20-F 1 a19-3543_120f.htm 20-F

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 20-F

 

(Mark One)

 

o

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

 

 

OR

 

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018.

 

 

OR

 

 

o

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

 

 

OR

 

 

o

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

 

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

 

For the transition period from                       to                        

 

Commission file number 001-36703

 

Sky Solar Holdings, Ltd.

(Exact name of Registrant as specified in its charter)

 

Cayman Islands

(Jurisdiction of incorporation or organization)

 

Unit 402, 4th Floor, Fairmont House

No.8 Cotton Tree Drive, Admiralty

Hong Kong Special Administrative Region

People’s Republic of China

(Address of principal executive offices)

 

Contact Person: Dr. Hao Wu

Principal executive officer

Phone:  +852 3960 6548

Facsimile:  +852 3180 9399

Address:  Unit 402, 4th Floor, Fairmont House

No.8 Cotton Tree Drive, Admiralty

Hong Kong Special Administrative Region

People’s Republic of China

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

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Ordinary Shares, par value
US$0.0001 per share

 

SKYS

 

NASDAQ Stock Market LLC
(the NASDAQ Capital 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)

 

NASDAQ Stock Market LLC (the NASDAQ Capital Market)

 

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.

 

419,546,514 Ordinary Shares were issued and outstanding as of December 31, 2018

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes   x No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes   x No

 

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registration was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes   o No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

x Yes   o No

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer x

 

Emerging growth company x

 

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

 

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

 

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

 

U.S. GAAP o

 

International Financial Reporting Standards as issued
by the International Accounting Standards Board
x

 

Other o

 

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

o Item 17   o Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

 

(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 Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

o Yes   o No

 

 

 


Table of Contents

 

SKY SOLAR HOLDINGS, LTD.

FORM 20-F ANNUAL REPORT FISCAL YEAR ENDED DECEMBER 31, 2018

 

 

Page

Part I

5

Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

5

Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE

5

Item 3. KEY INFORMATION

5

Item 4. INFORMATION ON THE COMPANY

39

Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

82

Item 6. DIRECTORS, SENIOR MANAGEMENT, AND EMPLOYEES

114

Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

123

Item 8. FINANCIAL INFORMATION

127

Item 9. THE OFFER AND LISTING

129

Item 10. ADDITIONAL INFORMATION

130

Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

136

Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

139

Part II

141

Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

141

Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

141

Item 15. CONTROLS AND PROCEDURES

141

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

143

ITEM 16B. CODE OF ETHICS

143

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

143

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

143

ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

143

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

143

ITEM 16G. CORPORATE GOVERNANCE

144

ITEM 16H. MINE SAFETY DISCLOSURE

144

Part III

145

ITEM 17. FINANCIAL STATEMENTS

145

ITEM 18. FINANCIAL STATEMENTS

145

ITEM 19. EXHIBITS

146

 


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CONVENTIONS THAT APPLY TO THIS ANNUAL REPORT ON FORM 20-F

 

Unless otherwise indicated, references in this annual report on Form 20-F:

 

·                  “ADRs” are to the American depositary receipts, which, if issued, evidence our ADSs;

 

·                  “ADSs” are to our American depositary shares, each of which represents eight ordinary shares, par value US$0.0001 per ordinary share;

 

·                  “CAD” and “Canadian dollar” are to the legal currency of Canada;

 

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

 

·                  “DG” are to distributed generation;

 

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

 

·                  “Euro” or “EUR” are to the legal currency of the 19 countries comprising the Eurozone;

 

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

 

·                  “historical project affiliates” are to certain operating entities in which we have had or currently have non-controlling interests, ChaoriSky Solar Energy S.a r.l., RisenSky Solar Energy S.a r.l., China New Era International Limited, Oky Solar Holdings, Ltd., 1088526 B.C. Ltd. and its subsidiaries, 1091187 B.C, Ltd., OKY Solar 1 K.K and OKY Solar Omut K.K;

 

·                  “HK$” are to the legal currency of the special administrative region of Hong Kong;

 

·                  “Hudson” are to Hudson Solar Cayman, LP;

 

·                  “IPP” are to independent power producer and refer to our business where we own and operate solar parks and derive revenue from selling electricity to the power grid;

 

·                  “IPP solar park(s)” are to solar generators which we own for the purpose of generating income from the sale of electricity over the life of the solar park(s);

 

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

 

·                  “kWh” are to kilowatt hour(s);

 

·                  “MW” are to megawatt(s);

 

·                  “Note Purchase Agreement” are to restated note purchase agreement with Hudson as amended on July 15, 2016;

 

·                  “O&M” are to operations and maintenance services provided for commercially operating solar parks;

 

·                  “ordinary shares” are to our ordinary shares, par value US$0.0001 per share;

 

·                  “PPA” are to power purchase agreements;

 

·                  “PV” are to photovoltaic;

 

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

 

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·                  “shovel-ready projects” are to projects that have all permits required for construction and grid connection, even if those projects may lack certain non-discretionary permits for which we have begun the application process and which will be granted and maintained based on our compliance with certain administrative procedures. For more information about our shovel-ready projects, including the anticipated timing of any outstanding permits, see “Item 4. Information on the Company— B. Business Overview — Our IPP Solar Parks.”

 

·                  “Silent Partner” are to the third party investor under the two silent partnership agreements entered into by Sky Solar Japan K.K., or SSJ, in September 9, 2014.

 

·                  “solar energy system sales” or “selling solar energy systems” refer to projects where we have derived revenue from selling permits and providing EPC services or selling commercially operational solar parks;

 

·                  “solar parks in operation” are to solar parks that have completed construction and are selling electricity. For more information about our solar parks in operation, see “Item 4. Information on the Company — B. Business Overview — Our IPP Solar Parks.”

 

·                  “solar parks under construction” are to solar parks that have secured site control, energy permits, all key agreements, zoning and environmental permissions and construction permits. For more information about our solar parks under construction, see “Item 4. Information on the Company — B. Business Overview — Our IPP Solar Parks.”

 

·                  “solar projects in pipeline” are to solar parks that are being studied for feasibility or have achieved certain milestones, but are not yet ready for construction. For more information about solar parks in our pipeline, see “Item 4. Information on the Company — B. Business Overview — Our IPP Solar Parks.”

 

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

 

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

 

·                  “we,” “us,” “our company,” “our” and “Sky Solar” are to Sky Solar Holdings, Ltd., its former parent company Sky Power Group Ltd., its predecessor entities and its consolidated subsidiaries.

 

We calculate the size of the PV market based on the volume of PV modules delivered to installation sites, including modules awaiting installation or connection to the power grid. Unless otherwise stated, the PV market relates to annual volume. PV panels generate direct current (DC) electricity, while electricity systems are based on alternating current (AC) electricity. The data presented in DC power numbers are, on average, greater by approximately 15% than the equivalent AC power numbers. All historical and forecast data are presented in DC power numbers. Certain reported AC power numbers have been converted to the equivalent DC power numbers. Our permits are generally calculated using AC power numbers and such AC power numbers have been converted to the equivalent DC power numbers in this annual report.

 

We calculate the attributable capacity of a solar park by multiplying the percentage of our equity ownership in the solar park by the total capacity of the solar park. Unless specifically indicated or the context otherwise requires, capacity of a solar park in this annual report refers to attributable capacity.

 

The conversion of Euros, Japanese yen, Renminbi, CAD and Hong Kong dollars into U.S. dollars in this annual report, made solely for the convenience of readers, is based on the noon buying rates in the city of New York for cable transfers of Euros, Japanese yen, Renminbi, CAD and Hong Kong dollars, respectively, as certified for customs purposes by the Federal Reserve Bank of New York as of December 31, 2018, which was EUR1.1456 to US$1.00, JPY109.7000 to US$1.00, RMB6.8755 to US$1.00, CAD1.3644 to US$1.00 and HK$7.8305 to US$1.00, respectively, unless indicated otherwise. No representation is intended to imply that the Euro, Japanese yen, Renminbi and Hong Kong dollar amounts could have been, or could be, converted, realized or settled into U.S.dollars at the foregoing rates or any other rate.

 

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FORWARD-LOOKING STATEMENTS

 

This annual report on Form 20-F contains statements of a forward-looking nature. All statements other than statements of historical facts are forward-looking statements. These forward-looking statements are made under the “safe harbor” provision under Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and as defined in the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions. These forward-looking statements relate to, among others:

 

·                  permitting, development and construction of our project pipeline according to schedule;

 

·                  average solar radiation hours globally and in the regions in which we operate;

 

·                  developments in, or changes to, laws, regulations, governmental policies and incentives, taxation affecting our operations;

 

·                  adverse changes or developments in the industry we operate;

 

·                  our ability to obtain additional financing;

 

·                  required payments of principal or related interest and other risks of our debt financing;

 

·                  our ability to maintain and enhance our market position;

 

·                  our ability to successfully implement any of our business strategies;

 

·                  the resolution of the dispute with Hudson regarding the Note Purchase Agreement (the “Hudson Dispute”) and related actions and proceedings;

 

·                  our ability to establish and operate new solar parks;

 

·                  our intention to operate in new markets and jurisdictions;

 

·                  our ability to explore new applications of solar energy and obtain business opportunities from other source of renewable energy;

 

·                  general political and economic conditions and macro-economic measures taken by the governments to manage economic growth in the geographical markets where we conduct our business;

 

·                  material changes in the costs of the PV modules and other equipment required for our operations;

 

·                  fluctuations in inflation, interest rates and exchange rates;

 

·                  the ramifications of our recent senior management changes and the potential sale of our securities by our former CEO, former chairman, and controlling shareholder, including public perception that our future direction, strategy or leadership is uncertain;

 

·                  a putative shareholder class action against our company, our chief executive officer and chief financial officer and our directors;

 

·                  other risks outlined in our filings with the United States Securities and Exchange Commission, or the SEC, including our registration statements on Form F-1, as amended; and

 

·                  those other risks identified in “Item 3. Key Information — D. Risk Factors” of this annual report on Form 20-F.

 

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These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, we cannot assure you that our expectations will turn out to be correct. Our actual results could be materially different from or worse than our expectations.

 

The forward-looking statements made in this annual report on Form 20-F relate only to events or information as of the date on which the statements are made in this annual report on Form 20-F. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.

 

Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

 

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PART I

 

ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3.  KEY INFORMATION

 

A.            Selected Financial Data

 

The following selected consolidated statements of profit or loss and other comprehensive income (expense) data for the years ended December 31, 2016, 2017 and 2018 and the selected consolidated statements of financial position data as of December 31, 2017 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this annual report on Form 20-F. Our selected consolidated statements of profit or loss and other comprehensive income (expense) data for the year ended December 31, 2014 and 2015 and our selected consolidated statements of financial position data as of December 31, 2014, 2015 and 2016 have been derived from our audited consolidated financial statements not included in this annual report on Form 20-F. Our audited consolidated financial statements are prepared and presented in accordance with International Financial Reporting Standards, or IFRS, issued by International Accounting Standards Board.

 

Our historical results for any period are not necessarily indicative of results to be expected for any future period. You should read the following selected consolidated financial data in conjunction with the consolidated financial statements and related notes and the information under “Item 5. Operating and Financial Review and Prospects.”

 

Selected Consolidated Statements of Profit or Loss and other Comprehensive Income (Loss)

 

 

 

Year Ended December 31,

 

 

 

2014

 

2015

 

2016

 

2017

 

2018

 

 

 

(US$ in thousands, except for per share information or as otherwise noted)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

Related parties

 

1,788

 

4,450

 

788

 

286

 

324

 

Non-related parties

 

31,097

 

42,705

 

65,137

 

56,447

 

64,345

 

Total revenue

 

32,885

 

47,155

 

65,925

 

56,733

 

64,669

 

Cost of sales and services

 

(20,747

)

(18,533

)

(30,911

)

(23,201

)

(30,262

)

Gross profit

 

12,138

 

28,622

 

35,014

 

33,532

 

34,407

 

Impairment loss on IPP solar parks

 

(1,549

)

(1,835

)

(2,151

)

(5,221

)

(4,541

)

Provision on receivables and other non-current assets

 

(2,200

)

(1,071

)

 

 

(626

)

Selling expenses

 

(1,160

)

(1,171

)

(882

)

(554

)

(2,610

)

Administrative expenses

 

(63,770

)(1)

(22,556

)

(29,744

)

(25,110

)

(27,948

)

Other operating income

 

6,293

 

197

 

13,163

 

2,068

 

25,630

 

Reversal of provision for other taxes

 

 

6,025

 

 

 

 

(Loss) profit from operations

 

(50,248

)

8,211

 

15,400

 

4,715

 

24,312

 

Investment income

 

405

 

349

 

498

 

7,891

 

580

 

Other losses

 

(15,647

)

(6,901

)

(4,971

)

(39,986

)

(22,397

)

Finance costs

 

(3,817

)

(3,897

)

(6,368

)

(12,200

)

(17,330

)

Other expenses

 

(3,526

)

 

 

 

 

(Loss) profit before taxation

 

(72,833

)

(2,238

)

4,559

 

(39,580

)

(14,835

)

Income tax (expense) credit

 

(910

)

684

 

(1,277

)

6,530

 

(7,285

)

(Loss) profit for the year

 

(73,743

)

(1,554

)

3,282

 

(33,050

)

(22,120

)

Other comprehensive (loss) income that may be subsequently reclassified to profit or loss:

 

 

 

 

 

 

 

 

 

 

 

Currency translation difference

 

(11,114

)

(10,310

)

(57

)

5,579

 

(3,190

)

Share of other comprehensive income of associates

 

 

 

136

 

 

 

Fair value loss arising from cash flow hedges

 

 

(680

)

(446

)

 

 

Release of cumulative fair value loss from cash flow hedges upon disposal of subsidiary

 

 

 

1,126

 

 

 

Total comprehensive income

 

(84,857

)

(12,544

)

4,041

 

(27,471

)

(25,310

)

Earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

Basic

 

(0.21

)

0.00

 

0.01

 

(0.1

)

(0.05

)

Diluted

 

(0.21

)

0.00

 

0.01

 

(0.1

)

(0.05

)

Earnings (loss) per ADS(2)

 

 

 

 

 

 

 

 

 

 

 

Basic

 

(1.66

)

(0.03

)

0.08

 

(0.8

)

(0.42

)

Diluted

 

(1.66

)

(0.03

)

0.08

 

(0.8

)

(0.42

)

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA(3)

 

(1,232

)

15,708

 

32,223

 

31,136

 

53,505

 

 

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(1)                                 Includes a one-time equity incentive fee expense of US$42.9 million in 2014.

 

(2)                                 Each ADS represents eight ordinary shares.

 

(3)                                 See “—Adjusted EBITDA” below.

 

Revenue Categories

 

 

 

Year Ended December 31,

 

 

 

2014

 

2015

 

2016

 

2017

 

2018

 

 

 

(US$ in thousands)

 

Electricity generation income(1)

 

22,205

 

35,479

 

53,658

 

53,614

 

61,438

 

Solar energy system sales

 

6,939

 

9,392

 

9,711

 

285

 

198

 

Other(2)

 

3,741

 

2,284

 

2,556

 

2,834

 

3,033

 

Total Revenue

 

32,885

 

47,155

 

65,925

 

56,733

 

64,669

 

 


(1)           Represents revenue from selling electricity from IPP solar parks

 

(2)           Represents revenue from the sale of solar modules and the provisions of O&M services.

 

Selected Consolidated Statements of Financial Position

 

 

 

Year Ended December 31,

 

 

 

2014

 

2015

 

2016

 

2017

 

2018

 

 

 

(US$ in thousands)

 

Current assets

 

95,496

 

80,973

 

166,168

 

138,402

 

174,720

 

Non-current assets

 

194,090

 

280,107

 

310,078

 

442,706

 

410,497

 

IPP solar parks

 

180,610

 

259,423

 

271,253

 

397,405

 

353,050

 

Total assets

 

289,586

 

361,080

 

476,246

 

581,108

 

585,217

 

Current liabilities

 

100,859

 

74,210

 

69,112

 

171,933

 

224,348

 

Non-current liabilities

 

64,978

 

174,151

 

273,212

 

302,947

 

282,662

 

Total equity

 

123,749

 

112,719

 

133,922

 

106,228

 

78,207

 

 

Adjusted EBITDA

 

To provide investors with additional information regarding our financial results, we have disclosed in this annual report Adjusted EBITDA, a non-IFRS financial measure. We present this non-IFRS financial measure because it is used by our management to evaluate our operating performance. We also believe that this non-IFRS financial measure provides useful information to investors and others in understanding and evaluating our consolidated results of operations in the same manner as our management and in comparing financial results across accounting periods and to those of our peer companies.

 

Adjusted EBITDA, as we present it, represents profit or loss for the period before taxes, depreciation and amortization, adjusted to eliminate the impact of share-based compensation expense, interest expenses, impairment loss and IPO expenses.

 

The use of the Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under IFRS. Some of these limitations are: (a) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; (b) Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (c) Adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (d) Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and (e) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Adjusted EBITDA alongside our other IFRS-based financial performance measures, such as (loss) profit for the period and our other IFRS financial results. The following table presents a reconciliation of Adjusted EBITDA to (loss) profit for the period, the most directly comparable IFRS measure, for each of the periods indicated:

 

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As of and for the Year Ended December 31,

 

 

 

2014

 

2015

 

2016

 

2017

 

2018

 

 

 

(US$ in thousands)

 

(Loss) profit for the year

 

(73,743

)

(1,554

)

3,282

 

(33,050

)

(22,120

)

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

910

 

(684

)

1,277

 

(6,530

)

7,285

 

Depreciation of property, plant and equipment

 

531

 

281

 

271

 

298

 

204

 

Depreciation of solar parks

 

6,177

 

9,229

 

14,208

 

14,272

 

19,414

 

Amortization

 

214

 

102

 

71

 

44

 

52

 

Share-based payment charged into profit or loss

 

43,941

 

1,389

 

997

 

(223

)

 

Interest expenses

 

3,817

 

3,897

 

6,368

 

12,200

 

17,330

 

Impairment loss on IPP solar parks

 

1,549

 

1,835

 

2,151

 

5,221

 

4,541

 

Fair value changes of financial liabilities-FVTPL

 

9,646

 

5,686

 

2,957

 

39,105

 

25,607

 

Fair value changes of financial assets-FVTPL

 

 

 

 

 

814

 

Hedge ineffectiveness on cash flow hedges and net loss arising on interest rate swap designated as FVTPL

 

 

585

 

641

 

(201

)

(248

)

IPO expenses

 

3,526

 

 

 

 

 

Reversal of provision for other taxes

 

 

(6,025

)

 

 

 

Impairment on the receivables and other non-current assets*

 

2,200

 

1,071

 

 

 

626

 

Adjusted EBITDA

 

(1,232

)

15,708

 

32,223

 

31,136

 

53,505

 

 


* Impairment on other non-current assets included for period of 2018 primarily related to the application of expected credit loss model is in accordance with IFRS 9.

 

We do not consider historical Adjusted EBITDA prior to the year 2014 to be representative of future Adjusted EBITDA, as our revenue model changed from primarily generating revenue from selling solar energy systems to primarily generating revenue from selling electricity in the fourth quarter of 2013. We believe that Adjusted EBITDA is an important measure for evaluating the results of our IPP business.

 

B.                                    Capitalization and Indebtedness

 

Not applicable.

 

C.                                    Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D.                                    Risk Factors

 

An investment in our ADSs involves a high degree of risk. Full and careful consideration should be given to the risks described below, together with other public information on our company, including our filings with securities regulators. Our business, financial condition and results of operations could be materially and adversely affected by any of the risks set forth herein, which could cause the trading price of our ADSs to decline and, therefore, holders to lose all or part of the value of their investments.

 

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Risks Related to Our Business and Industry

 

Our growth prospects and future profitability depend to a significant extent on global liquidity, our relationships with our financing parties, and the availability of additional funding options with acceptable terms.

 

We require a significant amount of cash to fund the installation and construction of our projects and other aspects of our operations. We may also require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue in order to remain competitive. Historically, we fund our project development through debt and equity financing, including but not limited to bank loans, convertible notes, proceeds from our IPO and cash from our operating activities. We expect to continue to expand our business with different financing options, including bank loans, debt or equity securities, financial leases and securitization.

 

Our financing parties may fail to fully perform their obligations or meet our expectations or cooperate with us satisfactorily for various reasons. Conversely, we may fail to fully perform our obligations due to changing market conditions or other factors. In addition, there can be no assurance that we will be able to maintain such relationships or enter into new relationships on terms or at costs that we find attractive or acceptable. Any deterioration in our existing relationships or failure to enter into new relationships with suitable partners on commercially acceptable terms to finance our project developments may have an adverse impact on our growth prospects and future profitability

 

For example, we entered into a strategic partnership agreement with Hudson in September 2015 to fund solar projects in Latin America, and to collaborate on identifying and acquiring suitable renewable assets in Japan and the United States. As we have seen a deterioration in cooperation since late 2018, it is unlikely that Hudson would be a source of additional funding, particularly while the Hudson Dispute remains unresolved. If Hudson is successful in its claim, we will be required to pay the amount as sought by Hudson and we may not have sufficient resource. As of the date of this report, Hudson already took enforcement action and control over certain of our subsidiaries, which together held six operating IPP solar parks with carrying amount of US$107.5 million, or 71.7MW as of December 31, 2018. See “Item 8. Financial Information — A. Consolidated Statements and Other Financial Information — Legal Proceedings — Hudson Dispute.” Subject to the outcome of the New York litigation, we intend to take action to regain the control of these two companies, but we cannot assure you that we may be successful.

 

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

 

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

 

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

 

·                  regulatory and government support in the form of tax credits, rebates, FIT price support schemes and other incentives;

 

·                  the continued confidence of banks and other financial institutions in our company and the PV industry;

 

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

 

·                  our ability to comply with any financial covenants under the debt financing.

 

In addition, historical project affiliates in which we have held non-controlling interests have secured financing from financial institutions where our affiliates’ other equity owners have acted as financial guarantors. The ability of our affiliates to obtain financing depends on the ability of our affiliates’ other equity owners to secure financing, provide acceptable guarantees for financing and comply with any applicable financial covenants. Due to our minority position, we may not be able to control the ability of the affiliate to comply with any applicable financial covenants or other obligations under the loan.

 

Any additional equity financing may be dilutive to our shareholders and any debt financing may require restrictive covenants. Additional funds may not be available on terms commercially acceptable to us. Failure to manage discretionary spending and raise additional capital or debt financing as required may adversely impact our ability to achieve our intended business objectives. We may from time to time offer additional securities, which may cause significant dilution. See “—We may issue additional ordinary shares, other equity or equity-linked or debt securities, which may materially and adversely affect the price of our ordinary shares or ADSs. Hedging activities may depress the trading price of our ordinary shares.”

 

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

 

We require a significant amount of cash to meet our capital requirements and fund our operations, including payments to suppliers for PV modules and balance-of-system components and to contractors for design, engineering, procurement and construction services. We believe our substantial indebtedness will increase as we may need to finance the payment of outstanding principal, accrued and unpaid interest and make-whole payment amount under the Note Purchase Agreement, and continue to develop our IPP business. As of December 31, 2018, we had US$49.7 million in outstanding short-term borrowings (including the current portion of long-term borrowings) and US$207.1 million in outstanding long-term borrowings (excluding the current portion), and incurred US$17.3 million interest expense.

 

Our debt could have significant consequences on our operations, including:

 

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

 

·                  limiting our ability to obtain additional financing;

 

·                  limiting our flexibility in planning for, or reacting to economic downturns;

 

·                  increasing our vulnerability to, changes in our business, the industry in which we operate and the general economy; and

 

·                  potentially increasing the cost of any additional financing.

 

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

 

If we do not successfully execute our financing plan, we may have to sell certain of our operating IPP solar parks or risk not being able to continue as a going concern.

