Attached files
file | filename |
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EX-32.1 - Hoku Corp | v164866_ex32-1.htm |
EX-32.2 - Hoku Corp | v164866_ex32-2.htm |
EX-31.1 - Hoku Corp | v164866_ex31-1.htm |
EX-31.2 - Hoku Corp | v164866_ex31-2.htm |
EX-10.109 - Hoku Corp | v164866_ex10-109.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
2009
|
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR THE TRANSITION PERIOD
FROM ______ TO ______.
|
Commission
File Number: 000-51458
HOKU
SCIENTIFIC, INC.
(Exact
name of Registrant as specified in its Charter)
Delaware
|
99-0351487
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
1288
Ala Moana Blvd., Ste. 220
Honolulu,
Hawaii 96814
(Address
of principal executive offices, including zip code)
(808)
682-7800
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. x Yes ¨ No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). ¨ Yes ¨ No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
¨ Large
accelerated filer x Accelerated
filer ¨ Non-accelerated
filer (Do not check if a smaller reporting company)
¨ Smaller
reporting company
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). ¨ Yes x No
Common
Stock, par value $0.001 per share, outstanding as of October 15, 2009:
21,397,078
HOKU
SCIENTIFIC, INC.
FORM
10-Q
For the
Quarterly Period Ended September 30, 2009
Table
of Contents
Part
I – Financial
Information
|
|||
Item
1.
|
Financial
Statements
|
3
|
|
Consolidated
Balance Sheets as of September 30, 2009 (unaudited) and March 31,
2009
|
3
|
||
Consolidated
Statements of Operations for the three months and six months ended
September 30, 2009 and 2008 (unaudited)
|
4
|
||
Consolidated
Statements of Cash Flows for the six months ended September 30, 2009 and
2008 (unaudited)
|
5
|
||
Notes
to Consolidated Financial Statements (unaudited)
|
6
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
16
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
26
|
|
Item
4.
|
Controls
and Procedures
|
27
|
|
Part
II – Other Information
|
|||
Item
1.
|
Legal
Proceedings
|
28
|
|
Item
1A.
|
Risk
Factors
|
28
|
|
Item
6.
|
Exhibits
|
45
|
|
Signatures
|
46
|
2
PART I. FINANCIAL
INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
HOKU
SCIENTIFIC, INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share and per share data)
September 30,
2009
|
March 31,
2009
|
|||||||
Assets
|
(unaudited)
|
|||||||
Cash
and cash equivalents
|
$ | 9,111 | $ | 17,383 | ||||
Inventory
|
302 | 1,549 | ||||||
Accounts
receivable
|
102 | 420 | ||||||
Costs
of uncompleted contracts
|
667 | 108 | ||||||
Other
current assets
|
491 | 226 | ||||||
Total
current assets
|
10,673 | 19,686 | ||||||
Property,
plant and equipment, net
|
267,689 | 204,525 | ||||||
Total
assets
|
$ | 278,362 | $ | 224,211 | ||||
Liabilities
and Equity
|
||||||||
Accounts
payable and accrued expenses
|
$ | 60,596 | $ | 38,191 | ||||
Deferred
revenue
|
12 | 784 | ||||||
Deposits
– Hoku Solar
|
- | 158 | ||||||
Deposits
– Hoku Materials
|
6,194 | 375 | ||||||
Other
current liabilities
|
223 | 446 | ||||||
Total
current liabilities
|
67,025 | 39,954 | ||||||
Long-term
debt (Deposits – Hoku Materials)
|
158,806 | 133,625 | ||||||
Total
liabilities
|
225,831 | 173,579 | ||||||
Commitments
and Contingencies
|
||||||||
Equity:
|
||||||||
Preferred
stock, $0.001 par value. Authorized 5,000,000 shares; no shares issued and
outstanding as of September 30, 2009 and March 31,
2009.
|
||||||||
Common
stock, $0.001 par value. Authorized 100,000,000 shares; issued
and outstanding 21,397,078 and 21,092,079 shares as of September 30, 2009
and March 31, 2009, respectively.
|
21 | 21 | ||||||
Additional
paid-in capital
|
66,208 | 65,780 | ||||||
Accumulated
deficit
|
(17,305 | ) | (15,169 | ) | ||||
Total
Hoku Scientific, Inc. shareholders’ equity
|
48,924 | 50,632 | ||||||
Noncontrolling
interest
|
3,607 | - | ||||||
Total
equity
|
52,531 | 50,632 | ||||||
Total
liabilities and equity
|
$ | 278,362 | $ | 224,211 |
See
accompanying notes to consolidated financial statements.
3
HOKU
SCIENTIFIC, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
(in
thousands, except share and per share data)
Three Months Ended
September 30,
|
Six Months Ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Service and license revenue(1)
|
$ | 1,498 | $ | 1,638 | $ | 1,572 | $ | 3,824 | ||||||||
Product revenue
|
— | 232 | — | 254 | ||||||||||||
Total revenue
|
1,498 | 1,870 | 1,572 | 4,078 | ||||||||||||
Cost of service and license
revenue
|
1,410 | 1,320 | 1,424 | 2,812 | ||||||||||||
Cost of product revenue
|
— | 176 | — | 208 | ||||||||||||
Total cost of revenue
|
1,410 | 1,496 | 1,424 | 3,020 | ||||||||||||
Gross margin
|
88 | 374 | 148 | 1,058 | ||||||||||||
Operating expenses:
|
||||||||||||||||
Selling, general and administrative (1)
|
1,539 | 1,060 | 2,604 | 2,304 | ||||||||||||
Total operating expenses
|
1,539 | 1,060 | 2,604 | 2,304 | ||||||||||||
Loss from operations
|
(1,451 | ) | (686 | ) | (2,456 | ) | (1,246 | ) | ||||||||
Interest and other income
(loss)
|
217 | (687 | ) | 302 | 51 | |||||||||||
Net loss
|
(1,234 | ) | (1,373 | ) | (2,154 | ) | (1,195 | ) | ||||||||
Net loss attributable to the noncontrolling
interest
|
(3 | ) | — | (18 | ) | — | ||||||||||
Net loss attributable to Hoku Scientific,
Inc.
|
$ | (1,231 | ) | $ | (1,373 | ) | $ | (2,136 | ) | $ | (1,195 | ) | ||||
Basic net loss per share attributable to Hoku
Scientific, Inc.
|
$ | (0.06 | ) | $ | (0.07 | ) | $ | (0.10 | ) | $ | (0.06 | ) | ||||
Diluted net loss per share attributable to Hoku
Scientific, Inc.
|
$ | (0.06 | ) | $ | (0.07 | ) | $ | (0.10 | ) | $ | (0.06 | ) | ||||
Shares used in computing basic net loss per
share
|
21,018,162 | 20,454,235 | 21,012,129 | 19,933,107 | ||||||||||||
Shares used in computing diluted net loss per
share
|
21,018,162 | 20,454,235 | 21,012,129 | 19,933,107 |
(1) Includes stock-based
compensation as follows:
|
||||||||||||||||
Cost of service and license
revenue
|
$ | 3 | $ | 3 | $ | 7 | $ | 7 | ||||||||
Selling, general and
administrative
|
269 | 257 | 428 | 721 |
See
accompanying notes to consolidated financial statements.
4
HOKU
SCIENTIFIC, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited,
in thousands)
Six Months Ended September
30,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss attributable to Hoku Scientific, Inc.
|
$ | (2,136 | ) | $ | (1,195 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
135 | 47 | ||||||
Impairment
of equipment held for sale
|
- | 3 | ||||||
Stock-based
compensation
|
377 | 727 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
318 | (509 | ) | |||||
Costs
of uncompleted contracts
|
(559 | ) | - | |||||
Inventory
|
1,247 | (482 | ) | |||||
Equipment
held for sale
|
- | 26 | ||||||
Other
current assets
|
(265 | ) | 1,025 | |||||
Accounts
payable and accrued operating expenses
|
(685 | ) | 3,422 | |||||
Deferred
revenue
|
(772 | ) | (24 | ) | ||||
Other
current liabilities
|
(223 | ) | (922 | ) | ||||
Deposits
– Hoku Materials
|
- | (4,000 | ) | |||||
Deposits
– Hoku Solar
|
(158 | ) | 532 | |||||
Net
cash used in operating activities
|
(2,721 | ) | (1,350 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Proceeds
from maturities of short-term investments
|
37 | 22,782 | ||||||
Purchases
of short-term investments
|
(37 | ) | (20,790 | ) | ||||
Increase in
restricted cash
|
- | 941 | ||||||
Payment
of accounts payable and accrued capital expenditures
|
(40,159 | ) | (60,218 | ) | ||||
Net
cash used in investing activities
|
(40,159 | ) | (57,285 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Net
proceeds from note payable
|
- | 3,380 | ||||||
Exercise
of common stock options
|
1 | 74 | ||||||
Proceeds
related to shelf registration stock sales
|
- | 6,729 | ||||||
Costs
related to shelf registration stock sales
|
- | (479 | ) | |||||
Contributions
from noncontrolling interest
|
3,607 | - | ||||||
Deposits
received – Hoku Materials
|
31,000 | 35,000 | ||||||
Net
cash provided by financing activities
|
34,608 | 44,704 | ||||||
Net
decrease in cash and cash equivalents
|
(8,272 | ) | (13,931 | ) | ||||
Cash
and cash equivalents at beginning of period
|
17,383 | 27,768 | ||||||
Cash
and cash equivalents at end of period
|
$ | 9,111 | $ | 13,837 | ||||
Supplemental
disclosure of non-cash investing activities:
|
||||||||
Acquisition
of property and equipment
|
$ | 60,372 | $ | 6,106 |
See
accompanying notes to consolidated financial statements.
5
HOKU
SCIENTIFIC, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(1)
Summary of Significant Accounting Policies and Practices
(a)
Description of Business
Hoku
Scientific, Inc., or the Company, is a materials science company focused on
clean energy technologies. The Company was incorporated in Hawaii in March 2001,
as Pacific Energy Group, Inc. In July 2001, the Company changed its name to Hoku
Scientific, Inc. In December 2004, the Company was reincorporated in
Delaware.
The
Company has historically focused its efforts on the design and development of
fuel cell technologies, including its Hoku membrane electrode assemblies, or
MEAs, and Hoku Membranes. In May 2006, the Company announced its plans to form
an integrated photovoltaic, or PV, module business, and its plans to manufacture
polysilicon, a primary material used in the manufacture of PV modules. In fiscal
2007, the Company reorganized its business into three business units: Hoku
Materials, Hoku Solar and Hoku Fuel Cells. In February and March
2007, the Company incorporated Hoku Materials, Inc. and Hoku Solar, Inc.,
respectively, as wholly-owned subsidiaries to operate its polysilicon and solar
businesses, respectively.
(b)
Basis of Presentation
The
Company has incurred operating losses in recent years and as of September 30,
2009, has a working capital deficiency. The losses, in part, have occurred as
the Company has directed its efforts to focus on the development of its
polysilicon and PV installation businesses. The Company's current operating plan
anticipates receiving cash during the present fiscal year through a combination
of debt financing and polysilicon customer prepayments to enable the continued
construction of the Company’s planned polysilicon production facility in
Pocatello, Idaho, or the Project. There have been delays in securing adequate
financing, and the Company has implemented cost and expense reduction measures
and other programs. In July 2009, the Company began curtailing construction at
the Project.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. This basis of accounting
contemplates the recovery of the Company’s assets and the satisfaction of
liabilities in the normal course of business and does not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going
concern. Refer to Note 12 for further discussion of management’s
plans and efforts related to the Company’s ability to continue as a going
concern.
The
accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with U.S. generally accepted accounting principles,
or GAAP, for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and accompanying notes required by GAAP for complete financial
statements. In the opinion of management, the consolidated financial statements
reflect normal recurring adjustments necessary for a fair presentation of the
results for the interim periods.
These
statements should be read in conjunction with the audited consolidated financial
statements and related notes included in the Company’s Annual Report on Form
10-K for the year ended March 31, 2009. Operating results for the three and six
months ended September 30, 2009 are not necessarily indicative of the results
that may be expected for the year ending March 31, 2010.
(c)
Principles of Consolidation
The
consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries, after elimination of significant intercompany amounts
and transactions, and Hoku Solar Power I LLC, a variable interest entity in
which the Company is the primary beneficiary.
6
(d) Use
of Estimates
The
preparation of the Company’s financial statements in conformity with U.S.
generally accepted accounting principles requires the Company’s management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. On an
on-going basis, the Company evaluates its estimates, including those related to
revenue recognition, accounts receivable, the carrying amounts of property,
plant and equipment and inventory, income taxes and the valuation of deferred
tax assets and stock options. These estimates are based on historical facts and
various other assumptions that the Company believes are reasonable.
(e)
Revenue Recognition
Revenue
from polysilicon and PV system installations is recognized when there is
evidence of an arrangement, delivery has occurred or services have been
rendered, the arrangement fee is fixed or determinable, and collectability of
the arrangement fee is reasonably assured. PV system installation contracts may
have several different phases with corresponding progress billings; however,
revenue is recognized when the installation is complete.
The
Company has also provided testing and engineering services to customers pursuant
to milestone-based contracts that are not multi-element arrangements. These
contracts sometimes provided for periodic invoicing upon completion of
contractual milestones. Customer acceptance is usually required prior to
invoicing. The Company recognizes revenue for these arrangements under the
completed contract method. Under the completed-contract method, the Company
defers the contract fulfillment costs and any advance payments received from the
customer and recognizes the costs and revenue in its statement of operations
once the contract is complete and the final customer acceptance, if required,
has been obtained.
Revenue
from the sale of electricity generated from the Company’s PV systems is based on
kilowatt usage and is recognized in accordance with its power purchase
agreements, or PPAs, with the Hawaii State Department of
Transportation.
The
Company charges the appropriate Hawaii general excise tax to its customers. The
taxes collected from sales are excluded from revenues and recorded as a
payable.
(f)
Cost of Uncompleted Contracts
Cost of
uncompleted contracts represents services performed and/or materials used
towards completing a customer contract. Based on the Company’s revenue
recognition policy, these services and/or materials cannot be recognized as
contract costs, and are deferred until the related revenue can be recognized. As
of September 30 and March 31, 2009, cost of uncompleted contracts was $667,000
and $108,000, respectively, related to PV system installation
contracts.
(g)
Guarantees and Indemnifications
The
Company has entered into PV system installation contracts which warrant the
installation against defects in workmanship, generally for a period of one year
from the date of installation. There were no accruals for or expenses
related to the warranties for any period presented.
The
Company, as permitted under Delaware law and in accordance with its Bylaws,
indemnifies its officers and directors for certain events or occurrences,
subject to certain limits, while the officer or director is or was serving at
the Company’s request in that capacity. The term of the indemnification period
is equal to the officer’s or director’s lifetime. The Company has also entered
into additional indemnification agreements with its officers and directors in
connection with its initial public offering. The maximum amount of potential
future indemnification is unlimited; however, the Company has obtained director
and officer insurance that limits its exposure and may enable it to recover a
portion of any future amounts paid. The Company believes the fair value for
these indemnification obligations is minimal. Accordingly, the Company has not
recognized any liabilities relating to these obligations as of September 30,
2009 and March 31, 2009.
The
Company has entered into customer contracts that contain indemnification
provisions. In these provisions, the Company typically agrees to indemnify the
customer against certain types of third-party claims. The Company would accrue
for known indemnification issues when a loss is probable and could be reasonably
estimated. The Company also would accrue for estimated incurred but unidentified
indemnification issues based on historical activity. There were no accruals for
or expenses related to indemnification issues for any period
presented.
(h)
Recently Issued Accounting Standards
In June
2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles- a
replacement of FASB Statement No. 162, which is now referenced as FASB
ASC 105-10-05. The FASB Accounting Standards Codification
(Codification) will become the source of authoritative U.S. generally accepted
accounting principles (GAAP) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (SEC) under the authority of federal
securities laws are also sources of authoritative GAAP for SEC
registrants. The new standard was effective for financial statements
issued for interim and annual periods ending after September 15, 2009 (i.e.,
September 30, 2009 for the Company) at which time the Codification will
supersede all then existing non-SEC accounting and reporting
standards.
7
In May
2009, the FASB issued SFAS No. 165, Subsequent Events, currently
referenced as FASB ASC 855-10-50, which requires that the Company specify the
period after the balance sheet date during which management shall evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements and the disclosures that an entity shall make about
events or transactions that occurred after the balance sheet
date. In preparing the accompanying unaudited financial
statements, the Company’s management has evaluated subsequent events through
November 9, 2009, which is the date that the financial statements were
filed.
(2)
Fair Value of Assets and Liabilities
Current
fair value guidance clarifies that fair value is an exit price, representing the
amount that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants. As such, fair
value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or
liability. As a basis for considering such
assumptions, the Company adheres to a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair value as
follows:
Level
1–
|
Observable
inputs such as quoted prices in active
markets;
|
Level
2–
|
Inputs,
other than the quoted prices in active markets, that are observable either
directly or indirectly; and
|
Level
3–
|
Unobservable
inputs in which there is little or no market data, which require the
reporting entity to develop its own
assumption.
|
As of
September 30, 2009, the Company held the following assets that are required to
be measured at fair value on a recurring basis (in thousands):
|
Fair Value Measurements as of September 30,
2009
|
|||||||||||||||
Total
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||||
Cash
equivalents
|
$ | 8,176 | $ | 8,176 | $ | — | $ | — | ||||||||
Total
assets measured at fair value
|
$ | 8,176 | $ | 8,176 | $ | — | $ | — |
(3)
Property, Plant and Equipment
Property,
plant and equipment consisted of the following:
September 30,
2009
|
March 31,
2009
|
|||||||
(in
thousands)
|
||||||||
Construction
in progress- Idaho plant and equipment
|
$ | 262,173 | $ | 199,338 | ||||
Photovoltaic
systems- Hoku Solar Power I, LLC
|
5,559 | 5,096 | ||||||
Production
equipment
|
108 | 108 | ||||||
Office
equipment and furniture
|
115 | 115 | ||||||
Automobile
|
98 | 98 | ||||||
268,053 | 204,755 | |||||||
Less
accumulated depreciation and amortization
|
(364 | ) | (230 | ) | ||||
Property,
plant and equipment, net
|
$ | 267,689 | $ | 204,525 |
In
assessing the recoverability of its long-lived assets, the Company compared the
carrying value to the undiscounted future cash flows the assets are expected to
generate. During the six months ended September 30, 2009, the Company had no
write-down of its assets.
(4)
Accounts payable and Accrued Expenses
Accounts
payable and accrued expenses were comprised of the following (in thousands of
dollars):
September 30,
2009
|
March 31,
2009
|
|||||||
(in
thousands)
|
||||||||
Capital
expenditures
|
$ | 60,372 | $ | 37,282 | ||||
Operating
expenditures
|
224 | 909 | ||||||
Property,
plant and equipment, net
|
$ | 60,596 | $ | 38,191 |
8
The
capital expenditures pertain primarily to the Idaho plant and equipment
additions that the Company is currently constructing in Pocatello, Idaho. Over
the next twelve months, the Company may have insufficient cash to meet all of
its obligations as they come due. To help address its obligations, in September
2009, the Company entered into a definitive agreement providing for a majority
investment in the Company by Tianwei New Energy Holdings Co., Ltd., or Tianwei,
and debt financing by Tianwei through China Construction Bank, as agent, for the
construction and development of the Company’s polysilicon production facility.
Subject to closing of the Tianwei financing transaction, which is anticipated to
occur in November 2009 after the satisfaction of closing conditions, including
but not limited to the approval of Chinese government authorities, and based on
the current terms of the anticipated transaction, $50 million of an aggregate of
$79 million in secured prepayments previously paid by Tianwei to the Company
under certain polysilicon supply agreements will be converted into shares of the
Company’s common stock. In addition, the Company would issue Tianwei
a warrant to purchase an additional 10 million shares of common stock and
Tianwei will arrange for $50 million in debt financing for the
Company, together with a commitment from Tianwei to assist the Company in
obtaining additional financing that may be required by the Company to construct
and operate the Project.
Furthermore,
the Company has modified payment terms in purchase orders with more than thirty
of its vendors to structure payment plans for amounts past due and to be
invoiced in the future. In the event the Company is unable to meet its
obligations under payment plans and other agreements, the Company may request
that its vendors forebear from enforcing one or more of their rights under their
respective agreements. There are no assurances that any of the Company’s vendors
will agree to forebear or otherwise make any concessions under their respective
agreements. If any of the Company’s vendors seek to enforce the Company’s
obligations under these agreements that it is unable to perform, which could
include asserting and/or foreclosing on materialman’s and laborer’s liens on the
Project, or taking other legal action, it could materially harm the Company’s
business, financial condition and results of operations and the Company may be
forced to delay, alter or abandon its planned business operations, which could
have a material adverse effect on the Company’s ability to continue as a going
concern and the recoverability of its long-lived assets.
(5)
Long-term Debt (Deposits- Hoku Materials)
The
Company has entered into various supply agreements with customers for the sale
and delivery of polysilicon over specified periods of time. Under the
supply agreements, customers are generally required to pay cash deposits to the
Company as a prepayment for future product deliveries. Generally,
these payments are for deliveries of polysilicon which are expected to occur
subsequent to the initial year of the agreements. At such time as the
Company begins to deliver polysilicon pursuant to each customer’s respective
contract and the Company is assured that the polysilicon has been accepted under
the terms of the respective contract, the related deposits will be reclassified
to deferred revenue.
As of
September 30 and March 31, 2009, the Company had $165 million and $134 million,
respectively, related to prepayments received under its various polysilicon
supply agreements. The prepaid amounts that are expected to be
applied to future product deliveries after September 30, 2010 have been
reflected in the consolidated balance sheets as long-term debt (deposits- Hoku
Materials) in the consolidated balance sheets.
