Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 20-F

 

 

(Mark One)

 

 

Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .

 

Commission file number: 001-37678

 

 

SPI Energy Co., Ltd.

(Exact name of Registrant as specified in its charter)

N/A

(Translation of Registrant’s name into English)

Cayman Islands

(Jurisdiction of incorporation or organization)

Suite 2703, 27/F, China Resources Building 26 Harbour Road, Wan Chai Hong Kong SAR, China

(Address of principal executive offices)

Tairan Guo, Chief Financial Officer Suite 2703, 27/F, China Resources Building 26 Harbour Road, Wan Chai Hong Kong SAR, China  Telephone: + 852 2291 6020  Fax: + 852 2291 6030

(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, each representing ten ordinary shares, par value $0.000001 per share* Ordinary shares, par value $0.000001 per share		The NASDAQ Stock Market LLC (The NASDAQ Global Select Market)   The NASDAQ Stock Market LLC   (The NASDAQ Global Select Market)

 

---

* Trading in the registrant’s American depositary shares on the NASDAQ Global Select Market was terminated as of September 18, 2017.

 

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

 

None

(Title of Class)

 

Table of Contents

 

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

 

None

(Title of Class)

 

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.

641,665,172 ordinary shares 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.

 

o 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.

 

o 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.

 

o Yes     x 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     o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  o

Accelerated filer  x

Non-accelerated filer  o

Emerging growth company  o

 

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. o

 

† 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 o

Other o

 

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.

 

o Item 17     o 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).

 

o Yes     x No

 

Table of Contents

 

TABLE OF CONTENTS

 

 

Table of Contents

 

CONVENTIONS THAT APPLY TO THIS ANNUAL REPORT

 

Unless otherwise indicated and except where the context otherwise requires, references in this annual report on Form 20-F to:

 

·                   “we,” “us,” “our Company,” “our” or “SPI Energy” refer to SPI Energy Co., Ltd., a Cayman Islands holding company and its subsidiaries or any of them, or where the context so requires, in respect of the period before our Company became the holding company of its present subsidiaries, such subsidiaries as if they were subsidiaries of our Company at the relevant time;

·                   “2014,” “2015” and “2016” refers to our fiscal years ended December 31, 2014, 2015 and 2016, respectively;

·                   “ADSs” refers to the American depositary shares, each representing ten ordinary shares, which were listed on the NASDAQ Global Select Market under the symbol of “SPI” between January 19, 2016 and September 18, 2017;

·                   “AUD” or “Australian Dollar” refers to the legal currency of Australia;

·                   “BT model” refers to our build-and-transfer model;

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

·                   “DG” refers to distributed generation;

·                   “EPC” refers to engineering, procurement and construction services;

·                   “EUR” or “Euro” refers to the legal currency of the countries comprising the euro area;

·                   “FIT” refers to feed-in tariff(s);

·                   “IPP model” refers to our independent power producer model;

·                   “LDK” refers to LDK Solar Co., Ltd.;

·                   “O&M” refers to operating and maintenance;

·                   “PPA” refers to power purchase agreement(s);

·                   “PV” refers to photovoltaic;

·                   “Redomicile Merger” refers to the redomicile of Solar Power, Inc. to the Cayman Islands through a merger with and into a wholly-owned subsidiary of SPI Energy Co., Ltd., which was completed on January 4, 2016;

·                   “RMB” or “Renminbi” refers to the legal currency of China;

·                   “Shares” or “ordinary shares” refers to our ordinary shares, par value $0.000001 per share;

·                   “SPI” refers to Solar Power, Inc., a company incorporated under the law of California;

·                   “U.K.” refers to the United Kingdom;

·                   “U.S.” refers to the United States of America;

·                   “U.S. dollar” or “$” refers to the legal currency of the United States of America; and

·                   “watt” or “W” refers to the measurement of total electrical power, where “kilowatt” or “kW” means one thousand watts, “megawatts” or “MW” means one million watts and “gigawatt” or “GW” means one billion watts.

 

Names of certain companies in this annual report are translated or transliterated from their original Chinese legal names.

 

Discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

 

The conversion of amounts of Australian Dollars, Euros and Renminbi, respectively, into U.S. dollars in this annual report, made solely for the convenience of readers, is based on the noon buying rates in the city of New York for cable transfers of Australian Dollars, Euros and Renminbi, respectively, as certified for customs purposes by the Federal Reserve Bank of New York as of December 30, 2016, which was AUD1.3831 to $1.00, EUR0.9477 to $1.00, and RMB6.9430 to $1.00, respectively, unless indicated otherwise. No representation is intended to imply that the Australian Dollar, Euro or Renminbi could have been, or could be, converted, realized or settled into U.S. dollars at the foregoing rates or any other rate.

 

4

Table of Contents

 

PART I

 

ITEM 1.                                                 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not Applicable.

 

ITEM 2.                                                 OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not Applicable.

 

ITEM 3.                                                 KEY INFORMATION

 

A.                                     Selected Financial Data

 

Our Selected Consolidated Financial Data

 

The following selected consolidated statements of operations data for the years ended December 31, 2014, 2015 and 2016 and the selected consolidated balance sheet data as of December 31, 2015 and 2016 are derived from our audited consolidated financial statements included elsewhere in this annual report. The selected consolidated statements of operations data for the years ended December 31, 2012 and 2013 and the consolidated balance sheet data as of December 31, 2012, 2013 and 2014 are derived from our audited consolidated financial statements not included in this annual report. The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The historical results are not necessarily indicative of results to be expected in any future periods.

 

		For the year ended December 31,
		2012		2013		2014		2015		2016
		($ in thousands, except share and per share data)
Consolidated Statements of Operations Data:
Net sales:
Net sales		64,417		42,629		91,642		190,510		140,199
Net sales, related party		35,539		—		—		—		—
Total net sales		99,956		42,629		91,642		190,510		140,199
Cost of goods sold:
Cost of goods sold		56,016		42,582		77,430		176,469		120,910
Cost of goods sold, related party		32,617		—		—		—		—
Provision for losses on contracts		2,729		2,816		2,055		5,932		403
Total cost of goods sold		91,362		45,398		79,485		182,401		121,313
Gross profit (loss)		8,594		(2,769	)	12,157		8,109		18,886
Operating expenses:
General and administrative		13,061		8,231		8,286		76,747		34,251
Sales, marketing and customer service		10,647		2,050		1,401		39,428		29,230
Provision for (reversal of) doubtful accounts, notes and other receivables		—		9,303		(2,043	)	45,328		30,465
Impairment charges		6,038		7,500		—		10,853		124,970
Engineering, design and product management		2,636		1,761		—		—		—
Total operating expenses		32,382		28,845		7,644		172,356		218,916
Operating income (loss)		(23,788	)	(31,614	)	4,513		(164,247	)	(200,030	)
Other income (expense):
Interest expense		(4,065	)	(4,321	)	(2,259	)	(9,275	)	(9,043	)
Interest income		2,527		1,655		1,212		2,218		1,163
Loss on extinguishment of convertible bonds		—		—		(8,907	)	—		—
Gain from deconsolidation		—		3,537		—		—		—
Change in fair value of derivative asset/liability		—		—		972		(15,650	)	(2,328	)
Loss on investment in affiliates		—		—		—		(2,493	)	(10,618	)
Net foreign exchange gain (loss)		(182	)	(688	)	1,498		4,412		797
Others		—		—		815		628		(573	)
Total other (expense) income, net		(1,720	)	183		(6,669	)	(20,160	)	(20,602	)

 

5

---

Table of Contents

 

		For the year ended December 31,
		2012		2013		2014		2015		2016
		($ in thousands, except share and per share data)
Loss before income taxes		(25,508	)	(31,431	)	(2,156	)	(184,407	)	(220,632	)
Income tax expense		(80	)	813		3,040		673		336
Net loss		(25,428	)	(32,244	)	(5,196	)	(185,080	)	(220,968	)
Net loss per common share:
Basic and Diluted		(0.13	)	(0.16	)	(0.02	)	(0.30	)	(0.34	)
Weighted average number of common shares used in computing per share amounts:
Basic and Dilutive		190,461,696		198,214,456		307,005,057		612,047,053		641,561,610
		As of December 31,
		2012		2013		2014		2015		2016
		($ in thousands)
Summary Consolidated Balance Sheet Data:
Cash and cash equivalents		17,823		1,031		156,540		82,124		4,178
Total current assets		141,014		24,127		381,314		393,569		154,333
Total assets		162,829		70,964		587,907		709,570		361,818
Total current liabilities		118,610		60,679		252,309		473,551		330,528
Total liabilities		138,707		73,831		325,799		493,012		374,746
Total stockholders’ equity (deficit)		24,122		(2,867	)	262,108		216,558		(12,928	)
Total liabilities and stockholders’ equity		162,829		70,964		587,907		709,570		361,818

 

Exchange Rate Information

 

Not Applicable.

 

B.                                     Capitalization and Indebtedness

 

Not Applicable.

 

C.                                     Reasons for the Offer and Use of Proceeds

 

Not Applicable.

 

D.                                     Risk Factors

 

Our business, financial condition and results of operations are subject to various changing business, competitive, economic, political and social conditions in China and worldwide. In addition to the factors discussed elsewhere in this annual report, the following are some of the important factors that could adversely affect our operating results, financial condition and business prospects, and cause our actual results to differ materially from those projected in any forward-looking statements.

 

Risks Related to Our Business and Industry

 

We have incurred net losses, experienced net cash outflows from operating activities and recorded working capital deficit. If we do not effectively manage our cash and other liquid financial assets and execute our liquidity plan, we may not be able to continue as a going concern.

 

We incurred net losses of $5.2 million, $185.1 million and $220.7 million in 2014, 2015 and 2016, respectively. We had an accumulated deficit of $466.8 million as of December 31, 2016. We had net cash used in operating activities of $56.5 million in 2014, net cash used in operating activities of $155.5 million in 2015 and net cash used in operating activities of $47.0 million in 2016. We also had a working capital deficit of $176.2 million as of December 31, 2016. In addition, we have substantial amounts of debts that will become due in 2017.

 

Historically, we have relied primarily on cash from our operations, bank borrowings, private placements and financial leases to fund our operations. We expect that our existing cash and cash equivalents and cash flows from operating and financing activities will be sufficient to meet our anticipated working capital requirements and capital expenditure for at least the next 12 months, but generally inadequate to pursue new project acquisition or development initiatives without additional capital. The timing and amount of our working capital and capital expenditure requirements may vary significantly depending on numerous factors, such as the timeliness of payments from our customers. We have filed liens to secure customer payments for each of our solar projects, but there is no assurance that such payments will be timely collected. We have also enhanced our collection efforts and undertaken various measures to collect outstanding payments from customers, damages from legal actions and other payments due to us. The volatility and potential deterioration of the PV market conditions and the overall global economies have also added uncertainties regarding the sustainability of the PV industry and adverse impact on the demand for our products. Without access to sufficient level of capital from operations or through bank borrowings or other sources, we may not be able to execute our growth strategy or pursue additional projects, or may not even be able to continue as a going concern. These doubts and uncertainties may create concerns for our creditors, suppliers, customers and other counterparties, and cause them to make it more difficult for us to raise our financing, conduct our business and meet our debt and other obligations.

 

6

Table of Contents

 

The report of our independent registered public accounting firm on our financial statements as of and for the year ended December 31, 2016 includes discussions on our ability to continue as a going concern. Although we have formulated a liquidity plan as summarized under Note 2 (a) to our consolidated financial statements appearing elsewhere in this annual report, we cannot assure you that we will be able to successfully execute this liquidity plan. The amount of liquidity that we need may be greater than we currently anticipate as a result of additional factors and events beyond our control, such as global economic slowdown, continued downturn in the global PV market, potential financial crises globally or in any region where we conduct a significant portion of our business, changes in the regulatory and business environments, including international trade-related sanctions, which may prevent us from operating normally or from effectively competing in the PV industry. All of these and other factors and occurrences may increase our cash requirements and make us unable to satisfy our liquidity requirements and we may, as a result, be unable to continue as a going concern.

 

Recently, we have revised the assumptions underlying our existing operating plans and recognized the fact that additional actions were needed to reposition our operations to minimize our cash outflows. Therefore, we are undertaking a number of initiatives in order to conserve or generate cash on an incremental basis in 2017. For a detailed discussions of these initiatives and strategies, please see “Item 5. Operating And Financial Review and Prospects—B. Liquidity and Capital Resources— Capital Resources and Material Known Facts on Liquidity.”

 

However, there is no assurance that these initiatives and strategies will be successfully implemented, or even if successfully implemented, our cash position and our operational efficiency will improve. In the event that our business initiatives and strategies do not achieve the expected results, our business, financial conditions, results of operations and liquidity position may be materially and adversely affected. Furthermore, we have identified several business related risk factors, such as contingent liabilities arising from litigations, suspected related party transactions and unusual transactions and compliance with laws and regulations, which could cause cash position to further deteriorate. For the foregoing reasons, we may not be able to continue as a going concern.

 

The operations of our e-commerce and investment business platform is unsuccessful.

 

In early 2015, our related party, Solar Energy E-Commerce (Shanghai) Limited (“Solar Energy E-Commerce”), launched the e-commerce and investment platform, www.solarbao.com, or the Solarbao platform, enabling retail customers and solar project developers to purchase various PV-related products and services. The Solarbao platform was intended to create a network connecting investors seeking solar industry investment opportunities and solar project developers. This platform primarily generated revenue from commissions derived from the leasing of solar panels. Starting from April 18, 2017, we have ceased offering new investment products to investors and stopped accepting new investments on the Solarbao platform due to its short operating history, the ever changing Chinese regulatory regime, government policies in this area and various other reasons as discussed below.

 

Beginning in April 2017, investors on the Solarbao platform have had issues recovering their principal and proceeds in accordance with the terms of their respective investment agreements due to the reduction in liquidity resulting from the combined effects of delay in the subsidies from the government on solar farms in operations and the delayed rental payment from the solar farm owners.

 

7

Table of Contents

 

Pursuant to the entrusted finance leasing contract entered into by and among the investors, Jiangsu Solarbao Leasing Co., Ltd., our project companies or third parties, and Solar Energy E-Commerce, Solar Energy E-Commerce’s role as an information intermediary bears no obligation to repay principal and proceeds to the individual investors. The main repayment obligors, which comprise mostly of our project companies and of third party project developers, should repay the investors the principal and interests on their investments. We are likely to be treated as a group with our project companies by the relevant PRC governmental authorities, and we may be required to pay the principal and interests payment to the investors. We may also be requested by the PRC governmental authorities to assist existing investors to recover their principal and interests, in which case third parties are repayment obligors. Since April 10, 2017, our project companies and third party project developers have been in default of repayments to the individual investors. On April 17, 2017, Meijv and Jiangsu Solarbao Leasing Co., Ltd. (“Jiangsu Solarbao”) issued a joint statement, announcing that they would repay investors within 180 days upon the occurrence of the default, and that Solarbao would simultaneously compensate the investors according to their respective investment agreements. We subsequently defaulted on the redemption and repayment plan. On October 12, 2017, Jiangsu Solarbao announced on www.solarbao.com that as of October 11, 2017, principal and interests payment of RMB 631 million ($90.9 million) were overdue to 11,064 individual investors. It also introduced a new redemption and repayment plan. As of the date of this annual report, we have made payment of $1.47 million to 1,313 individual investors. We plan to take all necessary measures to assist the existing investors to recover their principal and interests on their investments.

 

Legal proceedings, including but not limited to civil and criminal, may be brought against us if we fail to timely pay the investors in full or if we violate any laws or regulations, which may materially and adversely affect our business, brand, reputation, prospects, financial condition and results of operations. In addition, the laws and regulations governing the internet financing in China are developing and evolving and subject to changes. As a result of the abovementioned default, some investors began to report to the police department of Suzhou Industrial Park, and requested that the governmental authorities to order us to repay the principal and interest on their investment.  During the pre-investigation phase, we actively cooperated with the police and submitted relevant information and materials. At the same time, we communicated with local governmental authorities on various occasions regarding our redemption and repayment plan. The police department of Suzhou Industrial Park filed criminal charges against us in July 7, 2017.  Jiangsu Solarbao’s executives and some of its employees have been identified as criminal suspects,  and Jiangsu Solarbao’s bank accounts and its funds may be frozen. This case has not yet entered to the trial, and we have been taking all measures, including but not limited to the recovery of accounts receivable, disposal of solar power projects, and use of power plant’s operating income of our domestic companies, to assist investors in recovering the principal and interests on their investments.  Nevertheless, we may still be deemed as engaging in illegal public fund-raising by the court, and we may be subject to fines and our executives may be convicted and sentenced pursuant to the PRC laws and regulations. As a result, our business prospects and the results of operations of the e-commerce and investment platform may be materially and adversely affected. For a detailed discussion of the laws and regulations governing Internet finance and public fund-raising, see “Item 4. Information on the Company—B. Business Overview—Regulations—Internet Finance and Illegal Public Fund-raising.”

 

We have not been successful at managing or growing our e-commerce and investment business. Although we are currently in the process of assisting the existing investors to recover their investment principal and proceeds, we may continue incur significant costs due to our outstanding and potential future repayment obligations and the potential civil and criminal liabilities, and our business, brand, reputation, prospects, financial condition and results of operations may be materially and adversely affected.

 

We conduct our business in diverse locations around the world and are subject to economic, regulatory, social and political risks internationally and in the regions where we operate.

 

We currently conduct our business operations in China, the U.S., Japan, the U.K., Greece, Germany, Italy and Australia, and as of December 31, 2016, we owned and operated 69.2 MW of solar projects and had 30.79 MW of solar projects under construction across the world. We also provide EPC services in China and the U.S. Our business is therefore subject to diverse and constantly changing economic, regulatory, social and political conditions in these markets.

 

Operating internationally exposes us to a number of risks globally and in each of the markets where we operate, including, without limitation:

 

·                   global economic and financial conditions, including the stability of credit markets, foreign currency exchange rates and their fluctuations;

 

8

Table of Contents

 

·                   the supply and prices of other energy products such as oil, coal and natural gas in the relevant markets;

 

·                   changes in government regulations, policies, taxes and incentives, particularly those concerning the electric utility industry and the solar industry;

 

·                   reconciling heterogeneous, complex or contradictory regulations across different jurisdictions, international trade policies, including trade restrictions, embargoes and local sourcing or service requirements;

 

·                   political risks, including risks of expropriation and nationalization of assets, potential losses due to civil unrests, acts of terrorism and war, regional and global political or military tensions, strained or altered foreign relations;

 

·                   compliance with diverse and complex local environmental, safety, health, labor and other laws and regulations, which can be onerous and costly, as the magnitude, complexity and continuous amendments to the laws and regulations are difficult to predict and liabilities, costs, obligations and requirements associated with these laws and regulations may be substantial;

 

·                   dependence on local governments, utility companies and other entities for electricity, water, telecommunications, transportation and other utilities or infrastructure needs;

 

·                   difficulties associated with local operating and market conditions, particularly regarding customs, taxation and labor;

 

·                   difficulties for our senior management, primarily based in Shanghai, to effectively supervise local management teams in diverse locations;

 

·                   increased difficulty in protecting our intellectual property rights and heightened risk of intellectual property disputes;

 

·                   failure of our contractual counter-parties to honor their obligations to us, and potential disputes with regulatory authorities, customers, contractors, suppliers, local residents or communities;

 

·                   obtaining fair access and legal remedies or benefits through local judicial or administrative bodies; and

 

·                   failure to adapt to effectively to local competitive environments.

 

If economic recovery is slow in the markets where we operate, our business, financial condition, results of operations and prospects could be materially and adversely affected. Moreover, as we expand into additional markets, we may face unfamiliar regulatory regimes, business practices, governmental policies and industry conditions. As a result, our experience and knowledge of our existing markets may not be applicable to new markets that we enter, requiring significant time and resources to adapt our business to these unfamiliar markets. To the extent that our diverse business operations are affected by unexpected and adverse economic, regulatory, social and political conditions, we may experience business disruptions, loss of assets and personnel and other indirect losses and our business, financial condition and results of operations both locally and internationally could be materially and adversely affected.

 

The reduction, modification, delay or discontinuation of government subsidies and other economic incentives for the solar industry may reduce the profitability or viability of our solar projects and materially adversely affect our business.

 

At present, solar power is not cost competitive with other energy sources in our existing markets and the new markets we plan to expand into. For a variety of technological and economic reasons, the cost of generating electricity from solar energy in these markets currently exceeds and, absent significant changes in technological or economic circumstances, will continue to exceed the cost of generating electricity from conventional and certain other competing energy sources. Therefore, government subsidies and incentives, primarily in the form of feed-in tariffs, or FIT, price support schemes, tax credits, net metering and other incentives to end users, distributors, system integrators and manufacturers of solar products are generally required to enable companies such as us to successfully operate in these markets.

 

9

Table of Contents

 

Government subsidies and incentives vary by geographic market. The availability and size of such subsidies and incentives depend, to a large extent, on political and policy developments relating to environmental concerns and other macro-economic factors. These government subsidies and incentives are expected to gradually decrease in scope or be discontinued as solar power technology improves and becomes more affordable relative to other types of energy. Reductions have occurred in certain countries where we have operations, and subsidies and incentives may be further reduced or discontinued in countries where we currently or intend to operate. Reductions may apply retroactively to existing solar projects, which could significantly reduce the value of our existing solar projects and other businesses. Even if reductions in government subsidies and economic incentives apply only to future solar projects, our operations in that country could be materially and adversely affected as we would not be able to leverage our existing presence to drive further growth. Moreover, certain solar subsidies and incentives are designed to expire or decline over time, are limited in total funding, require renewal from regulatory authorities or impose certain investment or performance criteria on our business partners or us, which we may not be able to satisfy. In addition, we may not be able to upgrade our technologies rapidly enough to compensate for foreseeable reductions in government subsidies and incentives. As a result, a significant reduction in the scope or discontinuation of government incentive programs in our existing and target markets could have a material adverse effect on our business, financial condition, results of operations and prospects.

 

Misconduct and errors by our employees could harm our business and reputation.

 

We are exposed to many types of operational risks, including the risk of misconduct, errors and fraud by our employees and key management personnel. Our training, resources, technologies and fraud detection tools may be insufficient to accurately detect and prevent fraud. Significant increases in fraudulent activity could negatively impact our brand and reputation, which could increase our costs and expenses. High profile fraudulent activity could even lead to regulatory intervention, and may divert our management’s attention and cause us to incur additional expenses and costs. If any of the foregoing were to occur, our results of operations and financial condition could be materially and adversely affected.

 

Recent changes to our business strategy provide a limited history on which to base our prospects and anticipated results of operations. Our historical operating results may not serve as an adequate basis to evaluate our future prospects and results of operations.

 

Prior to 2014, we were primarily engaged in providing EPC services to developers of solar projects in the U.S. We have since 2014 expanded our EPC service business to China and commenced our global project development business under our independent power producer model, or IPP model, or our build-and-transfer model, or BT model, by ramping up our portfolio of solar projects. This limited operating history of developing and operating solar projects under our IPP and BT model may not be a reliable indicator of our future performance.

 

Given our limited operating history under the current business model, we may not be able to ascertain and allocate the appropriate financial and human resources necessary to grow these new business areas. We may invest considerable capital into growing these businesses but fail to address market or customer demands or otherwise fail to achieve satisfactory financial return. In particular, our results of operations, financial condition and future success depend largely on our ability to continue to identify suitable projects that complement our solar project pipeline through acquisitions and secondary development, as well as our ability to obtain the required regulatory approvals, financing and cost-effective construction services for these acquisitions. We must also sustainably manage and operate the solar projects that we acquire, develop and hold under our IPP model, or successfully identify buyers for solar projects under our BT model. In addition, in expanding into these new business areas, we may be competing against companies that have substantially more experience than we do with respect to solar projects under our IPP and BT models. If we are unable to achieve growth in these new business areas, our overall growth and financial performance may be inferior to our competitors and our operating results could be adversely impacted.

