLS is determined as the accounting acquirer. Consequently, the historical consolidated financial statements for all periods prior to the consummation of the Transaction only reflect the historical consolidated financial statements of Q CELLS. Upon the consummation of the Transaction, Q CELLS applied purchase accounting to the assets and liabilities of Hanwha SolarOne. Subsequent to the Transaction, the consolidated financial statements reflect the results of the combined company. The historical issued and outstanding Q CELLS common shares have been recast to retrospectively reflect the number of shares issued in the Transaction in all periods presented.

 

Revenue Recognition

 

Our primary business activity is to produce and sell PV modules. We periodically, upon special request from customers, sell PV cells and silicon ingots. We record revenue related to the sale of PV modules and PV cells and silicon ingots when the criteria of ASC 605-10, “Revenue Recognition: Overall” are met. These criteria include all of the following: persuasive evidence of an arrangement exists; delivery has occurred; the sales price is fixed or determinable; and collection is reasonably assured.

 

We perform ongoing credit assessment of each customer, including reviewing the customer’s latest financial information and historical payment record and performing necessary due diligence to determine acceptable credit terms. In instances where longer credit terms are granted to certain customers, the timing of revenue recognition was not impacted as we have historically been able to collect under the original payment terms without making concessions. Other than warranty obligations, we do not have any commitments or obligations to deliver additional products or services to the customers. Payments received from customers for shipping and handling costs are included in net revenues. Shipping and handling costs relating to sales and purchases are included in selling expenses and cost of revenue, respectively.

 

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We generally recognize revenue related to long-term solar systems integration services using the percentage-of-completion method which is the preferable method of revenue recognition for such contracts. We estimate our revenues by using the cost-to-cost method, whereby we derive a ratio by comparing the costs incurred to date to the total costs expected to be incurred on the project. We apply the ratio computed in the cost-to-cost analysis to the contract price to determine the estimated revenues earned in each period. A contract may be regarded as substantially completed if remaining costs are not significant in amount. When we determine that total estimated costs will exceed total revenues under a contract, we record a loss accordingly. In certain arrangements which did not meet the requirements to measure revenue according to the progress towards completion, we recognized revenue upon completion of the contract.

 

We entered into a processing service arrangement to process PV cells into PV modules with a third-party. For this service arrangement, we “purchases” PV cells from the related party and contemporaneously agrees to “sell” a specified quantity of PV modules back to the same party. The quantity of PV modules sold back to the same party under these processing arrangements is consistent with the amount of PV cells purchased from the same party based on current production conversion rates. In accordance with ASC 845-10, “Accounting for Purchases and Sales of Inventory with the Same Counterparty”, we record the amount of revenue on these processing transactions based on the amount received for PV modules sold less the amount paid for the PV cells purchased from the same party. These sales are subject to all of the above-noted criteria relating to revenue recognition.

 

We develop and sell solar power plants which generally include the lease of related real estate. We recognize revenue from such sale in accordance with ASC 360-20, “Real Estate Sales”. We record the sale as revenue using full accrual method when all of the following requirements are met: (a) the sales are consummated; (b) the buyer's initial and continuing investments are adequate to demonstrate its commitment to pay; (c) the receivable is not subject to any future subordination; and (d) we have transferred the usual risk and rewards of ownership to the buyer. Specifically, we consider the following factors in determining whether the sales have been consummated: (a) the parties are bound by the terms of a contract; (b) all consideration has been exchanged; (c) permanent financing for which the seller is responsible has been arranged; and (d) all conditions precedent to closing have been performed, and we do not have any substantial continuing involvement with the project.

 

Revenue is recognized net of all value-added taxes imposed by governmental authorities and collected from customers concurrent with revenue-producing transactions. We do not offer implicit or explicit rights of return, regardless of whether goods were shipped to the distributors or shipped directly to the end user, other than due to product defect.

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets as follows:

 

Buildings   20 to 50 years
Plant and machinery   5 to 15 years
Furniture, fixtures and office equipment   3 to 18 years
Others   1 to 20 years

 

Repair and maintenance costs are charged to expense when incurred, whereas the cost of renewals and betterments that extend the useful life of fixed assets are capitalized as additions to the related assets. Retirement, sale and disposal of assets are recorded by removing the cost and accumulated depreciation with any resulting gain or loss reflected in the consolidated statements of comprehensive income (loss).

 

Cost incurred in constructing new facilities, including progress payments, interest and other costs relating to the construction are capitalized and transferred to fixed assets upon completion and depreciation commences when the asset is available for its intended use.

 

Interest costs are capitalized if they are incurred during the acquisition, construction or production of a qualifying asset and such costs could have been avoided if expenditures for the assets have not been made. Capitalization of interest costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Interest costs are capitalized until the assets are ready for their intended use.

 

Warranty Costs

 

For a discussion of warranty costs, see “Item 4. Information on Company – B. Business Overview – Warranty”.

 

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If our PV modules fail to perform to the standards of the performance guarantee, we could incur substantial expenses and substantial cash outlays to repair, replace or provide refunds for the under-performing products, which could negatively impact our overall cash position.

 

Impairment of Long-Lived Assets

 

We evaluate our long-lived assets or asset groups, including land use rights with finite lives, for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying amount of a group of long-lived assets may not be recoverable. When these events occur, we evaluate for impairment by comparing the carrying amount of the assets to the future undiscounted net cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, we would recognize an impairment loss based on the excess of the carrying amount of the asset group over its fair value.

 

With respect to 2014, we performed impairment tests on the buildings, machinery and equipment that may potentially become idle following the restructuring of Hanwha Q CELLS GmbH’s operations that involve the relocation of its manufacturing facilities to Malaysia. Based on this impairment assessment, we concluded that the carrying amounts of some of the long-lived assets are not recoverable and recognized an impairment charge of $2.4 million, among which approximately $0.8 million resulted from the impairment of software and other intangible assets.

 

Nil and $4.5 million of impairment charge was recognized for the years ended December 31, 2015 and 2016, respectively.

 

Functional and Reporting Currencies

 

The functional currencies of our operating subsidiaries are generally their local currencies, as determined based on the criteria of ASC 830, “Foreign Currency Translation”. Our reporting currency is U.S. dollars.

 

Transactions denominated in foreign currencies are remeasured into the functional currency at the exchange rates prevailing on the transaction dates. Foreign currency denominated financial assets and liabilities are remeasured into the functional currency at the balance sheet date exchange rate. Exchange gains and losses occurring from such transactions or assets and liabilities denominated in currencies different from the functional currencies are reported in the statement of comprehensive income (loss) and affect the net income (loss) for the period.

 

We use the average exchange rate prevailing during the year and the exchange rate at the balance sheet date to translate the operating results and financial position, respectively, of consolidated subsidiaries using functional currencies that are different from the reporting currency. Accumulated translation adjustments are reported in stockholders’ equity, as a component of accumulated other comprehensive income (loss).

 

Financial Instruments—Foreign Currency Derivative Contracts, Commodity Contracts and Interest Rate Swap Contract

 

Our foreign currency derivative contracts, commodity derivative contracts and interest rate swap contracts are used to manage our foreign currency risks principally arising from sales contracts denominated in the Euro, Australian Dollar, Korean Won and Japanese Yen, maintain the stability of the purchase prices for silver and aluminum, the raw materials used in the production of PV products, and manage the interest rate risk for our long-term bank borrowings. We record these derivative instruments as current assets or current liabilities, measured at fair value.

 

Changes in the fair value of these derivative instruments are recognized in our consolidated statements of comprehensive income (loss). These derivative instruments are not designated and do not qualify as hedges and are adjusted to fair value through current earnings. As of December 31, 2016, the Group had outstanding cross-currency exchange rate contracts to deliver JPY1,800.0 million and receive $16.0 million and interest rate swap contracts with notional amount of $440.2 million in which the Company pays fixed interest and receives variable interest. We estimate the fair value of our foreign currency and interest rate swap derivatives using a pricing model based on market observable inputs.

 

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Accounting for Income Taxes and Uncertain Income Tax Positions

 

We account for income taxes in accordance with ASC 740, “Accounting for Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. We record a valuation allowance to offset deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

 

We also apply ASC 740-10, “Accounting for Uncertainty in Income Taxes”, which clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements. We have elected to classify interest and/or penalties related to an uncertain position, if and when required, as part of “other operating expenses” in the consolidated statements of comprehensive income (loss).

 

Advance to Suppliers and Long-term Prepayments

 

Advance to suppliers and long-term prepayments represent interest-free cash deposits paid to suppliers for future purchases of raw materials. As of December 31, 2016, we had $25.5 million of advances to suppliers and nil of long-term prepayments outstanding.

 

The risk of loss arising from non-performance by or bankruptcy of the suppliers is assessed prior to making the deposits and credit quality of the suppliers is continually assessed. If there is deterioration in the creditworthiness of the suppliers, we may seek to recover the advances from the suppliers and will provide for losses on advances in cost of revenues where we believe the suppliers will be unable to fulfill their supply obligations. In such cases, a charge to cost of revenues will be recorded in the period in which a loss is determined to be probable and the amount can be reasonably estimated.

 

In circumstances where a supplier is in contractual default and we have termination rights that require repayment of the remaining deposit and we have asserted such rights, the advances are reclassified to other current assets in our consolidated balance sheets. Similarly, we reclassify advances to other current assets when legal proceedings have commenced where we are claiming a breach of contract and are seeking monetary recovery of the remaining deposit. A provision for loss is recognized in operating expenses in the period in which the loss on such assets is determined to be probable and the amount can be reasonably estimated.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), “Revenue from Contracts with Customers (Topic 606)”. This guidance was issued to clarify the principles for recognizing revenue and developing a common revenue standard for U.S. GAAP and International Financial Reporting Standards (“IFRS”). In addition, in August 2015, the FASB issued Accounting Standards Update No. 2015-14 (ASU 2015-14): “Revenue from Contracts with Customers (Topic 606).” This update was issued to defer the effective date of ASU No, 2014-09 by one year. Therefore, the effective date of ASU No, 2014-09 for public business entities is for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

 

The FASB allows two adoption methods under ASU 2014-09. Under one method, a company will apply the rules to contracts in all reporting periods presented, subject to certain allowable exceptions. Under the other method, a company will apply the rules to all contracts existing as of January 1, 2018, recognizing in beginning retained earnings an adjustment for the cumulative effect of the change and providing additional disclosures comparing results to previous rules ("modified retrospective method"). We continue to evaluate the available adoption methods.

 

Upon initial evaluation, we believe the key changes in the standard that impact the Group’s revenue recognition relate to the allocation of contract revenues between various services and equipment, and the timing of when those revenues are recognized. Management is still in the process of evaluating these impacts and has not chosen the method as of December 31, 2016.

 

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In November 2015, the FASB issued Accounting Standards Update No. 2015-17 (ASU 2015-17), "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes." This guidance was issued to simplify the presentation of deferred income taxes. The amendments in this Update require that deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Group has not early adopted this Update. The Group believes that adoption of this ASU will not have a material effect on its consolidated financial statements. 

 

In January 2016, the FASB issued Accounting Standards Update No. 2016-01 (ASU 2016-01), "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The main objective of this update is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The new guidance addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2017. Early adoption by public entities is permitted only for certain provisions. The Group is in the process of evaluating the impact of the standard on its consolidated financial statements. 

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), “Leases”. Under the new guidance, lessees will be required to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier application permitted. The Group is in the process of evaluating the impact of the standard on its consolidated financial statements.

 

In March 2016, the FASB issued Accounting Standards Update No. 2016-07 (ASU 2016-07), “Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting”, which eliminates the requirement to retrospectively apply the equity method in previous periods. Instead, the investor must apply the equity method prospectively from the date the investment qualifies for the equity method. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The Group is in the process of evaluating the impact of the standard on its consolidated financial statements.

 

In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13), “Financial Instruments – Credit Losses”, which introduces new guidance for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including, but not limited to, trade and other receivables, held-to-maturity debt securities, loans and net investments in leases. The new guidance also modifies the impairment model for available-for-sale debt securities and requires the entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. The standard also indicates that entities may not use the length of time a security has been in an unrealized loss position as a factor in concluding whether a credit loss exists. The ASU is effective for public companies for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Group is in the process of evaluating the impact of the standard on its consolidated financial statements.

 

In August 2016, the FASB issued Accounting Standards Update No. 2016-15 (ASU 2016-15), “Statement of Cash Flows”, a proposed ASU on restricted cash in response to an EITF consensus-for-exposure. The proposed ASU would require an entity to include in its cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. The proposal’s primary purpose is to eliminate the diversity in practice related to how entities classify and present changes in restricted cash in the cash flow statement in accordance with ASC 230. The ASU is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Group is in the process of evaluating the impact of the standard on its consolidated financial statements.

 

In November 2016, the FASB issued Accounting Standards Update No. 2016-18 (ASU 2016-18), “Statement of Cash Flows”, which amends ASC 230 to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The ASU is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Group is in the process of evaluating the impact of the standard on its consolidated financial statements.

 

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Consolidated Results of Operations

 

Following the consummation of the combination of Hanwha SolarOne and Q CELLS on February 6, 2015, Q CELLS was determined as the accounting acquirer in accordance with ASC 805, “Business Combinations”. Consequently, the consolidated financial statements of Q CELLS are treated as our historical financial statements for all periods prior to the consummation of the combination of Hanwha SolarOne and Q CELLS with our consolidated results of operations reflected from February 6, 2015. The following table sets forth our and Q CELLS’ summary consolidated statements of operations and comprehensive income (loss) for the periods indicated:

 

    Year Ended December 31,  
    2014     2015(1)     2016  
    Q CELLS     Hanwha Q CELLS     Hanwha Q CELLS  
    ($)     % of Net
Revenues
    ($)     % of Net
Revenues
    ($)     % of Net
Revenues
 
    (In millions, except for percentages)  
Consolidated Statement of Operations Data                                                
Net revenues     773.1       100.0 %     1,800.8       100.0 %     2,425.9       100.0 %
Cost of Revenues     653.2       84.5 %     1,466.8       81.5 %     1,985.6       81.9 %
Gross profit     119.9       15.5 %     334.0       18.5 %     440.3       18.1 %
Operating expenses:                                                
Selling expenses     31.6       4.1 %     94.1       5.2 %     120.1       5.0 %
General and administrative expenses     48.0       6.2 %     91.7       5.1 %     78.2       3.2 %
Research and development expenses     27.4       3.5 %     48.3       2.7 %     49.2       2.0 %
Restructuring charges                 22.0       1.2 %     0.7       0.0 %
Total operating expenses     107.0       13.8 %     256.1       14.2 %     248.2       10.2 %
Operating income (loss)     12.9       1.7 %     77.9       4.3 %     192.1       7.9 %
Interest expense     (18.1 )     -2.3 %     (66.9 )     -3.7 %     (54.5 )     -2.2 %
Interest income     1.7       0.2 %     10.9       0.6 %     8.1       0.3 %
Foreign exchange gain (loss)     7.0       1.0 %     (23.6 )     -1.3 %     (3.5 )     -0.1 %
Changes in fair value of derivative contracts     0.9       0.0 %     9.6       0.5 %     (24.4 )     -1.0 %
Investment loss                 (1.3 )     -0.1 %            
Share of losses of equity method investments                 (0.6 )     0.0 %     (0.9 )     0.0 %
Reversal of litigation accruals                 48.5       2.7 %            
Other income (expense), net                 (0.6 )     0.0 %     6.3       0.3 %
Income (loss) before income taxes     4.4       0.6 %     53.9       3.0 %     123.2       5.1 %
Income tax expenses (benefits)     1.4       0.2 %     10.1       0.6 %     (4.3 )     -0.2 %
Net income (loss)     3.0       0.4 %     43.8       2.4 %     127.5       5.3 %
Foreign currency translation adjustments     (40.6 )     -5.3 %     (34.6 )     -1.9 %     (59.8 )     -2.5 %
Pension adjustments                             (0.3)       0.0 %
Comprehensive income (loss)     (37.6 )     -4.9 %     9.2       0.5 %     67.4       2.8 %

 

 
(1)Our results of operations for 2015 represent Q CELLS’ (but not Hanwha SolarOne’s) results of operations for the period from January 1, 2015 to February 5, 2015 and our consolidated results of operations for the period from February 6, 2015 to December 31, 2015 following the consummation of the combination of Hanwha SolarOne and Q CELLS on February 6, 2015.

