Hanwha Q Cells Earnings 2017-12-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 20-F

OR

For the fiscal year ended: December 31, 2017

OR

OR

Date of event requiring this shell company report   

For the transition period from   to   

Commission file number: 1- 33208

HANWHA Q CELLS CO., LTD.

(Exact name of Registrant as specified in its charter)

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

(Address of Principal Executive Offices)

Mr. Jung Pyo Seo

Chief Financial Officer

Telephone: +82-2-729-4431

Fax: +82-2-729-3003

Hanwha Building,

86 Cheonggyecheon-ro,

Jung-gu, Seoul, Korea

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

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

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

None

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

None

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

4,162,556,067 Ordinary Shares, par value $0.0001 per share, as of December 31, 2017

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

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

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

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

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

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

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

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

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.

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

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

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

Table of Contents

INTRODUCTION

Unless otherwise indicated, references in this annual report to:

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

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

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

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

In September 2010, we issued and sold to Hanwha Solar 36,455,089 ordinary shares for an aggregate sale price of $78.2 million. Concurrently with this offering, we issued 30,672,689 ordinary shares to Hanwha Solar at par value of the ordinary shares and subsequently issued an additional 14,407,330 ordinary shares at par value, which shares were to remain outstanding so long as and to the extent that the 901,961 ADSs we issued to facilitate our convertible notes offering in January 2008 remained outstanding. A portion of these ordinary shares were subsequently repurchased as described below. Concurrently, Hanwha Solar acquired 120,407,770 ordinary shares and 128,101 ADSs of the company, from Good Energies II LP and Yonghua Solar Power Investment Holding. Good Energies II LP and Yonghua Solar Power Investment Holding were companies owned by Mr. Yonghua Lu, the former chairman of the Company. Following this transaction, Mr. Lu did not hold any shares in the Company. Hanwha Solar, a holding company incorporated in the Cayman Islands, is a wholly-owned subsidiary of Hanwha Chemical, a leading chemical producer publicly traded on the Korea Exchange whose principal activities are the production of chemical, solar energy, construction, automotive and electronic materials and products.

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

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

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

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

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

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

Not applicable.

Not applicable.

A. Selected Financial Data

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

The following selected consolidated financial data have been derived from Q CELLS’ and our audited consolidated financial statements. Our selected data from the consolidated statement of operations for the years ended December 31, 2017, 2016 and 2015 and data from the consolidated balance sheets of December 31, 2017, 2016 and 2015 have been derived from our audited consolidated financial statements for the years ended December 31, 2017, 2016 and 2015 included elsewhere in this annual report. Q CELLS’ selected data from the consolidated statement of operations data for the year ended December 31, 2014 and 2013 and Q CELLS’ data from the consolidated balance sheets as of December 31, 2014 and 2013 have been derived from its audited consolidated financial statements, which are not included or incorporated by reference in this annual report.

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

Other Financial Data

Other Operating Data

B. Capitalization and Indebtedness

Not Applicable.

C. Reasons for the Offer and Use of Proceeds

Not Applicable.

D. Risk Factors 

Strategic risks

Our earnings may be adversely affected by unfavorable movements in average selling prices of PV products and key raw materials due to supply and demand imbalances across the PV value chain.

Average selling price of PV modules declined rapidly in the second half of 2016, triggered by a collapse in demand in the China market. In 2017, module ASPs continued to decline at a more moderate pace. Prices of key raw materials such as solar-grade polysilicon, however, increased due to supply shortage caused by shut-down of the polysilicon production facility in China due to stricter environmental regulations. Higher polysilicon prices led to higher wafer prices. Increases in input prices and a continued decline in module ASPs negatively impacted our profit margins. Our earnings may continue to be adversely affected if supply and demand imbalances continue to result in unfavorable movements in ASPs across the PV value chain.

Implementation on global safeguard measures applies to solar cells and modules manufacturing in Malaysia and South Korea that we import into the United States, impairing our ability to sell those products inside the United States and thereby materially and adversely affecting our business prospects, results of operations, and financial condition.

Upon a petition for import relief, as amended and properly filed under Section 201 of the U.S. Trade Act of 1974 (19 U.S.C. § 2251) on May 17, 2017, by Suniva, Inc., the U.S. International Trade Commission (“ITC”) instituted an investigation to determine “whether CSPV cells (whether or not partially or fully assembled into other products) are being imported into the United States in such increased quantities as to be a substantial cause of serious injury, or the threat thereof, to the domestic industry producing an article like or directly competitive with the imported articles. On May 25, 2017, SolarWorld Americas publicly stated its support for the petition as a co-petitioner.

Determining that the investigation is “extraordinarily complicated” within the meaning of Section 202(b)(2)(B) of the U.S. Trade Act of 1974, ITC had additional days to make its injury determination on September 22, 2017. Having made an affirmative injury determination that the CSPV products are being imported into the U.S. in such increased quantities as to be a substantial cause of serious injury to the domestic industry producing an article like or directly competitive with the imported article, ITC transmitted its report, including ITC’s injury determination, remedy recommendations, basis for such determination and recommendations, and a summary of the information obtained in the investigation, to the President on November 13, 2017. Furthermore, ITC recommended remedy measures on October 31, 2017.

President Trump then proclaimed a “safeguard measure” with regard to the CSPV products in the form of: (a) a tariff-rate quota on imports of solar cells for four years, with annual reductions, with the exception of first annual aggregate quantity not exceeding 2.5GW of imported cells; and (b) an increase in duties on imports of modules for four years, with annual reductions. The measure shall apply to imports from all countries (“global safeguard”) with the exclusion of Generalized System of Preferences beneficiary developing countries. This safeguard measure became effective as of 12:01 a.m. Eastern Standard Time (“EST”) on February 7, 2018.

Pursuant to Article 12.3 of the WTO Agreement, the U.S. has an obligation to consult with the WTO Members, including us. Based on the consultation, President Trump may proclaim the responding reduction, modification, or termination of the safeguard measure within 40 days.

Implementation on global safeguard measures applies to solar cells and modules manufacturing in Malaysia and South Korea that we import into the United States, impairing our ability to sell those products inside the United States and thereby materially and adversely affecting our business prospects, results of operations, and financial condition.

Change in government policies such as subsidies and/or regulations, may have a material adverse effect on our business and prospects

Demand for our PV products has been affected by global economic conditions, capital markets fluctuations and availability of government subsidies. Although solar power generation has reached grid parity in certain markets, the economic feasibility of solar power still depends substantially on government policies toward the renewable energy industry. As a result, federal, state and local governmental bodies in many countries, most notably Japan, the United States, China, Germany, the United Kingdom and France, have provided subsidies and economic incentives in the form of rebates, tax credits and other incentives to end users, distributors, system integrators and manufacturers of PV products to promote the use of solar energy and to reduce dependency on conventional sources of energy generation. The reduction or elimination of government subsidies and economic incentives in a particular country may adversely impact the growth of the solar energy and PV products markets, which could decrease demand for our products and reduce our revenue.

For example, the results of the 2016 United States presidential election created regulatory uncertainty in the renewable energy industry, potentially affecting the solar industry, our business, financial condition, and results of operations. Members of the United States administration, including representatives of the U.S. Department of Energy, have made public statements that indicate that the administration may not be supportive of various clean energy programs and initiatives designed to curtail climate change. For example, in June 2017, the U.S. President announced that the U.S. would withdraw from participation in the 2015 Paris Agreement on climate change mitigation. In addition, the administration has indicated that it may be supportive of overturning or modifying policies and regulations enacted by the prior administration that placed limitations on coal and gas electricity generation, mining, and/or exploration.

Germany and Japan continuously reduced feed-in tariffs. With residential LCOE of approximately 0.10 €/kWh PV electricity in Germany is now considerably cheaper than consuming electricity from the grid (0.29 €/kWh-0.31 €/kWh). Only excess electricity is supplied to the grid at a feed-in tariff of approximately 0.12 €/kWh. The Japanese government reduced feed-in tariffs applicable to systems of 10 kW or more from JPY32 per kWh for the fiscal year of 2014 to JPY21 per kWh for the fiscal year of 2017. For systems of 10 kW or less, the feed-in tariff rate per kWh was reduced from JPY37 for the fiscal year of 2014 to JPY28 per kWh, or JPY30, if obligated to use an output control system, for the fiscal year of 2017. See “Item 4. Information on the Company—B. Business Overview—Regulation”.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Legal and compliance risks

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

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

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

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

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

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

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

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

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

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

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

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

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

Operational risks

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

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

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

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

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

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

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

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

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

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

We incurred $8.2 million in warranty costs in 2017, compared to $11.0 million in 2016, and derecognized $7.6 million of previously accrued warranty expenses due to the settlement of our litigation with a certain customer. As of December 31, 2017, our accrued warranty costs totaled $48.5 million, compared to $61.2 million as of December 31, 2016.

