Canadian Solar Annual Report 2017

Plain-text annual report

Use these links to rapidly review the document Table of Contents CANADIAN SOLAR INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTSTable of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549Form 20-FCommission file number: 001-33107CANADIAN SOLAR INC.(Exact name of Registrant as specified in its charter)N/A(Translation of Registrant's name into English)Canada(Jurisdiction of incorporation or organization)545 Speedvale Avenue WestGuelph, Ontario, Canada N1K 1E6(Address of principal executive offices)Huifeng Chang, Chief Financial Officer545 Speedvale Avenue WestGuelph, Ontario, Canada N1K 1E6Tel: (1-519) 837-1881Fax: (1-519) 837-2550(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:(Mark One) o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 ORý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2017 ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ORo SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company reportTitle of Each Class Name of Each Exchange on Which RegisteredCommon shares with no par value The NASDAQ Stock Market LLC (The NASDAQ Global Select Market)Securities registered or to be registered pursuant to Section 12(g) of the Act:None(Title of Class)Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:None(Title of Class) Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report. 58,496,685 common shares issued and outstanding which were not subject to restrictions on voting, dividend rights and transferability, 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 o No ý 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 of1934. Yes o No ý 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 suchshorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o 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 toRule 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). Yes ý No o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of "accelerated filer," "large acceleratedfiler" and "emerging growth company" 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 forcomplying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. o Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP ý International Financial Reporting Standards as issued by the International Accounting Standards Board o Other o If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o Item 18 o 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 o No ý (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 ofsecurities under a plan confirmed by a court. Yes o No o †The term "new or revised financial accounting standard" refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.Large accelerated filer ý Accelerated filer o Non-accelerated filer oEmerging growth company o Table of Contents Table of Contents Page INTRODUCTION 1 FORWARD-LOOKING INFORMATION 2 PART I 3 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 3 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 3 ITEM 3. KEY INFORMATION 3 ITEM 4. INFORMATION ON THE COMPANY 39 ITEM 4A. UNRESOLVED STAFF COMMENTS 65 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 65 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 104 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 122 ITEM 8. FINANCIAL INFORMATION 123 ITEM 9. THE OFFER AND LISTING 129 ITEM 10. ADDITIONAL INFORMATION 130 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 140 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 141 PART II 142 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 142 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OFPROCEEDS 142 ITEM 15. CONTROLS AND PROCEDURES 142 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 144 ITEM 16B. CODE OF ETHICS 144 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 144 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 145 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 145 ITEM 16F. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT 145 ITEM 16G. CORPORATE GOVERNANCE 145 ITEM 16H. MINE SAFETY DISCLOSURE 145 PART III 146 ITEM 17. FINANCIAL STATEMENTS 146 ITEM 18. FINANCIAL STATEMENTS 146 ITEM 19. EXHIBITS 146 SIGNATURES 148 Table of Contents INTRODUCTION Unless otherwise indicated, references in this annual report on Form 20-F to:•"AC" and "DC" are to alternating current and direct current, respectively; •"China" and the "PRC" are to the People's Republic of China, excluding, for the purposes of this annual report on Form 20-F, Taiwan and thespecial administrative regions of Hong Kong and Macau; •"COD" refers to completion of development; •"CSI," "we," "us," "our company" and "our" are to Canadian Solar Inc., a Canadian company, its predecessor entities and its consolidatedsubsidiaries; •"C$" and "Canadian dollars" are to the legal currency of Canada; •"EPC" is to engineering, procurement and construction; •"EU" refers to the European Union; •"FIT" refers to feed-in tariff; •"MSS" refers to module and system solutions; •"O&M services" is to operation and maintenance services; •"PPA" refers to power purchase agreement; •"PV" is to photovoltaic. The photovoltaic effect is a process by which sunlight is converted into electricity; •"RMB" and "Renminbi" are to the legal currency of China; •"shares" and "common shares" are to common shares, with no par value, of Canadian Solar Inc.; •"THB" is to legal currency of Thailand; •"U.S." refers to the United States of America; •"W," "kW," "MW" and "GW" are to watts, kilowatts, megawatts and gigawatts, respectively; •"$," "US$" and "U.S. dollars" are to the legal currency of U.S.; •"€" and "Euro" are to the legal currency of the Economic and Monetary Union of the European Union; •"£" and "British pounds" are to the legal currency of the United Kingdom; and •"¥," "JPY" and "Japanese yen" are to the legal currency of Japan; This annual report on Form 20-F includes our audited consolidated financial statements for the years ended December 31, 2015, 2016 and 2017 and as ofDecember 31, 2016 and 2017. We use the noon buying rate in The City of New York for cable transfers in Renminbi, Euros, British pounds, Japanese yen, Canadian dollars, Australiandollars and Thai Baht per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York to translate Renminbi, Euros, British pounds,Japanese yen, Canadian dollars, Australian dollars and Thai Baht to U.S. dollars not otherwise recorded in our consolidated financial statements and includedelsewhere in this annual report. Unless otherwise stated, the translation of Renminbi, Euros, British pounds, Japanese yen, Canadian dollars, Australiandollars and Thai Baht into U.S. dollars was made by the noon buying rate in effect on December 29, 2017, which was RMB6.5063 to $1.00, €0.8318 to $1.00,£0.7391 to $1.00, ¥112.69 to $1.00, C$1.2517 to $1.00, AUD1.2795 to $1.00 and THB32.5600 to $1.00. We make no representation that the Renminbi,Euro, British pounds, Japanese yen, Canadian dollar, Australian dollars, Thai Baht or U.S. dollar amounts referred to in this annual report on Form 20-F couldhave been or could be converted into U.S. dollars, Euros, British pounds, Japanese yen, Canadian dollars, Australian dollars, Thai Baht or Renminbi, as thecase may be, at any particular rate or at all. See "Item 3. Key Information—D. Risk Factors—Risks Related to Our Company and Our Industry—Fluctuationsin exchange rates could adversely affect our business, including our financial condition and results of operations."1Table of Contents FORWARD-LOOKING INFORMATION This annual report on Form 20-F contains forward-looking statements that relate to future events, including our future operating results, our prospectsand our future financial performance and condition, results of operations, business strategy and financial needs, all of which are largely based on our currentexpectations and projections. These forward-looking statements are made under the "safe harbor" provisions of the U.S. Private Securities Litigation ReformAct of 1995. You can identify these statements by terminology such as "may," "will," "expect," "anticipate," "future," "intend," "plan," "believe," "estimate,""is/are likely to" or similar expressions. Forward-looking statements involve inherent risks and uncertainties. These forward-looking statements include,among other things, statements relating to:•our expectations regarding the worldwide demand for electricity and the market for solar power; •our beliefs regarding the importance of environmentally friendly power generation; •our beliefs regarding the value of and ability to monetize our portfolio of solar power projects; •our expectations regarding governmental support for solar power; •our beliefs regarding the rate at which solar power technologies will be adopted and the continued growth of the solar power industry; •our beliefs regarding the competitiveness of our solar power products and services; •our expectations with respect to increased revenue growth and improved profitability; •our expectations regarding the benefits to be derived from our supply chain management and vertical integration manufacturing strategy; •our ability to continue developing our in-house solar component production capability and our expectations regarding the timing of theexpansion of our internal production capacity; •our ability to secure adequate volumes of silicon, solar wafers and cells at competitive cost to support our solar module production; •our beliefs regarding the effects of environmental regulation; •our future business development, results of operations and financial condition; •competition from other manufacturers of solar power products and conventional energy suppliers; •our ability to successfully expand our range of products and services and to successfully execute plans for our energy segment; •our ability to develop, build and sell solar power projects in Canada, the U.S., Japan, China, Brazil, India, Mexico, the United Kingdom,Australia and elsewhere; and •our beliefs with respect to the outcome of the investigations and litigation to which we are a party. Known and unknown risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different from anyfuture results, performance or achievements expressed or implied by forward-looking statements. See "Item 3. Key Information—D. Risk Factors" for adiscussion of some of the risk factors that may affect our business and results of operations. These risks are not exhaustive. Other sections of this annual reportmay include additional factors that could adversely influence our business and financial performance. Moreover, because we operate in an emerging andevolving industry, new risk factors may emerge from time to time. We cannot predict all risk factors, nor can we assess the impact of all or any of these factorson our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those expressed or implied inany forward-looking statement. We do not undertake any obligation to update or revise the forward-looking statements except as required underapplicable law.2Table of Contents PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. ITEM 3. KEY INFORMATION A. Selected Financial DataSelected Consolidated Financial and Operating Data The following selected statement of operations data for the years ended December 31, 2015, 2016 and 2017 and balance sheet data as of December 31,2016 and 2017 have been derived from our consolidated financial statements, which are included elsewhere in this annual report on Form 20-F. You shouldread the selected consolidated financial and operating data in conjunction with those financial statements and the related notes and "Item 5. Operating andFinancial Review and Prospects" included elsewhere in this annual report on Form 20-F. Our selected consolidated statement of operations data for the years ended December 31, 2013 and 2014 and our consolidated balance sheet data as ofDecember 31, 2013, 2014 and 2015 were derived from our consolidated financial statements that are not included in this annual report. All of our financial statements are prepared and presented in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. Our historicalresults are not necessarily indicative of results for any future periods.3 For the years ended, or as of, December 31, 2013 2014 2015 2016 2017 (In thousands of $, except share and per share data, and operating dataand percentages) Statement of operations data: Net revenues 1,654,356 2,960,627 3,467,626 2,853,078 3,390,393 Income from operations 130,816 366,314 247,371 93,164 269,345 Net income 45,565 243,887 173,316 65,275 102,983 Net income attributable to Canadian Solar Inc. 31,659 239,502 171,861 65,249 99,572 Earnings per share, basic 0.68 4.40 3.08 1.13 1.71 Shares used in computation, basic 46,306,739 54,408,037 55,728,903 57,524,349 58,167,004 Earnings per share, diluted 0.63 4.11 2.93 1.12 1.69 Shares used in computation, diluted 50,388,284 59,354,615 60,426,056 58,059,063 61,548,158 Other financial data: Gross margin 16.7% 19.6% 16.6% 14.6% 18.8%Operating margin 7.9% 12.4% 7.1% 3.3% 7.9%Net margin 2.8% 8.2% 5.0% 2.3% 3.0%Table of ContentsB. Capitalization and Indebtedness Not applicable.C. Reasons for the Offer and Use of Proceeds Not applicable.D. Risk FactorsRisks Related to Our Company and Our IndustryWe may be adversely affected by volatile solar power market and industry conditions; in particular, the demand for our solar power products and servicesmay decline, which may reduce our revenues and earnings. Our business is affected by conditions in the solar power market and industry. We believe that the solar power market and industry may from time to timeexperience oversupply. When this occurs, many solar power project developers, solar system installers and solar power product distributors that purchasesolar power products, including solar modules from manufacturers like us, may be adversely affected. Although our shipments of solar modules increasedyear-over-year in 2015, 2016 and 2017, the average selling prices for our solar modules declined. Over the past several quarters, oversupply conditions acrossthe value chain and foreign trade disputes in the U.S., Europe, India and China have affected industry-wide demand and put pressure on average sellingprices, resulting in lower revenue for many industry participants. If the supply of solar modules grows faster than demand, and if governments continue toreduce financial support for the solar industry and impose trade barriers for solar power products, demand for our products, as well as our average sellingprice, could be materially and adversely affected.4 For the years ended, or as of, December 31, 2013 2014 2015 2016 2017 (In thousands of $, except share and per share data, and operating dataand percentages) Selected operating data: Solar power products sold (in MW) —MSS segment(1) 1,809.0 2,436.4 4,085.0 5,138.1 6,538.8 —Energy segment(2) 85.0 376.2 298.8 65.7 354.3 Total 1,894.0 2,812.6 4,383.8 5,203.8 6,893.1 Average selling price (in $ per watt) —Solar module 0.67 0.67 0.58 0.51 0.40 Balance Sheet Data: Net current assets (liabilities) (59,003) 366,621 (392,231) 69,697 (22,709)Total assets 2,453,735 3,068,115 4,413,928 5,406,606 5,889,627 Net assets 401,498 729,574 832,510 899,390 1,059,775 Long-term borrowings 151,392 134,300 606,577 493,455 404,341 Convertible notes — 145,691 146,674 125,569 126,476 Common shares 561,242 675,236 677,103 701,283 702,162 Number of shares outstanding 51,034,343 55,161,856 55,965,443 57,830,149 58,496,685 (1)Numbers are calculated after inter-segmentation elimination and represent solar power products sold to third parties. (2)Numbers are calculated after inter-segmentation elimination.Table of Contents The solar power market is still at a relatively early stage of development and future demand for solar power products and services is uncertain. Marketdata for the solar power industry is not as readily available as for more established industries, where trends are more reliably assessed from data gathered overa longer period of time. In addition, demand for solar power products and services in our targeted markets, including Europe, the U.S., Japan, China, Braziland India may not develop or may develop to a lesser extent than we anticipate. Many factors may affect the viability of solar power technology and thedemand for solar power products, including:•the cost-effectiveness, performance and reliability of solar power products and services, including our solar power projects, compared toconventional and other renewable energy sources and products and services; •the availability of government subsidies and incentives to support the development of the solar power industry; •the availability and cost of capital, including long-term debt and tax equity, for solar power projects; •the success of other alternative energy technologies, such as wind power, hydroelectric power, geothermal power and biomass fuel; •fluctuations in economic and market conditions that affect the viability of conventional and other renewable energy sources, such as increasesor decreases in the prices of oil, gas and other fossil fuels; •capital expenditures by end users of solar power products and services, which tend to decrease when the economy slows; and •the availability of favorable regulation for solar power within the electric power industry and the broader energy industry. If solar power technology is not suitable for widespread adoption or if sufficient demand for solar power products and services does not develop or if ittakes longer to develop than we anticipate, our revenues may suffer and we may be unable to sustain our profitability. Currently, demand in Europe generallyremains weak as a result of reductions in FITs in Germany and the elimination of FITs in Italy, the two largest European markets over the past several years.Although demand in other regions, including China, Japan, the U.S. and India, as well as many other emerging markets in Asia, the Middle East and Africa,has offset the decline in European demand, we cannot assure you that this demand will be sustainable or that any recent positive trends in supply or demandbalance will persist.The operating results of our energy segment and the mix of revenues from our MSS and energy segments may be subject to significant fluctuation due to anumber of factors, including our inability to find third party buyers for our solar power projects in a timely manner, on favorable terms and conditions, orat all. Our energy segment develops sells and/or operates and maintains solar power projects primarily in Canada, Japan, the U.S., China, Brazil, India, Mexico,the United Kingdom and Australia. Our solar project development activities have grown over the past several years through a combination of organic growthand acquisitions. After completing the development of solar power projects, we either sell them to third party buyers, or operate them under power purchaseagreements, or PPAs, or other contractual arrangements with utility companies or grid operators. Revenues from our energy segment increased by$920.0 million, or 16.5 times, from $55.8 million for the year ended December 31, 2012 to $975.9 million for the year ended December 31, 2015, but thendecreased by $869.5 million, or 89.1%, to $106.4 million for the year ended December 31, 2016, and then increased by $571.0 million, or 5.4 times, to$677.5 million for the year ended December 31, 2017. We intend to monetize the majority of our current portfolio of solar power projects in operation withan estimated resale value of5Table of Contentsapproximately $1.5 billion as of February 28, 2018. However, there is no assurance whether or when we will be able to realize their estimated resale value. The operating results of our energy segment may be subject to significant period-over-period fluctuations for a variety of reasons, including but notlimited to changes in market conditions after we have committed to projects, availability of project financing and changes in government regulations andpolicies, all of which may result in the cancellation of or delays in the development of projects, inability to monetize or delays in monetizing projects orchanges in amounts realized on monetization of projects. If a project is canceled, abandoned or deemed unlikely to occur, we will charge all prior capitalcosts as an operating expense in the quarter in which such determination is made, which could materially adversely affect operating results. Further, the mix of revenues from our MSS and energy segments can fluctuate dramatically from quarter to quarter, which may adversely affect ourmargins and financial results in any given period. Any of the foregoing may cause us to miss our financial guidance for a given period, which could adversely impact the market price for our commonstock and our liquidity.The execution of our growth strategy depends upon the continued availability of third-party financing arrangements for our customers, which is affectedby general economic conditions. Tight credit markets could depress demand or prices for solar power products and services, hamper our expansion andmaterially affect our results of operations. Most solar power projects, including our own, require financing for development and construction with a mixture of equity and third party funding. Thecost of capital affects both the demand and price of solar power systems. A high cost of capital may materially reduce the internal rate of return for solar powerprojects and therefore put downward pressure on the prices of both solar systems and solar modules, which typically comprise a major part of the cost of solarpower projects. Furthermore, solar power projects compete for capital with other forms of fixed income investments such as government and corporate bonds. Someclasses of investors compare the returns of solar power projects with bond yields and expect a similar or higher internal rate of return, adjusted for risk andliquidity. On December 14, 2016, the Federal Reserve raised interest rates by a 25 basis points to a range of 0.5% to 0.7%, marking the first time the FederalReserve has raised rates since December 2015. On March 15, 2017, June 14, 2017 and December 13, 2017, the Federal Reserve further raised interest rates by25 basis points each time to a range of 0.75% to 1.00%, 1.00% to 1.25% and 1.25% to 1.5%, respectively. Higher interest rates could increase the cost ofexisting funding and present an obstacle for future funding that would otherwise spur the growth of the solar power industry. In addition, higher bond yieldscould result in increased yield expectations for solar power projects, which would result in lower system prices. In the event that suitable funding isunavailable, our customers may be unable to pay for products they have agreed to purchase. It may also be difficult to collect payments from customersfacing liquidity challenges due to either customer defaults or financial institution defaults on project loans. Constricted credit markets may impede ourexpansion plans and materially and adversely affect our results of operations. Concerns about government deficits and debt in the EU have increased bondspreads in certain solar markets, such as Greece, Spain, Italy and Portugal. The cash flow of a solar power project is often derived from government-funded orgovernment-backed FITs. Consequently, the availability and cost of funding solar power projects is determined in part based on the perceived sovereigncredit risk of the country where a particular project is located. Therefore, credit agency downgrades of nations in the EU or elsewhere could decrease thecredit available for solar power projects, increase the expected rate of return as compared to bond yields, and increase the cost of debt financing for solarpower projects in countries with a higher perceived sovereign credit risk.6Table of Contents In light of the uncertainty in the global credit and lending environment, we cannot make assurances that financial institutions will continue to offerfunding to solar power project developers at reasonable costs. An increase in interest rates or a decrease in funding of capital projects within the globalfinancial market could make it difficult to fund solar power systems and potentially reduce the demand for solar modules and/or reduce the average sellingprices for solar modules, which may materially and adversely affect our business, results of operations, financial condition and prospects.Our future success depends partly on our ability to expand the pipeline of our energy segment in several key markets, which exposes us to a number of risksand uncertainties. Historically, our MSS segment has accounted for the majority of our net revenues, contributing 71.9%, 96.2% and 80.0% of our net revenues in 2015,2016 and 2017, respectively. However, we have, in recent years, increased our investment in and management attention on our energy segment, whichprimarily consists of solar power project development and sale, EPC and development services and operating solar power projects and sales of electricity. While we plan to continue to monetize our current portfolio of solar power projects in operation, we also intend to grow our energy segment bydeveloping and selling or operating more solar projects, including those that we develop and those that we acquire from third-parties. As we do, we will beincreasingly exposed to the risks associated with these activities. Further, our future success largely depends on our ability to expand our solar power projectpipeline. The risks and uncertainties associated with our energy segment and our ability to expand our solar power project pipeline include:•the uncertainty of being able to sell the projects, receive full payment for them upon completion, or receive payment in a timely manner; •the need to raise significant additional funds to develop greenfield or purchase late-stage solar power projects, which we may be unable toobtain on commercially reasonable terms or at all; •delays and cost overruns as a result of a number of factors, many of which are beyond our control, including delays in regulatory approvals,construction, grid-connection and customer acceptance testing; •delays or denial of required regulatory approvals by relevant government authorities; •diversion of significant management attention and other resources; and •failure to execute our project pipeline expansion plan effectively. If we are unable to successfully expand our energy segment, and, in particular, our solar power project pipeline, we may be unable to expand ourbusiness, maintain our competitive position, improve our profitability and generate cash flows.Governments may revise, reduce or eliminate subsidies and economic incentives for solar energy, which could cause demand for our products to decline. The market for on-grid applications, where solar power supplements the electricity a customer purchases from the utility network or sells to a utilityunder a FIT, depends largely on the availability and size of government subsidy programs and economic incentives. At present, the cost of solar powerexceeds retail electricity rates in many locations. Government incentives vary by geographic market. Governments in many countries, most notably China,Germany, Italy, the Czech Republic, the U.S., Japan, Canada (Ontario), South Korea, India, France, Australia and the United Kingdom, have providedincentives in the form of FITs, rebates, tax credits, renewable portfolio standards and other incentives. These governments have implemented mandates toend-users, distributors, system integrators and manufacturers of solar power products to promote the use of solar energy in on-grid applications and to reducedependency on other forms of energy. Some of these government mandates7Table of Contentsand economic incentives have been or are scheduled to be reduced or eliminated altogether. For example, the National Development and ReformCommission, or the NDRC, announced reductions in FITs for utility-scale solar projects and reductions in subsidies for distributed generation solar projectsin 2017. It is likely that this trend will continue, and that, eventually, subsidies for solar energy will be phased out completely. While solar power projects may continue to offer attractive internal rates of return, it is unlikely internal rates of return will be as high as they were in thepast. If internal rates of return fall below an acceptable rate for project investors, and governments continue to reduce or eliminate subsidies for solar energy,this may cause a decrease in demand and considerable downward pressure on solar systems and therefore negatively impact both solar module prices and thevalue of our solar power projects. The reduction, modification or elimination of government subsidies and economic incentives in one or more of our marketscould therefore materially and adversely affect the growth of such markets or result in increased price competition, either of which could cause our revenuesto decline and harm our financial results.The consummation of the proposed going-private transaction is uncertain, and the process of consummating such transaction could disrupt our operationor distract our management's attention, all of which could materially and adversely affect our business, results of operations and financial condition. Our board of directors received a preliminary non-binding proposal letter dated December 9, 2017 from Dr. Shawn (Xiaohua) Qu, or Dr. Qu, our chairman,president and chief executive officer, to acquire all of our outstanding common shares not owned by Dr. Qu and his wife in a going private transaction for$18.47 in cash per common share, or the Proposed Transaction. For more details, see "Item 4. Information on the Company—A. History and Development ofthe Company—Proposed Going-Private Transaction." Our board of directors has established a special committee of independent and disinterested directors to evaluate the Proposed Transaction. The specialcommittee will carefully consider and evaluate the Proposed Transaction and any alternative transactions with the assistance of its independent legal andfinancial advisors. The special committee has not made any decision with respect to the Proposed Transaction and there can be no assurance that a definitiveoffer relating to the Proposed Transaction or any other transaction will be made by Dr. Qu or any other person, that a definitive agreement with respect to theProposed Transaction or any other transaction will be executed or that the Proposed Transaction or any other transaction will be approved or consummated.Whether consummated or not, the Proposed Transaction could cause disruptions in our business and divert our management's attention and other resourcesfrom day-to-day operations or other strategic opportunities. We will incur costs, expenses, and fees for professional services and other transaction costs inconnection with the Proposed Transaction, which may not be recoverable even if the Proposed Transaction is not consummated. Furthermore, we could besubject to potential lawsuits in connection with the Proposed Transaction All of the foregoing could materially and adversely affect our business, results ofoperation and financial condition and the market price of our common shares. If a definitive agreement with respect to the Proposed Transaction is entered into and the Proposed Transaction is consummated, it would cause us to bedelisted from Nasdaq and become a private company, in which event our shareholders, other than Dr. Qu and his wife, would not be able to participate in ourfuture growth.General global economic conditions may have an adverse impact on our operating performance and results of operations. The demand for solar power products and services is influenced by macroeconomic factors, such as global economic conditions, demand for electricity,supply and prices of other energy products, such as8Table of Contentsoil, coal and natural gas, as well as government regulations and policies concerning the electric utility industry, the solar and other alternative energyindustries and the environment. As a result of global economic conditions, some governments may implement measures that reduce the FITs and othersubsidies designed to benefit the solar industry. During 2015, 2016 and 2017, a decrease in solar power tariffs in many markets placed downward pressure onthe price of solar systems in those and other markets. In addition, reductions in oil and coal prices may reduce the demand for and the prices of solar powerproducts and services. Our growth and profitability depend on the demand for and the prices of solar power products and services. If we experience negativemarket and industry conditions and demand for solar power projects and solar power products and services weakens as a result, our business and results ofoperations may be adversely affected.Imposition of antidumping and countervailing duty orders or safeguard measures in one or more markets may result in additional costs to our customers,which could materially or adversely affect our business, results of operations, financial conditions and future prospects. We have been in the past, and may be in the future, subject to the imposition of antidumping and countervailing duty orders in one or more of themarkets in which we sell our products. In the past, we have been subject to the imposition of antidumping and countervailing duty orders in the U.S., the EUand Canada and have, as a result, been party to lengthy proceedings related thereto. See "Item 8. Financial Information—A. Consolidated Statements andOther Financial Information—Legal and Administrative Proceedings." The U.S., the EU and Canada are important markets for us. Ongoing proceedingsrelating to past, and the imposition of any new, antidumping and countervailing duty orders or safeguard measures in these markets may result in additionalcosts to us and/or our customers, which may materially and adversely affect our business, results of operations, financial conditions and future prospects.Our project development and construction activities may not be successful, projects under development may not receive required permits, property rights,EPC agreements, interconnection and transmission arrangements, and financing or construction of projects may not commence or continue as scheduled,all of which could increase our costs, delay or cancel a project, and have a material adverse effect on our revenue and profitability. The development and construction of solar power projects involve known and unknown risks. We may be required to invest significant amounts ofmoney for land and interconnection rights, preliminary engineering and permitting and incur legal and other expenses before we can determine whether aproject is feasible. Success in developing a particular project is contingent upon, among other things:•securing land rights and related permits, including satisfactory environmental assessments; •receipt of required land use and construction permits and approvals; •receipt of rights to interconnect to the electric grid; •availability of transmission capacity, potential upgrade costs to the transmission grid and other system constraints; •payment of interconnection and other deposits (some of which are non-refundable); •negotiation of satisfactory EPC agreements; and •obtaining construction financing, including debt, equity and tax credits. In addition, successful completion of a particular project may be adversely affected by numerous factors, including:•delays in obtaining and maintaining required governmental permits and approvals; •potential challenges from local residents, environmental organizations, and others who may not support the project;9 Table of Contents•unforeseen engineering problems; subsurface land conditions; construction delays; cost over-runs; labor, equipment and materials supplyshortages or disruptions (including labor strikes); •additional complexities when conducting project development or construction activities in foreign jurisdictions, including compliance withthe U.S. Foreign Corrupt Practices Act and other applicable local laws and customs; and •force majeure events, including adverse weather conditions and other events beyond our control. If we are unable to complete the development of a solar power project or we fail to meet any agreed upon system-level capacity or energy outputguarantees or warranties (including 25 year power output performance guarantees) or other contract terms, or our projects cause grid interference or otherdamage, the EPC or other agreements related to the project may be terminated and/or we may be subject to significant damages, penalties and otherobligations relating to the project, including obligations to repair, replace or supplement materials for the project. We may enter into fixed-price EPC agreements in which we act as the general contractor for our customers in connection with the installation of theirsolar power systems. All essential costs are estimated at the time of entering into the EPC agreement for a particular project, and these costs are reflected in theoverall fixed price that we charge our customers for the project. These cost estimates are preliminary and may or may not be covered by contracts between usand the subcontractors, suppliers and other parties involved in the project. In addition, we require qualified, licensed subcontractors to install most of oursolar power systems. Shortages of skilled labor could significantly delay a project or otherwise increase our costs. Should miscalculations in planning aproject occur, including those due to unexpected increases in commodity prices or labor costs, or delays in execution occur and we are unable to increase theEPC sales price commensurately, we may not achieve our expected margins or our results of operations may be adversely affected.Developing and operating solar power projects exposes us to different risks than producing solar modules. The development of solar power projects can take many months or years to complete and may be delayed for reasons beyond our control. It often requiresus to make significant up-front payments for, among other things, land rights and permitting in advance of commencing construction, and revenue from theseprojects may not be recognized for several additional months following contract signing. Any inability or significant delays in entering into sales contractswith customers after making such up-front payments could adversely affect our business and results of operations. Furthermore, we may become constrainedin our ability to simultaneously fund our other business operations and invest in other projects. In contrast to developing solar modules, developing solar power projects requires more management attention to negotiate the terms of our engagementand monitor the progress of the projects which may divert management's attention from other matters. Our revenue and liquidity may be adversely affected tothe extent the market for solar power projects weakens or we are not able to successfully complete the customer acceptance testing due to technicaldifficulties, equipment failure, or adverse weather, and we are unable to sell our solar power projects at prices and on terms and timing that are acceptableto us. Our energy segment also includes operating solar power projects and selling electricity to the local or national grid or other power purchasers. As a result,we are subject to a variety of risks associated with intense market competition, changing regulations and policies, insufficient demand for solar power,technological advancements and the failure of our power generation facilities.10Table of ContentsWe face a number of risks involving PPAs and project-level financing arrangements, including failure or delay in entering into PPAs, defaults bycounterparties and contingent contractual terms such as price adjustment, termination, buy-out, acceleration or other clauses, all of which couldmaterially and adversely affect our energy segment, financial condition, results of operations and cash flows. We may not be able to enter into PPAs for our solar power projects due to intense competition, increased supply of electricity from other sources,reduction in retail electricity price, changes in government policies or other factors. There is a limited pool of potential buyers for electricity generated by oursolar power plants since the transmission and distribution of electricity is either monopolized or highly concentrated in most jurisdictions. The willingness ofbuyers to purchase electricity from an independent power producer may be based on a number of factors and not solely on pricing and surety of supply. If wecannot enter into PPAs on terms favorable to us, or at all, it would negatively impact our revenue and our decisions regarding the development of additionalpower plants. We may experience delays in entering into PPAs for some of our solar power projects or may not be able to replace an expiring PPA with acontract on equivalent terms and conditions, or otherwise at prices that permit operation of the related facility on a profitable basis. Any delay in enteringinto PPAs may adversely affect our ability to enjoy the cash flows generated by such projects. If we are unable to replace an expiring PPA with an acceptablenew PPA, the affected site may temporarily or permanently cease operations, which could materially and adversely affect our financial condition, results ofoperations and cash flows. Substantially all of the electric power generated by our solar power projects will be sold under long-term PPAs with public utilities, licensed suppliers orcommercial, industrial or government end users and we expect our future projects will also have long-term PPAs or similar offtake arrangements such as tariffprograms. If, for any reason, any of the purchasers of power under these contracts are unable or unwilling to fulfill their related contractual obligations or ifthey refuse to accept delivery of power delivered thereunder or if they otherwise terminate such agreements prior to the expiration thereof, our assets,liabilities, business, financial condition, results of operations and cash flows could be materially and adversely affected. Further, to the extent any of ourpower purchasers are, or are controlled by, governmental entities, our facilities may be subject to legislative or other political action that may impair theircontractual performance or contain contractual remedies that do not provide adequate compensation in the event a counterparty defaults. Some of our PPAs are subject to price adjustments over time. If the price under any of our PPAs is reduced below a level that makes a projecteconomically viable, our financial conditions, cash flow and results of operations could be materially and adversely affected. Further, some of our long-termPPAs do not include inflation-based price increases. Certain of the PPAs for our projects and those for projects that we have acquired and may acquire in thefuture contain or may contain provisions that allow the offtake purchaser to terminate or buy out the project or require us to pay liquidated damages upon theoccurrence of certain events. If these provisions are exercised, our financial condition, results of operations and cash flows could be materially and adverselyaffected. Additionally, certain of the project-level financing arrangements for projects allow, and certain of the projects that we may acquire in the future mayallow, the lenders or investors to accelerate the repayment of the financing arrangement in the event that a PPA is terminated or if certain operating thresholdsor performance measures are not achieved within specified time periods. Certain of our PPAs and project-level financing arrangements include, and in thefuture may include, provisions that would permit the counterparty to terminate the contract or accelerate maturity in the event we own, directly or indirectly,less than 50% of the combined voting power or, in some cases, if we cease to be the majority owner, directly or indirectly, of the applicable projectsubsidiary. The termination of any of our PPAs or the acceleration of the maturity of any of our financing arrangements as a result of a change-in-controlevent could have a material adverse effect on our financial condition, results of operations and cash flows.11Table of ContentsIf the supply of solar wafers and cells increases in line with increases in the supply of polysilicon, then the corresponding oversupply of solar wafers, cellsand modules may cause substantial downward pressure on the prices of our products and reduce our revenues and earnings. Silicon production capacity has expanded rapidly in recent years. As a result of this expansion, coupled with the global economic downturn, the solarindustry has experienced an oversupply of high-purity silicon since the beginning of 2009. This has contributed to an oversupply of solar wafers, cells andmodules and resulted in substantial downward pressure on prices throughout the value chain. Demand for solar power products remained soft through 2012but began to pick up in the second half of 2013, and continued to grow in 2015, 2016 and 2017. The average selling price of our solar modules decreasedfrom $0.67 per watt in 2013 and 2014 to $0.58 per watt in 2015, $0.51 per watt in 2016 and $0.40 per watt in 2017. While we believe that there is a relativebalance between capacity and demand at low prices due to industry consolidation, increases in solar module production in excess of market demand mayresult in further downward pressure on the price of solar wafers, cells and modules, including our products. Increasing competition could also result in uslosing sales or market share. Moreover, due to fluctuations in the supply and price of solar power products throughout the value chain, we cannot assure youthat we will be able, on an ongoing basis, to procure silicon, wafers and cells at reasonable costs if any of the above risks materializes. If we are unable, on anongoing basis, to procure silicon, solar wafers and solar cells at reasonable prices or mark up the price of our solar modules to cover our manufacturing andoperating costs, our revenues and margins will be adversely impacted, either due to higher costs compared to our competitors or due to further write-downs ofinventory, or both. In addition, our market share could decline if our competitors are able to price their products more competitively.Long-term supply agreements may make it difficult for us to adjust our raw material costs should prices decrease. Also, if we terminate any of theseagreements, we may not be able to recover all or any part of the advance payments we have made to these suppliers and we may be subject to litigation. We have entered into a number of long-term supply agreements with several silicon and wafer suppliers in order to secure a stable supply of raw materialsto meet our production requirements. These suppliers included GCL-Poly Energy Holdings Limited, or GCL, Xi'an LONGI Silicon Materials Corp., or LONGI,Deutsche Solar AG, or Deutsche Solar, and Jiangxi LDK Solar Hi-Tech Co., Ltd., or LDK. In 2009 and thereafter, we amended our agreements with certain of these suppliers to adjust the purchase price to prevailing market prices at the time weplace a purchase order and to reduce the quantity of products that we were required to purchase. Under our supply agreements with certain suppliers, andconsistent with historical industry practice, we make advance payments prior to scheduled delivery dates. These advance payments are made withoutcollateral and are credited against the purchase prices payable by us. As of December 31, 2017, the balance of the advance payments that we have made toGCL, Deutsche Solar and LDK totaled $31.1 million. Under our 12-year wafer supply agreement with Deutsche Solar, we purchased the contracted volume for 2009 but did not purchase the contractedvolumes for 2010 and 2011. The agreement contains a provision stating that, if we do not order the contracted volume in a given year, Deutsche Solar caninvoice us for the difference at the full contract price. We believe that these take-or-pay provisions of the agreement are void under German law. InDecember 2011, Deutsche Solar gave notice to us to terminate the agreement with immediate effect. Deutsche Solar stated that the reason for the terminationwas an alleged breach of the agreement by us. In the notice, Deutsche Solar reserved its right to claim damages of €148.6 million in court. As a result of thetermination, we reclassified the accrued loss on firm purchase commitments reserve of $27.9 million as of December 31, 2011 to loss contingency accruals. Inaddition, we made a full bad debt allowance of $17.4 million against the balance of advance payments to Deutsche Solar. The accrued amount of$27.9 million12Table of Contentsrepresents our best estimate for our loss contingency. Deutsche Solar did not specify the basis for its claimed damages of €148.6 million in the notice. In 2007, we entered into a three-year agreement, or the 2007 Supply Contract, with LDK under which we purchased specified quantities of silicon wafersand LDK converted our reclaimed silicon feedstock into wafers. In June 2008, we entered into two 10-year wafer supply agreements, or the 2008 SupplyContracts, with LDK, under which we agreed to purchase specified volumes of wafers at pre-determined prices each year, commencing January 1, 2009. InApril 2010, we gave LDK a termination notice for the 2007 Supply Contract and the 2008 Supply Contracts on the grounds that they refused to deduct fromthe selling price the deposits paid by us previously. We also initiated arbitration proceedings against LDK under the supply contracts, seeking a refund of theinitial deposits that we paid to them. On October 19, 2015, we reached a settlement agreement with LDK, or the 2015 Settlement Agreement. See "Item 8.Financial Information—A. Consolidated Statements and Other Financial Information—Legal and Administrative Proceedings." We recorded a charge of$20.8 million related to the 2015 Settlement Agreement in general and administrative expense in the third quarter of 2015. On May 19, 2016, we received acopy of a bill of complaint from Xinyu Intermediate Court, in which LDK's receiver applied to the court for an order to revoke the 2015 SettlementAgreement pursuant to PRC bankruptcy law, and requested us to pay an amount that had been waived by LDK under the 2015 Settlement Agreement. InMay 2017, the Xinyu Intermediate Court made a judgment in favor of LDK's receiver, revoking the 2015 Settlement Agreement and requiring CSI Cells topay RMB58.5 million to LDK's receiver and bear court expenses of RMB0.8 million. We recorded a $8.6 million provision in the first quarter of 2017 andCSI Cells appealed the judgment. In November 2017, the Jiangxi High People's Court, or Jiangxi High Court, dismissed CSI Cells' appeal and upheld theoriginal judgment. CSI Cells then appealed this judgment to the Supreme People's Court of The People's Republic of China, or the Supreme Court. InJanuary 2018, the Supreme Court put CSI Cells' appeal on record pending examination. To date, no decision has been made by the Supreme Court. InMarch 2018, LDK's receiver applied to the Xinyu Intermediate Court for compulsory execution of its judgment. The Xinyu Intermediate Court has acceptedthe LDK's receiver's application, and the execution procedure is currently in progress. We have in the past entered into long-term supply agreements for silicon wafers or solar cells with fixed price and quantity terms. If, during the term ofthese agreements, the price of materials decreases significantly and we are unable to renegotiate favorable terms with our suppliers, we may be placed at acompetitive disadvantage compared to our competitors, and our earnings could decline. In addition, if demand for our solar power products decreases, yet oursupply agreements require us to purchase more silicon wafers and solar cells than required to meet customer demand, we may incur costs associated withcarrying excess inventory. To the extent that we are not able to pass these increased costs on to our customers, our business, cash flows, financial conditionand results of operations may be materially and adversely affected. If our suppliers file lawsuits against us for early termination of these contracts, such eventscould be costly, may divert management's attention and other resources away from our business, and could have a material and adverse effect on ourreputation, business, financial condition, results of operations and prospects.We are subject to numerous laws and regulations at the national, regional and local levels of government in the markets where we do business. Anychanges to these regulations and policies may present technical, regulatory and economic barriers to the purchase and use of solar power products, solarprojects and solar electricity, which may significantly reduce demand for our products and services or otherwise adversely affect our financialperformance. We are subject to a variety of laws and regulations in the markets where we do business, some of which may conflict with each other and all of which aresubject to change. These laws and regulations include energy regulations, export and import restrictions, tax laws and regulations, environmental13Table of Contentsregulations, labor laws and other government requirements, approvals, permits and licenses. We also face trade barriers and trade remedies such as exportrequirements, tariffs, taxes and other restrictions and expenses, including antidumping and countervailing duty orders, which could increase the prices of ourproducts and make us less competitive in some countries. See "—Imposition of antidumping and countervailing duty orders or safeguard measures in one ormore markets may result in additional costs to our customers, which could materially or adversely affect our business, results of operations, financialconditions and future prospects." In the countries where we do business, the market for solar power products, solar projects and solar electricity is heavily influenced by national, state andlocal government regulations and policies concerning the electric utility industry, as well as policies disseminated by electric utilities. These regulations andpolicies often relate to electricity pricing and technical interconnection of customer-owned electricity generation, and could deter further investment in theresearch and development of alternative energy sources as well as customer purchases of solar power technology, which could result in a significant reductionin the potential demand for our solar power products, solar projects and solar electricity. In our MSS segment, we expect that our solar power products and their installation will continue to be subject to national, state and local regulations andpolicies relating to safety, utility interconnection and metering, construction, environmental protection, and other related matters. Any new regulations orpolicies pertaining to our solar power products may result in significant additional expenses to us, our resellers and customers, which could cause asignificant reduction in demand for our solar power products. In our energy segment, we are subject to numerous national, regional and local laws and regulations. Changes in applicable energy laws or regulations,or in the interpretations of these laws and regulations, could result in increased compliance costs or the need for additional capital expenditures. If we fail tocomply with these requirements, we could also be subject to civil or criminal liability and the imposition of fines. Further, national, regional or localregulations and policies could be changed to provide for new rate programs that undermine the economic returns for both new and existing projects bycharging additional, non-negotiable fixed or demand charges or other fees or reductions in the number of projects allowed under net metering policies.National, regional or local government energy policies, law and regulation supporting the creation of wholesale energy markets is currently, and maycontinue to be, subject to challenges, modifications and restructuring proposals, which may result in limitations on the commercial strategies available to usfor the sale of our power. Regulatory changes in a jurisdiction where we are developing a project may make the continued development of the project infeasible or economicallydisadvantageous and any expenditure we have made to date on such project may be wholly or partially written off. Any of these changes could significantlyincrease the regulatory related compliance and other expenses incurred by the projects and could significantly reduce or entirely eliminate any potentialrevenues that can be generated by one or more of the projects or result in significant additional expenses to us, our offtakers and customers, which couldmaterially and adversely affect our business, financial condition, results of operations and cash flows. We also face regulatory risks imposed by various transmission providers and operators, including regional transmission operators and independentsystem operators, and their corresponding market rules. These regulations may contain provisions that limit access to the transmission grid or allocate scarcetransmission capacity in a particular manner, which could materially and adversely affect our business, financial condition, results of operations andcash flows. We are also subject to the Foreign Corrupt Practices Act of 1977, or the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, theU.S. Travel Act, the USA PATRIOT Act, and other anti-bribery and anti-money laundering laws in countries in which we conduct activities. We face14Table of Contentssignificant liabilities if we fail to comply with the FCPA and other anticorruption laws that prohibit companies and their employees and third-partyintermediaries from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to foreign government officials, political parties,and private-sector recipients for the purpose of obtaining or retaining business. We may have direct or indirect interactions with officials and employees ofgovernment agencies or state-owned or affiliated entities. For example, in China, we may contract with and sell electricity to the national grid, a state-ownedenterprise. In other countries where we develop, acquire or sell solar projects, we need to obtain various approvals, permits and licenses from the local ornational governments. We can be held liable for the illegal activities of our employees, representatives, contractors, partners, and agents, even if we do notexplicitly authorize such activities. Any violation of the FCPA, other applicable anticorruption laws, and anti-money laundering laws could result inwhistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions, which could have a materialadverse effect on our business, financial condition, cash flows and reputation. In addition, responding to any enforcement action may result in the diversionof management's attention and resources, significant defense costs and other professional fees.Because the markets in which we compete are highly competitive and quickly evolving, because many of our competitors have greater resources than wedo or are more adaptive, and because we have a limited track record in our energy segment, we may not be able to compete successfully and we may not beable to maintain or increase our market share. We face intense competition in our MSS and energy segments. We have a large number of competitors in our solar modules business, including non-China-based competitors such as First Solar, Inc., or First Solar, and SunPower Corporation, or SunPower, and China-based competitors such as Trina SolarLimited, or Trina, JinkoSolar Holding Co., Limited, or Jinko, JA Solar Co., Limited, or JA Solar, and Hanwha Q Cells Co., Ltd., or Hanwha Q Cells. Some ofour competitors are developing or are currently producing products based on new solar power technologies that may ultimately have costs similar to or lowerthan our projected costs. These include products based on thin film PV technology, which requires either no silicon or significantly less silicon to producethan crystalline silicon solar modules, such as the ones that we produce, and is less susceptible to increases in silicon costs. Some of our competitors havelonger operating histories, greater name and brand recognition, access to larger customer bases, greater resources and significantly greater economies of scalethan we do. In addition, some of our competitors may have stronger relationships or may enter into exclusive relationships with some of the key distributorsor system integrators to whom we sell our products. As a result, they may be able to respond more quickly to changing customer demands or devote greaterresources to the development, promotion and sales of their products. Some of our competitors have more diversified product offerings, which may betterposition them to withstand a decline in demand for solar power products. Some of our competitors are more vertically integrated than we are, from upstreamsilicon wafer manufacturing to solar power system integration. This may allow them to capture higher margins or have lower costs. In addition, newcompetitors or alliances among existing competitors could emerge and rapidly acquire significant market share. If we fail to compete successfully, ourbusiness will suffer and we may not be able to maintain or increase our market share. For our energy segment, we compete in a more diversified and complicated landscape since the commercial and regulatory environments for solar powerproject development and operation vary significantly from region to region and country to country. Our primary competitors are local and internationaldevelopers and operators of solar power projects. Some of our competitors may have advantages over us in terms of greater experience or resources in theoperation, financing, technical support and management of solar power projects, in any particular markets or in general. Our energy segment has a global footprint and develops solar power projects primarily in Canada, Japan, the U.S., China, Brazil, India, Mexico, theUnited Kingdom and Australia. There is no15Table of Contentsguarantee that we can compete successfully in the markets we currently operate or the ones we plan to enter in the future. For example, in certain of our targetmarkets, such as China, state-owned and private companies have emerged to take advantage of the significant market opportunity created by attractivefinancial incentives and favorable regulatory environment provided by the governments. State-owned companies may have stronger relationships with localgovernments in certain regions and private companies may be more focused and experienced in developing solar power projects in the markets where wecompete. Accordingly, we need to continue to be able to compete against both state-owned and private companies in these markets. Our energy segment alsoprovides EPC in China, Canada, Australia and other countries. We face intense competition from other service providers in those markets. Since our energy segment includes electricity generation and sale, we believe that our primary competitors in the electricity generation markets in whichwe operate are the incumbent utilities that supply energy to our potential customers under highly regulated rate and tariff structures. We compete with theseconventional utilities primarily based on price, predictability of price, reliability of delivery and the ease with which customers can switch to electricitygenerated by our solar energy projects. As the solar power and renewable energy industry grows and evolves, we will also face new competitors who are not currently in the market. Our failureto adapt to changing market conditions and to compete successfully with existing or new competitors will limit our growth and will have a material adverseeffect on our business and prospects.We face risks associated with the marketing, distribution and sale of our solar power products and services internationally. The international marketing, distribution and sale of our products expose us to a number of risks, including:•fluctuating sources of revenues; •difficulties in staffing and managing overseas operations; •fluctuations in foreign currency exchange rates; •differing regulatory and tax regimes across different markets; •the increased cost of understanding local markets and trends and developing and maintaining an effective marketing and distribution presencein various countries; •the difficulty of providing customer service and support in various countries; •the difficulty of managing our sales channels effectively as we expand beyond distributors to include direct sales to systems integrators, endusers and installers; •the difficulty of managing the development, construction and sale of our solar power projects on a timely and profitable basis as a result oftechnical difficulties, commercial disputes with our customers and changes in regulations, among other factors; •the difficulties and costs of complying with the different commercial, legal and regulatory requirements in the overseas markets in whichwe operate; •any failure to develop appropriate risk management and internal control structures tailored to overseas operations; •any inability to obtain, maintain or enforce intellectual property rights; •any unanticipated changes in prevailing economic conditions and regulatory requirements; and16Table of Contents•any trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase the prices of our productsand make us less competitive in some countries. If we are unable to effectively manage these risks, our ability to expand our business abroad could suffer. Our revenue sources have fluctuated significantly over recent years. For example, in 2008, 89.5% of our revenues were attributable to Europe, while only4.6% and 5.9% were attributable to the Americas and Asia and others, respectively. However, in 2015, the Americas contributed 50.5% and Asia contributed39.9% of our revenues, while Europe and other regions contributed 9.6%; in 2016, the Americas contributed 38.7% and Asia contributed 46.9% of ourrevenues, while Europe and other regions contributed 14.4%; and in 2017, the Americas contributed 32.7% and Asia contributed 56.8% of our revenues,while Europe and other regions contributed 10.5%. As we shift the focus of our operations between different regions of the world, we have limited time toprepare for and address the risks identified above. Furthermore, some of these risks, such as currency fluctuations, will increase as our revenue contributionfrom certain global regions becomes more prominent. This may adversely influence our financial performance.Our future business depends in part on our ability to make strategic acquisitions, investments and divestitures and to establish and maintain strategicrelationships, and our failure to do so could have a material and adverse effect on our market penetration and revenue growth. We frequently look for and evaluate opportunities to acquire other businesses, make strategic investments or establish strategic relationships with thirdparties to improve our market position or expand our products and services. When market conditions permit and opportunities arise, we may also considerdivesting part of our current business to focus management attention and improve our operating efficiency. Investments, strategic acquisitions andrelationships with third parties could subject us to a number of risks, including risks associated with integrating their personnel, operations, services, internalcontrols and financial reporting into our operations as well as the loss of control of operations that are material to our business. If we divest any material partof our business, particularly our upstream manufacturing business or downstream energy business, we may not be able to benefit from our investment andexperience associated with that part of the business and may be subject to intensified concentration risks with less flexibility to respond to marketfluctuations. Moreover, it could be expensive to make strategic acquisitions, investments, divestitures and establish and maintain relationships, and we maybe subject to the risk of non-performance by a counterparty, which may in turn lead to monetary losses that materially and adversely affect our business. Wecannot assure you that we will be able to successfully make strategic acquisitions and investments and successfully integrate them into our operations, ormake strategic divestitures or establish strategic relationships with third parties that will prove to be effective for our business. Our inability to do so couldmaterially and adversely affect our market penetration, our revenue growth and our profitability.Our significant international operations expose us to a number of risks, including unfavorable political, regulatory, labor and tax conditions in thecountries where we operate. We intend to continue to extend our global reach and capture market share in various global markets. In doing so, we will be exposed to various risks,including political, regulatory, labor and tax risks. However, many perceive globalization to be in retreat and protectionism on the rise, as evidenced by thedecision of Great Britain to leave the European Union and the election of Donald Trump as the president of U.S., who, among other things, has threatened toimpose punitive tariffs on goods imported from China. If trade tensions increase among the U.S., China and other countries, it may have a material adverseeffect on our international operations. Furthermore, we may need to make substantial investments in our overseas operations, both initially and on anongoing basis, in order to17Table of Contentsattain longer-term sustainable returns. These investments could negatively impact our financial performance before sustainable profitability is recognized.We face risks related to private securities litigation. Our company and certain of our directors and executive officers were named as defendants in class action lawsuits in the U.S. and Canada alleging thatour financial disclosures during 2009 and early 2010 were false or misleading and in violation of U.S. federal securities laws and Ontario securities laws,respectively. The lawsuits in the U.S. were consolidated into one class action, which was dismissed with prejudice by the district court in March 2013, andsubsequently affirmed by the circuit court in December 2013. The lawsuit in Canada continues. As a preliminary matter, we challenged the Ontario Court'sjurisdiction to hear the plaintiff's claim, but this motion was unsuccessful. In September 2014, the plaintiff obtained an order granting him leave to assert thestatutory cause of action under the Ontario Securities Act for certain of his misrepresentation claims. In January 2015, the plaintiff obtained an order for classcertification in respect of the claims for which he obtained leave to assert the statutory cause of action under the Ontario Securities Act, for certain negligentmisrepresentation claims and for oppression remedy claims advanced under the Canada Business Corporations Act, or CBCA. The Court dismissed ourapplication for leave to appeal. The class action is at the merits stage. See "Item 8. Financial Information—A. Consolidated Statements and Other FinancialInformation—Legal and Administrative Proceedings." If the case goes to trial, the Canadian action could require significant management time and attentionand result in significant legal expenses. There is no guarantee that we will not become party to additional lawsuits. In addition, we are generally obligated, tothe extent permitted by law, to indemnify our directors and officers who are named defendants in these lawsuits. If we were to lose a lawsuit, we may berequired to pay judgments or settlements and incur expenses in aggregate amounts that could have a material and adverse effect on our financial condition orresults of operations.Our quarterly operating results may fluctuate from period to period. Our quarterly operating results may fluctuate from period to period based on a number of factors, including:•the average selling prices of our solar power products and services; •the timing of completion of construction of our solar power projects; •the timing and pricing of project sales; •changes in payments from power purchasers of solar power plants already in operation; •the rate and cost at which we are able to expand our internal production capacity; •the availability and cost of solar cells and wafers from our suppliers and toll manufacturers; •the availability and cost of raw materials, particularly high-purity silicon; •changes in government incentive programs and regulations, particularly in our key and target markets; •the unpredictable volume and timing of customer orders; •the loss of one or more key customers or the significant reduction or postponement of orders; •the availability and cost of external financing for on-grid and off-grid solar power applications; •acquisition and investment costs; •the timing of successful completion of customer acceptance testing of our solar power projects;18Table of Contents•geopolitical turmoil and natural disasters within any of the countries in which we operate; •foreign currency fluctuations, particularly in British pounds, Renminbi, Canadian dollar, Japanese yen and Euro; •our ability to establish and expand customer relationships; •changes in our manufacturing costs; •the timing of new products or technology introduced or announced by our competitors; •fluctuations in electricity rates due to changes in fossil fuel prices or other factors; •allowances for doubtful accounts and advances to suppliers; •inventory write-downs; •long-lived asset impairment; •depreciation charges relating to under-utilized assets; •loss on firm purchase commitments under long-term supply agreements; •construction progress of solar power projects and related revenue recognition; and •antidumping and countervailing duty costs and/or antidumping and countervailing duty true-up charges. We base our planned operating expenses in part on our expectations of future revenues. A significant portion of our expenses will be fixed in the short-term. If our revenues for a particular quarter are lower than we expect, we may not be able to reduce our operating expenses proportionately, which wouldharm our operating results for the quarter. As a result, our results of operations may fluctuate from quarter to quarter and our interim and annual financialresults may differ from our historical performance.Fluctuations in exchange rates could adversely affect our business, including our financial condition and results of operations. The majority of our sales in 2015, 2016 and 2017 were denominated in U.S. dollars, Renminbi and Japanese yen, with the remainder in other currenciessuch as Canadian dollars, Euros and Brazilian real. Our Renminbi costs and expenses are primarily related to the sourcing of solar cells, silicon wafers andsilicon, other raw materials, including aluminium and silver paste, toll manufacturing fees, labor costs and local overhead expenses within the PRC. Fromtime to time, we enter into loan arrangements with Chinese commercial banks that are denominated primarily in Renminbi or U.S. dollars. Most of our cashand cash equivalents and restricted cash are denominated in Renminbi. Fluctuations in exchange rates, particularly between the U.S. dollar, Renminbi,Canadian dollar, Euros, British pound and Japanese yen, may result in foreign exchange gains or losses. We recorded net foreign exchange gain of$22.9 million and $25.4 million in 2015 and 2016, respectively, and net foreign exchange loss of $23.4 million in 2017. The value of the Renminbi against the U.S. dollar, the Euro and other currencies is affected by, among other things, changes in China's political andeconomic conditions and China's foreign exchange policies. In late 2005, China amended its policy of tracking the value of the Renminbi to the U.S. dollarto instead fluctuate against a basket of foreign currencies, which caused the Renminbi to appreciate significantly against the U.S. dollar over the followingthree years. In June 2010, the PRC government announced that it would allow greater flexibility for the Renminbi to fluctuate against the U.S. dollar, whichresulted in further appreciation of the Renminbi, although in 2014, the value of the Renminbi depreciated against the U.S. dollar. In 2015, the PRCgovernment changed the way it19Table of Contentscalculates the mid-point price of Renminbi against the U.S. dollar, requiring the market-makers who submit for the People's Bank of China's reference rates toconsider the previous day's closing spot rate and foreign-exchange demand and supply, as well as changes in major currency rates. This change resulted infurther depreciation of the Renminbi against the U.S. dollar. In 2016, the Renminbi continued to depreciate against the U.S. dollar, in response to which theChinese government imposed restrictions on capital outflows. In October 2016, the International Monetary Fund added the Renminbi into the SpecialDrawing Rights currency basket. However, the status of the Renminbi as an international currency is still being tested by the market. We cannot provide anyassurances that the policy of the PRC government will not affect or the manner in which it may affect the exchange rate between the Renminbi and theU.S. dollar or other foreign currencies in the future. Since 2008, we have hedged part of our foreign currency exposures against the U.S. dollar using foreign currency forward or option contracts. In additionto collateral requirements to enter into hedging contracts, there are notional limits on the size of the hedging transactions that we may enter into with anyparticular counterparty at any given time. The effectiveness of our hedging program may be limited due to cost effectiveness, cash management, exchangerate visibility and downside protection. We recorded losses on change in foreign currency derivatives of $3.7 million in 2015, gains on change in foreigncurrency derivatives of $4.8 million in 2016, and losses on change in foreign currency derivatives of $2.6 million in 2017. The gains or losses on change inforeign currency derivatives are related to our hedging program. Volatility in foreign exchange rates will hamper, to some extent, our ability to plan our pricing strategy. To the extent that we are unable to pass alongincreased costs resulting from exchange rate fluctuations to our customers, our profitability may be adversely impacted. As a result, fluctuations in foreigncurrency exchange rates could have a material and adverse effect on our financial condition and results of operations.A change in our effective tax rate can have a significant adverse impact on our business. A number of factors may adversely impact our future effective tax rates, such as the jurisdictions in which our profits are determined to be earned andtaxed; changes in the valuation of our deferred tax assets and liabilities; adjustments to provisional taxes upon finalization of various tax returns;adjustments to the interpretation of transfer pricing standards; changes in available tax credits; changes in stock-based compensation expenses; changes intax laws or the interpretation of tax laws (for example, proposals for fundamental U.S. international tax reform); changes in U.S. GAAP; expiration of or theinability to renew tax rulings or tax holiday incentives; and the repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes. Achange in our effective tax rate due to any of these factors may adversely influence our future results of operations.Seasonal variations in demand linked to construction cycles and weather conditions may influence our results of operations. Our business is subject to seasonal variations in demand linked to construction cycles and weather conditions. Purchases of solar power products andservices tend to decrease during the winter months in several markets, such as Canada, due to adverse weather conditions that can complicate the installationof solar power systems and negatively impact the construction schedules of our solar power projects. Demand from some countries, such as the U.S. andChina, may also be subject to significant seasonality. Seasonal variations could adversely affect our results of operations and make them more volatile andunpredictable.20 Table of ContentsOur future success depends partly on our ability to maintain and expand our solar components manufacturing capacity, which exposes us to a number ofrisks and uncertainties. Our future success depends partly on our ability to maintain and expand our solar components manufacturing capacity. If we are unable to do so, we maybe unable to expand our business, maintain our competitive position, and improve our profitability. Our ability to expand our solar components productioncapacity is subject to risks and uncertainties, including:•the need to raise significant additional funds to purchase raw materials and to build additional manufacturing facilities, which we may beunable to obtain on commercially reasonable terms or at all; •delays and cost overruns as a result of a number of factors, many of which are beyond our control, including delays in equipment deliveryby vendors; •delays or denial of required regulatory approvals by relevant government authorities; •diversion of significant management attention and other resources; and •failure to execute our expansion plan effectively. If we are unable to maintain and expand our internal production capacity, we may be unable to expand our business as planned. Moreover, even if we domaintain and expand our production capacity, we might still not be able to generate sufficient customer demand for our solar power products to support theincreased production levels.We may be unable to generate sufficient cash flows or have access to external financing necessary to fund planned operations and make adequate capitalinvestments. We anticipate that our operating and capital expenditures requirements may increase. To develop new products, support future growth, achieve operatingefficiencies and maintain product quality, we may need to make significant capital investments in manufacturing technology, facilities and capitalequipment, research and development, and product and process technology. We also anticipate that our operating costs may increase as we expand ourmanufacturing operations, hire additional personnel, increase our sales and marketing efforts, invest in joint ventures and acquisitions, and continue ourresearch and development efforts with respect to our products and manufacturing technologies. Our operations are capital intensive. We rely on working capital financing substantially from Chinese banks for our manufacturing operations. Wecannot guarantee that we will continue to be able to extend existing or obtain new working capital financing on commercially reasonable terms or at all. See"—Our dependence on Chinese banks to extend our existing loans and provide additional loans exposes us to funding risks, which may materially andadversely affect our operations." Also, even though we are a publicly-traded company, we may not be able to raise capital via public equity and debtissuances due to market conditions and other factors, many of which are beyond our control. Our ability to obtain external financing is subject to a variety ofuncertainties, including:•our future financial condition, results of operations and cash flows; •general market conditions for financing activities by manufacturers of solar power products; and •economic, political and other conditions in the PRC and elsewhere. If we are unable to obtain funding in a timely manner and on commercially acceptable terms, our growth prospects and future profitability may beadversely affected. Construction of our solar power projects may require us to obtain project financing. If we are unable to obtain project financing, or if it is only availableon terms which are not acceptable to us, we may be unable to fully execute our business plan. In addition, we generally expect to sell our projects21Table of Contentsto tax-oriented, strategic industry and other investors. Such investors may not be available or may only have limited resources, in which case our ability tosell our projects may be hindered or delayed and our business, financial condition, and results of operations may be adversely affected. There can be noassurance that we will be able to generate sufficient cash flows, find other sources of capital to fund our operations and solar power projects, make adequatecapital investments to remain competitive in terms of technology development and cost efficiency required by our projects. If adequate funds and alternativeresources are not available on acceptable terms, our ability to fund our operations, develop and construct solar power projects, develop and expand ourmanufacturing operations and distribution network, maintain our research and development efforts or otherwise respond to competitive pressures would besignificantly impaired. Our inability to do the foregoing could have a material and adverse effect on our business and results of operations.We have substantial indebtedness and may incur substantial additional indebtedness in the future, which could adversely affect our financial health andour ability to generate sufficient cash to satisfy our outstanding and future debt obligations. We have substantial indebtedness and may incur substantial additional indebtedness in the future, which could adversely affect our financial health andour ability to generate sufficient cash to satisfy our outstanding and future debt obligations. Our substantial indebtedness could have importantconsequences to us and our shareholders. For example, it could:•limit our ability to satisfy our debt obligations; •increase our vulnerability to adverse general economic and industry conditions; •require us to dedicate a substantial portion of our cash flow from operations to servicing and repaying our indebtedness, thereby reducing theavailability of our cash flow to fund working capital, capital expenditures and for other general corporate purposes; •limit our flexibility in planning for or reacting to changes in our businesses and the industry in which we operate; •place us at a competitive disadvantage compared with our competitors that have less debt; •limit, along with the financial and other restrictive covenants of our indebtedness, among other things, our ability to borrow additionalfunds; and •increase the cost of additional financing. In the future, we may from time to time incur substantial additional indebtedness and contingent liabilities. If we incur additional debt, the risks that weface as a result of our already substantial indebtedness and leverage could intensify. Our ability to generate sufficient cash to satisfy our outstanding and future debt obligations will depend upon our future operating performance, whichwill be affected by prevailing economic conditions and financial, business and other factors, many of which are beyond our control. We cannot assure youthat we will be able to generate sufficient cash flow from operations to support the repayment of our current indebtedness. If we are unable to service ourindebtedness, we will be forced to adopt an alternative strategy that may include actions such as reducing or delaying capital expenditures, selling assets,restructuring or refinancing our indebtedness or seeking equity capital. These strategies may not be instituted on satisfactory terms, if at all. In addition,certain of our financing arrangements impose operating and financial restrictions on our business, which may negatively affect our ability to react to changesin market conditions, take advantage of business opportunities we believe to be desirable, obtain future financing, fund required capital expenditures, orwithstand a continuing or future downturn in our business. Any of these factors could materially and adversely affect our ability to satisfy our debtobligations.22Table of ContentsWe must comply with certain financial and other covenants under the terms of our debt instruments and the failure to do so may put us in default underthose instruments. Many of our loan agreements include financial covenants and broad default provisions. The financial covenants primarily include current ratios, quickratios, debt to asset ratios, contingent liability ratios and minimum equity requirements, which, in general, govern our existing long-term debt and debt wemay incur in the future. These covenants could limit our ability to plan for or react to market conditions or to meet our capital needs in a timely manner andcomplying with these covenants may require us to curtail some of our operations and growth plans. In addition, any global or regional economicdeterioration may cause us to incur significant net losses or force us to assume considerable liabilities, which would adversely impact our ability to complywith the financial and other covenants of our outstanding loans. If our creditors refuse to grant waivers for any non-compliance with these covenants, suchnon-compliance will constitute an event of default which may accelerate the amounts due under the applicable loan agreements. Some of our loanagreements also contain cross-default clauses, which could enable creditors under our debt instruments to declare an event of default should there be an eventof default on our other loan agreements. We cannot assure you that we will be able to remain in compliance with these covenants in the future. We may not beable to cure future violations or obtain waivers of non-compliance on a timely basis. An event of default under any agreement governing our existing orfuture debt, if not cured by us or waived by our creditors, could have a material adverse effect on our liquidity, financial condition and results of operations.Our dependence on Chinese banks to extend our existing loans and provide additional loans exposes us to funding risks, which may materially andadversely affect our operations. We require significant cash flow and funding to support our operations. As a result, we rely on short-term borrowings to provide working capital for ourdaily operations. Since the majority of our short-term borrowings come from Chinese banks, we are exposed to lending policy changes by the Chinese banks.In 2015, 2016 and 2017, we successfully extended our short-term borrowings and, as of December 31, 2017, we had outstanding short-term borrowings of$676.8 million with Chinese banks. Between January 1, 2018 and March 31, 2018, we obtained new borrowings of approximately $250.1 million fromChinese banks, including $63.9 million with due dates beyond December 31, 2018. Also, between January 1, 2018 and March 31, 2018, we renewed existingbank facilities of approximately $193.3 million from Chinese banks with due dates beyond December 31, 2018. If the Chinese government changes its macroeconomic policies and forces Chinese banks to tighten their lending practices, or if Chinese banks are nolonger willing to provide financing to solar power companies, including us, we may not be able to extend our short-term borrowings or make additionalborrowings in the future. As a result, we may not be able to fund our operations to the same extent as in previous years, which may have a material andadverse effect on our operations.Cancellations of customer orders may make us unable to recoup any prepayments made to suppliers. In the past, we were required to make prepayments to certain suppliers, primarily suppliers of machinery, silicon raw materials, solar ingots, wafers andcells. Although we require certain customers to make partial prepayments, there is generally a lag between the due date for the prepayment of purchasedmachinery, silicon raw materials, solar ingots, wafers and cells and the time that our customers make prepayments. In the event that our customers cancel theirorders, we may not be able to recoup prepayments made to suppliers, which could adversely influence our financial condition and results of operations.23Table of ContentsCredit terms offered to some of our customers expose us to the credit risks of such customers and may increase our costs and expenses, which could in turnmaterially and adversely affect our revenues, liquidity and results of operations. We offer unsecured short-term or medium-term credit to some of our customers based on their creditworthiness and market conditions. As a result, ourclaims for payments and sales credits rank as unsecured claims, which expose us to credit risk if our customers become insolvent or bankrupt. From time to time, we sell our products to high credit risk customers in order to gain early access to emerging or promising markets, increase our marketshare in existing key markets or because of the prospects of future sales with a rapidly growing customer. There are high credit risks in doing business withthese customers because they are often small, young and high-growth companies with significant unfunded working capital, inadequate balance sheets andcredit metrics and limited operating histories. If these customers are not able to obtain satisfactory working capital, maintain adequate cash flow, or obtainconstruction financing for the projects where our solar products are used, they may be unable to pay for the products for which they have ordered or of whichthey have taken delivery. Our legal recourse under such circumstances may be limited if the customer's financial resources are already constrained or if wewish to continue to do business with that customer. Revenue recognition for this type of customer is deferred until cash is received. If more customers towhom we extend credit are unable to pay for our products, our revenues, liquidity and results of operations could be materially and adversely affected.Our dependence on a limited number of suppliers of silicon wafers, cells and silicon, and the limited number of suppliers for certain other components,such as silver metallization paste, solar module back-sheet, and ethylene vinyl acetate encapsulant, could prevent us from delivering our products to ourcustomers in the required quantities or in a timely