 

2016 Compared to 2015

 

Net Revenues

 

Our net revenues increased by 34.7% to $2,425.9 million for 2016 from $1,800.8 million for 2015 due to an increase in PV module shipments from 2,956.1 MW for 2015 to 4,583.0 MW for 2016, which was primarily as a result of the strong increase in demand for our PV products in key markets such as the United States, Japan and India. Our year-over-year revenue increase in the United States was particularly strong, with an increase of 140.9% to $1,251.2 million in 2016 from $519.4 million in 2015.

 

Cost of Revenues and Gross Profit

 

Our cost of revenues increased by 35.4% to $1,985.6 million for 2016 from $1,466.8 million for 2015 due primarily to the substantial increase of PV product shipments by 55.0% in 2016 from the previous year.

 

Our gross profit increased by 31.8% to $440.3 million for 2016 from $334.0 million for 2015 also as a result of our manufacturing cost reduction, as we completed the ramp-up of newly commissioned production capacities in late 2015 and early 2016. Our gross profit margin decreased to 18.1% for 2016 from 18.5% for 2015, which was partially due to the steep decline of the market average selling price of solar modules in the second half of 2016.

 

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Selling Expenses, General and Administrative Expenses, Research and Development Expenses, and Restructuring Charges

 

Our selling expenses primarily consist of warranty costs, marketing and promotional expenses, shipping and handling costs and salaries, commissions, traveling expenses and benefits of our sales and marketing personnel. Our selling expenses increased by 27.6% to $120.1 million for 2016 from $94.1 million for 2015, which were largely in line with the increase in our sales volume. Selling expenses as a percentage of our total net revenues decreased to 5.0% for 2016 from 5.2% for 2015.

 

Our general and administrative expenses primarily consist of salaries and benefits of our administrative staff, depreciation charges of fixed assets used for administrative purposes, as well as administrative office expenses, including consumables, traveling expenses and insurance for our administrative personnel. Our general and administrative expenses decreased by 14.7% to $78.2 million for 2016 from $91.7 million for 2015, due primarily to our continuing cost controls measures. General and administrative expenses as a percentage of our total net revenues decreased to 3.2% for 2016 from 5.1% for 2015.

 

Our research and development expenses primarily consist of materials used for research and development purposes, salaries and benefits of our research and development staff, depreciation charges, and travel expenses incurred by our research and development staff or otherwise in connection with our research and development activities. Our research and development expenses increased by 1.9% to $49.2 million for 2016 from $48.3 million for 2015. Research and development expenses as a percentage of our total net revenues decreased to 2.0% for 2016 from 2.7% for 2015.

 

Operating Income

 

As a result of the foregoing, our operating income was $192.1 million for 2016, compared to $77.9 million for 2015. Our operating profit margin was 7.9% for 2016, compared to 4.3% for 2015.

 

Interest Income and Expense and Foreign Exchange Gain

 

We generated interest income of $8.1 million and incurred interest expense of $54.5 million for 2016, compared to interest income of $10.9 million and interest expense of $66.9 million for 2015. The decrease in interest expense was due to paydown of higher interest-bearing debt instruments and the decrease in commission rate of guarantee fee.

 

We recorded foreign exchange loss of $3.5 million for 2016, compared to foreign exchange loss of $23.6 million for 2015, due primarily to increased U.S. dollar denominated assets resulting from increased shipments to the U.S., which helped reduce our over-sold U.S. dollar position.

 

Income Tax Expenses

 

Our income tax benefits were $4.3 million for 2016 compared to a $10.1 million tax expense in 2015, primarily due to the derecognition of a $17.9 million uncertain tax position. Management believes that the company will not be liable for this tax position due to the expiration of the statute of limitations. This income tax benefit was partially off-set by tax expenses recognized by our Korean and American subsidiaries on their respective pre-tax incomes. Our effective tax rate was 18.7% in 2015.

 

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Net Income

 

As a result of the cumulative effect of the above factors, we had a net income of $127.5 million for 2016, compared to a net income of $43.8 million for 2015. Our net profit margin was 5.3% for 2016, as compared to 2.4% for 2015.

 

Other Comprehensive Income (Loss)

 

We recorded foreign currency translation adjustments of negative $59.8 million and pension adjustment of negative $0.3 million for 2016, compared to negative $34.6 million for 2015. Other comprehensive losses in 2016 resulted from depreciation of CNY, EUR, and MYR against the US dollar. Such depreciation of functional currencies in our Chinese, German, and Malaysian subsidiary resulted in the recognition of other comprehensive losses resulting from currency translation adjustments.

 

2015 Compared to 2014

 

Net Revenues

 

Our net revenues increased by 132.9% to $1,800.8 million for 2015 from $773.1 million for 2014, due partially to an increase in PV module shipments from 967.1MW for 2014 to 2,956.1MW for 2015 primarily as a result of (i) the inclusion of Hanwha SolarOne’s results of operations from February 6, 2015, and (ii) an increase in sales in the United States, Japan, PRC, Turkey and India from $122.6 million in 2014 to $1,101.3 million in 2015.

 

Cost of Revenues and Gross Profit

 

Our cost of revenues increased by 124.6% to $1,466.8 million for 2015 from $653.2 million for 2014 due primarily to the increase in our sales volume including as a result of the inclusion of Hanwha SolarOne’s results of operations from February 6, 2015 and the increased cost related to downstream activities.

 

In addition to the inclusion of Hanwha SolarOne’s gross profits, our gross profit increased to $334.0 million for 2015 from $119.9 million for 2014 also as a result of the cessation of production at our Thalheim facilities, which had higher unit cost structure, starting from March 2015, and our introduction of higher-efficiency PV module products which reduced unit cost structure. Our gross profit margin also increased to 18.5% for 2015 from 15.5% for 2014.

 

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Selling Expenses, General and Administrative Expenses, Research and Development Expenses, and Restructuring Charges

 

Our selling expenses primarily consist of warranty costs, marketing and promotional expenses, shipping and handling costs and salaries, commissions, traveling expenses and benefits of our sales and marketing personnel. Our selling expenses increased by 197.8% to $94.1 million for 2015 from $31.6 million for 2014, due primarily to the increase in overall size of our business as a result of the combination of Hanwha SolarOne and Q CELLS and to expanded sales and marketing networks to capture new growth markets such as India and Turkey. Selling expenses as a percentage of our total net revenues increased to 5.2% for 2015 from 4.1% for 2014.

 

Our general and administrative expenses primarily consist of salaries and benefits of our administrative staff, depreciation charges of fixed assets used for administrative purposes, as well as administrative office expenses, including consumables, traveling expenses and insurance for our administrative personnel. Our general and administrative expenses increased by 91.0% to $91.7 million for 2015 from $48.0 million for 2014, due primarily to (i) the increase in overall size of our business as a result of the combination of Hanwha SolarOne and Q CELLS, (ii) one-time service and consultancy fees of $1.6 million incurred in relation to the combination of Hanwha SolarOne and Q CELLS and (iii) certain restructuring related costs following the acquisition of Q CELLS. General and administrative expenses as a percentage of our total net revenues decreased to 5.1% for 2015 from 6.2% for 2014.

 

Our research and development expenses primarily consist of materials used for research and development purposes, salaries and benefits of our research and development staff, depreciation charges, and travel expenses incurred by our research and development staff or otherwise in connection with our research and development activities. Our research and development expenses increased by 76.3% to $48.3 million for 2015 from $27.4 million for 2014, due primarily to (i) the inclusion of Hanwha SolarOne’s research and development expenses from February 6, 2015 and (ii) commercial roll-out of Q.ANTUM products. Research and development expenses as a percentage of our total net revenues decreased to 2.7% for 2015 from 3.5% for 2014.

 

We incurred one-time restructuring charges of $22.0 million for 2015 as compared to none for 2014, in connection with our restructuring that started in March 2015 to cease production activities in Germany and transfer our manufacturing equipment to more cost-competitive production bases. Such restructuring charges consist primarily of severance and other one-time termination benefits, cost to relocate long-lived assets, repayments of government subsidies and other costs.

 

Operating Income

 

As a result of the foregoing, our operating income was $77.9 million for 2015, compared to $12.9 million for 2014. Our operating profit margin was 4.3% for 2015, compared to 1.7% for 2014.

 

Interest Income and Expense and Foreign Exchange Gain

 

We generated interest income of $10.9 million and incurred interest expense of $66.9 million for 2015, compared to interest income of $1.7 million and interest expense of $18.1 million for 2014. The increase in interest expense was due to an increase in the average outstanding balance of the interest-bearing debt due primarily to the increase of our overall debt as a result of the combination of Hanwha SolarOne and Q CELLS and to new capacity additions in Malaysia and Korea.

 

We recorded foreign exchange loss of $23.6 million for 2015, compared to foreign exchange gain of $7.0 million for 2014, due primarily to losses from U.S. dollar-nominated debt held by our operating subsidiaries, as a result of the appreciation in 2015 of the U.S. dollar against Renminbi and the Euro, the functional currencies of such subsidiaries.

 

Income Tax Expenses

 

Our income tax expenses were $10.1 million for 2015 compared to income tax expense of $1.4 million for 2014, due primarily to the increase in income before taxes. Our effective tax rate was 18.7% in 2015 compared to 31.8% in 2014.

 

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Net Income

 

As a result of the cumulative effect of the above factors, we had a net income of $43.8 million for 2015, compared to a net income of $3.0 million for 2014. Our net profit margin was 2.4% for 2015, as compared to 0.4% for 2014.

 

Other Comprehensive Income (Loss)

 

We recorded foreign currency translation adjustments of negative $34.6 million for 2015, compared to negative $40.6 million for 2014, due primarily to the appreciation of the U.S. dollar, our reporting currency, against the Euro, Malaysian Ringgit and Renminbi, which are the functional currencies of the relevant operating subsidiaries.

 

B. Liquidity and Capital Resources

 

We operate in an industry with significant financing requirements. Our principal sources of liquidity and capital have been:

 

·cash generated by our operations;

 

  · proceeds from borrowings from banks; and

 

  · proceeds from securities offerings.

 

Our principal capital requirements or uses have been:

 

  · financing our capital expenditures; and

 

  · financing our working capital requirements.

 

We believe our working capital is sufficient for our present requirements.

 

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Cash Flows

 

The following table sets forth a summary of our and Q CELLS’ cash flows for the periods indicated:

 

   Year Ended December 31, 
   2014   2015(1)   2016 
   Q CELLS   Hanwha Q
CELLS
   Hanwha Q
CELLS
 
   (In millions $) 
Net cash provided by (used in) operating activities   (81.6)   250.6    137.4 
Net cash provided by (used in) investing activities   (65.1)   (171.8)   (21.0)
Net cash provided by (used in) financing activities   56.4    (16.5)   117.2 
Net increase (decrease) in cash and cash equivalents   (90.3)   62.3    233.6 

 

 
(1)Our cash flows for 2015 represent Q CELLS’ cash flows for the period from January 1, 2015 to February 5, 2015 and our cash flows for the period from February 6, 2015 to December 31, 2015.

 

Cash Flows from Operating Activities

 

Net cash provided by (used in) operating activities primarily consists of net income (loss), as adjusted for non-cash items such as depreciation and amortization, allowance for doubtful accounts, foreign exchange translation gains and losses and non-cash interest income and expenses, and the effect of changes in certain operating assets and liabilities line items such as trade accounts receivable, inventories, other current assets, restricted cash, trade accounts payable, warranty provisions, accrued expenses, other payables and other current liabilities.

 

Our net cash provided by operating activities was $137.4 million for 2016, which was derived from net income of $127.5 million, adjusted to reflect a net positive adjustment relating to non-cash items and a net positive effect from changes in operating assets and liabilities. The adjustments relating to non-cash items were primarily comprised of depreciation, amortization and impairment of $94.1 million, foreign currency exchange loss of $35.3 million, and non-cash interest expenses on amortization of long-term debt and litigation accruals of $8.4 million. The adjustments relating to changes in operating assets and liabilities, which resulted in a net negative effect of $106.1 million, were primarily comprised of:

 

  · a decrease of $383.2 million in deferred revenue due primarily to the increase in cash payments received from customers in advance of the delivery of our PV modules;

  

  · an increase of $72.4 million in trade accounts receivable;

 

  · a decrease of $15.5 million in inventories due primarily to the improvement in inventory controls; and

 

·a decrease of $50.1 million in restricted cash due primarily to a decrease in cash provided to banks as collateral in relation to the purchase of raw materials and sale of goods and for our working capital financings.

 

Our net cash provided by operating activities was $250.6 million for 2015, which was derived from net income of $43.8 million, adjusted to reflect a net positive adjustment relating to non-cash items and a net positive effect from changes in operating assets and liabilities. The adjustments relating to non-cash items were primarily comprised of depreciation, amortization and impairment of $83.3 million, foreign currency exchange loss of $37.0 million, and non-cash interest expenses on amortization of long-term debt and litigation accruals of $9.8 million, partially offset by reversal of litigation accruals of $48.5 million. The adjustments relating to changes in operating assets and liabilities, which resulted in a net positive effect of $103.2 million, were primarily comprised of:

 

·an increase of $402.1 million in deferred revenue due primarily to the increase in cash payments received from customers in advance of the delivery of our PV modules;

 

·an increase of $196.4 million in trade accounts receivable;

 

·an increase of $74.0 million in inventories due primarily to the expansion of sales activities; and

 

·an increase of $67.0 million in restricted cash due primarily to an increase in cash provided to banks as collateral in relation to the purchase of raw materials and sale of goods and for our working capital financings.