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

For example, on September 30, 2014, a European customer initiated arbitration proceedings against Hanwha Q CELLS Qidong, one of our subsidiaries, under the rules of the London Court of International Arbitration. In its initial pleading, the European customer alleged that certain solar modules it purchased from Hanwha Q CELLS Qidong between 2009 and 2011 were defective, claiming total damages of approximately $240 million, comprised of purchase price adjustments and damages, as well as indemnification against any liability arising from the European customer’s sale of such modules to end customers. On November 7, 2014, Hanwha Q CELLS Qidong filed its response to the European customer’s request for arbitration. On December 10, 2014, the European customer filed its statement of case. On January 23, 2015, Hanwha Q CELLS Qidong filed its statement of defense, and through much of the first half of 2015 the European customer and Hanwha Q CELLS Qidong exchanged and responded to document requests. As November 8, 2017 the LCIA Court dismissed the above-reference arbitration upon its receipt and review of the letter informing that the Parties have reached a settlement. In accordance with Article 26.8 of the LCIA Arbitration Rules (1998), the LCIA Court informed Hanwha Q CELLS Qidong that the Arbitration has been discharged and that the arbitration proceedings have been concluded and dismissed with prejudice.

In addition, we purchase silicon-related materials and other components that we use in our products from third parties. It is often difficult to determine whether product defects are caused by defects in silicon, silicon wafers or other components of our products or other reasons. Even assuming that our product defects are caused by defects in raw materials, we may not be able to recover our warranty costs from our suppliers because the agreements we enter into with our suppliers typically contain limited warranties. The possibility of future product failures could cause us to incur substantial expense to provide refunds or resolve disputes with regard to warranty claims through litigation, arbitration or other means, or damage our market reputation and cause our sales to decline.

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

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

We depend on the timely sourcing of wafers and other raw materials from our suppliers in sufficient volumes. In 2017, the market experienced a moderate shortage of solar grade polysilicon, resulting from stricter environmental regulations in PRC as well as continuing anti-dumping and countervailing duties placed on polysilicon manufactured in Korea. Since we cannot guarantee the shortage of solar grade polysilicon will be resolved in the foreseeable future, we cannot guarantee that we will always be able to obtain sufficient quantities of wafers and other raw materials in a timely manner and at commercially reasonable prices. We may experience actual shortages of wafers and other raw materials or late or failed delivery for the following reasons:

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

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

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

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

Financial Risks

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

The principal amount of our total bank borrowings outstanding was $978.4 million as of December 31, 2017 of which $385.2 million were short-term bank borrowings and $293.6 million were the current portion of long-term bank borrowings. In addition, we had $99.5 million in long-term notes and MYR 835 million ($205.3 million, translated at the foreign exchange rate of $0.2459 per one MYR) in principal amount of long-term loan from the Malaysian government with a book value of $137.8 million as of December 31, 2017. We may also incur additional indebtedness.

Our debt could have a significant impact on our future operations and cash flow, including:

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

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

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

We currently sell a substantial portion of our PV products and services to a limited number of customers and countries. Customers that accounted for a significant portion of our total net revenues in 2017 included NextEra Energy Resources, LLC(Florida Power and Light), Hanwha Q CELLS Korea, Hanwha Q CELLS Japan, Hanwha Q CELLS USA, and Jinko Solar. Our five largest customers accounted for an aggregate of 39.2% of our net revenues in 2017, compared to 55.8% in 2016. In 2016, NextEra Energy Resources, LLC and Hanwha Q CELLS Japan individually accounted for more than 10% of our revenues.

In 2017, the United States, China, Europe, Korea, India, and Japan accounted for 40.5%, 16.6%, 10.4%, 8.7%, 8.0%, and 6.6% our net revenues, respectively, and were the top six countries or region in terms of percentage contribution to our net revenues, compared to 51.6%, 5.1%, 3.3%, 6.4%, 9.6% and 11.7%, respectively, 2016. The loss of sales to any one of these customers or countries would have a significant negative impact on our business.

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

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

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

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

In 2017, we purchased approximately 68.6% of our silicon wafers from external suppliers, with the three largest external silicon wafer suppliers accounting for 87.4% of our external purchases, compared to 77.4% in 2016. Currently, our principal silicon wafer suppliers include GCL Silicon Technology Holdings Limited, HuanTai Silicon Science & Technology Co. Ltd. and Zhenjiang Rietech New Energy Science Technology Co., Ltd. If we fail to develop or maintain our relationships with these or our other suppliers and we are unable to obtain these materials from alternative sources in a timely manner or on commercially reasonable terms, we may be unable to manufacture our products in a timely manner or at a reasonable cost, or at all, and as a result, we may not be able to deliver our products to our customers in the required quantities, at competitive prices and on acceptable terms of delivery. Problems of this kind could cause us to experience order cancellations, increased manufacturing costs, decreased revenue and loss of market share. In addition, some of our suppliers have a limited operating history and limited financial resources, and the contracts we entered into with these suppliers do not clearly provide for adequate remedies to us in the event any of these suppliers is not able to, or otherwise does not, deliver, in a timely manner or at all, any materials it is contractually obligated to deliver. Suppliers typically require a significant amount of capital to fund their operating activities, expand their manufacturing facilities, and conduct research and development activities. The inability of our suppliers to access capital or the insolvency of our suppliers could lead to their failure to deliver silicon materials to us. Any disruption in the supply of silicon materials to us may adversely affect our business, financial condition and results of operations.

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

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

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

We typically require a significant amount of capital to fund our operations. We expect that our capital expenditures in 2018 would amount to approximately $138.3 million, which will be primarily used to fund manufacturing technology upgrades and research and development. We also require cash generally to meet future capital requirements, which are difficult to plan in the rapidly changing PV industry. While we plan to fund our future capital and investment requirements with cash from operations, bank borrowings and other forms of financing, if necessary, we cannot guarantee that future financing will be available on satisfactory terms, or at all. Our ability to obtain external financing in the future is subject to a variety of uncertainties, including:

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

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

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

To the extent our foreign currency receivables are not matched with our foreign currency payables, we have entered into economic hedging transactions to mitigate the impact of short-term foreign currency fluctuations on our results of operations. Although the impact of exchange rate fluctuations has in the past been partially mitigated by such transactions, our results of operations have historically been affected by exchange rate fluctuations and may continue to be affected. The effectiveness of our hedging transactions may be limited and we may not be able to successfully hedge all of our exposure. Consequently, we may incur foreign exchange gains or losses upon collection and payment to settle our sales and purchasing transactions. Furthermore, any default by the counterparties to these hedging transactions could also adversely affect our financial condition and results of operations.

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

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

If we are unable to effectively manage these risks, our ability to conduct or expand our business globally would be impaired, which may in turn have a material adverse effect on our business, financial condition, results of operations and prospects.

Other Risks

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

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

Our business involves a significant number of related party transactions.

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

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

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

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

Although we rely primarily on trade secret laws and contractual restrictions to protect the technologies in the PV cells and PV modules we currently manufacture and sell, our success and ability to compete in the future may also depend to a significant degree on obtaining patent protection for our proprietary technologies.

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

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

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

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

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

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

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

We face risks related to health epidemics and other outbreaks.

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

You may have difficulty enforcing judgments obtained against us.

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

The market price of the ADSs may be volatile.

The market price of the ADSs has exhibited, and may continue to exhibit, significant volatility. The closing price of our ADSs ranged from a low of $6.37 per ADS to a high of $9.52 per ADS in 2017.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

There are uncertainties as to whether Cayman Islands courts would:

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

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

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

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

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

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

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

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

We do not believe we were a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes for our taxable year ended December 31, 2017 and do not expect to become a PFIC for the current taxable year or the foreseeable future. Our actual PFIC status for the current taxable year, however, will not be determinable until the close of the current taxable year ending December 31, 2018, and accordingly, there is no guarantee that we will not be a PFIC for the current taxable year or any future taxable year.

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

If we are a PFIC for any taxable year during which a U.S. investor holds the ADSs or ordinary shares, such U.S. investor will generally be subject to materially adverse tax consequences including being subject to greater amounts of tax on gains and certain distributions as well as increased tax reporting obligations. U.S. investors should consult their own tax advisors about the circumstances that may cause us to be classified as a PFIC and the consequences if we are classified as a PFIC. For additional information on the Company’s status as a PFIC, refer to item “10.E Taxation.”

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

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

Our management and independent registered public accounting firm have concluded that the internal control over financial reporting of Hanwha Q CELLS Co., Ltd. as of December 31, 2017 was not effective. In addition, we cannot guarantee that we will be able to remedy the material deficiencies identified in our internal control over financial reporting and that in the future our management or our independent registered public accounting firm will not identify material weaknesses during the Section 404 of the Sarbanes-Oxley Act audit process or for other reasons. Furthermore, because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. As a result, if we fail to maintain effective internal control over financial reporting or should we be unable to prevent or detect material misstatements due to error or fraud on a timely basis, investors could lose confidence in the reliability of our financial statements, which in turn could harm our business, results of operations and negatively impact the market price of the ADSs, and harm our reputation. Furthermore, we have incurred and expect to continue to incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.