manner, which could result in order cancellations and decreased revenues. We purchase silicon raw materials, silicon wafers and solar cells, from a limited number of third-party suppliers. Purchases from GCL, our largest supplierof raw materials by dollar amount of purchases, accounted for approximately 23.4%, 18.9% and 15.9% of our total raw materials purchases in 2015, 2016 and2017, respectively. In 2017, we purchased the majority of the silicon wafers used in our solar modules from third parties. Our major silicon wafer supplier was GCL. Ourmajor supplier of solar cells in 2017 was Inventec Corporation, or Inventec. These suppliers may not always be able to meet our quantity requirements, orkeep pace with the price reductions or quality improvements, necessary for us to price our products competitively. Supply may also be interrupted byaccidents, disasters or other unforeseen events beyond our control. The failure of a supplier, for whatever reason, to supply silicon wafers, solar cells, siliconraw materials or other essential components that meet our quality, quantity and cost requirements in a timely manner could impair our ability to manufactureour products or increase our costs. The impact could be more severe if we are unable to access alternative sources on a timely basis or on commerciallyreasonable terms, and could prevent us from delivering our products to our customers in the required quantities and at prices that are profitable. Problems ofthis kind could cause order cancellations, reduce our market share, harm our reputation and cause legal disputes with our customers.We are developing and commercializing higher conversion efficiency cells, but we may not be able to mass-produce these cells in a cost effective way, ifat all. Higher efficiency cell structures are becoming an increasingly important factor in cost competitiveness and brand recognition in the solar powerindustry. Such cells may yield higher power outputs at the same cost to produce as lower efficiency cells, thereby lowering the manufactured cost per watt.The ability to manufacture and sell solar modules made from such cells may be an important24Table of Contentscompetitive advantage because solar system owners can obtain a higher yield of electricity from the modules that have a similar infrastructure, footprint andsystem cost compared to systems with modules using lower efficiency cells. Higher conversion efficiency solar cells and the resulting higher output solarmodules are one of the considerations in maintaining a price premium over thin-film products. However, while we are making the necessary investments todevelop higher conversion efficiency solar power products, there is no assurance that we will be able to commercialize some or any of these products in a costeffective way, or at all. In the near term, such products may command a modest premium. In the longer term, if our competitors are able to manufacture suchproducts and we cannot do the same at all or in a cost efficient manner, we will be at a competitive disadvantage, which will likely influence our productpricing and our financial performance.We may be subject to unexpected warranty expense that may not be adequately covered by our insurance policies. Our warranty against defects in materials and workmanship is for ten years and, effective June 2015, we warrant that, for a period of 25 years, ourpolycrystalline modules will maintain the following performance levels:•during the first year, the actual power output of the module will be no less than 97.5% of the labeled power output; •from the second year to the 24th year, the actual annual power output decline will be no more than 0.7%; and •by the end of the 25th year, the actual power output of the module will be no less than 80.7% of the labeled power output. Effective June 2015, we warrant that, for a period of 25 years, our monocrystalline modules will maintain the following performance levels:•during the first year, the actual power output of the module will be no less than 97% of the labeled power output; •from the second year to the 24th year, the actual annual power output decline will be no more than 0.7%; and •by the end of the 25th year, the actual power output of the module will be no less than 80.2% of the labeled power output. In addition, effective August 2016, we lengthened the warranty against decline in our Dymond modules to 30 years. We warrant that, for a period of30 years, our Dymond polycrystalline modules will maintain the following performance levels:•during the first year, the actual power output of the module will be no less than 97.5% of the labeled power output; •from the second year to the 29th year, the actual annual power output decline will be no more than 0.5%; and •by the end of the 30th year, the actual power output of the module will be no less than 83% of the labeled power output. Effective August 2016, we warrant that, for a period of 30 years, our Dymond monocrystalline modules will maintain the following performance levels:•during the first year, the actual power output of the module will be no less than 97% of the labeled power output;25Table of Contents•from the second year to the sixth year, the actual annual power output decline will be no more than 0.7%; from the seventh year to the29th year, the actual annual power output decline will be no more than 0.5%; and •by the end of the 30th year, the actual power output of the module will be no less than 81.5% of the labeled power output. Effective August 2017, we warrant that, for a period of 25 years, our PERC monocrystalline modules will maintain the following performance levels:•during the first year, the actual power output of the module will be no less than 97.5% of the labeled power output; •from the second year to the 24th year, the actual annual power output decline will be no more than 0.7%; and •by the end of the 25th year, the actual power output of the module will be no less than 80.7% of the labeled power output. Effective August 2017, we warrant that, for a period of 30 years, our Dymond PERC monocrystalline modules will maintain the following performancelevels:•during the first year, the actual power output of the module will be no less than 97.5% of the labeled power output; •from the second year to the 29th year, the actual annual power output decline will be no more than 0.5%; and •by the end of the 30th year, the actual power output of the module will be no less than 83% of the labeled power output. We believe our warranty periods are consistent with industry practice. Due to the long warranty period, we bear the risk of extensive warranty claims longafter we have shipped our products and recognized revenue. We began selling specialty solar products in 2002 and began selling standard solar modules in2004. Any increase in the defect rate of our products would require us to increase our warranty reserves and would have a corresponding negative impact onour results of operations. Although we conduct quality testing and inspection of our solar module products, our solar module products have not been andcannot be tested in an environment simulating the up-to-30-year warranty periods. In particular, unknown issues may surface after extended use. These issuescould potentially affect our market reputation and adversely affect our revenues, giving rise to potential warranty claims by our customers. As a result, wemay be subject to unexpected warranty costs and associated harm to our financial results as long as 30 years after the sale of our products. In addition, forsolar power projects built by us, we provide a limited workmanship or balance of system warranty against defects in engineering, design, installation andconstruction under normal use, operation and service conditions for a period of up to five years following the energizing of the solar power plant. In resolvingclaims under the workmanship or balance of system warranty, we have the option of remedying through repair, refurbishment or replacement of equipment.We have also entered into similar workmanship warranties with our suppliers to back up our warranties. As part of our energy business, before commissioning solar power projects, we conduct performance testing to confirm that the projects meet theoperational and capacity expectations set forth in the agreements. In limited cases, we also provide for an energy generation performance test designed todemonstrate that the actual energy generation for up to the first three years meets or exceeds the modeled energy expectation (after adjusting for actual solarirradiation). In the event that the energy generation performance test performs below expectations, the appropriate party (EPC contractor or equipmentprovider) may incur liquidated damages capped at a percentage of the contract price.26Table of Contents We have entered into agreements with a group of insurance companies with high credit ratings to back up our warranties. Under the terms of theinsurance policies, which are designed to match the terms of our solar module product warranty policy, the insurance companies are obliged to reimburse us,subject to certain maximum claim limits and certain deductibles, for the actual product warranty costs that we incur under the terms of our solar moduleproduct warranty policy. We record the insurance premiums initially as prepaid expenses and amortize them over the respective policy period of one year.However, potential warranty claims may exceed the scope or amount of coverage under this insurance and, if they do, they could materially and adverselyaffect our business.We may not continue to be successful in developing and maintaining a cost-effective solar cell, wafer and ingot manufacturing capability. We plan to continue expanding our in-house solar cell, wafer and ingot manufacturing capabilities to support our solar module manufacturing business.Our annual solar cell, solar wafer and ingot production capacity was 5.45 GW, 5.0 GW and 1.2 GW, respectively, as of December 31, 2017. To remaincompetitive going forward, we intend to expand our annual solar cell, wafer and ingot production capacity to meet expected growth in demand for our solarmodules. However, we only have limited and recent operating experience in these areas and may face significant product development challenges.Manufacturing solar cells, wafers and ingots is a complex process and we may not be able to produce a sufficient quality of these items to meet our solarmodule manufacturing standards. Minor deviations in the manufacturing process can cause substantial decreases in yield and in some cases cause no yieldoutput or production to be suspended. We will need to make capital expenditures to purchase manufacturing equipment for solar cell, wafer and ingotproduction and will also need to make significant investments in research and development to keep pace with technological advances in solar powertechnology. Any failure to successfully develop and maintain cost-effective manufacturing capability may have a material and adverse effect on our businessand prospects. For example, we have in the past purchased a large percentage of solar cells from third parties. This negatively affected our margins comparedwith those of our competitors since it is less expensive to produce cells internally than to purchase them from third parties. Because third party solar cellpurchases are usually made in a period of high demand, prices tend to be higher and availability reduced. Although we intend to continue direct purchasing of solar cells, wafers and ingots and toll manufacturing arrangements through a limited number ofstrategic partners, our relationships with our suppliers may be disrupted if we engage in the large-scale production of solar cells, wafers and ingots ourselves.If our suppliers discontinue or reduce the supply of solar cells, wafers and ingots to us, through direct sales or through toll manufacturing arrangements, andwe are not able to compensate for the loss or reduction by manufacturing our own solar cells, wafers and ingots, our business and results of operations may beadversely affected.We may not achieve acceptable yields and product performance as a result of manufacturing problems. We need to continuously enhance and modify our solar module, cell, wafer and ingot production capabilities in order to improve yields and productperformance. Microscopic impurities such as dust and other contaminants, difficulties in the manufacturing process, disruptions in the supply of utilities ordefects in the key materials and tools used to manufacture solar modules, cells, ingots and wafers can cause a percentage of the solar modules, cells, ingotsand wafers to be rejected, which would negatively affect our yields. We may experience manufacturing difficulties that cause production delays and lowerthan expected yields. Problems in our facilities, including but not limited to production failures, human errors, weather conditions, equipment malfunction or processcontamination, may limit our ability to manufacture products, which could seriously harm our operations. We are also susceptible to floods, tornados,droughts, power losses and similar events beyond our control that would affect our facilities. A27Table of Contentsdisruption in any step of the manufacturing process will require us to repeat each step and recycle the silicon debris, which would adversely affect our yieldsand manufacturing cost.If we are unable to attract, train and retain technical personnel, our business may be materially and adversely affected. Our future success depends, to a significant extent, on our ability to attract, train and retain technical personnel. Recruiting and retaining qualifiedtechnical personnel, particularly those with expertise in the solar power industry, are vital to our success. There is substantial competition for qualifiedtechnical personnel, and there can be no assurance that we will be able to attract or retain sufficient qualified technical personnel. If we are unable to attractand retain qualified employees, our business may be materially and adversely affected.Our dependence on a limited number of customers and our lack of long-term customer contracts in our solar modules business may cause significantfluctuations or declines in our revenues. We sell a substantial portion of our solar module products to a limited number of customers, including distributors, system integrators, project developersand installers/EPC companies. Our top five customers by revenues collectively accounted for approximately 26.8%, 16.9% and 27.7% of our net revenues in2015, 2016 and 2017, respectively. We anticipate that our dependence on a limited number of customers will continue for the foreseeable future.Consequently, any of the following events may cause material fluctuations or declines in our revenues:•reduced, delayed or cancelled orders from one or more of our significant customers; •the loss of one or more of our significant customers; •a significant customer's failure to pay for our products on time; and •a significant customer's financial difficulties or insolvency. As we continue to expand our business and operations, our top customers continue to change. We cannot assure that we will be able to develop aconsistent customer base.There are a limited number of purchasers of utility-scale quantities of electricity, which exposes us and our utility-scale solar power projects toadditional risk. Since the transmission and distribution of electricity is either monopolized or highly concentrated in most jurisdictions, there are a limited number ofpossible purchasers for utility-scale quantities of electricity in a given geographic location, including transmission grid operators, state and investor-ownedpower companies, public utility districts and cooperatives. As a result, there is a concentrated pool of potential buyers for electricity generated by our solarpower plants and projects, which may restrict our ability to negotiate favorable terms under new PPAs and could impact our ability to find new customers forthe electricity generated by our generation facilities should this become necessary. Furthermore, if the financial condition of these utilities and/or powerpurchasers deteriorates or government policies or regulations to which they are currently subject that compel them to source renewable energy supplieschange, demand for electricity produced by our plants could be negatively impacted. In addition, provisions in our PPAs or applicable laws may provide forthe curtailment of delivery of electricity for various reasons, including preventing damage to transmission systems, system emergencies, force majeure oreconomic reasons. Such curtailment would reduce revenues to us from PPAs. If we cannot enter into PPAs on terms favorable to us, or at all, or if the purchaserunder our PPAs were to exercise its curtailment or other rights to reduce purchases or payments under such arrangements, our revenues and our decisionsregarding development of additional projects in the energy segment may be adversely affected.28Table of ContentsProduct liability claims against us could result in adverse publicity and potentially significant monetary damages. We, along with other solar power product manufacturers, are exposed to risks associated with product liability claims if the use of our solar powerproducts results in injury or death. Since our products generate electricity, it is possible that users could be injured or killed by our products due to productmalfunctions, defects, improper installation or other causes. Although we carry limited product liability insurance, we may not have adequate resources tosatisfy a judgment if a successful claim is brought against us. The successful assertion of product liability claims against us could result in potentiallysignificant monetary damages and require us to make significant payments. Even if the product liability claims against us are determined in our favor, wemay suffer significant damage to our reputation.Our founder, Dr. Shawn Qu, has substantial influence over our company and his interests may not be aligned with the interests of our other shareholders. As of March 31, 2018, Dr. Shawn Qu, our founder, Chairman, President and Chief Executive Officer, beneficially owned 13,775,642 common shares, or23.5% of our outstanding shares. As a result, Dr. Qu has substantial influence over our business, including decisions regarding mergers and acquisition,including the Proposed Transaction, consolidations and the sale of all or substantially all of our assets, the election of directors and other significantcorporate actions. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our othershareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our common shares.We may be exposed to infringement, misappropriation or other claims by third parties, which, if determined adversely to us, could require us to paysignificant damage awards. Our success depends on our ability to develop and use our technology and know-how and sell our solar power products and services without infringingthe intellectual property or other rights of third parties. The validity and scope of claims relating to solar power technology patents involve complexscientific, legal and factual questions and analyses and are therefore highly uncertain. We may be subject to litigation involving claims of patentinfringement or the violation of intellectual property rights of third parties. Defending intellectual property suits, patent opposition proceedings and relatedlegal and administrative proceedings can be both costly and time-consuming and may significantly divert the efforts and resources of our technical andmanagement personnel. Additionally, we use both imported and China-made equipment in our production lines, sometimes without sufficient supplierguarantees that our use of such equipment does not infringe third-party intellectual property rights. This creates a potential source of litigation orinfringement claims. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liabilityto third parties or require us to seek licenses from third parties, pay ongoing royalties, redesign our products or subject us to injunctions prohibiting themanufacture and sale of our products or the use of our technologies. Protracted litigation could also defer customers or potential customers or limit theirpurchase or use of our products until such litigation is resolved.Compliance with environmental laws and regulations can be expensive, and noncompliance with these regulations may result in adverse publicity andpotentially significant monetary damages, fines and the suspension or even termination of our business operations. We are required to comply with all national and local environmental regulations. Our business generates noise, wastewater, gaseous wastes and otherindustrial waste in our operations and the risk of incidents with a potential environmental impact has increased as our business has expanded. We believe thatwe substantially comply with all relevant environmental laws and regulations and have all necessary29Table of Contentsand material environmental permits to conduct our business as it is presently conducted. However, if more stringent regulations are adopted in the future, thecosts of complying with these new regulations could be substantial. If we fail to comply with present or future environmental regulations, we may be requiredto pay substantial fines, suspend production or cease operations. Our solar power products must comply with the environmental regulations of the jurisdictions in which they are installed, and we may incur expenses todesign and manufacture our products to comply with such regulations. If compliance is unduly expensive or unduly difficult, we may lose market share andour financial results may be adversely affected. Any failure by us to control our use or to restrict adequately the discharge, of hazardous substances couldsubject us to potentially significant monetary damages, fines or suspensions of our business operations.We may not be successful in establishing our brand name in important markets and the products we sell under our brand name may compete with theproducts we manufacture on an original equipment manufacturer, or OEM, basis for our customers. We sell our products primarily under our own brand name but also on an OEM basis. In certain markets, our brand may not be as prominent as other moreestablished solar power product vendors, and there can be no assurance that the brand names "Canadian Solar," or "CSI" or any of our possible future brandnames will gain acceptance among customers. Moreover, because the range of products that we sell under our own brands and those we manufacture for ourOEM customers may be substantially similar, we may end up directly or indirectly competing with our OEM customers, which could negatively affect ourrelationship with them.Failure to protect our intellectual property rights in connection with new solar power products may undermine our competitive position. As we develop and bring to market new solar power products, we may need to increase our expenditures to protect our intellectual property. Our failureto protect our intellectual property rights may undermine our competitive position. As of March 31, 2018, we had 935 patents and 399 patent applicationspending in the PRC for products that contribute a relatively small percentage of our net revenues. We have seven U.S. patents. We also have three patents inEurope (including two design patents). We have registered the "Canadian Solar" trademark in the U.S., Australia, Canada, Europe, South Korea, Japan, theUnited Arab Emirates, Hong Kong, Singapore, India, Argentina, Brazil, Peru and more than 20 other countries and we have applied for registration of the"Canadian Solar" trademark in a number of other countries. As of March 31, 2018, we had 66 registered trademarks and nine trademark application pendingin the PRC, and 75 registered trademarks and 26 trademark applications pending outside of China. These intellectual property rights afford only limitedprotection and the actions we take to protect our rights as we develop new solar power products may not be adequate. Policing the unauthorized use ofproprietary technology can be difficult and expensive. In addition, litigation, which can be costly and divert management attention, may be necessary toenforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others.We have limited insurance coverage and may incur significant losses resulting from operating hazards, product liability claims or business interruptions. Our operations involve the use, handling, generation, processing, storage, transportation and disposal of hazardous materials, which may result in fires,explosions, spills and other unexpected or dangerous accidents causing personal injuries or death, property damages, environmental damages and businessinterruption. Although we currently carry third-party liability insurance against property damages, the policies for this insurance are limited in scope and maynot cover all claims relating to personal injury, property or environmental damage arising from incidents on our properties or relating30Table of Contentsto our operations. See "Item 4. Information on the Company—B. Business Overview—Insurance." Any occurrence of these or other incidents which are notinsured under our existing insurance policies could have a material adverse effect on our business, financial condition or results of operations. We are also exposed to risks associated with product liability claims in the event that the use of our solar power products results in injury. See "—Productliability claims against us could result in adverse publicity and potentially significant monetary damages." Although we carry limited product liabilityinsurance, we may not have adequate resources to satisfy a judgment if a successful claim is brought against us. In addition, the normal operation of our manufacturing facilities may be interrupted by accidents caused by operating hazards, power supply disruptions,equipment failure, as well as natural disasters. While our manufacturing plants in China and elsewhere are covered by business interruption insurance, anysignificant damage or interruption to these plants could still have a material and adverse effect on our results of operations.If our internal control over financial reporting or disclosure controls and procedures are not effective, investors may lose confidence in our reportedfinancial information, which could lead to a decline in our share price. We are subject to the reporting obligations under U.S. securities laws. The U. S. Securities and Exchange Commission, or SEC, as required bySection 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring every public company to include a management report on its internal controlover financial reporting in its annual report, which contains management's assessment of the effectiveness of its internal control over financial reporting. Inaddition, an independent registered public accounting firm must report on the effectiveness of our internal controls over financial reporting. As ofDecember 31, 2017, our management concluded that our internal control over financial reporting was effective. However, we cannot assure you that materialweaknesses in our internal controls over financial reporting will not be identified in the future. Any material weaknesses in our internal controls could causeus not to meet our periodic reporting obligations in a timely manner or result in material misstatements in our financial statements. Material weaknesses inour internal controls over financial reporting could also cause investors to lose confidence in our reported financial information, leading to a decline in themarket price of our common shares.The audit report included in our annual report on Form 20-F was prepared by auditors who are not inspected by the Public Company AccountingOversight Board and, as a result, you are deprived of the benefits of such inspection. The independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as auditors ofcompanies that are traded publicly in the U.S. and a firm registered with the Public Company Accounting Oversight Board (United States), or the PCAOB, isrequired by the laws of the U.S. to undergo regular inspections by the PCAOB to assess its compliance with the laws of the U.S. and professional standards.Because our auditors are located in the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRCauthorities, our auditors are not currently inspected by the PCAOB. Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms' audit procedures and quality controlprocedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents thePCAOB from regularly evaluating our auditor's audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOBinspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor's auditprocedures or quality control procedures as compared31Table of Contentsto auditors outside of China that are subject to PCAOB inspections. As a result, investors may lose confidence in our reported financial information andprocedures and the quality of our financial statements.If additional remedial measures are imposed on the big four PRC-based accounting firms, including our independent registered public accounting firm, inadministrative proceedings brought by the SEC alleging the firms' failure to meet specific criteria set by the SEC, with respect to requests for theproduction of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act. Beginning in 2011, the Chinese affiliates of the "big four" accounting firms (including our independent registered public accounting firm) were affectedby a conflict between the U.S. and Chinese law. Specifically, for certain U.S. listed companies operating and audited in the PRC, the SEC and the PCAOBsought to obtain access to the audit work papers and related documents of the Chinese affiliates of the "big four" accounting firms. The accounting firmswere, however, advised and directed that, under Chinese law, they could not respond directly to the requests of the SEC and the PCAOB and that suchrequests, and similar requests by foreign regulators for access to such papers in China, had to be channeled through the China Securities RegulatoryCommission, or CSRC. In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the "big four" accounting firms (including our independent registered public accounting firm). A first instance trial of theseproceedings in July 2013 in the SEC's internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposedpenalties on the firms, including a temporary suspension of their right to practice before the SEC. Implementation of the latter penalty was postponedpending review by the SEC Commissioners. On February 6, 2015, before a review by the Commissioner had taken place, the firms reached a settlement withthe SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. Thefirms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substancerequire them to facilitate production via the CSRC. If the firms fail to follow these procedures and meet certain other specified criteria, the SEC retains theauthority to impose a variety of additional remedial measures, including, as appropriate, an automatic six-month bar on a firm's ability to perform certainaudit work, commencement of new proceedings against a firm or, in extreme cases, the resumption of the current administrative proceeding against allfour firms. In the event that the SEC restarts administrative proceedings, depending upon the final outcome, listed companies in the U.S. with major PRC operationsmay find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in their financial statements beingdetermined to not be in compliance with the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, including possibledelisting. Moreover, any negative news about any such future proceedings against the firms may cause investor uncertainty regarding China-based, U.S.-listed companies and the market price of their shares may be adversely affected. If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timelyfind another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not tobe in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our shares from Nasdaq, orderegistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our shares in the U.S.32Table of ContentsRisks Related to Doing Business in ChinaThe enforcement of the labor contract law and increases in labor costs in the PRC may adversely affect our business and our profitability. The Labor Contract Law came into effect on January 1, 2008, and was later revised on December 28, 2012; the Implementation Rules and the amendmentthereunder became effective on September 18, 2008 and July 1, 2013, respectively. The Labor Contract Law and the Implementation Rules imposed stringentrequirements on employers with regard to executing written employment contracts, hiring temporary employees, dismissing employees, consultation with thelabor union and employee assembly, compensation upon termination and overtime work, collective bargaining and labor dispatch business. In addition,under the Regulations on Paid Annual Leave for Employees, which came into effect on January 1, 2008, and their Implementation Measures, which werepromulgated and became effective on September 18, 2008, employees who have served for more than one year with an employer are entitled to a paidvacation ranging from five to 15 days, depending on their length of service. Employees who waive such vacation time at the request of the employer must becompensated for each vacation day waived at a rate equal to three times their normal daily salary. According to the Interim Provisions on Labor Dispatching,which came into effect on March 1, 2014, the number of dispatched workers used by an employer shall not exceed 10% of its total number of workers. Ourlabor costs are expected to continue to increase due to these new laws and regulations. Higher labor costs and labor disputes with our employees stemmingfrom these new rules and regulations could adversely affect our business, financial condition, and results of operations.The increase or decrease in tax benefits from local tax bureau could affect our total PRC taxes payments, which could have a material and adverse impacton our financial condition and results of operations. The Enterprise Income Tax Law, or the EIT Law, came into effect in China on January 1, 2008 and was amended on February 24, 2017. Under the EITLaw, both foreign-invested enterprises and domestic enterprises are subject to a uniform enterprise income tax rate of 25%. The EIT Law provides forpreferential tax treatment for certain categories of industries and projects that are strongly supported and encouraged by the state. For example, enterprisesqualified as a "High and New Technology Enterprise," or HNTE, are entitled to a 15% enterprise income tax rate provided that such HNTE satisfies otherapplicable statutory requirements. Further, enterprises which engage in businesses within the scope of the Catalogue of Encouraged Industries in WesternRegions promulgated by the NDRC, or Western Catalogue, are entitled to a 15% enterprise income tax rate provided that such enterprise satisfies otherapplicable statutory requirements. Certain of our PRC subsidiaries, such as CSI New Energy Holding Co., Ltd., or CSI New Energy Holding, CSI Cells Co., Ltd., or CSI Cells, CanadianSolar Manufacturing (Luoyang) Inc., or CSI Luoyang Manufacturing, Canadian Solar Manufacturing (Changshu) Inc., or CSI Changshu Manufacturing andSuzhou Sanysolar Materials Technology Co., Ltd., or Suzhou Sanysoalr. once enjoyed preferential tax benefits, such as a reduced enterprise income tax rateof 12.5% or 15%, however, some of these benefits expired. In 2017, only Suzhou Sanysolar Materials Technology Co., Ltd., or Suzhou Sanysolar, CSI Cells,CSI Changshu Manufacturing, and Changshu Tlian Co., Ltd., which were qualified as HNTEs, and Canadian Solar Sunenergy (Baotou) Co., Ltd., whichengaged in the business within the scope of the Western Catalogue, were benefited from a reduced enterprise income tax rate of 15%, subject to applicablestatutory requirements.There are significant uncertainties regarding our tax liabilities with respect to our income under the EIT Law. We are a Canadian company with a significant portion of our manufacturing operations in China. Under the EIT Law and its implementation regulations,both of which became effective on January 1, 2008, enterprises established outside China whose "de facto management body" is located in China are33Table of Contentsconsidered PRC tax residents and will generally be subject to the uniform 25% enterprise income tax rate on their global income. Under the implementationregulations, the term "de facto management body" is defined as substantial and overall management and control over aspects such as the production andbusiness, personnel, accounts and properties of an enterprise. The Circular on Identification of China-controlled Overseas-registered Enterprises as ResidentEnterprises on the Basis of Actual Management Organization, or Circular 82, further provides certain specific criteria for determining whether the "de factomanagement body" of a PRC-controlled offshore incorporated enterprise is located in the PRC. The criteria include whether (a) the premises where the seniormanagement and the senior management bodies responsible for the routine production and business management of the enterprise perform their functions aremainly located within the PRC, (b) decisions relating to the enterprise's financial and human resource matters are made or subject to approval byorganizations or personnel in the PRC, (c) the enterprise's primary assets, accounting books and records, company seals, and board and shareholders' meetingminutes are located or maintained in the PRC and (d) 50% or more of voting board members or senior executives of the enterprise habitually reside in thePRC. Although Circular 82 only applies to offshore enterprises controlled by enterprises or enterprise groups located within the PRC, the determining criteriaset forth in the Circular 82 may reflect the tax authorities' general position on how the "de facto management body" test may be applied in determining thetax resident status of offshore enterprises. As the tax resident status of an enterprise is subject to the determination by the PRC tax authorities, uncertaintiesremain with respect to the interpretation of the term "de facto management body" as applicable to our offshore entities. As a substantial number of themembers of our management team are located in China, we may be considered as a PRC tax resident under the EIT Law and, therefore, subject to the uniform25% enterprise income tax rate on our global income, but dividends received by us from our PRC subsidiaries may be exempt from the income tax. If ourglobal income is subject to PRC enterprise income tax at the rate of 25%, our financial condition and results of operation may be materially and adverselyaffected.Dividends paid by us to our non-PRC shareholders and gains on the sale of our common shares by our non-PRC shareholders may be subject to PRCenterprise income tax liabilities or individual income tax liabilities. Under the EIT Law and its implementation regulations, dividends paid to a non-PRC investor are generally subject to a 10% PRC withholding tax, ifsuch dividends are derived from sources within China and the non-PRC investor is considered to be a non-resident enterprise without any establishment orplace within China or if the dividends paid have no connection with the non-PRC investor's establishment or place within China, unless such tax iseliminated or reduced under an applicable tax treaty. Similarly, any gain realized on the transfer of shares by such investor is also subject to a 10% PRCwithholding tax if such gain is regarded as income derived from sources within China, unless such tax is eliminated or reduced under an applicable tax treaty. The implementation regulations of the EIT Law provide that (a) if the enterprise that distributes dividends is domiciled in the PRC, or (b) if gains arerealized from transferring equity interests of enterprises domiciled in the PRC, then such dividends or capital gains shall be treated as China-sourced income. Currently there are no detailed rules applicable to us that govern the procedures and specific criteria for determining the meaning of being "domiciled" inthe PRC. As a result, it is not clear how the concept of domicile will be interpreted under the EIT Law. Domicile may be interpreted as the jurisdiction wherethe enterprise is incorporated or where the enterprise is a tax resident. As a result, if we are considered a PRC "resident enterprise" for tax purposes, it ispossible that the dividends we pay with respect to our common shares to non-PRC enterprises, or the gain non-PRC enterprises may realize from the transferof our common shares or our convertible notes, would be treated as income34Table of Contentsderived from sources within China and be subject to the PRC withholding tax at a rate of 10% or a lower applicable treaty rate for enterprises. Under the Law of the People's Republic of China on Individual Income Tax, or the IIT Law, individual income tax is payable on PRC-source dividendincome. The implementation regulations of the IIT Law provide that income from dividends derived from companies, enterprises and other economicorganizations in China as well as income realized from transfer of properties in China is considered derived from sources inside China, regardless of whetherthe place of payment was inside China. Therefore, if we are treated as a company in China for tax purposes, any dividends we pay to our non-PRC individualshareholders as well as any gains realized by our non-PRC individual shareholders or our non-PRC individual note holders from the transfer of our commonshares or our convertible notes may be regarded as China-sourced income and, consequently, be subject to PRC withholding tax at a rate of up to 20% or alower applicable treaty rate for individuals. The investment returns of our non-PRC investors may be materially and adversely affected if any dividends wepay, or any gains realized on a transfer of our common shares, are subject to PRC tax.We face uncertainty from the PRC State Administration of Taxation's Announcement on Several Issues Concerning the Enterprise Income Tax on IndirectProperty Transfer by Non-Resident Enterprises. In March 2015, the PRC State Administration of Taxation, or the SAT, issued the Announcement on Several Issues Concerning the Enterprise IncomeTax on Indirect Property Transfer by Non-Resident Enterprises, or Announcement 7, which specifically regulated and strengthened the administration ofenterprise income tax on indirect transfer of properties such as equity in a Chinese resident enterprise. Under Announcement 7, where a non-resident enterprise indirectly transfers properties, such as equity of Chinese resident enterprises, without anyreasonable commercial purposes with the aim of avoiding payment of enterprise income tax, such indirect transfer shall be reclassified as a direct transfer ofequity of a Chinese resident enterprise. Properties such as equity in Chinese resident enterprises mentioned in Announcement 7 mean the properties, orChinese taxable properties, which are directly held by non-resident enterprises and subject the transfer income to enterprise income tax in China according tothe provisions of Chinese tax law. Indirect transfers of Chinese taxable properties are transactions which transfer the equity and other similar interests(hereinafter referred to as "equity") of enterprises abroad that directly or indirectly hold Chinese taxable properties (not including Chinese resident enterprisesregistered abroad). To estimate reasonable commercial purposes, all arrangements related to the indirect transfer of Chinese taxable properties must beconsidered comprehensively and certain factors, such as whether the main value of the equity of enterprises abroad is directly or indirectly from the Chinesetaxable properties, must be comprehensively analyzed. Except for the circumstances stipulated therein, the overall arrangements related to the indirecttransfer of Chinese taxable properties that fall in any of the following circumstances simultaneously are deemed as having no reasonable commercialpurposes: (a) more than 75% of the equity of enterprises abroad is directly or indirectly from Chinese taxable properties; (b) more than 90% of the total assets(not including cash) of enterprises abroad are directly or indirectly composed of investment in the territory of China at any time in the year before the indirecttransfer of Chinese taxable properties, or more than 90% of the income of enterprises abroad is directly or indirectly from the territory of China in the yearbefore the indirect transfer of Chinese taxable properties; (c) although the enterprises abroad and their subordinate enterprises directly or indirectly holdChinese taxable properties have registered in the host country (region) in order to satisfy the organization form required by law, the functions actuallyperformed and the risks undertaken are limited and are not sufficient to prove the economic essence; or (d) the burden of income tax of indirect transfer ofChinese taxable properties payable abroad is lower than the possible burden of taxation in China as for the direct transfer of Chinese taxable properties.However, a non-resident enterprise's income obtained from indirect transfer35Table of Contentsof Chinese taxable properties by purchasing and selling equity of the same listed enterprise abroad in the open market will not be taxed underAnnouncement 7. There is uncertainty as to the application of Announcement 7 and it is understood that the relevant PRC tax authorities have jurisdiction regardingreasonable commercial purposes. As a result, we may become at risk of being taxed under Announcement 7 and we may be required to expend valuableresources to comply with Announcement 7 or to establish that we should not be taxed under Announcement 7, which may materially adversely affect ourfinancial condition and results of operations. We do not believe that the transfer of our common shares or the convertible notes by our non-PRC shareholders would be treated as an indirect transfer ofequity in our PRC subsidiaries subject to Announcement 7. However, there is uncertainty as to the interpretation and application of Announcement 7 by thePRC tax authorities in practice. If you are required to pay PRC tax on the transfer of our common shares or convertible notes, your investment in us may bematerially and adversely affected. In addition, we cannot predict how Announcement 7 will affect our financial condition or results of operations.Restrictions on currency exchange may limit our ability to receive and use our revenues effectively. Certain of our revenues and expenses are denominated in Renminbi. If our revenues denominated in Renminbi increase or our expenses denominated inRenminbi decrease in the future, we may need to convert a portion of our revenues into other currencies to meet our foreign currency obligations. UnderChina's existing foreign exchange regulations, our PRC subsidiaries are able to pay dividends in foreign currencies without prior approval from the StateAdministration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, we cannot assure you that the PRC governmentwill not take further measures in the future to restrict access to foreign currencies for current account transactions. Foreign exchange transactions by our PRC subsidiaries under most capital accounts continue to be subject to significant foreign exchange controls andrequire the approval of or registration with PRC governmental authorities. In particular, if we finance our PRC subsidiaries by means of additional capitalcontributions, the approval of or the record-filing to certain government authorities, including the Ministry of Commerce or its local counterparts, is required.These limitations could affect the ability of our PRC subsidiaries to obtain foreign exchange through equity financing.Uncertainties with respect to the Chinese legal system could materially and adversely affect us. We conduct a significant portion of our manufacturing operations through our subsidiaries in China. These subsidiaries are generally subject to laws andregulations applicable to foreign investment in China and, in particular, laws applicable to wholly foreign-owned enterprises and joint venture companies.The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRClegislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since these lawsand regulations are relatively new and the PRC legal system is still developing, the implementation and enforcement of many laws, regulations and rules maybe inconsistent, which may limit legal protections available to us. In addition, any litigation in China may be protracted and may result in substantial costsand divert our resources and the attention of our management.36Table of ContentsRisks Related to Our Common SharesWe may issue additional common shares, other equity or equity-linked or debt securities, which may materially and adversely affect the price of ourcommon shares. We may issue additional equity, equity-linked or debt securities for a number of reasons, including to finance our operations and business strategy(including in connection with acquisitions, strategic collaborations or other transactions), to satisfy our obligations for the repayment of existingindebtedness, to adjust our ratio of debt to equity, to satisfy our obligations upon the exercise of outstanding warrants or options or for other reasons. Anyfuture issuances of equity securities or equity-linked securities could substantially dilute the interests of our existing shareholders and may materially andadversely affect the price of our common shares. We cannot predict the timing or size of any future issuances or sales of equity, equity-linked or debtsecurities, or the effect, if any, that such issuances or sales, may have on the market price of our common shares. Market conditions could require us to acceptless favorable terms for the issuance of our securities in the future.The market price for our common shares may be volatile. The market price for our common shares has been highly volatile and subject to wide fluctuations. During the period from November 9, 2006, the firstday on which our common shares were listed on Nasdaq, until December 31, 2016, the market price of our common shares ranged from $1.95 to $51.8 pershare. From January 1, 2017 to December 31, 2017, the market price of our common shares ranged from $10.86 to $19.09 per share. The closing market priceof our common shares on December 31, 2017 was $16.86 per share. The market price of our common shares may continue to be volatile and subject to widefluctuations in response to a wide variety of factors, including the following:•announcements of technological or competitive developments; •regulatory developments in our target markets affecting us, our customers or our competitors; •actual or anticipated fluctuations in our quarterly operating results; •changes in financial estimates by securities research analysts; •changes in the economic performance or market valuations of other solar power companies; •the departure of executive officers and key research personnel; •patent litigation and other intellectual property disputes; •litigation and other disputes with our long-term suppliers; •fluctuations in the exchange rates between the U.S. dollar, Euro, Japanese yen, British pound, Canadian dollar and Renminbi; •the release or expiration of lock-up or other transfer restrictions on our outstanding common shares; •sales or anticipated sales of additional common shares; and •the announcement and news regarding the Proposed Transaction. In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operatingperformance of particular companies. These market fluctuations may also have a material and adverse effect on the price of our common shares.37Table of ContentsSubstantial future sales of our common shares in the public market, or the perception that such sales could occur, could cause the price of our commonshares to decline. Sales of our common shares in the public market, or the perception that such sales could occur, could cause the market price of our common shares todecline. As of December 31, 2017, we had 58,496,685 common shares outstanding. The number of common shares outstanding and available for sale willincrease when our employees and former employees who are holders of restricted share units and options to acquire our common shares become entitled tothe underlying shares under the terms of their units or options. In addition, in connection with debt financing, we issued warrants and may issue additionalwarrants to purchase our common shares. To the extent these warrants are exercised and the common shares sold into the market, the market price of ourcommon shares could decline. Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings. We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make these rights availablein the U.S. unless we register the rights and the securities to which the rights relate under the Securities Act or an exemption from the registrationrequirements is available. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause aregistration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act.Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.Our articles of continuance contain anti-takeover provisions that could adversely affect the rights of holders of our common shares. The following provisions in our amended articles of continuance may deprive our shareholders of the opportunity to sell their shares at a premium overthe prevailing market price by delaying or preventing a change of control of our company:•Our board of directors has the authority, without approval from the shareholders, to issue an unlimited number of preferred shares in one ormore series. Our board of directors may establish the number of shares to be included in each such series and may fix the designations,preferences, powers and other rights of the shares of a series of preferred shares. •Our board of directors is entitled to fix and may change the number of directors within the minimum and maximum number of directorsprovided for in our articles. Our board of directors may appoint one or more additional directors to hold office for a term expiring no later thanthe close of the next annual meeting of shareholders, subject to the limitation that the total number of directors so appointed may not exceedone-third of the number of directors elected at the previous annual meeting of shareholders.You may have difficulty enforcing judgments obtained against us. We are a corporation organized under the laws of Canada and a substantial portion of our assets are located outside of the U.S. A substantial portion ofour current business operations is conducted in the PRC. In addition, a majority of our directors and officers are nationals and residents of countries otherthan the U.S. and a substantial portion of the assets of these persons are located outside the U.S. As a result, it may be difficult for you to effect service ofprocess within the U.S. upon these persons. It may also be difficult for you to enforce judgments obtained in U.S. courts based on the civil liability provisionsof the U.S. federal securities laws against us and our officers and directors, many of whom are not residents of the U.S. and whose assets are located insignificant part outside of the U.S. In addition, there is uncertainty as to whether the courts of Canada or the PRC would recognize38Table of Contentsor enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the U.S. or any state. Inaddition, it is uncertain whether such Canadian or PRC courts would be competent to hear original actions brought in Canada or the PRC against us or suchpersons predicated upon the securities laws of the U.S. or any state.We may be classified as a passive foreign investment company, which could result in adverse United States federal income tax consequences toUnited States Holders of our common shares. Based on the current value of our assets and the composition of our income and assets, we do not believe we were a passive foreign investment company,or PFIC, for United States federal income tax purposes for our taxable year ended December 31, 2017. However, because our PFIC status for 2018 or anyfuture taxable year may depend, in part, on the manner in which we operate our renewable energy generation assets, we cannot assure you that we will not bea PFIC for our current taxable year ending December 31, 2018 or any future taxable year. A non-United States corporation such as ourselves will be treated asa PFIC for United States federal income tax purposes for any taxable year if, applying applicable look-through rules, either (a) at least 75% of its gross incomefor such year is passive income or (b) at least 50% of the value of its assets (determined based on an average of the quarterly values of the assets) during suchyear is attributable to assets that produce or are held for the production of passive income. The determination of PFIC status is based on an annualdetermination that cannot be made until the close of a taxable year, involves extensive factual investigation, including ascertaining the fair market value ofall of our assets on a quarterly basis and the character of each item of income that we earn, and is subject to uncertainty in several respects. In particular, theapplication of the PFIC rules to certain of our business lines is complex and unclear, and we cannot guarantee that the United States Internal RevenueService, or IRS, will agree with any positions that we ultimately take. Accordingly, we cannot assure you that we will not be treated as a PFIC for any taxableyear or that the IRS will not take a contrary position. Changes in the composition of our income or composition of our assets may cause us to become a PFIC. The determination of whether we will be a PFICfor any taxable year may depend in part upon the value of our goodwill and other unbooked intangibles not reflected on our balance sheet (which maydepend upon the market value of the common shares from time to time, which may be volatile) and also may be affected by how, and how quickly, we spendour liquid assets. Further, while we believe our classification methodology and valuation approach is reasonable, it is possible that the IRS may challenge ourclassification or valuation of our goodwill and other unbooked intangibles, which may result in our being or becoming a PFIC for the current or one or morefuture taxable years. If we are a PFIC for any taxable year during which a United States Holder (as defined in "Item 10. Additional Information—E. Taxation—United StatesFederal Income Taxation") holds a common share, certain adverse United States federal income tax consequences could apply to such United States Holder.See "Item 10. Additional Information—E. Taxation—United States Federal Income Taxation—Passive Foreign Investment Company." ITEM 4. INFORMATION ON THE COMPANY A. History and Development of the Company Our legal and commercial name is Canadian Solar Inc. We were incorporated under the laws of the Province of Ontario, Canada in October 2001. Wechanged our jurisdiction by continuing under the Canadian federal corporate statute, the Canada Business Corporations Act, or CBCA, effective June 1,2006. As a result, we are governed by the CBCA. See "—C. Organizational Structure" for additional information on our corporate structure, including a list ofour major subsidiaries. Our principal executive office and principal place of business is located at 545 Speedvale Avenue West, Guelph, Ontario, Canada N1K 1E6. Ourtelephone number at this address is (1-519) 837-188139Table of Contentsand our fax number is (1-519) 837-2550. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue,New York, New York 10011. All inquiries to us should be directed at the address and telephone number of our principal executive office set forth above. Our website iswww.canadiansolar.com. The information contained on or accessible through our website does not form part of this annual report. We made capital expenditures of $642.8 million, $1,111.5 million and $311.0 million in 2015, 2016 and 2017, respectively. Our capital expenditureswere primarily to maintain and increase our ingot, wafer, cell and module manufacturing capacity and to develop and construct solar power systems. For moredetails, see "Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures."Proposed Going-Private Transaction Our board of directors received a preliminary non-binding proposal letter dated December 9, 2017 from Dr. Qu, our chairman, president and chiefexecutive officer, to acquire all of our outstanding common shares not owned by Dr. Qu and his wife, in a going private transaction for $18.47 in cash percommon share. On December 12, 2017, our board of directors formed a special committee of independent and disinterested directors, consisting of four independentdirectors, Messrs. Robert McDermott, Lars-Eric Johansson, Harry Ruda and Andrew Wong, to consider the proposal, with the aid of Barclays CapitalCanada Inc. as its independent financial advisor, Weil, Gotshal & Manges LLP as its U.S. legal counsel and Osler, Hoskin & Harcourt LLP as its Canadianlegal counsel. See "Item 3. Key Information—D. Risk Factors—Risks Related to Our Company and Our Industry—The consummation of the proposed going-private transaction is uncertain, and the process of consummating such transaction could disrupt our operation or distract our management's attention, all ofwhich could materially and adversely affect our business, results of operations and financial condition."B. Business OverviewOverview We are one of the world's largest solar power companies and a leading vertically-integrated provider of solar power products, services and systemsolutions with operations in North America, South America, Europe, Africa, the Middle East, Australia and Asia. We design, develop and manufacture solar ingots, wafers, cells, modules and other solar power products. Our solar power products include standard solarmodules and specialty solar products. We are incorporated in Canada and conduct most of our manufacturing operations in China and south-east Asia. Ourproducts include a range of solar modules built to general specifications for use in a wide range of residential, commercial and industrial solar powergeneration systems. Specialty solar products consist of customized solar modules that our customers incorporate into their own products and completespecialty products, such as portable solar home systems. We sell our products primarily under our "Canadian Solar" brand name. In recent years, we have increased our investment in, and management attention on, our energy segment. Our energy segment primarily comprises solarpower project development and sale, EPC and development services, and operating solar power projects and sales of electricity. Our energy segmentcontributed 20.0%, 3.8% and 28.1% of our net revenues in 2017, 2016 and 2015, respectively. While we plan to continue to monetize our current portfolio ofsolar power projects in operation, we also intend to grow our energy segment by building up our project pipeline and increasing the number of customers ofour EPC services. In March 2015, we acquired Recurrent Energy, LLC, or Recurrent, a leading solar energy developer with solar power projects locatedprincipally in California and Texas, and40Table of Contentsthereby significantly increased our solar project pipeline. As of February 28, 2018, our late-stage solar project pipeline, which refers to projects for whichenergy off-take agreements have been signed and which are expected to be built within the next two to four years, totaled approximately 2.0 gigawatt peak,or GWp, with 362.2 megawatt peak, or MWp, in Japan, 459 MWp in the U.S., 410 MWp in China, 215.6 MWp in Brazil, 59 MWp in India, 24.2 MWp inAustralia, 435.7 MWp in Mexico, 8.2 MWp in the United Kingdom, and 18.4 MWp in Chile. In addition to our late-stage solar project pipeline, as ofFebruary 28, 2018, we had a portfolio of solar power projects in operation totaling 1,211.1 MWp with an estimated resale value of approximately $1.5 billionas of February 28, 2018. For those projects that are subject to U.S. tax equity deals, only the value of the class B shares held by us was included in suchestimate of resale value. See "—Sales, Marketing and Customers—Energy Segment—Solar Project Development and Sale" and "—Sales, Marketing andCustomers—Energy Segment—Operating Solar Power Projects and Sales of Electricity" for a description of the status of our solar power projects in operation. We believe that we offer one of the broadest crystalline silicon solar power product lines in the industry. Our product lines range from modules ofmedium power to high efficiency, high-power output multi-crystalline and mono-crystalline modules, as well as a range of specialty products. We currentlysell our products to a diverse customer base in various markets worldwide, including China, Japan, the U.S., Germany, Brazil, Netherlands, France, Singapore,Canada, India and the United Kingdom. Our customers primarily include distributors, system integrators, project developers and installers/EPC companies. We employ a flexible vertically integrated business model that combines internal manufacturing capacity with direct material purchases of both cellsand wafers. We believe this approach has benefited us by lowering the cost of materials of our solar module products. We also believe that this approachprovides us with greater flexibility to respond to short-term demand increases. As of December 31, 2017, we had:•8.11 GW of total annual solar module manufacturing capacity, approximately 360 MW of which is located in Ontario, Canada, 1,550 MW inSouth East Asia, 400 MW in Brazil and the rest in China; •4.1 GW of total annual solar cell manufacturing capacity located in China; and •6.2 GW of total annual ingot and wafer manufacturing capacity located in China. We plan to expand our module, cell, wafer and ingot manufacturing capacities to 9.81 GW, 6.35 GW, 5.0 GW and 2.0 GW, respectively, byDecember 31, 2018. We intend to use substantially all of the silicon wafers that we manufacture to supply our own solar cell plants and to use substantially all of the solarcells that we manufacture to produce our own solar module products. We also intend to use some of the solar modules we produce in our energy segment. Oursolar module manufacturing costs in China, including purchased polysilicon, wafers and cells, decreased from $0.40 per watt in December 2015, to $0.33 perwatt in December 2016 and to $0.32 per watt in December 2017. We expect to continue to decrease the manufacturing costs for our production of wafers,cells and modules. We continue to focus on reducing our manufacturing costs by improving solar cell conversion efficiency, enhancing manufacturing yields and reducingraw material costs. In January 2009, we established a new solar cell efficiency research center to develop more efficient cell structures, and we have beenmaking ongoing improvements in solar cell conversion efficiency and product cost control. We began shipping new products, such as higher efficiencymodules, in late 2011. We have successfully developed and launched additional new high-efficiency cells and modules in the past few years and expect toincrease the sales volumes of these products in the future.41Table of ContentsOur Products and Services Our business consists of the following two business segments: MSS segment and energy segment. Our MSS segment primarily involves the design,development, manufacturing and sale of a wide range of solar power products, including standard solar modules and specialty solar products, solar systemkits and O&M services. Our energy segment primarily consists of solar power project development and sale, EPC and development services, and operatingsolar power projects and sales of electricity.Products Offered in Our MSS SegmentStandard Solar Modules Our standard solar modules are arrays of interconnected solar cells in weatherproof encapsulation. We produce a wide variety of standard solar modules,ranging from 3 W to over 375 W in power and using multi-crystalline or mono-crystalline cells in several different design patterns. Our mainstream solarmodules include standard CS6V (50 full cells), CS6K (60 full cells), CS6U (72 full cells), CS3K(120 half-cells), CS3U(144 half-cells), Dymond CS6K-P-FG(60 cells, double-glass) and Dymond CS6X-P-FG (72 cells, double-glass) modules, all using 6-inch solar wafers with the majority being multi-crystalline. Themainstream modules are designed for residential, commercial and utility applications. Small modules are for specialty applications. We launched our Quartech modules in March 2013. Quartech modules use 4-busbar solar cell technology which improves module reliability andefficiency. CS6P (6 × 10 cell layout) Quartech modules have power output between 255 W and 270 W, which enables us to offer customers modules withhigh power. We launched and started shipping Dymond modules in October 2014. Dymond modules are designed with double-glass encapsulation, which ismore reliable for harsh environments and ready for 1500V solar systems. We launched and started shipping SmartDC modules in September 2015. SmartDC modules feature an innovative integration of our module technologyand power optimization for grid-tied PV applications. By replacing the traditional junction-box, SmartDC modules eliminate module power mismatch,mitigate shading losses and optimize power output at module-level. SmartDC modules also provide module-level data to minimize operational costs and topermit effective system management. In March 2016, we launched our new Quintech SuperPower mono-crystalline modules. Quintech SuperPower mono-crystalline modules are made of cellswith PERC technology and significantly improve module efficiency and reliability. CS6K (6 × 10 cell layout aligned with mainstream dimensions) QuintechSuperPower mono modules have a power output between 285 W and 300 W with high efficiency and high reliability. We started commercial production ofQuintech CS6K and CS6U modules in 2016. These modules have features such as 5 busbar cells, standardized module dimensions and cell and moduleimprovements, resulting in higher wattage production and better performance. These modules are intended for broad base introduction, which covers mono-crystalline cells, multi-crystalline cells and mono-crystalline PERC cells. At the beginning of 2015, we started commercial production of Onyx cells with our in-house developed black silicon technology, Onyx technology.Onyx technology employs a nano-texturing process to make the multi-crystalline cell almost fully black, increasing cell efficiency and module wattage at thesame time. We started increasing the production volume of Onyx cells in 2016, which have been incorporated into our Quartech and Quintech modulefamilies. In July 2016, we launched the 1500V System Voltage crystalline solar module portfolio. The 1500V System Voltage crystalline module provides arobust and cost-efficient system solution by adding more modules in a string, which decreases the number of combiner boxes, direct current homeruns andtrenching. This unique product design improves the overall system performance and efficiency and reduces labor cost and installation time.42Table of Contents In 2017, we launched the Ku module series which results in 100% improvement in failure redundancy with innovative cell matrix interconnectiontechnology. The module power output is enhanced by up to 10 Watt per module while reducing the module working temperature. We developed P4 celltechnology, which is multi-crystalline PERC technology. The combination of P4 cell and Ku module technologies enable us to offer customer higher wattageand more reliable multi crystalline module products. We also launched and shipped HDM (High Density Module) product to some markets this year. TheHDM offers high wattage, high module efficiency and pleasant aesthetics for residential applications. Our standard solar modules are designed to endure harsh weather conditions and to be transported and installed easily. We began selling our solarmodule products in March 2002 and sell our standard solar modules primarily under our brand name.Specialty Solar Products Our specialty solar products are mainly Andes Solar Home System, or Andes SHS, and Maple Solar System, or Maple SS. Andes SHS is an off-grid solar system, designed to provide an economical source of electricity to homes and communities without access to gridelectricity or where electricity supply is scarce. The Andes SHS is portable, light-weight, and easy to set-up, making it ideal for situations where emergencypower is required. Maple SS is an economical, safe and clean energy solution for families who burn kerosene for lighting when darkness falls. It is a very convenient mobilepower source for outdoor activities, such as camping, boating and hiking. Maple SS includes a solar panel, energy-efficient LED lights, Li-ion batteries andmultiple cell phone charger plugs.Solar System Kits A solar system kit is a ready-to-install package consisting of solar modules produced by us and components, such as inverters, racking system and otheraccessories, supplied by third parties. We began selling solar system kits in 2010 and in 2017 sold them primarily to customers in Japan, Europe, the U.S.and China.O&M Services Our O&M services include inspections, repair and replacement of plant equipment, site management and administrative support services. In the secondhalf of 2012, we started to provide O&M services for solar power projects in commercial operation. In 2017, we provided O&M services primarily in theNorth American, Australia and Japan markets.Products and Services Offered in Our Energy SegmentSolar Project Development and Sale We develop, build and sell solar power projects. Our solar project development activities have grown over the past several years through a combinationof organic growth and acquisitions. Our global solar power project business develops projects primarily in Canada, Japan, the U.S., China, Brazil, India,Mexico, the United Kingdom and Australia. We have a team of experts which specialize in project development, evaluations, system designs, engineering,managing, project coordination and organizing financing. Our project sales team actively identifies and pursues suitable buyers for our solar power projects.See "—Sales, Marketing and Customers—Energy Segment—Solar Project Development and Sale" for a description of the status of our solar power projects.43 Table of ContentsEPC and Development Services Our EPC services include engineering, procurement and construction work for solar power projects owned either by us or by third-parties. In late 2010,we began providing EPC services primarily in Canada and China. We began providing development services in the U.S. after we acquired Recurrent in 2015.EPC services in China are provided through our affiliated company, Suzhou Gaochuangte New Energy Sources Development Co., Ltd., or Gaochuangte, inwhich we owned an 40% equity interest before June 30, 2017 and become our 80% owned subsidiary since July 1, 2017.Operating Solar Power Projects and Sales of Electricity In the fourth quarter of 2014, we began to operate certain of our solar projects and generate income from the sale of electricity. Although most of thesesolar projects are developed for sale, we may operate them prior to selling. As of February 28, 2018, we had a fleet of solar power plants in operation with anaggregate capacity of approximately 1,211.1 MWp.Supply Chain ManagementMSS Segment Our MSS segment depends on our ability to obtain a stable and cost-effective supply of polysilicon, solar ingots, wafers and cells. Our silicon waferagreements set forth price and quantity information, delivery terms and technical specifications. While these agreements usually set forth specific price terms,most agreements also include mechanisms to adjust the prices, either upwards or downwards, based on market conditions. We have entered into a number oflong-term supply agreements with several silicon and wafer suppliers in order to secure a stable supply of raw materials to meet our production requirements.These suppliers included GCL, LONGI, Deutsche Solar and LDK. In 2009 and thereafter, we amended our agreements with certain of these suppliers to adjustthe purchase price to prevailing market prices at the time we place a purchase order and to reduce the quantity of products that we are required to purchase.Under our supply agreements with certain suppliers, and consistent with historical industry practice, we make advance payments prior to scheduled deliverydates. These advance payments are made without collateral and are credited against the purchase prices payable by us. In 2017, we purchased the majority ofthe silicon wafers used in our solar modules from third parties. Our major silicon wafers supplier was GCL. Since 2011, the supply of polysilicon and siliconwafers has generally exceeded demand, particularly polysilicon. Polysilicon prices significantly decreased from approximately $20.6 per kilogram atDecember 31, 2014 to $13.7 per kilogram at December 31, 2015 due to oversupply but then started to increase in the third quarter of 2016, reachingapproximately $19.0 per kilogram by December 31, 2016 and $19.7 per kilogram by December 31, 2017. We plan to increase our in-house solar wafermanufacturing capacity and expect to diversify our external wafer and polysilicon suppliers. We purchase solar cells from a number of international and local suppliers, in addition to manufacturing our own solar cells and having tollmanufacturing arrangements with our solar cell suppliers. Our solar cell agreements set forth price and quantity information, delivery terms and technicalspecifications. These agreements generally provide for a period of time during which we can inspect the product and request the seller to make replacementsfor damaged goods. We generally require the seller to bear the costs and risks of transporting solar cells until they have been delivered to the locationspecified in the agreement. In 2017, our major supplier of solar cells was Inventec. As we expand our business, we expect to increase our solar cellmanufacturing capacity and diversify our solar cell supply channel to ensure we have the flexibility to adapt to future changes in the supply of, and demandfor, solar cells. For risks relating to the long-term agreements with our raw material suppliers, see "Item 3. Key Information—D. Risk Factors—Risks Related to OurCompany and Our Industry—Long-term supply44Table of Contentsagreements may make it difficult for us to adjust our raw material costs should prices decrease. Also, if we terminate any of these agreements, we may not beable to recover all or any part of the advance payments we have made to these suppliers and we may be subject to litigation."Energy Segment Our MSS segment supplies part of the solar modules used in our energy segment. For the solar power projects that we develop, we have the option ofeither using our own engineering and operation teams or hiring third-party contractors to build and operate the projects prior to sale.Manufacturing, Construction and OperationMSS Segment We assemble our solar modules by interconnecting multiple solar cells by tabbing and stringing them into a desired electrical configuration. We lay theinterconnected cells, laminate them in a vacuum, cure them by heating and package them in a protective lightweight anodized aluminum frame. We seal andweatherproof our solar modules to withstand high levels of ultraviolet radiation, moisture and extreme temperatures. We selectively use automated equipment to enhance the quality and consistency of our finished products and to improve the efficiency of ourmanufacturing processes. Key equipment in our manufacturing process includes automatic laminators, simulators and solar cell testers. The design of ourassembly lines provides flexibility to adjust the ratio of automated equipment to skilled labor in order to maximize quality and efficiency.Energy Segment We develop, construct, maintain, sell and/or operate solar power projects primarily in Canada, Japan, the U.S., China, Brazil, India, Mexico, theUnited Kingdom and Australia. We engage in all aspects of the development and operation of solar power projects, including project selection, design,permitting, engineering, procurement, construction, installation, monitoring, operation and maintenance. We also provide EPC services to third-parties. Our solar power projects development process primarily consists of the following stages:•Market due diligence and project selection. We search for project opportunities globally with the goal of maintaining a robust andgeographically diversified project portfolio. Our business team closely monitors the global solar power projects market and gathers marketintelligence to identify project development opportunities. Our development team prepares market analysis reports, financial models andfeasibility studies to guide us in evaluating and selecting solar power projects. As we consider undertaking new solar power projects, we weigha number of factors including location, local policies and regulatory environment, financing costs and potential internal rate of returns. •Project financing. We typically include project financing plans in our financial models and feasibility studies. We finance our projectsthrough our working capital and debt financing from local banks or international financing sources that require us to pledge project assets. •Permitting and approval. We either obtain the permits and approvals necessary for solar projects ourselves or we acquire projects that havealready received the necessary permits and approvals. The permitting and approval process for solar power projects varies from country tocountry and often among local jurisdictions within a country. •Project design, engineering, procurement and construction. Our engineering team generally designs solar power projects to optimizeperformance while minimizing construction and operational45Table of Contentscosts and risks. The engineering design process includes the site layout and electrical design as well choosing the appropriate technology, inparticular module and inverter types. We use solar modules produced by us and by third-party manufacturers, and procure inverters and otherequipment from third-party suppliers. We generally construct solar projects in China through Gaochuangte, our affiliate in which we owned an40% equity interest before June 30, 2017 and become our 80% owned subsidiary since July 1, 2017. Currently, we operate and maintain solar power projects in the United Kingdom, the U. S., China, Japan, India, Brazil, Australia, Africa and Spain. Weenter into grid-connection agreements and/or PPAs with the local grid companies. After a project is connected to the grid, we regularly inspect, monitor andmanage the project site with the intention to maximize the utilization rate, rate of power generation and system life of the project. We operate a monitoring center in Guelph, Ontario, Canada, which adopts the global monitoring platform (CSEye) to manage system alarms and reports.Our proprietary algorithms analyze the performance of the third party power plants that we operate and maintain on a daily basis and identify potentialproblems. For example, they raise alarms when inverters or strings are under-performing.Quality Control and Certifications We have registered our quality control system according to the requirements of ISO 9001:2008 and ISO/TS 16949 standards. TUV Rheinland Group, aleading international service company that documents the safety and quality of products, systems and services, audits our quality systems. We inspect andtest incoming raw materials to ensure their quality. We monitor our manufacturing processes to ensure quality control and we inspect finished products byconducting reliability and other tests. We have obtained IEC 61215 and IEC 61730 (previously TUV Class II safety) European standards for sales in Europe. We have also obtainedcertifications of CAN ORD-UL 1703 and UL 1703, which allow us to sell products in North America. In 2009, we obtained the necessary certifications to sellour modules in Japan, South Korea and Great Britain and to several solar programs in China, including Golden Sun. In 2011, we completed IEC 61215, IEC61730 and UL1703 certification for modules designed to be assembled from metal wrap-through cells. We also completed DLG ammoniac resistance testingand obtained the salt mist certification for our leading module CS6P-P in 2011. In 2012, we achieved the highest ratings possible in the two most significantstandard tests for ammonia resistance of solar modules, which were the IEC 62716 draft C ammonia corrosion test and the DLG standard test. In 2013, weextended the salt mist certification under IEC 61701 ed.2 Severity 1 to all of our standard modules at VDE (Verband Deutscher Elektrotechniker). In addition,during the same year, we were able to register more key module types at JET for Japan, and we enhanced the maximum system voltage up to 1000V for ourCSA (Canadian Standards Association) certification (North America), allowing significant cost reduction for our EPC partners. We also again raised theranking of CEC PTC ratings. In 2013, we extended our IEC and UL certifications to cover higher-power modules, up to 275 W for 60 cell models and 330 Wfor 72 cell models, through key technology improvements such as introduction of 4 busbar cell design. We also again improved our CEC PTC ratings for thespearhead CS6P-P model, and have demonstrated suitability of our product portfolio for reliable long-term operation under various climates, through SGSIEC 60068-2-68 sand blowing certification and extensive Potential Induced Degradation, or PID, resistance testing at respected laboratories, such asFraunhofer ISE, VDE and TUV SUD (Technischer Überwachungs-Verein Südteil Deutschland). In 2012, the new half-cell module designed by our R&D team was fully certified by CSA and VDE, two internationally recognized certification bodies.We also started providing our customers with third-party-approved PAN files (testing per IEC 61853-1) for all our key module series, allowing more accurateenergy yield simulation and better return-on-investment analysis for their projects. In 2013, we46Table of Contentsobtained certifications for double glasses and DC-to-AC module designs. With the emergence of new markets that we are expanding into, we have madeefforts to comply with new certification schemes that apply to us, such as INMETRO for Brazil and the UNI9177 fire test for Italy that we are nowcomplied with. In 2014, we received JET certification for our new high efficiency module series CS6V targeting the residential market, and also extended the highestpower range of our mainstream CS6P-P model to 275 W in JET. We also completed full certification for our new Quartech (4 busbar cells), coveringVDE/CSA/MCS-BBA/JET, which allows us to launch these products worldwide. Several state-of-the-art demonstration trials were implemented, such as a5 kW system located in the desert-like environment of Australian Alice Springs DKASC center. In 2015, we received several product certifications that support our new product launches. Our 60 and 72 cell double glass module series were certifiedby VDE, CSA and MCS-BBA, which allows us to launch these products worldwide. We also completed VDE and TUV-Rheinland certification(IEC61215/61730) of our new PERC mono 5 busbar premium module series. The PV connector T4 designed by us was certified by TUV-Rheinland and CSAto satisfy the latest and most stringent standards, namely IEC61852 and UL6703. We have updated our mainstream modules Life Cycle Analysis evaluationand have been granted verification certificate from TUV SUD to meet the PAS2050 and ISO14067 standards. To support our energy segment, we started implementing a state-of-the-art OPCT (On-going Performance Characterization Testing) program incooperation with PVEL-DNVGL laboratory in 2015, which delivered extensive module performance characterization per IEC61853 series standards. In 2016, we received JET certification for our new PERC mono 5 busbar premium module series. We also extended our VDE and CSA certifications tocover 1500V maximum system voltage on all of our major module products, providing significant system cost reduction opportunities for our customers. Weimplemented full salt mist, ammoniac and PID certification schemes as standard offer for all of our module series, striving for the highest reliabilityobjectives. Our standard and Dymond module series were granted SGS sand blowing qualification for installation in desert environment. Our in-housedesigned junction boxes B20S and B12S were successfully certified by TUV-Rheinland and CSA to satisfy the latest and most stringent internationalstandards, IEC62790 and UL3730. For all of our new module product series targeted for launch in or after 2017, we started implementing certification to meetnew IEC61215 and IEC61730 standards (2016 version). In 2017, we implemented the new IEC standards as our basic standards for all new products. We received the new IEC certification (VDE) for Kumodules, Ku Dymond modules, poly Generation 4, and HDM modules. All the new module products have also passed UL1703 testing, and received CSAcertification. And all the new products have achieved high CEC PTC ratings. We received the JET certification for HDM modules; and for Ku modules, weextended the certifications to many countries, including CEC in Australia, FSEC in America, MCS-BBA in UK, INMETRO in Brazil, and KS in Korea. In2017, the National Energy Administration of China announced the new Top runners' efficiency requirement, and most of our main products have passed theCQC, orChina Quality Certification Center, Top runners certification. Our PV test laboratory is registered with the ISO 17025 quality improvement program, and has been accepted for the Mutual Data Acceptance Programby the CSA in Canada, VDE in Germany, Intertek in the U.S. and CQC in China. The PV test laboratory allows us to conduct some product certificationtesting in-house, which decreases time-to-market and certification costs.47Table of ContentsSales, Marketing and Customers The following table sets forth, for the periods indicated, certain information relating to our total net revenues derived from our customers categorized bytheir geographic locations for the periods indicated:MSS Segment Our primary customers are distributors, system integrators, project developers and installers/EPC companies. A small number of customers havehistorically accounted for a significant portion of our net revenues. In 2015, 2016 and 2017, our top five customers of MSS segment by net revenuescollectively accounted for approximately 14.5%, 16.7% and 18.0%, respectively, of our total net revenues. Sales to our largest customer in those yearsaccounted for 4.6%, 5.0% and 7.2%, respectively, of our total net revenues. We market and sell solar modules worldwide for residential, commercial and utility-scale solar energy projects and solutions. We primarily sell ourproducts to distributors and large-scale installers through our own, home-grown sales teams, who operate throughout Europe, the Americas, the Middle Eastand the Asia-Pacific regions. Our marketing activities include brand sponsorship, social media discussions and digital marketing. Our teams also develop channel marketing programsto support our customers in their marketing of our business and products, in addition to providing to them various services such as product training, newproduct briefing, and sales training. Furthermore, our marketing team focuses heavily on public relations and crisis management to safeguard our publicimage. By working closely with our sales teams and other leading solar research companies, our marketing team provides up-to-date market information on aconstant basis, supporting the efforts of our sales team. Our marketing staff is located throughout the Americas, China, Europe, India, Japan, Australia, SouthAfrica and South Korea. We sell our standard solar module products primarily under three types of arrangements: (a) sales contracts to distributors; (b) sales to systems integrators,installers/EPC companies and project developers; and (c) OEM/tolling manufacturing arrangements. We target our sales and marketing efforts for our specialty solar products at companies in selected industry sectors, including the automotive,telecommunications and light-emitting diode, or LED, lighting sectors. As standard solar modules increasingly become commoditized and technologyadvancements allow solar power to be used in more off-grid applications, we intend to increase our sales and marketing efforts on our specialty solar productsand capabilities. Our sales and marketing team works with our specialty solar products development team to take into account changing customer preferencesand demands to ensure that our sales and marketing team is able to effectively communicate to customers our product development changes and innovations.We intend to establish additional relationships in other market sectors as the specialty solar products market expands.48 Years Ended December 31, 2015 2016 2017 Region Total NetRevenues % Total NetRevenues % Total NetRevenues % (In thousands of $, except for percentages) Asia 1,384,243 39.9 1,338,404 46.9 1,926,091 56.8 Americas 1,750,000 50.5 1,103,509 38.7 1,108,162 32.7 Europe and others 333,383 9.6 411,165 14.4 356,140 10.5 Total 3,467,626 100.0 2,853,078 100.0 3,390,393 100.0 Table of Contents As we expand our manufacturing capacity and enhance our brand name, we continue to develop new customer relationships in a wider range ofgeographic markets to decrease our market concentration. In 2013, we significantly increased our total number of customers and achieved a leading marketshare in Canada, Japan, Thailand and Central