 

In addition, we may not be able to successfully implement our new business initiatives.  For example, we have not been successful at managing or growing our Solarbao platform. For a detailed discussion, please see “—The operations of our e-commerce and investment business platform have been unsuccessful.”

 

10

Table of Contents

 

Due to the change in our strategic focus and revenue generating efforts since 2014, our prior operating history and historical operating results may not provide a meaningful basis for evaluating our business, financial performance and prospects. Period-to-period comparisons of our operating results and our results of operations for any period should not be relied upon as an indication of our performance for any future period. We have incurred net losses since our inception and as of December 31, 2016, we had an accumulated deficit of approximately $466.8 million. We may not be able to achieve or maintain profitability in the future.

 

We may not be able to acquire additional solar projects to grow our project portfolio, or effectively integrate or realize the anticipated benefits of our acquisitions.

 

Our current business strategy includes plans to further increase the number of solar projects we own and operate. Since 2014, we have significantly expanded our operations through acquisitions of solar projects across different development stages in China, Japan, the U.S., the U.K., Greece and Italy, and we may acquire additional businesses, products or technologies or enter into joint ventures or other strategic initiatives in the future. Accordingly, our ability to execute our expansion strategies depends on our ability to identify suitable investment or acquisition opportunities, which is subject to numerous uncertainties. We may not be able to identify favorable geographical markets for expansion or assess local demand for solar power, identify a sufficient number of projects as contemplated, or secure project financing and refinancing on reasonable terms for the contemplated acquisitions. In addition, our competitors may have substantially greater capital and other resources than we do, and may be able to pay more for the acquisition targets we identify and may be able to identify, evaluate, bid for and acquire a greater number of projects than our resources permit.

 

Furthermore, we may not realize the anticipated benefits of our acquisitions and each transaction involves numerous risks, including, among others:

 

·                   difficulty in assimilating the operations and personnel of the acquired business;

 

·                   difficulty in effectively integrating the acquired assets, technologies or products with our operations;

 

·                   difficulty in maintaining controls, procedures and policies during the transition and integration;

 

·                   disruption of our ongoing business and distraction of our management from daily operations;

 

·                   inability to retain key technical and managerial personnel and key customers, suppliers and other business partners of the acquired business;

 

·                   inability to achieve the financial and strategic goals for the acquired and combined businesses as a result of insufficient capital resources or otherwise;

 

·                   incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results;

 

·                   potential failure of the due diligence processes to identify significant issues with product quality, legal and financial liabilities, among others;

 

·                   potential failure to comply with local regulatory requirements or to obtain construction, environmental and other permits and approvals from governmental authorities in a timely manner or at all, which could delay or prevent such acquisitions; and

 

·                   potential failure to connect the acquired solar projects to the local grid on schedule and within budget, to ensure sufficient grid capacity for the life of the solar projects, or to collect FIT payments and other economic incentives as expected from local government authorities.

 

Acquisitions of companies are inherently risky, and ultimately, if we do not generate expected economic returns from the acquired businesses, or become responsible for any preexisting liabilities related to the acquired businesses, we may not fully realize the anticipated benefits of the acquisitions, which could adversely affect our business, financial condition or results of operations.

 

11

Table of Contents

 

Our substantial indebtedness could adversely affect our business, financial condition and results of operations.

 

We require a significant amount of cash to meet our capital requirements and fund our operations, including payments to suppliers for PV modules and components and to contractors for EPC services. As of December 31, 2016, we had $84.1 million in outstanding short-term borrowings and current portion of long-term borrowings and $15.1 million in outstanding long-term borrowings, excluding current portion.

 

Our existing debt may have significant consequences on our operations, including:

 

·                   reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes as a result of our debt service obligations;

 

·                   limiting our ability to obtain additional financing;

 

·                   making us more vulnerable to changes in our business, our industry and the general economy;

 

·                   potentially increasing the cost of any additional financing; and

 

·                   limiting our ability to make future acquisitions.

 

Any of these factors and other consequences that may result from our substantial indebtedness could have an adverse effect on our business, financial condition and results of operations as well as our ability to meet our payment obligations under our existing debt facilities. Our ability to meet our payment obligations under our existing debt facilities depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control.

 

Our results of operations may be subject to fluctuations.

 

Historically, we have generated a substantial portion of our revenue from the provision of EPC services. Before we achieve economies of scale in terms of our IPP projects and receive steady electricity generation income, our revenue in a given period will depend on the solar projects we provide EPC services to, or the number of solar projects sold under our BT model, and therefore is subject to significant fluctuations. For instance, we may generate a significant portion of our revenues from the one-time sale of solar projects for certain periods. Moreover, certain aspects of our operations will also be subject to seasonal variations. For example, we may schedule significant construction activities to connect solar projects to the grids prior to a scheduled decrease in FIT rates in order to qualify for more favorable FIT policies.

 

Failure to manage our evolving business could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

We intend to expand our business within our existing markets and in a number of selected new locations in the future. We also intend to expand our global project development business in the future. As our operations evolve, we expect to encounter additional challenges in our internal management, construction contracting management, investment and acquisition management, project management, project funding infrastructure and financing capabilities. Our existing operations, personnel, systems and internal control may not be adequate to support our business expansion and may require new investments in our internal management infrastructure. To manage the future growth of our operations, we will be required to improve our administrative, operational and financial systems, procedures and controls, and maintain, expand, train and manage a growing number of employees. In addition, we will need to hire and train additional project development personnel to manage our growing portfolio of IPP and BT projects. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities, execute our business strategies successfully or respond to competitive pressures. As a result, our business, prospects, financial condition and results of operations could be materially and adversely affected.

 

12

Table of Contents

 

We act as the general contractor for our customers for the provision of EPC services, and are subject to risks associated with construction, delays and other contingencies, which could have a material adverse effect on our reputation, business and results of operations.

 

Historically, we have generated a significant portion of our revenue from the provision of EPC services. We generally enter into fixed-price EPC contracts under which we act as the general contractor for our customers in connection with the installation of their solar power systems. All essential costs are estimated at the time of entering into the EPC contracts for a particular project, and are reflected in the overall fixed-price that we charge our customers. These cost estimates are preliminary and may or may not be covered by contracts between us or our subcontractors, suppliers or other parties to the project. In addition, we engage qualified and licensed subcontractors for the construction of our EPC projects. Shortages of such skilled labor could significantly delay a project or otherwise increase our costs. Should miscalculations in project planning or delay in execution occur (including those due to unexpected increases in inflation, commodity prices or labor costs), we may not be able to achieve our expected margins or recover our costs.

 

In addition, our EPC contracts generally provide for performance milestones. Delays in supply of PV module or components, construction delays, unexpected performance problems in electricity generation or other events may cause us to fail to meet these performance criteria, resulting in unanticipated and severe revenue and earnings losses and financial penalties. If we are unable to complete the development of a solar project, or fail to meet one or more agreed target construction milestone dates, any agreed upon system-level capacity or energy output guarantees or warranties (including, for some projects, twenty-five year performance warranties) or other terms under our EPC contracts, or the solar projects we develop cause grid interference or other damage, we may be subject to termination of such contracts or significant damages, penalties and/or other obligation under the EPC agreements or other agreements relating to the projects (including obligations to repair, replace and/or supplement additional modules and balance of system materials for the projects), particularly if our liabilities are not capped under the terms of such agreements, and we may not be able to recover our investment in the project. The occurrence of any of these events could have a material adverse effect on our reputation, business and results of operations.

 

We generally recognize revenue from EPC services on a “percentage of completion” basis and payments are due upon the achievement of contractual milestones and any delay or cancellation of a project could adversely affect our business.

 

We generally recognize revenue from our EPC services on a “percentage of completion” basis, and as a result, revenues from our EPC services are driven by the performance of our contractual obligations, which is in turn generally driven by timelines of the installation of solar power systems at customer sites. Such arrangement could result in unpredictability of revenue and in the near term, a revenue decrease. As with any project-related business, there is potential for delays within any particular customer project. Variation of project timelines and estimates may impact our ability to recognize revenue in a particular period. In addition, certain EPC contracts may provide for payment milestones due at specified stages throughout the development of a project. Because we must invest substantially in a project in advance of achieving these milestones and receiving payments, delay or cancellation of a project could adversely affect our business and results of operations.

 

We may fail to comply with laws and regulations in the markets we operate.

 

The development, construction and operation of solar projects are highly regulated. We conduct our operations in many jurisdictions and are subject to different laws and regulations, including national and local regulations relating to building codes, taxes, safety, environmental protection, utility interconnection, metering and other matters. Our establish subsidiaries also have operations in these countries and jurisdictions that are required to comply with various local laws and regulations. While we strive to work with our local counsel and other advisers to comply with the laws and regulations of each jurisdiction where we operate, there have been, and may continue to be, instances of non-compliances such as late filings of annual accounts with the appropriate governmental authorities, failure to notify governmental authorities of certain transactions, failure to hold annual meetings as required, failure to register director or address changes or other local requirements which may result in fines, sanctions or other penalties against our non-complying subsidiaries and its directors and officers. While we do not believe our past and continuing non-compliances, singularly or in the aggregate, will have a material adverse effect on our business, financial condition or results of operations, we cannot assure you that similar or other non-compliances will not occur in the future which may materially and adversely affect our business, financial condition or results of operations.

 

13

Table of Contents

 

We are responsible for obtaining a variety of approvals, permits and licenses from various authorities for our solar projects. The procedures for obtaining such approvals, permits and licenses vary from country to country, making it onerous and costly to adhere to the varying requirements and standards of individual localities. Failure to obtain the required approvals, permits or licenses or to comply with the conditions associated therewith may result in fines, sanctions, suspension, revocation or non-renewal of approvals, permits or licenses, or even criminal liabilities, which could material and adversely affect our business, financial condition and results of operations. In addition, new government regulations pertaining to our business or solar projects may result in significant additional expenses. We cannot assure you that we will be able to promptly and adequately respond to changes of laws and regulations in various jurisdictions, or that our employees and contractors will act in accordance with our internal policies and procedures. Failure to comply with laws and regulations where we develop, own and operate solar projects may materially and adversely affect our business, results of operations and financial condition. The market demand for solar power is strongly influenced by government regulations and policies concerning the electric utility industry as well as by policies promulgated by electric utilities in each of the markets we operate. These regulations and policies often relate to electricity pricing and technical interconnection of electricity generation. Customer purchases of alternative energy sources, including solar power technology, could be deterred by these regulations and policies, which may significantly reduce the demand for our PV solutions. For example, without a regulatory-mandated exception for solar power systems, utility customers are often charged interconnection or standby fees for putting distributed power generation on the electric utility grid or limit the production capacity to the grid. The county-level government may also levy additional tax related to land use or potential plants recovery that was not initially included during the development or construction phase. These fees could increase, rendering solar power less cost competitive in these markets and our PV solutions less desirable.

 

It is difficult to ensure ongoing compliance with the changing requirements of individual markets. Any new government regulations or utility policies pertaining to solar projects may result in significant additional expenses to us or other industry participants and as a result could cause a significant reduction in demand for our PV solutions.

 

The solar industry faces competition from both conventional power industries and other renewable power industries.

 

The solar industry faces intense competition from all other players within the energy industry, including both conventional energy providers such as nuclear, natural gas and fossil fuels and other renewable energy providers, such as geothermal, hydropower, biomass, wind and nuclear energy. Other energy sources may benefit from innovations that reduce their costs and increase safety, and therefore improve their competitiveness. New natural resources may be discovered, or global economic, business or political developments may disproportionately benefit conventional energy sources or other renewable energy sources at the expense of solar. Governments may strengthen their support for other renewable energy sources and reduce their support for the solar industry. Changes in supply and demand of conventional energy sources or other energy sources may reduce the cost of such sources and render solar power less attractive. For instance, the recent decline in oil prices and prolong low prices have adversely impacted the competitiveness of solar energy. Failure for our customers, other business partners or us to compete with the providers of other energy sources may materially and adversely affect our business, results of operations and financial condition.

 

The market for solar project development is highly competitive.

 

There is currently intense competition in the solar industry, particularly in the downstream project development segment. Solar projects encounter competition from utilities, industrial companies and other independent power producers. In recent years, there has been increasing competition for the award of PPAs, which has in some markets resulted in an excess supply above designated reserve margins and has been contributing to the declining electricity prices in many markets. In light of these conditions, we may not be able to obtain PPAs for our new solar projects under our IPP model, and we may not be able to renew PPAs on the same terms and conditions upon expiration, particularly in terms of securing an electricity sale price that enables profitable operation or the sale of a project at anticipated value, if at all.

 

We have only recently expanded our business to include global project development and may not have the same level of expertise and customer base as our competitors, which may affect our ability to successfully establish our presence in the global market. Our current or potential competitors may have greater operational, financial, technical, market share, scale, management or other resources than us in our existing or target markets. Our competitors may also enter into strategic alliances with other competitors to our detriment, or may ally with our suppliers or contractors, thereby limiting our procurement choices and our flexibility in project development. Our current or potential competitors may offer PV solutions comparable or superior to ours at the same or lower prices, or adapt more quickly to industry trends than we do. Increased competition may result in price reductions, reduced profit margins and loss of market share.

 

14

Table of Contents

 

Technological advances in the solar industry could render our PV solutions uncompetitive or obsolete.

 

The solar industry is characterized by its rapid adoption and application of technological advances. This requires us to develop new PV solutions and enhance our existing PV solutions to keep pace with and respond effectively to evolving technologies, market conditions and customer demands. Our competitors may develop technologies more advanced and cost-effective than ours. We will need to invest substantially in research and development to maintain our market position and effectively compete in the future. Our failure to further refine or enhance our technologies could render our technologies uncompetitive or obsolete, which could reduce our market share and cause our revenues to decline.

 

In addition, we may invest in and implement newly-developed, less-proven technologies in our project development or in maintaining or enhancing our existing projects. There is no guarantee that these new technologies will perform or generate customer demand as anticipated. The failure of our new technologies to perform as anticipated may materially and adversely affect our business and results of operations.

 

If sufficient demand for solar projects develops slower than we anticipate, develops in ways inconsistent with our strategy, or fails to develop at all, our business, financial condition, results of operations and prospects could be materially and adversely affected.

 

The solar power market worldwide is at a relatively early stage of development compared to conventional power markets and other renewable power markets, such as that for hydropower. Thus, trends in the solar industry are based only on limited data and may be unreliable. Many factors may affect the demand for solar projects worldwide, including:

 

·                   the cost and availability of project financing for solar projects;

 

·                   fluctuations in economic and market conditions that improve the viability of competing energy sources;

 

·                   the cost-effectiveness, performance and reliability of solar projects compared to conventional and other non-solar energy sources;

 

·                   the availability of grid capacity allocated to solar power;

 

·                   political opposition to solar power due to environmental, land use, safety or other local concerns;

 

·                   the availability of government subsidies and incentives to support the development of the solar industry;

 

·                   public perceptions of the utility, necessity and importance of solar power and other renewable energies;

 

·                   the success of other alternative energy generation technologies, such as fuel cells, wind power and biomass; and

 

·                   utility and grid regulations that present unique technical, regulatory and economic barriers to the development, transmission and use of solar energy.

 

Our analysis and predictions concerning the future growth of the solar industry are based on complex facts and circumstances and may be incorrect. If market demand for solar projects in our existing or target markets fails to develop according to our expectations, our business, financial condition, results of operations and prospects could be materially and adversely affected.

 

15

Table of Contents

 

Our growth prospects and future profitability and our ability to continue to acquire solar projects depends on the availability of sufficient financing on terms acceptable to us.

 

The development of solar projects requires significant upfront cash investments, including the costs of permit development, construction and associated operations. Since 2014, we have been expanding our solar project portfolio primarily by acquiring solar projects across different development stages. Such expansion strategy requires significant upfront capital expenditures which, depending on the respective development stages of the acquired projects, may not be recouped for a significant period of time. As a result, we are required to pursue a wide variety of capital resources to fund our operations, including private placements, bank loans, financial leases and other third-party financing options.

 

Our ability to obtain sufficient financing is subject to a number of uncertainties, including:

 

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

 

·                   the general condition and liquidity of global equity and debt capital markets;

 

·                   local regulatory and government support for solar power in markets where we operate, such as through tax credits and FIT schemes;

 

·                   the availability of credit lines from banks and other financial institutions;

 

·                   economic, political, social and other conditions in the markets where we operate;

 

·                   our level of indebtedness and ability to comply with financial covenants under our debt financing; and

 

·                   tax and securities laws which may hamper our ability to raise capital.

 

Due to these or other reasons, we may not be successful in obtaining the required funds for future acquisitions. Furthermore, we may be unable to refinance our bank borrowings on favorable terms, or at all, upon the expiration or termination of our existing loan facilities. In addition, rising interest rates could adversely affect our ability to secure financing on favorable terms. Our failure in securing suitable financing sources in a timely manner or at all, or on commercially acceptable terms, could significantly limit our ability to execute our growth strategies or future acquisitions, and may have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

An increase in interest rates or lending rates or tightening of the supply of capital in the global financial market could make it difficult for our customers to finance the cost of EPC services or solar projects and could reduce the demand of our PV solutions.

 

Many of our customers depend on debt and/or equity financing to fund the initial capital expenditure required to develop, build and/or purchase solar projects. These structured finance arrangements are complex and rely heavily on the creditworthiness of the customer as well as required returns of the financial institutions. Depending on the status of financial markets and overall economic conditions, financial institutions may be unwilling or unable to provide financing to our customers, which could materially and adversely affect our ability to maintain or grow our revenues. In addition, an increase in interest rates or lending rates, or a reduction in the supply of debt financing or tax equity investments, could reduce the number of solar projects that receive financing or otherwise make it difficult for our customers to secure the financing necessary to develop, build or purchase a solar project on favorable terms, or at all, and thus lower the demand for our PV solutions, which could limit our growth or reduce our net sales.

 

The significant period of time between our upfront investments in solar projects and their commencement of revenue generation could materially and adversely affect our liquidity, business and results of operations.

 

We have since 2014 commenced our global project development business under our IPP or BT models by ramping up our portfolio of solar projects. There is a significant gap between the time that we make significant upfront investments in the solar projects and the time that we receive any revenue from the electricity generated by these solar projects after grid connection (under our IPP model) or from the sale of these projects (under our BT model). These upfront investments include, among others, legal, accounting and other professional fees, costs associated with feasibility studies and due diligence, payments for land use rights, construction costs, government permits and deposits for grid connection agreements and PPAs, none of which may be refundable if a project fails to achieve completion. We have historically relied on private placements, bank loans and financial leases to cover costs and expenses incurred during project development.

 

16

Table of Contents

 

In particular, there could be an especially long gap between the initial assessment of a project, the first steps of acquiring land use rights and negotiating interconnection agreements and the obtaining of governmental approvals for construction. Acquisition of land use rights can be particularly time-consuming if we are engaged in primary development and need to negotiate with land owners or government entities. The significant development time increases the risk for adverse events during such process, whether they be economic, environmental, political, social or otherwise, that could cause further delays in project development or increase the overall development costs. Due to such adverse developments or unanticipated delays, we may be unable to recoup our initial investment in the solar projects, which may materially and adversely affect our liquidity, profitability and results of operations.

 

We may encounter unexpected difficulties when developing solar power projects.

 

In 2014, we commenced our global project development business by ramping up our portfolio of solar projects under both our IPP BT and EPC models. The attributable capacity of our projects in operation and projects under construction increased from 60.9 MW and 14.0 MW as of December 31, 2015 to 69.2 MW and 30.79 MW as of December 31, 2016, respectively. In addition, we had an aggregate of 71.6 MW of projects in announced pipeline as of December 31, 2016. See “Item 4. Information on the Company—B. Business Overview—Our Global Project Development Business.” The development of solar projects involve numerous risks and uncertainties and require extensive research, planning and due diligence. Before we can determine whether a solar project is economically, technologically or otherwise feasible, we may be required to incur significant capital expenditure for land and interconnection rights, preliminary engineering, permitting, legal and other work. Success in developing a particular solar project is contingent upon, among others:

 

·                   securing the rights to suitable project locations with access to the grid, necessary rights of way, and satisfactory land use permissions;

 

·                   rezoning land, as necessary, to support a solar project;

 

·                   negotiating and receiving on schedule the required permits and approvals for project development from government authorities;

 

·                   completing all required regulatory and administrative procedures needed to obtain permits and agreements;

 

·                   obtaining rights to interconnect the solar project to the grid or to transmit energy;

 

·                   paying interconnection and other deposits, some of which are non-refundable;

 

·                   negotiating favorable payment terms with module and other equipment suppliers and contractors;

 

·                   signing PPAs or other off-take arrangements that are commercially acceptable and adequate for providing financing;

 

·                   obtaining construction financing, including debt financing and equity contributions, as appropriate; and

 

·                   satisfactorily completing construction on schedule.

 

Successful completion of a particular solar project may be adversely affected by numerous factors, including, without limitation:

 

·                   unanticipated delays or changes in project plans;

 

17

Table of Contents

 

·                   changes to laws and regulations requiring additional permits, licenses and approvals, or difficulties in obtaining and maintaining existing governmental permits, licenses and approvals;

 

·                   the inability to obtain adequate financing with acceptable terms;

 

·                   unforeseeable engineering problems, construction or other unexpected delays and contractor performance issues;

 

·                   delays, disruptions or shortages of the supply of labor, equipment and materials, including work stoppages;

 

·                   defective PV module or other components sourced from our suppliers;

 

·                   adverse weather, environmental and geological conditions, force majeure and other events out of our control; and

 

·                   cost overruns due to any one or more of the foregoing factors.

 

Accordingly, some of the solar projects in our portfolio may not eventually commence operation and connect to the grid, or even proceed to construction. If a number of our solar projects are not completed, our business, financial condition and results of operations could be materially and adversely affected.

 

Our construction activities may be subject to cost overruns or delays.

 

We engage third-party contractors for the construction of solar projects. Construction of solar projects involves numerous risks and uncertainties, and may be adversely affected by circumstances outside of our control, including seasonal changes, inclement weather, failure to receive regulatory approvals on schedule or third-party delays in supplying PV modules or other materials. We may not be able to negotiate satisfactory construction agreements with third-party contractors, or our third-party contractors may not be able to contract with their subcontractors on a timely basis. In addition, if our contractors fail to adhere to our quality standards or otherwise fail to meet their contractual obligations, or if there is a shortage of contractors or labor strikes that prevents our contractors from completing their construction work on schedule or within budget, the solar projects may experience significant delays or cost overruns. Increases in the prices of solar products and components may also increase our procurement costs. Labor shortages, work stoppages and labor disputes could significantly delay a project or otherwise increase our costs. In addition, delays in obtaining or failure to obtain required construction permits could also delay or hinder the construction of our solar projects. A lack of proper construction permits or post-construction approvals could delay or prevent our solar projects from commencing operation and connecting to the grid.

 

We may not be able to recover any of our losses resulting from construction cost overruns or delays. In addition, since the FIT applicable to a solar project generally depends on its lead time to grid connection, construction and connection delays may lead to a lower-than-expected FIT, which would adversely affect the long-term value and potentially the viability of the project. Many PPAs also require our solar projects to connect to the grid by a certain date. If the construction of solar project is significantly delayed, we may be in violation of our PPAs or may only be entitled to reduced FIT payments, if at all. A reduction or forfeiture of FIT payments would materially and adversely affect the profitability for a solar power project. Any of the above contingencies could lead to our failure to generate expected return from our solar projects and result in unanticipated and significant revenue and earnings losses.