Under the
terms of the various long-term polysilicon supply agreements with its customers,
the Company is generally required to refund these prepayments, in each case, if
the customer terminates the respective supply agreement under certain
circumstances, which generally include, but are not limited to, bankruptcy,
failure to commence shipments of polysilicon by specified dates, repeated
failure to deliver a specified quality of product, and/or failure to meet other
milestones. The Company has granted security interests to each of its
customers in all of the Company’s tangible and intangible assets related to its
polysilicon business to serve as collateral for the Company’s obligation to
repay the remaining amount of each of its customer’s respective prepayments made
as of the date of any termination that has not been applied to the purchase
price of polysilicon previously delivered under the respective
contract.
The
following is a summary of prepayments received as of September 30,
2009:
Prepayment
|
||||
Customer
|
(in
thousands)
|
|||
Wuxi
Suntech Power Co., Ltd.
|
$ | 2,000 | ||
Solarfun
Power Hong Kong Ltd.
|
37,000 | |||
Tianwei
New Energy (Chengdu) Wafer Co., Ltd.
|
79,000 | |||
Jianxi
Jinko Solar Co., Ltd.
|
20,000 | |||
Shanghai
Alex New Energy Co., Ltd.
|
20,000 | |||
Wealthy
Rise International, Ltd. (Solargiga)
|
7,000 | |||
$ | 165,000 |
Based on
existing terms of the various long-term polysilicon supply agreements as of
September 30, 2009, the $165 million of customer prepayments would be credited
against future product deliveries as follows:
9
Application
of
|
||||
Customer
Deposits |
||||
September 30 Ending
|
(in thousands)
|
|||
2010
|
$ | 6,194 | ||
2011
|
12,670 | |||
2012
|
17,556 | |||
2013
|
17,256 | |||
2014
|
16,356 | |||
Thereafter
|
94,968 | |||
$ | 165,000 |
In
September 2009, the Company entered into a definitive agreement providing for a
majority investment in the Company by Tianwei New Energy Holdings Co., Ltd., or
Tianwei, and debt financing by Tianwei through China Construction Bank as agent,
for the construction and development of its planned polysilicon manufacturing
plant. Subject to closing of the Tianwei financing transaction, which
is anticipated to occur in November 2009 after the satisfaction of closing
conditions, including but not limited to the approval of Chinese government
authorities, the existing supply agreements with Tianwei will be amended to
reflect the conversion of $50 million of an aggregate of $79 million in secured
prepayments previously paid by Tianwei to the Company into shares of the
Company’s common stock.
(6)
Total Equity
Changes
in total equity for the six months ended September 30, 2009 were as follows (in
thousands):
Hoku Scientific, Inc.
Shareholders
|
||||||||||||||||||||||||
Additional
|
||||||||||||||||||||||||
Common
|
Paid-in
|
Accumulated
|
Noncontrolling
|
Total
|
Comprehensive
|
|||||||||||||||||||
Stock
|
Capital
|
Deficit
|
Interest
|
Equity
|
Income
|
|||||||||||||||||||
Balance
as of March 31, 2009
|
$ | 21 | $ | 65,780 | $ | (15,169 | ) | $ | - | $ | 50,632 | $ | - | |||||||||||
Contributions from
noncontrolling interest
|
3,625 | 3,625 | ||||||||||||||||||||||
Net
loss
|
(2,136 | ) | (18 | ) | (2,154 | ) | (2,154 | ) | ||||||||||||||||
Exercise
of common stock options
|
2 | 2 | ||||||||||||||||||||||
Stock-based
compensation
|
220 | 220 | ||||||||||||||||||||||
Grants
of stock awards
|
206 | 206 | ||||||||||||||||||||||
Balance
as of September 30, 2009
|
$ | 21 | $ | 66,208 | $ | (17,305 | ) | $ | 3,607 | $ | 52,531 | $ | (2,154 | ) |
(7)
Income Taxes
Income
taxes are accounted for under the asset and liability method. The Company
recognizes federal and state current tax liabilities based on its estimate of
taxes payable to or refundable by each tax jurisdiction in the current fiscal
year.
Deferred
tax assets and liabilities are established for the temporary differences between
the financial reporting bases and the tax bases of the Company’s assets and
liabilities at the tax rates the Company expects to be in effect when these
deferred tax assets or liabilities are anticipated to be recovered or settled.
The Company’s ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during periods in which those temporary
differences become deductible. The Company also records a valuation allowance to
reduce deferred tax assets by the amount of any tax benefits that, based on
available evidence and judgment, are not expected to be realized. Based on the
best available objective evidence, it is more likely than not that the Company’s
net deferred tax assets will not be realized. Accordingly, the Company continues
to provide a valuation allowance against its net deferred tax assets as of
September 30, 2009.
10
(8)
Net Loss per Share
Basic net
loss per share is computed by dividing net loss by the weighted average number
of shares of common stock outstanding and not subject to repurchase during the
period. Diluted net loss per share is computed by dividing net loss by the sum
of the weighted average number of shares of common stock outstanding, and the
dilutive potential common equivalent shares outstanding during the period.
Dilutive potential common equivalent shares consist of dilutive shares of common
stock subject to repurchase and dilutive shares of common stock issuable upon
the exercise of outstanding options to purchase common stock, computed using the
treasury stock method.
The
following table sets forth the computation of basic and diluted net loss per
share, including the reconciliation of the denominator used in the
computation of basic and diluted net loss per share:
|
Three Months Ended
September 30,
|
|
Six Months Ended
September 30,
|
||||||||||
|
2009
|
2008
|
|
2009
|
2008
|
||||||||
|
(in thousands, except share and per share data)
|
||||||||||||
Numerator:
|
|||||||||||||
Net
loss attributable to Hoku Scientific, Inc.
|
$
|
(1,231
|
)
|
$
|
(1,373
|
)
|
$
|
(2,136
|
)
|
$
|
(1,195)
|
||
Denominator:
|
|||||||||||||
Weighted
average shares of common stock (basic)
|
21,018,162
|
20,454,235
|
21,012,129
|
19,933,107
|
|||||||||
Effect
of Dilutive Securities
|
|||||||||||||
Add:
|
|||||||||||||
Weighted
average stock options
|
—
|
—
|
—
|
—
|
|||||||||
Weighted
average shares of common stock (diluted)
|
21,018,162
|
20,454,235
|
21,012,129
|
19,933,107
|
|||||||||
Basic
net loss per share attributable to Hoku Scientific, Inc.
|
$
|
(0.06
|
)
|
$
|
(0.07
|
)
|
$
|
(0.10
|
)
|
$
|
(0.06)
|
||
Diluted
net loss per share attributable to Hoku Scientific Inc.
|
$
|
(0.06
|
)
|
$
|
(0.07
|
)
|
$
|
(0.10
|
)
|
$
|
(0.06)
|
The basic
weighted average shares of common stock for the three and six months ended
September 30, 2009 and 2008 excludes unvested restricted shares of common
stock.
During
the three and six months ended September 30, 2009, potential dilutive securities
included options to purchase 116,787 and 111,158 shares of common stock,
respectively, at prices ranging from $0.075 to $0.52 per share in both periods.
During the three and six months ended September 30, 2009, all potential common
equivalent shares were anti-dilutive and were excluded in computing diluted net
loss per share, due to the Company’s net loss for the periods. During the three
and six months ended September 30, 2008, potential dilutive securities included
options to purchase 256,710 and 304,619 shares of common stock, respectively, at
prices ranging from $0.075 to $4.50 per share in both periods. During the three
and six months ended September 30, 2008, all potential common equivalent shares
were anti-dilutive and were excluded in computing diluted net loss per share,
due to the Company’s net loss for the periods.
(9)
Commitments, Contingencies and Purchase Obligations
Stone & Webster, Inc. In
August 2007, the Company entered into an Engineering, Procurement and
Construction Management Contract with Stone & Webster, Inc., or S&W, a
subsidiary of The Shaw Group Inc., for engineering, procurement, and
construction management services for the construction of the Project, which was
amended in October 2007 by Change Order No. 1, again in April 2008 by Change
Order No. 2, and again by Change Order No. 3 in February 2009, which are
collectively the S&W Engineering Agreement. Under the S&W Engineering
Agreement, S&W is to provide all engineering and procurement services
necessary to complete the design and planning for construction of the Project.
S&W is to be paid on a time and materials basis plus a fee for its services
and incentives if certain schedule and cost targets are met. The target cost for
the services to be provided under the S&W Engineering Agreement is $50
million.
Through
September 30, 2009, the Company made payments to S&W of $45.7 million and
had $1.8 million of payables outstanding as of September 30,
2009.
11
JH Kelly LLC. In August 2007,
the Company entered into a Cost Plus Incentive Contract with JH Kelly LLC, or JH
Kelly, for construction services for the construction of the Project, which was
amended in October 2007, by Change Order No. 1, again in April 2008 by Change
Order No. 2, again in March 2009 by Change Order No. 3, and again in September
2009 by Change Order No. 4, which are collectively the JH Kelly Construction
Agreement. Under the JH Kelly Construction Agreement, JH Kelly agreed to provide
the construction services as the Company’s general contractor for the
construction of the Project with a production capacity of 4,000 metric tons per
year. The target cost for the services to be provided under the JH Kelly
Construction Agreement is $145 million, including up to $5.0 million of
incentives that may be payable.
Through
September 30, 2009, the Company made payments to JH Kelly of
$53.6 million and had $13.0 million of payables outstanding as of
September 30, 2009.
Dynamic Engineering Inc. In
October 2007, the Company entered into an agreement with Dynamic Engineering
Inc., or Dynamic, for design and engineering services, and a related technology
license, for the process to produce and purify trichlorosilane, or TCS. Under
the agreement with Dynamic, or the Dynamic Agreement, Dynamic is obligated to
design and engineer a TCS production facility that is capable of producing
20,000 metric tons of TCS for the Company’s planned 4,000 metric tons per year
polysilicon production plant. The Dynamic process is to be integrated by S&W
into the overall Project, and will be constructed by JH Kelly. Under the Dynamic
Agreement, Dynamic's engineering services are provided and invoiced on a time
and materials basis, and the license fee will be calculated upon the successful
completion of the TCS production facility, and demonstration of certain TCS
purity and production efficiency capabilities. The maximum aggregate amount that
the Company may pay Dynamic for the engineering services and the technology
license is $12.5 million, which includes an incentive for Dynamic to complete
the engineering services under budget. Dynamic is guaranteeing the quantity and
purity of the TCS to be produced at the completed facility, and has agreed to
indemnify the Company for any third-party claims of intellectual property
infringement.
Through
September 30, 2009, the Company made payments to Dynamic of $5.6 million and had
$3.4 million of payables outstanding as of September 30, 2009.
GEC Graeber Engineering Consultants
GmbH and MSA Apparatus Construction for Chemical Equipment
Ltd. The Company entered into a contract with GEC
Graeber Engineering Consultants GmbH, or GEC, and MSA Apparatus Construction for
Chemical Equipment Ltd., or MSA, for the purchase and sale of 16 hydrogen
reduction reactors and hydrogenation reactors for the production of polysilicon,
and related engineering and installation services. Under the contract, the
Company will pay up to a total of 20.9 million Euros for the reactors. The
reactors are designed and engineered to produce approximately 2,000 metric tons
of polysilicon per year. The term of the contract extends until the end of the
first month after the expiration date of the warranty period, but may be
terminated earlier under certain circumstances.
In
January 2009, the Company received the first shipment of six hydrogen reduction
reactors, three hydrogenation reactors, and related equipment from GEC and MSA,
at the Project, and all of these polysilicon reactors have been assembled and
put into place on the Company’s production floor. The reactors are the first
units to arrive in Pocatello out of a planned total order of 28. The next
shipment of 10 polysilicon reactors and related equipment is scheduled to arrive
at the Project no later than the third quarter of fiscal 2010, subject to the
Company’s payment of an additional 3.2 million Euros or $4.7 million (based on
the Euro/U.S. dollar exchange rate, which was $1.4643/Euro as of September 30,
2009). The Company is in discussions with GEC to purchase additional 12 reactors
necessary for its planned annual capacity of 4,000 metric tons of
polysilicon. The cost of these additional reactors is not expected to
be greater than 20.9 million Euros.
Through
September 30 2009, the Company paid GEC and MSA an aggregate amount of 15.2
million Euros or $22.3 million and had 2.4 million Euros or $3.5 million of
payables outstanding as of September 30, 2009.
The
Company is in discussions with GEC to purchase additional 12 reactors necessary
for its planned annual capacity of 4,000 metric tons of
polysilicon. The cost of these additional reactors is not expected to
be greater than 20.9 million Euros.
Idaho Power
Company. In December 2007, the Company entered into an
agreement with Idaho Power Company, or Idaho Power, to complete the construction
of the electric substation to provide power for the Project, or the Idaho Power
Agreement. The Company is obligated to pay Idaho Power an aggregate of $14.8
million for the completion of the substation and associated facilities. Under
the terms of the Idaho Power Agreement, the substation and associated facilities
were scheduled to be completed on or before February 2009. The Idaho Power
Agreement provided that Idaho Power could invoice the Company additional amounts
for temporary power to enable the start-up and operation of the planned
polysilicon production plant prior to February 2009.
In
September 2008, the Company amended and restated the Idaho Power Agreement by
entering into an Amended and Restated Agreement for Construction of the Hoku
Electric Substation and Associated Facilities, or the Amended Idaho Power
Agreement. Under the Amended Idaho Power Agreement, Idaho Power agreed to
construct an electric substation and associated transmission facilities with an
increased capacity beyond what was provided for in the original Idaho Power
Agreement. Idaho Power estimates that the costs of construction under the
Amended Idaho Power Agreement will increase to $16.5 million. The Amended Idaho
Power Agreement also provides that upon completion of construction, there will
be a true-up of actual construction costs, so that either the Company will be
refunded any monies it has paid to Idaho Power over and above the actual costs
of construction, or the Company will pay Idaho Power any additional construction
costs beyond the original amount.
Through
September 30, 2009, the Company paid Idaho Power Company an aggregate
amount of $17.5 million through September 30, 2009, which includes $917,000 paid
to Idaho Power pursuant to a separate engineering services
agreement.
12
In
September 2008, the Company also entered into an Electric Service Agreement with
Idaho Power for the supply of electric power and energy to the Company for use
in the Project, subject to the approval of Idaho’s Public Utilities Commission,
or the ESA. The term of the ESA is four years, beginning in June 2009. During
the term of the ESA, Idaho Power agrees to make up to 82,000 kilowatts of power
available to the Company at certain fixed rates, which are subject to change
only by action of the Idaho Public Utilities Commission. After the initial term
of the ESA expires, either the Company or Idaho Power may terminate the ESA
without prejudice. If neither party chooses to terminate the ESA, then Idaho
Power will continue to provide electric service to us at the same fixed
rates.
In June
2009, the Company entered into an Amended and Restated Electric Service
Agreement, or the Amended Agreement, with Idaho Power which amends and restates
the ESA in its entirety. The Amended Agreement was filed with the
Idaho Public Utilities Commission, or PUC, and has been approved. The
Amended Agreement extends by six months the date upon which the Company is
obligated to begin purchasing prescribed amounts of electricity from Idaho
Power, from June 1, 2009, to December 1, 2009, as well as extending the initial
term of the ESA to December 2013. Prior to the December 1, 2009
effective date of the Amended Agreement, electricity is to be provided to the
Company by Idaho Power at the current Schedule 19T tariff rate.
AEG Power Solutions USA Inc.
(formerly known as Saft Power
Systems USA, Inc.). In March 2008, the Company entered into an agreement
with AEG Power Solutions USA Inc., or AEG, formerly known as Saft Power Systems
USA, Inc., which was subsequently amended in May 2009, or the AEG Agreement, for
the purchase and sale of thyroboxes, earth fault detection systems, and related
technical documentation and services, or the Deliverables. Under the AEG
Agreement, AEG was obligated to manufacture and deliver the Deliverables, which
are used as the power supplies for the polysilicon deposition reactors to be
used in the Project. The total fees payable to AEG for all
Deliverables under the AEG Agreement is approximately $13 million.
Through
September 30, 2009, the Company made payments to AEG of $6.2 million and had
$1.2 million of payables outstanding as of September 30, 2009.
Polymet Alloys, Inc. In
November 2008, the Company entered into an agreement with Polymet Alloys, Inc.,
or Polymet, for the supply of silicon metal to the Company for use in the
Project. In May 2009, the Company entered into an amended and restated supply
agreement with Polymet, or the Amended Polymet Agreement. The term of
the Amended Polymet Agreement is three years, commencing in 2010. Each year
during the term of the Amended Polymet Agreement, Polymet has agreed to sell to
the Company, and the Company has agreed to purchase from Polymet, no less than
65% of the Company’s annual silicon metal requirement. Pricing is to
be negotiated for each year of the Amended Polymet Agreement; however, if the
parties are unable to agree on pricing for any year, or the Company has agreed
to purchase less than the amount specified in the Amended Polymet Agreement,
Polymet has a right of first refusal to match the terms offered by any
third-party supplier from whom the Company may seek to purchase silicon
metal. Either party may also terminate the Amended Polymet Agreement
under certain circumstances, including a material breach by the other party that
has not been cured within a specified cure period, or the other party’s
voluntary or involuntary liquidation. As of September 30, 2009, the Company had
not made any payments to Polymet.
PVA Tepla Danmark. In April
2008, the Company entered into an agreement with PVA Tepla Danmark, or PVA, for
the purchase and sale of slim rod pullers and float zone crystal pullers. Under
the agreement, PVA is obligated to manufacture and deliver the slim rod pullers
and float zone crystal pullers for the Project. Slim rod pullers are used to
make thin rods of polysilicon that are then transferred into polysilicon
deposition reactors to be grown through a chemical vapor deposition process into
polysilicon rods for commercial sale to the Company’s end customers. The float
zone crystal pullers convert the slim rods into single crystal silicon for use
in testing the quality and purity of the polysilicon. The total fees payable to
PVA is approximately $6 million, which is payable in four installments, the
first of which was made in August 2008. Either party may terminate the agreement
if the other party is in material breach of the agreement and has not cured such
breach within 180 days after receipt of written notice of the breach, or if the
other party is bankrupt, insolvent, or unable to pay its debts.
Through
September 30, 2009, the Company had paid PVA an aggregate amount of $1.9 million
and had $3.9 million of payables outstanding as of September 30,
2009.
BHS Acquisitions, LLC. In
November 2008, the Company entered into an agreement with BHS Acquisitions, LLC,
or BHS, for the supply of hydrochloric acid, or HCl, to the Company for use in
the Project. The term of the agreement is eight years beginning on the date on
which the first shipment of product is delivered. Each year during the term of
the agreement, BHS has agreed to sell to the Company, and the Company has agreed
to purchase from BHS, specified volumes of HCl that meet certain purity
specifications. The volume is fixed during each of the eight years. Pricing is
fixed for the first twelve months of shipments, which are scheduled to begin no
later than January 2010, and the aggregate net value of the HCl to be purchased
by the Company under the agreement in the first twelve months is approximately
$2.4 million. Pricing is to be renegotiated for each of the remaining years of
the agreement; however, if the parties are unable to agree on pricing for any
future year, then either party may terminate the agreement without liability to
the other party. Either party may also terminate the agreement under certain
circumstances, including a material breach by the other party that has not been
cured within a specified cure period, or the other party’s voluntary or
involuntary liquidation. As of September 30, 2009, the Company had not made any
payments to BHS.
As of
September 30, 2009, twelve of the Company’s vendors have recorded mechanics lien
claims on the Company’s real property and improvements in Pocatello, Idaho. The
lien claims relate to an aggregate amount of approximately $23.8 million that
vendors claim are owed for labor, materials, equipment and/or services used in
the construction of the Project.
13
(10)
Operating Segments
Operating
segments are components of an enterprise for which discrete financial
information is available that is evaluated regularly by the chief operating
decision maker, or decision-making group, in deciding how to allocate resources
and in assessing performance. The Company’s chief operating decision-making
group is made up of the Chief Executive Officer, Chief Financial Officer, Chief
Technology Officer and Chief Operating Officer. The chief operating
decision-making group manages the profitability, cash flows, and assets of each
segment’s various product or service lines and businesses. The Company has three
operating business units in two industries: Fuel Cell and Solar. The Fuel Cell
industry is comprised of the fuel cell segment. The Solar industry is comprised
of the PV module installation business unit (Hoku Solar) and polysilicon
production business unit (Hoku Materials). A description of the products for
each business unit is described in Note 1, “Summary of Significant Accounting
Policies and Practices” above.
Three Months Ended
September 30,
|
Six Months Ended
September 30,
|
||||||||||||||||
2009
|
2008
|
2009
|
2008
|
||||||||||||||
|
(amounts in thousands)
|
||||||||||||||||
Revenue (in thousands): | |||||||||||||||||
Hoku
Fuel Cells
|
$ | — | $ | — | $ | — | $ | — | |||||||||
Hoku
Solar
|
1,498 | 1,870 | 1,572 | 4,078 | |||||||||||||
Hoku
Materials
|
— | — | — | — | |||||||||||||
Total
consolidated revenue
|
$ | 1,498 | $ | 1,870 | $ | 1,572 | $ | 4,078 |
|
Three Months Ended
September 30,
|
Six Months Ended
September 30,
|
||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Income
(loss) from operations (in thousands):
|
||||||||||||||||
Hoku
Fuel Cells
|
$
|
—
|
$
|
(7
|
)
|
$
|
2
|
$
|
(18
|
)
|
||||||
Hoku
Solar
|
(563
|
)
|
(55
|
)
|
(913
|
)
|
95
|
|||||||||
Hoku
Materials
|
(888
|
)
|
(624
|
)
|
(1,545
|
)
|
(1,323
|
)
|
||||||||
Total
consolidated loss from operations
|
$
|
(1,451
|
)
|
$
|
(686
|
)
|
$
|
(2,456
|
)
|
$
|
(1,246
|
)
|
The
reconciliation of segment operating results to the Company’s consolidated totals
was as follows (in thousands):
|
Three Months Ended
September 30,
|
Six Months Ended
September 30,
|
||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Consolidated
loss from operations
|
$
|
(1,451
|
)
|
$
|
(686
|
)
|
$
|
(2,456
|
)
|
$
|
(1,246
|
)
|
||||
Interest
and other income (loss)
|
217
|
(687
|
)
|
302
|
51
|
|||||||||||
Net
loss attributable to noncontrolling interest
|
(3
|
)
|
—
|
(18
|
)
|
—
|
||||||||||
Net
loss attributable to Hoku Scientific, Inc.
|
$
|
(1,231
|
)
|
$
|
(1,373
|
)
|
$
|
(2,136
|
)
|
$
|
(1,195
|
)
|
The
Company allocates its assets to its business units based on the primary business
units benefiting from the assets.