 

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Q CELLS’ net cash used in operating activities was $81.6 million in 2014, which was derived from net income of $3.0 million, adjusted to reflect a net positive adjustment relating to non-cash items and a net negative effect from changes in operating assets and liabilities. The adjustments relating to non-cash items were primarily comprised of depreciation, amortization and impairment of $37.4 million and non-cash interest expenses on amortization of long-term debt and litigation accruals of $7.7 million. The adjustments relating to changes in operating assets and liabilities, which resulted in a net negative effect of $131.9 million, were primarily comprised of:

 

·an increase of $46.1 million in inventories due primarily to the expansion of sales activities;

 

·an increase of $37.1 million in trade accounts receivable due primarily to the increase in sales; and

 

·a decrease of $26.5 million in trade accounts payable due primarily to early payments to suppliers for cash discount and relatively large payments made near the end of the year.

 

Cash Flows from Investing Activities

 

Our net cash provided by (used in) investing activities primarily consists of cash used for capital expenditures, net cash received from an acquisition and cash used in the acquisition of fixed assets.

 

Our net cash used in investing activities was $21.0 million for 2016, primarily consisting of $174.9 million of cash used in acquisition of fixed and intangible assets for capacity expansion and upgrades in our Malaysia, Korean and Chinese facilities and $150.9 million of cash received from repayment of loans by related parties.

 

Our net cash used in investing activities was $171.8 million for 2015, primarily consisting of $200.0 million of cash used in acquisition of fixed and intangible assets for capacity expansion and upgrades in our Malaysia, Korean and Chinese facilities and $70.2 million of cash received from an acquisition in connection with the combination of Hanwha SolarOne and Q CELLS.

 

Q CELLS’ net cash used in investing activities was $65.1 million in 2014, primarily consisting of $45.6 million of cash used for capital expenditures which were primarily used for the capacity expansion of its Malaysian facilities.

 

Cash Flows from Financing Activities

 

Our net cash provided by (used in) financing activities primarily consists of proceeds from borrowings from banks, as offset by repayments of bank borrowings.

 

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Our net cash provided by financing activities was $117.2 million for 2016. This was mainly attributable to repayment of bank borrowings of $484.6 million, partially offset by proceeds from borrowings from banks of $634.2 million.

 

Our net cash used in financing activities was $16.5 million for 2015. This was mainly attributable to repayment of bank borrowings of $684.6 million, partially offset by proceeds from borrowings from banks of $655.8 million and proceeds from borrowings from related parties of $35.8 million.

 

Q CELLS’ net cash provided by financing activities was $56.4 million in 2014. This was mainly attributable to proceeds from borrowings from banks of $69.3 million, partially offset by repayment of bank borrowings of $6.4 million and repayment of capital lease obligation of $5.6 million.

 

Capital Expenditures and Investment Requirements

 

 Our capital expenditures amounted to $174.9 million in 2016 which were primarily used to fund expansion of our

production facilities in Korea and on-going capital equipment upgrades in Malaysia and China.

 

Our capital expenditures amounted to $200.0 million in 2015 which were primarily used to construct new PV module processing facilities in Malaysia and Korea, as well as automate our existing manufacturing lines in China and upgrade our PV cell manufacturing facilities in Malaysia.

 

Q CELLS’ capital expenditures amounted to $45.6 million in 2014 which were primarily used to maintain and

upgrade its production facilities and equipment, primarily in Malaysia.

 

We expect that our capital expenditures will amount to approximately $50.0 million in 2017, which will be primarily used to fund on-going capital equipment upgrades in Malaysia and China and certain R&D activities. We plan to fund our capital expenditure and investment requirements with cash from operations, bank borrowings, proceeds from our securities offerings and other forms of financing, if necessary. We will actively review our capital expenditure and investment plans on a regular basis and make appropriate changes in accordance with our business environment.

 

Capital Resources

 

We have financed our operations primarily through cash flows from operations and proceeds from bank loans, capital contribution from Hanwha Solar and proceeds from our securities offerings.

 

As of December 31, 2016, we had long-term debt (including the current portion) of $794.2 million and short-term debt of $377.4 million. Our long-term debt consists mainly of long-term borrowings from commercial banks, a loan from the Malaysian government and long-term notes.

 

As of December 31, 2016, we had short-term bank borrowings from various commercial banks with an aggregate outstanding balance of $377.4 million. Our short-term bank borrowings outstanding as of December 31, 2016 bore average interest rates of 3.49% per annum. These short-term bank borrowings have terms of one month to one year, and expire at various times throughout the year. Some of our short-term bank borrowings were secured by land use rights and building ownership.

 

As of December 31, 2016, we had long-term bank borrowings (including current portion) from various commercial banks with an aggregate outstanding balance of $569.8 million. The long-term bank borrowings outstanding as of December 31, 2016 bore an average interest rate of 2.66% per annum and had maturities ranging from 2017 through 2019. We expect to continue to rollover our bank borrowings when they become due. To the extent we are unable to rollover our bank borrowings for whatever reason, we will repay such borrowings with cash generated from operating activities or alternative funding sources. Certain bank borrowings were guaranteed by Hanwha Chemical. See Note 13 to our consolidated financial statements included elsewhere in this annual report.

 

As of December 31, 2016, the principal amount of the Malaysian government loan was MYR 838 million ($186.9 million, translated at the rate of $0.223 per one Malaysian Ringgit) and is repayable in installments from 2013 through 2031. Interest rates are variable, with a fixed 0% interest through 2019, a fixed 1% interest through 2027 and a fixed 2% interest through maturity. The fixed assets of Hanwha Q CELLS Malaysia were pledged as collateral and the loan was guaranteed by Hanwha Chemical. The book value of the Malaysian government loan as of December 31, 2016 was $124.4 million, which is approximately the fair value of the loan measured at an effective interest rate of 4.3% per annum.

 

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As of December 31, 2016, we had cash and cash equivalents of $390.0 million. Our cash and cash equivalents primarily consist of cash on hand and bank deposits, which are unrestricted as to withdrawal and use and have original maturities less than 90 days. As of December 31, 2016, we had restricted cash in the amount of $116.8 million, which represents amounts held by a bank as security for letters of credit facilities, notes payable and bank borrowings and, therefore, are not available for our use. The restriction on the use of restricted cash is generally expected to be released at the maturity of the underlying letter of credit facilities, notes payable and bank borrowings which range from three months to 12 months, unless the underlying liabilities are rolled over or a default occurs. As we expect to roll over most of the underlying short-term liabilities, we do not expect the total amount of restricted cash to decrease substantially in the foreseeable future. As of December 31, 2016, unused loan facilities for short-term and long-term borrowings amounted to $43.5 million.

 

C. Research and Development, Patents and Licenses

 

The PV industry is characterized by rapidly evolving technology advancements. Achieving fast and continual technology improvements is of critical importance to maintaining our competitive advantage. Our research and development efforts concentrate on lowering production costs per watt by increasing the conversion efficiency rate of our products and reducing silicon usage by reducing the thickness of PV cells. Our research and development department works closely with our manufacturing department to lower production costs by improving our production efficiency and also with universities and research institutes to develop new technology and products.

 

We have been developing advanced technologies to improve the conversion efficiency and reduce the production cost of our PV products. Through the acquisition of Q CELLS in February 2015, we plan to leverage Q CELLS’ advanced technology and research processes to improve our product performance and reliability and reduce production costs. Our primary research and development center is located at Thalheim, Germany, which employed 207 highly trained researchers as of December 31, 2016. In the past, Q CELLS has developed and commercialized a wide range of products and standard production processes. For example, Q CELLS’ engineers developed the 6-inch solar cell, the 3-busbar layout and the full-square monocrystalline solar cell. Q CELLS also succeeded in 2014 in the commercial production of multicrystalline PERC cells, which have higher conversion efficiency rate than traditional BSF cells, at its German facilities and started marketing them under our “Q.ANTUM” brand. Q CELLS’ research and development expenses were $27.4 million 2014. Our research and development expenses were $49.2 million in 2016 and $48.3 million in 2015.

 

As of the date of this annual report, we had been granted 76 patents and utility models and 31 applications for patents and utility models pending in China, 43 patents and 71 patent applications pending in Germany and 66 patents and 42 patent applications pending in other countries.

 

D. Trend Information

 

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events since January 1, 2017 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

 

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E. Off-Balance Sheet Arrangements

 

We have not entered into any material financial guarantees or other commitments to guarantee the payment obligations of third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.

 

F. Tabular Disclosure of Contractual Obligations

 

The following table sets forth our contractual obligations as of December 31, 2016:

 

   Payment Due by Period 
   Total  

Less than

1 Year

   1-3 Years   3-5 Years  

More than

5 Years

 
   (In millions $) 
Long-term debt obligations(1)   1,008.5    241.7    582.9    3.3    180.6 
Operating lease obligations   1.9    1.2    0.7    -    - 
Commitments relating to the acquisition of fixed assets   33.9    33.9    -    -    - 
Total   1,044.3    276.8    583.6    3.3    180.6 

 

 
(1)

The long-term debt obligations represent the principals and the interests of (i) long-term bank borrowings, (ii) long-term notes and (iii) loan from the Malaysian government. Please see Note 13, “Borrowings”, and Note 19, “Long-Term Notes”, to our audited consolidated financial statements.

 

G. Safe Harbor

 

This annual report contains forward-looking statements that relate to future events, including our future operating results and conditions, our prospects and our future financial performance and condition, all of which are largely based on our current expectations and projections. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Our Business.” These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terminology such as “may,” “will,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” “is/are likely to” or other and similar expressions. Forward-looking statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement, including but not limited to the following:

 

·our expectations regarding the worldwide demand for electricity and the market for solar energy;

 

·our beliefs regarding the effects of environmental regulation, lack of infrastructure reliability and long-term fossil fuel supply constraints;

 

·our beliefs regarding the inability of traditional fossil fuel-based generation technologies to meet the demand for electricity;

 

·our beliefs regarding the importance of environmentally friendly power generation;

 

·our expectations regarding governmental support for the deployment of solar energy;

 

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·our beliefs regarding the acceleration of adoption of solar technologies;

 

·our expectations with respect to advancements in our technologies;

 

·our beliefs regarding the competitiveness of our solar products;

 

·our expectations regarding the scaling of our manufacturing capacity;

 

·our expectations with respect to revenue growth and profitability;

 

·our expectations with respect to our ability to secure raw materials, especially silicon and silicon wafers, in the future;

 

·our ability to integrate the businesses of Hanwha SolarOne and Q CELLS;

 

·competition from other manufacturers of PV products and conventional energy suppliers;

 

·our future business development, results of operations and financial condition;

 

·future economic or capital market conditions; and

 

·those described under the section entitled “Risk Factors.”

 

This annual report also contains data related to the PV market worldwide taken from third-party reports. The PV market may not grow at the rates projected by the market data, or at all. The failure of the market to grow at the projected rates may have a material adverse effect on our business and the market price of the ADSs. In addition, the rapidly changing nature of the PV market subjects any projections or estimates relating to the growth prospects or future condition of our market to significant uncertainties. If any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

 

The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report completely and with the understanding that our actual future results may be materially different from what we expect.

 

ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. Directors and Senior Management 

 

Directors and Executive Officers

 

The following table sets forth information regarding our directors and executive officers.

 

Name   Age   Position/Title   Term
Seong Woo Nam   60   Director, Chairman and Chief Executive Officer   December 2020
Jung Pyo Seo   51   Director and Chief Financial Officer   December 2020
Dong Kwan Kim   34   Director and Chief Commercial Officer   December 2017
Seung Deok Park   47   Director and Chief Technology Officer   December 2017
Seung Heon Kim   60   Independent Director   December 2017
Hyun Chul Chun   59   Independent Director   December 2017
Young S. Kim   68   Independent Director   December 2018

 

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Directors

 

Mr. Seong Woo Nam has served as our chairman of the board and chief executive officer since April 2014. Prior to his current position, Mr. Nam was the executive vice president and general manager of Samsung Electronics’ IT Solutions Business. Prior to leading the IT Solutions Business at Samsung Electronics, Mr. Nam spent eight years directing the business innovation team at Samsung Electronics across a broad range of business segments including planning, supply chain management, logistics, and information strategy. He received his bachelor’s degree in political science from Sogang University in 1983.

 

Mr. Jung Pyo Seo has served as our director since April 2014 and as our chief financial officer since July 2011. He also serves as a member of our corporate governance and nominating committee. Prior to his current position, Mr. Seo served as chief financial officer and chief operating officer of Azdel Inc., in Virginia from 2008 to 2011. While with Azdel Inc., Mr. Seo rebuilt the company’s cash and debt management systems and processes, implemented a new ERP system, managed commercial banking relationships, raised capital and helped the company expand market share in a competitive market with rising raw material prices. He also played an important role in the acquisition and post-acquisition integration of Azdel Inc. by Hanwha Corporation. Prior to that, Mr. Seo held a variety of accounting, finance and sales-related positions at Hanwha Resorts Corporation and Hanwha Chemical for 12 years. Mr. Seo received an MBA with a concentration in Finance from the University of Washington, and a B.A. with a concentration in Finance and Accounting from Seoul National University.

 

Mr. Dong Kwan Kim has served as our director since March 2015 and as our chief commercial officer since September 2014. Prior to his current position, Mr. Kim served as chief strategic marketing officer at Q CELLS since August 2013, where he was instrumental in developing new markets for the company and expanding downstream business opportunities. Mr. Kim had previously served as chief strategy officer of Hanwha SolarOne from December 2011 until July 2013 and was a member of the board of directors from December 2010 until August 2013, and was re-appointed in March 2014. He received his bachelor’s degree in political science from Harvard University in 2006.

 

Mr. Seung Deok Park has served as our director since December 2015 and as head of our corporate planning team since July 2015. Mr. Park joined Hanwha Chemical in 1994 as a research engineer, and in 2009 moved to the Hanwha Group headquarters as a director focused on incubation of new business opportunities. He joined Hanwha SolarOne in January 2012 as a senior manager in product management. He was promoted to a vice president in January 2016. Mr. Park received his bachelor’s degree in chemical engineering from Sogang University, Seoul, Korea in 1993 and his master’s degree in chemical engineering from Pohang University of Science & Technology, Pohang, Korea in 1995.

 

Mr. Seung Heon Kim has served as our independent director since January 2016 and is a vice president at the Defense Acquisition Program Institute, a non-profit organization licensed by the Defense Acquisition Program Administration, where Mr. Kim served as Director General of Cost Accounting and Verification Group from August 2011 to August 2013. He also served as a non-executive member of the board of directors of the Korea Consumer Agency, a public institution established under the Fair Trade Commission, from 2013 to 2015. From 1988 to 2011, Mr. Kim held several positions at Samil PricewaterhouseCoopers, including audit partner, where he led audit services to a broad range of Korean and multinational companies in a variety of industries. Mr. Kim is a certified public accountant licensed in Korea and California and has spent over 30 years holding accounting and audit related positions. He received both his BA and MBA degrees from Seoul National University in Korea.