 

We are in need of additional funding to sustain our business as a going concern. As of December 31, 2018, our current liabilities of US$224.3 million, which included US$121.9 million other current liability due on April 1, 2019 according to the settlement agreement with the silent partnership in Japan, exceeded our current assets by approximately US$49.6 million. In 2018, we incurred net loss of US$22.1 million.

 

Our management reviews our forecasted cash flows on an on-going basis to ensure that we will have sufficient capital from a combination of internally generated cash flows and proceeds from financing activities and assets disposition, if required, in order to fund our working capital and capital expenditures. For example, as of December 31, 2018, excluding the US$121.9 million current liabilities in connection with the purchase of TK interest pursuant to the TK Interest Agreement, for which we made the payment on March 29, 2019, with a combination of (i) the proceeds in the aggregate of JPY9.4 billion (US$85.7 million) from the sale of 12 Japan IPP solar parks, (ii) cash in bank of JPY3.4 billion (US$31.0 million), and (iii) the proceeds from the drawdown in the amount of JPY2.8 billion (US$25.5 million) under a loan from a third party in Japan, our other remaining current assets of US$98.7 million were US$3.7 million less than our remaining current liability of US$102.4 million.

 

In addition to the current liabilities of US$224.3 million, as of December 31, 2018, we have committed to capital expenditure of US$30.9 million relating to the construction of solar parks contracted for but not provided for in the consolidated financial statements as of December 31, 2018. Besides, Hudson accelerated the debt collection by sending a notice dated January 22, 2019, declaring that all Obligations (as defined in the Note Purchase Agreement), including the outstanding principal, accrued and unpaid interest and make-whole payment amount thereof, were immediately due, See  “Item 8. Financial Information — A. Consolidated Statements and Other Financial Information — Legal Proceedings.” Depending upon the potential resolution of the Hudson Dispute and the related actions and proceedings, we may need to seek additional sources of liquidity. Our principal sources of liquidity to date have been debt and equity financing, including but not limited to bank loans, convertible notes, proceeds from our IPO and cash from our operating activities.

 

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We cannot assure you that we will successfully execute our financing plan. If we do not successfully execute this plan, we may have to sell operating IPP parks and not be able to continue as a going concern. Such failure could materially and adversely affect our financial condition, results of operations and business prospects.

 

Our failure to comply with financial and other covenants under our loan agreements or other financing arrangements, may materially and adversely affect our financial condition, results of operations and business prospects .

 

Our loan agreements usually contain financial and other covenants that require us to maintain certain financial ratios or impose certain restrictions on disposition and encumbrance of our assets or the conduct of our business. Our financing parties have alleged and may from time to time allege, that we fail to comply with covenants under these agreements. For example, see “Item 8. Financial Information — A. Consolidated Statements and Other Financial Information — Legal Proceedings — Hudson Dispute.” An event of default under a financing arrangement may result in acceleration of the principal amounts and interests, and trigger cross-default provisions of other financing agreements. For example, the Hudson Dispute may trigger an event of default under the financing documents of our borrowing with Inter-American Development Bank, even though we have not yet received notice from Inter-American Development Bank as of the date of this annual report. If we are required to repay a significant portion or all of our existing indebtedness prior to their maturity, we may lack sufficient financial resources to do so. We are typically required to provide certain collateral under the financing arrangements, including our solar park assets or account or trade receivables for sale of electricity of our solar parks. To the extent we cannot repay our indebtedness, holders of the collateral may auction or sell the assets or interest of our solar parks to enforce their rights, which will materially and adversely affect our financial condition, results of operations and business prospects. Furthermore, a breach of financial and other covenants will also restrict our ability to pay dividends. Any of those events could have a material adverse effect on our financial condition, results of operations and business prospects.

 

We have been involved in several actions and proceedings, including those in connection with the Hudson Dispute, and being named as a defendant in a putative class action lawsuit. We have also been, and in the future may be, the target of other lawsuits or other allegations by third parties, which could adversely affect our business, financial conditions, results of operations, cash flows, reputation and our ADS trading price.

 

We have been, and in the future may be, the target of lawsuits or other allegations by third parties, which in the past included, and may in the future include, disputes with our business and funding partners, shareholder class action lawsuits, and malicious allegations, anonymous or otherwise, regarding our personnel, business, operations, accounting, corporate history, prospects or business ethics. For example, Hudson alleged in a series of letters that events of default under the Note Purchase Agreement had occurred .Hudson also sent a notice of acceleration dated January 22, 2019, declaring that all Obligations (as defined in the Note Purchase Agreement), including the alleged outstanding principal, accrued and unpaid interest were immediately due. We dispute that amount is due. On January 22, 2019, Hudson sent a demand on guaranty to us and certain of our subsidiaries who are guarantors of the notes under the Note Purchase Agreement pursuant to a guaranty dated September 18, 2015. Hudson also initiated proceedings in some of the jurisdictions where our business, subsidiaries and guarantors are located to enforce Hudson’s collateral under the Note Purchase Agreement. Hudson exercised its purported rights to enforce its share pledge under the Note Purchase Agreement for Energy Capital Investment S.à.r.l. and its 100% owned subsidiary Renewable Capital Investment 2 S.L. Therefore, Energy Capital Investment S.à.r.l. and Renewable Capital Investment 2 S.L. and its five consolidated Uruguayan special purpose vehicle entities were taken over by Hudson on January 24, 2019. These two subsidiaries hold six operating IPP solar parks with 71.7 MW of production capacity and carrying amount of US$107.5 million. We have advised Hudson that it is not entitled to enforce its share pledges under the Note Purchase Agreement and further advised Hudson of its fiduciary duties in connection with Energy Capital Investment S.à.r.l. and Renewable Capital Investment 2 S.L. On February 8, 2019, Hudson filed an action captioned Hudson Solar Cayman, LP v. Sky Solar Holdings, Ltd., et al. in the Supreme Court of the State of New York, County of New York seeking summary judgment in lieu of a complaint to, among other things, accelerate amounts allegedly due under the Note Purchase Agreement and enforce certain guaranties related to the Note Purchase Agreement against Sky Solar, Sky Solar Power LTD., and Sky International Enterprise Group Limited. On March 11, 2019, we filed an opposition brief in New York Supreme Court to oppose  summary judgment. On March 14, 2019, Hudson filed a reply to our opposition brief. Additional information concerning this action is publicly available in court filings under Index No. 650847/2019 (Cohen, J.). Subject to the outcome of the New York litigation, we intend to take action to regain the control of Energy Capital Investment S.à.r.l. and Renewable Capital Investment 2 S.L., but we cannot assure you that we will be successful. Hudson also recently served statutory demands on such guarantors in the Cayman Islands, the British Virgin Islands, and Hong Kong demanding repayment of accelerated amounts allegedly outstanding under the guaranties for the Note Purchase Agreement, which demands were subsequently withdrawn. In addition, Hudson also exercised its purported rights to enforce another share pledge under the Note Purchase Agreement for Lumens Holdings 1, LLC— an entity in respect of approximately 22 MW of operating solar assets in the United States (the “Sunpeak Projects”). Thereafter, Hudson scheduled an auction of the limited liability interests in Lumens Holdings 1, LLC We immediately informed Hudson that its enforcement of the share pledge in connection with Lumens Holdings 1, LLC and its subsequent attempt to conduct an auction for the entity’s interests was premature and patently improper. Consequently, Hudson postponed the auction indefinitely and recently indicated no auction is presently scheduled.  Hudson confirmed that it will not proceed with an auction on or prior to June 15, 2019. As of the date of this annual report, the only pending judicial proceeding initiated by Hudson against us is Hudson’s summary judgment proceeding in New York Supreme Court. If the New York Supreme Court rules in Hudson’s favor on its motion for summary judgment in lieu of complaint, we may be required to pay the amounts Hudson seeks in its motion, including amounts for outstanding principal, accrued and unpaid interest and make-whole. We may not have sufficient resources to pay those amounts. Hudson may also be able to enforce its rights under the guaranty or collateral provided to it under the Note Purchase Agreement, which may result in us losing control of our business and assets. Notwithstanding the above, we intend to continue to vigorously defend against Hudson’s summary judgment proceeding in New York Supreme Court and any other actions and proceedings Hudson may commence against us in order to prevent Hudson from controlling our business and assets and to minimize interruptions to our business and operations on a go-forward basis. However, we cannot assure you that we will be successful in defending against these actions and proceedings. In addition, we will have to defend against the securities class action lawsuit described in “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Hudson Dispute,” including any appeals of such lawsuit should our initial defense be unsuccessful. The total direct costs associated with these legal actions and other proceedings recorded were approximately US$1.5 million for 2017 and nil for 2018.

 

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Addressing and responding to litigation and disputes represents a significant draw on our resources, both due to the involvement of members of management and the need to retain external advisors. Any decision that is not favorable to us or appeals by opposing parties would also represent a draw on our resources. We cannot predict what the result of any appeal might be, which could  materially and adversely affect our business, financial conditions, results of operations, cash flows, reputation and ADS trading price.

 

Beyond what is described above and discussed below, in “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings”, we are currently unable in the aggregate to estimate the possible loss or possible range of loss, if any, associated with the outstanding litigation matters. Any adverse outcome of these cases, including any appeal that is not in our favor, could have a material adverse effect on our business, financial condition, results of operation, cash flows, reputation and ADS trading price. In addition, there can be no assurance that our insurance carriers will cover all or part of the defense costs, or any liabilities that may arise from these matters. The litigation process may utilize a significant portion of our cash resources and divert management’s attention from the day-to-day operations of our company, all of which could harm our business. We also may be subject to claims for indemnification related to these matters, and we cannot predict the impact that indemnification claims may have on our business or financial results.

 

In addition, in October 2014, counsel representing certain former employees of Sky Solar Holdings Co., Ltd., a former shareholder of Sky Solar Power Ltd., sent letters threatening litigation, and certain of these claimants sent harassing emails, short messages and letters to certain of our shareholders, directors and professional advisors alleging that they were deprived of the economic benefits of their holdings in Sky Solar Holdings Co., Ltd. as a result of (i) an alleged failure of sufficient advance notice of the restructuring of Sky Solar Holdings Co., Ltd. and the transfer of assets from Sky Solar Holdings Co., Ltd. to us, and (ii) a purported improper use by Mr. Su of a proxy that such shareholders had granted him to attend shareholder meetings and vote shares on their behalf. In March 2015, a group of former employees and shareholders of Sky Solar Holdings Co., Ltd commenced an arbitration with the Hong Kong International Arbitration Centre, or HKIAC, against our former CEO and former chairman, Mr. Su, and his wholly-owned subsidiary Flash Bright Power Limited (“Flash Bright”) in connection with the restructuring of Sky Solar Holdings Co., Ltd. Sky Solar Holdings Co., Ltd is not a party to the arbitration. Since the commencement of these proceedings, three of the six claimants have withdrawn their claims. In May 2018, an unfavorable arbitral award was granted (the “HKIAC Award”). In January 2019, the claimants applied to the United States District Court Southern District of New York for an order of attachment against the personal property of our former CEO and former chairman Mr. Su, including the ordinary shares and ADS held by Flash Bright, which are among the subject shares under a stock purchase agreement between, among others, Flash Bright and Japan NK Investment K.K. dated March 1, 2019. The order of attachment was granted by the court on March 19, 2019. Although we are not a party to these proceedings, these allegations represented a significant matter requiring close engagement by our management. It is also possible that any  allegations and arbitral awards against us or our executives will be publicly disseminated through various media, including, without limitation, internet chat rooms, blogs, social networks or other websites. Any attempted enforcement of the arbitral awards or public dissemination of any of these allegations and arbitral awards by these claimants could adversely affect our business, financial conditions, results of operations, cash flows, reputation and ADS trading price.

 

Other claims may be brought against or by us from time to time regarding, for example, defective or incomplete work, defective products, personal injuries or deaths, damage to or destruction of property, breach of warranty, late completion of work, delayed payments, intellectual property rights or regulatory compliance, and may subject us to litigation, arbitration and other legal proceedings, which may be expensive, lengthy, disruptive to normal business operations and require significant attention from our management. If we are found to be liable on any claims made against us, we would incur a charge against earnings to the extent that a sufficient reserve had not been implemented. Charges and write-downs associated with such legal proceedings could have a material adverse effect on our business, financial condition, results of operations, cash flows, reputation, and ADS trading price. Moreover, legal proceedings, particularly those resulting in judgments or findings against us, may harm our reputation and competitiveness in the market.

 

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The reduction, modification or elimination of government subsidies and economic incentives may reduce the economic benefits of our existing solar parks and our opportunities to develop or acquire suitable new solar parks.

 

In many countries where we are currently or intend to become active, solar power markets, particularly the market of on- grid PV systems, would not be commercially viable without government subsidies or economic incentives. The cost of generating electricity from solar energy in these markets currently exceeds, and very likely will continue to exceed for the foreseeable future, the cost of generating electricity from conventional or some other non-solar renewable energy sources. These subsidies and incentives have been primarily in the form of FIT price support schemes, tax credits, net metering and other incentives to end users, distributors, system integrators and manufacturers of solar energy products.

 

The availability and size of such subsidies and incentives depend, to a large extent, on political and policy developments relating to environmental concerns in a given country. Changes in policies could lead to a significant reduction in or a discontinuation of the support for renewable energies in such country. Government subsidies and incentives for solar energy were recently reduced in some countries and may be further reduced or eliminated in the future. For example, in December 2015, following a ministerial decision, a levy of 3.6% was imposed on the electricity sold by PV stations in Greece from January 1, 2016 onwards. On May 31, 2018, the National Development and Reform Commission, the Ministry of Finance and National Energy Administration of China jointly announced a new policy to lower the solar feed-in-tariff, halt subsidized utility-scale development, and implement a quota for distributed projects in China. The United States federal government currently offers an investment tax credit (“Federal ITC”) under Section 48 of the U.S. Internal Revenue Code, for the installation of commercial solar power. The Federal ITC will reduce gradually from 2020. Compared with the current Federal ITC (30% of the cost of the system for projects which begin construction by December 31, 2019), the Federal ITC for new commercial solar energy systems will be 26% and 22% for projects which began construction from January 1, 2020 to December 31, 2021, respectively, which will further decrease to 10% from 2022. Solar parks that meet the deadlines above for the commencement of construction must be placed in service before January 1, 2024 to qualify for the credits at the levels set out above. In June 2018, the Internal Revenue Service (“IRS”) released its guidance setting forth the requirements for establishing the beginning of construction for solar energy projects. Accordingly, the profitability of our new solar projects in the United States will be adversely affected by the reduction in, or the expiration of, the Federal ITC. Further, under tax reform legislation enacted in the United States in 2017, the tax rates applicable to corporations in the United States have been substantially reduced, from a maximum rate of 35% to a maximum rate of 21%. This may result in the reduced demand of investors in investments in solar parks with Federal ITC, which may in turn increase our costs of capital to be used in constructing these projects. While some of the reductions in government subsidies and economic incentives apply only to future solar parks, they could diminish our opportunities to continue to develop or acquire suitable newly developed solar parks. Some of these reductions may apply retroactively to existing solar parks, which could significantly reduce the economic benefits we receive from the existing solar parks. Moreover, some of the solar program subsidies and incentives expire or decline over time, are limited in total funding, require renewal from regulatory authorities or require us to meet certain investment or performance criteria. A significant reduction in the scope or discontinuation of government incentive programs in our target markets and globally could have a material adverse effect on our business, financial condition, results of operations and prospects.

 

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We conduct our business operations globally and are subject to global and local risks related to economic, regulatory, social and political uncertainties.

 

We conduct our business operations in a number of countries and, as of December 31, 2018, had completed 406.2 MW of solar parks globally. As of December 31, 2018, we owned and operated 211.0 MW of solar parks as an IPP. In addition, as of December 31, 2018, we had 5.4 MW of solar parks under construction, 136.4 MW of shovel-ready projects and 242.6 MW of solar parks in pipeline in four countries. Our business is therefore subject to diverse and constantly changing economic, regulatory, social and political conditions in the jurisdictions in which we operate.

 

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

 

·                  economic and financial conditions, including the stability of credit markets, foreign currency controls and fluctuations;

 

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

 

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

 

·                  complex regulations in numerous jurisdictions, including trade restrictions or embargoes;

 

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

 

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

 

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

 

·                  local corporate governance and other legal requirements;

 

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

 

·                  failure of our contractual parties to honor their obligations to us, and potential disputes with clients, contractors, suppliers or local residents or communities.

 

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At the end of September 2014, five out of the ten general electricity utilities in Japan announced plans to temporarily suspend reviews of proposals from solar energy producers, such as us, due to a foreseeable shortage in their available power transmission capacity in light of the popularity of the FIT program. The five utilities in question are Kyushu Electric Power, Shikoku Electric Power and Okinawa Electric Power, which operate in the west of Japan, and Hokkaido Electric Power and Tohoku Electric Power, which operate in the northeast. Such temporary suspension has been lifted in exchange for the introduction of a new rule referred to as the “designated electric company system.” In cases where the interconnection amounts applied for have already surpassed or are expected to surpass available interconnection amounts under the current rules, electric companies will be able to use the “designated electric company system” to grant interconnection on the premise that such interconnection may be subject to uncompensated curtailment beyond 30 days or 360 hours per year. Power Co., Inc., Tohoku Electric Power Co., Inc., Hokuriku Electric Power Co., Inc., Chugoku Electric Power Co., Inc., Shikoku Electric Power Co., Ltd., Kyushu Electric Power Co., Ltd., and Okinawa Electric Power Co., Inc.) out of the ten general electricity utilities in Japan have been designated as “designated electric companies” for solar projects. While such uncompensated unlimited curtailment will not apply to projects that received the interconnection acceptance before the interconnection application amount surpassed the available interconnection capacity for each relevant electricity utility, we may still experience adverse effect in relation thereto and our future expansion options under the FIT program may be materially and adversely affected. Furthermore, an announcement was made in February 2016 regarding a cabinet decision concerning the “Amendment Bill for Partial Amendment of the Act on Special Measures Concerning Procurement of Electricity from Renewable Energy Sources by Electricity Utilities (FIT Act), etc.” which was submitted in the 190th ordinary session of the Diet. On April 1, 2017, the Amendment of the FIT Act has been enacted. The Amendment of the FIT Act has drastically revised the FIT scheme in order to achieve the dual goal of “maximal implementation of renewable energy and suppression of burden by the citizens.” Some of the main points of the revision are establishing an  FIT approval (setsubi nintei) system in light of the incidence of non-operational projects, refining existing schemes in order to ensure the appropriate operation of business throughout the entire business period, setting targets on the mid- to long-term FIT price and disclosure of the FIT price for a multiple-year period, for example, by implementing a bidding system and changing the entities that are obligated to purchase renewable electricity.

 

Furthermore, since the latter part of 2016, there have been certain notable changes in the Ontario government’s energy policy regarding PPAs. As a result, the second Large Renewal Project program (LRP II) was cancelled, and there will be no further rounds of FIT applications for renewable energy project applications in Ontario. In addition, the outcome Ontario Provincial election scheduled for June 7, 2018 could result in additional uncertainty with the Ontario renewable energy sector. Accordingly, Ontario is no longer a key market for obtaining future PPAs. However, other provinces in Canada have begun work on potential new programs to encourage greater use of renewable energy, potentially utilizing PPAs or otherwise.

 

In May 2017, U.S. International Trade Commission initiated global safeguard investigation to determine whether crystalline silicon photovoltaic (“CSPV”) cells (whether or not partially or fully assembled into other products) are being imported into the United States in such increased quantities as to be a substantial cause of serious injury, or the threat thereof, to the domestic industry producing an article like or directly competitive with the imported articles (“Section 201 Investigation”). The Section 201 Investigations are not country specific. They involve imports of the products under investigation from all sources, including China. In September 2017, the U.S. International Trade Commission voted affirmatively in respect of whether imports of CSPV cells (whether or not partially or fully assembled into other products) are causing serious injury to domestic producers of CSPV products. On January 22, 2018, the U.S. President made the final decision to provide a remedy to the U.S. industry, and the CSPV cells/modules concerned are subject to the safeguard measures established in the U.S. President’s final result, which includes that the CSPV cells and modules imported will be subject to additional duties of 30%, 25%, 20% and 15% from the first year to the fourth year, respectively, except for the first 2.5 GW of all imported CSPV cells concerned in each of those four years, which are excluded from the additional tariff. It is believed that the costs of solar power projects in the United States may increase and the demand for solar PV products in the United States may be adversely impacted due to the decision of the White House under the Section 201 Investigation. The final decision of the Section 201 Investigation may directly lead to an increase in the cost of U.S. solar power projects, which may lead to an overall reduction in our profitability.

 

In 2018, Bulgaria changed its legislation in relation to the FIT price support scheme by long term PPAs,  which was changed by premium support scheme for PV stations with installed capacity of 4 and above 4 MW. PPAs have been replaced by premium agreements, concluded between each producer and the State Fund “Security of the Electricity System” (“FSES”). Premium agreements have been signed by the end of October 2018 and in force no later than January 1, 2019 and validity for the term of the signed PPA for the given PV station.

 

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In order to receive additional premium determined by Energy and Water Regulatory Commission (“EWRC”), the producers are required to sell the electricity produced at the free market . The EWRC may modify the determined premiums, but only once in every six months, provided that there is a material change between the estimated market price for the base energy load for that period and the estimated one for the remaining period on the free market. In a nutshell, previous FIT is replaced by the sum of free market price plus premium.  The free market prices are continuously  increasing recently, resulting in the increase of electricity proceeds and corresponding O&M revenue However, it may also lead to the fluctuation of the future O&M revenue in Bulgaria.

 

In December 2018, the Ministry of Economy, Trade and Industry (“METI”) in Japan determined new measures to reduce the public burden caused by the non-operation of approved commercial facilities for photovoltaic power generation under FIT scheme. Pursuant to the new measures, each non-operation of commercial facility for photovoltaic power generation (>10KW), approved between 2012 and 2014 under the FIT scheme and with the interconnection contract signed before July 31, 2016, is generally required to submit the commencement application to the utility company.

 

Any non-operation of commercial facility for photovoltaic power generation which is not in accord with the timeline, the approved FIT will be adjusted to the new one which is two years before the application acceptance of utility company. For example, if the application is accepted in 2019, the adjusted FIT will be JPY21 per kWh, which is the FIT of 2017 fiscal year. Due to the new measures, some of our projects in Japan may be suffered from FIT loss.

 

To the extent that our business operations are affected by unexpected and adverse economic, regulatory, social and political conditions in the jurisdictions in which we have operations, we may experience project disruptions, loss of assets and personnel, and other indirect losses that could adversely affect our business, financial condition and results of operations.

 

We are expanding our business into China, which may expose our business to new risks that may materially and adversely affect our future prospects and results of operations.