 

We rely on third-party suppliers and contractors when developing our solar power projects.

 

We source PV modules and other balance-of-system components from a wide selection of third-party suppliers and LDK and engage third-party contractors for the construction of solar projects. We typically enter into contracts with our suppliers and contractors on a project-by-project basis and do not maintain long-term contracts with our suppliers or contractors. Therefore, we are generally exposed to price fluctuations and availability of PV modules and balance-of-system components sourced from our suppliers and construction services procured from our contractors. For example, in light of changing market dynamics and government policies, the price and availability of PV modules have been subject to significant volatility in recent years. Increases in the prices of PV modules or balance-of-system components, decreases in their availability, fluctuations in construction, labor and installation costs, or changes in the terms of our relationship with our suppliers and contractors may increase the cost of procuring equipment and engaging contractors and hence materially adversely affect our financial condition and results of operations.

 

18

Table of Contents

 

Furthermore, the delivery of defective products or products or construction services by our suppliers or contractors which are otherwise not in compliance with contract specifications, or the late supply of products or construction services, may cause construction delays or solar power projects that fail to adhere to our quality and safety standards, which could have a material adverse effect on our business, results of operations, financial condition and cash flow.

 

Warranties provided by our suppliers and contractors may be limited or insufficient to compensate for our losses, or may not cover the nature of our losses incurred.

 

We expect to benefit from various warranties, including product quality and performance warranties, provided by our suppliers and contractors. These suppliers and contractors, however, may file for bankruptcy, cease operations or otherwise become unable or unwilling to fulfill their warranty obligations. Even if a supplier fulfills its warranty obligations, the warranty may not be sufficient to compensate us for all of our losses. In addition, the warranty for inverters and transformers generally expire after 5 to 10 years from the date such equipment is delivered or commissioned and is subject to liability limits. Where damages are caused by defective products provided by our suppliers or construction services delivered by our contractors, our suppliers or contractors may be unable or unwilling to perform their warranty obligations as a result of their financial conditions or otherwise. Or if the warranty has expired or a liability limit has been reached, there may be a reduction or loss of warranty protection for the affected projects, which could have a material adverse effect on our business, financial condition and results of operations.

 

Our solar projects have short operating histories and may not perform up to our expectations.

 

The projects in our solar project portfolio are relatively new with expected operating lives of more than 20 years. The majority of our projects in operation as of December 31, 2016 had commenced operations within the last 24 months. In addition, the projects we acquire in the future may not have commenced construction or operation or otherwise have a limited operating history. As a result, our assumptions and estimates regarding the future performance of these projects are, and will be, made without the benefit of a meaningful operating history, which may impair our ability to accurately assess the potential profitability of the projects. The performance of these projects will also be subject to risks inherent in newly constructed renewable energy projects, including breakdowns and outages, latent defects, equipment that performs below our expectations and system failures. Failure of some or all of our projects to perform up to our expectations could have a material adverse effect on our business, financial condition and results of operations.

 

We may not be able to obtain long-term contracts for the sale of electricity generated by our solar projects under our IPP model at prices and on other terms favorable to attract financing and other investments.

 

Since 2014, we started acquiring solar projects across different stages of development globally and to hold some of these acquired projects under our IPP model. Obtaining long-term contracts for the sale of electricity generated by our solar projects under our IPP model at prices and on other terms favorable to us will be essential for obtaining financing or completing construction of these projects. We must compete for PPAs against other developers of solar and renewable energy projects. Furthermore, other sources of power, such as natural gas-fired power plants, have historically been cheaper than the cost of solar power and power from certain types of projects, such as natural gas-fired power plants, can be delivered on a firm basis. The availability of PPAs is subject to a number of economic, regulatory, tax and public policy factors. The inability to compete successfully against other power producers or otherwise enter into PPAs favorable to us would negatively affect our ability to develop and finance our projects and negatively impact our revenue.

 

We may be subject to unforeseen costs, liabilities or obligations when providing O&M services.

 

We provide ongoing O&M services to third-party solar projects under fixed-price long-term service agreements, pursuant to which we generally perform all scheduled and unscheduled maintenance and operating and other asset management services for the system. Our costs to perform these services are estimated at the time of entering into the O&M agreement for a particular project, and these are reflected in the fixed-price that we charge our customers under the O&M agreement. Should miscalculations in estimating these costs occur (including those due to unexpected increases in inflation or labor costs), our O&M services may not be profitable and our growth strategy and results of operations could be adversely affected. Because of the long-term nature of these O&M agreements, the adverse impacts on results of operations could be significant, particularly if our liabilities are not capped or subject to an above-market liability cap under the terms of the O&M agreement. In addition, we may be subject to substantial costs, liabilities or obligations in the event that the solar projects we maintain and operate do not meet any agreed-upon system-level availability or performance warranties.

 

19

Table of Contents

 

We have limited insurance coverage.

 

Our insurance policies cover employee-related accidents and injuries, property damage, machinery breakdowns, fixed assets, facilities and liability deriving from our activities, including environmental liability. We consider our current insurance coverage to be adequate, but we cannot assure you that our insurance will be sufficient or effective under all circumstances and against all hazards or liabilities to which we may be subject. Furthermore, our insurance coverage is subject to deductibles, caps, exclusions and other limitations. A loss for which we are not fully insured could have a material adverse effect on our business, financial condition, results of operations and cash flows. Furthermore, due to rising insurance costs and changes in the insurance markets, we cannot assure you that our insurance coverage will continue to be available at comparable rates or on similar terms, if at all. We may also reduce or cancel our insurance coverage at any time. We may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates and we may elect to self-insure a portion of our solar project portfolio. Any losses not covered by insurance could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

In addition, the insurance industry in many parts of the world is still in an early stage of development. As we continue to expand our global presence, we cannot assure you that we will be able to obtain adequate insurance coverage in each of the new markets we enter. To the extent that our operations are not adequately insured in these markets, our business, financial condition and results of operations may be materially and adversely affected.

 

We may be subject to product or strict liability claims if the provision of our EPC services or the solar projects we sell result in injury or damage, and we have limited insurance coverage to protect against such claims, as well as losses that may result from business interruptions or natural disasters.

 

Solar projects are highly sophisticated and generate and transfer large volumes of electric charge with the potential to harm or kill, whether by improper installation or other causes. We are therefore exposed to an inherent risk of product liability claims or class action suits in the event that the installation of the solar power systems during the provision of our EPC services, or the solar projects we sell under our BT model, results in injury or damage, and we may even be liable in some jurisdictions under a strict liability theory, where liability holds even if we are not negligent or at fault. Moreover, to the extent that a claim is brought against us, we may not have adequate resources to defend ourselves. We rely on our general liability insurance to cover product liability and other liability claims and have not separately obtained product liability insurance. The unfavorable settlement of product or strict liability claims against us could result in significant monetary damages and significant payments in excess of our insurance coverage could have a materially adverse effect on our financial results. Any such business disruption could result in substantial costs and diversion of resources.

 

Solar energy generation depends heavily on suitable meteorological conditions. If weather conditions are unfavorable, our power generation output, and therefore the revenue from our solar projects, may be substantially below our expectations.

 

The electricity produced and revenues generated by solar projects are highly dependent on suitable solar conditions and associated weather conditions. Such conditions are beyond our control. Furthermore, components of these generation systems, including solar panels and inverters, can be damaged by severe weather, such as heavy snowstorms, hailstorms, ice storms, lightning strikes, extreme winds, earthquakes or tornadoes. Replacement and spare parts for key components may be difficult costly or unavailable. Unfavorable weather and atmospheric conditions could reduce the electricity output of our solar projects to below projected generation, damage or impair the effectiveness of our projects or require shutdown of key equipment, impeding operation of our projects and our ability to achieve forecasted revenues and cash flows.

 

The amount of electricity solar projects produce is dependent in part on the amount of sunlight, or insolation, where the projects are located. Because shorter daylight hours in winter months results in less insolation, the generation of particular projects will vary depending on the season.

 

20

Table of Contents

 

We base our investment decisions with respect to solar power generation assets on the findings of related solar studies conducted prior to construction or based on historical conditions at existing projects. However, actual climatic conditions at an asset site may not conform to the findings of these studies.  For example, unexpected development of climate conditions that was not taken into consideration during the investment decision-making process, such as smog and sand storms may significantly reduce the solar power generation. Therefore, our solar projects may not meet anticipated production levels or the rated capacity of our projects, which could adversely affect our business, financial condition, results of operations and cash flows.

 

The operation of solar projects involves significant inherent risks and hazards that could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

The operation of solar projects involves numerous hazardous activities, including delivering electricity to transmission and distribution systems. We are subject to natural disasters such as earthquakes, floods, snow obscuration, high temperatures, lightning, hurricanes, long-term climate changes, volcanoes and wind risks, as well as other inherent risks affecting resource availability such as fire, explosion, soil and ice buildup, structural collapse and equipment failure. Moreover, we may suffer from negligent acts by our PPA counterparties or other third parties. Our rooftop projects could cause damage to the building roof, resulting in claims due to water damages or replacement of roofing materials. These and other hazards can cause significant personal injury or loss of life, severe damage to, and destruction of, property and equipment and contamination of, or damage to, the environment, wildlife takes or fatalities and suspension of operations. The occurrence of any of these events may result in lawsuits against us asserting claims for substantial damages, including for environmental cleanup costs, personal injury and property damage and fines and/or penalties.

 

In addition, the ongoing operation of solar projects face risks that include the breakdown or failure of equipment or processes or performance below expected levels of output or efficiency due to wear and tear, latent defect, design error or operator error or force majeure events, among others. Unplanned outages, including extensions of scheduled outages, occur from time to time and are an inherent risk of our business. Unplanned outages typically increase our operation and maintenance expenses and may reduce our revenues as a result of generating and selling less electricity.

 

If we fail to properly operate and maintain our solar projects, these projects may experience decreased performance, shortened operating life or shut downs. Our solar projects may also require periodic upgrading and improvement. Changes in our own operation or local conditions may increase the costs of operating the project, including costs related to labor, equipment, insurance and taxes. If we cause damage to third parties, we may become liable for the consequences of any resulting damage. We may also experience equipment malfunction or failure, leading to unexpected maintenance needs, unplanned outages or other operational issues. In addition, inconsistencies in the quality of solar panels, PV modules, balance-of-system components or maintenance services for our solar projects may affect the system efficiency of our projects.

 

Any unexpected operational or mechanical failure, including failure associated with breakdowns and forced outages, and any decreased operational or management performance, could reduce our solar projects’ power generating capacity below expected levels, reducing our revenues and profitability. Degradation of the performance of our solar projects above levels provided for in the relevant PPAs may also reduce our revenues. Unanticipated capital expenditures associated with maintaining, upgrading or repairing our projects may also reduce our profitability. In addition, damage to our reputation due to system failure or accidents could negatively impact our relationships with customers and local government authorities, which could also materially adversely affect our business. Negative public or community response to solar energy projects could adversely affect the approval for and construction of our projects. We maintain insurance coverage that we consider adequate but we cannot assure you that our insurance will be sufficient or effective under all circumstances and against all hazards or liabilities to which we may be subject.

 

Environmental, health and safety laws and regulations subject us to extensive and increasingly stringent operational requirements, as well as potentially substantial liabilities arising out of environmental contamination.

 

We are subject to, in each of the jurisdictions we operate, numerous national and local laws, regulations, guidelines, policies, directives and other requirements governing or relating to, among others, land use and zoning matters and protection of human health and the environment, including those limiting the discharge and release of pollutants into the environment, and the protection of certain wildlife. These laws and regulations require our solar projects to, among others, obtain and maintain approvals and permits, undergo environmental impact assessments and review processes and implement environmental, health and safety programs and procedures to control risks associated with the construction, operation and decommissioning of solar projects. If our solar projects do not comply with applicable environmental laws, regulations or permit requirements, we may be required to pay significant fines or penalties or suspend or cease operations of the affected projects. Violations of environmental and other laws, regulations and permit requirements may also result in criminal sanctions or injunctions.

 

21

Table of Contents

 

Our solar projects may experience malfunctions and other unplanned events that result in personal injury and property damage. As such, the operation of our projects carries an inherent risk of environmental, health and safety liabilities (including potential civil actions, compliance or remediation orders, fines and other penalties), and may subject us to administrative and judicial proceedings. In addition, certain environmental laws and regulations may impose joint and several liability on past and present owners and operators of sites, related to the cleaning up of sites where hazardous wastes or materials were disposed or released.

 

We may continue to conduct acquisitions and enter into joint ventures, investments or other strategic alliances which may be unsuccessful.

 

We may continue to grow our operations through acquisitions, as well as joint ventures or other strategic alliances when appropriate opportunities arise. Such acquisitions, joint ventures and strategic alliances may expose us to additional operational, regulatory, market and geographical risks as well as risks associated with additional capital requirements and diversion of management attention. In particular, any future strategic alliances may expose us to the following risks:

 

·                   There may be unforeseen risks relating to our counterparty’s business and operations or liabilities that were not discovered by us through our legal and business due diligence prior to our investment. Such undetected risks and liabilities could have a material adverse effect on our reputation, business and results of operations in the future.

 

·                   We may not have experience acquiring, managing or investing in other companies. Business acquisitions may generally divert a significant portion of our management and financial resources from our existing business and the integration of the target’s operations may pose significant business challenges, potentially straining our ability to finance and manage our existing operations.

 

·                   There is no assurance that the expected synergies from any business acquisition, joint venture or strategic alliances will materialize. If we are not successful in the integration of a target’s operations, we may not be able to generate sufficient revenue from its operations to recover costs and expenses of the acquisition.

 

·                   Acquisition or participation in a new joint venture or strategic alliance may involve us in the management of operation in which we do not possess extensive expertise.

 

The materialization of any of these risks could have a material adverse effect on our business, financial condition and results of operations.

 

We rely substantially on our senior management team and our ability to attract, train and retain qualified personnel for our current and future success.

 

The industry experience, expertise and contributions of our chairman, Mr. Xiaofeng Peng, is essential to our continuing success. We will continue to rely on our senior management, regional management and other key employees to manage our business operations and implement our growth plans. If they cannot work together effectively or efficiently, our business may be severely disrupted. If one or more of our senior or regional management personnel were unable or unwilling to continue to hold their present positions, we might not be able to recruit, train and retain personnel with comparable qualifications, and our results of operations and financial condition may be materially and adversely affected.

 

Our qualified and experienced project development teams are critical to our success. We may not be able to continue to attract, train and retain qualified personnel, including executive officers, project development personnel, project management personnel and other key personnel with the necessary experience and expertise. In particular, as we enter into new markets, we face challenges to recruit and retain qualified personnel who are familiar with local regulatory regimes and have adequate experiences in project development and operations. In particular, we have experienced a lack of accounting personnel with an appropriate level of knowledge and experience in U.S. GAAP, which resulted in the late filing of this annual report.

 

22

Table of Contents

 

There is substantial competition for qualified personnel in the downstream PV industry. Our competitors may offer more competitive packages or otherwise attract our personnel. Our costs to retain qualified personnel may also increase in response to competition. If we fail to continue to attract and retain a sufficient number of personnel with suitable managerial, technical or marketing expertise, our business operations could be adversely affected and our future growth and expansions may be inhibited.

 

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 trade secrets, know-how and other proprietary information 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 to provide us with meaningful protection or commercial advantage. Third parties may be able to use the technologies that we have developed and compete with us, which could have a material adverse effect on our business, financial condition or results of operations. Our failure to protect our intellectual property and proprietary rights may undermine our competitive position. Third parties may infringe or misappropriate our proprietary technologies or other intellectual property and proprietary rights. Policing the unauthorized use of proprietary technology can be difficult and expensive. In particular, the laws and enforcement procedures of the PRC and certain other markets where we operate are uncertain or do not protect intellectual property rights to the same extent as do the laws and enforcement procedures of the United States. We may need to resort to court proceedings to enforce our intellectual property rights in the future. Litigation relating to our intellectual property might result in substantial costs and diversion of resources and management attention away from our business. An adverse determination in any such litigation will impair our intellectual property rights and adversely affect our business, prospects and reputation.

 

We may be exposed to infringement or misappropriation claims by third parties which, if determined adversely to us, could cause us to pay significant damage awards.

 

Our success depends largely on our ability to use and develop our technology and know-how without infringing the intellectual property rights of third parties. The validity and scope of claims relating to solar technology involve complex scientific, legal and factual questions and analysis and, therefore, may be highly uncertain. As we continue to expand internationally, we face a heightened risk of becoming the subject of claims for intellectual property infringement. We may be subject to litigation involving claims of patent infringement or violation of intellectual property rights of third parties. An adverse determination in any such litigation or proceedings against us could subject us to significant liabilities to third parties, including requiring us to seek licenses from third parties, to pay ongoing royalties or to pay monetary and punitive damages. Protracted litigation could also result in our customers or potential customers deferring or limiting their procurement of our PV solutions until resolution of such litigation, which could result in losses and adversely affect our reputation and results of operations.

 

Our management has identified material weaknesses in our internal control over financial reporting and we may not be able to remediate these weaknesses. Additionally, our management may identify material weaknesses in the future that could adversely affect investor confidence, impair the value of our securities and increase our cost of raising capital.

 

Our management identified material weaknesses in our internal control over financial reporting, and our chief executive officer and chief financial officer concluded that our disclosure and internal controls and procedures were not effective as of December 31, 2016. See “Item 15. Controls and Procedures” for more information. There can be no assurance as to how quickly or effectively we can remediate the material weaknesses in our internal control over financial reporting or that additional material weaknesses will not be identified in the future.

 

Any failure to remedy additional weaknesses or deficiencies in our internal control over financial reporting that may be discovered in the future or to implement new or improved controls, or difficulties encountered in the implementation of such controls, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Any such failure could, in turn, affect the future ability of our management to certify that our internal control over financial reporting is effective. Ineffective internal control over financial reporting could also subject us to the scrutiny of the SEC and other regulatory bodies which could cause investors to lose confidence in our reported financial information and subject us to civil or criminal penalties or shareholder litigation, which could have an adverse effect on the trading price of our securities.

 

23

Table of Contents

 

In addition, if we identify additional deficiencies in our internal control over financial reporting, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our share price. Furthermore, additional deficiencies could result in future non-compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). Such non-compliance could subject us to a variety of administrative sanctions, including review by the SEC or other regulatory authorities.

 

Our independent registered public accounting firm may be suspended from practicing before the SEC if they are unable to continue to satisfy SEC investigation requests in the future. If a delay in completion of our audit process occurs as a result, we could be unable to timely file certain reports with the SEC, which may lead to the delisting of our ordinary shares.

 

On January 22, 2014, Judge Cameron Elliot, an SEC administrative law judge, issued an initial decision suspending the Chinese member firms of the “Big Four” accounting firms, including KPMG network from, among others things, practicing before the SEC for six months. On February 12, 2014, the accounting firms filed an appeal with the SEC regarding the administrative law judge’s decision. On February 6, 2015, the Chinese member firms of the “Big Four” accounting firms, including our independent registered accounting firm, reached settlement with the SEC. As part of the settlement, each of the Chinese member firms of “Big Four” accounting firms agreed to settlement terms that include a censure; undertakings to make a payment to the SEC; procedures and undertakings as to future requests for documents by the SEC; and possible additional proceedings and remedies should those undertakings not be adhered to.

 

If the settlement terms are not adhered to, Chinese member firms of “Big Four” accounting firms, including our independent registered public accounting firm, may be suspended from practicing before the SEC which could in turn delay the timely filing of our financial statements with the SEC. In addition, it could be difficult for us to timely identify and engage another qualified independent auditor to replace our independent registered public accounting firm. A delay in completion of the audit process could delay the timely filing of our annual reports with the SEC. A delinquency in our filings with the SEC may result in delisting of our ordinary shares from NASDAQ or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ordinary shares in the United States and could have a material and adverse effect on our results of operation and financial condition.

 

Our independent registered public accounting firm’s audit documentation related to their audit report included in the annual report may include audit documentation located in China. The Public Company Accounting Oversight Board, or PCAOB, currently cannot inspect audit documentation located in China and, as such, you may be deprived of the benefits of such inspection.

 

Our independent registered public accounting firm issued an audit opinion on the financial statements included in this in the annual report filed with the SEC. As an auditor of companies that are traded publicly in the U.S. and a firm registered with the PCAOB, our auditor is required by the laws of the U.S. to undergo regular inspections by the PCAOB. However, work papers located in China are not currently inspected by the PCAOB because the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities.

 

Inspections of certain other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. However, the PCAOB is currently unable to inspect an auditor’s audit work related to a company’s operations in China and where such documentation of the audit work is located in China. As a result, our investors may be deprived of the benefits of PCAOB’s oversight of our auditors through such inspections.

 

The inability of the PCAOB to conduct inspections of our auditor’s work papers in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may consequently lose confidence in our reported financial information and procedures and the quality of our financial statements.

 

24

Table of Contents

 

The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates, judgments and assumptions that may ultimately prove to be incorrect.

 

The accounting estimates and judgments that management must make in the ordinary course of business affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the periods presented. If the underlying estimates are ultimately proven to be incorrect, subsequent adjustments could have a material adverse effect on our operating results for the period or periods in which the change is identified.

 

Risks Related to Our International Operations

 

We are subject to risks associated with foreign currency exchange rates, fluctuations of which may negatively affect our revenue, cost of goods sold and gross margins and could result in exchange losses.

 

We currently operate in a number of jurisdictions including China, the U.S., Japan, the U.K., Greece, Germany, Italy and Australia, and our local operations are generally conducted in the functional currency of the home jurisdiction. The FIT and other subsidies granted are also denominated in local currencies. Thus, we deal on a regular basis in several currencies concurrently, which exposes us to significant currency exchange risks. Any increased costs or reduced revenue as a result of foreign exchange rate fluctuations could adversely affect our profit margins. The fluctuation of foreign exchange rates also affects the value of our monetary and other assets and liabilities denominated in local currencies. Generally, an appreciation of the U.S. dollar against the relevant local currencies could result in a foreign exchange loss for assets denominated in such local currencies and a foreign exchange gain for liabilities denominated in such local currencies. Conversely, a devaluation of the U.S. dollar against the relevant local currencies could result in a foreign exchange gain for assets denominated in such local currencies and a foreign exchange loss for liabilities denominated in such local currencies.

 

We may also expand into emerging markets, some of which may have an uncertain regulatory environment relating to currency policy. Conducting business in such emerging markets could increase our exposure to foreign exchange risks. Although we access a variety of financing solutions that are tailored to the geographic location of our projects and to local regulations, we have not entered into any hedging transactions to reduce the foreign exchange risks, but may do so in the future when appropriate. However, if we decide to hedge our foreign exchange exposure in the future, we cannot assure you that we will be able to reduce our foreign currency risk exposure in an effective manner, at reasonable costs, or at all.

 

Certain of our solar projects are located in China, and therefore we are subject to risks associated with the Chinese legal system which could have a material adverse effect on us.

 

We are a Cayman Islands company and our operations in China are subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to wholly foreign owned companies. Since 1979, Chinese legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since these laws and regulations are relatively new and the Chinese legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since Chinese administrative authorities and courts have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult than in more developed legal systems to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may impede our ability to enforce the contracts we have entered into with customers, suppliers, other business partners and government authorities. In addition, such uncertainties, including the inability to enforce our contracts, could materially adversely affect our business and operations.

