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Management's Discussion of Results of Operations (Excerpts)

For purposes of readability, Zenith attempts to strip out all tables in excerpts from the Management Discussion. That information is contained elsewhere in our articles. The idea of this summary is simply to review how well we believe Management does its reporting. Also, this highlights what Management believes is important.

In our Decision Matrix at the end of each article, a company with 0 to 2 gets a "-1", and 3 to 5 gets a "+1."

On a scale of 0 to 5, 5 being best, Zenith rates this company's Management's Discussion as a 5.


Executive Overview

We are a leading global provider of comprehensive PV solar energy solutions. We 
design, manufacture, and sell PV solar modules with an advanced thin film 
semiconductor technology and also develop and sell PV solar power systems that 
primarily use the modules we manufacture. Additionally, we provide O&M services 
to system owners. We have substantial, ongoing R&D efforts focused on various 
technology innovations. We are the world’s largest thin film PV solar module 
manufacturer and one of the world’s largest PV solar module manufacturers.

Certain of our financial results and other key operational developments for the 
three months ended March 31, 2020 include the following:

•Net sales for the three months ended March 31, 2020 were $532.1 million, which 
was consistent with net sales for the same period in 2019. The increase in net 
sales from the volume of modules sold to third parties and ongoing construction 
activities at the GA Solar 4 project was offset by the decrease in net sales 
due to the completion of substantially all construction activities at the 
Rosamond, Phoebe, and Lake Hancock projects in 2019.

•Gross profit for the three months ended March 31, 2020 increased to 17.0% from 
0.0% for the same period in 2019. The increase in gross profit was primarily 
due to higher gross profit on third-party module sales and improved utilization 
of our manufacturing facilities from the successful ramp of various Series 6 
manufacturing lines, partially offset by the mix of lower gross profit projects 
under construction during the period.

•As of March 31, 2020, we had 5.5 GWDC of total installed Series 6 nameplate 
production capacity across all our facilities. We produced 1.5 GWDC of solar 
modules during the three months ended March 31, 2020, which represented a 34% 
increase from the same period in 2019. The increase in production was primarily 
driven by the Series 6 production capacity added in 2019 at our second facility 
in Ho Chi Minh City, Vietnam and our facility in Lake Township, Ohio as well as 
improved utilization at various facilities, partially offset by the ramp down 
of our Series 4 manufacturing lines. We expect to produce 5.9 GWDC of solar 
modules during 2020, substantially all of which will be Series 6 modules.

•In response to the COVID-19 pandemic, governmental authorities have 
recommended or ordered the limitation or cessation of certain business or 
commercial activities in jurisdictions in which we operate, including the 
United States, Malaysia, and Vietnam. At this time, such limitations have had a 
limited effect on our manufacturing facilities. However, these orders are 
subject to continuous revision, and our understanding of the applicability of 
these orders and any potential exemptions may change at any time. To enable the 
continuity of our operations, we have implemented a wide range of safety 
measures intended to inhibit the spread of COVID-19 at our manufacturing, 
administrative, and other sites and facilities.

•In January 2020, we entered into an MOU to settle a class action lawsuit filed 
in 2012 in the Arizona District Court against the Company and certain of our 
current and former officers and directors. Pursuant to the MOU, we paid a total 
of $350 million to settle the claims brought on behalf of all persons who 
purchased or otherwise acquired the Company’s shares during a specified period, 
in exchange for mutual releases and a dismissal with prejudice of the complaint 
upon court approval of the settlement. The settlement contained no admission of 
liability, wrongdoing, or responsibility by any of the parties.

Market Overview

The solar industry continues to be characterized by intense pricing 
competition, both at the module and system levels. In particular, module 
average selling prices in many global markets have declined in recent years and 
are expected to continue to decline in the future. Furthermore, the COVID-19 
pandemic has adversely affected certain purchasers of modules and systems, 
which may result in additional pressure on demand and average selling prices. 
In the aggregate, we believe manufacturers of solar cells and modules have 
significant installed production capacity, relative to global demand, and the 
ability for additional capacity expansion. Accordingly, we believe the solar 
industry may from time to time experience periods of structural imbalance 
between supply and demand (i.e., where production capacity exceeds global 
demand), and that such periods will also put pressure on pricing, which may be 
exacerbated by the current COVID-19 disruption in the global economy. 
Additionally, intense competition at the system level may result in an 
environment in which pricing falls rapidly, thereby potentially increasing 
demand for solar energy solutions but constraining the ability for project 
developers and diversified module manufacturers to sustain meaningful and 
consistent profitability. In light of such market realities, we continue to 
focus on our strategies and points of differentiation, which include our 
advanced module technology, our manufacturing process, our financial viability, 
and the sustainability advantage of our modules and systems.

Global solar markets continue to expand and develop, in part aided by demand 
elasticity resulting from declining average selling prices, both at the module 
and system levels, which have promoted the widespread adoption of solar energy. 
As a result of such market opportunities, we are expanding our manufacturing 
capacity while also developing and operating multiple solar projects around the 
world as we execute on our utility-scale project pipeline. See the tables under 
“Management’s Discussion and Analysis of Financial Condition and Results of 
Operations – Systems Project Pipeline” for additional information about 
projects within our advanced-stage pipeline. Although we expect a meaningful 
portion of our future consolidated net sales, operating income, and cash flows 
to be derived from such projects, we expect third-party module sales to 
continue to have a more significant impact on our operating results as we 
expand capacity and leverage the benefits of our Series 6 module technology.