September 30, 2009
|
March 31, 2009
|
|||||||
(amounts in thousands)
|
||||||||
Identifiable
assets:
|
||||||||
Hoku
Solar
|
$ | 7,148 | $ | 9,738 | ||||
Hoku
Materials
|
262,252 | 199,473 | ||||||
Unallocated
assets
|
8,962 | 15,000 | ||||||
Total
assets
|
$ | 278,362 | $ | 224,211 |
14
(11)
Agreement with Tianwei and Cost of Financing
In
September 2009, the Company entered into a definitive agreement providing for a
majority investment in the Company by Tianwei, and debt financing by Tianwei
through China Construction Bank as agent, for the construction and development
of the Project. Subject to closing of the Tianwei financing
transaction, which is anticipated to occur in November 2009 after the
satisfaction of closing conditions, including but not limited to the approval of
Chinese government authorities, and based on the current terms of the
anticipated transaction, the existing polysilicon supply agreements would be
amended such that $50 million of an aggregate of $79 million in secured
prepayments previously paid by Tianwei to the Company will be
converted into shares of the Company’s common stock. The
amended supply agreements will also provide for a reduced price at which Tianwei
purchases polysilicon by approximately 11% in each year of the ten year
agreement.In addition, the Company will issue Tianwei a warrant to purchase an
additional 10 million shares of common stock and Tianwei will arrange for $50
million in debt financing for the Company, together with a commitment from
Tianwei to assist the Company in obtaining additional financing that may be
required by the Company to construct and operate the Project. The Company
expects to receive the $20 million of the debt financing in November 2009, and
$30 million in December 2009.
In
exchange for the value provided by Tianwei, the Company will issue to Tianwei
33,379,287 newly-issued shares of its common stock and grant Tianwei a warrant
to purchase an additional 10 million shares of its common stock. The
terms of the warrant will include: (i) a per share exercise price equal to
$2.52; (ii) an exercise period of seven years; and (iii) provision for net-issue
exercise. The newly issued shares of the Company’s common stock and warrant will
represent approximately 66% of the Company’s fully diluted outstanding
shares.
Subject
to closing of the Tianwei financing transaction, the $50 million in debt, plus
$63 million in additional prepayments from its existing customers,
will be used to pay current liabilities and complete construction of
the Project to the point where the Company could commence initial shipments to
customers. Until such time, the Company intends to delay the
additional financing of $71 million which is necessary to complete the
construction of the Project. Upon receipt of these funding sources, the Company
anticipates resuming full scale plant construction in November 2009. However, if
the anticipated transaction is not consummated, there is a delay in receiving
the $50 million in debt from the Tianwei transaction, or the Company does not
receive anticipated prepayments from its other polysilicon supply agreements,
the Company may need to curtail construction.
As of
September 30, 2009, the Company has deferred approximately $152,000 of costs
incurred related to the agreement with Tianwei
(12)
Going Concern
The
Company has incurred significant net losses since inception and has relied on
its ability to fund its operations principally through both registered and
unregistered offerings of its securities and prepayments on its long-term
polysilicon contracts. Even if the Company is successful in closing its
transaction with Tianwei, securing additional long-term polysilicon contracts
that could provide additional prepayments, and its existing customers fulfill
their obligations to make additional prepayments when due (of which there can be
no assurances), the Company will still need to seek additional financing to
complete its polysilicon production facility currently under
construction. As of September 30, 2009, the Company had cash and cash
equivalents on hand $9.1 million and short-term liabilities of $67.0 million.
Consequently, there is substantial doubt that the Company will have sufficient
cash to meet all of its obligations as they come due. The Company does not
expect to generate significant revenue until it successfully commences the
manufacture and shipment of polysilicon and begins meeting the obligations under
the Company’s supply contracts. Assuming the closing of the Tianwei
transaction and receipt of $63 million under current contractual
prepayments, the Company will still need to raise as much as $71 million based
on the estimate of $390 million to construct and equip the plant. If
the Company is unable to secure additional long-term supply contracts and
prepayments, if for any reason (e.g. contract amendment, termination, breach,
etc.) one or more of the Company’s polysilicon supply customers do not pay the
full amount of the prepayments to which they are presently committed and/or if
the actual cost to complete the Project is more than $390 million, the amount
the Company will need to raise could exceed $71 million.
The
Company’s ability to continue as a going concern depends on its ability to raise
debt or equity financing, increase revenues and reduce expenses. The Company has
already modified payment terms in purchase orders with more than thirty of its
vendors to structure payment plans for amounts past due and to be invoiced in
the future. The Company’s management continues to evaluate a variety of
alternatives to raise capital and manage the Company’s
liquidity. These alternatives include, without
limitation:
|
·
|
debt
financing, including financing that is guaranteed by a private third
party;
|
|
·
|
one
or more equity offerings, including an offering of stock the Company
previously registered with the Securities and Exchange Commission on Form
S-3;
|
|
·
|
prepayments
for product to be delivered under new long-term polysilicon supply
contracts;
|
|
·
|
government
funding from grants and/or loan
guarantees; and/or
|
15
|
·
|
further
extending the construction schedule and payment plans with
vendors
|
In
addition to the foregoing alternatives, the Company has retained Deutsche Bank
Securities, Inc., as its financial advisor to seek a possible sale of Hoku
Scientific or Hoku Materials. There are no assurances that the Company will be
successful in executing any of the foregoing options. If the Company is unable
to raise capital and manage its liquidity, there is substantial doubt that the
Company will be able to continue as a going concern. The inability to continue
as a going concern could result in an orderly wind-down of the Company or other
potential forms of restructuring.
Item
2.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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Forward-Looking
Statements
This
Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that are based on our
management’s beliefs and assumptions and on information currently available to
our management. Forward-looking statements include all statements other than
statements of historical fact contained in this Quarterly Report on Form 10-Q,
including, but not limited to, statements about:
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•
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The closing of our financing
agreement with Tianwei, and our receipt of the proceeds of our
$50 million loan agreement with Tianwei and China Construction
Bank;
|
|
•
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our ability to raise
sufficient funds to construct and equip a 4,000 metric ton per year
polysilicon manufacturing facility in Pocatello, Idaho, including payments
for the engineering and procurement services from Stone & Webster,
Inc., construction services from JH Kelly LLC, the purchase and
installation of equipment from GEC Graeber Engineering Consultants GmbH
and MSA Apparatus Construction for Chemical Equipment, Ltd., AEG Power
Solutions USA Inc., formerly known as Saft Power Systems USA, Inc., PVA
Tepla Danmark and other vendors, contractors and consultants in general,
and to comply with our obligations under our polysilicon supply agreements
with Shanghai Alex New Energy Co., Ltd., Wuxi Suntech Power Co., Ltd.,
Solarfun Power Hong Kong Limited, Tianwei New Energy (Chengdu) Wafer Co.,
Ltd., Jiangxi Jinko Solar Co., Ltd. and Wealthy Rise
International,
Ltd.(Solargiga);
|
|
•
|
our ability to raise
additional cash to provide the Company with sufficient liquidity to
continue as a going concern;
|
|
•
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our ability to receive
customer prepayments based on the agreed-upon schedules and contingent
upon meeting certain milestones, if at all, under our polysilicon supply
agreements with Shanghai Alex New Energy Co., Ltd., Wuxi Suntech Power
Co., Ltd., Solarfun Power Hong Kong Limited, Tianwei New Energy (Chengdu)
Wafer Co., Ltd., Jiangxi Jinko Solar Co., Ltd. and Wealthy Rise
International,
Ltd.(Solargiga);
|
|
•
|
our ability to secure
additional long-term polysilicon supply customers and customer
prepayments;
|
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•
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our cost to engineer, procure,
construct and operate our planned polysilicon facility, including any cost
increases resulting from the planned increase in production capacity from
3,500 metric tons per year to 4,000 metric tons per
year;
|
|
•
|
our ability to meet our
commitments under certain supply agreements to deliver polysilicon in the
first quarter of calendar year
2010;
|
|
•
|
the ability of Stone &
Webster, Inc., JH Kelly LLC, GEC Graeber Engineering Consultants GmbH and
MSA Apparatus Construction for Chemical Equipment, Ltd., Idaho Power
Company, Dynamic Engineering Inc., AEG Power Solutions USA Inc., formerly
known as Saft Power Systems USA, Inc., PVA Tepla Danmark, Polymet Alloys,
Inc., BHS Acquisitions, LLC and our other vendors, contractors and
consultants to meet the delivery schedules and other terms in their
respective agreements with
us;
|
|
•
|
our ability to engineer,
construct and operate a production plant for
polysilicon;
|
|
•
|
our ability to produce
polysilicon, the quality of any polysilicon we produce, our costs to
produce polysilicon, and our ability to offer pricing that is competitive
with competing products;
|
16
|
•
|
our ability to raise
sufficient funds to purchase raw materials needed for the production of
polysilicon from vendors with whom we have current supply agreements, such
as Polymet Alloys, Inc. and BHS Acquisitions, LLC, as well as from other
vendors with whom we do not yet have supply
agreements;
|
|
•
|
the performance by our
existing customers of their obligations under polysilicon supply
agreements, and our ability to secure new customers for additional
prepayments;
|
|
•
|
our ability to diminish or
defer capital expenditures for our polysilicon plant by delaying
construction of our trichlorosilane production
system;
|
|
•
|
our ability to produce
trichlorosilane, and the efficiency and potential operating cost savings
from the trichlorosilane production process to be designed by Dynamic
Engineering Inc.;
|
|
•
|
our ability to identify and
reach agreements with vendors to supply us with the raw materials we will
need to produce polysilicon, including our ability to identify and reach
an agreement with a vendor of trichlorosilane and the cost of purchasing
trichlorosilane from third
parties;
|
|
•
|
our ability to meet the
quality, quantity and timing requirements under our polysilicon supply
agreements with Shanghai Alex New Energy Co., Ltd., Wuxi Suntech Power
Co., Ltd., Solarfun Power Hong Kong Limited, Tianwei New Energy (Chengdu)
Wafer Co., Ltd., Jiangxi Jinko Solar Co., Ltd. and Wealthy Rise
International,
Ltd.(Solargiga);
|
|
•
|
our forecasted revenue from
the potential future sale of
polysilicon;
|
|
•
|
our ability to complete
photovoltaic system installations, including potential future
installations with The James Campbell
Company;
|
|
•
|
our ability to offer pricing
for photovoltaic system installations that is competitive with competing
products and installation
providers;
|
|
•
|
the performance and durability
of the photovoltaic systems we
install;
|
|
•
|
the cost to procure and
install photovoltaic
systems;
|
|
•
|
our ability to offer pricing
that is competitive with competing products and expected future revenue
from the photovoltaic system installation
business;
|
|
•
|
our expectations regarding the
potential size and growth of photovoltaic system installations and
polysilicon markets in general and our revenues in
particular;
|
|
•
|
our expectations regarding the
market acceptance of our
products;
|
|
•
|
our future financial
performance;
|
|
•
|
our business strategy and
plans; and
|
|
•
|
objectives of our management
for future operations.
|
In
some cases, you can identify forward-looking statements by terms such as
“anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,”
“intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,”
“would” and similar expressions intended to identify forward-looking statements.
These statements involve known and unknown risks, uncertainties and other
factors that may cause our actual results, performance, time frames or
achievements to be materially different from any future results, performance,
time frames or achievements expressed or implied by the forward-looking
statements. We discuss many of these risks, uncertainties and other factors in
this Quarterly Report on Form 10-Q in greater detail in Part II, Item IA. “Risk
Factors.” Given these risks, uncertainties and other factors, you should not
place undue reliance on these forward-looking statements. Also, these
forward-looking statements represent our estimates and assumptions only as of
the date hereof. We hereby qualify all of our forward-looking statements by
these cautionary statements. Except as required by law, we assume no obligation
to update these forward-looking statements publicly, or to update the reasons
actual results could differ materially from those anticipated in these
forward-looking statements, even if new information becomes available in the
future.
The
following discussion should be read in conjunction with our financial statements
and the related notes contained elsewhere in this Quarterly Report on Form 10-Q
and with our financial statements and notes thereto for the fiscal year ended
March 31, 2009, contained in our Annual Report on Form 10-K, filed with the
Securities and Exchange Commission on June 15, 2009.
17
Overview
Hoku
Scientific, Inc. is a materials science company focused on clean energy
technologies. We were incorporated in Hawaii in March 2001, as Pacific Energy
Group, Inc. In July 2001, we changed our name to Hoku Scientific, Inc. In
December 2004, we were reincorporated in Delaware.
Recent
Developments Related to Liquidity and Capital Resources
We have
incurred significant net losses since inception and we have relied on our
ability to fund our operations principally through both registered and
unregistered offerings of our securities and prepayments on long-term
polysilicon contracts. Assuming the closing of the Tianwei transaction, even if
we are successful in securing additional long-term polysilicon contracts that
could provide additional prepayments, and our existing customers fulfill their
obligations to make additional prepayments when due (of which there can be no
assurances), we will still need to seek additional financing to complete our
planned polysilicon production facility currently under construction in
Pocatello, Idaho, or the Project. As of September 30, 2009, we had cash and cash
equivalents on hand of $9.1 million and short term liabilities of $67.0
million.
To help
address our cash needs to meet our obligations, we have modified payment terms
in purchase orders with more than thirty of our vendors to structure payment
plans for amounts past due and to be invoiced in the future. Furthermore, in
September 2009, we entered into a definitive agreement providing for a majority
investment in us by Tianwei New Energy Holdings Co., Ltd., or Tianwei, and debt
financing by Tianwei through China Construction Bank, as agent, for the
construction and development of the Project. Subject to closing of
the Tianwei financing transaction, which is anticipated to occur in November
2009 after the satisfaction of closing conditions, including but not limited to
the approval of Chinese government authorities, Tianwei will convert $50 million
of an aggregate of $79 million in secured prepayments previously paid by Tianwei
to us under certain polysilicon supply agreements into shares of our common
stock. In addition, we will issue Tianwei a warrant to purchase an
additional 10 million shares of common stock and Tianwei will arrange for $50
million in debt financing for us, together with a commitment from Tianwei to
assist us in obtaining additional financing that may be required by us to
construct and operate the Project. We currently expect to receive the
$20 million of the debt financing in November 2009, and $30 million in December
2009.
The $50
million in debt, plus $63 million in additional prepayments from our existing
customers, will be used to pay current liabilities and complete construction of
the Project to the point where we could commence shipments to customers, and we
intend to delay any additional financing until such time. On the basis of these
funding sources, we anticipate resuming full scale plant construction in
November 2009. We do not expect to generate significant revenue until
we successfully commence the manufacture and shipment of polysilicon and begin
meeting the obligations under our supply contracts. In addition, we will still
need to seek additional financing to complete the Project. If we are unable to
secure additional long-term supply contracts and prepayments, assuming the cost
to construct and equip the Project does not exceed $390 million and that all of
our existing customers make their prepayments when due, the amount we will need
to raise could be as much as $71 million. If we are unable to secure
additional long-term supply contracts and prepayments, if for any reason (e.g.
contract amendment, termination, breach, etc.) one or more of our polysilicon
supply customers do not pay the full amount of the prepayments to which they are
presently committed and/or if the actual cost to complete the Project is more
than $390 million, the amount we will need to raise could exceed $71
million. Furthermore, if there is a delay in receiving the $50
million in debt from the Tianwei transaction, or we do not receive our
anticipated prepayments from our customers, or other unfavorable factors occur,
it could raise substantial doubt about our ability to continue as a going
concern. The inability to continue as a going concern could result in an orderly
wind-down of us or other potential forms of restructuring.
Hoku
Materials
In
February 2007, we incorporated Hoku Materials to manufacture polysilicon, a key
material used in PV modules. We had originally planned to use the polysilicon
internally by Hoku Solar to manufacture our own brand of solar modules, and for
sale to the larger solar market. However, as a result of increased
demand from third-party customers, and our revised strategy for Hoku Solar, we
now intend to sell all of our planned output of polysilicon to third-party
customers.
In May
2007, we commenced construction of our planned polysilicon manufacturing
facility in Pocatello, Idaho, or the Project. In September 2008, we announced
that we would be increasing our planned polysilicon facility capacity from 3,500
metric tons per year to 4,000 metric tons per year. Our original estimated
construction cost for a facility capable of producing 3,500 metric tons of
polysilicon per year was $390 million. We do not believe we will require a
significant amount of additional capital, if any, to increase our Project
capacity to 4,000 metric tons per year; however, we are continuing to review the
$390 million estimated cost to complete the Project. This estimate is based on
our discussion with vendors, declining costs of materials and labor and ongoing
adjustments of certain design elements; however, changes in costs, modifications
in construction timelines and other factors could cause the actual cost to
significantly exceed our estimate. Any significant increase in the cost to
complete the Project could have a material adverse effect on our business,
financial condition and results of operations. In April 2008, we issued a change
order with Stone & Webster, Inc., our engineering and procurement service
provider, and as a result our estimate of the total cost to construct and equip
the Project decreased from $400 million to $390 million.
During
the three and six months ended September 30, 2009, Hoku Materials incurred an
operating loss of $888,000 and $1.5 million respectively, in expenses, which
mainly consists of payroll, travel expenses, and professional fees. In addition,
as of September 30, 2009, Hoku Materials has capitalized $262.1 million related
to construction costs for the Project and received $165 million in customer
deposits as prepayments on long-term polysilicon supply
agreements.
18
Construction/Financing
Update
In
September 2009, we entered into a definitive agreement providing for a majority
investment in us by Tianwei New Energy Holdings Co., Ltd., or Tianwei, and debt
financing by Tianwei through China Construction Bank, as agent, for the
construction and development of the Project. Subject to closing of
the Tianwei financing transaction, which is anticipated to occur in November
2009 after the satisfaction of closing conditions, including but not limited to
the approval of Chinese government authorities, Tianwei will convert $50 million
of an aggregate of $79 million in secured prepayments previously paid by Tianwei
to us under certain polysilicon supply agreements into shares of our common
stock. In addition, we will issue Tianwei a warrant to purchase an
additional 10 million shares of common stock and Tianwei will arrange for $50
million in debt financing for us, together with a commitment from Tianwei to
assist us in obtaining additional financing that may be required by us to
construct and operate the Project. We expect to receive $20 million
of the debt financing in November 2009, and $30 million in December
2009.
The $50
million in debt, plus $63 million in additional prepayments from our existing
customers, will be used to pay current liabilities and complete construction of
the Project to the point where we could commence initial shipments to customers,
and we intend to delay any additional financing until such time. On the basis of
these funding sources, we anticipate resuming full scale Project construction in
November 2009, expect to complete our reactor demonstration in the fourth
quarter of calendar year 2009 and begin polysilicon production in the first
quarter of calendar year 2010.
Polysilicon
Supply Agreement Updates
Wuxi
Suntech Power Co., Ltd.
In July
2009, Hoku Materials and Wuxi Suntech Power Co., Ltd., or Suntech, amended the
existing agreements between the two parties such that Suntech agreed to waive
the following rights:
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•
|
Its
right to enforce the obligation of Hoku Materials to complete the Test
Demonstration (as defined in the Suntech Supply Agreement) by September
30, 2009, or the Demo Final Date. Suntech’s waiver will expire
on December 31, 2009, with the result that if we have not completed the
Test Demonstration by that date, we will be in breach of our obligation to
complete the Test Demonstration.
|
|
•
|
Its
right to enforce the obligation of Hoku Materials to complete the TCS
Demonstration (as defined in the Suntech Supply Agreement) by December 31,
2009, or the TCS Final Date. Suntech’s waiver will expire on
December 31, 2010, with the result that if we have not completed the TCS
Demonstration by that date, we will be in breach of our obligation to
complete the TCS Demonstration.
|
|
•
|
Its
right to enforce the obligation of Hoku Materials to complete the Shipment
Milestone (as defined in the Suntech Supply Agreement) by December 31,
2009, or the Shipment Final Date. Suntech’s waiver will expire
on March 31, 2010, with the result that if we have not completed the
Shipment Milestone by that date, we will be in breach of our obligation to
complete the Shipment Milestone.
|
In
exchange for the Suntech waivers described above, we agreed to waive our right
to payment of the TCS Demonstration Installment and, as a result, Suntech is no
longer required to make $15 million in additional prepayments. In
addition, we authorized Suntech to replace its $45 million Stand-by Letter of
Credit with a $30 million stand-by letter of credit issued by a bank in China,
which may be collateralized with non-cash assets. The amendment, anticipated to
close in November 2009, will result in a change of control of
us.
Tianwei
New Energy (Chengdu) Wafer Co., Ltd.
Subject
to closing of the Tianwei financing transaction, which is anticipated to occur
in November 2009 after the satisfaction of closing conditions, including but not
limited to the approval of Chinese government authorities, we will enter into
amendments with Tianwei New Energy (Chengdu) Wafer Co., Ltd., or
Tianwei. Pursuant to the amendments, we (a) will convert $50 million
of the total $79 million of prepayments previously paid to us by Tianwei into
shares of our common stock and (b) will reduce the price at which Tianwei
purchases polysilicon by approximately 11% per year. Under the
amendments, the amount of polysilicon to be delivered will remain unchanged and
Tianwei will still be required to pay us an additional $2 million in
prepayments; however, the total revenue for the polysilicon to be sold by us to
Tianwei will be modified such that up to approximately $418 million may be
payable to us during the ten-year term (exclusive of amounts Tianwei may
purchase pursuant to its right of first refusal), subject to product deliveries
and other conditions.