 

We substantially expanded our business in China in 2018. In March 2018, Suzhou Tianlian New Energy Limited, one of our subsidiaries, entered into two 25-year PPA with two wholly-owned subsidiaries of Shenzhen Kaifa Technology Co., Ltd. to develop a 1.7 MW rooftop solar project in Suzhou, China, which is our first DG project in China. We also entered into two 25-year PPAs with two private companies to develop, one solar project of 0.8 MW waiting for construction permit and one solar project of 1.1 MW in development stage in Kunshan, China by the end of first quarter of 2019. Our ability to successfully implement our business expansion strategy into China is subject to various risks and uncertainties, including, in addition to the general risks and uncertainties for development of solar projects:

 

·                  failure to renew the grid connection and dispatch agreements with the grid providers and energy management contracts;

 

·                  uncertainty of PPAs and project-level financing arrangements;

 

·                  the grid providers’ failure or unwillingness to fulfill their related contractual obligations;

 

·                  fluctuations of the price of electricity, particularly the decrease in the public utility rate;

 

·                  access to project financing and other sources of capital to finance our China investments, which may not be available on reasonable terms or at all given the fact that Chinese capital and foreign exchange markets are less developed relative to the countries where we have worked in the past;

 

·                  curtailment of power purchase amounts promised by utilities due to lack of sufficient transmission grid infrastructure;

 

·                  regulations creating significant burdens or limiting entirely the ability of Chinese residents to repatriate capital into China, which affects our ability to finance Chinese investment through funds we have obtained or we will obtain from abroad;

 

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·                  our short operational history as a downstream solar park developer in China;

 

·                  delays in obtaining land rights and related permits and other required governmental permits and approvals;

 

·                  potential difficulties in collecting payments from large state-owned enterprises or utilities, due to certain aspects of the Chinese legal system;

 

·                  potential challenges from local residents, government organizations, and others who may not support our projects;

 

·                  potential conflict with our module and other equipment suppliers as a result of our direct competition with certain of their downstream ventures; and

 

·                  the enforcement of the deed of non-competition and right of first refusal with our director and former chief executive officer Mr. Weili Su with respect to his business in China. See “—We have entered into a deed of non-competition and right of first refusal with our director and former chief executive officer Mr. Weili Su with respect to his businesses in China, which may result in a transaction that is not on an arm’s length basis” and “—We rely on licensing arrangements with entities controlled by our director and former chief executive officer, Mr. Su to use the trademark “Sky Solar.” Any improper use of these trademarks by us, our licensor or any other third parties could materially and adversely affect our business, financial condition and results of operations.”

 

If we are unable to effectively manage these risks, we may not be able to successfully execute our expansion plan in China and face a loss of the time, effort and capital invested there. We may not be able to manage our business growth strategy as planned and our results of operations may be adversely affected.

 

As we may enter new markets in different jurisdictions and expand our business to new areas, we face different regulatory regimes, business practices, governmental requirements and industry conditions and we may spend substantial resources familiarizing ourselves with the new environment and conditions.

 

As we may enter new markets in different jurisdictions and expand our business to new areas, we will face different regulatory regimes, business practices, governmental requirements and industry conditions. As a result, our prior experiences and knowledge in other jurisdictions may not be relevant, and we may spend substantial resources familiarizing ourselves with the new environment and conditions. For example, as we are expanding further into the U.S. and China markets, additional risks and permitting delays, as well as, project development and timing issues in a highly regulated market may be significant.

 

In the United States, federal, state and local government regulations and policies concerning the electric utility industry, utility rate structures, interconnection procedures, and internal policies of electric utilities, heavily influence the market for electricity generation products and services. These regulations and policies often relate to electricity pricing and the interconnection of distributed electricity generation systems to the power grid. Policies and regulations that promote renewable energy have been challenged by traditional utilities and questioned by those in government and others arguing for less governmental spending and involvement in the energy market. To the extent that such views are reflected in government policy, the changes in such policies and regulations could adversely affect our results of operations, cost of capital and growth prospects.

 

Further, federal, regional, state or local regulations and policies could be changed to provide for new rate programs that undermine the economic returns for both new and existing solar parks in operation by charging additional, non-negotiable fixed or demand charges or other fees or reductions in the number of solar projects allowed under net metering policies. National, regional, state or local government energy policies, law and regulation supporting the creation of or regulating entry into wholesale energy markets is currently, and may continue to be, subject to challenges, modifications and restructuring proposals, which may result in limitations on the commercial strategies available to us for the sale of our power.

 

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Regulatory and permitting changes in a jurisdiction in which we have a solar park in pipeline or solar park under construction may make the continued development of such solar park infeasible or economically disadvantageous and any expenditure we have made to date on such solar park in pipeline or solar park under construction may be wholly or partially written off. Any of these changes could significantly increase the regulatory-related compliance and other expenses incurred by the solar parks in pipeline or solar parks under construction and could significantly reduce or entirely eliminate any potential revenues that can be generated by one or more of such solar parks or result in significant additional expenses to us, our offtakers and customers, which could materially and adversely affect our business, financial condition, results of operations and cash flows.

 

We also face regulatory risks imposed by various transmission providers and operators, including regional transmission operators and independent system operators, and their corresponding market rules. These regulations may contain provisions that limit access to the transmission grid or allocate scarce transmission capacity in a particular manner, which could materially and adversely affect our business, financial condition, results of operations and cash flows.

 

We are also subject to the Foreign Corrupt Practices Act of 1977, or the FCPA, the U.S. domestic bribery statute, the U.S. Travel Act, the USA PATRIOT Act, and other applicable anti-bribery and anti-money laundering laws. We face significant liabilities if we fail to comply with the FCPA and other anticorruption 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 of government agencies. In the United States, we need to obtain various approvals, permits and licenses from the federal, state of local government agencies. We can be held liable for the illegal activities of our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize such activities. Any violation of the FCPA, other applicable anticorruption laws, and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of certain privileges, severe criminal or civil sanctions, which could have a material adverse effect on our business, financial condition, cash flows and reputation. In addition, responding to any enforcement action may result in the diversion of management’s attention and resources, significant defense costs and other professional fees.

 

We may explore business in new areas with the proceeds received from the disposal of our assets in Japan. For our business in new areas, we may face new competition. If we cannot successfully address the foregoing new challenges and compete effectively, we may not be able to recover costs incurred for developing and marketing our new business, and eventually achieve profitability from these businesses, and, consequently, our future results of operations and growth prospects may be materially and adversely affected.

 

Our relatively limited operating history as an IPP and certain recent events involving changes in our management and potential sale of our securities by our former CEO, former chairman and controlling shareholder may make it difficult to judge our future prospects and results of operations.

 

We began our business in 2009. We started to develop our first solar park in 2009, and first began to operate solar parks in 2012 as an IPP. In 2016, 2017 and 2018, we derived 14.7% , 0.5 % and 0.3% of our total revenue from selling solar energy systems. In 2013, in order to internalize more value from project development and generate recurring revenue and cash flow, we began to focus on owning and operating solar parks as an IPP. As of December 31, 2018, we had a total of 211.0 MW of IPP solar parks in operation with a carrying value of US$353.1 million. In 2016, 2017 and 2018, we derived 81.4%, 94.5% and 95.0% respectively, of our total revenue from electricity sales from our IPP solar parks. Our historic track record of selling solar energy systems may not be a reliable indicator of our performance as an IPP.

 

Our rapidly evolving business and, in particular, our relatively limited operating history as an IPP, may not be an adequate basis for evaluating our business prospects and financial performance, and makes it difficult to predict the future results of operations. Our past success occurred in an environment where capital was readily accessible to our clients and economic incentives were more favorable for PV power in certain markets, such as Japan, Canada, Greece, Bulgaria, the United States, and Uruguay. Therefore, period-to-period comparisons of our operating results and our results of operations for any period should not be relied upon as an indication of our performance for any future period. In particular, our results of operations, financial condition, and future success depend, to a significant extent, on our ability to continue to identify suitable sites, obtain required regulatory approvals, arrange financing from various sources, construct solar parks in a cost-effective and timely manner, expand our project pipeline and manage and operate solar parks that we develop. If we cannot do so, we may not be able to expand our business at a profit or at all, maintain our competitive position, satisfy our contractual obligations, or sustain growth and profitability.

 

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In addition, pursuant to a stock purchase agreement between, among others, Flash Bright, a wholly-owned subsidiary of our former CEO and former chairman Mr. Weili Su, and Japan NK Investment K.K. dated March 1, 2019, Flash Bright agreed to sell107,088,104 ordinary shares of our company in the form of ADSs, and 2,600,006 of ordinary shares of our company to Japan NY Investment K.K. These ADSs and ordinary shares together represented 26.1% of our ordinary shares as of March 31, 2019. After the closing of the transaction, Mr. Su will no longer be our largest shareholder and we may be exposed to risks from change of control. As of the date of this report, the transfer has not been completed, and there may be uncertainties around the transfer by Flash Bright under the stock purchase agreement in light of the order of attachment with respect to the HKIAC Award. See “—We have been involved in several actions and proceedings, including in connection with the Hudson Dispute, and being named as a defendant in a putative class action lawsuit. We have also been, and in the future may be, the target of other lawsuits or other allegations by third parties, which could adversely affect our business, financial conditions, results of operations, cash flows, reputation and our ADS trading price.”

 

We have experienced frequent changes in our senior management in recent years. On June 6, 2017, we named Mr. Hao Wu as our new chairman of the board of directors, replacing Mr. Weili Su, effective immediately. Also effective as of the same day, Mr. Su no longer served as our chief executive officer, or as director, officer, manager, legal representative or in any other management position of our subsidiaries or any other consolidated entities. On the same day, we set up a management committee, members of which include our directors Mr. Hao Wu, Mr. Xinhua Yu and Mr. Xiaoguang Duan, and started to search for candidates for vacated management positions. On June 15, 2017, we established an independent committee consisting solely of our independent directors, who subsequently engaged a PRC law firm to investigate the conduct of our former chief executive officer and former chairman of the board, Mr. Weili Su, involving certain transactions and fund transfers, which appeared to lack proper board and audit committee authorization. On September 19, 2017, the PRC law firm concluded that the transactions and fund transfers between us and certain entities controlled by Mr. Su were not approved by the board or the audit committee, and in addition, there was insufficient documentary support of such fund transfer. On February 18, 2019, we received the full settlement amount of approximately US$15 million from Mr. Su pursuant to the settlement agreement between Mr. Su and us dated September 19, 2017. As more fully described below in “Item 7 Major Shareholders and Related Party Transactions—B. Related Party Transactions—Transactions with Weili Su,” we entered into settlement arrangements with our director and former chief executive officer, Mr. Su to resolve all potential claims by us against Mr. Su and certain entities controlled by him concerning the fund transfers, as well as all potential claims that Mr. Su and such entities may have against us in connection with Mr. Su’s employment at our company.

 

In August 2018, Mr. Andrew (Jianmin) Wang resigned as our chief financial officer and director and we named Mr. Sanjay Shrestha as our chief financial officer and director.

 

In November 2018, we appointed Mr. Benjamin (Binjie) Duan as a director of our company.

 

On January 28, 2019, Mr. Sanjay Shrestha was terminated from his position as our chief financial officer and we named Ms. Julie (Liwei) Zhu as our acting chief financial officer. On February 1, 2019, Mr. Sanjay Shrestha resigned as our director.

 

The ramifications of our recent senior management changes and the potential sale of our securities by our former CEO, former chairman, and controlling shareholder, including public perception that our future direction, strategy or leadership are uncertain, and the costs and expenses and diversion of our management’s attention from our business related to all of the above may materially and adversely affect our business, reputation and prospects.

 

The delay between making significant upfront investments in our solar parks and receiving revenue could materially and adversely affect our liquidity, business and results of operations.

 

There are generally many months or even years between our initial significant upfront investments in developing permits to build solar parks we expect to own and operate and when we commence to receive revenue from the sale of electricity generated by such solar parks after grid connection. Such investments include, without limitation, legal, accounting and other third-party fees, costs associated with feasibility study, payments for land rights, government permits, large transmission and PPA deposits or other payments, which may be non-refundable. Furthermore, we have historically relied on our own equity contribution and bank loans to pay for costs and expenses incurred during project development, especially to third parties for PV modules and balance-of-system components and EPC and O&M services. Solar parks typically generate revenue only after becoming commercially operational and starting to sell electricity to the power grid. There may be an especially long delay from initial land and interconnection assessments to projects becoming shovel-ready, especially when we obtain permits directly from regulators and site control rights directly from prior rights holders under our primary permit development model. Between our initial investments in the development of permits for solar parks and their connection to the transmission grid, there may be adverse developments to such solar parks. We consider parks “shovel-ready” even if we have not obtained non-discretionary permits, that is, such permits which we expect to be granted if we comply with the relevant administrative procedures and criteria. In certain jurisdictions, maintaining our permits and operating our plants involve meeting ongoing compliance and other legal obligations. Furthermore, we may not be able to obtain all of the permits as anticipated, permits that were obtained may expire or become ineffective or we may not be able to obtain debt financing as anticipated. In addition, the timing gap between our upfront investments and actual generation of revenue, or any added delay in between due to unforeseen events, could put strains on our liquidity and resources, and materially and adversely affect our profitability and results of operations.

 

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We may not be able to develop or acquire additional attractive solar assets to grow our business.

 

Our current business strategy includes plans to further grow our solar business by developing or acquiring additional solar assets. As part of our growth plan, we may acquire solar parks in various development stages through a competitive bidding process. We compete for project awards based on, among other things, pricing, technical and engineering expertise, financing capabilities, past experience and track record. It is difficult to predict whether and when we will be awarded a new solar park. The bidding and selection process is also affected by a number of factors, including factors which may be beyond our control, such as market conditions or government incentive programs. Our competitors may have greater financial resources, a more effective or established localized business presence or a greater willingness or ability to operate with little or no operating margins for sustained periods of time. Any increase in competition during the bidding process or reduction in our competitive capabilities could have a significant adverse impact on our market share and on the margins we generate from our solar parks.

 

·                  Other difficulties executing this growth strategy, particularly in new jurisdictions we may enter, include: accurately prioritizing geographic markets for entry, including estimates on addressable market demand;

 

·                  obtaining construction, environmental and other permits and approvals;

 

·                  securing land, rooftop or other site control;

 

·                  managing local operational, capital investment or components sourcing regulatory requirements;

 

·                  connecting to the power grid on schedule and within budget;

 

·                  connecting to the power grid if there is insufficient grid capacity;

 

·                  identifying, attracting and retaining qualified development specialists, technical engineering specialists and other personnel;

 

·                  managing any acquired assets or assets held under affiliates;

 

·                  securing cost-competitive financing on attractive terms;

 

·                  operating and maintaining solar parks to maintain the power output and system performance;

 

·                  collecting FIT payments and other economic incentives as expected; and

 

·                  transferring our permits and solar modules, and commercially operational solar parks at prices and on terms and timing that are acceptable to us.

 

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Our future success depends significantly on the continued service of our senior management team and our ability to attract, train and retain qualified personnel.

 

The industry experience, expertise and contributions of our senior management are essential to our continuing success. We will continue to rely on the contributions of our senior management, regional management and other key employees to implement our growth plans. If we were to lose the services of any of our senior management members and were unable to train or recruit and retain personnel with comparable qualifications, the management and growth of our business could be adversely affected.

 

On June 6, 2017, we named Mr. Hao Wu as our new chairman of the board of directors, replacing Mr. Weili Su, effective immediately. In August 2018, Mr. Andrew (Jianmin) Wang resigned as our chief financial officer and director, and we named Mr. Sanjay Shrestha as our chief financial officer and director. In November 2018, we appointed Mr. Benjamin (Binjie) Duan as a director of our company. On January 28, 2019, we  terminated Mr. Sanjay Shrestha from his position as our chief financial officer and named Ms. Julie (Liwei) Zhu as our acting chief financial officer. On February 1, 2019, Mr. Sanjay Shrestha resigned as our director. The ramifications of these recent senior management changes, including public perception that our future direction, strategy or leadership is uncertain, and the costs and expenses and diversion of our management’s attention from our business related thereto could materially and adversely affect our business, prospects, financial condition and results of operations.

 

Our success is also largely attributable to the qualified and experienced project development teams that we have been able to train, attract and retain in the past. We may not be able to continue to train, attract and retain high quality personnel, including executive officers, project development personnel, project management personnel and other key qualified personnel who have the necessary and required experience and expertise. In particular, as we enter new markets in different jurisdictions, we always face challenges to find and retain qualified local personnel who are familiar with local regulatory regimes and adequately experienced in project development and operations.

 

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

 

We may not be able to find suitable sites for the development of solar parks.

 

Solar parks require solar and geological conditions that can only be found in a limited number of geographic areas. Further, large, utility-scale solar parks must be interconnected to the power grid in order to deliver electricity, which requires us to find suitable sites with capacity on the power grid available. Our competitors may impede our development efforts by acquiring control of all or a portion of a PV site we seek to develop. In addition, we acquire land with the understanding that such land may be rezoned for solar park development. However, rezoning has, at times, taken longer than expected or has not been possible. For example, we encounter difficulties registering certain leasehold interests due to other land owners’ opposition to the rezoning process from time to time. Although our operations were not materially affected by this delay, or the costs involved, future rezoning efforts may materially and adversely impact our business and results of operation. Even when we have identified a desirable site for a solar park, our ability to obtain site control with respect to the site is subject to our ability to finance the transaction and manage growing competition from other solar power producers that may have better access to local government support, financial or other resources. If we were unable to find or obtain site control for suitable PV sites on commercially acceptable terms, our ability to develop new solar parks on a timely basis or at all might be harmed, which could have a material adverse effect on our business, financial condition and results of operations.

 

Our legal rights to certain real properties used for our solar parks are subject to third party rights and may be challenged by property owners or third parties.

 

Our rights to the properties used for our solar parks may be challenged by property owners and other third parties. For example, in Chile we have had to negotiate and clarify with other mining concession holders about the priority of our mining concession rights over certain areas where we intend to construct a solar park, which may delay our timetable for construction. An adverse decision from a court or the absence of an agreement with such third-parties may result in additional costs and delays in the construction and operating phases of any solar park so situated. In addition, certain real properties used for our solar parks in Spain and Uruguay were mortgaged to third parties by the relevant landlords to secure other debts before we obtained our rights with respect to such properties and, as a result, our rights are subject to the mortgages. In the event of failure by the relevant debtor to comply with its payment obligations, the mortgagee will be entitled to sell the properties. By authorization granted by the Uruguayan mortgagee dated November 2016, the mortgagee or any purchaser of such properties shall respect our rights to the properties, including the original terms and extensions of the land lease agreements. In addition, some properties used for our solar parks are subject to other third-party rights such as right of passage and right to place cables and other equipment on the properties, which may result in certain interferences with our use of the properties. Our rights to the properties used for our solar parks may be challenged by property owners and other third parties for various other reasons as well. For example, we do not always have the exclusive right to use a given site. Any such challenge, if successful, could impair the development or operations of our solar parks on such properties. We are also subject to the risk of potential disputes with property owners or third parties who otherwise have rights to or interests in the properties used for our solar parks. Such disputes, whether resolved in our favor or not, may divert management’s attention, harm our reputation or otherwise disrupt our business.

 

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

 

We intend to expand our business significantly within selected existing markets and in a number of new locations in the future. For example, we entered the U.S. market in 2015, forming Sky Capital America Inc. as part of our strategy to target the U.S. as a market with high growth potential. We acquired 22.1 MW operating solar parks and 44.4 MW development stage permits in the U.S. in 2016. As of the dated of this report, we had 27.8MW operating solar parks and 42.8MW developing state permits in the US. We substantially expanded our business in China in 2018. In March 2018, Suzhou Tianlian New Energy Limited, one of our subsidiaries, entered into two 25-year PPA with two wholly-owned subsidiaries of Shenzhen Kaifa Technology Co., Ltd. to develop a 1.7 MW rooftop solar project in Suzhou, China, which is our first DG project in China. We also entered into two 25-year PPAs with two private companies to develop, one solar project of 0.8 MW waiting for construction permit and one solar project of 1.1 MW in development stage in Kunshan, China by the end of first quarter of 2019. As we grow, we expect to encounter additional challenges to our internal processes, external construction management, capital commitment process, project funding infrastructure, financing capabilities and regulatory compliance. Our existing operations, personnel, systems and internal control may not be adequate to support our growth and expansion and may require us to make additional unanticipated investments in our infrastructure. In addition, our experience developing, building and selling solar energy systems may not be applicable to our IPP solar parks, since IPP solar parks require enhanced financing and O&M capabilities. To manage the future growth of our operations, we will be required to improve our administrative, operational and financial systems, procedures and controls, and maintain, expand, train and manage our growing employee base. We will need to hire and train project development personnel to expand and manage our project development efforts. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities, execute our business strategies successfully or respond to competitive pressures. As a result, our business, prospects, financial condition and results of operations could be materially and adversely affected.

 

Our international operations require significant management resources and present legal, compliance and execution risks in multiple jurisdictions.

 

We have adopted a global business model under which we maintain significant operations and facilities through our subsidiaries located in Europe, South America, North America and Asia, while our corporate management team and directors are primarily based in Hong Kong and Shanghai. Although we have appointed managing directors who oversee regions, such as Europe, East Asia and the Americas., the global nature of our business may stretch our management resources as well as make it difficult for our corporate management to effectively monitor local execution teams and ensure utilization of best-practice corporate governance practices. The global nature of our operations and limited resources of our management may create risks and uncertainties when executing our strategy and conducting operations in multiple jurisdictions, which could affect our costs and results of operations.

 

Decreases in the spot market price of electricity could harm our IPP revenue and reduce the competitiveness of solar parks in grid-parity markets.

 

The electricity prices for solar parks are either fixed through long-term PPAs or are variable and determined by the spot market. Although the price of electricity as of December 31, 2018 was fixed or specially fixed through PPAs for 100% of our solar parks in operation, in countries where the price of electricity is sufficiently high that solar parks can be profitably developed without the need for government price supports, a condition known as “grid-parity,” solar parks may choose not to enter into fixed PPAs and sell based on the spot market price of electricity. The market price of electricity can be subject to significant fluctuations and can be affected by drivers such as the cost of traditional fossil fuels used for electricity generation, the discovery of new fossil fuel sources, additional electricity generation capacity, additional electric transmission and distribution lines, technological or regulatory changes, increased energy conservation or for a number of other reasons.

 

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Decreases in the spot price of electricity in such countries would render PV energy less competitive compared to other forms of electricity. For example, PV may no longer be in grid parity if the price of fossil fuels used for electricity generation decreased sufficiently. In this situation, our solar parks may no longer be profitable in that market and we may not be able to recoup the time and effort invested in applying for permits or developing solar parks. A reduction in electricity prices would render our solar parks less economically attractive. If the retail price of energy were to decrease due to any of these reasons, or others, our business.

 

If sufficient demand for solar parks does not develop or takes longer to develop than we anticipate, our business, financial condition, results of operations and prospects could be materially and adversely affected.

 

The PV market is at a relatively early stage of development in many of the markets that we have entered or intend to enter. The PV industry continues to experience lower costs, improved efficiency and higher electricity output. However, trends in the PV industry are based only on limited data and may not be reliable. Many factors may affect the demand for solar parks, including:

 

·                  the cost and availability of credit, loans and other forms of financing for solar parks;

 

·                  fluctuations in economic and market conditions that affect the viability of conventional and non-solar renewable energy sources;

 

·                  the cost-effectiveness of solar parks compared to conventional and other non-solar energy sources;

 

·                  the performance and reliability of solar parks compared to conventional and other non-solar energy sources;

 

·                  the availability of grid capacity to dispatch power generated from solar parks;

 

·                  environmental concerns related to solar parks and other local permit issues;

 

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

 

·                  public perceptions of the direct and indirect benefits of adopting renewable energy technology;

 

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

 

·                  regulations and policies governing the electric utility industry that may present technical, regulatory and economic barriers to the purchase and use of solar energy; and

 

·                  the deregulation of the electric power industry and the broader energy industry.

 

If market demand for solar parks fails to develop sufficiently, our business, financial condition, results of operations and prospects could be materially and adversely affected.

 

We face significant competition in certain markets in which we operate.

 

We face significant competition in certain markets in which we operate. Our primary competitors are local and international developers and operators of solar parks, many of which are integrated with upstream PV manufacturers. We also compete with utilities generating power from conventional fossil fuels and other sources of renewable energy in regions that have achieved grid parity, such as Chile. As we further expand into downstream markets, we will face increasing competition from these companies.

 

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In certain of our target markets, such as China, state-owned and private companies have emerged to take advantage of the significant market opportunity created by attractive financial incentives and favorable regulatory environment provided by the governments. State-owned companies may have stronger relationships with local governments in certain regions and private companies may be more focused and experienced in developing solar power projects in the markets where we compete. Accordingly, we need to continue to be able to compete against both state-owned and private companies in these markets.