America, which we maintained in 2014. In 2015, we maintained our leading market share in those markets andat the same time expanded our customer base into several emerging solar markets, such as Southeast Asia. In 2016, we achieved a leading market share inBrazil and maintained our leading market share in Canada, Japan, Thailand and India. In 2017, we maintained our leading market share in India, Japan,Brazil, Europe and Middle East. We expect that our near term major markets will be Europe and the Asia Pacific region. In 2010, we commenced the sale of solar system kits. A solar system kit is a ready-to-install package consisting of solar modules produced by us andcomponents, such as inverters, racking system and other accessories, supplied by third parties. In 2017, we sold approximately 91.2 MW of system kitsprimarily in Japan, Europe, the U.S. and China.O&M Services Since 2012, we have started to provide O&M services for solar power projects in commercial operation. Our O&M services include inspections, repairand replacement of plant equipment, site management and administrative support services.Energy Segment We develop, construct, maintain, sell and/or operate solar projects primarily in Canada, Japan, the U.S., China, Brazil, India, Mexico, theUnited Kingdom and Australia. We provide EPC and development services primarily in Canada, China, Australia, India and the U.S. We sell our projects tolarge utility companies and other power producers. Customers for our EPC and development services include solar project developers and owners. In order to continue to grow our energy segment, we conduct market due diligence, routinely meet with industry players and interested investors andattend industry conferences and events to identify project development opportunities. Our energy segment team has extensive industry expertise andsignificant experience in working with government authorities and developing new projects for our target markets.Solar Project Development and Sale Our late-stage pipeline includes nearly all projects (a) for which energy off-take agreements have been entered into, and (b) that are expected to be builtwithin the next two to four years. However, some of our late-stage projects may not be completed due to failure to secure permits or grid connection, amongother risks. In March 2015, we acquired Recurrent, a leading solar energy developer with solar power projects located principally in California and Texas forapproximately $261 million. As of February 28, 2018, our late-stage utility-scale solar project pipeline totaled approximately 2.0 GWp, including 459 MWp in the U.S., 435.7 MWpin Mexico, 410 MWp in China, 362.2 MWp in Japan, 215.6 MWp in Brazil, 59 MWp in India, 24.2 MWp in Australia, 18.4 MWp in Chile and 8.2 MWp inthe United Kingdom.In Canada During 2017, we sold three solar farms, SSM1, SSM2 and SSM3, totaling 72.2 MWp to Fengate SSM Holdco LP, an affiliate of Fengate Real AssetsInvestments.49Table of ContentsIn Japan During 2017, we completed the construction and grid connection of 11 solar power plants, with a total capacity of approximately 105.5 MWp, and wesold 76.6 MWp solar power plants, of which 72.7 MWp was sold to Canadian Solar Infrastructure Fund, Inc., or CSIF. As of February 28, 2018, our late-stageutility-scale solar power project pipeline for which interconnection agreements and FIT have been secured totaled approximately 362.2 MWp, including122.7 MWp in construction and 239.5 MWp under development. We had an additional 9.4 MWp of projects in the bidding process, which will be added tothe list of late-stage projects once FIT has been secured. The expected schedule of commercial operation date, or COD, of our late-stage, utility scale solar power projects in Japan, as of February 28, 2018, wasas follows:In the U.S. During 2017, we completed and sold two solar farms, Tranquility 8 and IS 42, totaling 373 MWp to Sempra Renewables LLC, a unit of Sempra Energy(NYSE: SRE) and Falck Renewables S.p.A., respectively. Our late-stage, utility-scale solar project pipeline in the U.S. as of February 28, 2018 was as follows:In China During 2017, we connected seven solar power plants totaling 61.4 MWp to the grid and completed the sale of five solar power projects totaling113.5 MWp in Jiangsu Province to Shenzhen Energy Nanjing Holding Co., Ltd., or Shenzhen Energy, a subsidiary of Shenzhen Energy Group Co., Ltd. As ofFebruary 28, 2018, our late-stage solar project pipeline in China totaled approximately 410 MWp with expected COD by the end of 2018.In Brazil During 2017, we completed the construction and sold two solar farms, Pirapora I and Pirapora III, totaling 284 MWp to EDF En Do Brasil Participacoes.50Expected COD Schedule (MWp) 2018 2019 2020 2021 andThereafter Total 76.7 92.3 45.2 147.9 362.2 Project MWp Location Status ExpectedCOD Mustang Two 210 California Development 2020 Gaskell West 2 147 California Development 2020 NC102 102 North Carolina Construction 2018 Total 459 Table of Contents Our late-stage, utility-scale solar project pipeline in Brazil as of February 28, 2018 was as follows:In India During 2017, we completed the construction and sold 108 MWp SECI Maharashtra solar farm. As of February 28, 2018, we have secured 25 years PPAs for two solar power projects, of 35 MWp and 24MW, respectively, with Solar EnergyCorporation of India, an off-taker affiliated with the government of India, in the state of Karnataka. These projects are expected to commence operations in2018 and 2019, respectively.In Australia As of February 28, 2018, our late-stage solar project pipeline in Australia reached 24.2 MWp, including two solar power projects which are underconstruction stage and are expected to reach commercial operation in 2018.In Mexico As of February 28, 2017, our late-stage, utility-scale solar project pipeline in Mexico was as follows:In the United Kingdom During 2017, we completed the construction of six solar power projects totaling approximately 26 MWp. As of February 28, 2017, our late-stage, utilityscale pipeline of solar power projects totaled 8.2 MWp.EPC and Development Services Beginning in late 2010, we started entering into EPC contracting arrangements, initially in Canada and China. Under these arrangements, the solar powerproject developer owns the projects and we are contracted to perform the EPC work. We complete the EPC contracts in China through Gaochuangte, ouraffiliate in which we owned an 40% equity interest before June 30, 2017 and become our 80% owned subsidiary since July 1, 2017. Since 2014, we havebeen providing EPC services in Australia. In 2015, we completed approximately 152.1 MW(DC) and 1.4 MW(DC) of solar system EPC contracts in Ontario, Canada and Australia, respectively. In2016, we completed approximately51Project MWp Location Status ExpectedCOD Pirapora II 23(1)Minas Gerais Construction 2018 Guimarania 80.6 Minas Gerais Construction 2018 Salgueiro 112 Pernambuco Development 2020 Total 215.6 (1)23 MWp represents our 20% equity interest in 115 MWp Pirapora II.Project MWp Location Status ExpectedCOD EL Mayo 124 Sonora Development 2020 Horus 119 Aguascalientes Development 2020 Tastiota 125 Sonora Development 2020 Aguascalientes 67.7 Aguascalientes Construction 2018 Total 435.7 Table of Contents2.1 MW(DC) and 3.1 MW(DC) of solar system EPC contracts in Ontario, Canada and Australia, respectively. We began providing development services in the U.S. after we acquired Recurrent in 2015.Operating Solar Power Projects and Sales of Electricity In addition to our late-stage, utility-scale solar project pipeline, we had a portfolio of solar power projects in operation totaling 1.2 GWp as ofFebruary 28, 2018. Our revenue generated from sale of electricity was $29.2 million in 2017. The resale value of these projects was estimated atapproximately $1.5 billion as of February 28, 2018. For those projects that are subject to U.S. tax equity deals, only the value of the class B shares held by uswas included in the aforementioned estimate of resale value. We are actively trying to monetize the majority of our solar power projects in operation and weexpect a decrease in our revenue from sale of electricity in 2018. Our total portfolio of solar power projects in operation as of February 28, 2018 was as follows: In March 2018, we completed the sale of three solar power projects in operation in the U.S., totaling approximately 309 MWp, to Korea ElectricityPower Co. Ltd. or KEPCO, for approximately $720 million.Customer Support and Service We typically sell our standard solar modules with a ten-year warranty against defects in materials and workmanship and a linear power performancewarranty that guarantees the actual power output of our modules. For solar power projects built by us, we provide a limited workmanship or balance of system warranty against defects in engineering, design, installationand construction under normal use, operation and service conditions for a period of up to five years following the energizing of the solar power project. Inresolving claims under the workmanship or balance of system warranty, we have the option of remedying through repair, refurbishment or replacement ofequipment. We have also entered into similar workmanship warranties with our suppliers to back up our warranties. As part of our energy business, before commissioning solar power projects, we conduct performance testing to confirm that the projects meet theoperational and capacity expectations set forth in the agreements. In limited cases, we also provide for an energy generation performance test designed todemonstrate that the actual energy generation for up to the first three years meets or exceeds the modeled energy expectation (after adjusting for actual solarirradiation). In the event that the energy generation performance test performs below expectations, the appropriate party (EPC contractor or equipmentprovider) may incur liquidated damages capped at a percentage of the contract price. In certain instances, a bonus payment may be received if the energygeneration performance test performs above expectations. Our customer support and service handles technical inquiries and warranty-related issues. In 2016, we expanded our capacity in these areas to betterenable us to handle our customer's questions and concerns in a timely and professional manner. In 2017, we renewed our product warranty insurance coverage to provide additional security to our customers. See "—Insurance" below. Our customersupport and service function will continue to expand and improve services we provide to our customers.52Projects in Operation (MWp) U.S. Japan Brazil China India Others Total 808 85.6 56.8 145.5 91.1 24.1 1,211.1 Table of ContentsCompetitionMSS Segment The market for solar power products is competitive and evolving. We compete with American companies, such as First Solar and SunPower, and China-based companies such as Trina, Jinko, JA Solar and Hanwha Q Cells. Some of our competitors are developing or producing products based on alternativesolar technologies, such as thin film PV materials, that may ultimately have costs similar to, or lower than, our projected costs. Solar modules produced usingthin film materials, such as cadmium telluride and copper indium gallium selenide technology, generally have lower conversion efficiency but do not usesilicon for production, compared to our crystalline silicon solar module products, and as such are less susceptible to increases in the costs of silicon. Some ofour competitors have also become vertically integrated, from upstream polysilicon manufacturing to solar system integration. In addition, the solar powermarket in general competes with other sources of renewable and alternative energy as well as conventional power generation. We believe that the key competitive factors in the market for solar power products include:•price; •the ability to deliver products to customers on time and in the required volumes; •product quality and associated service issues; •nameplate power and other performance parameters of the module, such as power tolerances; •value-added services such as system design and installation; •value-added features such as those that make a module easier or cheaper to install; •additional system components such as mounting systems, delivered as a package or bundle; •brand equity and any good reputation resulting from the above items, including the willingness of banks to finance projects using modulesproduced by a particular supplier; •customer relationships and distribution channels; and •the aesthetic appearance of solar power products. In the immediate future, we believe that our ability to compete depends on our ability to deliver cost-effective products in a timely manner and todevelop and maintain a strong brand name based on high quality products and strong relationships with downstream customers. Our competiveness alsodepends on our ability to effectively manage our cash flow and balance sheet and to maintain our relationships with the financial institutions that fund solarpower projects. Consolidation of the solar industry is already occurring and is expected to continue in the near future. We believe that such consolidationwill benefit our company in the long-term. We believe that the key to competing successfully in the long-term is to produce innovative, high qualityproducts at competitive prices and develop an integrated sales approach that includes services, ancillary products, such as mounting systems and inverters,and value-added product features. We believe that a good marketing program and the strong relationships that we are building with customers and supplierswill support us in this competitive environment.Energy Segment Our energy segment is a capital intensive business with numerous industry participants. We face competition from a large and diverse group of local andinternational project developers, financial investors and certain utility companies. These competitors varies in terms of size, geographic focus, financialresources and operating capabilities and are active in Canada, Japan, the U.S., China, Brazil,53Table of ContentsIndia, Mexico, the United Kingdom, Australia and other markets where we operate or intend to enter. We compete in a diversified and complicated landscapesince the commercial and regulatory environments for solar power project development, sale and operation vary significantly from region to region andcountry to country. Our primary competitors are local and international developers and operators of solar power projects. We believe the key competitivefactors in the global solar power project development industry include:•vertical integration with upstream manufacturing; •permit and project development experience and expertise; •reputation and track record; •relationship with government authorities and knowledge of local policies; •strong internal working capital and good relationship with banks and international organizations that enhance access to external financing; •experienced technicians and executives who are familiar with the industry and the implementation of our business plans; and •expertise and experience in providing EPC. However, we cannot guarantee that some of our competitors do not or will not have advantages over us in terms of greater operational, financial,technical, management or other resources in particular markets or in general. Currently, we operate and maintain solar power projects in the United Kingdom, the U.S., China, Japan, Brazil, India, Australia, Africa and Spain. Wecompete to supply energy to our potential customers with a limited number of utilities and providers of distributed generation in these markets. If we wish toenter into new PPAs for our solar power projects upon termination of previous PPAs, we compete with conventional utilities primarily based on cost ofcapital, generation located at customer sites, operations and management expertise, price (including predictability of price), green attributes of power, theease by which customers can switch to electricity generated by our energy systems and our open architecture approach to working within the industry, whichfacilitates collaboration and project acquisitions. For further discussion of the competitive risks that we face, see "Item 3. Key Information—D. Risk Factors—Risks Related to Our Company and OurIndustry—Because the markets in which we compete are highly competitive and quickly evolving, because many of our competitors have greater resourcesthan we do or are more adaptive, and because we have a limited track record in our energy segment, we may not be able to compete successfully and we maynot be able to maintain or increase our market share."Insurance We maintain property risk insurance policies with reputable insurance companies to cover our equipment, facilities, buildings and inventories. Thecoverage of these insurance policies includes losses due to natural hazards and losses arising from unforeseen accidents. Our manufacturing plants in Chinaand elsewhere are covered by business interruption insurance. However, significant damage or interruption to any of our manufacturing plants, whether as aresult of fire or other causes, could still have a material and adverse effect on our results of operations. We also maintain commercial general liability(including product liability) coverage. We obtained credit insurance from China Export & Credit Insurance Corporation, or Sinosure. Credit insurance isdesigned to offset the collection risk of our account receivables for certain customers within the credit limits approved by Sinosure. Risks related to marine,air and inland transit for the export of our products and domestic transportation of54Table of Contentsmaterials and products are covered under cargo transportation insurance. We also maintain directors and officers liability insurance. In April 2010, we began entering into agreements with a group of insurance companies to reduce some of the risks associated with our warranties. Underthe terms of the insurance policies, the insurance companies are obliged to reimburse us, subject to certain maximum claim limits and certain deductibles, forthe actual product warranty costs that we incur under the terms of our warranty against defects in workmanship and material and our warranty relating topower output. The warranty insurance is renewable annually. We believe that our warranty improves the marketability of our products and our customers arewilling to pay more for products with warranties backed by insurance.Environmental Matters Except as disclosed in the "Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China," we believe we have obtained theenvironmental permits necessary to conduct the business currently carried on by us at our existing manufacturing facilities. We have also conductedenvironmental studies in conjunction with our solar power projects to assess and reduce the environmental impact of such projects. Our products must comply with the environmental regulations of the jurisdictions in which they are installed. We make efforts to ensure that ourproducts comply with the EU's Restriction of Hazardous Substances Directive, which took effect in July 2006, by reducing the amount of lead and otherrestricted substances used in our solar module products. Our operations are subject to regulation and periodic monitoring by local environmental protection authorities. If we fail to comply with present orfuture environmental laws and regulations, we could be subject to fines, suspension of production or cessation of operations.Government Regulations This section sets forth a summary of certain significant regulations or requirements that affect our business activities in China or our shareholders' right toreceive dividends and other distributions from us.Renewable Energy Law and Other Government Directives In February 2005, China enacted its Renewable Energy Law, which became effective on January 1, 2006 and was revised in December 2009. The revisedRenewable Energy Law, which became effective on April 1, 2010, sets forth policies to encourage the development and use of solar energy and other non-fossil energy and their on-grid generation. It also authorizes the relevant pricing authorities to set favorable prices for the purchase of electricity generated bysolar and other renewable power generation systems. The law also sets forth the national policy to encourage the installation and use of solar energy water-heating systems, solar energy heating and coolingsystems, solar PV systems and other solar energy utilization systems. It also provides financial incentives, such as national funding, preferential loans and taxpreferences for the development of renewable energy projects subject to certain regulations of the relevant authorities. In November 2005, the NDRC promulgated the Renewable Energy Industry Development Guidance Catalogue, in which solar power figuredprominently. In January 2006, the NDRC promulgated two implementation directives with respect to the Renewable Energy Law. In January 2007, the NDRCpromulgated another related implementation directive. These directives set forth specific measures for setting the price of electricity generated by solar andother renewable power generation systems, for sharing additional expenses, and for allocating administrative and supervisory55Table of Contentsauthority among different government agencies at the national and provincial levels. They also stipulate the responsibilities of electricity grid companiesand power generation companies with respect to the implementation of the Renewable Energy Law. In August 2007, the NDRC promulgated the Medium and Long-Term Development Plan for the Renewable Energy Industry. This plan sets forth nationalpolicy to provide financial allowance and preferential tax regulations for the renewable energy industry. The Outline of the Thirteenth Five-Year Plan forNational Economic and Social Development of the PRC, which was approved by the National People's Congress in March 2016, the Thirteenth Five-YearPlan for Renewable Energy Development, which was promulgated by the NDRC in December 2016, and the Thirteenth Five-Year Plan for Solar PowerGeneration, which was promulgated by the National Energy Administration in December 2016 also demonstrates a commitment to promote the developmentof renewable energy to enhance the competitiveness of the renewable energy industry, including the solar energy industry. China's Ministry of Housing and Urban-Rural Development (formerly, the Ministry of Construction) also issued a directive in June 2005 which seeks toexpand the use of solar energy in residential and commercial buildings and encourages the increased application of solar energy in different townships.Similarly, China's State Council promulgated a directive in July 2005, which sets forth specific measures to conserve energy resources. In November 2005,China's Ministry of Housing and Urban-Rural Development promulgated the Administrative Provisions on Energy Conservation for Civil Constructionswhich encourages the development of solar energy. In August 2006, the State Council issued the Decision on Strengthening the Work of EnergyConservation which encourages the great development of the solar energy and other renewable energy. In addition, on April 1, 2008, the PRC EnergyConservation Law came into effect. Among other objectives, this law encourages the installation of solar power facilities in buildings to improve energyefficiency. In July 2009, China's Ministry of Finance and Ministry of Housing and Urban-Rural Development jointly promulgated "the Urban DemonstrationImplementation Program of the Renewable Energy Building Construction" and "the Implementation Program of Acceleration in Rural Application of theRenewable Energy Building Construction" to support the development of the new energy industry and the new energy-saving industry. On March 8, 2011, China's Ministry of Finance and Ministry of Housing and Urban-Rural Development jointly promulgated the Notice on FurtherApplication of Renewable Energy in Building Construction, which aims to raise the percentage of renewable energy used in buildings. On August 21, 2012, China's Ministry of Finance and Ministry of Housing and Urban-Rural Development jointly promulgated the Notice on ImprovingPolicies for Application of Renewal Energy in Building and Adjusting Fund Allocation and Management Method, which aims to promote the use of solarenergy and other new energy products in public facilities and residences, further amplifying the effect of the policies for application of renewable energyin buildings. In June 2014, the General Office of the State Council issued its Notice on Printing and Distributing the Action Plan for the Energy Development Strategy(2014-2020), which requested accelerating the development of solar power generation, including promoting the construction of photovoltaic baseconstruction, among others. In April 2015, China's Ministry of Finance promulgated the Interim Measures for Administration of the Special Fund for the Development of RenewableEnergy Sources, which stipulated the division of regulation of special fund for the development of renewable energy sources and the main scopes tobe supported. In April 2016, the NDRC and National Energy Administration issued the Notice on Printing and Distributing the Action Plan for Energy TechnologyRevolution and Innovation (2016-2030), which sets forth the focus, the main direction, the timetable and the route of energy technology innovation.56Table of Contents In November 2017, the NDRC issued the Opinions on Comprehensively Deepening the Reform of the Price Mechanism, which requested improving theprice mechanism of renewable energy, including adopting the decrement mechanism on the on-grid benchmark price of new energy resources such as windpower and photovoltaic power.Environmental Regulations As we have expanded our ingot, silicon wafer and solar cell manufacturing capacities, we have begun to generate material levels of noise, wastewater,gaseous wastes and other industrial waste. Additionally, as we expand our internal solar components production capacity, our risk of facility incidents thatwould negatively affect the environment also increases. We are subject to a variety of governmental regulations related to the storage, use and disposal ofhazardous materials. The major environmental laws and regulations applicable to us include the PRC Environmental Protection Law, which became effectivein 1989, as amended and promulgated in 2014, the PRC Law on the Prevention and Control of Noise Pollution, which became effective in 1997, the PRCLaw on the Prevention and Control of Air Pollution, which became effective in 1988, as amended and promulgated in 1995, 2000 and 2015, the PRC Law onthe Prevention and Control of Water Pollution, which became effective in 1984, as amended and promulgated in 1996, 2008 and 2017, the PRC Law on thePrevention and Control of Solid Waste Pollution, which became effective in 1996, as amended and promulgated in 2004, 2013, 2015 and 2016, the PRC Lawon Evaluation of Environmental Affects, which became effective in 2003, as amended and promulgated in 2016, the PRC Law on Promotion of CleanProduction, which became effective in 2003, as amended and promulgated in 2012, and the Regulations on the Administration of Construction ProjectEnvironmental Protection, which became effective in 1998, as amended and promulgated in 2017. Some of our PRC subsidiaries are located in Suzhou, China, which is adjacent to Taihu Lake, a nationally renowned and protected body of water. As aresult, production at these subsidiaries is subject to the Regulations on the Administration of Taihu Basin, which became effective on 2011, the Regulationof Jiangsu Province on Preventing Water Pollution in Taihu Lake, which became effective in 1996 and was further revised and promulgated in 2007, 2010,2012 and 2018, and the Implementation Plan of Jiangsu Province on Comprehensive Treatment of Water Environment in Taihu Lake Basin, which waspromulgated in February 2009 and amended in 2013. Because of these regulations, the environmental protection requirements imposed on nearbymanufacturing projects, especially new projects, have increased noticeably, and Jiangsu Province has stopped approving construction of new manufacturingprojects that increase the amount of nitrogen and phosphorus released into Taihu Lake, except for those satisfy certain applicable statutory requirements.Admission of Foreign Investment The principal regulation governing foreign ownership of solar power businesses in the PRC is the Foreign Investment Industrial Guidance Catalogue.Under the current catalogue, which was amended in June 2017 and became effective on July 28, 2017, the solar power related business is classified as an"encouraged foreign investment industry." Companies that operate in encouraged foreign investment industries and satisfy applicable statutory requirementsare eligible for preferential treatment, including exemption from customs of certain self-used equipment and priority consideration in obtaining land userights provided by certain local governments. While the 2004 catalogue only applied to the construction and operation of solar power stations, the 2007 catalogue expanded its application alsoapplies to the production of solar cell manufacturing machines, the production of solar powered air conditioning, heating and drying systems and themanufacture of solar cells, and the 2011 catalogue, the 2015 catalogue and the current 2017 catalogue also cover the manufacture of solar light collectorglass and etc.57Table of ContentsAdministration of Foreign Invested Companies The establishment, approval, registered capital requirement and day-to-day operational matters of wholly foreign-owned enterprises, are regulated by theWholly Foreign-Owned Enterprise Law of the PRC, effective in 1986 and amended in 2000 and 2016, and the Implementation Rules of the Wholly Foreign-owned Enterprise Law of the PRC, effective in 1990 and amended in 2001 and 2014. The establishment, operation and management of corporate entities inChina are governed by the Company Law of the PRC, or the Company Law, effective in 1994 and amended in 1999, 2004, 2005 and 2013. The CompanyLaw is applicable to our PRC subsidiaries unless PRC laws on foreign investment stipulate otherwise.Income Tax and VAT PRC enterprise income tax is calculated based on taxable income determined under PRC accounting principles. Under the EIT Law, both foreign-invested enterprises and domestic enterprises are subject to a uniform enterprise income tax rate of 25%. The EIT Lawprovides for preferential tax treatment for certain categories of industries and projects that are strongly supported and encouraged by the state. For example,enterprises qualified as HNTEs are entitled to a 15% enterprise income tax rate, provided that such HNTEs satisfy other applicable statutory requirements.Another example, enterprises which engage in the business within the Western Catalogue, are entitled to a 15% enterprise income tax rate provided that suchenterprise satisfies other applicable statutory requirements. Certain of our subsidiaries, such as CSI New Energy Holding, CSI Cells, CSI Luoyang Manufacturing, CSI Changshu Manufacturing and SuzhouSanysolar, once enjoyed preferential tax benefits, such as a reduced enterprise income tax rate of 12.5% or 15%, however, some of these benefits expired. In2017, only Suzhou Sanysolar, CSI Cells, CSI Changshu Manufacturing and Changshu Tlian Co., Ltd., which were qualified as HNTEs, and Canadian SolarSunenergy (Baotou) Co., Ltd., which engaged in the business within the scope of the Western Catalogue, were benefited from a reduced enterprise income taxrate of 15%, subject to applicable statutory requirements. The EIT Law also provides that enterprises established outside China whose "de facto management body" is located in China are considered PRC taxresidents and will generally be subject to the uniform 25% enterprise income tax rate on their global income. Under the implementation regulations, the term"de facto management body" is defined as substantial and overall management and control over aspects such as the production and business, personnel,accounts and properties of an enterprise. Circular 82 further provides certain specific criteria for determining whether the "de facto management body" of aPRC-controlled offshore incorporated enterprise is located in the PRC. The criteria include whether (a) the premises where the senior management and thesenior management bodies responsible for the routine production and business management of the enterprise perform their functions are mainly locatedwithin the PRC, (b) decisions relating to the enterprise's financial and human resource matters are made or subject to approval by organizations or personnelin the PRC, (c) the enterprise's primary assets, accounting books and records, company seals, and board and shareholders' meeting minutes are located ormaintained in the PRC and (d) 50% or more of voting board members or senior executives of the enterprise habitually reside in the PRC. AlthoughCircular 82 only applies to offshore enterprises controlled by enterprises or enterprise groups located within the PRC, the determining criteria set forth in theCircular 82 may reflect the tax authorities' general position on how the "de facto management body" test may be applied in determining the tax residentstatus of offshore enterprises. As the tax resident status of an enterprise is subject to the determination by the PRC tax authorities, uncertainties remain withrespect to the interpretation of the58Table of Contentsterm "de facto management body" as applicable to our offshore entities. As a substantial number of the members of our management team are located inChina, we may be considered as a PRC tax resident under the EIT Law and, therefore, subject to the uniform 25% enterprise income tax rate on ourglobal income. Under the EIT Law and implementing regulations issued by the State Council, the PRC withholding tax rate of 10% is generally applicable to interestand dividends payable to investors from companies that are not "resident enterprises" in the PRC, to the extent such interest or dividends have their sourceswithin the PRC. If our Canadian parent entity is deemed a PRC tax resident under the EIT Law based on the location of our "de facto management body,"dividends distributed from our PRC subsidiaries to our Canadian parent entity could be exempt from Chinese dividend withholding tax. However, in thatcase, dividends from us to our shareholders may be regarded as China-sourced income and, consequently, be subject to Chinese withholding tax at the rate of10%, or at a lower treaty rate if applicable. Similarly, if we are considered a PRC tax resident, any gain realized by our shareholders from the transfer of ourcommon shares is also subject to Chinese withholding tax at the rate of 10% if such gain is regarded as income derived from sources within the PRC. It isunclear whether any dividends that we pay on our common shares or any gains that our shareholders may realize from the transfer of our common shareswould be treated as income derived from sources within the PRC and subject to PRC tax. In addition, under Announcement 7, where a non-resident enterprise indirectly transfers properties, such as equity in Chinese resident enterprises,without any reasonable commercial purposes with the aim of avoiding payment of enterprise income tax, such indirect transfer shall be reclassified as a directtransfer of equity in a Chinese resident enterprise. Properties such as equity in Chinese resident enterprises mentioned in Announcement 7 mean theproperties, or Chinese taxable properties, which are directly held by non-resident enterprises and subject the transfer income to enterprise income tax inChina according to the provisions of Chinese tax law. Indirect transfers of Chinese taxable properties are transactions which transfer the equity of enterprisesabroad that directly or indirectly hold Chinese taxable properties (not including Chinese resident enterprises registered abroad). To estimate reasonablecommercial purposes, all arrangements related to the indirect transfer of Chinese taxable properties must be considered comprehensively and certain factors,such as whether the main value of the equity of enterprises abroad is directly or indirectly from the Chinese taxable properties, must be comprehensivelyanalyzed. Except for the circumstances stipulated therein, the overall arrangements related to the indirect transfer of Chinese taxable properties that fall inany of the following circumstances simultaneously are deemed as having no reasonable commercial purposes: (a) more than 75% of the equity of enterprisesabroad is directly or indirectly from Chinese taxable properties; (b) more than 90% of the total assets (not including cash) of enterprises abroad is directly orindirectly composed of investment in the territory of China at any time in the year before the indirect transfer of Chinese taxable properties, or more than 90%of the income of enterprises abroad is directly or indirectly from the territory of China in the year before the indirect transfer of Chinese taxable properties;(c) although the enterprises abroad and their subordinate enterprises directly or indirectly hold Chinese taxable properties have registered in the host country(region) in order to satisfy the organization form required by law, the functions actually performed and the risks undertaken are limited and are not sufficientto prove the economic essence; or (d) the burden of income tax of indirect transfer of Chinese taxable properties payable abroad is lower than the possibleburden of taxation in China as for the direct transfer of Chinese taxable properties. However, a non-resident enterprise's income obtained from indirect transferof Chinese taxable properties by purchasing and selling equity of the same listed enterprise abroad in the open market will not be taxed underAnnouncement 7. There is uncertainty as to the application of Announcement 7 and it is understood that the relevant PRC tax authorities have jurisdiction regardingreasonable commercial purposes. As a result,59Table of Contentswe may become at risk of being taxed under Announcement 7 and we may be required to expend valuable resources to comply with Announcement 7 or toestablish that we should not be taxed under Announcement 7, which may materially adversely affect our financial condition and results of operations. Under the Provisional Regulation of the PRC on Value Added Tax amended in 2008, 2016 and 2017 and its implementation rules, which becameeffective in 2009 and were amended in 2011, all entities and individuals that are engaged in the sale of goods, processing, repairs and replacement services,the sales of services, intangible assets or real estate, and the importation of goods in China are required to pay VAT. Gross proceeds from sales andimportation of goods and sales of labor services are generally subject to VAT at a rate of 17%, with exceptions for certain categories of goods that are taxed ata rate of 11%. Gross proceeds from sales of real estate are subject to VAT at a rate of 11%. Gross proceeds from sales of services and intangible assets aregenerally subject to VAT at a rate of 6%, with exceptions for certain categories of services or intangible assets that are taxed at a rate of 17% or 11%. Whenengaging in exportation of certain goods or cross-border sales of certain services or intangible assets, the exporter or the seller is entitled to a refund of aportion or all of the VAT that it has already paid or borne. In March, 2018, the State Council decided to reduce the VAT rate of industries such as the manufacturing industry from 17% to 16% and the VAT rate ofindustries such as the transportation, construction and basic telecommunication services and goods such as agricultural products from 11% to 10%.Foreign Currency Exchange Foreign currency exchange regulation in China is primarily governed by the Foreign Currency Administration Rules, which became effective in 1996and were amended in 1997 and 2008, and the Settlement, Sale and Payment of Foreign Exchange Administration Rules (1996), or the Settlement Rules. Currently, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and service-relatedforeign exchange transactions. Conversion of the Renminbi for most capital account items, such as security investment and repatriation of investment,however, is still subject to limitation and requires the approval by or registration with SAFE. However, SAFE began to reform the foreign exchange administration system and issued the Notice on Reforming the Administrative ApproachRegarding the Settlement of the Foreign Exchange Capitals of Foreign-invested Enterprises, or Circular 19, on March 30, 2015, which allows foreigninvested enterprises to settle their foreign exchange capital on a discretionary basis according to the actual needs of their business operation and allows aforeign-invested enterprise with a business scope including "investment" to use the RMB capital converted from foreign currency registered capital for equityinvestments within the PRC. On June 9, 2016, SAFE issued the Circular on Reforming and Regulating Policies on the Control over Foreign ExchangeSettlement of Capital Accounts, or Circular 16. Compared to Circular 19, Circular 16 provides that discretionary foreign exchange settlement applies toforeign exchange capital, foreign debt offering proceeds and remitted foreign listing proceeds, and the corresponding RMB obtained from foreign exchangesettlement are not restricted from extending loans to related parties or repaying the inter-company loans (including advances by third parties). On February 13, 2015, SAFE promulgated the Circular on Further Simplifying and Improving the Policies Concerning Foreign Exchange Control onDirect Investment, or SAFE Circular No. 13, which delegates the authority to enforce the foreign exchange registration in connection with the inbound andoutbound direct investment under relevant SAFE rules to certain banks and therefore further simplifies the foreign exchange registration procedures forinbound and outbound direct investment.60Table of Contents On January 26, 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuinenessand Compliance Verification, which sets out various measures that relaxes the policy restriction on foreign exchange inflow to further enhance trade andinvestment facilitation and that tightens genuineness and compliance verification of cross-border transactions and cross-border capital flow.Dividend Distribution The principal regulations governing distribution of dividends paid by wholly foreign owned enterprises include the Wholly Foreign-Owned EnterpriseLaw of the PRC, effective in 1986 and amended in 2000 and 2016, the Implementation Rules of the Wholly Foreign-Owned Enterprise Law of the PRC,effective in 1990 and amended in 2001 and 2014, the Company Law effective in 1994 and amended in 1999, 2004, 2005 and 2013 and the EIT Law and itsimplementation rules, both effective in 2008. Under these laws, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance withPRC accounting standards and regulations. In addition, a wholly foreign owned enterprise in China is required to set aside at least 10% of its after-tax profitsdetermined in accordance with PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50% of itsregistered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate aportion 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.Employment The major laws and regulations governing the employment relationship, including wage and hour requirements, working and safety conditions, socialinsurance, housing funds and other welfare. The PRC Labor Law which became effective on January 1, 1995 and amended on August 27, 2009, the LaborContract Law of the People's Republic of China, which became effective on January 1, 2008, and was later revised on December 28, 2012, its ImplementingRegulation and the amendment thereunder, which became effective on September 18, 2008 and July 1, 2013, respectively, permit workers in both state-owned and private enterprises in the PRC to bargain collectively. The PRC Labor Law and the PRC Labor Contract Law provide for collective contracts to bedeveloped through collaboration between the labor unions (or worker representatives in the absence of a union) and management that specify such matters asworking conditions, wage scales, and hours of work. The PRC Labor Contract Law and its Implementing Regulation impose certain requirements with respectto human resources management, including, among other things, signing labor contracts with employees, terminating labor contracts, paying remunerationand compensation and making social insurance contributions. In addition, the PRC Labor Contract Law requires employers to provide remunerationpackages that meet the relevant local minimum standards. The PRC Labor Contract Law has enhanced rights for the nation's workers, including permittingopen-ended labor contracts and severance payments. It requires employers to provide written contracts to their workers, restricts the use of temporary laborand makes it harder for employers to lay off employees. It also requires that employees with fixed-term contracts be entitled to an indefinite-term contractafter a fixed-term contract is renewed twice or the employee has worked for the employer for a consecutive ten-year period. According to the InterimProvisions on Labor Dispatching, which came into effect on January 3, 2014, the number of dispatched workers used by an employer shall not exceed 10% ofits total number of workers. Under applicable PRC laws, rules and regulations, including the Social Insurance Law promulgated by the Standing Committee of the National People'sCongress and effective as of July 1, 2011, the Rules on Implementing the Social Insurance Law issued by Ministry of Human Resource and Social Securityand effective as of July 1, 2011, the Interim Regulations on the Collection and Payment of61Table of ContentsSocial Security Funds promulgated by the State Council and effective as of January 22, 1999, the Interim Measures Concerning Maternity Insurancepromulgated by the Ministry of Labor and effective as of January 1, 1995, the Regulations on Occupational Injury Insurance promulgated by the StateCouncil and effective as of January 1, 2004 and amended on December 20, 2010, and the Regulations on the Administration of Housing Accumulation Fundspromulgated by the State Council and effective as of April 3, 1999 and amended on March 24, 2002, employers are required to contribute, on behalf of theiremployees, to a number of social security funds, including funds for basic pension insurance, unemployment insurance, basic medical insurance,occupational injury insurance, maternity leave insurance, and to housing accumulation funds. These payments are made to local administrative authoritiesand any employer who fails to contribute may be fined and ordered to remediate on payments within a stipulated time period.C. Organizational Structure The following table sets out our major subsidiaries, including their place of incorporation and our ownership interest, as of March 31, 2018.62Name of entity Place ofincorporation Ownershipinterest CSI Solartronics (Changshu) Co., Ltd. PRC 100%CSI Solar Technologies Inc. PRC 100%CSI New Energy Holding Co., Ltd. PRC 100%Canadian Solar Manufacturing (Luoyang) Inc. PRC 100%Canadian Solar Manufacturing (Changshu) Inc. PRC 100%CSI Cells Co., Ltd. PRC 100%Canadian Solar (USA) Inc. USA 100%Canadian Solar Japan K.K. Japan 100%Canadian Solar Solutions Inc. Canada 100%CSI Solar Power Group Co., Ltd. (formerly named/known as "CSI Solar Power(China) Inc.") PRC 100%Canadian Solar EMEA GmbH Germany 100%Canadian Solar (Australia) Pty Limited. Australia 100%Canadian Solar International Limited Hong Kong 100%Canadian Solar O and M (Ontario) Inc. Canada 100%Suzhou Sanysolar Materials Technology Co., Ltd. PRC 93.95%Canadian Solar South East Asia Pte. Ltd. Singapore 100%Canadian Solar South Africa (Pty) Ltd. South Africa 100%Canadian Solar Brazil Commerce, Import and Export of Solar Panels Ltd. Brazil 100%Canadian Solar Middle East Limited United Arab Emirates 100%Canadian Solar Construction (USA) LLC USA 100%Canadian Solar Projects K.K. Japan 100%CSI&GCL Solar Manufacturing (Yan Cheng) Inc. PRC 80%Canadian Solar UK Ltd. United Kingdom 100%Canadian Solar UK Projects Ltd. United Kingdom 100%Changshu Tegu New Material Technology Co., Ltd. PRC 90%Changshu Tlian Co., Ltd. PRC 100%Canadian Solar Trading (Changshu) Inc. PRC 100%Recurrent Energy Group Inc. USA 100%Recurrent Energy, LLC USA 100%PT. Canadian Solar Indonesia Indonesia 67%Canadian Solar Manufacturing Vietnam Co., Ltd. Vietnam 100%Canadian Solar Energy Private Limited India 100%Table of ContentsD. Property, Plant and Equipment The following is a summary of our material properties, including information on our manufacturing facilities and office buildings as of the date of thisannual report on Form 20-F:•CSI Changshu Manufacturing has the land use right to two pieces of land of approximately 40,000 square meters and 180,000 square meters,respectively, in Changshu, on which we have built manufacturing facilities with a total floor area of approximately 164,817 square meters. Wehave obtained certificates for property ownership for all of CSI Changshu Manufacturing's facilities. •CSI Luoyang Manufacturing has a land use right to a piece of land of approximately 35,345 square meters in Luoyang (Phase I), on which wehave constructed manufacturing facilities. The floor area of Phase I is approximately 6,761 square meters. The certificates for propertyownership were granted in June 2008. In 2008, CSI Luoyang Manufacturing obtained the land use right to a piece of land adjacent ofapproximately 79,685 square meters (Phase II), on which we have constructed manufacturing facilities. The floor area of Phase II isapproximately 29,811 square meters. The certificates for property ownership were granted in September 2013. In 2016, CSI LuoyangManufacturing obtained the land use right to a piece of land of 159,961 square meters (Phase III), on which we have constructedmanufacturing facilities with the floor area of approximately 38,955 square meters. We have obtained the certificates for property ownershipfor Phase III in March 2018. •CSI Cells has the land use right to a piece of land of approximately 65,661 square meters in Suzhou. We completed the construction of our firstsolar cell manufacturing facilities on this site in the first quarter of 2007. The Phase I manufacturing facilities have 14,077 square meters, forwhich we obtained the certificate for property ownership. The Phase II cell manufacturing facilities, with 30,102 square meters of workshopspace, were completed in 2009. The Phase III cell manufacturing facilities, with a total floor area of approximately 21,448 square meters ofmanufacturing and office space, were completed in August 2011. We have passed the required inspection and are in the process of obtainingproperty ownership certificate from the competent government authority. CSI Cells merged with CSI Solar New Energy (Suzhou) Co., Ltd. in2012,63Name of entity Place ofincorporation Ownershipinterest Canadian Solar MSS (Australia) Pty Ltd (formerly named/known as "Canadian SolarAustralia 1 Pty Ltd.") Australia 100%Canadian Solar Energy Holding Company Limited Hong Kong 100%Canadian Solar Manufacturing (Thailand) Co., Ltd. Thailand 99.99992%Canadian Solar Sunenergy (Suzhou) Co., Ltd. PRC 100%Canadian Solar Energy Holding Singapore 1 Pte. Ltd. Singapore 100%Canadian Solar Sunenergy (Baotou) Co., Ltd. PRC 100%CSl Cells (Yancheng) Co., Ltd. PRC *CSI Modules (DaFeng) Co., Ltd. PRC ***CSI Cells holds 3.23% equity rights of CSI Cells (Yancheng) Co., Ltd. A limited partnership fund, of which CSI Cells holds 37.33%shares as a limited partner and a wholly-owned subsidiary of CSI Solar Power Group Co., Ltd. holds 0.17% shares as a general partner,holds 96.77% equity rights of CSI Cells (Yancheng) Co., Ltd. **CSI Changshu Manufacturing holds 4% equity rights of CSI Modules (DaFeng) Co., Ltd. A limited partnership fund, of which CSIChangshu Manufacturing holds 14.93% shares as a limited partner and a wholly-owned subsidiary of CSI Solar Power Group Co., Ltd.holds 0.07% shares as a general partner, holds 96% equity rights of CSI Modules (DaFeng) Co., Ltd.Table of Contentsand obtained the land use right to a piece of land of approximately 10,000 square meters in Suzhou and the certificate for property ownershipfor approximately 4,833 square meters of floor area.•The construction of cell manufacturing facilities (Phase I) of CSI&GCL Solar Manufacturing (Yan Cheng) Inc., or CSI&GCL SolarManufacturing, was completed in Yancheng in 2015. The floor area of Phase I is approximately 26,921 square meters. CSI&GCL SolarManufacturing currently leases the manufacturing facilities for Phase I but has the right and expects to purchase those facilities and obtain theland use rights between 2018 and 2020. CSI&GCL Solar Manufacturing commenced commercial production in the first quarter of 2016. In2016, CSI&GCL Solar Manufacturing obtained the land use right to a piece of land of approximately 133,333 square meters (Phase II andPhase III). The construction of Phase II and Phase III cell manufacturing facilities with floor area of approximately 22,121 square meters wascompleted in 2016 and we are in the process of obtaining the certificates for property ownership for Phase II and Phase III. In 2017, CSI&GCLSolar Manufacturing obtained the land use rights for approximately 33,664 square meters for the construction of Phase IV. •In Baotou of Inner Mongolia, we lease module manufacturing facilities with a floor space area of 10,190 square meters for a term of two yearscommencing in November 2016. This module manufacturing facility has commenced operation in the first quarter of 2017. In addition, wehave built manufacturing facilities with a floor area of approximately 18,000 square meters on a piece of land of approximately244,801 square meters to which we do not have obtained yet but plan to obtain the land use right, and the production has commenced inMay 2017. We have also started the construction of other facilities producing poly ingots and mono ingots with a floor area of approximately61,728 square meters on the same land. •In Suzhou, Canadian Solar Sunenergy (Suzhou) Co., Ltd. has obtained the land use right to a piece of land of approximately 60,000 squaremeters and owns the module manufacturing facility thereon with a floor area of 28,355 square meters, which commenced production in the firstquarter of 2017. •CSI Cells (Yancheng) Co., Ltd. has obtained the land use right to a piece of land of approximately 133,857 square meters (Phase I) located inNational Yancheng Economic Technical Development Zone of Yancheng City, in November 2017, on which the construction of cellmanufacturing facilities has started since August 2017. The floor area of cell manufacturing facilities (Phase I) is approximately 63,496 squaremeters and expected to complete and commence operations by the end of 2018. •CSI Modules (DaFeng) Co., Ltd. obtained the land use right to a piece of land of 200,006 square meters in Yan-Cheng Da-Feng EconomicDevelopment District in 2017. The module production facility of 67,800 square meters (Phase I) is under construction and expected tocomplete in the fourth quarter of 2018. •In Taiwan, we lease a plant facility of approximately 20,227 square meters located in Hukou Township of Hsinchu City with a five-year termin December 2017. The production of 200 MW module manufacturing is expected to commence in the second quarter of 2018. •In Ontario, we lease approximately 14,851 square meters of manufacturing facilities in Guelph, Ontario, Canada for a term of ten yearscommencing September 1, 2010. We also lease a warehouse of 7,912 square meters and an office building of 1,146 square meters on the samepremises as the Guelph, Ontario, Canada manufacturing facilities for the same term.64Table of Contents•In Vietnam, we lease approximately 15,784 square meters of manufacturing facilities in Haiphong City, Vietnam for a term of three yearscommencing August 1, 2015. The renovation of the facility was completed and production began in the first quarter of 2016. •In Thailand, Canadian Solar Manufacturing (Thailand) Co., Ltd. purchased 179.2 Rai (286,732 square meters) of land with the ownershipcertificate obtained. The construction of a cell manufacturing facility with a floor area of 19,139 square meters and a module manufacturingfacility with a floor area of 29,723 square meters has been completed. Production of modules began in the third quarter of 2016 and productionof cells has begun in April 2017. •In Indonesia, we lease a total floor area of approximately 8,000 square meters for our module production facilities, through our 67% ownedsubsidiary, PT. Canadian Solar Indonesia, which was established under a strategic partnership agreement with PT Comtel Energi. Productioncommenced in the first quarter of 2016. Except as disclosed in the "Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China," we believe we have obtained theenvironmental permits necessary to conduct the business currently carried on by us at our existing manufacturing facilities. For more details, see "B. BusinessOverview—Environmental Matters." ITEM 4A. UNRESOLVED STAFF COMMENTS None. ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidatedfinancial statements and the related notes thereto included elsewhere in this annual report on Form 20-F. This discussion may contain forward-lookingstatements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in theseforward-looking statements as a result of various factors, including those set forth under "Item 3. Key Information—D. Risk Factors" or in other parts of thisannual report on Form 20-F.A. Operating ResultsFactors Affecting Our Results of Operations The most significant factors that affect our financial performance and results of operations are:•solar power products pricing; •costs of silicon raw materials and solar ingots, wafers and cells relative to the selling prices of modules; •government subsidies and the availability of financing for solar projects; •industry and seasonal demand; •impact of certain of our long-term purchase commitments; •solar power project development and sale and EPC and development services; •antidumping and countervailing duty costs and true-up charges; and •foreign exchange.65Table of ContentsSolar Power Products Pricing Before 2004, all of our net revenues were generated from sales of specialty solar modules and products. In 2004, we began selling standard solar modules.In 2015, we generated 71.9% of our net revenues from our MSS segment, which primarily comprises the design, development, manufacture and sale of solarpower products, solar system kits and O&M services, and 28.1% from our energy segment, which primarily comprises solar power project development andsale, EPC and development services, and operating solar power projects and sales of electricity. In 2016, we generated 96.2% of our net revenues from ourMSS segment and 3.8% from our energy segment. In 2017, we generated 80.0% of our net revenues from our MSS segment and 20.0% from ourenergy segment. Our standard solar modules are priced based on the actual flash test result or the nameplate capacity of our modules, expressed in watts-peak. The actualprice per watt is affected by overall demand for modules in the solar power market and increasingly by the total power of the module. Higher-poweredmodules usually command slightly higher prices per watt. We price our standard solar modules based on the prevailing market price at the time we enter into sales contracts with our customers, taking intoaccount the size of the contract, the strength and history of our relationship with the customer and the costs of silicon raw materials and solar ingots, wafersand cells. During the first few years of our operations, the average selling price for standard solar modules rose year-over-year across the industry, primarilybecause of high demand. During the period from 2004 to 2008, the average selling price of our standard solar modules ranged from $3.62 to $4.23. Followinga price peak in the third quarter of 2008, the industry-wide average selling price of standard solar modules declined sharply, as market demand declined andcompetition increased due to the worldwide credit crisis, reduction in government subsidies in certain solar markets and increased manufacturing output. In2009, the average selling price of our standard solar modules continued to fall, with an average selling price of $1.93 per watt in the fourth quarter of 2009.Since 2009, the average selling price of our standard solar modules has generally continued to fall largely due to an oversupply of solar modules. In 2014 and2015, the average selling price of our standard solar modules was approximately $0.67 per watt and $0.58 per watt, respectively; and, in 2016 and 2017, itwas approximately $0.51 per watt and $0.40 per watt, respectively. We expect the averaging selling price of our standard solar modules to continue to drop,albeit at a moderate rate.Costs of Silicon Raw Materials and Solar Ingots, Wafers and Cells Relative to the Selling Prices of Modules We produce solar modules, which are an array of interconnected solar cells encased in a weatherproof frame, and products that use solar modules. Solarcells are the most important component of solar modules. Our solar cells are currently made from mono-crystalline and multi-crystalline solar wafers throughmultiple manufacturing steps. Solar wafers are the most important material for making solar cells. Solar ingots are the most important material for makingsolar wafers. If we are unable to procure silicon raw materials and solar ingots, wafers and cells at reduced prices in line with the decreasing selling prices ofour solar modules, our revenues and margins could be adversely impacted, either due to higher manufacturing costs than our competitors or write-downs ofinventory, or both. Our market share could decline if our competitors are able to offer better pricing than we are.Government Subsidies and the Availability of Financing for Solar Projects We believe that the near-term growth of the market for on-grid applications depends in large part on the availability and size of government subsidiesand economic incentives, and the availability and cost of financing for solar projects. For a detailed discussion of the impact of government subsidies and incentives, possible changes in government policy and associated risks to ourbusiness, see "Item 3. Key Information—D. Risk66Table of ContentsFactors—Risks Related to Our Company and Our Industry—Governments may revise, reduce or eliminate subsidies and economic incentives for solarenergy, which could cause demand for our products to decline." and "Item 4. Information on the Company—B. Business Overview—Sales, Marketingand Customers." For a detailed discussion of the impact of the availability and cost of debt or equity for solar power projects and our customers' ability to finance thepurchase of our products or to construct solar power projects, see "Item 3. Key Information—D. Risk Factors—Risks Related to Our Company and OurIndustry—The execution of our growth strategy depends upon the continued availability of third-party financing arrangements for our customers, which isaffected by general economic conditions. Tight credit markets could depress demand or prices for solar power products and services, hamper our expansionand materially affect our results of operations."Industry and Seasonal Demand Our business and revenues depend on the demand for solar power. Although solar power technology has been used for several decades, the solar powermarket has only started to grow significantly in the past few years. See "Item 3. Key Information—D. Risk Factors—Risks Related to Our Company and OurIndustry—We may be adversely affected by volatile solar power market and industry conditions; in particular, the demand for our solar power products andservices may decline, which may reduce our revenues and earnings." Industry demand is affected by seasonality. Demand tends to be lower in winter, whenadverse weather conditions can complicate the installation of solar power systems, thereby decreasing demand for solar modules. See "Item 3. KeyInformation—D. Risk Factors—Risks Related to Our Company and Our Industry—Seasonal variations in demand linked to construction cycles and weatherconditions may influence our results of operations."Impact of Certain of Our Long-term Purchase Commitments Currently, we acquire a large portion of solar wafers and cells required for our production through purchasing arrangements. See "Item 3. Key Information—D. Risk Factors—Risks Related to Our Company and Our Industry—Long-term supply agreements may make it difficult for us to adjust our raw materialcosts should prices decrease. Also, if we terminate any of these agreements, we may not be able to recover all or any part of the advance payments we havemade to these suppliers and we may be subject to litigation."Solar Power Project Development and Sale and EPC and Development Services Revenues generated from our energy segment accounted for 28.1%, 3.8% and 20.0% of our net revenues in 2015, 2016 and 2017, respectively. Themajority of these revenues came from the sale of solar power projects and the provision of EPC and development services. We intend to monetize the majorityof our current portfolio of solar power projects in operation that have an estimated resale value of approximately $1.5 billion as of February 28, 2018. Ourrevenues from the energy segment are affected by the timing of the completion and sale of solar power projects. See "Item 4. Information on the Company—B. Business Overview—Sales, Marketing and Customers—Energy Segment—Solar Project Development and Sale" for a description of the status of our solarpower projects. Solar power project development and sale and EPC and development services involve numerous risks and uncertainties. For a detailed discussion ofthese risks and uncertainties, see "Item 3. Key Information—D. Risk Factors—Risks Related to Our Company and Our Industry—Our future success dependspartly on our ability to expand the pipeline of our energy segment in several key markets, which exposes us to a number of risks and uncertainties" and"Item 3. Key Information—D. Risk Factors—Risks Related to Our Company and Our Industry—Our project development and construction activities may notbe successful, projects under development may not receive required permits, property67Table of Contentsrights, PPAs, interconnection and transmission arrangements, and financing or construction of projects may not commence or continue as scheduled, all ofwhich could increase our costs, delay or cancel a project, and have a material adverse effect on our revenue and profitability."Antidumping and Countervailing Duty Costs and True-up Charges In 2017, we made approximately $7.6 million of cash deposits pursuant to antidumping and countervailing duty rulings in the U.S., of which$7.3 million were charged to our cost of revenues. In addition, we booked the benefits of two reversals of $42.6 million and $15.0 million, primarilyassociated with prior years' module sales based on the final rates of the third administrative review of Solar 1 and the first administrative review of Solar2 carried out by the U.S. Department of Commerce, respectively. We have been in the past, and may be in the future, subject to antidumping and countervailing duty rulings and orders. In particular, we have beensubject to antidumping and countervailing duty rulings in the U.S., the EU and Canada and have, as a result, been party to lengthy proceedings relatedthereto. See "Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal and Administrative Proceedings." The U.S.,EU and Canada are important markets for us. Ongoing proceedings relating to, and the imposition of any new, antidumping and countervailing duty rulingsand orders or safeguard measures in these markets may result in additional costs to us and/or our customers.Foreign Exchange The majority of our sales in 2017 were denominated in U.S. dollars, Renminbi and Japanese yen, with the remainder in other currencies such as Euros,Brazilian real, Canadian dollars, Australian dollars and British pounds. The majority of our costs and expenses in 2017 were denominated in Renminbi,primarily related to purchases of solar cells and wafers and silicon and other raw materials, toll manufacturing fees, labor costs and local overhead expenseswithin the PRC. From time to time, we enter into loan arrangements with Chinese commercial banks that are denominated primarily in Renminbi orU.S. dollars. The majority of our cash and cash equivalents and restricted cash is denominated in Renminbi. See "Item 3. Key Information—D. Risk Factors—Risks Related to Our Company and Our Industry—Fluctuations in exchange rates could adversely affect our business, including our financial condition andresults of operations."Segment Reporting We use the management approach to determine operating segments. The management approach considers the internal organization and reporting usedby our chief operating decision maker for making decisions, allocating resources and assessing performance. We have identified our chief executive officer asour chief operating decision maker, since he reviews consolidated and segment results when making decisions about allocating resources and assessingperformance for us. Following our decision to expand our business to include both building and selling and building and operating solar power projects, we operated ourbusiness in three principal reportable business segments in 2015: MSS segment, energy development segment and electricity generation segment. Followingour decision to terminate our plans to create and spin off a publicly-traded "yieldco" that would hold the majority of our solar power projects in operation, wehave operated our business in two principal reportable business segments since 2016:•MSS Segment, which primarily comprises the design, development, manufacture and sale of solar power products and solar system kits, andO&M services;68Table of Contents•Energy Segment, which primarily comprises solar power project development and sale, EPC and development services, and operating solarpower projects and sales of electricity.Overview of Financial Results We evaluate our business using a variety of key financial measures.Net RevenuesMSS Segment Revenues generated from our MSS segment accounted for 71.9%, 96.2% and 80.0% of our net revenues in 2015, 2016 and 2017, respectively. Ourrevenues from our MSS segment are affected primarily by average selling prices per watt and unit volumes shipped, both of which depend on product supplyand demand.Energy Segment Revenues generated from our energy segment accounted for 28.1%, 3.8% and 20.0% of our net revenues in 2015, 2016 and 2017, respectively. Ourrevenues from our energy segment are affected primarily by the timing of the completion and sale of solar power projects. See "Item 4. Information on theCompany—B. Business Overview—Sales, Marketing and Customers—Energy Segment—Solar Project Development and Sale" for a description of the statusof our solar power projects. Revenue recognition for our energy segment, especially our solar power projects, is, in many cases, not linear in nature due to the timing of when allrelevant revenue recognition criteria have been met. During 2017, we recognized $632.3 million of revenue from the sale of solar power projects using thefull accrual method and nil revenue from the percentage-of-completion method. Our revenue recognition policies for the solar power project development aredescribed in "—Critical Accounting Policies—Revenue Recognition." Our revenues from sales to customers are recorded net of estimated returns.Cost of RevenuesMSS Segment The cost of revenues of our MSS segment consists primarily of the costs of:•solar cells; •silicon wafers; •high purity and solar grade silicon materials; •materials used in solar cell production, such as metallic pastes; •other materials for the production of solar modules such as glass, aluminum frames, EVA (ethylene vinyl acetate, an encapsulant used to sealthe module), junction boxes and polymer back sheets; •production labor, including salaries and benefits for manufacturing personnel; •warranty costs; •overhead, including utilities, production equipment maintenance, share-based compensation expenses for restricted share units and optionsgranted to employees in our manufacturing department and other support expenses associated with the manufacture of our solarpower products;69Table of Contents•depreciation and amortization of manufacturing equipment and facilities, which are increasing as we expand our manufacturing capabilities; •inventory write-downs; •depreciation charges relating to under-utilized assets; and •antidumping and countervailing duty costs and true-up charges. Our cost of revenues increased in 2015, decreased in 2016 and increased in 2017, in each instance in line with the change in net revenues for the year. Before June 2009, we typically sold our standard solar modules with a two-year guarantee for defects in materials and workmanship and a 10-year and25-year warranty against declines of more than 10% and 20%, respectively, from the initial minimum power generation capacity at the time of delivery. InJune 2009, we increased our guarantee for defects in materials and workmanship to six years. In August 2011, we increased our guarantee for defects inmaterials and workmanship to ten years and we warrant that, for a period of 25 years, our standard solar modules will maintain the following performancelevels:•during the first year, the actual power output of the module will be no less than 97% of the labeled power output; •from the second year to the 24th year, the actual annual power output decline of the module will be no more than 0.7%; and •by the end of the 25th year, the actual power output of the module will be no less than 80% of the labeled power output. Effective June 2015, we warrant that, for a period of 25 years, our polycrystalline modules will maintain the following performance levels:•during the first year, the actual power output of the module will be no less than 97.5% of the labeled power output; •from the second year to the 24th year, the actual annual power output decline will be no more than 0.7%; and •by the end of the 25th year, the actual power output of the module will be no less than 80.7% of the labeled power output. Effective June 2015, we warrant that, for a period of 25 years, our monocrystalline modules will maintain the following performance levels:•during the first year, the actual power output of the module will be no less than 97% of the labeled power output; •from the second year to the 24th year, the actual annual power output decline will be no more than 0.7%; and •by the end of the 25th year, the actual power output of the module will be no less than 80.2% of the labeled power output. Effective August 2016, we lengthened the warranty against decline in our Dymond modules to 30 years. We warrant that, for a period of 30 years, ourDymond polycrystalline modules will maintain the following performance levels:•during the first year, the actual power output of the module will be no less than 97.5% of the labeled power output;70Table of Contents•from the second year to the 29th year, the actual annual power output decline will be no more than 0.5%; and •by the end of the 30th year, the actual power output of the module will be no less than 83% of the labeled power output. Effective August 2016, we warrant that, for a period of 30 years, our Dymond monocrystalline modules will maintain the following performance levels:•during the first year, the actual power output of the module will be no less than 97% of the labeled power output; •from the second year to the sixth year, the actual annual power output decline will be no more than 0.7%; •from the seventh year to the 29th year, the actual annual power output decline will be no more than 0.5%; and •by the end of the 30th year, the actual power output of the module will be no less than 81.5% of the labeled power output. Effective August 2017, we warrant that, for a period of 25 years, our PERC monocrystalline modules will maintain the following performance levels:•during the first year, the actual power output of the module will be no less than 97.5% of the labeled power output; •from the second year to the 24th year, the actual annual power output decline will be no more than 0.7%; and •by the end of the 25th year, the actual power output of the module will be no less than 80.7% of the labeled power output. Effective August 2017, we warrant that, for a period of 30 years, our Dymond PERC monocrystalline modules will maintain the following performancelevels:•during the first year, the actual power output of the module will be no less than 97.5% of the labeled power output; •from the second year to the 29th year, the actual annual power output decline will be no more than 0.5%; and •by the end of the 30th year, the actual power output of the module will be no less than 83% of the labeled power output. In resolving claims under the workmanship guarantee, we have the option of remedying the defect through repair, refurbishment or replacement ofequipment. In resolving claims under the performance warranty, we have the right to repair or replace solar modules at our option. We believe our warranty periods are consistent with industry practice. Due to the long warranty period, we bear the risk of extensive warranty claims longafter we have shipped our products and recognized revenue. See "Item 3. Key Information—D. Risk Factors—Risks Related to Our Company and OurIndustry—We may be subject to unexpected warranty expense that may not be adequately covered by our insurance policies." We maintain warranty reserves to cover potential liabilities that could arise under these guarantees and warranties. We currently take a 1% warrantyprovision against our revenue for sales of solar power products.71Table of Contents We have entered into agreements with a group of insurance companies with high credit ratings to back up our warranties. Under the terms of theinsurance policies, which are designed to match the terms of our solar module product warranty policy, the insurance companies are obliged to reimburse us,subject to certain maximum claim limits and certain deductibles, for the actual product warranty costs that we incur under the terms of our solar moduleproduct warranty policy. We record the insurance premiums initially as prepaid expenses and amortize them over the respective policy period of one year.The warranty insurance is renewable annually. See "—Critical Accounting Policies—Warranty Costs." Total write-downs of inventory included in our cost of revenue were $23.0 million, $19.5 million and $17.8 million in 2015, 2016 and 2017,respectively. On occasion, we enter into firm purchase commitments to acquire materials from our suppliers. A firm purchase commitment represents an agreement thatspecifies all significant terms, including the price and timing of the transactions, and includes a disincentive for non-performance that is sufficiently large tomake performance probable. This disincentive is generally in the form of a take-or-pay provision, which requires us to pay for committed volumes regardlessof whether we actually acquire the materials. We evaluate these agreements and record a loss, if any, on firm purchase commitments using the same way asthat used to value inventory losses. We did not record a loss on firm purchase commitments for the years ended December 31, 2015, 2016 and 2017. See"Item 3. Key Information—D. Risk Factors—Risks Related to Our Company and Our Industry—Long-term supply agreements may make it difficult for us toadjust our raw material costs should prices decrease. Also, if we terminate any of these agreements, we may not be able to recover all or any part of theadvance payments we have made to these suppliers and we may be subject to litigation." In 2017, we made approximately $7.6 million of cash deposits pursuant to antidumping and countervailing duty rulings in the U.S., of which$7.3 million were charged to our cost of revenues. In addition, we booked the benefits of two reversals of $42.6 million and $15.0 million, primarilyassociated with prior years' module sales based on the final rates of the third administrative review of Solar 1 and the first administrative review of Solar2 carried out by the U.S. Department of Commerce, respectively.Energy Segment The cost of revenues of our energy segment consists primarily of the costs of:•acquiring solar power projects; •acquiring and developing solar project sites, including interconnection fees and permitting costs; •solar project EPC and development services; •interest capitalized for solar power projects during construction period; •operating and maintaining solar project assets, including depreciation and amortization of solar project assets; and •labor, including salaries and benefits for operating and maintenance personnel. For solar power projects built by us, we provide a limited workmanship or balance of system warranty against defects in engineering design, installationand construction under normal use, operation and service conditions for a period of up to five years following the energizing of the solar power project. Inresolving claims under the workmanship or balance of system warranty, we have the option of remedying through repair, refurbishment or replacement ofequipment. We have entered into similar workmanship warranties with our suppliers to back up our warranties.72Table of Contents We maintain warranty reserves to cover potential liabilities that could arise under these guarantees and warranties. Before commissioning solar power projects, we conduct performance testing to confirm that the projects meet the operational and capacity expectationsset forth in the agreements. In limited cases, we also provide for an energy generation performance test designed to demonstrate that the actual energygeneration for up to the first three years meets or exceeds the modeled energy expectation (after adjusting for actual solar irradiation). In the event that theenergy generation performance test performs below expectations, the appropriate party (EPC contractor or equipment provider) may incur liquidated damagescapped at a percentage of the contract price.Gross Profit/Gross Margin Our gross profit is affected by a number of factors, including the success of and contribution from both of our operating segments, the average sellingprice of our solar power products, our product mix, loss on firm purchase commitments under long-term supply agreements, our ability to cost-effectivelymanage our supply chain, the timing of completion of construction of our solar power projects, the timing and pricing of project sales and project financing.Operating Expenses Our operating expenses include selling expenses, general and administrative expenses, research development expenses and other operating income, net.Our operating expenses increased in 2015, decreased in 2016 and increased in 2017. We expect our operating expenses to increase as our net revenues growin the future.Selling Expenses Selling expenses consist primarily of salaries and benefits, transportation and customs expenses for delivery of our products, sales commissions for oursales agents, advertising, promotional and trade show expenses, and other sales and marketing expenses. Our selling expenses increased in 2015, decreased in2016 and increased in 2017. We expect as we increase our sales volumes in the future, our selling expenses will increase as we hire additional sales personnel,target more markets and initiate additional marketing programs to reach our goal of continuing to be a leading global brand.General and Administrative Expenses General and administrative expenses consist primarily of salaries and benefits for our administrative and finance personnel, consulting and professionalservice fees, government and administration fees and insurance fees. Our general and administrative expenses increased in 2015, 2016 and 2017.Research and Development Expenses Research and development expenses consist primarily of costs of raw materials used in our research and development activities, salaries and benefits forresearch and development personnel and prototype and equipment costs related to the design, development, testing and enhancement of our products and oursilicon reclamation program. In 2015, 2016 and 2017, our research and development expenses accounted for 0.5%, 0.6% and 0.8%, respectively, of our totalnet revenues. We expect that our research and development expenses will increase as we devote more efforts to research and development in the future.73Table of ContentsOther Operating Income, Net Other operating income, net, primarily consists of gains or losses on disposal of solar power systems and property, plant and equipment, and governmentgrants received. In prior years, the net gain or loss on disposal of property, plant and equipment and government grants were immaterial and included ingeneral and administrative expenses. In 2016, given that we have begun to separately present the results of monetization of our solar power systems, wereclassified the prior year immaterial amounts to conform to the current year's presentation.Share-based Compensation Expenses Under our share incentive plan, as of December 31, 2017, we had outstanding:•369,173 stock options; •116,500 restricted shares; and •1,732,047 restricted share units. For a description of the stock options, restricted share units and restricted shares granted, including the exercise prices and vesting periods, see "Item 6.Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers—Share-based Compensation—Share Incentive Plan."We recognize share-based compensation to employees as expenses in our statement of operations based on the fair value of the equity awards on the date ofthe grant. The compensation expense is recognized over the period in which the recipient is required to provide services in exchange for the equity award. We have made an estimate of expected forfeitures and recognize compensation costs only for those equity awards that we expect to vest. We estimate ourforfeitures based on past employee retention rates and our expectations of future retention rates. We prospectively revise our forfeiture rates based on actualhistory. Our share-based compensation expenses may change based on changes in actual forfeitures. For the year ended December 31, 2017, we recorded share-based compensation expenses of approximately $9.3 million, compared to approximately$7.8 million for the year ended December 31, 2016. We have allocated these share-based compensation expenses to our cost of revenues, selling expenses,general and administrative expenses and research and development expenses, depending on the job functions of the individuals to whom we granted theoptions, restricted shares and restricted share units. The following table sets forth, for the periods indicated, the allocation of our share-based compensation expenses both in absolute amounts and as apercentage of total share-based compensation expenses. We expect to incur additional share-based compensation expenses as we expand our operations.Interest Expense Interest expense consists primarily of interest incurred with respect to our short and long-term borrowings from Chinese commercial banks andinternational banks, short-term commercial paper, and the convertible senior notes issued by us in February 2014.74 Years Ended December 31, 2015 2016 2017 (In thousands of $, except for percentages) Share-based compensation expenses included in: Cost of revenues 697 11.7% 815 10.5% 958 10.3%Selling expenses 1,088 18.2% 1,216 15.7% 1,088 11.7%General and administrative expenses 3,889 65.2% 5,254 67.7% 6,559 70.4%Research and development expenses 292 4.9% 472 6.1% 709 7.6%Total share-based compensation expenses 5,966 100.0% 7,757 100.0% 9,314 100.0% Table of ContentsGain (Loss) on Change in Fair Value of Derivatives We have entered into foreign currency derivatives to hedge part of the risks of our expected cash flows, mainly in Renminbi, Canadian dollars, Britishpounds and Japanese yen. In 2015, we had a loss on the change in fair value of derivatives of $12.2 million, which included a $3.7 million loss on change infair value of foreign currency derivatives, a $8.9 million loss on change in fair value of warrants and a $0.4 million gain on change in fair value of interestrate swap/swaption contracts. The warrants were issued in conjunction with the $180 million in financing arranged by Credit Suisse AG, Singapore Branch, orCredit Suisse, in the fourth quarter of 2015. These warrants can be settled in cash at the discretion of the holder and as a result they are derivative liabilitiesthat were recorded at fair value at issuance and are subsequently marked to market at the end of each reporting period. In 2016, we had a gain on the changein fair value of derivatives of $27.3 million, which included a $4.8 million gain on change in fair value of foreign currency derivatives, a $24.5 million gainon change in fair value of warrants and a $2.0 million loss in change in fair value of interest rate swap/swaption contracts. In 2017, we had a loss on thechange in fair value of derivatives of $0.3 million, which included a $2.6 million loss on change in fair value of foreign currency derivatives, a $0.7 milliongain on change in fair value of warrants and a $1.6 million gain in change in fair value of interest rate swap contracts.Income Tax Expense We recognize deferred tax assets and liabilities for temporary differences between the financial statement and income tax bases of assets and liabilities.Valuation allowances are provided against deferred tax assets when management cannot conclude that it is more likely than not that some portion or alldeferred tax assets will be realized. We are governed by the CBCA, a federal statute of Canada and are registered to carry on business in Ontario. This subjects us to both Canadian federaland Ontario provincial corporate income taxes. Our combined tax rate was 26.5% for each of the years ended 2015, 2016 and 2017. PRC enterprise income tax is calculated based on taxable income determined under PRC accounting principles with a uniform enterprise income tax rateof 25%. Our major PRC subsidiaries, such as CSI New Energy Holding, CSI Cells, CSI Luoyang Manufacturing, CSI Changshu Manufacturing and SuzhouSanysolar, once enjoyed preferential tax benefits, such as a reduced enterprise income tax rate of 12.5% or 15%, however, some of these benefits expired. In2017, only Suzhou Sanysolar, CSI Cells, CSI Changshu Manufacturing and Changshu Tlian Co., Ltd., which were qualified as HNTEs, and Canadian SolarSunenergy (Baotou) Co., Ltd., which engaged in the business within the scope of the Western Catalogue, were benefited from a reduced enterprise income taxrate of 15%, subject to applicable statutory requirements. The EIT Law provides that enterprises established outside China whose "de facto management body" is located in China are considered PRC taxresidents and will generally be subject to the uniform 25% enterprise income tax rate on their global income. Under the implementation regulations, the term"de facto management body" is defined as substantial and overall management and control over such aspects as the production and business, personnel,accounts and properties of an enterprise. Circular 82 further provides certain specific criteria for determining whether the "de facto management body" of aPRC-controlled offshore incorporated enterprise is located in the PRC. The criteria include whether (a) the premises where the senior management and thesenior management bodies responsible for the routine production and business management of the enterprise perform their functions are mainly locatedwithin the PRC, (b) decisions relating to the enterprise's financial and human resource matters are made or subject to approval by organizations or personnelin the PRC, (c) the enterprise's primary assets, accounting books and records, company seals, and board and shareholders' meeting minutes are located ormaintained in the PRC and (d) 50% or more of voting board members or senior executives of the enterprise habitually reside in the PRC. AlthoughCircular 82 only applies to75Table of Contentsoffshore enterprises controlled by enterprises or enterprise groups located within the PRC, the determining criteria set forth in the Circular 82 may reflect thetax authorities' general position on how the "de facto management body" test may be applied in determining the tax resident status of offshore enterprises. Asthe tax resident status of an enterprise is subject to the determination by the PRC tax authorities, uncertainties remain with respect to the interpretation of theterm "de facto management body" as applicable to our offshore entities. As a substantial number of the members of our management team are located inChina, we may be considered as a PRC tax resident under the EIT Law and, therefore, subject to the uniform 25% enterprise income tax rate on ourglobal income. Under the EIT Law and implementing regulations issued by the State Council, the PRC withholding tax rate of 10% is generally applicable to interestand dividends payable to investors that are not "resident enterprises" in the PRC, to the extent such interest or dividends have their sources within the PRC.We consider the undistributed earnings of our PRC subsidiaries (approximately $353.4 million as of December 31, 2017) to be indefinitely reinvested inChina, and, consequently, we have made no provision for withholding taxes for those amounts.Critical Accounting Policies We prepare financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect:•the reported amounts of our assets and liabilities, •the disclosure of our contingent assets and liabilities at the end of each fiscal period, and •the reported amounts of revenues and expenses during each fiscal period. We regularly evaluate these judgments, estimates and assumptions based on our own historical experience, knowledge and assessment of currentbusiness and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form ourbasis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financialreporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others intheir application. When reviewing our financial statements, the following should be considered:•our selection of critical accounting policies, •the judgment and other uncertainties affecting the application of such policies, and •the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.Revenue RecognitionMSS Segment We recognize revenues for solar product sales when persuasive evidence of an arrangement exists, delivery of the product has occurred and title and riskof loss has passed to the customers, the sales price is fixed or determinable and the collectability of the resulting receivable is reasonably assured. Ifcollectability is not reasonably assured, we recognize revenue only upon collection of cash. Revenues also include reimbursements received from customersfor shipping and handling costs. Sales agreements typically contain customary product warranties but do not contain any post-shipment obligations nor anyreturn or credit provisions.76Table of Contents A majority of our contracts provide that products are shipped under the terms of free on board, or FOB, ex-works, or cost, insurance and freight, or CIF,and delivered duty paid, or DDP. Under FOB, we fulfill our obligation to deliver when the goods have passed over the ship's rail at the named port ofshipment. The customer has to bear all costs and risks of loss or damage to the goods from that point. Under ex-works, we fulfill our obligation to deliverwhen we have made the goods available at our premises to the customer. The customer bears all costs and risks involved in taking the goods from ourpremises to the desired destination. Under CIF, we must pay the costs, marine insurance and freight necessary to bring the goods to the named port ofdestination but the risk of loss of or damage to the goods as well as any additional costs due to events occurring after the time the goods have been deliveredon board the vessel, is transferred to the customer when the goods pass the ship's rail in the port of shipment. Under DDP, we are responsible for making a safedelivery of goods to a named destination, paying all transportation expenses and the duty. We bear the risks and costs associated with supplying the goods tothe delivery location. As of December 31, 2015, 2016 and 2017, we had inventories of $7.3 million, $5.9 million and $7.1 million, respectively, relating to sales to customerswhere revenues were not recognized because the collection of payment was not reasonably assured. The delivered products remain as inventories on ourconsolidated balance sheets, regardless of whether title has been transferred. In such cases, we recognize revenues, adjust inventories and recognize cost ofrevenues when payment is collected from customers. Our revenues from sales to customers are recorded net of estimated returns. We enter into toll manufacturing arrangements in which we receive cells and return finished modules. In such cases, the title of the cells received and riskof loss remains with the seller. As a result, we do not recognize inventory on the consolidated balance sheets. We recognize a service fee as revenue when theprocessed modules are delivered. During the years ended December 31, 2015, 2016 and 2017, we recognized revenue of $6.8 million, nil and nil,respectively, under the toll manufacturing arrangements.Energy Segment We use the percentage-of-completion method to recognize revenues for projects for which we provide EPC and development services, unless we cannotmake reasonably dependable estimates of the costs to complete the contract, in which case we would use the completed contract method. The percentage-of-completion method is considered appropriate in circumstances in which reasonably dependable estimates can be made and in which all the followingconditions exist:•contracts executed by the parties normally include provisions that clearly specify the enforceable rights regarding goods or services to beprovided and received by the parties, the consideration to be exchanged, and the manner and terms of settlement; •the buyer can be expected to satisfy all obligations under the contract; and •the contractor can be expected to perform all contractual obligations. We use the cost-to-cost method to measure the percentage of completion and recognize revenue based on the estimated progress to completion. Weperiodically revise our profit estimates based on changes in facts, and immediately recognize any losses that are identified on contracts. Incurred costsinclude all direct material, labor, subcontractor cost, and other associated costs. We recognize job material costs as incurred costs when the job materials havebeen permanently attached or fitted to the solar power projects as required by the engineering design. The construction periods normally extend beyond sixmonths and less than one year.77Table of Contents The percentage-of-completion method of revenue recognition requires us to make estimates of net contract revenues and costs to complete contracts. Inmaking such estimates, management judgments are required to evaluate significant assumptions including the amount of net contract revenues, the cost ofmaterials and labor, expected labor productivity, the impact of potential variances in schedule completion, and the impact of any penalties, claims, changeorders, or performance incentives. If estimated total costs on any contract are greater than the net contract revenues, we recognize the entire estimated loss in the period the loss becomesknown. The cumulative effect of the revisions to estimates related to net contract revenues and costs to complete contracts, including penalties, claims,change orders, performance incentives, anticipated losses, and others are recorded in the period in which revisions to the estimates are identified and theamounts can be reasonably estimated. The effect of the changes on future periods are recognized as if the revised estimates had been used since revenue wasinitially recognized under the contract. Such revisions could occur in any reporting period, and the effects may be material depending on the size of thecontracts or the changes in estimates. We recognize revenue from the sale of project assets owned by us in accordance with Accounting Standards Codification, or ASC, 360-20, Real EstateSales. For these transactions, we have determined that the project assets, which represent the costs of constructing solar power projects, represent "integral"equipment and as such, the entire transaction is in substance the sale of real estate and subject to the revenue recognition guidance under ASC 360-20 RealEstate Sales. We record the sale as revenue using one of the following revenue recognition methods, based upon evaluation of the substance and form of theterms and conditions of such real estate sales arrangements:•Full accrual method. We record revenue for certain sales arrangements after construction of discrete portions of the project or after the entireproject is substantially complete. We recognize revenue and profit using the full accrual method when all of the following requirements aremet: (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 termsof 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. •Percentage-of-completion method. We apply the percentage-of-completion method, as further described below, to certain real estate salesarrangements where we convey control of land or land rights, (a) when a sale has been consummated; (b) we have transferred the usual risksand rewards of ownership to the buyer; (c) the initial and continuing investment criteria have been met; (d) we have the ability to estimate itscosts and progress toward completion, and (e) all other revenue recognition criteria have been met. The initial and continuing investmentrequirements, which demonstrate a buyer's commitment to honor their obligations for the sales arrangement, can typically be met through thereceipt of cash or an irrevocable letter of credit from a highly creditworthy lending institution. When evaluating whether the usual risks andrewards of ownership have transferred to the buyer, we consider whether we have or may be contingently required to have any prohibited formsof continuing involvement with the project. Prohibited forms of continuing involvement in a real estate sales arrangement may include usretaining risks or rewards associated with the project that are not customary with the range of risks or rewards that an EPC contractormay assume. •Installment method. Depending on whether the initial and continuing investment requirements have been met, and whether collectability fromthe buyer is reasonably assured, we may align our revenue recognition and release of project assets or deferred project costs to cost of sales78Table of Contentswith the receipt of payment from the buyer if the sale has been consummated and we have transferred the usual risks and rewards of ownershipto the buyer. On occasion we sell an interest in the project assets to a third party with an option to repurchase those assets in the future. We consider that there arecontinuing involvements in the projects, and thus no profit or revenue is recognized. The transactions are accounted for as financing arrangement or profit-sharing arrangement.•Financing method. If we determine that it is likely the repurchase option will be exercised, the transactions are accounted for as financingarrangement. All the project assets remain on our consolidated balance sheets. The buyer's shares of earnings in the projects, during eachperiod are reflected as interest expenses with a corresponding increase to the respective financing liabilities. Further distributions from theprojects are reflected as a decrease to the financing liabilities. As of December 31, 2016 and 2017, we recorded financing liabilities of$459.3 million and $407.7 million in financing liabilities on the consolidated balance sheet, respectively. The balances had been net ofdistributions of $1.4 million and $9.6 million as of December 31, 2016 and 2017, respectively. •Profit-sharing arrangement. If we determine that it is unlikely the repurchase option will be exercised, the transactions are accounted for asprofit-sharing arrangement. We reclassify the property and any related existing debt assumed by the buyer to an investment account on itsbalance sheet and any cash received from the buyer is credited to the investment account. The amount will be recorded in investments inaffiliates or other liabilities on the balance sheet depending on whether the amount is a debit or credit. As of December 31, 2016 and 2017, werecorded $4.8 million and $4.8 million, respectively, in other liabilities on the consolidated balance sheet. During 2017, we recognized $632.3 million and nil of revenue from the sale of solar power projects using the full accrual method and percentage-of-completion method, respectively. We allocate revenue for transactions involving multiple-element arrangements to each unit of accounting on a relative fair value basis. We estimate fairvalue on each unit of accounting on the following basis (a) vendor-specific objective evidence of selling price, if it exists, otherwise, (b) third-party evidenceof selling price. If neither (a) nor (b) exists, management's best estimate of the selling price for that unit of accounting is used. We recognize revenue for eachunit of accounting when the revenue recognition criteria have been met. Electricity revenue is generated primarily from various non-affiliated parties under long-term PPAs and performance-based energy incentives. Werecognize electricity revenue when persuasive evidence of an arrangement exists, electricity has been generated and transmitted to the grid, the price ofelectricity is fixed or determinable and the collectability of the resulting receivable is reasonably assured. Performance-based energy incentives are awarded under certain state programs for the delivery of renewable electricity. We recognize performance-basedenergy incentives of electricity revenue generated from solar power systems when the condition attached to it has been met and there is reasonable assurancethat the grant will be received. During the years ended December 31, 2016 and 2017, we recognized performance-based energy incentives of $22.8 millionand $10.9 million, respectively, related to electricity generated and recognized in revenue. Certain PPAs are accounted for as operating leases in accordance with ASC 840-20, Operating Leases. Minimum lease payments are recognized over theterm of the lease and contingent rents are recorded when the achievement of the contingency becomes probable in accordance with the U.S. GAAP. None ofour operating leases have minimum lease payments, so revenue from these contracts is recognized as energy and any related renewable energy attributes aredelivered. During the79Table of Contentsyears ended December 31, 2016 and 2017, the total lease income recognized was $6.2 million and $2.5 million, respectively, related to PPAs.Warranty Costs Before June 2009, we typically sold our standard solar modules with a two-year guarantee for defects in materials and workmanship and a 10-year and25-year warranty against declines of more than 10% and 20%, respectively, from the initial minimum power generation capacity at the time of delivery. InJune 2009, we increased our guarantee for defects in materials and workmanship to six years. In August 2011, we increased our guarantee for defects inmaterials and workmanship to ten years and we warrant that, for a period of 25 years, our standard solar modules will maintain the following performancelevels:•during the first year, the actual power output of the module will be no less than 97% of the labeled power output; •from the second year to the 24th year, the actual annual power output decline of the module will be no more than 0.7%; and •by the end of the 25th year, the actual power output of the module will be no less than 80% of the labeled power output. Effective June 2015, we warrant that, for a period of 25 years, our polycrystalline modules will maintain the following performance levels:•during the first year, the actual power output of the module will be no less than 97.5% of the labeled power output; •from the second year to the 24th year, the actual annual power output decline will be no more than 0.7%; and •by the end of the 25th year, the actual power output of the module will be no less than 80.7% of the labeled power output. Effective June 2015, we warrant that, for a period of 25 years, our monocrystalline modules will maintain the following performance levels:•during the first year, the actual power output of the module will be no less than 97% of the labeled power output; •from the second year to the 24th year, the actual annual power output decline will be no more than 0.7%; and •by the end of the 25th year, the actual power output of the module will be no less than 80.2% of the labeled power output. Effective August 2016, we lengthened the warranty against decline in our Dymond modules to 30 years. We warrant that, for a period of 30 years, ourDymond polycrystalline modules will maintain the following performance levels:•during the first year, the actual power output of the module will be no less than 97.5% of the labeled power output; •from the second year to the 29th year, the actual annual power output decline will be no more than 0.5%; and •by the end of the 30th year, the actual power output of the module will be no less than 83% of the labeled power output.80Table of Contents Effective August 2016, we warrant that, for a period of 30 years, our Dymond monocrystalline modules will maintain the following performance levels:•during the first year, the actual power output of the module will be no less than 97% of the labeled power output; •from the second year to the sixth year, the actual annual power output decline will be no more than 0.7%; •from the seventh year to the 29th year, the actual annual power output decline will be no more than 0.5%; and •by the end of the 30th year, the actual power output of the module will be no less than 81.5% of the labeled power output. Effective August 2017, we warrant that, for a period of 25 years, our PERC monocrystalline modules will maintain the following performance levels:•during the first year, the actual power output of the module will be no less than 97.5% of the labeled power output; •from the second year to the 24th year, the actual annual power output decline will be no more than 0.7%; and •by the end of the 25th year, the actual power output of the module will be no less than 80.7% of the labeled power output. Effective August 2017, we warrant that, for a period of 30 years, our Dymond PERC monocrystalline modules will maintain the following performancelevels:•during the first year, the actual power output of the module will be no less than 97.5% of the labeled power output; •from the second year to the 29th year, the actual annual power output decline will be no more than 0.5%; and •by the end of the 30th year, the actual power output of the module will be no less than 83% of the labeled power output. For solar power projects built by us, we provide a limited workmanship or balance of system warranty against defects in engineering design, installationand construction under normal use, operation and service conditions for a period of up to five years following the energizing of the solar power project. Inresolving claims under the workmanship or balance of system warranty, we have the option of remedying through repair, refurbishment or replacement ofequipment. We have entered into similar workmanship warranties with our suppliers to back up our warranties. We maintain warranty reserves to cover potential liabilities that could arise under these guarantees and warranties. Due to limited warranty claims todate, we accrue the estimated costs of warranties based on an assessment of our competitors' and our own actual claim history, industry-standard acceleratedtesting, estimates of failure rates from our quality review, and other assumptions that we believe to be reasonable under the circumstances. Actual warrantycosts are accumulated and charged against the accrued warranty liability. To the extent that accrual for warranty costs differs from the estimates, we willprospectively revise our accrual rate. We currently record a 1% warranty provision against our revenue for sales of solar power products. We have entered into agreements with a group of insurance companies with high credit ratings to back up our warranties. Under the terms of theinsurance policies, which are designed to match the terms of our solar module product warranty policy, the insurance companies are obliged to reimburse81Table of Contentsus, subject to certain maximum claim limits and certain deductibles, for the actual product warranty costs that we incur under the terms of our solar moduleproduct warranty policy. We record the insurance premiums initially as prepaid expenses and amortize them over the respective policy period of one year. The warranty obligations that we record relate to defects that existed when a product was sold to the customer. The event that we are insured againstunder our insurance policies is the sale of a defective product. Accordingly, we view the insured loss attributable to the shipment of defective productscovered under our warranty as analogous to potential claims, or claims that have been incurred as of the product shipment date, but not yet reported. Weexpect to recover all or part of the cost of our obligations with respect to the defective products through insurance claims. Therefore, our accounting policy isto record an asset for the amount determined to be probable of recovery from the insurance claims (not to exceed the amount of the total losses incurred),consistent with the guidance set forth at ASC 410-30. We consider the following factors in determining whether an insurance receivable that is probable and recoverability can be reasonably estimated:•reputation and credit rating of the insurance company; and •comparison of the solar module product warranty policy against the terms of the insurance policies (to ensure valid warranty claims submittedby customers will be covered by the policy and therefore reimbursed by the insurance companies). With respect to specific claims submitted, written communications with the insurance company are monitored to ensure the claim has been promptlysubmitted to and accepted by the insurance company, and reimbursements have been subsequently collected. The successfully processed claims providefurther evidence that the insurance policies are functioning as anticipated. To the extent uncertainties regarding the solvency of insurance carriers or the legal sufficiency of insurance claims (including if they became subject tolitigation) were to arise, we would establish a provision for uncollectible amounts based on the specific facts and circumstances. To date, no provision hasbeen determined to be necessary. If an accrual for warranty costs differs from the estimates and we prospectively change our accrual rate, this may result in achange to the amount expected to be recovered from insurance. As the warranty obligation and related recovery asset do not meet the criteria for offsetting, the gross amounts are reported in our consolidated balancesheets. The asset is expected to be realized over the life of the warranty obligation, which is 25 or 30 years and is treated as a non-current asset consistent withthe underlying warranty obligation. When a specific claim is submitted, and the corresponding insurance proceeds will be collected within twelve months ofthe balance sheet date, we will reclassify that portion of the receivable as being current. The insurance receivable amounts were $56.6 million, $61.9 millionand $74.9 million at the end of 2015, 2016 and 2017, respectively, and were included as a component of other non-current assets. We made downward adjustments to our accrued warranty costs of $16.9 million and $7.5 million and other non-current assets of $15.2 million and$5.2 million, for the years ended December 31, 2016 and 2017, respectively, to reflect the general declining trend of the average selling price of solarmodules, which is a primary input into the estimated warranty costs. Accrued warranty costs (net effect of adjustments) of $15.9 million, $9.8 million and$19.8 million are included in cost of revenues for the years ended December 31, 2015, 2016 and 2017, respectively.82Table of ContentsIncome Taxes Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financialstatements, net tax loss carry-forwards and credits using the enacted tax rates expected to apply to taxable income in the periods in which the deferred taxliability or asset is expected to be settled or realized. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that someportion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxableincome during the periods in which those temporary differences become deductible for tax purposes. We have recognized a valuation allowance of$56.0 million, $71.5 million and $65.4 million as of December 31, 2015, 2016 and 2017, respectively. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities. Before 2016, the components of the deferred taxassets and liabilities were individually classified as current and non-current based on the characteristics of the underlying assets and liabilities, or theexpected timing of their use when they did not relate to a specific asset or liability. In 2016, we adopted ASU2015-17 prospectively and did not revise priorperiods, and as of December 31, 2016 and 2017, the components of the deferred tax assets and liabilities were all classified as non-current on ourconsolidated balance sheet. Income tax expense includes (a) deferred tax expense, which generally represents the net change in the deferred tax asset or liability balance during theyear plus any change in valuation allowances; (b) current tax expense, which represents the amount of tax currently payable to or receivable from a taxingauthority; and (c) non-current tax expense, which represents the increases and decreases in amounts related to uncertain tax positions from prior periods andnot settled with cash or other tax attributes. We only recognize tax benefits related to uncertain tax positions when such positions are more likely than not ofbeing sustained upon examination. For such positions, the amount of tax benefit that we recognize is the largest amount of tax benefit that is more than fiftypercent likely of being sustained upon the ultimate settlement of such uncertain tax position. We record penalties and interests associated with the uncertaintax positions as a component of income tax expense. We use the flow-through method to account for investment tax credits earned on qualifying projects placed into service. Under this method theinvestment tax credits are recognized as a reduction to income tax expense in the year the credit arises. The use of the flow-through method also results in abasis difference from the recognition of a deferred tax liability and an immediate income tax expense for reduced future tax depreciation of the related assets.Such basis differences are accounted for pursuant to the income statement method.Recently Issued Accounting Pronouncements In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Updates, (or ASU) 2014-09, Revenue from Contractswith Customers (Topic 606), to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP andInternational Financial Reporting Standards. An entity has the option to apply the provisions of ASU 2014-09 either retrospectively to each prior reportingperiod presented or retrospectively with the cumulative effect of initially applying this standard recognized at the date of initial application. ASU 2014-09 iseffective for fiscal years and interim periods within those years beginning after December 15, 2016, and early adoption is not permitted. In August 2015, theFASB updated this standard to ASU 2015-14, the amendments in this ASU defer the effective date of ASU 2014-09, that the ASU should be applied to annualreporting periods beginning after December 15, 2017 and earlier application is permitted only as of annual reporting periods beginning after December 15,2016, including interim reporting periods within that reporting period.83Table of Contents We will adopt ASU 2014-09 in the period beginning from January 1, 2018 using the modified retrospective approach. This approach will be applied toall contracts not complete as of January 1, 2018. We expect this adoption to primarily affect certain energy business sales arrangements currently accounted for under ASC 360-20, which requires us toevaluate whether such arrangements have any forms of continuing involvement that may affect the revenue or profit recognition of the transactions,including arrangements with prohibited forms of continuing involvement requiring us to reduce the potential profit on a project sale by the maximumexposure to loss. We anticipate that ASU 2014-09, which supersedes the real estate sales guidance under ASC 360-20, will result in the earlier recognition ofrevenue and profit. We expect revenue recognition for other sales arrangements, including sales of solar power products, EPC and development services,O&M services and electricity income, to remain materially consistent with the current practice. Based on our assessment and best estimates of the effects of adopting ASU 2014-09 at the time of the preparation of this Annual Report on Form 20-F, weexpect a cumulative-effect adjustment, $1.3 million increase to the opening balance of retained earnings on January 1, 2018. The cumulative-effectiveadjustment is primarily due to the recognition of profit associated with projects sold in 2017, which had previously been deferred under ASC 360-20. We have substantially completed our evaluation of the impact on accounting policies, disclosures, and internal processes and controls the new standardhas on our revenue stream. As part of the adoption, we have modified certain control procedures and processes, although these updates are not expected tohave a material effect on our internal controls over financial reporting. Additionally, the adoption of ASU 2014-09 will result in increased footnote disclosures, particularly with regard to:•revenue-related balance sheet accounts and associated activity in the fiscal period, •disaggregation of revenue into appropriate categories, •unsatisfied performance obligations, •the pro-forma impact of changes to our financial statements in the initial year of adoption, and •qualitative disclosures related to the nature and terms of our sales, timing of the transfer of control and judgments used in the application ofthe five-step process. In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10)—Recognition and Measurement of Financial Assetsand Financial Liabilities. The new guidance requires equity investments (except those accounted for under the equity method of accounting, or those thatresult in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income and separate presentation of financialassets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or theaccompanying notes to our consolidated financial statements. The guidance also eliminates the requirement to disclose the fair value of financial instrumentsmeasured at amortized cost for organizations that are not public business entities and the requirement for public business entities to disclose the method(s)and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balancesheet. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscalyears. We adopted this standard on January 1, 2018. This accounting standards update does not have a material impact on our consolidated financialstatements.84Table of Contents In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)". Under the new guidance, lessees will be required to recognize all leases (with theexception of short-term leases) at the commencement date including a lease liability, which is a lessee's obligation to make lease payments arising from alease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified assetfor the lease term. Lessees (for capital and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered intoafter, the beginning of the earliest comparative period presented in our consolidated financial statements. The modified retrospective approach would notrequire any transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transitionapproach. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interimperiods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). This new guidance requires modified retrospective application and becomeseffective for us in the first quarter of 2019, but early adoption is permitted. We are currently evaluating this update to determine the full impact of itsadoption on the consolidated financial position, results of operations, cash flows and related disclosures, as well as the impact of adoption on policies,practices and systems. As of December 31, 2017, we have $80.2 million of future minimum operating lease commitments that are not currently recognized onthe consolidated balance sheet (see note 23). Therefore, we expect material changes to our consolidated balance sheets. In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting., which amends ASC Topic 718,Compensation—Stock Compensation. The objective of this amendment is part of the FASB's Simplification Initiative as it applies to several aspects of theaccounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, andclassification on the statement of cash flows. The effective date of the amendment is for fiscal years beginning after December 31, 2016 and interim periodswithin that reporting period. We adopted the ASU for the year ended December 31, 2017 and has already considered the impact on our consolidated financialstatements and related disclosures and the effects upon adoption are not material. In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses (Topic 326)". The pronouncement changes the impairment modelfor most financial assets, and will require the use of an "expected loss" model for instruments measured at amortized cost. Under this model, entities will berequired to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset,resulting in a net presentation of the amount expected to be collected on the financial asset. This pronouncement is effective for fiscal years, and for interimperiods within those fiscal years, beginning after December 15, 2019. We do not expect a material impact to our consolidated financial statement uponadoption of this ASU. In August 2016, the FASB issued ASU 2016-15 which amends the guidance on the classification of certain cash receipts and payments in the statementof cash flows. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017 and is applied retrospectively. Earlyadoption is permitted including adoption in an interim period. We will adopt this ASU on its effective date of January 1, 2018 and is in the process ofevaluating the impact on our consolidated financial statements upon adoption. In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 230)—Intra-Entity Transfers of Assets Other Than Inventory, which removes theprohibition in ASC 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other thaninventory. The ASU, which is part of the Board's simplification initiative, is intended to reduce the complexity of U.S. GAAP and diversity in practice relatedto the tax consequences of certain types of intra-entity asset transfers, particularly those involving intellectual property (IP). For public business entities, theASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted for allentities as of the beginning of a85Table of Contentsfiscal year for which neither the annual or interim (if applicable) financial statements have been issued or made available for issuance. We are currentlyevaluating the impact of the adoption this standard on our consolidated financial statements. In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash", which clarifies the presentation of restrictedcash and restricted cash equivalents in the statements of cash flows. Under ASU 2016-18 restricted cash and restricted cash equivalents are included with cashand cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. This ASU should beapplied retrospectively and becomes effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, but earlyadoption is permitted. Currently the changes in restricted cash were included in the investing activities in the cash follow statement with the amounts of$(100.9) million, $50.6 million and $(102.0) million for the year of 2015, 2016 and 2017 respectively. We plan to adopt this ASU for the fiscal yearbeginning from January 1, 2018. In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business". The update affects allcompanies and other reporting organizations that must determine whether they have acquired or sold a business. The definition of a business affects manyareas of accounting including acquisitions, disposals, goodwill, and consolidation. The update is intended to help companies and other organizationsevaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The update provides a more robust framework touse in determining when a set of assets and activities is a business, and also provides more consistency in applying the guidance, reducing the costs ofapplication, and making the definition of a business more operable. For public companies, the update is effective for annual periods beginning afterDecember 15, 2017, including interim periods within those periods. The guidance should be applied prospectively upon its effective date. The effect of ASU2017-01 on the consolidated financial statements will be dependent on any future acquisitions. In January 2017, the FASB issued ASU 2017-04, which removes the requirement to compare the implied fair value of goodwill with its carrying amountas 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 bycomparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carryingamount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.An entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwillimpairment loss, if applicable. For public business entities that are SEC filers, the guidance is effective for fiscal years beginning after December 15, 2019.Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect the adoptionto have a significant impact to our consolidated financial statements. In May 2017, the FASB issued ASU 2017-09, "Compensation-Stock Compensation", to provide clarity and reduce complexity on when to applymodification accounting to existing share-based payment awards. The guidance will be applied prospectively. We adopted this standard on January 1, 2018.This accounting standards update does not have a material impact on our consolidated financial statements.86 Table of ContentsResults of Operations The following table sets forth a summary, for the periods indicated, of our consolidated results of operations and each item expressed as a percentage ofour total net revenues. Our historical results presented below are not necessarily indicative of the results that may be expected for any future period.87 For the years ended December 31, 2015 2016 2017 (in thousands of $, except percentages) Net revenues $3,467,626 100.0%$2,853,078 100.0% 3,390,393 100.0%MSS segment(1) 2,675,999 77.2% 2,825,270 99.0% 2,850,859 84.1%Energy segment 975,937 28.1% 106,432 3.8% 677,470 20.0%Elimination (184,310) (5.3)% (78,624) (2.8)% (137,936) (4.1)%Cost of revenues 2,890,856 83.4% 2,435,890 85.4% 2,752,795 81.2%MSS segment 2,278,805 65.7% 2,429,207 85.1% 2,390,686 70.5%Energy segment 778,050 22.5% 66,955 2.4% 473,453 14.0%Elimination (165,999) (4.8)% (60,272) (2.1)% (111,344) (3.3)%Gross profit 576,770 16.6% 417,188 14.6% 637,598 18.8%MSS segment 397,194 11.5% 396,063 13.8% 460,173 13.6%Energy segment 197,887 5.7% 39,477 1.4% 204,017 6.0%Elimination (18,311) (0.5)% (18,352) (0.6)% (26,592) (0.8)%Operating expenses: Selling expenses 149,710 4.3% 145,367 5.1% 156,032 4.6%General and administrative expenses 168,025 4.8% 203,789 7.1% 230,998 6.8%Research and development expenses 17,056 0.5% 17,407 0.6% 28,777 0.8%Other operating income, net (5,392) (0.1)% (42,539) (1.5)% (47,554) (1.4)%Total operating expenses 329,399 9.5% 324,024 11.4% 368,253 10.9%Income from operations 247,371 7.1% 93,164 3.3% 269,345 7.9%Other income (expenses) Interest expense (54,148) (1.6)% (69,723) (2.4)% (117,971) (3.5)%Interest income 16,831 0.5% 10,236 0.4% 10,477 0.3%Gain (loss) on change in fair value ofderivatives (12,196) (0.4)% 27,322 1.0% (272) —(2)Investment income (loss) 2,342 0.1% (1,532) (0.1)% (3,607) (0.1)%Foreign exchange gain (loss) 22,882 0.7% 25,406 0.9% (23,449) (0.7)%Gain on repurchase of convertible notes — — 2,782 0.1% — — Others 389 0.0% — — — — Income before income taxes and equity inearnings (loss) of unconsolidated investees 223,471 6.4% 87,655 3.1% 134,523 4.0%Income tax expense (49,512) (1.4)% (17,976) (0.6)% (40,951) (1.2)%Equity in earnings (loss) of unconsolidatedinvestees (643) 0.0% (4,404) (0.2)% 9,411 0.3%Net income 173,316 5.0% 65,275 2.3% 102,983 3.0%Less: Net income attributable to non-controllinginterests 1,455 0.0% 26 0.0% 3,411 0.1%Net income attributable to Canadian Solar Inc. 171,861 5.0% 65,249 2.3% 99,572 2.9%(1)In 2017, the MSS segment provided O&M services which were previously provided by the energy segment. Net revenues, cost ofrevenues and gross profit of MSS segment and energy segment forTable of ContentsYear Ended December 31, 2017 Compared to Year Ended December 31, 2016 Net Revenues. Our total net revenues increased by $537.3 million, or 18.8%, from $2,853.1 million for the year ended December 31, 2016 to$3,390.4 million for the year ended December 31, 2017. The increase was primarily due to an increase in shipments from our MSS segment (from 5,138 MWto 6,539 MW) and an increase in revenue contribution from the sale of solar power projects, partially offset by a decrease in the average selling price of oursolar modules. For the year ended December 31, 2017, Asia contributed 56.8%, the Americas contributed 32.7%, and Europe and others accounted for 10.5%of our net revenues. Our top five customers by revenues collectively accounted for 27.7% of our net revenues for the year ended December 31, 2017.•MSS Segment. Revenues generated by our MSS segment increased by $25.6 million, or 0.9%, from $2,825.3 million for the year endedDecember 31, 2016 to $2,850.9 million for the year ended December 31, 2017. The increase was primarily due to an increase of $800.7 millionattributable to a 30.3% increase in shipments of our solar modules, offset by a decrease of $765.6 million attributable to a 22.2% decline in theaverage selling price of our solar modules.Our total solar module shipments recognized in revenue for the year ended December 31, 2017 were 6,893 MW, an increase of 32.5% from5,204 MW for the year ended December 31, 2016. Shipments to non-European markets increased by 1,744 MW from 4,498.0 MW for the yearended December 31, 2016 to 6,242 MW for the year ended December 31, 2017, primarily to customers in China, the U.S. and India. Shipmentsto European markets decreased by 54.5 MW from 705.7 MW for the year ended December 31, 2016 to 651.2 MW for the year endedDecember 31, 2017.The average selling price of our solar modules declined from $0.51 for the year ended December 31, 2016 to $0.40 for the year endedDecember 31, 2017. The decline was primarily due to the supply of solar products exceeding demand and change in the geographic mixof revenues.•Energy Segment. Revenues generated from our energy segment increased by $571.0 million, or 536.5%, from $106.4 million for the yearended December 31, 2016 to $677.5 million for the year ended December 31, 2017. This increase was primarily due to an increase of$609.6 million in sales of solar power projects, partially offset by a decrease in electricity revenue of $39.6 million and a decrease of$2.6 million in development service fees. Cost of Revenues. Our total cost of revenues increased by $316.9 million, or 13.0%, from $2,435.9 million for the year ended December 31, 2016 to$2,752.8 million for the year ended December 31, 2017. The increase was primarily due to an increase in shipments of our solar modules and sales of solarpower projects, partially offset by lower solar module manufacturing costs. Total cost of revenues as a percentage of total net revenues decreased from 85.4%for the year ended December 31, 2016 to 81.2% for the year ended December 31, 2017.•MSS Segment. Cost of revenues incurred by our MSS segment decreased by $38.5 million, or 1.6%, from $2,429.2 million for the year endedDecember 31, 2016 to $2,390.7 million for the year ended December 31, 2017. The decrease was primarily due to lower module manufacturingcosts, lower antidumping and countervailing duty rulings related charges and the $57.6 million reversal of such charges, primarily associatedwith prior years' module sales based on the final rates of the third administrative review of Solar 1 and the first administrative review of Solar 2,partially offset by an increase in shipments of our solar modules. Our module manufacturing88the years ended December 31, 2015 and 2016 have been restated to conform to the current year's presentation.(2)Less than 0.1%.Table of Contentscost in China, including purchased polysilicon, wafers and cells, was $0.32 per watt in December 2017.For the year ended December 31, 2017, we made approximately $7.6 million of cash deposits relating to antidumping and countervailing dutyrulings in the U.S, of which $7.3 million were charged to our cost of revenues. In addition, we booked the benefits of two reversals of$42.6 million and $15.0 million, primarily associated with prior years' module sales based on the final rates of the third administrative reviewof Solar 1 and the first administrative review of Solar 2 carried out by the U.S. Department of Commerce, respectively.•Energy Segment. Cost of revenues incurred by our energy segment increased by $406.5 million, or 607.1%, from $67.0 million for the yearended December 31, 2016 to $473.5 million for the year ended December 31, 2017. The increase was primarily due to an increase in sales ofsolar power projects. Gross Profit. As a result of the foregoing, our total gross profit increased by $220.4 million, or 52.8%, from $417.2 million for the year endedDecember 31, 2016 to $637.6 million for the year ended December 31, 2017. Our total gross margin increased from 14.6% for the year ended December 31,2016 to 18.8% for the year ended December 31, 2017.•MSS Segment. Gross profit for our MSS segment increased by $64.1 million, or 16.2%, from $396.1 million for the year ended December 31,2016 to $460.2 million for the year ended December 31, 2017, primarily due to an increase in shipments of our solar modules, a decrease inour solar module manufacturing costs and lower antidumping and countervailing duty rulings related charges and the $57.6 million benefit ofthe two reversals relating to the U.S. antidumping and countervailing duty rulings, partially offset by a decrease in the average selling price ofour solar modules. Gross margin increased from 14.0% for the year ended December 31, 2016 to 16.1% for the year ended December 31, 2017,primarily due to a decrease in our solar module manufacturing cost, lower charges and the reversal relating to U.S. antidumping andcountervailing duty rulings, partially offset by a decrease in the average selling price of our solar modules. •Energy Segment. Gross profit for our energy segment increased by $164.5 million, or 416.8%, from $39.5 million for the year endedDecember 31, 2016 to $204.0 million for the year ended December 31, 2017, primarily due to an increase in sales of solar power projects,partially offset by a decrease in electricity sale revenue. Gross margin decreased from 37.1% for the year ended December 31, 2016 to 30.1%for the year ended December 31, 2017, primarily due to a lower proportion of high margin electricity revenue in 2017. Operating Expenses. Our operating expenses increased by $44.2 million, or 13.6%, from $324.0 million for the year ended December 31, 2016 to$368.3 million for the year ended December 31, 2017. Operating expenses as a percentage of our total net revenues decreased from 11.4% for the year endedDecember 31, 2016 to 10.9% for the year ended December 31, 2017. Selling Expenses. Our selling expenses increased by $10.7 million, or 7.3%, from $145.4 million for the year ended December 31, 2016 to$156.0 million for the year ended December 31, 2017. The increase was primarily due to increase of $11.3 million in shipping, handling and storage chargesand $1.5 million in professional service expenses, partially offset by a decrease of $3.0 million in rental expenses. Selling expenses as a percentage of our nettotal revenues decreased from 5.1% for the year ended December 31, 2016 to 4.6% for the year ended December 31, 2017. General and Administrative Expenses. Our general and administrative expenses increased by $27.2 million, or 13.4%, from $203.8 million for the yearended December 31, 2016 to $231.0 million for the year ended December 31, 2017. The increase was primarily due to an increase of $17.5 million89Table of Contentsin labor costs, $8.6 million provision for the LDK case and $7.0 million in bad debt provision, partially offset by a decrease of $10.8 million in impairmentcharges. General and administrative expenses as a percentage of our total net revenues decreased from 7.1% for the year ended December 31, 2016 to 6.8% forthe year ended December 31, 2017. Research and Development Expenses. Our research and development expenses increased by $11.4 million, or 65.3%, from $17.4 million for the yearended December 31, 2016 to $28.8 million for the year ended December 31, 2017. The increase was primarily due to an increase of $6.3 million in materialsconsumables and $5.7 million in labor costs. Research and development expenses as a percentage of our total net revenues were 0.6% for the year endedDecember 31, 2016 and 0.8% for the year ended December 31, 2017. Other Operating Income, Net. Our other operating income, net, increased by $5.0 million, or 11.8%, from $42.5 million for the year endedDecember 31, 2016 to $47.6 million for the year ended December 31, 2017. The increase was primarily due to a net gain from the sale of certain solar powerprojects to CSIF in Japan. Income from operations. As a result of the foregoing, income from operations increased by $176.2 million, or 189.1%, from $93.2 million for the yearended December 31, 2016 to $269.3 million for the year ended December 31, 2017. Interest Expense, Net. Our interest expense, net, increased by $48.0 million, or 80.7%, from $59.5 million for the year ended December 31, 2016 to$107.5 million for the year ended December 31, 2017. Interest expense increased by $48.2 million, or 69.2%, from $69.7 million for the year endedDecember 31, 2016 to $118.0 million for the year ended December 31, 2017. The increase was primarily due to lower capitalized interest and higher debt.Interest income increased by $0.2 million, or 2.4%, from $10.2 million for the year ended December 31, 2016 to $10.5 million for the year endedDecember 31, 2017. Gain/(Loss) on Change in Fair value of Derivatives. We recorded a loss of $0.3 million on change in fair value of derivatives for the year endedDecember 31, 2017, compared to a gain of $27.3 million for the year ended December 31, 2016. The loss on change in fair value of derivatives for the yearended December 31, 2017 was due to a loss of $2.6 million on change in fair value of foreign currency derivatives and a gain of $1.6 million on change infair value of swap and a gain of $0.7 million on change in fair value of warrants. The loss on change in fair value of foreign currency derivatives for the yearended December 31, 2017 was attributable to a loss on foreign currency forward contracts that we purchased to hedge the fluctuation of exchange rates offoreign currencies, including British pounds, Euros and Thailand Baht. Foreign Exchange Gain/(Loss). We recorded a foreign exchange loss of $23.4 million for the year ended December 31, 2017, compared to a foreignexchange gain of $25.4 million for the year ended December 31, 2016. The loss for the year ended December 31, 2017 was primarily due to the appreciationof Canadian dollar and Renminbi against the U.S. dollar. Income Tax Expense. We recorded an income tax expense of $41.0 million for the year ended December 31, 2017, compared to an income tax expenseof $18.0 million for the year ended December 31, 2016. The increase in income tax expense in 2017 was primarily due to our higher profit before income tax,more income generated form high tax rate regions, a reduction in deferred tax asset due to effects associated with the U.S. Tax Cuts and Jobs Act, partiallyoffset by a reversal of valuation allowance. Equity in Earnings/(Loss) of Unconsolidated Investees. Our share of the earnings (loss) of unconsolidated investees was net gain of $9.4 million for theyear ended December 31, 2017, compared to net loss of $4.4 million for the year ended December 31, 2016.90Table of Contents Net Income Attributable to Non-Controlling Interest. The net income attributable to non-controlling interest is the share of net income attributable tothe interests of non-controlling shareholders in certain of our subsidiaries in China, Indonesia, Japan and Australia. No net income was generated inconnection with the sale of project assets which was attributable to non-controlling interests for the year ended December 31 2017. Net Income Attributable to Canadian Solar Inc. As a result of the foregoing, we recorded net income of $99.6 million for the year ended December 31,2017, which was an increase of $34.3 million, or 52.6%, compared to our net income of $65.2 million for the year ended December 31, 2016.Year Ended December 31, 2016 Compared to Year Ended December 31, 2015 Net Revenues. Our total net revenues decreased by $614.5 million, or 17.7%, from $3,467.6 million for the year ended December 31, 2015 to$2,853.1 million for the year ended December 31, 2016. The decrease was primarily due to a decrease in the average selling price of our solar modules and adecrease in revenue contribution from the sale of solar power projects, partially offset by an increase in shipments from our MSS segment from 4,085 MW forthe year ended December 31, 2015 to 5,138 MW for the year ended December 31, 2016. For the year ended December 31, 2016, Europe and others accountedfor 14.4% of our net revenues, while the Americas contributed 38.7% and Asia contributed 46.9%. Our top five customers by revenues collectively accountedfor 16.9% of our net revenues for the year ended December 31, 2016.•MSS Segment. Revenues generated by our MSS segment increased by $149.3 million, or 5.6%, from $2,676.0 million for the year endedDecember 31, 2015 to $2,825.3 million for the year ended December 31, 2016. The increase was primarily due to an increase of $528.2 millionattributable to a 21.2% increase in shipments of our solar modules, partially offset by a decrease of $372.1 million attributable to a 12.3%decline in the average selling price of our solar modules.Our total solar module shipments recognized in revenue for the year ended December 31, 2016 were 5,204 MW, an increase of 18.7% from4,384 MW for the year ended December 31, 2015. Shipments to non-European markets increased by 653.1 MW from 3,844.9 MW for the yearended December 31, 2015 to 4,498.0 MW for the year ended December 31, 2016, primarily to customers in the U.S., India and China.Shipments to European markets increased by 166.8 MW from 538.9 MW for the year ended December 31, 2015 to 705.7 MW for the yearended December 31, 2016.The average selling price of our solar modules declined from $0.58 for the year ended December 31, 2015 to $0.51 for the year endedDecember 31, 2016. The decline was primarily due to the supply of solar products exceeding demand and change in the geographic mixof revenues.•Energy Segment. Revenues generated from our energy segment decreased by $869.5 million, or 89.1%, from $975.9 million for the year endedDecember 31, 2015 to $106.4 million for the year ended December 31, 2016. This decrease was primarily due to a decrease of $535.3 millionin sales of solar power projects and a decrease of $373.9 million in EPC and development service fees. The decrease was partially offset by anincrease in electricity revenue of $36.7 million generated from solar power plants in operation. Cost of Revenues. Our total cost of revenues decreased by $455.0 million, or 15.7%, from $2,890.9 million for the year ended December 31, 2015 to$2,435.9 million for the year ended December 31, 2016. The decrease was primarily due to a decrease in sales of solar power projects and lower solar modulemanufacturing costs, partially offset by an increase in shipments of our solar91Table of Contentsmodules. Total cost of revenues as a percentage of total net revenues increased slightly from 83.4% for the year ended December 31, 2015 to 85.4% for theyear ended December 31, 2016.•MSS Segment. Cost of revenues incurred by our MSS segment increased by $150.4 million, or 6.6%, from $2,278.8 million for the year endedDecember 31, 2015 to $2,429.2 million for the year ended December 31, 2016. The increase was primarily due to an increase in solar moduleshipments, partially offset by lower solar module manufacturing costs. Our total manufacturing costs in China, including purchasedpolysilicon, wafers and cells was $0.33 per watt in December 2016.For the year ended December 31, 2016, we made approximately $144.3 million of cash deposits relating to antidumping and countervailingduty rulings in the U.S., of which $132.2 million were charged to our cost of revenues. In addition, we booked a true-up provision of$44.1 million primarily associated with prior years' module sales from China to the U.S following the announcement of the preliminary resultsof the third administrative review carried out by the U.S. Department of Commerce of the import into the U.S. of Chinese origin solar productsusing Chinese origin solar cells.•Energy Segment. Cost of revenues incurred by our energy segment decreased by $711.1 million, or 91.4%, from $778.1 million for the yearended December 31, 2015 to $67.0 million for the year ended December 31, 2016. The decrease was primarily due to a decrease in sales ofsolar power projects and a decrease in costs of EPC and development services. Gross Profit. As a result of the foregoing, our total gross profit decreased by $159.6 million, or 27.7%, from $576.8 million for the year endedDecember 31, 2015 to $417.2 million for the year ended December 31, 2016. Our total gross margin decreased from 16.6% for the year ended December 31,2015 to 14.6% for the year ended December 31, 2016.•MSS Segment. Gross profit for our MSS segment decreased by $1.1 million, or 0.3%, from $397.2 million for the year ended December 31,2015 to $396.1 million for the year ended December 31, 2016, primarily due to a decrease in the average selling price of our solar modules aswell as higher charges relating to U.S. antidumping and countervailing duty rulings, partially offset by an increase in shipments of our solarmodules and a decrease in our solar module manufacturing costs. Gross margin decreased from 14.8% for the year ended December 31, 2015 to14.0% for the year ended December 31, 2016, primarily due to a decrease in the average selling price of our solar modules and higher chargesrelating to U.S. antidumping and countervailing duty rulings, partially offset by a decrease in our solar module manufacturing costs. •Energy Segment. Gross profit for our energy segment decreased by $158.4 million, or 80.1%, from $197.9 million for the year endedDecember 31, 2015 to $39.5 million for the year ended December 31, 2016, primarily due to a decrease in sales of solar power projects,partially offset by an increase in electricity sale revenue. Gross margin increased from 20.3% for the year ended December 31, 2015 to 37.1%for the year ended December 31, 2016, primarily due to higher margin from the sale of solar power projects in 2016 and from electricity sale bysolar power plants in operation. Operating Expenses. Our operating expenses decreased by $5.4 million, or 1.6%, from $329.4 million for the year ended December 31, 2015 to$324.0 million for the year ended December 31, 2016. Operating expenses as a percentage of our total net revenues increased from 9.5% for the year endedDecember 31, 2015 to 11.4% for the year ended December 31, 2016. Selling Expenses. Our selling expenses decreased by $4.3 million, or 2.9%, from $149.7 million for the year ended December 31, 2015 to$145.4 million for the year ended December 31, 2016. The92Table of Contentsdecrease was primarily due to decreases of $4.6 million in shipping, handling and storage charges and $5.9 million in external sales commissions, partiallyoffset by an increase of $5.0 million in labor cost of sales and marketing staff. Selling expenses as a percentage of our net total revenues increased from 4.3%for the year ended December 31, 2015 to 5.1% for the year ended December 31, 2016. General and Administrative Expenses. Our general and administrative expenses increased by $35.8 million, or 21.3%, from $168.0 million for the yearended December 31, 2015 to $203.8 million for the year ended December 31, 2016. The increase was primarily due to an increase of $20.6 million inprofessional service fees, and an increase of $18.3 million in fixed assets impairment. General and administrative expenses as a percentage of our total netrevenues increased from 4.8% for the year ended December 31, 2015 to 7.1% for the year ended December 31, 2016. Research and Development Expenses. Our research and development expenses increased by $0.4 million, or 2.1%, from $17.1 million for the yearended December 31, 2015 to $17.4 million for the year ended December 31, 2016. Research and development expenses as a percentage of our total netrevenues were 0.5% for the year ended December 31, 2015 and 0.6% for the year ended December 31, 2016. Income from operations. As a result of the foregoing, income from operations decreased by $154.2 million, or 62.3%, from $247.4 million for the yearended December 31, 2015 to $93.2 million for the year ended December 31, 2016. Other Operating Income, Net. Our other operating income, net, increased by $37.1 million, or 6.9 times, from $5.4 million for the year endedDecember 31, 2015 to $42.5 million for the year ended December 31, 2016. The increase was primarily due to gains from the sales of our solar power projectsin operation in Canada and China during 2016. Interest Expense, Net. Our interest expense, net, increased by $22.2 million, or 59.4%, from $37.3 million for the year ended December 31, 2015 to$59.5 million for the year ended December 31, 2016. Interest expense increased by $15.6 million, or 28.8%, from $54.1 million for the year endedDecember 31, 2015 to $69.7 million for the year ended December 31, 2016. Interest income decreased by $6.6 million, or 39.2%, from $16.8 million for theyear ended December 31, 2015 to $10.2 million for the year ended December 31, 2016. Gain/(Loss) on Change in Fair value of Derivatives. We recorded a gain of $27.3 million on change in fair value of derivatives for the year endedDecember 31, 2016, compared to a loss of $12.2 million for the year ended December 31, 2015. The gain on change in fair value of derivatives for the yearended December 31, 2016 was primarily due to a gain of $24.5 million on change in fair value of warrants and a gain of $4.8 million on change in fair valueof foreign currency derivatives. The gain on change in fair value of foreign currency derivatives for the year ended December 31, 2016 was attributable to again on foreign currency forward contracts that we purchased to hedge the fluctuation of exchange rates of foreign currencies, such as Japanese Yen, BritainPounds, Renminbi and Euros. Foreign Exchange Gain/(Loss). We recorded a foreign exchange gain of $25.4 million for the year ended December 31, 2016, compared to a gain of$22.9 million for the year ended December 31, 2015. The gain for the year ended December 31, 2016 was primarily due to the depreciation of Japanese Yen,British Pounds and Renminbi against the U.S. dollar. Income Tax Expense. We recorded an income tax expense of $18.0 million for the year ended December 31, 2016, compared to $49.5 million for theyear ended December 31, 2015. The decrease in income tax provision in 2016 was primarily due to our lower profit before income tax.93Table of Contents Equity in Earnings/(Loss) of Unconsolidated Investees. Our share of the earnings (loss) of unconsolidated investees was net loss of $4.4 million for theyear ended December 31, 2016, compared to net loss of $0.6 million for the year ended December 31, 2015. Net Income Attributable to Non-Controlling Interest. The net income attributable to non-controlling interest is the share of net income attributable tothe interests of non-controlling shareholders in certain of our subsidiaries in China, Indonesia, Japan and Australia. No net income was generated inconnection with the sale of project assets which was attributable to non-controlling interests for the year ended December 31, 2016. Net Income Attributable to Canadian Solar Inc. As a result of the foregoing, we recorded net income of $65.2 million for the year ended December 31,2016, which was a decrease of $106.6 million, or 62.0%, compared to our net income of $171.9 million for the year ended December 31, 2015.B. Liquidity and Capital ResourcesCash Flows and Working Capital We are required to make prepayments to some suppliers, primarily suppliers of machinery, silicon raw materials, solar ingots, wafers and cells. Eventhough we require some customers to make partial prepayments, there is typically a lag between the time we make our prepayments for silicon raw materialsand the time our customers make their prepayments. Our energy segment required increased funding and use of working capital in 2017 and is expected to continue to require significant funding and use ofworking capital in the future. The time cycles of our solar power project development and operation can vary substantially and take many years. As a result,we may need to make significant up-front investments of resources before the collection of any cash from the sale or operation of these projects. Theseinvestments include payment of interconnection and other deposits, posting of letters of credit, and incurring engineering, permitting, legal and otherexpenses. In addition, we may have to use our existing bank facilities to finance the construction of these solar power projects. Depending on the size andnumber of solar power projects that we are developing and self-financing, our liquidity requirements could be significant. Delays in constructing orcompleting the sale of any of our solar power projects which we are self-financing could also impact our liquidity. In 2017, we financed our operations primarily through short-term and long-term borrowings As of December 31, 2017, we had $561.7 million in cash andcash equivalents and $628.5 million in restricted cash. Our cash and cash equivalents consist primarily of cash on hand, bank balances and demand deposits,which are unrestricted as to withdrawal and use, and have original maturities of three months or less. In 2017, our restricted cash was mainly used as collateralto secure bank acceptances and borrowings. As of March 31, 2018, we had contractual credit facilities with an aggregate limit of approximately $3,282.4 million. In addition, we had non-bindingcredit facilities of approximately $509.2 million. As of March 31, 2018, we had approximately:•$343.1 million of long-term borrowings (non-current portion), of which $230.7 million was secured by equity, accounts receivable,inventories, project assets and property, plant and equipment, and $991.6 million of long-term borrowings (current portion), of which$921.8 million was secured by equity, accounts receivable, inventories, project assets and property, plant and equipment; and •$865.9 million of short-term borrowings, of which $519.9 million was secured by restricted cash, accounts receivable, inventories, land userights, equity, project assets and property, plant and equipment.94Table of Contents The long-term borrowings (non-current portion) will mature during the period from the second quarter of 2019 to the fourth quarter of 2037 and bearinterests ranging from nil to 7.49% per annum. The long-term borrowings (current portion) include $131.7 million with maturity dates in 2018 and$859.9 million with maturity dates ranging from 2018 to the fourth quarter of 2037, which are reclassified as current liabilities because these borrowings areassociated with certain solar power projects that are expected to be sold in 2018. The long-term borrowings (current portion) bear interests ranging from nil to11.25% per annum. The short-term borrowings will mature during 2018 through the first quarter of 2019 and bear interest ranging from 1.06% to 10.5% per annum. Ourfacilities of credit contain no specific extension terms but, historically, we have been able to obtain new short-term borrowings with similar terms shortlybefore they mature. In February 2014, we completed an offering of 3,194,700 common shares and $150 million of 4.25% convertible senior notes. In 2016, we repurchased$22.5 million of the convertible senior notes at weighted average price of $85.43 per $100 par value. In May 2015, we closed a £35.0 million ($47.4 million) project financing facility with Investec Bank plc for a portfolio of four operating solar powerplants with installed capacities totaling 40.2 MW in the United Kingdom. In May 2016, we refinanced a portfolio of four operating solar power plants withBayern LB for a non-recourse facility of £36.4 million ($49.2 million) with a term of 17 years. In February 2018, we completed the sale of these solar powerplants to Greencoat Solar II LP, or Greencoat Solar, and the project facility was assumed by Greencoat Solar. In December 2015, we signed a financing agreement pursuant to which Deutsche Bank AG, Tokyo Branch, agreed to provide a JPY12.0 billion($106.5 million) senior non-recourse project finance credit facility for the construction of our 48 MWp Kumamoto Mashiki solar power plant in Japan. InDecember 2016, the facility agreement was amended and restated with a term of three years. The project reached its COD in the first half of 2017 and theconstruction debt was fully repaid in October 2017. In January 2016, we closed on a tax equity investment commitment with GE Energy Financial Services, for the 75 MW Astoria 2 solar power project inCalifornia, U.S. Santander Bank was the coordinating lead arranger of a five-member bank club, including NORD/LB, Rabobank, Key Bank and CIT Bank,which provided project-level construction debt, a letter of credit facility and a back-leveraged term loan facility, totaling approximately $180.0 million. TheAstoria 2 project has commenced commercial operation. The project-level construction debt was fully repaid and the back-leveraged loan of $64.8 millionhas an eight-year term. In March 2018, we finalized the sale of Astoria 2 to KEPCO, and the balance of back-leveraged loan was assumed by KEPCO. In January 2016, we signed a $60.0 million loan facility agreement with International Finance Corporation, a member of World Bank Group, or IFC, tofund the construction of our solar cell and module production facilities in Vietnam and other countries approved by IFC. The loan facility will expire inJune 2020. On the same day, we signed a subscription agreement with IFC pursuant to which IFC agreed to subscribe for 529,661 of our common shares at$18.88 per share. The subscription was completed in February 2016 and the proceeds of approximately $10.0 million has been used for the construction,operation and general corporate purpose of our solar cell and module production facilities in countries approved by IFC. In February 2016, we secured a credit facility with Ping An Bank, pursuant to which Ping An Bank agreed to provide up to $300 million to Recurrent forits solar power project development, construction and operation activities. The credit facility has a three-year maturity and $150 million has been drawn as ofMarch 31, 2018.95Table of Contents In February 2016, we entered into a financing agreement, pursuant to which Goldman Sachs Japan Co., Ltd. agreed to arrange a JPY3.0 billion($26.6 million) nonrecourse project finance bond with a maturity of 20 years and a fixed coupon rate of 1.4% per annum for the construction of the10.2 MWp Aomori-Misawa solar power project in Japan. In December 2016, the project reached its COD. In July 2016, we entered into a private placement agreement with Prudential Capital Group, pursuant to which, Prudential Capital Group agreed topurchase non-recourse notes with an aggregate principal amount of approximately JPY6.2 billion ($55.0 million). The proceeds from the private placementwere used to finance a portfolio of solar power plants with a total design capacity of 21.2 MWp in Japan. The notes were fully repaid in October 2017. In September 2016, we completed two issues of commercial paper with total principal amount of RMB900 million ($138.3 million). The commercialpaper bears a fixed interest rate ranging from 5.3% to 5.5% per annum, with a tenor of nine months and one year, respectively. We repaid the commercialpaper of RMB500 million ($76.8 million) and RMB400 million ($61.5 million) in June 2017 and September 2017, respectively. In September 2016, we signed a financing agreement with the Export Development Canada, pursuant to which Export Development Canada agreed toprovide bank guarantees or letters of credit of up to $100 million to support our global project development. Royal Bank of Canada and Toronto Branch ofChina Construction Bank Corporation serve as fronting banks on the facility. In June 2017, we have renewed the agreement with the same terms. In September 2016, we obtained a syndicated three-year loan facility for JPY9.6 billion ($85.2 million). Sumitomo Mitsui Banking Corporation acted asthe lead arranger and 13 other financial institutions participated. In December 2017, the facility agreement was amended and the facility amount has beenincreased to JPY9.9 billion ($87.9 million). The loan proceeds have been used to finance solar project development in Japan and for general corporateworking capital requirements. In December 2016, we secured senior and subordinate non-recourse term loan facilities of JPY14.9 billion ($132.2 million) to finance the constructionand operation of a 55 MWp solar power plant in the Yamaguchi prefecture, Japan. The facilities were arranged by Hanwha Asset Management and have amaturity of 17 years. In December 2016, we secured non-recourse term loan facilities of £49.3 million ($66.7 million) to refinance a portfolio of ten solar power plants, withtotal designed capacity of 50 MW in the United Kingdom. National Westminster Bank, a subsidiary of RBS Group, is providing the 18.7-year term facility. InFebruary 2018, we completed the sale of these solar power plants to Greencoat Solar and the facility was assumed by Greencoat Solar. In January 2017, we obtained a five-year syndicated credit facility of $210 million. The Siam Commercial Bank Public Company Limited, or SCB, actedas the lead arranger and China Minsheng Banking Corporation Ltd. is one of the lenders. As of March 31, 2018, the proceeds of $62.6 million have been usedto finance the construction of our solar cell and module manufacturing facilities in Thailand. Under the same facility agreement, we obtained a total ofuncommitted facility of THB4.04 billion ($124.1 million) from SCB to support the operations of our manufacturing company in Thailand. In March 2017, we entered into a three-year credit agreement of JPY4.0 billion ($35.5 million) with Sumitomo Mitsui Finance and Leasing Company,Limited, a member of Sumitomo Mitsui Financial Group. The facility received commitments from five finance leasing institutions. As of March 31, 2018, wehave used proceeds of JPY580.6 million ($5.2 million) from the facility to expand the development of solar power projects in Japan.96Table of Contents In April 2017, we completed our second non-recourse project bond placement of JPY5.4 billion ($47.9 million) with Goldman Sachs Japan Co., Ltd. tofinance the construction of the 19.05 MWp Gunma Aramaki solar power project in Japan. The project bond has a dual-tenor maturity of 1.5 years and20.3 years, representing the initial and extended tenor respectively, within a single-tranche of bond. The bond pays a fixed coupon of 1.2875% per annumduring the initial tenor and, if extended at our option, 1.3588% per annum thereafter. The project reached commercial operation in December 2017. In April 2017, we secured a debt facility of $97 million with Prudential Capital Group and a tax equity investment commitment with U.S. BancorpCommunity Development Corporation, to finance our 92 MWp IS 42 solar power project near Fayetteville, North Carolina. In September 2017, the projectreached its COD and subsequently we closed the sale of IS 42 project to Falck Renewables S.p.A and the balance of project debt was assumed by the buyer. In May 2017, we secured a five-year non-recourse project financing of AUD65 million ($50.8 million) with Bank of Tokyo-Mitsubishi UFJ, Ltd. andClean Energy Finance Corporation for two solar farm power projects, the 17 MW Longreach project and the 30 MW Oakey project, both in Queensland,Australia. The projects have commenced construction and are expected to reach commercial operation in 2018. In October 2017, we entered into a bindingcontract with Foresight Solar Fund Limited, or Foresight, pursuant to which Foresight agreed to acquire 49% interests in Longreach and Oakey. Theacquisition was completed in the first quarter of 2018. In November 2017, we completed our second green project bond placement of JPY7.4 billion ($65.7 million) with Goldman Sachs Japan Co., Ltd. tofinance the operation of our 27.3 MWp Tottori solar power project in Japan. The green project bond consists of a dual-tenor maturity of 1.5 years and18.3 years, representing the initial and extended tenor respectively, within a single-tranche of the bond. The bond pays a fixed coupon of 1.2725% perannum during the initial tenor and, if extended, 1.3113% per annum thereafter. In November 2017, we closed a combined construction loan and construction letter of credit facility with KeyBank N.A. for our 28 MWp Gaskell West1 solar power project. The project reached commercial operation in March 2018. In early 2018, we closed the sale of the project to Southern Power and theoutstanding construction loan of $18.6 million was fully repaid. In December 2017, we secured a non-recourse 17-year term facility of £41.9 million ($56.7 million) with Bayern LB to refinance a portfolio of tenoperating solar power plants, totaling 52.2 MW, in the United Kingdom. In February 2018, we completed the sale of these solar power plants to GreencoatSolar, and the facility was assumed by Greencoat Solar. In March 2018, we secured a non-recourse 18.5 year term facility of JPY16 billion ($142.0 million) from Shinsei Bank, Limited to finance theconstruction of our 53.4 MWp Oita Hijimachi solar power project in Japan. Construction of the project commenced in November 2017 and the project isexpected to begin commercial operation in 2019.Although no assurance can be given, we believe that we will be able to fully execute our business plans andto renew substantially all our existing bank borrowings as they become due, if needed. We believe that adequate sources of liquidity will exist to fund ourworking capital and capital expenditures requirements and to meet our short-term debt obligations and other liabilities and commitments as they becomedue. As of the date of this annual report, we were in compliance with all material terms of our borrowing agreements.97Table of Contents Due to market competition, in many cases, we offer credit terms to our customers ranging from 30 days up to 90 days with small advance paymentsranging from 5% to 20% of the sale prices. The prepayments are recorded as current liabilities under advances from customers, and amounted to$76.2 million, $90.1 million and $51.7 million as of December 31, 2015, 2016 and 2017, respectively. As the market demand for our products has changedand as we have diversified our geographical markets, we have increased and may continue to increase our credit term sales to certain creditworthy customersafter careful review of their credit standings and acceptance of export credit insurance by Sinosure, or other risk mitigation channels such as local creditinsurance or factoring. The following table sets forth a summary of our cash flows for the periods indicated:Operating Activities Net cash provided by operating activities was $203.9 million in 2017, compared to net cash used in operating activities of $278.1 million in 2016. Thechange was primarily due to $37.7 million increase in net income and $399.2 million decrease in net operating assets in 2017. Net cash used in operating activities was $278.1 million in 2016, compared to net cash provided by operating activities of $413.7 million in 2015. Thechange was primarily due to $511.1 million increase in working capital investment and $108.0 million decrease of net income in 2016. Net cash provided by operating activities was $413.7 million in 2015, compared to $265.1 million in 2014. The change was primarily due to improvedworking capital management, partially offset by a decrease in net income from $243.9 million to $173.3 million.Investing Activities Net cash used in investing activities was $341.2 million in 2017, compared to net cash used in investing activities of $1,042.6 million in 2016. Thechange was primarily due to a decrease of $791.1 million in payments for construction of our solar power systems, partially offset by $152.6 million increasein restricted cash. Net cash used in investing activities was $1,042.6 million in 2016, compared to $999.1 million in 2015. The change was primarily due to $468.7 millionincrease in payments for construction of our solar power systems and manufacturing plants, partially offset by a reduced payment of $196.8 million for theacquisition of subsidiaries, $151.5 million decrease in restricted cash and $90.1 million net proceeds from the disposal of solar power systems. Net cash used in investing activities was $999.1 million in 2015, compared to $116.0 million in 2014. The change was primarily due to an increase inpayments of $551.9 million for construction of our solar power systems, net payments of $196.8 million to acquire subsidiaries, as well as an increase inrestricted cash mainly used as collateral to secure our bank acceptances and borrowings.98 As of December 31, 2015 2016 2017 (in thousands of $) Net cash provided by (used in) operating activities 413,658 (278,073) 203,920 Net cash used in investing activities (999,104) (1,042,557) (341,215)Net cash provided by financing activities 619,483 1,299,823 165,283 Net increase (decrease) in cash and cash equivalents 3,536 (33,119) 49,432 Less: net increase (decrease) in cash and cash equivalents classified within assetsheld-for-sale at end of period — 8,921 (1,208)Cash and cash equivalents at the beginning of the year 549,543 553,079 511,039 Cash and cash equivalents at the end of the year 553,079 511,039 561,679 Table of ContentsFinancing Activities Net cash provided by financing activities was $165.3 million in 2017, compared to net cash provided by financing activities of $1,299.8 million in2016. The change was primarily due to a decrease of $405.5 million proceeds from borrowings, a decrease of $415.5 million in tax equity contributionpayments in the U.S. compared with 2016 and repayment of $139.0 million of short-term commercial paper in China during 2017. Net cash provided by financing activities was $1,299.8 million in 2016, compared to $619.5 million in 2015. The change was primarily due to$415.5 million additional contribution payments from tax equity partners of our U.S. projects and net proceeds of $134.3 million from the issuance of short-term commercial paper in China during 2016. Net cash provided by financing activities was $619.5 million in 2015, compared to $191.9 million in 2014. The change was primarily due to a netincrease in bank borrowings during 2015. As of December 31, 2017, we had total outstanding credit facilities of $3,963.5 million, of which $591.5 million was undrawn and available. We believethat our current cash and cash equivalents, anticipated cash flow from operations and existing banking facilities will be sufficient to meet our anticipatedcash needs, including our cash needs for working capital and capital expenditures, for the 12 months ending December 31, 2018. We may, however, requireadditional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. As of December 31, 2017, we had outstanding short-term borrowings of $676.8 million with Chinese banks. Between January 1, 2018 and March 31,2018, we obtained new borrowings of $250.1 million from Chinese banks, including $63.9 million with due dates beyond December 31, 2018. Also, betweenJanuary 1, 2018 and March 31, 2018, we renewed existing bank facilities of $193.3 million from Chinese banks with due dates beyond December 31, 2018.The availability of commercial loans from Chinese commercial banks may be affected by administrative policies of the PRC government, which in turn mayaffect our plans for business expansion. If our existing cash or the availability of commercial bank borrowings is insufficient to meet our requirements, wemay seek to sell additional equity securities or debt securities or borrow from other sources. We cannot assure that financing will be available in the amountswe need or on terms acceptable to us, if at all. The issuance of additional equity securities, including convertible debt securities, would dilute the holdings ofour shareholders. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could result inoperating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additionalequity or debt financing as required, our business operations and prospects may suffer.Capital Expenditures We made capital expenditures of $642.8 million, $1,111.5 million and $311.0 million in 2015, 2016 and 2017, respectively. Our capital expenditureswere primarily to maintain and increase our ingot, wafer, cell and module manufacturing capacity and to develop solar power systems. As of December 31,2017, our commitments for the purchase of property, plant and equipment were $201.6 million.Restricted Net Assets Our PRC subsidiaries are required under PRC laws and regulations to make appropriations from net income as determined under accounting principlesgenerally accepted in the PRC, or PRC GAAP, to non-distributable reserves, which include a general reserve, staff welfare and bonus reserve. The generalreserve is required to be made at not less than 10% of the profit after tax as determined under PRC GAAP. The boards of directors of our PRC subsidiariesdetermine the staff welfare and bonus99Table of Contentsreserves. The general reserves are used to offset future extraordinary losses. Our PRC subsidiaries may, upon a resolution of their boards of directors, converttheir general reserves into capital. The staff welfare and bonus reserves are used for the collective welfare of the employees of the PRC subsidiaries. Inaddition to their general reserves, our PRC subsidiaries are required to obtain approval from the local government authorities prior to decreasing anddistributing any registered share capital to their shareholders. Accordingly, both the appropriations to general reserve and the registered share capital of ourPRC subsidiaries are considered as restricted net assets. These restricted net assets amounted to $396.3 million, $411.9 million and $461.8 million as ofDecember 31, 2015, 2016 and 2017, respectively. Our operations in China are subject to certain restrictions on the transfer and use of cash within our company. Transfers of cash between our PRCsubsidiaries and the Canadian parent company are restricted to normal trade business payments and any further capital contribution from the Canadian parentcompany may only be made under China's existing foreign currency regulations. Foreign exchange transactions by our PRC subsidiaries under most capitalaccounts continue to be subject to significant foreign exchange controls and require the approval of or registration with PRC governmental authorities. Inparticular, if we finance our PRC subsidiaries by means of additional capital contributions, certain government authorities, including the Ministry ofCommerce or its local counterparts, must approve these capital contributions. These limitations could affect the ability of our Chinese subsidiaries to obtainforeign exchange through equity financing. As of December 31, 2017, $353.4 million of undistributed earnings in our PRC subsidiaries are considered to be indefinitely reinvested so that noprovision of withholding taxes has been provided in our consolidated financial statements. Our PRC subsidiaries are required to make appropriations of atleast 10% of net income, as determined under PRC GAAP, to a non-distributable general reserve. After making this appropriation, the balance of theundistributed earnings is distributable. Should our PRC subsidiaries subsequently distribute their distributable earnings, they are subject to applicablewithholding taxes to the PRC State Administration of Tax.C. Research and Development We have four research and development centers with state-of-the-art equipment: the Center for Solar Cell Research, the Center for Module Development,the Center for System Product and the Center for Photovoltaic Testing and Reliability Analysis. The Center for Solar Cell Research is focused on developingnew high efficiency solar cells and advanced solar cell processing technologies. The Center for Module Development is focused on module innovations,developing new module designs for different markets and application. The Center for System Product aims to develop high quality and low cost off-gridproducts like total kits, energy storage system, as well as smart grid. It also provides system performance evaluation and LCOE benchmarking. The Center forPhotovoltaic Testing and Reliability Analysis has been accredited and operating according to ISO/IEC17025 standard since 2009 and is focused on solarmodule and module components reliability testing and qualification, and solar module performance analysis. It actively participates in and contributes toIEC standard development on solar modules, such as IEC 62804 test method on PID and has been qualified by VDE, CSA, Intertek and TUV Rheinland intheir Test Data Acceptance Programs. As of December 31, 2017, we had approximately 477 employees engaged in research, product development and engineering. Our research and development activities are generally focused on the following areas:•continuously improving solar cell conversion efficiency and developing new structures and technologies for higher efficiencies; •developing modules with improved design and assembly methods to have higher power output;100Table of Contents•improving manufacturing yield and reliability of solar modules and reducing manufacturing costs; •developing smart modules integrated with optimizer or micro-inverters; •testing, data tracing and analysis for module performance and reliability; •designing and developing customized solar modules and products to meet customer requirements; and •developing new methods and equipment for analysis and quality control of incoming materials (such as polysilicon, wafers, cells and othermodule components). Going forward, we will focus on the following research and development initiatives which we believe will enhance our competitiveness:•High efficiency cells. We have finished commercializing our in-house developed black silicon technology on multi wafers. All our multi cellcapacity is converted as at December 31, 2017. This self-developed, wet chemical texturing is a unique, IP-protected and cost effectivetechnology and will significantly increase solar cell efficiency due to advanced light absorption and surface passivation. We are continuouslycommercializing PERC (passivated emitter and rear cell) technology in order to further increase cell efficiency. Mass production of PERCcommenced in our Yancheng facility in March 2016. We are now expanding the technology to include multi crystalline (P4 technology) andusing it in our manufacturing sites in Yancheng, Suzhou and Thailand as well. We also have focused research and development initiatives onN-type bifacial cell, PASSCon cell, heterojunction cell, IBC cell and other high efficiency cell designs. With these advanced technologies, wecan significantly lower the LCOE (levelized cost of energy) on the system level and improve our products' market competitiveness. •Solar module manufacturing technologies. Since the opening of our Center for Photovoltaic Testing and Reliability Analysis, we havefocused on developing state-of-the-art testing and diagnostic techniques that improve solar module production yield, efficiency andreliability. We are the first to convert all our production lines to mass production of five bus-bar cells and modules. We will extend our productcompetitiveness by commencing volume production of our multi bus-bar cell and modules with higher module wattage in the second quarterof 2018. HDM modules are also being produced and shipped. We have developed new technology for PID-resistant modules, which havereceived certification by the TUV SUD and the VDE testing and certification institutes. Our black silicon and Quintech module technologyhas improved the output power. We also started mass production of double-glass modules that are market-leading in yield, cell-to-modulepower loss and cost, in 2017. •Power system integration and solar application products. We began to explore power system integration products and expanded our researchand development efforts in solar application products and commercial sales of such products in 2015. •Solar power system development, energy storage system, off-grid power system, micro grid system and smart grid system. As we continue tomove into the downstream energy segment, we have strengthened the capabilities of our engineering staff and increased investment inthese areas.D. Trend Information Other than as disclosed elsewhere in this annual report on Form 20-F, we are not aware of any trends, uncertainties, demands, commitments or events thatare reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosedfinancial information to be not necessarily indicative of future operating results or financial conditions.101Table of ContentsE. Off Balance Sheet Arrangements We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder's equity, or that are not reflected in ourconsolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that servesas 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 ObligationsContractual Obligations and Commercial Commitments The following table sets forth our contractual obligations and commercial commitments as of December 31, 2017: The above table excludes accrued warranty costs of $55.7 million, liability for uncertain tax positions of $9.3 million, deferred tax liabilities—non-current of $5.6 million and loss contingency accruals of $25.7 million as we are unable to reasonably estimate the timing of future payments of102 Payment Due by Period Total Less Than1 Year 1-3 Years 3-5 Years More Than5 Years (In thousands of $) Short-term debt obligations(1) 2,123,891 2,123,891 — — — Interest related to short-term debt obligations(2) 47,950 47,950 — — — Operating lease obligations 110,660 10,230 16,909 11,854 71,667 Capital lease obligations 110,296 59,340 47,531 3,425 — Purchase obligations(3) 1,389,411 1,382,763 6,648 — — Long-term debt obligations 404,341 — 375,731 18,510 10,100 Interest related to long-term debt obligations(4) 32,508 15,804 13,673 1,903 1,128 Convertible notes(5) 127,500 — 127,500 — — Interest related to convertible notes(6) 6,141 5,419 722 — — Financing liability 12,243 — — 12,243 — Interest related to Financing liability 2,806 582 1,163 1,061 — Total 4,367,747 3,645,979 589,877 48,996 82,895 (1)Includes $166.2 million of short-term and long-term borrowings that have been reclassified to liabilities held-for-sale as a result of thereclassification of solar power systems to assets held-for-sale. (2)Interest rates range from 0% to 11.25% per annum for short-term debt obligations. For the interest related to the short-term and long-term borrowings that have been reclassified to liabilities held-for-sale, the maturity dates of these borrowings are based on currentestimates. (3)Includes commitments to purchase property, plant and equipment of $201.6 million and raw materials of $1,187.8 million. (4)Interest rates range from 0% to 7.49% per annum for long-term debt obligations. (5)Assumes no redemption of convertible notes and none of the convertible notes will be converted into ordinary shares. (6)Interest rate is 4.25% per annum on the principal outstanding.Table of Contentsthese liabilities. Other long-term liabilities of $38.9 million were also excluded in the above table. For additional information, see the notes to ourconsolidated financial statements, included herein.G. Safe Harbor This annual report on Form 20-F contains forward-looking statements that relate to future events, including our future operating results, our prospectsand our future financial performance and condition, results of operations, business strategy and financial needs, all of which are largely based on our currentexpectations and projections. These statements are made under the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. Youcan identify these forward-looking statements by terminology such as "may," "will," "expect," "anticipate," "future," "intend," "plan," "believe," "estimate,""is/are likely to" or similar expressions. Forward-looking statements involve inherent risks and uncertainties. These forward-looking statements include,among other things, statements relating to:•our expectations regarding the worldwide supply and demand for solar power products and the market demand for our products; •our beliefs regarding the importance of environmentally friendly power generation; •our beliefs regarding the value of and ability to monetize our portfolio of solar power projects; •our expectations regarding governmental support for solar power; •our beliefs regarding the fluctuation in availability of silicon, solar wafers and solar cells; •our beliefs regarding our ability to resolve our disputes with suppliers with respect to our long-term supply agreements; •our beliefs regarding the continued growth of the solar power industry; •our beliefs regarding the competitiveness of our solar module products; •our expectations with respect to increased revenue growth and improved profitability; •our expectations regarding the benefits to be derived from our supply chain management and vertical integration manufacturing strategy; •our ability to continue developing our in-house solar components production capabilities and our expectations regarding the timing andproduction capacity of our internal manufacturing programs; •our ability to secure adequate silicon and solar cells to support our solar module production; •our beliefs regarding the effects of environmental regulation; •our beliefs regarding the changing competitive landscape in the solar power industry; •our future business development, results of operations and financial condition; •competition from other manufacturers of solar power products and conventional energy suppliers; •our ability to expand our products and services and to successfully execute plans for our energy segment; •our ability to develop, build and sell solar power projects in Canada, the U.S., Japan, China, Brazil, Mexico, the United Kingdom, Australiaand elsewhere; and •our beliefs with respect to the outcome of the investigations and litigation to which we are a party.103Table of Contents Known and unknown risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different from anyfuture results, performance or achievements expressed or implied by forward-looking statements. See "Item 3. Key Information—D. Risk Factors" for adiscussion of some risk factors that may affect our business and results of operations. These risks are not exhaustive. Other sections of this annual report mayinclude additional factors that could adversely influence our business and financial performance. Moreover, because we operate in an emerging and evolvingindustry, new risk factors may emerge from time to time. We cannot predict all risk factors, nor can we assess the impact of these factors on our business or theextent to which any factor, or combination of factors, may cause actual result to differ materially from those expressed or implied in any forward-lookingstatement. We do not undertake any obligation to update or revise the forward-looking statements except as required under applicable law. ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. Directors and Senior Management The following table sets forth information regarding our directors and executive officers as of the date of this annual report on Form 20-F.Directors Dr. Shawn (Xiaohua) Qu has served as our chairman, president and chief executive officer since founding our company in October 2001. Through hisleadership, we became a public listed company on the Nasdaq in 2006 and have since firmly established ourselves among the top ranked manufacturers ofsolar PV products globally. Prior to founding Canadian Solar, Dr. Shawn Qu held various positions in product engineering, business development andstrategic planning at ATS Automation Tooling Systems, Inc., or ATS, and its solar subsidiary Photowatt International S.A. Prior to ATS, Dr. Shawn Qu was aresearch scientist at Ontario Power Generation where he worked as a process leader in its solar product commercialization team. In 2011, Dr. Shawn Qubecame a visiting professor at Tsinghua University, one of the most prestigious universities in China. Dr. Shawn Qu has published research articles inacademic journals including IEEE Quantum Electronics, Applied Physics Letter and Physical Review. He received a Ph.D. in material sciences in 1995 fromthe University of Toronto, focusing on semiconductor super lattice and optical effects. He also holds a Master of Science in physics from University ofManitoba and a Bachelor of Science in applied physics from Tsinghua University in Beijing.104Name Age Position/TitleShawn (Xiaohua) Qu 54 Chairman of the Board, President and Chief Executive OfficerRobert McDermott 76 Lead Independent DirectorLars-Eric Johansson 71 Independent DirectorHarry E. Ruda 59 Independent DirectorAndrew (Luen Cheung)Wong 60 Independent DirectorHuifeng Chang 52 Senior Vice President and Chief Financial OfficerGuangchun Zhang 60 Senior Vice President and Chief Operations OfficerYan Zhuang 54 Senior Vice President, Chief Commercial Officer and President of Modules and SystemsSolutions BusinessArthur (Jian) Chien 57 Senior Vice President, Chief Strategy Officer and President of Energy BusinessJianyi Zhang 60 Senior Vice President, General Counsel and Chief Compliance OfficerGuoqiang Xing 54 Senior Vice President and Chief Technology OfficerTable of Contents Mr. Robert McDermott has served as lead independent director of our company since August 2006. Mr. McDermott is a corporate director and consultant.Before July 2011, he was a partner with McMillan LLP, a business law firm based in Canada, where he practiced business law, with an emphasis on mergersand acquisitions, securities and corporate finance, and advised boards and special committees of public companies on corporate governance matters. He isnow a counsel to the firm. Mr. McDermott was admitted to the Ontario Bar in Canada in 1968. He has a Juris Doctor degree from the University of Toronto in1966 and a Bachelor of Arts degree from the University of Western Ontario in 1963. Mr. Lars-Eric Johansson has served as an independent director of our company since August 2006. Mr. Johansson has worked in finance and controlspositions for more than thirty years in Sweden and Canada. He has been the president and chief executive officer of Ivanhoe Mines Ltd. (formerlyIvanplats Inc. and Ivanhoe Nickel & Platinum Ltd.), a Canadian public mining company since May 1, 2007. From 2003 to 2008, Mr. Johansson was a directorand chairperson of the audit committee of Harry Winston Diamond Corporation, a specialist diamond company with assets in the mining and retail segmentsof the diamond industry. From May 2004 to April 2006, he was an executive vice president and the chief financial officer of Kinross Gold Corporation, agold mining company dually listed on the Toronto Stock Exchange and the New York Stock Exchange. Between June 2002 and November 2003,Mr. Johansson was an executive vice president and chief financial officer of Noranda Inc., a Canadian mining company dually listed on the Toronto StockExchange and the New York Stock Exchange. Until May 2004, Mr. Johansson served as a special advisor at Noranda Inc. From 1989 to May 2002, he was thechief financial officer and senior vice president of Falconbridge Limited, a mining and metals company in Canada listed on the Toronto Stock Exchange. Hehas chaired the audit committee of Golden Star Resources Ltd., a gold mining company dually listed on the Toronto Stock Exchange and American StockExchange, from 2006 to 2010. From 2002 to 2003, he was also a director of Novicor Inc., a company formerly listed on the Toronto Stock Exchange.Mr. Johansson holds an MBA, with a major in finance and accounting, from Gothenburg School of Economics in Sweden. Dr. Harry E. Ruda has served as an independent director of our company since July 2011. He is the Director of the Centre for Advanced Nanotechnology,the Stanley Meek Chair in Nanotechnology and Professor of Applied Science and Engineering at the University of Toronto, Canada. From 1982 to 1984, hedeveloped one of the first theories for electron transport in selectively doped two dimensional electron gas heterostructures, while working as an IBM post-doctoral fellow. From 1984 to 1989, he was a senior scientist at 3M Corporation, developing some of the first models for electronic transport and opticalproperties of wide bandgap II-VI semiconductors. Dr. Ruda joined the faculty of the University of Toronto in 1989 in the Materials Science and Engineeringand Electrical and Computer Engineering Departments. His research interests focus on the fabrication and modeling of semiconductor nanostructures withapplications in the fields of optoelectronics, energy and sensing. Dr. Ruda was one of the founders of a Canadian National Centre of Excellence in Photonics.He has served on the National Science and Engineering Council of Canada and on other government panels, including those of the Department of Energy,Environmental Protection Agency, National Science Foundation in the U.S. and the Royal Academy of Engineering and Engineering Physical SciencesResearch Council in the United Kingdom. Dr. Ruda is a Fellow of the Royal Society of Canada, a Fellow of the Institute of Physics, a Fellow of the Instituteof Nanotechnology, and a Fellow of the Canadian Academy of Engineering. He obtained his Ph.D. in semiconductor physics from the Massachusetts Instituteof Technology in 1982. Mr. Andrew (Luen Cheung) Wong has served as an independent director of our company since August 2014. Mr. Wong currently serves as a director anda member of the audit committee, nomination and remuneration committee of China CITIC Bank Corporation Limited, a company listed on The StockExchange of Hong Kong, since 2013. He has also served as a director of Chubb Life105Table of ContentsInsurance Company Ltd. since 2008, and is an independent director and the vice-chairman of Huazhong In-vehicle Holdings Company Limited, which islisted in Hong Kong Stock Exchange. Previously, Mr. Wong was the director of Intime Retail (Group) Co. Ltd., a company listed on The Stock Exchange ofHong Kong, between 2013 and 2014, and was the director and a member of audit committee, risk management committee, nomination and remunerationcommittee of China Minseng Bank, a company listed on The Stock Exchange of Hong Kong, from 2006 to 2012. From 1982 to 2006, Mr. Wong held seniorpositions at the Royal Bank of Canada, the Union Bank of Switzerland, Citicorp International Limited, a merchant banking arm of Citibank, Hang Seng BankLimited and DBS Bank Limited, Hong Kong. Mr. Wong was awarded the National Excellent Independent Director by the Shanghai Stock Exchange in 2010and received the Medal of Honour (Hong Kong SAR) from the Hong Kong SAR Government in 2011. Mr. Wong obtained his Bachelor of Social Sciences(Honours) degree from the University of Hong Kong in 1980 and a Master of Philosophy degree from Hong Kong Buddhist College in 1982.Executive Officers Dr. Huifeng Chang has served as our senior vice president and chief financial officer in May 2016. He has 17 years of experience in capital markets,financial investment and risk management. Before joining us, Dr. Chang was the co-head of Sales & Trading at the U.S. subsidiary of China InternationalCapital Corp (CICC) from 2010 to 2015. Prior to that, he was the CEO of CSOP Asset Management based in Hong Kong from early 2008 to 2010, investingfunds from China in the international markets. From 2000 to 2008, Dr. Chang was vice president and an equity proprietary trader at Citigroup EquityProprietary Investments in New York. Before going to New York, Dr. Chang worked at Kamakura Corp in Hawaii as a risk consultant to banks in Asia. Hereceived a Ph.D. in soil physics and MBA from University of Hawaii in the early 1990s, M.S. degree from Academia Sinica in 1987 and B.S. degree fromNanjing Agricultural University in 1984. Mr. Guangchun Zhang has served as our chief operations officer since December 2012 and has over 18 years of experience in the PV industry. Prior tojoining us, Mr. Zhang worked for Suntech Power Holdings Co., Ltd, as senior vice president for research and development and industrialization ofmanufacturing technology since December 2005. Prior to joining Suntech, Mr. Zhang previously worked at the Centre for Photovoltaic Engineering at theUniversity of New South Wales in Australia and Pacific Solar Pty. Limited from June 1994 to November 2005. Mr. Zhang was an associate professor inShandong Technology University in China from February 1982 to May 1994. Mr. Zhang received his bachelor degree in 1982 from the School of ElectronicEngineering at Shandong Industrial Institute. Mr. Yan Zhuang has served as our chief commercial officer since May 2012. He also served as our senior vice president of global sales and marketingsince July 2011, and prior to that as our vice president of global sales and marketing since June 2009. He was an independent director of our company fromSeptember 2007 to June 2009. Mr. Zhuang has worked in corporate branding, sales and marketing positions with, or provided consulting services to, avariety of multinational companies for over 15 years. In 2008, he founded and became a director of INS Research and Consulting. Mr. Zhuang was the headof Asia for Hands-on Mobile, Inc., a global media and entertainment company with operations in China, South Korea and India, from 2006 to 2007. Hepreviously served as our senior vice president of business operations and marketing in Asia. Before joining Hands-on Mobile, Inc., he held various marketingand business operation positions with Motorola Inc., including as its Asia Pacific regional director of marketing planning and consumer insight. Prior to that,he was a marketing consultant in Canada and China. Mr. Zhuang holds a bachelor's degree in electrical engineering from Northern Jiaotong University,China, a Master of Science degree in applied statistics from the University of Alberta, Canada and a Master of Science degree in marketing management fromthe University of Guelph, Canada.106Table of Contents Mr. Arthur (Jian) Chien joined us as senior vice president and chief strategy officer, and president of our energy business in the summer of 2015. He hasmore than two decades of experience in investment management, capital markets, large scale manufacturing management, and renewable energy projectdevelopment. From 2007 to 2010, he served as our chief financial officer and held other positions throughout the Company. Between these two periods ofservice with Canadian Solar, Mr. Chien was the chief executive officer and managing director of Talesun Solar, a Chinese based solar project developer andEPC contractor. Earlier in his career, he held various management positions with companies in Canada, Europe and China, including chief financial officer ofthe Greater China regional office of the Bekeart Group of Belgium, chief financial officer of China Grand Enterprise Ltd., and managing director of BeijingEncon Investment. He has also served as a board director with two Chinese listed companies. Mr. Chien graduated with a Science degree from the Universityof Science and Technology of China in 1982. He received a Master's degree in Economics and was a Ph.D. candidate from the University of Western Ontario,Canada. Mr. Jianyi Zhang joined us at the end of February 2016 as senior vice president and chief legal officer, and was appointed as chief compliance officer inApril 2016. After graduation from Washington University School of Law, Mr. Zhang worked at Troutman Sanders LLP as an associate from June 1993 toSeptember 1994. Thereafter, he formed a law firm Su & Zhang in Los Angeles, California. He rejoined Troutman Sanders LLP as an associate in April 1995,became a partner in September of 1999 and worked in that position until December 2001. From January 2002 to June 2005, Mr. Zhang worked at WalmartStores, Inc. first as a senior corporate counsel II and then as senior assistant general counsel. From July 2005 to February 2016, he served, consecutively, assenior advisor to Chinese law firms of Jingtian & Gongcheng Law Firm, Runbo Law Firm, East Associates Law Firm and East & Concord Partners in Beijing.Mr. Jianyi Zhang received his B.A. degree and M.A. degree from the University of Helsinki, Finland in 1982 and 1983, respectively. After graduation fromthe University of Helsinki in 1983, Mr. Zhang worked at the Chinese Foreign Ministry until September 1989. Thereafter, he went to study at WashingtonUniversity School of Law in St. Louis, Missouri and received his J.D. degree in 1992. Dr. Guoqiang Xing serves as senior vice president and chief technology officer. He joined us in November 2014 as corporate vice president oftechnology. He has over 22 years of research and development experience in photovoltaic and semiconductor industries. From September 2009 toOctober 2014, he was the chief technology officer of Hareon Solar, a company listed on the Shanghai Stock Exchange. He was also employed by JA Solar, acompany listed on the NASDAQ Stock Market, as the R&D director from January 2008 to August 2009. His experience in the semiconductor industryincludes serving as (a) a R&D advanced process director at HHNEC, a company based in Shanghai, from 2005 to 2008, (b) a R&D advanced process directorat Semiconductor Manufacturing International, a company listed on the Hong Kong Stock Exchange, from 2002 to 2005, and (c) a member of technical staffat Kilby Center, Texas Instruments, a company listed on the New York Stock Exchange, in Dallas, Texas from 1995 to 2002. He received his Bachelor ofScience degree in Physics from Peking University in 1984 and his Ph.D. in Physical Chemistry from Rice University, Houston, Texas in 1993. He was apostdoctoral research scientist in the Chemistry Department at Columbia University from 1993 to 1995.Duties of Directors Under the CBCA, our directors are required to manage, or to supervise the management of, the business and affairs of our company. They have a duty ofloyalty to act honestly and in good faith with a view to our best interests. They also have a duty to exercise the care, diligence and skill that a reasonablyprudent person would exercise in comparable circumstances. A shareholder has the right to seek damages if a duty owed by our directors is breached.107Table of Contents The functions and powers of our board of directors include:•convening shareholder meetings and reporting to shareholders at such meetings; •declaring dividends and authorizing other distributions to shareholders; •appointing officers and determining the term of office of officers; •exercising the borrowing powers of our company and mortgaging the property of our company; and •approving the issuance of shares.B. Compensation of Directors and Executive OfficersCash Compensation We paid our directors and executive officers aggregate cash remuneration, including salaries, bonuses and benefits in kind, of approximately$5.2 million for 2017. Of this amount, we paid approximately $0.3 million to our four independent directors and approximately $4.9 million to our executiveofficers. The total amount set aside or accrued by us and our subsidiaries to provide pension, retirement or similar benefits for our directors and executiveofficers was approximately $0.1 million in 2017.Share Incentive Plan In March 2006, we adopted a share incentive plan, or the Plan. The purpose of the Plan is to promote the success and enhance the value of our company by linking the personal interests of the directors, employees andconsultants to those of the shareholders and providing the directors, employees and consultants with an incentive for outstanding performance to generatesuperior returns to the shareholders. The Plan is also intended to motivate, attract and retain the services of the directors, employees and consultants uponwhose judgment, interest and effort the successful conduct of our operations is largely dependent. In September 2010, the shareholders approved an amendment to the Plan to increase the maximum number of common shares which may be issuedpursuant to all awards of restricted shares, options and restricted share units under the Plan to the sum of (i) 2,330,000 plus (ii) the sum of (a) 1% of thenumber of our outstanding common shares on the first day of each of 2007, 2008 and 2009 plus (b) 2.5% of our outstanding common shares on the first dayof each calendar year after 2009. As of March 31, 2018, the maximum number of common shares which may be issued pursuant to all awards of restrictedshares, options and restricted share units under the Plan was 14,490,000 common shares, of which 566,190 restricted shares, 3,354,543 options, and4,769,068 restricted share units (in each case net of forfeitures) have been awarded, leaving 5,800,199 common shares available to be issued. The following describes the principal terms of the Plan. Types of Awards. We may make the following types of awards under the Plan:•restricted shares, which are common shares that are subject to certain restrictions and may be subject to risk of forfeiture or repurchase; •options, which entitle the holder to purchase our common shares; and •restricted share units, which entitle the holder to receive our common shares Plan Administration. The Compensation Committee of our board of directors administers the Plan, except with respect to awards made to our non-employee directors, where the entire board of108Table of Contentsdirectors administers the Plan. The Compensation Committee or the full board of directors, as appropriate, determines the provisions, terms, and conditions ofeach award. Award Agreement. Awards are evidenced by an award agreement that sets forth the terms, conditions and limitations for each award. Eligibility. We may grant awards to employees, directors and consultants of our company or any of our related entities, which include our subsidiariesand any entities in which we hold a substantial ownership interest. We may, however, grant options that are intended to qualify as incentive share optionsonly to our employees. Acceleration of Awards upon Corporate Transactions. Outstanding awards will accelerate upon a change-of-control where the successor entity doesnot assume our outstanding awards. In such event, each outstanding award will become fully vested and immediately exercisable, the transfer restrictions onthe awards will be released and the repurchase or forfeiture rights will terminate immediately before the date of the change-of-control transaction. Exercise Price and Term of Options. In general, the Compensation Committee determines the exercise price of an option and sets out the price in theaward agreement. The exercise price may be a fixed or variable price related to the fair market value of our common shares. If we grant an incentive shareoption to an employee who, at the time of that grant, owns shares representing more than 10% of the voting power of all classes of our share capital, theexercise price cannot be less than 110% of the fair market value of our common shares on the date of that grant and the share option is exercisable for no morethan five years from the date of that grant. The term of an award may not exceed ten years from the date of the grant. Vesting Schedule. In general, the Compensation Committee determines the vesting schedule.Restricted Shares The following table summarizes, as of March 31, 2018, the restricted shares granted under the Plan to our executive officers and to other individuals,individually and each as a group. We have not granted any restricted shares to our directors. The restricted shares granted in May 2006 vested over a two-yearperiod beginning in March 2006. The vesting periods for all other restricted shares are indicated in the notes below.109Name RestrictedSharesGranted RestrictedSharesVested RestrictedSharesForfeited Date of Grant Employees Twelve individuals as a group 330,860 330,860 — May 30, 2006 Hanbing Zhang(3) 116,500(4) 116,500 — July 28, 2006 Employees as a group 447,360 447,360 — Other Individuals One individual 2,330(1) 2,330 — May 30, 2006 One individual 116,500(2) 116,500 — June 30, 2006 Other Individuals as a group 118,830 118,830 — Total Restricted Shares 566,190 566,190 — (1)Vest on accelerated termination. (2)Vest over a two-year period from the date of grant. (3)The wife of Dr. Shawn Qu, our founder, Chairman, President and Chief Executive Officer. (4)Vest over a four-year period from the date of grant. Table of ContentsOptions The following table summarizes, as of March 31, 2018, the options granted under the Plan to our directors and executive officers and to otherindividuals, individually and as a group. The options granted to our independent directors vest immediately. Unless otherwise noted, all other optionsgranted vest over a four-year period (one-quarter on each anniversary date) from the date of grant, and exercise prices are equal to the average of the tradingprices of the common shares for the five trading days preceding the date of grant.110Name CommonSharesUnderlyingOptionsGranted CommonSharesUnderlyingOptionsExercised CommonSharesUnderlyingOptionsForfeited CommonSharesUnderlyingOptionsOutstanding ExercisePrice($ perShare) Date of Grant Date ofExpiration Directors: Shawn (Xiaohua) Qu 20,000 — — 20,000 3.18 March 12, 2009 March 11, 2019 25,000 — — 25,000 11.33 August 27, 2010 August 26, 2020 18,779 — — 18,779 9.33 May 20, 2011 May 19, 2021 Robert McDermott 46,600(1) 46,600 — — 15.00(3) August 8, 2006 — 23,300(2) 23,300 — — 9.88 July 1, 2007 — 23,300(2) — — 23,300 41.75(4) June 26, 2008 June 25, 2018 23,300(2) — — 23,300 13.75(4) June 29, 2009 June 28, 2019 23,300(2) — — 23,300 12.09(4) September 20, 2010 September 19, 2020 23,300(2) 23,300 — — 9.81(4) June 27, 2011 — 23,300(2) 23,300 — — 3.03(4) June 11, 2012 — 23,300(2) 23,300 — — 8.29(4) June 7, 2013 — Lars-Eric Johansson 46,600(2) 46,600 — — 15.00(3) August 8, 2006 — 23,300(2) 23,300 — — 9.88(4) July 1, 2007 — 23,300(2) — — 23,300 41.75(4) June 26, 2008 June 25, 2018 23,300(2) 23,300 — — 13.75(4) June 29, 2009 — 23,300(2) 23,300 — — 12.09(4) September 20, 2010 — 23,300(2) 23,300 — — 9.81(4) June 27, 2011 — 23,300(2) 23,300 — — 3.03(4) June 11, 2012 — 23,300(2) — — 23,300 8.29(4) June 7, 2013 June 6, 2023 Harry E. Ruda 23,300(2) 23,300 — — 8.31(4) August 14, 2011 — 23,300(2) 23,300 — — 3.03(4) June 11, 2012 — 23,300(2) — — 23,300 8.29(4) June 7, 2013 June 6, 2023 Directors as a Group 553,079 349,500 — 203,579 Executive Officers: Yan Zhuang 23,300(2) 23,300 — — 7.36 September 24, 2007 — 23,300(2) — — 23,300 41.75 June 26, 2008 June 25, 2018 80,000 80,000 — — 9.37 May 23, 2009 — 15,000 15,000 — — 11.33 August 27, 2010 — 11,268 11,268 — — 9.33 May 20, 2011 — Arthur (Jian) Chien 46,600(1) 46,600 — — 4.29 August 8, 2006 — 23,300(2) 23,300 — — 9.88 July 1, 2007 — 46,600 34,950 11,650 — 7.36(4) September 24, 2007 — 20,000 5,000 15,000 — 3.18 March 12, 2009 — 15,000 — 15,000 — 11.33 August 27, 2010 — Executive Officers as aGroup 304,368 239,418 41,650 23,300 Table of Contents111Name CommonSharesUnderlyingOptionsGranted CommonSharesUnderlyingOptionsExercised CommonSharesUnderlyingOptionsForfeited CommonSharesUnderlyingOptionsOutstanding ExercisePrice($ perShare) Date of Grant Date ofExpiration Employees: Ten employees as a group 791,035 669,875 121,160 — 2.12 May 30, 2006 — Twenty-eight employees asa group 126,170 92,968 33,202 — 4.29 May 30, 2006 — One employee 2,330(6) 2,330 — — 4.29 May 30, 2006 — Two employees as a group 51,260 51,260 — — 4.29 June 30, 2006 — One employee 64,075 64,075 — — 4.29 July 17, 2006 — Hanbing Zhang(7) 46,600 46,600 — — 4.29 July 28, 2006 — One employee 58,250 14,563 — 43,687 12.00(8) August 8, 2006 August 7, 2018 Three employees as agroup 11,650 9,903 1,747 — 12.00(8) August 31, 2006 — Three employees as agroup 79,900 58,250 21,650 — 12.10 March 1, 2007 — One employee 6,990 1,748 5,242 — 12.10 March 1, 2007 — Five employees as a group 52,280 5,413 46,867 — 8.21 August 17, 2007 — Eight employees as agroup 39,208 34,376 4,832 — 7.36 September 24, 2007 — Thirteen employees as agroup 193,445 140,113 53,332 — 7.36 September 24, 2007 — Six employees as a group 36,136 25,000 11,136 — 19.55 February 28, 2008 — One employee 10,000 — 10,000 — 19.40 March 3, 2008 — Two employees as a group 18,000 — 18,000 — 20.67 March 31, 2008 — Two employees as a group 53,300 — 53,300 — 46.28 June 26, 2008 — Four employees as a group 30,000 5,000 25,000 — 27.88 August 7, 2008 — Seventy-eight employeesas a group 400,200 252,890 132,110 15,200 3.18 March 12, 2009 March 11, 2019 Hanbing Zhang(7) 6,000 — — 6,000 3.18 March 12, 2009 March 11, 2019 One employee 20,000 20,000 — — 5.26 March 30, 2009 — Eighteen employees as agroup 59,400 40,600 18,800 — 9.37 May 23, 2009 — One employee 10,000 — 10,000 — 11.58 May 31, 2009 — One employee 23,300 23,300 — — 13.75(4) June 29, 2009 — Seven employees as agroup 30,800 13,200 17,600 — 15.18 August 6, 2009 — Fourteen employees as agroup 82,600 60,600 22,000 — 16.10 November 8, 2009 — One hundred and thirty-oneemployees as a group 483,600 238,050 239,675 5,875 11.33 August 27, 2010 August 26, 2020 Hanbing Zhang(7) 12,000 — — 12,000 11.33 August 27, 2010 August 26, 2020 One employee 23,300 23,300 — — 12.09(4) September 20, 2010 — One employee 100,000 — 100,000 — 15.19 October 8, 2010 — One hundred and fifty-threeemployees as a group 236,000 128,450 95,750 11,800 15.24 November 14, 2010 November 13, 2020 Five employees as a group 32,900 24,650 4,200 4,050 13.99 March 5, 2011 March 4, 2021 Seventy-three employees asa group 353,064 193,556 137,094 22,414 9.33 May 20, 2011 May 19, 2021 Hanbing Zhang(7) 7,512 — — 7,512 9.33 May 20, 2011 May 19, 2021 Five employees as a group 150,000 45,000 105,000 — 8.94 June 1, 2011 — One employee 23,300 23,300 — — 9.81(4) June 27, 2011 — One employee 60,688 60,688 — — 9.52 July 20, 2011 — Twenty employees as agroup 74,000 27,000 44,500 2,500 3.03 November 14, 2011 November 13, 2021 Employees as a group 3,859,293 2,396,058 1,332,197 131,038 Two individuals as a group 11,650 11,650 — — 15.00(3) April 13, 2007 — Individuals as a group 11,650 11,650 — — Total Options 4,728,390 2,996,626 1,373,847 357,917 (1)Vest in two equal installments, the first upon the date of grant and the second upon the first year anniversary of the date of grant as long as the director remains in service. (2)Vest immediately upon the date of grant. (3)The initial public offering price of the common shares. (4)Exercise price equal to the average of the trading prices of the common shares for the 20 trading days preceding the date of grant. (5)Vest one year after the date of grant. (6)Vesting accelerated on termination. (7)The wife of Dr. Shawn Qu, our founder, Chairman, President and Chief Executive Officer. (8)80% of the initial public offering price of the common shares.Table of Contents Before 2014, we agreed to grant each of our independent directors, Robert McDermott, Lars-Eric Johansson and Harry E. Ruda, options to purchase23,300 of our common shares immediately after each annual shareholder meeting at an exercise price equal to the average of the trading price of our commonshares for the 20 trading days ending on such date. These options vested immediately.Restricted Share Units The following table summarizes, as of March 31, 2018, the restricted share units granted under the Plan to our directors and executive officers and toother individuals, individually and as a group. The restricted share units granted on May 8, 2011 vested on the anniversary of the date of grant. The restrictedshare units granted to our independent directors vest on the earlier of the date that the director ceases to be a member of our board of directors for any reasonand three years after the date of the grant. The other restricted share units granted vest over a four-year period (one-quarter on each anniversary date) from thedate of grant.112Name RestrictedShare UnitsGranted RestrictedShare UnitsVested RestrictedShare UnitsForfeited Date of Grant Expiration Directors: Shawn (Xiaohua) Qu 6,154(1) 6,154 — May 8, 2011 — 13,706(2) 13,706 — May 20, 2011 — 75,075(2) 75,075 — March 16, 2012 — 67,024(2) 67,024 — March 9, 2013 — 11,983(2) 8,987 — May 4, 2014 May 3, 2024 8,274(2) 4,137 — May 3, 2015 May 2, 2025 20,216(2) 5,054 — July 8, 2016 July 7, 2026 121,951(6) 76,220 — November 6, 2016 November 5, 2026 22,607(2) — — May 17, 2017 May 16, 2027 77,289(6) 9,662 — November 5, 2017 November 4, 2027 Robert McDermott 1,020(5) 1,020 — July 1, 2014 — 800(5) 800 — October 1, 2014 — 1,274(5) 1,274 — January 1, 2015 — 880(5) — — April 1, 2015 March 31, 2025 993(5) — — July 1, 2015 June 30, 2025 1,820(5) — — October 1, 2015 September 30, 2025 1,033(5) — — January 1, 2016 December 31, 2025 1,572(5) — — April 1, 2016 March 31, 2026 2,051(5) — — July 1, 2016 June 30, 2026 2,228(5) — — October 1, 2016 September 30, 2026 2,411(5) — — January 1, 2017 December 31, 2026 2,562(5) — — April 1, 2017 March 31, 2027 1,901(5) — — July 1, 2017 June 30, 2027 1,818(5) — — October 1, 2017 September 30, 2027 1,767(5) — — January 1, 2018 December 31, 2027 Lars-Eric Johansson 1,020(5) 1,020 — July 1, 2014 — 800(5) 800 — October 1, 2014 — 1,274(5) 1,274 — January 1, 2015 — 880(5) — — April 1, 2015 March 31, 2025 993(5) — — July 1, 2015 June 30, 2025 1,820(5) — — October 1, 2015 September 30, 2025 1,033(5) — — January 1, 2016 December 31, 2025 1,572(5) — — April 1, 2016 March 31, 2026 2,051(5) — — July 1, 2016 June 30, 2026 2,228(5) — — October 1, 2016 September 30, 2026 2,411(5) — — January 1, 2017 December 31, 2026 2,562(5) — — April 1, 2017 March 31, 2027 1,901(5) — — July 1, 2017 June 30, 2027 1,818(5) — — October 1, 2017 September 30, 2027 1,767(5) — — January 1, 2018 December 31, 2027 Table of Contents113Name RestrictedShare UnitsGranted RestrictedShare UnitsVested RestrictedShare UnitsForfeited Date of Grant Expiration Harry E. Ruda 1,020(5) 1,020 — July 1, 2014 — 800(5) 800 — October 1, 2014 — 1,274(5) 1,274 — January 1, 2015 — 880(5) — — April 1, 2015 March 31, 2025 993(5) — — July 1, 2015 June 30, 2025 1,820(5) — — October 1, 2015 September 30, 2025 1,033(5) — — January 1, 2016 December 31, 2025 1,572(5) — — April 1, 2016 March 31, 2026 2,051(5) — — July 1, 2016 June 30, 2026 2,228(5) — — October 1, 2016 September 30, 2026 2,411(5) — — January 1, 2017 December 31, 2026 2,562(5) — — April 1, 2017 March 31, 2027 1,901(5) — — July 1, 2017 June 30, 2027 1,818(5) — — October 1, 2017 September 30, 2027 1,767(5) — — January 1, 2018 December 31, 2027 Andrew (Luen Cheung) Wong 610(1) 610 — August 7, 2014 — 800(1) 800 — October 1, 2014 — 1,274(1) 1,274 — January 1, 2015 — 880(1) 880 — April 1, 2015 — 993(1) 993 — July 1, 2015 — 1,820(1) 1,820 — October 1, 2015 — 1,033(1) 1,033 — January 1, 2016 — 1,572(1) 1,572 — April 1, 2016 — 2,051(5) — — July 1, 2016 June 30, 2026 2,228(5) — — October 1, 2016 September 30, 2026 2,411(5) — — January 1, 2017 December 31, 2026 2,562(5) — — April 1, 2017 March 31, 2027 1,901(5) — — July 1, 2017 June 30, 2027 1,818(5) — — October 1, 2017 September 30, 2027 1,767(5) — — January 1, 2018 December 31, 2027 Directors as a group 520,389 284,283 — Executive Officers Huifeng Chang 23,340(2) 11,670 — May 8, 2016 May 7, 2026 13,477(2) 3,369 — July 8, 2016 July 7, 2026 15,072(2) — — May 17, 2017 May 16, 2027 Guangchun Zhang 80,000(2) 80,000 — March 9, 2013 — 7,262(2) 5,446 — May 4, 2014 May 3, 2024 5,516(2) 2,758 — May 3, 2015 May 2, 2025 13,477(2) 3,369 — July 8, 2016 July 7, 2026 15,072(2) — — May 17, 2017 May 16, 2027 Yan Zhuang 2,564(1) 2,564 — May 8, 2011 — 8,224(2) 8,224 — May 20, 2011 — 45,045(2) 45,045 — March 16, 2012 — 40,214(2) 40,214 — March 9, 2013 — 7,988(2) 5,991 — May 4, 2014 May 3, 2024 5,516(2) 2,758 — May 3, 2015 May 2, 2025 13,477(2) 3,369 — July 8, 2016 July 7, 2026 15,072(2) — — May 17, 2017 May 16, 2027 Arthur (Jian) Chien 13,445(2) 6,722 — June 26, 2015 June 25, 2025 13,477(2) 3,369 — July 8, 2016 July 7, 2026 15,072(2) — — May 17, 2017 May 16, 2027 Jianyi Zhang 25,934(2) 12,967 — May 8, 2016 May 7, 2026 13,477(2) 3,369 — July 8, 2016 July 7, 2026 15,072(2) — — May 17, 2017 May 16, 2027 Guoqiang Xing 5,717(2) 4,288 — December 26, 2014 December 25, 2024 2,758(2) 1,379 — May 3, 2015 May 2, 2025 6,739(2) 1,685 — July 8, 2016 July 7, 2026 3,586(2) 896 — May 17, 2017 May 16, 2027 15,072(2) — — May 17, 2017 May 16, 2027 Executive Officers as a group 441,665 249,452 — Table of Contents114Name RestrictedShare UnitsGranted RestrictedShare UnitsVested RestrictedShare UnitsForfeited Date of Grant Expiration Employees Nine employees as a group 13,844(1) 10,768 3,076 May 8, 2011 — One hundred and seventy-four employees as a group 423,801(2) 291,519 132,282 May 20, 2011 — One employee 42,868(2) 42,868 — July 20, 2011 — One hundred and forty-eight employees as a group 1,170,089(2) 814,764 355,325 March 16, 2012 — Four employees as a group 43,000(2) 10,500 32,500 May 6, 2012 — Three employees as a group 30,000(2) 30,000 — August 16, 2012 — Two employees as a group 16,006(2) 16,006 — August 17, 2012 — One hundred and forty-one employees as a group 956,437(2) 701,711 254,726 March 9, 2013 — One employee 20,000(2) 20,000 — June 16, 2013 — One employee 2,861(2) 2,861 — July 16, 2013 — One employee 1,952(2) 488 1,464 July 18, 2013 — Thirteen employees as a group 19,655(2) 17,387 2,268 August 10, 2013 — Seven hundred and forty-eight employees as a group 126,036(4) 126,036 — August 11, 2013 — One employee 10,000(2) 5,000 5,000 August 17, 2013 — One employee 20,000(2) 5,000 15,000 September 3, 2013 — One employee 1,739(2) 1,739 — October 31, 2013 — Four employees as a group 5,933(2) 4,362 1,571 November 8, 2013 — One employee 1,040(2) 1,040 — November 25, 2013 — Hanbing Zhang(3) 1,538(1) 1,538 — May 8, 2011 — 5,482(2) 5,482 — May 20, 2011 — 21,021(2) 21,021 — March 16, 2012 — 18,767(2) 18,767 — March 9, 2013 — 2,796(2) 2,097 — May 4, 2014 May 3, 2024 2,344(2) 1,172 — May 3, 2015 May 2, 2025 4,717(2) 1,179 — July 8, 2016 July 7, 2026 5,275(2) — — May 17, 2017 May 16, 2027 One hundred and eighty-six employees as a group 207,923(2) 126,932 52,146 May 4, 2014 May 3, 2024 Three employees as a group 8,574(2) 2,338 6,236 August 7, 2014 — Four employees as a group 17,472(2) 14,244 3,228 August 8, 2014 — One employee 847(2) — 847 September 1, 2014 — Three employees as a group 2,112(2) 1,518 594 September 26, 2014 — Six employees as a group 33,956(2) 25,254 513 December 26, 2014 December 25, 2024 Ten employees as a group 109,036(2) 53,812 50,176 January 29, 2015 January 28, 2025 Six employees as a group 68,660(2) 13,731 54,929 January 30, 2015 — Two hundred and seven employees as a group 145,901(2) 65,403 31,692 May 3, 2015 May 2, 2025 Eighty-four employees as a group 81,838(2) 25,620 43,020 June 15, 2015 June 14, 2025 Three employees as a group 15,535(2) 7,766 — June 26, 2015 June 25, 2025 Thirteen employees as a group 56,124(2) 22,499 17,278 September 25, 2015 September 24, 2025 Nine employees as a group 26,169(2) 12,948 3,250 December 24, 2015 December 23, 2025 One employee 10,549(2) 7,912 2,637 April 21, 2016 — Five employees as a group 16,149(2) 7,166 — May 8, 2016 May 7, 2026 Two hundred and thirty-eight employees as a group 443,454(2) 103,441 54,260 July 8, 2016 July 7, 2026 Twenty-three employees as a group 50,243(2) 11,723 11,820 August 8, 2016 August 7, 2026 Five employees as a group 23,654(2) 5,914 — November 6, 2016 November 5, 2026 Twelve employees as a group 44,903(2) 8,163 13,957 March 6, 2017 March 5, 2027 Two hundred and ninety-five employees as a group 715,566(2) 21,540 8,120 May 17, 2017 May 16, 2027 Three employees as a group 12,563(2) — — August 7, 2017 August 6, 2027 Nine employees as a group 26,012(2) — — November 5, 2017 November 4, 2027 Three employees as a group 6,524(2) — — March 11, 2018 March 10, 2028 Employees as a group 5,090,965 2,691,229 1,157,915 Total Restricted Share Units 6,053,019 3,224,964 1,157,915 (1)Vest over a one-year period from the date of grant. (2)Vest over a four-year period from the date of grant.Table of Contents Effective June 23, 2014, we have agreed to grant each of our independent directors, Robert McDermott, Lars-Eric Johansson, Harry E. Ruda and Andrew(Luen Cheung) Wong, restricted share units quarterly in advance on the first day of July, October, January and April in each year of service. The number ofrestricted share units granted quarterly is determined by dividing $30,000 by the average of the closing price of our common shares on each of the fivetrading days preceding the date of the grant. Each restricted share unit will entitle those directors to receive one of our common shares upon vesting. Exceptas noted in the table above, these restricted share units vest on the earlier of the date that the director ceases to be a member of our board of directors for anyreason and three years after the grant date. We agree to issue common shares to those directors as soon as practicable, and in any event within 60 days, afterthe granted restricted share units are vested.C. Board Practices In 2017, our board of directors held five meetings and passed 60 resolutions by unanimous written consent.Terms of Directors and Executive Officers Our officers are appointed by and serve at the discretion of our board of directors. Our current directors have not been elected to serve for a specific termand, unless re-elected, hold office until the close of our next annual meeting of shareholders or until such time as their successors are elected or appointed.Committees of the Board of Directors Our board of directors has established an audit committee, a compensation committee, a nominating and corporate governance committee and a researchand development committee. It has also established a special committee to consider the Proposed Transaction. For more details on the Proposed Transaction,see "Item 4. Information on the Company—A. History and Development of the Company—Proposed Going-Private Transaction."Audit Committee Our audit committee comprises Messrs. Lars-Eric Johansson, Robert McDermott, Harry E. Ruda and Andrew (Luen Cheung) Wong and is chaired byMr. Johansson. Mr. Johansson qualifies as an "audit committee financial expert" as required by the SEC. Each of Messrs. Johansson, McDermott, Ruda andWong satisfies the "independence" requirements of the Nasdaq corporate governance rules and is "financially literate" as required by the Nasdaq rules. Theaudit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:•selecting our independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by our independentauditors; •reviewing with our independent auditors any audit problems or difficulties and management's responses; •reviewing and approving all proposed related-party transactions, as defined in Item 404 of Regulation S-K under the Securities Act;115(3)The wife of Dr. Shawn Qu, our founder, Chairman, President and Chief Executive Officer. (4)Vest immediately upon the date of grant. (5)Vest after three years from the date of grant (6)Vest over an eight-quarter period from date of grant.Table of Contents•discussing the annual audited financial statements with management and our independent auditors; •reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies; •annually reviewing and reassessing the adequacy of our audit committee charter; •such other matters that are specifically delegated to our audit committee by our board of directors from time to time; •meeting separately and periodically with management and our internal and independent auditors; and •reporting regularly to the full board of directors. In 2017, our audit committee held five meetings, and did not pass any resolution by unanimous written consent.Compensation Committee Our compensation committee consists of Messrs. Lars-Eric Johansson, Robert McDermott, Harry E. Ruda and Andrew (Luen Cheung) Wong and ischaired by Mr. Wong. Each of Messrs. Johansson, McDermott, Ruda and Wong satisfies the "independence" requirements of the Nasdaq corporategovernance rules. The compensation committee assists the board in reviewing and approving the compensation structure for our directors and executiveofficers, including all forms of compensation to be provided to our directors and executive officers. Members of the compensation committee are notprohibited from direct involvement in determining their own compensation. Our chief executive officer may not be present at any committee meeting duringwhich his compensation is deliberated. The compensation committee is responsible for, among other things:•reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer, evaluating theperformance of our chief executive officer in light of those goals and objectives, and setting the compensation level of our chief executiveofficer based on this evaluation; •reviewing and approving the compensation arrangements for our other executive officers and our directors; and •overseeing and periodically reviewing the operation of our employee benefits plans, including bonus, incentive compensation, stock option,pension and welfare plans. In 2017, our compensation committee held six meetings and did not pass any resolution by unanimous written consent.Nominating and Corporate Governance Committee Our nominating and corporate governance committee consists of Messrs. Lars-Eric Johansson, Robert McDermott, Harry E. Ruda and Andrew (LuenCheung) Wong and is chaired by Mr. McDermott. Each of Messrs. Johansson, McDermott, Ruda and Wong satisfies the "independence" requirements of theNasdaq corporate governance rules. The nominating and corporate governance committee assists the board of directors in identifying individuals qualified tobecome our directors and in determining the composition of the board and its committees. The nominating and corporate governance committee isresponsible for, among other things:•identifying and recommending to the board nominees for election or re-election to the board, or for appointment to fill any vacancy;116Table of Contents•reviewing annually with the board the current composition of the board in light of the characteristics of independence, age, skills, experienceand availability of service to us; •identifying and recommending to the board the directors to serve as members of the board's committees; •advising the board periodically with respect to significant developments in the law and practice of corporate governance as well as ourcompliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and onany corrective action to be taken; and •monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures toensure proper compliance. In 2017, our nominating and corporate governance committee held four meetings and did not pass any resolution by unanimous written consent.Research and Development Committee Our research and development committee consists of Dr. Harry E. Ruda and Dr. Shawn Qu and is chaired by Dr. Ruda. Our chief technical officer is anadvisory member of the committee. The research and development committee advises and assists the board of directors and management on matters relatingto technology and technological innovation and development as it relates to our solar power business. The research and development committee isresponsible for, among other things:•reviewing, evaluating and advising the board of directors and management regarding the quality, scope, direction and effectiveness of ourresearch and development programs and activities; •reviewing, evaluating and advising the board of directors and management regarding our progress in achieving our research and developmentgoals and objectives; •reviewing, evaluating and making recommendations to the board of directors and management on our internal and external investments inscience and technology; •monitoring, identifying, evaluating and advising the board of directors and management regarding competing solar power technologies andnew and emerging developments in solar power science and technology; •reviewing, evaluating and advising the board of directors and our chief executive officer regarding the composition and quality of the researchand development team; and •providing general oversight of matters relating to the protection of our intellectual property. Our research and development committee was formed in November 2014. In 2017, it held four meetings and did not pass any resolution by unanimouswritten consent.Special Committee Our special committee consists of Messrs. Lars-Eric Johansson, Robert McDermott, Harry E. Ruda and Andrew (Luen Cheung) Wong and is chaired byMr. McDermott. Each of Messrs. Johansson, McDermott, Ruda and Wong satisfies the "independence" requirements of the Nasdaq corporate governance rulesand is disinterested in the Proposed Transaction. The special committee is responsible for, among other things:•reviewing and assessing the Proposed Transaction; •considering whether there are alternative transactions to the Proposed Transaction and, if so, reviewing and assessing each alternativetransaction; and117Table of Contents•determining whether to pursue the Proposed Transaction or one or more alternative transactions or to maintain our current status quo as apublic company and reject the Proposed Transaction or any alternative transaction. In 2017, our special committee held two meetings and did not pass any resolution by unanimous written consent.Interested Transactions Under the CBCA, a director or officer of a corporation who is a party to a material contract or transaction or proposed material contract or transactionwith the corporation, or is a director or officer (or an individual acting in a similar capacity) of, or has a material interest in, any person who is party to such acontract or transaction, is required to disclose to the corporation in writing or request to have entered into the minutes of meetings of directors the nature andextent of his or her interest in accordance with the requirements of the CBCA. A director may vote on any resolution in respect of such contract or transactiononly if the contract or transaction is: (a) one relating primarily to remuneration as a director, officer, employee or agent of the corporation or an affiliate;(b) one for indemnity or insurance in favor of directors and officers in compliance with the CBCA; or (c) one with an affiliate. In 2017, we did not enter into any interested transactions other than those described in this "Item 6. Directors, Senior Management and Employees" and"Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions."Remuneration and Borrowing Our directors may determine the remuneration to be paid to them. The compensation committee will assist the directors in reviewing and approving thecompensation structure for our directors. Our directors may, without authorization of the shareholders (a) borrow money on our credit, (b) issue, reissue, sell,pledge or hypothecate debt obligations of ours, (c) give a guarantee on our behalf to secure performance of an obligation of any person, and (d) mortgage,hypothecate, pledge or otherwise create a security interest in all or any property of ours, owned or subsequently acquired, to secure any obligation of ours.Qualification Each of our independent directors is asked to hold common shares and/or restricted share units having a value which is at least five times the director'sannual cash retainer and to satisfy this requirement before the later of July 1, 2017 and three years after he or she becomes a director.Employment Agreements We have entered into employment agreements with each of our executive officers. All of the employment agreements with our executive officers are for an indefinite term. Under the employment agreements, we may terminate anexecutive officer's employment at any time for cause without notice and for any other reason by giving written notice of termination to the executive officer.An executive officer may terminate his employment at any time by giving 30 or 60 days' notice of termination to us. If we terminate an executive officer'semployment for any reason other than cause, or the executive officer terminates his employment for good reason, the executive officer is entitled to continueto receive his salary for a period of six or twelve months following the termination of his employment provided that he continues to comply with hisconfidentiality, inventions and non-competition obligations described below.118Table of Contents Each executive officer has agreed not to disclose or use, directly or indirectly, any of our confidential information, including trade secrets andinformation concerning our finances, employees, technology, processes, facilities, products, suppliers, customers and markets, except in the performance ofhis duties and responsibilities or as required pursuant to applicable law. Each executive officer has also agreed to disclose in confidence to us all inventions,designs and trade secrets which he may conceive, develop or reduce to practice during his employment and to assign all right, title and interest in them to us.Finally, each executive officer has agreed that he will not, directly or indirectly, during and within one year after the termination of his employment:•communicate or have any dealings with our customers or suppliers that would be likely to harm the our business relationship with them; •provide services, whether as a director, officer, employee, independent contractor or otherwise, to a competitor or acquire or hold any interestin, whether as a shareholder, partner or otherwise, in a competitor provided that the executive officer may hold up to 5% of the outstandingshares or other securities of a competitor that is listed on a securities exchange or recognized securities market; and •approach solicit, whether by offer of employment or otherwise, the services of any of our employees. Our compensation committee is required to approve all employment agreements entered into by us with any employee whose base salary is equal to orgreater than $150,000.Director Agreements We have entered into director agreements with our independent directors, pursuant to which we make payments in the form of an annual cash retainer,payable quarterly, and quarterly grants of restricted share units to our independent directors for their services. See "—B. Compensation of Directors andExecutive Officers."Indemnification of Directors and Officers Under the CBCA and pursuant to our by-laws, we may indemnify any present or former director or officer or an individual who acts or has acted at ourrequest as a director or officer, or an individual acting in a similar capacity, of another corporation or entity, against all costs, charges and expenses, includingan amount paid to settle an action or satisfy a judgment, reasonably incurred by such individual in respect of any civil, criminal, administrative, investigativeor other proceeding in which the individual is involved because of that association with us or other entity, provided that the director or officer acted honestlyand in good faith with a view to our best interests, or, as the case may be, to the best interests of the other entity for which he or she acted as a director orofficer or in a similar capacity at our request, and, in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, hadreasonable grounds for believing that his or her conduct was lawful. Such indemnification may be made in connection with a derivative action only withcourt approval. A director or officer is entitled to indemnification from us as a matter of right if the court or other competent authority has judged that he orshe has not committed any fault or omitted to do anything that the individual ought to have done and fulfilled the conditions set forth above. We have entered into indemnity agreements with each of our directors agreeing to indemnify them, to the fullest extent permitted by law, against allliability, loss, harm damage cost or expense, reasonably incurred by the director in respect of any threatened, pending, ongoing or completed claim or civil,criminal, administrative, investigative or other action or proceeding made or commenced against him or in which he is or was involved by reason of the factthat he is or was a director of our company. Our directors and officers are covered by directors' and officers' insurance policies.119Table of ContentsD. Employees As of December 31, 2015, 2016 and 2017, we had 8,969, 9,724 and 12,129 full-time employees, respectively. The following table sets forth the numberof our employees categorized by our areas of operations and as a percentage of our workforce as of December 31, 2017. As of December 31, 2017, we had 2,919 employees at our facilities in Suzhou, 2,232 employees at our facilities in Changshu, 2,329 employees at ourfacilities in Luoyang, 1,488 employees at our facilities in Yancheng, 607 employees at our facilities in Baotou and 2,554 employees based in our facilitiesand offices in Canada, Japan, Australia, Singapore, South Korea, Hong Kong, India, Indonesia, Thailand, Vietnam, Brazil, United Arab Emirates, South Africa,the Americas and the EU (which includes Germany, Italy, United Kingdom and Spain). Our employees are not covered by any collective bargainingagreement. We consider our relations with our employees to be good. From time to time, we also employ or engage part-time employees or independentcontractors to support our manufacturing, research and development and sales and marketing activities. We plan to hire additional employees as we expand.E. Share Ownership The following table sets forth information with respect to the beneficial ownership of our common shares as of March 31, 2018, the latest practicabledate, by:•each of our directors and executive officers; and •each person known to us to own beneficially more than 5% of our common shares. The calculations in the table below are based on the 58,581,765 common shares outstanding, as of March 31, 2018. Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by aperson and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days from March 31, 2018,including through the exercise of any option, warrant or other right or the conversion of any120 As of December 31, 2017 Number of Employees Percentage of Total Manufacturing 9,842 81.2%General and administrative 1,084 8.9%Research and development 477 3.9%Sales and marketing 726 6.0%Total 12,129 100%Table of Contentsother security. These shares, however, are not included in the computation of the percentage ownership of any other person.121 Shares BeneficiallyOwned(1) Number % Directors and Executive Officers:(2) Shawn (Xiaohua) Qu(3) 13,775,642 23.5%Robert McDermott(4) 78,013 * Lars-Eric Johansson(5) 55,564 * Harry E. Ruda(6) 26,413 * Guangchun Zhang(7) 10,332 * Yan Zhuang(8) 33,813 * Arthur (Jian) Chien(9) 3,369 * Huifeng Chang(10) 15,370 * Jianyi Zhang(11) 18,199 * Guoqiang Xing(12) 12,620 * All Directors and Executive Officers as a Group 14,029,335 23.8%Principal Shareholders JPMorgan Chase & Co(13) 4,518,282 7.7%*The person beneficially owns less than 1% of our outstanding shares. (1)Beneficial ownership is determined in accordance with Rule 13d-3 of the General Rules and Regulations under the Exchange Act, andincludes voting or investment power with respect to the securities. (2)The business address of our directors and executive officers is 545 Speedvale Avenue West, Guelph, Ontario, Canada N1K 1E6. (3)Comprises 13,641,892 common shares directly held by Dr. Shawn Qu and Hanbing Zhang, the wife of Dr. Shawn Qu, 89,291 commonshares issuable upon the exercise of options held by Dr. Shawn Qu and Ms. Zhang within 60 days from March 31, 2018, 44,459 sharesissuable upon vesting of restricted share units held by Dr. Shawn Qu and Ms. Zhang within 60 days from March 31, 2018. (4)Comprises 7,233 common shares directly held by Mr. McDermott and 69,900 common shares issuable upon exercise of options heldby Mr. McDermott within 60 days from March 31, 2018, and 880 shares issuable upon vesting of restricted share units held byMr. McDermott within 60 days from March 31, 2018. (5)Comprises 8,084 common shares directly held by Mr. Johansson and 46,600 common shares issuable upon exercise of options held byMr. Johansson within 60 days from March 31, 2018, and 880 shares issuable upon vesting of restricted share units held byMr. Johansson within 60 days from March 31, 2018. (6)Comprises 2,233 common shares directly held by Mr. Ruda, 23,300 common shares issuable upon exercise of options held byMr. Ruda within 60 days from March 31, 2018, and 880 shares issuable upon vesting of restricted share units held by Mr. Ruda within60 days from March 31, 2018. (7)Comprises 10,332 common shares issuable upon vesting of restricted shares units held by Mr. Zhang within 60 days fromMarch 31, 2018. (8)Comprises 23,300 common shares issuable upon exercise of options held by Mr. Zhuang within 60 days from March 31, 2018, and10,513 common shares issuable upon vesting of restricted share units held by Mr. Zhuang within 60 days from March 31, 2018.Table of Contents None of our shareholders have different voting rights from other shareholders as of the date of this annual report on Form 20-F. We are currently notaware that we are directly or indirectly owned or controlled by another corporation, by any foreign government or by any other natural or legal personseverally or jointly and we are currently not aware of any arrangement that may, at a subsequent date, result in a change of control of our company, other thanthe proposed going private transaction disclosed in "Item 4. Information on the Company—History and Development of the Company." ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. Major Shareholders Please refer to "Item 6. Directors, Senior Management and Employees—E. Share Ownership."B. Related Party TransactionsGuarantees and Loans Dr. Shawn Qu, our Chairman, President and Chief Executive Officer, fully guaranteed one-year loan facilities from Chinese commercial banks ofRMB896 million, RMB896 million and RMB1,346 million in 2015, 2016 and 2017, respectively. Amounts drawn down from the facilities as atDecember 31, 2015, 2016 and 2017 were $78.2 million, $79.6million and $135.2 million, respectively. Dr. Shawn Qu fully guaranteed a three-year $150 million loan facility from Chinese commercial banks in 2015. The facility was fully drawn down as atDecember 31, 2016 and 2017. Recurrent entered into buyer payment guaranties with a third party supplier in connection with certain solar module supply agreements of Tranquillityand Garland, our 49% owned affiliates, pursuant to which Recurrent unconditionally guaranteed to the third party supplier the timely payment in full whendue and other payment obligations of Tranquillity and Garland required under the solar module supply agreements. As of December 31, 2017, the payablebalances due by Tranquillity and Garland was nil.Sales and purchase contracts with affiliates In 2017, we sold 13 solar power projects to CSIF, our 14.76% owned affiliate in Japan, in the amount of JPY18,426.8 million ($163.2 million) recordedin revenue and JPY3,148.6 million ($27.9 million) recorded in other operating income, provided asset management service to CSIF in the amount ofJPY303.8 million ($2.7 million), provided O&M service to CSIF in the amount of JPY32.1 million ($0.3 million).122(9)Comprises 3,369 common shares issuable upon vesting of restricted shares units held by Mr. Chien within 60 days fromMarch 31, 2018. (10)Comprises 8,233 common shares directly held by Mr. Chang and 7,137 shares issuable upon vesting of restricted share units held byMr. Chang within 60 days from March 31, 2018. (11)Comprises 11,062 common shares directly held by Mr. Zhang and 7,137 shares issuable upon vesting of restricted share units held byMr. Zhang within 60 days from March 31, 2018. (12)Comprises 6,270 shares directly held by Mr. Xing and 6,350 shares issuable upon vesting of restricted share units held by Mr. Xingwithin 60 days from March 31, 2018. (13)Represents 4,518,282 common shares of our Company held by JPMorgan Chase & Co, as reported on Schedule 13G filed byJPMorgan Chase & Co on January 5, 2018. The percentage of beneficial ownership was calculated based on the total number of ourcommon shares as of March 31, 2018. The principal business address of JPMorgan Chase & Co is 270 Park Avenue, New York,NY 10017.Table of Contents In 2017, we sold solar power products to Gaochuangte in the amount of RMB11.4 million ($1.6 million), before Gaochuangte became our 80% ownedsubsidiary. In 2017, we incurred costs of RMB44.3 million ($6.4 million) to Gaochuangte for EPC services related to our solar power projects. In 2017, we purchased raw materials from Suzhou iSilver Materials Co., Ltd. in the amount of RMB332.0 million ($49.1 million), purchased equipmentfrom Suzhou Kzone Equipment Technology Co., Ltd in the amount of RMB29.7 million ($4.4 million).Employment Agreements See "Item 6. Directors, Senior Management and Employees—C. Board Practices—Employment Agreements."Share Incentive Plan See "Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers—Share-based Compensation—ShareIncentive Plan."C. Interests of Experts and Counsel Not applicable. ITEM 8. FINANCIAL INFORMATION A. Consolidated Statements and Other Financial Information We have appended audited consolidated financial statements filed as part of this annual report.Legal and Administrative ProceedingsClass Action Lawsuits In January 2015, the plaintiff in a class action lawsuit filed against us and certain of our executive officers in the Ontario Superior Court of Justiceobtained an order for class certification in respect of certain claims for which he had obtained leave in September 2014 to assert the statutory cause of actionfor misrepresentation under the Ontario Securities Act, for certain negligent misrepresentation claims and for oppression remedy claims advanced under theCBCA. The Court dismissed our application for leave to appeal and the class action is at the merits stage. We believe the Ontario action is without merit andwe are defending it vigorously.LDK In July 2010, CSI Cells, one of our wholly-owned subsidiaries, filed a request for arbitration against LDK with Shanghai International Economy andTrade Arbitration Commission, formerly known as CIETAC Shanghai Branch, in relation to wafer supply contracts we entered into with LDK inOctober 2007, or the 2007 Supply Contract, and in June 2008, or the 2008 Supply Contracts. In December 2012, CIETAC Shanghai Branch awardedRMB248.9 million in compensation plus RMB2.32 million in arbitration expenses to LDK for the damages LDK claimed to have suffered from the allegedbreaches by us of the 2007 Supply Contract and 2008 Supply Contracts between July 2009 and September 2010, or the 2012 Arbitral Award. In February 2013, LDK filed for enforcement of the 2012 Arbitral Award with Jiangsu Suzhou Intermediate People's Court, or the Suzhou IntermediateCourt. In 2013, LDK initiated two separate proceedings against us in Jiangxi Xinyu Intermediate People's Court, or the Xinyu Intermediate Court,123Table of Contentsclaiming that we had forfeited our rights to the initial deposits under the 2007 Supply Contract and 2008 Supply Contracts because of the alleged breachesunder these contracts. On October 18, 2013, the Xinyu Intermediate Court stayed these proceedings pending the decision by the Suzhou Intermediate Courtas to the 2012 Arbitral Award. On September 9, 2015, the Suzhou Intermediate Court ruled in favor of LDK. On October 19, 2015, we reached a settlementagreement with LDK, or the 2015 Settlement Agreement. Under the 2015 Settlement Agreement, we agreed to pay RMB132.7 million to LDK and topurchase 64.3 million pieces of silicon wafers from LDK at market price over a three year period starting in or around December 2015, in exchange for whichLDK (a) would release us from the 2012 Arbitration Award and waive its rights and claims thereunder and (b) would withdraw its complaints from the XinyuIntermediate Court and terminate such proceedings. The Suzhou Intermediate Court reviewed the 2015 Settlement Agreement and terminated theenforcement proceeding relating to the 2012 Arbitral Award. On May 19, 2016, we received a copy of a bill of complaint from Xinyu Intermediate Court, in which LDK's receiver applied to the court for an order torevoke the 2015 Settlement Agreement pursuant to PRC bankruptcy law, and requested us to pay an amount that had been waived by LDK under the 2015Settlement Agreement. In May 2017, the Xinyu Intermediate Court made a judgment in favor of LDK's receiver, revoking the 2015 Settlement Agreement andrequiring CSI Cells to pay RMB58.5 million to LDK's receiver and bear court expenses at RMB0.8 million. We recorded a $8.6 million provision in the firstquarter of 2017 and CSI Cells appealed the judgment. In November 2017, the Jiangxi High People's Court, or Jiangxi High Court, dismissed CSI Cells' appealand upheld the original judgment. CSI Cells then appealed this judgment to the Supreme People's Court of The People's Republic of China, or the SupremeCourt. In January 2018, the Supreme Court put CSI Cells' appeal on record pending examination. To date, no decision has been made by the Supreme Court.In March 2018, LDK's receiver applied to the Xinyu Intermediate Court for compulsory execution of its judgment. The Xinyu Intermediate Court hasaccepted the LDK receiver's application, and the execution procedure is currently in progress.U.S. Antidumping and Countervailing Duty ProceedingsSolar 1 On October 9, 2012, the United States Department of Commerce, or USDOC, issued final affirmative determinations with respect to its antidumping andcountervailing duty investigations on crystalline silicon photovoltaic, or CSPV, cells, whether or not incorporated into modules, from China. OnNovember 7, 2012, the U.S. International Trade Commission, or USITC, determined that imports of CSPV cells had caused material injury to the U.S. CSPVindustry. This decision was subsequently affirmed by the U.S. Court of International Trade, or CIT, and the U.S. Court of Appeals for the Federal Circuit(Federal Circuit). As a result of these determinations, we were required to pay cash deposits on Chinese-origin CSPV cells imported into the U.S., whether or notincorporated into modules, the rates of which applicable to our company were 13.94% (antidumping duty) and 15.24% (countervailing duty), respectively.We paid all the cash deposits due under these determinations. Several parties challenged the determinations of the USITC in appeals to the CIT. On August 7,2015, the CIT sustained the USITC's final determination and on January 22, 2018, the Federal Circuit upheld the CIT's decision. There was no further appealto the U.S. Supreme Court and, therefore, this decision is final. The rates at which duties will be assessed and payable are subject to administrative reviews. The first administrative reviews were concluded on July 14, 2015, when the USDOC published its final results of the first administrative reviews of theantidumping and countervailing duty orders on CSPV cells. As a result of these decisions, the duty rates applicable to us were revised to 9.67% (antidumpingduty) and 20.94% (countervailing duty), respectively. The rates at which duties will be124Table of Contentsassessed and payable for the reviewed periods were appealed to the CIT. The CIT affirmed the USDOC's remand determination as to the final results of thecountervailing duty review, and no change was made to our countervailing duty rate. This decision has not been appealed to the Federal Circuit. The CITlikewise affirmed USDOC's remand determination as to the final results of the antidumping duty review, and no change was made to our antidumping dutyrate. The CIT's decision affirming USDOC's determination on the antidumping duty rate has now been appealed to the Federal Circuit, with a decisionexpected in late 2018 or 2019. The second administrative reviews were concluded in June 2016 (antidumping duty) and July 2016 (countervailing duty) when the USDOC publishedthe final results of the second administrative reviews of the antidumping and countervailing duty orders on CSPV cells. Due to these decisions, theantidumping duty rate applicable to us was reduced to 8.52% (from 9.67%). Because we were not subject to the second administrative review of thecountervailing duty order, our countervailing duty rate remained at 20.94%. There is no ongoing litigation related to the countervailing duty rate. Theantidumping duty rates at which duties will be assessed and payable for the reviewed period are subject to ongoing litigation at the CIT, including remandproceedings before USDOC in which the agency has announced no change to the antidumping duty rate at this time. Further decisions on these appeals areexpected later in 2018. The third administrative reviews were concluded in June 2017 (antidumping duty) and July 2017 (countervailing duty) when the USDOC published thefinal results of the third administrative reviews of the antidumping and countervailing duty orders on CSPV cells. As result of these decisions, the duty ratesapplicable to us were changed to 13.07% (from 8.52%) (antidumping duty) and 18.30% (from 20.94%) (countervailing duty). The rates at which duties willbe assessed and payable for the reviewed period are subject to ongoing litigation at the CIT. Decisions on these appeals are not expected until late 2018or 2019. The fourth and fifth of these reviews are ongoing and are expected to conclude in mid-2018 and mid-2019, respectively. The preliminary countervailingduty results of the fourth administrative review estimate a reduced countervailing duty rate of 13.72% (from 18.30%). We are vigorously contesting thepreliminary results in the final phase of this administrative review. We are not subject to the fourth administrative review of the antidumping duty order.Therefore our antidumping duty rate will remain at 13.07%. We were just selected for individual review in the fifth administrative review of the countervailing duty order. The final results of this review and thefourth administrative review of the countervailing duty order and the fifth administrative review of the antidumping duty order may result in duty rates thatdiffer from the previous duty rates and cash deposit rates applicable to us. These duty rates could materially and adversely affect our U.S. import operationsand increase our cost of selling into the U.S.Solar 2 On December 31, 2013, SolarWorld US filed a new trade action with the USDOC and the USITC accusing Chinese producers of certain CSPV modules ofdumping their products into the U.S. and of receiving countervailable subsidies from the Chinese authorities. This trade action also alleged that Taiwaneseproducers of certain CSPV cells and modules dumped their products into the United States. Excluded from these new actions were those Chinese-origin solarproducts covered by the Solar 1 orders described above. We were identified as one of a number of Chinese producers exporting the subject goods to theU.S. market. "Chinese CSPV products subject to Solar 2 orders" refer to CSPV products manufactured in mainland China using non-Chinese (e.g., Taiwanese) CSPVcells and imported into the USA during the investigation or review periods of Solar 2. "Taiwanese CSPV products subject to Solar 2 orders" refer125Table of Contentsto CSPV products manufactured outside of mainland China using Taiwanese CSPV cells and imported into the USA during the investigation or reviewperiods of Solar 2. On December 23, 2014, the USDOC issued final affirmative determinations with respect to its antidumping and countervailing duty investigation onthese CSPV products. On January 21, 2015, the USITC determined that imports of these CSPV products had caused material injury to the U.S. CSPV industry.As a result of these determinations, we are required to pay cash deposits on these CSPV products, the rates of which applicable to our Chinese CSPV productssubject to Solar 2 orders were 30.06% (antidumping duty) and 38.43% (countervailing duty), respectively. The cash deposit rate applicable to our TaiwaneseCSPV products subject to Solar 2 orders varied by solar cell producer. We paid all the cash deposits due under these determinations. The countervailing duty rate applicable to us was challenged at the CIT and we were a party to these proceedings. In September 2017, the CIT sustainedUSDOC's CVD remand determination, which reduced Canadian Solar's CVD rate from 38.43% to 33.58%. The case has not been further appealed and, thus,the decision is final. Canadian Solar and other interested parties also appealed the scope of the Solar 2 antidumping and countervailing orders determined byCommerce to the CIT. The CIT affirmed Commerce's scope determinations on July 21, 2017. That decision has been appealed to the Federal Circuit, and adecision is expected later in 2018. The rates at which duties will be assessed and payable are subject to administrative reviews. The first administrative reviews for both the Chinese and Taiwanese orders of Solar 2 were concluded in July 2017 (China and Taiwan antidumping dutyorders) and September 2017 (China-only countervailing duty order), respectively, when the USDOC published the final results. Because we were not subjectto the first administrative reviews of the Chinese orders of Solar 2, our duty rates will remain at 30.06% (antidumping duty) and 33.58% (countervailing duty)for our Chinese CSPV products subject to Solar 2 orders during the period of the first administrative review. For our imports of Taiwanese CSPV productssubject to the Solar 2 orders, DOC calculated antidumping duty rates ranging from 3.56% to 4.20%. The second administrative reviews for both the Chinese and Taiwanese orders of Solar 2 are expected to conclude in mid-2018. We are not subject to thesecond reviews of the Chinese orders of Solar 2, meaning that there will be no change in the duty rates applicable to us in that proceeding. The USDOC'spreliminary results of the second review of the Taiwanese order of Solar 2 calculated an antidumping margin of 1.07% for us. The final results for theTaiwanese order of Solar 2 will set a new cash deposit rate, which may differ from the cash deposit rates applicable to us. These duties could materially andadversely affect our U.S. import operations and increase our cost of selling into the U.S. The third administrative reviews for both the Chinese and Taiwanese orders of Solar 2 are ongoing and are expected to conclude in mid-2019.Section 201 On May 17, 2017, following receipt of a petition from Suniva, Inc., which was later joined by SolarWorld Americas, Inc., the USITC instituted asafeguard investigation to determine whether there were increased imports of CSPV products in such quantities as to be a substantial cause of serious injury,or the threat thereof, to the domestic industry producing like or directly competitive products. On September 22, 2017, the USITC determined that CSPVproducts are being imported into the United States in such increased quantities as to be a substantial cause of serious injury to the domestic industry. On January 23, 2018, the President of the United States imposed a safeguard measure on imports of CSPV cells, whether or not partially or fullyassembled into other products such as modules, consisting of (1) a tariff-rate quota for four years on imports of CSPV cells not partially or fully126Table of Contentsassembled into other products, with (a) an in-quota quantity of 2.5 gigawatts, and (b) a tariff rate applicable to over-quota CSPV cells of 30%, decliningannually by five percentage points to 25% in the second year, 20% in the third year, and 15% in the fourth year; and (2) a 30% tariff for four years on CSPVmodules, declining annually by five percentage points to 25% in the second year, 20% in the third year, and 15% in the fourth year. This safeguard measure,which became effective on February 7, 2018, applies to CSPV products imported from all countries, except for certain developing country members of theWorld Trade Organization. The safeguard measure may be amended or eliminated during the mid-term review, which should take place in 2020, as required by U.S. law. ThePresident may then reduce, modify, or terminate the action taken if the President determines that: (1) the domestic industry has made a positive adjustment toimport competition; (2) the domestic industry has not made adequate efforts to make a positive adjustment to import competition; or (3) the effectiveness ofthe safeguard action has been impaired by changed economic circumstances. On February 9, 2018, Canadian Solar and two other manufacturers and exporters of CSPV modules from Canada challenged the applicability of thesafeguard measure to U.S. imports of CSPV modules from Canada. The Canadian parties applied to the CIT for a temporary restraining order and preliminaryinjunction (TRO/PI) to halt the imposition of the 30% tariff on CSPV modules imported from Canada. The CIT denied the application, and the Canadianparties have appealed this decision to the Federal Circuit.European Antidumping and Anti-Subsidy Investigations On September 6, 2012, following a complaint lodged by EU ProSun, an ad-hoc industry association of EU CSPV module, cell and wafer manufacturers,the European Commission initiated an antidumping investigation concerning EU imports of CSPV modules and key components (i.e., cells and wafers)originating in China. On November 8, 2012, following a complaint lodged by the same parties, the European Commission initiated an anti-subsidyinvestigation on these same products. On December 6, 2013, the EU imposed definitive antidumping and countervailing measures on imports of CSPVmodules and key components (i.e., cells and wafers) originating in or consigned from China. On February 28, 2014, we filed separate actions with the General Court of the EU for annulment of the regulation imposing the definitive antidumpingmeasures and of the regulation imposing the definitive countervailing measures (case T-162/14 and joined cases T-158/14, T-161/14, and T-163/14). TheGeneral Court rejected these actions for annulment. On May 8, 2017, we appealed the judgements of the General Court before the Court of Justice of the EU(cases C-236/17 and C-237/17). The appeals are pending. On December 5, 2015, the European Commission initiated expiry (sunset) reviews of the antidumping and countervailing measures on imports of CSPVmodules and key components (i.e., cells and wafers) originating in or consigned from China. On March 3, 2017, the European Commission extended theantidumping and countervailing measures for 18 months on imports of CSPV modules and key components (i.e., cells and wafers) originating in or consignedfrom China. On September 16, 2017, the European Commission amended the form of the antidumping and countervailing measures for certain Chineseexporters (but not for Canadian Solar). On March 13, 2018, the European Commission published notices of expiry of the antidumping and countervailing measures on imports of CSPVmodules and key components (i.e., cells) originating in or consigned from China. The notices provide that the measures will expire on September 3, 2018,unless the EU industry (successfully) requests the European Commission to initiate expiry (sunset) reviews by June 3, 2018.127Table of ContentsCanadian Antidumping and Countervailing Duties Investigation On June 3, 2015, the Canada Border Services Agency released final determinations of dumping and subsidization which found dumping calculated byway of a Ministerial Specification based on a Non Market Economy finding applicable to all cooperative exporters and ascertained a Canadian Solar-specificsubsidies rate of RMB0.014 per Watt. On July 3, 2015 the Canadian International Trade Tribunal determined that a Canadian industry was not negativelyaffected as a result of imported modules but was threatened with negative impact. As a result of these findings, definitive duties were imposed on imports ofChinese solar modules into Canada starting on July 3, 2015. We do not believe the imposition of these duties will have a material negative effect upon ourresults of operations because we have significant module manufacturing capacity in Ontario and do not rely on Chinese solar modules to serve our Canadianbusiness.Dividend Policy We have never declared or paid any dividends on our common shares, nor do we have any present plan to declare or pay any dividends on our commonshares in the foreseeable future. We currently intend to retain our available funds and any future earnings to operate and expand our business. Our board of directors has complete discretion on whether to pay dividends, subject only to the requirements of the CBCA. Even if our board of directorsdecides to pay dividends, the form, frequency and amount will depend upon our future operations, earnings, capital requirements, surplus, general financialcondition, contractual restrictions, and other factors that our board of directors may deem relevant.B. Significant Changes Between January 1, 2018 and March 31, 2018, an additional 73,824 restricted share units granted under the Plan vested. Except as described above, we have not experienced any significant changes since the date of our audited consolidated financial statements included inthis annual report.128Table of Contents ITEM 9. THE OFFER AND LISTING A. Offering and Listing Details Our common shares have been listed on the Nasdaq under the symbol "CSIQ" since November 9, 2006. The following table sets forth the high and lowtrading prices for our common shares on the Nasdaq for the periods indicated.B. Plan of Distribution Not applicable.C. Markets Our common shares have been listed on the Nasdaq since November 9, 2006 under the symbol "CSIQ."D. Selling Shareholders Not applicable.E. Dilution Not applicable.129 Trading Price High Low $ $ Annual Highs and Lows 2013 33.25 3.12 2014 44.50 20.64 2015 40.08 14.16 2016 28.80 10.25 2017 19.09 10.86 Quarterly Highs and Lows First Quarter 2016 28.80 15.62 Second Quarter 2016 19.65 13.56 Third Quarter 2016 16.16 11.72 Fourth Quarter 2016 15.95 10.25 First Quarter 2017 15.85 10.86 Second Quarter 2017 16.38 12.07 Third Quarter 2017 18.12 14.84 Fourth Quarter 2017 19.09 15.42 First Quarter 2018 17.60 14.45 Monthly Highs and Lows 2017 October 17.66 15.42 November 19.09 16.70 December 18.40 16.04 2018 January 17.47 15.21 February 15.97 14.45 March 17.60 15.33 April (through April 23) 16.70 15.49 Table of ContentsF. Expenses of the Issue Not applicable. ITEM 10. ADDITIONAL INFORMATION A. Share Capital Not applicable.B. Memorandum and Articles of Association We incorporate by reference into this annual report the description of our Amended Articles of Continuance, as amended, contained in our F-1 registration statement (File No. 333-138144), as amended, initially filed with the SEC on October 23, 2006.C. Material Contracts We have not entered into any material contracts other than in the ordinary course of business and other than those described in "Item 4. Information onthe Company" or elsewhere in this annual report on Form 20-F.D. Exchange Controls See "Item 4. Information on the Company—B. Business Overview—Government Regulations—Foreign Currency Exchange" and "Item 4. Information onthe Company—B. Business Overview—Government Regulations—Dividend Distribution."E. TaxationPrincipal Canadian Federal Tax ConsiderationsGeneral The following is a summary of the principal Canadian federal income tax implications generally applicable to a U.S. Holder (defined below), who holdsor acquires our common shares, or the Common Shares, and who, at all relevant times, for purposes of the Income Tax Act (Canada), or the Canadian Tax Act,(i) is the beneficial owner of such Common Shares; (ii) has not been, is not and will not be resident (or deemed to be resident) in Canada at any time whilesuch U.S. Holder has held or holds the Common Shares; (iii) holds the Common Shares as capital property; (iv) deals at arm's length with and is not affiliatedwith us; (v) does not use or hold, and is not deemed to use or hold, the Common Shares in the course of carrying on a business in Canada, (vi) is not part of atransaction or event or series of transactions or events that includes the acquisition or holding of Common Shares so as to cause the foreign affiliate dumpingrules in section 212.3 of the Canadian Tax Act to apply; (vii) is not a "specified shareholder" of us as defined subsection 18(5) of the Canadian Tax Act;(viii) is not a financial institution, specified financial institution, partnership or trust as defined in the Canadian Tax Act; (ix) is a resident of the United Statesfor purposes of the Canada—United States Income Tax Convention (1980), or the Convention, and is fully entitled to the benefits of the Convention; and(x) has not, does not and will not have a fixed base or permanent establishment in Canada within the meaning of the Convention at any time when suchU.S. Holder has held or holds the Common Shares, or a U.S. Holder. Special rules that are not addressed in this summary may apply to a U.S. Holder that is aninsurer that carries on, or is deemed to carry on, an insurance business in Canada and elsewhere or that is an authorized foreign bank as defined in theCanadian Tax Act and such U.S. Holders should consult their own tax advisers.130Table of Contents This summary assumes that we are a resident of Canada for the purposes of the Canadian Tax Act. Should it be determined that we are not a resident ofCanada for the purposes of the Canadian Tax Act by virtue of being resident in another country (such as the PRC) by virtue of the application of an incometax convention between Canada and that other country, the Canadian income tax consequences to a U.S. Holder will differ from those described herein andU.S. Holders should consult their own tax advisors. This summary is based on the current provisions of the Canadian Tax Act, and the regulations thereunder, the Convention, and our counsel'sunderstanding of the published administrative practices and policies of the Canada Revenue Agency, all in effect as of the date of this annual report onForm 20-F. This summary takes into account all specific proposals to amend the Canadian Tax Act or the regulations thereunder publicly announced by or onbehalf of the Minister of Finance (Canada) prior to the date of this annual report on Form 20-F. No assurances can be given that such proposed amendmentswill be enacted in the form proposed, or at all. This is not an exhaustive summary of all potential Canadian federal income tax consequences to a U.S. Holderand this summary does not take into account or anticipate any other changes in law or administrative practices, whether by judicial, governmental orlegislative action or decision, nor does it take into account provincial, territorial or foreign tax legislation or considerations, which may differ from theCanadian federal income tax considerations described herein. The Canadian federal income tax consequences of purchasing, owning and disposing of Common Shares will depend on each U.S. Holder's particularsituation. This summary is not intended to be a complete analysis of or description of all potential Canadian federal income tax consequences, and shouldnot be construed to be, legal, business or tax advice directed at any particular U.S. Holder or prospective purchaser of Common Shares. Accordingly,U.S. Holders or prospective purchasers of Common Shares should consult their own tax advisors for advice with respect to the Canadian federal income taxconsequences of an investment in Common Shares based on their own particular circumstances.Dividends Amounts paid or credited, or deemed under the Canadian Tax Act to be paid or credited, on account or in lieu of payment of, or in satisfaction of,dividends to a U.S. Holder that has provided the requisite documentation regarding its entitlement to benefits under the Convention will be subject toCanadian non-resident withholding tax at the reduced rate of 15% under the Convention. This rate is further reduced to 5% in the case of a U.S. Holder that isa company for purposes of the Convention that owns at least 10% of our voting shares at the time the dividend is paid or deemed to be paid.Disposition of Our Common Shares A U.S. Holder will not be subject to income tax under the Canadian Tax Act in respect of any capital gain realized on a disposition or deemeddisposition of its Common Shares unless, at the time of disposition, the Common Shares constitute "taxable Canadian property" of the U.S. Holder for thepurposes of the Canadian Tax Act and the U.S. Holder is not otherwise entitled to an exemption under the Convention. Generally, a Common Share owned by a U.S. Holder will not be taxable Canadian property of the U.S. Holder at a particular time provided that, at thattime, the common shares of our company are listed on a designated stock exchange (which currently includes the Nasdaq), unless at any time in the previous60 month period:•the U.S. Holder and persons with whom the U.S. Holder does not deal at arm's length alone or in any combination has owned 25% or more ofthe shares of any class or series of shares in the capital of our company, and131Table of Contents•more than 50% of the fair market value of the Common Shares is derived directly or indirectly from one or any combination of real orimmovable property situated in Canada, Canadian resource properties, timber resource properties, and options in respect of, or interest in orrights in any such properties, whether or not such property exists; or •the Common Shares are otherwise deemed under the Canadian Tax Act to be taxable Canadian property. U.S. Holders for whom the Common Shares are, or may be, taxable Canadian property should consult their own tax advisors.Canada—United States Income Tax Convention The Convention includes a complex limitation on benefits provision. U.S. Holders are urged to consult their own tax advisors to determine theirentitlement to benefits under the Convention.United States Federal Income Taxation The following discussion describes the material United States federal income tax consequences to a United States Holder (as defined below), undercurrent law, of an investment in our common shares. This discussion is based on the federal income tax laws of the United States as of the date of this annualreport on Form 20-F, including the United States Internal Revenue Code of 1986, as amended, or the Code, existing and proposed Treasury Regulationspromulgated thereunder, judicial authority, published administrative positions of the United States Internal Revenue Service, or IRS, and other applicableauthorities, all as of the date of this annual report on Form 20-F. All of the foregoing authorities are subject to change, which change could applyretroactively and could significantly affect the tax consequences described below. We have not sought any ruling from the IRS with respect to the statementsmade and the conclusions reached in the following discussion and there can be no assurance that the IRS or a court will agree with our statements andconclusions. Except as explicitly described below, this discussion does not address any reporting obligations that may be applicable to persons holdingcommon shares through a bank, financial institution or other entity, or a branch thereof located, organized or resident outside the United States. This discussion applies only to a United States Holder (as defined below) that holds common shares as capital assets for United States federal income taxpurposes (generally, property held for investment). The discussion neither addresses the tax consequences to any particular investor nor describes all of thetax consequences applicable to persons in special tax situations such as:•banks and certain other financial institutions; •insurance companies; •regulated investment companies; •real estate investment trusts; •brokers or dealers in stocks and securities, or currencies; •persons who use or are required to use a mark-to-market method of accounting; •certain former citizens or residents of the United States subject to Section 877 of the Code; •entities subject to the United States anti-inversion rules; •tax-exempt organizations and entities; •persons subject to the alternative minimum tax provisions of the Code; •persons whose functional currency is other than the United States dollar;132Table of Contents•persons holding common shares as part of a straddle, hedging, conversion or integrated transaction; •persons that actually or constructively own common shares representing 10% or more of our voting power or value; •persons who acquired common shares pursuant to the exercise of an employee stock option or otherwise as compensation; •partnerships or other pass-through entities, or persons holding common shares through such entities; •persons required to accelerate the recognition of any item of gross income with respect to our common shares as a result of such income beingrecognized on an applicable financial statement; or •persons that held, directly, indirectly or by attribution, common shares or other ownership interest in us prior to our initial public offering. If a partnership (including an entity or arrangement treated as a partnership for United States federal income tax purposes) holds the common shares, thetax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. A partnership or partnerin a partnership holding common shares should consult its own tax advisors regarding the tax consequences of investing in and holding the common shares. THE FOLLOWING DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT A SUBSTITUTE FOR CAREFUL TAXPLANNING AND ADVICE. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THEUNITED STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES ARISINGUNDER THE FEDERAL ESTATE OR GIFT TAX LAWS OR THE LAWS OF ANY STATE, LOCAL OR NON-UNITED STATES TAXINGJURISDICTION OR UNDER ANY APPLICABLE TAX TREATY. For purposes of the discussion below, a "United States Holder" is a beneficial owner of the common shares that is, for United States federal incometax purposes:•an individual who is a citizen or resident of the United States; •a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the lawsof the United States, any state thereof or the District of Columbia; •an estate, the income of which is subject to United States federal income taxation regardless of its source; or •a trust, if (i) a court within the United States is able to exercise primary jurisdiction over its administration and one or more United Statespersons have the authority to control all of its substantial decisions or (ii) in the case of a trust that was treated as a domestic trust under the lawin effect before 1997, a valid election is in place under applicable Treasury Regulations to treat such trust as a domestic trust.Dividends and Other Distributions on the Common Shares Subject to the passive foreign investment company rules discussed below, the gross amount of any distribution that we make to you with respect to thecommon shares (including any amounts withheld to reflect Canadian or PRC withholding taxes) will be taxable as a dividend, to the extent paid out of ourcurrent or accumulated earnings and profits, as determined under United States federal income tax133Table of Contentsprinciples. Such income (including any withheld taxes) will be includable in your gross income on the day actually or constructively received by you.Because we do not intend to determine our earnings and profits on the basis of United States federal income tax principles, any distribution paid generallywill be reported as a "dividend" for United States federal income tax purposes. Such dividends will not be eligible for the dividends-received deductionallowed to qualifying corporations under the Code. Dividends received by a non-corporate United States Holder may qualify for the lower rates of tax applicable to "qualified dividend income," if thedividends are paid by a "qualified foreign corporation" and other conditions discussed below are met. A non-United States corporation is treated as aqualified foreign corporation (a) with respect to dividends paid by that corporation on shares that are readily tradable on an established securities market inthe United States or (b) if such non-United States corporation is eligible for the benefits of a qualifying income tax treaty with the United States that includesan exchange of information program. However, we will not be treated as a qualified foreign corporation if we are a passive foreign investment company in thetaxable year in which the dividend is paid or the preceding taxable year. Under a published IRS Notice, common shares are considered to be readily tradable on an established securities market in the United States if they arelisted on the Nasdaq, as our common shares are. In addition, we may be eligible for the benefits of the income tax treaty between the United States andCanada, or, if we are treated as a PRC resident enterprise under the PRC tax law (see "—People's Republic of China Taxation") then we may be eligible for thebenefits of the income tax treaty between the United States and the PRC. If we are eligible for such benefits, then dividends that we pay on our commonshares would, subject to applicable limitations, be eligible for the reduced rates of taxation. Even if dividends would be treated as paid by a qualified foreign corporation, a non-corporate United States Holder will not be eligible for reduced ratesof taxation if it does not hold our common shares for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date or if theUnited States Holder elects to treat the dividend income as "investment income" pursuant to Section 163(d)(4) of the Code. In addition, the rate reductionwill not apply to dividends of a qualified foreign corporation if the non-corporate United States Holder receiving the dividend is obligated to make relatedpayments with respect to positions in substantially similar or related property. You should consult your own tax advisors regarding the availability of the lower tax rates applicable to qualified dividend income for any dividendsthat we pay with respect to the common shares, as well as the effect of any change in applicable law after the date of this annual report on Form 20-F. Any Canadian or PRC withholding taxes imposed on dividends paid to you with respect to the common shares generally will be treated as foreign taxeseligible for credit against your United States federal income tax liability, subject to the various limitations and disallowance rules that apply to foreign taxcredits generally. For purposes of calculating the foreign tax credit, dividends paid to you with respect to the common shares will be treated as income fromsources outside the United States and generally will constitute passive category income. The rules relating to the determination of the foreign tax credit arecomplex, and you should consult your tax advisors regarding the availability of a foreign tax credit in your particular circumstances. The amount of any dividend paid in currency other than the United States dollar will be the dividend's United States dollar value calculated by referenceto the exchange rate in effect on the date of receipt, regardless of whether the payment is in fact converted into United States dollars. A United States Holdermay have foreign currency gain or loss, which will be ordinary gain or loss, if any dividend is converted into United States dollars after the date of receipt.134Table of ContentsDisposition of the Common Shares You will recognize gain or loss on a sale or exchange of the common shares in an amount equal to the difference between the amount realized on the saleor exchange and your tax basis in the common shares. Subject to the discussion under "—Passive Foreign Investment Company" below, such gain or lossgenerally will be capital gain or loss. Capital gains of a non-corporate United States Holder, including an individual that has held the common share for morethan one year, currently are eligible for reduced tax rates. The deductibility of capital losses is subject to limitations. Any gain or loss that you recognize on a disposition of the common shares generally will be treated as United States-source income or loss for foreign taxcredit limitation purposes. However, if we are treated as a PRC resident enterprise for PRC tax purposes and PRC tax is imposed on gain from the dispositionof the common shares (see "—People's Republic of China Taxation") then a United States Holder that is eligible for the benefits of the income tax treatybetween the United States and the PRC may elect to treat the gain as PRC-source income for foreign tax credit purposes. If such an election is made, the gainso treated will be treated as a separate class or "basket" of income for foreign tax credit purposes. You should consult your tax advisors regarding the propertreatment of gain or loss, as well as the availability of a foreign tax credit, in your particular circumstances. A United States Holder that receives currency other than the United States dollar upon the sale or other disposition of common shares will realize anamount equal to the United States dollar value of the foreign currency on the date of such sale or other disposition or, if the common shares are traded on anestablished securities market, in the case of cash basis and electing accrual basis taxpayers, the settlement date. If a United States Holder is not able to treatthe settlement date as the realization date, the United States Holder will recognize currency gain or loss if the United States dollar value of the currencyreceived on the settlement date differs from the amount realized. A United States Holder will have a tax basis in the currency received equal to theUnited States dollar amount at the spot rate on the settlement date. Generally, any gain or loss realized by a United States Holder on a subsequent conversionor disposition of such currency will be United States source ordinary income or loss.Passive Foreign Investment Company Based on the current value of our assets and the composition of our income and assets, we do not believe we were a passive foreign investment company,or PFIC, for United States federal income tax purposes for our taxable year ended December 31, 2017. However, because our PFIC status for our currenttaxable year ending December 31, 2018 or any future taxable year may depend, in part, on the manner in which we operate our renewable energy generationassets, we cannot assure you that we will not be a PFIC for our current taxable year ending December 31, 2018 or any future taxable year. The determinationof PFIC status is based on an annual determination that cannot be made until the close of a taxable year, involves extensive factual investigation, includingascertaining the fair market value of all of our assets on a quarterly basis and the character of each item of income that we earn, and is subject to uncertainty inseveral respects. In particular, the application of the PFIC rules to certain of our business lines is complex and unclear, and we cannot guarantee that theUnited States Internal Revenue Service, or IRS, will agree with any positions that we ultimately take. Accordingly, we cannot assure you that we will not betreated as a PFIC for any taxable year or that the IRS will not take a contrary position. A non-United States corporation such as ourselves will be treated as a PFIC for United States federal income tax purposes for any taxable year if,applying applicable look-through rules, either:•at least 75% of its gross income for such year is passive income; or135Table of Contents•at least 50% of the value of its assets (determined based on a quarterly average) during such year is attributable to assets that produce or areheld for the production of passive income. For this purpose, passive income generally includes dividends, interest, royalties, rents (other than certain royalties and rents derived in the activeconduct of a trade or business and not derived from a related person) and net gains from transactions involving commodities (other than certain hedgingtransactions and certain active business gains). We will be treated as owning a proportionate share of the assets and earning a proportionate share of theincome of any other corporation in which we own, directly or indirectly, more than 25% by value of the stock. If the percentage of our assets treated asproducing passive income increases, we may become a PFIC for the current or one or more future taxable years. Changes in the composition of our income or composition of our assets may cause us to become a PFIC. The determination of whether we will be a PFICfor any taxable year also may depend in part upon the value of our goodwill and other unbooked intangibles not reflected on our balance sheet (which maybe determined based upon the market value of the common shares from time to time, which may be volatile). Among other matters, if our marketcapitalization is less than anticipated or subsequently declines, we may be or become a PFIC for the current or future taxable years because our liquid assetsand cash (which are for this purpose considered assets that produce passive income) may then represent a greater percentage of our overall assets. Further,while we believe our classification methodology and valuation approach (including, if relevant, any approach taken with respect to our marketcapitalization) is reasonable, it is possible that the IRS may challenge our classification or valuation of our goodwill and other unbooked intangibles. If we are a PFIC for any taxable year during which you hold common shares, we will continue to be treated as a PFIC with respect to you for allsucceeding years during which you hold common shares, unless we were to cease to be a PFIC and you make a "deemed sale" election with respect to thecommon shares. If such election is made, you will be deemed to have sold the common shares you hold at their fair market value and any gain from suchdeemed sale would be subject to the rules described in the following two paragraphs. After the deemed sale election, so long as we do not become a PFIC in asubsequent taxable year, your common shares with respect to which such election was made will not be treated as shares in a PFIC and, as a result, you willnot be subject to the rules described below with respect to any "excess distribution" you receive from us or any gain from an actual sale or other disposition ofthe common shares. You are strongly urged to consult your tax advisors as to the possibility and consequences of making a deemed sale election if we are andthen cease to be a PFIC and such an election becomes available to you. If we are a PFIC for any taxable year during which you hold common shares, then, unless you make a "mark-to-market" election (as discussed below), yougenerally will be subject to special and adverse tax rules with respect to any "excess distribution" that you receive from us and any gain that you recognizefrom a sale or other disposition, including a pledge, of the common shares. For this purpose, distributions that you receive in a taxable year that are greaterthan 125% of the average annual distributions that you received during the shorter of the three preceding taxable years or your holding period for thecommon shares will be treated as an excess distribution. Under these rules:•the excess distribution or recognized gain will be allocated ratably over your holding period for the common shares; •the amount of the excess distribution or recognized gain allocated to the taxable year of distribution or gain, and to any taxable years in yourholding period prior to the first taxable year in which we were treated as a PFIC, will be treated as ordinary income; and •the amount of the excess distribution or recognized gain allocated to each other taxable year will be subject to the highest tax rate in effect forindividuals or corporations, as applicable, for each136Table of Contentssuch year and the resulting tax will be subject to the interest charge generally applicable to underpayments of tax. If we are a PFIC for any taxable year during which you hold common shares and any of our non-United States subsidiaries or other corporate entities inwhich we directly or indirectly own equity interests is also a PFIC, you would be treated as owning a proportionate amount (by value) of the shares of eachsuch non-United States entity classified as a PFIC (each such entity, a lower-tier PFIC) for purposes of the application of these rules. You should consult yourown tax advisor regarding the application of the PFIC rules to any of our lower tier PFICs. If we are a PFIC for any taxable year during which you hold common shares, then in lieu of being subject to the tax and interest-charge rules discussedabove, you may make an election to include gain on the common shares as ordinary income under a mark-to-market method, provided that the commonshares constitute "marketable stock." Marketable stock is stock that is regularly traded on a qualified exchange or other market, as defined in applicableTreasury regulations. Our common shares are listed on the Nasdaq, which is a qualified exchange or other market for these purposes. Consequently, as long asthe common shares are regularly traded, and you are a holder of common shares, we expect that the mark-to-market election would be available to you, if webecame a PFIC but no assurances are given in this regard. Because a mark-to-market election cannot be made for any lower-tier PFICs that we may own, if we were a PFIC for any taxable year, a United StatesHolder that makes the mark-to-market election may continue to be subject to the tax and interest charges under the general PFIC rules with respect to suchUnited States Holder's indirect interest in any investments held by us that are treated as an equity interest in a PFIC for United States federal incometax purposes. In certain circumstances, a shareholder in a PFIC may avoid the adverse tax and interest-charge regime described above by making a "qualified electingfund" election to include in income its share of the corporation's income on a current basis. However, you may make a qualified electing fund election withrespect to your common shares only if we agree to furnish you annually with a PFIC annual information statement as specified in the applicable Treasuryregulations. We currently do not intend to prepare or provide the information that would enable you to make a qualified electing fund election. A United States Holder that holds the common shares in any year in which we are classified as a PFIC will be required to file an annual report containingsuch information as the United States Treasury Department may require. You should consult your own tax advisor regarding the application of the PFIC rulesto your ownership and disposition of the common shares and the availability, application and consequences of the elections discussed above.Information Reporting and Backup Withholding Information reporting to the IRS and backup withholding generally will apply to dividends in respect of our common shares, and the proceeds from thesale or exchange of our common shares, that are paid to you within the United States (and in certain cases, outside the United States), unless you furnish acorrect taxpayer identification number and make any other required certification, generally on IRS Form W-9 or you otherwise establish an exemption frominformation reporting and backup withholding. Backup withholding is not an additional tax. Amounts withheld as backup withholding generally areallowed as a credit against your United States federal income tax liability, and you may be entitled to obtain a refund of any excess amounts withheld underthe backup withholding rules if you file an appropriate claim for refund with the IRS and furnish any required information in a timely manner. United States Holders should consult their tax advisors regarding the application of the information reporting and backup withholding rules.137Table of ContentsInformation with Respect to Foreign Financial Assets United States Holders who are individuals (and certain entities closely held by individuals) generally will be required to report our name, address andsuch information relating to an interest in the common shares as is necessary to identify the class or issue of which your common shares are a part. Theserequirements are subject to exceptions, including an exception for common shares held in accounts maintained by certain financial institutions and anexception applicable if the aggregate value of all "specified foreign financial assets" (as defined in the Code) does not exceed $50,000. United States Holders should consult their tax advisors regarding the application of these information reporting rules.Medicare Tax Certain United States Holders that are individuals, estates or trusts are required to pay an additional 3.8% tax on, among other things, dividends andgains from the sale or other disposition of capital assets for taxable years beginning after December 31, 2012. United States Holders that are individuals,estates or trusts should consult their tax advisors regarding the effect, if any, of this tax provision on their ownership and disposition of common shares.People's Republic of China Taxation Under the EIT Law, which took effect as of January 1, 2008 and amended on February 24, 2017, enterprises established under the laws of non-PRCjurisdictions but whose "de facto management body" is located in China are considered "resident enterprises" for PRC tax purposes. Under theimplementation regulations issued by the State Council relating to the EIT Law, "de facto management bodies" are defined as the bodies that have materialand overall management and control over the business, personnel, accounts and properties of an enterprise. The Circular on Identification of China-controlled Overseas-registered Enterprises as Resident Enterprises on the Basis of Actual Management Organization, or Circular 82, further provides certainspecific criteria for determining whether the "de facto management body" of a PRC-controlled offshore incorporated enterprise is located in the PRC. Thecriteria include whether (a) the premises where the senior management and the senior management bodies responsible for the routine production and businessmanagement of the enterprise perform their functions are mainly located within the PRC, (b) decisions relating to the enterprise's financial and humanresource matters are made or subject to approval by organizations or personnel in the PRC, (c) the enterprise's primary assets, accounting books and records,company seals, and board and shareholders' meeting minutes are located or maintained in the PRC and (d) 50% or more of voting board members or seniorexecutives of the enterprise habitually reside in the PRC. Although the Circular 82 only applies to offshore enterprises controlled by enterprises or enterprisegroup located within the PRC, the determining criteria set forth in the Circular 82 may reflect the tax authorities' general position on how the "de factomanagement body" test may be applied in determining the tax resident status of offshore enterprises. As the tax resident status of an enterprise is subject tothe determination by the PRC tax authorities, uncertainties remain with respect to the interpretation of the term "de facto management body" as applicable tous. Most of our management are currently based in China, and may remain in China in the future. If we are treated as a "resident enterprise" for PRC taxpurposes, we will be subject to PRC income tax on our worldwide income at a uniform tax rate of 25%, but dividends received by us from our PRCsubsidiaries may be exempt from the income tax. Under the EIT Law and its implementation regulations, dividends paid to a non-PRC investor are generally subject to a 10% PRC withholding tax, ifsuch dividends are derived from sources within China and the non-PRC investor is considered to be a non-resident enterprise without any establishment orplace within China or if the dividends paid have no connection with the non-PRC investor's establishment or place within China, unless such tax iseliminated or reduced under an138Table of Contentsapplicable tax treaty. Similarly, any gain realized on the transfer of shares or convertible notes by such investor is also subject to a 10% PRC withholding taxif such gain is regarded as income derived from sources within China, unless such tax is eliminated or reduced under an applicable tax treaty. The implementation regulations of the EIT Law provide that (a) if the enterprise that distributes dividends is domiciled in the PRC, or (b) if gains arerealized from transferring equity interests of enterprises domiciled in the PRC, then such dividends or capital gains shall be treated as China-sourced income.Currently there are no detailed rules applicable to us that govern the procedures and specific criteria for determining the meaning of being "domiciled" in thePRC. As such, it is not clear how the concept of domicile will be interpreted under the EIT Law. Domicile may be interpreted as the jurisdiction where theenterprise is incorporated or where the enterprise is a tax resident. As a result, if we are considered a PRC "resident enterprise" for tax purpose, it is possible that the dividends we pay with respect to our common shares tonon-PRC enterprises, or the gain non-PRC enterprises may realize from the transfer of our common shares or our convertible notes, would be treated asincome derived from sources within China and be subject to the PRC withholding tax at a rate of 10% or a lower applicable treaty rate for enterprises. Under the IIT Law, individual income tax is payable on PRC-source dividend income. The implementation regulations of the IIT Law provide thatincome from dividends derived from companies, enterprises and other economic organizations in China as well as income realized from transfer of propertiesin China is considered derived from sources inside China, regardless of whether the place of payment was inside China. Therefore, if we are treated as acompany in China for tax purposes, any dividends we pay to our non-PRC individual shareholders as well as any gains realized by our non-PRC individualshareholders or our non-PRC individual note holders from the transfer of our common shares or our convertible notes may be regarded as China-sourcedincome and, consequently, be subject to PRC withholding tax at a rate of up to 20% or a lower applicable treaty rate for individuals.F. Dividends and Paying Agents Not applicable.G. Statement by Experts Not applicable.H. Documents on Display We previously filed with the SEC our registration statements on Form F-1 (File Number 333-138144), initially filed on October 23, 2006, andregistration statements on Form F-3 (File Number 333-208828), initially filed on January 4, 2016. We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to filereports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within four months after the end of each fiscal year forfiscal years ending on or after December 15, 2011. Copies of reports and other information, when so filed, may be inspected without charge and may beobtained at prescribed rates at the public reference facilities maintained by the Securities and Exchange Commission at 100 F Street, N.E., Room 1580,Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC also maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information regardingregistrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules under the ExchangeAct prescribing the139Table of Contentsfurnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. Our financial statements have been prepared in accordance with U.S. GAAP. We will furnish our shareholders with annual reports, which will include a review of operations and annual audited consolidated financial statementsprepared in conformity with U.S. GAAP.I. Subsidiary Information For a listing of our major subsidiaries, see "Item 4. Information on the Company—C. Organizational Structure." ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Exchange Risk The majority of our sales in 2017 are denominated in U.S. dollars, Renminbi and Japanese yen, with the remainder in other currencies such as Euros,Brazilian real and Canadian dollars, while a substantial portion of our costs and expenses is denominated in Renminbi and U.S. dollars. From time to time, weenter into loan arrangements with Chinese commercial banks that are denominated primarily in Renminbi or U.S. dollars. Most of our cash and cashequivalents and restricted cash are denominated in Renminbi. Therefore, fluctuations in currency exchange rates could have a significant impact on ourfinancial stability. Fluctuations in exchange rates, particularly between the U.S. dollar, Renminbi, Canadian dollar, Euros, British pounds and Japanese yen,may result in fluctuations in foreign exchange gains or losses. We recorded a foreign exchange gain of $22.9 million in 2015, recorded a foreign exchangegain $25.4 million in 2016 and incurred a foreign exchange loss of $23.4 million in 2017. We cannot predict the impact of future exchange rate fluctuationson our results of operations and may incur net foreign currency losses in the future. The depreciation of U.S. dollar against Renminbi for our accountsreceivable was the chief reason for our foreign exchange loss in 2017. As of December 31, 2017, we held $358.1 million in accounts receivable, most ofwhich were denominated in U.S. dollars. Had we converted all of our accounts receivable, assuming all denominated in U.S. dollar, into Renminbi atRMB6.5063 for $1.00, the noon buying rate as of December 31, 2017, our accounts receivable would have been RMB2,329.8 million as of December 31,2017. Assuming that Renminbi appreciates by a rate of 10% to an exchange rate of RMB5.8557 to $1.00, we would record a loss of our accounts receivablein Renminbi terms. A 10% appreciation of Renminbi would result in our holding Renminbi equivalents of RMB2,096.9 million. These amounts wouldtherefore reflect a theoretical loss of RMB233.0 million for our accounts receivable as of December 31, 2017. This calculation model is based on multiplyingour accounts receivable, which are held in U.S. dollars, by a smaller Renminbi equivalent amount resulting from an appreciation of Renminbi. Since 2008, we have hedged part of our foreign currency exposures against the U.S. dollar using foreign currency forward or option contracts in order tolimit our exposure to fluctuations in foreign exchange rates. We incurred a loss on change in foreign currency derivatives of $3.7 million in 2015, a gain onchange in foreign currency derivatives of $4.8 million in 2016 and a loss on change in foreign currency derivatives of $2.6 million in 2017. The gains orlosses on change in foreign currency derivatives are related to our hedging program. As of December 31, 2017, we had forward contracts of the U.S. dollar against the Renminbi with notional amount of $415.0 million outstanding.Assuming a 10.0% appreciation of the U.S. dollar against the Renminbi, the mark-to-market gain of our outstanding forward contracts of the U.S. dollaragainst the Renminbi would have decreased by approximately $41.5 million.140Table of Contents Our financial statements are expressed in U.S. dollars, while some of our subsidiaries use different functional currencies, such as the Renminbi, Euro,Canadian dollar, British pounds and Japanese yen. The value of your investment in our common shares will be affected by the foreign exchange rate betweenthe U.S. dollar and other currencies used by our subsidiaries. To the extent we hold assets denominated in currencies other than U.S. dollars, any appreciationof such currencies against the U.S. dollars will likely result in an exchange gain while any depreciation will likely result in an exchange loss when we convertthe value of these assets into U.S. dollar equivalent amounts. On the other hand, to the extent we have liabilities denominated in currencies other thanU.S. dollars, any appreciation of such currencies against the U.S. dollar will likely result in an exchange loss while any depreciation will likely result in anexchange gain when we convert the value of these liabilities into U.S. dollar equivalent amounts. These and other effects on our financial conditionsresulting from the unfavorable changes in foreign currency exchange rates could have a material adverse effect on the market price of our common shares, thedividends we may pay in the future, and your investment.Interest Rate Risk Our exposure to interest rate risk primarily relates to interest expense under our short-term and long-term bank borrowings, as well as interest incomegenerated by excess cash invested in demand deposits and liquid investments with original maturities of three months or less. Such interest-earninginstruments carry a degree of interest rate risk. We used derivative financial instruments to manage some of our interest risk exposure. We have not beenexposed nor do we anticipate being exposed to material risks due to changes in interest rates. However, our future interest expense may increase due tochanges in market interest rates. ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable.141Table of Contents PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None of these events occurred in any of the years ended December 31, 2015, 2016 and 2017. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS A.-D. Material Modifications to the Rights of Security Holders See "Item 10. Additional Information—B. Memorandum and Articles of Association" for a description of the rights of shareholders, which remainunchanged.E. Use of Proceeds Not applicable. ITEM 15. CONTROLS AND PROCEDURES Disclosure Controls and Procedures Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of ourdisclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required byRule 13a-15(b) under the Exchange Act. Based upon that evaluation, our management has concluded that, as of the end of the period covered by this annualreport, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports that we file orsubmit under the Exchange Act was recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, and that theinformation required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to ourmanagement, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures.Management's Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such item is defined in Rules 13a-15(f) under the Exchange Act, for our company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of consolidated financial statements in accordance with generally accepted accounting principles andincludes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactionsand dispositions of a company's assets; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidatedfinancial statements in accordance with generally accepted accounting principles, and that a company's receipts and expenditures are being made only inaccordance with authorizations of a company's management and directors; and (c) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of a company's assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.142Table of Contents As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules as promulgated by the Securities and Exchange Commission, ourmanagement assessed the effectiveness of our internal control over financial reporting as of December 31, 2017 using criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, managementconcluded that our internal control over financial reporting was effective as of December 31, 2017. Deloitte Touche Tohmatsu Certified Public Accountants LLP, an independent registered public accounting firm, who audited our consolidated financialstatements for the year ended December 31, 2017, has also audited the effectiveness of internal control over financial reporting as of December 31, 2017.Report of the Independent Registered Public Accounting Firm To the shareholders and the Board of Directors of Canadian Solar Inc.Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Canadian Solar Inc. and subsidiaries (the "Company") as of December 31, 2017, based oncriteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, basedon criteria established in Internal Control—Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidatedfinancial statements as of and for the year ended December 31, 2017, of the Company and our report dated April 26, 2018, expressed an unqualified opinionon those financial statements.Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectivenessof internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal143Table of Contentscontrol over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately andfairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the companyare being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financialstatements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate./s/ Deloitte Touche Tohmatsu Certified Public Accountants LLPShanghai, ChinaApril 26, 2018Changes in Internal Controls Management has evaluated, with the participation of our chief executive officer and chief financial officer, whether any changes in our internal controlover financial reporting that occurred during our last fiscal year have materially affected, or are reasonably likely to materially affect, our internal controlover financial reporting. Based on the evaluation we conducted, management has concluded that no such changes occurred during the period covered by thisannual report on Form 20-F. ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT Our board of directors has determined that Lars-Eric Johansson qualifies as an "audit committee financial expert" as defined in Item 16A of Form 20-F.Each of the members of the audit committee is an "independent director" as defined in the Nasdaq Marketplace Rules. ITEM 16B. CODE OF ETHICS Our board of directors has adopted a code of ethics that applies to our directors, officers, employees and agents, including certain provisions thatspecifically apply to our chief executive officer, chief financial officer, chief operations officer, chief technology officer, vice presidents and any otherpersons who perform similar functions for us. We have posted our code of business conduct on our website www.canadiansolar.com. We hereby undertake toprovide to any person without charge, a copy of our code of business conduct and ethics within ten working days after we receive such person's writtenrequest. ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by DeloitteTouche Tohmatsu Certified Public Accountants LLP,144Table of Contentsour principal external auditors, for the periods indicated. We did not pay any other fees to our auditors during the periods indicated below. The policy of our audit committee is to pre-approve all audit and non-audit services provided by Deloitte Touche Tohmatsu Certified PublicAccountants LLP, including audit services, audit-related services, tax services and other services as described above, other than those for de minimis serviceswhich are approved by the Audit Committee prior to the completion of the audit. We have a written policy on the engagement of an external auditor. ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES Not applicable. ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS None. ITEM 16F. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT Not applicable. ITEM 16G. CORPORATE GOVERNANCE None. ITEM 16H. MINE SAFETY DISCLOSURE Not applicable.145 For the Years EndedDecember 31, 2016 2017 Audit fees(1) $1,934,196 $1,791,044 Audit related fees(2) $1,070,261 $869,158 Tax fees(3) $183,939 $332,898 All other fees(4) — 474,442 (1)"Audit fees" means the aggregate fees billed for professional services rendered by our principal auditors for the annual audit of ourconsolidated financial statements. (2)"Audit related fees" represents the aggregate fees billed for assurance and related services by our principal auditors that are reasonablyrelated to the performance of the audit or review of our consolidated financial statements and are not reported as audit fees. Theseinclude professional services rendered in connection with bond and equity offerings, statutory audits of our subsidiary companies,quarterly reviews and other related services. In 2016, "Audit related fees" included approximately $0.7 million for the statutory auditsof our subsidiary companies. In 2017, "Audit related fees" included approximately $0.4 million for the statutory audits of oursubsidiary companies. (3)"Tax fees" of 2016 and 2017 were for services rendered by our principal accountants for tax compliance, tax advice and tax planning. (4)"All other fees", refers to the consulting service for SAP consulting service.Table of Contents PART III ITEM 17. FINANCIAL STATEMENTS We have elected to provide financial statements pursuant to Item 18. ITEM 18. FINANCIAL STATEMENTS The consolidated financial statements of Canadian Solar Inc. are included at the end of this annual report. ITEM 19. EXHIBITS 146ExhibitNumber Description of Document1.1 Amended Articles of Continuance (incorporated by reference to Exhibit 3.2 of our registration statement on Form F-1 (File No. 333-138144), as amended, initially filed with the SEC on October 23, 2006)2.1 Registrant's Specimen Certificate for Common Shares (incorporated by reference to Exhibit 4.11 from our F-1 registration statement (File No. 333-138144), as amended, initially filed with the Commission on October 23,2006)4.1 Amended and Restated Share Incentive Plan of the Registrant, effective on May 8, 2011 (incorporated by referenceto Exhibit 4.1 of our annual report on Form 20-F for the year ended December 31, 2016 (File No. 001-33107),initially filed with the SEC on April 27, 2017)4.2 Form of Director Indemnity Agreement (incorporated by reference to Exhibit 4.1 of our annual report on Form 20-Ffor the year ended December 31, 2008 (File No. 001-33107), as amended, initially filed with the SEC on June 8,2009)4.3 Employment Agreement between the Registrant and Dr. Shawn Qu (incorporated by reference to Exhibit 10.2 of ourregistration statement on Form F-1 (File No. 333-138144), as amended, initially filed with the SEC on October 23,2006)4.4 Form of Employment Agreement between the Registrant and its executive officers (incorporated by reference toExhibit 4.7 of our annual report on Form 20-F for the year ended December 31, 2010 (File No. 001-33107), asamended, initially filed with the SEC on May 17, 2011)4.5 Indenture, dated as of February 18, 2014, between the Registrant and The Bank of New York Mellon, as the trustee(incorporated by reference to Exhibit 4.5 of our annual report on Form 20-F for the year ended December 31, 2013(File No. 001-33107), as amended, initially filed with the SEC on April 28, 2014)4.6 Purchase and Sale Agreement by and among Sharp Corporation, Sharp US Holding Inc., Canadian Solar EnergyAcquisition Co. and Canadian Solar Inc., dated as of February 3, 2015 (incorporated by reference to Exhibit 4.6 ofour annual report on Form 20-F for the year ended December 31, 2014 (File No. 001-33107), as amended, initiallyfiled with the SEC on April 23, 2015)4.7† Silicon Wafer Purchase Contract between CSI Cells Co., Ltd., CSI&GCL Solar Manufacturing (Yan Cheng) Inc. andCanadian Solar Manufacturing (Luoyang) Inc., and GCL-Poly (Suzhou) Energy Limited, dated January 29, 2016(incorporated by reference to Exhibit 4.7 of our annual report on Form 20-F for the year ended December 31, 2015(File No. 001-33107), as amended, initially filed with the SEC on April 20, 2016)Table of Contents147ExhibitNumber Description of Document8.1* List of Major Subsidiaries12.1* CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200212.2* CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200213.1** CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2** CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200215.1* Consent of Deloitte Touche Tohmatsu Certified Public Accountants LLP101* Financial information from registrant for the year ended December 31, 2016 formatted in eXtensible BusinessReporting Language (XBRL):(i) Consolidated Balance Sheets as of December 31, 2016 and 2017; (ii) Consolidated Statements of Operations forthe Years Ended December 31, 2015, 2016 and 2017; (iii) Consolidated Statements of Comprehensive Income forthe Years Ended December 31, 2015, 2016 and 2017; (iv) Consolidated Statements of Changes in Equity for theYears Ended December 31, 2015, 2016 and 2017; (v) Consolidated Statements of Cash Flows for the Years EndedDecember 31, 2015, 2016 and 2017; (vi) Notes to Consolidated Financial Statements; and (vii) AdditionalInformation—Financial Statements Schedule I*Filed herewith. **Furnished herewith. †Confidential treatment is being requested with respect to portions of this exhibit and such confidential treatment portions have beendeleted and replaced with "****" and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 under theSecurities Exchange Act of 1934.Table of Contents SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned tosign this annual report on its behalf.Date: April 26, 2018148 CANADIAN SOLAR INC. By: /s/ Shawn (Xiaohua) Qu Name: Shawn (Xiaohua) QuTitle: Chairman, President and Chief Executive Officer By: /s/ Huifeng Chang Name: Huifeng ChangTitle: Senior Vice President and Chief Financial OfficerTable of Contents CANADIAN SOLAR INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2016 and 2017 F-3 Consolidated Statements of Operations for the Years Ended December 31, 2015, 2016 and 2017 F-4 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2015, 2016 and 2017 F-5 Consolidated Statements of Changes in Equity for the Years Ended December 31, 2015, 2016 and 2017 F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2016 and 2017 F-7 Notes to Consolidated Financial Statements F-9 Additional Information—Financial Statement Schedule I F-85 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Canadian Solar Inc.Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Canadian Solar Inc. and subsidiaries (the "Company") as of December 31, 2017 and2016, the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows, for each of the three years in the periodended December 31, 2017, the related notes and the financial statement schedule included as Schedule I (collectively referred to as the "financialstatements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity withaccounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company'sinternal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued bythe Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 26, 2018, expressed an unqualified opinion on theCompany's internal control over financial reporting.Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financialstatements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Companyin accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performingprocedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond tothose risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits alsoincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of thefinancial statements. We believe that our audits provide a reasonable basis for our opinion./s/ Deloitte Touche Tohmatsu Certified Public Accountants LLPShanghai ChinaApril 26, 2018We have served as the Company's auditor since 2006.F-2Table of Contents CANADIAN SOLAR INC. CONSOLIDATED BALANCE SHEETS December 31,2016 December 31,2017 (In Thousands of U.S. Dollars,except share data) ASSETS Current assets: Cash and cash equivalents, including consolidated variable interest entities of $4,066 and $33,993 as of December 31, 2016and 2017, respectively 511,039 561,679 Restricted cash—current, including consolidated variable interest entities of $25,958 and nil as of December 31, 2016 and2017, respectively 487,516 617,761 Accounts receivable trade, net of allowance of $26,119 and $32,941 as of December 31, 2016 and 2017, respectively,including consolidated variable interest entities of nil and $2,787 as of December 31, 2016 and 2017, respectively 400,251 358,091 Accounts receivable, unbilled 3,425 1,253 Amounts due from related parties 19,082 26,102 Inventories 295,371 346,092 Value added tax recoverable, including consolidated variable interest entities of nil and $4,772 as of December 31, 2016 and2017, respectively 55,680 94,503 Advances to suppliers—current, net of allowance of $6,482 and $5,705 as of December 31, 2016 and 2017, respectively,including consolidated variable interest entities of nil and $16 as of December 31, 2016 and 2017, respectively 29,312 61,399 Derivative assets—current 12,270 16,200 Project assets—current, including consolidated variable interest entities of $114,440 and $171,898 as of December 31, 2016and 2017, respectively 1,317,902 1,523,342 Assets held-for-sale 392,089 182,797 Prepaid expenses and other current assets, including consolidated variable interest entities of $2,249 and $12,605 as ofDecember 31, 2016 and 2017, respectively 266,826 296,084 Total current assets 3,790,763 4,085,303 Restricted cash—non-current 9,145 10,695 Property, plant and equipment, net 462,345 747,235 Solar power systems, net 112,062 63,964 Deferred tax assets—non-current 229,980 131,796 Advances to suppliers—non-current, net of allowance of $13,045 and $13,057 as of December 31, 2016 and 2017, respectively 54,080 38,325 Prepaid land use rights, including consolidated variable interest entities of $689 and $22,927 as of December 31, 2016 and2017, respectively 48,651 78,649 Investments in affiliates 368,459 414,215 Intangible assets, net 8,422 10,986 Goodwill 7,617 6,248 Derivative assets—non-current 15,446 10,911 Project assets—non-current 182,391 148,170 Other non-current assets, including consolidated variable interest entities of $5,834 and $2,708 as of December 31, 2016 and2017, respectively 117,245 143,130 TOTAL ASSETS 5,406,606 5,889,627 LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND EQUITY Current liabilities: Short-term borrowings, including consolidated variable interest entities of $69,811 and $214,128 as of December 31, 2016 and2017, respectively 1,600,033 1,957,755 Accounts payable, including consolidated variable interest entities of $29,813 and -nil as of December 31, 2016 and 2017,respectively 440,116 402,964 Short-term notes payable 296,663 572,631 Amounts due to related parties, including consolidated variable interest entities of nil and $272 as of December 31, 2016 and2017, respectively 19,912 6,023 Other payables, including consolidated variable interest entities of $22 and nil as of December 31, 2016 and 2017, respectively 223,584 315,321 Short-term commercial paper 131,432 — Advances from customers 90,101 51,739 Derivative liabilities—current 9,625 6,121 Liabilities held-for-sale 279,272 185,872 Financing liabilities—current 459,258 407,683 Other current liabilities, including consolidated variable interest entities of nil and $7,863 as of December 31, 2016 and 2017,respectively 171,070 201,903 Total current liabilities 3,721,066 4,108,012 Accrued warranty costs 61,139 55,659 Convertible notes 125,569 126,476 Long-term borrowings 493,455 404,341 Derivative liabilities—non-current — 359 Liability for uncertain tax positions 8,431 9,264 Deferred tax liabilities—non-current 23,348 5,562 Loss contingency accruals 22,654 25,682 Financing liabilities—non-current — 12,243 Other non-current liabilities, including consolidated variable interest entities of nil and $6,777 as of December 31, 2016 and2017, respectively 51,554 82,254 TOTAL LIABILITIES 4,507,216 4,829,852 Commitments and contingencies (Note 23) Equity: Common shares—no par value: unlimited authorized shares, 57,830,149 and 58,496,685 shares issued and outstanding atDecember 31, 2016 and 2017, respectively 701,283 702,162 Additional paid-in capital (8,897) 417 Retained earnings 284,109 383,681 Accumulated other comprehensive loss (91,814) (54,034)Total Canadian Solar Inc. shareholders' equity 884,681 1,032,226 Non-controlling interests in subsidiaries 14,709 27,549 TOTAL EQUITY 899,390 1,059,775 TOTAL LIABILITIES AND EQUITY 5,406,606 5,889,627 See notes to consolidated financial statements.F-3Table of Contents CANADIAN SOLAR INC. CONSOLIDATED STATEMENTS OF OPERATIONS See notes to consolidated financial statements.F-4 Years Ended December 31, 2015 2016 2017 (In Thousands of U.S. Dollars, except shareand per share data) Net revenues: —Non-related parties 3,363,274 2,605,335 3,221,928 —Related parties 104,352 247,743 168,465 Total net revenues 3,467,626 2,853,078 3,390,393 Cost of revenues: —Non-related parties 2,821,972 2,216,146 2,641,583 —Related parties 68,884 219,744 111,212 Total cost of revenues 2,890,856 2,435,890 2,752,795 Gross profit 576,770 417,188 637,598 Operating expenses: Selling expenses 149,710 145,367 156,032 General and administrative expenses 168,025 203,789 230,998 Research and development expenses 17,056 17,407 28,777 Other operating income, net (5,392) (42,539) (47,554)Total operating expenses, net 329,399 324,024 368,253 Income from operations 247,371 93,164 269,345 Other income (expenses): Interest expense (54,148) (69,723) (117,971)Interest income 16,831 10,236 10,477 Gain (loss) on change in fair value of derivatives (12,196) 27,322 (272)Foreign exchange gain (loss) 22,882 25,406 (23,449)Investment income (loss) 2,342 (1,532) (3,607)Gain on repurchase of convertible notes — 2,782 — Others 389 — — Other expenses, net (23,900) (5,509) (134,822)Income before income taxes and equity in earnings (loss) ofunconsolidated investees 223,471 87,655 134,523 Income tax expense (49,512) (17,976) (40,951)Equity in earnings (loss) of unconsolidated investees (643) (4,404) 9,411 Net income 173,316 65,275 102,983 Less: net income attributable to non-controlling interests 1,455 26 3,411 Net income attributable to Canadian Solar Inc. 171,861 65,249 99,572 Earnings per share—basic $3.08 $1.13 $1.71 Shares used in computation—basic 55,728,903 57,524,349 58,167,004 Earnings per share—diluted $2.93 $1.12 $1.69 Shares used in computation—diluted 60,426,056 58,059,063 61,548,158 Table of Contents CANADIAN SOLAR INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME See notes to consolidated financial statements.F-5 Years Ended December 31, 2015 2016 2017 (In Thousands of U.S. Dollars) Net income 173,316 65,275 102,983 Other comprehensive income (loss) (net of tax of nil): Foreign currency translation adjustment (75,687) (41,786) 39,305 Gain(loss) on commodity hedge 2,078 2,083 (1,844)Gain(loss) on interest rate swap — 10,375 (246)Comprehensive income 99,707 35,947 140,198 Less: comprehensive income attributable to non-controlling interests 7,759 2,656 2,846 Comprehensive income attributable to Canadian Solar Inc. 91,948 33,291 137,352 Table of Contents CANADIAN SOLAR INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY See notes to consolidated financial statements.F-6 CommonShares AdditionalPaid-inCapital RetainedEarnings AccumulatedOtherComprehensiveIncome (loss) EarningsAttributable toCanadianSolar Inc. Non-ControllingInterest TotalEquity Number $ $ $ $ $ $ $ (In Thousands of U.S. Dollars, except share data) Balance at January 1, 2015 55,161,856 675,236 (25,682) 46,999 20,058 716,611 12,963 729,574 Net income — — — 171,861 — 171,861 1,455 173,316 Foreign currency translationadjustment — — — — (81,992) (81,992) 6,305 (75,687)Profit distribution to a non-controlling interest — — — — — — (305) (305)Share-based compensation — — 5,966 — — 5,966 — 5,966 Tax benefit of share-basedcompensation — — 853 — — 853 — 853 Exercise of share options 803,587 1,867 — — — 1,867 — 1,867 Acquisition of non-controllinginterests — — 1,724 — — 1,724 (2,651) (927)Gain on commodity hedge — — — — 2,078 2,078 — 2,078 Disposal of a subsidiary — — — — — — (4,225) (4,225)Balance at December 31, 2015 55,965,443 677,103 (17,139) 218,860 (59,856) 818,968 13,542 832,510 Net income — — — 65,249 — 65,249 26 65,275 Foreign currency translationadjustment — — — — (44,416) (44,416) 2,630 (41,786)Capital injection from non-controlling interests — — — — — — 1,648 1,648 Issuance of ordinary shares, netof issuance costs 1,029,661 23,408 — — — 23,408 — 23,408 Deferred tax on issuance costs ofordinary shares — 65 — — — 65 — 65 Share-based compensation — — 7,757 — — 7,757 — 7,757 Tax benefit of share-basedcompensation — — 485 — — 485 — 485 Exercise of share options 835,045 707 — — — 707 — 707 Fair value change on derivatives — — — — 12,458 12,458 — 12,458 Disposal of a subsidiary — — — — — — (3,137) (3,137)Balance at December 31, 2016 57,830,149 701,283 (8,897) 284,109 (91,814) 884,681 14,709 899,390 Net income — — — 99,572 — 99,572 3,411 102,983 Foreign currency translationadjustment — — — — 39,870 39,870 (565) 39,305 Acquisition of subsidiaries — — — — — — 9,994 9,994 Share-based compensation 9,314 — — 9,314 — 9,314 Exercise of share options 666,536 879 — — — 879 — 879 Fair value change on derivatives — — — — (2,090) (2,090) — (2,090)Balance at December 31, 2017 58,496,685 702,162 417 383,681 (54,034) 1,032,226 27,549 1,059,775 Table of Contents CANADIAN SOLAR INC. CONSOLIDATED STATEMENTS OF CASH FLOWS See notes to consolidated financial statements.F-7 Years Ended December 31, 2015 2016 2017 (In Thousands of U.S. Dollars) Operating activities: Net income 173,316 65,275 102,983 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 94,217 95,849 99,273 Loss on disposal of property, plant and equipment 1,801 8,094 13,976 Gain on disposal of solar power systems and other investments — (46,367) (27,803)Impairment loss of property, plant and equipment 6,992 22,757 11,626 Impairment loss of project assets — 2,952 — Impairment loss of investment — — 3,686 (Gain) loss on change in fair value of derivatives 12,196 (27,322) 272 Equity in loss (earnings) of unconsolidated investees 643 4,404 (9,411)Allowance for doubtful accounts 3,673 (280) 7,265 Write-down of inventories 23,013 19,467 17,820 Gain on repurchase of convertible notes — (2,782) — Share-based compensation 5,966 7,757 9,314 Unrealized gain from sales to unconsolidated investees 15,637 9,469 13,065 Changes in operating assets and liabilities: Accounts receivable trade (63,352) (33,060) 46,337 Accounts receivable, unbilled 15,642 4,688 2,345 Amounts due from related parties (99,893) (4,230) (10,089)Inventories 50,821 (50,557) (49,024)Value added tax recoverable (22,725) (11,466) (38,190)Advances to suppliers 7,967 (30,609) (15,990)Project assets 70,943 (6,792) (128,982)Prepaid expenses and other current assets 36,745 (135,426) (49,813)Other non-current assets (6,093) (1,308) (23,795)Accounts payable (23,975) 61,157 (27,758)Short-term notes payable 116,453 (141,363) 243,685 Amounts due to related parties 47,522 (43,774) 33,908 Other payables 12,484 63,828 (5,889)Advances from customers (30,123) 19,710 (44,985)Other liabilities 56,542 (995) (18,774)Accrued warranty costs 12,004 (3,847) (6,726)Prepaid land use rights (16,262) (19,714) (30,087)Goodwill — — 1,369 Liability for uncertain tax positions (1,111) (6,037) 833 Deferred taxes (112,263) (95,629) 84,939 Net settlement of derivatives 24,878 (1,922) (1,460)Net cash provided by (used in) operating activities 413,658 (278,073) 203,920 Table of ContentsCANADIAN SOLAR INC.CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued) See notes to consolidated financial statements.F-8 Years Ended December 31, 2015 2016 2017 (In Thousands of U.S. Dollars) Investing activities: (Increase) decrease in restricted cash (100,935) 50,585 (101,985)Investments in affiliates (84,389) (124,737) (92,925)Return of investment from unconsolidated investees 1,698 7,442 4,233 Purchase of property, plant and equipment (90,905) (286,722) (276,978)Purchase of solar power systems (551,863) (824,766) (33,697)Repayment of loan received from a third party 24,467 — — Proceeds from disposal of solar power systems — 90,078 128,768 Proceeds from insurance claim — 46,801 43,930 Proceeds from disposal of investment on subsidiaries 3,615 1,899 — Distribution to non-controlling shareholders upon disposal of a subsidiary (4,225) (3,137) — Acquisition of subsidiaries, net of cash paid (196,783) — (12,561)Proceeds from disposal of property, plant and equipment 216 — — Net cash used in investing activities (999,104) (1,042,557) (341,215)Financing activities: Proceeds from short-term borrowings 1,436,950 1,841,808 1,646,910 Repayment of short-term borrowings (1,308,235) (2,243,003) (2,068,069)Proceeds from long-term borrowings 487,228 1,076,332 690,841 Profit distribution to a non-controlling interest (305) — — Gross proceeds from issuance of common shares — 23,864 — Issuance costs paid for common shares offering — (456) — Payment of financing costs (39,297) (3,750) — Purchase of shares from non-controlling shareholders (927) — — Proceeds from non-controlling interest — 1,648 — Proceeds from issuance of warrant 16,378 — — Proceeds from third party financing liabilities 1,685 415,523 12,243 Proceeds from sales-leaseback arrangement 25,246 96,697 61,142 Distributions to tax equity investors — — (9,582)Repayment of capital lease obligation (1,107) (24,191) (30,128)Proceeds from short-term commercial paper — 134,311 — Repayment of short-term commercial paper — — (138,953)Payments for repurchase of convertible notes — (19,667) — Proceeds from exercise of stock options 1,867 707 879 Net cash provided by financing activities 619,483 1,299,823 165,283 Effect of exchange rate changes (30,501) (12,312) 21,444 Net increase (decrease) in cash and cash equivalents 3,536 (33,119) 49,432 Cash and cash equivalents at the beginning of the year 549,543 553,079 511,039 Less: net increase (decrease) in cash and cash equivalents classified within assets held-for-sale at the end of the year — 8,921 (1,208)Cash and cash equivalents at the end of the year 553,079 511,039 561,679 Supplemental disclosure of cash flow information: Interest paid (net of amounts capitalized) 49,619 70,827 113,513 Income taxes paid 87,348 187,876 45,483 Supplemental schedule of non-cash activities: Reclassification of solar power systems to project assets 114,131 1,362,037 4,782 Unpaid proceeds from disposal of subsidiaries included in prepaid expenses and other current assets — 14,604 — Property, plant and equipment costs included in other payables 34,161 120,881 153,017 Solar power systems costs included in accounts payables 115,887 72,885 — Reclassification of partial interests in project assets to investment in connection with a sale of 51% equity in theproject 84,200 — — Decrease in amounts due from related parties, net of investments in affiliates — 65,090 — Table of Contents CANADIAN SOLAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017 (In Thousands of U.S. Dollars, unless otherwise indicated) 1. ORGANIZATION AND PRINCIPAL ACTIVITIES Canadian Solar Inc. ("CSI") was incorporated pursuant to the laws of the Province of Ontario in October 2001, and changed its jurisdiction by continuingunder the Canadian federal corporate statute, the Canada Business Corporations Act, or CBCA, effective June 1, 2006. CSI and its subsidiaries (collectively, the "Company") design, develop, and manufacture solar wafers, cells and solar power products. In recent years, theCompany has increased investment in, and management attention on its total solutions business, which primarily consists of solar power project developmentand sale, EPC and development services, O&M services, operating solar power projects and sales of electricity, and sales of solar system kits. As ofDecember 31, 2017, major subsidiaries of CSI are included in Appendix 1.2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES(a) Basis of presentation The consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles("U.S. GAAP").(b) Basis of consolidation The consolidated financial statements include the financial statements of the Company and its subsidiaries in which it has a controlling financial interestor variable interest entities ("VIEs") for which the Company is a primary beneficiary. A controlling financial interest is typically determined when a company holds a majority of the voting equity interest in an entity. All intercompanybalances and transactions between the Company and its subsidiaries have been eliminated in consolidation. The Company consolidates VIEs when the Company is the primary beneficiary. The primary beneficiary of a VIE is the party that has the power to directthe activities that most significantly impact the performance of the entity and the obligation to absorb losses or the right to receive benefits that couldpotentially be significant to the entity. VIEs are entities that lack sufficient equity to finance their activities without additional financial support from otherparties or whose equity holders, as a group, lack one or more of the following characteristics: (a) direct or indirect ability to make decisions; (b) obligation toabsorb expected losses; or (c) right to receive expected residual returns. VIEs must be evaluated quantitatively and qualitatively to determine the primarybeneficiary, which is the reporting entity that has (a) the power to direct activities of a VIE that most significantly impact the VIEs economic performance and(b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that couldpotentially be significant to the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes. A VIE can have only oneprimary beneficiary, but may not have a primary beneficiary if no party meets the criteria described above. When evaluating whether the Company is the primary beneficiary of a VIE, and must therefore consolidate the entity, the Company performs aqualitative analysis that considers the design of the VIE, the nature of its involvement and the variable interests held by other parties. If that evaluation isF-9Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)inconclusive as to which party absorbs a majority of the entity's expected losses or residual returns, a quantitative analysis is performed to determine theprimary beneficiary. For the Company's consolidated VIEs, the Company has presented on the consolidated balance sheets, to the extent material, the assets of itsconsolidated VIEs that can only be used to settle specific obligations of the consolidated VIE, and the liabilities of its consolidated VIEs for which creditorsdo not have recourse to its general assets outside of the consolidated VIE. All significant intercompany accounts and transactions between the Company andits consolidated VIEs have been eliminated in consolidation.(c) Use of estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affectreported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected inthe Company's consolidated financial statements include revenue recognition for sales of solar power projects, EPC and development services accounted forunder the percentage-of-completion method, allowance for doubtful accounts receivable and advances to suppliers, valuation of inventories and provisionfor firm purchase commitments, provision for contingent liability, impairment of long-lived assets and project assets, the estimated useful lives of long-livedassets, determination of assets retirement obligation ("ARO"), accrual for warranty and the recognition of the benefit from the purchased warranty insurance,fair value estimate of financial instruments including warrants and other types of derivative, accrual for uncertain tax positions, valuation allowances fordeferred tax assets, applying acquisition method of accounting to business acquisitions and the grant-date fair value of share-based compensation awards andrelated forfeiture rates.(d) Cash and cash equivalents and restricted cash Cash and cash equivalents are stated at cost, which approximates fair value. Cash and cash equivalents consist of cash on hand and demand deposits,which are unrestricted as to withdrawal and use, and have original maturities of three months or less when acquired. Restricted cash represents amounts held by banks, which are not available for the Company's general use, as security for issuance of letters of credit,short-term notes payable and bank borrowings. Upon maturity of the letters of credit, repayment of short-term notes payable or bank borrowings, the depositsare released by the bank and become available for general use by the Company.(e) Accounts receivable, unbilled Accounts receivable, unbilled represents revenue that has been recognized in advance of billing the customer. The Company uses the percentage-of-completion method to recognize revenue from EPC and development services and sales of solar power projects when all relevant revenue recognition criteriahave been met. Under this accounting method, revenue may be recognized in advance of billingF-10Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)the customer, which results in the recording of accounts receivable, unbilled. Once the Company meets the billing criteria under such contract, it bills thecustomer and reclassifies the unbilled balance to accounts receivable trade. Billing requirements vary by contract, but are generally structured aroundcompletion of certain construction milestones.(f) Allowance for doubtful receivables The Company began purchasing insurance from China Export & Credit Insurance Corporation ("Sinosure") since 2009 for certain of its accountsreceivable trade in order to reduce its exposure to bad debt loss. The Company provides an allowance for accounts receivable trade using primarily a specificidentification methodology. An allowance is recorded based on the likelihood of collection from the specific customer regardless whether such account iscovered by Sinosure. At the time the claim is made to Sinosure, the Company records a receivable from Sinosure equal to the expected recovery up to theamount of the specific allowance. The Company had recorded a receivable from Sinosure in prepaid expenses and other current assets of $409 and $9 as ofDecember 31, 2016 and 2017, respectively and a corresponding reduction in bad debt expense.(g) Advances to suppliers The Company makes prepayments to certain suppliers and such amounts are recorded in advances to suppliers in the consolidated balance sheets.Advances to suppliers expected to be utilized within twelve months as of each balance sheet date are recorded as current assets and the portion expected to beutilized after twelve months are classified as non-current assets in the consolidated balance sheets.(h) Inventories Before 2016, inventories were stated at the lower of cost or market. In 2016, the Company adopted ASU 2015-11 prospectively, and inventories arestated at the lower of cost or net realizable value as of December 31, 2016 and 2017. Cost is determined by the weighted-average method. Cost of inventoriesconsists of direct materials and, where applicable, direct labor costs, tolling costs and those overhead costs that have been incurred in bringing theinventories to their present location and condition. Adjustments are recorded to write down the cost of obsolete and excess inventories to the estimated net realizable value based on historical and forecastdemand. The Company outsources portions of its manufacturing process. These outsourcing arrangements may or may not include transfer of title of the rawmaterials inventory to third-party manufacturers. Such raw materials are recorded as raw materials inventory when purchased from suppliers. For thoseoutsourcing arrangements in which the title is not transferred, the Company maintains such inventory on the Company's consolidated balance sheets as rawmaterials inventory while it is in physical possession of the third-party manufacturer. Upon receipt, processed inventory is reclassified to work-in-processinventory and a processing fee is paid to the third-party manufacturer.F-11Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued) For those outsourcing arrangements, characterized as sales, in which title (including risk of loss) is transferred to the third-party manufacturer, theCompany is constructively obligated, through raw materials sales agreements and processed inventory purchase agreements, which have been entered intowith the third-party manufacturer simultaneously, to repurchase the inventory once processed. In this case, the raw materials remain classified as raw materialinventory while in physical possession of the third-party manufacturer and cash is received, which is classified as "advances from customers" on theconsolidated balance sheets and not as revenue or deferred revenue. Cash payments for outsourcing arrangements, which require prepayments for repurchaseof the processed inventory, are classified as "advances to suppliers" on the consolidated balance sheets. There is no right of offset for these arrangements andaccordingly, "advances from customers" and "advances to suppliers" remain on the consolidated balance sheets until the processed inventory is repurchased. On occasion, the Company enters into firm purchase commitments to acquire materials from its suppliers. A firm purchase commitment represents anagreement that specifies all significant terms, including the price and timing of the transactions, and includes a disincentive for non-performance that issufficiently large to make performance probable. This disincentive is generally in the form of a take-or-pay provision, which requires the Company to pay forcommitted volumes regardless of whether the Company actually acquires the materials. The Company evaluates these agreements and records a loss, if any,on firm purchase commitments using the same way as that used to value inventory losses.(i) Project assets Project assets consist primarily of capitalized costs relating to solar power projects in various stages of development prior to the intended sale of the solarpower projects to a third party. These costs include certain acquisition costs, land costs and costs for developing and constructing a solar power system.Development costs can include legal, consulting, permitting, and other similar costs. Construction costs can include execution of field construction,installation of solar equipment, solar modules and related equipment. Interest costs incurred on debt during the construction phase and all deferred financingcosts amortized during the construction phase are also capitalized within project assets. Solar power projects are preliminarily classified as project assets unless the Company has intention not to sell them to third parties. In that case, they willbe classified as solar power systems on the balance sheet. During the development phase, solar power projects are accounted for in accordance with therecognition, initial measurement and subsequent measurement subtopics of ASC 970 — 360, as they are considered in substance real estates. The costs toconstruct solar power projects are presented as operating activities or investing activities in the consolidated statement of cash flows, if they are related toproject assets or solar power systems, respectively. While the solar power projects are in the development phase, they are generally classified as non-currentassets, unless it is anticipated that construction will be completed and the sale will occur within one year. Once the development of the solar power projects is substantially complete and the projects reach Commercial Operation Date ("COD"), appropriatenessof the classification of the solar power projects is re-assessed based on the circumstances at that time. Solar power projects that the Company intendsF-12Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)to sell, which meet the criteria of ASC 360-10-45-9 on COD, are classified as project assets-current. Solar power projects that the Company intends to holdand operate to generate electricity are still classified as solar power systems. The Company reclassified solar power systems of $1,202.1 million and$1.0 million to project assets-current, and $160.0 million and $3.8 million to project assets-non-current on the consolidated balance sheet in 2016 and 2017,respectively. The Company reviews project assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not berecoverable. The Company considers a project commercially viable or recoverable if it is anticipated to be sold for a profit once it is either fully developed orfully constructed. The Company considers a partially developed or partially constructed project commercially viable or recoverable if the anticipated sellingprice is higher than the carrying value of the related project assets. The Company examines a number of factors to determine if the project will be recoverable,the most notable of which include whether there are any changes in environmental, ecological, permitting, market pricing or regulatory conditions thatimpact the project. Such changes could cause the costs of the project to increase or the selling price of the project to decrease. If a project is not consideredrecoverable, the Company impairs the respective project assets and adjusts the carrying value to the estimated recoverable amount, with the resultingimpairment recorded within operations. Project assets are often held in separate legal entities which are formed for the special purpose of constructing the project assets, which the Companyrefers to as "project companies". The Company consolidates project companies as described in note (b) above. The cash paid to the non-controlling interest inconnection with disposal of such project companies was recorded as a financing activity in the consolidated statement of cash flows. The Company does not depreciate the project assets. Any revenue generated from a solar power system connected to the grid would be consideredincidental revenue and accounted for as a reduction of the capitalized project costs for development. If circumstances change, and the Company will begin tooperate the project assets for the purpose of generating income from the sale of electricity, the project assets will be reclassified to solar power systems.(j) Business combination Business combinations are recorded using the acquisition method of accounting and, accordingly, the acquired assets and liabilities are recorded at theirfair market value at the date of acquisition. Any excess of acquisition cost over the fair value of the acquired assets and liabilities, including identifiableintangible assets, is recorded as goodwill. The Company charges acquisition related costs that are not part of the purchase price consideration to general andadministrative expenses as they are incurred. These costs typically include transaction and integration costs, such as legal, accounting, and otherprofessional fees.(k) Assets acquisition When the Company acquires other entities, if the assets acquired and liabilities assumed do not constitute a business, the transaction is accounted for asan asset acquisition. Assets are recognizedF-13Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)based on the cost, which generally includes the transaction costs of the asset acquisition, and no gain or loss is recognized unless the fair value of noncashassets given as consideration differs from the assets' carrying amounts on the Company's books. The costs of asset acquisitions generally include the directtransaction costs of the asset acquisition. If the consideration given is not in the form of cash (that is, in the form of noncash assets, liabilities incurred, orequity interests issued), measurement is based on either the cost to the acquiring entity or the fair value of the assets (or net assets) acquired, whichever ismore clearly evident and, thus, more reliably measurable. The cost of a group of assets acquired in an asset acquisition is allocated to the individual assetsacquired or liabilities assumed based on their relative fair value and does not give rise to goodwill.(l) Goodwill Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value assigned to the individual assets acquired andliabilities assumed. The Company does not amortize goodwill but instead test goodwill for impairment at least annually in the fourth quarter. The Companyperforms impairment tests between scheduled annual tests if facts and circumstances indicate that it is more likely than not that the fair value of a reportingunit that has goodwill is less than its carrying value. The Company may first make a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying valueto determine whether it is necessary to perform the two-step goodwill impairment test. The qualitative impairment test considers various factors includingmacroeconomic conditions, industry and market conditions, cost factors, a sustained share price or market capitalization decrease, and any reporting unitspecific events. If it is determined through the qualitative assessment that a reporting unit's fair value is more likely than not greater than its carrying value,the two-step impairment test is not required. If the qualitative assessment indicates it is more likely than not that a reporting unit's fair value is not greaterthan its carrying value, the Company proceeds to perform the two-step impairment test. The Company may also elect to proceed directly to the two stepimpairment test without considering such qualitative factors. The first step in a two-step impairment test is the comparison of the fair value of a reporting unit with its carrying amount, including goodwill. Inaccordance with the authoritative guidance over fair value measurements, the Company defines the fair value of a reporting unit as the price that would bereceived to sell the unit as a whole in an orderly transaction between market participants at the measurement date. The Company primarily uses the incomeapproach methodology of valuation, which includes the discounted cash flow method, to estimate the fair values of the reporting units. Significant management judgment is required when estimating the fair value of the reporting units including the forecasting of future operating resultsand the selection of discount and expected future growth rates that the Company uses in discounting cash flows. If the estimated fair value of a reporting unitexceeds its carrying value, goodwill is not impaired and no further analysis is required. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill is not impaired, and no further analysis is required. Conversely, if thecarrying value of a reporting unit exceeds itsF-14Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)estimated fair value, the Company records an impairment loss equal to the excess, not to exceed the total amount of goodwill allocated to the reporting unit. The Company performed a qualitative assessment for each of the reporting units in the fourth quarter of 2017 and concluded that it was not more likelythan not that the fair value of each reporting unit was less than its carrying amount. Accordingly, the two-step goodwill impairment test for the Company'sreporting units was not considered necessary.(m) Property, plant and equipment Property, plant and equipment is recorded at cost less accumulated depreciation. The cost of property, plant and equipment comprises its purchase priceand any directly attributable costs, including interest costs capitalized during the period the asset is brought to its working condition and location for itsintended use. The Company expenses repair and maintenance costs as incurred. Depreciation is computed on a straight-line basis over the following estimated useful lives: Costs incurred in constructing new facilities, including progress payments, capitalized interests and other costs relating to the construction, arecapitalized and transferred to property, plant and equipment on completion and depreciation commences from that time. For property, plant and equipment that has been placed into service, but is subsequently idled temporarily, the Company continues to recorddepreciation expense during the idle period. The Company adjusts the estimated useful life of the idled assets if the estimated useful life has changed.(n) Assets held-for-sale Long-lived assets (disposal group) are classified as held for sale if their carrying amount will be recovered principally through a sale transaction ratherthan through continuing use. This condition is regarded as met only when management commits to a plan to sell the asset; the asset is available forimmediate sale in its present condition; an active program to locate a buyer and other actions required to complete the plan have been initiated; the sale ofthe asset is probable within one year; the asset is being actively marketed for sale at a reasonable price in relation to its current fair value; and it is unlikelythat significant changes to the plan will be made or that the plan will be withdrawn. Long-lived assets classified as held for sale are measured at lower of theircarrying amount and fair value less costs to sell and depreciation (amortization) ceases once the asset is classified as held for sale.F-15Buildings 20 yearsLeasehold improvements Over the shorter of the lease term or their estimated useful livesMachinery 5-10 yearsFurniture, fixtures and equipment 5 yearsMotor vehicles 5 yearsTable of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)(o) Solar power systems Solar power systems are comprised of ground-mounted projects and roof top systems that the Company intends to hold for use. The solar power systemsare stated at cost less accumulated depreciation. The cost consists primarily of direct costs incurred in various stages of development prior to thecommencement of operations. For a self-developed solar power system, the actual cost capitalized is the amount of the expenditure incurred for theapplication of the feed-in tariff ("FIT") or other similar contracts, permits, consents, construction costs, interest costs capitalized, and other costs capitalized.For a solar power system acquired from third parties, the initial costs include the consideration transferred and certain direct acquisition costs. Expendituresfor major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When solar power systems is retired, or otherwise disposed of, the cost and accumulated depreciation is removed from the balance sheets and anyresulting gain or loss is included in the results of operations for the respective period. Depreciation is recognized using the straight-line method over theestimated useful lives of the solar power systems of 20 to 25 years.(p) Intangible assets Intangible assets primarily represent the technical know-how and computer software purchased from third parties. Intangible assets are recorded at fairvalue at the time of acquisition less accumulated amortization, if applicable. Amortization is recorded according to the following table on a straight-linebasis for all intangible assets:(q) Prepaid land use rights Prepaid land use rights represent amounts paid for the Company's lease for the use right of lands located in China ("PRC") and Japan. Amounts arecharged to earnings ratably over the lease periods of 20 to 50 years.(r) Investments in affiliates The Company accounts for the investments in affiliates using either the cost or equity method of accounting depending upon whether the Company hasthe ability to exercise significant influence over the affiliates. As part of this evaluation, the Company considers the participating and protective rights in theaffiliates as well as its legal form. The Company records the cost method investments at historical cost and subsequently record any dividends received fromthe net accumulated earnings of the investee as income. Dividends received in excess of earnings are considered a return of investment and are recorded asreductions in the cost of the investment. The Company uses the equity method of accounting for the investments when the Company has the ability tosignificantly influence theF-16Power purchase agreement ("PPA") Over the estimated useful livesTechnical know-how 10 yearsComputer software 1-10 yearsTable of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)operations or financial activities of the investee. The Company records the equity method investments at historical cost and subsequently adjusts thecarrying amount each period for share of the earnings or losses of the investee and other adjustments required by the equity method of accounting. Dividendsreceived from the equity method investments are recorded as reductions in the cost of such investments. Investments are evaluated for impairment when facts or circumstances indicate that the fair value of the investment is less than its carrying value. Animpairment is recognized when a decline in fair value is determined to be other-than-temporary. The Company reviews several factors to determine whether aloss is other-than-temporary. These factors include, but are not limited to, the: (i) nature of the investment; (ii) cause and duration of the impairment;(iii) extent to which fair value is less than cost; (iv) financial conditions and near term prospects of the affiliates; and (v) ability to hold the security for aperiod of time sufficient to allow for any anticipated recovery in fair value. During the years ended December 31, 2015, 2016 and 2017, the Companyrecorded nil, nil and $3,686 impairment charges on its investments, respectively.(s) Impairment of long-lived assets The Company assesses the recoverability of the carrying value of long-lived assets when an indicator of impairment has been identified. The Companyreviews the long-lived assets each reporting period to assess whether impairment indicators are present. For purposes of recognition and measurement of animpairment loss, a long-lived asset or assets is grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largelyindependent of the cash flows of other assets and liabilities. For long-lived assets, when impairment indicators are present, the Company comparesundiscounted future cash flows, including the eventual disposition of the asset group at market value, to the asset group's carrying value to determine if theasset group is recoverable. Assessments also consider changes in asset group utilization, including the temporary idling of capacity and the expected timingof placing this capacity back into production. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Companywill recognize an impairment loss based on the fair value of the assets. The Company recorded impairment charges for long-lived assets of $6,992, $22,757and $11,626 for the years ended December 31, 2015, 2016 and 2017, respectively.