Lower industry module and system pricing is expected to contribute to 
diversification in global electricity generation and further demand for solar 
energy. Over time, however, declining average selling prices may adversely 
affect our results of operations to the extent we have not already entered into 
contracts for future module or system sales. If competitors reduce pricing to 
levels below their costs; bid aggressively low prices for module sale 
agreements or PPAs; or are able to operate at minimal or negative operating 
margins for sustained periods of time, our results of operations could be 
further adversely affected. In certain markets in California and elsewhere, an 
oversupply imbalance at the grid level may reduce short-to-medium term demand 
for new solar installations relative to prior years, lower PPA pricing, and 
lower margins on module and system sales to such markets. However, we believe 
the effects of such imbalance can be mitigated by modern solar power plants 
that offer a flexible operating profile, thereby promoting greater grid 
stability and enabling a higher penetration of solar energy. We continue to 
address these uncertainties, in part, by executing on our module technology 
improvements, partnering with grid operators and utility companies, and 
implementing certain other cost reduction initiatives.

We face intense competition from manufacturers of crystalline silicon solar 
modules and developers of solar power projects. Solar module manufacturers 
compete with one another on price and on several module value attributes, 
including wattage (or conversion efficiency), energy yield, and reliability, 
and developers of systems compete on various factors such as net present value, 
return on equity, and levelized cost of electricity (“LCOE”), meaning the net 
present value of a system’s total life cycle costs divided by the quantity of 
energy that is expected to be produced over the system’s life. Many crystalline 
silicon cell and wafer manufacturers continue to transition from lower 
efficiency Back Surface Field multi-crystalline cells (the legacy technology 
against which we have generally competed) to higher efficiency Passivated 
Emitter Rear Contact (“PERC”) mono-crystalline cells at competitive cost 
structures. Additionally, while conventional solar modules, including the solar 
modules we produce, are monofacial, meaning their ability to produce energy is 
a function of direct and diffuse irradiance on their front side, certain 
manufacturers of mono-crystalline PERC modules are promoting bifacial modules 
that also capture diffuse irradiance on the back side of a module. The cost 
effective manufacture of bifacial PERC modules has been enabled, in part, by 
the expansion of inexpensive crystal growth and diamond wire saw capacity in 
China. Bifaciality compromises nameplate efficiency, but by converting both 
front and rear side irradiance, such technology may improve the overall energy 
production of a module relative to nameplate efficiency when applied in certain 
applications, which, after considering the incremental BoS and other costs, 
could potentially lower the overall LCOE of a system when compared to systems 
using conventional solar modules, including the modules we produce.

We believe we are among the lowest cost module manufacturers in the solar 
industry on a module cost per watt basis, based on publicly available 
information. This cost competitiveness allows us to compete favorably in 
markets where pricing for modules and systems is highly competitive. Our cost 
competitiveness is based in large part on our advanced thin film semiconductor 
technology, module wattage (or conversion efficiency), proprietary 
manufacturing process (which enables us to produce a CdTe module in a matter of 
hours using a continuous and highly automated industrial manufacturing process, 
as opposed to a batch process), and our focus on operational excellence. In 
addition, our CdTe modules use approximately 1-2% of the amount of 
semiconductor material that is used to manufacture conventional crystalline 
silicon solar modules. The cost of polysilicon is a significant driver of the 
manufacturing cost of crystalline silicon solar modules, and the timing and 
rate of change in the cost of silicon feedstock and polysilicon could lead to 
changes in solar module pricing levels. In recent years, polysilicon 
consumption per cell has been reduced through various initiatives, such as the 
adoption of diamond wire saw technology, which have contributed to declines in 
our relative manufacturing cost competitiveness over conventional crystalline 
silicon module manufacturers.

In terms of energy yield, in many climates our CdTe solar modules provide an 
energy production advantage over most monofacial crystalline silicon solar 
modules of equivalent efficiency rating. For example, our CdTe solar modules 
provide a superior temperature coefficient, which results in stronger system 
performance in typical high insolation climates as the majority of a system’s 
generation, on average, occurs when module temperatures are well above 25°C 
(standard test conditions). In addition, our CdTe solar modules provide a 
superior spectral response in humid environments where atmospheric moisture 
alters the solar spectrum relative to laboratory standards. Our CdTe solar 
modules also provide a better shading response than conventional crystalline 
silicon solar modules, which may experience significantly lower energy 
generation than CdTe solar modules when shading occurs. As a result of these 
and other factors, our PV solar modules typically produce more annual energy in 
real world field conditions than conventional modules with the same nameplate 
capacity. Furthermore, our thin-film CdTe semiconductor technology is immune to 
cell cracking and its resulting power output loss, a common failure often 
observed in crystalline silicon modules caused by adverse manufacturing, 
handling, weather, or other conditions.

While our modules and systems are generally competitive in cost, reliability, 
and performance attributes, there can be no guarantee such competitiveness will 
continue to exist in the future to the same extent or at all. Any declines in 
the competitiveness of our products could result in further declines in the 
average selling prices of our modules and systems and additional margin 
compression. We continue to focus on enhancing the competitiveness of our solar 
modules and systems by accelerating progress along our module technology and 
cost reduction roadmaps.

Certain Trends and Uncertainties

We believe that our business, financial condition, and results of operations 
may be favorably or unfavorably impacted by the following trends and 
uncertainties. See Item 1A. “Risk Factors” of our Annual Report on Form 10-K 
for the year ended December 31, 2019 and Item 1A. of this Quarterly Report on 
Form 10-Q for discussions of other risks (the “Risk Factors”) that may affect 
us.

Our long-term strategic plans are focused on our goal to create long-term 
shareholder value through a balance of growth, profitability, and liquidity. In 
executing such plans, we are focusing on providing utility-scale PV solar 
energy solutions in key geographic markets that we believe have a compelling 
need for mass-scale PV solar electricity, including markets throughout the 
Americas, the Asia-Pacific region, Europe, and certain other strategic markets. 
While these markets are expected to exhibit strong long-term demand for solar 
energy, the economic disruption caused by the COVID-19 pandemic has adversely 
affected near-term demand for electricity at the grid level. As a result, such 
temporary decline in load may adversely affect demand for specific forms of 
generation, such as our PV solar energy solutions, depending on the severity 
and duration of the economic disruption. Given these market dynamics, we are 
focusing on opportunities in which our PV solar energy solutions can compete 
directly with traditional forms of energy generation on an LCOE or similar 
basis, or complement such generation offerings. These opportunities include the 
retirement and replacement of aging fossil fuel-based generation resources with 
utility-scale PV solar energy solutions. For example, cumulative global 
retirements of coal generation plants are expected to approximate 900 GWDC by 
2040, representing a significant increase in the potential market for solar 
energy.