 

Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the U.S. or other countries. Furthermore, Chinese tax authorities may reduce or terminate tax incentives that our Chinese subsidiaries currently enjoy, and their enforcement practice of certain tax laws, such as laws regulating transfers of equity interests in our Chinese subsidiaries remain uncertain. Accordingly, we cannot predict the effect of future developments in the Chinese legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of national laws by local regulations. These uncertainties could limit the legal protections available to us and other foreign investors, including you. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

 

25

Table of Contents

 

Chinese regulations relating to overseas investment by Chinese residents may restrict our overseas and cross-border investment activities and adversely affect the implementation of our strategy as well as our business and prospects.

 

On July 4, 2014, the State Administration of Foreign Exchange of China, or SAFE, issued the Circular on the Administration of Foreign Exchange Issues Related to Overseas Investment, Financing and Roundtrip Investment by Domestic Residents through Offshore Special Purpose Vehicles, or the SAFE Circular 37, which replaced the former circular commonly known as “SAFE Circular 75” promulgated on October 21, 2005. The SAFE Circular 37 requires Chinese residents to register with the competent local SAFE branch in connection with their direct establishment or indirect control of an offshore special purpose vehicle, for the purpose of overseas investment and financing, with such Chinese residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests. The SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as any change of basic information (including change of the Chinese residents, name and operation term), increase or decrease of capital contribution by Chinese individuals, share transfer or exchange, merger, division or other material event. In the event that a Chinese shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the Chinese subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its Chinese subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under Chinese law for evasion of foreign exchange controls.

 

The failure of our Chinese beneficial owners to comply with the registration procedures set forth in the SAFE Circular 37 may subject such beneficial owners and our Chinese subsidiaries to fines and legal sanctions. Such failure may also result in restrictions on our Chinese subsidiaries’ ability to distribute profits to us or our ability to inject capital into our Chinese subsidiaries or otherwise materially adversely affect our business, financial condition and results of operations. Furthermore, since the SAFE Circular 37 was recently promulgated, it is unclear how this regulation, and any future regulation concerning offshore or cross-border transactions, will be interpreted and implemented by the relevant Chinese government authorities. We cannot predict how these regulations will affect our business operations or future strategy.

 

We may rely on dividends paid by our PRC subsidiaries to fund any cash and financing requirements we may have. Any limitation on the ability of our PRC subsidiaries to pay dividends to us could have a material adverse effect on our ability to conduct our business and to pay dividends to holders of our ordinary shares.

 

With China being one of our major markets, we may rely on dividends to be paid by our wholly owned PRC subsidiaries for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to the holders of our ordinary shares and service any debt we may incur. If our wholly owned PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us.

 

Under PRC laws and regulations, wholly foreign-owned enterprises in the PRC may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its after-tax profits each year, after making up previous years’ accumulated losses, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital. In addition, at the discretion of the wholly foreign-owned enterprise, it may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. Any limitation on the ability of our wholly owned PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

 

26

Table of Contents

 

If the PRC government finds that the structure we have adopted for the e-commerce business does not comply with PRC governmental restrictions on foreign investment in internet-based businesses, or if these laws or regulations or interpretations of existing laws or regulations change in the future, we could be subject to severe penalties, including the shutting down of the e-commerce and investment platform.

 

Foreign ownership of internet-based businesses is subject to significant restrictions under current PRC laws and regulations. The PRC government regulates the conduct of online commerce through strict business licensing requirements and other government regulations. These laws and regulations also limit foreign ownership in PRC companies that provide internet information distribution services. Companies operating internet-based businesses such as the Solarbao platform primarily targeting retail customers in China are governed by these rules and regulations in China.

 

Since we are a Cayman Islands company and due to PRC governmental restrictions on foreign investment in internet-based business in China, Solar Energy E-Commerce was established in late 2014 and commenced operation in early 2015. Solar Energy E-Commerce operates www.solarbao.com e-commerce and investment platform, which primarily targets retail customers residing in China. Our PRC subsidiary, Yan Hua Internet, entered into a series of contractual arrangements with Solar Energy E-Commerce and its shareholders on March 26, 2015. Legal enforceability of these contractual arrangements has not been established primarily because the registration of the equity interest pledge agreement with the relevant PRC government authority has not been completed, as one of the legal shareholder’s equity in Solar Energy E-Commerce is restricted from pledge and transfer, making us unable to legally enforce our right under the equity interest pledge agreements and potentially other agreements. As a result, Solar Energy E-Commerce was not consolidated into our financial statements as of and for the year ended December 31, 2016. We have established a new corporate structure for the e-commerce business under which Solarbao has been migrated into a domestic company, Meijv, and Yan Hua Internet has entered into a new set of contractual arrangements on March 17, 2016, including an equity interest pledge agreement, with Meijv and Shanghai Youying E-commerce Co., Ltd. (“Youying”). We have registered the equity interest pledge agreement with the relevant PRC government authority on March 17, 2016.  Mr. Min Xiahou, Mr. Tairan Guo, Youying and Yan Hua Internet have entered into a set of contractual arrangements on May 11, 2017, including an equity interest pledge agreement, similar to those entered among Yan Hua Internet, Youying and Meijv. As the 100% shareholder of Meijv, Youying has pledged its equity interests in Meijv and registered this equity pledge with the relevant PRC government authority, and the legal enforceability of the contractual agreements has been established.

 

Although we believe that our current corporate structure of e-commerce business is in compliance with existing PRC laws, rules and regulations, we are advised by our PRC legal adviser, that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations, and these laws or regulations or interpretations of these laws or regulations may change in the future. For example, on January 19, 2015, the Ministry of Commerce of the PRC, or MOFCOM, published a draft of the PRC Law on Foreign Investment (Draft for Comment), or the Draft Foreign Investment Law, which is to regulate foreign invested enterprises, or FIEs, the same way as PRC domestic entities, except for those FIEs that operate in industries deemed to be either “restricted” or “prohibited” in a “Negative List.” See “Item 4. Information on the Company—B. Business Overview—E-Commerce and Investment Business.” Because the Negative List has yet to be published, it is unclear whether it will differ from the current list of industries subject to restrictions or prohibitions on foreign investment. There is substantial uncertainty regarding the Draft Foreign Investment Law, including, among others, what the actual content of the law will be as well as the adoption and effective date of the final form of the law. While such uncertainty exists, we cannot assure you that the new foreign investment law, when it is adopted and becomes effective, will not have a material and adverse effect on our ability to conduct the e-commerce business through our contractual arrangements. Furthermore, the relevant government authorities have broad discretion in interpreting these laws and regulations. Accordingly, we cannot assure you that PRC government authorities will not ultimately take a contrary view.

 

If our contractual arrangements for the operation of the e-commerce business in China are found to be in violation of any existing or future PRC laws or regulations, the relevant governmental authorities would have broad discretion in dealing with such violation, including levying fines, shutting down or blocking the Solarbao platform, discontinuing or placing restrictions on the www.solarbao.com operations, or taking other regulatory or enforcement actions that could be harmful to our business. Any of these actions may disrupt the operations of the e-commerce business and adversely affect our business, reputation, financial condition and results of operations.

 

27

Table of Contents

 

We rely on contractual arrangements with Meijv and its shareholders for the operation of the Solarbao platform, which may not be as effective as direct ownership.

 

Because of PRC restrictions on foreign ownership of e-commerce businesses in China, we depend on contractual arrangements with Meijv in which we have no ownership interest to conduct the e-commerce business. These contractual arrangements are intended to provide us with effective control over this entity and allow us to obtain its economic benefits. Meijv’s sole shareholder is owned directly by our current or previous core management team and directors, Mr. Min Xiahou and Mr. Tairan Guo. Mr. Min Xiahou, Mr. Tairan Guo, Youying and Yan Hua Internet have entered into a set of contractual arrangements on May 11, 2017, including an equity interest pledge agreement similar as the contractual arrangements among Yan Hua Internet, Youying and Meijv. However, these contractual arrangements may not be as effective in providing control as direct ownership. For example, Meijv and its shareholder could breach their contractual arrangements with us by, among other things, failing to operate the e-commerce business in an acceptable manner or taking other actions that are detrimental to our interests. If we were the controlling shareholder of Meijv with direct ownership, we would be able to exercise our rights as shareholders to effect changes to its board of directors, which in turn could implement changes at the management and operational level. However, under the current contractual arrangements, as a legal matter, if Meijv or its shareholder fails to perform their obligations under these contractual arrangements, we may have to incur substantial costs to enforce such arrangements, and rely on legal remedies under PRC law, including contract remedies, which may be time-consuming, unpredictable and expensive. If we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, our business and operations could be severely disrupted, which could materially and adversely affect our results of operations and damage our reputation. See “—If the PRC government finds that the structure we have adopted for the e-commerce business does not comply with PRC governmental restrictions on foreign investment in internet-based businesses, or if these laws or regulations or interpretations of existing laws or regulations change in the future, we could be subject to severe penalties, including the shutting down of the e-commerce and investment platform.”

 

The shareholders of Youying, which is the sole shareholder of Meijv, may have potential conflicts of interest with us, which may materially and adversely affect our business.

 

The individual shareholders of Youying are also shareholders, directors and officers of our Company. Conflicts of interest may arise between the roles of these individuals as shareholders, directors and officers of our Company and as shareholders of Youying. We cannot assure you that when conflicts arise, shareholders of Youying will act in the best interest of our Company or that the conflicts will be resolved in our favor. For example, these individuals with dual roles may decide to transfer significant business or assets of Meijv to other legal entities they own or control, or opportunities may arise in the future for these individuals to sell Meijv or its significant business or assets to third parties at a premium. Under either circumstance, the consideration of such a transfer or sale would be paid to Youying or its individual shareholders, not to our Company or our other shareholders, which may be materially detrimental to our other shareholders. In addition, these individual shareholders may otherwise breach or cause Meijv to breach or refuse to renew its existing contractual arrangements with us. Currently, we do not have existing arrangements to address such potential conflicts of interest between these individuals and our Company. If we cannot resolve any conflicts of interest or disputes between us and these shareholders, we would have to rely on legal proceedings, which may be expensive, time-consuming and disruptive to our operations. There is also substantial uncertainty as to the outcome of any such legal proceedings.

 

The heightened scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on our business operations, our acquisition or restructuring strategy or the value of your investment in us.

 

Pursuant to the Notice on Strengthening the Administration on Enterprise Income Tax for Non-resident Enterprise Equity Transfer (the “SAT Circular 698”) issued by China’s State Administration of Taxation (“SAT”) in December 2009 with retroactive effect from January 1, 2008, where a non-resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas non-public holding company, or an Indirect Transfer, using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC withholding tax at a rate of up to 10%. SAT Circular 698 also provides that where a non-PRC resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than the fair market value, the relevant tax authority has the power to make a reasonable adjustment of the taxable income of the transaction.

 

28

Table of Contents

 

On February 3, 2015, the SAT released the Announcement on Several Issues concerning the Enterprise Income Tax on Income from the Indirect Transfer of Assets by Non-Resident Enterprises (Announcement 7). Announcement 7 does not replace Circular 698 in its entirety; instead, it abolishes certain provisions and provides more comprehensive guidelines on a number of issues. Although it becomes effective from the date of issuance, it also applies to transactions that took place prior to the effective date but review of which has not yet been concluded by the tax bureaus.

 

Announcement 7 stipulates that when a non-resident enterprise engages in an indirect transfer of assets, including shares of PRC resident enterprise, through an arrangement that does not have a bona fide commercial purpose in order to avoid China’s enterprise income tax, the transaction should be re-characterized as a direct transfer of the PRC assets. Announcement 7 stipulates SAT’s intention to provide relief to some qualified transactions. Article 6 of Announcement 7 provides for a safe harbor for indirect transfers resulting from qualified group internal reorganizations. An indirect transfer that satisfies all of the following three conditions will be deemed to have a bona fide commercial purpose and thus will not be taxable under Announcement 7:

 

the transferor and the transferee are qualified related enterprises, which will be the case if any of the following applies:

 

(1)                                  the transferor directly or indirectly owns 80% or more of the shares in the transferee;

 

(2)                                  the transferee directly or indirectly owns 80% or more of the shares in the transferor; or

 

(3)                                  80% or more of the shares of both the transferor and transferee are directly or indirectly owned by the same shareholder.

 

Where more than 50% of the value of the equity interest of the non-resident intermediary enterprise is derived directly or indirectly from immovable assets located in PRC, the qualified ownership requirement will be increased to 100%.

 

After the indirect transfer, the PRC tax payable on a potential subsequent indirect transfer of the same PRC taxable assets is no lower than the PRC tax that could have been payable on a similar or an identical indirect transfer if the first indirect transfer did not take place; and

 

All the consideration paid by the transferee must consist of its own shares or shares of a related enterprise with which the transferee has a controlling relationship (excluding shares of listed companies).

 

Announcement 7 may be determined by the tax authorities to be applicable to previous investments or the current merger restructure by non-resident investors in our Company, if any of such transactions were determined by the tax authorities to lack reasonable commercial purpose. Although we believe that the risk of SAT Circular 698 or Announcement 7 applying to the Redomicile Merger is low, we and our existing non¬resident investors may become at risk of being taxed under Announcement 7 and may be required to expend valuable resources to comply with Announcement 7 or to establish that we should not be taxed under Announcement 7, which may have a material adverse effect on our financial condition and results of operations or such non-resident investors’ investments in us. We have conducted and may conduct acquisitions involving changes in corporate structures, and historically our shares were transferred by certain then shareholders to our current shareholders. We cannot assure you that the PRC tax authorities will not, at their discretion, adjust any capital gains and impose tax return filing obligations on us or require us to provide assistance for the investigation of PRC tax authorities with respect thereto. Any PRC tax imposed on a transfer of our ordinary shares or any adjustment of such gains would cause us to incur additional costs and may have a negative impact on the value of your investment in us.

 

The ongoing debt crisis in the Eurozone and market perceptions concerning the instability of the Euro and the European economy could adversely affect our business, results of operations and financing.

 

Concerns persist regarding the debt burden of certain Eurozone countries and their ability to meet future financial obligations, the overall stability of the Euro and the suitability of the Euro as a single currency given the diverse economic and political circumstances in individual Eurozone countries. These concerns or market perceptions concerning these and related issues could adversely affect the value of our Euro-denominated assets and obligations and lead to future economic slowdowns.

 

29

Table of Contents

 

Risks Related to Our Ordinary Shares

 

We have significant “equity overhang” which could adversely affect the market price of our Shares and impair our ability to raise additional capital through the sale of equity securities.

 

As of the date of this annual report, we had 725,067,172 ordinary shares outstanding, including 272,404,000 ordinary shares, or approximately 30.4% of our total ordinary shares outstanding, held by Mr. Xiaofeng Peng, our director, executive chairman of the board of directors and chief executive officer. The possibility that substantial amounts of our outstanding Shares may be sold by Mr. Xiaofeng Peng or the perception that such sales could occur, or “equity overhang,” could adversely affect the market price of our ordinary shares, and could impair our ability to raise additional capital through the sale of equity securities in the future.

 

We are subject to litigation risks, including securities class actions and shareholder derivative actions, which may be costly to defend and the outcome of which is uncertain.

 

From time to time, we are subject to legal claims, with and without merit, that may be costly and which may divert the attention of our management and our resources in general. In addition, our solar projects may be subject to litigation or other adverse proceedings that may adversely impact our ability to proceed with construction or grid connection or sell a given project, which would adversely affect our ability to recognize revenue with respect to such project. We are currently involved in various legal proceedings. See “Item 8. Financial Information —Consolidated Statements and Other Financial Information—Legal and Administrative Proceedings.”  The results of complex legal proceedings are difficult to predict. Lawsuits filed against us may assert types of claims that, if resolved against us, could give rise to substantial damages, and an unfavorable outcome or settlement of one or more of these lawsuits, or any future lawsuits, could have a material adverse effect on our business, financial condition, or results of operations. Even if these lawsuits are not resolved against us, the costs of defending such lawsuits may not be covered by our insurance policies. We cannot assure you that additional litigation will not be filed against us in the future.

 

It may be difficult to effect service of process on, or to enforce any judgments obtained outside the PRC against us, our directors, or our senior management members who reside in the PRC.

 

Most of our existing directors and senior management members reside in the PRC and most of our assets and the assets of such persons are located in the PRC. Accordingly, it may be difficult for investors to effect service of process in the United States on us or on any of these persons or to enforce judgments obtained outside of the PRC against us or any of these persons. The PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments awarded by courts in many developed countries, including the U.S. and the U.K. Therefore, the recognition and enforcement in the PRC of judgments of a court in any of these jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or even impossible.

 

There is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (a) is given by a foreign court of competent jurisdiction, (b) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (c) is final, (d) is not in respect of taxes, a fine or a penalty, and (e) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. However, the Cayman Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature. Because such a determination has not yet been made by a court of the Cayman Islands, it is uncertain whether such civil liability judgments from U.S. courts would be enforceable in the Cayman Islands.

 

Our shareholders may experience future dilution.

 

Our amended and restated memorandum and articles of association permits our board of directors, without shareholder approval, to authorize the issuance of preferred shares. The board of directors may classify or reclassify any preferred shares to set the preferences, rights and other terms of the classified or reclassified shares, including the issuance of preferred shares that have preference rights over our ordinary shares with respect to dividends, liquidation and voting rights. Furthermore, substantially all of our ordinary shares for which our outstanding stock options are exercisable are, once they have been purchased, eligible for immediate sale in the public market.

 

30

Table of Contents

 

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make these rights available in the United States unless we register the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

 

The issuance of additional shares in our capital or the exercise of stock options or warrants could be substantially dilutive to your shares and may negatively affect the market price of our ordinary shares.

 

The price of our securities has been and may continue to be highly volatile.

 

The price of our ordinary shares has been and may continue to be subject to wide fluctuations in the future in response to many events or factors, including those discussed in the preceding risk factors relating to our operations, as well as:

 

·                   actual or anticipated fluctuations in operating results, actual or anticipated gross profit as a percentage of net sales, our actual or anticipated rate of growth and our actual or anticipated earnings per share;

 

·                   changes in expectations as to future financial performance or changes in financial estimates;

 

·                   changes in governmental regulations or policies in the PRC and other countries in which we do business;

 

·                   our, or a competitor’s, announcement of new products, services or technological innovations;

 

·                   the operating and stock price performance of other comparable companies;

 

·                   news and commentary emanating from the media, securities analysts or government bodies in the PRC relating to us and to the industry in general;

 

·                   changes in the general condition of the global economy and credit markets;

 

·                   general market conditions or other developments affecting us or our industry;

 

·                   announcements regarding patent litigation or the issuance of patents to us or our competitors;

 

·                   release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares;

 

·                   sales or perceived sales of additional ordinary shares; and

 

·                   commencement of, or our involvement in, litigation.

 

Any of these factors may result in large and sudden changes in the volume and price at which our ordinary shares will trade. We cannot give any assurance that these factors will not occur in the future again. In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also have a material adverse effect on the market price of our ordinary shares. In the past, following periods of volatility in the market price of their stock, many companies have been the subject of securities class action litigation. If we become involved in similar securities class action litigation in the future, it could result in substantial costs and diversion of our management’s attention and resources and could harm our stock price, business, prospects, financial condition and results of operations.

 

31

Table of Contents

 

If we fail to meet the applicable listing requirements, NASDAQ may delist our ordinary shares from trading on its exchange in which case the liquidity and market price of our securities could decline and our ability to raise additional capital would be adversely affected.

 

Our ordinary shares are currently listed for trading on the NASDAQ Global Select Market. Before the substitution listing, our ADSs were listed on the NASDAQ Global Select Market. There are a number of requirements that must be met in order for our ordinary shares to remain listed on the NASDAQ Global Select Market, and the failure to meet any of these listing standards could result in the delisting of our ordinary shares from NASDAQ. On June 30, 2017, we received a delisting determination from the Listing Qualifications Department of NASDAQ, indicating that as a result of our failure to timely file with the SEC the Form 20-F for the year ended December 31, 2016, trading of our securities will be suspended. See “Item 4. Information on the Company— History and Development of the Company.” In addition, on May 25, 2017, we received a notification letter from the Listing Qualifications Department of NASDAQ, notifying us that the minimum bid price per ADS, was below $1.00 for a period of 30 consecutive business days and that we did not meet the minimum bid price requirement set forth in the Nasdaq Listing Rules. See “Item 4. Information on the Company— A. History and Development of the Company.” We have a compliance period of 180 calendar days, or until November 21, 2017, to regain compliance with Nasdaq’s minimum bid price requirement. If at any time during such 180-day period, the closing bid price of our ordinary shares is at least $1.00 for a minimum of 10 consecutive business days, Nasdaq will provide us with a written confirmation of compliance and the matter will be closed. As of the date of this annual report, we have filed the required Form 20-F and regained compliance. Furthermore, we have determined to effect a consolidation of our ordinary shares, at a ratio of one-for ten. However, after the completion of such reverse stock split, there is no assurance the bid price of our ordinary shares to remain above $1.00 for a period of ten days before November 21, 2017. We cannot assure you that we will be able to timely file such reports or comply with all other Nasdaq Listing Rules at all times in the future, or regain compliance in a timely manner in case of a default and avoid any subsequent adverse action taken by the Listing Qualifications Department, including but not limited to delisting.

 

Any potential delisting of our ordinary shares from the NASDAQ would make it impossible for our shareholders to sell our ordinary shares in the public market and will result in decreased liquidity, limited availability of market quotations for our ordinary shares, limited availability of news and analyst coverage on us and decrease in our ability to issue additional securities.

 

Our articles of association contain anti-takeover provisions that could prevent a change in control even if such takeover is beneficial to our shareholders.

 

Our articles of association contain provisions that could delay, defer or prevent a change in control of us that could be beneficial to our shareholders. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors and take other corporate actions. As a result, these provisions could limit the price that investors are willing to pay for the ordinary shares. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a price above the then current market price of our ordinary shares. These provisions provide that our board of directors has authority, without any further action by our shareholders, 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 the ordinary shares. The board of directors may decide to issue such preferred shares quickly with terms calculated to delay or prevent a change in control of us or make the removal of our management more difficult. If the board of directors decides to issue such preferred shares, the price of our ordinary shares may fall and the voting and other rights of holders of our ordinary shares may be materially adversely affected.

 

You may not receive dividends or other distributions on our ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.

 

Under Cayman Islands law, we may only pay dividends out of our profits or share premium account subject to our ability to pay our debts as they fall due in the ordinary course of our business. Our ability to pay dividends will therefore depend on our ability to generate sufficient profits. We cannot give any assurance that we will declare dividends of any amounts, at any rate or at all in the future. We have not paid any dividends in the past. Future dividends, if any, will be paid at the discretion of our board of directors, subject to requirements under Cayman Islands law and our memorandum and articles of association, as amended and restated from time to time, and will depend upon our future operations and earnings, capital expenditure requirements, general financial conditions, legal and contractual restrictions and other factors that our board of directors may deem relevant.

 

32

Table of Contents

 

We are treated as a U.S. corporation for U.S. federal tax purposes.

 

Due to the circumstances of our formation and the application of Section 7874(b) of the United States Internal Revenue Code of 1986, as amended (the “Code”), we are treated as a U.S. corporation for all purposes of the Code. As a result, we are subject to U.S. federal corporate income tax on our worldwide income. In addition, if we pay dividends to a Non-U.S. Holder, as defined in the discussion “Item 10. Additional Information—E. Taxation—U.S. Federal Income Taxation,” U.S. income tax will be withheld at the rate of 30%, or, subject to certain conditions, such lower rate as may be provided in an applicable income tax treaty. Each investor should consult its own tax adviser regarding the U.S. federal income tax consequences of holding the ordinary shares in its particular circumstances.