 

Mr. Hyun Chul Chun has served as our independent director since January 2016 and has been a managing partner at Saesidae Accounting Corporation, which he joined in April 2014. He is also a member of the board of directors and audit committee of Aekyung Industry Co., Ltd., and a part-time auditor of Unicef Korea. From 1994 to 2014, he held several positions at Deloitte Anjin LLC, including audit partner and dean of Deloitte Academy. Mr. Chun is a certified public accountant licensed in Korea and has spent over 30 years holding accounting and audit related positions. He received both his BA and MBA degrees from Yonsei University in Korea.

 

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Mr. Young S. Kim has served as our independent director since January 2017 and is currently a technical advisor at Realgain. Also, he served as a technical advisor at ISU Chemical for new business development. He was a project engineer at DOW Chemical of Freeport, Texas. He received his BA in Chemical Engineering from Seoul National University in Korea in 1974 and a master’s degree in Industrial Engineering from Dow International Vocational School in Texas in 1980.

 

B. Compensation 

 

Compensation

 

In 2016, we paid aggregate cash compensation of approximately $6.0 million to our directors and executive officers. For options granted to officers and directors, see “—2006 Share Option Plan” and “—2007 Equity Incentive Plan.”

 

The purposes of our 2006 share option plan and 2007 equity incentive plan are to attract and retain the best available personnel for positions of substantial responsibility, provide additional incentive to employees, directors and consultants and promote the success of our business. Our board of directors believes that our company’s long-term success is dependent upon our ability to attract and retain superior individuals who, by virtue of their ability, experience and qualifications, make important contributions to our business.

 

2006 Share Option Plan

 

We adopted our 2006 share option plan in November 2006. Our 2006 share option plan provides for the grant of options to purchase our ordinary shares, subject to vesting.

 

Administration. Our 2006 share option plan is administered by the compensation committee of our board of directors. The committee will determine the provisions, terms and conditions of each option grant, including, but not limited to, the exercise price for the options, vesting schedule, forfeiture provisions, form of payment of exercise price and other applicable terms. The exercise price may be adjusted in the event of certain share or rights issuances by our company.

 

Option Exercise. Our 2006 Share Option Plan requires the options be vested over five years in equal portions, except that the vesting schedule of options granted to certain of our professionals, independent directors and advisors may be less than five years if our compensation committee deems it necessary and appropriate. The options, once vested, are exercisable at any time before November 30, 2016, at which time the options will become null and void. The exercise prices of the options are determined by the compensation committee.

 

Termination of Awards. Options granted under our 2006 share option plan have specified terms set forth in a share option agreement. Each employee who has been granted options shall undertake to work for our company for at least five years starting from the grant date, or for such term as is otherwise specified in the individual’s share option agreement. In the event that the employee’s employment with our company terminates without cause, the employee shall be entitled to exercise his or her vested options within three months of his or her termination, and any unvested options will be forfeited to our company. However, if instead the employee’s employment is terminated by our company for cause, all of his or her unexercised options, whether vested or unvested, will be forfeited to our company.

 

Share Split or Combination. In the event of a share split or combination of our ordinary shares, the options, whether exercised or not, shall be split or combined at the same ratio.

 

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Amendment and Termination of Plan. Our compensation committee may at any time amend, suspend or terminate our 2006 share option plan. Amendments to our 2006 share option plan are subject to shareholder approval, to the extent required by law, or by stock exchange rules or regulations. Any amendment, suspension or termination of our 2006 share option plan may not adversely affect awards already granted without written consent of the recipient of such awards.

 

Our board of directors authorized the issuance of up to 10,799,685 ordinary shares upon exercise of awards granted under our 2006 share option plan. The following table sets forth certain information regarding our outstanding options under our 2006 share option plan as of the date of this annual report.

 

Name 

ADSs

Underlying

Outstanding
Option

   Exercise Price   Grant Date  Expiration Date
       ($/ADS)       
Seong Woo Nam           
Jung Pyo Seo           
Dong Kwan Kim           
Seung Deok Park           
Seung Heon Kim           
Hyun Chul Chun           
Young S. Kim           
Other individuals as a group   2,728    90.0   November 30, 2006  November 30, 2016
    2,000    265.5   December 13, 2007  November 30, 2016
                 
Total   4,728            

 

 
No outstanding share option was held by such person.

 

2007 Equity Incentive Plan

 

We adopted our 2007 equity incentive plan in August 2007. It provides for the grant of options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance stock to our employees, directors and consultants. The maximum aggregate number of our ordinary shares that may be issued under the 2007 equity incentive plan is 10,799,685. In addition, the plan provides for an annual increase in the number of shares available for issuance on the first day of each fiscal year, beginning with our 2008 fiscal year, equal to 2% of our then outstanding ordinary shares or such lesser amount as our board of directors may determine.

 

Administration. Different committees with respect to different groups of service providers, comprised of members of our board or other individuals appointed by the board, may administer our 2007 equity incentive plan. The administrator has the power to determine which individuals are eligible to receive an award, the terms of the awards, including the exercise price (if any), the number of shares subject to an award, the exercisability of the awards and the form of consideration payable upon exercise.

 

Options. The exercise price of incentive stock options must be at least equal to the fair market value of our ordinary shares on the date of grant; however, the overseas price of our non-statutory stock options may be as determined by the administrator. The term of an incentive stock option may not exceed ten years, except that with respect to any participant who owns 10% of the voting power of all classes of our outstanding shares as of the grant date, the term must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. The administrator determines the term of all other options. Upon the termination of the service of a participant, he or she may exercise his or her vested options for the period of time stated in the option agreement, and any unvested options are forfeited to our company. Generally, if termination is due to death or disability, the option will remain exercisable for twelve months. In all other cases, the option will generally remain exercisable for three months. However, an option generally may not be exercised later than the expiration of its term.

 

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Restricted Stock. Restricted stock awards are ordinary shares that vest in accordance with terms and conditions established by the administrator and set forth in an award agreement. The administrator will determine the number of shares of restricted stock granted to any employee and may impose whatever conditions to vesting it determines to be appropriate.

 

Stock Appreciation Rights. Stock appreciation rights allow the recipient to receive the appreciation in the fair market value of our ordinary shares between the date of grant and the exercise date. The exercise price of stock appreciation rights granted under our plan may be as determined by the administrator. Stock appreciation rights expire under the same rules that apply to options.

 

Performance Units and Performance Shares. Performance units and performance shares are awards that will result in a payment to a participant generally only if performance goals established by the administrator are achieved. The administrator will establish organizational or individual performance goals in its discretion, which, depending on the extent to which they are met, will determine the number and the value of performance units and performance shares to be paid out to participants.

 

Restricted Stock Units. Restricted stock units are similar to awards of restricted stock, but are not settled unless the award vests. Restricted stock units may consist of restricted stock, performance share or performance unit awards, and the administrator may set forth restrictions based on the achievement of specific performance goals.

 

Amendment and Termination. Our 2007 equity incentive plan will automatically terminate in 2017, unless we terminate it sooner. Our board of directors has the authority to amend, alter, suspend or terminate the plan provided such action does not impair the rights of any participant with respect to any outstanding awards.

 

Our board of directors authorized the issuance of up to 10,799,685 ordinary shares upon exercise of awards granted under our 2007 equity incentive plan. The following table sets forth certain information regarding our outstanding options under our 2007 equity incentive plan as of the date of this annual report.

 

Name 

ADSs

Underlying

Outstanding

Option

  

Exercise

Price

   Date of Grant  Expiration Date
       ($/ADS)       
Seong Woo Nam           
Jung Pyo Seo           
Dong Kwan Kim           
Seung Deok Park           
Seung Heon Kim           
Hyun Chul Chun           
Young S. Kim           
Other individuals as a group   1,258    67.2   October 16, 2008  October 16, 2018
    100    67.2   March 17, 2009  March 17, 2019
    400    37.1   April 28. 2009  April 28. 2019
    5,016    68.5   December 3, 2009  December 3, 2019
    750    74.8   June 28, 2010  June 28, 2020
                 
Total   7,524            

 

 
No outstanding share option was held by such person.

 

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The following table sets forth certain information regarding our granted restricted stock units under our 2007 equity incentive plan as of the date of this annual report.

 

Name 

ADSs

Underlying

Granted

Restricted Stock
Units

   Date of Grant  Expiration Date
           
Seong Woo Nam       
Jung Pyo Seo   861   March 1, 2015  March 1, 2025
Dong Kwan Kim   453   March 1, 2015  March 1, 2025
Seung Deok Park   498   March 1, 2015  March 1, 2025
Seung Heon Kim       
Hyun Chul Chun       
Young S. Kim       
Other individuals as a group   750   January 1, 2008  January 1, 2018
    750   January 1, 2010  January 1, 2020
    625   January 1, 2011  January 1, 2021
    21,931   February 28, 2011  February 28, 2021
    26,406   March 31, 2011  March 31, 2021
    1,125   April 28, 2011  April 28, 2021
    2,250   May 31, 2011  May 31, 2021
    2,194   July 28, 2011  July 28, 2021
    2,438   August 26, 2011  August 26, 2021
    844   October 28, 2011  October 28, 2021
    6,563   November 29, 2011  November 29, 2021
    938   December 29, 2011  December 29, 2021
    375   January 1, 2012  January 1, 2022
    2,250   April 30, 2012  April 30, 2022
    1,000   January 13, 2013  January 1, 2023
    250   May 28, 2013  May 28, 2023
    750   January 1, 2014  January 1, 2024
    750   January 1, 2015  January 1, 2025
    13,182   March 1, 2014  August 1, 2024
    20,085   March 1, 2015  March 1, 2025
    29,358   January 1, 2016  March 1, 2026
Total   136,626       

 

 
No restricted stock units have been granted to such person.

 

C. Board Practices 

 

Directors’ Term and Directorship Period

 

Name   Appointed   Term Expiration   Period in Office
Seong Woo Nam   December 2014   December 2018   2 years  and 5 month
Jung Pyo Seo   December 2014   December 2018   2 years  and 5 month
Dong Kwan Kim   December 2015     December 2017   1 year and 5 months
Seung Deok Park   December 2015   December 2017   1 year and 5 months
Seung Heon Kim   December 2015   December 2017   1 year and 5 months
Hyun Chul Chun   December 2015   December 2017   1 year and 5 months
Young S. Kim   December 2016   December 2018   5 months

 

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Committees of the Board of Directors

 

Audit Committee

 

Name   Appointed   Term Expiration   Period in Office
Seung Heon Kim   January 2016   December 2017   1 year and 4 months
             
Hyun Chul Chun   January 2016   December 2017   1 year and 4 months
             
Young S. Kim   January 2017   December 2017   4 months

 

The audit committee is chaired by Mr. Hyun Chul Chun, a director with accounting and financial management expertise as required by the Nasdaq corporate governance rules (the “Nasdaq Rules”).

 

Our board of directors has determined that each of Mr. Seung Heon Kim and Mr. Hyun Chul Chun qualifies as an “audit committee financial expert” as set forth under the applicable rules of the SEC. Each of the members of the audit committee is an “independent director” as defined in the Nasdaq Marketplace Rules.

 

All of the members of our audit committee satisfy the “independence” requirements of the Nasdaq Rules. The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:

 

·selecting our independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by our independent auditors;

 

·reviewing with our independent auditors any audit problems or difficulties and management’s response;

 

·reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under the Securities Act;

 

·discussing the annual audited financial statements with management and our independent auditors;

 

·reviewing major issues as to the adequacy of our internal control and any special audit steps adopted in light of material control deficiencies;

 

·annually reviewing and reassessing the adequacy of our audit committee charter;

 

·such other matters that are specifically delegated to our audit committee by our board of directors from time to time;

 

·meeting separately and periodically with management and our internal and independent auditors; and

 

·reporting regularly to our board of directors.

 

Our audit committee has established a “whistleblower” reporting system to allow individuals to make anonymous communications to the audit committee regarding financial and accounting matters relating to our company.

 

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Compensation Committee

  

Name   Appointed   Term Expiration   Period in Office
Seung Heon Kim   January 2016   December 2017   1 year and 4 months
             
Hyun Chul Chun   January 2016   December 2017   1 year and 4 months
             
Young S. Kim   January 2017   December 2017   4 months

 

The compensation committee is chaired by Mr. Young S. Kim. All of the members of our compensation committee satisfy the “independence” requirements of the Nasdaq Rules.

 

Our compensation committee assists our board of directors in reviewing and approving the compensation structure of our directors and executive officers, including all forms of compensation to be provided to our directors and executive officers. Members of the compensation committee are not prohibited from direct involvement in determining their own compensation. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation committee is responsible for, among other things:

 

·approving and overseeing the compensation package for our executive officers;

 

·reviewing and making recommendations to our board of directors with respect to the compensation of our directors;

 

·reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer, evaluating the performance of our chief executive officer in light of those goals and objectives, and setting the compensation level of our chief executive officer based on this evaluation; and

 

·reviewing periodically and making recommendations to our board of directors regarding any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.

 

Corporate Governance and Nominating Committee

 

Name   Appointed   Term Expiration   Period in Office
Seung Heon Kim   January 2016   December 2017   1 year and 4 months
             
Hyun Chul Chun   January 2016   December 2017   1 year and 4 months
             
Young S. Kim   January 2017   December 2017   4 months
             
Jung Pyo Seo   April 2014   December 2017   3 years  and 1 month

 

The corporate governance and nominating committee is chaired by Mr. Seung Heon Kim.

 

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The corporate governance and nominating committee assists our board of directors in identifying individuals qualified to become our directors and in determining the composition of our board of directors and its committees. The corporate governance and nominating committee is responsible for, among other things:

 

·identifying and recommending nominees for election or re-election to our board of directors, or for appointment to fill any vacancy;

 

·reviewing annually with our board of directors its current composition in light of the characteristics of independence, age, skills, experience and availability of service to us;

 

·identifying and recommending to our board the directors to serve as members of committees;

 

·advising the board periodically with respect to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to our board of directors on all matters of corporate governance and on any corrective action to be taken; and

 

·monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.

 

Duties of Directors

 

Under Cayman Islands law, our directors owe to us fiduciary duties, including a duty of loyalty, a duty to act honestly, and a duty to act in what they consider in good faith to be in our best interests. Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association, as amended and restated from time to time.

 

Terms of Directors and Executive Officers

 

Our directors hold office until the expiration of such term as may be specified in the resolution appointing such director, or if no such term is specified until such time as they are removed from office by ordinary resolution or the unanimous written resolution of all shareholders. Any director appointed by the directors (either to fill a casual vacancy or as an addition to the existing directors) shall hold office only until the next following annual general meeting and shall then be eligible for re-election at that meeting. Any director may be removed by an ordinary resolution of our shareholders (including by a unanimous written resolution signed by all our shareholders). In addition, the office of a director will automatically be vacated if (i) he gives notice in writing to our company that he resigns the office of director, (ii) all of the directors (other than the one to be removed) pass a resolution or sign a notice effecting his removal from his office as such, (iii) he is prohibited from being a director under any applicable law, rules or regulations and the Nasdaq Rules, (iv) he absents himself (without being represented by proxy or an alternate director appointed by him) from three consecutive meetings of the board of directors without special leave of absence from the directors, and all of the directors (other than the one to be removed) pass a resolution that he has by reason of such absence vacated office, (v) he dies, becomes bankrupt or makes any arrangement or composition with his creditors, or (vi) he is found to be or becomes of unsound mind. Our officers are appointed by and serve at the discretion of our board of directors.