This focus on our core module and utility-scale offerings exists within a 
current market environment that includes rooftop and distributed generation 
solar, particularly in the United States. While it is unclear how rooftop and 
distributed generation solar might impact our core utility-scale based 
offerings over the next several years, we believe that utility-scale solar will 
continue to be a compelling offering for companies with technology and cost 
leadership and will continue to represent an increasing portion of the overall 
electricity generation mix. However, our module offerings in certain 
international markets may be driven, in part, by future demand for rooftop and 
distributed generation solar solutions.

Our ability to provide utility-scale offerings on economically attractive terms 
depends, in part, on market factors outside our control, such as the 
availability of debt and/or equity financing (including, in the United States, 
tax equity financing), interest rate fluctuations, domestic or international 
trade policies, and government support programs. Adverse changes in these 
factors could increase the cost of utility-scale systems, which could reduce 
demand for such systems and limit the number of potential buyers. For example, 
we generally sell projects we have developed within our systems business, 
including projects in the United States, Japan, and elsewhere, to purchasers 
that depend on financing to fund the initial capital expenditures required to 
develop, build, and/or purchase a system. Although governments and central 
banks around the world have implemented significant measures to support capital 
markets, the economic disruption caused by the COVID-19 pandemic may result in 
a long-term tightening of the supply of capital in global financial markets 
(including, in the United States, a reduction in total tax equity 
availability). A reduction in the supply of project debt or equity financing 
(including, in the United States, tax equity financing) caused by the COVID-19 
pandemic could make it difficult for our customers to secure the financing 
necessary to develop, build, purchase, or install systems. Similarly, 
purchasers of modules may cease or significantly reduce business operations, 
cease or delay module procurement, encounter an inability to obtain financing, 
including due to a reduction in the supply of project debt financing or equity 
investments (including, in the United States, tax equity financing), conserve 
capital resources, or take other actions in response to the COVID-19 pandemic, 
which may reduce demand and average selling prices for our modules.

We are focusing our resources in those markets and energy applications in which 
solar power can be a least-cost, best-fit energy solution, particularly in 
regions with significant current or projected electricity demand, relatively 
high existing electricity prices, strong demand for renewable energy 
generation, and high solar resources. As a result, we closely evaluate and 
monitor the appropriate level of resources required to support such markets and 
their associated sales opportunities. We have dedicated, and intend to continue 
to dedicate, significant capital and human resources to reduce the total 
installed cost of PV solar energy and to ensure that our solutions integrate 
well into the overall electricity ecosystem of each specific market.

Creating or maintaining a market position in certain strategically targeted 
markets and energy applications also requires us to adapt to new and changing 
market conditions. For example, we continue to monitor and adapt to the 
dynamics of emerging technologies, such as commercially viable energy storage 
solutions, which are expected to further enable PV solar power systems to 
compete with traditional forms of energy generation by shifting the delivery of 
energy generated by such systems to periods of greater demand. Storage 
solutions continue to evolve in terms of technology and cost, and cumulative 
global deployments of storage capacity are expected to exceed 900 GWDC by 2040, 
representing a significant increase in the potential market for renewable 
energy. We also continue to monitor and adapt to changing dynamics in the 
market set of potential buyers of solar projects. Market environments with few 
potential project buyers and a higher cost of capital would generally exert 
downward pressure on the potential revenue from the solar projects we are 
developing, whereas, conversely, market environments with many potential 
project buyers and a lower cost of capital would likely have a favorable impact 
on the potential revenue from such solar projects. For example, the emergence 
of utility-owned generation has increased the number of potential project 
buyers as such utility customers benefit from a potentially low cost of capital 
available through rate-based utility investments. Given their long-term 
ownership profile, utility-owned generation customers typically seek to partner 
with diversified and stable companies that can provide a broad spectrum of 
utility-scale generation solutions, including reliable PV solar technology, 
thereby mitigating their long-term ownership risks.

On occasion, we may also elect to develop partially contracted or uncontracted 
systems for which there is a partial or no PPA with an off-taker, such as a 
utility, but rather an intent to sell some portion of the electricity produced 
by the system on an open contract basis until the system is sold. Expected 
revenue from projects without a PPA for the full off-take of the system is 
subject to greater variability and uncertainty based on market factors and is 
typically lower than projects with a PPA for the full off-take of the system. 
Furthermore, all system pricing is affected by the pricing of energy to be sold 
on an open contract basis following the termination of the PPA (i.e., merchant 
pricing curves), and changes in market assumptions regarding future open 
contract sales, including potential changes in energy demand caused by the 
COVID-19 pandemic, may also result in significant variability and uncertainty 
in the value of our systems projects.

As previously disclosed, following an evaluation of the long-term sustainable 
cost structure, competitiveness, and risk-adjusted returns of our U.S. project 
development business, we have determined it is in the best interest of our 
stockholders to explore options for this business line. This exploration may 
result in, among other possibilities, a partnership with a third-party who 
possesses complimentary competencies or a sale of all or a portion of our U.S. 
project development business. These potential third-party partners or 
purchasers of interests in our U.S. project development business may now, or in 
the future, be impacted by the global business disruption caused by the 
COVID-19 pandemic, and may consequently focus on their own operations and/or 
delay considering potential partnerships or other arrangements with respect to 
our U.S. project development business. While we have previously disclosed that 
the exploration of options for our U.S. project development business is not 
subject to any definitive timetable and there can be no assurances that this 
process will result in any transaction, the COVID-19 pandemic may have the 
effect of delaying or preventing the consummation of any such transaction.