Wealthy
Rise International, Ltd.
We have
granted to Wealthy Rise International, Ltd., or Solargiga, an extension of time,
or the Extension, to make an aggregate of $9.9 million in prepayments that were
payable between June and October, 2009. Pursuant to the Extension,
the date on which the $9.9 million is due has been extended to the earlier of
November 15, 2009, or the date on which we and Wealthy Rise enter into a
definitive amendment to the Agreement pursuant to which the schedule and
conditions for Wealthy Rise’s prepayments could be adjusted.
19
Hoku
Solar
We
incorporated Hoku Solar to design, engineer and install PV systems and related
services. During
the three and six months ended September 30, 2009, Hoku Solar incurred an
operating loss of $563,000 and $913,000, respectively, primarily reflecting the
operational focus on completing the installation and system acceptance of the
seven PV systems for Power I which began generating PPA revenues in May
2009.
Hoku
Fuel Cells
Under the
name Hoku Fuel Cells, we operate our fuel cell business, which has designed,
developed and manufactured membranes and membrane electrode assemblies, or MEAs,
for proton exchange membrane, or PEM, fuel cells. Hoku MEAs are designed for the
residential primary power, commercial back-up, and automotive hydrogen fuel cell
markets. To date, none of our customers have commercially deployed products
incorporating Hoku MEAs or Hoku Membranes, and we have not sold any products
commercially. We do not have any current material fuel cell
contracts.
We intend
to selectively pursue patent applications in order to protect our technology,
inventions and improvements related to our fuel cell products; however, we do
not currently plan on actively pursuing any new contracts or committing material
resources to further develop our fuel cell products.
During
the three and six months ended September 30, 2009, Hoku Fuel Cells had
insignificant activity primarily associated with patent applications in order to
protect our technology, inventions and improvements related to our fuel cell
products.
Financial
Operations Review
During
the three and six months ended September 30, 2009, we derived all of our revenue
through PV system installation and ancillary services related to Hoku Solar. We
expect that all of our revenue will be derived through PV system installations
and the sale of electricity until the first half of calendar year 2010, when
Hoku Materials is expected to generate revenue through the sale of
polysilicon.
During
the three and six months ended September 30, 2009, our revenue was $1.5 million
and $1.6 million, respectively, comprised of commercial PV system installations
and electricity sales.
Consolidated
Results of Operations
The
following analysis of the unaudited consolidated financial condition and results
of operations of Hoku Scientific, Inc. and its subsidiaries should be read in
conjunction with the consolidated financial statements and the related notes
thereto in this Quarterly Report on Form 10-Q.
Comparison
of Three Months Ended September 30, 2009 and 2008
Revenue. Revenue was $1.5
million for the three months ended September 30, 2009 compared to $1.9 million
for the same period in 2008. Revenue in both periods was primarily comprised of
PV system installations and related services.
Cost of Revenue.
Cost of revenue was $1.4 million for the three months ended September
30, 2009 compared to $1.5 million for the same period in fiscal 2009. Cost of
service and license revenue primarily consisted of employee compensation and
supplies and materials.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses were $1.5 million
for the three months ended September 30, 2009 compared to $1.1 million for the
same period in fiscal 2009. The increase of $479,000 was primarily due to
compensation to Board Directors of $210,000, retention payments for officers and
other key employees of $130,000 and higher payroll expenses of
$125,000.
Interest and Other
Income/(Loss). Interest and other income was $217,000 for the three
months ended September 30, 2009 compared to a loss of $687,000 for the same
period in fiscal 2009. Interest and other income for the three months ended
September 30, 2009 was primarily comprised of $210,000 in prior accruals for
general excise tax reserves due to statute limitations and interest income of
$7,000. Interest and other loss for the three months ended September
30, 2008 was primarily comprised of unrealized losses related to our foreign
currency (Euro) forward contracts of $780,000, offset by interest income and
from the sale of fuel cell equipment of $53,000 and $40,000,
respectively.
20
Comparison
of Six Months Ended September 30, 2009 and 2008
Revenue. Revenue was $1.6
million for the six months ended September 30, 2009 compared to $4.1 million for
the same period in 2008. Revenue for both periods was primarily comprised of PV
system installations and related services.
Cost of Revenue. Cost
of revenue was $1.4 million for the six months ended September 30, 2009
compared to $3.0 million for the same period in 2008. Cost of service and
license revenue primarily consisted of employee compensation and supplies and
materials.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses were $2.6 million
for the six months ended September 30, 2009 compared to $2.3 million for the
same period in fiscal 2009. The increase of $300,000 was primarily due to higher
payroll expenses of $290,000, compensation to Board Directors of $210,000 and
retention payments for officers and other key employees of $130,000 The increase
was offset by lower stock based compensation of $351,000.
Interest and Other
Income/(Loss). Interest and other income was $302,000 for the six months
ended September 30, 2009 compared to $51,000 for the same period in fiscal 2009.
Interest and other income for the six months ended September 30, 2009 was
primarily comprised of the reversal of $221,000 in accruals for general excise
tax reserves, $40,000 from the sale of fuel cell equipment and interest income
of $20,000. Interest and other income for the six months ended September
30, 2008 was primarily comprised of interest income and the sale of fuel cell
equipment of $245,000 and $74,000, respectively, offset by unrealized losses
related to our foreign currency (Euro) forward contracts of
$268,000.
Liquidity
and Capital Resources
We have
incurred significant net losses since inception and we have relied on our
ability to fund our operations principally through both registered and
unregistered offerings of our securities and prepayments on long-term
polysilicon contracts. Even if we are successful in securing additional
long-term polysilicon contracts that could provide additional prepayments, and
our existing customers fulfill their obligations to make additional prepayments
when due (of which there can be no assurances), we will still need to seek
additional financing to complete our polysilicon production facility currently
under construction. As of September 30, 2009, we had cash and cash equivalents
on hand of $9.1 million and short term liabilities of $67.0
million.
To help
address our cash needs to meet our obligations, we have modified payment terms
in purchase orders with more than thirty of our vendors to structure payment
plans for amounts past due and to be invoiced in the future. Furthermore, in
September 2009, we entered into a definitive agreement providing for a majority
investment in us by Tianwei New Energy Holdings Co., Ltd., or Tianwei, and debt
financing by Tianwei through China Construction Bank, as agent, for the
construction and development of our polysilicon production facility in
Pocatello, Idaho. Subject to closing of the Tianwei financing transaction,
which is anticipated to occur in November 2009 after the satisfaction of closing
conditions, including but not limited to the approval of Chinese government
authorities, $50 million of an aggregate of $79 million in secured prepayments
previously paid by Tianwei to us under certain polysilicon supply agreements
will be converted into shares of our common stock. In addition, we will
issue Tianwei a warrant to purchase an additional 10 million shares of common
stock and Tianwei will arrange for $50 million in debt financing for us,
together with a commitment from Tianwei to assist us in obtaining additional
financing that may be required by us to construct and operate the Project.
We expect to receive the $20 million of the loan proceeds in November 2009, and
$30 million in December 2009.
In
exchange for the value that would be provided by Tianwei, we will issue to
Tianwei 33,379,287 newly-issued shares of our common stock and grant Tianwei a
warrant to purchase an additional 10 million shares of our common stock at a
price per share equal to $2.52. The newly issued shares of the Company’s common
stock and warrant will represent approximately 66% of the Company’s
fully-diluted outstanding shares.
The $50
million in debt, plus $63 million in additional prepayments from our existing
customers, will be used to pay current liabilities and complete construction to
the point where we could commence shipments to customers, and we intend to delay
any additional financing until such time. On the basis of these funding sources,
we anticipate resuming full scale Project construction in November 2009.
We do not expect to generate significant revenue until we successfully commence
the manufacture and shipment of polysilicon and begin meeting the obligations
under our supply contracts.
The total
actual cost of construction and equipment for the Project is estimated to be
$390 million. This estimate is based on our discussion with vendors, declining
costs of materials and labor and ongoing adjustments of certain design elements;
however, changes in costs, modifications in construction timelines and other
factors could cause the actual cost to significantly exceed our estimate. Our
six long-term supply customers have collectively committed to contribute $228.4
million towards these costs in the form of polysilicon supply prepayments,
subject to the achievement of various milestones and repayment obligations under
certain circumstances. As of September 30, 2009, we had collected $165.0 million
of combined prepayments that were committed to us from these customers. As of
September 30, 2009, we had contributed approximately $41 million to the
construction cost of the Project.
We will
need to seek additional financing to complete construction of the Project.
Assuming the closing of the Tianwei financing transaction and the receipt of $50
million in debt financing, if we are unable to secure additional long-term
supply contracts and prepayments, assuming the cost to construct and equip the
Project does not exceed $390 million and that all of our existing customers make
their prepayments when due, the amount we will need to raise could be as much as
$71 million. If we are unable to secure additional long-term supply
contracts and prepayments, if for any reason (e.g. contract amendment,
termination, breach, etc.), or one or more of our polysilicon supply customers
do not pay the full amount of the prepayments to which they are presently
committed and/or if the actual cost to complete the Project is more than $390
million, the amount we will need to raise could exceed $71 million.
Furthermore, if there is a delay in receiving the $50 million in debt financing
from the Tianwei transaction, or we do not receive our anticipated prepayments
from our existing customers, it could raise substantial doubt about our ability
to continue as a going concern through at least September 30, 2010. The
inability to continue as a going concern could result in an orderly wind-down of
us or other potential forms of restructuring.
21
As of
September 30, 2009, we had an accumulated deficit of $17.3 million. Hoku
Materials does not currently generate any revenue and we do not anticipate
revenue from Hoku Materials until the first quarter of calendar year 2010.
During the six months ended September 30, 2009, our revenue was primarily
from PV system installations and related services primarily from Hoku Solar
contracts. At this time, we do not believe we will receive any meaningful
revenue from Hoku Fuel Cell products and services for the foreseeable
future.
The sale
of additional equity and convertible debt instruments may result in additional
dilution to our current stockholders. Additionally, if we do not have sufficient
cash to meet all of our obligations as they come due, we will have to ask our
vendors to forebear from enforcing one or more of their rights under their
respective agreements. There are no assurances that our vendors will agree
to forebear or otherwise make any concessions under their respective agreement.
If any of our vendors seek to enforce our obligations under these agreements
that we are unable to perform, which could include asserting and/or foreclosing
on materialman’s and laborer’s liens on the Project, or taking other legal
action, it could materially harm our business, financial condition and results
of operations and we may be forced to delay, alter or abandon our planned
business operations, which could have a material adverse effect on the our
ability to continue as a going concern and the recoverability of its long-lived
assets.
Net Cash Used In
Operating Activities. Net cash used in operating activities was
$2.7 million for the six months ended September 30, 2009 compared to $1.4
million for the same period in 2008. The net cash used in operating activities
was primarily due to the costs expended for uncompleted solar contracts,
decrease in accounts payable and accrued operating expenses and lower
deferred revenues during the six months ended September 30, 2009 as
compared to the same period in 2008.
Net Cash Used In
Investing Activities. Net cash used in investing activities was
$40.2 million for the six months ended September 30, 2009 compared to $57.3
million for the same period in 2008. The net cash used in investing activities
in both periods was primarily due to the capitalization of funds to pay for
construction costs related the Project.
Net Cash Provided
By Financing Activities. Net cash provided by financing activities
was $34.6 million for the six months ended September 30, 2009 compared to $44.7
million for the same period in 2008. The net cash provided by financing
activities during the six months ended September 30, 2009 was primarily due to
deposits received from polysilicon prepayment supply contracts of $31.0 million
and contributions from the noncontrolling interest of $3.6 million. The
net cash provided by financing activities during the six months ended September
30, 2008 was primarily due to $35.0 million in deposits received from supply
agreements for polysilicon deliveries and the sale of 1,160,716 shares of our
common stock for net proceeds of approximately $6.7 million.
Contractual
Obligations
The
following table summarizes the contractual obligations that existed at September
30, 2009. The amounts in the table below do not include time and materials
contracts and incentive payments. In addition, the GEC Graeber Engineering
Consultants GmbH, and MSA Apparatus Construction for Chemical Equipment Ltd.
contract for the purchase and sale of hydrogen reduction reactors and
hydrogenation reactors is to be paid in Euros and the contractual obligation is
determined based on the Euro/U.S. dollar exchange rate, which was $1.4643/Euro
as of September 30, 2009.
Contractual Obligations
|
Total
|
Less Than
One Year
|
One to
Three Years
|
Three to
Five Years
|
More Than
Five Years
|
|||||||||||||||
(in thousands)
|
||||||||||||||||||||
Construction in progress
|
$ | 20,968 | $ | 20,968 | $ | — | $ | — | $ | — | ||||||||||
Equipment purchases
|
89,108 | 85,438 | 3,670 | — | — | |||||||||||||||
Supply purchases
|
76,042 | 9,616 | 40,296 | 26,130 | — | |||||||||||||||
Leases
|
523 | 236 | 287 | — | — | |||||||||||||||
Deposits – Hoku Materials
|
165,000 | 6,194 | 30,226 | 33,612 | 94,968 | |||||||||||||||
Total
|
$ | 351,641 | $ | 122,452 | $ | 74,479 | $ | 59,742 | $ | 94,968 |
We may
have insufficient cash to meet all of our obligations as they come due through
September 30, 2010. We have modified payment terms in purchase orders with
more than thirty of our vendors to structure payment plans for amounts past due
and to be invoiced in the future. In the event we are unable to meet our
obligations under payment plans and other agreements, we will have to ask our
vendors to forebear from enforcing one or more of their rights under their
respective agreements. There are no assurances that any of our vendors
will agree to forebear or otherwise make any concessions under their respective
agreements. If any of our vendors seek to enforce our obligations under
these agreements that we are unable to perform, which could include asserting
and/or foreclosing on materialman’s and laborer’s liens on the Project, or
taking other legal action, it could materially harm our business, financial
condition and results of operations and we may be forced to delay, alter or
abandon our planned business operations, which could have a material adverse
effect on the our ability to continue as a going concern.
22
Stone & Webster, Inc. In
August 2007, we entered into an Engineering, Procurement and Construction
Management Contract with Stone & Webster, Inc., or S&W, a subsidiary of
The Shaw Group Inc., for engineering, procurement, and construction management
services for the construction of our the Project, which was amended in October
2007 by Change Order No. 1, again in April 2008 by Change Order No. 2, and
again by Change Order No. 3 in February 2009, which are collectively the S&W
Engineering Agreement. Under the S&W Engineering Agreement, S&W is to
provide all engineering and procurement services necessary to complete the
design and planning for construction of the Project. S&W is to be paid on a
time and materials basis plus a fee for its services and incentives if certain
schedule and cost targets are met. The target cost for the services to be
provided under the S&W Engineering Agreement is $50 million.
Through
September 30, 2009, the Company made payments to S&W of $45.7 million and
had $1.8 million of payables outstanding as of September 30, 2009.
JH Kelly LLC. In August 2007,
we entered into a Cost Plus Incentive Contract with JH Kelly LLC, or JH Kelly,
for construction services for the construction of the Project, which was amended
in October 2007, by Change Order No. 1, again in April 2008 by Change
Order No. 2, again in March 2009 by Change Order No. 3, and again in September
2009 by Change Order No. 4, which are collectively the JH Kelly Construction
Agreement. Under the JH Kelly Construction Agreement, JH Kelly agreed to provide
the construction services as our general contractor for the construction of the
Project with a production capacity of 4,000 metric tons per year. The target
cost for the services to be provided under the JH Kelly Construction Agreement
is $145 million, including up to $5.0 million of incentives that may be
payable.
Through
September 30, 2009, the Company made payments to JH Kelly of $53.6 million
and had $13.0 million of payables outstanding as of September 30,
2009.
Dynamic Engineering Inc. In
October 2007, we entered into an agreement with Dynamic Engineering Inc., or
Dynamic, for design and engineering services, and a related technology license,
for the process to produce and purify trichlorosilane, or TCS. Under the
agreement with Dynamic, or the Dynamic Agreement, Dynamic is obligated to design
and engineer a TCS production facility that is capable of producing 20,000
metric tons of TCS for the Project. The Dynamic process is to be integrated by
S&W into the overall polysilicon production facility, and will be
constructed by JH Kelly. Under the Dynamic Agreement, Dynamic's engineering
services are provided and invoiced on a time and materials basis, and the
license fee will be calculated upon the successful completion of the TCS
production facility, and demonstration of certain TCS purity and production
efficiency capabilities. The maximum aggregate amount that we may pay Dynamic
for the engineering services and the technology license is $12.5 million, which
includes an incentive for Dynamic to complete the engineering services under
budget. Dynamic is guaranteeing the quantity and purity of the TCS to be
produced at the completed facility, and has agreed to indemnify us for any
third-party claims of intellectual property infringement.
Through
September 30, 2009, the Company made payments to Dynamic of $5.6 million and had
$3.4 million of payables outstanding as of September 30, 2009.
GEC Graeber Engineering Consultants
GmbH and MSA Apparatus Construction for Chemical Equipment Ltd. We
entered into a contract with GEC Graeber Engineering Consultants GmbH, or GEC,
and MSA Apparatus Construction for Chemical Equipment Ltd., or MSA, for the
purchase and sale of 16 hydrogen reduction reactors and hydrogenation reactors
for the production of polysilicon, and related engineering and installation
services. Under the contract, we will pay up to a total of 20.9 million Euros
for the reactors. The reactors are designed and engineered to produce
approximately 2,000 metric tons of polysilicon per year. The term of the
contract extends until the end of the first month after the expiration date of
the warranty period, but may be terminated earlier under certain
circumstances.
In
January 2009, we received the first shipment of six Siemens-process reactors at
the Project, and all of these polysilicon reactors have been assembled and put
into place on our production floor. The reactors are the first units to arrive
in Pocatello out of a planned total order of 28. The next shipment of 10
polysilicon reactors and related equipment is scheduled to arrive at our
facility in the third quarter of fiscal 2010, subject to its payment of an
additional 3.2 million Euros or $4.7 million (based on the Euro/U.S. dollar
exchange rate, which was $1.4643/Euro as of September 30, 2009). We are in
discussions with GEC to purchase additional 12 reactors necessary for our
planned annual capacity of 4,000 metric tons of polysilicon. The cost of
these additional reactors is not expected to be greater than 20.9 million
Euros.
Through
September 30 2009, the Company paid GEC and MSA an aggregate amount of 15.2
million Euros or $22.3 million and had 2.4 million Euros or $3.5 million of
payables outstanding as of September 30, 2009.
Idaho Power Company. In
December 2007, we entered into an agreement with Idaho Power Company, or Idaho
Power, to complete the construction of the electric substation to provide power
for the Project, or the Idaho Power Agreement. We are obligated to pay Idaho
Power an aggregate of $14.8 million for the completion of the substation and
associated facilities. Under the terms of the Idaho Power Agreement, the
substation and associated facilities were scheduled to be completed on or before
February 2009. The Idaho Power Agreement provided that Idaho Power could invoice
us additional amounts for temporary power to enable the start-up and operation
of the Project prior to February 2009.
23
In
September 2008, we amended and restated the Idaho Power Agreement by entering
into an Amended and Restated Agreement for Construction of the Hoku Electric
Substation and Associated Facilities, or the Amended Idaho Power Agreement.
Under the Amended Idaho Power Agreement, Idaho Power agreed to construct an
electric substation and associated transmission facilities with an increased
capacity beyond what was provided for in the original Idaho Power Agreement.
Idaho Power estimates that the costs of construction under the Amended Idaho
Power Agreement will increase to $16.5 million. The Amended Idaho Power
Agreement also provides that upon completion of construction, there will be a
true-up of actual construction costs, so that either we will be refunded any
monies we have paid to Idaho Power over and above the actual costs of
construction, or we will pay Idaho Power any additional construction costs
beyond the original amount.
Through
September 30, 2009, the Company paid Idaho Power an aggregate amount of
$17.5 million through September 30, 2009, which includes $917,000 paid to Idaho
Power pursuant to a separate engineering services agreement.
In
September 2008, we also entered into an Electric Service Agreement with Idaho
Power for the supply of electric power and energy to us for use in the Project,
subject to the approval of Idaho’s Public Utilities Commission, or the ESA. The
term of the ESA is four years, beginning in June 2009. During the term of the
ESA, Idaho Power agrees to make up to 82,000 kilowatts of power available to us
at certain fixed rates, which are subject to change only by action of the Idaho
Public Utilities Commission. After the initial term of the ESA expires, either
we or Idaho Power may terminate the ESA without prejudice. If neither party
chooses to terminate the ESA, then Idaho Power will continue to provide electric
service to us at the same fixed rates.
In June
2009, we entered into an Amended and Restated Electric Service Agreement, or the
Amended Agreement, with Idaho Power which amends and restates the ESA in its
entirety. The Amended Agreement was filed with the Idaho Public Utilities
Commission, or PUC, and was approved. The Amended Agreement extends by six
months the date upon which we are obligated to begin purchasing prescribed
amounts of electricity from Idaho Power, from June 1, 2009 to December 1, 2009,
as well as extending the initial term of the ESA to December 2013. Prior
to the December 1, 2009 effective date of the Amended Agreement, electricity is
to be provided to us by Idaho Power at the current Schedule 19T tariff
rate.
AEG Power Solutions USA Inc.
(formerly known as Saft Power Systems USA, Inc.). In March 2008, we
entered into an agreement with AEG Power Solutions USA Inc., or AEG, formerly
known as Saft Power Systems USA, Inc., which was subsequently amended in May
2009, or the AEG Agreement, for the purchase and sale of thyroboxes, earth fault
detection systems, and related technical documentation and services, or the
Deliverables. Under the AEG Agreement, AEG was obligated to manufacture and
deliver the Deliverables, which are used as the power supplies for the
polysilicon deposition reactors to be used in the Project. The total fees
payable to AEG for all Deliverables under the AEG Agreement is approximately $13
million.
