Item 1.
Business
Forward-Looking Statements
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,” “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 Annual Report on Form 10-K in greater detail in Part I, 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 Annual Report on Form 10-K.
Our fiscal year ends on March 31. We designate our fiscal year by the year in which that fiscal year ends; e.g., fiscal 2011 refers to our fiscal year ended March 31, 2011.
Overview
Hoku Corporation is a solar energy products and services company. We were incorporated in Hawaii in March 2001, as Pacific Energy Group, Inc. and changed our name to Hoku Scientific, Inc. in July 2001. In December 2004, we were reincorporated in Delaware. In March 2010, we changed our name from Hoku Scientific, Inc. to Hoku Corporation.
We originally focused our efforts on the design and development of fuel cell technologies, including our Hoku membrane electrode assemblies, or MEA’s, and Hoku Membranes. In May 2006, we announced our plans to form an integrated photovoltaic, or PV, module business, and our plans to manufacture polysilicon, a primary material used in the manufacture of PV modules, at our polysilicon manufacturing plant in Pocatello, Idaho, or the Polysilicon Plant. In fiscal 2007, we reorganized our business into three business units: Hoku Materials, Hoku Solar and Hoku Fuel Cells. In February and March 2007, we incorporated Hoku Materials, Inc. and Hoku Solar, Inc., respectively, as wholly owned subsidiaries to operate our polysilicon and solar businesses, respectively.
In September 2010, we elected to discontinue the operations of Hoku Fuel Cells. However, we continue to maintain ownership of its intellectual property, including patents.
Hoku Materials
Hoku Materials was incorporated to manufacture polysilicon, a key material used in PV modules. In May 2007, we commenced construction of our planned polysilicon manufacturing facility in Pocatello, Idaho, which would be capable of producing 4,000 metric tons of polysilicon per year, or the Polysilicon Plant. We expect to incur approximately $600 million of costs before we can commence operation of the first 2,500 metric tons of production capacity. We also expect to invest up to an additional approximately $100 million to complete the second phase of construction, which will add an additional 1,500 metric tons of manufacturing capacity, and allow us to complete our planned on-site trichlorosilane plant, or TCS plant. Accordingly, we currently estimate that the completion for the full, planned 4,000 metric ton Polysilicon Plant will cost approximately $700 million. This estimate is based on our recent progress on construction and discussion with vendors; however, changes in costs, including costs in engineering contracts, modifications in construction timelines, delays in our construction schedule and other factors could cause the actual cost to significantly exceed our estimate. Any significant increase in the cost to complete the Polysilicon Plant could have a material adverse effect on our business, financial condition and results of operations
As of March 31, 2011, we have installed 16 Siemens-process reactors at the Polysilicon Plant and successfully produced polysilicon using two of the 16 reactors in a pilot production demonstration. Contingent on securing additional financing, we expect to commission our reactors capable of producing 2,500 metric tons of polysilicon per annum and begin our first commercial shipment in the second half of calendar year 2011. We intend to ramp-up production throughout calendar year 2012, during which we expect to reach full production capability.
Hoku Materials incurred an operating loss of $11.9 million and $4.1 million in fiscal 2011 and 2010, respectively, which is primarily comprised of costs related to our pilot polysilicon production, payroll, including stock compensation, professional fees and travel expenses. In addition, as of March 31, 2011, Hoku Materials has capitalized $478.5 million related to construction costs for the Polysilicon Plant and had received $140.2 million in customer deposits as prepayments under long-term polysilicon supply agreements.
Hoku Solar
Our goal is to be a leading provider of PV system installations. We plan to continue to focus on designing, engineering and installing turnkey PV systems and related services in Hawaii using solar modules purchased from third-party suppliers.
In addition to continuing to focus on our turnkey solar integration business in the coming fiscal year, we also plan to expand our focus on large-scale PV project development within Hawaii and elsewhere, including the U.S. mainland. This effort will be focused on leveraging our solar integration, project management and financing expertise to develop a portfolio of rooftop solar energy facilities and multiple utility-scale PV farms, which would generate solar power for sale to utilities and large industrial customers for use on their grids.