We continually evaluate forecasted global demand, competition, and our 
addressable market and seek to effectively balance manufacturing capacity with 
market demand and the nature and extent of our competition. During 2019, we 
commenced commercial production of Series 6 modules at our second manufacturing 
facility in Ho Chi Minh City, Vietnam and our manufacturing facility in Lake 
Township, Ohio. In 2020, we expect to transition certain legacy Series 4 
manufacturing facilities in Kulim, Malaysia to our Series 6 module technology 
and continue to expand capacity and throughput at our other existing 
manufacturing facilities. Such additional capacity, and any other potential 
investments to add or otherwise modify our existing manufacturing capacity in 
response to market demand and competition, may require significant internal and 
possibly external sources of capital, and may be subject to certain risks and 
uncertainties described in the Risk Factors.

In response to the COVID-19 pandemic, governmental authorities have recommended 
or ordered the limitation or cessation of certain business or commercial 
activities in jurisdictions in which we do business or have operations. While 
some of these orders permit the continuation of essential business operations, 
or permit the performance of minimum business activities, these orders are 
subject to continuous revision or may be revoked or superseded, or our 
understanding of the applicability of these orders and exemptions, may change 
at any time. In addition, due to contraction of the virus, or concerns about 
becoming ill from the virus, we may experience reductions in the availability 
of our operational workforce, such as our manufacturing personnel. As a result, 
we may at any time be ordered by governmental authorities, or we may determine, 
based on our understanding of the recommendations or orders of governmental 
authorities or the availability of our personnel, that we have to curtail or 
cease business operations or activities altogether, including manufacturing, 
fulfillment, project development, construction, operating or maintenance 
operations, or research and development activities. At this time, such 
limitations have had a limited effect on our manufacturing facilities, and we 
have implemented a wide range of safety measures intended to enable the 
continuity of our operations and inhibit the spread of COVID-19 at our 
manufacturing, administrative, and other sites and facilities, including those 
in the United States, Malaysia, and Vietnam.

Systems Project Pipeline

The following tables summarize, as of May 7, 2020, our approximately 1.7 GWAC 
advanced-stage project pipeline. The actual volume of modules installed in our 
projects will be greater than the project size in MWAC as module volumes 
required for a project are based upon MWDC, which will be greater than the MWAC 
size pursuant to a DC-AC ratio typically ranging from 1.1 to 1.4. Such ratio 
varies across different projects due to many factors, including PPA pricing and 
the location, design, and costs of the system. Projects are typically removed 
from our advanced-stage project pipeline tables below once we substantially 
complete construction of the project and after substantially all of the 
associated project revenue is recognized. A project, or a portion of a project, 
may also be removed from the tables below in the event a project is not able to 
be sold due to the changing economics of the project or other factors or we 
decide to temporarily own and operate a project based on strategic 
opportunities or market factors.


Results of Operations

Segment Overview

We operate our business in two segments. Our modules segment involves the 
design, manufacture, and sale of CdTe solar modules to third parties, and our 
systems segment includes the development, construction, operation, maintenance, 
and sale of PV solar power systems, including any modules installed in such 
systems and any revenue from energy generated by such systems.

Net sales

Modules Business

We generally price and sell our solar modules on a per watt basis. During the 
three months ended March 31, 2020, we sold the majority of our solar modules to 
integrators and operators of systems in the United States, and substantially 
all of our modules business net sales were denominated in U.S. dollars. We 
recognize revenue for module sales at a point in time following the transfer of 
control of the modules to the customer, which typically occurs upon shipment or 
delivery depending on the terms of the underlying contracts.

Systems Business

During the three months ended March 31, 2020, the majority of our systems 
business net sales were in the United States and were denominated in U.S. 
dollars. We recognize revenue for the sale of a development project, which 
excludes EPC services, or for the sale of a completed system when we enter into 
the associated sales contract with the customer. For other sales of solar power 
systems and/or EPC services, we generally recognize revenue over time as our 
performance creates or enhances an energy generation asset controlled by the 
customer. Furthermore, the sale of a solar power system combined with EPC 
services represents a single performance obligation for the development and 
construction of a single generation asset. For such arrangements, we recognize 
revenue as work is performed using cost based input methods, which result in 
revenue being recognized as work is performed based on the relationship between 
actual costs incurred compared to the total estimated costs for a given 
contract.

Net sales from our modules segment increased $194.9 million for the three 
months ended March 31, 2020 compared to the three months ended March 31, 2019 
primarily due to a 96% increase in the volume of watts sold. Net sales from our 
systems segment decreased $194.7 million for the three months ended March 31, 
2020 compared to the three months ended March 31, 2019 primarily due to the 
completion of substantially all construction activities at the Rosamond, 
Phoebe, and Lake Hancock projects in 2019, partially offset by ongoing 
construction activities at the GA Solar 4 project.

Cost of sales

Modules Business

Our modules business cost of sales includes the cost of raw materials and 
components for manufacturing solar modules, such as glass, transparent 
conductive coatings, CdTe, and other thin film semiconductors, laminate 
materials, connector assemblies, edge seal materials, and frames. In addition, 
our cost of sales includes direct labor for the manufacturing of solar modules 
and manufacturing overhead, such as engineering, equipment maintenance, quality 
and production control, and information technology. Our cost of sales also 
includes depreciation of manufacturing plant and equipment, facility-related 
expenses, environmental health and safety costs, and costs associated with 
shipping, warranties, and solar module collection and recycling (excluding 
accretion).

Systems Business

For our systems business, project-related costs include development costs 
(legal, consulting, transmission upgrade, interconnection, permitting, and 
other similar costs), EPC costs (consisting primarily of solar modules, 
inverters, electrical and mounting hardware, project management and 
engineering, and construction labor), and site specific costs.