 

The service contracts of our directors do not provide for benefits upon termination of their directorship.

 

Employment Agreements

 

We have entered into employment agreements with all of our executive officers. Under these agreements, each of our executive officers is employed for a specified time period. We may terminate his or her employment for cause at any time for certain acts of the employee.

 

Each executive officer has agreed to hold, both during and subsequent to the terms of his or her agreement, in confidence and not to use, except in pursuance of his or her duties in connection with the employment, any of our confidential information, technological secrets, commercial secrets and know-how. Our executive officers have also agreed to disclose to us all inventions, designs and techniques which resulted from work performed by them, and to assign us all right, title and interest of such inventions, designs and techniques.

 

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Additionally, our executive officers are typically bound by non-competition provisions contained in their employment agreements that prohibit them from engaging in activities that compete with our business during and for a certain period after their employment with our company.

 

D. Employees 

 

The following table sets forth the number of our full-time employees by function as of December 31, 2015 and 2016 and Q CELLS’ full-time employees by function as of December 31, 2014:

 

   As of December 31, 
   2014   2015   2016 
   Q CELLS   Hanwha Q
CELLS
   Hanwha Q
CELLS
 
Manufacturing and engineering   647    7,792    6,294 
General and administration   182    783    536 
Quality control   97    557    541 
Research and development   239    386    308 
Purchasing and logistics   117    147    148 
Marketing and sales   114    240    176 
Total   1,396    9,905    8,003 

 

The following table sets forth the number of our full-time employees by geographic location as of December 31, 2015 and 2016 and Q CELLS’ and Hanwha SolarOne’s full-time employees by geographic location as of December 31, 2014:

 

   As of December 31, 
   2014   2015   2016 
   Q CELLS   Hanwha Q
CELLS
   Hanwha Q
CELLS
 
China   -    6,555    5,290 
Germany   893    448    395 
Malaysia   488    1,887    2,150 
Korea   -    795    90 
Others   14    220    78 
Total   1,396    9,905    8,003 

 

We offer our employees competitive compensation packages and various training programs, and as a result we have generally been able to attract and retain qualified personnel.

 

We are subject to the local labor and employment laws of various jurisdictions in which we operate. For example, in Germany, our employees are covered by various labor laws that provide employees, through works councils, with rights of information and consultation with respect to specific matters involving their employer’s business and operations, including downsizing or closure of facilities and employment terminations. The German worker protection laws could impair our flexibility in streamlining or restructuring our business operations in Germany. In China, as required by PRC regulations, we participate in various employee benefit plans that are organized by municipal and provincial governments, including housing, pension, medical and unemployment benefit plans. We are required under PRC law to make contributions to the employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time. Members of the retirement plan are entitled to a pension equal to a fixed proportion of their salaries. The total amount of contributions we made to employee benefit plans in China in 2016 was $7.4 million.

 

Our employees in Germany are represented by the works council organized under the German law, which is entitled to consultation and, in some areas, to co-determination rights concerning labor conditions. None of our employees in Malaysia is represented by a union.

 

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We adopted our 2006 share option plan in November 2006, which provides an additional means to attract, motivate, retain and reward selected directors, officers, managers, employees and other eligible persons. An aggregate of 10,799,685 ordinary shares has been reserved for issuance under this plan.

 

We adopted our 2007 equity incentive plan in August 2007. It provides for the grant of options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance stock to our employees, directors and consultants. The maximum aggregate number of our ordinary shares that may be issued under the 2007 equity incentive plan is 10,799,685. In addition, the plan provides for an annual increase in the number of shares available for issuance on the first day of each fiscal year, beginning with our 2008 fiscal year, equal to 2% of our then outstanding ordinary shares or such lesser amount as our board of directors may determine. As of December 31, 2016, options to purchase 7,869,060 ordinary shares have been granted and were outstanding under this plan and our 2006 share option plan.

 

We typically enter into a standard confidentiality and non-competition agreement with our management and research and development personnel. These contracts include a covenant that prohibits these individuals from engaging in any activities that compete with our business during, and for two years after, the period of their employment with our company.

 

We believe we maintain a good working relationship with our employees, and we have not experienced any significant labor disputes or any difficulty in recruiting staff for our operations. On March 29, 2013, Hanwha Q CELLS Qidong signed a collective bargaining agreement in accordance with the guidelines of the PRC labor law. The collective bargaining agreement covers all of the employees of Hanwha Q CELLS Qidong who are PRC citizens and is effective from March 29, 2013 to March 17, 2019.

 

In March 2015, as part of our strategy to reduce manufacturing cost, Q CELLS ceased the production of PV cells and modules at its manufacturing facilities in Thalheim, Germany. The manufacturing equipment was relocated to our other facilities in Malaysia in the first half of 2015.

 

In connection with the relocation of our manufacturing facilities, we have restructured our workforce in Germany. The production transfer to other sites and the corresponding restructuring has led to a reduction of the workforce in Germany by approximately 550 positions. We continue to maintain approximately 450 jobs in Germany. In February 2015, we have reached an agreement with the works council representing the employees in Germany on the terms and conditions of the restructuring program. In 2016, we incurred approximately $0.7 million of restructuring cost, including termination payments, in connection with the restructuring. In comparison, we incurred $22.0 million for 2015 in connection with our restructuring including discontinuation of commercial production in Germany. Due to the restructuring of our workforce, we may be subject to disputes with our former employees and the related cost could have a material adverse effect on our business and results of operations.

 

E. Share Ownership 

 

The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of April 20, 2017, by:

 

  · each of our directors and executive officers; and

 

  · each person known to us to own beneficially more than 5.0% of our ordinary shares.

 

   Shares Beneficially Owned(1)(2) 
   Number   % 
Directors and Executive Officers:          
           
Jung Pyo Seo        
Seong Woo Nam        
Seung Deok Park        
Seung Heon Kim        
Hyun Chul Chun        
           
Major Shareholders:          
Hanwha Solar Holdings Co., Ltd.(3)   3,910,394,773    94.0%

 

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The person does not beneficially own any ordinary share or options exercisable within 60 days of the date of this annual report.
   
(1) Beneficial ownership is determined in accordance with Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, and includes voting or investment power with respect to the securities.
   
(2) The number of shares beneficially owned by each listed person as of March 31, 2017. The number of ordinary shares outstanding in calculating the percentages for each listed person includes the ordinary shares underlying options exercisable by such person within 60 days of March 31, 2017. Percentage of beneficial ownership of each listed person is based on 4,162,038,802 ordinary shares outstanding as of March 31, 2017, as well as the ordinary shares underlying share options exercisable by such person within 60 days of the date of this annual report. This number excludes: (i) the remaining 401,408 ADSs which were issued to facilitate our convertible notes offering in January 2008; (ii) the remaining 20,062,348 ordinary shares issued to Hanwha Solar at par value of $0.0001 per ordinary share, in connection with Hanwha Solar’s purchase of 36,455,089 ordinary shares of our company in September 2010; and (iii) the 10,136 ADSs (representing 506,800 ordinary shares) which have been reserved by our company as of March 31, 2017 to allow for the participation in the ADS program by our employees pursuant to our equity incentive plans from time to time. We excluded those shares as we do not believe that they will increase the number of ordinary shares considered outstanding for the purpose of calculating beneficial ownership. Our total outstanding ordinary shares would be 4,182,607,925 if those numbers mentioned above are to be included.
   
(3) Held 3,903,989,723 ordinary shares (excluding the remaining 20,062,348 ordinary shares issued to Hanwha Solar at par value of $0.0001 per ordinary share, in connection with Hanwha Solar’s purchase of 36,455,089 ordinary shares of our company in September 2010) and 128,101 ADSs (representing 6,405,050 ordinary shares) as of March 31, 2016. The address of Hanwha Solar Holdings Co., Ltd. is c/o Hanwha Chemical Corporation, Hanwha Building, 1, Janggyo-dong, Jung-gu, Seoul 100-797, Korea. Hanwha Solar is a wholly-owned subsidiary of Hanwha Chemical and Hanwha Chemical may therefore be deemed to be the beneficial owner of our ordinary shares held by Hanwha Solar. Hanwha Corporation together with its affiliates hold approximately 36.30% of the issued and outstanding shares of Hanwha Chemical and Hanwha Corporation may therefore be deemed to be the beneficial owner of our ordinary shares held by Hanwha Solar. Mr. Seung-Youn Kim, a representative director and executive officer of Hanwha Chemical and Hanwha Corporation, together with his affiliates hold approximately 36.05% of the issued and outstanding shares of Hanwha Corporation and Mr. Seung-Youn Kim may therefore be deemed to be the beneficial owner of our ordinary shares held by Hanwha Solar.

 

As of April 20, 2017, approximately 6.18% of our outstanding ordinary shares, represented by 5,171,117 ADSs, were held in the form of ADSs in the United States by 41 record holders, among which 38 record holders were U.S. holders.

 

ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A. Major Shareholders 

 

Please refer to “Item 6.E. Share Ownership.”

 

B. Related Party Transactions 

 

We engage from time to time in various transactions with related parties, including our affiliates. We believe that we (and, historically, both Q CELLS and Hanwha SolarOne) have conducted our transactions with related parties as we would in comparable arm’s-length transactions with a non-related party, on a basis substantially as favorable to us as would be obtainable in such transactions.

 

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After the completion of our initial public offering on December 26, 2006, we adopted an audit committee charter, which requires that the audit committee review all related party transactions on an ongoing basis and all such transactions be approved by the committee.

 

In the second quarter of 2016, as part of our plans to fully optimize our manufacturing cost structure and operational efficiency, we sold our 100% equity interest in the module manufacturing facility located in Eumseong, Korea to Hanwha Q CELLS Korea Corp. for $58.5 million in cash and the assumption of all outstanding assets and liabilities.

 

Private Placement

 

In September 2010, we issued in a private placement an aggregate of 36,455,089 ordinary shares to Hanwha Solar at a purchase price of $2.144 per share for an aggregate sale price of $78.2 million. Concurrently with the closing of this offering, we issued 30,672,689 ordinary shares to Hanwha Solar at par value of the ordinary shares and subsequently an additional 14,407,330 ordinary shares at par value, which shares were to remain outstanding so long as and to the extent that the 901,961 ADSs we issued to facilitate our convertible notes offering in January 2008 remain outstanding. In October 2011, we repurchased and cancelled 25,017,671 ordinary shares from Hanwha Solar at par value of $0.0001 per ordinary share.

 

In connection with our public offering of 920,000 ADSs in November 2010, we issued in a private placement to Hanwha Solar an additional 45,981,604 ordinary shares at a price of $1.8 per ordinary share for an aggregate sale price of $82.8 million pursuant to a shareholder agreement we and Hanwha Solar entered into on September 16, 2010.

 

In February 2015, we issued 3,701,145,330 ordinary shares to Hanwha Solar in exchange for the transfer of 100% of the outstanding share capital of Q CELLS by Hanwha Solar to us and Q CELLS became a wholly-owned subsidiary of us. The new shares issued by us to Hanwha Solar in the transaction represent approximately 8.09 newly issued shares for each of our then-outstanding shares on a fully diluted basis.

 

Shareholder Agreement

 

In connection with the our acquisition of Q CELLS from Hanwha Solar and the issuance of our new shares to Hanwha Solar, we and Hanwha Solar entered into a shareholder agreement, dated as of December 8, 2014, which replaced the existing shareholder agreement, dated as of September 16, 2010, as amended by amendment No. 1, dated as of November 12, 2013.

 

Below is a summary of the key provisions of the shareholder agreement.

 

Registration Rights

 

Under the shareholder agreement, Hanwha Solar will be entitled to specified registration rights with respect to any potential public offering of our ordinary shares or ADSs in the United States, and will be entitled to any analogous or equivalent rights with respect to any other offering of shares in any other jurisdiction pursuant to which we undertake to publicly offer or list such securities for trading on a recognized securities exchanges subject to applicable law.

 

Board of Directors

 

Three members of the board of directors will be “independent directors”, as defined under Nasdaq Marketplace Rule 5605(a)(2) and otherwise satisfying the independence requirements imposed by Rule 10A-3 of the Exchange Act. Each independent director will be appointed for a two year term (or such other period of time as is generally applicable to other members of the board of directors).

 

The shareholder agreement does not specify the number of directors of our board of directors, while our memorandum and articles of association, as amended, provides that our board of directors will consist of not less than five and not more than ten directors.

 

Audit Committee

 

So long as we qualify as a “foreign private issuer” (as defined in Rule 3b-4(c) under the Exchange Act), Hanwha Solar will be entitled (but not required) to appoint one individual to serve as an observer to our audit committee so long as such individual (i) satisfies the “no compensation” prong of the independence requirements under Rule 10A-3 of the Exchange Act, (ii) is not a voting member or the chair of, our audit committee and (iii) is not an executive officer of Hanwha Solar or us.

 

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Specific Approvals

 

The prior approval of a majority of our independent directors will be required to delist the ADSs from Nasdaq, deregister our ordinary shares or the ADSs under the Exchange Act, or amend any provision of our organizational documents to the extent that such amendment would be inconsistent with or conflict with the provisions of the shareholder agreement.

 

Any “related party transaction,” as defined in Nasdaq Marketplace Rule 5630, or transactions or matters involving a “related person” as defined under Item 404 of Regulation S-K promulgated under the Exchange Act, will require the prior approval of our audit committee.

 

In the event any matter is presented to our board of directors for prior approval or determination and any director who has been nominated by Hanwha Solar has an actual or potential conflict of interest with respect to such matter, as determined in good faith by a majority of our independent directors, then the approval or determination with respect to such matter will be made by a majority of the members of our board of directors without such conflict of interest.

 

Restrictions on Further Purchases by Hanwha Solar

 

Hanwha Solar will not acquire, directly or indirectly, by purchase, squeeze-out, merger, consolidation, compulsory acquisition, scheme of arrangement, recapitalization, negotiated transaction or otherwise, that number of our securities that would result in a beneficial ownership percentage of 95.03% or greater unless such acquisition, however structured, shall have been approved in advance by a majority of our independent directors.