Through
September 30, 2009, the Company made payments to AEG of $6.2 million and had
$1.2 million of payables outstanding as of September 30, 2009.
Polymet Alloys, Inc. In
November 2008, we entered into an agreement with Polymet Alloys, Inc., or
Polymet, for the supply of silicon metal to us for use in our planned
polysilicon production facility in Pocatello, Idaho. In May 2009, we entered
into an amended and restated supply agreement with Polymet, or the Amended
Polymet Agreement. The term of the Amended Polymet Agreement is three
years, commencing in 2010. Each year during the term of the Amended Polymet
Agreement, Polymet agreed to sell to us, and we agreed to purchase from Polymet,
no less than 65% of our annual silicon metal requirement. Pricing is to be
negotiated for each year of the Amended Polymet Agreement; however, if the
parties are unable to agree on pricing for any year, or we have agreed to
purchase less than the amount specified in the Amended Polymet Agreement,
Polymet has a right of first refusal to match the terms offered by any
third-party supplier from whom we may seek to purchase silicon metal.
Either party may also terminate the Amended Polymet Agreement under certain
circumstances, including a material breach by the other party that has not been
cured within a specified cure period, or the other party’s voluntary or
involuntary liquidation. As of September 30, 2009, we had not made any payments
to Polymet.
PVA Tepla Danmark. In April
2008, we entered into an agreement with PVA Tepla Danmark, or PVA, for the
purchase and sale of slim rod pullers and float zone crystal pullers. Under the
agreement, PVA is obligated to manufacture and deliver the slim rod pullers and
float zone crystal pullers for the Project. Slim rod pullers are used to make
thin rods of polysilicon that are then transferred into polysilicon deposition
reactors to be grown through a chemical vapor deposition process into
polysilicon rods for commercial sale to our end customers. The float zone
crystal pullers convert the slim rods into single crystal silicon for use in
testing the quality and purity of the polysilicon. The total fees payable to PVA
is approximately $6 million, which is payable in four installments, the first of
which was made in August 2008. Either party may terminate the agreement if the
other party is in material breach of the agreement and has not cured such breach
within 180 days after receipt of written notice of the breach, or if the other
party is bankrupt, insolvent, or unable to pay its debts.
Through
September 30, 2009, the Company had paid PVA an aggregate amount of $1.9 million
and had $3.9 million of payables outstanding as of September 30,
2009.
BHS Acquisitions, LLC. In
November 2008, we entered into an agreement with BHS Acquisitions, LLC, or BHS,
for the supply of hydrochloric acid, or HCl, to us for use in the Project. The
term of the agreement is eight years beginning on the date on which the first
shipment of product is delivered. Each year during the term of the agreement,
BHS has agreed to sell to us, and we have agreed to purchase from BHS, specified
volumes of HCl that meet certain purity specifications. The volume is fixed
during each of the eight years. Pricing is fixed for the first twelve months of
shipments, which are scheduled to begin no later than January 2010, and the
aggregate net value of the HCl to be purchased by us under the agreement in the
first twelve months is approximately $2.4 million. Pricing is to be renegotiated
for each of the remaining years of the agreement; however, if the parties are
unable to agree on pricing for any future year, then either party may terminate
the agreement without liability to the other party. Either party may also
terminate the agreement under certain circumstances, including a material breach
by the other party that has not been cured within a specified cure period, or
the other party’s voluntary or involuntary liquidation. As of September 30,
2009, we have not made any payments to BHS.
24
Operating
Capital and Capital Expenditure Requirements
As we
invest resources towards our polysilicon manufacturing and PV systems
installation service businesses, develop our products, expand our corporate
infrastructure, prepare for the increased production of our products and
evaluate new markets to grow our business, we expect that our expenses will
continue to increase and, as a result, we will need to generate significant
revenue to achieve profitability.
In
September 2009, we entered into a definitive agreement providing for a majority
investment in us by Tianwei New Energy Holdings Co., Ltd., or Tianwei, and debt
financing by Tianwei through China Construction Bank, as agent, for the
construction and development of our polysilicon production facility in
Pocatello, Idaho. Subject to closing of the Tianwei financing transaction,
which is anticipated to occur in November 2009 after the satisfaction of closing
conditions, including but not limited to the approval of Chinese government
authorities, Tianwei will convert $50 million of an aggregate of $79 million in
secured prepayments previously paid by Tianwei to us under certain polysilicon
supply agreements into shares of our common stock. In addition, we will
issue Tianwei a warrant to purchase an additional 10 million shares of common
stock and Tianwei will arrange for $50 million in debt financing for us,
together with a commitment from Tianwei to assist us in obtaining additional
financing that may be required by us to construct and operate the Project.
We expect to receive $20 million of the loan proceeds in November 2009, and $30
million in December 2009.
The $50
million in debt, plus $63 million in additional prepayments from our existing
customers, will be used to pay current liabilities and complete construction of
the Project to the point where we could commence shipments to customers, and we
intend to delay any additional financing until such time. On the basis of these
funding sources, we anticipate resuming full scale Project construction in
November 2009. We do not expect to generate significant revenue until we
successfully commence the manufacture and shipment of polysilicon and begin
meeting the obligations under our supply contracts.
We will
need to seek additional financing to complete construction of the Project.
Assuming the closing of the Tianwei financing transaction and the receipt of $50
million in debt financing, if we are unable to secure additional long-term
supply contracts and prepayments, assuming the cost to construct and equip the
Project does not exceed $390 million and that all of our existing customers make
their prepayments when due, the amount we will need to raise could be as much as
$71 million. If we are unable to secure additional long-term supply
contracts and prepayments, if for any reason (e.g. contract amendment,
termination, breach, etc.), or one or more of our polysilicon supply customers
do not pay the full amount of the prepayments to which they are presently
committed and/or if the actual cost to complete the Project is more than $390
million, the amount we will need to raise could exceed $71 million.
Furthermore, if there is a delay in receiving the $50 million in debt from the
Tianwei transaction, we do not receive its anticipated prepayments, or other
unfavorable factors occur, it could raise substantial doubt about our ability to
continue as a going concern. The inability to continue as a going concern could
result in an orderly wind-down of us or other potential forms of
restructuring.
The sale
of additional equity and convertible debt instruments may result in additional
dilution to our current stockholders. If we raise additional funds through the
issuance of convertible debt securities, these securities could have rights
senior to those of our common stock and could contain covenants that would
restrict our operations. We may require additional capital beyond our currently
forecasted amounts. Any required additional capital may not be available on
reasonable terms, if at all. If we are unable to obtain additional financing, we
may be required to reduce the scope of, delay or eliminate some or all of our
planned research, development and commercialization and manufacturing
activities, which could harm our business. Our forecasts of the period of
time through which our financial resources will be adequate to support our
operations are forward-looking statements and involve risks and uncertainties.
Actual results could vary as a result of a number of factors, including the
factors discussed in Part II, Item 1.A. “Risk Factors” and the section above
entitled “Forward-Looking Statements.”
Critical
Accounting Policies and Significant Judgments and Estimates
Our
management’s discussion and analysis of our financial condition and results of
operations are based on our unaudited consolidated financial statements, which
have been prepared in accordance with U.S. generally accepted accounting
principles for interim financial statements and the instructions to Form 10-Q
and Regulation S-X. The preparation of these unaudited consolidated financial
statements requires us to make estimates and assumptions relating to the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported amounts of revenue and expenses during the reporting periods. We
evaluate our estimates and judgments on an ongoing basis. We base our estimates
on historical experience and on various other factors that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates.
While our
significant accounting policies are more fully described in Note 1 to the
unaudited consolidated financial statements included in this Quarterly Report on
Form 10-Q and Note 1 to the audited financial statements included in our Annual
Report on Form 10-K, filed with the Securities and Exchange Commission on June
15, 2009, we believe that the following accounting policies and estimates are
critical to a full understanding and evaluation of our reported financial
results.
25
Revenue Recognition. Revenue
from polysilicon and PV system installations is recognized when there is
evidence of an arrangement, delivery has occurred or services have been
rendered, the arrangement fee is fixed or determinable, and collectability of
the arrangement fee is reasonably assured. PV system installation contracts may
have several different phases with corresponding progress billings, however,
revenue is recognized when the installation is complete and accepted by the
customer.
We have
also provided testing and engineering services to customers pursuant to
milestone-based contracts that are not multi-element arrangements. These
contracts sometimes provided for periodic invoicing upon completion of
contractual milestones. Customer acceptance is usually required prior to
invoicing. We recognized revenue for these arrangements under the completed
contract method. Under the completed-contract method, we defer the
contract fulfillment costs and any advance payments received from the customer
and recognize the costs and revenue in our statement of operations once the
contract is complete and the final customer acceptance, if required, has been
obtained.
Revenue
from the sale of electricity generated from our PV systems is based on kilowatt
usage and is recognized in accordance with its power purchase agreements, or
PPAs.
Stock-Based Compensation. We
account for stock-based employee compensation arrangements using the fair value
method, in which the fair value of stock options and/or restricted stock awards
granted to our employees and non-employees is determined using the Black-Scholes
pricing model. The Black-Scholes pricing model requires the input of several
subjective assumptions including the expected life of the option/restricted
stock award and the expected volatility of the option/restricted stock award at
the time the option/restricted award is granted. The fair value of our
option/restricted award, as determined by the Black-Scholes pricing model, is
expensed over the requisite service period, which is generally five years for
stock options and varies between two and five years for restricted stock
awards.
The
assumptions used in calculating the fair value of our stock options and
restricted stock awards represent management’s best estimates, but these
estimates involve inherent uncertainties and the application of management
judgment. As a result, changes in these inputs and assumptions can materially
affect the measure of the estimated fair value of our stock options and
restricted stock awards. In addition, we are required to estimate the expected
forfeiture rate and only recognize expense for those options and shares expected
to vest. If our actual forfeiture rate is materially different from our
estimate, the stock-based compensation expense could be significantly different
from what we have recorded in the current period. Furthermore, this accounting
estimate is reasonably likely to change from period to period as further stock
options and restricted stock awards are granted and adjustments are made for
stock option and restricted stock awards forfeitures and cancellations. We do
not record any deferred stock-based compensation on our balance sheet for our
stock options and restricted stock awards.
Recent
Accounting Pronouncements
In June
2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles- a
replacement of FASB Statement No. 162, which is now referenced as FASB
ASC 105-10-05. The FASB Accounting Standards Codification (Codification)
will become the source of authoritative U.S. generally accepted accounting
principles (GAAP) recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under the authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants. The new standard was effective
for financial statements issued for interim and annual periods ending after
September 15, 2009 (i.e., September 30, 2009 for the Company) at which time the
Codification will supersede all then existing non-SEC accounting and reporting
standards.
Off-Balance
Sheet Arrangements
None
Item
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
The
primary objective of our investment activities is to preserve our capital for
the purpose of funding our operations. To achieve this objective, our investment
policy allows us to maintain a portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, auction
instruments, corporate and government bonds and certificates of deposit. These
investments are generally short-term in nature and highly liquid. As of
September 30, 2009, we did not maintain any short-term investments. Our
cash and cash equivalents as of September 30, 2009 were $9.1
million.
All of
our contracts are denominated in U.S. dollars, except for our contracts with GEC
and MSA which are denominated in Euros. As a result of the early settlement of
our Euros purchase agreements, we no longer maintain any investment in Euros,
nor are we a party to any agreements to purchase Euros at certain dates in the
future. Accordingly, we are subject to the then current spot rate between
the US dollar and the Euro at such time that a payment is required under the GEC
and MSA contracts.
26
Item
4.
|
CONTROLS
AND PROCEDURES
|
Evaluation of Disclosure Controls
and Procedures. As of the end of the period covered by this report, we
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in the Securities Exchange Act Rules
13a-15(e) and 15d-15(e)). Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that as of the end of the period
covered by this report, our disclosure controls and procedures were effective to
ensure that information required to be disclosed by us in reports we file or
submit under the Exchange Act is (1) recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms, and (2)
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure.
Changes in Internal Control over
Financial Reporting. There were no changes in our internal controls
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934) that occurred during the period covered by this
report that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
27
PART
II—OTHER INFORMATION
Item
1.
|
LEGAL
PROCEEDINGS
|
From time
to time we may be involved in litigation relating to claims arising out of our
operations. We are not currently involved in any material legal
proceedings.
ITEM
1A.
|
RISK
FACTORS
|
In
addition to the risks discussed in Part I, Item 2, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” our business is
subject to the risks set forth below.
Risks
Associated With Our Business
If we are unable to consummate the
proposed transaction with Tianwei, if there is any delay in closing our Tianwei
financing or receiving proceeds of our $50 million loan agreement with Tianwei,
or we are unable to secure adequate funds on terms acceptable to us, we will be
unable to support our business requirements, build our business or continue as a
going concern.
As of
September 30, 2009, we had cash and cash equivalents on hand of $9.1 million and
short term liabilities of $67.0 million. In September 2009, we entered into a
definitive agreement providing for a majority investment in us by Tianwei New
Energy Holdings Co., Ltd., or Tianwei, and debt financing by Tianwei through
China Construction Bank, as agent, for the construction and development of our
planned polysilicon production facility in Pocatello, Idaho, or the
Project. Subject to closing of the Tianwei financing transaction, which is
anticipated to occur in November 2009 after the satisfaction of closing
conditions, including but not limited to the approval of Chinese government
authorities, Tianwei will convert $50 million of an aggregate of $79 million in
secured prepayments previously paid by Tianwei to us under certain polysilicon
supply agreements into shares of our common. In addition, we will issue
Tianwei a warrant to purchase an additional 10 million shares of common stock
and Tianwei will arrange for $50 million in initial debt financing for us,
together with a commitment from Tianwei to assist us in obtaining additional
financing that may be required by us to construct and operate the Project.
We expect to receive the $20 million of the loan proceeds in November 2009, and
$30 million December 2009.
The $50
million in debt, plus $63 million in additional prepayments from our existing
customers, will be used to pay current liabilities and complete construction of
the Project to the point where we could commence shipments to customers, and we
intend to delay any additional financing until such time. Upon receipt of these
funding sources, we anticipate resuming full scale plant construction in
November 2009. We do not expect to generate significant revenue until we
successfully commence the manufacture and shipment of polysilicon and begin
meeting the obligations under our supply contracts.
We will
need to seek additional financing to complete construction of the Project. If we
are unable to generate revenue or secure adequate additional financing when
needed, we will be forced to further reduce expenditures in order to continue as
a going concern. Reduction of expenditures could have a material adverse effect
on our business. The amount and timing of our future capital needs depend on
many factors, including the timing of our development efforts, opportunities for
strategic transactions, and the amount and timing of any revenues we are able to
generate. Given our current business strategy, however, we will need to secure
additional financing in order to execute our plans and continue our operations.
If there is any delay in closing the Tianwei financing, or if the Tianwei
financing does not close for any reason, or if the financing closes but there is
a delay in receiving the proceeds from the $50 million loan agreement with
Tianwei, or if we are unable to raise additional financing to complete the
Project, our business will be materially and adversely harmed.
Over the
next twelve months, we may have insufficient cash to meet all of our obligations
as they come due. We have modified payment terms in purchase orders with more
than thirty of our vendors to structure payment plans for amounts past due and
to be invoiced in the future. In the event we are unable to meet our obligations
under payment plans and other agreements, we will have to ask our vendors to
forebear from enforcing one or more of their rights under their respective
agreements. There are no assurances that any of our vendors will agree to
forebear or otherwise make any concessions under their respective
agreements. If any of our vendors seek to enforce our obligations under
these agreements that we are unable to perform, which could include asserting
and/or foreclosing on materialman’s and laborer’s liens on the Project, or
taking other legal action, it could materially harm our business, financial
condition and results of operations and we may be forced to delay, alter or
abandon our planned business operations, which could have a material adverse
effect on our ability to continue as a going concern.
There are
no assurances that we will be successful in executing any of the foregoing
alternatives. If we are unable to raise additional capital and manage our
liquidity, there is substantial doubt that we will be able to continue as a
going concern through at least September 30, 2010. The inability to continue as
a going concern could result in an orderly wind-down of our business or other
potential forms of restructuring.
28
Our
independent registered public accounting firm’s report on our fiscal 2009
financial statements questions our ability to continue as a going
concern.
Our
independent registered public accounting firm’s report on our financial
statements for each of the three years in the period ended March 31, 2009,
expresses doubt about our ability to continue as a going concern. Their report
includes an explanatory paragraph stating that there is substantial doubt about
our ability to continue as a going concern due to the lack of sufficient
capital, as of the date their report was issued, to support our business
plan.
We will
need to secure additional financing in the future and if we are unable to secure
adequate funds at the times needed and on terms acceptable to us, we will be
unable to support our business requirements, build our business or continue as a
going concern. Accordingly, we can offer no assurance that the actions we plan
to take to address these conditions will be successful. The inclusion of a
“going concern modification” in the report of our independent accountants, in
and of itself, may have a material adverse effect on our ability to obtain
financing and to conduct our business generally, which could have a material
adverse effect on our stock price.
We
need at least $390 million to construct and equip our planned polysilicon
production plant, and we may be unable to raise this amount of capital on
favorable terms or at all.
Our
planned entry into the polysilicon market will require us to spend significant
sums to support the construction of a facility to produce polysilicon, to
purchase capital equipment, to fund new sales and marketing efforts, to pay for
additional operating costs and to significantly increase our headcount. As a
result, we expect our costs to increase significantly, which will result in
further losses before we can begin to generate significant operating revenue
from our Hoku Materials division.
Based on
our polysilicon supply agreements with our customers, we plan to equip and
construct the Project, with a production capacity of 4,000 metric tons of
polysilicon per year. Our original estimated actual construction cost for a
facility capable of producing 3,500 metric tons of polysilicon per year was $390
million; however, we have not yet determined what, if any, additional cost
associated with the increase in our planned production output from 3,500 to
4,000 metric tons per year will be, and we continue to review our construction
cost estimates. Our estimates are based on our discussion with vendors,
declining costs of materials and labor and ongoing adjustments of certain design
elements; however, changes in costs, modifications in construction timelines and
other factors could significantly increase the actual costs.
We plan
on funding the remaining construction costs through customer prepayments and/or
through debt or equity financing, including $50 million from our anticipated
loan agreement with Tianwei and China Construction Bank. As of September 30,
2009, we had received $165 million in customer prepayments under our supply
contracts and expect to receive an additional $63.4 million in customer
prepayments. As of September 30, 2009, we had also contributed an additional
approximately $41 million to the construction cost of the Project.
We have
experienced delays in the receipt of customer prepayments from certain of our
long-term polysilicon supply customers. If we experience further delays in
receipt of these payments, receive reduced payments, or fail to receive any of
them entirely, or if there is any delay in receiving the proceeds from our $50
million loan agreement with Tianwei, we could experience delays in our ability
to continue the engineering, construction, and procurement of the Project in
order to deliver polysilicon in the first quarter of calendar year 2010, or
within the time periods specified in our customer supply contracts, which could
materially harm our business. Even if we receive these prepayments on time and
in the amounts agreed upon, the actual costs to engineer, construct, and procure
the Project could exceed our estimates, and we may be unable to raise any
additional funding required to pay for any such added costs. If we are
unable to begin producing polysilicon by the first quarter of calendar year 2010
and meet our customer commitments, our business will be materially harmed and we
may be forced to delay, alter or abandon our planned business
operations.
If we are
unable to raise capital and manage our liquidity, there is substantial doubt
that we will be able to continue as a going concern through at least September
30, 2010. The inability to continue as a going concern could result in an
orderly wind-down of our business or other potential forms of
restructuring.
The
actual cost to construct and equip our planned polysilicon production facility
may be significantly higher than our estimated cost.
Our
estimate of $390 million to construct and equip the Project is based on our
discussion with vendors, declining costs of materials and labor and ongoing
adjustments of certain design elements; however, changes in costs, modifications
in construction timelines and other factors could cause our actual cost to
significantly exceed our estimate. If the actual cost is significantly higher
than we estimate, it could materially and adversely affect our ability to raise
capital, to complete the Project on schedule or at all, and could materially
harm our business, financial condition and results of operations and we may be
forced to delay, alter or abandon our planned business operations.
The
slowdown of construction and procurement at the Project increases the risk that
we will not meet certain construction and delivery milestones in our long-term
polysilicon supply contracts.
The
inability to resume and accelerate construction and procurement at the Project
increases the likelihood that we will be unable to meet certain construction and
delivery milestones in our long-term polysilicon contracts, which could cause a
termination of one or more of our polysilicon supply contracts and the
corresponding right to seek a refund of any prepayments made as of the date of
termination. Any such termination could have a material adverse
effect on our financial condition and results of operations.
29
Assuming
the cost to complete the Project is $390 million, and assuming all of our
polysilicon customers honor their commitments to make timely prepayments, we
will still need to raise capital through one or more debt or equity offerings
for the procurement and construction of the Project.
Assuming
the total actual cost to construct and equip the Project is $390 million, that
we are successful in receiving all customer prepayments that are presently
committed to us when due, and that we receive the proceeds from the anticipated
$50 million loan agreement with Tianwei, we believe we will need to raise as
much as $71 million through a combination of new customer prepayments, debt
and/or equity. If we are unable to secure additional long-term supply
contracts and prepayments, if for any reason (e.g. contract amendment,
termination, breach, etc.), or one or more of our polysilicon supply customers
do not pay the full amount of the prepayments to which they are presently
committed and/or if the actual cost to complete the Project is more than $390
million, the amount we will need to raise could exceed $71
million. Furthermore, if there is a delay in receiving the $50
million in debt from the Tianwei transaction, or other unfavorable factors
occur, it could raise substantial doubt about our ability to continue as a going
concern through at least September 30, 2010.
There are
no assurances that we will be able to secure any additional debt or equity
financing on favorable terms, at the time such financing is needed, or at all.