 

Some of our competitors may have advantages over us in terms of greater operational, financial, technical, management or other resources in particular markets or in general. Our market position depends on our financing, development and operation capabilities, reputation, experience and track record. Our competitors may also enter into strategic alliances or form affiliates with other competitors to our detriment. Suppliers or contractors may merge with our competitors which may limit our choices of contractors and hence the flexibility of our overall project execution capabilities. There can be no assurance that our current or potential competitors will not offer solar parks or services comparable or superior to those that we offer at the same or lower prices or adapt more quickly than we do. Increased competition may result in price reductions, reduced profit margins and loss of market share.

 

We are subject to risks associated with fluctuations in the prices of PV modules and balance-of-system components or in the costs of design, construction and labor.

 

We procure supplies for solar parks construction, such as PV modules and balance-of-system components, from third-party suppliers. We typically enter into contracts with our suppliers and contractors on a project-by-project basis or a project portfolio basis. We generally do not maintain long-term contracts with our suppliers. Although some of our EPC contracts allow us to reclaim additional costs incurred as a result of unexpected increases in procurement costs, we are still exposed to fluctuations in prices for our PV modules and balance-of-system components. The price for procuring PV modules may increase as a result of application of laws and regulations. For example, the final decision of Section 201 Investigation had caused a concern that there could be an increase of prices for the PV modules, which may lead to an overall reduction in our profitability.  See “—We conduct our business operations globally and are subject to global and local risks related to economic, regulatory, social and political uncertainties.” Although the price of modules has normalized,  we cannot assure you that similar issues in the future may not arise, the likelihood of which we are unable to determine at this time. Increases in the prices of PV products or balance-of-system components or fluctuations in design, construction, labor and installation costs may increase the cost of procuring equipment and engaging contractors and hence materially and adversely affect our results of operations.

 

Solar project development and construction is challenging and may ultimately not be successful; solar parks in pipeline may not receive required permits, property rights, PPAs, interconnection transmission arrangements; and financing or construction of solar parts under construction 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 business, financial condition and results of operations.

 

The development and construction of solar projects involve numerous risks and uncertainties and requires extensive research, planning and due diligence. We may be required to incur significant amounts of capital expenditure for land and interconnection rights, preliminary engineering, permitting, legal and other expenses before we can determine whether a solar park is economically, technologically or otherwise feasible. Success in developing a particular solar park is contingent upon, or may be impacted by, among other things:

 

·                  securing suitable project sites, necessary rights of way, satisfactory land rights in the appropriate locations with capacity on the transmission grid and related permits, including completing environmental review and implementing any required mitigation measures;

 

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

 

·                  negotiating satisfactory engineering, procurement and construction agreements and land use and access rights;

 

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

 

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

 

·                  procuring rights to interconnect the solar park to the electric grid or to transmit energy;

 

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

 

·                  negotiating favorable payment terms with suppliers;

 

·                  signing PPAs or other arrangements that are commercially acceptable, including adequate for providing financing;

 

·                  obtaining construction financing, including debt financing and own equity contribution; and

 

·                  satisfactorily completing construction on schedule.

 

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

 

·                  unanticipated changes in project plans or defective or late execution;

 

·                  difficulties in obtaining and maintaining governmental permits, licenses and approvals required by existing laws and regulations or additional regulatory requirements not previously anticipated;

 

·                  the inability to procure adequate financing with acceptable terms, especially for engineering, procurement and construction;

 

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

 

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

 

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

 

·                  cost over-runs, due to any one or more of the foregoing factors.

 

Accordingly, some of the solar parks in our pipeline may not be completed or even proceed to construction. If a number of solar parks are not completed, our business, financial condition and results of operations could be materially and adversely affected.

 

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

 

Construction of our solar parks may be adversely affected by circumstances outside of our control, including inclement weather, a failure to receive regulatory approvals on schedule or third-party delays in providing PV modules, inverters or other materials. Obtaining full permits for our solar parks is time consuming and we may not be able to meet our expected timetable for obtaining full permits for our solar parks in the pipeline. We may not be able to negotiate satisfactory engineering, procurement and construction agreements with third parties. Changes in project plans or designs, or defective or late execution may increase our costs and cause delays. Increases in the prices of PV products and balance-of-system components may increase procurement costs. Labor shortages, required construction permits could also delay or hinder the construction of our solar parks. A lack of proper construction permits or post-construction approvals could delay or prevent us from commencing operation and connecting to the relevant grid.

 

Moreover, we rely on a limited number of third-party suppliers for certain components and equipment used in the construction of our solar parks, such as PV modules. The failure of a supplier to supply components and equipment in a timely manner, or at all, or to supply components and equipment that meet our quality, quantity and cost requirements, could impair our ability to install solar parks or may increase our costs. To the extent the processes that our suppliers use to manufacture components are proprietary, we may be unable to obtain comparable components from alternative suppliers.

 

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In addition, we typically utilize and rely on third-party contractors to construct and install our solar parks. If our contractors do not satisfy their obligations or do not perform work that meets our quality standards or if there is a shortage of third-party contractors or if there are labor strikes that interfere with the ability of our employees or contractors to complete their work on time or within budget, we could experience significant delays or cost overruns.

 

We may not be able to recover any of these losses in connection with construction cost overruns or delays. In addition, if we are unable to connect a solar park to the power grid on schedule, we may experience lower FIT, as FIT regimes generally ratchet down the FIT awarded to solar parks that connect later to the power grid. In addition, in certain cases of delay, we might not be able to obtain any FIT or PPA at all, as certain PPAs require that we connect to the transmission grid by a certain date. If the solar park is significantly delayed, we may forfeit the PPA and we may only be able to obtain reduced FIT payments or may even become ineligible for FIT payments at all. A reduction or forfeiture of FIT payments or would materially and adversely affect the financial results and results of operations for that solar park, even to the point of rendering the project no longer profitable. In Chile, a country where FIT payments are not necessarily required for solar power to be economically competitive, failure to meet certain deadlines may result in the cancellation of key permits and jeopardize the viability of a project. Any of the contingencies discussed above could lead us to fail to generate our expected return from our solar parks and result in unanticipated and significant revenue and earnings losses.

 

We may be subject to unforeseen costs, liabilities or obligations when operating and maintaining solar parks.

 

We operate and maintain the solar parks in our IPP portfolio. In addition, we have entered into separate contractual agreements to operate and maintain substantially all of the solar parks built by us. Pursuant to these agreements, we generally perform scheduled and unscheduled maintenance and operating and other asset management services. We subcontract certain on-the- ground O&M services, including security and repair, to third-parties, who may not perform their services adequately.

 

If we or our third-party contractors fail to properly operate and maintain the solar parks, the solar parks may experience decreased performance, reduced useful life or shut downs. Through changes in our own operation or in local conditions, the costs of operating the project may increase, including costs related to labor, equipment, insurance and taxes. If they are careless or negligent, resulting in damage to third parties, we may become liable for the consequences of any resulting damage. We may also experience equipment malfunction or failure, leading to unexpected maintenance needs, unplanned outages or other operational issues. In addition, inconsistencies in the quality of solar panels, PV modules, balance-of-system components or maintenance services for our solar parks may affect the system efficiency of our solar parks. We may also encounter difficulties selling electricity to the power grid due to failures in infrastructure or transmission systems. To the extent that any of the foregoing affects our ability to sell electricity to the power grid, or we incur increased costs in relation to operating and maintaining solar parks, our business, financial condition and results of operation could be materially and adversely affected.

 

Our project operations may be adversely affected by weather and climate conditions, natural disasters and adverse work environments.

 

Solar parks depend on the amount and intensity of sunlight, which is affected by weather and climate conditions. Any change of such conditions in the areas we operate that reduces solar radiation will adversely affect our business and results of operations. In addition, we may operate in areas that are under the threat of floods, earthquakes, landslides, mudslides, sandstorms, drought, or other inclement weather and climate conditions or natural disasters. If inclement weather or climatic conditions or natural disasters occur in areas where our solar parks and project teams are located, project development, connectivity to the power grid and the provision of O&M services may be adversely affected. In particular, materials may not be delivered as scheduled and labor may not be available. As many of our solar parks are located in the same region, such solar parks may be simultaneously affected by weather and climate conditions, natural disasters and adverse work environments.

 

During periods of curtailed activity, we may continue to incur operating expenses. We may bear some or all of the losses associated with such unforeseen events. Moreover, natural disasters which are beyond our control may adversely affect the economy, infrastructure and communities in the countries and regions where we conduct our business operations. Such conditions may result in personal injuries or fatalities or have an adverse effect on our work performance, progress and efficiency or even result in personal injuries or fatalities.

 

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We are subject to counterparty risks under our FIT price support schemes and PPAs.

 

As an IPP, we generate electricity income primarily pursuant to FIT price support schemes or PPAs, which subjects us to counterparty risks with respect to electric utilities and regulatory regimes. Our FIT price support schemes and PPAs in one region or country are generally signed with a limited number of electric utilities. We rely on these electric utilities to fulfill their responsibilities for the full and timely payment of our tariffs. As we expand our DG business, we may sign PPAs with commercial and industrial (“C&I”) buyers directly. As C&I buyers generally have less credit worthiness than utilities companies, we may be exposed to increased risk in collecting our current and future electricity revenue. In addition, the relevant regulatory authorities may retroactively alter their FIT price support regimes in light of changing economic circumstances, changing industry conditions or for any number of other reasons. For example, the Greek government passed a law in April 2014 reducing FIT currently in effect in existing contracts by roughly 30%, while imposing a discount on electricity already sold in 2013. In December 2015, following a ministerial decision, a levy of 3.6% was imposed on the electricity sold by PV stations in Greece from January 1, 2016 onwards. In December 2013, the Bulgarian government imposed a 20% fee on revenue generated from PV and wind energy installations. Subsequently, the Constitutional Court of Bulgaria determined the fee to be unconstitutional, and renewable energy producers are no longer required to pay this fee. Furthermore, starting on July 24, 2015, all energy producers in Bulgaria shall pay monthly contributions in favor of the Electric Power Grid Security Fund amounting to 5% of their monthly revenues generated from electricity sold, VAT excluded. If the relevant government authorities, the local power grid companies or other counterparties or responsible parties do not perform their obligations under the FIT price support schemes and PPAs and we are unable to enforce our contractual rights, our results of operations and financial condition may be materially and adversely affected.

 

Our results of operations may be subject to fluctuations.

 

Prior to 2013, we primarily generated revenue from selling permits, providing EPC services and selling commercially operational solar parks. In a given period, our revenue was affected by the limited number of solar parks that are under development and sold to third parties, and therefore subject to significant fluctuations. Although we currently derive a majority of our revenue from electricity sale from our solar parks, we will continue to develop, build and sell solar energy systems and solar parks from time to time to take advantage of attractive market opportunities. As a result, we may generate more of our revenues from the one-time sale of solar parks for certain periods. To the extent that we continue to develop, build and sell solar energy systems, we may be exposed to similar risks going forward.

 

Moreover, certain aspects of our IPP business are also subject to seasonal variations. For example, certain economic incentive programs, such as FIT regimes, generally include mechanisms that ratcheted down the incentives over time in line with the general trend of decreasing system costs of solar parks. As a result, we may schedule significant construction activities to connect solar parks to the power grids prior to scheduled decreases in FIT rates, which vary from country to country, in order to qualify for more favorable FIT policies.

 

We have entered into a deed of non-competition and right of first refusal with our director and former chief executive officer Mr. Weili Su with respect to his businesses in China, which may result in a transaction that is not on an arm’s length basis.

 

We have entered into a deed of non-competition and right of first refusal with Mr. Weili Su (“Mr. Su”) whereby he promises that he and any company he controls will not engage in any business that competes with us and grants us the right of first refusal to purchase shares in his businesses in China in which he owns more than 50% of the voting shares in the event that Mr. Su receives from or otherwise negotiate with a third party a bona fide offer to purchase Mr. Su’s shares in any of the business and the sale of such shares will result in Mr. Su ceasing control of that business. We cannot assure you that we will be able to enforce the agreement or exercise the right of first refusal when Mr. Su wishes to sell his business interests in China. Moreover, the non-competition clause will terminate at the earlier of (i) the delisting of our ADSs and ordinary shares from the NASDAQ Capital Market, (ii) the time when Mr. Su ceases to be our largest shareholder and (iii) upon the mutual agreement of Mr. Su and our company to terminate the non-competition clause. Pursuant to the Schedule 13D filed by Japan NK Investment K.K. on March 11, 2019, Mr. Su entered into a Stock Purchase Agreement where he agreed to sell 107,088,104 ordinary shares of our company in the form of ADSs (which are subject to the enforcement proceedings in the United States) and 2,600,006 ordinary shares in March 2019. Once this transaction is closed, Mr. Su will cease to be our largest shareholder and hence, the non-competition clause will terminate, which may adversely affect our business in China.

 

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We will have the right of first refusal to purchase Mr. Su’s shares in his business in China when the sale of the shares will result in Mr. Su ceasing control of that business and the right will terminate at the earlier of (i) the delisting of our ADSs and ordinary shares from the NASDAQ Capital Market, and (ii) upon the mutual agreement to terminate by Mr. Su and our company. The right of first refusal does not extend to the sale of individual solar assets. “Control” is defined as the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting shares, by contract, or otherwise. Additionally, under the laws and practice of the Cayman Islands, shareholders may not be afforded the same level of protection from an affiliate transaction that would typically be the case for a Delaware corporation, such as fairness opinions and an independent due diligence process. We cannot assure you that the deed of non-competition and the right of first refusal, or the subsequent sale of Mr. Su’s businesses to us, if any, will be negotiated or administered on an arm’s length basis. In addition, we cannot assure you that Mr. Su will ever wish to sell his business in China, or that our right of first refusal will ever be exercised or that any purchase by us of any of Mr. Su’s businesses in China would be on terms equivalent to an arm’s length transaction.

 

We may incur warranty expenses in connection with the solar energy systems we have sold.

 

We provide two to five year warranties to the clients of our EPC services and purchasers of our solar parks. Although we generally obtain warranties from our equipment suppliers, we may be responsible for claims during the warranty period with respect to defects in our EPC services and solar parks sold. We are required to remove such defects generally within 48 hours after the defects occur, and to bear all the costs associated with our repair work. Our expenses for repairs have historically not been material. If significant defects arise from our EPC services or solar parks sold to clients, we may suffer adverse impacts on our financial condition and business.

 

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

 

In order to develop solar parks we must obtain a variety of approvals, permits and licenses from various authorities. The procedures for obtaining such approvals, permits and licenses vary from country to country, making it onerous and costly to track the requirements of individual localities and comply with the varying standards. Failure to obtain the required approvals, permits or licenses or to comply with the conditions associated therewith could result in fines, sanctions, suspension, revocation or non-renewal of approvals, permits or licenses, or even criminal penalties, which could have a material adverse effect on our business, financial condition and results of operations.

 

Any new government regulations pertaining to our business or solar parks may result in significant additional expenses. We cannot assure you that we will be able to promptly and adequately respond to changes of laws and regulations in various jurisdictions, or that our employees and contractors will act in accordance with such laws. Failure to comply with laws and regulations where we develop, construct and operate solar parks may materially and adversely affect our business, results of operations and financial condition.

 

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We may become regulated as a utility company in certain jurisdictions in the future.

 

We currently are not subject to regulation as a utility company in any jurisdiction. Our business strategy includes plans to further grow our solar business by developing or acquiring additional solar assets. Operation of these solar parks and sales of electricity from such solar parks could change our regulatory position in certain jurisdictions in the future. Utility companies are typically subject to complex regulations at the local, state or national level in various jurisdictions, and these regulations could place significant restrictions on our ability to operate our business and execute our business plan by prohibiting or otherwise restricting our sale of electricity. If we were subject to regulation as a utility company, our operating costs could materially increase.

 

If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately report our results of operations or prevent fraud or fail to meet our reporting obligations and investor confidence and the market price of our ADSs may be materially and adversely affected.

 

As a public company in the United States, we are subject to Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, which requires that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2015. See “Item 15. Controls and Procedures.” In connection with the preparation and external audit of our consolidated financial statements for the year ended December 31, 2018, we and our independent public accounting firm identified three material weaknesses and other control deficiencies, in our internal control over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified related to, among other deficiencies, (i) insufficient accounting resources and process including implementations of policies and procedures necessary to comply with reporting and compliance requirements of IFRS and the SEC, (ii) lack of sufficient written policies and proper procedures in relation to certain internal control over financial reporting as well as the financial closing and reporting procedures at certain overseas components, and (iii) an event relating to the flow of funds improperly diverted by the joint venture partner in Uruguay, which was only discovered a few months thereafter, although we had taken action and managed to recover most of the improperly diverted funds by the end of December 31, 2018. Our independent registered public accounting firm was not engaged to undertake a comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses and other control deficiencies in our internal control over financial reporting. In light of the material weaknesses and other control deficiencies, we believe it is possible that, had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control deficiencies may have been identified. See” Item 15. Controls and Procedures—Management’s Annual Report on Internal Control Over Financial Reporting” and “—Changes in Internal Control over Financial Reporting.” We have begun and plan to continue to take various measures to remediate the material weaknesses and other deficiencies identified. However, these measures may not fully address the material weaknesses and other control deficiencies in our internal control over financial reporting that we have identified or may identify in the future.

 

In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, unless we qualify as a “non-accelerated filer” as defined in Rule 12b-2 of the Exchange Act, our independent registered public accounting firm may need to attest to and report on the effectiveness of our internal control over financial reporting and may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

 

Failure to achieve and maintain an effective internal control environment could result in material misstatements in our financial statements and our failure to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.

 

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We face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

 

The State Administration of Taxation has promulgated several rules and notices to tighten the scrutiny over acquisition transactions in recent years, including the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises in 2009 with retroactive effect from January 1, 2008, or SAT Circular 698, the Notice on Several Issues Regarding the Income Tax of Non-PRC Resident Enterprises in 2011, or SAT Circular 24, and the Notice on Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-PRC Resident Enterprises in February 2015, or SAT Circular 7. Pursuant to these rules and notices, if a non-PRC resident enterprise transfers its equity interests in a PRC tax resident enterprise, such non-PRC resident transferor must report to the tax authorities at the place where the PRC tax resident enterprise is located and is subject to a PRC withholding tax of up to 10%. In addition, if a non-PRC resident enterprise indirectly transfers so- called PRC Taxable Properties, referring to properties of an establishment or a place of business in China, real estate properties in China and equity investments in a PRC tax resident enterprise, by disposition of the equity interests in an overseas non-public holding company without a reasonable commercial purpose and resulting in the avoidance of PRC enterprise income tax, the transfer will be re-characterized as a direct transfer of the PRC Taxable Properties and gains derived from the transfer may be subject to a PRC withholding tax of up to 10%. SAT Circular 7 has listed several factors to be taken into consideration by the tax authorities in determining if an indirect transfer has a reasonable commercial purpose. However, regardless of these factors, an indirect transfer satisfying all the following criteria will be deemed to lack a reasonable commercial purpose and be taxable in the PRC: (i) 75% or more of the equity value of the intermediary enterprise being transferred is derived directly or indirectly from PRC Taxable Properties; (ii) at any time during the one year period before the indirect transfer, 90% or more of the asset value of the intermediary enterprise (excluding cash) is comprised directly or indirectly of investments in the PRC, or 90% or more of its income is derived directly or indirectly from the PRC; (iii) the functions performed and risks assumed by the intermediary enterprise and any of its subsidiaries that directly or indirectly hold the PRC Taxable Properties are limited and are insufficient to prove their economic substance; and (iv) the foreign tax payable on the gain derived from the indirect transfer of the PRC Taxable Properties is lower than the potential PRC tax on the direct transfer of those assets. On the other hand, indirect transfers falling into the scope of the safe harbors under SAT Circular 7 may not be subject to PRC tax. The safe harbors include qualified group restructurings, public market trades and exemptions under tax treaties.

 

Under SAT Circular 7 and other PRC tax regulations, in the case of an indirect transfer, entities or individuals obligated to pay the transfer price to the transferor must act as withholding agents and are required to withhold the PRC tax from the transfer price. If they fail to do so, the seller is required to report and pay the PRC tax to the PRC tax authorities. If neither party complies with the tax payment or withholding obligations under SAT Circular 7, the tax authority may impose penalties such as late payment interest on the seller. In addition, the tax authority may also hold the withholding agents liable and impose a penalty of 50% to 300% of the unpaid tax on them. The penalty imposed on the purchasers may be reduced or waived if the withholding agents have submitted the relevant materials in connection with the indirect transfer to the PRC tax authorities in accordance with SAT Circular 7.

 

Accordingly, one of our affiliates established in the PRC, Tany International (Baoding) Solar Electric Co., Ltd., or Tany Baoding, is a PRC resident enterprise and one of our subsidiaries established in Hong Kong, Sky International Enterprise Group Limited, or Sky International Enterprise, may be deemed as a non-PRC resident enterprise under SAT Circular 7 and other PRC tax regulations. Sky International Enterprise disposed of 100% of the equity interests in Tany International (Hong Kong) Co Limited, or Tany Hong Kong, which holds 100% of the equity interests in Tany Baoding, to Sky Solar (Hong Kong) International Co. Limited on May 28, 2013. This disposal may be categorized as an “Indirect Transfer” of equity interests in a PRC resident enterprise by a non-PRC resident enterprise as defined under SAT Circular 7 and other PRC tax regulations. Therefore, Tany Baoding may be liable to assist tax authorities in collecting such tax from Sky International Enterprise if the transfer of equity interests in Tany Hong Kong is subject to SAT Circular 7 and other PRC tax regulations, in which case, Sky International Enterprise would incur tax obligations when the relevant equity transfer contract took effect and the transfer was completed. The tax obligation for this transaction may incur on the date when relevant transfer contract took effect or procedures were closed, pursuant to Article 15 of SAT Circular 7. However, it currently unclear how the relevant PRC tax authority will implement or enforce SAT Circular 7 and other PRC tax regulations and whether the enterprise income tax on capital gains will be subject to any further change resulting in any adverse impact on us.

 

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Our global income may become subject to PRC income tax if we are deemed to be a PRC resident enterprise for PRC tax purposes and our non-PRC shareholders may be subject to PRC tax on dividends and gain realized on our shares.

 

In connection with the EIT Law which came into effect on January 1, 2008, the Implementing Rules of the EIT Law, or the Implementing Rules, were enacted on December 6, 2007 and became effective on January 1, 2008. Under the EIT Law and the Implementing Rules, an enterprise established outside the PRC may be considered a “PRC resident enterprise” and be subject to PRC enterprise income tax on its global income at the rate of 25%, if its “de facto management body” is located within the PRC. The Implementing Rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, production processes, personnel, accounts and properties of an enterprise incorporated outside the PRC. At present, it is unclear how the foregoing factors will be applied by the PRC tax authorities to determine whether we have a de facto management body in the PRC. Since some of our management personnel currently reside in the PRC but the majority of our turnover arises from our operations outside the PRC, there is a possibility that the PRC tax authorities could determine that we are a PRC resident enterprise, which would make us subject to PRC tax on our worldwide income at a rate of 25%. Moreover, the risk that we will be found to be a PRC resident enterprise will increase as we execute our strategic entry into the Chinese market. This may have an adverse effect on our financial condition and results of operation. However, our PRC legal counsel does not believe that we or any of our subsidiaries outside of China meet all of the conditions necessary to be considered a PRC resident enterprise based on their review of surrounding facts and circumstances.

 

In addition, if we are treated as a “PRC resident enterprise” under PRC law, dividends we pay on our ADSs to non-PRC ADS holders or on our ordinary shares to non-PRC shareholders, and capital gains realized by such ADS holders or shareholders on the sale or other disposition of ADSs or ordinary shares, may be treated as PRC-source income. Accordingly, we may be required to withhold PRC income tax from dividends paid to non-PRC resident ADS holders or shareholders, and the transfer of ADSs or ordinary shares by such ADS holders or shareholders, as the case may be, may be subject to PRC income tax. Such tax on the income of non-PRC resident enterprise ADS holders or shareholders may be imposed at a rate of 10% (and may be imposed at a rate of 20% in the case of non-PRC resident individual ADS holders or shareholders), subject to the provisions of any applicable tax treaty. If we are required to withhold PRC income tax on dividends payable to our non-PRC resident ADS holders or shareholders, or if you are required to pay PRC income tax on the transfer of the ADSs, or ordinary shares, the value of your investment in our ADSs, or ordinary shares, may be materially and adversely affected.