 

Restrictions on Transfer by Hanwha Solar

 

Hanwha Solar will not effect any transaction or series of related transactions involving a sale(s) of our ordinary shares to any non-affiliated third-party if, after giving effect to such sale, such third-party (individually or together with its affiliates or other persons which would constitute a “group” (as defined under Section 13(d) of the Exchange Act) with such third-party or its affiliates) would beneficially own 30% or more of the total number of issued and outstanding ordinary shares unless (i) approved in advance by a majority of the our independent directors, (ii) after giving effect to such sale(s), Hanwha Solar together with its affiliates continues to control us or (iii) such third-party, its affiliates and/or persons which constitute a “group” with such third-party, as the case may be, agree in writing to be bound by the terms of the shareholder agreement to the same extent as Hanwha Solar.

 

Equity Incentive Plan

 

See “Item 6.B. Compensation—2006 Share Option Plan” and “Item 6.B. Compensation—2007 Equity Incentive Plan.”

 

Material Transactions with Certain Shareholders and Affiliated Companies

 

A summary of our material transactions with related parties is set forth below. In addition, see Note 27 to our audited consolidated financial statements included elsewhere in this annual report for a description of material transactions with related parties.

 

Transactions between Hanwha SolarOne and Q CELLS

 

In 2014, Hanwha SolarOne provided PV module processing services to Q CELLS to produce PV modules from PV cells provided by Q CELLS, which generated revenues amounting to $84.1 million. Hanwha SolarOne also purchased PV cells and other raw materials from Q CELLS to produce its own PV modules, which amounted to $9.1 million in 2014. Since our acquisition of Q CELLS in February 2015, transactions between Hanwha SolarOne and Q CELLS have become intercompany transactions not reported in our consolidated financial statements.

 

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Transactions with Hanwha Corporation

 

Hanwha Corporation is the controlling shareholder of Hanwha Chemical, which is the parent company of Hanwha Solar, our largest shareholder, and it is engaged in the global trading business, among others. We sell (and, historically, both Q CELLS and Hanwha SolarOne sold) PV modules to Hanwha Corporation which then resells the PV modules purchased from us to system integrators and third-party distributors in various markets. We also purchase (and, historically, both Q CELLS and Hanwha SolarOne purchased) raw materials, primarily polysilicon and silver paste, from Hanwha Corporation. In 2016 and 2015, our sales to Hanwha Corporation amounted to $38.7 million and $117.5 million, respectively, and our purchase of raw materials from Hanwha Corporation amounted to $259.8 million and $306.7 million, respectively. Q CELLS’ sales to Hanwha Corporation in 2014 amounted to $340.8 million. Q CELLS’ purchase of raw materials from Hanwha Corporation in 2014 amounted to $310.8 million.

 

As of December 31, 2016 and December 31, 2015, we had amount due to Hanwha Corporation of $27.5 million and $118.6 million, respectively, which primarily consisted of accounts payable related to purchases of raw materials, and amount due from Hanwha Corporation of nil and $75.6 million, respectively, which primarily consisted of accounts receivable related to sales of PV modules. Q CELLS had amount due to Hanwha Corporation of $63.8 million as of December 31, 2014, which primarily consisted of accounts payable related to purchases of raw materials. Q CELLS had amount due from Hanwha Corporation of $125.3 million as of December 31, 2014, which primarily consisted of accounts receivable related to sales of PV modules.

  

Transactions with Hanwha Q CELLS USA Corp.

 

Hanwha Q CELLS USA Corp. is a wholly-owned subsidiary of Hanwha Q CELLS Americas Holdings Corp., an indirect subsidiary of Hanwha Corporation, and primarily engages in the sale and distribution of PV products and PV downstream business in the United States. Hanwha Q CELLS Americas Holdings Corp. is not our consolidated subsidiary. We sell (and, historically, Q CELLS sold) PV modules to Hanwha Q CELLS USA Corp. which then resell the PV modules purchased from us to system integrators and third-party distributors in the United States. Our sales to Hanwha Q CELLS USA Corp. in 2016 and 2015 amounted to nil and $139.7 million. Q CELLS’ sales to Hanwha Q CELLS USA Corp. in 2014 amounted to $2.5 million. In 2016 and 2015, we also purchased PV modules from Hanwha Q CELLS USA Corp. for the amount of nil and $20.4 million, respectively.

 

As of December 31, 2016 and December 31, 2015, we had amount due from Hanwha Q CELLS USA Corp. of $20.8 million and $58.9 million, respectively, which primarily consisted of accounts receivable/payable related to sales of PV modules. Q CELLS had amount due from Hanwha Q CELLS USA Corp. of $15.3 million as of December 31, 2014, which primarily consisted of accounts receivable related to sales of PV modules.

 

Transactions with Hanwha Q CELLS Japan Co., Ltd.

 

Hanwha Q CELLS Japan Co., Ltd. is an indirect subsidiary of Hanwha Corporation and is not our consolidated subsidiary. It primarily engages in the sale and distribution of PV products and PV downstream business in Japan. We sell (and, historically, both Q CELLS and Hanwha SolarOne sold) PV modules to Hanwha Q CELLS Japan Co., Ltd., which then resells the PV modules purchased from us to system integrators and third-party distributors in Japan. Our sales to Hanwha Q CELLS Japan Co., Ltd. in 2016 and 2015 amounted to $284.0 million and $193.4 million, respectively. Q CELLS’ sales to Hanwha Q CELLS Japan Co., Ltd. in 2014 amounted to $56.7 million.

 

As of December 31, 2016 and December 31, 2015, we had amount due from Hanwha Q CELLS Japan Co., Ltd. of $33.4 million and $21.0 million, respectively, which primarily consisted of accounts receivable related to sales of PV modules. Q CELLS had amount due from Hanwha Q CELLS Japan Co., Ltd. of $1.1 million as of December 31, 2014, which primarily consisted of accounts receivable related to sales of PV modules.

 

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Transactions with Hanwha Q CELLS Korea Corp.

 

Hanwha Q CELLS Korea Corp. is an indirect subsidiary of Hanwha Corporation and is not our consolidated subsidiary. It primarily engages in the sale and distribution of PV products and PV downstream business in Korea. We sell (and, historically, both Q CELLS and Hanwha SolarOne sold) PV modules to Hanwha Q CELLS Korea Corp., which then resells the PV modules purchased from us to system integrators and third-party distributors in Korea. Our sales to Hanwha Q CELLS Korea Corp. in 2016 and 2015 amounted to $105.5 million and $76.5 million, respectively. Q CELLS’ sales to Hanwha Q CELLS Korea Corp. in 2014 amounted to $0.2 million.

 

As of December 31, 2016 and December 31, 2015, we had amount due from Hanwha Q CELLS Korea Corp. of $43.9 million and $142.2 million, respectively, which primarily consisted of accounts receivable related to sales of PV modules.

 

On March 31, 2017, the Group entered into a sale agreement with Hanwha Q CELLS Korea Corp. to sell certain intellectual properties to Hanwha Q CELLS Korea Corp. for proceeds of USD $18.1 million.

 

Transactions with Hanwha Chemical

 

Hanwha Chemical, which is the parent company of Hanwha Solar, our largest shareholder, has guaranteed certain borrowings and notes of us (and, historically, both Q CELLS and Hanwha SolarOne), which have paid guarantee fees to Hanwha Chemical. As of December 31, 2016 and December 31, 2015, the amount of our bank borrowings guaranteed or jointly guaranteed by Hanwha Chemical amounted to $789.7 million and $690.2 million, respectively. The amount of Q CELLS’ bank loans, government loan and purchase price liabilities guaranteed by Hanwha Chemical amounted to $413.5 million as of December 31, 2014. In 2016 and 2015, we purchased raw materials from Hanwha Chemical for the amount of $53.7 million and $35.6 million, respectively.

 

Transactions with Hanwha Advanced Materials Corp.

 

Hanwha Advanced Materials Corp. is a wholly-owned subsidiary of Hanwha Chemical that engages in the manufacturing of various automotive and electronics materials, and is not our consolidated subsidiary. We purchase (and, historically, both Q CELLS and Hanwha SolarOne purchased) raw materials from Hanwha Advanced Materials Corp. Our purchase of raw materials from Hanwha Advanced Materials Corp. in 2016 and 2015 amounted to $43.4 million and $47.3 million, respectively. Q CELLS’ purchase of raw materials from Hanwha Advanced Materials Corp. in 2014 amounted to $5.5 million.

 

As of December 31, 2016 and December 31, 2015, we had amount due to Hanwha Advanced Materials Corp. of $7.3 million and $14.4 million, respectively, which primarily consisted of accounts payable related to purchases of raw materials.

 

C. Interests of Experts and Counsel 

 

Not applicable.

 

ITEM 8 FINANCIAL INFORMATION

 

A. Consolidated Statements and Other Financial Information

 

We have appended consolidated financial statements filed as part of this annual report.

 

Legal and Administrative Proceedings

 

On July 26, 2012, we brought a lawsuit against Hoku Corporation and Hoku Materials, Inc. (collectively, “Hoku”), one of our polysilicon suppliers, at the Los Angeles Superior Court for Hoku’s failure to perform a multi-year framework polysilicon supply agreement entered into on November 19, 2007. Hoku never made any delivery of polysilicon, and failed to return a $49 million prepayment to us. Hoku Corporation and Hoku Materials, Inc. each filed a Chapter 7 Petition in the Bankruptcy Court of Pocatello, Idaho on July 2, 2013.

 

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We face payment collection difficulties with respect to certain customers, which may materially and adversely impact our operating margins. For example, on June 8, 2012, we submitted an arbitration request to Guangzhou Arbitration Commission requiring Guo Hua, owner of a PV project for which we acted as an EPC contractor, to pay a total amount of RMB92 million ($14.2 million) including, among other things, overdue payment of EPC contract price, accrued interest, damages and legal cost in accordance with the EPC contract. On August 5, 2012, Guo Hua submitted an counterclaim to Guangzhou Arbitration Commission alleging that we have substantially breached the EPC contract, and Guo Hua requested termination of the EPC contract and demanded us to pay a total amount of approximately RMB187 million ($28.9 million) for breach of contract. On September 11, 2014, Guangzhou Arbitration Commission issued their arbitral award which dismissed Guo Hua’s counterclaim for approximately RMB187 million and ordered Guo Hua to pay RMB78.2 million ($12.1 million) plus interests for late payment at the rate of 8.33% per month since December 20, 2010 until the RMB78.2 million is fully paid. On January 13, 2015, we filed an application to Guangdong Heyuan Court to enforce such arbitral award, and two days later Guangdong Heyuan Court ordered Guo Hua to perform its obligations under the arbitral award. Guo Hua failed to do so. On December 7, 2015, Guangdong Heyuan Court ordered the evaluation and auction of Guo Hua’s assets to enforce the arbitral award. As of the date of this annual report, the evaluation is still on-going. We are also claiming that Guo Hua’s shareholders shall be held jointly liable for a part of the arbitral award. See “Item 3.D. Risk Factors—Risks Related to Our Business and Industry—We may be unable to collect payments from our customers on a timely basis or at all. If such collection problems occur, our business may suffer and our results of operations may be materially and adversely affected.”

 

As a result of a petition filed on October 9, 2011 by U.S. producers of solar crystalline silicon PV cells, or solar panels, on December 7, 2012, the USDOC, published an Antidumping Duty Order and a Countervailing Duty Order on solar panels imported from China. Consequently, imports of solar panels from Hanwha Q CELLS Qidong are subject to a combined effective anti-dumping and countervailing duty deposit rate of 29.18%, of which 15.24% is attributable to the countervailing duty. Imports of solar panels from Hanwha Q CELLS Hong Kong are subject to a combined effective rate of 254.66%, which is comprised of an anti-dumping duty of 239.42% and a countervailing duty of 15.24%. Actual anti-dumping and countervailing duties ultimately due are determined by the DOC after its review of actual transactions. Such review takes place annually in the anniversary month (December) of the publication of the anti-dumping and countervailing duty Orders, and covers the preceding one-year period. In December 2013, the U.S. industry requested administrative reviews in both the anti-dumping and countervailing duty cases and the resulting reviews were initiated by the USDOC on February 3, 2014. The U.S. industry requested that Hanwha Q CELLS Qidong be reviewed in both the anti-dumping and countervailing duty cases. In the course of those reviews, based on the USDOC’s regulations, the U.S. industry withdrew its requests for the anti-dumping and countervailing duty reviews of Hanwha Q CELLS Qidong. As a consequence, its anti-dumping and countervailing duty rates remained unchanged and the previous anti-dumping duty deposits paid on entries into the United States made from May 25, 2012 to November 30, 2013 are to be liquidated at the deposit rate in effect at the time of entry. Similarly, countervailing duty deposits paid on entries into the United States made from March 26 to December 31, 2012 are to be liquidated at the deposit rate in effect at the time of entry. Additionally, no request of Hanwha Q CELLS Qidong’s anti-dumping duty entries made during the period from December 1, 2013 to November 30, 2015 or of its countervailing duty entries made during the period from January 1, 2013 to December 31, 2014 was made to the USDOC. Consequently, these entries are to be liquidated at the deposit rates in effect at the time of entry.

 

In addition, on December 31, 2013, SolarWorld Americas, Inc. filed new anti-dumping duty cases against similar CSPV products from China and Taiwan and a new countervailing duty case against China. These new cases seek anti-dumping and countervailing duties against (i) CSPV products with cells with any stage of production in China, if the cells are assembled in China, regardless of the country of origin of the cells, as well as (ii) CSPV products containing cells that were of Taiwanese origin. The USDOC and USITC initiated investigations on January 21, 2014.

 

In its final determinations in these investigations, the USDOC found that PRC and Taiwanese exporters were selling subject CSPV products to the United States at less than fair value (“Anti-Dumping Investigation”) and/or that PRC exporters are receiving actionable subsidies (“Countervailing Duty Investigation”). The USITC published its final determination on February 10, 2015 that the American industry was materially injured as a result of these imports, and the USDOC published final orders on February 18, 2015, requiring importers of subject CSPV products, including Hanwha Q CELLS Qidong and Hanwha Q CELLS Hong Kong, to pay anti-dumping duty and/or countervailing duty deposits for their entries of subject CSPV products into the United States.

 

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In connection with the USDOC’s anti-dumping investigation of subject CSPV products from China, the USDOC applied an anti-dumping duty deposit rate of 52.13% to Hanwha Q CELLS Qidong and Hanwha Q CELLS Hong Kong as “separate rate” companies, based on the USDOC’s findings with respect to the other Chinese exporters selected for individual examination. In connection with the USDOC’s Anti-Dumping Investigation of subject CSPV products from Taiwan, the USDOC applied an anti-dumping duty deposit rate of 19.50% to Hanwha Q CELLS Qidong and Hanwha Q CELLS Hong Kong as “all others” companies, based on the USDOC’s findings with respect to other Taiwanese exporters selected for individual examination. Moreover, in connection with the Countervailing Investigation and Final Order, the USDOC applied a countervailing duty deposit rate of 38.43% to Hanwha Q CELLS Qidong and Hanwha Q CELLS Hong Kong as an “all-other” company, which is based on the USDOC’s findings with respect to the other Chinese exporters selected for individual examination.