Our cost of sales decreased $90.1 million, or 17%, and decreased 17.0 
percentage points as a percent of net sales for the three months ended March 
31, 2020 compared to the three months ended March 31, 2019. The decrease in 
cost of sales was driven by a $184.6 million decrease in our systems segment 
cost of sales primarily due to the lower volume of projects under construction 
during the period. Such decrease was partially offset by a $94.5 million 
increase in our modules segment cost of sales primarily due to higher costs of 
$178.4 million from an increase in the volume of modules sold, partially offset 
by continued cost reductions in the cost per watt of our solar modules, which 
decreased cost of sales by $64.6 million, and lower under-utilization and 
certain other charges associated with the initial ramp of certain Series 6 
manufacturing lines, which decreased cost of sales by $28.1 million compared to 
2019.

Gross profit

Gross profit may be affected by numerous factors, including the selling prices 
of our modules and systems, our manufacturing costs, project development costs, 
BoS costs, the capacity utilization of our manufacturing facilities, and 
foreign exchange rates. Gross profit may also be affected by the mix of net 
sales from our modules and systems businesses.

Gross profit for the three months ended March 31, 2020 increased to 17.0% from 
0.0% during the three months ended March 31, 2019 primarily due to higher gross 
profit on third-party module sales and improved utilization of our 
manufacturing facilities from the successful ramp of various Series 6 
manufacturing lines, partially offset by the mix of lower gross profit projects 
under construction during the period.

Selling, general and administrative

Selling, general and administrative expense consists primarily of salaries and 
other personnel-related costs, professional fees, insurance costs, and other 
business development and selling expenses.

Selling, general and administrative expense for the three months ended March 
31, 2020 increased compared to the three months ended March 31, 2019 primarily 
due to higher employee compensation expense, including higher severance and 
share-based compensation; an increase in professional fees; and higher expected 
credit losses for our accounts receivable due to the current economic 
conditions resulting from the COVID-19 pandemic.

Research and development

Research and development expense consists primarily of salaries and other 
personnel-related costs; the cost of products, materials, and outside services 
used in our R&D activities; and depreciation and amortization expense 
associated with R&D specific facilities and equipment. We maintain a number of 
programs and activities to improve our technology and processes in order to 
enhance the performance and reduce the costs of our solar modules.

Research and development expense for the three months ended March 31, 2020 
increased compared to the three months ended March 31, 2019 primarily due to 
increased material and module testing costs and higher employee compensation 
expense.

Production start-up

Production start-up expense consists primarily of employee compensation and 
other costs associated with operating a production line before it is qualified 
for full production, including the cost of raw materials for solar modules run 
through the production line during the qualification phase and applicable 
facility related costs. Costs related to equipment upgrades and implementation 
of manufacturing process improvements are also included in production start-up 
expense as well as costs related to the selection of a new site, related legal 
and regulatory costs, and costs to maintain our plant replication program to 
the extent we cannot capitalize these expenditures. In general, we expect 
production start-up expense per production line to be higher when we build an 
entirely new manufacturing facility compared with the addition or replacement 
of production lines at an existing manufacturing facility, primarily due to the 
additional infrastructure investment required when building an entirely new 
facility.

During the three months ended March 31, 2020, we incurred production start-up 
expense for the transition to Series 6 module manufacturing at our second 
facility in Kulim, Malaysia and the capacity expansion of our manufacturing 
facility in Perrysburg, Ohio. During the three months ended March 31, 2019, we 
incurred production start-up expense at our facility in Lake Township, Ohio, 
and our second facility in Ho Chi Minh City, Vietnam, which commenced 
commercial production in early 2019.

Foreign currency (loss) income, net

Foreign currency (loss) income, net consists of the net effect of gains and 
losses resulting from holding assets and liabilities and conducting 
transactions denominated in currencies other than our subsidiaries’ functional 
currencies.

Foreign currency loss for the three months ended March 31, 2020 was consistent 
with the three months ended March 31, 2019.

Interest income

Interest income is earned on our cash, cash equivalents, marketable securities, 
restricted cash, and restricted marketable securities. Interest income also 
includes interest earned from notes receivable and late customer payments.

Interest income for the three months ended March 31, 2020 decreased compared to 
the three months ended March 31, 2019 primarily due to lower average balances 
of time deposits and lower interest rates on cash and cash equivalents.

Interest expense, net

Interest expense, net is primarily comprised of interest incurred on long-term 
debt, settlements of interest rate swap contracts, and changes in the fair 
value of interest rate swap contracts that do not qualify for hedge accounting 
in accordance with ASC 815. We may capitalize interest expense to our project 
assets or property, plant and equipment when such costs qualify for interest 
capitalization, which reduces the amount of net interest expense reported in 
any given period.

Interest expense, net for the three months ended March 31, 2020 decreased 
compared to the three months ended March 31, 2019 primarily due to changes in 
the fair value of interest rate swap contracts, which do not qualify for hedge 
accounting, partially offset by higher interest expense associated with project 
debt.

Other (expense) income, net

Other (expense) income, net is primarily comprised of miscellaneous items and 
realized gains and losses on the sale of marketable securities and restricted 
marketable securities.

Other (expense) income, net for the three months ended March 31, 2020 decreased 
compared to the three months ended March 31, 2019 primarily due to expected 
credit losses associated with certain notes receivable, partially offset by 
prior period charges associated with certain letter of credit arrangements and 
the impairment of a strategic investment. See Note 5. “Consolidated Balance 
Sheet Details” for further information about the allowance for credit losses 
for our notes receivable.

Income tax benefit

Income tax expense or benefit, deferred tax assets and liabilities, and 
liabilities for unrecognized tax benefits reflect our best estimate of current 
and future taxes to be paid. We are subject to income taxes in both the United 
States and numerous foreign jurisdictions in which we operate, principally 
Australia, Japan, and Malaysia. Significant judgments and estimates are 
required to determine our consolidated income tax expense. The statutory 
federal corporate income tax rate in the United States is 21%, and the tax 
rates in Australia, Japan, and Malaysia are 30%, 30.6%, and 24%, respectively. 
In Malaysia, we have been granted a long-term tax holiday, scheduled to expire 
in 2027, pursuant to which substantially all of our income earned in Malaysia 
is exempt from income tax, conditional upon our continued compliance with 
certain employment and investment thresholds.