In December 2008, Hoku Corporation and UFA Renewable Energy Fund I, LLC, a Delaware limited liability company, or UFA established and capitalized Hoku Solar Power I, LLC, a California limited liability company, or Power I. Under the terms of the Power I Operating Agreement by and between the Hoku Corporation and UFA, or the Operating Agreement, we assigned the power purchase agreements, or PPAs, to Power I, which was created to own and operate each PV system and which will sell the electricity generated by the PV systems to the Hawaii State Department of Transportation, or DOT, at predetermined contract rates. Under the terms of the PPAs, Power I is permitted to install, maintain and operate each of the seven planned energy systems on DOT facilities over a term of 20 years, commencing on the date that the system is operational for energy to be delivered to DOT. All seven PV systems have been completed and transferred to Power I.
Hoku Solar recognized an operating profit of $41,000 for fiscal year 2011, as compared to an operating loss of $1.9 million for fiscal 2010. The increase in operating profit was primarily due to PV system installations and sale of electricity to the Hawaii State Department of Transportation.
Our Solar Businesses
Solar Industry Overview
Photovoltaic Systems
Photovoltaic, or PV, systems convert sunlight directly into electricity. These systems are used for “on-grid” and “off-grid” residential, commercial and industrial applications, and for a variety of consumer applications. “On-grid” markets refer to applications where solar power is used to supplement a customer’s electricity purchased from the utility network, whereas “off-grid” markets include those applications where access to utility networks is not economical or physically feasible, including road signs, highway call boxes and communications support along remote pipelines and telecommunications equipment, as well as rural residential applications. Consumer applications include garden lights, other outdoor lighting and handheld devices such as calculators.
A PV system consists of one or more PV modules electrically connected in series, and typically includes a power inverter to convert the direct current, or DC, electricity produced by the modules into alternative alternating current, or AC, electricity that is required for most applications. For “on-grid” applications, an interconnection to the utility grid is required, and in “off-grid” applications, a battery may be required to provide power at night, and at other times when the sunlight is not sufficiently providing enough solar radiation for the PV system to generate sufficient electricity to power the electrical load. The key components of PV modules are PV cells, which are in turn made from silicon wafers. Silicon wafers are made from silicon ingots, which are in turn made from raw polysilicon. The following is a brief overview of these products and technologies.
Polysilicon
Polysilicon is an essential raw material in the production of PV cells. Polysilicon is created by altering quartz or sand to produce solar-grade polysilicon or electronic-grade polysilicon. The key difference between solar-grade and electronic-grade polysilicon is the purity requirement. The purity requirement for solar-grade polysilicon is typically 99.9999%-99.999999% pure, while electronic-grade polysilicon tends to be at least 99.9999999% pure. The majority of polysilicon production begins with quartz or sand, which is refined into metallurgical-grade silicon, or MG-Si. MG-Si is then purified by various chemical processes into highly pure process chemicals, including silane and trichlorosilane, or TCS. There are two main technologies for producing polysilicon from silane and TCS: the Siemens reactor method and the fluidized bed reactor, or FBR method. In the Siemens reactor process, the silane or TCS gas is introduced into a thermal decomposition furnace (reactor) with high temperature polysilicon rods inside a jacketed bell jar. The silicon contained in the gas will deposit on the heated rods, which gradually grow until the desired diameter has been reached. The end product is in the form of rods or chunks of polysilicon. The technology in the Siemens reactor was developed in the late 1950’s, is widely implemented, accounting for a majority of the polysilicon production today, and currently produces a higher purity of material. In the FBR process, silane or TCS gas is introduced into a tube-like reactor in which small polysilicon granules are suspended in the gas stream, referred to as the fluidized bed. The silicon contained in the gas deposits on the surface of the hot granules in the bed until the desired diameter has been reached.
Silicon Ingots and Wafers
Before polysilicon rods or chunks can be used in PV cells, they must first be converted into ingots, which are cut into wafers. There are two processes for making ingots from polysilicon: the monocrystalline and the multicrystalline process. To make monocrystalline ingots, a single crystal of polysilicon is grown, whereas, multicrystalline ingots are made by melting chunks of polysilicon together in a crucible to form a large block of multicrystalline polysilicon, which is then cut into smaller bricks. The monocrystalline ingot or the multicrystalline brick is then cut into thin wafers, typically using a cable saw. The end product is either a monocrystalline or a multicrystalline silicon wafer.
