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CANADIAN SOLAR 2017

Total solar module shipments were at record high at 6,828 MW in 2017

Canadian Solar Inc. is one of the world's largest solar power companies. As a leading manufacturer of solar photovoltaic modules and provider of solar energy solutions, Canadian Solar also has a geographically diversified pipeline of utility-scale power projects in various stages of development. In the past 17 years, Canadian Solar has successfully delivered over 25GW of premium quality modules to over 90 countries around the world.

The Company operates in North America, South America, Europe, Africa, the Middle East, Australia and Asia. Canadian Solar has the following business segments: MSS segment, energy segment. The MSS segment primarily involves the design, development, manufacturing and sale of solar power products. The energy segment primarily consists of solar power project development and sale, EPC (Engineering, Procurement and Construction) and development services, and operating solar power projects and sales of electricity.

In recent years, Canadian Solar has increased investment in the energy segment. The energy segment primarily comprises solar power project development and sales and operating solar power projects and sales of electricity. According to the Annual Financial Report, the energy segment of Canadian Solar contributed 20.0%, 3.8% and 28.1% of net revenues in 2017, 2016 and 2015, respectively. In 2015, 2016 and 2017, Canadian Solar´s top five customers of its MSS segment by net revenues collectively accounted for approximately 14.5%, 16.7% and 18.0%, respectively, of the total net revenues.

In March 2015, Canadian Solar acquired Recurrent Energy, LLC, a leading solar energy developer with solar power projects in California and Texas, and thereby significantly increased its solar project pipeline. As of February 2018, Canadian Solar had a portfolio of solar power projects in operation, totalling 1,211.1 MWp, with an estimated resale value of approximately $1.5 billion.

The total net revenues of the Company increased by $537.3 million, or 18.8%, from $2,853.1 million in 2016 to $3,390.4 million in 2017. This increase was primarily due to an increase in shipments from the MSS segment and an increase in revenue contribution from the sale of solar power projects.

In 2017, Asia contributed 56.8%, the Americas contributed 32.7%, and Europe and others accounted for 10.5% of the net revenues. Segmentally, the revenues generated by the MSS segment increased by $25.6 million, or 0.9%, from $2,825.3 million in 2016 to $2,850.9 million in 2017. The increase was primarily due to an increase of $800.7 million, attributable to a 30.3% increase in shipments of solar modules.

Revenues generated from the energy segment increased by $571.0 million, or 536.5%, from $106.4 million in 2016 to $677.5 million in 2017. This increase was primarily due to an increase of $609.6 million in sales of solar power projects.

The total cost of revenues increased by $316.9 million, or 13.0%, from $2,435.9 million in 2016 to $2,752.8 million in 2017. The increase was primarily due to an increase in shipments of solar modules and sales of solar power projects, partially offset by lower solar module manufacturing costs. Segmentally, the cost of revenues incurred by the MSS segment decreased by $38.5 million, or 1.6%, from $2,429.2 million in 2016 to $2,390.7 million in 2017. The decrease was primarily due to lower module manufacturing costs.

Cost of revenues incurred by the energy segment increased by $406.5 million, or 607.1%, from $67.0 million in 2016 to $473.5 million in 2017. This increase was primarily due to an increase in sales of solar power projects.

The Company made capital expenditures of $642.8 million, $1,111.5 million and $311.0 million in 2015, 2016 and 2017, respectively. The capital expenditures were primarily to maintain and increase ingot, wafer, cell and module manufacturing capacity, and to develop and construct solar power systems.

The total gross profit of the Company increased by $220.4 million, or 52.8%, from $417.2 million in 2016 to $637.6 million for the year ended December 31, 2017. The total gross margin increased from 14.6% in 2016 to 18.8% in 2017.

Segmentally, gross profit for the MSS segment increased by $64.1 million, or 16.2%, from $396.1 million in 2016 to $460.2 million in 2017 due to an increase in shipments of solar modules. Gross margin for the MSS segment increased from 14.0% in 2016 to 16.1% for the year 2017 due to a decrease in solar module manufacturing cost and lower charges.

Gross profit for energy segment increased by $164.5 million, or 416.8%, from $39.5 million in 2016 to $204.0 million in 2017, primarily due to an increase in sales of solar power projects. Gross margin decreased from 37.1% in 2017 to 30.1% in 2017, primarily due to a lower proportion of high margin electricity revenue in 2017.

Operating expenses of the Company increased by $44.2 million, or 13.6%, from $324.0 million in 2016 to $368.3 million in 2017. Selling expenses increased by $10.7 million, or 7.3%, from $145.4 million in 2016 to $156.0 million in 2017. This increase was primarily due to an increase of $11.3 million in shipping, handling and storage charges and $1.5 million in professional service expenses.

General and administrative expenses increased by $27.2 million, or 13.4%, from $203.8 million in 2016 to $231.0 million in 2017. The increase was primarily due to an increase of $17.5 million in labor costs.

Research and development expenses increased by $11.4 million, or 65.3%, from $17.4 million in 2016 to $28.8 million in 2017. This increase was primarily due to an increase of $6.3 million in materials consumables and $5.7 million in labor costs. Research and development expenses as a percentage of the total net revenues were 0.6% in 2016 and 0.8% in 2017.

As of December 31, 2017, Canadian Solar had $561.7 million in cash and cash equivalents and $628.5 million in restricted cash. Net cash used in investing activities was $341.2 million in 2017, compared to net cash used in investing activities of $1,042.6 million in 2016. This change was primarily due to a decrease of $791.1 million in payments for construction of solar power systems.