 

We rely on licensing arrangements with entities controlled by our director and former chief executive officer, Mr. Su to use the trademark “Sky Solar.” Any improper use of these trademarks by us, our licensor or any other third parties could materially and adversely affect our business, financial condition and results of operations.

 

Our rights to our trade names and trademarks are among the most important factor in marketing our services and operating our business. The trademark “Sky Solar,” or “天华阳光” in Chinese, is owned by an entity controlled by Mr. Su, and we have obtained, under a license agreement, the non-exclusive right to use this trademark so long as the trademark is valid. Our license authorizes the use of the trademark in jurisdictions such as the United States, Chile, Japan, Greece, Bulgaria, South Africa, and Hong Kong, but we are not licensed to use the trademark in China, which may limit our ability to operate business in China. Under the trademark license agreement, we are required to pay 0.05% of our revenue, not exceeding HK$10 million, to this entity for the trademark license starting from 2014 at the end of each year. The trademark “Sky Solar” or “天华阳光” is also used by the entity, its subsidiaries and affiliated entities, which are controlled by Mr. Su. If the entity, any of its subsidiaries or affiliated entities, or any third party uses the trade name “Sky Solar,” “天华阳光” or trademarks we use to develop our services and operations in ways that adversely affect such trade name or trademark, our reputation could suffer damage, which in turn could have a material adverse effect on our business, financial condition and results of operations. In addition, if for any reason we are no longer able to use the “Sky Solar” or “天华阳光” trademark due to a dispute with the entity, or be found to have infringed the “Sky Solar” or “天华阳光” trademark in any jurisdictions, including China, or otherwise, our reputation, marketing ability, business and results of operations could be materially and adversely affected.

 

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We may not be able to adequately protect our intellectual property rights, including trademarks and know-how, which could harm our competitiveness.

 

We rely on a combination of trademarks and know-how to protect our intellectual property. As of December 31, 2018, we have two licenses granting us the right to use 30 trademarks in 23 jurisdictions, including the brand name “Sky Solar,” which we believe have been vital to our competitiveness and success and for us to attract and retain our clients and business partners. We license the brand name “Sky Solar” from our director and former chief executive officer, Mr. Su. See “—We rely on licensing arrangements with entities controlled by our director and former chief executive officer, Mr. Su to use the trademark “Sky Solar.” Any improper use of these trademarks by us, our licensor or any other third parties could materially and adversely affect our business, financial condition and results of operations.” We cannot assure you that the measures we have taken will be sufficient to prevent any misappropriation of our intellectual property.

 

Intellectual property laws and means of enforcement of intellectual property laws vary by jurisdiction. Enforcement of our intellectual property rights could be time-consuming and costly. We may not be able to immediately detect and remediate unauthorized use of our intellectual property. In the event that the measures taken by us or the protection afforded by law do not adequately safeguard our intellectual property rights, we could suffer losses in revenue and profit due to competing offerings of services that exploit our intellectual properties. Furthermore, we cannot assure that any of our intellectual property rights will not be challenged by third parties. Adverse rulings in any litigation or proceedings could result in the loss of our proprietary rights and subject us to substantial liabilities, or even disrupt our business operations.

 

Fluctuations in foreign currency exchange rates may negatively affect our revenue, cost of sales and gross margins and could result in exchange losses.

 

Our subsidiaries trade in their functional currencies in the course of their business operations. Our investment holding companies transact in functional currencies of their subsidiaries. Our investment holding companies have foreign financing and investing activities, which expose them to foreign currency risk. As a result, we are subject to significant risks associated with foreign currency exchange rate fluctuations. For example, in 2016, we recorded net foreign exchange gain of US$1.2 million, primarily due to appreciation of the U.S. dollar. Changes in the value of local currencies could increase our U.S. dollar costs or reduce our U.S. dollar revenue. In 2017, we recorded net foreign exchange gain of US$1.8 million, primarily due to the fluctuation of Euro. In 2018 we recorded net foreign exchange gain of US$0.4 million, primarily due to the fluctuation of Euro. Any increased costs or reduced revenue as a result of foreign exchange rate fluctuations could adversely affect our profit margins. The fluctuation of foreign exchange rates also affects the value of our monetary and other assets and liabilities denominated in local currencies, primarily the Euro, JPY and CAD. Generally, an appreciation of the U.S. dollar against relevant local currencies could result in a foreign exchange loss for assets denominated in such local currencies and a foreign exchange gain for liabilities denominated in such local currencies. Conversely, a devaluation of the U.S. dollar against relevant local currencies could result in a foreign exchange gain for assets denominated in such local currencies and a foreign exchange loss for liabilities denominated in such local currencies.

 

We could also expand our business into emerging markets, some of which may have an uncertain regulatory environment relating to currency policy.

 

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

 

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The audit reports included in this annual report are prepared by auditors who are not inspected fully by the Public Company Accounting Oversight Board, or the PCAOB, and, as such, our shareholders are deprived of the benefits of such inspection.

 

The independent registered public accounting firms operating in China, including our current and previous independent registered public accounting firms, are required by the laws of the United States to undergo regular inspections by PCAOB to assess their compliance with the laws of the United States and professional standards. Our previous and current independent registered public accounting firms are both located in China. Without the approval of the PRC authorities, PCAOB is currently unable to conduct inspections of certain independent registered public accounting firms in China, including our previous independent registered public accounting firm. Therefore, our current and previous auditors, like other independent registered public accounting firms operating in China, are not currently inspected by the PCAOB. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. The joint statement reflects a heightened interest in an issue that U.S. regulators have not been able to reconcile. However, it remains unclear what further actions the SEC and PCAOB will take to address the problem.

 

Inspections of other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, and such deficiencies may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures, and to the extent that such inspections might have facilitated improvements in our auditor’s audit procedures and quality control procedures, investors may be deprived of such benefits.

 

Our senior management, directors, principal shareholders and affiliated entities have substantial control and influence over our corporate actions and business, and their interests may not be aligned with our other shareholders.

 

Our senior management, directors, principal shareholders and their affiliated entities beneficially own approximately 27.7% of our outstanding shares as of March 31, 2019. Our director and former chief executive officer, Mr. Su, has the ability to vote or the proxy to vote an aggregate of 26.1% of our outstanding shares as of the date of this annual report. As a result, Mr. Su exerts substantial influence over matters requiring approval by our shareholders, including electing directors and approving mergers or other business combination transactions and he may not act in the best interests of other shareholders. Mr. Su also controls the “Sky Solar” and “天华阳光” trademarks licensed to us, and holds solar parks in Greece and China under the “Sky Solar” and “天华阳光” brand that are not part of our company.  This concentration of ownership may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and reduce the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders, including you. Without Mr. Su’s and other management’s consents, we could be prevented from entering into transactions that could be beneficial to us. Although Mr. Su has fiduciary obligations to our company as a director, his interests may not always be aligned with the interests of our other shareholders. Mr. Su may also take actions to prevent us from continuing to use the trademarks.

 

We have limited business insurance coverage internationally.

 

The insurance industry in many parts of the world is still in an early stage of development. Insurance companies in many countries offer only limited business insurance options. As a result, we have not maintained, and generally do not maintain, full liability, hazard or other insurance covering our services, business, operations, errors, acts or omissions, personnel or properties. To the extent that we are unable to recover from others for any uninsured losses, such losses could result in a loss of capital and significant harm to our business. If any action, suit, or proceeding is brought against us and we are unable to pay a judgment rendered against us or defend ourselves against such action, suit, or proceeding, our business, financial condition and operations could be negatively affected.

 

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RISKS RELATED TO OUR ADSS AND OUR TRADING MARKETS

 

The trading prices of our ADSs may be volatile, which could result in substantial losses to investors.

 

The market price for our ADSs has fluctuated significantly since we first listed our ADSs in November 13, 2014 with closing prices ranging from US$0.46 to US$12.72 per ADS as of May 13, 2019. Overall, since the ADSs were first listed, the general trend in price has been downward. The price and trading volume of our ADSs may become highly volatile and subject to wide fluctuations due to factors beyond our control. This may happen because of broad market and industry factors. For example, the prices of some foreign companies’ securities, including companies in the solar industry, have experienced significant volatility in recent years. Furthermore, as a result of the narrow band of our ADSs publicly available for trading, small trades can cause significant percentage changes in valuation in a short time period. Such volatility may affect the attitude of investors towards our securities, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting or other practices at other foreign companies may also negatively affect the attitudes of investors towards foreign companies in general, including us, regardless of whether we have engaged in such practices. In addition, securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance, such as the recent global economic crisis or other macroeconomic events, which may have a material adverse effect on the market price of our ADSs.

 

In addition to market factors, the price and trading volume for our ADSs may be highly volatile for factors specific to our own operations and the solar industry, including the following:

 

·                  actual or anticipated fluctuations in our financial results and operating metrics;

 

·                  changes in earnings estimates or recommendations by securities analysts;

 

·                  announcements of new investments, acquisitions, strategic partnerships, or affiliates or disposition of material assets, business or investments;

 

·                  announcements of new services and expansions by us or our competitors;

 

·                  additions or departures of key personnel;

 

·                  release of lock-up or other transfer restrictions on our outstanding equity securities, which could result in downward price pressure on our ADSs and increase the number of ADSs traded in the market;

 

·                  sales of additional securities;

 

·                  changes in policies and developments relating to the solar industry;

 

·                  the valuation of publicly traded companies that are engaged in business activities similar to ours;

 

·                  news regarding recruitment or loss of key personnel by us or our competitors; and

 

·                  potential litigation or regulatory investigations.

 

Any of these factors may result in large and sudden changes in the volume and price at which our ADSs trade. Furthermore, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also have a material adverse effect on the market price of our ADSs.

 

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

 

Our ADSs are currently listed for trading on the NASDAQ Capital Market. There are a number of requirements that must be met in order for our ADSs to remain listed on the NASDAQ Capital Market, including but not limited to the minimum bid price of at least $1.00 per ADS, and the failure to meet any of these listing standards could result in the delisting of our ADSs from NASDAQ. On September 18, 2018, NASDAQ notified us that our company did not maintain a minimum bid price of $1 per ADS and provided the company a compliance period of 180 calendar days in which to regain compliance. Subsequent to that notice, NASDAQ provided a further notification, granting our company an additional 180 calendar days ending September 16, 2019, as we provided written notice of our intention to cure the deficiency by effecting an ADS ratio change and met all other requirement. We cannot assure you that we will be able to regain compliance within the additional 180 day or comply with all Nasdaq Listing Rules at all times in the future, or regain compliance in a timely manner in case of a default and avoid any subsequent adverse action taken by NASDAQ, including but not limited to delisting.

 

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

 

Because we do not expect to pay dividends in the foreseeable future, you must rely on price appreciation of our ADSs for return on your investment.

 

We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.

 

Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiary, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.

 

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

 

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act of 1933, as amended, or the Securities Act, but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities in connection with such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of our ADSs.

 

Substantial future sales or perceived sales of our ADSs in the public market could cause the price of our ADSs to decline.

 

Sales of substantial amount of our ADSs or ordinary shares in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to decline. As of December 31, 2018, we had 419,546,514 ordinary shares outstanding, including 6,353,750 ADSs sold in our initial public offering. All of our ADSs sold in the offering are freely transferable without restriction or additional registration under the Securities Act. The remaining ordinary shares outstanding are available for sale subject to volume and other restrictions as applicable under Rule 144 and Rule 701 under the Securities Act. As of December 31, 2018, 221,802,288 of these remaining ordinary shares had been converted into ADSs. In addition, we may also issue additional options in the future which may be exercised for additional ordinary shares. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs.

 

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

 

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

 

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

 

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

 

The depositary for our ADSs may give us a discretionary proxy to vote the ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, which could adversely affect your interests.

 

Under the deposit agreement for our ADSs, if we asked for your voting instructions but the depositary does not receive your instructions by the cut-off date specified in the related notice, the depositary will give us a discretionary proxy to vote the ordinary shares underlying your ADSs as to all matters at the shareholders’ meeting unless:

 

·                  we have failed to timely provide the depositary with notice of meeting and related voting materials;

 

·                  we have instructed the depositary that we do not wish a discretionary proxy to be given;

 

·                  we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

 

·                  a matter to be voted on at the meeting would have a material adverse impact on shareholders; or

 

·                  the voting at the meeting is to be made on a show of hands.

 

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The effect of this discretionary proxy is that if you do not vote at shareholders’ meetings, you cannot prevent the ordinary shares underlying your ADSs from being voted, except under the circumstances described above. This may make it more difficult for shareholders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.

 

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

 

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

 

You may face difficulties in protecting your interests and your ability to protect your rights through the U.S. federal courts may be limited.

 

We are an exempted company with limited liability incorporated under the laws of the Cayman Islands. Most of our business operations are located outside the United States. A substantial majority of our directors and a substantial majority of our senior management team are residing outside of the United States, and a substantial portion of their assets are located outside of the United States. As a result, it may be difficult or impossible for you to bring an original action against us or against these individuals in a U.S. court in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands, China and many other jurisdictions where we have operations may render you unable to enforce a judgment against our assets or the assets of our directors and officers located in those jurisdictions. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, and there is uncertainty as to whether the courts of the Cayman Islands would (1) recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States, or (2) entertain original actions brought in the Cayman Islands against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States. The uncertainty with regard to Cayman Islands law relates to whether a judgment obtained from the U.S. courts under civil liability provisions of the securities law will be determined by the courts of the Cayman Islands as penal or punitive in nature. The courts of the Cayman Islands may not recognize or enforce such judgments against a Cayman company, and because such a determination has not yet been made by a court of the Cayman Islands, it is uncertain whether such civil liability judgments from U.S. courts would be enforceable in the Cayman Islands. Further, the courts of the Cayman Islands would recognize a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) or, in certain circumstances, an in personal judgment for non-monetary relief, and would give a judgment based thereon provided that and would give a judgment based thereon provided that (a) such courts had proper jurisdiction over the parties subject to such judgment; (b) such courts did not contravene the rules of natural justice of the Cayman Islands; (c) such judgment was not obtained by fraud; (d) the enforcement of the judgment would not be contrary to the public policy of the Cayman Islands; (e) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands; and (f) there is due compliance with the correct procedures under the laws of the Cayman Islands.

 

In addition, China does not have any treaties or other agreements that provide for reciprocal recognition and enforcement of foreign judgments with the United States.

 

Our corporate affairs are governed by our memorandum and articles of association and by the Companies Law (2013 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands have a less developed body of securities laws as compared to the United States, and provide significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States. As a result, your ability to protect your interests if you are harmed in a manner that would otherwise enable you to sue in a United States federal court may be limited to direct shareholder lawsuits.

 

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Shareholders of Cayman Islands exempted companies such as ourselves have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our amended and restated articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

 

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

 

We rely on the foreign private issuer exemption from most of the corporate governance requirements under the NASDAQ Stock Market Rules.

 

We are exempt from certain corporate governance requirements of NASDAQ by virtue of being a foreign private issuer. We are required to provide a brief description of the significant differences between our corporate governance practices and the corporate governance practices required to be followed by U.S. domestic companies under the NASDAQ Stock Market Rules. The standards applicable to us are considerably different than the standards applied to U.S. domestic issuers. The significantly different standards applicable to us do not require us to:

 

·                  have a majority of the board be independent;

 

·                  have independent directors involved in the selection of director nominees, by having a nominating and corporate governance committee that is composed entirely of independent directors or by having director nominees selected or recommended by a majority of independent directors meeting in executive session;

 

·                  have independent directors involved in the determination of executive compensation, by having a compensation committee that is composed entirely of independent directors or by submitting such matters for approval or recommendation by a majority of independent directors meeting in executive session;

 

·                  have a minimum of two members on our compensation committee that is composed entirely of independent directors; and

 

·                  have a minimum of three members on our audit committee that is composed entirely of independent directors.

 

We are not required to and will not voluntarily meet these requirements. As a result of our use of the “foreign private issuer” exemptions, you will not have the same protection afforded to shareholders of companies that are subject to all of NASDAQ’s corporate governance requirements. For a description of the material corporate governance differences between NASDAQ requirements and Cayman Islands law, see “Item 16G. Corporate Governance.”

 

As a public company, our compliance costs may continue to increase in the future, particularly when we cease to qualify as an “emerging growth company.”

 

As a public company, we have incurred significant legal, accounting and other expenses that we did not have as a private company prior to our initial public offering. When we cease to be an “emerging growth company”, we expect to incur additional significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes Oxley Act and the other rules and regulations of the SEC. We will cease to be an “emerging growth company” on the earliest of (a) the last day of the fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of our initial public offering; (c) the date on which we have, during the preceding three-year period, issued more than US$1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act, which would occur if the market value of our ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. In addition, new rules and regulations relating to information disclosure, financial reporting and control and corporate governance, which could be adopted by the SEC, NASDAQ and other regulatory bodies and exchange entities from time to time, could result in a significant increase in legal, accounting and other compliance costs and to make certain corporate activities more time-consuming and costly, which could materially affect our business, financial condition and results of operations.

 

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We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to evaluate our performance and prospects.

 

We are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we are subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we are not required to issue proxy statements. We are not required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers are not required to report equity holdings under Section 16 of the Exchange Act and are not subject to the insider short-swing profit disclosure and recovery regime. Although we are not required to issue quarterly reports, we furnish our interim financial information on Form 6-K and publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of NASDAQ.

 

As a foreign private issuer, we are also exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. However, we are still subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive the same information about us and at the same time as the information provided by U.S. domestic reporting companies.

 

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies make our ADSs less attractive to investors.

 

We are an “emerging growth company,” as defined in the JOBS Act, and we take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act for so long as we qualify as an “emerging growth company”. Section 404(b) of the Sarbanes-Oxley Act requires our independent registered public accounting firm to attest to and report on the effectiveness of the internal control structure and procedures for financial reporting.

 

We will cease to be an “emerging growth company” upon the earliest of: (i) the last day of the fiscal year during which we have gross revenues of US$1.07 billion or more, (ii) the last day of the fiscal year following the fifth anniversary of the date of our initial public offering, (iii) the date on which we have issued more than US$1 billion in non-convertible debt during the previous three-year period, or (iv) when we become a “large accelerated filer,” as defined in Rule 12b-2 under the Exchange Act.

 

We may issue additional ordinary shares, other equity or equity-linked or debt securities, which may materially and adversely affect the price of our ordinary shares or ADSs. Hedging activities may depress the trading price of our ordinary shares.

 

We may issue additional equity, equity-linked or debt securities for a number of reasons, including to finance our operations and business strategy (including in connection with acquisitions, strategic collaborations or other transactions), to satisfy our obligations for the repayment of existing indebtedness, to adjust our ratio of debt to equity, to satisfy our obligations upon the exercise of outstanding warrants or options or for other reasons. Any future issuances of equity securities or equity-linked securities could substantially dilute your interests and may materially and adversely affect the price of our ordinary shares or ADSs. We cannot predict the timing or size of any future issuances or sales of equity, equity-linked or debt securities, or the effect, if any, that such issuances or sales may have on the market price of our ordinary shares or ADSs. Market conditions could require us to accept less favorable terms for the issuance of our securities in the future.

 

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Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.

 

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

 

There is a significant risk that we will become a passive foreign investment company for U.S. federal income tax purposes, which could result in adverse U.S. federal income tax consequences to U.S. investors in our ADSs or ordinary shares.

 

A non-U.S. corporation will be a passive foreign investment company (a “PFIC”), for any taxable year in which (1) at least 75% of its gross income is passive income or (2) at least 50% of the value (based on an average of quarterly values) of its assets is attributable to assets that produce or are held for the production of passive income. The factual determination of whether we are a PFIC will be made annually. Accordingly, it is possible that we may become a PFIC in the current or any future taxable year due to changes in our asset or income composition. Because we have valued our goodwill based on the projected market value of our equity, a decrease in the price of our ADSs may also result in our becoming a PFIC. If we are classified as a PFIC, our ADSs or ordinary shares will continue to be treated as shares in a PFIC for all succeeding years during which a U.S. Holder holds our ADSs or ordinary shares, unless we cease to be a PFIC and the U.S. Holder makes certain elections with respect to the ADSs or ordinary shares.

 

We believe that we were not a PFIC for U.S. federal income tax purposes for our taxable year ended December 31, 2018. Based on the current and projected composition of our income and valuation of our assets, there is a significant risk that we will become a PFIC during our current taxable year or in the future. Our PFIC status will depend upon the composition of our income and assets from time to time, including the value of our ADSs at any such time. Our holding of a substantial amount of cash and the manner in which we manage certain solar assets may result in our treatment as a PFIC for our current taxable year. There can be no assurance that we will not be a PFIC for our current taxable year or any future taxable year. If we were treated as a PFIC for any taxable year during which a U.S. Holder (as defined in “Item 10. Additional Information—E. Taxation—United States Federal Income Taxation”) holds our ADSs or ordinary shares, such U.S. Holder may incur significantly increased U.S. income tax on gain recognized on the sale or other disposition of our ADSs or ordinary shares and on the receipt of distributions on the shares to the extent such distribution is treated as an “excess distribution” under the U.S. federal income tax rules. Additionally, if we were to be or become classified as a PFIC, a U.S. Holder may be subject to additional U.S. tax form filing requirements, and the statute of limitations for collections may be suspended if the Holder does not file the appropriate form. You are urged to consult your tax advisor regarding our possible status as a PFIC. 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

 

We are a Cayman Islands holding company and conduct all of our business through and derive all of our income from our investment holding subsidiaries and operating subsidiaries in various countries around the world. In 2007, our director and former chief executive officer, Mr. Su, already a successful businessman and founder of a few solar companies in China, made investments in Europe and began to develop renewable energy power parks in Germany, the Czech Republic and Spain. Beginning in 2009, he expanded his investments to Japan, Canada and the United States, focusing on the construction and operation of solar parks. A number of these ventures became part of our current operations.

 

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In 2009, Mr. Su incorporated Sky Solar Holdings Co., Ltd. in the Cayman Islands as a vehicle to consolidate his interests in various ventures involving solar parks and to facilitate capital-raising activities. Sky Solar Holdings Co., Ltd. was the immediate holding company of Sky Solar Power Ltd., a limited liability company incorporated in the British Virgin Islands before our establishment. In 2009, we connected our first projects in the Czech Republic. In 2011, we expanded into Latin America. In 2012, we shifted our focus to IPP and commenced our strategic operations in South Africa. On August 19, 2013, in order to facilitate the listing of the business, Mr. Su incorporated our company under our former name Sky Power Holdings, Ltd., as a listing vehicle and concurrently we became the holding company of Sky Solar Power Ltd. The immediate holding company of our company was Sky Power Group Ltd., which was incorporated on June 24, 2013 as an exempted company with limited liability in the Cayman Islands. On June 26, 2014, we changed the name of Sky Power Holdings Ltd. to Sky Solar Holdings, Ltd.

 

In September 2013, Sky Solar Holdings Co., Ltd. and Sky Power Group, Ltd. completed a one-for-one share swap, or the 2013 Share Swap. Upon completion of the 2013 Share Swap, shareholders holding approximately 94.8% of the equity interest in Sky Solar Holdings Co., Ltd., on an as-converted basis, as well as convertible promissory noteholders of Sky Solar Holdings Co., Ltd., exchanged their interest in Sky Solar Holdings Co., Ltd. for an equivalent equity interest in the corresponding classes of shares or in the form of convertible promissory notes in Sky Power Group, Ltd., on an as-converted and one-share-to-one-share basis. The attributable interests of the shareholders and convertible promissory noteholders of Sky Solar Holdings Co., Ltd. in our company remained the same before and after the 2013 Share Swap.