PV Cells
PV cells are made from silicon wafers. The wafer undergoes a process to combine positive and negative layers on the wafer, attach electrodes, and coat with anti-reflective materials. The performance of a PV cell is measured by its solar radiation conversion efficiency. The solar radiation conversion efficiency is a measure of the net percentage of energy from solar radiation that the PV cell converts into electricity. PV cells made from multicrystalline wafers may have efficiencies in the range of 13-18%, whereas PV cells made from monocrystalline wafers typically have higher efficiencies, sometimes up to 20%, but are more expensive to produce.
PV Modules
PV modules are commonly known as solar panels. A PV module is made by electrically wiring together PV cells in series to increase the total voltage output. The connected cells are laminated in a glass or plastic covering and then framed. The wires connecting the PV cells terminate in a junction box to allow multiple PV modules to be electrically connected in a series to further increase the voltage and power output.
Hoku Materials
Business Strategy and Planned Polysilicon Product
Contingent on securing additional financing, we expect to commission our reactors capable of producing 2,500 metric tons of polysilicon per annum and begin our first commercial shipment in the second half of calendar year 2011. We intend to ramp-up production throughout calendar year 2012, during which we expect to reach full production capability.
Financing Update
Overview
During fiscal year 2011, we obtained an aggregate of $194.3 million of debt financing through bank credit agreements to support our operations. In April 2011 and June 2011, we also secured a $15.0 million and $24.7 million credit agreement from the New York Branch of Industrial and Commercial Bank of China, Ltd., New York Branch. All of these credit agreements are secured by letters of credit provided by our majority stockholder, Tianwei New Energy Holding Co. Ltd., or Tianwei. In addition, as of March 31, 2011, we are expecting an additional $8.2 million in customer prepayments from our existing customers, which are payable upon the achievement of polysilicon delivery milestones. As of March 31, 2011, we have funded approximately $455.4 million of our Polysilicon Plant. After considering our recently secured credit lines for $39.7 million and $8.2 million in expected prepayments as described more fully below, we still need to raise at least an additional $196 million to complete the construction of our Polysilicon Plant based upon our current estimate of $700 million to complete construction, which excludes our working capital needs.
We plan on raising this money through one or more subsequent debt and/or equity offerings. We plan to continue to rely on Tianwei and its resources to finance our remaining construction and operating expenses. However, we expect to compensate Tianwei for its collateral support. We have been discussing with Tianwei what would constitute fair compensation for Tianwei for the financial services it has been providing and will provide to us. While the discussions are ongoing, we believe this compensation may be in the form of common stock warrants. To the extent common stock warrants are issued to Tianwei for its financial services it may significantly dilute the ownership of its stockholders other than Tianwei. We expect to finalize the type of compensation and amount during the fiscal year 2012.
Tianwei has committed to provide us the financial support for our ongoing operations, planned capital expenditures and debt service requirements through at least April 1, 2012.
The following table describes the basic terms of our outstanding credit agreements:
Date of Credit
Agreement
Lender
Principal Amount
Interest Rate
Maturity Date
May 24, 2010
China Merchants Bank Co., Ltd., New York Branch
$20,000,000
LIBOR Rate plus 2% or prime rate at our election for any portion not less than $1 million
May 24, 2012
June 30, 2010
China Construction Bank, New York Branch
$28,300,000
LIBOR Rate plus 1.875% or prime rate at our election for any portion not less than $1 million
June 15, 2012 or the 15th day prior to the expiration of the Letter of Credit.
August 16, 2010
China Merchants Bank Co., Ltd., New York Branch
$10,000,000
LIBOR Rate plus 2% or prime rate at our election for any portion not less than $1 million
August 16, 2012
August 26, 2010
China Merchants Bank Co., Ltd., New York Branch
$5,000,000
LIBOR Rate plus 2% or prime rate at our election for any portion not less than $1 million
August 24, 2012
September 17, 2010
China Merchants Bank Co., Ltd., New York Branch
$10,000,000
LIBOR Rate plus 2% or prime rate at our election for any portion not less than $1 million
September 16, 2013
October 8, 2010
China Merchants Bank Co., Ltd., New York Branch
$13,000,000
LIBOR Rate plus 2% or prime rate at our election for any portion not less than $1 million
October 18, 2013
October 19, 2010
China Construction Bank, Singapore Branch
$29,000,000
LIBOR Rate plus 2%.