 

Moreover, entries of subject CSPV products made before USITC’s final determination are potentially subject to different anti-dumping and countervailing duty rates than those identified in the USDOC Final Orders. In connection with the Countervailing Investigation, U.S. Customs and Border Protection (“CBP”) has continued to suspend liquidation of unliquidated countervailing duty deposits of 26.89% for entries of subject cells from the PRC entering the United States on or after June 10, 2014 (the date on which the USDOC published its preliminary countervailing duty determination) but before October 8, 2014 (the date on which the USDOC instructed CBP to discontinue the suspension of liquidation).

 

Similarly, in connection with the Anti-Dumping Investigations, CBP will continue to suspend liquidation of unliquidated anti-dumping duty deposits of 42.33% for entries of Photovoltaic Products from China and 24.23% for entries of Photovoltaic Products from Taiwan entering the United States on or after July 31, 2014 (the date on which the USDOC published its preliminary anti-dumping duty determination) but before January 28, 2015 (the date provisional measures expires).

 

Because Hanwha Q CELLS Qidong and Hanwha Q CELLS Hong Kong were not subject to the first administrative review, which was initiated on April 7, 2016, their entries made during the respective periods subject to the reviews will be liquidated at the deposit rates in effect at the time of entry. The ultimate liability for entries made during these periods (which is the liability of the importer of record) will be assessed based on liquidation instructions issued by the USDOC on July 8, 2016.

 

On March 6, 2017, at Hanwha’s request, the USDOC initiated a “changed circumstances” review and preliminarily found that (a) Hanwha Q CELLS Qidong is the successor-in-interest to SolarOne Qidong for purposes of the anti-dumping duty orders on solar cells and solar products from the PRC; and (b) Q CELLS Hong Kong is the successor-in-interest to SolarOne Hong Kong for purposes of the anti-dumping duty order on solar products from the PRC. If the USDOC’s findings are affirmed, the successor entities would be entitled to the predecessor entities’ cash deposit rates with respect to U.S. entries of merchandise subject to the orders.

 

The final results released on April 13, 2017, provide that the USDOC will instruct U.S. Customs and Border Protection (CBP) to suspend liquidation of entries of solar products and solar cells exported by Q CELLS Qidong at the anti-dumping duty cash-deposit rates applicable to SolarOne Qidong. Those cash deposit rates are 13.18% and 30.06% respectively. In addition, the USDOC will instruct CBP to suspend liquidation of entries of solar products exported to exported by Q CELLS Hong Kong at the anti-dumping duty cash-deposit rate applicable to SolarOne Hong Kong. That cash deposit rate is 30.06 percent.

 

On September 6 and November 8, 2012, the European Commission initiated an anti-dumping proceeding and an anti-subsidy proceeding concerning imports of crystalline silicon PV modules and key components, such as cells and wafers, originating in China. On July 27, 2013, the European Union and Chinese trade negotiators announced that an agreement had been reached pursuant to which Chinese manufacturers, including Hanwha SolarOne, would limit our export of solar panels and cells to the European Union and for no less than a minimum price, in exchange for the European Union agreeing to forgo the imposition of anti-dumping duties on these solar panels from China. The offer was approved by the European Commission on August 2, 2013, and the final version was published on December 5, 2013. The Chamber of Commerce for Import and Export of Machinery and Electronic Product of China was responsible for allocating the quota between PV companies and Hanwha SolarOne was allocated a portion of the quota, which amounted to 324.73 MW of modules and 7.52 MW of cells in 2014 and 225.73 MW of modules and 5.22 MW of cells in 2015. The duties were imposed for a period of two years and remained in force while the European Commission carried out an expiry review and other reviews published on December 5, 2015. Solar panels and cells imported in excess of the annual quota will be subject to anti-dumping and anti-subsidy duties. This price undertaking and annual quota have also resolved the parallel anti-subsidy investigation. For companies that would violate the price undertaking or the quota, or which do not form part of the agreement, definitive duties will be levied as per the definitive anti-dumping and anti-subsidy Regulations that were published on December 5, 2013. Finally, it should be noted wafers have been excluded from the scope of both the anti-dumping and anti-subsidy measures. In connection with the implementation of the undertaking, the European Commission conducted an on-spot verification at Hanwha Q CELLS Qidong from July 17, 2014 to July 18, 2014 and another on-spot verification at SolarOne GmbH from October 30, 2014 to October 31, 2014. On May 22, 2015, we received communication from the European Commission regarding the verifications confirming our compliance with the undertaking, as well as some further practical instructions. On June 8, 2015, we provided our responses to those instructions and on October 22, 2015 received follow-up questions on some of our responses. On October 30, 2015, we provided clarifications in response to the follow-up inquiry. As of the date of this annual report, we have not received any further written decision from the European Commission regarding the verifications. See “Item 3.D. Risk Factors—Risks Related to Our Business and Industry—Changes in international trade policies and international barriers to trade may material adversely affect our ability to export our products worldwide.”

 

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In May 2015, having determined that sufficient prima facie evidence existed for the initiation of an investigation pursuant to the relevant European Union regulation, the European Commission initiated an investigation of a number of Chinese manufacturers including us, and conducted an anti-circumvention review to ascertain whether a circumvention of anti-dumping and countervailing duty measures imposed by the European Union on imports of PV modules and cells from China, Malaysia and Taiwan takes place. If the European Commission establishes that the circumvention of the existing anti-dumping and countervailing duties has taken place, the duties will be imposed in respect of imports consigned from Malaysia and Taiwan. The review is not targeted specifically against us. However, in order to ensure that no duties are imposed in respect of products produced at our production facilities in Malaysia, on June 17, 2015, we claimed an exemption from any possible countervailing and anti-dumping duties in respect of the products consigned from Malaysia. On February 12, 2016, the European Commission officially published the outcome of its investigation regarding the possible circumvention of the existing trade defense measures through Malaysia and Taiwan and extended the definitive anti-dumping duty to imports of PV modules and cells from Malaysia and Taiwan, whether declared as originating in Malaysia and in Taiwan or not. While the import duties have generally been imposed on PV modules and cells imported from Malaysia and Taiwan, Hanwha Q CELLS Malaysia Sdn. Bhd., our wholly-owned subsidiary in Malaysia, has been explicitly exempted from this regulation as one of five companies from Malaysia.

 

On December 5, 2015, the European Commission initiated expiry reviews and a partial interim review, with the aim of examining whether the continued imposition of the measures on cells is still in the European Union’s interest, of the anti-dumping and the countervailing measures applicable to imports of PV modules and cells from China. Given that the Commission has opened expiry reviews into the measures in force on imports of solar panels from China, then the duties, the undertaking and the Minimum Import Price will remain in force until the reviews are finished. Expiry reviews can only keep the measures in force exactly as they are (including the undertaking) or remove the measures altogether, whereas interim reviews may result in an adoption of certain measures. The Commission decided to also open an interim review at the same time, in order to consider changing the measures in force. The review was opened as there was prima facie evidence that the circumstances on the basis of which the original measures were imposed had changed. The review was limited to examining whether it is in the interest of the European Union to maintain the measures currently in force on solar cells.

 

On December 20, 2016, in order to describe the details of the proceedings and to outline the results of the investigations, the European Commission published a “General Disclosure Document on the expiry review and a partial interim review of the countervailing measures applicable to imports of crystalline silicon photovoltaic modules and key components (i.e. cells) originating in or consigned from the People's Republic of China”. In view of the conclusions reached by the Commission with regard to the continuation and the likelihood of recurrence of subsidization and of continuation of injury, it recommended that, in accordance with Article 18(2) of the basic Regulation, the countervailing measures applicable to imports of crystalline silicon photovoltaic modules and key components (i.e. cells) originating in consigned from the PRC, imposed by Regulation (EU) No 1239/2013, should be maintained. Accordingly, the Commission has proposed the extension of existing trade duties on Chinese solar products for a further two years.

 

On March 3rd, 2017, the European Commission published in the Official Journal of the European Union its decision that the anti-dumping and anti-subsidy duties on cells and modules imported from China will be extended by 18 months, instead of the originally proposed 24 months. At the same time the European Commission initiated a new interim review with the goal of changing the mechanism by which the minimum import price is derived. The results are expected to be published by December 3, 2017. 

 

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In July 2013, Q CELLS filed an arbitration claim in Frankfurt, Germany, against the insolvency administrator of Global PVQ SE (formerly Q Cells SE) regarding the dispute over the adjustment to the purchase price for certain assets of Q Cells SE acquired by Q CELLS, and certain liabilities related thereto assumed by Q CELLS, pursuant to the asset purchase agreement by and among the insolvency administrator, Hanwha Solar Germany GmbH (predecessor of Q CELLS) and Hanwha Chemical dated August 26, 2012. In October 2015, we obtained an arbitral award in the amount of EUR 45.9 million regarding this arbitration proceeding.

 

On September 30, 2014, a European customer initiated arbitration proceedings against Hanwha Q CELLS Qidong, one of our subsidiaries, under the rules of the London Court of International Arbitration. In its initial pleading, the European customer alleged that certain solar modules it purchased from Hanwha Q CELLS Qidong between 2009 and 2011 were defective, claiming total damages of approximately $240 million, comprised of purchase price adjustments and damages, as well as indemnification against any liability arising from the European customer’s sale of such modules to end customers. On November 7, 2014, Hanwha Q CELLS Qidong filed its response to the European customer’s request for arbitration. On December 10, 2014, the European customer filed its statement of case. On January 23, 2015, Hanwha Q CELLS Qidong filed its statement of defense, and through much of the first half of 2015 the European customer and Hanwha Q CELLS Qidong exchanged document requests and produced documents to each other. On September 30, 2015, the parties agreed to enter into settlement discussions and implement a temporary “standstill” of all proceedings in the arbitration. The merits hearing, which had been scheduled for May 2016, was also adjourned. As of the date of this annual report, the parties’ “standstill” remains in place.

 

On December 16, 2014, Konca Solar Cells Co. Ltd. (“Konca”) raised a counterclaim against Q CELLS in an arbitration proceeding initiated by Q CELLS in which Q CELLS claimed that Konca was to return $7.2 million of advance payments made by Q CELLS. Konca claimed a damage of $22.0 million alleging that Q CELLS owed Konca the amounts invoiced to, and unpaid by, the former Q Cells SE. Q CELLS asserted that in accordance with the asset purchase agreement pursuant to which Hanwha Solar acquired Q CELLS’ business in October 2012, it assumed assets of the former Q Cells SE but was specifically exempted from those liabilities claimed by Konca. This claim was settled on December 29, 2015, whereas Konca agreed to pay a settlement sum of $5.5 million to Q CELLS.

 

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Other than as described above, there are no material legal proceedings, regulatory inquiries or investigations pending or threatened against us. We may from time to time be subject to various legal or administrative proceedings arising in the ordinary course of our business.

 

Dividend Policy

 

We made a one-time cash dividend payment in the aggregate amount of RMB7.2 million ($1.1 million) to the holders of the series A convertible preference shares on December 31, 2006. Except for the foregoing, we have never declared or paid any cash dividends, nor do we have any present plan to pay any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all of our available funds and any future earnings to operate and expand our business.

 

The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors (provided always that under Cayman Islands law, we may pay a dividend only out of either profit or our share premium account, and provided further that in no circumstances may we pay a dividend if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business). Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, ADS holders will receive payment to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares” for the description of a summary of the material provisions of the deposit agreement.

 

B. Significant Changes 

 

There have been no significant changes since December 31, 2016, the date of the annual consolidated financial statements in this annual report.

 

ITEM 9 THE OFFER AND LISTING

 

A. Offering and Listing Details 

 

The ADSs, each representing fifty of our ordinary shares, have been listed on the Nasdaq Global Market since December 20, 2006. Our ticker symbol is “HQCL.”

 

In 2016, the trading price of the ADSs on the Nasdaq Global Market has ranged from a low of $7.50 per ADS to a high of $22.66 per ADS, as adjusted retrospectively to reflect the current ratio of the ADSs to ordinary shares of one ADS representing fifty ordinary shares effective as of June 15, 2015.

 

The following table provides the high and low trading prices for the ADSs on the Nasdaq Global Market for the periods indicated, and all prices have been retrospectively adjusted to reflect the current ADS to ordinary share ratio of one ADS to fifty ordinary shares effective on June 15, 2015 for all periods presented.

 

   Sales Price 
   High   Low 
Annually High and Low          
2012   25.10    7.74 
2013   57.00    8.60 
2014   42.40    10.50 
2015   28.87    7.70 
2016   22.66    7.50 
Quarterly High and Low          
First Quarter 2015   22.90    9.20 
Second Quarter 2015   25.80    14.00 
Third Quarter 2015   17.50    7.70 
Fourth Quarter 2015   28.87    12.29 
First Quarter 2016   22.66    13.69 
Second Quarter 2016   15.75    10.81 
Third Quarter 2016   15.33    10.35 
Fourth Quarter 2016   12.22    7.50 
Monthly Highs and Lows          
October 2016   11.43    11.07 
November 2016   11.28    8.13 
December 2016   9.20    7.50 
January 2017   8.75    7.65 
February 2017   9.79    7.52 
March 2017   9.17    6.50 
April 2017 (through April 21, 2017)   7.42    6.54 

 

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B. Plan of Distribution 

 

Not applicable.

 

C. Markets 

 

The ADSs, each representing fifty of our ordinary shares, have been listed on the Nasdaq Global Market since December 20, 2006 and are under the symbol “HQCL.”

 

D. Selling Shareholders 

 

Not applicable.

 

E. Dilution 

 

Not applicable.

 

F. Expenses of the Issue 

 

Not applicable.

 

ITEM 10 ADDITIONAL INFORMATION

 

A. Share Capital 

 

Not applicable.

 

B. Memorandum and Articles of Association 

 

We incorporate by reference into this annual report the description of our amended and restated memorandum of association contained in our F-1 registration statement (File No. 333-139258), as amended, initially filed with the Commission on December 11, 2006. Our shareholders adopted our amended and restated memorandum and articles of association by special resolutions passed on December 18, 2006. The amended and restated memorandum and articles of association became effective on December 26, 2006. Our shareholders adopted some further amendments to our amended and restated memorandum and articles of association by special resolutions passed at an extraordinary general meeting on February 21, 2011. Such amendments include our name change, the increase of our authorized share capital from $50,000 to $100,000 and the deletion of the requirement of prior majority shareholder approval for issuance of shares in an amount equal to or more than 20% of all the shares issued and outstanding. Our shareholders adopted amendments to our amended and restated memorandum and articles of association by special resolutions passed at an extraordinary general meeting on February 4, 2015. The adopted Second Amended and Restated Memorandum of Association included our name change to “Hanwha Q CELLS Co., Ltd.”, the increase of our authorized share capital from $100,000 to $700,000 and the following provisions, among others:

 

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·our board of directors to consist of not less than five and not more than ten directors (exclusive of alternative directors);

 

·directors are elected at the annual general meeting and hold the office for a term as specified in the resolution that appointed them or if no such term is specified then they hold the office until they are removed from office by ordinary resolution or by unanimous written consent of all the shareholders; If for any cause, the directors have been elected at an annual general meeting, they may be elected as soon thereafter as convenient at an extraordinary general meeting;

 

·so long as our ADSs are listed or quoted on Nasdaq, we will establish and maintain an audit committee as a committee of the board of directors satisfying the following criteria:

 

(i) the audit committee will be comprised three members, each of whom shall be (a) a member of the board of directors and (b) an independent director; and

 

(ii) the authority and duties of the audit committee will be in accordance with (a) SEC rules, (b) the Nasdaq Rules (without regards to any “home country” exception under Nasdaq Rule 5615(a)(3)) and (c) the audit committee’s charter and adopting resolutions in effect from time to time;

 

·in the event any matter is presented to our board of directors for prior approval or determination and any director who has been nominated by Hanwha Solar has an actual or potential conflict of interest with respect to such matter, as determined in good faith by a majority of our independent directors, then the approval or determination with respect to such matter will be made by a majority of the members of our board of directors without such conflict of interest;

 

·the prior approval of our audit committee or a majority of our independent directors will be required to delist our ADSs from Nasdaq, deregister our ordinary shares or the ADSs under the Exchange Act, or enter into any “related party transaction,” as defined in Nasdaq Marketplace Rule 5630, or transactions or matters involving a “related person” as defined under Item 404 of Regulation S-K promulgated under the Exchange Act.