A. History and Development of the Company

Hanwha SolarOne

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

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

Q CELLS

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

Hanwha SolarOne’s Acquisition of Q CELLS

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

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

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

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

Capital Expenditures and Investment

As of December 31, 2017, we had annual production capacities of 4,300 MW for PV modules, 4,300 MW for PV cells, 1,100 MW for silicon wafers and 1,600 MW for silicon ingots. Our cells and modules are manufactured in China and Malaysia and the entirety of wafers and ingots are manufactured in China. In August, we shut down our wafer manufacturing facility in China as we determined that the cost of production was too high and the scale of operations was insufficient in order to stay competitive. Our wafer fab has been incurring sizable losses over the past three years and we believe the discontinuation of our wafer production will result in improved operating results moving forward.

We made capital expenditures of $110.2 million in 2017 which were used primarily to construct new PV module processing facilities in Malaysia and Korea, as well as to automate our existing manufacturing lines in China and upgrade our PV cell manufacturing facilities in Malaysia. We expect our capital expenditures will amount to approximately $90.3 million in 2018, which will be primarily used to fund on-going capital equipment upgrades in Malaysia and China and for research and development activities. We plan to fund our capital expenditure and investment requirements primarily with cash flows generated from operations in 2018. We will actively review our capital expenditure and investment plans on a regular basis and make appropriate changes in accordance with our business environment.

In the year ended December 31, 2017, we acquired a 50% interest in our Turkish joint venture with Kalyon for $26.2 million. The joint venture company will be classified as investments accounted for by the equity method. The joint venture company will be constructing an integrated manufacturing facility and a 1GW solar power plant in Turkey. The manufacturing facility will be producing ingots, wafers, cells, and modules. The solar power plant will be constructed using the modules produced in the Turkish factory and will sell electricity to the grid at a fixed price for the first 15 years of operation and at prevailing market prices for the following 15 years. We expect the Turkish joint venture to be subject to risks and uncertainties resulting from exchange rate volatilities and future electricity prices.

B. Business Overview

Overview

We are a leading global solar energy company involved in the manufacturing and sales of solar cells and modules. We manufacture a variety of PV cells and PV modules at our manufacturing facilities in China and Malaysia, using advanced manufacturing process technologies including those developed at our research and development facilities in Germany. We sell PV cells and PV modules directly to utility companies, system integrators and also through third-party distributors. We supply our solar products across the world; mainly to the United States, China, Europe, Korea, India and Japan, with sales to those countries comprising approximately 80.4% of our 2017 net revenues, compared to 84.4% in 2016. We are also growing a nascent engineering, procurement and construction (“EPC”) group that is focusing on markets in Europe, Turkey and Australia, in addition to the United States.

We have continuously improved process technology and product quality since we commenced our commercial production in 2005. Our Q.ANTUM (a product line utilizing passivated emitter rear contact technology) monocrystalline, Q.ANTUM multicrystalline and standard BSF multicrystalline PV cells achieved average conversion efficiency rates up to 22.0% , 20.4% and 19.0%, respectively, each based on the commercially produced PV cells in December 2017.

Our net revenues in 2017 amounted to $2,188.9 million, among which $461.3 million, or 21.1%, was derived from sales to related parties. We recorded a net loss of $12.4 million in 2017 and had accumulated earnings of $94.9 million, long-term borrowings and long-term notes (including the current position) of $830.5 million and short-term bank borrowings of $385.2 million as of December 31, 2017.

Our Products and Services

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

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

PV Products

A PV module is an assembly of PV cells that have been electrically interconnected and laminated in a durable and weather-proof package. We have been selling a wide range of PV modules, which range in power between 265 W and 310 W for 60-cell modules, and 315 W and 370 W for 72-cell modules in 2017.

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

All of the PV modules that we sell are produced from the PV cells manufactured by us or our affiliated company, Hanwha Q Cells Korea Corp.

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

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

Raw Materials Supply Management

Manufacturing of our solar products requires reliable supplies of various raw materials, including silicon wafers, ethylene vinyl acetate, triphenyltin, tempered glass, connecting bands, welding bands, silica gel, aluminum alloy and junction boxes. We believe it is important to secure a stable supply of raw materials, while not being overly dependent on a limited number of supply sources. The three largest wafer suppliers accounted for 87.4% of our total silicon wafer purchases in 2017. We seek to maintain multiple supply sources of raw materials to the extent practicable and have not in the past experienced any material disruption of our manufacturing process due to insufficient supply of raw materials. See “Item 3.D. Risk Factors—Financial Risks—Our dependence on a limited number of suppliers for a substantial majority of silicon-related materials may prevent us from delivering our products in a timely manner to our customers in the required quantities, which could result in order cancellations, decreased revenue and loss of market share.”

We maintain different inventory levels of our raw materials, depending on the type of product and the lead time required for additional supplies when needed. We seek to maintain reasonable inventory levels that achieve a balance between our efforts to reduce our storage costs and optimize working capital on one hand, and the need to ensure that we have access to adequate supplies in a timely manner on the other. We had $84.5 million of raw materials in inventory as of December 31, 2017.

Silicon-Based Raw Materials

Among the various raw materials required for our manufacturing process, silicon wafers are the most important for producing PV cells. A silicon wafer is a flat piece of crystalline silicon that can be processed into a PV cell. We currently use 6-inch wafers in our production. We produced a portion of our silicon wafer supplies internally through Hanwha Q CELLS Technology. In 2017, silicon wafers produced internally accounted for approximately 29.5% of our total silicon wafer supplies. We procure the remainder of our silicon wafer supplies from third-party suppliers on a purchase order basis. We may also procure a small portion of silicon wafer supplies through spot market purchases. Currently, our principal silicon wafer suppliers include GCL Silicon Technology Holdings Limited, HuanTai Silicon Science & Technology Co. Ltd and Zhenjian Rietech New Energy Science Technology Co., Tld. In August 2017, we decided to discontinue our wafer production as we determined that our wafer operations would not be capable of competing on a global scale. See “Item 3.D. Risk Factors—Financial Risks—Our dependence on a limited number of suppliers for a substantial majority of silicon-related materials may prevent us from delivering our products in a timely manner to our customers in the required quantities, which could result in order cancellations, decreased revenue and loss of market share.”

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

Other Raw Materials

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

Production and Project Development

Production Facilities

We manufacture PV cells and PV modules through Hanwha Q CELLS Malaysia Sdn. Bhd., our wholly-owned subsidiary in Malaysia, with facilities occupying a gross floor area of 255,000 square meters in Cyberjaya, Malaysia, and through Hanwha Q CELLS Qidong, our wholly-owned PRC subsidiary, with facilities occupying a gross floor area of 173,220 square meters in Qidong, Jiangsu Province, China. As of December 31, 2017, we had annual production capacities of 4,300 MW for PV modules, 4,300 MW for PV cells, and 1,600 MW for silicon ingots.

We manufacture our silicon ingots and wafers through Hanwha Q CELLS Technology, one of our wholly-owned subsidiaries, with facilities occupying a gross floor area of approximately 104,479 square meters in Lianyungang, Jiangsu Province, China. As of December 31, 2017, Hanwha Q CELLS Technology had annual production capacities of 1,600 MW for silicon ingots. As of December 31, 2017, we did not have any wafer production capacity as we discontinued our wafer production in August 2017.

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

The table below sets forth our PV product manufacturing nameplate capacity at our manufacturing facilities as of December 31, 2017:

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

Production Process

The following is an overview of the general production stages for our PV cells:

1. Rinsing: Rinsing in the process during which ultrasonic cleaning is performed on silicon wafers, followed by chemical treatment of the wafer surface, which reduces the cells’ reflection of sunlight and improves sunlight absorption capacity.

2. Diffusion: Diffusion is the process during which certain impurities are introduced into the silicon wafer through a thermal process to enable the formation of an electric field within the PV cell.

3. Etching: Etching is the process that is applied on the border of the wafers to prevent direct electrical shorting between the front and the back of each PV cell.

4. Secondary rinsing: Secondary rinsing is the process during which the wafer surface is chemically cleaned to remove the silicon dioxide that may have formed on the surface of the wafer in order to improve the cell’s capacity to absorb sunlight.

5. PECVD: PECVD is the process which produces a silicon nitride film on the wafer’s surface in the front, which improves the PV cell’s capacity to absorb sunlight.

6. Screen printing: Through the screen-printing process, negative and positive metal contacts, or electrodes, are printed on the front and back surfaces of the PV cell.