 

On April 5, 2018, we confirmed the assumption of the principal executive officer functions by Dr. Hao Wu acting on behalf of the management committee. In August 2018, Mr. Andrew (Jianmin) Wang resigned as our chief financial officer and director and we named Mr. Sanjay Shrestha as our chief financial officer and director. On November 27, 2018, we appointed Mr. Benjamin (Binjie) Duan as a director of the Company. On January 28, 2019, Mr. Sanjay Shrestha was terminated from his position as our chief financial officer and named Ms. Julie (Liwei) Zhu as our acting chief financial officer. In February 2019, Mr. Sanjay Shrestha resigned as our director.

 

On June 25, 2018, the Silent Partner filed a lawsuit against SSJ, which alleged that there were significant difference in the understandings of the silent partnership and purported to seek certain damages. In December, 2018, SSJ and Sky international Enterprise Group Ltd. have entered into a TK Interest Agreement with the Silent Partner and the Silent Partner withdrew the lawsuit it filed against SSJ. Under the terms of the TK Interest Agreement, we made a payment of JPY 2 billion (US$18 million) to the Silent Partner upon the signing of the TK Interest Agreement, and an additional JPY 13.4 billion (US$121 million) had been paid on March 29, 2019, with a combination of (i) the proceeds in the aggregate of JPY9.4 billion (US$85.7 million) from the sale of 12 Japan IPP solar parks, (ii) cash in bank of JPY3.4 billion (US$31.0 million), and (iii) the proceeds from the drawdown in the amount of JPY2.8 billion (US$25.5 million) under a loan from a third party in Japan, at which time the Silent Partners’ entire interest under the silent partnership agreement was transferred to us. See “Item 4. Information on the Company—B. Business Overview—Featured Countries—Japan—Japan Silent Partnership.”

 

Hudson alleged in a series of letters that events of default under the Note Purchase Agreement had occurred. Hudson also sent a notice of acceleration dated January 22, 2019 declaring that all Obligations (as defined in the Note Purchase Agreement), including the outstanding principal, accrued and unpaid interest and make-whole payment amount thereof, were immediately due. Hudson also initiated certain proceedings against us in connection with the Hudson Dispute as of the date of the report. For more information, see “Item 8. Financial Information — A. Consolidated Statements and Other Financial Information — Legal Proceedings — Hudson Dispute.”

 

On February 18, 2019, we received the full settlement amount of approximately US$15 million from Mr. Su pursuant to the settlement agreement between Mr. Su and us dated September 19, 2017. For impacts and ramifications of these developments relating to our senior management, please refer to “Item 3. Key Information—D. Risk Factors—Risks Related to our Business and Industry—Our future success depends significantly on the continued service of our senior management team and our ability to attract, train and retain qualified personnel,” “Item 5. Operating and Financial Review and Prospects—Major Components of Our Results of Operations” and “Item 7. Major Shareholders and Related Party Transactions— B. Related Party Transactions.”

 

We have been strengthening our presence in our existing core markets, expanding into new markets as well as strategically monetizing solar parks in certain existing jurisdictions to deploy in our core growth markets. See “—B. Business Overview—Our IPP Solar Parks” and “—B. Business Overview—Featured Countries.”

 

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Our legal and commercial name is Sky Solar Holdings, Ltd. Our principal executive offices are located at Unit 402, 4th Floor, Fairmont House, No.8 Cotton Tree Drive, Admiralty, Hong Kong Special Administrative Region, People’s Republic of China. Our registered office in the Cayman Islands is located at the offices of Codan Trust Company (Cayman) Limited at Cricket Square, Hutchins Drive, PO Box 2681, Grand Cayman, KY1-1111, Cayman Islands. Our website is www.skysolarholdings.com. Furthermore, the SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding us that file electronically with the SEC.

 

INITIAL PUBLIC OFFERING

 

In November 2014, we completed our initial public offering, in which we offered and sold 50,830,000 ordinary shares in the form of ADSs (6,630,000 of which were purchased by our underwriters through exercise of the over-allotment option granted to them by us), raising net proceeds of approximately US$46.1 million (US$6.6 million of which was raised in through the underwriters’ exercise of their option to purchase additional ADSs in full). Each of our ADSs represents eight of our ordinary shares. Our ADSs are listed on the NASDAQ Capital Market under the symbol SKYS.

 

B.                                    Business Overview

 

OVERVIEW

 

We are a global IPP. We develop, own and operate solar parks and generate revenue primarily by selling electricity. We have focused on the downstream solar market since our inception and have developed projects primarily in Asia, South America, Europe and North America. We believe our broad geographic reach and established presence across key solar markets are significant differentiators that provide global opportunities and mitigate country-specific risks. We aim to expand our current operations such as those in Japan, the United States, Uruguay, Chile, Canada and China, and establish operations in other select geographies with highly attractive solar radiation, regulatory environments, power pricing, land availability, financial access and overall power market trends. By design, we focus on the downstream PV segment, and as a result, we are technology agnostic and we can customize our solar parks based on local environmental and regulatory requirements.

 

Prior to becoming an IPP, we sold the solar parks and systems that we developed. We initiated our global IPP model in 2012. In 2013, we began to strategically reduce our system sale business in favor of the IPP model in order to internalize more value from project development and generate stable and recurring long-term cash flow. By the fourth quarter of 2013, we began to generate a majority of our revenue from selling electricity from IPP solar parks. We intend to leverage our established pipeline projects and increased financing capabilities to expand our IPP business. We also optimize our portfolio from time to time by selling solar energy systems or establishing joint ventures, depending on project economics, local power markets and the regulatory conditions.

 

We have access to a variety of financing sources and a demonstrated ability to design cost-effective project funding solutions. We are well positioned to create efficient financing solutions that are responsive to local regulatory conditions and financial markets. We believe we can leverage our global presence to reduce our financing costs with alternatives from different geographies.

 

As of December 31, 2018, we developed 328 solar parks with an aggregate capacity of 406.2 MW in Japan, China, Bulgaria, Germany, Greece, the Czech Republic, Spain, Canada, the United States and Uruguay. Under our IPP revenue model, we owned and operated 211.0 MW of solar parks, including 103.9 MW in Japan, 1.7 MW in China, 5.6 MW in the Czech Republic, 0.3 MW in Canada, 27.8 MW in the United States and 71.7 MW in Uruguay. A majority of our PPAs fix the price of electricity sold by our IPP solar parks for 20 years or more. In addition to our existing operational project portfolio, as of December 31, 2018, we had more than 380 MW of solar projects in various stages of development in countries such as Chile, Japan, Canada and the United States, consisting of 5.4 MW under construction, 136.4 MW of shovel-ready projects and approximately 242.6 MW of solar parks in pipeline. We classify 147.4 MW of these solar projects under development as advanced or qualified pipeline.

 

We believe that our proven track record of identifying and developing revenue-producing solar parks, operating under local conditions, developing local relationships and managing a global platform provide us with substantial advantages over both local and international solar park developers. We have been strengthening our presence in our existing core markets, expanding into new markets as well as strategically monetizing solar parks in certain existing jurisdictions to deploy in our core growth markets. We intend to continue selectively expanding our operations with a near-term focus on key solar markets, such as Japan, the United States, Chile, Canada and China, which we recently entered with our first DG project.

 

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Our revenue was US$65.9 million, US$56.7 million and US$64.7 million in 2016, 2017 and 2018, respectively. Our gross profit was US$35.0 million, US$33.5 and US$34.4 million in 2016, 2017 and 2018, respectively. We incurred gains of US$3.3 million in 2016, losses of US$33.1 million in 2017 and losses of US$22.1 million in 2018. Our IPP solar parks provide attractive long-term recurring revenue from selling electricity. From 2016 to 2017 and to 2018, our revenue from selling electricity from IPP solar parks changed from US$53.7 million to US$53.6 million and to US$61.4 million, representing 81.4%, 94.5% and 94.9% of our revenue, respectively. The total capacity of our IPP solar parks was 159.8 MW, 196.7MW and 211.0MW, and the total carrying value of our IPP solar parks was US$271.3 million, US$397.4 million and US$353.1 million as of December 31, 2016, 2017 and 2018, respectively.

 

OUR IPP SOLAR PARKS

 

IPP solar parks are solar power plants that we own and operate as an independent power producer. These parks sell electricity to the grid throughout their operational lives. In countries such as Japan, Bulgaria, China, the Czech Republic, Uruguay, Canada and the United States, our IPP solar parks sell power under PPAs. In countries like Chile, where the market for electricity has reached grid-parity, which occurs when the market price of energy from renewable sources is competitive with the price of conventional sources, our IPP assets will sell power in the electricity market.

 

The process for developing a solar park varies according to local regulations in each jurisdiction, although there are certain key milestones common to many jurisdictions. Generally, a developer first secures site control, typically by acquisition of the land or a long-term lease arrangement, obtains key energy permits, such as operational licenses, and enters into key agreements, such as grid connection agreements, PPAs and other off-take agreements. Prior to construction, the developer secures the appropriate zoning and environmental permissions, applicable construction permits, and project funding. When construction is complete, the solar park may be connected and begin selling electricity to the transmission grid. We classify our IPP solar parks based on these key milestones.

 

·                  Solar Parks in Operation. These solar parks have completed construction and are selling electricity.

 

·                  Solar Parks Under Construction. These solar parks have secured site control, energy permits, all key agreements, zoning and environmental permissions and construction permits.

 

·                  Shovel-ready projects. These projects have all permits required for construction and grid connection, even if those projects may lack certain non-discretionary permits for which we have begun the application process and which will be granted and maintained based on our compliance with certain administrative procedures. We must also still submit certain administrative notifications at least one month prior to construction to begin building certain shovel-ready projects in Japan. For detailed permitting requirements in each country where we have shovel-ready projects, see “—Featured Countries.”

 

·                  Solar Projects in Pipeline. These solar parks are being studied for feasibility or have achieved certain milestones, but are not yet ready for construction. Our solar projects in pipeline are classified as either “advanced pipeline,” “qualified pipeline” or “development pipeline.” We generally expect solar projects to be shovel-ready within 12 months of their designation as advanced pipeline. We expect finalization of at least one key permit or agreement for our solar projects within six months of their designation as qualified pipeline. Development pipeline solar projects are under evaluation. For more information about our solar projects in pipeline, see “—Solar Projects in Pipeline.”

 

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Solar Parks in Operation

 

The following table sets forth our IPP solar parks grouped by commercial operation dates that we owned and operated or in which we held a minority equity interest as of December 31, 2018:

 

Location

 

Connected
in

 

Number
of
Parks

 

Sky Solar
Equity
Holding

 

Sky
Solar’s
Attributable
Capacity
(MW)

 

Installation
(ground-
mounted
or rooftop-
mounted)

 

FIT
Terms
(1)

 

Price of
Electricity
(per kWh)

 

Contract
Life

 

Counterparties

 

Japan

 

2013Q1

 

1

 

100

%

0.6

 

Ground

 

Fixed

 

JPY32-40

 

20 years

 

Tokyo Electric; North East Electric; Hokkaido Electric; Kyushu Electric;

 

 

 

2013Q2

 

1

 

100

%

2.4

 

Ground

 

 

 

 

 

 

 

 

 

 

2013Q3

 

2

 

100

%

3.9

 

Ground

 

 

 

 

 

 

 

 

 

 

2013Q4

 

3

 

100

%

4.4

 

Ground

 

 

 

 

 

 

 

 

 

 

2014Q1

 

1

 

100

%

2.0

 

Ground

 

 

 

 

 

 

 

 

 

 

2014Q2

 

4

 

100

%

5.4

 

Ground

 

 

 

 

 

 

 

 

 

 

2014Q4

 

4

 

100

%

7.9

 

Ground

 

 

 

 

 

 

 

 

 

 

2015Q1

 

16

 

100

%

26.4

 

Ground

 

 

 

 

 

 

 

 

 

 

 

2015Q3

 

6

 

100

%

9.4

 

Ground

 

 

 

 

 

 

 

 

 

 

 

2015Q4

 

8

 

100

%

11.9

 

Ground

 

 

 

 

 

 

 

 

 

 

 

2016Q1

 

3

 

100

%

6.3

 

Ground

 

 

 

 

 

 

 

 

 

 

 

2016Q3

 

2

 

100

%

3.7

 

Ground

 

 

 

 

 

 

 

 

 

 

 

2016Q4

 

6

 

100

%

7.5

 

Ground

 

 

 

 

 

 

 

 

 

 

 

2017Q2

 

2

 

100

%

1.6

 

Ground

 

 

 

 

 

 

 

 

 

 

 

2018Q1

 

3

 

100

%

4.3

 

Ground

 

 

 

 

 

 

 

 

 

 

 

2018Q3

 

1

 

100

%

2.1

 

Ground

 

 

 

 

 

 

 

 

 

 

 

2018Q4

 

2

 

100

%

4.1

 

Ground

 

 

 

 

 

 

 

 

 

Subtotal

 

 

 

65

 

 

 

103.9

 

 

 

 

 

 

 

 

 

 

 

The United States

 

2014Q4

 

1

 

100

%

0.1

 

Rooftop

 

Fixed

 

US$0 21

 

20 years

 

Private Business

 

 

 

2016Q3

 

23

 

100

%

22.0

 

Ground

 

 

 

 

 

20 years

 

 

 

 

 

2018Q3

 

1

 

100

%

5.7

 

Ground

 

 

 

 

 

 

 

 

 

Subtotal

 

 

 

25

 

 

 

27.8

 

 

 

 

 

 

 

 

 

 

 

Uruguay

 

2015Q3

 

1

 

85

%

8.0

 

Ground

 

Fixed in each term

 

US$0.13

 

20 years

 

Private Business

 

 

 

2017Q3

 

5

 

85

%

63.7

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

 

6

 

 

 

71.7

 

 

 

 

 

 

 

 

 

 

 

Canada

 

2014Q4

 

2

 

100

%

0.2

 

Rooftop

 

Fixed

 

CAD 0.713

 

20 years

 

IESO(3)

 

 

 

2018Q2

 

1

 

100

%

0.1

 

Rooftop

 

Fixed

 

CAD0.213

 

20 years

 

IESO(3)

 

Subtotal

 

 

 

3

 

 

 

0.3

 

 

 

 

 

 

 

 

 

 

 

China

 

2018Q4

 

1

 

100

%

1.7

 

Rooftop

 

Fixed

 

RMB0.66

 

25 years

 

GCL New Energy, Jinko Solar

 

Subtotal

 

 

 

1

 

 

 

1.7

 

 

 

 

 

 

 

 

 

 

 

Czech Republic

 

2009Q4

 

1

 

100

%

2.3

 

Ground

 

Fixed with 2% annual inflation rate(2)

 

EUR0. 45-0.47

 

20 years

 

CEZ Distribuce a.s.; E. ON Distribuce; CEZ Prodej s. r. o.

 

 

 

2010Q2

 

1

 

100

%

1.0

 

Ground

 

 

 

 

 

 

 

 

 

 

 

2010Q3

 

1

 

100

%

2.3

 

Ground

 

 

 

 

 

 

 

 

 

Subtotal

 

 

 

3

 

 

 

5.6

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

211.0

 

 

 

 

 

 

 

 

 

 

 

 


(1)                                     Pricing terms are stipulated in the relevant laws and regulations in each country as referred to by the relevant PPAs

 

(2)                                     The FIT term is fixed FIT based on a pricing matrix established by the Energy Regulatory Office with a 2% annual inflation adjustment to market rate reset by the Energy Regulatory Office.

 

(3)                                     The Independent Electricity System Operator (“IESO”) is the successor entity to the Ontario Power.

 

*                                           As of December 31, 2018, we owned four solar parks totaling 3.7 MW through our minority equity positions in RisenSky Solar Energy S.a r.l., which we operated and maintained. In 2018, these IPP solar parks received approximately 1,188 to 1,405 radiation hours. We do not foresee having a significant number of development solar parks in our pipeline in Bulgaria. We will continue to operate our existing assets in Bulgaria and currently have no plans to divest such assets. However, we do not expect that Bulgaria will be a significant contributor to our capacity growth going forward.

 

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(4)                                     Hudson exercised its purported rights to enforce its share pledge over Energy Capital Investment S.à.r.l. and its 100% owned subsidiary Renewable Capital Investment 2 S.L in connection with the Note Purchase Agreement. Therefore, Energy Capital Investment S.à.r.l. and Renewable Capital Investment 2 S.L. and its  five consolidated Uruguay special purpose vehicle entities, were taken over by Hudson on January 24, 2019, and are no longer our subsidiaries as of the date of this annual report. Subject to the outcome of the New York litigation, we intend to take action to regain the control of these two companies, but we cannot assure you that we may be successful. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We have been involved in several actions and proceedings, including in connection with the Hudson Dispute, and being named as a defendant in a putative class action lawsuit. We have also been, and in the future may be, the target of other lawsuits or other allegations by third parties, which  could adversely affect our business, financial conditions, results of operations, cash flows, reputation and our ADS trading price.”

 

*                                           We disposed of 12 IPP solar parks in operation in Japan with US$85.7 million, or 23.4MW to finance payment to the Silent Partner to purchase TK interest pursuant to TK Interest Agreement in March 2019.

 

Solar Parks Under Construction

 

The following table sets forth our solar parks under construction grouped by region as of December 31, 2018:

 

Location

 

Sky Solar
Equity Holding

 

Number of
Solar Parks

 

Attributable
Capacity

 

Ground/Rooftop

 

Scheduled
Commercial
Operation
Date

 

PPA Terms

 

(MW)

 

Japan

 

Sky Solar 100%

 

4

 

5.4

 

Ground

 

2019Q2

 

20 years fixed FIT

 

Total

 

 

 

4

 

5.4

 

 

 

 

 

 

 

 

Shovel-Ready Projects

 

The following table sets forth our shovel-ready projects grouped by region and percentage of ownership as of December 31, 2018:

 

Location

 

Equity Holding

 

Number of Solar
Parks

 

Attributable
Capacity

 

Ground/Rooftop

 

PPA Terms

 

Japan(1)

 

Sky Solar 100%

 

15

 

62.3

 

Ground

 

20 years fixed FIT

 

Chile(2)

 

Sky Solar 100%

 

7

 

74.1

 

Ground

 

specially stated in PPAs

 

Total

 

 

 

22

 

136.4

 

 

 

 

 

 


(1)                                 In Japan, after securing a site and applying for zoning and environmental permits, we seek a Facility Certification from the energy authority. We may then pursue a connection agreement with the local utility, which contains the material terms for the final PPA, which is formally entered into after construction has been completed. In addition, we normally submit certain administrative notifications at the time we receive funding. As of December 31, 2018, 15 of our shovel-ready projects representing a total of 62.3 MW were still waiting for at least one or more permissions under either the Forest Land Act (shinrin hou) Law No. 249 of 1951, as amended) and the Agricultural Land Act (nou chi hou) (Law No. 229 of 1952, as amended) and the submission or notifications under the Soil Contamination Act (dojo osen taisaku hou) (Law No. 53 of 2002, as amended). These permissions are generally considered granted unless our application falls into one of the non-grant categories provided for in these laws and their related administrative ordinances.

 

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(2)                                 In Chile, there is no requirement for a license to produce electricity, and a PPA is not necessary if electricity is to be sold in the spot market. Once a project has site control for the plant and transmission lines, it may seek an interconnection agreement. Prior to commencing construction, it must have an approved environmental plan. Construction permits are obtained through the local municipality. Our shovel-ready projects in Chile have secured all permits for construction and construction can begin upon receipt of funding.

 

Solar Projects in Pipeline

 

Solar parks in the pipeline are divided into three categories:

 

·                  Advanced pipeline solar projects. These solar parks have secured both site control and at least one other milestone permit or agreement. In order for them to obtain the necessary permits and agreements for project funding, we must complete additional administrative and regulatory steps in adherence with applicable regulations. We generally expect solar parks to be shovel-ready within 12 months of their designation as advanced pipeline.

 

·                  Qualified pipeline solar projects. These solar parks have been approved for investment by the investment committee and have secured site control, but have only begun applying or negotiating for key permits or agreements. The time required to obtain these permits and agreements varies according to the local regulations in each jurisdiction, but we expect finalization of at least one key permit or agreement within six months of a project’s classification as qualified pipeline.

 

·                  Development pipeline solar projects. These are solar parks are in markets that are under evaluation by our regional development teams and investment committee for development feasibility, but for which we have not otherwise taken any steps in the project development process.

 

The following table sets forth our current pipeline solar parks according to the classifications described above. Due to our ongoing business, the numbers in this chart are subject to change as solar parks continue through the development process:

 

 

 

Stage of Development

 

Location

 

Advanced Pipeline

 

Qualified Pipeline

 

Development Pipeline

 

 

 

(MW)

 

North America

 

42.8

 

0.3

 

 

Latin America

 

104.3

 

 

 

Asia

 

 

 

95.2

 

Total

 

147.1

 

0.3

 

95.2

 

 

OUR SOLAR ENERGY SYSTEM SALES BUSINESS

 

Solar Energy System Sales consists of our provision of Pipeline plus EPC services and the transfer of completed solar parks. The following table outlines the capacities of the solar energy systems we sold during the periods indicated:

 

 

 

Year Ended December 31,

 

 

 

2016

 

2017

 

2018

 

Location

 

Capacity (MW)

 

Number of
Solar Parks

 

Capacity (MW)

 

Number of
Solar Parks

 

Capacity (MW)

 

Number of
Solar Parks

 

Europe

 

 

 

 

 

 

 

 

 

 

 

 

 

Greece

 

 

 

23.0

 

20

 

 

 

Spain

 

 

 

 

 

0.9

 

12

 

North America

 

 

 

 

 

 

 

 

 

 

 

 

 

Canada

 

9.2

 

17

 

1.6

 

6

 

 

 

Asia

 

 

 

 

 

 

 

 

 

 

 

 

 

Japan

 

 

 

0.5

 

6

 

46.1

 

5

 

Total

 

9.2

 

17

 

25.1

 

32

 

47.0

 

17

 

 

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FEATURED COUNTRIES

 

Japan

 

We entered the Japanese market in 2009. As of December 31, 2018, we owned and operated 65 IPP solar parks totaling 103.9 MW, which are located in Tokyo, Chugoku, Kyushu, Hokkaido, Kansai and Tohoku. In 2017, these IPP solar parks received approximately 1,200 to 1,300 radiation hours. We also had 5.4 MW of solar parks under construction and 62.3 MW of shovel-ready projects ready to be developed upon receipt of funding. Additionally, we had 95.2 MW of solar parks in our pipeline in Japan. In Japan, our projects eligible for FIT 1 included 89.3 MW in operation, 3.7 MW under construction and 8.8 MW shovel-ready, and our projects eligible for FIT 2 included 14.6 MW in operation, 1.7 MW under construction and 8.9 MW shovel-ready projects, and our projects eligible for FIT 3 included 44.0 MW shovel-ready, and our projects eligible for FIT 4 included 0.6 MW shovel-ready, as of December 31, 2018. We cooperated with Renova, a listing company in Japan, and NEC Capital, to invest in a 40.8 MW project in Japan on March 30, 2018. We invested JPY529 million (US$4.7 million) for 45% of the distribution of profit or loss on such project. This project is expected to complete in October 2021.

 

Our shovel-ready projects in Japan have secured site control, energy permits and all key agreements that are required for construction of solar parks in Japan. As of December 31, 2018, 15 of our shovel-ready projects representing a total of 62.3 MW were still waiting for at least one or more permissions under either the Forest Land Act (shinrin hou) Law No. 249 of 1951, as amended) and the Agricultural Land Act (nou chi hou) (Law No. 229 of 1952, as amended) and the submission or notifications under the Soil Contamination Act (dojo osen taisaku hou) (Law No. 53 of 2002, as amended). These permissions are generally considered granted unless our application falls into one of the non-grant categories provided for in these laws and their related administrative ordinances. We applied for these permissions no later than nine months prior to the scheduled date of construction for a particular project, and as a result, we expect these permissions to be approved approximately at the commencement of construction. We consider Japan to be a core growth area going forward.