About 3 years from first advance
December 20, 2010
China Merchants Bank Co., Ltd., New York Branch
$10,000,000
LIBOR Rate plus 2% or prime rate at our election for any portion not less than $1 million
December 20, 2013
December 23, 2010
Industrial and Commercial Bank of China Ltd., New York Branch
$15,500,000
LIBOR Rate plus 2.6%.
Earlier of December 23, 2013 or 10th business day prior to the date the Letter of Credit expires or terminates
January 10, 2011
Industrial and Commercial Bank of China Ltd., New York Branch
$19,500,000
LIBOR Rate plus 2.6%.
Earlier of January 10, 2014 or 10th business day prior to the date the Letter of Credit expires or terminates
February 7, 2011
CITIC Bank International Limited, New York Branch
$19,000,000
LIBOR Rate plus 2.5%.
Earlier of February 4, 2013 and the 15th business day prior to the date on which the first letter of credit expires or terminates
February 25, 2011
Bank of China, New York Branch
Lesser of $30,000,000 or the aggregate amount of letter of credit
LIBOR Rate plus 2.4%.
Earlier of February 25, 2014 and the 15th business day prior to the date on which the first letter of credit expires or terminates
April 7, 2011
Industrial and Commercial Bank of China Ltd., New York Branch
$15,000,000
LIBOR Rate plus 2.7%
Earlier of April 6, 2014 and the 10th business day prior to the date on which the letter of credit expires or terminates
June 2, 2011
Industrial and Commercial Bank of China Ltd., New York Branch
$24,700,000
LIBOR Rate plus 3.8%
Earlier of June 2, 2016, and the 10th business day prior to the date on which the letter of credit expires or terminates
In connection with the execution of each credit agreement described above, we also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei with respect to the negotiation, execution and performance of the letter of credit supporting each such credit agreement. All of the credit agreements contain customary representations, warranties and covenants. For a more detailed description of each credit agreement, see “Management’s Discussion and Analysis-Hoku Materials”.
In accordance with Hoku Materials’ supply agreement with Hanwha SolarOne, or SolarOne, formerly known as Solarfun Power Hong Kong Limited, a subsidiary of Solarfun Power Holdings Co., Ltd., if we fail to commence the delivery of polysilicon by June 30, 2011, SolarOne shall have the right to terminate our supply agreement with SolarOne, in which event Hoku Materials would be obligated to repay SolarOne’s prepayments of $49 million under the supply agreement. We did not make any shipments to SolarOne by June 30, 2011, and we are in discussions with SolarOne regarding a possible amendment of the agreement (see further discussion on SolarOne contract below).
In addition, we are in discussions with our other customers, including Wuxi Suntech Power Co., Ltd., Tianwei New Energy (Chengdu) Wafer Co., Ltd., regarding the extension of delivery dates beginning in June 2011 in our supply agreements. Under the terms of all of our supply agreements, the failure to deliver polysilicon by the stated delivery dates will allow the customers to terminate the supply agreements, require the repayments of the deposits under the agreements, which in the aggregate amount to $140 million at March 31, 2011, which in turn could result in an event of default under our existing credit agreements with our third party lenders. The event of default under our existing credit agreements could result in our lenders accelerating repayment of our third party debt, which we do not have the wherewithal to repay. The third party credit agreements are all secured by standby letters of credit drawn by our majority shareholder, Tianwei, as collateral. To the extent that the third party lenders accelerate repayment of the debt, Tianwei has provided a letter of commitment to us that it would not demand repayment from us until the original due dates of the third party credit agreements ranging from May 2012 through June 2016.
Tianwei New Energy Holding Co. Ltd.