7. Firing: Silicon and metal electrodes are connected through and electrode firing process in a conveyor belt furnace at high temperature.

8. Testing and sorting: PV cells are tested to determine their electrical performance and sorted based on their conversion rate.

The following is an overview of the general production stages for our PV cells:

1. Welding: Multiple PV cells are interconnected based on the desired electrical configurations through welding.

2. Lamination: The interconnected cells are then laid out and laminated in vacuum through a heating process. Through lamination, PV modules are sealed in weatherproof packages that can withstand high levels of ultraviolet radiation and moisture.

3. Framing: Assembled PV modules are packaged in protective aluminum frames prior to testing.

4. Testing: PV modules are tested to determine their electrical performance.

Quality Control and Certifications

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

We maintain several certifications for our quality control procedures, which demonstrate our compliance with international and domestic operating standards. We believe that our quality control procedures are enhanced by the use of sophisticated production system designs and a high degree of automation in our production process. The certifications that we currently maintain include ISO 9001:2015 quality management system certification for the process of design, production and sale of our PV modules, ISO 14001:2015 environmental management system certification, ISO 50001: 2011 energy management systems certification, OHSAS 18001:2007 occupational health and safety management system certification, IEC certification for our PV modules and CSA certification. The IEC certification is issued by independent institutes TÜV and VDE in Germany to certify our PV modules are qualified under IEC 61215 and IEC 61730 safety test standards and consistent production quality inspections are performed periodically. Maintaining this certification has greatly enhanced our sales in European countries, as well as countries in Asia, the Middle East and South Africa. We obtained CSA certification issued by Canadian Standard Association, independent product-safety testing and certification organizations, which enables us to sell our products to customers in the North America. Furthermore, in the United States, our modules have been certified by the California Energy Commission, the state’s primary energy policy and planning agency. We obtained a certification issued by KEA (previously known as KEMCO), an independent product-safety testing and certification organization in Korea, which enables us to sell our products to customers in Korea. We obtained an MCS certificate which enables us to sell products to the United Kingdom and Clean Energy Council listing for the Australian market. We also obtained a JPAC listing and passed JET qualification for entry into the Japan market. Further, our PV lab was recognized by VDE and CSA as a Test Data Acceptable Program, which means that our lab is qualified to conduct IEC and UL1703 testing by itself and reflects our lab’s capabilities and management.

Sales and Distribution

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

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

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

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

Following the merger of Hanwha SolarOne and Q CELLS, we were able to expand our geographic footprint and realize synergies from coordinating the two companies’ sales and distribution operations. We seek to further diversify our geographic presence and customer base in order to achieve a balanced and sustainable growth.

Warranty

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

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

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

We incurred $8.2 million in warranty costs in 2017, compared to $11.0 million in 2016, and derecognized $7.6 million of previously accrued warranty expenses due to the settlement of our litigation with a certain customer. As of December 31, 2017, our accrued warranty costs totaled $48.5 million, compared to $61.2 million as of December 31, 2016.

Research and Development and Intellectual Property

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

We have been developing advanced technologies to improve the conversion efficiency and reduce the production cost of our PV products. Our primary research and development center is located at Thalheim, Germany, which employed 176 highly trained researchers as of December 31, 2017. In the past, Q CELLS has developed and commercialized a wide range of products and standard production processes. For example, Q CELLS’ engineers developed the 6-inch solar cell, the 3-busbar layout and the full-square monocrystalline solar cell. Q CELLS also succeeded in 2014 in the commercial production of multicrystalline PERC cells, which have a higher conversion efficiency rate than traditional BSF cells, at its German facilities, and started marketing them under our “Q.ANTUM” brand. Our research and development expenses were $24.0 million in 2017.

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

As of the date of this annual report, we had been granted 92 patents and utility models and 49 applications for patents and utility models pending in China, 46 patents and 70 patent applications pending in Germany and 68 patents and 44 patent applications pending in other countries. Our issued patents and pending patent applications relate primarily to process technologies for manufacturing PV cells. We are the owner of “SolarOne” and “Q CELLS” trademarks and have registered them in major markets where we sell our PV products. We also registered “Shuo Wang” in Chinese character, our trademark for our secondary class modules, with the China Trademark Office, which allows us to use this trademark in China.

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

Competition

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

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

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

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

Environmental Matters

We are subject to a wide array of local, national and international environmental, health and workplace safety laws, regulations and conventions. Our manufacturing processes involve the use of hazardous materials and chemicals and related equipment and generate noise, waste water, air emissions and other industrial wastes. We are required to maintain various environmental permits and authorizations with respect to these operations. If an accident occurs, we could be held liable for resulting damages, which could be substantial. We are also subject to potential liability for the remediation of contamination associated with both present and past hazardous waste generation, handling, and disposal activities.

Environmental laws are subject to change. We may become subject to stricter environmental standards in the future and face larger capital expenditures in order to comply with environmental laws which could have a material adverse effect on our business. We are also subject to periodic inspections by local environmental protection authorities. We have established a pollution control system and installed various equipment to process and dispose of our industrial waste and hazardous materials. We also maintain an ISO 14001 environmental management system certification, which is issued by the International Organization for Standardization to demonstrate our compliance with international environmental standards. While we have not been subject to any material proceedings or fines for environmental violations in the past three years, there is no assurance that we will not be subject to such fines or proceedings in the future.

Insurance

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

Regulation

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

China

Renewable Energy Law and Other Government Directives

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

In June 2015, the National Energy Administration, the PRC Ministry of Industry and Information Technology and the PRC Certification and Accreditation Administration, jointly issued the Opinion on Promoting the Application of Advanced PV Products and Industry Upgrading, which requires higher technical standards for PV products, including (1) at least 15.5% and 16% PV conversion efficiency for polycrystalline silicon and monocrystalline silicon cell modules, (2) at least 28% PV conversion efficiency for high concentration PV products, and (3) at least 8%, 11%, 11% and 10% PV conversion efficiency for silicon-based, copper indium gallium selenide solar cells, cadmium telluride and other types of thin-film cell modules, respectively. In addition, the attenuation rate of polycrystalline silicon, monocrystalline silicon and thin-film cell modules must not be higher than 2.5%, and 3% respectively, in the first year, thereafter not higher than 0.7% per year, and ending with 20% at most during the whole project life cycle. For thin-film cell modules, the attenuation rate must not be higher than 5% in the first year, thereafter not higher than 0.4% per year, and ending with 15% at most during the whole project life cycle.

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

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

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

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

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

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

China’s National Energy Administration published its official solar statistics for 2017, revealing that China has installed a total of 52.83 gigawatts worth of new solar capacity in 2017. According to the data, China installed around 126 gigawatts of photovoltaic power, which increased 67% from 2016. This brings China’s cumulative solar capacity up to 130.25GW, around 7.3% of the country’s national power generation capacity.

In March 2018, the Ministry of Industry and Information Technology promulgated the 2018 PV Manufacturing Standards and Conditions, which replaced the 2015 PV Manufacturing Standards and Conditions. The 2018 PV Manufacturing Standards and Conditions strictly controls PV manufacturing projects simply expanding production capacity and guides PV manufacturer to strengthen technology innovation, improve product quality and decrease manufacturing costs. According to the 2018 PV Manufacturing Standards and Conditions, the PV manufacturer shall be incorporated in PRC as an independent legal entity; possess independent PV product manufacturing, supply and after sales capability; possess qualification of provincial or higher level independent R&D institute, technical center or high-tech enterprise; the expenses for R&D or process improvement shall not be lower than 3% of sales revenue and RMB 10 million; the actual production volume of previous year shall not be lower than 50% of the actual production capacity in the previous year. The minimum photoelectric conversion efficiency for polysilicon cells and crystal silicon cells shall not be lower than 18% and 19.5% respectively. The minimum photoelectric conversion efficiency for polysilicon modules and crystal silicon modules shall not be lower than 16% and 16.8% respectively.

Regulation of Foreign Businesses

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

Tax

PRC enterprise income tax is calculated based on taxable income determined under PRC accounting principles. On March 16, 2007, the National People’s Congress of the PRC passed the EIT, which took effect as of January 1, 2008. In accordance with the EIT, a unified enterprise income tax rate of 25% and unified tax deduction standards are applied equally to both domestic-invested enterprises and foreign-invested enterprises, such as Hanwha Q CELLS Qidong.

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

Foreign Currency Exchange

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

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

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

Dividend Distribution

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

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

United States

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

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

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

On December 22, 2017, the U.S. enacted significant changes to U.S. tax law following the passage and signing of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018" (the "The Tax Cuts and Jobs Act"). The Act mandates the reduction or elimination of assorted industry-specific tax incentives in return for corporate tax rates reductions. Under current law, the ITC will be reduced from approximately 30% to approximately 26% for solar systems placed into service after December 31, 2019, and then further reduced to approximately 22% for solar systems placed into service after December 31, 2020. Thereafter, the ITC will remain at 10% for commercial projects.