 

We rely on the foreign private issuer exemption for certain corporate governance requirements under the NASDAQ Stock Market Rules, or the NASDAQ Rules, including the majority independent board requirement. This may afford less protection to holders of our ordinary shares and ADSs.

 

As a foreign private issuer, we are exempt from certain corporate governance requirements of NASDAQ. 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 U.S. domestic issuers under the NASDAQ Rules. The standards applicable to us are considerably different from those applied to U.S. domestic issuers. For instance, we are not required to:

 

·                   have a majority of the board of directors be comprised of independent directors;

 

·                   have a compensation committee that is comprised solely of independent directors;

 

·                   having a nomination and corporate governance committee that is comprised solely of independent directors;

 

·                   have executive compensation be determined by independent directors or a committee of independent directors;

 

·                   have director nominees be selected, or recommended for selection by the board of directors, by independent directors or a committee of independent directors;

 

·                   hold an annual meeting of shareholders no later than one year after the end of our fiscal year-end; and

 

·                   have shareholder approval for private placement of Company’s common stocks at a price less than the greater of book or market value which together with sales by officers, directors or Substantial Shareholders of the Company equals 20% or more of common stock or 20% or more of the voting power outstanding before the issuance.

 

We are not required to, and will not voluntarily meet, these requirements. For example, our board of directors currently consists of six directors, three of whom satisfy the “independence” requirements of Rule 10A-3 under the Exchange Act and Rule 5605 of the NASDAQ Rules. The law of our home country, the Cayman Islands, does not require a majority of our board of directors be composed of independent directors. We intend to follow our home country practice with regard to the composition of the board of directors.

 

As a result, holders of our ordinary shares may not have the same protection afforded to shareholders of companies that are subject to all of NASDAQ’s corporate governance requirements. For a description of the material corporate governance differences between the NASDAQ Rules and Cayman Islands law, see “Item 16G. Corporate Governance.”

 

33

Table of Contents

 

ITEM 4.                                                 INFORMATION ON THE COMPANY

 

A.                                     History and Development of the Company

 

Our legal and commercial name is SPI Energy Co., Ltd. Our principal executive office is located at Suite 2703, 27/F, China Resources Building, 26 Harbour Road, Wan Chai, Hong Kong SAR, China. Our telephone number at this address is + 852 2291 6020 and our fax number is +852 2291 6030. Our registered office is situated at the offices of Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.

 

We raised a significant amount of cash for our working capital purposes from the issuance of shares of SPI’s common stock and convertible notes in 2014, 2015 and 2016 to non-U.S. investors in private placements. In those periods, we entered into various private placement share purchase agreements and option agreements with a number of non-U.S. investors and issued approximately 356.7 million unregistered shares or options to purchase shares of SPI’s common stock in reliance on Regulation S of the Securities Act, or Regulation S, mostly at a per share purchase price benchmarked to the prevailing trading price of SPI’s shares at the respective dates of these agreements, and raised an aggregate of $401.58 million. We also raised $55.0 million of cash by issuing unregistered convertible notes to non-U.S. investors in reliance of Regulations S in 2014 and 2015. In January 2016, we raised $5 million by issuing 2.5 million ordinary shares, in reliance on Regulation S, to a non-U.S. investor who exercised an option to purchase our ordinary shares pursuant to an option agreement with our Company.  In September 2016, we entered into share purchase agreements with certain existing shareholders, including certain members of our management and other investors to issue and sell them an aggregate of 386.1 million ordinary shares for a total consideration of approximately $100 million. In January 2017, we completed approximately $881,000 of its $100 million private placement. In April 2017, we entered into a share purchase agreement with Tiger Capital Fund SPC participating in Tiger Global SP, which has agreed to purchase 80,000,000 ordinary shares, at an aggregate purchase price of US$5,760,000. In June 2017, the Tiger Fund agreed to assign its rights and obligations under the share purchase agreement to Qian Kun Prosperous Times Investment Limited. The transaction was completed in July 2017.  In October 2017, we entered into share purchase agreements with each of Qian Kun Prosperous Times Investment Limited and Alpha Assai fund SP of Sunrise SPC. The share purchase agreements provide, among other things, that Qian Kun Prosperous Times Investment Limited and Alpha Assai fund SP of Sunrise SPC will purchase 80,000,000 and 240,000,000 ordinary shares respectively, for a total consideration of $33,920,000, subject to the terms and conditions of the respective share purchase agreement, including a lock-up for 90 days from the closing date of the contemplated transactions, or such other time or on such other date that is agreed upon in writing by both parties. The consummation of these transactions are also subject to customary closing conditions.

 

Our Company was incorporated by SPI as a company limited by shares in the Cayman Islands on May 4, 2015. On January 4, 2016, we completed the redomiciliation of SPI to the Cayman Islands, whereby SPI merged with and into a wholly-owned subsidiary of our Company and the holders of SPI common stock that was acquired before the relevant F-4 registration statement became effective have the right to receive ADS representing ordinary shares of our Company. As a result, the former shareholders of SPI became the beneficial owners of the capital stock of our Company, and our Company, together with our subsidiaries, now own and continue to conduct SPI’s business in substantially the same manner as was conducted by SPI and its subsidiaries. Our Company is also managed by substantially the same board of directors and executive officers that managed SPI previously.

 

Between January 19, 2016 and September 18, 2017, our ADSs were listed on the NASDAQ Global Select Market under the symbol of “SPI”. The Bank of New York Mellon, the depositary bank for the our ADS facility, terminated our ADS facility on September 18, 2017. Following such termination, we listed our ordinary shares, par value $0.000001 each, for trading on NASDAQ Global Select Market in substitution for our ADSs. On September 19, 2017, the substitution listing became effective and our ordinary shares began trading on the NASDAQ Global Select Market under the symbol of “SPI”.

 

On January 10, 2017, we received notification from the Listing Qualifications Department of NASDAQ, indicating that we are not currently in compliance with Nasdaq’s Listing Rules for continued listing due to the our failure to file with the SEC an interim balance sheet and income statement as of the end of June 30, 2016. On May 15, 2017, we filed interim balance sheet and income statement and regained compliance with respect to this filing.

 

On May 25, 2017, we received a notification letter from the Listing Qualifications Department of NASDAQ, notifying us that the minimum bid price per ADS, was below $1.00 for a period of 30 consecutive business days and that we did not meet the minimum bid price requirement set forth in the Nasdaq Listing Rules. We have a compliance period of 180 calendar days, or until November 21, 2017, to regain compliance with Nasdaq’s minimum bid price requirement. If at any time during such 180-day period, the closing bid price of our ordinary shares is at least $1.00 for a minimum of 10 consecutive business days, Nasdaq will provide us with a written confirmation of compliance and the matter will be closed.

 

34

---

Table of Contents

 

On June 30, 2017, we were notified by the Nasdaq Listing Qualification Staff that our ADSs were subject to delisting because our annual report on Form 20-F for the year ended December 31, 2016 was not filed on a timely basis. On July 7, 2017, we submitted a request for hearing before the Nasdaq Listing Qualifications Panel and a stay of the delisting. The hearing was held on August 10, 2017, at which our request to remain listed on The Nasdaq Stock Market was granted. Our continued listing is subject to, among other things, we providing to the panel a written update on or before September 30, 2017 detailing the status of its audit review, any outstanding items, and documentation yet to be provided to satisfy the requests of our auditor and we informing the panel on or before October 27, 2017 that we have filed with the SEC our Form 20-F for the year ended December 31, 2016. We have complied with the aforementioned requirements by the Nasdaq Listing Qualifications Panel for continued listing.

 

B.                                     Business Overview

 

We are a global provider of PV solutions for business, residential, government and utility customers and investors. We provide a full spectrum of EPC services to third party project developers, as well as develop, own and operate solar projects that sell electricity to the grid in multiple countries, including China, the U.S., the U.K., Greece, Japan and Italy. Prior to 2014, we were primarily engaged in providing EPC services to developers in the U.S. We were also engaged in the development, manufacture and marketing of a variety of PV modules, the key components of solar parks that convert sunlight into electricity, and balance-of-system components, including our in-house brand. We have discontinued our manufacturing business and liquidated our research and development function. Starting from 2014, we expanded our full spectrum EPC service business to China, where we provided comprehensive and quality services to large solar projects. In addition, we commenced our global project development business by ramping up our portfolio of global solar projects, including projects that we plan to hold in the long term and derive electricity generation revenue from our independent power producer model, or IPP model, and projects that we plan to sell in the future when we are presented with attractive opportunities under our build-and-transfer model, or BT model. We grow our project portfolio primarily through acquisitions and act as a secondary developer for the projects which are under construction or in pipeline upon acquisition. Solar projects in our current portfolio include projects at all stages of development, including projects in operation, projects under construction and projects in pipeline. See “—Our Global Project Development Business—Our Solar Project Portfolio.”

 

For our EPC service business, the scope of our work encompasses engineering design procurement of technical components from PV module and panel manufacturers and contracting of construction and installation, which reaches both upstream and downstream along the spectrum of the solar business value chain. Our rigorous design and supply chain management as well as construction quality control enable us to design, build and deliver world-class solar system configurations with components that can work optimally together.  In 2015 and 2016, we focused on solar projects in China, where the projects are eligible to receive various forms of government incentives and have access to funding options, and where we enjoy relatively high margins with respect to our EPC service business compared to projects in other jurisdictions. We derived approximately 25.1% and 10.0% of revenue from our EPC service business in China with an average gross profit margin of 15.7% and 7.0% for the years ended December 31, 2015 and 2016, respectively. We also provide a comprehensive set of long-term O&M services over the anticipated life of a solar project for third party developers, including performance monitoring, system reporting, preventative maintenance and full warranty support. We have incurred net losses since our inception.

 

For our global project development business, as of December 31, 2016, we had completed a series of acquisitions of solar projects that were in operation, consisting of (i) 26.6 MW of projects in Greece, acquired in December 2014 for a total consideration of $140.5 million of its fair value, (ii) 20.0 MW of projects in China, acquired in December 2014 for a total consideration of RMB190 million ($30.6 million), and (iii) 4.3 MW of projects in Italy, acquired in February 2015 for a total consideration of $11.8 million of its fair value.  We further completed the construction and then started to operate two projects in the U.K. in the first quarter of 2016, with a total capacity of 8.1 MW. The Greek, Chinese, UK and Italian projects were already connected to the grid. During the year ended December 31, 2016, we completed the construction of one solar projects in the U.S. and three PV solar projects in the Japan. and sold them to third parties at the consideration of $2.1 million and JPY 1,349 million ($12.4 million), respectively, which have been recognized as revenue accordingly.

 

35

Table of Contents

 

As of the date of this report, we completed another solar project in the U.K. with a total capacity of 4.4 MW and sold to third party in June 2017; we are constructing an aggregate of 6.9 MW of projects in the United States and 4.4 MW of projects in Japan under our BT model. We anticipate that the Japan project will be connected to the grid by end of October 2017 and the U.S. project will be connected to the grid in 2018.

 

We had 71.6 MW of projects in announced pipeline as of December 31, 2016. See “—Our Global Project Development Business—Our Solar Project Portfolio.” We expect to complete the acquisition of, or commence permitting processes for, our projects in announced pipeline as soon as practicable. We believe these new additions, combined with our existing project portfolio, demonstrate our broad geographic reach and established presence across key solar markets and mitigate country-specific risks.

 

We launched www.solarbao.com in early 2015, which primarily targets retail customers residing in China. Starting from May  2017, we have ceased offering new investment products to investors and stopped accepting new investments on the Solarbao platform. For a detailed discussion, please see “Item 3. Key Information—D. Risk factors—The operations of our e-commerce and investment business platform have been unsuccessful.”

 

On January 9, 2017, we relocated our global headquarters to Hong Kong for better access to the international capital market, attract high-caliber talents and develop the international market, while synchronizing the international and domestic resources to execute globalization strategy.

 

Our Engineering, Procurement and Construction Service Business

 

Developing a PV system is a highly complex endeavor which requires technical expertise as well as process management and business skills. The engineers of a PV project must properly oversee the design and installation of the PV modules, racking and mounting systems, interconnection and balance-of-systems components, inverters, batteries and other electric and technical equipment and enable the project to generate electricity and interconnect with the local grid. As the engineer’s work is closely interrelated with the equipment installed in the project and the construction of the project itself, project developers generally contract out all three important tasks of the (engineering, procurement and construction services, which form the technical backbone of a successful PV power plant) to a single EPC contractor.

 

An EPC service provider generally plans, executes and manages the engineering design of a project, the procurement of required components and materials, and the construction of the project itself. Focused on the engineering and other technical aspects of the project, EPC services are distinguishable from the financial and regulatory aspects of developing a solar project generally handled by developers’ in-house teams. EPC services work is at the center of the project development value chain, reaching both upstream (the procurement of equipment from PV module manufacturers) and downstream (the contracting of construction and installation work). As a PV solution provider familiar with the entire process of a PV project development, we are able to deliver sophisticated and specialized EPC solutions to PV project developers, achieving efficiencies in both the upstream and downstream of the value chains.

 

When providing EPC services, our expertise in the solar project development and manufacturing fields allows us to realize cooperative synergies and also exert leverage with third-party contractors that helps drive performance and create value for our customers. Our broad expertise can inform the overall development process, affording us a more significant role in program management, project scheduling, quality management and quality control of a project. Under this model, we work closely with our customers and sub-contractors to successfully deliver completed solar projects, fostering and improving our existing relationships with established PV system developers, integrators and installers. Thus, our provision of EPC services is a critical contribution to projects in which we partner with project developers.

 

We typically work with customers on-site to perform feasibility studies, manage deliveries and materials, and oversee design, installation, construction system start-up, testing, and grid connection. The size of the system is the primary determinant of development timing. For an average project, the process takes three to six months, based on our past experience. We use our in-house capabilities for engineering and procurement, taking advantage of our strong relationships with diverse supplier network for the provision of modules, racking systems, balance of system components and other items at competitive prices and terms. We generally outsource and oversee construction to specialized EPC construction sub-contractors.

 

36

Table of Contents

 

We earn pre-agreed EPC service fees from our customers, who generally make milestone payments to us. In 2014, 2015 and 2016, we derived revenue of $87.3 million, $48.0 million and $13.5 million, respectively, from the provision of our EPC services. Prior to 2014, our EPC work was primarily for customers in the U.S. In 2014, as a part of the commencement of our global project development business in the Chinese market, we began to undertake major EPC projects in certain parts of China. In 2014, we provided EPC services to three large Chinese projects having capacities of 21.0 MW, 30.0 MW and 30.0 MW located in Jiangxi Province, Ningxia Autonomous Region and Inner Mongolia Autonomous Region, respectively. Our three largest EPC customers in 2014 were the respective owners of these three projects, all of which were regional developers in China. In 2015, we provided EPC services to five Chinese solar projects having attributable capacities of 49.5 MW in the Inner Mongolia Autonomous Region, 30 MW in the Ningxia Autonomous Region and 6 MW in Gansu Province. In 2016, we entered into new EPC contracts in China to provide EPC services to a a 0.289MW project with Hebei Zhaoshu New Energy Technology Co., Ltd. and a 1MW project with Foshan Kezhou New Energy Development Co., Ltd.

 

Engineering Design

 

As a critical first step in the EPC process, engineering design involves the planning of the entire solar project, from feasibility studies of the land and irradiation levels to efficient arrangement of mounting, modules and connection systems. Our technical team takes responsibility over initial solar project engineering with support from third-party contractors. The engineering design process includes the site layout and the electrical design, as well as assessment of a variety of factors in order to choose appropriate technologies and equipment for the project, particularly modules and inverters. Throughout the engineering design phase, we aim to reduce the risks, control the costs and improve the performance of our EPC projects.

 

Procurement and Construction

 

In order to focus on our core downstream development and EPC service businesses, we no longer manufacture PV modules or produce other equipment such as controllers, inverters and balance of system components. Rather, we procure them from third-party manufacturers and install them in our PV systems as part of our EPC business.

 

We procure PV modules and other key equipment for project construction from independent suppliers and contract work to third-party EPC contractors in areas such as logistics, installation, construction and supervision. We believe this allows us to focus our resources on higher value-added tasks. We maintain an updated list of qualified and reliable global suppliers and local third-party contractors in the areas where we operate with a proven track record and with which we have established relationships.

 

We choose our suppliers and third-party EPC contractors through a competitive bidding process. The relevant departments of our headquarters organize and collect bids, communicate with bidders and coordinate with our regional development teams to meet local technical and legal requirements. This helps ensure that we have a strong, reliable and experienced supplier and construction team working with us on each of our EPC project.

 

Procurement of PV Modules and Other Equipment

 

We apply stringent quality assurance protocols to select components with a long useful life that are compatible with a variety of parameters of the project, including local topography and local solar irradiation.

 

PV modules, the primary equipment of our solar projects, typically contribute to a substantial portion of the overall system costs. We procure our PV modules from a wide array of suppliers including Trina Solar Limited, JinkoSolar Holding Co., Ltd., SOLARWORLD AG, Xiexin Integration Technology Co., Ltd., Wuxi Saijing Solar Co., LTD, Zhejiang Global Photovoltaic Technology Co., Ltd., Ningbo Shared Solar Energy Co., Ltd. and Tangshan Haitai New Energy Co., Ltd., among others.

 

We consider the following factors when we procure project equipment: technical specifications (such as size, type and power output), bid prices, warranty and insurance programs, spectral response, performance in low light, nominal power tolerance levels, degradation rate, technical support and reputation of suppliers. We typically require 10-year warranties for defects in materials or workmanship and 25-year warranty for module capacity under normal testing conditions (2-3% of capacity for the first year with a 0.5-0.8% linear degradation in capacity every year thereafter).

 

37

Table of Contents

 

We are generally required to pay 100% of the purchase price within a period ranging from three months to six months after receipt, inspection and acceptance of the PV modules. We typically pay manufacturers deposits that represent 10% to 50% of the total purchase price.

 

Construction Contracting

 

When acting as a general contractor, we generally outsource the construction of our PV power plants to third-party construction companies and closely monitor their execution of our designs. Most of these companies are specialized EPC construction subcontractors. Our construction oversight teams conduct constructability reviews, provide construction support, contract administration and document control services, construction inspection, engineering support, instrumentation installation and monitoring, and on-site construction supervision and monitoring.

 

We utilize a number of metrics to manage and monitor the performance of our third-party contractors in terms of both quality and delivery time and to ensure compliance with applicable safety and other requirements. For instance, we may delegate qualified representatives to review, supervise, organize and provide comments on the third-party contractor’s design, construction plan, construction guidelines, materials and documentations. We also conduct periodic inspections to examine project implementation and quality against our project planning and quality standards and prepare periodic reports for review and approval by our relevant departments. If we identify any quality or progress issues that are attributable to the work of our third-party contractors, we will follow-up with them and monitor their rectification work.

 

Those third-party contractors are responsible for the quality of the project, and must maintain relevant insurance designating us as the beneficiary. They must ensure the project complies with all local safety, labor and environmental laws and regulations. We examine and keep records of the production-related safety documentation and insurance policies of our third-party contractors. All production-related tools and equipment used by our third-party contractors must be compliant with and certified by applicable regulatory standards. The contractors submit detailed quality assurance procedures and regularly updates us on the progress, quality and safety of the project. Our third-party contractors utilize a variety of measures to protect the project location, including the transmission line, built facilities and infrastructure, from damage during the construction process.

 

We are generally entitled to damages if our third-party contractors fail to meet the prescribed requirements and deadlines under our contracts. We usually negotiate to pay our third-party contractors the remaining 5% or 10% of the contract price after the expiration of the quality warranty period, which generally ranges from one to two years. If we pay the full contract price upon completion of a project, we require the contractor to provide a performance guarantee in respect of the warranty obligations for such project.

 

Commissioning and Warranties

 

We assess and evaluate our solar projects before completion. Upon completion of construction, we conduct commissioning tests prior to grid connection. The tests include a detailed visual inspection of all significant aspects of the plant, an open circuit voltage test and a short circuit current test, and then a direct-current test after connecting to the grid. We focus commissioning tests on the quality of the construction and major equipment. These tests are conducted in order to ensure that the plant is structurally and electrically safe, and is sufficiently robust to operate as designed for the specified project lifetime.

 

After grid connection, we also conduct commissioning tests on electricity generation performance. As grid connection requires approval from power companies, post-grid connection commissioning tests are also conducted by local quality supervisors or third-parties approved by the power companies. In addition to the warranties provided by the manufacturers of modules and balance-of-system components, EPC contractors also typically provide a limited warranty against defects in workmanship, engineering design, and installation services under normal use and service conditions for a period of one to two years following the energizing of a section of a solar power plant or upon substantial completion of the entire solar power plant. In resolving claims under the workmanship, design and installation warranties, the new owner has the option of remedying the defect to the warranted level through repair, refurbishment, or replacement.

 

38

Table of Contents

 

Our Global Project Development Business

 

We develop and sell or own and operate solar projects which sell electricity to the grid in multiple countries, including China, the U.S., the U.K., Greece, Japan and Italy. In 2014, we commenced our global project development business by ramping up our portfolio of global solar projects, including projects that we plan to hold in the long term for electricity generation revenue under our IPP model, as well as projects which we plan to sell in the future when we are presented with attractive opportunities under our BT model. We grow our project portfolio primarily through acquisitions and our project acquisition strategy is based on rigorous market research and due diligence on the target project’s capacity, local energy demands, applicable tariff regime, supporting infrastructure, local government support and topography for construction in the case of projects under construction and projects in pipeline. We also consider available financing options, internal rate of return, key technical components, terms of the grid connection agreements and power purchase agreements, or PPAs, as well as guarantees on performance for projects in all development stages. We act as secondary developer for the projects under construction or in pipeline when they are acquired. We either hold these projects in the long term for electricity generation revenue or sell them when presented with attractive opportunities.

 

As of December 31, 2016, we had completed a series of acquisitions of solar projects that were in operation, consisting of 26.6 MW of projects in Greece, 4.3 MW of projects in Italy. The Greek and the Italian projects were already connected to the grid when the acquisitions were completed.

 

We had an aggregate of 4.4 MW of projects in the U.K., 6.9 MW of projects in the U.S. and 4.4 MW of projects under construction in Japan as of December 31, 2016. We expect that all of these projects will be connected to the grid by December 31, 2017 and December 31, 2018 respectively.

 

Most of our solar projects are subject to the FIT policies of the countries or regions where they operate. FIT refers to the national and local subsidies to solar power generation supported by the government. For the FIT terms of our projects, please refer to “—Our Solar Project Portfolio.”

 

Our Solar Project Portfolio

 

We expect our solar projects to have operational lives of 25 to 27 years. As of December 31, 2016, our solar project portfolio consisted of:

 

·                   Projects in Operation—“Projects in operation” refers to projects connected to the grid and selling electricity. As of December 31, 2016, we had projects in operation with an attributable capacity of 69.2 MW in the U.K., Greece, China and Italy.

 

·                   Projects under Construction—“Projects under construction” refers to projects at the construction stage. We generally complete construction in three to six months after obtaining all the permits required for construction, if local climate and topographical conditions permit. We had 30.79 MW of projects under construction in the China, US, U.K. and Japan as of December 31, 2016 and we expect substantially all of them to be connected to the grid by December 31, 2017.

 

·                   Projects in Announced Pipeline—“Projects in announced pipeline” refers to projects that we have entered into definitive agreements to develop with a third party in which we expect to own a majority of the equity interest, and projects we have entered into definitive agreements to acquire.