Our tax rate is affected by recurring items, such as tax rates in foreign 
jurisdictions and the relative amounts of income we earn in those 
jurisdictions. The rate is also affected by discrete items that may occur in 
any given period, but are not consistent from period to period. Income tax 
benefit increased by $87.8 million during the three months ended March 31, 2020 
compared to the three months ended March 31, 2019 primarily due to an $88.7 
million discrete tax benefit from the effect of tax law changes associated with 
the CARES Act.

Equity in earnings, net of tax

Equity in earnings, net of tax represents our proportionate share of the 
earnings or losses from equity method investments as well as any gains or 
losses on the sale or disposal of such investments.

Equity in earnings, net of tax for the three months ended March 31, 2020 was 
consistent with the three months ended March 31, 2019.

Critical Accounting Policies and Estimates

In preparing our condensed consolidated financial statements in conformity with 
U.S. GAAP, we make estimates and assumptions that affect the amounts of 
reported assets, liabilities, revenues, and expenses, as well as the disclosure 
of contingent liabilities. Some of our accounting policies require the 
application of significant judgment in the selection of the appropriate 
assumptions for making these estimates. By their nature, these judgments are 
subject to an inherent degree of uncertainty. We base our judgments and 
estimates on our historical experience, our forecasts, and other available 
information as appropriate. We believe the judgments and estimates involved in 
over time revenue recognition, accrued solar module collection and recycling, 
product warranties, accounting for income taxes, and long-lived asset 
impairments have the greatest potential impact on our condensed consolidated 
financial statements. The actual results experienced by us may differ 
materially and adversely from our estimates. To the extent there are material 
differences between our estimates and the actual results, our future results of 
operations will be affected. For a description of the accounting policies that 
require the most significant judgment and estimates in the preparation of our 
condensed consolidated financial statements, refer to our Annual Report on Form 
10-K for the year ended December 31, 2019.

Liquidity and Capital Resources

As of March 31, 2020, we believe that our cash, cash equivalents, marketable 
securities, cash flows from operating activities, contracts with customers for 
the future sale of solar modules, and advanced-stage project pipeline will be 
sufficient to meet our working capital, systems project investment, and capital 
expenditure needs for at least the next 12 months. As needed, we also believe 
we will have adequate access to the capital markets. We monitor our working 
capital to ensure we have adequate liquidity, both domestically and 
internationally.

We intend to maintain appropriate debt levels based upon cash flow 
expectations, our overall cost of capital, and expected cash requirements for 
our operations, such as systems project development activities in certain 
international regions. However, our ability to raise capital on terms 
commercially acceptable to us could be constrained if there is insufficient 
lender or investor interest due to company-specific, industry-wide, or broader 
market concerns, such as a tightening of the supply of capital due to the 
COVID-19 pandemic and related containment measures. Any incremental debt 
financings could result in increased debt service expenses and/or restrictive 
covenants, which could limit our ability to pursue our strategic plans.

As of March 31, 2020, we had $1.5 billion of cash, cash equivalents, and 
marketable securities compared to $2.2 billion as of December 31, 2019. The 
decrease in cash, cash equivalents, and marketable securities was primarily 
driven by the $350 million settlement payment associated with our prior class 
action lawsuit; the timing of cash receipts from certain third-party module 
sales, for which proceeds were received in late 2019 prior to the step down in 
the U.S. investment tax credit; purchases of property, plant and equipment; and 
other operating expenditures. As of March 31, 2020, $0.9 billion of our cash, 
cash equivalents, and marketable securities was held by our foreign 
subsidiaries and was primarily based in U.S. dollar, Euro, and Japanese yen 
denominated holdings.

We utilize a variety of tax planning and financing strategies in an effort to 
ensure that our worldwide cash is available in the locations in which it is 
needed. If certain international funds were needed for our operations in the 
United States, we may be required to accrue and pay certain U.S. and foreign 
taxes to repatriate such funds. We maintain the intent and ability to 
permanently reinvest our accumulated earnings outside the United States, with 
the exception of our subsidiaries in Canada and Germany. In addition, changes 
to foreign government banking regulations may restrict our ability to move 
funds among various jurisdictions under certain circumstances, which could 
negatively impact our liquidity and capital resources.

Our systems business requires significant liquidity and is expected to continue 
to have significant liquidity requirements in the future. The net amount of our 
project assets and related portion of deferred revenue, which approximates our 
net capital investment in the development and construction of systems projects, 
was $363.7 million as of March 31, 2020. Solar power project development 
cycles, which span the time between the identification of a site location and 
the commercial operation of a system, vary substantially and can take many 
years to mature. As a result of these long project cycles and strategic 
decisions to finance the development of certain projects using our working 
capital, we may need to make significant up-front investments of resources in 
advance of the receipt of any cash from the sale of such projects. Delays in 
construction or in completing the sale of our systems projects that we are 
self-financing may also impact our liquidity. In certain circumstances, we may 
need to finance construction costs exclusively using working capital, if 
project financing becomes unavailable due to regional, market-wide, or other 
concerns.

From time to time, we may develop projects in certain markets around the world 
where we may hold all or a significant portion of the equity in a project for 
several years. Given the duration of these investments and the currency risk 
relative to the U.S. dollar in some of these markets, we continue to explore 
local financing alternatives. Should these financing alternatives be 
unavailable or too cost prohibitive, we could be exposed to significant 
currency risk and our liquidity could be adversely impacted.

Additionally, we may elect to retain an ownership interest in certain systems 
projects after they become operational if we determine it would be of economic 
and strategic benefit to do so. If, for example, we cannot sell a system at 
economics that are attractive to us or potential customers are unwilling to 
assume the risks and rewards typical of system ownership, we may instead elect 
to temporarily own and operate such system until we can sell it on economically 
attractive terms. The decision to retain ownership of a system impacts our 
liquidity depending upon the size and cost of the project. As of March 31, 
2020, we had $470.7 million of net PV solar power systems that had been placed 
in service, primarily in international markets. We have elected, and may in the 
future elect, to enter into temporary or long-term project financing to reduce 
the impact on our liquidity and working capital with regards to such systems.