On January 23, 2018, President Trump issued Proclamation 9693, which imposed tariffs on imported solar cells and modules (the “Tariffs”). These Tariffs took effect on February 7, 2018. Modules will be subject tariffs of 30% in 2018, 25% in 2019, 20% in 2020 and 15% in 2021. Cells will also be subject to a 30% tariff, but only after total cell imports exceed 2.5 GW.

We expect the Tariffs to cause market volatility and price fluctuations, and will likely result in a range of impacts to the global manufacturing market, as well as our business in particular. Such tariffs are likely to increase the price of our solar products and result in significant additional costs to our customers, which could materially and adversely affect our business and results of operations.

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

Europe

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

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

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

Further amendments of the Renewable Energy Act became effective on August 1, 2014, introducing further degression of the feed-in-tariff and obligations to direct marketing of energy produced by new PV systems above 10 MW.

We must comply with legislation in EU jurisdictions which impose duties in respect of health and safety management, for example in relation to management of staff, engagement of contractors and the distribution, transportation and safe use of products. Failure to comply with health and safety law can involve in significant claims, penalties and, potentially, terms of imprisonment.

All products entering the EU must comply with product law. The manufacturer has the primary responsibility for designing and manufacturing products so as to ensure that they are "safe". We must ensure that we supply products which comply with product safety requirements, monitor the safety of products on the market and take steps to, for example, notify the relevant competent authority and to remove a product from the market if it is discovered to be unsafe.

Japan

Japan adopted the Renewables Portfolio Standard Act in 2002, which established minimum amounts of electricity generated from new energy sources that should be used by electric utilities. In addition, since 2012, in the aftermath of the tsunami in 2011, Japan has refocused its policies towards encouraging the growth of renewable energy, including the use of solar PV, by imposing a feed-in tariff scheme. Under this scheme, utilities are required to purchase electricity generated from renewable energy sources on a fixed-period contract for a fixed price. The rate and period are decided every year by an independent committee of the government. The costs incurred by the utility in purchasing renewable energy shall be transferred to all electricity consumers on a nationwide equal surcharge. For the 2017 fiscal year (ending in March 2018), were JPY21 per kWh for systems over 10 kW and JPY28 per kWh for systems less than 10 kW (JPY30 per kWh, if obligated to use an output control system). The amended scheme also introduced new authorization procedures including the submission of a project feasibility study.

Malaysia

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

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

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

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

C. Organizational Structure

The following diagram illustrates our corporate structure as of December 31, 2017.

As of December 31, 2017, we were entitled to substantially all of the economic interests of five holdings companies in Turkey, each of which owned special purpose vehicles, by means of a usufruct contract. While we did not have any ownership interest in the five holdings and their special purpose vehicles, the usufruct contract enabled us to make decisions over the activities that most significantly impacted the economic performance of the holding companies and their respective special purpose vehicles. For the abovementioned reasons we concluded that we were the primary beneficiary of the five holdings companies and thus the five holdings companies and their respective special purpose vehicles were accounted for as consolidated variable interest entities (VIEs) for the year ended December 31, 2017.

The fair value measurements utilize estimates based on key assumptions of the Acquisition, and historical and current market data. In order to ultimately determine the fair values of intangible assets acquired for VIEs, the Group may engage a third party independent valuation specialist, however as of the date of this report, the valuation has not been undertaken. The preliminary allocation of the purchase price is based on the best information available and is pending. 805-10-25-13 requires that, if the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete. During the measurement period, the acquirer shall retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.

During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets or liabilities as of that date. The Group expects the purchase price allocations for the acquisition of VIEs to be completed by the end of the second quarter of fiscal year 2018.

D. Property, Plant and Equipment 

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

The following table sets forth certain information regarding our primary property and facilities owned or leased by us as of December 31, 2017.

We expect that our capital expenditures in 2018 will amount to approximately $90.3 million, which will be primarily used to fund manufacturing technology upgrades and certain R&D related expenditures. We will actively review our capital expenditure plan on a regular basis and make appropriate changes in accordance with our business environment.

None.

A. Operating Results 

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

Overview

We are a global, leading solar energy company involved in manufacturing and sales of solar cells and modules. We manufacture a variety of PV cells and PV modules at our manufacturing facilities in Malaysia and China using advanced manufacturing process technologies including those developed at our research and development facilities in Germany. We supply our solar products across the world, mainly to the United States, China, India, and Japan with sales to those countries comprising approximately 72% of our 2017 net revenue. We sell PV cells and PV modules directly to utility companies, system integrators and also through third-party distributors. We are also growing a nascent EPC group that is focusing on markets in Europe, Turkey and Australia, in addition to the United States.

We shipped 2,956 MW, 4,583.0 MW and 5,438.3 MW of PV modules in 2015, 2016 and 2017, respectively. The average selling price of our PV modules was $0.58 per watt in 2015, $0.53 per watt in 2016 and $0.38 per watt in 2017.

Our net revenues in 2017, 2016, and 2015 were $2,188.9 million, $2,425.9 million, and $1,800.8 million, respectively. We recorded a net loss of $12.4 million 2017, net income of $127.5 million and $43.8 million in 2016 and 2015, respectively. As of December 31, 2017, we had accumulated earnings of $94.9 million and had total borrowings of $1,116.2 million and long-term notes of $99.5 million outstanding.

Key Factors Affecting Our Financial Performance

The most significant factors affecting our financial performance are:

Industry Supply and Demand

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

The PV industry went through a prolonged period of oversupply from the second half of 2009 through 2015, in which the average selling price of our modules declined from $1.10 to $0.50 per watt. During this period of oversupply, an industry-wide capacity rationalization took place, resulting in the bankruptcy and/or consolidation of numerous suppliers lacking competitiveness. In 2015 and the first half of 2016, declining PV prices enabled PV to compete with other forms of energy in key markets such as Japan, China, and the United States. As a result corporate profitability improved across the entire spectrum of the industry’s value chain.

In the second half of 2016, an unfavorable government subsidy scheme in China led an oversupply driven by decrease in China demand. Average selling prices of modules dropped 25% in the second half of 2016 and remained at that level throughout 2017. All major PV manufacturers experienced a decline in profitability, driven by lower margins due to lower ASPs and comparatively higher input prices.

Towards the end of 2017, the U.S. administration’s pro-fossil fuel platform began imposing tariffs and quotas on imported CSPV products, leading to increased uncertainties regarding U.S. demand. While the long-term impacts of the tariffs are yet to be seen, adverse impacts to the U.S. utility sector, at least in the short-term, seem inevitable.

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

Government Subsidies and Trade Sanctions

The imposition of anti-dumping or countervailing duties by the PRC against our products produced in other jurisdictions, or our raw materials, including polysilicon, could materially increase our cost of production and have a material adverse effect on our business and results of operations

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

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

Since the January 2017 change of administration in the United States, U.S. government support for the energy industry has focused more on fossil-fuel-based and other conventional sources of supply. If this continues, the demand for our products may decline. We also expect that new legislation, policies, legal and administrative actions may be proposed or enacted that could curtail subsidies that benefit our products and that additional sanctions could be imposed that could materially and adversely affect demand for our products and our results of operations. See “Item 3.D. Risk Factors—Risks Related to Our Business and Industry—A recent petition filed with the U.S. International Trade Commission calling for new tariffs on solar cells and minimum prices for solar modules imported from outside the United States could harm our ability to sell our products inside the United States, and thereby materially and adversely affect our business prospects, results of operations and financial condition.”

In addition, the Chinese government has imposed anti-dumping duties on certain imports of solar grade polysilicon products imported from the United States and Korea since January 2014 and the European Union since May 2014. See, “Risk Factors—Risks Related to Our Business and Industry—The imposition of anti-dumping or countervailing duties on our raw materials, including polysilicon, could materially increase our cost of production and have a material adverse effect on our business and results of operations.” While these tariffs did not materially increase our cost of production in 2017, we cannot guarantee that these tariffs will not have a material and adverse effect in the future.

Average Selling Price of Our PV Products

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

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

The average selling price of our PV modules was $0.38 per watt in 2017, $0.53 per watt in 2016, and $0.58 per watt in 2015. The changes in the average selling prices of our PV modules primarily reflected the prevailing market trend.

Price and Availability of Silicon and Silicon Wafers 

In 2017, the market experienced a shortage of polysilicon due to more stringent environmental regulations in China. Polysilicon prices, which started the year at $ 15.37/kg recorded a high of $ 17.57/kg towards the end of the year. The effects of higher polysilicon prices, which spilled over to the wafer portion of the value chain, was combined with a supply-demand imbalance in the wafer portion of the value chain as manufacturers took capacities off-line to transition to diamond wire wafers from the traditional slurry wire wafers.