 

The following summary sets forth our solar projects in operation, solar projects under construction and solar projects in announced pipeline as of December 31, 2016. For more recent development of our solar projects portfolio and potential sale of our solar projects, please see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Resources and Material Known Facts on Liquidity.”

 

39

Table of Contents

 

Solar Projects in Operation*

 

Country		Project name		Gross capacity (MW)		Our equity holding		Attributable capacity (MW)		Ground/ Rooftop		Connection date		FIT terms
Greece		Sinsin Renewable Investment Limited		26.6		100	%	26.6		Ground		February to October 2013		EUR0.14-0.38/kWh 1
China		Gonghe County Xinte Photovoltaic Co., Ltd.		20.0		100	%	20.0		Ground		December 2013		RMB1.00/kWh 2
China		Hefei 200 Residents Project		1.02		100	%	1.02		Rooftop		August 2015		RMB1.06/kWh 3
China		Feixi County Hospital Project		0.146		100	%	0.146		Rooftop		December 2015		RMB1.57/kWh 4
China		Shanghai Siyuan Project		0.224		100	%	0.224		Rooftop		January 2016		RMB1.58/kWh 5
China		Suzhou Tong Yuan Fang Project		0.199		100	%	0.199		Rooftop		March 2016		RMB1.2416/kWh 6
China		Shanghai Gene Technology Project		0.101		100	%	0.101		Rooftop		April 2016		RMB1.27/kWh 7
China		Suzhou Mudu Studio City Project		0.2244		100	%	0.2244		Rooftop		April 2016		RMB1.166/kWh 8
China		Suzhou Hen Sheng Project		0.160		100	%	0.160		Rooftop		April 2016		RMB1.166/kWh 9
China		Nantong Anda Project		4.791		100	%	4.791		Rooftop		May 2016		RMB 1/kWh 10
China		Fuzhou Meicheng Project		1.705		100	%	1.705		Rooftop		May 2016		RMB 1/kWh 11
China		Suzhou Meiliang Project		2.036		100	%	2.036		Rooftop		May 2016		RMB1.6269/kWh 12
Italy		SPI Renewables Energy (Luxembourg) Private Limited Company S.a.r.l. (formerly known as CECEP Solar Energy (Luxembourg) Private Limited Company (S.a.r.l.)); Italsolar S.r.l.		4.3		100	%	4.3		Ground and Rooftop		December 2009		EUR0.22-0.35/kWh
UK		Cairnhill Solarfield Limited		3.0906		100	%	3.0906		Ground		February 2016		1.3 ROCs
UK		Emotion energy Solar One Limited		4.971		100	%	4.971		Ground		March 2016		1.3 ROCs
Total				69.57				69.57

 

---

1.                   The PPA agreements did not fix the FIT. The FIT will be charged based on the relevant law in force in Greece. The current law in force is law 4254/2014. According the monthly FIT statements by the electricity supply bureau in Greece, the FIT range of the PV plants was EUR0.14~0.38/kWh in 2014.

 

2.                   It is the government policy of Qinghai Province in China that the PV plants grid-connected at the end of 2013 are entitled to a total electricity price of RMB 1.0/kWh once approved by Development and Reform Committee of Qinghai Province, among which RMB 0.35/kWh is to be paid by State Grid Company directly as set out in the PPA agreement. The remaining part (RMB 0.65/kWh) will be paid as an additional tariff by central government through State Grid Company.

 

3.                   RMB1.02/kWh is a total electricity price entitled to the project, among which RMB0.6/kWh is the price for electricity sold to 200 residents on whose property the PV project is located, RMB0.42/kWh is the national subsidy, and RMB4/kWh will be paid as an additional construction subsidy by the government of Hefei City.

 

4.                   RMB1.57/kWh is a total electricity price entitled to the project, among which RMB0.9/kWh is the price for electricity sold to the hospital on whose property the PV project is located, RMB0.42/kWh is the national subsidy, and RMB0.25/kWh will be paid as an additional tariff by the government of Hefei City.

 

5.                   RMB1.58/kWh is a total electricity price entitled to the project, among which RMB0.91/kWh is the price for electricity sold to the company on whose property the PV project is located, RMB0.42/kWh is the national subsidy, and RMB0.25/kWh will be paid as an additional tariff by the government of Shanghai City.

 

40

Table of Contents

 

6.                   RMB1.2416/kWh is a total electricity price entitled to the project, among which RMB 0.8216/kWh is the price for electricity sold to the company on whose property the PV project is located, and RMB0.42/kWh is the national subsidy.

 

7.                   RMB1.27/kWh is a total electricity price entitled to the project, among which RMB0.6/kWh is the price for electricity sold to the company on whose property the PV project is located, RMB0.42/kWh is the national subsidy, and RMB 0.25/kWh will be paid as an additional tariff by the government of Shanghai City.

 

8.                   RMB1.166/kWh is a total electricity price entitled to the project, among which RMB0.746/kWh is the price for electricity sold to the company on whose property the PV project is located, and RMB0.42/kWh is the national subsidy.

 

9.                   The entitled electricity price is same as Suzhou Solar Juice New Energy Co., Ltd. (Mudu Studio City Project).

 

10.               This project is entitled to a total electricity price of RMB1.0/kWh, among which RMB0.378/kWh is to be paid by State Grid Company and the remaining part (RMB0.622/kWh) will be paid as an additional tariff by central government through State Grid Company.

 

11.               This project is entitled to a total electricity price of RMB1.0/kWh, among which RMB0.3993/kWh is to be paid by State Grid Company and the remaining part (RMB0.6007/kWh) will be paid as an additional tariff by central government through State Grid Company.

 

12.               RMB1.6269/kWh is a total electricity price entitled to the project, among which RMB0.8289/kWh is the price for electricity sold to the company on whose property the PV project is located, RMB0.3780/kWh is the price for residual electricity connected to the grid, and RMB0.42/kWh is the national subsidy.

 

Solar Projects Under Construction*

 

Country		Our equity holding		Number of solar projects		Attributable capacity (MW)		Ground/Rooftop		Scheduled Connection date		FIT terms
U.K.		100	%	1		4.4		Ground		2017		1.2 ROCs
Japan		100	%	2		4.4		Ground		2017		JPY 36 per kWh
US		100	%	9		6.9		Ground		2018		<500kW: $0.238/kWh >500kW: $0.236/kWh 1
China		100	%	3		14.89		Rooftop and Ground		2017		0.98RMB/kWh
Total				15		30.79

 

---

1                    Intended by us to be BT projects as of December 31, 2016, and may be held as our IPP projects upon completion of construction if we determine that the return of owning the projects and selling electricity is more attractive.

 

As of December 31, 2016, the total capital expenditure incurred for our solar projects under construction amounted to approximately $18.5 million and we expect to incur additional $30 million to complete these projects. As the total capital expenditure may be affected by various factors including, among others, increases in cost of key equipment and materials, failure to obtain sufficient financing, unexpected engineering or environmental issues as well as changes in regulatory requirements, the actual total capital expenditure may deviate significantly from such estimates. We expect to finance construction of these projects using cash from our operations and private placements, bank borrowings, financial leases as well as other third-party financing options.

 

Solar Projects in Announced Pipeline*

 

·                   As of December 31, 2016, we were in the process of obtaining relevant regulatory approvals for the following self-developed solar products: 2.6 MW projects in Guangdong, 5 MW projects in Hubei, 12.26 MW projects in Jiangsu; 0.8 MW projects in Zhejiang; 6.5 MW project in Shandong; 30 MW project in Henan, China; 13.3 MW project in the U.S.; and 1.1 MW project in Japan.

 

*                  Our project portfolio excludes projects for which we provide EPC services but in which we do not own any equity interest or do not expect to acquire and excludes projects we have disposed of.

 

41

Table of Contents

 

Featured Markets

 

·                   China. We entered the Chinese market in 2014. As of December 31, 2016, we owned 11 solar projects in operation with a total capacity of 30.2 MW, located in Qinghai Province, Anhui Province, Shanghai Province, Jiangsu Province, and Jiangxi Province, China. We also had 57.2 MW of projects in announced pipeline as of December 31, 2016. In China, most of the projects in our portfolio are eligible to receive FIT.

 

·                   U.S. We have been present in the U.S. market since the commencement of our business. As of December 31, 2016, we had 6.9 MW of projects under construction and 13.3 MW of projects in announced pipeline.

 

·                   U.K. We entered the U.K. market in 2014. As of December 31, 2016, we owned 2 solar projects in operation with a total capacity of 8.1MW and we have 4.4MW of projects under construction. In the U.K., all of the projects in our portfolio are eligible for FIT.

 

·                   Greece. We entered the Greek market in 2014. As of December 31, 2016, we owned eight solar projects in operation with a total capacity of 26.6 MW. In Greece, all of the projects in our portfolio are eligible for FIT.

 

·                   Japan. We entered the Japanese market in 2014. We had 4.4 MW of solar projects under construction and 1.1 MW of solar projects in announced pipeline as of December 31, 2016. In Japan, all of our projects are eligible to receive FIT.

 

·                   Italy. We entered the Italian market in 2015. We had 4.3 MW of solar projects in operation as of December 31, 2016. In Italy, all of our projects are eligible to receive FIT.

 

The following table sets forth a breakdown of our net sales by geographic location of customers for the periods indicated:

 

		For the year ended December 31, 2016
		2014				2015				2016
		($ in thousands except percentage)
China		76,426		83.4	%	56,745		29.8	%	25,597		18.3	%
United Kingdom		—		—		50,345		26.4	%	694		0.0	%
Australia		—		—		35,418		18.6	%	81,241		57.9	%
United States		14,690		16.0	%	29,925		15.7	%	6,622		4.7	%
Greece		526		0.6	%	8,720		4.6	%	8,737		6.2	%
Japan		—		—		6,626		3.5	%	12,893		9.2	%
Italy		—		—		1,395		0.7	%	1,740		1.2	%
Germany		—				1,336		0.7	%	2,675		2.5	%
Total		91,642		100.0	%	190,510		100.0	%	140,199		100.0	%

 

Acquisition of Solar Projects

 

We made significant acquisitions of solar projects in 2014 and 2015. See “Item 5. Operating and Financial Review and Prospects—Operating Results—Recent Acquisition Activities” on the projects we have acquired or expect to acquire. We may keep acquiring completed solar projects or other assets from independent third-parties which we believe will synergize with our existing operations and expansion strategies Those acquisitions would be preapproved by our board.

 

Our board of directors has formulated a uniform standard for assessing target assets with respect to the acquisition of solar projects, and such standard may be adjusted based on our Company’s business, financial condition and results of operations from time to time. Our board of directors considers the following criteria when assessing potential acquisitions, among others:

 

·                   the internal rate of return of the project prior to leverage, taking into consideration applicable FIT or PPA rate, and other applicable government incentives;

 

42

Table of Contents

 

·                   our ratio of debt-service coverage;

 

·                   the solar irradiation hours of the project, after discounting for performance;

 

·                   the use of financeable and reliable brands for and technical specifications of the key components, including modules, invertors, mounting systems, racks/tracking systems, and EPC integration services;

 

·                   any performance guarantees required, as well as any compensation for failing to perform;

 

·                   clear and trustworthy opinions from third-party professionals after detailed technical, financial, tax and legal due diligence; and

 

·                   reasonable payment terms matching relevant milestones.

 

Market Due Diligence

 

We aim to select solar projects located at sites with long solar irradiation hours, high energy demand, good supporting infrastructure, favorable tariff regimes, local government support and appropriate topography for construction. We systematically analyze land cost, solar irradiation, grid connection capacity, land and property status, government support, availability of project financing and any other project information that would impact the overall economic return of the project. We target projects that we believe to have appropriate balance of financial returns, costs and risks.

 

Permit Development Process

 

The permit development process is the process of obtaining all required permits, certifications and approvals from relevant government authorities for solar project development. As of December 31, 2016, most of our solar projects in operation had been undertaken by us as a secondary developer.

 

We acquire solar projects under development by third parties which have secured land use rights, development permits, or even begun construction. We typically learn about potential projects suitable for secondary development from our business partners, national or local governments, industry publications, overseas engineering exhibitions or overseas business liaison organizations. Our criteria for sourcing solar projects include land cost, solar irradiation, availability of FIT benefits or other government incentives, grid connection capacity, local financing opportunities and other project information. The selection process involves detailed due diligence into those third parties’ relevant company documentation, financial projections and the legal status of permits already secured by the project.

 

After an acquisition, we continue to develop the project through grid connection as our own. We pursue secondary permit development in markets with relatively liquid markets for energy permits transfer, thus allowing a smooth transfer of pre-operational solar assets from third-party developers to us. Under certain circumstances, we negotiate site acquisition, preliminary permits, grid connection agreements and PPAs for projects under our secondary development model depending on the development stage when we acquire them.

 

Permit Development Steps

 

The following sets forth each step of our permit development:

 

·                   Evaluating project sites and location —The critical factors for evaluating the site of a solar project include its solar irradiation, its proximity to a grid connection point, zoning regulations and its general geographic and topographic features. If a project site is suitable for development or acquisition, our regional development team submits a site assessment report on the land and other related information to our management for evaluation and approval.

 

·                   Due diligence —Our in-house technical and EPC team, along with third-party experts we contract as needed, examine project items such as engineering and design specifications, technical risks and solar irradiation and environmental analyses. We pay special attentions to potential delays and cost overruns, grid capacity and additional costs which may not be captured in the technical design. We also ensure that a project has clean legal titles to the permits and other permissions it has secured. In all cases, we ensure that local regulations allow us to properly carry out our business intentions for a project, whether by allowing us to hold the project under our IPP model or transfer it under our BT model.

 

43

Table of Contents

 

·                   Market considerations —We target projects which have appropriate balance of financial returns, costs and risks. Important factors include, the costs of maintenance, local taxes and fees, and the availability of applicable FIT, local credit or other refinancing options. Our financial teams conduct financial forecasts based on information about the financial prospects of the solar project and the local energy market to make a profitability estimate and adjust our capital plan accordingly.

 

·                   Permitting —Permit and licensing requirements vary depending on the jurisdiction of the solar project, but the key permits, licenses and agreements typically required for solar projects include land acquisition or lease contracts, environmental impact assessments, building or rezoning permits, planning consents, grid connection contracts and PPAs. We work closely with relevant government and private stakeholders to secure all necessary permits to develop a project, including local or regional planning authorities, electric utilities, local communities, environmental agencies, as well as health and safety agencies.

 

Project Financing

 

A solar project sponsor typically sets up a project company as a special purpose vehicle to own a particular solar project and arrange for project financing. We typically enter into contracts and other agreements under the name of the project company, which facilitates project financing by isolating the project and its assets, and any potential securitization requirements, from our broader global business.

 

The construction cost of a project is mainly funded by our working capital, and to a lesser extent, funded through Solarbao and bank borrowings in the year ended December 31, 2016. We seek to negotiate favorable credit terms with our equipment suppliers and EPC contractors when possible, such that payment is not due until several months after construction and grid connection are complete. While the exact mix of external and internal financing varies from project to project, we estimate that as of December 31, 2016, approximately 50% to 60% of the total costs of our solar projects under construction were funded by our working capital, with the remainder funded through the Solarbao platform and via bank borrowings. Our working capital dedicated towards a particular project would be generally available to us for other purposes if needed, and would not be considered restricted cash isolated at that project. We also have given guarantees to the lenders on certain project financings. However, none of our cash and cash equivalents have been collateralized to guarantee such project financings.

 

We generally seek to arrange debt financing for our solar projects from local banks and financial leasing companies in countries that are more open and receptive to renewable energy investments, such as China, where we primarily work with reputable banking institutions such as Bank of Suzhou Co., Ltd. For example, we currently has a credit line of RMB 17.8 million with Bank of Suzhou Co., Ltd. In March 28, 2016, we entered into a 10-year leasing agreement with China Kangfu International Leasing Co., Ltd. and obtained financing of RMB140 million ($21.6 million) from it.

 

Engineering, Procurement and Construction

 

Given the multi-jurisdiction coverage of our project portfolio, we choose to utilize our EPC capabilities or contract third party EPC contractors to service our own projects, based on our cost analysis taking into consideration of locations, topographical conditions as well as the quality and competition of local EPC service providers. For detailed information on our EPC capabilities, see “—Our Engineering, Procurement and Construction Service Business.”

 

Operation and Maintenance Business

 

We operate and maintain solar projects connected to the grid, especially those we have provided EPC services to. We regularly maintain solar projects for our customers to ensure that these projects operate in good condition and comply with the recommendations issued by the grid company in order to remain connected. We utilize specialized software to monitor the performance and security of the solar projects on a real-time basis.

 

By operating the projects effectively and efficiently, we reduce down time and increase electricity output. A project’s major lifecycle costs mainly consist of maintenance fee and depreciation of modules, inverters and transformers. We monitor electricity production and any incidents or abnormalities which may impede normal operation. We adjust production levels based on the available capacity of the grid.

 

44

Table of Contents

 

E-Commerce and Investment Business

 

The Solarbao platform was launched in early 2015. Starting from April 18, 2017, we have ceased offering new investment products to investors and stopped accepting new investments. Legal proceedings, including but not limited to civil and criminal, may be brought against us if we fail to timely pay the investors in full or if we violate any laws or regulations, which may materially and adversely affect our business, brand, reputation, prospects, financial condition and results of operations. For a detailed discussion, please see “Item 3. Key Information—D. Risk factors—The operations of our e-commerce and investment business platform have been unsuccessful.” The Solarbao platform offers a variety of functions, including primarily:

 

·                   an e-commerce services function, where new energy project holders may obtain financing by transferring ownership of relevant equipment to online investors;

 

·                   an entrusted leasing function, where at the time the online investors obtain the relevant equipment from the new energy project holders, the online investors can lease the equipment back to the new energy project holders through the Solarbao platform and its partner financial leasing companies. New energy project holders would pay rental income to the online investors with earnings from operating the new energy project;

 

·                   a leased asset trading function, where we introduce investment institutions to act as market makers, including purchasing the leased asset that online investors obtained from new energy project holders. We also provide product packaging and resale services to the market makers; and

 

·                   an Internet financing channel (www.solarbao.com), through which we and third parties (including developers of new energy project such as PV projects) obtain project funding through purchasing equipment (such as modules and inverters) from manufacturers, and subsequently onselling to and leasing back from investors the equipment with a specified rate of return.

 

Under various functions of our e-commerce and investment platform, we expect that our revenue streams will include i) the difference between the returns on our PV projects and the returns that the investors are entitled to, ii) the profit of purchasing PV modules from manufacturers and selling them to PV project developers, pre-agreed platform utilization commissions from investors when they transfer their ownerships in PV modules, iii) rental income that financial institutions receive when acting as market makers for third-party projects, and iv) pre-agreed commissions from third-party project developers when they utilize the platform as a financing channel, among others.

 

For each transaction on the Solarbao platform, the investor’s ownership is evidenced by an electronic contract (the “Sales Contract”) among (a) the Company’s financial leasing subsidiary, Jiangsu Solarbao Leasing Co. Ltd., (b) the project holder (which is either a third-party project developer or one of our project companies), and (c) the investor. The Sales Contract provides, among others, (i) the purchase of equipment (such as modules and inverters) by the investor, and (ii) immediately after the purchase of the equipment, the leasing of the equipment by the investor back to the project holder. After the lock-up period expires, an investor has the following options to transfer his or her ownership of the equipment: (a) during the term of the Sales Contract, the investor may transfer the ownership of the equipment to (i) other online investors, or (ii) investment institutions who act as market makers through Solarbao; or (b) upon expiration of the Sales Contract, the project holder is legally obligated to purchase the equipment from the investor by paying the residual value of the principal and unpaid interest under the leaseback arrangement, if any. Pursuant to the Sales Contracts, the project holders are obligated to purchase the equipment from the investors at the expiration of the leasing period. The investors are entitled to terminate the Sales Contracts if the Company’s financial leasing subsidiary or the project holders default on their obligations therein and fail to rectify such default within a prescribed time period and demand reimbursement from the defaulting parties. Upon termination of the Sales Contracts due to such default, the investors have the following options with respect to their ownership of the equipment: (i) taking possession of the equipment, (ii) leasing the equipment to other project holders through Solarbao, (iii) transferring the equipment to other investors, or (iv) selling the equipment to certain investment institution of the Company who acts as a market maker through Solarbao, if the Sales Contracts so stipulate.

 

45

Table of Contents

 

Foreign ownership of internet-based businesses is subject to significant restrictions under current PRC laws and regulations. The PRC government regulates the conduct of online commerce through strict business licensing requirements and other government regulations. These laws and regulations also limit foreign ownership in PRC companies that provide internet information distribution services. Companies operating Internet-based businesses such as the www.solarbao.com e-commerce and investment platform primarily targeting retail customers in China and www.solartao.com are governed by these rules and regulations in China.

 

According to the Administrative Rules for Foreign Investments in Telecommunications Enterprises (the “FITE Regulations”) issued by the State Council of the PRC on December 11, 2001 and amended on February 6, 2016, foreign investors’ ultimate equity ownership in an entity in the PRC providing value-added telecommunications services shall not exceed 50% and a foreign investor wishing to acquire any equity interest in a value-added telecommunications business in the PRC must demonstrate (i) a good track record, and (ii) experience in providing value-added telecommunications services. In accordance with the Catalog of Industries for Guiding Foreign Investment (2011 Revision) (the “Old Catalog”), our e-commerce business, which is defined as a type of value-added telecommunication services, is classified into “Catalog of industries in which foreign investment is restricted.” On March 10, 2015, the Ministry of Commerce of the PRC, or MOFCOM, and National Development and Reform Commission of the PRC published the Catalog of Industries for Guiding Foreign Investment (2015 Revision) (the “2015 Catalog”) which took effect on April 10, 2015 and replaced by the Catalog of Industries for Guiding Foreign Investment (2017 Revision) (the “2017 Catalog”) released on June 28, 2017. In the 2015 Catalog and 2017 Catalog, e-commerce, as opposed to other value-added telecommunication services, is exempted from the restricted category. However, this new change has not been reflected in the FITE Regulations by any amendment, thus we should still rely on the contractual arrangement among our PRC subsidiary, Meijv and its shareholders for the operation of the e-commerce business in order to comply with the FITE Regulations.

 

On January 19, 2015, the Ministry of Commerce of the PRC, or MOFCOM, published a draft of the PRC Law on Foreign Investment (Draft for Comment), or the Draft Foreign Investment Law, for which the comment period ended on February 17, 2015. At the same time, MOFCOM published an accompanying explanatory note of the Draft Foreign Investment Law, or the Explanatory Note, which contains important information about the Draft Foreign Investment Law, including its drafting philosophy and principles, main content, plans to transition to the new legal regime and treatment of business in China controlled by foreign invested enterprises, or FIEs, primarily through contractual arrangements. The Draft Foreign Investment Law is intended to replace the current foreign investment legal regime consisting of three laws: the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-Invested Enterprise Law, as well as detailed implementing rules. The Draft Foreign Investment Law proposes significant changes to the PRC foreign investment legal regime. The proposed Draft Foreign Investment Law is to regulate FIEs the same way as PRC domestic entities, except for those FIEs that operate in industries deemed to be either “restricted” or “prohibited” in a “Negative List.” Because the Negative List has yet to be published, it is unclear whether it will differ from the current list of industries subject to restrictions or prohibitions on foreign investment. The Draft Foreign Investment Law also provides that only FIEs operating in industries on the Negative List will require entry clearance and other approvals that are not required of PRC domestic entities. As a result of the entry clearance and approvals, certain FIEs’ operating in industries on the Negative List may not be able to continue to conduct their operations through contractual arrangements. There is substantial uncertainty regarding the Draft Foreign Investment Law, including, among others, what the actual content of the law will be as well as the adoption and effective date of the final form of the law. While such uncertainty exists, we cannot assure you that the new foreign investment law, when it is adopted and becomes effective, will not have a material and adverse effect on our ability to conduct the e-commerce business through our contractual arrangements.