The following additional considerations have impacted or may impact our 
liquidity for 2020 and beyond:

•We expect to spend $450 million to $550 million for capital expenditures, 
including amounts related to the transition of our second manufacturing 
facility in Kulim, Malaysia from Series 4 to Series 6 module 54 Table of 
Contents technology and upgrades to other machinery and equipment, which we 
believe will further increase our module wattage and expand capacity and 
throughput at our other manufacturing facilities.

•In January 2020, we entered into an MOU to settle a class action lawsuit filed 
in the Arizona District Court. Pursuant to the MOU, among other things, we 
agreed to pay a total of $350 million to settle the claims in the lawsuit in 
exchange for mutual releases and dismissal with prejudice of the compliant upon 
court approval of the settlement. In February 2020, we subsequently entered 
into a Stipulation and Agreement of Settlement (the “Settlement Agreement”) 
with certain named plaintiffs on terms and conditions that were consistent with 
the MOU. Pursuant to the Settlement Agreement, among other things, (i) we 
contributed $350 million in cash to a settlement fund that will be used to pay 
all settlement fees and expenses, attorneys’ fees and expenses, and cash 
payments to members of the settlement class and (ii) the settlement class has 
agreed to release us, the other defendants named in the class action, and 
certain of their respective related parties from any and all claims concerning, 
based on, arising out of, or in connection with the class action. The 
Settlement Agreement contained no admission of liability, wrongdoing, or 
responsibility by any of the parties.

The settlement, including the payment and release described above, is subject 
to court approval. Following a February 27, 2020 hearing, the Arizona District 
Court entered an order on March 2, 2020 that granted preliminary approval of 
the settlement and permitted notice to the class. Under that order, among other 
matters, written objections from any objectors are due by June 9, 2020 and a 
final approval hearing is scheduled for June 30, 2020. If the court approves 
the settlement and enters such order and final judgement, and such judgement is 
no longer subject to further appeal or other review, the settlement fund will 
be disbursed in accordance with a plan of allocation approved by the court and 
the release will be effective to all members of the settlement class.

•Our failure to obtain raw materials and components that meet our quality, 
quantity, and cost requirements in a timely manner could interrupt or impair 
our ability to manufacture our solar modules or increase our manufacturing 
costs. Accordingly, we may enter into long-term supply agreements to mitigate 
potential risks related to the procurement of key raw materials and components, 
and such agreements may be noncancelable or cancelable with a significant 
penalty. For example, we have entered into long-term supply agreements for the 
purchase of certain specified minimum volumes of substrate glass and cover 
glass for our PV solar modules. Our actual purchases under these supply 
agreements are expected to be approximately $2.4 billion of substrate glass and 
$500 million of cover glass. We have the right to terminate these agreements 
upon payment of specified termination penalties (which are up to $430 million 
in the aggregate and decline over time during the respective supply periods).

•The balance of our solar module inventories and BoS parts was $387.0 million 
as of March 31, 2020. As we continue to develop our advanced-stage project 
pipeline, we must produce solar modules in volumes sufficient to support our 
planned construction schedules. As part of this development and construction 
cycle, we typically produce these inventories in advance of receiving payment 
for such materials, which may temporarily reduce our liquidity. Once solar 
modules and BoS parts are installed in a project, they are classified as either 
project assets, PV solar power systems, or cost of sales depending on whether 
the project is subject to a definitive sales contract and whether other revenue 
recognition criteria have been met. We also produce significant volumes of 
modules for sale directly to third-parties, which requires us to carry 
inventories at levels sufficient to satisfy the demand of our customers and the 
needs of their projects, which may also temporarily reduce our liquidity.

•We may commit significant working capital over the next several years to 
advance the construction of various U.S. systems projects or procure the 
associated modules or BoS parts, by specified dates, for such projects to 
qualify for certain federal investment tax credits (“ITC”). Among other 
requirements, such credits require projects to have commenced construction in 
2020, which may be achieved by certain qualifying procurement activities, to 
receive a 26% investment tax credit. The credit will step down to 22% for 
projects that commence construction in 2021, and will further step down to 10% 
for projects that commence construction thereafter.

•We may also commit working capital to acquire solar power projects in various 
stages of development, including advanced-stage projects with PPAs, and to 
continue developing those projects, as necessary. Depending upon the size and 
stage of development, the costs to acquire such solar power projects could be 
significant. When evaluating project acquisition opportunities, we consider 
both the strategic and financial benefits of any such acquisitions.

Cash Flows

Operating Activities

The increase in net cash used in operating activities was primarily driven by 
the $350 million settlement payment associated with our prior class action 
lawsuit as described above and the timing of cash receipts from certain 
third-party module sales, for which proceeds were received in late 2019 prior 
to the step down in the U.S. investment tax credit. Such increases were 
partially offset by higher cash proceeds from projects sold in prior periods.

Investing Activities

The increase in net cash from investing activities was primarily due to higher 
net sales and maturities of marketable securities and restricted marketable 
securities and lower purchases of property, plant and equipment.

Financing Activities

The decrease in net cash provided by financing activities was primarily due to 
higher net borrowings under project specific debt financings in 2019 associated 
with the construction of certain projects in Japan and Australia.

Contractual Obligations

There have been no material changes in our contractual obligations outside the 
ordinary course of business since December 31, 2019.

Off-Balance Sheet Arrangements

As of March 31, 2020, we had no off-balance sheet debt or similar obligations, 
other than financial assurance related instruments, which are not classified as 
debt. We do not guarantee any third-party debt.