(t) Interest capitalization The Company capitalizes interest costs as part of the historical costs of acquiring or constructing certain assets during the period of time required to getthe assets ready for their intended use or sell the asset to a customer. The Company capitalizes interest costs to the extent that expenditures to acquire,construct, or develop an asset have occurred and interest costs have been incurred. Interest capitalized for property, plant and equipment, or solar powersystems is depreciated over the estimated useful life of the related asset, as the qualifying asset is placed into service. The interest capitalized for projectassets forms part of the cost of revenues when such project assets are sold and all revenue recognition criteria are met. Interest capitalization ceases once aproject is substantially complete or no longer undergoing construction activities to prepare it for its intended use.F-17Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)(u) Assets retirement obligation Certain jurisdictions in which the Company's project assets are located or certain land lease agreements require the removal of the solar power systemswhen the project is decommissioned. Assets retirement obligation ("ARO") for the estimated costs of decommissioning associated with long-lived assets at afuture date are accounted for in accordance with ASC 410-20, Asset Retirement Obligations ("ASC 410-20"). ASC 410-20 requires an entity to recognize thefair value of a liability for an ARO in the period in which it is incurred and a reasonable estimate of fair value can be made. Upon initial recognition of aliability for an ARO, the asset retirement cost is capitalized by increasing the carrying amount of the related long-lived asset by the same amount. Over time,the liability is accreted to its expected future value, while the capitalized cost is depreciated over the useful life of the related asset. The Company's AROincluded in solar power systems were $1,503 and $109 as of December 31, 2016 and 2017, respectively.(v) Contingencies Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that aliability has been incurred and the amount can be reasonably estimated. If a potential material loss contingency is not probable but is reasonably possible, oris probable but the amount cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss ifdeterminable and material, is disclosed. Legal costs incurred in connection with loss contingencies are expensed as incurred.(w) Income taxes Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financialstatements, net tax loss carry-forwards and credits using the enacted tax rates expected to apply to taxable income in the periods in which the deferred taxliability or asset is expected to be settled or realized. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that someportion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxingauthorities. Before 2016, the components of the deferred tax assets and liabilities were individually classified as current and non-current based on thecharacteristics of the underlying assets and liabilities, or the expected timing of their use when they did not relate to a specific asset or liability. In 2016, theCompany adopted ASU2015-17 prospectively and did not revise prior periods, and as of December 31, 2017, the components of the deferred tax assets andliabilities were all classified as non-current on the consolidated balance sheet. Income tax expense includes (i) deferred tax expense, which generally represents the net change in the deferred tax asset or liability balance during theyear plus any change in valuation allowances; (ii) current tax expense, which represents the amount of tax currently payable to or receivable from a taxingauthority; and (iii) non-current tax expense, which represents the increases and decreases in amounts related to uncertain tax positions from prior periods andnot settled with cash or other tax attributes. The Company only recognizes tax benefits related to uncertain tax positions when suchF-18Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)positions are more likely than not of being sustained upon examination. For such positions, the amount of tax benefit that the Company recognizes is thelargest amount of tax benefit that is more than fifty percent likely of being sustained upon the ultimate settlement of such uncertain tax position. TheCompany records penalties and interests associated with the uncertain tax positions as a component of income tax expense. The Company uses the flow-through method to account for investment tax credits earned on qualifying projects placed into service. Under this methodthe investment tax credits are recognized as a reduction to income tax expense in the year the credit arises. The use of the flow-through method also results ina basis difference from the recognition of a deferred tax liability and an immediate income tax expense for reduced future tax depreciation of the relatedassets. Such basis differences are accounted for pursuant to the income statement method.(x) Revenue recognitionSolar power products The Company recognizes revenues for solar product sales when persuasive evidence of an arrangement exists, delivery of the product has occurred andtitle and risk of loss has passed to the customers, the sales price is fixed or determinable and the collectability of the resulting receivable is reasonablyassured. If collectability is not reasonably assured, the Company recognizes revenue only upon collection of cash. Revenues also include reimbursementsreceived from customers for shipping and handling costs. Sales agreements typically contain the customary product warranties but do not contain any post-shipment obligations nor any return or credit provisions. A majority of the Company's contracts provide that products are shipped under the term of free on board, or FOB, ex-works, or cost, insurance and freight,or CIF, and delivered duty paid, or DDP. Under FOB, the Company fulfills its obligation to deliver when the goods have passed over the ship's rail at thenamed port of shipment. The customer has to bear all costs and risks of loss or damage to the goods from that point. Under ex-works, the Company fulfills itsobligation to deliver when it has made the goods available at its premises to the customer. The customer bears all costs and risks involved in taking the goodsfrom the Company's premises to the desired destination. Under CIF, the Company must pay the costs, marine insurance and freight necessary to bring thegoods to the named port of destination but the risk of loss of or damage to the goods as well as any additional costs due to events occurring after the time thegoods have been delivered on board the vessel, is transferred to the customer when the goods pass the ship's rail in the port of shipment. Under DDP, theCompany is responsible for making a safe delivery of goods to a named destination, paying all transportation expenses and the duty. The Company bears therisks and costs associated with supplying the goods to the delivery location. As of December 31, 2015, 2016 and 2017, the Company had inventories of $7.3 million, $5.9 million and $7.1 million, respectively, relating to sales tocustomers where revenues were not recognized because the collection of payment was not reasonably assured. The delivered products remain as inventorieson consolidated balance sheets, regardless of whether title has been transferred.F-19Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)In such cases, the Company recognizes revenue, adjusts inventories and recognizes cost of revenues when payment is collected from customers. Revenues from sales to customers are recorded net of estimated returns. The Company enters into toll manufacturing arrangements in which the Company receives cells and returns finished modules. In such cases, the title ofthe cells received and risk of loss remains with the seller. As a result, the Company does not recognize inventory on the consolidated balance sheets. TheCompany recognizes a service fee as revenue when the processed modules are delivered. During the years ended December 31, 2015, 2016 and 2017, theCompany recognized revenue of $6,764, nil and nil, respectively, under toll manufacturing arrangements.EPC and development services The Company uses the percentage-of-completion method to recognize revenues for which the Company provides EPC and development services, unlessthe Company cannot make reasonably dependable estimates of the costs to complete the contract, in which case the Company would use the completedcontract method. The percentage-of-completion method is considered appropriate in circumstances in which reasonably dependable estimates can be madeand in which all the following conditions exist: (i) contracts executed by the parties normally include provisions that clearly specify the enforceable rightsregarding goods or services to be provided and received by the parties, the consideration to be exchanged, and the manner and terms of settlement; (ii) thebuyer can be expected to satisfy all obligations under the contract; and (iii) the contractor can be expected to perform all contractual obligations. TheCompany uses the cost-to-cost method to measure the percentage of completion and recognize revenue based on the estimated progress to completion. TheCompany periodically revises its profit estimates based on changes in facts, and immediately recognizes any losses that are identified on contracts. Incurredcosts include all direct material, labor, subcontractor cost, and other associated costs. The Company recognizes job material costs as incurred costs when thejob materials have been permanently attached or fitted to the solar power projects as required by the engineering design. The construction periods normallyextend beyond six months and less than one year. The percentage-of-completion method of revenue recognition requires the Company to make estimates of net contract revenues and costs to completecontracts. In making such estimates, management judgments are required to evaluate significant assumptions including the amount of net contract revenues,the cost of materials and labor, expected labor productivity, the impact of potential variances in schedule completion, and the impact of any penalties,claims, change orders, or performance incentives. If estimated total costs on any contract are greater than the net contract revenues, the Company recognizes the entire estimated loss in the period the lossbecomes known. The cumulative effect of the revisions to estimates related to net contract revenues and costs to complete contracts, including penalties,claims, change orders, performance incentives, anticipated losses, and others are recorded in the period in which revisions to the estimates are identified andthe amounts can be reasonably estimated. The effect of the changes on future periods are recognized as if the revised estimates hadF-20Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)been used since revenue was initially recognized under the contract. Such revisions could occur in any reporting period, and the effects may be materialdepending on the size of the contracts or the changes in estimates.Solar power projects The Company recognizes revenue from the sale of project assets in accordance with ASC 360-20, Real Estate Sales. For these transactions, the Companyhas determined that the project assets, which represent the costs of constructing solar power projects, represent "integral" equipment and as such, the entiretransaction is in substance the sale of real estate and subject to the revenue recognition guidance under ASC 360-20 Real Estate Sales. The Company recordsthe sale as revenue with profit reduced by the maximum exposure to loss using one of the following revenue recognition methods, based upon evaluation ofthe substance and form of the terms and conditions of such real estate sales arrangements:(i)Full accrual method. The Company records revenue for certain sales arrangements after construction of discrete portions of a project or afterthe entire project is substantially complete. The Company recognizes revenue and profit using the full accrual method when all of thefollowing requirements are met: (a) the sales are consummated; (b) the buyer's initial and continuing investments are adequate to demonstrateits commitment to pay; (c) the receivable is not subject to any future subordination; and (d) the Company has transferred the usual risk andrewards of ownership to the buyer. Specifically, the Company considers the following factors in determining whether the sales have beenconsummated: (a) the parties are bound by the terms of a contract; (b) all consideration has been exchanged; (c) permanent financing for whichthe seller is responsible has been arranged; and (d) all conditions precedent to closing have been performed, and the Company does not haveany substantial continuing involvement with the project. (ii)Percentage-of-completion method. The Company applies the percentage-of-completion method, as further described below, to certain realestate sales arrangements where the Company conveys control of land or land rights, (a) when a sale has been consummated; (b) the Companyhas transferred the usual risks and rewards of ownership to the buyer; (c) the initial and continuing investment criteria have been met; (d) theCompany has the ability to estimate its costs and progress toward completion, and (e) all other revenue recognition criteria have been met. Theinitial and continuing investment requirements, which demonstrate a buyer's commitment to honor their obligations for the sales arrangement,can typically be met through the receipt of cash or an irrevocable letter of credit from a highly creditworthy lending institution. Whenevaluating whether the usual risks and rewards of ownership have transferred to the buyer, the Company considers whether it has or may becontingently required to have any prohibited forms of continuing involvement with the project. Prohibited forms of continuing involvementin a real estate sales arrangement may include the Company retaining risks or rewards associated with the project that are not customary withthe range of risks or rewards that an EPC contractor may assume.F-21Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)(iii)Installment method. Depending on whether the initial and continuing investment requirements have been met, and whether collectability fromthe buyer is reasonably assured, the Company may align its revenue recognition and release of project assets or deferred project costs to cost ofsales with the receipt of payment from the buyer if the sale has been consummated and the Company has transferred the usual risks and rewardsof ownership to the buyer. On occasion, the Company sells an interest in the project assets to a third party with an option to repurchase those assets in the future. The Companyconsiders that there are continuing involvements in the projects and thus no profit or revenue is recognized. The transactions are accounted for as financingarrangement or profit-sharing arrangement.(iv)Financing method. If the Company determines that it is likely the repurchase option will be exercised, the transactions are accounted for asfinancing arrangement. All the project assets remain on the Company's consolidated balance sheets. The buyer's shares of earnings in theprojects, during each period are reflected as interest expenses with a corresponding increase to the respective financing liabilities. Furtherdistributions from the projects are reflected as a decrease to the financing liabilities. As of December 31, 2016 and 2017, the Companyrecorded financing liabilities of $459.3 million and $407.7 million in financing liabilities-current on the consolidated balance sheet,respectively. The balances had been net of distributions of $1.4 million and $9.6 million as of December 31, 2016 and 2017, respectively. (v)Profit-sharing arrangement. If the Company determines that it is unlikely the repurchase option will be exercised, the transactions areaccounted for as profit-sharing arrangement. The Company reclassifies the property and any related existing debt assumed by the buyer to aninvestment account on its balance sheet and any cash received from the buyer is credited to the investment account. The amount will berecorded in investments in affiliates or other liabilities on the balance sheet depending on whether the amount is a debit or credit. As ofDecember 31, 2016 and 2017, the Company recorded $4.8 million and $4.8 million, respectively, in other liabilities on the consolidatedbalance sheet. During 2015, 2016 and 2017, the Company recognized $557,132, $22,237 and $632,256 of revenue from the sale of solar power projects using the fullaccrual method and recognized $863, $428 and nil from sales of power projects using percentage-of-completion method, respectively. The Company allocates revenue for transactions involving multiple-element arrangements to each unit of accounting on a relative fair value basis. TheCompany estimates fair value on each unit of accounting on the following basis: (i) vendor-specific objective evidence of selling price, if it exists, otherwise,(ii) third-party evidence of selling price. If neither (i) nor (ii) exists, management's best estimate of the selling price for that unit of accounting is used. TheCompany recognizes revenue for each unit of accounting when the revenue recognition criteria have been met.Electricity revenue Electricity revenue is generated primarily from various non-affiliated parties under long-term PPAs and performance based energy incentives. TheCompany recognizes electricity revenue when persuasiveF-22Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)evidence of an arrangement exists, electricity has been generated and transmitted to the grid, the price of electricity is fixed or determinable and thecollectability of the resulting receivable is reasonably assured. Performance-based energy incentives are awarded under certain state programs for the delivery of renewable electricity. The Company recognizesperformance-based energy incentives of electricity revenue generated from solar power systems when the condition attached to it has been met and there isreasonable assurance that the grant will be received. During the years ended December 31, 2015, 2016 and 2017, the Company recognized performance-based energy incentives of $16.1 million, $22.8 million, and $10.9 million, respectively, related to electricity generated and recognized in revenue. Certain PPAs are accounted for as operating leases in accordance with ASC 840-20, Operating Leases. Minimum lease payments are recognized over theterm of the lease and contingent rents are recorded when the achievement of the contingency becomes probable in accordance with the U.S. GAAP. None ofthe Company's operating leases have minimum lease payments, so revenue from these contracts is recognized as energy and any related renewable energyattributes are delivered. During the years ended December 31, 2015, 2016 and 2017, the total lease income recognized was $6.1 million, $6.2 million, and$2.5 million related to PPAs, respectively.(y) Shipping and handling costs Payments received from customers for shipping and handling costs are included in net revenues. Shipping and handling costs relating to sales of$73,008, $68,451 and $79,853, are included in selling expenses for the years ended December 31, 2015, 2016 and 2017, respectively.(z) Research and development Costs related to the design, development, testing and enhancement of products and silicon reclamation program are included in research anddevelopment expenses. Research and development costs are expensed when incurred and amounted to $17,056, $17,407 and $28,777 for the years endedDecember 31, 2015, 2016 and 2017, respectively.(aa) Other operating income, net Other operating income, net primarily consists of gains or losses on disposal of solar power systems and property, plant and equipment, and governmentgrants received, and compensation from business interruption insurance. Government grants received by the Company consist of unrestricted and restricted grants and subsidies. Unrestricted grants that allowed the Company'sfull discretion in utilizing the funds were recognized as other operating income upon receipt of cash and when all the conditions for their receipt have beensatisfied. Restricted grants related to prepaid land use rights are recorded as deferred subsidies in other non-current liabilities and are amortized on a straight-line basis over the term of the land use right. In 2017, the Company received government grants related to land use rights of $4,329 and amortized thedeferred subsidies of $103 into other operating income.F-23Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued) Business interruption insurance compensation of $15,238 received by the Company in 2017 is related to the finalization of an insurance claim related tothe tornado damage to one of cell factories of the Company. Before 2016, the net loss on disposal of property, plant and equipment and government grants were included in general and administrative expenses. In2016, the Company reclassified the prior years' numbers, which are immaterial to the financial statements, to be consistent with current year's presentation. The following table summarizes the Company's other operating income, net:(ab) Warranty cost Before June 2009, the Company typically sold its standard solar modules with a two-year guarantee for defects in materials and workmanship and a 10-year and 25-year warranty against declines of more than 10% and 20%, respectively, from the initial minimum power generation capacity at the time ofdelivery. In June 2009, the Company increased its warranty against defects in materials and workmanship to six years. In August 2011, the Company increased its guarantee for defects in materials and workmanship to ten years and the Company warrants that, for a periodof 25 years, its standard solar modules will maintain the following performance levels: (i) during the first year, the actual power output of the module will beno less than 97% of the labeled power output; (ii) from the second year to the 24th year, the actual annual power output decline of the module will be nomore than 0.7%; and (iii) by the end of the 25th year, the actual power output of the module will be no less than 80% of the labeled power output. Effective June 2015, the Company warrants that, for a period of 25 years, its polycrystalline modules will maintain the following performance levels:(i) during the first year, the actual power output of the module will be no less than 97.5% of the labeled power output; (ii) from the second year to the24th year, the actual annual power output decline will be no more than 0.7%; and (iii) by the end of the 25th year, the actual power output of the module willbe no less than 80.7% of the labeled power output. Effective June 2015, the Company warrants that, for a period of 25 years, its monocrystalline modules will maintain the following performance levels:(i) during the first year, the actual powerF-24 Years Ended December 31, 2015 2016 2017 $ $ $ Net gain on disposal of solar power system — (47,899) (27,803)Net loss on disposal of property, plant and equipment 1,801 8,094 1,960 Government grants (7,193) (2,734) (6,473)Business interruption insurance compensation — — (15,238) (5,392) (42,539) (47,554)Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)output of the module will be no less than 97% of the labeled power output; (ii) from the second year to the 24th year, the actual annual power output declinewill be no more than 0.7%; and (iii) by the end of the 25th year, the actual power output of the module will be no less than 80.2% of the labeled poweroutput. In addition, effective January 1, 2015, the Company lengthened the warranty against decline in its Dymond modules to 30 years and the Companyguarantees that, for a period of 30 years, the Dymond modules will maintain the following performance levels: (i) during the first year, the actual poweroutput of the module will be no less than 97.5% of the labeled power output; (ii) from the second year to the 29th year, the actual annual power outputdecline will be no more than 0.5%; and (iii) by the end of the 30th year, the actual power output of the module will be no less than 83% of the labeledpower output. Effective August, 2016, the Company lengthened the warranty against decline in its Dymond polycrystalline modules to 30 years and the Companywarrants that, for a period of 30 years, the Dymond modules will maintain the following performance levels: (i) during the first year, the actual power outputof the module will be no less than 97.5% of the labeled power output; (ii) from the second year to the 29th year, the actual annual power output decline willbe no more than 0.5%; and (iii) by the end of the 30th year, the actual power output of the module will be no less than 83% of the labeled power output. Effective August, 2016, the Company warrants that, for a period of 30 years, its Dymond monocrystalline modules will maintain the followingperformance levels: (i) during the first year, the actual power output of the module will be no less than 97% of the labeled power output; (ii) from the secondyear to the sixth year, the actual annual power output decline will be no more than 0.7%; (iii) from the seventh year to the 29th year, the actual annual poweroutput decline will be no more than 0.5%and (iiii) by the end of the 30th year, the actual power output of the module will be no less than 81.5% of thelabeled power output. Effective August 2017, the Company warrant that, for a period of 25 years, its PERC monocrystalline modules will maintain the following performancelevels: (i) during the first year, the actual power output of the module will be no less than 97.5% of the labeled power output; (ii) from the second year to the24th year, the actual annual power output cline will be no more than 0.7%; and (iii) by the end of the 25th year, the actual power output of the module will beno less than 80.7% of the labeled power output. Effective August 2017, the Company warrant that, for a period of 30 years, our Dymond PERC monocrystalline modules will maintain the followingperformance levels: (i) during the first year, the actual power output of the module will be no less than 97.5% of the labeled power output;(ii) from the secondyear to the 29th year, the actual annual power output decline will be no more than 0.5%; and (iii) by the end of the 30th year, the actual power output of themodule will be no less than 83% of the labeled power output. In resolving claims under the workmanship warranty, the Company has the option of remedying through repair, refurbishment or replacement ofequipment. In resolving claims under the performance warranty, the Company has the right to repair or replace solar modules, at the Company's option.F-25 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued) For solar power projects built by the Company, the Company provides a limited workmanship or balance of system warranty against defects inengineering design, installation and construction under normal use, operation and service conditions for a period of up to five years following the energizingof the solar power project. In resolving claims under the workmanship or balance of system warranty, the Company has the option of remedying throughrepair, refurbishment or replacement of equipment. The Company has entered into similar workmanship warranties with its suppliers to back up its warranties. The Company maintains warranty reserves to cover potential liabilities that could arise under these guarantees and warranties. Due to limited warranty claims to date, the Company accrues the estimated costs of warranties based on an assessment of its competitors' and its ownactual claim history, industry-standard accelerated testing, estimates of failure rates from the Company's quality review, and other assumptions that theCompany believes to be reasonable under the circumstances. Actual warranty costs are accumulated and charged against the accrued warranty liability. Tothe extent that accrual for warranty costs differs from the estimates, the Company will prospectively revise its accrual rate. The Company currently records a1% warranty provision against the revenue for sales of solar power products. The Company have entered into agreements with a group of insurance companies with high credit ratings to back up its warranties. Under the terms ofthe insurance policies, which are designed to match the terms of our solar module product warranty policy, the insurance companies are obliged to reimbursethe Company, subject to certain maximum claim limits and certain deductibles, for the actual product warranty costs that the Company incur under the termsof our solar module product warranty policy. The Company records the insurance premiums initially as prepaid expenses and amortize them over therespective policy period of one year. The unamortized carrying amount is $2,531 and $2,850 as of December 31, 2016 and 2017, respectively and wasincluded as a component of prepaid expenses and other current assets. The warranty obligations the Company records relate to defects that existed when the product was sold to the customer. The event which the Company isinsured against through its insurance policies is the sale of products with these defects. Accordingly, the Company views the insured losses attributable to theshipment of defective products covered under its warranty as analogous to potential claims, or claims that have been incurred as of the product ship date, butnot yet reported. The Company expects to recover all or a portion of its obligation through insurance claims. Therefore, the Company's accounting policy isto record an asset for the amount determined to be probable of recovery from the insurance claims (not to exceed the amount of the total losses incurred),consistent with the guidance set forth at ASC 410-30. The Company considers the following factors in determining whether an insurance receivable that is probable and recoverability can be reasonablyestimated: (i) reputation and credit rating of the insurance company; (ii) comparison of the solar module product warranty policy against the terms of theinsurance policies, to ensure valid warranty claims submitted by customers will be covered by the policy and therefore reimbursed by the insurancecompanies; and (iii) with respect to specific claims submitted, written communications from the insurance company are monitored to ensure the claim hasbeen promptly submitted to and accepted by the insurance company, and reimbursements have beenF-26Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)subsequently collected. The successfully processed claims provide further evidence that the insurance policies are functioning as anticipated. To the extent uncertainties regarding the solvency of insurance carriers or the legal sufficiency of insurance claims (including if they became subject tolitigation) were to arise, the Company will establish a provision for uncollectible amounts based on the specific facts and circumstances. To date, noprovision had been determined to be necessary. In addition, to the extent that accrual for warranty costs differs from the estimates and the Companyprospectively revises its accrual rate, this change may result in a change to the amount expected to be recovered from insurance. As the warranty obligation and related recovery asset do not meet the criteria for offsetting, the gross amounts are reported in the Company'sconsolidated balance sheets. The asset is expected to be realized over the life of the warranty obligation, which is 25 or 30 years and is treated as a non-current asset consistent with the underlying warranty obligation. When a specific claim is submitted, and the corresponding insurance proceeds will becollected within twelve months of the balance sheet date, the Company will reclassify that portion of the receivable as being current. The insurancereceivable amounts were $61,879 and $74,872 as of December 31, 2016 and 2017, respectively, and were included as a component of other non-currentassets. The Company made downward adjustments to its accrued warranty costs of $7,467 and other non-current assets of $5,178, for the year endedDecember 31, 2017, to reflect the general declining trend of the average selling price of solar modules, which is a primary input into the estimated warrantycosts. Accrued warranty costs (net effect of adjustments) of $15,876, $9,817 and $19,793 are included in cost of revenues for the years ended December 31,2015, 2016 and 2017, respectively.(ac) Foreign currency translation The United States dollar ("U.S. dollar" or "$"), the currency in which a substantial amount of the Company's transactions are denominated, is used as thefunctional and reporting currency of CSI. Monetary assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollarsat the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the U.S. dollar during the year are converted into the U.S. dollarat the applicable rates of exchange prevailing on the transaction date. Transaction gains and losses are recognized in the consolidated statements ofoperations. Gains and losses on intra-entity foreign currency transactions that are of a long-term-investment nature (that is, settlement is not planned oranticipated in the foreseeable future) between consolidated entities are not recognized in earnings, but are included as a component of other comprehensiveincome. The financial records of certain of the Company's subsidiaries are maintained in local currencies other than the U.S. dollar, such as Renminbi ("RMB"),Euro, Canadian dollar ("CAD"), Japanese yen and British pound ("GBP"), which are their functional currencies. Assets and liabilities are translated at theexchange rates at the balance sheet date, equity accounts are translated at historical exchange rates and revenues, expenses, gains and losses are translatedusing the average rate for the year. Translation adjustments are reported as foreign currency translation adjustment and are shown as a separate component ofother comprehensive income in the statements of comprehensive income.F-27Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)(ad) Comprehensive income Comprehensive income includes all changes in equity except those resulting from investments by owners and distributions to owners. For the yearspresented, total comprehensive income included (i) net income, (ii) foreign currency translation adjustments, (iii) gains and losses on intra-entity foreigncurrency transactions that are of a long-term-investment nature (that is, settlement is not planned or anticipated in the foreseeable future) betweenconsolidated entities, and (iv) the unrealized gains or losses (effective portion) on derivative instruments that qualify for and have been designated as cashflow hedges.(ae) Foreign currency risk The RMB is not a freely convertible currency. The PRC State Administration for Foreign Exchange, under the authority of the People's Bank of China,controls the conversion of RMB into foreign currencies. The value of the RMB is subject to changes in central government policies and to internationaleconomic and political developments affecting supply and demand in the China foreign exchange trading system market. The Company's cash and cashequivalents and restricted cash denominated in RMB amounted to $538,788 and $702,443 as of December 31, 2016 and 2017, respectively.(af) Concentration of credit risk Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash,accounts receivable, advances to suppliers and amounts due from related parties. All of the Company's cash and cash equivalents are held with financial institutions that Company management believes to have high credit quality. The Company conducts credit evaluations of customers and generally does not require collateral or other security from its customers. The Companyestablishes an allowance for doubtful accounts primarily based upon the age of the receivables and factors surrounding the credit risk of specific customers.With respect to advances to suppliers, such suppliers are primarily suppliers of raw materials. The Company performs ongoing credit evaluations of itssuppliers' financial conditions. The Company generally does not require collateral or security against advances to suppliers, however, it maintains a reservefor potential credit losses and such losses have historically been within management's expectation. The prepayments made by the Company are unsecured and expose the Company to supplier credit risk. As of December 31, 2016 and 2017, grossprepayments made to individual suppliers in excess of 10% of total advances to suppliers are as follows:F-28 At December 31,2016 At December 31,2017 $ $ Supplier A 18,260 18,260 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)(ag) Fair value of financial instruments The Company applies authoritative guidance for fair value measurements for its financial assets and liabilities. The guidance defines fair value as an exitprice representing the amount that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between marketparticipants. The guidance also establishes a fair value hierarchy, which prioritized the inputs used in measuring fair value. The standard describes threelevels of inputs that may be used to measure fair value: Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. The Company's restricted cashbalance for all periods presented uses level one fair value inputs. Level 2—Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in activemarkets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated byobservable market data by correlation or other means. Level 3—Unobservable inputs reflecting the Company's own assumptions incorporated in valuation techniques used to determine fair value. Theseassumptions are required to be consistent with market participant assumptions that are reasonably available.(ah) Derivatives instruments and hedging activity The Company's primary objective for holding derivative financial instruments is to manage risks. Depending on the terms of the specific derivativeinstruments and market conditions, some of the Company's derivative instruments may be assets and others liabilities at any particular point in time. Therecognition of gains or losses resulting from changes in fair value of these derivative instruments is based on the use of each derivative instrument andwhether it qualifies for hedge accounting. The Company enters into derivatives to hedge its foreign currency risk, exposure to losses from price adjustments of electricity and interest rate risk.When the Company determines to designate a derivative instrument as a cash flow hedge, the Company formally documents the hedging relationship and itsrisk management objective and strategy for undertaking the hedge, the hedging instrument, the hedged item, the nature of the risk being hedged, how thehedging instrument's effectiveness in offsetting the hedged risk will be assessed, and a description of the method of measuring ineffectiveness. The Companyalso formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivative that is used in hedging transactions is highly effective inoffsetting changes in cash flows of hedged items. The effective portion of gains and losses on derivatives designated as cash flow hedges are initially deferredin other comprehensive income before being recognized in the statements of operations in the same period as the hedged transactions are reflected inearnings. Gains and losses on derivatives that are not designated or fail to qualify as effective hedges are recognized in the statements of operationsas incurred.F-29Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued) Fair value of the derivative instruments is determined using pricing models developed based on the underlying price of the hedged items. The values arealso adjusted to reflect nonperformance risk of the counterparty and the Company, as necessary.(ai) Earnings (loss) per share Basic earnings (loss) is computed by dividing income (loss) attributable to holders of common shares by the weighted average number of common sharesoutstanding during the year. Diluted earnings (loss) per common share reflects the potential dilution that could occur if securities or other contracts to issuecommon shares were exercised or converted into common shares. Common share equivalents are not included in the calculation of dilutive earnings per shareif their effects are anti-dilutive.(aj) Share-based compensation The Company's share-based compensation with employees, such as share options, restricted shares and restricted share units ("RSUs"), is measured at thegrant date, based on the fair value of the award, and is recognized as compensation expense, net of estimated forfeitures, over the period during which anemployee is required to provide service in exchange for the award, which is generally the vesting period.(ak) Recently issued accounting pronouncements In May 2014, the Financial Accounting Standards Board (or "FASB") issued Accounting Standards Updates (or "ASU") 2014-09, Revenue from Contractswith Customers (Topic 606), to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP andInternational Financial Reporting Standards. An entity has the option to apply the provisions of ASU 2014-09 either retrospectively to each prior reportingperiod presented or retrospectively with the cumulative effect of initially applying this standard recognized at the date of initial application. ASU 2014-09 iseffective for fiscal years and interim periods within those years beginning after December 15, 2016, and early adoption is not permitted. In August 2015, theFASB updated this standard to ASU 2015-14, the amendments in this ASU defer the effective date of ASU 2014-09, that the ASU should be applied to annualreporting periods beginning after December 15, 2017 and earlier application is permitted only as of annual reporting periods beginning after December 15,2016, including interim reporting periods within that reporting period. The Company will adopt ASU 2014-09 in the period beginning from January 1, 2018 using the modified retrospective approach. This approach will beapplied to all contracts not complete as of January 1, 2018. The Company expects this adoption to primarily affect certain energy business sales arrangements currently accounted for under ASC 360-20, whichrequires the Company to evaluate whether such arrangements have any forms of continuing involvement that may affect the revenue or profit recognition ofthe transactions, including arrangements with prohibited forms of continuing involvement requiring the Company to reduce the potential profit on a projectsale by the maximum exposure toF-30Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)loss. The Company anticipates that ASU 2014-09, which supersedes the real estate sales guidance under ASC 360-20, will result in the earlier recognition ofrevenue and profit. The Company expects revenue recognition for other sales arrangements, including sales of solar power products, EPC and developmentservices, O&M services and electricity income, to remain materially consistent with the current practice. Based on the Company's assessment and best estimates of the effects of adopting ASU 2014-09 at the time of the preparation of this Annual Report onForm 20-F, the Company expects a cumulative-effect adjustment, $1.3 million increase to the opening balance of retained earnings on January 1, 2018. Thecumulative-effective adjustment is primarily due to the recognition of profit associated with projects sold in 2017, which had previously been deferred underASC 360-20. The Company has substantially completed its evaluation of the impact on accounting policies, disclosures, and internal processes and controls the newstandard has on its revenue stream. As part of the adoption, the Company has modified certain control procedures and processes, although these updates arenot expected to have a material effect on the Company's internal controls over financial reporting. Additionally, the adoption of ASU 2014-09 will result in increased footnote disclosures, particularly with regard to (1) revenue-related balance sheetaccounts and associated activity in the fiscal period, (2) disaggregation of revenue into appropriate categories, (3) unsatisfied performance obligations,(4) the pro-forma impact of changes to the Company's financial statements in the initial year of adoption, and (5) qualitative disclosures related to the natureand terms of the Company's sales, timing of the transfer of control and judgments used in the application of the five-step process. In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10)-Recognition and Measurement of Financial Assetsand Financial Liabilities. The new guidance requires equity investments (except those accounted for under the equity method of accounting, or those thatresult in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income and separate presentation of financialassets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or theaccompanying notes to the financial statements. The guidance also eliminates the requirement to disclose the fair value of financial instruments measured atamortized cost for organizations that are not public business entities and the requirement for public business entities to disclose the method(s) and significantassumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The newguidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. TheCompany adopted this standard on January 1, 2018. This accounting standards update does not have a material impact on the Company's consolidatedfinancial statements. In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)". Under the new guidance, lessees will be required to recognize all leases (with theexception of short-term leases) at the commencement date including a lease liability, which is a lessee's obligation to make lease payments arising from alease, measured on a discounted basis; and a right-of-use asset, which is an asset thatF-31Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)represents the lessee's right to use, or control the use of, a specified asset for the lease term. Lessees (for capital and operating leases) must apply a modifiedretrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financialstatements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative periodpresented. Lessees may not apply a full retrospective transition approach. Public business entities should apply the amendments in ASU 2016-02 for fiscalyears beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). This newguidance requires modified retrospective application and becomes effective for the Group in the first quarter of 2019, but early adoption is permitted. TheCompany is currently evaluating this update to determine the full impact of its adoption on the consolidated financial position, results of operations, cashflows and related disclosures, as well as the impact of adoption on policies, practices and systems. As of December 31, 2017, the Company has $80.2 millionof future minimum operating lease commitments that are not currently recognized on the consolidated balance sheet (see note 23). Therefore, the Companyexpects material changes to its consolidated balance sheets. In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718,Compensation-Stock Compensation. The objective of this amendment is part of the FASB's Simplification Initiative as it applies to several aspects of theaccounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, andclassification on the statement of cash flows. The effective date of the amendment is for fiscal years beginning after December 31, 2016 and interim periodswithin that reporting period. The Company adopted the ASU for the year ended December 31, 2017 and has already considered the impact on itsconsolidated financial statements and related disclosures and the effects upon adoption are not material. In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses (Topic 326)". The pronouncement changes the impairment modelfor most financial assets, and will require the use of an "expected loss" model for instruments measured at amortized cost. Under this model, entities will berequired to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset,resulting in a net presentation of the amount expected to be collected on the financial asset. This pronouncement is effective for fiscal years, and for interimperiods within those fiscal years, beginning after December 15, 2019. The Company does not expect a material impact to its consolidated financial statementupon adoption of this ASU. In August 2016, the FASB issued ASU 2016-15 which amends the guidance on the classification of certain cash receipts and payments in the statementof cash flows. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017 and is applied retrospectively. Earlyadoption is permitted including adoption in an interim period. The Company will adopt this ASU on its effective date of January 1, 2018 and is in the processof evaluating the impact on its consolidated financial statements upon adoption. In October, 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 230)—Intra-Entity Transfers of Assets Other Than Inventory", which removesthe prohibition in ASC 740 against theF-32Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The ASU, which is part of theBoard's simplification initiative, is intended to reduce the complexity of U.S. GAAP and diversity in practice related to the tax consequences of certain typesof intra-entity asset transfers, particularly those involving intellectual property (IP). For public business entities, the ASU is effective for annual periodsbeginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted for all entities as of the beginning of a fiscalyear for which neither the annual or interim (if applicable) financial statements have been issued or made available for issuance. The Company is currentlyevaluating the impact of the adoption this standard on its consolidated financial statements. In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash", which clarifies the presentation of restrictedcash and restricted cash equivalents in the statements of cash flows. Under ASU 2016-18 restricted cash and restricted cash equivalents are included with cashand cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. This ASU should beapplied retrospectively and becomes effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, but earlyadoption is permitted. Currently the changes in restricted cash were included in the investing activities in the cash follow statement with the amounts of$(100.9) million, $50.6 million and $(102.0) million for the year of 2015, 2016 and 2017 respectively. The Company plans to adopt this ASU for the fiscalyear beginning from January 1, 2018. In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business". The update affects allcompanies and other reporting organizations that must determine whether they have acquired or sold a business. The definition of a business affects manyareas of accounting including acquisitions, disposals, goodwill, and consolidation. The update is intended to help companies and other organizationsevaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The update provides a more robust framework touse in determining when a set of assets and activities is a business, and also provides more consistency in applying the guidance, reducing the costs ofapplication, and making the definition of a business more operable. For public companies, the update is effective for annual periods beginning afterDecember 15, 2017, including interim periods within those periods. The guidance should be applied prospectively upon its effective date. The effect of ASU2017-01 on the consolidated financial statements will be dependent on any future acquisitions. In January, 2017, the FASB issued ASU 2017-04, which removes the requirement to compare the implied fair value of goodwill with its carrying amountas 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 bycomparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carryingamount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.An entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwillimpairment loss, if applicable. For public business entities that are SEC filers, the guidance is effective for fiscal years beginning after December 15, 2019.Early adoption is permitted for interim or annual goodwill impairment testsF-33Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)performed on testing dates after January 1, 2017. The Company does not expect the adoption to have a significant impact to its consolidated financialstatements. In May 2017, the FASB issued ASU 2017-09, "Compensation-Stock Compensation", to provide clarity and reduce complexity on when to applymodification accounting to existing share-based payment awards. The guidance will be applied prospectively. The Company adopted this standard onJanuary 1, 2018. This accounting standards update does not have a material impact on its consolidated financial statements.3. BUSINESS COMBINATIONAcquisition of Recurrent On March 30, 2015, the Company acquired 100% of the equity interests in Recurrent Energy, LLC ("Recurrent"), a limited liability company organizedand existing under the laws of the State of Delaware. Through its subsidiaries, Recurrent engages in developing, building, operating and sales of utility scaleand commercial solar systems. Subsequent to the acquisition, Recurrent has become a wholly owned subsidiary of the Company and operates and developsits major solar project pipeline in the United States. The purchase price of Recurrent was allocated to identifiable assets acquired and liabilities assumed on their estimated fair values at the date ofacquisition. The excess of the purchase price over fair value of net assets acquired was allocated to goodwill. The Company acquired Recurrent for a total cash consideration of approximately $261.4 million. The fair values assigned are based on reasonablemethods applicable to the nature of the assets acquired and liabilities assumed. The following table summarized the estimated fair values of assets acquiredand liabilities assumed at the date of acquisition. The goodwill is allocated to each project under Recurrent with respect to their fair value. None of the goodwill recognized from the acquisition ofRecurrent is expected to be deductible for income taxF-34 In Millions ofU.S. Dollars Recognized identifiable assets acquired and liabilities assumed Cash 108.4 Restricted cash 38.2 Project assets 233.5 Solar power systems, net 46.8 Other assets 40.2 Less: Long term borrowings and notes payable 165.2 Other liabilities 51.4 Total identifiable net assets 250.5 Goodwill 10.9 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)3. BUSINESS COMBINATION (Continued)purposes. Goodwill recognized from this acquisition reflects the current value of the expected future income resulting from synergies of the Company'scombined operations. For the year ended December 31, 2016 and 2017, nil and $1,369 million goodwill have been included in the cost of revenues with thesales of the related project assets, respectively. Revenue of the Company for the year ended December 31, 2015 included $266.9 million generated from Recurrent since acquisition day, and netincome of the Company for the year ended December 31, 2015 included $3.5 million net income from Recurrent since acquisition, respectively. No bank fees, legal costs and accounting costs associated with the acquisition have been expensed and recorded within general and administrativeexpense in the consolidated statement of operations for the year ended December 31, 2016 and 2017.Acquisition of SSM On September 28, 2015, the Company acquired 100% of the equity interests in SSM1 Solar ULC, SSM2 Solar ULC, and SSM3 Solar ULC (together as"SSM"). Subsequent to the acquisition, SSM have become wholly owned subsidiaries of the Company and operates and develops its solar project pipelinein Canada. The Company acquired SSM for a total cash consideration of approximately $59.0 million. The following table summarized the fair value of assetsacquired and liabilities assumed at the acquisition date: No bank fees, legal costs and accounting costs associated with the acquisition have been expensed and recorded within general and administrativeexpense in the consolidated statement of operations for the year ended December 31, 2016 and 2017. On February 1st, 2017, the Company completed thesale of SSM to Fengate SSM Holdco LP for approximately $200.2 million.Acquisition of Gaochuangte On December 17, 2009, CSI Cells Co., Ltd. ("SZCC") established a joint venture, Suzhou Gaochuangte New Energy Co., Ltd. ("Gaochuangte"). SZCCheld 40% equity interests and accounted for the investment using equity method. On June 30, 2017, SZCC paid RMB 220.6 million ($33,761) toF-35 In Millions ofU.S. Dollars Recognized identifiable assets acquired and liabilities assumed Cash 8.1 Solar power systems. 141.9 Intangible assets 72.0 Other assets 11.7 Less: Short-term borrowings 7.4 Long-term borrowings 134.6 Other liabilities 32.7 Total identifiable net assets 59.0 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)3. BUSINESS COMBINATION (Continued)acquire additional 40% equity interest of Gaochuangte and Gaochuangte becomes the Company's 80% owned subsidiary. The following table summarizedthe fair value of assets acquired and liabilities assumed at the acquisition date:Pro forma results of acquisitions (unaudited) The following pro forma condensed consolidated financial results of operations are presented as if the acquisitions described above had been completedat the beginning of the comparable annual reporting period. Specifically, the pro forma results give effect as though the acquisition of Gaochuangte wereconsummated on January 1, 2016. The pro forma condensed consolidated financial information has been prepared for comparative purposes only. The pro forma information does notpurport to be indicative of the results of operations that actually would have resulted had the combinations occurred at the beginning of each periodpresented or of future results of the consolidated entities.F-36 In Millions ofU.S. Dollars Recognized identifiable assets acquired and liabilities assumed Cash 21.2 Accounts receivable. 20.0 Fixed assets 2.0 Other assets 25.8 Less: Accounts payable 13.1 Other liabilities 3.9 Total identifiable net assets 52.0 Less: Non-controlling interests 10.9 Less: Net assets belongs to CSI before acquisition 7.3 33.8 For the year endDecember 31 2016 2017 (In thousands of U.S. Dollars, expect per share data) Pro forma revenues 2,873,713 3,419,421 Pro forma net income attributable to CSI 65,994 100,007 Diluted earnings per share attributable to CSI 1.14 1.70 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)4. ALLOWANCE FOR DOUBTFUL ACCOUNTS Allowance for doubtful accounts are comprised of allowances for accounts receivable trade, advances to suppliers and other receivables. An analysis of allowances for accounts receivable, trade for the years ended December 31, 2015, 2016 and 2017 is as follows: An analysis of allowances for advances to suppliers for the years ended December 31, 2015, 2016 and 2017 is as follows: An analysis of allowances for other receivables for the years ended December 31, 2015, 2016 and 2017 is as follows:F-37 Years Ended December 31, 2015 2016 2017 $ $ $ Beginning of the year 31,817 28,156 26,119 Allowances made (reversed) during the year, net (1,084) (854) 5,345 Accounts written-off against allowances (858) (47) (174)Foreign exchange effect (1,719) (1,136) 1,651 Closing balance 28,156 26,119 32,941 Years Ended December 31, 2015 2016 2017 $ $ $ Beginning of the year 37,735 28,629 19,527 Allowances made (reversed) during the year, net 1,291 (5,427) (833)Accounts written-off against allowances (9,465) (3,644) — Foreign exchange effect (932) (31) 68 Closing balance 28,629 19,527 18,762 Years Ended December 31, 2015 2016 2017 $ $ $ Beginning of the year 830 3,885 9,251 Allowances made during the year, net 3,257 5,954 549 Foreign exchange effect (202) (588) 549 Closing balance 3,885 9,251 10,349 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)5. INVENTORIES Inventories consist of the following: In 2015, inventory was written down by $23,013 to reflect the lower of cost or market measurement. In 2016 and 2017, inventory was written down by$19,467 and $17,820, respectively, to reflect the lower of cost and net realizable value since the Company adopted ASU 2015-11 prospectively.6. PROJECT ASSETS Project assets consist of the following: The Company recorded impairment charges and write-off for project assets of nil, $2,952 and nil for the years ended December 31, 2015, 2016 and 2017,respectively.7. ASSETS HELD-FOR-SALE The Company was in negotiation with a number of potential buyers to sell certain solar power projects in operation in Spain, Japan and theUnited Kingdom. Solar power projects meeting the conditions of being classified as held for sale were presented as assets held-for-sale and associatedliabilities were presented as liabilities held-for-sale on the consolidated balance sheet.F-38 At December 31,2016 At December 31,2017 $ $ Raw materials 71,655 90,299 Work-in-process 22,776 59,576 Finished goods 200,940 196,217 295,371 346,092 At December 31,2016 At December 31,2017 $ $ Project assets—Acquisition cost 38,298 40,094 Project assets—EPC and other cost 1,461,995 1,631,418 1,500,293 1,671,512 Current portion 1,317,902 1,523,342 Non-current portion 182,391 148,170 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)7. ASSETS HELD-FOR-SALE (Continued) The Company's assets of solar power projects held for sale as of December 31, 2016 and 2017 were as follows: The Company's liabilities of solar power projects held for sale as of December 31, 2016 and 2017 were as follows:F-39 At December 31,2016 At December 31,2017 $ $ Cash and cash equivalents 8,921 7,714 Restricted cash—current 41 129 Accounts receivable trade, net 6,555 1,161 Prepaid expenses and other current assets 7,427 8,394 Solar power systems, net 290,613 165,312 Intangible assets, net 68,438 — Other non-current assets 10,094 87 Total assets held-for-sale 392,089 182,797 At December 31,2016 At December 31,2017 $ $ Short-term borrowings 12,221 4,862 Accounts payable 880 100 Other payables 13,240 2,022 Derivative liabilities-current 3,863 — Other current liabilities 1,537 918 Long-term borrowings 224,545 161,323 Derivative liabilities—non-current 16,672 4,024 Other non-current liabilities 6,314 12,623 Total liabilities held-for-sale 279,272 185,872 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)8. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment, net consist of the following: Depreciation expense of property, plant and equipment was $80,642, $72,813 and $88,931 for the years ended December 31, 2015, 2016 and 2017,respectively. Construction in process primarily represents production facilities under construction and the machinery under installation.9. SOLAR POWER SYSTEMS, NET Solar power systems, net consist of the following: For the years ended December 31, 2017, the Company completed construction of certain solar power projects and transferred from solar power systems toproject assets totaling $4.8 million. In connection with decisions to sell certain operating solar power projects, the Company reclassified solar power systemsof $42.0 million to assets held-for-sale, of which $40.8 million was sold, during the year ended December 31, 2017. Depreciation expense of solar powersystems was $11,340, $16,492 and $5,683 for the years ended December 31, 2015, 2016 and 2017, respectively.F-40 At December 31,2016 At December 31,2017 $ $ Buildings 187,179 340,215 Leasehold improvements 9,023 11,498 Machinery 458,624 698,150 Furniture, fixtures and equipment 44,443 50,310 Motor vehicles 4,653 5,782 Land 13,451 18,647 717,373 1,124,602 Accumulated depreciation (402,792) (462,128)Impairment (17,601) (7,933) 296,980 654,541 Construction in process 165,365 92,694 Property, plant and equipment, net 462,345 747,235 At December 31,2016 At December 31,2017 $ $ Solar power systems in operation 120,935 74,488 Solar power systems under construction 4,782 4,710 Accumulated depreciation (13,655) (15,234)Solar power systems, net 112,062 63,964 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)10. INTANGIBLE ASSETS, NET The following table summarizes the Company's intangible assets: Amortization expense for the years ended December 31, 2015, 2016 and 2017 were $2,235, $6,544 and $4,659, respectively. Amortization expenses of the above intangible assets are expected to be approximately $2.8 million, $2.8 million, $2.1 million, $1.6 million and$1.7 million for the years ended December 31, 2018, 2019, 2020, 2021, 2022 and thereafter, respectively.11. FAIR VALUE MEASUREMENT The Company measures at fair value its financial assets and liabilities by using a fair value hierarchy that prioritizes the inputs to valuation techniquesused to measure fair value. Fair value is the price that would be received from the sale of an asset or paid to transfer a liability (i.e., an exit price) on themeasurement date in an orderly transaction between market participants.F-41At December 31, 2017 GrossCarryingAmount AccumulatedAmortization Net $ $ $ Technical know-how 2,334 (1,371) 963 Computer software 20,883 (10,860) 10,023 Total intangible assets, net 23,217 (12,231) 10,986 At December 31, 2016 GrossCarryingAmount AccumulatedAmortization Net $ $ $ Technical know-how 1,431 (1,183) 248 Computer software 15,884 (7,710) 8,174 Total intangible assets, net 17,315 (8,893) 8,422 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)11. FAIR VALUE MEASUREMENT (Continued) As of December 31, 2016 and 2017, the following financial assets and liabilities were measured at fair value on a recurring basis in periods subsequent totheir initial recognition using the type of inputs shown as follows: Foreign exchange forward contracts The Company entered into certain foreign currency derivative contracts to protect against volatility of future cash flows caused by the changes in foreignexchange rates. The foreign currency derivativeF-42 Fair Value Measurements Using At December 31, 2017 Total FairValue andCarryingValue on theBalance Sheets Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) $ $ $ $ Assets: Foreign exchange forward contracts 12,316 — 12,316 — Commodity hedge 3,416 — 3,416 — Interest rate swap 11,379 — 11,379 — Total assets 27,111 — 27,111 — Liabilities: Interest rate swap 1,359 — 1,359 — Foreign exchange forward contracts 5,121 — 5,121 — Total liabilities 6,480 — 6,480 — Fair Value Measurements Using At December 31, 2016 Total FairValue andCarryingValue on theBalance Sheets Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) $ $ $ $ Assets: Foreign exchange forward contracts 10,632 — 10,632 — Commodity hedge 4,230 — 4,230 — Interest rate swap 12,854 — 12,854 — Total assets 27,716 — 27,716 — Liabilities: Interest rate swap 5,418 — 5,418 — Warrants 711 — 711 — Foreign exchange forward contracts 3,496 — 3,496 — Total liabilities 9,625 — 9,625 — Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)11. FAIR VALUE MEASUREMENT (Continued)contracts do not qualify for hedge accounting and, as a result, the changes in fair value of the foreign currency derivative contracts are recognized in theconsolidated statements of operations. The Company's foreign currency derivative instruments relate to foreign exchange options or forward contracts involving major currencies such asJapanese yen, Euro, Canadian dollar and Renminbi. Since its derivative instruments are not traded on an exchange, the Company values them usingvaluation models. Interest rate yield curves and foreign exchange rates are the significant inputs into these valuation models. These inputs are observable inactive markets over the terms of the instruments the Company holds, and accordingly, the fair value measurements are classified as Level 2 in the hierarchy.The Company considers the effect of its own credit standing and that of its counterparties in valuations of its derivative financial instruments.Commodity hedge During the year ended December 31, 2015, the Company entered into a fixed for floating energy commodity swap with a financial institution to hedgecash flows associated with electricity sales of the Astoria project in the U.S. for the period between expected COD and commencement of the long term PPAwith the off taker in January 2019. The swap contract was designated as a cash flow hedge at inception and is anticipated to be effective through its two-yearterm that ends on December 31, 2018. The fair value of the swap contract was $4,230 and $3,416, an asset position, recorded in derivative assets on thebalance sheet at December 31, 2016 and 2017, respectively. The effective portion of gains and losses on derivatives designated as cash flow hedges areinitially deferred in other comprehensive income before being recognized in the statements of operations in the same period as the hedged transactions arereflected in earnings. Gains and losses on derivatives that are not designated or fail to qualify as effective hedges are recognized in the statements ofoperations as incurred. Fair value of the commodity swap is determined using pricing models developed based on the underlying commodity price of electricity and adjusted toreflect nonperformance risk of the counterparty and the Company, as necessary, which are considered Level 2 inputs.Interest rate swap SSM, which the Company acquired on September 28, 2015, entered into fixed for floating interest rate swaps with a financial institution to hedge theinterest rate risk resulting from fluctuations in interest rates on its project construction debts with notional amount totaling CAD186.0 million($133.9 million), which will expire in 2029. The interest rate swaps had not been designated as a hedge for accounting purposes. The total estimated fairvalue of the swap contracts was $3,863 and nil, a liability position, as of December 31, 2016 and recorded in liabilities held-for-sale on the balance sheet asof December 31, 2017, respectively, and the change in its fair value was recorded in gain (loss) on change in fair value of derivatives during the year endedDecember 31, 2016 and 2017. During the year ended December 31, 2016, the Company entered into fixed for floating interest rate swaps with two financial institutions to hedge theinterest rate risk on its project debts obtained in the United Kingdom with notional amount totaling GBP78.4 million ($96.8 million), which will expireF-43Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)11. FAIR VALUE MEASUREMENT (Continued)between 2033 and 2034. The interest rate swaps had been designated as cash flow hedges for accounting purposes. Together with interest rate swap contracts of total notional amounts of approximately $399.0 million entered into for Recurrent projects upon theexercise of the swaption and designated as cash flow hedges, the total estimated fair value of the swap contracts was recorded as derivative assets of $11,379and derivative liabilities of $1,359 on the balance sheet as of December 31, 2017. The effective portion of gains and losses on derivatives designated as cashflow hedges are initially deferred in other comprehensive income before being recognized in the statements of operations in the same period as the hedgedtransactions are reflected in earnings. Gains and losses on derivatives that are not designated or fail to qualify as effective hedges are recognized in thestatements of operations as incurred. The estimated fair value of interest rate swaps was measured based on observable market data, which are considered Level 2 inputs.Warrants The fair value of the warrants (see Note 28) was determined using the Binomial model, with certain inputs significant to the valuation methodologyclassified as Level 2 inputs. The fair value of derivative instruments on the consolidated balance sheets as of December 31, 2016 and 2017 and the effect of derivative instruments onthe consolidated statements of operations for the years ended December 31, 2015, 2016 and 2017 are as follows:F-44 Fair Value of Derivative Assets At December 31, 2016 At December 31, 2017 Balance Sheet Location Fair Value Balance Sheet Location Fair Value $ $ Foreign exchange forwardcontracts Derivative assets—current 10,632 Derivative assets—current 12,316 Commodity hedge Derivative assets—current 1,638 Derivative assets—current 3,416 Interest rate swap Derivative assets—current — Derivative assets—current 468 Commodity hedge Derivative assets—non-current 2,592 Derivative assets—non-current — Interest rate swap Derivative assets—non-current 12,854 Derivative assets—non-current 10,911 Total 27,716 Total 27,111 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)11. FAIR VALUE MEASUREMENT (Continued) The Company measures certain long-lived assets or long-term investments at fair value on a non-recurring basis in periods after initial measurement incircumstances when the fair value of such assets is below its recorded cost and impairment is required. The Company recorded impairment charges for certain idle assets of $6,992, $22,757 and $11,626 for the years ended December 31, 2015, 2016 and2017, respectively. The fair value of these assets was measured based on prices offered by unrelated third-party willing buyers and classified as level 3 fairvalue measurements as the offering prices are not observable. The Company also holds financial instruments that are not recorded at fair value in the consolidated balance sheets, but whose fair value is required to bedisclosed under the U.S. GAAP. The carrying values of cash and cash equivalents, restricted cash, trade receivables, billed and unbilled, amounts due from related parties, accountspayables, short-term notes payable, amounts due to related parties and short-term borrowings approximate their fair values due to the short-term maturity ofthese instruments. Long-term borrowings were $493,455 and $404,341 as of December 31, 2016 and 2017, respectively, which approximate their fair valuessince most of the borrowings contain variable interest rates. The fair value of long-term borrowings was measured based on discounted cash flow approach,which is classified as level 2 as the key inputs can be corroborated with market data.F-45 Fair Value of Derivative Liabilities At December 31, 2016 At December 31, 2017 Balance Sheet Location Fair Value Balance Sheet Location Fair Value $ $ Foreign exchange forwardcontracts Derivative liabilities—current 3,496 Derivative liabilities—current 5,120 Warrants Derivative liabilities—current 711 Derivative liabilities—current — Interest rate swap Derivative liabilities—current 5,418 Derivative liabilities—current 1,001 Interest rate swap Derivative liabilities—non-current — Derivative liabilities—non-current 359 Total 9,625 Total 6,480 Amount of Gain (Loss)Recognized in Statementsof Operations Years Ended December 31 Location ofGain (Loss) Recognizedin Statements of Operations 2015 2016 2017 $ $ $ Foreign exchange forward contracts Gain (loss) on change in fair value of derivatives (3,738) 4,798 (2,638)Warrants Gain (loss) on change in fair value of derivatives (8,887) 24,554 711 Commodity hedge Gain (loss) on change in fair value of derivatives (7) 75 — Interest rate swaption Gain (loss) on change in fair value of derivatives (107) (4,335) — Interest rate swap Gain (loss) on change in fair value of derivatives 543 2,230 1,655 Total (12,196) 27,322 (272)Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)11. FAIR VALUE MEASUREMENT (Continued) The carrying value of the Company's outstanding convertible notes was $125.6 million and $126.5 million as of December 31, 2016 and 2017,respectively, which approximates the fair value.12. VARIABLE INTEREST ENTITIES Since 2016, the Company, through its wholly owned subsidiary, CSE Japan Investment Company Limited, entered into silent partnership agreementswith various Japan project companies, for the purpose of raising project finance bonds arranged by Goldman Sachs Japan Co., Ltd. Under the silentpartnership agreements, the project entities are considered VIEs in which the Company has no equity interests, but is entitled to substantially all of theeconomic interests of the projects. In addition, the Company has the power to make decisions over the activities that most significantly impact the economicperformance of the projects under the asset management agreement signed simultaneously between the project companies and Canadian Solar Project K.K, asubsidiary of the Group. As such, the Company concluded it was the primary beneficiary of the project companies and thus these project companies wereaccounted for as consolidated VIEs for the year ended December 31, 2016 and 2017. As of December 31, 2017, the carrying amounts and classifications of the consolidated VIEs' assets and liabilities, excluding intercompany balanceswhich are eliminated upon consolidation, included in the Company's consolidated balance sheet are as follows: All of the assets are restricted for settlement of the VIEs' obligations, and all of the liabilities can only be settled using VIE resources. Net income andoverall cash flow activities during the year are immaterial to the consolidated financial statements.F-46 At December 31,2017 $ Current assets 226,071 Non-current assets 25,635 Total assets 251,706 Current liabilities 222,263 Non-current liabilities 6,777 Total liabilities 229,040 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)13. INVESTMENTS IN AFFILIATES Investments in affiliates consist of the following:Tax equity transactions In 2015, the Company, through its wholly owned subsidiary, Recurrent, entered into the following tax equity transactions: In August 2015, the Company completed the sale of 100% of the class A membership interests of RE Tranquillity Holdings LLC, the holding companyof the Tranquillity project companies, to Southern Power ("Southern"), a subsidiary of Southern Company. The Company maintains 100% ownership in theclass B membership interests of RE Tranquillity Holdings LLC. Southern paid the Company an initial contribution of $100 million in cash for the class Amembership interests in RE Tranquillity Holdings LLC. In October 2015, the Company completed the sale of 100% of the class A membership interests of RE Silverlake Holdings LLC, the holding company ofthe Garland project companies, to Southern. The Company maintains 100% ownership in the class B membership interests of RE Silverlake Holdings LLC.Southern paid the Company an initial contribution of $49 million in cash for the class A membership interests in RE Silverlake Holdings LLC. In December 2015, the Company completed the sale of 100% of the class A membership interests of RE Roserock Holdings LLC, the holding companyof the Roserock project companies, to Southern. The Company maintains 100% ownership in the class B membership interests of RE RoserockHoldings LLC. Southern paid the Company an initial contribution of $45 million in cash for the class A membership interests in RE Roserock Holdings LLC. Under the LLC agreements, the class A membership interests and class B membership interests will receive 51% and 49%, respectively, of future cashflow distributions, and Southern is entitled to substantially all of the projects' federal tax benefits.F-47 At December 31, 2016 2017 CarryingValue OwnershipPercentage CarryingValue OwnershipPercentage $ (%) $ (%) Suzhou Gaochuangte New Energy Co., Ltd. 7,049 40 — — CSI SkyPower 3,749 50 — — RE Tranquillity Holdings LLC ("Tranquillity") 143,951 49 145,795 49 RE Silverlake Holdings LLC ("Garland") 118,641 49 120,247 49 RE Roserock Holdings LLC ("Roserock") 30,870 49 77,053 49 Suzhou Financial Leasing Co., Ltd. 12,974 6 14,129 6 Pirapora Solar Holding S.A. 13,775 20 6,551 20 Canadian Solar Infrastructure Fund, Inc. — — 23,866 14.76 Others 37,450 21-49 26,574 21-49 Total 368,459 414,215 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)13. INVESTMENTS IN AFFILIATES (Continued) Effective with the sale of the class A membership interests, the Company ceased having controlling financial interests in Tranquillity, Roserock andGarland, and accounted for the transactions as partial sales of real estates under ASC360-20. The Company also considered that it would continue to exercisesignificant influences over its retained interests in and has accounted for these interests pursuant to the equity method of accounting. Under this method, the Company recognizes its equity in earnings attributable to class B membership interests according to its proportionate share ofinvestees' operating cash flows. Additionally, the Company amortizes the basis difference between the cost of investment and its proportionate share of theinvestees' net assets over the estimated lives of the related assets. In connection with these sales to Southern in 2015, $190.4 million was recognized as revenue, and with the loss of controlling financial interests inTranquillity, Garland and Roserock, the Company derecognized net assets of $93.9 million, $56.4 million and $23.5 million, respectively, and recognized itsclass B membership interests in investments in affiliates. Subsequent to sales of the class A membership interests, the Company further contributed $123.2 million and nil to the projects in 2016 and 2017,respectively.Other investments On December 17, 2009, SZCC established a joint venture, Gaochuangte, for total cash consideration of $2,929. SZCC holds 40% voting interests andone of the three board members is designated by SZCC and, as such, SZCC is considered to have significant influence over the investee. On July 4, 2011,Gaochuangte increased its share capital and SZCC paid $3,119 in proportion to its ownership percentage. On June 30, 2017, SZCC paid $32,351 to increaseits ownership to 80%, became the Company's 80% owned subsidiary. On July 4, 2011, CSI Solar Power Group Co., Ltd. (formerly "CSI Solar Power (China) Inc.") ("SZSP") acquired 10% interests in a joint venture, GCL-CSI(Suzhou) Photovoltaic Technology Co., Ltd., for cash consideration of $2,549. SZSP is able to exercise significant influence over the investee through itsrepresentative in the board. In September 2016, the Company sold its entire interests in the investee. On May 23, 2012, CSI established a joint venture, CSI SkyPower, for cash consideration of $3,429. In August 2013, CSI SkyPower increased its sharecapital, and CSI paid $4,000 in proportion to its ownership percentage. CSI holds a 50% voting interests and two of the four board members are designatedby CSI and, as such, CSI is considered to have significant influence over the investee. In December 2017, the Company provided full impairment on thisinvestment due to deterioration of the investee's financial position. In December 2014, CSI sold its 95% equity interests in two solar power project companies, Discovery Light and Foto Light, to a third party buyer. InJune 2016, the Company sold the remaining 5% equity interests of the two project companies.F-48Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)13. INVESTMENTS IN AFFILIATES (Continued) In March 2015, CSI sold its 95% equity interests in a project company, City Light, to a third party buyer. In June 2016, the Company sold the remaining5% equity interests of this project company. On September 8, 2015, SZSP established an entity, Suzhou Financial Leasing Co., Ltd., for cash consideration of $13,860, in which the Company holds6% voting interests. One of five board members is designated by SZSP and, as such SZSP is considered having significant influence over the investee and theequity method is used in this investment. On October 7, 2016, CSI entered into a shareholders' agreement with EDF EN do Brasil ("EDF"), a subsidiary of EDF Energies Nouvelles, pursuant towhich EDF owned 80% equity interests in Pirapora I project companies previously transferred from CSI and the Company retained the remaining 20% equityinterests. On October 26, 2017, Canadian Solar Infrastructure Fund, Inc. ("CSIF") priced its initial public offering of 177,800 investment units at 100,000 Japaneseyen per unit, before underwriting discounts. Of the units included in the offering, the Company purchased 25,395 units as the designated purchaser. TheCompany has held 26,895 units including initial private investment of 1,500 units. On November 22, 2017, due to the exercise of over-allotment issuance byMizuho Securities Co., Ltd., by 2,890 units, the total 182,190 units have issued by CSIF as of December 31, 2017, the Company owned 14.76% of total units.One out of the three members of the board of directors of CSIF represents the Company. The quorum for a board resolution of CSIF is a majority of themembers of the board of directors, and the adoption of a resolution requires a majority of the votes presents. Equity in earnings (loss) of unconsolidated investees were $(643), $(4,404) and $9,411 for the years ended December 31, 2015, 2016 and 2017,respectively.F-49Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)14. BORROWINGS As of December 31, 2017, the Company had contractual credit facilities of $3,477,650 and $455,507 was available for draw down upon demand. Inaddition, as of December 31, 2017, the Company also had non-binding credit facilities of $485,869. As of December 31, 2017, short-term borrowings of $1,582,100 and long-term borrowings of $266,133 were secured by property, plant and equipmentwith carrying amounts of $206,689, inventories of $111,437, prepaid land use rights of $52,513, equity of $789,204, restricted cash of $219,377, accountsreceivable of $253,164 and project assets and solar power systems of $1,546,819.F-50 At December 31,2016 At December 31,2017 $ $ Bank borrowings 1,960,893 2,043,974 Analysis as: Short-term 902,348 829,035 Long-term, current portion 675,857 860,954 Subtotal for short-term 1,578,205 1,689,989 Long-term, non-current portion 382,688 353,985 Borrowings from non-banking institutions 132,595 318,122 Analysis as: Short-term — 270 Long-term, current portion 21,828 267,496 Subtotal for short-term 21,828 267,766 Long-term, non-current portion 110,767 50,356 Total 2,093,488 2,362,096 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)14. BORROWINGS (Continued)a)Short-term The Company's short-term borrowings consist of the following: The average interest rate on short-term borrowings was 3.45% and 3.31% per annum for the years ended December 31, 2016 and 2017, respectively.Certain long-term borrowings were classified as current liabilities because these borrowings are associated with certain solar power projects that are expectedto be sold within one year.F-51 At December 31,2016 At December 31,2017 $ $ Bank borrowings Short-term bank borrowings secured by restricted cash 266,685 267,507 Short-term bank borrowings secured by inventories 46,408 7,652 Short-term bank borrowings secured by prepaid land use rights and property, plantand equipment 211,263 248,502 Short-term bank borrowings secured by project assets and solar power systems 82,079 2,700 Unsecured short-term borrowings 295,913 302,674 Long-term borrowings due within one year Long-term borrowings due within one year secured by prepaid land use rights andproperty, plant and equipment 16,919 8,313 Long-term borrowings due within one year secured by project assets and solar powersystems 630,696 690,283 Long-term bank borrowings due within one year secured by equity 18,765 151,000 Unsecured long-term borrowings due within one year 9,477 11,358 1,578,205 1,689,989 Borrowings from non-banking institutions Short-term borrowings secured by project assets — 270 Long-term borrowings due within one year secured by project assets 2,640 205,873 Unsecured long-term borrowings due within one year 19,188 61,623 21,828 267,766 Total 1,600,033 1,957,755 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)14. BORROWINGS (Continued)b)Long-term The Company's long-term borrowings consist of the following: The average interest rate on long-term borrowings was 3.75% and 3.06% per annum for the years ended December 31, 2016 and 2017, respectively. Future principal repayments on the long-term borrowings are as follows: On June 20, 2013, Canadian Solar New Energy (Tumushuke) Co. Ltd., the Company's 100% owned subsidiary, entered into a loan agreement,denominated in RMB, with China Development Bank, Suzhou Branch ("CDB"). The total credit facility under this agreement is $41,312 and used toF-52 At December 31,2016 At December 31,2017 $ $ Bank borrowings Unsecured long-term bank borrowings — 87,852 Long-term bank borrowings secured by project assets and solar power systems 27,100 24,640 Long-term bank borrowings secured by property, plant and equipment 15,588 83,329 Long-term bank borrowings secured by equity 340,000 150,000 Long-term borrowings secured by inventory — 8,164 382,688 353,985 Borrowings from non-banking institutions Long-term borrowings secured by project assets and solar power systems 49,767 — Unsecured long-term borrowings 61,000 50,356 110,767 50,356 Total 493,455 404,341 2018 1,128,450 2019 332,956 2020 42,775 2021 12,873 2022 5,637 Thereafter 10,100 Total 1,532,791 Less: future principal repayment related to long-term borrowings, current portion (1,128,450)Total long-term portion $404,341 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)14. BORROWINGS (Continued)finance the project costs. The outstanding borrowing under this agreement equaled $24,946 at December 31, 2017, which requires repayment semi-annuallyand matures in 2026. The loan is secured by solar power systems. As at December 31, 2017, the Company met all the requirements of the financial covenants. On August 28, 2013, CSI Solar Power Group Co., Ltd. (formerly "CSI Solar Power (China) Inc.") entered into a financing agreement, denominated inRMB, with CDB, pursuant to which CDB agreed to provide long-term financing of $7,652 for the construction of solar power projects in Suzhou NationalNew and High-tech Industrial Development Zone. The outstanding borrowing under this agreement equaled $3,826 at December 31, 2017, which requiresrepayment semi-annually and matures in 2021. The loan is secured by project assets and guaranteed by Canadian Solar Manufacturing (Changshu) Inc. As atDecember 31, 2017, the Company met all the requirements of the financial covenants. On June 25, 2014, CSI-GCL (Yan Cheng) Solar Manufacturing Co., Ltd. ("YCSM") entered into a financing agreement, denominated in RMB, with localChinese state-owned companies, which agreed to provide long-term construction financing of $64,277 for the construction of solar power projects andproduction line construction in Yancheng, Jiangsu. The facility is free of securities, financial covenants or restrictions. The total outstanding borrowingsunder this agreement equaled $52,924 at December 31, 2017, which requires repayment of $19,944, $26,093 and $6,887 in 2018, 2019 and 2020,respectively. On November 25, 2015, Recurrent entered into a facility agreement for $150,000 with Ping An Bank, China (Shanghai) Pilot Free Trade Zone Branch, tofinance its project development and operation. The outstanding borrowing under this agreement was $150,000 at December 31, 2017, which requires fullrepayment in 2019. The loan is secured by 100% LLC interests of Recurrent and guaranteed by CSI and CSI Solar Power Group Co., Ltd. As at December 31,2017, the Company was in compliance with all requirements of the financial covenants. On January 6, 2016, Canadian Solar Manufacturing (Luoyang) Inc. entered into a loan agreement, denominated in RMB, with a local Chinese state-owned company, which agreed to provide long-term working capital financing of approximately $9,182. The total outstanding borrowings under thisagreement equaled $8,446 at December 31, 2017, which require full repayment in 2019. The agreement does not contain any financial covenants orrestrictions. On January 28, 2016, Canadian Solar Solutions Inc. and Canadian Solar Manufacturing Vietnam Co., Ltd. entered into a loan agreement of $60,000 withInternational Finance Corporation ("IFC"), a member of World Bank Group, to fund the construction of solar cell and module production facilities in Vietnamand other countries approved by IFC. The outstanding borrowing under this agreement was $15,025 at December 31, 2017, which requires repayment of$5,008, $5,008 and $5,009 in 2018, 2019 and 2020, respectively. The loan is secured by accounts receivable, inventory and property, plant and equipment.As at December 31, 2017, the Company was in compliance with all requirements of the financial covenants.F-53Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)14. BORROWINGS (Continued) On March 23, 2016, CSI Cells Co., Ltd. entered into a financing agreement, denominated in RMB, with a local Chinese state-owned company, whichagreed to provide long-term working capital financing of approximately $47,290. The total outstanding borrowings under this agreement were $24,512 atDecember 31, 2017, which require repayment of $15,923, $2,813 and $5,776 in 2018, 2019 and 2020, respectively. The agreement does not contain anyfinancial covenants or restrictions. On September 28, 2016, Canadian Solar Projects K.K entered into a financing agreement with Sumitomo Mitsui Banking Corporation, denominated inJPY, which agreed to provide revolving long-term working capital financing of approximately $87,852. The total outstanding borrowings under thisagreement was $87,852 at December 31, 2017. The borrowing is unsecured and guaranteed by CSI and does not contain any financial covenants orrestrictions. On January 13, 2017, Canadian Solar Manufacturing (Thailand) Co., Ltd entered into a syndicated credit facility, denominated in U.S. dollars, arrangedby Siam Commercial Bank Public Company Limited, and China Minsheng Banking Corporation Ltd is one of the lenders. The total credit facility under thisagreement is $210,000 and to finance the construction of solar cell and module manufacturing facilities in Thailand. The outstanding borrowings under thisagreement was $67,215 at December 31, 2017, which requires quarterly repayments and matures in 2022. The loan is secured by prepaid land use rights,property, plant and equipment, and guaranteed by CSI Solar Power Group Co., Ltd. The borrowing also contains some financial covenants measured byliabilities. As of December 31, 2017, the Company met all the requirements of financial covenants. On March 29, 2017, Canadian Solar Manufacturing (Luoyang) Inc. entered into an entrusted loan agreement, denominated in RMB, with