 

On April 6, 2015, our shareholders adopted further amendment to our amended and restated memorandum and articles of association by a special resolution passed at an extraordinary general meeting which deleted the fixed ratio of five ordinary shares represented by one ADS.

 

C. Material Contracts 

 

We have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information on the Company” or elsewhere in this annual report on Form 20-F.

 

D. Exchange Controls 

 

Foreign Currency Exchange

 

Foreign currency exchange in China is primarily governed by the following regulations:

 

·Foreign Exchange Administration Rules (1996), as amended; and

 

·Regulations of Settlement, Sale and Payment of Foreign Exchange (1996).

 

Under the Foreign Exchange Administration Rules, the Renminbi is convertible for current account items, including distribution of dividends, payment of interest, trade and service-related foreign exchange transactions. Conversion of Renminbi for capital account items, such as direct investment, loan, securities investment and repatriation of investment, however, is still subject to the approval of SAFE.

 

Under the Regulations of Settlement, Sale and Payment of Foreign Exchange, foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after valid commercial documents are provided and, in the case of capital account item transactions, after obtaining the approval from SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by the Ministry of Commerce, SAFE and the NDRC.

 

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E. Taxation 

 

Cayman Islands Taxation

 

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. Payments of dividends and capital in respect of the ordinary shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of a dividend or capital to any holder of ordinary shares, nor will gains derived from the disposal of the ordinary shares be subject to Cayman Islands income or corporation tax. No Cayman Islands stamp duty will be payable unless an instrument is executed in, brought to, or produced before a court of the Cayman Islands. The Cayman Islands is not party to any double tax treaties applicable to any payments made by or to our company. There are no exchange control regulations or currency restrictions in the Cayman Islands.

 

PRC Taxation

 

Under the EIT, which took effect as of January 1, 2008, enterprises established under the laws of non-PRC jurisdictions but whose “de facto management body” is located in the PRC are considered “resident enterprises” for PRC tax purposes. The EIT does not define the term “de facto management.” However, the Implementation Regulations for the Enterprise Income Tax Law of the PRC issued by the State Council on December 6, 2007 defined de facto management body as an establishment that exerts substantial and comprehensive management and control over the business operations, staff, accounting, assets and other aspects of the enterprise. Although we do not believe that we should be treated as a “resident enterprise” for PRC tax purposes, if we are so treated, we will be subject to PRC income tax on our worldwide income at a uniform tax rate of 25%, excluding the dividend income we receive from our PRC subsidiaries which should have been subject to PRC income tax already.

 

Moreover, the EIT provides that an income tax rate of 10% is normally applicable to dividends payable to non-PRC investors who are “non-resident enterprises,” to the extent such dividends are derived from sources within the PRC. We are a Cayman Islands holding company and a significant portion of our income may be derived from dividends we receive from our operating subsidiaries located in the PRC (through our holding company structure). Thus, dividends paid to us by our subsidiaries in China may be subject to the 10% income tax if we are considered a “non-resident enterprise” under the EIT.

 

Similarly, any gain realized on the transfer of ADSs or shares by non-PRC investors who are “non-resident enterprises,” is also subject to 10% PRC withholding income tax if such gain is regarded as income derived from sources within the PRC. If we are considered a “resident enterprise”, it is unclear whether the dividends we pay with respect to our ordinary shares or ADSs, or the gain you may realize from the transfer of our ordinary shares or ADSs, would be treated as income derived from sources within the PRC and subject to PRC tax.

 

If we are deemed by the PRC tax authorities as a “resident enterprise” and declare dividends, under the existing Implementation Regulations of the EIT, dividends paid by us to our ultimate shareholders, which are “non- resident enterprises” and do not have an establishment or place of business in the PRC, or which have an establishment or place of business in the PRC but the relevant income is not effectively connected with that establishment or place of business, might be subject to PRC withholding tax at 10% or a lower treaty rate.

 

According to the Individual Income Tax Law, PRC income tax at the rate of 20% is applicable to dividends payable to individual investors if such dividends are regarded as income derived from sources within the PRC. Similarly, any gain realized on the transfer of ADSs or ordinary shares by individual investors is also subject to PRC tax at 20% if such gain is regarded as income derived from sources within the PRC. If we are deemed by the PRC tax authorities as a “resident enterprise,” the dividends we pay to our individual investors with respect to our ordinary shares or ADSs, or the gain the individual investors may realize from the transfer of our ordinary shares or ADSs, might be treated as income derived from sources within the PRC and be subject to PRC tax at 20% or a lower treaty rate. Under the current double taxation treaty between the PRC and the United States, for beneficial owners of shares who are tax-resident in the United States who qualify for the benefits of the treaty, and whose ownership of the shares is not attributable to a permanent establishment or fixed place of business in the PRC, the applicable treaty rate on dividends is 10% (the “Treaty Rate”).

 

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U.S. Federal Income Taxation

 

The following discussion describes the material U.S. federal income tax consequences to U.S. Holders (defined below) under present law of an investment in the ADSs or ordinary shares. This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), existing and proposed U.S. Treasury regulations promulgated thereunder, and administrative and judicial interpretations thereof, all as of the date of this annual report. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below. This discussion is not a complete description of all tax considerations that may be relevant. Further, it applies only to U.S. Holders that hold the ADSs or ordinary shares as capital assets within the meaning of Section 1221 of the Code (generally, property held for investment) and use the U.S. dollar as their functional currency. This section does not address state, local, or foreign tax considerations that may be applicable, the Medicare Contribution tax on net investment income, or any U.S. federal estate or gift tax consequences, and does not address tax considerations applicable to U.S. Holders subject to special rules, such as:

 

  · a dealer in securities or currencies;
  · a trader in securities that elects to use a mark-to-market method of accounting;
  · a bank or other financial institution;
  · a regulated investment company or real estate investment trust;
  · an insurance company;
  · a retirement plan;
  · certain former citizens or residents of the United States;
  · a tax-exempt organization;
  · a person that holds the ADSs or ordinary shares as part of a hedge, integration, straddle or conversion transaction for tax purposes;
  · a person that enters into “constructive sales” involving ADSs or ordinary shares or substantially identical property;
  · a person liable for the alternative minimum tax; or
  · a person that directly, indirectly or constructively owns 10% or more of our voting stock.

 

If you are a partner in a partnership or other entity taxable as a partnership for U.S. federal income tax purposes that holds ADSs or ordinary shares, your tax treatment generally will depend on your status and the activities of the partnership. If you are a partner or partnership holding ADSs or ordinary shares, you should consult your own tax advisors.

 

For purposes of this discussion, you are a “U.S. Holder” if you are a beneficial owner of an ADS or ordinary share and you are, for U.S. federal income tax purposes:

 

  · an individual citizen or resident of the United States;
  · a corporation (or other entity taxable as a corporation) organized under the laws of the United States, any state in the United States, or the District of Columbia;
  · an estate whose income is subject to U.S. federal income taxation regardless of its source; or
  · a trust that (1) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

 

YOU ARE URGED TO CONSULT YOUR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO YOUR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO YOU OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSS OR ORDINARY SHARES.

 

The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and any related agreement will be complied with in accordance with their terms. If you hold ADSs, you generally will be treated as the holder of the underlying ordinary shares represented by those ADSs for U.S. federal income tax purposes. Exchanges of ordinary shares for ADSs and ADSs for ordinary shares generally will not be subject to U.S. federal income tax.

 

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Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares

 

Subject to the PFIC rules discussed below, the gross amount of any distribution (including constructive dividends) to you with respect to the ADSs or ordinary shares, including the amount of any taxes withheld therefrom, generally will be included in your gross income as dividend income on the date of actual or constructive receipt by the depositary, in the case of ADSs, or by you, in the case of ordinary shares, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). We do not currently intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, you should expect that any distribution we make will generally be treated as a dividend. The dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations.

 

With respect to certain non-corporate U.S. Holders, including individual U.S. Holders, dividends may constitute “qualified dividend income” and be taxed at the lower applicable capital gains rate, provided that (1) the ADSs or ordinary shares with respect to which the dividends are paid are readily tradable on an established securities market in the United States, or we are eligible for one of certain income tax treaties with the United States, including the current income tax treaty between the United States and the PRC, (2) we are not a PFIC (as discussed below) for either our taxable year in which the dividend was paid or the preceding taxable year, and (3) certain holding period requirements are met. Under U.S. Internal Revenue Service authority, ordinary shares, or ADSs representing such shares, are considered for the purpose of clause (1) above to be readily tradable on an established securities market in the United States if they are listed on the Nasdaq Global Market, as the ADSs are. We do not, however, expect our ordinary shares that are not represented by ADSs to be readily tradable on an established securities market in the United States. Furthermore, in the event that we are deemed to be a PRC resident enterprise under the EIT (as described above under “Taxation—PRC Taxation”), we may be eligible for the benefits of the current income tax treaty between the United States and the PRC for the purpose of clause (1) above. You should consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to the ADSs or ordinary shares.

 

Dividends will constitute foreign source income for U.S. foreign tax credit limitation purposes and will generally constitute “passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.” Subject to certain conditions and limitations, PRC withholding taxes on dividends may be treated as foreign taxes eligible for credit against your U.S. federal income tax. If you are eligible for the benefits of the income tax treaty between the United States and the PRC, any PRC withholding taxes on dividends in excess of the Treaty Rate will not be eligible for such credit. You should consult your own tax advisors regarding the creditability of any PRC tax.

 

Taxation of a Sale or Other Disposition of ADSs or Ordinary Shares

 

Subject to the PFIC rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of an ADS or ordinary share equal to the difference between the amount realized for the ADS or ordinary share and your tax basis in the ADS or ordinary share. The gain or loss generally will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held the ADS or ordinary share for more than one year, you will be eligible for reduced tax rates. The deductibility of capital losses is subject to limitations. Any such gain or loss that you recognize will generally be treated as U.S. source income or loss for foreign tax credit limitation purposes. You generally would only be able to claim a foreign tax credit for any foreign taxes to the extent that you have foreign source income. However, as described above under “Taxation—PRC Taxation,” any gain from the disposition of an ADS or ordinary share may be subject to PRC tax. In such event, a U.S. Holder that is eligible for the benefits of the income tax treaty between the United States and the PRC may elect to treat the gain from a disposition of an ADS or ordinary share as foreign source gain for foreign tax credit purposes. You should consult your own tax advisor regarding your eligibility for the benefits of the income tax treaty between the United States and the PRC and the creditability of any PRC tax.

 

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Passive Foreign Investment Company Status

 

Special and adverse U.S. federal income tax rules apply to U.S. holders that own, directly or indirectly, shares of a “PFIC.” A non-U.S. corporation is considered to be a PFIC for any taxable year if, after applying certain look-through rules, either: (1) at least 75% of its gross income is passive income, or (2) at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income. For this purpose, passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person). The PFIC determination is made annually, and a non-U.S. corporation’s status could change depending, among other things, upon changes in the composition of its gross income and assets, and the market value of its assets and its stock.

 

We do not believe that we were a PFIC for U.S. federal income tax purposes for the taxable year that ended December 31, 2016, and we do not currently expect to be a PFIC for U.S. federal income tax purposes for our current taxable year or the foreseeable future. Our actual PFIC status for the current taxable year, however, will not be determinable until the close of the current taxable year ending December 31, 2017, and accordingly, there is no guarantee that we will not be a PFIC for the current taxable year or any future taxable year.

 

We must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change. If we are a PFIC for any year during which you hold ADSs or ordinary shares, unless you make a “mark-to-market” election as discussed below, we generally will continue to be treated as a PFIC for all succeeding years during which you hold ADSs or ordinary shares.

 

If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, you will be subject to special tax rules with respect to any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the ADSs or ordinary shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the ADSs or ordinary shares will be treated as an excess distribution. Under these special tax rules:

 

  · the excess distribution or gain will be allocated ratably over your holding period for the ADSs or ordinary shares;
  · the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we became a PFIC, will be treated as ordinary income; and
  · the amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

 

The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the ADSs or ordinary shares cannot be treated as capital, even if you hold the ADSs or ordinary shares as capital assets.

 

Alternatively, a U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock of a PFIC to elect out of the tax treatment under the excess distribution regime described above. If you make a mark-to-market election for the ADSs or ordinary shares, you will include in income each year that we are a PFIC an amount equal to the excess, if any, of the fair market value of the ADSs or ordinary shares as of the close of your taxable year over your adjusted basis in such ADSs or ordinary shares. You are allowed a deduction for the excess, if any, of the adjusted basis of the ADSs or ordinary shares over their fair market value as of the close of any such taxable year. However, deductions are allowable only to the extent of any net mark-to-market gains on the ADSs or ordinary shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the ADSs or ordinary shares, are treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss on the ADSs or ordinary shares, as well as to any loss realized on the actual sale or disposition of the ADSs or ordinary shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such ADSs or ordinary shares. Your basis in the ADSs or ordinary shares will be adjusted to reflect any such income or loss amounts.

 

The mark-to-market election is available only for “marketable stock,” which is stock that is regularly traded in other than de minimis quantities on at least 15 days during each calendar quarter on a qualified exchange, including the Nasdaq Global Market, or other market, as defined in applicable U.S. Treasury regulations. The ADSs are listed on the Nasdaq Global Market, and we expect that they will continue to be regularly traded on the Nasdaq Global Market. Consequently, if you are a holder of ADSs, the mark-to-market election should be available to you were we to be or become a PFIC.

 

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If we are a PFIC with respect to you for any taxable year, to the extent any of our subsidiaries are also PFICs or we make direct or indirect equity investments in other entities that are PFICs, you may be deemed to own shares in such lower-tier PFICs that are directly or