We acquire substantially all of our wafers from a limited number of suppliers at pre-determined terms linked to prevailing market prices. We also acquire a small portion of our polysilicon and silicon wafers through spot market purchases. The prices we pay for silicon and silicon wafers in spot market purchases vary according to the prevailing market price, which have been, and may continue to be, subject to significant fluctuations.

Manufacturing Capacity and Capacity Utilization

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

The following tables set forth Q CELLS’ and our production volume of silicon ingots, silicon wafers, PV cells and PV modules for the periods indicated:

As of December 31, 2017, we had annual nameplate capacities of 4,300 MW for PV cells, 4,300 MW for PV modules, and 1,600 MW for silicon ingots.

Process Technologies

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

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

Fluctuations in Foreign Exchange Rates

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

We enter into economic hedging transactions to minimize the impact of short-term exchange rate fluctuations on the mismatch between our receivables and payables. As we do not intend to fully hedge all of our open positions, we expect fluctuations in foreign exchange rates to continue to, to a certain extent, affect our results of operations. Although the impact of exchange rate fluctuations has in the past been partially mitigated by such transactions, our results of operations have historically been affected by exchange rate fluctuations and may continue to be affected.

Net Revenues

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

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

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

We currently sell a substantial portion of our PV products and services to a limited number of customers and countries. Customers that accounted for a significant portion of our total net revenues in 2017 included NextEra Energy Resources, LLC (Florida Power and Light), Hanwha Q CELLS Korea, Hanwha Q CELLS Japan, Hanwha Q CELLS USA, and Jino0 Solar. Our five largest customers accounted for an aggregate of 39.8% of our net revenues in 2017, compared to 55.8% and 35.5% in 2016 and 2016, respectively.

Geographically, the United States, China, Europe, Korea, India, and Japan accounted for 40.5%, 16.6%, 10.4%, 8.7%, 8.0%, and 6.6% our net revenues, respectively, and were the top six countries or regions in terms of percentage contribution to our net revenues in 2017, compared to 51.6%, 5.1%, 3.3%, 6.4%, 9.6% and 11.7%, respectively, in 2016 and 28.8%, 7.8%, 20.0%, 11.4%, 7.1% and 10.7%, respectively, in 2015. Although we anticipate that our dependence on a limited number of customers in a few concentrated geographic regions, including Europe, Japan, the United States and China, will continue for the foreseeable future, we are actively expanding our customer base and geographic coverage through various marketing efforts, especially in other developing PV markets, such as Korea, India, Australia, Turkey and Latin America.

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

Cost of Revenues and Operating Expenses

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

Cost of Revenues

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

Silicon and silicon wafers are the most important raw materials for our products. We record the purchase price of silicon and silicon wafers and other raw materials initially as inventory in our consolidated balance sheets, and then transfer this amount to our cost of revenues when the raw materials are consumed in our manufacturing process and the finished products are sold and delivered. Certain silicon suppliers required prepayments from us in advance of delivery. We classify such prepayments as advances to suppliers and record such prepayments under either non-current assets or current assets in our consolidated balance sheets.

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

Operating Expenses

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

Selling Expenses

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

General and Administrative Expenses

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

Research and Development Expenses

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

Restructuring Charges

In January 2015, we announced restructuring plans to restructure our global operations. This decision includes the shutdown of its production facilities in Thalheim, Germany and the transfer of machineries used for production to the production site in Malaysia. This plan resulted in a downsizing of the workforce in Germany, which was communicated in March 2015, and an alternate use for certain assets that cannot be transferred. The Group estimated that it recognized aggregate charges pursuant to the restructuring plan of up to $22.0 million and $0.7 million in 2015 and 2016, respectively, consisting of severance and other one-time termination benefits, cost to relocate long-lived assets, repayments of government subsidies and other costs. In 2017, we made payments in the amount of $1.5 million to settle restructuring charge related liabilities. As of December 31, 2017, we had $0.2 million of liabilities to be settled in relation to our 2015 restructuring.

Other operating income

In the first quarter of 2017, we sold certain intellectual properties relating to the production of PERC cells to Hanwha Q CELLS Korea and received EUR 16.3 million ($18.4 million) in exchange.

Taxation

Cayman Islands

Under the current law of the Cayman Islands law, the Company and its subsidiaries in Cayman Islands are not subject to tax on its income or capital gains. In addition, upon any payment of dividends by the Company, no withholding tax is imposed.

Korea

The basic Korean corporation national income tax rates are 10% on first 200million Korean Won(KRW), 20% for the tax base between KRW 200million and KRW 20billion, 22% for the excess. And additional local income tax rates are 1% on the first KRW 200million, 2% for the tax base between KRW 200million and KRW 20billion, 2.2% for the excess. And Effective from the tax year beginning on or after 1 January 2015 through the tax year including 31 December 2017, in order to motivate corporations to utilize corporate retained earnings to fund facility investment, wage increases, and dividend payments, the corporate income tax law has introduced a 10% additional tax if the company’s qualified expenditures for facility investment, wage increases, and dividend payments fall short of a certain threshold.

Malaysia

Hanwha Q CELLS Malaysia Sdn. Bhd was incorporated in Malaysia and is subject to 24% corporate income tax rate except for small business company that have paid-up capital with respect to ordinary shares of MYR 2,500,000 or less. For years of assessment 2017 and 2018, corporate income tax rate on incremental chargeable income derived from business sources, as compared to the immediate preceding year of assessment, is reduced from 1% to 4% if certain conditions are met. Malaysia offers a wide range of incentives such as tax holiday or investment tax allowances, which are granted to promote investments in selected industry sector or promoted areas.

China, People’s Republic of

The statutory standard rate of enterprise income tax in China, People’s Republic is 25%, effective from January 1, 2008. In accordance with the corporate income tax law, a company is entitled to a preferential income tax of 15% if qualifying as an Advanced and New Technology Enterprise. The preferential tax rate, once being approved by the relevant government authorities, is subject to renewal every three years. However, a company that enjoys the preferential income tax rate should perform self-assessment to ensure it maintains the required qualification during those three years.

Germany

Hanwha Q CELLS Gmbh was incorporated in Germany and is subject to 15% corporate income tax rate plus a solidarity surcharge of 5.5% on corporate income tax and a trade tax which is combination of a uniform rate of 3.5% and municipal tax at a rate of between 9.1% and 15.75%.

United States

Hanwha Q CELLS America Inc and its subsidiaries in USA are subject to progressive US federal statutory tax rate from 15% to 21% and also subject to the state of California income tax rate of 8.84%. The state income tax paid is deductible for US federal income tax.

Turkey

Hanwha Q CELLS Turkey and its subsidiaries in Turkey are liable for corporate income tax at a rate of 20% on net profits generated.

Chile

Hanwha Q CELLS Chile SpA and its subsidiaries were incorporated in Chile. The corporate income tax rate is 25% or 25.5%, depending on the tax regime elected by the company.

Australia

Hanwha Q CELLS Australia Pty Ltd was incorporated in Australia and is subject to a federal tax rate of 30% except for eligible small business company that have the aggregate turnover of less than AUD 2 million.

Hong Kong SAR

Hanwha Q CELLS Hong Kong Limited was incorporated in Hong Kong. Hong Kong adopts a territorial basis of taxation and profit tax is payable on profits arising in or derived from Hong Kong. No income tax provision has been made for Hanwha Q CELLS Hong Kong Limited in any period, as the entities did not have assessable profits subject to Hong Kong Profit Tax at the rate of 16.5% for the years presented.

Canada

Hanwha Q CELLS Canada, Corp. was incorporated in Canada. The basic rate of federal corporate tax for 2017 is 38%, but it is reduced to 15% by an abatement of 10 percentage points on a corporation’s taxable income earned in a province or territory and a general rate reduction of 13 percentage points on a corporation’s full-rate taxable income. Provincial and territorial tax rates are added to the federal tax and generally vary between 10% and 16% of taxable income.

British Virgin Islands

Under the British Virgin Islands Business Companies Act, companies incorporated under the British Virgin Islands Companies Act are exempt from all taxes.

Critical Accounting Policies and Estimates

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

Reverse Acquisition

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

Revenue Recognition

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

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

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

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

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

Property, Plant and Equipment

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

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

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

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

Warranty Costs

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

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

Impairment of Long-Lived Assets

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

$36.3 million, $4.5 million and nil impairment charge was recognized for the years ended December 31, 2017, 2016, and 2015, respectively. The impairment recognized in the year ended December 31, 2017, was in relation to the discontinuation of our wafer production. Upon detailed review of the competitiveness of our wafer manufacturing operation, we determined that we do not have the production scale that will enable us to stay competitive in the global wafer market. The impairment amount and recoverability of remaining assets relating to wafer production were evaluated by an independent expert taking into account expected sales price of impaired assets less costs associated with the disposition of such assets.