Ping AnInternational Financial Leasing Co., Ltd. and a Chinese bank, which agreed to provide two-year working capital financing of approximately $2,619. Thetotal outstanding borrowings under this agreement equaled $1,660 at December 31, 2017, which requires repayment of $1,319 and $341 in 2018 and 2019,respectively. The loan is unsecured and guaranteed by CSI Solar Power Group Co., Ltd. and Canadian Solar Manufacturing (Changshu) Inc. The agreementdoes not contain any financial covenants or restrictions. On March 31, 2017, Canadian Solar Sun Energy (Suzhou) Co., Ltd entered into a financing agreement, denominated in RMB, with Bank of Jiangsu,which agreed to provide long-term construction financing of $21,426 for enhancement of solar module manufacturing in in Suzhou, Jiangsu. Theoutstanding borrowing under this agreement was $9,183 at December 31, 2017, which requires repayment of $3,306, $3,306 and $2,571 in 2018, 2019 and2020, respectively. The loan is secured by property, plant and equipment and guaranteed by CSI Solar Power Group Co., Ltd. The agreement does not containany financial covenants or restrictions. On July 1, 2017, Canadian Solar Japan K.K. entered into a financing agreement with Mizuho Bank, Ltd, denominated in JPY, which agreed to providerevolving long-term working capital financing of approximately $8,164. The total outstanding borrowings under this agreement equaled $8,164 atDecember 31, 2017. The loan is secured by inventory and accounts receivable. The agreement does not contain any financial covenants or restrictions.F-54Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)14. BORROWINGS (Continued) The long-term borrowings disclosed above bear floating interest rates from nil to 7.485% per annum.c)Interest expense The Company capitalized interest costs incurred on borrowings obtained to finance construction of solar power projects or property, plant andequipment until the asset is ready for its intended use. The interests incurred during the years ended December 31, 2015, 2016 and 2017 are as follows:15. SHORT-TERM NOTES PAYABLE The Company enters into arrangements with banks whereby the banks issue notes to the Company's vendors, which effectively serve to extend thepayment date of the associated accounts payable. Vendors may present the notes for payment to a bank, including the bank issuing the note, prior to thestated maturity date, but generally at a discount from the face amount of the note. The Company is generally required to deposit restricted cash balances withthe issuing bank, which are utilized to immediately repay the bank upon the banks' settlement of the notes. Given the purpose of these arrangements is toextend the payment dates of accounts payable, the Company has recorded such amounts as short-term notes payable. As payments by the bank areimmediately repaid by the Company's restricted cash balances and other deposits with the same bank, the notes payable do not represent cash borrowingsfrom the bank and, as such, the associated cash payments have been recorded by the Company as an operating activity in the consolidated statements of cashflows. As of December 31, 2016 and 2017, short-term notes payable was $296,663 and $572,631, respectively.16. SHORT-TERM COMMERCIAL PAPER On September 5, 2016, the Company issued a RMB400 million ($60 million) commercial paper at par value with a fixed interest rate of 5.5% per annumfor a tenor of one year, the net proceeds from the issuance after deducting issuance expenses, were approximately RMB398.4 million ($59.9 million), interestis payable from September 7, 2016, the paper matured on September 7, 2017 and repayable at its principal amount plus accrued interest. The amortizationexpense was RMB1,092 ($160) for the year ended December 31, 2017. Coupon interest of RMB15,008 ($2,199) was recorded for the year endedDecember 31, 2017. Principal amount plus accrued interest was paid off as of December 31, 2017.F-55 Years Ended December 31 2015 2016 2017 $ $ $ Interest capitalized—project assets 102 47,881 13,274 Interest capitalized—solar power systems 23,328 3,113 — Interest capitalized—property, plant and equipment 912 819 1,010 Interest expense 54,148 69,723 117,971 Total interest incurred 78,490 121,536 132,255 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)16. SHORT-TERM COMMERCIAL PAPER (Continued) On September 23, 2016, the Company issued a RMB500 million ($74.8 million) commercial paper for a term of nine months with a fixed interest rate of5.3% per annum, the net proceeds from the issuance after deducting issuance expenses, were approximately RMB498.5 million ($74.7 million), interest ispayable from September 26, 2016, the paper matured on June 23, 2017 and repayable at its principal amount plus accrued interest. The amortization expensewas RMB961 ($140) for the year ended December 31, 2017. Coupon interest of RMB12,560 ($1,826) was recorded for the year ended December 31, 2017.Principal amount plus accrued interest was paid off as of December 31, 2017.17. ACCRUED WARRANTY COSTS The Company's warranty activity is summarized below:18. RESTRICTED NET ASSETS As stipulated by the relevant laws and regulations applicable to China's foreign investment enterprise, the Company's PRC subsidiaries are required tomake appropriations from net income as determined under accounting principles generally accepted in the PRC ("PRC GAAP") to non-distributable reserves,which include general reserve, enterprise expansion reserve and staff welfare and bonus reserve. The wholly-owned PRC subsidiaries are not required to makeappropriations to the enterprise expansion reserve but appropriations to the general reserve are required to be made at not less than 10% of the profit after taxas determined under PRC GAAP. The board of directors determines the staff welfare and bonus reserve. The general reserve is used to offset future losses. The PRC subsidiaries may, upon a resolution passed by the stockholder, convert the general reserveinto capital. The staff welfare and bonus reserve is used for the collective welfare of the employee of the subsidiaries. The enterprise expansion reserve is forthe expansion of the PRC subsidiaries' operations and can be converted to capital subject to approval by the relevant authorities. These reserves representappropriations of the retained earnings determined in accordance with Chinese law. In addition to the general reserve, the Company's PRC subsidiaries are required to obtain approval from the local PRC government prior to distributingany registered share capital. Accordingly, both the appropriations to general reserve and the registered share capital of the Company's PRC subsidiaries areconsidered as restricted net assets amounting to $461.8 million as of December 31, 2017.F-56 Years Ended December 31, 2015 2016 2017 $ $ $ Beginning balance 54,644 65,193 61,139 Warranty provision 15,876 9,817 19,793 Warranty costs incurred (3,872) (13,663) (26,552)Foreign exchange effect (1,455) (208) 1,279 Ending balance 65,193 61,139 55,659 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)19. CONVERTIBLE NOTES On February 18, 2014, the Company issued $130,000 of convertible notes (the "2014 Notes"). The Company granted the initial purchasers a 30-dayoption to purchase up to an additional $20,000 aggregate principal amount of the 2014 Notes. The option was fully exercised by initial purchasers on thesame day. The key terms of the 2014 Notes are described as follows: Maturity date. The 2014 Notes mature on February 15, 2019. Interest. The 2014 Notes holders are entitled to receive interest at 4.25% per annum on the principal outstanding, in semi-annually installments,payable in arrears on February 15 and August 15 of each year, beginning August 15, 2014. Conversion. The initial conversion rate is 22.2222 shares per $1,000 initial principal amount, which represents an initial conversion price ofapproximately $45.00 per share. The 2014 Notes are convertible at any time prior to maturity. The conversion rate is subject to change for certain anti-dilution events and upon a change in control. If the holders elect to convert the 2014 Notes upon a change of control, the conversion rate will increase by anumber of additional shares as determined by reference to an adjustment schedule based on the date on which the change in control becomes effective andthe price paid per common share in the transaction (referred to as the "Fundamental Change Make-Whole Premium"). The Fundamental Make-WholePremium is intended to compensate holders for the loss of time value upon early exercise. Redemption. The Company may redeem for cash all or any portion of the notes (i) at the Company's option, on or after February 21, 2017, if the lastreported sale price of the Company's common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or notconsecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading dayimmediately preceding the date on which the Company provides notice of redemption, or (ii) following the occurrence of certain tax related events, in eachcase, at a redemption price equals to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, theredemption date. As of December 31, 2016 and 2017, the carrying value of the convertible notes was $125,569 and $126,476, respectively. The balance at December 31,2016 and 2017 was net of unamortized issuance costs of $1,931 and $1,024, respectively. The debt issuance costs are being amortized through interestexpense over the period from February 18, 2014, the date of issuance, to February 15, 2019, the date of expiration, using the effective interest rate methodwhich was 4.96% for the year ended December 31, 2017. The amortization expense was $810, $898 and $907 for the years ended December 31, 2015, 2016and 2017, respectively. Coupon interest of $5,642 and $5,419 was recorded for the years ended December 31, 2016 and 2017, of which, $2,008and $2,008was not paid and recorded in other payables on the consolidated balance sheets, respectively.F-57Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)20. INCOME TAXES The provision for income taxes is comprised of the following: The Company mainly operates in Canada, PRC, Japan, Germany, the United States, Hong Kong, Thailand and Vietnam.F-58 Years Ended December 31, 2015 2016 2017 $ $ $ Income before income taxes Canada 79,631 57,922 (30,524)United States (14,183) (74,002) (33,205)PRC including Hong Kong 174,201 152,588 173,266 Japan 14,284 7,981 28,164 United Kingdom (7,536) (25,781) 403 Other (23,569) (35,457) 5,830 222,828 83,251 143,934 Current tax Canada 71,002 610 346 United States 40,567 96,172 (54,482)PRC including Hong Kong 20,154 29,181 (7,383)Japan 5,388 3,381 31,266 United Kingdom 419 (206) — Other 823 (9,263) (8,008) 138,353 119,875 (38,261)Deferred tax Canada (44,548) 6,366 (6,464)United States (45,024) (74,562) 67,426 PRC including Hong Kong 7,305 (31,731) 23,452 Japan 58 361 (4,499)United Kingdom — — (353)Other (6,632) (2,333) (350) (88,841) (101,899) 79,212 Total income tax expense Canada 26,454 6,976 (6,118)United States (4,457) 21,610 12,944 PRC including Hong Kong 27,459 (2,550) 16,069 Japan 5,446 3,742 26,767 United Kingdom 419 (206) (353)Other (5,809) (11,596) (8,358) 49,512 17,976 40,951 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)20. INCOME TAXES (Continued)Canada The Company was incorporated in Ontario, Canada and is subject to both federal and Ontario provincial corporate income taxes at a rate of 26.5% for theyears ended December 31, 2015, 2016 and 2017. Canadian Solar Solutions Inc. was incorporated in Ontario, Canada and is subject to both federal and Ontario provincial corporate income taxes at a rateof 25% for all years ended December 31, 2015, 2016 and 2017.United States Canadian Solar (USA) Inc. was incorporated in Delaware, USA and is subject to federal, California, and other states' corporate income taxes at a rate of38.56%, 37.69% and 38.61% for the years ended December 31, 2015, 2016 and 2017, respectively. Canadian Solar Energy Acquisition Co. was incorporated in Delaware, USA on January 22, 2015 and is subject to federal, California, and other states'corporate income taxes at a rate of 40.75%, 43.63% and 38.32% for the years ended December 31, 2015, 2016 and 2017, respectively.Japan Canadian Solar Japan K.K. was incorporated in Japan and is subject to Japanese corporate income taxes at a normal statutory rate of approximately35.64%, 35.15% and 32.02% for the years ended December 31, 2015, 2016 and 2017, respectively.Germany Canadian Solar EMEA GmbH was incorporated in Munich, Germany and is subject to German corporate income tax at a rate of approximately 33% forthe years ended December 31, 2015, 2016 and 2017, respectively.Vietnam Canadian Solar Manufacturing Vietnam Co., Ltd was incorporated in Vietnam in June 25, 2015 and is subject to Vietnamese corporate income taxes at anormal statutory rate of 10%. The Company enjoyed tax exemption from 2016 as its first profitable year. For 2017, it continued to enjoy the tax exemption.The exemption will expire in year 2019. The Company will use a reduced statutory rate of 5% from 2020 to 2028.Thailand Canadian Solar Manufacturing (Thailand) Co.,Ltd. was incorporated in Thailand in November 20, 2015 and is subject to Thailand corporate incometaxes at a normal statutory rate of 20%. The Company currently has two Board of Investment certificates for tax exemption which have differentF-59Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)20. INCOME TAXES (Continued)effective years. The licenses both started from year 2017, one of which will expire in year 2022 and the other in year 2025.Hong Kong Canadian Solar International Ltd. was incorporated in Hong Kong, China, and is subject to Hong Kong profits tax at a rate of 16.5% for the years endedDecember 31, 2015, 2016 and 2017, respectively.PRC The other major operating subsidiaries, including CSI Solartronics (Changshu) Co., Ltd., CSI Solar Technologies Inc., CSI Cells Co., Ltd., CanadianSolar Manufacturing (Luoyang) Inc., CSI Solar Power Group Co., Ltd. (formerly "CSI Solar Power (China) Inc.") and Canadian Solar Manufacturing(Changshu) Inc., and Suzhou Sanysolar Materials Technology Co., Ltd. were governed by the PRC Enterprise Income Tax Law ("EIT Law"). CSI Solartronics (Changshu) Co., Ltd., CSI Solar Technologies Inc., Canadian Solar Manufacturing (Luoyang) Inc., CSI Solar Power Group Co., Ltd.(formerly "CSI Solar Power (China) Inc.") are all subject to the enterprise income tax rate of 25% for the years ended December 31, 2015, 2016 and 2017. Suzhou Sanysolar Materials Technology Co., Ltd. is subject to the enterprise income tax rate of 15% resulting from its High and New TechnologyEnterprise status for the years ended December 31, 2015, 2016 and 2017 and Canadian Solar Manufacturing (Changshu) Inc. Changshu Tlian Co., LTD andCSI Cells Co., Ltd., for the year ended December 31, 2017. The Company makes an assessment of the level of authority for each of its uncertain tax positions (including the potential application of interest andpenalties) based on their technical merits, and has measured the unrecognized benefits associated with such tax positions. This liability is recorded asliability for uncertain tax positions in the consolidated balance sheets. In accordance with its policies, the Company accrues and classifies interest andpenalties associated with such unrecognized tax benefits as a component of its income tax provision. The amount of interest and penalties accrued as ofDecember 31, 2016 and 2017 was $2,747 and $3,083, respectively. The Company does not anticipate any significant changes to its liability forunrecognized tax positions within the next 12 months.F-60Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)20. INCOME TAXES (Continued) The following table illustrates the movement and balance of the Company's liability for uncertain tax positions (excluding interest and penalties) for theyears ended December 31, 2015, 2016 and 2017, respectively. The Company is subject to taxation in various jurisdictions where it operates, mainly including Canada, China and the United States. Generally, theCompany's taxation years from 2010 to 2017 are open for reassessment to the Canadian tax authorities. The Company's taxation years from 2007 through2017 are subject to examination by the Chinese tax authorities due to its permanent establishment in China. The Company is subject to taxation in theUnited States and various state jurisdictions. The Company is not currently under examination by the federal or state tax authorities. The Company's incometax returns for 2013 through 2017 remain open to examination by the US tax authorities. According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of income taxes has resultedfrom the computational errors of the taxpayer. The statute of limitations could be extended to five years under special circumstances. Though not beingclearly defined, a special circumstance would suffice where any underpayment of income taxes exceeds RMB100. For income tax adjustments relating totransfer pricing matters, the statute of limitations is ten years. Therefore, the Company's Chinese subsidiaries might be subject to reexamination by theChinese tax authorities on non-transfer pricing matters for taxation years up to 2012 retrospectively, and on transfer pricing matters for taxation years up to2007 retrospectively. There is no statute of limitations in case of tax evasion in China.F-61 Years Ended December 31, 2015 2016 2017 $ $ $ Beginning balance 10,844 9,490 5,684 Addition for tax positions related to the current year 196 1,376 1,376 Reductions for tax positions from prior years/Statute of limitationsexpirations — (5,436) (1,094)Foreign exchange effect (1550) 254 215 Ending balance 9,490 5,684 6,181 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)20. INCOME TAXES (Continued) The components of the deferred tax assets and liabilities are presented as follows:F-62 At December 31,2016 At December 31,2017 $ $ Deferred tax assets: Accrued warranty costs 23,228 17,945 Bad debt allowance 8,058 7,288 Investment in affiliates under tax equity transactions 54,187 24,859 Inventory write-down 4,564 3,283 Future deductible expenses 13,321 17,652 Depreciation and impairment difference of property, plant and equipment and solarpower systems 29,668 13,333 Accrued liabilities related to countervailing and antidumping duty deposits 111,021 59,983 Deferred tax assets relating to sales of solar power systems 996 2,721 Net operating losses carry-forward 48,678 52,007 Unrealized foreign exchange loss and capital loss 3,278 3,888 Others 4,450 17,912 Total deferred tax assets, gross 301,449 220,871 Valuation allowance (71,469) (65,399)Total deferred tax assets, net of valuation allowance 229,980 155,472 Deferred tax liabilities: 3,315 2,742 Derivative assets Depreciation difference of property, plant and equipment 468 243 Insurance recoverable 16,727 21,420 Others 2,838 4,833 Total deferred tax liabilities 23,348 29,238 Net deferred tax assets 206,632 126,234 Analysis as: Non-current deferred tax assets 229,980 131,796 Non-current deferred tax liabilities (23,348) (5,562)Net deferred tax assets 206,632 126,234 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)20. INCOME TAXES (Continued) Movement of the valuation allowance is as follows: As of December 31, 2017, the Company has accumulated net operating losses of $229,708, of which $111,392 will expire between 2018 and 2037, andthe remaining can be carried forward indefinitely. The Company considers positive and negative evidences to determine whether some portion or all of the deferred tax assets will not be realized. Thisassessment considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future profitability, the duration of statutory carry-forward periods, the Company's experience with tax attributes expiring unused and tax planning alternatives. The Company has considered the followingpossible sources of taxable income when assessing the realization of deferred tax assets:•Tax planning strategies; •Future reversals of existing taxable temporary differences; •Further taxable income exclusive of reversing temporary differences and carry-forwards; The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporarydifferences become deductible for tax purposes. As a result, the Company has recognized a valuation allowance of $71,469 and $ 65,399 as at December 31,2016 and 2017, respectively.F-63 Years Ended December 31, 2015 2016 2017 $ $ $ Beginning balance 52,985 55,959 71,469 Additions (Reversals) (944) 14,486 (5,361)Addition from acquisition of Recurrent 4,949 — — Foreign exchange effect (1,031) 1,024 (709)Ending balance 55,959 71,469 65,399 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)20. INCOME TAXES (Continued) Reconciliation between the provision for income tax computed by applying Canadian federal and provincial statutory tax rates to income before incometaxes and the actual provision and benefit for income taxes is as follows: In accordance with the EIT Law, dividends, which arise from profits of foreign invested enterprises in PRC earned after January 1, 2008, are subject to a10% withholding income tax. Under applicable accounting principles, a deferred tax liability should be recorded for taxable temporary differenceattributable to excess of financial reporting basis over tax basis in the investment in a foreign subsidiary. However, a deferred tax liability is not recognized ifthe basis difference is not expected to reverse in the foreseeable future and is expected to be permanent in duration. As of December 31, 2017, all of theundistributed earnings of approximately $353.4 million attributable to the Company's PRC subsidiaries and affiliates are considered to be permanentlyreinvested, and no provision for PRC withholding income tax on dividend has been made thereon accordingly. Upon distribution of those earnings generatedafter January 1, 2008, in the form of dividends or otherwise, the Company would be subject to the then applicable PRC tax laws and regulations.Distributions of earnings generated before January 1, 2008 are exempt from PRC dividend withholding tax. The amounts of unrecognized deferred taxliabilities for these earnings are in the range of $17.6 million to $35.3 million, as the withholding tax rate of the profit distribution will be 5% or 10%depends on whether the immediate offshore companies can enjoy the preferential withholding tax rate of 5%. On December 22, 2017, the U.S. president signed into law H.R.1, originally known as the "Tax Cuts and Jobs Act." The Act includes substantial changesto taxation of businesses with one of the most important being the top tax rate reduction from 35% to 21% and presents significant potential impacts onfinancial statements including the reassessment of the value of deferred taxes and taxes on mandatory repatriation. Per ASC 740, companies are required torecognize the effect of tax law changes in the period of enactment. Therefore, the Company has reflected the impacts of the tax law changes on the currentprovision. Effective for tax years beginning after December 31, 2017, the corporation tax rate is permanently reduced to 21%. The federal rate changeresulted in a net overall deferred tax asset reduction and result in additional tax expense.F-64 Years Ended December 31, 2015 2016 2017 Combined federal and provincial income tax rate 27% 27% 27%Effect of permanent difference 1% (16)% (18)%Effect of different tax rate on earnings in other jurisdictions (3)% (18)% (7)%Effect of tax holiday —% (4)% (2)%Unrecognized tax provision —% 4% —%Change in valuation allowance —% 32% (6)%Effect of change in tax rate —% —% 39%Others (3)% (3)% (5)% 22% 22% 28% Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)20. INCOME TAXES (Continued) The aggregate amount and per share effect of tax holiday are as follows:21. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share for the years indicated:F-65 Years EndedDecember 31, 2015 2016 2017 (In Thousands ofUS Dollars, exceptper share data) The aggregate amount — 3,343 2,850 Per share—basic — 0.06 0.05 Per share—diluted — 0.06 0.05 Years Ended December 31, 2015 2016 2017 (In Thousands of US Dollars, except share andper share data) Numerator: Net income attributable to Canadian Solar Inc.—basic $171,861 $65,249 $99,572 Dilutive effect of interest expense of convertible notes 5,275 — 4,649 Net income attributable to Canadian Solar Inc.—diluted $177,136 $65,249 $104,221 Denominator: Denominator for basic calculation—weighted averagenumber of common shares—basic 55,728,903 57,524,349 58,167,004 Diluted effects of share number from share options andRSUs 1,343,162 534,714 547,821 Diluted effects of share number from warrants 20,658 — — Dilutive effects of share number from convertible notes 3,333,333 — 2,833,333 Denominator for diluted calculation—weighted averagenumber of common shares—diluted 60,426,056 58,059,063 61,548,158 Basic earnings per share $3.08 $1.13 $1.71 Diluted earnings per share $2.93 $1.12 $1.69 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)21. EARNINGS PER SHARE (Continued) The following table sets forth anti-dilutive shares excluded from the computation of diluted earnings per share for the years indicated.22. RELATED PARTY BALANCES AND TRANSACTIONSRelated party balances: The amount due from related parties of $26,102 as of December 31, 2017 consists of (i) trade receivable of $13,930 for development services provided toRoserock, the Company's 49% owned affiliate, (ii) cash funding of $11,052 to Garland, another 49% owned affiliate, (iii) cash funding of $921 to PilipinasNewton Energy Corp, the Company's 40% owned affiliate, and (iv) $199 receivable for O&M service provided to CSIF, the Company's 14.76% ownedaffiliate. No amount was due as of December 31, 2017. The amount due from related parties of $19,082 as of December 31, 2016 consists of (i) trade receivable of $1,446 for solar power products sold toGaochuangte, the Company's 40% owned affiliate in 2016, which became a subsidiary of the Company in 2017, (ii) prepayments for bid deposits of $1,897to CSI Skypower, the Company's 50% owned affiliate, and (iii) trade receivable of $15,739 for solar power products sold and development services providedto Tranquillity, Garland and Roserock, the Company's 49% owned affiliates. No amount was due as of December 31, 2016. The amount due to related parties of $6,023 as of December 31, 2017 consists of (i) a trade payable of $5,096 due to Suzhou iSilver Materials Co., Ltd.,the Company's 15% owned affiliate, for raw materials purchased, (ii) payable for equipment purchase of $927 million to Suzhou Kzone EquipmentTechnology Co., Ltd, the Company's 32% owned affiliate obtained in September 2017. The amount due to related parties of $19,912 as of December 31, 2016 consists of (i) a trade payable of $19,912 due to Gaochuangte for the EPCservice fees.Related party transactions:Guarantees and loans Dr. Shawn Qu, Chairman, President and Chief Executive Officer, fully guaranteed one-year loan facilities from Chinese commercial banks ofRMB896 million, RMB896 million and RMB1,346 million ($206.0 million) in 2015, 2016 and 2017, respectively. Amounts drawn down from the facilitiesas at December 31, 2015, 2016 and 2017 were $78,225, $79,558 and $135,225, respectively. Dr. Shawn Qu fully guaranteed three-year loan facilities of $150 million from Chinese commercial banks in 2015. The facility was fully drawn down as atDecember 31, 2016 and 2017.F-66 Years Ended December 31, 2015 2016 2017 Share options and RSUs 115,017 476,043 372,743 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)22. RELATED PARTY BALANCES AND TRANSACTIONS (Continued) In the first quarter of 2015, Dr. Shawn Qu loaned the Company $35.0 million at an interest rate of 4.25% per annum. The Company fully repaid the loan,including interest of $21, in March 2015. In 2015, Recurrent entered into buyer payment guaranties with a third party supplier in connection with certain solar module supply agreements ofTranquillity and Garland, pursuant to which Recurrent unconditionally guarantees to the third party supplier the timely payment in full when due and otherpayment obligations of Tranquillity and Garland required under the solar module supply agreements. The payable balance due by Tranquillity and Garlandwas nil and $11.1 million, respectively, as of December 31, 2016 and was both nil, as of December 31, 2017.Sales and purchase contracts with affiliates In 2017, the Company sold 13 solar power projects to CSIF, the Company's 14.76% owned affiliate in Japan, in the amount of JPY18,426,754 ($163,155)recorded in revenue and JPY3,148,648($27,879) recorded in other operating income, provided asset management service and O&M service to CSIF in theamount of JPY303,772($2,699) and JPY32,119 ($285), respectively. In 2017, the Company sold solar power products to Gaochuangte in the amount of RMB11,352 ($1,648), before Gaochuangte became the Company's80% owned subsidiary. In 2016, the Company sold solar power products to Roserock and Garland in the amount of $247,743, provided development services to Tranquillity,Garland and Roserock in the amount of $48,711. In 2015, the Company sold solar power products to Gaochuangte in the amount of RMB39,922 ($6,508), sold solar power products to Roserock andGarland in the amount of $28,132, provided development services to Tranquillity, Garland and Roserock in the amount of $69,712. In 2017, 2016 and 2015, the Company incurred costs of RMB44,271 ($6,430), RMB54,891 ($8,274) and RMB175,272 ($28,159) to Gaochuangte forEPC services related to the Company's solar power projects, respectively. These amounts were recorded in project assets. In 2017, the Company purchased raw materials from Suzhou iSilver Materials Co., Ltd in the amount of RMB331,958 ($49,113), purchased equipmentfrom Suzhou Kzone Equipment Technology Co., Ltd in the amount of RMB29,704 ($4,395). In 2016, the Company purchased raw materials from Suzhou iSilver Materials Co., Ltd in the amount of RMB53,271 ($8,030).23. COMMITMENTS AND CONTINGENCIESa)Lease commitments The Company has operating lease agreements principally for its office properties in the PRC, Canada, Japan and the United States. Such leases haveremaining terms ranging from one to 402 months and are renewable upon negotiation. Rental expenses were $15,451, $17,116 and $19,765 for the yearsended December 31, 2015, 2016 and 2017, respectively.F-67Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)23. COMMITMENTS AND CONTINGENCIES (Continued) Future minimum lease payments under non-cancelable operating lease agreements at December 31, 2017 were as follows:b)Property, plant and equipment purchase commitments As of December 31, 2017, the commitments for the purchase of property, plant and equipment were $201,577.c)Supply purchase commitments In order to secure future solar wafers supply, the Company has entered into long-term supply agreements with suppliers in the past several years. Undersuch agreements, the suppliers agreed to provide the Company with specified quantities of solar wafers, and the Company has made prepayments to thesuppliers in accordance with the supply contracts. The following is a schedule, by year, of future minimum obligation, using market prices, under all supply agreements as of December 31, 2017:d)ContingenciesDeutsche Solar AG In 2007, the Company entered into a twelve-year wafer supply agreement with Deutsche Solar AG, under which the Company was required to purchase acontracted minimum volume of wafers at pre-determined fixed prices and in accordance with a pre-determined schedule, commencing January 1, 2009. Thefixed prices may be adjusted annually at the beginning of each calendar year by Deutsche Solar AG to reflect certain changes in their material costs. Theagreement also contains a take-or-pay provision, which requires the Company to pay the contracted amount regardless of whether the Company acquires thecontracted annual minimum volumes. In 2009, the Company did not meet the minimum volume requirements under the agreement. Deutsche Solar AGagreed that the Company could fulfill its fiscal 2009 purchase obligation in fiscal 2010. In 2010, the Company fulfilled its 2009F-68Year Ending December 31: $ 2018 10,230 2019 8,884 2020 8,025 2021 6,889 2022 4,965 Thereafter 71,667 Total 110,660 Year Ending December 31: $ 2018 1,187,834 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)23. COMMITMENTS AND CONTINGENCIES (Continued)purchase commitment under the agreement but did not meet the minimum purchase obligation for 2010. In 2011, the Company did not meet its purchasecommitment for the respective years. The Company believes that the take-or-pay provisions of the agreement are void under German law and, accordingly, asof December 31, 2010 had not accrued for the full $21,144 that would otherwise be due under the take-or-pay provision of the agreement. Rather, theCompany assumed that it would be permitted to purchase its 2010 contracted quantity, in addition to its 2011 contracted quantity, in fiscal 2011 and hadincluded the purchase obligation for both years in its evaluation of the loss on the long-term purchase commitments. The Company did not record a loss onfirm purchase commitments in any of the three years ended December 31, 2017. In December 2011, Deutsche Solar AG gave notice to the Company to terminate the twelve-year wafer supply agreement with immediate effect. DeutscheSolar AG justified the termination with alleged breach of the agreement by the Company. In the notice, Deutsche Solar AG also reserved its right to claimdamage of Euro148.6 million in court. The agreement was terminated in 2011. As a result, the Company reclassified the accrued loss on firm purchasecommitments reserve of $27,862 as of December 31, 2011 to loss contingency accruals. In addition, the Company made a full bad debt allowance of $17,409against the balance of its advance payments to Deutsche Solar as a result of the termination of the long-term supply contract. As of December 31, 2017, theaccrued amount of $25,682 represents the Company's best estimate for its loss contingency. Deutsche Solar did not specify the basis for its claimed damage ofEuro 148.6 million in the notice.LDK In 2007, the Company entered into a three-year agreement with Jiangxi LDK Solar Hi-Tech Co., Ltd., or LDK, under which the Company purchasedspecified quantities of silicon wafers and LDK converted the Company's reclaimed silicon feedstock into wafers. In June 2008, the Company entered into twolong-term supply purchase agreements with LDK in which the Company was required to purchase a contracted minimum volume of wafers at pre-determinedfixed prices and in accordance with a pre-determined schedule. In April 2010, the Company sent a notice to LDK and announced termination of thesetwo contracts. In July 2010, CSI Cells Co. Ltd., one of the Company's wholly-owned subsidiaries, filed a request for arbitration against LDK with ShanghaiInternational Economy and Trade Arbitration Commission, formerly known as CIETAC Shanghai Branch in relation to wafer supply contracts the Companyentered into with LDK in October 2007, or the 2007 Supply Contract and in June 2008, or the 2008 Supply Contracts. In December 2012, CIETAC ShanghaiBranch awarded RMB248.9 million in compensation plus RMB2.32 million in arbitration expenses to LDK for the damages LDK claimed to have sufferedfrom the alleged breaches by the Company of the 2007 Supply Contract and 2008 Supply Contracts between July 2009 and September 2010, or the 2012Arbitral Award. In February 2013, LDK filed for enforcement of the 2012 Arbitral Award with Jiangsu Suzhou Intermediate People's Court, or the Suzhou IntermediateCourt. In 2013, LDK initiated two separate proceedings against the Company in Jiangxi Xinyu Intermediate People's Court, or the Xinyu Intermediate Court,claiming that the Company had forfeited its rights to the initial deposits under theF-69Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)23. COMMITMENTS AND CONTINGENCIES (Continued)2007 Supply Contract and 2008 Supply Contracts because of the alleged breaches under these contracts. On October 18, 2013, the Xinyu Intermediate Courtstayed these proceedings pending the decision by the Suzhou Intermediate Court as to the 2012 Arbitral Award. On September 9, 2015, the Suzhou Intermediate Court ruled in favor of LDK. On October 19, 2015, the Company reached a settlement agreement withLDK, or the 2015 Settlement Agreement. Under the 2015 Settlement Agreement, the Company agreed to pay RMB132.7 million ($20.8 million translated byusing the rate in 2015) to LDK and to purchase 64.3 million pieces of silicon wafers from LDK at market price over a three year period starting in or aroundDecember 2015, in exchange for which LDK (i) would release the Company from the 2012 Arbitration Award and waive its rights and claims thereunder and(ii) would withdraw its complaints from the Xinyu Intermediate Court and terminate such proceedings. The Suzhou Intermediate Court reviewed the 2015Settlement Agreement and terminated the enforcement proceeding relating to the 2012 Arbitral Award. The $20.8 million paid to LDK was recognized asgeneral and administrative expenses in 2015. As of December 31, 2014, the Company had provided a full allowance against the advance to LDK of $9,798,due to the uncertainty of recovery. As of December 31, 2015, the allowance was written-off. On May 19, 2016, the Company received a copy of a bill of complaint from Xinyu Intermediate Court, in which LDK's receiver applied to the court foran order to revoke the 2015 Settlement Agreement pursuant to PRC bankruptcy law, and requested it to pay an amount that had been waived by LDK underthe 2015 Settlement Agreement. In May 2017, the Xinyu Intermediate Court made a judgment in favor of LDK's receiver, revoking the 2015 SettlementAgreement and requiring CSI Cells to pay RMB58.5 million to LDK's receiver and bear court expenses at RMB0.8 million. The Company recorded a$8.6 million provision in the first quarter of 2017 and CSI Cells appealed the judgment. In November 2017, the Jiangxi High People's Court, or Jiangxi HighCourt, dismissed CSI Cells' appeal and upheld the original judgment. CSI Cells then appealed this judgment to the Supreme People's Court of The People'sRepublic of China, or the Supreme Court. In January 2018, the Supreme Court put CSI Cells' appeal on record pending examination. To date, no decision hasbeen made by the Supreme Court. In March 2018, LDK's receiver applied to the Xinyu Intermediate Court for compulsory execution of its judgment. TheXinyu Intermediate Court has accepted the LDK receiver's application, and the execution procedure is currently in progress.Class Action Lawsuits Following the two subpoenas from the SEC in 2010, six class action lawsuits were filed in the U.S. District Court for the Southern District of New York,or the New York cases, and another class action lawsuit was filed in the U.S. District Court for the Northern District of California, or the California case. TheNew York cases were consolidated into a single action in December 2010. On January 5, 2011, the California case was dismissed by the plaintiff, who becamea member of the lead plaintiff group in the New York action. On March 11, 2011, a Consolidated Complaint was filed with respect to the New York action.The Consolidated Complaint alleges generally that the Company's financial disclosures during 2009 and early 2010 were false or misleading; asserts claimsunder Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder; and names the Company, its chief executive officer and its former chieffinancial officer as defendants. The Company filed itsF-70Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)23. COMMITMENTS AND CONTINGENCIES (Continued)motion to dismiss in May 2011, which was taken under submission by the Court in July 2011. On March 30, 2012, the Court dismissed the ConsolidatedComplaint with leave to amend, and the plaintiffs filed an Amended Consolidated Complaint against the same defendants on April 19, 2012. On March 29,2013, the Court dismissed with prejudice a class action lawsuit filed against the Company and certain named defendants alleging that the Company'sfinancial disclosures during 2009 and early 2010 were false or misleading and in violation of federal securities law. The court found that the plaintiffs failedto adequately allege a securities law violation and granted the Company's motion to dismiss all claims against all defendants with prejudice. OnDecember 20, 2013, the United States Court of Appeals for the Second Circuit affirmed the district court's order dismissing such class action lawsuit. In addition, a similar class action lawsuit was filed against the Company and certain of its executive officers in the Ontario Superior Court of Justice onAugust 10, 2010. The lawsuit alleges generally that the Company's financial disclosures during 2009 and 2010 were false or misleading and brings claimsunder the shareholders' relief provisions of the CBCA, Part XX III.1 of the Ontario Securities Act as well as claims based on negligent misrepresentation. InDecember 2010, the Company filed a motion to dismiss the Ontario action on the basis that the Ontario Court has no jurisdiction over the claims andpotential claims advanced by the plaintiff. The court dismissed the Company's motion on August 29, 2011. On March 30, 2012, the Ontario Court of Appealdenied the Company's appeal with regard to its jurisdictional motion. On November 29, 2012, the Supreme Court of Canada denied the Company'sapplication for leave to appeal the order of the Ontario Court of Appeal. The plaintiff's motions for class certification and leave to assert the statutory cause ofaction under the Ontario Securities Act were served in January 2013 and initially scheduled for argument in the Ontario Superior Court of Justice inJune 2013.However, the plaintiff's motions were adjourned in view of the plaintiff's decision to seek an order compelling the Company to file additionalevidence on the motions. On July 29, 2013 the Court dismissed the plaintiff's motion to compel evidence. On September 24, 2013 the plaintiff's applicationfor leave to appeal from the July 29 order was dismissed. In September 2014, the plaintiff obtained an order granting him leave to assert the statutory cause ofaction under the Ontario Securities Act for certain of his misrepresentation claims. In January 2015, the plaintiff in the class action lawsuit filed against the Company and certain of its executive officers in the Ontario Superior Court ofJustice obtained an order for class certification in respect of certain claims for which he had obtained leave in September 2014 to assert the statutory cause ofaction for misrepresentation under the Ontario Securities Act, for certain negligent misrepresentation claims and for oppression remedy claims advancedunder the CBCA. The Court dismissed the Company's application for leave to appeal and the class action is at the merits stage. The Company believes theOntario action is without merit and the Company is defending it vigorously.Countervailing and antidumping duties In October 2011, a trade action was filed with the U.S. Department of Commerce, or USDOC, and the U.S. International Trade Commission, or USITC, bythe U.S. unit of SolarWorld AG and six other U.S. firms, accusing Chinese producers of crystalline silicon photovoltaic cells, or CSPV cells, whether or notincorporated into modules, of selling their products (i.e., CSPV cells or modulesF-71Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)23. COMMITMENTS AND CONTINGENCIES (Continued)incorporating these cells) into the United States at less than fair value, or dumping, and of receiving countervailable subsidies from the Chinese authorities.These firms asked the U.S. government to impose antidumping and countervailing duties on Chinese-origin CSPV cells. The Company was identified as oneof a number of Chinese exporting producers of the subject goods to the U.S. market. The Company also has affiliated U.S. operations that import the subjectgoods from China. On October 9, 2012, the USDOC issued final affirmative determinations with respect to its antidumping and countervailing duty investigations on CSPV,cells, whether or not incorporated into modules, from China. On November 7, 2012, the USITC determined that imports of CSPV cells had caused materialinjury to the U.S. CSPV industry. This decision was subsequently affirmed by the U.S. Court of International Trade, or CIT, and the U.S. Court of Appeals forthe Federal Circuit (Federal Circuit). As a result of these determinations, the Company was required to pay cash deposits on Chinese-origin CSPV cells imported into the U.S., whether or notincorporated into modules the rates of which applicable to the Company were 13.94% (antidumping duty) and 15.24% (countervailing duty), respectively.The Company paid all the cash deposits due under these determinations. Several parties challenged the determinations of the USITC in appeals to the CIT.On August 7, 2015, the CIT sustained the USITC's final determination and on January 22, 2018, the Federal Circuit upheld the CIT's decision. There was nofurther appeal to the U.S. Supreme Court and, therefore, this decision is final. The rates at which duties will be assessed and payable are subject to administrative reviews. The first administrative reviews were concluded on July 14, 2015, when the USDOC published its final results of the first administrative reviews of theantidumping and countervailing duty orders on CSPV cells. As a result of these decisions, the duty rates applicable to the Company were revised to 9.67%(antidumping duty) and 20.94% (countervailing duty), respectively. The rates at which duties will be assessed and payable for the reviewed periods wereappealed to the CIT. The CIT affirmed the USDOC's remand determination as to the final results of the countervailing duty review, and no change was madeto our countervailing duty rate. This decision has not been appealed to the Federal Circuit. The CIT likewise affirmed USDOC's remand determination as tothe final results of the antidumping duty review, and no change was made to our antidumping duty rate. The CIT's decision affirming USDOC's determinationon the antidumping duty rate has now been appealed to the Federal Circuit, with a decision expected in late 2018 or 2019. The second administrative reviews were concluded in June 2016 (antidumping duty) and July 2016 (countervailing duty) when the USDOC publishedthe final results of the second administrative reviews of the antidumping and countervailing duty orders on CSPV cells. Due to these decisions, theantidumping duty rate applicable to the Company was reduced to 8.52% (from 9.67%). Because the Company was not subject to the second administrativereview of the countervailing duty order, its countervailing duty rate remained at 20.94%. There is no ongoing litigation related to the countervailing dutyrate. The antidumping duty rates at which duties will be assessed and payable for the reviewed period are subject to ongoing litigation at the CIT, includingremand proceedings beforeF-72Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)23. COMMITMENTS AND CONTINGENCIES (Continued)USDOC in which the agency has announced no change to the antidumping duty rate at this time. Further decisions on these appeals are expected laterin 2018. The third administrative reviews were concluded in June 2017 (antidumping duty) and July 2017 (countervailing duty) when the USDOC published thefinal results of the third administrative reviews of the antidumping and countervailing duty orders on CSPV cells. As result of these decisions, the duty ratesapplicable to us were changed to 13.07% (from 8.52%) (antidumping duty) and 18.30% (from 20.94%) (countervailing duty). The rates at which duties willbe assessed and payable for the reviewed period are subject to ongoing litigation at the CIT. Decisions on these appeals are not expected until late 2018,or 2019. The fourth and fifth of these reviews are ongoing and are expected to conclude in mid-2018 and mid-2019, respectively. The preliminary countervailingduty results of the fourth administrative review estimate a reduced countervailing duty rate of 13.72% (from 18.30%). The Company is vigorously contestingthe preliminary results in the final phase of this administrative review. The Company is not subject to the fourth administrative review of the antidumpingduty order. Therefore, our antidumping duty rate will remain at 13.07%. The Company was just selected for individual review in the fifth administrative review of the countervailing duty order. The final results of this reviewand the fourth administrative review of the countervailing duty order and the fifth administrative review of the antidumping duty order may result in dutyrates that differ from the previous duty rates and cash deposit rates applicable to the Company. These duty rates could materially and adversely affect ourU.S. import operations and increase the Company's cost of selling into the U.S. On December 31, 2013, SolarWorld US filed a new trade action with the USDOC and the USITC accusing Chinese producers of certain CSPV modules ofdumping their products into the U.S. and of receiving countervailable subsidies from the Chinese authorities. This trade action also alleged that Taiwaneseproducers of certain CSPV cells and modules dumped their products into the United States. Excluded from these new actions were those Chinese-origin solarproducts covered by the Solar 1 orders described above. The Company was identified as one of a number of Chinese producers exporting the subject goods tothe U.S. market. "Chinese CSPV products subject to Solar 2 orders" refer to CSPV products manufactured in mainland China using non-Chinese (e.g., Taiwanese) CSPVcells and imported into the USA during the investigation or review periods of Solar 2. "Taiwanese CSPV products subject to Solar 2 orders" refer to CSPVproducts manufactured outside of mainland China using Taiwanese CSPV cells and imported into the USA during the investigation or review periods ofSolar 2. On December 23, 2014, the USDOC issued final affirmative determinations with respect to its antidumping and countervailing duty investigation onthese CSPV products. On January 21, 2015, the USITC determined that imports of these CSPV products had caused material injury to the U.S. CSPV industry.As a result of these determinations, the Company is required to pay cash deposits on these CSPV products the rates of which applicable to its Chinese CSPVproducts subject to Solar 2 orders were 30.06% (antidumping duty) and 38.43% (countervailing duty), respectively. The cash deposit rateF-73Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)23. COMMITMENTS AND CONTINGENCIES (Continued)applicable to its Taiwanese CSPV products subject to Solar 2 orders varied by solar cell producer. The Company paid all the cash deposits due under thesedeterminations. The countervailing duty rate applicable to the Company was challenged at the CIT and the Company was a party to these proceedings. InSeptember 2017, the CIT sustained USDOC's CVD remand determination, which reduced Canadian Solar's CVD rate from 38.43% to 33.58%. The case hasnot been further appealed and, thus, the decision is final. Canadian Solar and other interested parties also appealed the scope of the Solar 2 antidumping andcountervailing orders determined by Commerce to the CIT. The CIT affirmed Commerce's scope determinations on July 21, 2017. That decision has beenappealed to the Federal Circuit, and a decision is expected later in 2018 The rates at which duties will be assessed and payable are subject to administrative reviews. The first administrative reviews for both the Chinese and Taiwanese orders of Solar 2 were concluded in July 2017 (China and Taiwan antidumping dutyorders) and September 2017 (China-only countervailing duty order), respectively, when the USDOC published the final results. Because the Company wasnot subject to the first administrative reviews of the Chinese orders of Solar 2, its duty rates will remain at 30.06% (antidumping duty) and 33.58%(countervailing duty) for its Chinese CSPV products subject to Solar 2 orders during the period of the first administrative review. For its imports of TaiwaneseCSPV products subject to the Solar 2 orders, DOC calculated antidumping duty rates ranging from 3.56% to 4.20%. The second administrative reviews for both the Chinese and Taiwanese orders of Solar 2 are expected to conclude in mid-2018. The Company is notsubject to the second reviews of the Chinese orders of Solar 2, meaning that there will be no change in the duty rates applicable to it in that proceeding. TheUSDOC's preliminary results of the second review of the Taiwanese order of Solar 2 calculated an antidumping margin of 1.07% for Canadian Solar entities.The final results for the Taiwanese order of Solar 2 will set a new cash deposit rate, which may differ from the cash deposit rates applicable to the Company.These duties could materially and adversely affect the Company's U.S. import operations and increase its cost of selling into the U.S. The third administrative reviews for both the Chinese and Taiwanese orders of Solar 2 are ongoing and are expected to conclude in mid-2019. In 2017, a total of $7.6 million cash deposits were paid relating to countervailing and antidumping rulings in the U.S., of which $7.3 million werecharged into cost of sales. As of December 31, 2017, $0.3 million countervailing and antidumping rulings remained in inventories. In addition, the Companybooked the benefits of two reversals of $42.6 million and $15.0 million, primarily associated with prior years' module sales based on the final rates of thethird administrative review of Solar 1 and the first administrative review of Solar 2 carried out by the U.S. Department of Commerce, respectively. On May 17, 2017, following receipt of a petition from Suniva, Inc., which was later joined by SolarWorld Americas, Inc., the USITC instituted asafeguard investigation to determine whether there were increased imports of CSPV products in such quantities as to be a substantial cause of serious injury,or the threat thereof, to the domestic industry producing like or directly competitive products. On September 22, 2017, the USITC determined that CSPVproducts are being imported into theF-74Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)23. COMMITMENTS AND CONTINGENCIES (Continued)United States in such increased quantities as to be a substantial cause of serious injury to the domestic industry. On January 23, 2018, the President of the United States imposed a safeguard measure on imports of CSPV cells, whether or not partially or fullyassembled into other products such as modules, consisting of (1) a tariff-rate quota for four years on imports of CSPV cells not partially or fully assembledinto other products, with (a) an in-quota quantity of 2.5 gigawatts, and (b) a tariff rate applicable to over-quota CSPV cells of 30%, declining annually by fivepercentage points to 25% in the second year, 20% in the third year, and 15% in the fourth year; and (2) a 30% tariff for four years on CSPV modules,declining annually by five percentage points to 25% in the second year, 20% in the third year, and 15% in the fourth year. This safeguard measure, whichbecame effective on February 7, 2018, applies to CSPV products imported from all countries, except for certain developing country members of the WorldTrade Organization. The safeguard measure may be amended or eliminated during the mid-term review, which should take place in 2020, as required by U.S. law. ThePresident may then reduce, modify, or terminate the action taken if the President determines that: (1) the domestic industry has made a positive adjustment toimport competition; (2) the domestic industry has not made adequate efforts to make a positive adjustment to import competition; or (3) the effectiveness ofthe safeguard action has been impaired by changed economic circumstances. On February 9, 2018, Canadian Solar and two other manufacturers and exporters of CSPV modules from Canada challenged the applicability of thesafeguard measure to U.S. imports of CSPV modules from Canada. The Canadian parties applied to the CIT for a temporary restraining order and preliminaryinjunction (TRO/PI) to halt the imposition of the 30% tariff on CSPV modules imported from Canada. The CIT denied the application, and the Canadianparties have appealed this decision to the Federal Circuit. On September 6, 2012, following a complaint lodged by EU ProSun, an ad-hoc industry association of EU CSPV module, cell and wafer manufacturers,the European Commission initiated an antidumping investigation concerning EU imports of CSPV modules and key components (i.e., cells and wafers)originating in China. On November 8, 2012, following a complaint lodged by the same parties, the European Commission initiated an anti-subsidyinvestigation on these same products. On December 6, 2013, the EU imposed definitive antidumping and countervailing measures on imports of CSPV modules and key components (i.e., cellsand wafers) originating in or consigned from China. On February 28, 2014, the Company filed separate actions with the General Court of the EU for annulment of the regulation imposing the definitiveantidumping measures and of the regulation imposing the definitive countervailing measures (case T-162/14 and joined cases T-158/14, T-161/14, and T-163/14). The General Court rejected these actions for annulment. On May 8, 2017, the Company appealed the judgements of the General Court before theCourt of Justice of the EU (cases C-236/17 and C-237/17). The appeals are pending.F-75 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)23. COMMITMENTS AND CONTINGENCIES (Continued) On December 5, 2015, the European Commission initiated expiry (sunset) reviews of the antidumping and countervailing measures on imports of CSPVmodules and key components (i.e., cells and wafers) originating in or consigned from China. On March 3, 2017, the European Commission extended theantidumping and countervailing measures for 18 months on imports of CSPV modules and key components (i.e., cells and wafers) originating in or consignedfrom China. On September 16, 2017, the European Commission amended the form of the antidumping and countervailing measures for certain Chineseexporters (but not for Canadian Solar). On March 13, 2018, the European Commission published notices of expiry of the antidumping and countervailing measures on imports of CSPVmodules and key components (i.e., cells) originating in or consigned from China. The notices provide that the measures will expire on September 3, 2018,unless the EU industry (successfully) requests the European Commission to initiate expiry (sunset) reviews by June 3, 2018. On June 3, 2015, the Canada Border Services Agency released final determinations of dumping and subsidization which found dumping calculated byway of a Ministerial Specification based on a Non Market Economy finding applicable to all cooperative exporters and ascertained a Canadian Solar-specificsubsidies rate of RMB0.014 per Watt. On July 3, 2015 the Canadian International Trade Tribunal determined that a Canadian industry was not negativelyaffected as a result of imported modules but was threatened with negative impact. As a result of these findings, definitive duties were imposed on imports ofChinese solar modules into Canada starting on July 3, 2015. The Company does not believe the imposition of these duties will have a material negativeeffect upon its results of operations because it has significant module manufacturing capacity in Ontario and do not rely on Chinese solar modules to serve itsCanadian business.24. SEGMENT INFORMATION The Company uses the management approach to determine operating segments. The management approach considers the internal organization andreporting used by the Company's chief operating decision maker ("CODM") for making decisions, allocating resources and assessing performance. TheCompany's CODM has been identified as the Chief Executive Officer of the Company, since he reviews consolidated and segment results when makingdecisions about allocating resources and assessing performance of the Company. Following the Company's decision to expand its business to include both building and selling and building and operating solar power projects, theCompany operated its business in three principal reportable business segments in 2015: module and system solutions ("MSS") segment, energy developmentsegment and electricity generation segment. Following its decision to terminate plans to create and spin off a publicly-traded "yieldco" that would hold themajority of the Company's solar power projects in operation, the Company have operated its business in two principal reportable business segments since2016, i.e., MSS segment and energy segment. The prior year segment information has been restated to conform to the current year's presentation. The MSSsegment primarily comprises the design, development, manufacture and sales of solar power products and solar system kits, and O&M services. The energysegment primarily comprises solar project development andF-76Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)24. SEGMENT INFORMATION (Continued)sale, EPC and development services, operating solar power projects and sales of electricity. The sales from MSS segment to energy segment have terms andconditions similar to sales to third parties. The Company's CODM reviews net revenue and gross profit and does not review balance sheet information bysegment. In 2017, the MSS segment provided O&M services which were provided by the energy segment. Net revenues, cost of revenues and gross profit ofMSS segment and energy segment for the years ended December 31, 2015 and 2016 have been restated to conform to the current year's presentation. The following table summarizes the Company's revenues and gross profit generated from each segment: F-77 Years Ended December 31, 2017 MSS Energy Elimination Total $ $ $ $ Net revenues 2,850,859 677,470 (137,936) 3,390,393 Cost of revenues 2,390,686 473,453 (111,344) 2,752,795 Gross profit 460,173 204,017 (26,592) 637,598 Years Ended December 31, 2016 MSS Energy Elimination Total $ $ $ $ Net revenues 2,825,270 106,432 (78,624) 2,853,078 Cost of revenues 2,429,207 66,955 (60,272) 2,435,890 Gross profit 396,063 39,477 (18,352) 417,188 Years Ended December 31, 2015 MSS Energy Elimination Total $ $ $ $ Net revenues 2,675,999 975,937 (184,310) 3,467,626 Cost of revenues 2,278,805 778,050 (165,999) 2,890,856 Gross profit 397,194 197,887 (18,311) 576,770 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)24. SEGMENT INFORMATION (Continued) The following table summarizes the Company's net revenues generated from different geographic locations. The information presented below is based onthe location of customers' headquarters: The following table summarizes the Company's long-lived assets, including property, plant and equipment, non-current project assets, solar powersystems, prepaid land use rights and intangibleF-78 Years Ended December 31, 2015 2016 2017 $ $ $ Europe and other regions: —Germany 75,912 132,185 94,066 —Netherlands 12,859 36,732 51,357 —United Kingdom 98,800 73,274 48,295 —Australia 18,150 33,634 48,069 —Turkey 7,547 9,544 24,833 —Spain 8,246 22,516 13,471 —Others 111,869 103,280 76,049 333,383 411,165 356,140 The Americas: —United States 903,748 863,500 628,815 —Brazil — 33,002 388,554 —Canada 747,100 193,790 52,194 —Others 99,152 13,217 38,599 1,750,000 1,103,509 1,108,162 Asia: —PRC 402,180 585,296 874,559 —Japan 578,173 373,396 476,946 —India 262,536 292,234 336,468 —Singapore 24,131 7,615 97,483 —U.A.E — 5,391 91,991 —Others 117,223 74,472 48,644 1,384,243 1,338,404 1,926,091 Total net revenues 3,467,626 2,853,078 3,390,393 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)24. SEGMENT INFORMATION (Continued)assets at December 31, 2016 and 2017 by geographic region, based on the physical location of the assets: The following table summarizes the Company's revenues generated from each product or service:25. MAJOR CUSTOMERS No customers accounted for 10% or more of total net revenues. The accounts receivable from three customers with the largest receivable balances represents 12%, 4% and 4% of the balance of the account atDecember 31, 2017, and 9%, 6% and 4% of the balance of the account at December 31, 2016, respectively. The balance from the customer with the largestreceivable balance is $43,218 and $34,468 as of December 31, 2016 and 2017, respectively.26. EMPLOYEE BENEFIT PLANS Employees of the Company located in the PRC are covered by the retirement schemes defined by local practice and regulations, which are essentiallydefined contribution schemes. The calculation of contributions for eligible employees is based on 20% of the applicable payroll cost in 2016. The expenseincurred by the Company to these defined contributions schemes was $6,189, $7,186 and $9,412 for the years ended December 31, 2015, 2016 and 2017,respectively.F-79 At December 31,2016 At December 31,2017 $ $ PRC 434,989 675,291 Japan 167,465 99,673 United States 67,652 71,761 Canada 7,308 8,827 Others 136,457 193,452 Total long-lived assets 813,871 1,049,004 Years Ended December 31, 2015 2016 2017 $ $ $ Solar power products 2,303,287 2,573,685 2,551,509 Solar system kits 93,406 86,794 84,598 Solar power projects 557,995 22,665 632,256 EPC and development services 385,882 11,990 2,925 Electricity 32,059 68,789 29,236 O&M services 3,310 4,128 6,938 Others 91,687 85,027 82,931 Total net revenues 3,467,626 2,853,078 3,390,393 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)26. EMPLOYEE BENEFIT PLANS (Continued) In addition, in 2017, the Company is required by PRC law to contribute approximately 10%, 8%, 2% and 2% of applicable salaries for medical insurancebenefits, housing funds, unemployment and other statutory benefits, respectively. The PRC government is directly responsible for the payment of the benefitsto these employees. The amounts contributed for these benefit schemes were $8,193, $9,128 and $10,447 for the years ended December 31, 2015, 2016 and2017, respectively.27. SHARE-BASED COMPENSATION In March 2006, the Company adopted a share incentive plan, or the Plan. The purpose of the Plan is to promote the success and enhance the value of theCompany by linking the personal interests of the directors, employees and consultants to those of the shareholders and providing the directors, employeesand consultants with an incentive for outstanding performance to generate superior returns to the shareholders. The Plan is also intended to motivate, attractand retain the services of the directors, employees and consultants upon whose judgment, interest and effort the successful conduct of the Company'soperations is largely dependent. In September 2010, the shareholders approved an amendment to the Plan to increase the maximum number of commonshares which may be issued pursuant to all awards of options, restricted shares and RSUs under the Plan to the sum of (i) 2,330,000 plus (ii) the sum of (a) 1%of the number of outstanding common shares of the Company on the first day of each of 2007, 2008 and 2009 and (b) 2.5% of the number of outstandingcommon shares of the Company outstanding on the first day of each calendar year after 2009. The Plan will expire on, and no awards may be granted after,May 8, 2021. Under the terms of the Plan, options are generally granted with an exercise price equal to the fair market value of the Company's ordinary sharesand expire ten years from the date of grant.Options to Employees As of December 31, 2017, there was nil unrecognized compensation expense related to share-based compensation awards. During the years endedDecember 31, 2015, 2016 and 2017, $355, $44 and nil was recognized as compensation expense, respectively. The Company utilizes the Binomial option-pricing model to estimate the fair value of stock options. No stock options were granted in 2015, 2016and 2017. The Company used the market yield of Chinese International Government Bonds, denominated in U.S. dollar, with maturities that can cover thecontractual life of the shares option for the risk-free rates. In 2013, since the Company has been listed for approximately 7 years and its share price history ismore comparable to the life of the issued options, the Company estimated the expected volatility based on the annualized standard deviation of its dailystock price return from the date of listing to the valuation date. The Company's dividend policy is to retain earnings for reinvestment purpose, thus thedividend yield is assumed to be zero. The Company estimated the annual exit rates based on the historical general exit rate of employees at different levels.The Company estimated the exercise multiple based on the historical exercise pattern of prior employee stock options granted by the Company.F-80Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)27. SHARE-BASED COMPENSATION (Continued) A summary of the option activity is as follows: The weighted average grant-date fair values of options granted in 2015, 2016 and 2017 was nil. The total intrinsic value of options exercised during theyears ended December 31, 2015, 2016 and 2017 was $3,422, $2,643 and $605, respectively.RSUs to Employees The Company granted 574,488, 868,036 and 1,033,001 RSUs to employees in 2015, 2016 and 2017, respectively. The RSUs entitle the holders toreceive the Company's common shares upon vesting. The RSUs were granted for free and generally vest over periods from one to four years based on thespecific terms of the grants. The fair market value of the Company's ordinary shares at the date of grant resulted in total compensation cost of approximately$13.2 million, $12.1 million and $13.3 million that will be recognized ratably over the vesting period for the RSUs granted in 2015, 2016 and 2017,respectively. In the years ended December 31, 2015, 2016 and 2017, the Company recognized $5,611, $7,713 and $9,314 in compensation expenseassociated with these awards, respectively. As of December 31, 2017, there was $21,867 of total unrecognized share-based compensation related to unvested RSUs, which is expected to berecognized over a weighted-average period of 2.65 years.F-81 Numberof Options WeightedAverageExercisePrice WeightedAverageRemainingContractTerms AggregateIntrinsic Value $ In Thousands ofU.S. Dollars Options outstanding at January 1, 2017 466,286 14.52 3 years 1,081 Granted — Exercised (97,113) 9.03 Forfeited — Options outstanding at December 31, 2017 369,173 15.97 2 years 2,068 Options vested or expected to be vested at December 31, 2017 369,173 15.97 2 years 2,068 Options exercisable at December 31, 2017 369,173 15.97 2 years 2,068 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)27. SHARE-BASED COMPENSATION (Continued) A summary of the RSU activity is as follows: The total fair value of RSUs vested during the years ended December 31, 2015, 2016 and 2017 was $4,641, $7,271 and $12,091, respectively.28. WARRANTS In connection with $180 million of two-year senior secured term syndicated loan arranged by Credit Suisse, the Company issued the lenders warrants topurchase up to 1,348,040 shares of CSI's common stock, at an exercise price of $24.48 per share on October 26, 2015, and warrants to purchase up to940,171 shares of common stock, at an exercise price of $28.08 per share on December 11, 2015, respectively (the "Warrants"), subject to adjustment underseveral special circumstances, including anti-dilution clauses. The Warrants can be settled in cash at the discretion of the holder. As a result, they were accounted for as derivative liabilities which were fair valued atissuance and are subsequently marked to market at the end of each reporting period, until such time as the warrant is exercised or expired. On the issuance dates of the Warrants, the Company recorded them at the fair value of $16,378 with an offset to the borrowing proceeds. The Companyrecognized a gain of $24,554 and $711 from change in fair value of the Warrants in the consolidated statements of operations for the year endedDecember 31, 2016 and 2017, respectively. The Warrants expired at October 25, 2017 and December 10, 2017, respectively. The Company utilizes the Binomial model to estimate the fair value of the Warrants. The following assumptions were used to estimate the fair value ofthe Warrants as of the date that the Warrants were originally issued and as of December 31, 2016:F-82 Number ofShares Weighted AverageGrant-DateFair Value $ Unvested at January 1, 2017 1,402,859 17.27 Granted 1,033,001 13.11 Vested 569,423 14.49 Forfeited (134,390) 20.89 Unvested at December 31, 2017 1,732,047 15.42 At October 26,2015 At December 11,2015 At December 31,2016Exercise price $24.48 $28.08 $24.48 ~ $28.08Risk-free interest rate 0.672% 0.935%0.850% ~ 0.875%Dividend yield — — —Time to maturity 2 2 0.82 ~ 0.94Expected volatility 67.24% 65.13%53.99% ~ 59.21%Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)28. WARRANTS (Continued) The Company used the market yield of U.S. Government Bonds with maturity on October 31, 2017 as of the valuation date for the risk-free interest rate.The Company's dividend policy is to retain earnings for reinvestment purpose and the Company does not intend to distribute dividends, thus the dividendyield is assumed to be zero. Expected volatility is based on the historical share price movement of the Company for the period of time close to the expectedtime to exercise. The expected life is based on the remaining term of the Warrants. The following is a reconciliation of the beginning and expiration the Warrants:29. CAPITAL LEASES During 2017, the Company sold certain machinery ("leased assets") to third party financing companies (the "purchaser-lessor") and simultaneouslyentered into contracts to lease back the leased assets from the purchaser-lessor for periods ranging from two to four years. Pursuant to the terms of thecontracts, the Company is required to pay to the purchaser-lessor quarterly lease payments over the terms of the lease and has the option to re-purchase themachinery for a nominal price upon the expiration of the lease. The lease is classified as capital lease. In connection with this sale-leaseback transaction, theCompany recognized a loss of approximately $6.5million, which is being deferred and amortized into expense over the remaining useful lives of the leasedassets. In March 2017, the Company entered into a two-year finance leasing contract with a third-party lessor to lease equipment with carrying amount of$23.0 million. Pursuant to the terms of the contract, the Company is required to pay to the lessor quarterly lease payment over the lease term and has theoption to re-purchase these equipment at a nominal price upon the expiration of the lease. The lease is classified as capital lease. As of December 31, 2016 and 2017, the net value of the leased assets are:F-83Derivative Liabilities At December 31,2017 $ Beginning balance 711 Expiration of the Warrants (711)Ending balance — At December 31,2016 At December 31,2017 $ $ Machinery and equipment 17,206 131,624 Accumulated depreciation (6,473) (46,727)Machinery and equipment, net 10,733 84,897 Table of ContentsCANADIAN SOLAR INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 and 2017(In Thousands of U.S. Dollars, unless otherwise indicated)29. CAPITAL LEASES (Continued) The Company also leases machinery from third parties in the PRC under non-cancellable capital leases. As of December 31, 2017, future minimum leasepayments for assets under capital leases to be paid over the remaining terms of up to four years were as follows: The current portion of the present value of net minimum lease payments is recorded in other payables, while the non-current portion is recorded in othernon-current liabilities.30. SUBSEQUENT EVENTS In January 2018, the Company entered into an agreement with Photon Energy NV to co-develop five utility-scale solar power projects, with a totalcapacity of 1.14 GWp, in New South Wales, Australia. In February 2018, the Company completed the sale of solar power plants totaling 142 MWp in the U.K. to Greencoat Solar II LP, for approximately GBP191.2 million ($267.7 million), net of distributions of GBP 3.8 million ($5.3 million) made prior to closing. In March 2018, the Company completed the sale of its interests in three solar power plants totaling 309 MWp in the U.S. to Korea Electric PowerCorporation, for approximately $720 million.F-84Year Ending December 31: $ 2018 59,340 2019 33,300 2020 14,231 2021 and thereafter 3,425 Total minimum lease payments 110,296 Less: amount representing interest 6,982 Present value of net minimum lease payments 103,314 Current portion 59,942 Non-current portion 43,372 Table of Contents Additional Information—Financial Statement Schedule I Canadian Solar Inc. Schedule I has been provided pursuant to the requirements of Rule 12-04(a) and 4-08(e)(3) of Regulation S-X, which require condensed financialinformation as to financial position, changes in financial position and results of operations of a parent company as of the same dates and for the same periodsfor which audited consolidated financial statements have been presented as the restricted net assets of Canadian Solar Inc.'s consolidated and unconsolidatedsubsidiaries not available for distribution to Canadian Solar Inc. as of December 31, 2017 of $461.8 million, exceeded the 25% threshold. The condensed financial information has been prepared using the same accounting policies as set out in the consolidated financial statements, exceptthat the equity method has been used to account for investments in subsidiaries.F-85Table of Contents FINANCIAL INFORMATION OF PARENT COMPANY BALANCE SHEETS F-86 December 31,2016 December 31,2017 (In Thousands of U.S.Dollars, except share data) ASSETS Current assets: Cash and cash equivalents 21,348 16,957 Accounts receivable trade, net of allowance for doubtful accounts of $3,007 and $3,642 asof December 31, 2016 and 2017, respectively 103 6,207 Amounts due from related parties 419,075 375,843 Derivative assets—current 2,425 — Advances to suppliers, net of allowance for doubtful accounts of $5,225 and $5,222 as ofDecember 31, 2016 and 2017, respectively — 60 Prepaid expenses and other current assets 4,871 11,490 Total current assets 447,822 410,557 Investment in subsidiaries 789,633 1,005,176 Deferred tax assets—non-current 22,609 9,185 Other non-current assets 64,903 67,940 TOTAL ASSETS 1,324,967 1,492,858 LIABILITIES AND EQUITY Current liabilities: Short-term borrowings 10,000 151,000 Accounts payable 3 3 Amounts due to related parties 73,053 139,091 Derivative liabilities—current 1,914 — Other current liabilities 10,952 36,914 Total current liabilities 95,922 327,008 Accrued warranty costs 2,950 — Convertible notes 125,569 126,476 Long-term borrowings 190,000 — Deferred tax liabilities—non-current 20,054 524 Liability for uncertain tax positions 5,791 6,625 TOTAL LIABILITIES 440,286 460,633 Equity: Common shares—no par value: unlimited authorized shares, 57,830,149 and58,496,685 shares issued and outstanding at December 31, 2016 and 2017, respectively 701,283 702,162 Additional paid-in capital (8,897) 417 Retained earnings 284,109 383,680 Accumulated other comprehensive loss (91,814) (54,034)TOTAL EQUITY 884,681 1,032,225 TOTAL LIABILITIES AND EQUITY 1,324,967 1,492,858 Table of Contents FINANCIAL INFORMATION OF PARENT COMPANY STATEMENTS OF OPERATIONS F-87 Years Ended December 31 2015 2016 2017 (In Thousands of U.S. Dollars) Net revenues 23,302 13,748 35,011 Cost of revenues 15,850 9,657 29,542 Gross profit 7,452 4,091 5,469 Operating expenses: Selling expenses 3,309 3,727 2,221 General and administrative expenses 29,124 17,167 18,390 Research and development expenses 450 589 645 Other operating loss — — 1,173 Total operating expenses 32,883 21,483 22,429 Loss from operations (25,431) (17,392) (16,960)Other income (expenses): Interest expense (17,241) (29,032) (20,078)Interest income 34,471 44,666 42,191 Gain (loss) on change in fair value of derivatives (13,571) 30,988 (7,134)Foreign exchange gain (loss) 1,324 (3,810) (18,110)Gain on repurchase of convertible notes — 2,782 — Investment loss — — (11,944)Other income (expenses), net: 4,983 45,594 (15,075)Income (loss) before income taxes and equity in earnings (loss) of subsidiaries andunconsolidated investees (20,448) 28,202 (32,035)Income tax (expense) benefit (1,231) (6,599) 1,686 Equity in earnings of subsidiaries 193,813 43,596 130,048 Equity in earnings (loss) of unconsolidated investees (273) 50 (127)Net income 171,861 65,249 99,572 Table of Contents FINANCIAL INFORMATION OF PARENT COMPANY STATEMENTS OF COMPREHENSIVE INCOME (LOSS) F-88 Years Ended December 31, 2015 2016 2017 (In Thousands of U.S. Dollars) Net income 171,861 65,249 99,572 Other comprehensive income (loss) (net of tax of nil): Foreign currency translation adjustment (79,913) (31,958) 37,780 Comprehensive income 91,948 33,291 137,352 Table of Contents FINANCIAL INFORMATION OF PARENT COMPANY STATEMENTS OF CASH FLOWS F-89 Years Ended December 31, 2015 2016 2017 (In Thousands of U.S. Dollars) Operating activities: Net income 171,861 65,249 99,572 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 32 32 33 Loss on disposal of subsidiaries — — 9,559 Impairment loss of investment — — 3,686 (Gain) loss on change in fair value of derivatives 13,571 (30,988) 7,134 Gain on repurchase of convertible notes — (2,782) — Allowance for doubtful accounts 1,535 (844) 2,666 Equity in earnings of subsidiaries (193,813) (43,596) (130,048)Equity in loss (earnings) of unconsolidated investees 273 (50) 127 Share-based compensation 5,966 7,757 9,314 Changes in operating assets and liabilities: Inventories 296 146 — Accounts receivable trade 2,189 3,010 (6,739)Amounts due from related parties 228,284 21,731 57,539 Advances to suppliers (226) 226 (60)Prepaid expenses and other current assets (7,106) 6,955 (5,715)Other non-current assets (14,710) (2,039) 1,016 Accounts payable 3 (4) — Advances from customers 1,352 (1,413) (1,069)Amounts due to related parties 103,348 (129,307) 66,038 Accrued warranty costs (2,941) (12,381) (10,639)Other liabilities 4,484 (297) 23,505 Liability for uncertain tax positions (1,111) (7,413) 833 Deferred taxes 1,451 199 (6,106)Net settlement of derivatives (3,950) 17,043 (6,358)Net cash provided by (used in) operating activities 310,788 (108,766) 114,288 Investing activities: (Increase) decrease in restricted cash (6,513) 6,512 — Investment in subsidiaries (116,840) — (64,185)Proceeds from disposal of subsidiaries — — 61,749 Purchase of property, plant and equipment — — (26)(Funding) repayment of loans to subsidiaries (550,776) 299,578 (74,458)Net cash provided by (used in) investing activities (674,129) 306,090 (76,920)Financing activities: Proceeds from short-term borrowings 10,000 — — Repayment of short-term borrowings — (190,000) (49,000)Proceeds from long-term borrowings 364,680 — — Proceeds from issuance of warrant 16,378 — — Investment on non-controlling interest (918) — — Proceeds from issuance of common shares — 23,864 — Issuance costs paid for common shares offering — (456) — Payment for repurchase of convertible notes — (19,667) — Proceeds from exercise of stock options 1,867 707 879 Net cash provided by (used in) financing activities 392,007 (185,552) (48,121)Effect of exchange rate changes 2,085 (24,630) 6,362 Net increase (decrease) in cash and cash equivalents 30,751 (12,858) (4,391)Cash and cash equivalents at the beginning of the year 3,455 34,206 21,348 Cash and cash equivalents at the end of the year 34,206 21,348 16,957 Supplemental disclosure of cash flow information: Interest paid (net of amounts capitalized) 15,299 29,288 18,375 Income taxes paid — — — Table of Contents Appendix 1 Major Subsidiaries of CSI The following table sets forth information concerning CSI's major subsidiaries:F-90Subsidiary Place andDateof Incorporation AttributableEquityInterest Held Principal ActivityCSI Solartronics (Changshu) Co., Ltd. PRCNovember 23, 2001 100% Developing solar power projectCSI Solar Technologies Inc. PRCAugust 8, 2003 100% Sales and marketing of solar productsCSI New Energy Holding Co., Ltd. PRCJanuary 7, 2005 100% Investment holdingCanadian Solar Manufacturing (Luoyang) Inc. PRCFebruary 24, 2006 100% Manufacture of solar modules, ingots and wafersCanadian Solar Manufacturing (Changshu) Inc. PRCAugust 1, 2006 100% Production of solar modulesCSI Cells Co., Ltd. PRCAugust 23, 2006 100% Manufacture of solar cellsCanadian Solar (USA) Inc. USAJune 8, 2007 100% Sales and marketing of modulesCanadian Solar Japan K.K. JapanJune 21, 2009 100% Sales and marketing of modulesCanadian Solar Solutions Inc. CanadaJune 22, 2009 100% Developing solar power project and manufacture of solarmodulesCSI Solar Power Group Co., Ltd. (formerlynamed/known as "CSI Solar Power (China) Inc.") PRCJuly 7, 2009 100% Investment holding and tradingCanadian Solar EMEA GmbH GermanyAugust 21, 2009 100% Sales and marketing of modulesCanadian Solar (Australia) Pty Limited AustraliaFebruary 3, 2011 100% Developing solar power projectCanadian Solar International Limited Hong KongMarch 25, 2011 100% Sales and marketing of modulesCanadian Solar O and M (Ontario) Inc. CanadaMay 10, 2011 100% Solar farm operating and maintenance serviceSuzhou Sanysolar Materials Technology Co., Ltd. PRCAugust 17, 2011 75.324% Production of solar module materialsCanadian Solar South East Asia Pte. Ltd. SingaporeSeptember 19, 2011 100% Sales and marketing of modulesCanadian Solar South Africa (Pty) Ltd South AfricaJune 22, 2012 100% Sales and marketing of modulesCanadian Solar Brazil Commerce, Import and Export ofSolar Panels Ltd. BrazilNovember 14, 2012 100% Sales and marketing of solar modules, and provide solarenergy solution to customerCanadian Solar Middle East Limited United Arab EmiratesDecember 10, 2012 100% Sales and marketing of modulesCanadian Solar Construction (USA) LLC USAMay 20, 2014 100% Solar farm operating and maintenance serviceCanadian Solar Projects K.K. JapanMay 20, 2014 100% Developing solar power projectCSI&GCL Solar Manufacturing (Yan Cheng) Inc. PRCMay 29, 2014 80% Research and developing, manufacture and sales of solarcells, and solar power projects developmentCanadian Solar UK Ltd. United KingdomMay 29, 2014 100% Sales and marketing of modulesCanadian Solar UK Projects Ltd. United KingdomAugust 29, 2014 100% Developing solar power projectTable of ContentsF-91Subsidiary Place andDateof Incorporation AttributableEquityInterest Held Principal ActivityChangshu Tegu New Material Technology Co., Ltd. PRCSeptember 2, 2014 90% EVA solar packaging film research anddevelopment, production, and salesChangshu Tlian Co., Ltd. PRCDecember 26, 2014 100% Junction box and connector research,development, production and salesCanadian Solar Trading (Changshu) Inc. PRCJanuary 22, 2015 100% Sales of solar wafers, cells and otherphotovoltaic productsRecurrent Energy Group Inc. USAJanuary 22, 2015 100% Developing solar power projectRecurrent Energy, LLC USAMarch 31, 2015 100% Developing solar power projectPT. Canadian Solar Indonesia IndonesiaFebruary 26, 2015 67% Production of solar modulesCanadian Solar Manufacturing Vietnam Co., Ltd. VietnamJune 25, 2015 100% Production of solar modulesCanadian Solar Energy Private Limited IndiaMay 06, 2015 100% Sales and marketing of modulesCanadian Solar MSS (Australia) Pty Ltd (formerly named/known as"Canadian Solar Australia 1 Pty Ltd. ") AustraliaAugust 03, 2015 100% Sales and marketing of modulesCanadian Solar Energy Holding Company Limited Hong KongSeptember 22, 2015 100% Project investment, financing, trading of solarmodulesCanadian Solar Manufacturing (Thailand) Co., Ltd. ThailandNovember 20, 2015 99.99992% Cells and module productionCanadian Solar Sunenergy (Suzhou) Co., Ltd. PRCMay 12, 2016 100% Production of solar modulesCanadian Solar Energy Holding Singapore 1 Pte. Ltd. SingaporeJune 7, 2016 100% Development & Ownership of Solar PVProjectsCanadian Solar Sunenergy (Baotou) Co., Ltd. PRCAugust 18, 2016 100% Production of solar modules, ingots and wafersCSI Cells (Yancheng) Co., Ltd. PRCMay 18, 2017 *Production of solar cellsCSI Modules (DaFeng) Co., Ltd. PRCMay 16, 2017 **Production of solar modules*CSI Cells holds 3.23% equity rights of CSI Cells (Yancheng) Co., Ltd. A limited partnership fund, of which CSI Cells holds 37.33% shares as a limited partner and a wholly-owned subsidiary of CSI Solar Power Group Co., Ltd. holds 0.17% shares as a general partner, holds 96.77% equity rights of CSI Cells (Yancheng) Co., Ltd. **CSI Changshu Manufacturing holds 4% equity rights of CSI Modules (DaFeng) Co., Ltd. A limited partnership fund, of which CSI Changshu Manufacturing holds 14.93% sharesas a limited partner and a wholly-owned subsidiary of CSI Solar Power Group Co., Ltd. holds 0.07% shares as a general partner, holds 96% equity rights of CSI Modules(DaFeng) Co., Ltd.EXHIBIT 8.1 LIST OF MAJOR SUBSIDIARIES (As of March 31, 2018) Name of entity Place of incorporation Ownership interest CSI Solartronics (Changshu) Co., Ltd.PRC100%CSI Solar Technologies Inc.PRC100%CSI New Energy Holding Co., Ltd.PRC100%Canadian Solar Manufacturing (Luoyang) Inc.PRC100%Canadian Solar Manufacturing (Changshu) Inc.PRC100%CSI Cells Co., Ltd.PRC100%Canadian Solar (USA) Inc.USA100%Canadian Solar Japan K.K.Japan100%Canadian Solar Solutions Inc.Canada100%CSI Solar Power Group Co., Ltd. (formerly named/known as “ CSI SolarPower (China) Inc.”)PRC100%Canadian Solar EMEA GmbHGermany100%Canadian Solar (Australia) Pty LimitedAustralia100%Canadian Solar International LimitedHong Kong100%Canadian Solar O and M (Ontario) Inc.Canada100%Suzhou Sanysolar Materials Technology Co., Ltd.PRC93.95%Canadian Solar South East Asia Pte. Ltd.Singapore100%Canadian Solar South Africa (Pty) Ltd.South Africa100%Canadian Solar Brazil Commerce, Import and Export of Solar PanelsLtd.Brazil100%Canadian Solar Middle East LimitedUnited Arab Emirates100%Canadian Solar Construction (USA) LLCUSA100%Canadian Solar Projects K.K.Japan100%CSI&GCL Solar Manufacturing (Yan Cheng) Inc.PRC80%Canadian Solar UK Ltd.United Kingdom100%Canadian Solar UK Projects Ltd.United Kingdom100%Changshu Tegu New Material Technology Co., Ltd.PRC90%Changshu Tlian Co., Ltd.PRC100%Canadian Solar Trading (Changshu) Inc.PRC100%Recurrent Energy Group Inc.USA100%Recurrent Energy, LLCUSA100%PT. Canadian Solar IndonesiaIndonesia67%Canadian Solar Manufacturing Vietnam Co., Ltd.Vietnam100%Canadian Solar Energy Private LimitedIndia100%Canadian Solar MSS (Australia) Pty Ltd (formerly named/known as“Canadian Solar Australia 1 Pty Ltd.”)Australia100%Canadian Solar Energy Holding Company LimitedHong Kong100%Canadian Solar Manufacturing (Thailand) Co., Ltd.Thailand99.99992%Canadian Solar Sunenergy (Suzhou) Co., Ltd.PRC100%Canadian Solar Energy Holding Singapore 1 Pte. Ltd.Singapore100%Canadian Solar Sunenergy (Baotou) Co., Ltd.PRC100%CSI Cells (Yancheng) Co., Ltd.PRC*CSI Modules (DaFeng) Co., Ltd.PRC** * CSI Cells holds 3.23% equity rights of CSI Cells (Yancheng) Co., Ltd. A limited partnership fund, of which CSI Cells holds 37.33% shares as alimited partner and a wholly-owned subsidiary of CSI Solar Power Group Co., Ltd. holds 0.17% shares as a general partner, holds 96.77% equityrights of CSI Cells (Yancheng) Co., Ltd.** CSI Changshu Manufacturing holds 4% equity rights of CSI Modules (DaFeng) Co., Ltd. A limited partnership fund, of which CSI ChangshuManufacturing holds 14.93% shares as a limited partner and a wholly-owned subsidiary of CSI Solar Power Group Co., Ltd. holds 0.07% shares as ageneral partner, holds 96% equity rights of CSI Modules (DaFeng) Co., Ltd. EXHIBIT 12.1 Certification by the Chief Executive OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Shawn (Xiaohua) Qu, certify that: 1. I have reviewed this annual report on Form 20-F of Canadian Solar Inc. (the “Company”); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the periodcovered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financialreporting; and 5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’sinternal control over financial reporting. Date: April 26, 2018 By:/s/ Shawn (Xiaohua) QuName: Shawn (Xiaohua) QuTitle: Chief Executive Officer EXHIBIT 12.2 Certification by the Chief Financial OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Huifeng Chang, certify that: 1. I have reviewed this annual report on Form 20-F of Canadian Solar Inc. (the “Company”); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the periodcovered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financialreporting; and 5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’sinternal control over financial reporting. Date: April 26 2018 By:/s/ Huifeng ChangName: Huifeng ChangTitle: Chief Financial Officer EXHIBIT 13.1 Certification by the Chief Executive OfficerPursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of Canadian Solar Inc. (the “Company”) on Form 20-F for the year ended December 31, 2017 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Shawn (Xiaohua) Qu, Chief Executive Officer of the Company, certify, pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. Date: April 26, 2018 By:/s/ Shawn (Xiaohua) QuName: Shawn (Xiaohua) QuTitle: Chief Executive Officer EXHIBIT 13.2 Certification by the Chief Financial OfficerPursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of Canadian Solar Inc. (the “Company”) on Form 20-F for the year ended December 31, 2017 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Huifeng Chang, Chief Financial Officer of the Company, certify, pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. Date: April 26, 2018 By:/s/ Huifeng ChangName: Huifeng ChangTitle: Chief Financial Officer EXHIBIT 15.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement Nos. 333-147042, 333-178187 and 333-201766 on Form S-8 andRegistration Statement No. 333-208828 on Form F-3 of our reports dated April 26, 2018, relating to the financial statements and financial statement scheduleof Canadian Solar Inc. and subsidiaries (the “Company”), and the effectiveness of the Company’s internal control over financial reporting, appearing in thisAnnual Report on Form 20-F of the Company for the year ended December 31, 2017. /s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP Shanghai, ChinaApril 26 2018

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