If we are unable to secure adequate debt or equity financing to complete
construction of the Project in time to meet certain milestones and/or to meet
our customer commitments, our business will be materially harmed and we may be
forced to delay, alter or abandon our planned business operations, which could
have a material adverse effect on our ability to continue as a going concern.
The inability to continue as a going concern could result in an orderly
wind-down of our business or other potential forms of
restructuring.
We
have a limited operating history and, in calendar year 2006, determined to enter
the photovoltaic system installation and polysilicon markets and to redirect
efforts and resources that were historically directed toward the fuel cell
market. If we are unable to generate significant revenue from our photovoltaic
system installations and polysilicon segments, our business will be materially
harmed.
We were
incorporated in March 2001 and have a limited operating history. We have
cumulative net losses since our inception through September 30, 2009. In
calendar year 2006, we announced a change in our main business and our intention
to form a polysilicon business through our subsidiary, Hoku Materials, and a
photovoltaic, or PV, system installation business through our subsidiary Hoku
Solar. The polysilicon business includes developing production capabilities for,
and the eventual production of polysilicon. The PV systems installation business
includes the design, engineering, procurement and installation of turnkey PV
systems for residential and commercial customers. Prior to our announcement, our
business was solely focused on the stationary and automotive fuel cell markets.
We do not expect to generate any material revenue from Hoku Fuel Cells in the
foreseeable future, and Hoku Materials does not currently generate any operating
revenue.
We have
no prior experience in the polysilicon business. In order to be successful, we
are devoting substantial management time and energy and significant capital
resources to developing this new business, including the construction of the
Project. We commenced construction in May 2007, and expect to begin producing
polysilicon beginning in the first quarter of calendar year 2010, with
full-scale production to begin in the second half of calendar year 2010;
however, there are no assurances that this schedule will not need to be further
modified. We will need to purchase polysilicon from third parties in order to
meet delivery schedules in order to avoid termination of one or more of our
customer supply contracts. In addition, any delays beyond the first
quarter of calendar year 2010 could result in the termination of a customer
supply contracts, which would require us to refund substantial amounts of cash
that has been paid to us as prepayments for future product deliveries. We have
encountered, and expect that we will continue to encounter, significant risks
relating to our entering into the polysilicon industry and changes in that
industry, including potentially significant increases in polysilicon supply and
falling polysilicon prices. If we are unable to address these risks and other
risks successfully, our business, financial condition and results of operations
will be materially and adversely affected.
If
any of our Project engineering, construction, or key equipment vendors are late
in providing their contract deliverables, we may be unable to complete the
construction of the Project to begin commercial shipments in the first quarter
of calendar year 2010, or at all, which could materially harm our
business.
We have
contracts with Stone & Webster, Inc. JH Kelly, LLC, GEC Graeber Engineering
Consultants GmbH and MSA Apparatus Construction for Chemical Equipment, Ltd.,
Idaho Power Company, Dynamic Engineering Inc., AEG Power Solutions USA Inc.,
formerly known as Saft Power Systems USA, Inc., PVA Tepla Danmark, Polymet
Alloys, Inc., BHS Acquisitions, LLC and our other vendors, contractors and
consultants who are providing key services, equipment, and supplies for the
engineering, construction and procurement of the Project. If we experience
delays in the performance or delivery of the services, equipment, and goods
under these respective agreements, we may be unable to commence production of
polysilicon in the second half of calendar year 2009, to ramp-up production and
commence commercial shipments in calendar year 2010, or deliver the volume of
polysilicon that is required under our polysilicon supply
agreements.
If
we are unable to secure adequate quantities of trichlorosilane on favorable
terms and at the times needed, our business will be materially
harmed.
We have
decided to defer approximately $40 million in capital expenditures by delaying
construction of our on-site trichlorosilane, or TCS, production facility. TCS is
needed to produce polysilicon. We are in discussions with third-party
TCS producers for a TCS supply contract to enable us to execute on this
strategy. There are no assurances, however, that we will be able to secure
adequate TCS at the time and in the amounts needed on favorable terms, or at
all. If we are unable to secure adequate TCS on favorable terms and at the times
needed, we may be unable to meet certain milestones in our customer contracts or
to meet our customer supply commitments and our business, financial condition
and results of operations will be materially harmed.
30
We
may have difficulty managing changes in our operations, which could harm our
business.
To date
we have expended significant financial and management resources in connection
with our planned entry into the polysilicon market and the development of our PV
system installation business. For example, in May 2007, we commenced
construction of the Project. Construction of the Project and the operation of
the polysilicon manufacturing and PV system installation businesses will involve
substantial changes to our operations and place a significant strain on our
senior management team and financial and other resources, and will, among other
things, require us to significantly increase our international activities; hire
and train additional financial, accounting sales and marketing personnel; and
make substantial investment in our engineering, logistics, financial and
information systems, including implementing new enterprise-level transaction
processing, operational and financial management information systems, procedures
and controls.
Any
failure by us to manage the expansion of our operations or succeed in these
markets or other markets that we may enter in the future, may harm our business,
prospects, financial condition and results of operations.
If
our supply agreement with Wuxi Suntech Power Co., Ltd. is terminated for any
reason, our business will be materially harmed .
In May
2008, we amended our polysilicon supply agreement with Wuxi Suntech Power Co.,
Ltd., or Suntech, for the sale and delivery of polysilicon to Suntech over a
ten-year period, or the Amended Suntech Supply Agreement. In July 2009, we
entered into an amendment to the Amended Supply Agreement. Under the Amended
Suntech Supply Agreement, up to approximately $678 million may be payable to us
during the ten-year period, subject to the achievement of certain milestones,
the acceptance of product deliveries and other conditions. Pursuant to the
Amended Suntech Supply Agreement, we granted to Suntech a security interest in
all of our tangible and intangible assets related to our polysilicon business to
serve as collateral for our obligations under the Amended Suntech Supply
Agreement. These security interests are pari-passu with the security interests
granted to our other five long-term supply customers. The customer security
interests provide that they would be junior to the collateral interest of any
lender providing debt financing for Project construction.
Each
party may elect to terminate the Amended Suntech Supply Agreement under certain
circumstances, including, but not limited to:
·
|
the
bankruptcy, assignment for the benefit of creditors or liquidation of the
other party; or
|
·
|
the
insolvency of the other party; or
|
·
|
a
material breach of the other party.
|
Suntech
may also
terminate the agreement for the following material breaches:
·
|
if
we enter into customer commitments to deliver more than the rated capacity
of the Project, subject to exceptions for planned expansion and
increases in productivity; or
|
·
|
if
we fail to deliver a predetermined quantity of our polysilicon product by
December 2009; or
|
·
|
if
we fail to complete successfully any of the polysilicon quality and
production volume tests or the process implementation test set forth in
the
agreement within specified periods of time during calendar year 2009 and
2010.
|
In
addition, in the instance of extraordinary events, including events of force
majeure and other events outside of our control, which result in our inability
to perform under the terms of the Amended Suntech Supply Agreement, we are
afforded only a limited amount of time to cure such conditions. In the event we
fail to cure the condition so that we can supply our product to Suntech or
otherwise satisfy our delivery requirements by delivering to Suntech third-party
polysilicon purchased in the open market, Suntech may terminate the Amended
Suntech Supply Agreement.
There is
a material risk that we will be unable to meet one or more of the milestones set
forth in the Amended Suntech Supply Agreement within the specified period of
time during calendar year 2009. See Amendment to First Amended and
Restated Supply Agreement with Wuxi Suntech Power Co., Ltd. If
we are unable to meet one or more milestones, Suntech has the right to terminate
the Amended Suntech Supply Agreement. If the Amended Suntech Supply Agreement is
terminated for any reason, our business will be materially harmed. In addition,
if the Amended Suntech Supply Agreement is terminated by Suntech, we will be
required to return any deposits and advance payments received up to the date of
the termination, which was $2 million as of September 2009, and we will need to
secure new funds in order to finance the construction of the Project. Securing
new funds may delay the anticipated timing of completion of the Project, which
delay may result in us failing to meet our delivery requirements under our other
supply agreements. We may not be able to secure new funds on terms as favorable
to us as those under the Amended Suntech Supply Agreement or at all. If we are
unable to secure new funds, we will not be able to complete construction of the
Project, our business will be materially harmed and we may be forced to delay,
alter or abandon our planned business operations.
31
If
our supply agreement with Solarfun Power Hong Kong Limited is terminated for any
reason, our business will be materially harmed.
In May
2008, we and Solarfun Power Hong Kong Limited, or Solarfun, a subsidiary of
Solarfun Power Holdings Co., Ltd., or Solarfun Holdings, entered into a Second
Amended and Restated Supply Agreement, or the Solarfun Supply Agreement,
pursuant to which we have agreed to sell to Solarfun, and Solarfun has agreed to
purchase from us, specified quantities of polysilicon over a ten-year
period. In March 2009, we entered into Amendment No. 2 to the Second
Amended and Restated Solarfun Supply Agreement with Solarfun, or Solarfun
Amendment No. 2. Under Solarfun Amendment No. 2, up to approximately $384
million may be payable to us over a ten year period. Pursuant to the Solarfun
Supply Agreement and Solarfun Amendment No. 2, we granted to Solarfun a security
interest in all of our tangible and intangible assets related to our polysilicon
business to serve as collateral for our obligations under the Solarfun Supply
Agreement and Solarfun Amendment No. 2. These security interests are pari-passu
with the security interests granted to our other five long-term supply
customers. The customer security interests provide that they would be junior to
the collateral interest of any lender providing debt financing for plant
construction.
Each
party may elect to terminate the Solarfun Supply Agreement and Solarfun
Amendment No. 2 under certain circumstances, including, but not limited
to:
·
|
the
bankruptcy, assignment for the benefit of creditors or liquidation of the
other party; or
|
·
|
the
insolvency of the other party; or
|
·
|
a
material breach of the other party.
|
Solarfun
may also terminate the Solarfun Supply Agreement and Solarfun Amendment No. 2 if
we fail to deliver a predetermined quantity of polysilicon product by June 30,
2010. There is a material risk that we will not meet this delivery
milestone. In addition, in the instance of extraordinary events,
including events of force majeure and other events outside of our control, which
result in our inability to perform under the terms of the Second Amended and
Restated Solarfun Supply Agreement, as amended by Solarfun Amendment No. 2, we
are afforded only a limited amount of time to cure such conditions. In the event
we fail to cure the condition so that we can supply our product to Solarfun or
otherwise satisfy our delivery requirements by delivering to Solarfun
third-party polysilicon purchased in the open market, Solarfun may terminate the
Solarfun Supply Agreement and Solarfun Amendment No. 2.
If the
Solarfun Supply Agreement and Solarfun Amendment No. 2 are terminated for any
reason, our business will be materially harmed. In addition, if the Second
Amended and Restated Solarfun Supply Agreement and Solarfun Amendment No. 2 are
terminated by Solarfun, we will be required to return any deposits and advance
payments received up to the date of the termination, which was $37 million as of
September 30, 2009, and we will need to secure new funds in order to finance the
construction of the Project. Securing new funds may delay the anticipated timing
of completion of the Project, which delay may result in us failing to meet our
delivery requirements under our polysilicon supply agreements. We may not be
able to secure new funds on terms as favorable to us as those under the Solarfun
Supply Agreement and Solarfun Amendment No. 2, or at all. If we are unable to
secure new funds, we will not be able to complete construction of the Project,
our business will be materially harmed and we may be forced to delay, alter or
abandon our planned business operations.
If
our supply agreement with Jiangxi Jinko Solar Co., Ltd. is terminated for any
reason, our business will be materially harmed.
In
February 2009, we entered into an Amended & Restated Supply Agreement with
Jiangxi Jinko Solar Co., Ltd., or the Amended Jinko Supply Agreement. Under the
Amended Jinko Agreement, up to approximately $119 million may be payable to us
during a ten-year period, subject to product deliveries and other conditions.
Pursuant to the Amended Jinko Supply Agreement, we granted to Jinko a security
interest in all of our tangible and intangible assets related to our polysilicon
business to serve as collateral for our obligations under the Amended Jinko
Supply Agreement. These security interests are pari-passu with the security
interests granted to our other five long-term supply customers. The customer
security interests provide that they would be junior to the collateral interest
of any lender providing debt financing for Project construction.
Each
party may elect to terminate the Amended Jinko Supply Agreement under certain
circumstances, including, but not limited to:
·
|
the
bankruptcy, assignment for the benefit of creditors or liquidation of the
other party; or
|
·
|
the
insolvency of the other party; or
|
·
|
a
material breach of the other party.
|
Jinko may
also terminate the agreement if we fail to deliver a predetermined quantity of
our polysilicon product by December 31, 2009. Although we have the ability to
meet this milestone by delivering product that is manufactured by a third party,
there is a material risk that we will not meet this delivery milestone. In
addition, in the instance of extraordinary events, including events of force
majeure and other events outside of our control, which result in our inability
to perform under the terms of the Amended Jinko Supply Agreement, we are
afforded only a limited amount of time to cure such conditions. In the event we
fail to cure the condition so that we can supply our product to Jinko or
otherwise satisfy our delivery requirements by delivering to Jinko third-party
polysilicon purchased in the open market, Jinko may terminate the Amended Jinko
Supply Agreement.
32
If the
Amended Jinko Supply Agreement is terminated for any reason, our business will
be materially harmed. In addition, if the Amended Jinko Supply Agreement is
terminated by Jinko, we will be required to return any deposits and advance
payments received up to the date of the termination, which was $20 million as of
September 30, 2009, and we will need to secure new funds in order to finance the
construction of the Project. Securing new funds may delay the anticipated timing
of completion of the Project, which delay may result in us failing to meet our
delivery requirements under our other supply agreements. We may not be able to
secure new funds on terms as favorable to us as those under the Amended Jinko
Supply Agreement or at all. If we are unable to secure new funds, we will not be
able to complete construction of the Project, our business will be materially
harmed and we may be forced to delay, alter or abandon our planned business
operations.
If
either of our supply agreements with Tianwei New Energy (Chengdu) Wafer Co.,
Ltd. is terminated for any reason, our business will be materially
harmed.
Subject
to closing of the Tianwei financing transaction, which is anticipated to occur
in November 2009 after the satisfaction of closing conditions, including but not
limited to the approval of Chinese government authorities, we will enter into
Amendment and Restated Supply Agreement No. 1, or Amendment No. 1, with Tianwei
New Energy (Chengdu) Wafer Co., Ltd., or Tianwei, for the sale and delivery of
polysilicon to Tianwei over a ten-year period. Under Amendment No.
1, we will convert $28 million of the total $44 million of
prepayments previously paid to us by Tianwei into shares of our common stock and
will reduce the price at which Tianwei purchases polysilicon by approximately
11% per year. The amount of polysilicon to be delivered remains
unchanged and Tianwei is still required to pay us an additional $1 million in
prepayments; however, the total revenue for the polysilicon to be sold by us to
Tianwei has been modified such that up to approximately $232 million may be
payable to us during the ten-year term (exclusive of amounts Tianwei may
purchase pursuant to its right of first refusal), subject to acceptance of
product deliveries and other conditions.
Subject
to closing of the Tianwei financing transaction, which is anticipated to occur
in November 2009 after the satisfaction of closing conditions, including the
approval of Chinese government authorities, we will enter into Amendment and
Restated Supply Agreement No. 2, or Amendment No. 2, with Tianwei, for the sale
and delivery of polysilicon to Tianwei over a ten-year period. Under
Amendment No. 2, we will convert $22 million of the total $35 million
of prepayments previously paid to us by Tianwei into shares of our common stock
and will reduce the price at which Tianwei purchases polysilicon by
approximately 11% per year. The amount of polysilicon to be delivered
remains unchanged and Tianwei is still required to pay us an additional $1
million in prepayments; however, the total revenue for the polysilicon to be
sold by us to Tianwei has been modified such that up to approximately $186
million may be payable to us during the ten-year term (exclusive of amounts
Tianwei may purchase pursuant to its right of first refusal), subject to
acceptance of product deliveries and other conditions.
Pursuant
to Amendment No. 1 and Amendment No. 2, or the Tianwei Supply Agreements, we
will grant to Tianwei a security interest in all of our tangible and intangible
assets related to our polysilicon business to serve as collateral for our
obligations under the Tianwei Supply Agreements. This security
interest will be pari-passu with the security interests granted to our other
five long-term supply customers. The customer security interests provide that
they would be junior to the collateral interest of any lender providing debt
financing for Project construction.
Each
party may elect to terminate either of the Tianwei Supply Agreements under
certain circumstances, including, but not limited to:
·
|
the
bankruptcy, assignment for the benefit of creditors or liquidation of the
other party; or
|
·
|
the
insolvency of the other party; or
|
·
|
a
material breach of the other party.
|
In
addition, in the instance of extraordinary events, including events of force
majeure and other events outside of our control, which result in our inability
to perform under the terms of either or both of the Tianwei Supply Agreements,
we are afforded only a limited amount of time to cure such
conditions. In the event we fail to cure the condition so that we can
supply our product to Tianwei or otherwise satisfy our delivery requirements by
delivering to Tianwei third-party polysilicon purchased in the open market,
Tianwei may terminate the respective Tianwei Supply Agreement.
Tianwei
may also terminate Amendment No. 1 if we fail to deliver a predetermined
quantity of our polysilicon product by March 31, 2010. Tianwei may terminate
Amendment No. 2 if we fail to deliver a predetermined quantity of our
polysilicon product by June 30, 2010. There is a material risk that we will not
meet these delivery milestones. Upon a termination of Amendment No. 1
by Tianwei due to our failure to deliver polysilicon in the amounts and by the
dates required in the contract, we are required to refund to Tianwei 150% of the
prepayments made as of the date of such termination, which is $44 million as of
September 30, 2009, less any part of thereof that has been applied to the
purchase price of products previously delivered to Tianwei. In most
other cases, if Tianwei terminates Amendment No. 1, then we are required to
refund to Tianwei 100% of the prepayments made as of the date of termination,
less any part of thereof that has been applied to the purchase price of products
previously delivered under the contract. Upon a termination of Amendment No. 2
by Tianwei due to our failure to deliver polysilicon in the amounts and by the
dates required in the contract, we are required to refund to Tianwei 150% of the
prepayments made as of the date of termination, which is $35 million as of
September 30, 2009, less any part thereof that has been applied to the purchase
price of products previously delivered to Tianwei. In most other cases, if
Tianwei terminates Amendment No. 2, then we are required to refund to Tianwei
100% of the prepayments made as of the date of termination, less any part
thereof that has been applied to the purchase price of products previously
delivered under the contract.
33
If either
or both of the Tianwei Supply Agreements are terminated for any reason, our
business will be materially harmed. In addition, if Amendment No. 1 is
terminated, we will be required to return any deposits and advance payments
received up to the date of the termination, which is $44 million as of September
30, 2009. If Amendment No. 2 is terminated, we will be required to
return any deposits and advance payments received up to the date of the
termination, which is $35 million as of September 30, 2009. In the event of the
termination of either of the Tianwei Supply Agreements, we will need to secure
new funds in order to finance the construction of the Project. Securing new
funds may delay the anticipated timing of completion of the Project, which delay
may result in us failing to meet our delivery requirements under our other
supply agreements. We may not be able to secure new funds on terms as favorable
to us as those under the Tianwei Supply Agreements, or at all. If we are unable
to secure new funds, we will not be able to complete construction of the
Project, our business will be materially and adversely affected and we may be
forced to delay, alter or abandon our planned business operations.
If
our supply agreement with Wealthy Rise International, Ltd. is terminated for any
reason, our business will be materially harmed.
In April
2009, we entered into an Amended and Restated Supply Agreement, or the Amended
Solargiga Supply Agreement, with Wealthy Rise International, Ltd., or Solargiga,
pursuant to which up to approximately $136 million may be payable to us over a
ten-year period, subject to product deliveries and other
conditions. Pursuant to the Amended Solargiga Supply Agreement, we
granted to Solargiga a security interest in all of our tangible and intangible
assets related to our polysilicon business to serve as collateral for our
obligations under the Amended Solargiga Supply Agreement. These security
interests are pari-passu with the security interests granted to our other five
long-term supply customers. The customer security interests provide that they
would be junior to the collateral interest of any lender providing debt
financing for plant construction.
Each
party may elect to terminate the Amended Solargiga Supply Agreement under
certain circumstances, including, but not limited to:
·
|
the
bankruptcy, assignment for the benefit of creditors or liquidation of the
other party; or
|
·
|
the
insolvency of the other party; or
|
·
|
a
material breach of the other party.
|
Solargiga
may also terminate the agreement if we fail to deliver a predetermined quantity
of our polysilicon product by October 31, 2010. There is a material risk that we
will not meet this delivery milestone. In addition, in the instance of
extraordinary events, including events of force majeure and other events outside
of our control, which result in our inability to perform under the terms of the
Amended Solargiga Supply Agreement, we are afforded only a limited amount of
time to cure such conditions. In the event we fail to cure the condition so that
we can supply our product to Solargiga or otherwise satisfy our delivery
requirements by delivering to Solargiga third-party polysilicon purchased in the
open market, Solargiga may terminate the Amended Solargiga Supply
Agreement.
If the
Amended Solargiga Supply Agreement is terminated for any reason, our business
will be materially harmed. In addition, if the Amended Solargiga
Supply Agreement is terminated by Solargiga as a result of our failure to
deliver polysilicon in the amounts and by the dates required in the Amended
Solargiga Supply Agreement, we are required to refund to Solargiga all of the
prepayments made as of the date of such termination, which was $7 million as of
September 30, 2009, less any part of thereof that has been applied to the
purchase price of polysilicon delivered under the Amended Solargiga Supply
Agreement. Moreover, we will need to secure new funds in order to finance the
construction of the Project. Securing new funds may delay the anticipated timing
of completion of the Project, which delay may result in us failing to meet our
delivery requirements under our other supply agreements. We may not
be able to secure new funds on terms as favorable to us as those under the
Amended Solargiga Supply Agreement or at all. If we are unable to secure new
funds, we will not be able to complete construction of the Project, our business
will be materially harmed and we may be forced to delay, alter or abandon our
planned business operations.