In December 2009, we completed a financing transaction with Tianwei in which we issued to Tianwei 33,379,287 shares of our common stock, representing 60% of our fully-diluted outstanding shares. We also granted to Tianwei a warrant to purchase an additional 10 million shares of our common stock. The terms of the warrant include: (i) a per share exercise price equal to $2.52; (ii) an exercise period of seven years; and (iii) provision for a cashless, net-issue exercise.
In exchange for the issuance of 33,379,287 shares of our common stock, the existing polysilicon supply agreements with Tianwei were amended to reduce the aggregate secured prepayment amount by $50.0 million out of an aggregate of $79.0 million. The amended supply agreements also provide for a reduced price at which Tianwei purchases polysilicon by approximately 11% in each year of the ten year agreement. Tianwei also agreed to loan us $50.0 million. In January and March 2010, we received $20.0 million and $30.0 million, respectively, in loan proceeds. The loans bear an annual interest rate of 5.94% and have a term of two years. Pursuant to the loan agreement, we have pledged a security interest in all of our assets to Tianwei. The $20.0 million and $30.0 million in loan proceeds become due in January and March 2012, respectively, with no penalty for earlier prepayment of principal, and interest payments are due quarterly. In March 2011, Tianwei informed us that it will not require repayment of these loans until subsequent to April 1, 2012. As of March 31, 2011, the entire $50.0 million was outstanding, and we are continuing our discussions with Tianwei to determine the date when these loans can be repaid.
Current Customers: Polysilicon Supply Agreements
Overview
As of March 31, 2011, we have polysilicon supply agreements with six leading solar companies for periods ranging from three to eleven years for the sale of up to approximately 34,100 metric tons of polysilicon, subject to meeting certain milestones and other conditions. The terms of these agreements are described in more detail below. Under each of these agreements, we have granted to the respective customer a security interest in all of our tangible and intangible assets related to our polysilicon business. These security interests are subordinated to the Tianwei financing and any third-party debt secured to finance construction of the Polysilicon Plant.
Once our planned facility, which has been designed to produce up to 4,000 metric tons of polysilicon per year, is operating at full capacity, we expect that we will be able to meet the annual delivery requirements of our polysilicon sales contracts. In addition, through fiscal 2020, we project to have anywhere between approximately 500 to 1,500 metric tons of unallocated annual polysilicon production capacity from our planned production output of 4,000 metric tons per year. This unallocated polysilicon may be sold under one or more new long-term contracts, reserved for strategic purposes, or sold on the spot market. Through our polysilicon supply agreements, which contain among other things fixed prices for the sale of polysilicon, we are attempting to implement a pricing strategy that balances the goal of maximizing our profits while mitigating the risks that arise from the volatility of the polysilicon market. In our recent amendments to our supply agreements we have added or continued to provide for pricing flexibility for the later years of the supply agreements to protect ourselves against the supply agreements that require the sale of polysilicon at below market prices.
At this time, we do not believe that we will be able to fulfill our shipment obligations in calendar year 2011 to any of our customers. We are in active discussions with each of them to amend our respective supply agreements. Any amendment could result in new terms and conditions that increase our obligations or reduce the economic benefit of the supply agreement to us. See “Risk Factor- If we are unable to renegotiate amendments to our supply agreements or if any of our supply agreements is terminated for any reason, our business will be materially harmed”.
The following describes in more detail our polysilicon supply agreements:
Wuxi Suntech Power Co. Ltd. In June 2007, we entered into a fixed price, fixed volume supply agreement with Wuxi Suntech Power Co., Ltd., or Suntech, for the sale and delivery of polysilicon. The supply agreement has been subsequently amended in June 2010, pursuant to which we revised the first delivery of polysilicon products to Suntech in June 2011, and Suntech waived certain milestones required under the agreement. We also agreed to waive our right to prepayment of an additional $30.0 million, and Suntech may terminate the $30.0 million stand-by letter of credit previously issued by a bank in China. The term of the agreement was shortened to one year and pricing was fixed for the term of the agreement. The agreement will automatically renew with the same terms unless either party terminates the agreement. If we fail to commence shipments by June 2011, then Suntech may terminate the supply agreement. We did not make any shipments to Suntech by June 2011, and we are in discussions with Suntech regarding a possible amendment of the agreement.