Functional and Reporting Currencies

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

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

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

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

Our foreign currency derivative contracts and interest rate swap contracts are used to manage our foreign currency risks principally arising from sales contracts denominated in the Euro, Australian Dollar, Korean Won and Japanese Yen, and interest rate risk arising from our long-term bank borrowings. We record these derivative instruments as current assets or current liabilities, measured at fair value.

Changes in the fair value of these derivative instruments are recognized in our consolidated statements of comprehensive income (loss). These derivative instruments are not designated and do not qualify as hedges and are adjusted to fair value through current earnings. As of December 31, 2017, the Group had outstanding cross-currency exchange rate contracts to deliver AUD 19.7 million, JPY 1,726.3 million, CAD 0.7 million, EUR 5.8million and receive $35.8 million and interest rate swap contracts with notional amount of $ 440.2 million in which the Company pays fixed interest and receives variable interest. We estimate the fair value of our foreign currency and interest rate swap derivatives using a pricing model based on market observable inputs.

Accounting for Income Taxes and Uncertain Income Tax Positions

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

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

Advance to Suppliers and Long-term Prepayments

Advance to suppliers and long-term prepayments represent interest-free cash deposits paid to suppliers for future purchases of raw materials. As of December 31, 2017, we had $41.2 million of advances to suppliers outstanding.

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

Recent Accounting Pronouncements

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

The FASB allows two adoption methods under ASU 2014-09. Under one method, a company will apply the rules to contracts in all reporting periods presented, subject to certain allowable exceptions. Under the other method, a company will apply the rules to all contracts existing as of January 1, 2018, recognizing in beginning retained earnings an adjustment for the cumulative effect of the change and providing additional disclosures comparing results to previous rules ("modified retrospective method"). The Group evaluated the available adoption methods, and chooses the modified retrospective transition method. Under the chosen method, the potential effect the implementation will have on its revenue streams and financial statements are as follows;

Variable consideration on quantity discount – Under 606-10-32-5 if the consideration promised in a contract includes a variable amount, an entity shall estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. Also under 606-10-32-8 an entity shall estimate an amount of variable consideration by using either of the following methods, depending on which method the entity expects to better predict the amount of consideration to which it will be entitled:

a. The expected value—The expected value is the sum of probability-weighted amounts in a range of possible consideration amounts. An expected value may be an appropriate estimate of the amount of variable consideration if an entity has a large number of contracts with similar characteristics.

b. The most likely amount is the single most likely amount in a range of possible consideration amounts (that is, the single most likely outcome of the contract). The most likely amount may be an appropriate estimate of the amount of variable consideration if the contract has only two possible outcomes (for example, an entity either achieves a performance bonus or does not).

For customers in Europe, the Company provides credit notes in the following quarter if certain goals are achieved by the customer. Transaction price applicable for credit note to be provided in the future needs to be deferred. Furthermore, credit note provided to the customer based on the sales quantity, is variable consideration, and needs to be considered for determination of transition price. The entity expects the effect of these changes to decrease revenues by $0.6m based on the above assumptions being applied during 2017.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The amendments in this update are intended to simplify the presentation of deferred income taxes and require that deferred tax liabilities and assets be classified as noncurrent in a consolidated statement of financial position. The standard was retrospectively adopted by the Company on January 1, 2016. According to the Company retrospectively adopted the standard as of December 31, 2016, the line items current liabilities and non-current liabilities in our consolidated balance sheet would have been reduced and increased by $2.4 million respectively, as a result of reclassifying the current deferred tax liabilities.

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

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

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

In August 2016, the FASB issued Accounting Standards Update No. 2016-15 (ASU 2016-15), “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments,” which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The ASU is effective for annual and interim periods beginning after December 15, 2017. The Group is in the process of evaluating the impact of the standard on its consolidated financial statements.

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

In January 2017, the FASB issued Accounting Standards Update 2017-01 (ASU 2017-01), “Business Combinations (Topic 805): Clarifying the Definition of a Business”, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Group does not expect that the new standard will have a material impact on its consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04 (ASU 2017-04), “Simplifies Goodwill Impairment TestIntagibles, Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, under the ASU, “an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.” The ASU is effective prospectively for fiscal years beginning after December 15, 2019. The Group does not expect that the new standard will have a material impact on its consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock compensation (Topic 718): Scope of modification accounting” to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. ASU 2017-09 is effective prospectively for all companies for annual periods beginning on or after December 15, 2017, and early adoption is permitted. The Group does not expect that the new standard will have a material impact on its consolidated financial statements.

In August 2017, the FASB issued Accounting Standards Update No. 2017-12 (ASU 2017-12), “Derivatives and Hedging”, – Targeted Improvements to Accounting for Hedging Activities, to simplify certain aspects of hedge accounting for both non-financial and financial risks and better align the recognition and measurement of hedge results with an entity’s risk management activities. ASU 2017-12 also amends certain presentation and disclosure requirements for hedging activities and changes how an entity assesses hedge effectiveness. ASU 2017-12 is effective for fiscal years and interim periods within those years beginning after December 15, 2018, and early adoption is permitted. The Group is in the process of evaluating the impact of the standard on its consolidated financial statements.

In February 2018, the FASB issued Accounting Standards Update No. 2018-02 (ASU 2018-02), “Income Statement – Reporting Comprehensive Income” – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, to allow entities to reclassify the income tax effects of the Tax Act on items within accumulated other comprehensive income to retained earnings. ASU 2018-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2018, and early adoption is permitted. The Group is in the process of evaluating the impact of the standard on its consolidated financial statements.

Consolidated Results of Operations

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

2017 Compared to 2016

Net Revenues

Our net revenues decreased by 9.8% to $2,188.9 million for 2017 from $2,425.9 million for 2016 due to lower PV module ASPs. Global PV Module ASPs which averaged $ 0.53/Wp in the first half of 2016 declined sharply to $0.42/Wp in the second half of 2016, due to the global oversupply caused by a decrease in domestic demand in PRC. APS continued to decline steadily in 2017, resulting in a revenue decrease of $237.0 million year over year. This decrease in revenue was partially off-set by the increased shipment volumes from 4,583 MW in 2016 to 5,438 MW in 2017. In 2017, our major markets were the United States, China, India, Europe, Korea, and Japan, accounting for 80.4% of our total revenues, compared to 88.4% in 2016.

Cost of Revenues and Gross Profit

Our cost of revenues decreased by 2.1% to $1,944.1 million for 2017 from $1,985.6 million for 2016 due primarily to the reduction in raw material and processing costs. Wafers, which were on average priced around $0.75 per piece during 2016, traded for an average of $0.61 per piece during 2017, resulting in a 7% decrease our manufacturing costs.

Our gross profit decreased by 44.4% to $244.8 million for 2017 from $440.3 million for 2016 as ASP decline outpaced manufacturing cost reduction and we recognized a one-time loss in the amount of $39.2 million upon discontinuation of our wafer manufacturing operations. Our gross profit margin decreased to 11.2% for 2017 from 18.1% for 2016.

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

Our selling expenses primarily consist of warranty costs, marketing and promotional expenses, shipping and handling costs and salaries, commissions, traveling expenses and benefits of our sales and marketing personnel. Our selling expenses decreased by 4.7% to $114.5 million for 2017 from $120.1 million for 2016, due to continued cost cutting efforts. Selling expenses as a percentage of our total net revenues increased slightly to 5.2% of our revenues in 2017 compared to 5.0% in 2016.

Our general and administrative expenses primarily consist of salaries and benefits of our administrative staff, depreciation charges of fixed assets used for administrative purposes, as well as administrative office expenses, including consumables, traveling expenses, insurance for our administrative personnel, and bad debt expense. Our general and administrative expenses increased by 26.7% to $99.1 million for 2017 from $78.2 million for 2016, due primarily a one-time bad debt expense in the amount of $35.1 million. This one-time increase in general and administrative expenses was partially off-set by our continued cost cutting efforts. General and administrative expenses as a percentage of our total net revenues increased to 4.5% for 2017 from 3.2% for 2016.

Our research and development expenses primarily consist of materials used for research and development purposes, salaries and benefits of our research and development staff, depreciation charges, and travel expenses incurred by our research and development staff or otherwise in connection with our research and development activities. Our research and development expenses decreased by 51.2% to $24.0 million for 2017 from $49.2 million for 2016. Research and development expenses as a percentage of our total net revenues decreased to 1.1% for 2017 from 2.0% for 2016.

In 2017, we recognized other income in the amount of $18.4 million resulting from a sale of certain intellectual properties relating to the mass production of PERC cells to a third party, resulting in a one-time deduction to our operating expenses.