 

Japan Silent Partnership

 

Sky Solar Japan K.K., or SSJ, our wholly owned subsidiary in Japan, entered into two silent partnership agreements on September 9, 2014 with two groups of third party investors, or the Silent Partners, pursuant to which the Silent Partner provided financing and SSJ was to develop and operate certain solar parks in Japan, or the SSJ Silent Partnership Assets. On August 28, 2015, the two silent partnership agreements were amended and restated. On the same day, one of the two Silent Partner transferred its interests in the silent partnership to the other Silent Partner, which is, currently serving as the sole Silent Partner under the two silent partnership agreements.

 

In accordance with the agreements, SSJ contributed solar power projects with an agreed valuation of approximately JPY5.2 billion (US$46.1 million) pursuant to the original agreements and solar power projects with an agreed valuation of approximately JPY4.1 billion (US$36.4 million) pursuant to the amended agreements, which means that SSJ has contributed solar power projects with an agreed valuation of approximately JPY9.3 billion (US$82.5 million) in total so far. The Silent Partner contributed JPY9 billion (US$79.0 million) in cash, including JPY5 billion (US$43.5 million) in cash pursuant to the original agreements, and JPY4 billion (US$35.5 million) in cash pursuant to the amended agreements, JPY2 billion (US$17.7 million) of which would be used by SSJ to extend a loan, or upstream loan, of the same principal amount to Sky International Enterprise for, among others, the development of certain PV projects in Asia and the Americas, and the remaining JPY2 billion (US$17.7 million) of which would be used by SSJ to continue executing project pipelines in Japan. The upstream loan is secured by a pledge of all shares held by Sky International Enterprise in SSJ. As a result of these contributions, the SSJ and the Silent Partner’s original distribution percentages were 51.07% and 48.93%, which may be adjusted subsequently, for example, to result in the Silent Partner enjoying a 15% cumulative IRR under the silent partnership agreement. There were a total of 65 contributed solar parks with an aggregate capacity of 106.1 MW, consisting of approximately 93.6 MW which were completed and in operation, approximately 3.8 MW under construction and approximately 8.7 MW shovel-ready as of December 31, 2018.

 

No separate legal entity was established in connection with the silent partnership agreement. The SSJ Silent Partnership Assets are held and managed through the SSJ legal entity, subject to the provisions of the silent partnership agreement. The Silent Partner is not involved in the investment decisions associated with management of the SSJ Silent Partnership Assets or other assets and businesses which continue to be held and operated by SSJ, outside the auspices of the silent partnership agreement. Pursuant to the original agreements, distributable profits from the SSJ Silent Partnership Assets shall be subject to a preferred 15% internal rate of return, or IRR, priority distribution, as follows: first distributed to the Silent Partner in proportion to its respective capital contributions, until a cumulative annual IRR of 15% on capital contributions is achieved, and any remaining profits shall be distributed to SSJ until a cumulative annual IRR of 15% of SSJ’s contributed amount, based on the agreed valuation, is achieved. The amended agreements removed the preferred 15% IRR priority distribution requirement, and therefore, any distributable profits from the SSJ Silent Partnership Assets shall be distributed to SSJ and the Silent Partner pursuant to their respective percentages of contribution. The Silent Partner shall only bear losses up to the amount of money they financed.

 

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Since the middle of 2017, our Silent Partner in Japan has sent us notices, which allege that we have breached certain terms of the silent partnership agreement. Based on the advice of our Japanese counsel, we do not believe these allegations are reasonable, but nonetheless intend to amicably resolve the disputes with the Silent Partner to minimize the distraction of our management and disruption to our business. On June 25, 2018, Silent Partner filed a lawsuit against SSJ, which alleged that there were significant difference in the understandings of the silent partnership and purported to seek certain damages. In December, 2018, SSJ and Sky international Enterprise Group Ltd. have entered into the TK Interest Agreement with the Silent Partners and the Silent Partners withdrew the lawsuit it filed against SSJ. Under the terms of the TK Interest Agreement, we made a payment of JPY 2 billion (US$18 million) to the Silent Partners upon the signing of the TK Interest Agreement. On March 29, 2019, we made a payment of JPY 13.4 billion (US$121 million) with a combination of (i) the proceeds in the aggregate of JPY9.4 billion (US$85.7 million) from the sale of 12 Japan IPP solar parks, (ii) cash in bank of JPY 3.4 billion (US$31.0 million), and (iii) the proceeds from the drawdown in the amount of JPY 2.8 billion (US$25.5 million) under a  loan from a third party in Japan to purchase TK interest pursuant to the TK Interest Agreement, at which time the Silent Partners’ entire interest under the silent partnership agreement was transferred to us.

 

United States

 

We entered the US market in 2015, with the formation of Sky Capital America Inc. Through this subsidiary, we have been evaluating and pursuing potential opportunities to acquire secondary permits and operating solar park assets. We have brought on additional personnel and resources to develop, analyze and execute significant pipeline opportunities.

 

As of December 31, 2018, we owned and operated 25 solar parks in the United States totaling 27.8 MW. Additionally, we had 42.8 MW of solar parks in advanced pipeline in the United States.

 

We are combining United States and Canada operation as North America region and are continuing evaluating and pursuing additional opportunities to either acquire US projects for our development pipeline or through joint venture or other arrangements. We expect it will be a core growth area going forward.

 

In addition, we are also exploring new applications of solar energy, or other source of renewable energy, which we believe can bring us new business opportunities in the future:

 

Remote and Mining Micro-Grid

 

The combination of utility-scale solar energy with energy storage may have significantly cost advantage compare to the oil- based source of energy, for mining business in remote communities. We are exploring the business opportunities in the North America region.

 

Energy Storage with Solar Energy in Commercial Market

 

Many commercial customers are face increasing or unpredictable energy costs due to outages, peak load costs and the time of use costs. The combination of solar energy and energy storage has been recognized as one of the solutions to manage the energy cost. We are working with some potential commercial partners and exploring the business opportunities.

 

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Electric Vehicles

 

The continuously growing of EV market is driving the vehicle batteries cost down, and is also creating a growing market for the batteries recharging business. With that growth, we are exploring business opportunities that Solar Energy to be applied for the EV batteries recharging process.

 

Anaerobic Digestor (AD)

 

In multiple states, oncoming legislatively-driven mandates to divert organics from landfills are forcing many companies and municipalities to seek alternative disposal methods. AD technology can convert these wastes into a baseload renewable energy and can decrease disposal trucking and tipping fees while at the same time providing a source of revenue and offsetting energy needs.

 

Uruguay

 

We entered the Uruguayan market in 2012. As of December 31, 2018, we owned and operated 71.7 MW of solar parks, all of which were connected by September 2017. In 2018, these solar parks received radiation of approximately 1,600 to 1,700 hours per year.

 

We consider Uruguay to be a core growth area going forward.

 

Chile

 

We entered the Chilean market in 2011. As of December 31, 2018, we had 74.1 MW of shovel-ready projects ready to be developed upon receipt of funding. Additionally, we had 104.3 MW of advanced pipeline in our Chilean pipeline. In 2018, these solar parks received approximately 1,600 radiation hours per year. We believe our solar parks in Chile will have operating lives of 25 to 30 years. Continued reduction of EPC costs related to our Chilean projects are driving more favorable project economics.

 

Our shovel-ready projects in Chile have secured site control, energy permits and have received any zoning, environmental or other permits required for construction of solar parks in Chile. We believe we will be able to finalize key agreements and begin construction upon the receipt of funding via project financing arrangements that are being negotiated. It typically takes one to two years to develop a shovel-ready project in Chile.

 

Canada

 

We entered the Canadian market in 2009. In 2018, we completed construction of one 0.1MW rooftop facility. As of December 31, 2018, we fully owned three rooftop solar projects totaling 0.3MW, and had a partial interest in two ground-mount projects totaling 0.3MW, which were in pipeline stage.

 

In 2018, our operating solar parks in Canada received radiation of approximately 1,150 hours. Our projects and large renewable procurement contracts in Canada sell electricity to utility companies via the IESO.

 

In recent years, there have been certain notable changes in the Ontario government’s energy policy regarding PPAs, particularly as a consequence of the change in administration after the June 2018 election. As a result, taking into account the actions of the IESO, the decisions of the previous government and the government elected in June 2018, we have seen negative impacts to our current and future business in the area.

 

We have made submissions to IESO to seek permitted compensation for development costs, and costs recovery is expected to be significantly less than the actual amount of development costs, due to the nature of the recovery cap provided in the contract.

 

China

 

In March 2018, Suzhou Tianlian New Energy Co., Ltd, which is 100% held by Wuxi Tianlian New Energy Development Co., Ltd, entered into two 25-year PPA with two wholly-owned subsidiaries of Shenzhen Kaifa Technology Co., Ltd. to develop, own and operate a 1.7 MW rooftop solar project in Suzhou, China. We completed the development of the project in October 2018. Upon completion, Shenzhen Kaifa Technology Co., Ltd. purchased 98% of the electricity generated from the project, with the balance being sold to the State Grid. This marked our first DG project in China.

 

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We also entered into two 25-year PPAs with two private companies to develop, own and operate another 1.9 MW rooftop solar projects in Suzhou and Kunshan by the end of first quarter of 2019.

 

We currently derive a majority of our revenue from electricity sale from our owned and operated solar parks, and be oriented to develop self-use industrial and commercial spare-net projects, household projects, and poverty alleviation projects, through both independent development and collaborations. We also intend to own fully operational solar assets, as well as solar energy system sales assets to external third parties, which are mainly state-owned conglomerates and public companies. We will continue evaluate acquisition targets to build the operating assets in China and explore the multi-energy complementary energy solutions including PV power generation with energy storage, smart micro-grid, and other forms of energy based on PV.

 

We consider China a core growth area going forward, where our primary focus will be on the DG market.

 

Partnership and Disputes with Hudson Solar Cayman LP

 

In September 2015, we, through our then wholly-owned subsidiary Energy Capital Investment S.à.r.l., formed a partnership with Hudson, private equity and infrastructure firm dedicated exclusively to investing in renewable power and clean energy.

 

As part of this partnership, Hudson has invested a total of approximately US$50 million by way of convertible notes, for purpose of funding construction of approximately 84.2 MW of solar projects in Uruguay (the “Uruguay Projects”), as well as the Sunpeak Projects. On their terms, the convertible notes are due to mature on the earlier of (i) the twentieth anniversary of the initial amortization date and (ii) August 19, 2036. The initial amortization date in this context refers to the earlier of (i) the date which is nine months after the date on which a project enters into full commercial operation, achieves preliminary acceptances, achieves technical acceptance or achieves other similar milestones, as determined in accordance with the primary construction contract(s) for such project and (ii) twenty-four months after the convertible note purchase date. According to the convertible notes documents, a portion of outstanding amount of the notes and interests equal to the equity value of the relevant project company multiplied by the percentage ownership in such project company can be converted into holding company or project company equity owned by Hudson. This conversion feature contemplates a 49% stake in the holding company which owns the Sunpeak Projects and a 34% to 49% stake in the project companies which own the Uruguayan projects. This equity conversion feature also provides that, in the event such conversion does not occur or is delayed beyond the dates determined by the notes associated with the relevant project, we shall repay the principal and interest on a semi-annually basis according to the applicable note repayment schedule. As of December 31, 2018, Hudson had funded US$48.2 million under these convertible notes to fund the transaction costs in connection with the Hudson partnership. As of March 31, 2019, no equity conversions have taken place, with the result that we have commenced making payments of the principal and interest. As of March 31, 2019, we have repaid Hudson a total of US$7.2 million, representing principal and interest, and Hudson has not made any allegations of any payment default.

 

Hudson alleged in a series of letters that events of default under the Note Purchase Agreement had occurred. Hudson also sent a notice of acceleration dated January 22, 2019 declaring that all Obligations (as defined in the Note Purchase Agreement), including the outstanding principal, accrued and unpaid interest and make-whole payment amount thereof, were immediately due. Hudson also initiated certain proceedings against us in connection with the Hudson Dispute as of the date of the report. For more information, see “Item 8. Financial Information — A. Consolidated Statements and Other Financial Information — Legal Proceedings — Hudson Dispute” for a description of the Hudson Dispute, which remains unresolved, and the related proceedings and actions.

 

We intend to continue to vigorously defend against Hudson’s actions and proceedings in order to minimize interruptions to its business and operations.

 

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Czech Republic

 

We entered the Czech market in 2009. As of December 31, 2018, we owned and operated three IPP solar parks totaling 5.6 MW. In 2018, these IPP solar parks received approximately 1,100 to 1,200 radiation hours.

 

We do not foresee having a significant number of development projects in our pipeline in the Czech Republic. We will continue to operate our existing assets in the Czech Republic and currently have no plans to divest such assets. However, we do not expect that the Czech Republic will be a significant contributor to our capacity growth going forward.

 

Spain

 

We entered the Spanish market in 2009. By the end of 2018, we have transferred all 12 solar parks totaling 0.9 MW.

 

We do not foresee obtaining a significant number of development solar parks in our pipeline in Spain. We will continue to operate our existing assets in Spain and currently have no plans to divest such assets. However, we do not expect that Spain will be a significant contributor to our capacity growth going forward.

 

Greece

 

We entered the Greek market in 2009. As of December 31, 2018, we did not own or operate any IPP solar parks, or have any shovel-ready projects ready to be developed or any solar parks in our pipeline in Greece.

 

Customers and Marketing

 

We have historically sold solar energy systems to off-takers and sold electricity to the transmission grid. Purchasers of our solar energy systems included utility companies, independent power developers and producers, commercial and industrial companies, and other solar energy system owners. Purchasers of our electricity include government electricity utilities in each country where we operate, among others. For detailed information about our customers who contribute over 10% of our total revenue during the relevant periods, see “Item 5. Operating and Financial Review and Prospects—Major Components of Our Results of Operations.”

 

Members of our senior and local management team routinely meet with industry players and interested investors. Our business development teams around the world have significant experience building business in local markets and actively pursue growth opportunities in all major markets. We promote our industry reputation by participating in local trade conferences and other industry events and forums, which provide access to key local industry players and government authorities that can help us identify leads and other growth opportunities. We intend to continue to increase our marketing efforts.

 

Market Due Diligence

 

Before we enter into a new market or make any major investments, our regional development teams prepare market analysis reports and financial models, including key financial assumptions, to guide us in sourcing, evaluating and executing solar parks.

 

The report includes information on overall market conditions, renewable resources regulations, an analysis of our local strengths and weaknesses, average cost estimates, project development procedures, a detailed list and analysis of tasks and requisite authorizations, a list of key project milestones, the major risks of projects in the market and an action plan outlining requirements for pursuing projects in the market.

 

We update the market analysis report quarterly, and as needed, based on changes in the market or more accurate information.

 

We also engage reputable law firms and consulting firms to investigate the validity of regulatory permits, property laws, solar regulations, environmental laws, and tax and incentive policies, with particular focus on any PV or other renewable energy regulatory environment and policies.

 

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Permit Development

 

We generally act as a primary developer, especially in markets with abundant solar resources, attractive financing sources or long-term green energy subsidies, such as Japan. Under our primary development model, we obtain site control rights for a solar park, obtain permits required for construction and negotiate grid connection agreements and PPAs.

 

We may also act as a secondary developer. Under our secondary development model, we buy projects in various stages of permit development and continue developing those solar parks. We pursue secondary permit development in markets with relatively liquid markets for permits such as in the United States or Canada.

 

As of December 31, 2018, a majority of our solar parks and solar projects in pipeline in terms of capacity have been undertaken by us as a primary developer. We expect the proportion of solar parks which we pursue under primary development to decrease going forward, as we ramp up acquisitions and secondary permit development.

 

Primary Permit Development

 

The following diagram illustrates our primary permit development:

 

 

Site Selection

 

We typically receive details of potential project sites from our business partners, previous solar park owners, national or local governments, public sources of local information, overseas engineering exhibitions or overseas business liaison organizations. We systematically source solar parks in each of the different markets in which we operate based on land cost, solar radiation, grid connection capacity, protected land status and other project information. If the project site is suitable for development, the regional development team submits a site assessment report on the land and other related information to the regional managing director, who submits a project budget to our corporate headquarters for approval.

 

Feasibility Study

 

After selecting a site, we strive to reduce risks by conducting a thorough feasibility study and identifying potential issues.

 

We target projects we believe to have an appropriate balance of financial returns, costs and risks.

 

Our in-house technical team, along with external experts we engage as-needed, investigate items such as engineering specifications and solar radiation analysis. We pay specific attention to potential delays and cost overruns, grid capacity and additional costs which may not be captured in the technical design.

 

Our investment and financial teams perform financial forecasts based on information about the financial prospects of the solar park and the local energy market to make a profitability estimate and adjust our capital plan accordingly.

 

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Securing Permits

 

After the project development budget is approved, the regional development team begins project development. Permit and licensing requirements vary, depending on the jurisdiction of the solar park, but the key permits, licenses and agreements typically required for solar parks include land acquisition or lease contracts, environmental impact assessments, building permits, planning consents, grid connection contracts and PPAs. The government authorities and other stakeholders that are consulted vary from country to country but usually include the local or regional planning authority, electricity utilities, local communities, environmental agencies, as well as health and safety agencies.

 

The regional development team provides an update on project development to the relevant regional and corporate departments on a regular basis, including, among other things, information on the status of the requisite permits and, for more significant solar parks, detailed action and status updates.

 

Secondary Permit Development

 

The following diagram illustrates our secondary permit development:

 

 

For our secondary development solar parks, we acquire shovel-ready projects or close to shovel-ready projects from third parties. When we identify a suitable solar park for acquisition, we perform thorough due diligence based on documentation, financial projections and the legal status of each permit. Our regional and corporate EPC teams analyze engineering, design and technical risks. We also retain external EPC consultants for particular regions or solar parks as needed.

 

Prior to signing a definitive acquisition agreement, the regional development team provides an application to our investment committee which includes the major terms of the solar park acquisition agreements, an economic analysis, an internal technical due diligence report and other project materials.

 

ENGINEERING, PROCUREMENT AND CONSTRUCTION

 

EPC services include engineering design, construction contracting and management, procurement of PV modules, balance-of-system components and other components. We generally outsource construction to third parties and use our in-house capabilities for engineering and procurement.

 

Engineering

 

Through engineering design, we aim to reduce the risks, reduce the costs and improve the performance of our solar parks. The engineering design process includes the site layout and the electrical design as well as assessing a variety of factors to choose an appropriate technology and the modules and inverters in particular.

 

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Procurement and Construction

 

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

 

We choose our suppliers and third-party contractors through a bidding process or through our affiliates or other cooperative arrangements with various manufacturers and contractors. The relevant departments of our headquarters organize and collect bids, communicate with bidders and coordinate with our regional development teams to meet local technical and legal requirements.

 

PV Module Procurement

 

PV modules are the primary equipment of our solar parks and the costs of PV modules generally constitute a substantial portion of the average total system costs. We procure our PV modules from a broad range of suppliers.

 

Our purchasing decisions take into consideration technical specifications (including size, type and power output) bid price, warranty and insurance programs, spectral response, performance in low light, nominal power tolerance levels, degradation rate, technical support and the reputation of the supplier. We generally require warranties for defects in materials or workmanship for a typical duration of 5 to 10 years and a warranty for module capacity under normal testing conditions for a duration ranging from 10 to 25 years (97.5% of capacity for the first year with a 0.7% linear degradation in capacity every year thereafter).

 

We are generally required to pay 100% of the purchase price within a period ranging from three months to six months after receipt, inspection and acceptance of the PV modules.

 

Third-party Contractors

 

We engage third-party contractors for construction. We employ a number of measures to manage and monitor the performance of such contractors in terms of both quality and delivery time and to ensure compliance with the applicable safety and other requirements. For example, we generally have on-site supervisors and hold regular on-site meetings with the third-party contractors to monitor their work to ensure that projects progress according to schedule and adhere to quality standards. We also conduct periodic inspections to examine project implementation and quality standards compared to our project planning and prepare periodic reports for review and approval by the relevant departments in our corporate headquarters. If we identify any quality or progress issues which are attributable to the work of the third-party contractors, we will have further follow-up discussions with the third party contractors and monitor their rectification work.

 

We also require our third-party contractors for construction and installation to comply with applicable laws and regulations regarding work safety as well as our own production safety rules and policies. We examine and keep records of the production- related safety documentation and insurance policies of our third-party contractors. All production-related tools and equipment used by our third party contractors must be compliant with and certified by applicable regulatory standards. Our third-party contractors should also regularly provide their internal records relating to production safety (for example safety production training and safety inspections) to us, and we also conduct regular safety supervision and inspection on the third-party contractors.

 

Under our third-party contracting agreements, we are generally entitled to compensation if the third-party contractors fail to meet the prescribed requirements and deadlines under their contracting agreements. We generally negotiate to pay our contractors approximately 10% of the contract price after the expiration of the quality warranty period, which generally lasts two years, or, if we pay all of the contract price upon completion of the solar park, require the contractor to provide a bond in respect of the warranty obligations.

 

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Commissioning and Warranties

 

When the EPC contractor notifies the regional solar park team of on-grid operation, the regional solar park team thoroughly tests each aspect of the solar park, usually for a period of one month. Commissioning tests generally include a detailed visual inspection of all significant aspects of the plant, an open circuit voltage test and short circuit current test prior to grid connection, and a direct-current test after connecting to the power grid. These tests are conducted in order to ensure that the plant is structurally and electrically safe, and is sufficiently robust to operate as designed for the specified project lifetime. We have not experienced any material delays in construction or unsatisfactory workmanship with respect to our solar parks. Following the commissioning, the solar park is handed over to the new owner.

 

In addition to the warranties provided by the manufacturers of modules and balance-of-system components, EPC contractors also typically provide a limited warranty against defects in workmanship, engineering design, and installation services under normal use and service conditions for a period of one to two years following the energizing of a section of a solar power plant or upon substantial completion of the entire solar power plant. In resolving claims under the workmanship, design and installation warranties, the new owner has the option of remedying the defect to the warranted level through repair, refurbishment, or replacement.

 

Operations and Maintenance

 

We operate and maintain our own IPP portfolio and substantially all of the solar parks built by us, including solar parks held by other parties pursuant to separate contractual agreements. We utilize customized software to monitor the performance and security of our solar parks in a real-time basis. Our O&M platform in Bulgaria monitors solar parks in Europe, while our platform in Tokyo monitors solar parks in Japan.

 

We regularly maintain our solar farms with an intention to maximize the utilization rate, rate of power generation and system life of our solar parks. We engage on-the-ground contractors who are on-call to promptly remedy any issues that may arise.

 

Solar parks have no moving parts and consequently low operations and maintenance costs. The warranty period of inverters and transformers is 5 to 10 years, while the warranty period for PV modules is 25 years and the FIT regime is generally 20 years. The effective life of inverters and transformers is 10 years, while the effective life of PV modules is 25 years. The owners of the solar parks will bear the costs of replacing equipment after the expiration of the warranty periods.

 

Solar Park Project Financing

 

The financing of a solar park is typically arranged by the project sponsor who sets up a project company, a special purpose vehicle, to own a particular solar park or portfolio. Contracts and other agreements are typically entered into under the name of the project company, which in certain cases is an affiliate of which we hold the non-controlling interests.

 

Construction costs are funded by our working capital. Where possible, we seek to negotiate favorable credit terms with our equipment suppliers or EPC contractor, such that payment is not due until several months following the completion of construction and connection. Following connection in order to optimize the solar park’s capital structure, pay our contractors and replenish our working capital, we typically pledge the solar park assets to raise debt financing. Such debt financing usually has a term of over 15 years.