Upon Suntech’s termination of the agreement under certain circumstances, we are required to refund to Suntech all prepayments, which were $2.0 million as of March 31, 2011, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement. Upon termination of the agreement for cause by us, we generally may retain the entire amount of prepayments made as of the date of such termination as liquidated damages, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement.
Hanwha SolarOne, formerly Solarfun Power Hong Kong Limited. In November 2007, we entered into a fixed price, fixed volume supply agreement with Hanwha SolarOne, or SolarOne, formerly known as Solarfun Power Hong Kong Limited, a subsidiary of Solarfun Power Holdings Co., Ltd., for the sale of polysilicon. As of March 31, 2011, SolarOne has paid to us $49.0 million as a prepayment for future polysilicon product deliveries, and it is obligated to pay us an additional $6.0 million in prepayments.
The supply agreement was subsequently amended in November 2010, to provide that we will sell approximately 7,300 metric tons of polysilicon over an 11-year term, approximately 6,750 metric tons of which are to be shipped during the second through tenth year of the agreement. The pricing under the agreement was adjusted such that it is fixed for the first five years and thereafter will vary from year to year based on market pricing and negotiations between us and SolarOne. The fixed pricing for the first five years of the supply agreement was a few dollars above the long-term contract prices then prevailing in the market and below the spot prices by a dollar amount that is in the low double digits. If SolarOne fails to make any of the $6.0 million prepayment under the agreement, then the pricing adjustments shall not be effective. We also agreed that the initial delivery date to avoid breach and termination would be extended to June 2011. We did not make any shipments to SolarOne by the June 2011 deadline, and we are in discussions with SolarOne regarding a possible amendment of our supply agreement.
Upon SolarOne’s termination of the agreement under certain circumstances, we are required to refund to SolarOne all prepayments made as of the date of termination, which were $49.0 million as of March 31, 2011, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement. Upon termination of the agreement by us, we generally may retain the entire amount of prepayments made as of the date of such termination as liquidated damages, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement.
Jinko Solar Co., Ltd.
In July 2008, we entered into a supply agreement with Jinko Solar Co., Ltd., formerly known as Jiangxi Jinko Solar Co., Ltd., or Jinko, for the sale and delivery of polysilicon. In December 2010, we amended the supply agreement under which we will sell approximately 1,800 metric tons of polysilicon over a nine-year term. The pricing under the agreement was adjusted such that it is fixed for the first five years and thereafter will vary from year to year based on market pricing and negotiations between us and Jinko. The fixed pricing for the first five years of the supply agreement was a few dollars above the long-term contract prices then prevailing in the market and below the spot prices by a dollar amount that is in the low double digits. We also agreed that the initial delivery date to avoid breach and termination would be extended to August 2011. We do not anticipate making any shipments to Jinko by August 2011, and we are in discussions with Jinko regarding a possible amendment of the agreement. As of March 31, 2011, Jinko has paid us a total cash deposit of $20.0 million as prepayment for future product deliveries.
Tianwei New Energy (Chengdu) Wafer Co., Ltd. In fiscal 2009, we entered into two fixed price, fixed volume supply agreements with Tianwei New Energy (Chengdu) Wafer Co., Ltd., or Tianwei Wafer, for the sale and delivery of polysilicon. In December 2009, we amended the agreements pursuant to which we converted $50.0 million of the total $79.0 million of prepayments previously paid into shares of our common stock and reduced the price at which Tianwei Wafer purchases polysilicon by approximately 11% per year. The amount of polysilicon to be delivered remains unchanged and Tianwei Wafer is required to pay us an additional $2.0 million in prepayments; however, the total revenue for the polysilicon to be sold by us to Tianwei Wafer has been modified such that up to approximately $418.0 million may be payable to us during the ten-year term (exclusive of amounts Tianwei Wafer may purchase pursuant to its right of first refusal), subject to acceptance of product deliveries and other conditions. Our failure to commence shipments of polysilicon by June 2011 constitutes a material breach by us under the terms of the agreement, among other circumstances. However, we are in discussions with Tianwei Wafer regarding a possible amendment of the agreement.