 

Since we are a Cayman Islands company and due to PRC governmental restrictions on foreign investment in internet-based business in China, Solar Energy E-Commerce was established in late 2014 and commenced operation in early 2015. Solar Energy E-Commerce operated www.solarbao.com e-commerce and investment platform which primarily targets retail customers residing in China. Our PRC subsidiary, Yan Hua Internet, entered into a series of contractual arrangements with Solar Energy E-Commerce and its shareholders on March 26, 2015. Legal enforceability of these contractual arrangements has not been established, primarily because the registration of the equity interest pledge agreement with the relevant PRC government authority has not been completed as one of the legal shareholder’s equity in Solar Energy E-Commerce is restricted from pledge and transfer, making us unable to legally enforce our right under the equity interest pledge agreements and potentially other agreements. As a result, Solar Energy E-Commerce was not consolidated into our financial statements as of and for the year ended December 31, 2015. We have established a new corporate structure for the e-commerce business under which Solarbao has been migrated into a domestic company, Meijv, since April 2016 and Yan Hua Internet has entered into a new set of contractual arrangements on March 17, 2016, including an equity interest pledge agreement, with Meijv and Youying. We have registered the equity interest pledge agreement with the relevant PRC government authority on March 17, 2016. Mr. Min Xiahou, Mr. Tairan Guo, Youying and Yan Hua Internet have entered into a set of contractual arrangements on May 11, 2017, including an equity interest pledge agreement, similar to those entered among Yan Hua Internet, Youying and Meijv. As the 100% shareholder of Meijv, Youying has pledged its equity interests in Meijv and register this equity pledge with the relevant PRC government authority, and the legal enforceability of the contractual agreements is established. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with Solar Energy E-Commerce and Its Shareholders” and “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with Meijv and Its Shareholders.”

 

46

Table of Contents

 

We believe that the current corporate structure of Solarbao and the anticipated restructuring are in compliance with existing PRC laws, rules and regulations.

 

Our Australia Distribution Business

 

Solar Juice Pty Limited or Solar Juice, our subsidiary with a focus on PV products and storage systems in Australia and Southeast Asia, has grown substantially in 2016.

 

For more information on our acquisition of Solar Juice, see “Item 5. Operating and Financial Review and Prospects—Operating Results—Recent Acquisition Activities.”

 

Our Partnership with Energy Storage Solution Provider

 

See “Item 5. Operating and Financial Review and Prospects—Operating Results—Recent Acquisition Activities—Other Solar Businesses— EnSync Acquisition.”

 

Our Partnership with Electric Vehicle Rental Service Provider

 

See “Item 5. Operating and Financial Review and Prospects—Operating Results—Recent Acquisition Activities—Other Solar Businesses— Acquisition of Dingding Yiwei.”

 

Competition

 

The solar power market is intensely competitive and rapidly evolving, and we compete with major international and domestic companies over the development of solar projects. Our major competitors include leading global players such as SunPower Corporation, First Solar, Inc., Canadian Solar, Inc., SunEdison, Inc., SolarCity Corporation, Lightsource Renewable Energy Limited, and regional players such as West Holdings Corporation, Looop Inc., Zhenfa New Energy Science and Technology Co. Ltd., TBEA Sunoasis Co. Ltd., China Power Investment Corporation and other regional and international developers.

 

We believe that we can compete favorably with our competitors given that the key competitive factors for solar project development and operation include, without limitation:

 

·                   industry reputation and development track record;

 

·                   site selection and acquisition;

 

·                   permit and project development experience and expertise;

 

·                   relationship with government authorities and knowledge of local policies;

 

·                   ability to secure high-quality PV modules and balance-of-system components at favorable prices and terms;

 

·                   ready access to project financing;

 

·                   control over the quality, efficiency and reliability of project development;

 

·                   expertise in permit and project development; and

 

·                   expertise in providing EPC and O&M services.

 

47

Table of Contents

 

However, we cannot guarantee that some of our competitors do not or will not have advantages over us in terms of greater operational, financial, technical, management or other resources in particular markets or in general. In terms of the broader energy sector, the entire solar industry faces competition from other power generation sources, including conventional sources as well as other emerging technologies. Solar power has certain advantages and disadvantages when compared to other power generating technologies. The advantages include the ability to deploy products in many sizes and configurations, install products almost anywhere in the world, provide reliable power for many applications and reduce air, water and noise pollution. Yet other energy sources have advantages which may result in electric utilities, grid companies or other off-takers to enter PPAs or other electricity purchase arrangements with companies specializing in those energy sources rather than us or other companies specializing in solar power.

 

Suppliers

 

There are numerous suppliers of PV modules in the industry, and we have adopted a supplier-neutral approach. For both our EPC service business and global project development business, we select the suppliers based on whether we could obtain high-quality PV modules and balance-of-system components at favorable prices and payment terms. For both our EPC service and global project development business, we procure our PV modules from a broad range of suppliers including Hanwha Q CELLS Co., Ltd., CECEP Solar Energy Technology Co., Ltd., Znshine PV-tech Co., Ltd., Lightway Green New Energy Co., Ltd., Renesola America, Inc., and LDK, among others.

 

Customers and Marketing

 

We have historically provided EPC and O&M services, a line of business we are still engaged in. We are also selling electricity to the grid under our IPP model as well as selling solar projects under our BT model. Customers of our EPC services include independent power developers and producers as well as commercial and industrial companies. For our global project development business, we sell electricity to power companies and other electricity off-takers, including government-owned utility companies, operating in the United States, China, Greece and Italy under our IPP model. Purchasers of our BT projects included utility companies, independent power developers and producers, commercial and industrial companies as well as investors in the solar business. Further, customers of our Australia distribution business include residential ones, towards which we distribute PV modules, balance of system components, solar monitoring systems and inverters.

 

Although we derived substantially all of our revenue in 2013 and 2014 from provision of our EPC services, our revenue from sales of PV solar systems accounted for the largest portion of our total revenue and we expect to increase the percentage of revenue generated from our global project development business. For detailed information about our EPC customers in 2014 and 2015, see “—Our Engineering, Procurement and Construction Service Business.”

 

We promote our reputation by participating in industry conferences worldwide and aggressively sourcing development opportunities in markets with strong growth potential. Members of our senior and local management team routinely meet with industry players and interested investors. Our business development teams around the world have significant experience building business in local markets and actively pursue growth opportunities around the world. We intend to continue to increase our marketing efforts going forward.

 

We historically engaged in high-profile marketing activities focused on developing our brand awareness not just among the solar business developers who have traditionally been our customers, but also among the general public. For example, in 2009, then-Governor Arnold Schwarzenegger made a speech at one of our 40-acre solar projects outside Sacramento, a media opportunity that we embraced to build our brand awareness.

 

48

Table of Contents

 

As we shift our business towards global project development and the expansion of our EPC business in China, we have continued to embrace unique marketing strategies. In 2015, we announced a partnership with the Sacramento Kings basketball team under which we will install a rooftop solar system on the Kings’ Entertainment and Sports Center in downtown Sacramento. The project was completed in October 2016. The Kings will also add brand support to the Solarbao e-commerce and investment platform, where we have also engaged with the famous Chinese pianist Lang Lang to act as spokesman for this new and exciting brand. Our contract period with Lang Lang is from January 30, 2015 to January 30, 2018. Pursuant to the contract, Lang Lang was hired as spokesman of Solarbao to promote Solarbao e-commerce and investment platform. Lang Lang should provide the following services: to film at least one print advertisement and one video advertisement and attend at least one company PR promotion activity every year; during the contract period, attend at least one noncommercial event. We have the right to publish three video advertisements and three print advertisements featuring Lang Lang. We may use Lang Lang’s image in commercial advertisements during the contract period, including photos, signature, voice and etc. The total contract amount is $2.9 million with the following payment terms: 25% ($0.7 million) paid in cash in January 2015, another 25% ($0.7 million) paid in our ordinary shares in June 2015, and the remaining 50% to be settled in cash ($0.7 million of which can be settled in ordinary shares of the Company at Lang Lang’s demand) in late 2016. For all share settlements, the number of shares is determined based on the average market price of 90 days before the issuance/payment date. However, we are not in active cooperation with the Sacramento Kings on this initiative, as we intended to terminate our partnership. In addition, we terminated the contract with Lang Lang.

 

With respect to the advertising costs and expenses under the sponsorship, we expense the costs of producing advertisements as incurred. Regarding the sponsorships of events, the sponsorship amounts are amortized over the period during which the performance under the sponsorship is received. In addition, we have undertaken “red packet” promotions, where we offered rebates on orders placed on Solarbao during Chinese New Year holiday in 2015 and other retail marketing programs in China to build brand awareness among the investors and individuals that we are targeting with the Solarbao platform and EPC services.

 

Seasonality

 

Demand for solar power products tends to be weaker during the winter months partly due to adverse weather conditions in certain regions, which complicate the installation of solar power systems. Our operating results may fluctuate from period to period based on the seasonality of industry demand for solar power products. Our sales in the first quarter of any year may also be affected by the occurrence of the Chinese New Year holiday during which domestic industrial activity is normally lower than that at other times. Certain aspects of our operations are also subject to seasonal variations. For example, we may schedule significant construction activities to connect solar projects to the grids prior to a scheduled decrease in FIT rates in order to qualify for more favorable FIT policies.

 

Insurance

 

We maintain the types and amounts of insurance coverage that we believe are consistent with customary industry practices in all the countries where we operate. Our insurance policies cover employee-related accidents and injuries, property damage, machinery breakdowns, fixed assets, facilities and liability deriving from our activities, including environmental liability. We maintain business interruption insurance for interruptions resulting from incidents covered by insurance policies. We have not had any material claims under our insurance policies that would either invalidate our insurance policies or cause a material increase to our insurance premiums. We cannot assure you, however, that our insurance coverage will adequately protect us from all risks that may arise or in amounts sufficient to prevent any material loss.

 

Regulations

 

We operate in multiple jurisdictions, including China, the U.S., Japan, the U.K, Greece, Germany, Italy and Australia. We are therefore subject to complex laws, regulations and policies promulgated by the governments and government-run utilities of these jurisdictions, including FIT regulations, clean energy incentive rules and programs, laws and regulations that apply to all power producers, regulations that specifically apply to solar power project operators, EPC service providers as well as solar kit distributors, tax regulations and intellectual property laws, among others. We are also subject to a number of PRC laws governing foreign investment in various sectors in China. Pursuant to the Revised Catalog which took effect on July 28, 2017, our business as a provider of EPC services to solar projects as well as developing, owning and operating solar projects is classified into “catalog of industries in which foreign investment is encouraged,” such as construction and operation of new energy power stations (including, among others, solar energy, geothermal energy, tidal energy, wave energy, garbage energy, biogas energy and wind energy). In the Revised Catalog, e-commerce, as opposed to other value-added telecommunication services, is exempted from the restricted category. However, this new change has not been reflected in the FITE Regulations by any amendment, thus we should still rely on the contractual arrangement among our PRC subsidiary, Meijv and its shareholders for the operation of the e-commerce business in order to comply with the FITE Regulations.

 

49

Table of Contents

 

This section sets forth a summary of the most significant regulations or requirements that affect our business activities in China or our shareholders’ right to receive dividends and other distributions from us.

 

Renewable Energy Law and Other Government Directives

 

The Renewable Energy Law , which originally became effective on January 1, 2006 and was amended on December 26, 2009, sets forth policies to encourage the development and on-grid application of solar energy and other renewable energy. The law also sets forth a national policy to encourage the installation and use of solar energy water heating systems, solar energy heating and cooling systems, PV systems and other systems that use solar energy. It also provides financial incentives, such as national funding, preferential loans and tax preferential treatment for the development of renewable energy projects and authorizes the relevant pricing authorities to set favorable prices for electricity generated from solar and other renewable energy sources.

 

The PRC Energy Conservation Law , which was amended on October 28, 2007 and came into effect on July 2, 2016, encourages the utilization and installation of solar power facilities on buildings for energy-efficiency purposes. The law also encourages and supports the development of solar energy system in rural areas.

 

On September 4, 2006, the MOF and Ministry of Construction jointly promulgated the Interim Measures for Administration of Special Funds for Application of Renewable Energy in Building Construction , pursuant to which the MOF will arrange special funds to support the application of Building Integrated Photovoltaics systems, or BIPV applications, to enhance building energy efficiency, protect the environment and reduce consumption of fossil fuel energy. Under these measures, applications to provide hot water supply, refrigeration, heating and lighting are eligible for such special funds.

 

On October 10, 2010, the State Council of China promulgated a decision to accelerate the development of seven strategic new industries. Pursuant to this decision, the PRC government will promote the popularization and application of solar thermal technologies by increasing tax and financial policy support, encouraging investment and providing other forms of beneficial support.

 

On March 8, 2011, the MOF and the Ministry of Housing and Urban-Rural Development jointly promulgated the Notice on Further Application of Renewable Energy in Building Construction to increase the utilization of renewable energy in buildings.

 

On March 27, 2011, the NDRC promulgated the revised Guideline Catalog for Industrial Restructuring which categorizes the solar power industry as an encouraged item. On February 16, 2013, the NDRC promulgated the 2013 revised Guideline Catalog for Industrial Restructuring to be effective on May 1, 2013, the solar power industry is still categorized as an encouraged item.

 

On December 16, 2011, the MOF and Ministry of Housing and Urban-Rural Development jointly released a notice regarding the application of PV technology in building structures, pursuant to which the PRC government offers subsidies ranging from RMB7.5 to RMB9.0 per watt for BIPV projects. The construction of such BIPV projects must be completed in 2012.

 

On February 24, 2012, the MIIT released the 12th Five-Year Plan for the Solar Photovoltaic Industry . According to the industry plan, China will reduce the cost of solar power to 0.8 yuan (12 U.S. cents) per kilowatt-hour by 2015 and 0.6 yuan per kWh by 2020 and increase production of solar panels.

 

In response to the increased pace of market development, the PRC State Council, in a statement dated July 4, 2013, announced that installed capacity for solar electricity is expected to reach more than 35 GW by 2015 at a growth rate of about 10 GW a year between now and then, and to reach more than 100 GW by 2020. The PRC State Council also described principles promoting the PV industry through (i) the exploration of the distributed PV power generation market, (ii) the improvement to the grid connection management and service, in particular for PV power generation, (iii) the improvement to pricing and subsidy policies and development of fund for renewable energy and (iv) support from the financial institutions to the PV industry, among other matters.

 

On January 17, 2014, China’s National Energy Administration (the NEA) issued the Notice on Targets for the Increase in PV Power Generation Capacity for 2014 , and announced that the total target for the increase in PV power generation capacity for 2014 will be 14 GW, of which 8 GW will be reserved for distributed power generation and 6 GW will be reserved for power generation by solar power projects.

 

50

Table of Contents

 

On March 16, 2015, the NEA promulgated the Circular on Implementation Plans of PV Generation Construction for 2015 , which revised China’s 2015 solar electricity installation target upwards by 20% to 17.8 GW of capacity for ground-mounted projects and indicated that rooftop DG projects would no longer be subject to a quota.

 

In March 2016, the National People’s Congress approved the Outline of the Thirteenth Five-Year Plan for National Economic and Social Development of the PRC , which includes a national commitment to promote the development of renewable energy and enhancing the competitiveness of the renewable energy industry. Accordingly, in June 2016, the Ministry of Industry and Information Technology promulgated the Industrial Green Development Plan (2016-2020) to support the development of the PRC solar power industry.

 

On June 3, 2016, the NEA promulgated the Circular on Implementation Plans of PV Generation Construction for 2016 , and announced that the total target for the increase in PV power generation capacity for 2016 will be 18.1 GW, of which 12.6 GW will be reserved for ordinary PV power plant projects and 5.5 GW will be reserved for PV leading technology bases.

 

On November 29, 2016, the State Council released the 13th Five-Year Development Plan for National Strategic New Industries . According to this document, by 2020, the total installed capacity of PV generation will achieve 105 GW. This document also set forth the major policies to be promulgated for promoting the development of solar power industry.

 

On December 8, 2016, the NEA officially released the 13th Five-Year Plan on Solar Power Development .  In the document, the NEA stated that by 2020, the total installed capacity of distributed PV generation will achieve 105 GW in China.

 

On December 26, 2016, the NDRC and NEA jointly issued the 13th Five-Year Plan for Energy Development , which demonstrated a commitment to solar energy. It proposed that by the end of 2020, there should be 110 GW of installed solar power capacity. In addition, the Plan also encouraged and promoted the development of distributed PV power generation.

 

On February 10, 2017, the NEA promulgated the Circular on Printing and Distributing the Guidance on Energy Work in 2017 , which promotes the photovoltaic, thermal power project construction.  According to this circular, the government plans to start the new construction scale of 20 million kilowatts and the new installed capacity of 18 million kilowatts in 2017.

 

Laws and Regulations Concerning the Electric Power Industry

 

The regulatory framework of the PRC power industry consists primarily of the Electric Power Law of the PRC , which became effective on April 1, 1996 (subsequently revised effective in 2009 and 2015) and the Electric Power Regulatory Ordinance, which became effective on May 1, 2005. One of the stated purposes of the Electric Power Law is to protect the legitimate interests of investors, operators and users and to ensure the safety of power operations. According to the Electric Power Law, the PRC government encourages PRC and foreign investment in the power industry. The Electric Power Regulatory Ordinance sets forth regulatory requirements for many aspects of the power industry, including, among others, the issuance of electric power business permits, the regulatory inspections of power generators and grid companies and the legal liabilities for violations of the regulatory requirements.

 

Obtaining the Electric Power Business Permit

 

On January 5, 2006, the NDRC promulgated the Administrative Provisions on Renewable Energy Power Generation which set forth specific measures for setting the price of electricity generated from renewable energy sources, including solar and for allocating the costs associated with renewable power generation. The Administrative Provisions on Renewable Energy Power Generation also delegate administrative and supervisory authority among government agencies at the national and provincial levels and assign partial responsibility to electricity grid companies and power generation companies for implementing the Renewable Energy Law.

 

51

Table of Contents

 

Pursuant to the Provisions on the Administration of the Electric Power Business Permit , which were issued by the SERC and became effective on December 1, 2005 (subsequently amended on May 30, 2015), unless otherwise provided by the SERC, no company or individual in the PRC may engage in any aspect of electric power business (including power generation, transmission, dispatch and sales) without first obtaining an electric power business permit from the SERC. These provisions also require that if an applicant seeks an electric power business permit to engage in power generation, it must also obtain in advance all relevant government approvals for the project including construction, generation capacity and environmental compliance.

 

However, there are exceptions which our certain PV Power Generation Projects may not need obtain an electric power business permit from the SERC. On July 18, 2013, the NDRC issued the Interim Measures for the Administration of Distributed PV Power Generation , which waived the previous requirement to obtain an Electric Power Business Permit for DG projects. On April 9, 2014, the NEA issued the Circular on Clarifying Issues concerning the Administration of Electric Power Business Permit , which waived requirement to obtain an Electric Power Business Permit for those solar power generation projects with installed capacity less than 6 MW and any DG projects approved by or filed with the NDRC or its local branches, and required local NEA to simplify the Electric Power Business Permit application procedure for the solar power generation companies.

 

Obtaining the Construction Engineering Qualifications and Permit

 

Pursuant to the Construction Law which was promulgated by the Ministry of Construction on November 1, 1997 and amended on April 22, 2011, the Regulation on Administration on Qualifications to Survey and Design Construction Engineering which became effective on September 1, 2007, as amended on May 4, 2015, the Ordinance on Administration on Survey and Design of Construction Engineering which became effective on September 25, 2000, as amended on June 12, 2015, an enterprise engaged in the design and engineering work for an electric power project must obtain a qualification certificate and must conduct its work within the strict design scope set forth in its certificate. An enterprise conducting design or engineering work without first obtaining the qualification certificate or an enterprise that has obtained the qualification certificate but exceeds the permitted design scope may be subject to action by the relevant authorities, including monetary penalties, rescission of its certification or confiscation of all illicit gains.

 

Pursuant to the Provisions on the Administration of Permits of Installation, Repair, and Test of Electric Power Facilities , which were promulgated by the SERC and became effective on March 1, 2005, as amended on December 18, 2009 and May 30, 2015, any entity or individual engaged in installing, repairing or testing of electric power facilities in the PRC must obtain a permit unless otherwise exempted by the SERC. There are three categories of permits and each category is further subdivided into five levels. Each category represents a specific range of activity i.e ., installation, repair and testing. Each level denotes the maximum voltage level of an electric facility that a permit holder may work with. To apply for a permit, an applicant must submit the application to the local branch of SERC. A permit holder may also apply to change either the permitted matter, which is the category or level of the permit, or the registered matter, which is the name, legal address, legal representative and other pertinent matters. A permit is valid for six years and can be renewed.

 

Grid Connection and Dispatch

 

All electric power generated in China is distributed through power grids, except for electric power generated by facilities not connected to a grid. The distribution of power to each grid is administered by dispatch centers, which the administration and dispatch of planned output by power plants connected to the grid. The Regulations on the Administration of Electric Power Dispatch to Networks and Grids , promulgated by the State Council and the former Ministry of Electric Power Industry, effective on November 1, 1993, as amended on January 8, 2011, and its implementation measures, regulate the operation of dispatch centers.

 

52

Table of Contents

 

Internet Finance and Illegal Public Fund-raising

 

While China’s traditional financial system operates under a sophisticated regulatory regime, the regulatory framework for internet finance has only developed since 2010. The Guiding Opinions on Promoting the Healthy Development of Internet Finance 2015 , or the 2015 Internet Finance Guidelines, is the first formal and comprehensive guideline to regulate the emerging internet finance industry in China. The guideline explains how China’s financial and internet regulations would apply to the country’s growing internet finance industry.  The 2015 Internet Finance Guidelines defines internet finance as a new financial business model whereby traditional financial institutions and internet enterprises use internet technology together with information and communications technologies to provide financing, payment, investment and information intermediary services, including: third party payment service, online lending, that is, individual online peer-to-peer (P2P) lending, equity crowdfunding, online fund sales, online insurance, online trust and online consumer finance. The business carried out by the Solarbao platform is new, not within the scope of the aforementioned 7 kinds of internet financial products. However, we still need to follow the general principles and rules set forth in the 2015 Internet Finance Guidelines, such as strengthening the information and risk disclosure, protecting the rights and interests of users, increasing the internet and information security level of the platform and performing the anti-money laundering obligations, which are applied to all internet finance areas.

 

In 2016, the State Council released the Plan to Implement Special Rectification Work on Internet Finance Risks 2016 , or the 2016 Internet Finance Rectification Plan. This plan seeks to standardize the regulation and supervision of internet finance by balancing the often competing goals of protecting consumers and encouraging financial innovation and intends to launch a nationwide campaign to deal with non-compliance in this area. However, this plan only addresses certain high-level principles.

 

As the 2015 Internet Finance Guidelines and the 2016 Internet Finance Rectification Plan are high-level principles only, details of the regulatory regime are provided in a complicated patchwork of implementing legislation published subsequently by various regulatory agencies within their respective jurisdictions.