 

Debt financing for our solar parks in the Czech Republic, Canada, Uruguay, United States and Japan is typically obtained from local banks or other financial institutions. For example, in December 2015, we entered into project-specific facility agreements with total amount of CAD 23.2 million (US$16.8 million) with a bank in Canada. In 2016, we entered into facility agreements with total amount of JPY 6,223,601,618 with local banks in Japan. In 2017, we entered into facility agreements with US$20.7 million for our projects in the United States with banks in the United States. In 2018, we entered into facility agreements with total amount of JPY 3.42 billion with local banks in Japan and US$4.4 million with banks in the United States.

 

In Latin America, we are also seeking to arrange debt financing for projects from regional banks in that area as well as international financing sources. In July 2015, debt financing application for six of our projects in Uruguay was officially approved by Inter-American Development Bank, with total amount of US$82.3 million, which was secured in part with equity from a strategic partner. In 2016, we closed such project financing, and all the US$82.3 million had been drawn down as of December 31, 2018.

 

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Acquisition of Assets

 

We may from time to time acquire businesses, solar parks or other assets from related parties or independent third parties which we believe will complement our current operations and expansion strategies. A majority of our directors, including all of our independent directors, must approve such acquisitions.

 

With respect to the acquisition of solar parks, our board of directors shall formulate a uniformed standard accessing target assets, and such standard may be adjusted from time to time based on our company’s business, financial condition and results of operations. Our board of directors may consider the following criteria, among others:

 

·                  the internal rate of return of the project before leverage;

 

·                  our debt-service coverage ratio;

 

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

 

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

 

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

 

·                  clear and reliable opinions from third party professionals after thorough technical, financial, tax and legal due diligence; and

 

·                  adequate payment terms matching relevant milestones.

 

In connection with the acquisition of any business from a related party, if any part of the consideration in such acquisition is our securities, the value of such acquisition is equivalent to 20% or more of our market capitalization (as measured as an average over the 30 days prior to the date of determination) and our market capitalization as so measured is less than US$1.0 billion, we will engage an independent consulting or valuation firm to assess the transaction. Such acquisition will be subject to the approval of two- thirds of all shareholders who participate (in person or by proxy) in a shareholders’ meeting approving such transaction after sufficient notice is given to ADR holders to participate in any such meetings.

 

If we have purchased assets from a related party during any twelve month period (the “Related Party Purchases”), and the aggregate dollar value of the consideration for the Related Party Purchases during the twelve month period preceding the most recent Related Party Purchase, together with the most recent Related Party Purchase, is at least equivalent to 20% or more of our market capitalization (as measured as an average over the 30 days prior to the most recent Related Party Purchase) and our market capitalization as so measured is less than US$1.0 billion, the most recent Related Party Purchase will be subject to the approval of two-thirds of all shareholders who participate (in person or by proxy) in a shareholders’ meeting approving such transaction after sufficient notice is given to ADR holders to participate in any such meetings. For more information about acquisitions from related parties, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.”

 

Our Historical Project Affiliates

 

We have historically formed project affiliates for solar park co-investment with partners who seek to build PV assets overseas. We adopted minority positions in each of the affiliates, with rights that give us significant influence over the entity. The majority owner of our affiliate maintains control and management over the affiliate. Participating in these entities allows us to provide our project development services to the affiliate, while increasing the confidence of our partners in our interest in the long- term potential of the IPP solar parks. As of the date of this annual report, we or Sky Solar Holdings Co., Ltd., a former shareholder of our parent company, held equity interests or are currently holding equity interests in eight affiliates, ChaoriSky Solar Energy S.a r.l., RisenSky Solar Energy S.a r.l., China New Era International Limited, Oky Solar Holdings, Ltd., 1088526 B.C. Ltd. and its subsidiaries, 1091187 B.C, Ltd. and its subsidiaries, OKY Solar 1 K.K and OKY Solar Omut K.K. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.”

 

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Partners that are module manufacturers are able to contribute their modules to the affiliates and we are able to sell permits and provide EPC services. In addition, the majority owner of our affiliates generally provides EPC bridge financing or corporate guarantees for long-term loans. When the solar park is complete, the majority owner may purchase our minority equity position in the affiliate or continue with the existing equity arrangement. In addition, the affiliate may sell the solar park to an independent third- party or to the affiliate’s other owner itself or hold it and sell electricity to the power grid, as an IPP. We have also developed permits and solar parks, which were sold directly to our affiliates.

 

Historically, a significant portion of the revenue that we derived from our affiliates was through selling permits and providing EPC services to the affiliates. Going forward, we expect to derive revenue from providing O&M services under long-term contracts to the solar parks constructed by these entities.

 

The following table sets forth the contribution to our revenue of each of our historical project affiliates and certain significant current and former related parties for the periods indicated:

 

 

 

Year Ended December 31,

 

 

 

2016

 

2017

 

2018

 

 

 

(US$ in
thousands)

 

(%)

 

(US$ in
thousands)

 

(%)

 

(US$ in
thousands)

 

(%)

 

RisenSky Solar and its subsidiaries

 

254

 

0.4

 

277

 

0.5

 

278

 

0.4

 

1088526 B.C. Ltd and its subsidiaries

 

 

 

 

 

7

 

0.0

 

1091187 B.C. Ltd and its subsidiaries

 

 

 

 

 

30

 

0.0

 

Oky Solar Holdings and its subsidiaries

 

525

 

0.8

 

 

 

 

 

Sky Global Solar S.A.

 

9

 

0.0

 

9

 

 

9

 

0.0

 

Total

 

788

 

1.2

 

286

 

0.5

 

324

 

0.4

 

 

In September 2011, we jointly formed an affiliate with Risen Energy Co., Ltd. (300118:Shenzhen), or Risen. Risen through its affiliate Risen Energy (Hong Kong) Co., Ltd. held 70% of the share capital of the entity, RisenSky Solar Energy S.a r.l., or RisenSky, and we held 30%. RisenSky is organized as a limited liability company under the laws of Luxembourg, and our cooperation under the venture is governed by the articles of association of that company. In March 2012, China Development Bank extended loans to RisenSky in an amount of EUR26.2 million for the development of four solar parks in Bulgaria with an aggregate capacity of 12.1 MW, which was guaranteed by Risen. As of December 31, 2018, RisenSky had completed 12.3 MW of solar parks in Bulgaria.

 

In 2013, SSJ entered into an agreement with Orix K.K. (a publicly-listed company in Japan and the United States) to register in Japan a private limited liability company, Oky Solar Holdings, in which 30% of the share capital is subscribed by Sky Solar Japan while the remaining 70% is subscribed by Orix K.K. Oky Solar Holdings is engaged in the business of developing solar parks. In March 2017, SSJ entered into a share transfer agreement with Orix Holdings to sell the share interest in OKY Solar 1 K.K and OKY Solar Omut K.K at the consideration of JPY1,068 million (US$9.18 million), which was closed on March 29, 2017 with all consideration paid in cash.

 

In September 2016, Energy Capital Investment II sarl entered into a share purchase agreement with Jade Fair Precision Ltd. to sell its 25 preferred share in the capital of 1088526 B.C. Ltd. (a company incorporated under the laws of the Province of British Columbia), with total purchase price of CAD 10,600,000 (US$7,997,700), which is determined applying the pre-determined annual cash distribution rate and using the discounted cash flow model reflecting the future cash flow prepared as the base model as of transaction date. This purchase price represents majority (approximately 87%) of the total fair value of the project company as of transaction date.

 

In January 2017, Energy Capital Investment II sarl entered into a share purchase agreement with Jade Fair Precision Ltd. to sell its 25 preferred share in the capital of 1091187 B.C, Ltd., with total purchase price of CAD 4.0 million (US$3.0 million), which was completed in January 2017. 1091187 B.C, Ltd. was incorporated with total capital of 75 common shares and 25 preferred shares, and owns Sky Solar (Canada) FIT 2 LP and its six operating solar facilities.

 

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One impact of the Hudson Dispute has been the actions taken by Hudson to take over certain entities in our corporate structure, namely, Energy Capital Investment S.à.r.l., Renewable Capital Investment 2 S.L. and its  five consolidated Uruguay special purpose vehicle entities.  See  “Item 3. Key Information—D. Risk Factors — Risks Related to our Business and Industry” for a description of the Hudson Dispute, which remains unresolved.

 

Competition

 

We believe that our primary competitors are local and international developers of solar parks, many of whom are integrated with upstream manufacturers.

 

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

 

·                  access to financing, including debt and equity financing at the project and company levels;

 

·                  site selection and sourcing of solar parks;

 

·                  permit and project development experience and expertise;

 

·                  reputation and track record;

 

·                  relationship with government authorities and knowledge of local policies;

 

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

 

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

 

·                  expertise in providing operation and maintenance services.

 

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. See “Item 3. Key Information—D. Risk Factors—Risks Related to our Business and Industry— We face significant competition in certain markets in which we operate.”

 

Facilities

 

Our principal executive offices are located at Unit 402, 4th Floor, Fairmont House, No.8 Cotton Tree Drive, Admiralty, Hong Kong Special Administrative Region, People’s Republic of China. We also have eight leased offices in the China, Japan, Greece, Canada, Chile, Uruguay, Bulgaria and the United States. We believe that our facilities are in good condition and generally suitable and adequate for our needs in the foreseeable future. However, we will continue to seek additional space as needed to satisfy our growth.

 

Seasonality

 

Changes in climate, geography, weather patterns, and other phenomena in the regions where we operate may significantly affect our business. For example, solar parks depend on the amount and intensity of sunlight, which is affected by weather and climate conditions. As a result, our IPP electricity production and amount of electricity sold and therefore our IPP revenue tend to be higher during periods or seasons when there is more irradiation.

 

Regulatory Matters

 

We develop, sell and operate our solar parks around the world, and as such we are subject to laws in multiple jurisdictions that affect companies developing and operating solar parks, many of which are still evolving and could be interpreted in ways that could harm our business. For example, we are subject to laws relating to: permit development for solar parks; engineering and constructing solar parks; solar park operations and power generation; connecting and selling electricity to the power grid; and PV and other applicable renewable energy tariffs and incentives.

 

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Although we develop and operate solar parks all over the world, our current solar park development business is primarily based in Japan, Canada, Uruguay, Chile, Bulgaria, and the United States and as such, we are primarily governed by and especially sensitive to the laws and regulations of such jurisdictions, including the following:

 

Japanese Regulations

 

Electricity Business Act (Denki Jigyo Ho)

 

The Electricity Business Act provides a regulatory framework of the electricity business. It regulates the construction, maintenance and operation of electric facilities for the purpose of assuring public safety and promoting environmental preservation. As of April 1, 2016, the Electricity Business Act was significantly amended to liberalize the retail electricity sales.

 

Notification.

 

In cases where a person intends to conduct a power generation project which falls under a “power generation business” (hatsuden jigyo) as defined in the Electricity Business Act (“Power Generation Business”), a notification must be submitted to METI before the business commences and a power supply plan (kyoukyu keikaku) must also be submitted to METI annually.

 

Whether a power generation project to be conducted by a solar park operator falls under a Power Generation Business (as defined below) depends on its capacity and supply destination.

 

A Power Generation Business is defined as a power generation business that generates more than 10,000 kW of the maximum connected electricity in total for the use of a retail electricity business, a general power transmission and distribution business, or a specified power transmission and distribution business in its power generation facility which meets the following requirements (i) to (iii) (“Specified Electric Facility for Power Generation”): (i) output capacity is more than 1,000 kW; electricity for the use of a retail electricity business, etc. is more than 50% of the output capacity (or more than 10% if the output capacity is more than 100,000 kW); and (iii) the quantity of electricity for the use of a retail electricity business, etc. is expected to be more than 50% of the quantity of the generated electricity (kWh) (or more than 10% if the output capacity is more than 100,000 kW).

 

Regulations on Electric Facilities

 

In addition, in most of the cases, solar park facilities are likely to fall under the category of “private electric facilities” (jikayou denki kousakubutsu), as defined in the Electricity Business Act, and the Act requires a solar park operator to take several measures when operating such private electric facilities. The details of the measures to be taken vary depending on the size of the output capacity.

 

Based on the timeline for implementing the project, there are three key measures that need to be taken:

 

·                  A construction plan (kouji keikaku) must be submitted to METI by no later than 30 days prior to the commencement date of construction project, except for projects with capacities less than 2,000 kW;

 

·                  Safety regulations (hoan kitei) must be submitted to METI by the commencement of the use of the facilities (or before the commencement of construction in some cases); and

 

·                  A chief engineer for the electricity facilities must be appointed and notified to the METI before the commencement of construction.

 

Feed-in Tariff

 

The FIT scheme is established by The Act on Special Measures concerning the Procurement of Renewable Electric Energy by Operators of Electric Utilities, or the FIT Act.

 

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Under the FIT Act, electric utility operators are obliged to enter into PPAs and interconnect their electric transmission and other electricity facilities with power generation facilities with suppliers of renewable electricity only when the suppliers of renewable electricity obtain the license from, and comply with other requirements of, METI. On an annual basis, METI is to set the electricity price for the contracts during such term and to report the same to the Diet.

 

Certification. In order to participate in the FIT scheme, under the amended Act on Special Measures Concerning Procurement of Renewable Electric Energy by Operators of Electric Utilities, certification of business plan is required pursuant to Article 9 under FIT Act, and, for the certification, a business plan is required to meet the following requirements:

 

·                  The content of the business plan conforms to the standards prescribed by the Ordinance of METI;

 

·                  The business plan is expected to be implemented smoothly and certainly;

 

·                  The facility for supplying renewable electricity conforms to the standards prescribed by the Ordinance of METI;

 

·                  The method of generating electricity conforms to the standards prescribed by the Ordinance of METI; and

 

·                  METI may reject the application for the certification in cases where METI finds that the business plan does not meet the requirements.

 

Determination of price. The price and term for PPAs varies depending on the type, installation mode, scale and other factors of the relevant renewable electricity source, and is to be determined by METI after their consideration of the opinions of other relevant governmental ministries as well as the opinion of a procurement price calculation committee, consisting of five members appointed by METI with the approval of the Diet.

 

The Minister of METI has set the procurement price for solar power electricity when the total size of the output capacity of the facility for supplying renewable electricity exceeds 10 kW:

 

·                                          as 40 yen (tax excluded) per kWh over the next 20 years, for those facilities receiving a connection offer from the grid utility between July 1, 2012 and March 31, 2013;

 

·                                          as 36 yen (tax excluded) per kWh over the next 20 years, for those facilities a connection offer from the grid utility between April 1, 2013 and March 31, 2014;

 

·                                          as 32 yen (tax excluded) per kWh over the next 20 years, for those facilities receiving a connection offer from the grid utility after between April 1, 2014 and March 31, 2015;

 

·                                          as 29 yen (tax excluded) per kWh over the next 20 years, for those facilities entering into a grid-connection agreement during the period from April 1, 2015 to June 30, 2015;

 

·                                          as 27 yen (tax excluded) per kWh over the next 20 years, for those facilities entering into a grid-connection agreement during the period from July 1, 2015 to March 31, 2016;

 

·                                          as 24 yen (tax excluded) per kWh over the next 20 years, for those facilities entering into a grid-connection agreement during the period from July 1, 2016 to March 31, 2017;

 

·                                          as 21 yen (tax excluded) per kWh over the next 20 years, for those facilities which have been approved by METI (such approvals are applicable only to those facilities with effective grid-connection agreements) during the period from April 1, 2017 to March 31, 2018 for supplying renewable electricity less than 2,000 kW;

 

·                                          as 18 yen (tax excluded) per kWh over the next 20 years, for those facilities which have been approved by METI (such approvals are applicable only to those facilities with effective grid-connection agreements) during the period from April 1, 2017 to March 31, 2018 for supplying renewable electricity less than 2,000 kW; and

 

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·                                          as the tender price, for those facilities which exceed 500kW during the period from April 1, 2019 to March 31, 2020. For the avoidance of doubt, the procurement price is applicable only to those facilities which put in a winning bid.

 

In addition METI considered reform measures on their solar energy policies and introduced these reform measures in April 2015. These reform measures include the following:

 

·                                          For facilities with respect to which a connection offer was not received by March 31, 2015, the electricity purchase price shall be fixed at the rate applicable when the grid-connection agreement is executed between the grid utility and the solar energy producer;

 

·                                          For facilities contemplating an increase in capacity on or after February 15, 2015 or to change on or after the same date such to solar cells differing in type, decline in conversion efficiency, etc. from those originally notified, the electricity purchase price shall be generally fixed at the rate applicable when the capacity increase or the change of solar cells is consummated;

 

·                                          General electricity utilities are allowed to terminate a grid-connection agreement, if (i) a solar energy producer does not start its output operation on the commencement date provided for in the grid-connection agreement without exceptional reasons or (ii) a solar energy producer does not pay, within one month of the conclusion date of the grid-connection agreement, the construction fee provided for in the agreement; and

 

·                                          In addition to Hokkaido Electric Power, six general electric utilities (Tohoku Electric Power, Hokuriku Electric Power, Chugoku Electric Power, Shikoku Electric Power, Kyushu Electric Power and Okinawa Electric Power) are newly allowed to enter into a grid-connection agreement, where those general electricity utilities may restrict output hours of each solar energy producer by longer than 360 hours per year in cases where the interconnection amounts applied for to such electricity utility have already surpassed or are expected to surpass available interconnection amounts of such electricity utility under the current rules.

 

In order to execute an electricity supply agreement with an operator of electric utilities under the FIT Act, a written application detailing the outline of solar power electricity, the format of which is usually prepared by the operator of electric utilities must be submitted to the operator of electric utilities, after which such operator will approve the application unless there is “a likelihood of unjust harm to the benefit of operators of electric utilities” or “a just reason as set forth in the FIT Act.”

 

Furthermore, the FIT Act was revised and the revisions came into force on April 1, 2017. In this regard, if a power plant owner fails to execute an electricity supply agreement with an operator of electric utilities including an agreement regarding construction costs by April 1, 2016, a certification by the Minister of Economy which is certified on or before June 30, 2017 will be automatically terminated on April 1, 2017. If a power plant owner fails to execute an electricity supply agreement with an operator of electric utilities including an agreement regarding construction costs on or before 9 months after the certification, a certification by the Minister of Economy which is certified on or after July 1, 2016 till March 31, 2017, will be automatically terminated 9 months after the certification.

 

Regulations Specifically Relating to Construction

 

The following is a list of the major acts that stipulate regulations depending on the nature of the land where a power plant is to be constructed:

 

Name of the Act

 

Applicable Case (subject to possible exceptions)

Agricultural Land Act (Nochi Hou)

 

When the targeted land is an agricultural land.

Agricultural Promotion Region Establishment Act (Nougyou Shinkou Chiiki No Seibi Ni Kansuru Houritsu)

 

When the targeted land is within an agricultural purpose area (noouyouchi kuiki).

Forest Act (Shinrin Hou)

 

When the targeted land is located in an area where a local forest plan (Chiiki Shinrin Keikaku) is to be implemented.

Civil Aeronautics Act (Koku Hou)

 

When the targeted land is located close to an airport.

Soil Contamination Countermeasures Act (Dojo Osen Taisaku Ho)

 

When a person extracts soil or takes any other action that changes the character of the targeted land and such targeted land has more than a certain area as stipulated in the Soil Contamination Countermeasures Act.

Local environmental impact assessment ordinances

 

Local environmental impact assessment ordinances of some local governments require environmental impact assessment for solar park businesses

Landscape Law

 

When the targeted lands are located within a landscape planning area.

Local land use regulation ordinances

 

Typically, when a project intends to change the land use of an area of or greater than 5 ha or something like that.

 

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Chilean Regulations

 

Electric Energy Specific Applicable Permits. To construct, it will depend on the energy project´s characteristics and the environmental impacts that it may generate, it may be necessary to obtain an environmental assessment resolution that certify the project as environmentally favorable. This resolution will also identify the required permits by the project, depending on the particular characteristics of it. In addition, the project must obtain other relevant permits such as constructions permits for permanent buildings, issued by the Departments of Works of the relevant Municipality, and the corresponding health and electric permits, issued by the Regional Authority of Health and the Superintendency of Electricity and Fuels, respectively.

 

To operate a power project in Chile, no general or specific governmental authorizations or permits are required, except for the authorizations or permits required by the concession system for public distribution services or other sector-specific regulations including, but not limited to, regulations on environment and construction.

 

Electric Concession and Other Production Licenses. Chilean energy market consists of three segments: generation, transportation and distribution. Chilean regulations, in particular the Electrical Services General Law (Decree Law No. 4/2007 and its amendments), do not require an electric concession or a production or operation license to build and operate PV power plants or to commercialize its production, or for transmission services. Only distribution services require an electric concession.

 

Interconnection to the Electric System. Usually a power plant will be interconnected to the grid. To be interconnected to the grid, it will need to pass interconnection and synchronization tests before the Independent Electric National System Coordinator (CISEN), which is a non-profit, technical and independent entity, in charge of the coordination of the operation of all the installations of the National Electric System that operate interconnected among themselves, promoting the stability of the system. In addition, this entity is responsible for preserving the safety of the National Electric System, and for ensuring the most economical operation for all the electrical system installations, and the open access to all transmission systems. New generators must not affect the stability and quality of the electric system and must comply with certain technical requirements to interconnection and supply energy into the electric system.

 

Use of Third Parties Transmission Lines. Generators have guaranteed access to use all electric installations that occupy public property or if the facilities have been built under an electric concession if capacity is available, power lines, power substations and other components of the transmission system. Any complaint regarding a restriction to this right to free access can be brought before a specialized and technical committee regulated under the Electric Law (“Expert’s Panel” regulated on Article No. 208 and followings). Generators must pay the full cost of increasing the transmission capacity to meet the generator’s needs.

 

Generators will pay a fee for the use of transmission installations. The fee must comply with the legal requirements of non-discrimination or overcharge. The right to free access is also constrained by the actual technical available for the capacity of the transmission grid.

 

Environmental Approval. Environmental approval is needed for any electric power plant over 3 MW of gross capacity before it can begin construction. The environmental approval process will be more or less complex depending on the particular characteristics of the project. If the power plant has less than 3 MW of gross capacity, it may require only a statement that the project will not have a major environmental impact, thus, not requiring an environmental approval resolution. However, a complete environmental assessment study may be required for those projects that may produce any of the negative effects referred to in Article No. 11 of the Environmental Law (Law No. 19.300).

 

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Right of Way for Electrical Transmission Line. A right of way for electrical transmission line is not required if the developer obtains private agreements (right of way’s contracts) with the owners of all affected properties. Otherwise, a right of way must be obtained through legal servitudes and electric concessions, regulated both in the Electric Law.

 

Direct Authorization of Use of Public Properties. The direct authorization of use of public properties is required for projects that occupy public goods. In order to obtain the direct authorization, a project owner must apply to the authority, giving information in regard with the expected use of the public goods. Since there is a public interest for the development of clean energy sources, getting such authorization should not represent a complex process.

 

Favorable Construction Report (former land use change). Projects located in rural areas (outside the urban limits) must obtain the relevant report which allows the construction even the land remains a rural zone. This permit is granted through an administrative proceeding. Such proceeding could become more demanding and complex if the land has some preferred uses, as environmental conservation or tourism. A project that has been granted with an environmental approval shall not meet an complex issue obtaining this authorization.

 

Construction Permit. A construction permit must be granted by the Works Department from the relevant Municipality (Dirección de Obras Municipales), which analyzes whether such construction meets the relevant safety and engineering construction requirements—basically will be focus on inhabited buildings, for the safety considerations before referred-it will also be necessary to obtain a verification of construction work upon completion, certifying that as-built construction is consistent with the granted construction permit. In some projects, this building in only necessary to begin the construction of all buildings such as offices and others (not the power plant or the transmission line).

 

Dispatch and Commercialization of the Chilean Electricity Market. The energy purchase and sale market is structured as a mandatory pool-type market restricted to gen