Upon Tianwei Wafer’s termination of the agreements under certain circumstances, we are required to refund to Tianwei Wafer the $29.0 million in prepayments made as of March 31, 2011, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreements. Upon a termination of the agreements by us, we generally may retain the entire amount of prepayments made as of the date of such termination as liquidated damages, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreements
Wealthy Rise International, Ltd. In September 2008, we entered into a fixed price, fixed volume supply agreement with Wealthy Rise International, Ltd., a wholly owned subsidiary of Solargiga Energy Holdings, Ltd., or Solargiga, for the sale of polysilicon. In March 2010, we amended the agreement pursuant to which we agreed to sell to Solargiga specified volumes of polysilicon at a predetermined price over a three-year period beginning in calendar year 2011, subject to product deliveries and other conditions. In June 2011, we amended the agreement pursuant to which we agreed to sell to Solargiga specified volumes of polysilicon at a predetermined price over a five-year period beginning in calendar year 2012, subject to product deliveries and other conditions. The fixed pricing in this agreement was at the level of long-term contract prices prevailing in the market at the time of this amendment and below the spot prices by a dollar amount that is in the low double digits. The pricing for the last two years of the five-year term may be adjusted based on market prices of polysilicon and negotiations between us and Solargiga. The aggregate amount that may be paid to us over the five-year term is $92.8 million, assuming no such pricing adjustment in the last two years occurs and without taking into account the prepayments already received by us. This amount is a reduction from the $455.0 million that would have been payable to us over a ten-year period under the original agreement. The amendment also extended the date by which we were obligated to commence shipments of polysilicon from May 2011 to May 2012. We also granted to Solargiga a warrant to purchase 1,196,581 shares of our common stock. The terms of the warrant include: (i) a per share exercise price equal to $2.75; and (ii) a five year term.
Pursuant to the agreement, Solargiga was obligated to pay us additional prepayments in the aggregate amount of $13.2 million that was payable in four increments of $3.3 million in each of April, June, August and October 2010, and a final prepayment of $200,000 upon Solargiga’s receipt of certain aggregate volumes of polysilicon product from us. We received all four increments from Solargiga of $13.2 million.
Solargiga has the right to terminate the amended agreement and recover any prepayments made if we have not commenced polysilicon shipments by September 30, 2012. Upon Solargiga’s termination of the agreement under certain circumstances, we are required to refund to Solargiga all prepayments made as of the date of termination, which were $20.2 million as of March 31, 2011, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement. Upon termination of the agreement by us, we generally may retain the entire amount of prepayments made as of the date of such termination as liquidated damages, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement.
Shanghai Alex New Energy Co., Ltd. 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. In January 2011, we entered into Amendment No. 2 to Supply Agreement with Alex, or Amendment No. 2, which provides for a pricing adjustment such that pricing is fixed for the first three years and thereafter will vary from year to year based on market pricing and negotiations between us and Alex. The fixed pricing for the first three years of the supply agreement was at the level of the long-term contract prices prevailing in the market at the time of the amendment and below the spot prices by a dollar amount that is in the low double digits. Under Amendment No. 2, we have an obligation to use commercially reasonable efforts to make our first shipment to Alex by March 31, 2011, and if we did not do so within a certain number of days after the scheduled delivery date, we would provide Alex with a purchase price adjustment. As of March 31, 2011, we did not make our first shipment and as a result the purchase price was adjusted accordingly. Furthermore, if we have not made our initial shipment of product on or before September 30, 2011, Alex will have the right to terminate the agreement.
Upon Alex’s termination of the agreement under certain circumstances, we are required to refund to Alex all prepayments made as of the date of termination, which were $20.0 million as of March 31, 2011, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement. Upon termination of the agreement by us, we generally may retain the entire amount of prepayments made as of the date of such termination as liquidated damages, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement.
Hoku Solar
Business Strategy and PV Products
Our goal is to be a leading provider in PV system installations and PV project development. We plan to continue to focus on designing, engineering and installing turnkey PV systems and related services in Hawaii using solar modules purchased from third-party suppliers and to develop projects.