 

Raising funds by entities or individuals from the general public must be conducted in strict compliance with applicable PRC laws and regulations to avoid administrative and criminal liabilities. The Measures for the Banning of Illegal Financial Institutions and Illegal Financial Business Operations promulgated by the State Council in July 1998, and the Notice on Relevant Issues Concerning the Penalty on Illegal Fund-Raising issued by the General Office of the State Council in July 2007 explicitly prohibit illegal public fund-raising. The main features of illegal public fund-raising include: (i) illegally soliciting and raising funds from the general public by means of issuing stocks, bonds, lotteries or other securities without obtaining the approval of relevant authorities, (ii) promising a return of interest or profits or investment returns in cash, properties or other forms within a specified period of time, and (iii) using a legitimate form to disguise the unlawful purpose.

 

To further clarify the criminal charges and punishments relating to illegal public fund-raising, the Supreme People’s Court promulgated the Judicial Interpretations to Issues Concerning Applications of Laws for Trial of Criminal Cases on Illegal Fund-Raising, or the Illegal Fund-Raising Judicial Interpretations, which came into force in January 2011. The Illegal Fund-Raising Judicial Interpretations provide that a public fund-raising will constitute a criminal offense related to “illegally soliciting deposits from the public” under the PRC Criminal Law, if it meets all the following four criteria: (i) the fund-raising has not been approved by the relevant authorities or is concealed under the guise of legitimate acts; (ii) the fund-raising employs general solicitation or advertising such as social media, promotion meetings, leafleting and short message service, or SMS, advertising; (iii) the fundraiser promises to repay, after a specified period of time, the capital and interests, or investment returns in cash, property in kind and other forms; and (iv) the fund-raising targets the general public as opposed to specific individuals. Pursuant to the Illegal Fund-Raising Judicial Interpretations, an offender that is an entity will be subject to criminal liabilities, if it illegally solicits deposits from the general public or illegally solicits deposits in disguised form (i) with the amount of deposits involved exceeding RMB1,000,000, (ii) with over 150 fund-raising targets involved, or (iii) with the direct economic loss caused to fund-raising targets exceeding RMB500,000, or (iv) the illegal fund-raising activities have caused baneful influences to the public or have led to other severe consequences. An individual offender is also subject to criminal liabilities but with lower thresholds. In addition, an individual or an entity who has aided in illegal fund-raising from the general public and charges fees, including but not limited to agent fees, rewards, rebates and commission, would constitute an accomplice of the crime of illegal fund-raising. In accordance with the Opinions of the Supreme People’s Court, the Supreme People’s Procurator and the Ministry of Public Security on Several Issues concerning the application of Law in the Illegal Fund-Raising Criminal Cases, administrative proceedings for determining the nature of illegal fund-raising activities is not a prerequisite procedure for the initiation of criminal proceeding concerning the crime of illegal fund-raising, and the administrative departments’ failure in determining the nature of illegal fund-raising activities does not affect the investigation, prosecution and trial of cases concerning the crime of illegal fund-raising.

 

53

Table of Contents

 

FIT and Subsidies

 

FIT Payments

 

The Renewable Energy Law of the PRC , which was amended on December 26, 2009 and became effective on April 1, 2010, sets forth policies to encourage the development and utilization of solar power and other renewable energy. The Renewable Energy Law authorizes the relevant pricing authorities to set favorable prices for electricity generated from solar and other renewable energy sources.

 

The Circular on Improving Policies on the On-grid Tariffs of Solar Power Generation , which was issued by the NDRC and became effective on July 24, 2011, provides that the FIT (including VAT) for solar power projects approved before July 1, 2011 that began operation before December 31, 2011 would be RMB1.15 per kWh and the FIT (including VAT) for solar power projects either approved after July 1, 2011 or completed after December 31, 2011 would be RMB1.00 per kWh (excluding on-grid solar power projects located in Tibet).

 

The NDRC further issued the Circular on Promoting the Healthy Development of PV Industry by Price Leverage on August 26, 2013, or the 2013 Circular. Under this circular, the FIT (including VAT) for solar power projects approved or filed after September 1, 2013 or beginning operation after January 1, 2014 would be RMB0.90 per kWh, RMB0.95 per kWh or RMB1.00 per kWh, depending on the locations of the projects (excluding on-grid solar power projects located in Tibet).

 

In addition, the 2013 Circular sets forth special rules that entitle DG projects (excluding the projects that have received an investment subsidy from the central budget) to a national subsidy of RMB0.42 per kWh. According to the Circular on Further Implementing Polices Relating to Distributed Generation issued by the NEA on September 2, 2014 and the Circular on Implementation Plans of PV Generation Construction for 2015 issued by the NEA on March 16, 2015 and the Circular on Implementation Plans of PV Generation Construction for 2016 issued by the NEA on June 3, 2016, rooftop DG projects that sell electricity directly to consumers or to both consumers and grid enterprises will receive a national subsidy of RMB0.42 per kWh plus the local desulphurized coal benchmark electricity price for the electricity sold to the State Grid or a negotiated electricity purchase price for electricity sold directly to consumers. Ground-mounted projects and rooftop DG projects which sell all electricity to grid enterprises are entitled to the FIT of RMB0.90 per kWh, RMB0.95 per kWh or RMB1.00 per kWh, depending on where the project is located (excluding on-grid solar power projects located in Tibet).

 

Pursuant to the Circular on Adjusting Benchmark On-grid Tariffs for Photovoltaic Power Generation Projects and Onshore Wind Power by the NDRC on December 26, 2016, the benchmark electricity price for the newly-built PV generations after January 1, 2017 and newly-approved onshore wind power after January 1, 2018 will be reduced.  The benchmark electricity price for those newly-built PV generations in 2017 located in the Class I Resource Area will be RMB0.65 per kWh, the price in Class II Resource Area is RMB0.75 per kWh, while in Class III Resource Area is RMB0.75 per kWh.  Meanwhile, the benchmark electricity price for PV generations will be adjusted on a yearly basis.

 

Pursuant to the Circular on Adjusting Benchmark On-grid Tariffs for Photovoltaic Power Generation Projects and Onshore Wind Power by the NDRC on December 26, 2016, the benchmark electricity price for the newly-built PV generations after January 1, 2017 and newly-approved onshore wind power after January 1, 2018 will be reduced.  The benchmark electricity price for those newly-built PV generations in 2017 located in the Class I Resource Area will be RMB0.65 per kWh, the price in Class II Resource Area is RMB0.75 per kWh, while in Class III Resource Area is RMB0.75 per kWh.  Meanwhile, the benchmark electricity price for PV generations will be adjusted on a yearly basis.

 

The difference (in amount) between the FIT for solar power projects and the desulphurized coal benchmark electricity price, or the subsidies paid to DG projects, are funded by the renewable energy development funds. The above FIT and subsidy policies are valid for 20 years for each power generation project since its formal operation, in principle.

 

Subsidy Catalog

 

On November 29, 2011, the MOF, NDRC and NEA jointly issued the Interim Measures for the Administration of Levy and Use of Renewable Energy Development Fund , which provides that development funds for renewable energy include designated funds arranged by the public budget of national finance, and renewable energy tariff surcharge collected from electricity consumers. Solar power projects can only receive central government subsidies after completing certain administrative and perfunctory procedures with the relevant authorities of finance, price and energy to be listed in the Subsidy Catalog issued by the MOF, NDRC and NEA. These subsidies represent the difference between the FIT for solar power projects and the desulphurized coal benchmark electricity price.

 

54

Table of Contents

 

In order to be listed in the Subsidy Catalog, ground-mounted projects submit applications to the relevant provincial authorities; and in accordance with the Circular on Issues Concerning Implementing Electric Quantity-based Subsidy Policy for Distributed Generation Projects issued by the MOF on July 24, 2013, rooftop DG projects submit applications to the grid enterprises in the area where the projects are located. After preliminary review of the applications, the provincial authorities will jointly report to the MOF, NDRC and NEA, and the MOF, NDRC and NEA will have final review on such applications to decide whether to list in the Subsidy Catalog.

 

The following flow chart illustrates the process for a utility-scale project to be listed in the Subsidy Catalog.

 

 

Development Funds of Renewable Energy

 

The Renewable Energy Law provides financial incentives, including national funding for the development of renewable energy projects.

 

Pursuant to the Interim Measures for the Administration of Designated Funds for the Development of Renewable Energy issued by the MOF and effective on April 2, 2015, the MOF sets up designated funds to support the development and utilization of renewable energy in accordance with the national fiscal budget.

 

According to the Implementing Measures for the Administration of Price of Renewable Energy and Cost Sharing Program issued by the NDRC on January 4, 2006, the gap between the FIT for solar power projects and the desulphurized coal benchmark electricity price would be shared within the service coverage of grid enterprises at or above provincial level.

 

Mandatory Purchase of Renewable Energy

 

The Renewable Energy Law imposes mandatory obligations on grid enterprises to purchase the full amount of on-grid electricity generated by approved renewable energy plants whose power generation projects meet the grid connection technical standards in the areas covered by the grid enterprises’ power grids. Grid enterprises must improve the power grid construction in order to better absorb electricity generated from renewable energy.

 

Pursuant to the Measures for the Supervision and the Administration of Purchase of Full Amount of Renewable Energy by Grid Companies issued by the SERC in July 2007, the SERC and its local branches supervise the purchase of the full amount of renewable energy by the grid enterprises. If the grid enterprises do not purchase the full volume of the electricity generated from the renewable energy due to the circumstances such as force majeure or any other circumstance endangering the safety and stability of the power grids, the grid enterprises must promptly notify the renewable energy power generation companies of the details in writing and also submit detailed facts to the competent local branches of the SERC.

 

The Several Opinions on Promoting the Healthy Development of PV Industry issued by the State Council on July 4, 2013 also requires the grid enterprises to ensure PV power generation projects’ timely connection to the power grid and purchase the full amount of electricity generated by the PV power generation projects.

 

On March 20, 2015, the NDRC and NEA issued a directive opinion, which emphasizes that the competent provincial authorities must strengthen the implementation of the provisions with regard to the purchase of the full amount of electricity generated by renewable energy and avoid any curtailment of solar power projects. In addition, it also stated that electricity generated by clean energy is encouraged to be sold directly to the consumers in the regions where there is ample supply of clean energy, and the relevant parities must coordinate the trans-provincial supply of electricity and power transmission capability, in order to maximize the utilization of clean energy. Local governments also announced their intentions to efficiently implement the system regarding the purchase of the full amount of renewable energy, such as the Inner Mongolian Autonomous Government.

 

55

Table of Contents

 

Clean Development Mechanism

 

Clean Development Mechanism, or CDM, is an arrangement under the Kyoto Protocol under the United Nations Framework Convention on Climate Change, or the UNFCCC. It allows industrialized countries with a greenhouse gas emission reduction commitment to invest in emission reducing projects in developing countries in order to earn Certified Emission Reduction, or CERs. The PRC approved and ratified the UNFCCC in 1993 and the Kyoto Protocol in 2002, but has no binding obligation to meet the emission reduction targets. On August 3, 2011, the Measures for the Administration of Operation of Clean Development Mechanism Projects promulgated by the NDRC jointly with the Ministry of Science and Technology, the Ministry of Foreign Affairs and the MOF, sets forth general rules and specific requirements for the application for, and approval of, CDM projects. Only companies wholly owned or controlled by PRC companies are qualified to apply for the PRC government’s approval for a CDM project. Some of our solar power projects are on the list of CDM projects.

 

Environmental Protection

 

The construction processes of our solar power projects generate material levels of noise, waste water, gaseous emissions and other industrial wastes. Therefore, we are subject to a variety of government regulations related to the storage, use and disposal of hazardous materials and to the protection of the environment of the community. The major environmental regulations applicable our business activities in the PRC include the Environmental Protection Law of the PRC , the Law on the Prevention and Control of Noise Pollution , the Law on the Prevention and Control of Air Pollution , the Law on the Prevention and Control of Water Pollution , the Law on the Prevention and Control of Solid Waste Pollution , the Environmental Impact Evaluation of Law , and the Regulations on the Administration of Environmental Protection In Construction Projects . See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—Environmental, health and safety laws and regulations subject us to extensive and increasingly stringent operational requirements, as well as potentially substantial liabilities arising out of environmental contamination.”

 

Foreign Investment in Solar Power Business

 

The principal regulation governing foreign ownership of solar power businesses in the PRC is the Foreign Investment Industrial Guidance Catalog (2017 Revision) . Under the current catalog, which was amended in 2017 and became effective on June 28, 2017, the solar power industry is classified as an “encouraged foreign investment industry.” Foreign-invested enterprises in the encouraged foreign investment industry are entitled to certain preferential treatment, such as exemption from tariff on equipment imported for their operations, after obtaining approval from the PRC government authorities.

 

Work Safety

 

The Work Safety Law of the PRC , which became effective on November 1, 2002 and amended on August 31, 2014 is the principal law governing the supervision and administration of work safety for solar power projects. In accordance with the Measures for the Supervision and the Administration of Work Safety of Electricity Industry promulgated by the NDRC, which became effective on March 1, 2015, power plants are responsible for maintaining their safety operations in accordance with the relevant laws, regulations, rules and standards regarding the work safety. The NEA and its local branches supervise and administer the work safety of electricity industry at the national and local level.

 

Employment

 

Pursuant to the Labor Law of the PRC , the Labor Contract Law of the PRC and the Implementing Regulations of the Labor Contract Law of the PRC , employers must enter into written employment contracts with full-time employees. If an employer fails to do so within one year from the date on which the employment relationship is established, the employer must rectify the situation by entering into a written employment contract with the employee and pay the employee twice the employee’s salary for the period during which the written contract is not signed. The Labor Contract Law and its implementing rules also require all employers must comply with local minimum wage standards. If the wage paid to the employee by the employer is lower than the local minimum wage standard, the competent labor authorities may order the employer to pay the difference; in the event of any failure to pay within the time limit, the employer may be ordered to pay additional compensation to the employee at the standard of more than 50% but less than 100% of the payable amount. Violations of the Labor Law, the Labor Contract Law and its implementing rules may result in the imposition of fines and other administrative liabilities.

 

56

Table of Contents

 

Enterprises in the PRC are required by the PRC laws and regulations to participate in certain employee benefit plans covering pension insurance, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance and housing funds, and contribute to the plans or funds in amounts equal to certain percentages of salaries, including bonuses and allowances, of the employees as specified by the local government from time to time at locations where they operate their businesses or where they are located. According to the Social Insurance Law of the PRC, which came into effect on July 1, 2011, an employer that fails to make social insurance contributions may be ordered to pay the required contributions within a stipulated deadline and be subject to a late fee at the rate of 0.05% per day from the date on which the contribution becomes due. If the employer still fails to rectify the failure to make social insurance contributions within the stipulated deadline, it may be subject to a fine ranging from one to three times the amount overdue. According to the Regulations on the Administration of Housing Fund, which came into force on March 24, 2002, an enterprise that fails to make housing fund contributions may be ordered to rectify the noncompliance and pay the required contributions within a stipulated deadline; otherwise, an application may be made to a local court for compulsory enforcement.

 

Taxation

 

See “Item 10. Additional Information—E. Taxation—PRC Taxation.”

 

Foreign Currency Exchange

 

Foreign currency exchange regulation in the PRC is primarily governed by the Regulations on the Administration of Foreign Exchange , and the Provisions on the Administration of Settlement, Sale and Payment of Foreign Exchange . Currently, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and service related foreign exchange transactions. Conversion of Renminbi for most capital account items, such as direct investment, security investment and repatriation of investment, however, is still subject to registration with the SAFE. Foreign-invested enterprises may buy, sell and remit foreign currencies at financial institutions engaged in foreign currency settlement and sale after providing valid commercial documents and, in the case of most capital account item transactions, obtaining approval from the SAFE. Capital investments by foreign enterprises are also subject to limitations, which include approvals by the NDRC, the MOC, and registration with the SAFE.

 

In August 2008, the SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises , or the SAFE Circular No. 142, regulating the conversion by a foreign invested enterprise of foreign currency-registered capital into RMB by restricting how the converted RMB may be used. Pursuant to the SAFE Circular No. 142, the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable government authority and may not be used for equity investments within the PRC.

 

In addition, the SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without the SAFE’s approval, and such RMB capital may not in any case be used to repay RMB-denominated loans if the proceeds of such loans have not been used. Violations may result in severe monetary or other penalties. Furthermore, on March 30, 2015, the SAFE issued the Circular on Reforming the Administration Approach Regarding the Foreign Exchange Capital Settlement of Foreign-invested Enterprises , or SAFE Circular NO.19, which replaced the SAFE Circular NO.142 when it became effective on June 1, 2015. SAFE Circular NO.19 provides that, among other things, the Renminbi capital converted from the foreign currency registered capital of a foreign-invested enterprise may be used for equity investments within the PRC. There are uncertainties in interpretation and implementation as to actual transactions according to SAFE Circular NO.19.

 

In February 2012, the SAFE promulgated the Notice on the Administration of Foreign Exchange Matters for Domestic Individuals Participating in the Stock Incentive Plans of Overseas Listed Companies , or the Stock Option Notice. The Stock Option Notice replaced a prior rule issued by SAFE in 2007, the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in an Employee Stock Holding Plan or Stock Option Plan of an Overseas-Listed Company. Under the Stock Option Notice, domestic individuals who participate in equity incentive plans of an overseas listed company are required, through a PRC agent or PRC subsidiary of such listed company, to register with SAFE and complete certain other bank and reporting procedures. The Stock Option Notice simplifies the requirements and procedures for the registration of stock incentive plan participants, especially in respect of the required application documents and the absence of strict requirements on offshore and onshore custodian banks, as were stipulated in the previous rules.

 

57

Table of Contents

 

In November 2012, the SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment which substantially amended and simplified the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign exchange accounts (e.g. pre-establishment expenses account, foreign exchange capital account, guarantee account), the reinvestment of lawful incomes derived by foreign investors in the PRC (e.g. profit, proceeds of equity transfer, capital reduction, liquidation and early repatriation of investment), and purchase and remittance of foreign exchange as a result of capital reduction, liquidation, early repatriation or share transfer in a foreign-invested enterprise no longer require the SAFE’s approval, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible before. In addition, the SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specified that the administration by the SAFE or its local branches over direct investment by foreign investors in the PRC must be conducted by way of registration and banks shall process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by the SAFE and its branches.

 

On July 4, 2014, the SAFE issued the Circular on the Administration of Foreign Exchange Issues Related to Overseas Investment, Financing and Roundtrip Investment by Domestic Residents through Offshore Special Purpose Vehicles , or the SAFE Circular 37, which replaced the former circular commonly known as “SAFE Circular 75” promulgated on October 21, 2005. The SAFE Circular 37 requires PRC residents to register with the competent local SAFE branch in connection with their direct establishment or indirect control of an offshore special purpose vehicle, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests. The SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as any change of basic information (including change of the PRC residents, name and operation term), increase or decrease of capital contribution by the PRC residents, share transfer or exchange, merger, division or other material events. In the event that a PRC resident holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under the PRC law for evasion of foreign exchange controls.

 

On February 13, 2015, the SAFE promulgated the Circular on Further Simplification and Improvement of Foreign Currency Administration Policies on Direct Investment , which will be effective on June 1, 2015. This circular aims to further remove or simplify the approval requirements of SAFE upon the direct investment by foreign investors.

 

On June 9, 2016, the SAFE promulgated the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts (the “Circular 16 ” ), which expands the application scope from only the capital of the foreign-invested enterprises to the capital, the foreign debt fund and the fund from oversea public offering.  Also, Circular 16 allows the enterprises to use their foreign exchange capitals under capital account allowed by the relevant laws and regulations. On January 26, 2017, the SAFE issued the Notice on Improving the Check of Authenticity and Compliance to further Promote Foreign Exchange Control (the “Circular 3”), which continuously implements and improves the policy for outward remittance of foreign exchange profit generated from direct investment.  In addition, Circular 3 expands the scope of settlement of exchange for domestic loans in foreign currencies, and it is allowed to transfer inward overseas loans under domestic guarantee.  The debtor may, directly or indirectly, transfer inward the funds under guarantee by domestic lending, equity investment or other measures.

 

58

Table of Contents

 

Dividend Distribution

 

The principal laws and regulations governing distribution of dividends paid by wholly foreign owned enterprises include the Company Law of the PRC as amended on December 28, 2013, the Wholly Foreign Owned Enterprise Law of the PRC as amended on September 3, 2016 and the Implementing Rules of the Wholly Foreign Owned Enterprise Law of the PRC as amended on February 19, 2014.

 

Under these laws and regulations, foreign-invested enterprises in the PRC may pay dividends only out of their accumulated profits, if any, as determined in accordance with the PRC accounting standards and regulations. In addition, a wholly foreign owned enterprise in the PRC is required to set aside as general reserves at least 10% of its after-tax profit, until the accumulative amount of such reserves reaches 50% of its registered capital. These reserves are not distributable as cash dividends. A wholly foreign owned enterprise is not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year. A wholly foreign owned enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds and expansion funds, which may not be distributed to equity owners except in the event of liquidation.

 

Intellectual Property Rights

 

Patent

 

The PRC has domestic laws for the protection of rights in copyrights, patents, trademarks and trade secrets. The PRC is also a signatory to the world’s major intellectual property conventions, including:

 

·                   Convention establishing the World Intellectual Property Organization (WIPO Convention) (June 4, 1980);

 

·                   Paris Convention for the Protection of Industrial Property (March 19, 1985);

 

·                   Patent Cooperation Treaty (January 1, 1994); and

 

·                   The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (November 11, 2001).

 

Patents in the PRC are governed by the Chinese Patent Law (March 12, 1984), as amended and its Implementing Regulations (January 19, 1985), as amended.

 

The PRC is a signatory to the Paris Convention for the Protection of Industrial Property, in accordance with which any person who has duly filed an application for a patent in one signatory country shall enjoy, for the purposes of filing in the other countries, a right of priority during the period fixed in the convention (12 months for inventions and utility models, and 6 months for industrial designs).

 

The Chinese Patent Law covers three kinds of patents, namely, patents for inventions, utility models and designs. The Chinese patent system adopts the principle of first to file, which means where multiple patent applications are filed for the same invention, a patent will be granted only to the party that filed the application first. Consistent with international practice, the PRC only allows the patenting of inventions or utility models that possess the characteristics of novelty, inventiveness and practical applicability. For a design to be patentable, it must not be identical with or similar to any design which has been publicly disclosed in publications in the country or abroad before the date of filing or has been publicly used in the country before the date of filing, and must not be in conflict with any prior right of another.

 

PRC law provides that anyone wishing to exploit the patent of another must enter into a written licensing contract with the patent holder and pay the patent holder a fee. One rather broad exception to this, however, is where a party possesses the means to exploit a patent for inventions or utility models but cannot obtain a license from the patent holder on reasonable terms and in a reasonable period of time, the SIPO, is authorized to grant a compulsory license. A compulsory license can also be granted where a national emergency or any extraordinary state of affairs occurs or where the public interest so requires. The patent holder may appeal such a decision within three months from receiving notification by filing a suit in people’s court in the PRC.

 

PRC law defines patent infringement as the exploitation of a patent without the authorization of the patent holder. A patent holder who believes his patent is being infringed may file a civil suit or file a complaint with a local PRC intellectual property administrative authority, which may order the infringer to stop the infringing acts. A preliminary injunction may be issued by the people’s court upon the patentee’s or the interested parties’ request before any legal proceedings are instituted or during the proceedings. Evidence preservation and property preservation measures are also available both before and during the litigation. Damages in the case of patent infringement are determined as either the loss suffered by the patent holder arising from the infringement or the benefit gained by the infringer from the infringement. If it is difficult to ascertain damages in this manner, damages may be determined with reference to the license fee under a contractual license.

 

59