If
our Agreement with Shanghai Alex New Energy Co., Ltd. is terminated for any
reason, our business will be materially harmed.
In
February 2009, we entered into a supply agreement with Shanghai Alex New Energy
Co., Ltd., or Alex, for the sale and delivery of polysilicon to Alex over a
ten-year period, or the Alex Supply Agreement. Under the Alex Supply Agreement,
approximately $119 million may be payable to us during a ten-year period,
subject to product deliveries and other conditions. Pursuant to the Alex Supply
Agreement, we granted to Alex a security interest in all of our tangible and
intangible assets related to our polysilicon business to serve as collateral for
our obligations under the Alex Supply Agreement. These security interests are
pari-passu with the security interests granted to our other five long-term
supply customers. The customer security interests provide that they would be
junior to the collateral interest of any lender providing debt financing for
Project construction.
Each
party may elect to terminate the Alex Supply Agreement under certain
circumstances, including, but not limited to:
·
|
the
bankruptcy, assignment for the benefit of creditors or liquidation of the
other party; or
|
·
|
the
insolvency of the other party;
or
|
34
·
|
a
material breach of the other party.
|
Alex may
also terminate the agreement if we fail to deliver a predetermined quantity of
our polysilicon product by March 31, 2010. Although we have the ability to meet
this milestone by delivering product that is manufactured by a third party,
there is a material risk that we will not meet this delivery milestone. In
addition, in the instance of extraordinary events, including events of force
majeure and other events outside of our control, which result in our inability
to perform under the terms of the Alex Supply Agreement, we are afforded only a
limited amount of time to cure such conditions. In the event we fail to cure the
condition so that we can supply our product to Alex or otherwise satisfy our
delivery requirements by delivering to Alex third-party polysilicon purchased in
the open market, Alex may terminate the Alex Supply Agreement.
If the
Alex Supply Agreement is terminated for any reason, our business may be
materially and adversely affected. In addition, if the Alex Supply
Agreement is terminated by Alex as a result of our failure to deliver
polysilicon in the amounts and by the dates required in the Alex Supply
Agreement, we are required to refund to Alex all of the prepayments made as of
the date of termination, which was $20 million as of September 30, 2009, less
any part thereof that has been applied to the purchase price of polysilicon
delivered under the Alex Supply Agreement. Moreover, we will need to secure new
funds in order to finance the construction of the Project. Securing new funds
may delay the anticipated timing of completion of the Project, which delay may
result in us failing to meet our delivery requirements under our other supply
agreements. We may not be able to secure new funds on terms as
favorable to us as those under the Alex Supply Agreement or at all. If we are
unable to secure new funds, we will not be able to complete construction of the
Project, our business will be materially and adversely affected and we may be
forced to delay, alter or abandon our planned business operations.
We
will face intense competition in the polysilicon market from large competitors
with significantly greater operating histories and financial and technological
resources. We expect polysilicon supply to increase and competition
to further intensify.
We will
compete in the polysilicon market with companies such as Hemlock Semiconductor
Corporation, Renewable Energy Corporation ASA, Mitsubishi Polycrystalline
Silicon America Corporation, Mitsubishi Materials Corporation, Tokuyama
Corporation, MEMC Electronic Materials, Inc., and Wacker Chemie AG. In addition,
new companies have emerged in China, Korea, India, Europe, Brazil, Australia,
North America, and the Middle East, and new technologies, such as fluidized bed
reactors and direct solidification, are emerging, which may have significant
cost and other advantages over the Siemens process we are planning to use to
produce polysilicon at our production facility. These competitors may have
longer operating histories, greater name recognition and greater financial,
sales and marketing, technical and other resources than us. As a result of these
disparities, we may be unable to successfully obtain and retain the customer and
supplier relationships necessary to be successful in the polysilicon market and
PV system installation market, and our operating results and our businesses may
suffer.
Certain
polysilicon producers have announced plans to invest heavily in the expansion of
their production capacities in view of the recent scarcity of solar-grade
silicon. These initiatives may increase the visibility of already-operational
competitors in the industry and their promised delivery capacities, making it
more difficult for us to establish market share as a new entrant, especially
given the fact that the Project is not yet operational. Further, as these
initiatives develop, we expect significant additional production capacity to
come on-line in fiscal 2010, near in time to when the Project is scheduled to
become fully operational. This additional capacity may suppress prices, which
could make it more difficult to retain our existing customer relationships and
to make new relationships, and otherwise adversely affect our
business.
Fluctuations
in industrial production capacity for polysilicon could harm our
business.
Certain
polysilicon producers have invested heavily in the expansion of their production
capacities in view of the recent scarcity of solar-grade polysilicon. We
currently expect significant additional capacity to come on-line in fiscal 2010,
near in time to when our proposed polysilicon facility is scheduled become fully
operational. In addition, if an excess supply of electronic-grade polysilicon
were to develop, producers of electronic-grade silicon could switch production
to solar-grade polysilicon, causing the price of solar-grade polysilicon to
decline more rapidly than we currently anticipate. The electronic-grade
polysilicon market historically has experienced significant cyclicality; for
example, that market experienced significant excess supply from 1998 through
2003. Moreover, the forecasted increases in polysilicon supply could also be
exacerbated if the demand for polysilicon decreases significantly as a result of
the introduction of new technologies that materially reduce or eliminate the
need for polysilicon in producing effective PV systems.
If any of
these events occurred, they could result in an excess supply of solar-grade
polysilicon and could suppress market prices for solar-grade polysilicon. Any
such suppression of market prices for polysilicon would affect the price which
we could expect to receive in selling our polysilicon in the spot market and
could provide our customers with incentives to reconsider or renegotiate their
long-term supply contracts with us to the extent the polysilicon deliverable
under those contracts is priced above prevailing market prices. During fiscal
year 2009, spot market prices of polysilicon decreased dramatically with an
increase in supply, and further price declines are possible in fiscal 2010 as
additional supply is forecasted to enter the market. Further
decreases in demand and polysilicon prices could materially harm our business,
financial condition and results of operations.
Conversely,
in the past, industry-wide shortages of polysilicon have created shortages of PV
modules and increased prices for such modules. In the event of a polysilicon
shortage, any inability to obtain PV modules at commercially reasonable prices,
or at all, would adversely affect our PV system installation business by
reducing our ability to meet potential customer demand for our products or to
provide products at competitive prices. Any continued industry shortage in
available polysilicon could delay the potential growth of our PV system
installations business, thereby harming our business.
35
We
rely on limited suppliers and, if these suppliers fail to deliver materials that
meet our quality requirements in a timely, cost-effective manner or at all, our
production of polysilicon and our installation of PV systems would be
limited.
It is
highly likely that we will procure materials for our PV system installation
business from vertically integrated solar module manufacturing and installation
companies that are also our competitors. These companies may choose in the
future not to sell these materials to us at all, or may raise their prices to a
level that would prevent us from selling our goods and services on a profitable
basis.
In our
polysilicon business we rely heavily on our contracted suppliers of key process
technologies and infrastructure including such components as the reactors and
the TCS process. If any of these suppliers fail to perform their contractual
obligations, we will be required to seek alternative suppliers and likely will
not be able to commence production of polysilicon at the Project on our current
schedule. Any such production delays may result in a breach of one or more of
our supply agreements with Alex, Suntech, Solarfun, Jinko, Tianwei and/or
Solargiga and such breaches may allow these customers to terminate the supply
agreements and seek a return of prepayments, which would harm our business and
may make impossible the completion of the Project.
Even
if we achieve our polysilicon and PV system installation objectives on a timely
basis and complete the construction of the Project our polysilicon production
plant as currently planned, we may still be unsuccessful in developing,
producing and/or selling these products and services, which would harm our
business.
If we are
successful in our efforts to construct the Project, our ability to successfully
compete in the polysilicon and PV system installation markets will depend on a
number of factors, including:
·
|
our
ability to produce or procure TCS and polysilicon, and install PV systems
at costs that allow us to achieve or maintain profitability in
these
businesses;
|
·
|
our
ability to successfully manage a much larger and growing enterprise, with
a broader national and international
presence;
|
·
|
our
ability to attract new customers and expand existing customer
relationships;
|
·
|
our
ability to develop new technologies to become competitive through cost
reductions;
|
·
|
our
ability to scale our business to be
competitive;
|
·
|
our
ability to predict and adapt to changing market conditions, including the
price of inputs and the spot price for polysilicon sold in the
market
by us or purchased by us from third-parties to settle customer
commitments; and
|
·
|
future
product liability or warranty
claims.
|
If
our PV system installation competitors are able to develop and market products
that customers prefer to our products, we may not be able to generate sufficient
revenue to continue operations.
The
market for PV systems installations is competitive and continually evolving. As
a new entrant to this market, we expect to face substantial competition from
companies such as SunPower Corporation, SunEdison, and other new and emerging
companies throughout many parts of the world. Many of our known competitors are
established players in the solar industry, and have a stronger market position
than ours and have larger resources and name recognition than we have.
Furthermore, the PV market in general competes with other sources of renewable
energy and conventional power generation.
Technological
development in the solar power industry could reduce market demand for
polysilicon or allow for lower cost production of polysilicon by our
competitors, which could cause our sales and profit to decline .
The solar
power industry is characterized by evolving technologies and standards.
Technological evolutions and developments in PV products, including thin-film
technologies, higher PV efficiency and thinner wafers may decrease the demand
for polysilicon by PV module manufacturers, and some manufacturers are
developing alternative solar technologies that require significantly less
silicon than crystalline silicon-based solar cells and modules, or no
polysilicon at all. If these developing technologies prove more advantageous in
application and are widely adopted, we may experience a decrease in demand for
our polysilicon and a decrease in our sales or operating margins.
Additionally,
other technologies for the production of polysilicon are increasing in
prevalence in the industry. Technologies which compete with the Siemens reactor
process, including fluidized bed reactor process, may enable the manufacture of
polysilicon more quickly or at lower cost than does the Siemens reactor process.
To the extent that our competitors adopt other technologies that enable them to
compete more effectively, our operating margins and price-competitiveness may be
impacted. In the event that we are unable to re-design our production facility
around these more efficient processes on manageable timetables and at reasonable
cost, our business could be adversely affected.
36
Our
operating results have fluctuated in the past, and we expect a number of factors
to cause our operating results to continue to fluctuate in the future, making it
difficult for us to accurately forecast our quarterly and annual operating
results.
Hoku
Materials does not currently generate any operating revenue and we do not expect
to generate any material revenue from Hoku Fuel Cells in the foreseeable future.
All of our revenue presently is generated by Hoku Solar and our PV system
installation activities.
Our
future operating results and cash flows will depend on many factors that will
impact our polysilicon business run by Hoku Materials, our PV system
installation business run by Hoku Solar and our fuel cell business, including
the following:
·
|
the
size and timing of customer orders, milestone achievement, product
delivery and customer acceptance, if
required;
|
·
|
the
length of contract negotiation
cycles,
|
·
|
the
timing of equipment delivery and procurement, integration and
testing,
|
·
|
our
success in obtaining prepayments from customers for future shipments of
polysilicon;
|
·
|
our
success in maintaining and enhancing existing strategic relationships and
developing new strategic relationships with potential customers;
|
·
|
our
ability to finance power purchase agreements for potential PV system
installation customers;
|
·
|
actions
taken by our competitors, including new product introductions and pricing
changes;
|
·
|
the
costs of maintaining our
operations;
|
·
|
customer
budget cycles and changes in these budget cycles;
and
|
·
|
external
economic and industry conditions.
|
As a
result of these factors, we believe that period-to-period comparisons of our
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance.
If
we fail to maintain proper and effective internal controls, our ability to
produce accurate financial statements could be impaired, which could adversely
affect our operating results, our ability to operate our business and investors’
views of us.
Ensuring
that we have adequate internal financial and accounting controls and procedures
in place to help ensure that we can produce accurate financial statements on a
timely basis is a costly and time-consuming effort that needs to be re-evaluated
frequently. In May 2007, we commenced construction of the Project. Construction
of the Project and the operation of our polysilicon manufacturing business and
PV system installation businesses will involve substantial changes to our
operations will require us to increase our international activities, hire and
train additional financial and accounting personnel, make substantial
investments in our engineering, logistics, financial and information systems,
including implementing new enterprise-level transaction processing, operational,
financial and accounting management information systems, procedures and
controls. In connection with the planned increased scale of our polysilicon
manufacturing business and PV system installation businesses and our
implementation of new operational and financial management information systems
to accommodate these businesses, we expect to engage in a process of
documenting, reviewing and improving our internal control and procedures in
connection with Section 404 of the Sarbanes-Oxley Act, which requires an annual
assessment by management on the effectiveness of our internal control over
financial reporting. We conduct annual testing of our internal controls in
connection with the Section 404 requirements and, as part of that documentation
and testing, we may identify areas for further attention and improvement.
Implementing any appropriate changes to our internal controls may entail
substantial costs in order to modify our existing accounting systems and take a
significant period of time to complete, and may distract our officers, directors
and employees from the operation of our business. Further, we may encounter
difficulties assimilating or integrating the internal controls, disclosure
controls and IT infrastructure of the businesses that we may acquire in the
future. These changes may not, however, be effective in maintaining the adequacy
of our internal controls, and any failure to maintain that adequacy, or
consequent inability to produce accurate financial statements on a timely basis,
could increase our operating costs and could materially impair our ability to
operate our business. In addition, investors’ perceptions that our internal
controls are inadequate or that we are unable to produce accurate financial
statements may seriously affect our stock price.
We
may not be able to protect our intellectual property, and we could incur
substantial costs defending ourselves against claims that our products infringe
on the proprietary rights of others.
Our
ability to compete effectively in the fuel cell market will depend on our
ability to protect our intellectual property rights with respect to our
membranes, our membrane electrode assemblies, or MEAs and manufacturing
processes and any intellectual property we develop with respect to our
polysilicon business. We rely in part on patents, trade secrets and policies and
procedures related to confidentiality to protect our intellectual property.
However, much of our intellectual property is not covered by any patent or
patent application. Confidentiality agreements to which we are party may be
breached, and we may not have adequate remedies for any breach. Our trade
secrets may also become known without breach of these agreements or may be
independently developed by our competitors. Our inability to maintain the
proprietary nature of our technology and processes could allow our competitors
to limit or eliminate any of our potential competitive advantages. Moreover, our
patent applications may not result in the grant of patents either in the United
States or elsewhere. Further, in the case of our issued patents or our patents
that may issue, we do not know whether the claims allowed will be sufficiently
broad to protect our technology or processes. Even if some or all of our patent
applications that issue are sufficiently broad, our patents may be challenged or
invalidated and we may not be able to enforce them. We could incur substantial
costs in prosecuting or defending patent infringement suits or otherwise
protecting our intellectual property rights. We do not know whether we have been
or will be completely successful in safeguarding and maintaining our proprietary
rights. Moreover, patent applications filed in foreign countries may be subject
to laws, rules and procedures that are substantially different from those of the
United States, and any resulting foreign patents may be difficult and expensive
to enforce. Further, our competitors may independently develop or patent
technologies or processes that are substantially equivalent or superior to ours.
If we are found to be infringing third-party patents, we could be required to
pay substantial royalties and/or damages, and we do not know whether we will be
able to obtain licenses to use these patents on acceptable terms, if at all.
Failure to obtain needed licenses could delay or prevent the development,
production or sale of our products, and could necessitate the expenditure of
significant resources to develop or acquire non-infringing intellectual
property.
37
Asserting,
defending and maintaining our intellectual property rights could be difficult
and costly, and failure to do so might diminish our ability to compete
effectively and harm our operating results. We may need to pursue lawsuits or
legal actions in the future to enforce our intellectual property rights, to
protect our trade secrets and domain names, and to determine the validity and
scope of the proprietary rights of others. If third parties prepare
and file applications for trademarks used or registered by us, we may oppose
those applications and be required to participate in proceedings to determine
priority of rights to the trademark.
We cannot
be certain that others have not filed patent applications for technology covered
by our issued patent or our pending patent applications or that we were the
first to invent technology because:
·
|
some
patent applications in the United States may be maintained in secrecy
until the patents are issued;
|
·
|
patent
applications in the United States and many foreign jurisdictions are
typically not published until 18 months after filing;
and
|
·
|
publications
in the scientific literature often lag behind actual discoveries and the
filing of patents relating to those
discoveries.
|
Competitors
may have filed applications for patents, may have received patents and may
obtain additional patents and proprietary rights relating to products or
technology that block or compete with our products and technology. Due to the
various technologies involved in the development of fuel cell systems, including
membrane and MEA technologies, and photovoltaic products, it is impracticable
for us to affirmatively identify and review all issued patents that may affect
our products. Although we have no knowledge that our products and technology
infringe any third party’s intellectual property rights, we cannot be sure that
we do not infringe any third party’s intellectual property rights. We may have
to participate in interference proceedings to determine the priority of
invention and the right to a patent for the technology. Litigation and
interference proceedings, even if they are successful, are expensive to pursue
and time-consuming, and we could use a substantial amount of our financial
resources in either case.
The
loss of any of our executive officers or the failure to attract or retain
specialized technical and management personnel could impair our ability to grow
our business.
We are
highly dependent on our executive officers, including Dustin M. Shindo, our
Chairman of the Board of Directors, President and Chief Executive Officer, and
Karl M. Taft III, our Chief Technology Officer. Due to the specialized knowledge
that each of our executive officers possesses with respect to our technology or
operations, the loss of service of any of our executive officers would harm our
business. We do not have employment agreements with any of our executive
officers, and each may terminate his employment without notice and without cause
or good reason. In addition, we do not carry key man life insurance on our
executive officers.
There is
a limited pool of qualified applicants for our operations located in Hawaii
capable of meeting our specialized needs. Our future success will depend, in
part, on our ability to attract and retain qualified management and technical
personnel, many of whom must be relocated from the continental United States or
other countries. In addition, we will need to hire and train specialized
engineers to manage and operate our planned polysilicon facility in Pocatello,
Idaho. We may not be successful in hiring or retaining qualified personnel. Our
inability to hire qualified personnel on a timely basis, or the departure of key
employees, could harm our business.
We
will use materials that are considered hazardous in our planned polysilicon
manufacturing and production processes and, therefore, we could be held liable
for any losses that result from the use and handling of such hazardous
materials, with respect to losses which we do not carry insurance.
The
production of polysilicon will involve the use of materials that are hazardous
to human health and the environment, the storage, handling and disposal of which
will be subject to government regulation. Compliance with environmental laws and
regulations may be expensive, and current or future environmental regulations
may increase our manufacturing costs and may require us to halt or suspend our
operations until we regain compliance. If we have an accident at our facility
involving a spill or release of these substances, we may be subject to civil
and/or criminal penalties, including financial penalties and damages, and
possibly injunctions preventing us from continuing our operations. Any liability
for penalties or damages, and any injunction resulting from damages to the
environment or public health and safety, could harm our business. In addition
under various Federal, state and local laws, ordinances and regulations, an
owner or operator of real estate is liable for costs of removal or remediation
of certain hazardous or toxic substances on or in such property. These laws
often impose such liability without regard to whether the owner or operator knew
of, or was responsible for, the presence of such substances. We do not have any
insurance for liabilities arising from the use and handling of hazardous
materials.
38
Our
manufacturing business will involve many operating risks that can cause
substantial losses.
The
manufacture of our polysilicon may involve one or more of the following
risks:
·
|
fires;
|
·
|
explosions;
|
·
|
blow-outs;
|
·
|
uncontrollable
flow of gases; and
|
·
|
pipe
or cement failures.
|
In the
event that any of the foregoing events occur, we could incur substantial losses
as a result of injury or loss of life; severe damage or destruction of property,
natural resources or equipment; pollution and other environmental damage;
investigatory and clean-up responsibilities; regulatory investigation and
penalties; suspension of operations; or repairs to resume
operations. If we experience any of these problems, our ability to
conduct operations could be adversely affected. These conditions can
cause substantial damage to facilities and interrupt production. If
realized, the foregoing risks could have a material adverse affect on our
business, financial condition and results of operations.
Any
significant and prolonged disruption of our operations in Hawaii could result in
PV system installation delays that would reduce our revenue.
Hoku
Solar’s business operations are currently located exclusively in the state of
Hawaii, which is subject to the potential risk of earthquakes, hurricanes,
tsunamis, floods and other natural disasters. The occurrence of an earthquake,
hurricane, tsunami, flood or other natural disaster in Hawaii could result in
damage, power outages and other disruptions that would interfere with our
ability to conduct our PV system installation business. In October 2006, for
example, Hawaii suffered a major earthquake causing significant damage
throughout the state. Our facilities and operations, however, did not suffer any
damage.
Most of
the materials we use in our PV system installation business must be delivered
via air or sea. Hawaii has a large union presence and has historically
experienced labor disputes, including dockworker strikes, which could prevent or
delay cargo shipments. Any future dispute that delays shipments via air or sea
could prevent us from procuring or installing our turnkey PV systems in time to
meet our customers’ requirements, or might require us to seek alternative and
more expensive freight forwarders or contract manufacturers, which could
increase our expenses.
We
have significant international activities and customers, particularly in China,
that subject us to additional business risks, including increased logistical
complexity and regulatory requirements, which could result in a decline in our
revenue.