Quantitative and Qualitative Disclosures about Market Risk

Limitations on the Effectiveness of Controls

Control systems, no matter how well designed and operated, can provide only 
reasonable, not absolute, assurance that the control systems’ objectives are 
being met. Further, the design of any system of controls must reflect the fact 
that there are resource constraints, and the benefits of all controls must be 
considered relative to their costs. Because of the inherent limitations in all 
control systems, no evaluation of controls can provide absolute assurance that 
all control issues and instances of fraud, if any, within our Company have been 
detected. These inherent limitations include the realities that judgments in 
decision-making can be faulty and that breakdowns can occur because of error or 
mistake. Control systems can also be circumvented by the individual acts of 
some persons, by collusion of two or more people, or by management override of 
the controls. The design of any system of controls is also based in part upon 
certain assumptions about the likelihood of future events, and there can be no 
assurance that any design will succeed in achieving its stated goals under all 
potential future conditions. Over time, controls may become inadequate because 
of changes in conditions or deterioration in the degree of compliance with 
policies or procedures.



Risk Factors

COVID-19 and other public health crises could materially impact our business, 
financial condition, and results of operations.

The COVID-19 pandemic has had an unprecedented impact on the United States, 
Malaysia, and other countries throughout the world, including those in which we 
do business or have operations. Although as of the date of this filing, we have 
not been materially impacted by COVID-19, the pandemic could materially impact 
our business, financial condition, and results of operations in the future. The 
extent to which the pandemic could impact us is highly uncertain and cannot be 
predicted, and will depend largely on subsequent developments, including the 
severity and duration of the pandemic, and measures taken to contain the spread 
of the virus, such as restrictions on travel and gatherings of people and 
temporary closures of or limitations on businesses and other commercial 
activities.

As a result of the COVID-19 pandemic and these related containment measures, we 
may be subject to significant risks, which have the potential to materially and 
adversely impact our business, financial condition, and results of operations, 
including the following:

•The economic disruption caused by the COVID-19 pandemic may result in a 
long-term tightening of the supply of capital in global financial markets 
(including, in the United States, a reduction in total tax equity 
availability), which could make it difficult for purchasers of our development 
projects to secure the debt or equity capital necessary to finance a PV solar 
power system, thereby delaying or reducing demand for these projects;

•Purchasers of PV modules may delay module procurement in response to the 
COVID-19 pandemic, which may result in additional pressure on global demand and 
average selling prices for modules, and may exacerbate structural imbalances 
between global PV module supply and demand;

•We may at any time be ordered by governmental authorities, or we may 
determine, based on our understanding of the recommendations or orders of 
governmental authorities, that we have to curtail or cease business operations 
or activities, including manufacturing;

•The failure of our suppliers or vendors to supply materials or equipment, or 
the failure of our vendors to repair or replace our specialized equipment, due 
to the COVID-19 pandemic, related containment measures, or limitations on 
logistics providers’ ability to operate, may idle, slowdown, shutdown, or 
otherwise cause us to adjust our manufacturing capacity;

•The COVID-19 pandemic and related containment measures may result in us 
incurring delays in obtaining, or failing to obtain, the approvals or rights 
that are required for our development projects to proceed, such as permitting, 
interconnection, or land usage approvals or rights, and the COVID-19 pandemic 
and related containment measures may delay or prevent the performance by third 
parties of activities related to the development of these projects, such as 
interconnection, engineering, procurement, construction, and other activities;

•We perform substantial R&D to continue to improve our module wattage (or 
conversion efficiency), lower our module cost per watt, lower the LCOE of our 
PV solar power systems, and otherwise keep pace with technological advances in 
the solar industry. The COVID-19 pandemic and related containment measures, 
including the unavailability of our personnel and third-party partners who are 
engaged in R&D activities, may inhibit our R&D efforts or our ability to timely 
advance or commercialize these efforts; and

•In response to the COVID-19 pandemic, the vast majority of our associates who 
are capable of performing their function remotely are telecommuting (i.e., 
working from home). While we have instituted security measures to minimize the 
likelihood and impact of a cybersecurity incident with respect to associates 
utilizing technological communications tools, these measures may be inadequate 
to prevent a cybersecurity breach because of the unprecedented number of 
associates continuously using these tools. Recently, there have been reports of 
a surge in widespread cyber-attacks during the COVID-19 pandemic. Any increase 
in the frequency or scope of cyber-attacks during the COVID-19 pandemic may 
exacerbate the aforementioned cybersecurity risks.

If the severity and duration of the COVID-19 pandemic and related containment 
measures do not abate, many of the other risks described in Item 1A. “Risk 
Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019 
may have a significant impact on our business, financial condition, and results 
of operations.

The reduction, elimination, or expiration of government subsidies, economic 
incentives, tax incentives, renewable energy targets, and other support for 
on-grid solar electricity applications, or other adverse public policies, such 
as tariffs or other trade remedies imposed on solar cells and modules, could 
negatively impact demand and/or price levels for our solar modules and systems 
and limit our growth or lead to a reduction in our net sales, thereby adversely 
impacting our operating results.

Although we believe that solar energy will experience widespread adoption in 
those applications where it competes economically with traditional forms of 
energy without any support programs, in certain markets our net sales and 
profits remain subject to variability based on the availability and size of 
government subsidies and economic incentives. Federal, state, and local 
governmental bodies in many countries have provided subsidies in the form of 
feed-in-tariffs, rebates, tax incentives, and other incentives to end users, 
distributors, system integrators, and manufacturers of PV solar products. Many 
of these support programs expire, phase out over time, require renewal by the 
applicable authority, or may be amended. A summary of certain recent 
developments in the major government support programs that may impact our 
business appears under Item 1. “Business – Support Programs” of our Annual 
Report on Form 10-K. To the extent these support programs are reduced earlier 
than previously expected or are changed retroactively, such changes could 
negatively impact demand and/or price levels for our solar modules and systems, 
lead to a reduction in our net sales, and adversely impact our operating 
results. Another consideration in the U.S. market, and to a lesser extent in 
other global markets, is the effect of governmental land-use planning policies 
and environmental policies on utility-scale PV solar development. The adoption 
of restrictive land-use designations or environmental regulations that 
proscribe or restrict the siting of utility-scale solar facilities could 
adversely affect the marginal cost of such development.