Operating Income

As a result of the foregoing, our operating income was $25.6 million for 2017, compared to $192.1 million for 2016. Our operating profit margin was 1.2% for 2017, compared to 7.9% for 2016.

Interest Income and Expense and Foreign Exchange Gain

We generated interest income of $4.9 million and incurred interest expense of $44.9 million for 2017, compared to interest income of $8.1 million and interest expense of $54.5 million for 2016. The decrease in interest expense was due to the repayment of higher interest-bearing debt instruments, a temporary repayment of loans, and decrease in parental guarantee fees.

We recorded foreign exchange gain of $18.0 million for 2017, compared to foreign exchange loss of $3.5 million for 2016, due primarily to increased U.S. dollar denominated assets resulting from increased shipments to the U.S., which helped reduce our over-sold U.S. dollar position.

Income Tax Expenses

Our income tax expense was $12.0 million for 2017 compared to an income tax benefit of $4.3 million in 2016. In 2016, we recognized a tax benefit primarily due to the derecognition of a $17.9 million due to expiration of the period of exclusion regarding an uncertain tax position in China.

Net Results of Operations

As a result of the cumulative effect of the above factors, we had a net loss of $12.4 million for 2017, compared to a net income of $127.5 million for 2016. Our net profit margin was -0.6% for 2017, as compared to 5.3% for 2016.

Other Comprehensive Income (Loss)

We recorded foreign currency translation adjustments of positive $59.9 million and pension adjustment of negative $0.2 million for 2017, compared to negative $59.8 million foreign currency translation adjustments and a negative $0.3 million pension adjustment for 2016. Other comprehensive losses in 2017 resulted from depreciation of CNY, EUR, and MYR against the US dollar. Such depreciation of functional currencies in our Chinese, German, and Malaysian subsidiary resulted in the recognition of other comprehensive losses resulting from currency translation adjustments.

2016 Compared to 2015

Net Revenues

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

Cost of Revenues and Gross Profit

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

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

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

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

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

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

Operating Income

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

Interest Income and Expense and Foreign Exchange Gain

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

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

Income Tax Expenses

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

Net Income

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

Other Comprehensive Income (Loss)

We recorded foreign currency translation adjustments of positive $59.9 million and pension adjustment of negative $0.2 million for 2017, compared to foreign currency translation adjustments of negative $59.8 million and pension adjustment of negative $0.3 million for 2016, compared to foreign currency translation adjustments of negative $34.6 million and pension adjustment of nil for 2015. Other comprehensive losses in 2017 resulted from depreciation of CNY, EUR, and MYR against the US dollar. Such depreciation of functional currencies in our Chinese, German, and Malaysian subsidiary resulted in the recognition of other comprehensive losses resulting from currency translation adjustments.

B. Liquidity and Capital Resources

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

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

Cash Flows

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

Cash Flows from Operating Activities

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

Our net cash used in operating activities was $48.8 million for 2017, which was derived from net loss of $12.4 million, adjusted to reflect a net positive adjustment relating to non-cash items and a net positive effect from changes in operating assets and liabilities. The adjustments relating to non-cash items were primarily comprised of depreciation, amortization and impairment of $111.2 million, foreign currency exchange gain of $28.7 million. The adjustments relating to changes in operating assets and liabilities, which resulted in a net negative effect of $141.8 million, were primarily comprised of:

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

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

Cash Flows from Investing Activities

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

Our net cash used in investing activities was $199.5 million for 2017, primarily consisting of $110.2 million of cash used in acquisition of fixed and intangible assets for capacity expansion and upgrades in our Malaysia and Chinese facilities and $13.0 million of cash received from repayment of loans by related parties.

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

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

Our capital expenditures amounted to $110.2 million in 2017 which were primarily used to fund on-going capital equipment enhancements in Malaysia and China, as well as entitled to substantially all of the economic interests of five holdings companies in Turkey, each of which owned special purpose vehicles, by means of a usufruct contract.

Our capital expenditures amounted to $174.9 million in 2016 which were primarily used to fund expansion of our production facilities in Korea and on-going capital equipment upgrades in Malaysia and China.

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

We expect that our capital expenditures will amount to approximately $90.3 million in 2018, which will be primarily used to fund on-going capital equipment upgrades in Malaysia and China and certain R&D activities. We plan to fund our capital expenditure and investment requirements with cash from operations, bank borrowings, proceeds from our securities offerings and other forms of financing, if necessary. We will actively review our capital expenditure and investment plans on a regular basis and make appropriate changes in accordance with our business environment.

Cash Flows from Financing Activities

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

Our net cash provided by financing activities was $17.4 million for 2017. This was mainly attributable to repayment of bank borrowings of $447.9 million, partially offset by proceeds from borrowings from banks of $430.5 million.

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

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

Capital Resources

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

As of December 31, 2017, we had long-term debt (including the current portion) of $731.0 million and short-term debt of $385.2 million. Our long-term debt consists mainly of long-term borrowings from commercial banks, a loan from the Malaysian government and long-term notes.

As of December 31, 2017, we had short-term bank borrowings from various commercial banks with an aggregate outstanding balance of $385.2 million. Our short-term bank borrowings outstanding as of December 31, 2017 bore average interest rates of 4.09% per annum. These short-term bank borrowings have terms of one month to one year, and expire at various times throughout the year. Some of our short-term bank borrowings were secured by land use rights and building ownership.

As of December 31, 2017, we had long-term bank borrowings (including current portion) from various commercial banks with an aggregate outstanding balance of $593.2 million. The long-term bank borrowings outstanding as of December 31, 2017 bore an average interest rate of 3.33% per annum and had maturities ranging from 2018 through 2020. We expect to continue to rollover our bank borrowings when they become due. To the extent we are unable to rollover our bank borrowings for whatever reason, we will repay such borrowings with cash generated from operating activities or alternative funding sources. Certain bank borrowings were guaranteed by Hanwha Chemical. See Note 13 to our consolidated financial statements included elsewhere in this annual report.

As of December 31, 2017, the principal amount of the Malaysian government loan was MYR 835,000,000 million ($205.3 million, translated at the rate of $0.2459 per one Malaysian Ringgit) and is repayable in installments from 2013 through 2031. Interest rates are variable, with a fixed 0% interest through 2019, a fixed 1% interest through 2027 and a fixed 2% interest through maturity. The fixed assets of Hanwha Q CELLS Malaysia were pledged as collateral and the loan was guaranteed by Hanwha Chemical. The book value of the Malaysian government loan as of December 31, 2017 was $137.8 million, which is approximately the fair value of the loan measured at an effective interest rate of 4.3% per annum.

As of December 31, 2017, we had cash and cash equivalents of $183.4 million. Our cash and cash equivalents primarily consist of cash on hand and bank deposits, which are unrestricted as to withdrawal and use and have original maturities less than 90 days. As of December 31, 2017, we had restricted cash in the amount of $139.7 million, which represents amounts held by a bank as security for letters of credit facilities, notes payable and bank borrowings and, therefore, are not available for our use. The restriction on the use of restricted cash is generally expected to be released at the maturity of the underlying letter of credit facilities, notes payable and bank borrowings which range from three months to 12 months, unless the underlying liabilities are rolled over or a default occurs. As we expect to roll over most of the underlying short-term liabilities, we do not expect the total amount of restricted cash to change substantially in the foreseeable future. As of December 31, 2017, unused loan facilities for short-term and long-term borrowings amounted to $64.7 million.

C. Research and Development, Patents and Licenses

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

We have been developing advanced technologies to improve the conversion efficiency and reduce the production cost of our PV products. Following the acquisition of Q CELLS in February 2015, we were able to share best practices between the former SolarOne and Q CELLS and roll-out Q CELLS’ advanced technology and research processes to improve our product performance and reliability and reduce production costs. Our primary research and development center is located at Thalheim, Germany, which employed 207 highly trained researchers as of December 31, 2016. In the past, Q CELLS has developed and commercialized a wide range of products and standard production processes. For example, Q CELLS’ engineers developed the 6-inch solar cell, the 3-busbar layout and the full-square monocrystalline solar cell. Q CELLS also succeeded in 2014 in the commercial production of multicrystalline PERC cells, which have higher conversion efficiency rate than traditional BSF cells, at its German facilities and started marketing them under our “Q.ANTUM” brand. Our research and development expenses were $23.1 million in 2017, $49.2 million in 2016 and $48.3 million in 2015.

As of the date of this annual report, we had been granted 92 patents and utility models and 49 applications for patents and utility models pending in China, 46 patents and 70 patent applications pending in Germany and 68 patents and 44 patent applications pending in other countries.

D. Trend Information

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events since January 1, 2018 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

E. Off-Balance Sheet Arrangements

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

F. Tabular Disclosure of Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2017:

G. Safe Harbor

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

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

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

A. Directors and Senior Management 

Directors and Executive Officers

The following table sets forth information regarding our directors and executive officers as of December 31, 2017.