Our
current polysilicon supply agreements are with Alex, Suntech, Jinko, Solarfun,
Tianwei and Solargiga, all of which are located in The People’s Republic of
China, or China, and Hong Kong. As a result, we will be engaging in significant
international sales of our polysilicon, which can be subject to many inherent
risks that are difficult or impossible for us to predict or control,
including:
·
|
political
and economic instability;
|
·
|
unexpected
changes in regulatory requirements and
tariffs;
|
·
|
difficulties
and costs associated with staffing and managing foreign operations,
including foreign distributor
relationships;
|
·
|
longer
accounts receivable collection cycles in certain foreign
countries;
|
·
|
adverse
economic or political changes;
|
·
|
unexpected
changes in regulatory requirements;
|
·
|
more
limited protection for intellectual property in some
countries;
|
·
|
potential
trade restrictions, exchange controls and import and export licensing
requirements;
|
·
|
U.S.
and foreign government policy changes affecting the markets for our
products;
|
·
|
problems
in collecting accounts receivable;
and
|
39
·
|
potentially
adverse tax consequences of overlapping tax
structures.
|
All of
our polysilicon supply contracts are denominated in U.S. dollars. Therefore,
increases in the exchange rate of the U.S. dollar to foreign currencies will
cause our products to become relatively more expensive to customers in those
countries, which could lead to a reduction in sales or profitability in some
cases.
All
of our polysilicon customers are located in China and Hong Kong, which involves
various political and economic risks.
Presently,
all of our long-term polysilicon supply contracts are with companies based in
China and Hong Kong. Accordingly, our business, financial condition, results of
operations and prospects could be disproportionately affected by economic,
political and legal developments in China. China’s economy differs from the
economies of most developed countries in many respects, including:
·
|
the
higher level of government involvement and
regulation;
|
·
|
the
early stage of development of the market-oriented sector of the
economy;
|
·
|
the
rapid growth rate; and
|
·
|
the
higher level of control over foreign
exchange.
|
China’s
government continues to exercise significant control over economic growth in
China through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and imposing policies
that impact particular industries or companies in different ways. China’s
government also sets policy with respect to the use of alternative energy such
as solar. Any adverse change in the economic conditions or government
conditions or government policies in China could have a material adverse effect
on our business, financial condition and results of operations.
Failure
to comply with the US Foreign Corrupt Practices Act could subject us to
penalties and other adverse consequences.
We are
subject to the U.S. Foreign Corrupt Practices Act, which generally prohibits
U.S. companies from engaging in bribery or other prohibited payments to foreign
officials for the purpose of obtaining or retaining business. Non-U.S.
companies, including some that may compete with us, are not subject to these
prohibitions. If our employees or other agents are found to have engaged in
practices such as bribery, pay-offs or other fraudulent practices in China, we
could suffer severe penalties and other consequences that may have a material
adverse effect on our business, financial condition and results of
operations.
Adverse
general economic conditions could harm our business.
Adverse
overall economic conditions that impact consumer spending could impact our
results of operations. Future economic conditions affecting disposable income
such as employment levels, consumer confidence, credit availability, business
conditions, stock market volatility, weather conditions, acts of terrorism,
pandemic, threats of war, and interest and tax rates could reduce consumer
spending or cause consumers to shift their spending away from our goods and
services. If the economic conditions continue to be adverse or worsen, we may
experience material adverse impacts on our business, operating results and
financial condition.
A
drop in the retail price of conventional energy or non-solar renewable energy
sources could harm our business.
The price
of conventional energy can affect the demand for alternative energy solutions
such as solar. Fluctuations in economic and market conditions that impact the
prices of conventional and non-solar renewable energy sources could cause the
demand for solar energy systems to decline, which would have a negative impact
on our business. Inexpensive prices for oil and other fossil fuels and utility
electric rates could also have a negative effect on our PV system installation
and polysilicon production businesses.
Conversely,
our polysilicon manufacturing process uses significant amounts of electric
energy. High energy prices, therefore, could increase our production
costs, and increases in the cost of electricity reduce our
margins. Although we have entered into a long term contract with
Idaho Power to supply electric power to the Project at a fixed rate, the Idaho
Public Utilities Commission can change the rate under certain
circumstances. Should this happen, substantial increases in our
electricity costs could have a material adverse effect on our business,
financial condition and results of operations.
Current
credit and financial market conditions could prevent or delay our current or
future customers from obtaining financing necessary to purchase our products and
services or finance their own operations or capacity expansions, which could
adversely affect our business, our operating results and financial condition
.
Due to
the recent severe tightening of credit and concerns regarding the availability
of credit around the world, our solar customers may delay or attempt to delay
their payments to us in connection with product and service purchases, or may be
delayed in obtaining, or may not be able to obtain, necessary financing for
their purchases of our products and services or their own operations or
expansion plans. In addition, the current credit and financial market conditions
may adversely affect the ability of our customers that have executed long-term
supply agreements to purchase polysilicon from us to make additional required
payments to us pursuant to these long-term supply agreements or to fund their
own expansion plans. Delays of this nature could materially harm our polysilicon
sales and PV installations, and therefore harm our business.
40
Risks
Associated With Government Regulation and Incentives.
If
we do not obtain on a timely basis the necessary government permits and
approvals to construct and operate the Project, our construction costs could
increase and our business could be harmed.
We have
received the air permit and storm water prevention permit that are necessary to
begin construction of the Project; however, we need to apply for additional
permits with federal, state and local authorities, including building permits to
continue the construction of the Project, and permits to operate the Project
when construction is complete. The government regulatory process is lengthy and
unpredictable and delays could cause additional expense and increase our
construction costs. In addition, we could be required to change our construction
plans in order receive the required permits and such changes could also result
in additional expense and delay. Any delay in completion of construction could
result in us failing to meet our delivery deadlines under our supply agreements
and give the other parties to these agreements the right to terminate the
agreements.
Our
business and industry are subject to government regulation, which may harm our
ability to market our products.
The
market for electricity generation products is heavily influenced by foreign,
federal, state and local government regulations and policies concerning the
electric utility industry, as well as policies promulgated by electric
utilities. These regulations and policies often relate to electricity pricing
and technical interconnection of customer-owned electricity generation. In the
United States and in a number of other countries, these regulations and policies
are being modified and may continue to be modified. Customer purchases of, or
further investment in the research and development of, alternative energy
sources, including solar power technology, could be deterred by these
regulations and policies, which could result in a significant reduction in the
potential demand for our PV system installations. For example, without a
regulatory mandated exception for solar power systems, utility customers are
often charged interconnection or standby fees for putting distributed power
generation on the electric utility grid. These fees could increase the cost to
our customers of installing PV systems and make them less desirable, thereby
harming our business, prospects, results of operations and financial condition.
Furthermore, our discussions with The James Campbell Company to plan and
construct a Kapolei Sustainable Energy Park are conditioned upon receiving
various government approvals related to the capped solid waste storage area on
the site.
The
installation of PV systems is subject to oversight and regulation in accordance
with national and local ordinances relating to zoning, building codes, safety,
environmental protection, utility interconnection and metering and related
matters. It is difficult to track the requirements of individual states and
counties and to design equipment to comply with the varying standards. Any new
government regulations or utility policies pertaining to PV system installations
may result in significant additional expenses to us and, as a result, could
cause a significant reduction in demand for our PV system installation
services.
If
government incentives to locate the Project our planned polysilicon facility in
the City of Pocatello, Idaho are not realized then the costs of establishing our
facility may be higher than we currently estimate.
The State
of Idaho and the local municipal government have approved a variety of
incentives to attract Hoku Materials, including tax incentives, financial
support for infrastructure improvements around the Project, and grants to fund
the training of new employees. In March 2007, we entered into a 99-year ground
lease with the City of Pocatello, for approximately 67 acres of land in
Pocatello, Idaho and in May 2007, we commenced construction of the
Project.
In May
2007, the City of Pocatello approved an ordinance that authorized certain tax
incentives related to the infrastructure necessary for the completion and
operation of the Project. In May 2009, we entered into an Economic Development
Agreement, or the PDA Agreement, with the Pocatello Development Authority, or
PDA, pursuant to which PDA agreed to reimburse to us amounts we actually incur
in making certain infrastructure improvements consistent with the North Portneuf
Urban Renewal Area and Revenue Allocation District Improvement Plan and the
Idaho Urban Renewal Law, or the Infrastructure Reimbursement, and an additional
amount as reimbursement for and based on the number of full time employee
equivalents we create and maintain, or the Employment Reimbursement,
at the Project. The parties agreed that (a) the Infrastructure
Reimbursement will be an amount that is equal to 95% of the tax increment
payments PDA actually collects on the North Portneuf Tax Increment Financing
District with respect to our real property and improvements located in such
district, or the TIF Revenue, up to approximately $26 million, less the actual
Road Costs, and (b) the Employment Reimbursement will be an amount that is equal
to 50% of the TIF Revenue, up to approximately $17 million. However, there are
no assurances that all or any part of the amount authorized will be paid to us,
and we could ultimately receive significantly less or nothing at all, and we may
not realize the benefits of these other offered incentives including workforce
training funds and utility capacities. The tax incentives expire on December 31,
2030. If there are changes to the ordinance, which affects the amount of the
incentives, or for other reasons, some of which may be beyond our control, we
are unable to realize all or any part of these incentives, the operating costs
of the Project may be higher than we currently estimate.
41
The
reduction or elimination of government and economic incentives for PV systems
and related products could reduce the market opportunity for our PV installation
services.
We
believe that the near-term growth of the market for on-grid applications, where
solar power is used to supplement a customer’s electricity purchased from the
utility network, depends in large part on the availability and size of
government incentives. Because we plan to sell to the on-grid market, the
reduction or elimination of government incentives may adversely affect the
growth of this market or result in increased price competition, both of which
adversely affect our ability to compete in this market. Currently, the U.S.
federal solar tax credit is scheduled to expire at the end of calendar year
2016. If similar tax or other federal government incentives are not available
beyond calendar year 2016, it could harm our PV system installation
business.
Today,
the cost of solar power exceeds the cost of power furnished by the electric
utility grid in many locations. As a result, federal, state and local government
bodies in many countries, most notably Germany, Japan and the United States,
have provided incentives in the form of rebates, tax credits and other
incentives to end users, distributors, system integrators and manufacturers of
solar power products to promote the use of solar energy in on-grid applications
and to reduce dependency on other forms of energy. These government economic
incentives could be reduced or eliminated altogether. For example, Germany has
been a strong supporter of solar power products and systems and political
changes in Germany could result in significant reductions or eliminations of
incentives, including the reduction of tariffs over time. Some solar program
incentives expire, decline over time, are limited in total funding or require
renewal of authority. Net metering policies in Japan could limit the amount of
solar power installed there. Reductions in, or elimination or expiration of,
governmental incentives could result in decreased demand for PV products, and
reduce the size of the market for our planned PV system installation services
and the demand for solar-grade polysilicon.
Risks
Associated With Our Common Stock and Charter Documents
Our
stock price is volatile and purchasers of our common stock could incur
substantial losses.
Our stock
price is volatile and between April 1, 2009 and September 30, 2009, our stock
had low and high sales prices in the range of $1.67 to $4.64 per share. During
fiscal year 2009, the stock market in general has experienced extreme volatility
that has often been unrelated to the operating performance of particular
companies. The market price of our common stock may fluctuate significantly in
response to a number of factors, including:
•
|
variations
in our financial results or those of our competitors and our
customers;
|
•
|
announcements
by us, our competitors and our customers of acquisitions, new products,
the acquisition or loss of significant contracts, commercial
relationships or capital
commitments;
|
•
|
the
performance of the stock market generally and the over-all condition of
the global macro economy;
|
•
|
failure
to meet the expectations of securities analysts or investors with respect
to our financial results;
|
•
|
our
ability to develop and market new and enhanced products on a timely
basis;
|
•
|
litigation;
|
•
|
changes
in our management;
|
•
|
changes
in governmental regulations or in the status of our regulatory
approvals;
|
•
|
future
sales of our common stock by us and future sales of our common stock by
our officers, directors and
affiliates;
|
•
|
investors’
perceptions of us; and
|
•
|
general
economic, industry and market
conditions.
|
In
addition, in the past, following periods of volatility and a decrease in the
market price of a company’s securities, securities class action litigation has
often been instituted against that company. Class action litigation, if
instituted against us, could result in substantial costs and a diversion of our
management’s attention and resources.
42
Upon
closing of the Tianwei financing transaction, Tianwei will control us, and as
long as Tianwei controls us other stockholders’ ability to influence matters
requiring stockholder approval will be limited.
Upon
closing of the Tianwei financing transaction, Tianwei will own 33,379,287 shares
of our common stock, and will hold a warrant to purchase an additional 10
million shares of our common stock, together representing approximately 66% of
our total outstanding shares of common stock. Tianwei will have the right
to nominate four out of seven of our directors until the earlier of (i) Tianwei
(together with its affiliates) ceasing to be our largest individual stockholder
or (i) Tianwei (together with its affiliates) owning less than 25% of the
outstanding shares of our common stock.
In
addition, as a majority stockholder Tianwei may have the ability to control the
outcome of all matters that would be determined by a vote of our stockholders,
including:
·
|
the
composition of our board of directors and, through our board of directors,
any determination with respect to our business plans and policies,
including the appointment and removal of our
officers;
|
·
|
any
determinations with respect to mergers and other business
combinations;
|
·
|
our
acquisition or disposition of
assets;
|
·
|
our
financing activities;
|
·
|
changes
to our polysilicon supply agreements with
Tianwei;
|
·
|
the
allocation of business opportunities that may be suitable for us and
Tianwei;
|
·
|
the
payment of dividends on our common stock;
and
|
·
|
the
number of shares available for issuance under our stock
plans.
|
Tianwei’s
voting control may discourage transactions involving a change of control of us,
including transactions in which the holders of our common stock might otherwise
receive a premium for their shares over the then current market price. Until one
year from the close of the Tianwei financing transaction, Tianwei will be
prohibited from selling or transferring, directly or indirectly, 70% of its
shares of common stock. Thereafter, Tianwei will not be prohibited from
selling a controlling interest in us to a third party and may do so without
stockholder approval and without providing for a purchase of other stockholders’
shares of common stock. Accordingly, our shares of common stock may be worth
less than they would be if Tianwei did not maintain voting control over
us.
Upon
closing of the Tianwei financing transaction, through potential control of our
board of directors, Tianwei may cause our board to act in Tianwei’s best
interests which may diverge from the best interests of other stockholders and
make it difficult for us to recruit quality independent directors.
Upon
closing of the Tianwei financing transaction, Tianwei will have the right to
nominate four out of seven board of directors and may at any time replace four
out of seven of our directors. As a result, unless and until the earlier of (i)
Tianwei (together with its affiliates) ceasing to be our largest individual
stockholder or (i) Tianwei (together with its affiliates) owning less than 25%
of the outstanding shares of our common stock, Tianwei could effectively control
and direct our board of directors, which means that to the extent the interests
of Tianwei and we diverge, Tianwei can cause us to act in Tianwei’s best
interest to the detriment of the value of our common stock. Under these
circumstances, persons who might otherwise accept our invitation to join our
board of directors may decline.
Foreign
investors in our stock may face certain tax withholding rules if we are
classified as a U.S. real property holding corporation.
Under
U.S. tax rules, a corporation is considered a U.S. real property holding
corporation if the fair market value of its real property interests held by the
corporation in the United States equals or exceeds 50 percent of the total fair
market values of its real property interests and business
assets. In such event, the foreign seller of stock in a
publicly-traded corporation who owns more than 5% of that corporation’s common
stock is subject to a tax withholding requirement imposed on the purchaser,
equal to 10% of the sales price of the stock. This 10% withholding applies to
the amount realized on the sale of the stock, irrespective of the seller’s gain
on the sale. This withheld tax is treated as an advance payment against the
actual individual or corporate capital-gains tax owed by the
investor. In the event we were to be classified as a U.S. real
property holding corporation, large foreign investors who hold more than 5% of
our stock, would be subject to this 10% withholding requirement.
Anti-takeover
defenses that we have in place could prevent or frustrate attempts by
stockholders to change our directors or management.
Provisions
in our amended and restated certificate of incorporation and bylaws may make it
more difficult for or prevent a third party from acquiring control of us without
the approval of our Board of Directors. These provisions:
•
|
establish
a classified Board of Directors, so that not all members of our Board of
Directors may be elected at one
time;
|
•
|
set
limitations on the removal of
directors;
|
•
|
limit
who may call a special meeting of
stockholders;
|
43
•
|
establish
advance notice requirements for nominations for election to our Board of
Directors or for proposing matters that can be actedupon
at stockholder meetings;
|
•
|
prohibit
stockholder action by written consent, thereby requiring all stockholder
actions to be taken at a meeting of our stockholders;
and
|
•
|
provide
our Board of Directors the ability to designate the terms of and issue new
series of preferred stock without stockholder
approval.
|
These
provisions may have the effect of entrenching our management team and may
deprive investors of the opportunity to sell their shares to potential acquirers
at a premium over prevailing prices. This potential inability to obtain a
control premium could reduce the price of our common stock.
As a
Delaware corporation, we are also subject to Delaware anti-takeover provisions.
Our Board of Directors could rely on Delaware law to prevent or delay an
acquisition.
Because
we do not intend to pay dividends, stockholders will benefit from an investment
in our common stock only if it appreciates in value.
We have
not paid cash dividends on any of our classes of capital stock to date, and we
currently intend to retain our future earnings, if any, 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. The success of an
investment in our common stock will depend entirely upon any future
appreciation. There is no guarantee that our common stock will
appreciate in value or even maintain the price at which stockholders purchased
their shares.
44
(a)
Exhibits
Exhibit
Number
|
Description
of Document
|
|
2.1
|
Securities
Purchase Agreement, dated as of September 28, 2009, by and
between Tianwei New Energy Holdings Co., Ltd. and Hoku Scientific, Inc.
(incorporated by reference to Exhibit 2.1 to our current report on Form
8-K filed September 29, 2009)
|
|
4.2
|
Form
of Warrant of Hoku Scientific, Inc. (incorporated by reference to Exhibit
4.2 to our current report on Form 8-K filed September 29,
2009)
|
|
4.3
|
Form
of Investor Rights Agreement between Tianwei New Energy Holdings Co., Ltd.
and Hoku Scientific, Inc. (incorporated by reference to Exhibit
4.3 to our current report on Form 8-K filed September 29,
2009)
|
|
10.108
|
Form
of Entrustment Loan Contract by and among Tianwei New Energy Holdings Co.
Ltd., China Construction Bank Chengdu Branch, Hoku Materials, Inc. and
Hoku Scientific, Inc. (incorporated by reference to Exhibit
10.108 to our current report on Form 8-K filed September 29,
2009)
|
|
10.109†
|
Change
Order Number 4 to Cost Plus Incentives Contract, dated September 18, 2009,
by and between Hoku Materials, Inc. and JH Kelly LLC
|
|
31.1
|
Certification
of Chief Executive Officer required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.
|
|
31.2
|
Certification
required of Chief Financial officer as required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended.
|
|
32.1#
|
Certification
of Chief Executive Officer required by Rule 13a-14(b) of the Securities
Exchange Act of 1934, as amended.
|
|
32.2#
|
Certification
of Chief Financial Officer required by Rule 13a-14(b) of the Securities
Exchange Act of 1934, as
amended.
|
†
|
Confidential
treatment has been requested for portions of this exhibit. These portions
have been omitted from this Quarterly Report on Form 10-Q and have been
filed separately with the Securities and Exchange
Commission.
|
#
|
In
accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos.
33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control
Over Financial Reporting and Certification of Disclosure in Exchange Act
Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2
hereto are deemed to accompany this Form 10-Q and will not be deemed
“filed” for purpose of Section 18 of the Exchange Act. Such certifications
will not be deemed to be incorporated by reference into any filing under
the Securities Act or the Exchange Act, except to the extent that the
registrant specifically incorporates it by
reference.
|
45
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized on November 9, 2009.
HOKU
SCIENTIFIC, INC.
|
/s/ DARRYL S. NAKAMOTO
|
Darryl
S. Nakamoto
|
Chief
Financial Officer, Treasurer and Secretary
(Principal
Financial and Accounting
Officer)
|
46
INDEX
OF EXHIBITS
Exhibit
Number
|
Description
of Document
|
|
2.1
|
Securities
Purchase Agreement, dated as of September 28, 2009, by and
between Tianwei New Energy Holdings Co., Ltd. and Hoku Scientific, Inc.
(incorporated by reference to Exhibit 2.1 to our current report on Form
8-K filed September 29, 2009)
|
|
4.2
|
Form
of Warrant of Hoku Scientific, Inc. (incorporated by reference to Exhibit
4.2 to our current report on Form 8-K filed September 29,
2009)
|
|
4.3
|
Form
of Investor Rights Agreement between Tianwei New Energy Holdings Co., Ltd.
and Hoku Scientific, Inc. (incorporated by reference to Exhibit 4.3 to our
current report on Form 8-K filed September 29, 2009)
|
|
10.108
|
Form
of Entrustment Loan Contract by and among Tianwei New Energy Holdings Co.
Ltd., China Construction Bank Chengdu Branch, Hoku Materials, Inc. and
Hoku Scientific, Inc. (incorporated by reference to Exhibit
10.108 to our current report on Form 8-K filed September 29,
2009)
|
|
10.109†
|
Change
Order Number 4 to Cost Plus Incentives Contract, dated September 18, 2009,
by and between Hoku Materials, Inc. and JH Kelly LLC
|
|
31.1
|
Certification
of Chief Executive Officer required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.
|
|
31.2
|
Certification
required of Chief Financial officer as required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended.
|
|
32.1#
|
Certification
of Chief Executive Officer required by Rule 13a-14(b) of the Securities
Exchange Act of 1934, as amended.
|
|
32.2#
|
Certification
of Chief Financial Officer required by Rule 13a-14(b) of the Securities
Exchange Act of 1934, as
amended.
|
†
|
Confidential
treatment has been requested for portions of this exhibit. These portions
have been omitted from this Quarterly Report on Form 10-Q and have been
filed separately with the Securities and Exchange
Commission.
|
#
|
In
accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos.
33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control
Over Financial Reporting and Certification of Disclosure in Exchange Act
Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2
hereto are deemed to accompany this Form 10-Q and will not be deemed
“filed” for purpose of Section 18 of the Exchange Act. Such certifications
will not be deemed to be incorporated by reference into any filing under
the Securities Act or the Exchange Act, except to the extent that the
registrant specifically incorporates it by
reference.
|
47