In addition to continuing to expand our turnkey solar integration business in the coming fiscal year we also plan to expand our focus on large-scale PV project development within the State of Hawaii and elsewhere, specifically the U.S. mainland. This effort will be focused on leveraging our solar integration, project management and financing expertise to develop a portfolio of rooftop solar energy facilities and multiple utility-scale PV farms which would generate solar power for sale to utilities and large industrial customers for use on their grids.
As of March 31, 2011, we had approximately $1.0 million in PV system installation and/or related services under contract that we expect to complete in fiscal 2012. In addition, we will continue to generate revenue from the sale of electricity through power purchase agreements, or PPAs, on the seven PV systems we installed for the Hawaii State Department of Transportation, or DOT, at predetermined contract rates.
Our solar integration business remains focused on the turnkey delivery of commercial, industrial and utility-scale PV projects, both roof- and ground-mounted. For example, in conjunction with James Campbell Company, LLC, and Forest City Sustainable Resources, LLC, we continue our efforts to advance the development of the Kapolei Sustainable Energy Park, a ground-mounted PV system which would be capable of generating between 800 and 1,300 kilowatts of peak DC power.
Furthermore, we also intend to expand our project development service offering. We are in various stages of providing PV design and advisory services for select clients, several of whom have a nationwide real estate footprint. To this end, we are working proactively with our customers and each island's utility company to systematically address the myriad technical and business challenges facing prospective solar investors and PV system hosts in Hawaii. We are also pursuing opportunities to expand Hoku Solar on the U.S. mainland.
Backlog
As of March 31, 2011, we have entered into PV system installation and other related service contracts that we have not completed; however, we do not have a backlog.
Sales and Marketing
Hoku Materials is offering to sell polysilicon for use in the production of solar modules. We are in the process of constructing our Polysilicon Plant and do not expect to have polysilicon available until the second half of calendar year 2011.
Hoku Solar is offering the sale and installation of our turnkey PV systems and related services or the option of a PPA, where we would install and own the solar system and the end user would pay us for the electricity produced under a long-term contract.
Intellectual Property
Our solar businesses depend upon licensed technology, information, processes and know-how as well as our proprietary information, processes and know-how. We protect our intellectual property rights based upon trade secrets. Although we believe that we have obtained all necessary licenses from our consulting and engineering firms and turnkey equipment suppliers that are necessary to manufacture, market and/or sell the products contemplated in our Hoku Materials business, we cannot be assured that claims of infringement of other parties’ proprietary rights (or claims of indemnification resulting from infringement claims) will not be asserted or prosecuted against us in the future. Any such claims, with or without merit, could be time consuming to defend, result in costly litigation, divert management’s attention and resources or require us to enter into royalty or licensing agreements.
We have selectively pursued patent applications in order to protect our technology, inventions and improvements related to our fuel cell products. As of March 31, 2011, 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.
Manufacturing
Hoku Materials
We installed the first 16 out of a planned total order of 28 Siemens-process reactors at the Polysilicon Plant, and as of March 31, 2011, we have successfully produced polysilicon using two of the 16 reactors in a pilot production demonstration. We produced the material after completing a comprehensive system commissioning protocol, which culminated in deposition runs in two of our installed polysilicon reactors. The primary purpose of the testing was to confirm system integrity and validate operating procedures.
Contingent on financing, we plan to install and commence commercial production runs on the first 16 deposition reactors, which are capable of producing 2,500 metric tons of polysilicon per annum, beginning in the second half of calendar year 2011. We plan to continue on-site construction to complete the installation of the final 12 polysilicon reactors throughout calendar year 2012, which will bring our on-site reactor total to the full planned complement of 28 units, or 4,000 metric tons of polysilicon per annum. We will continue to use TCS procured from outside sources to manufacture solar-grade polysilicon in our Siemens reactors until the construction of our TCS is completed, which is expected to be completed in the first half of calendar 2012. Assuming we receive the necessary additional financing, we believe we will be able to meet our customer deliveries and ramp-up to full capacity by the end of calendar year 2012.
We will need additional financing to complete the construction of the Polysilicon Plant, and should there be delays in securing additional financing, we may need to implement cost and expense reduction programs and other programs to generate cash that are not currently planned, but are responsive to our liquidity requirements. If we are unable to secure additional financing or structure credit terms with our vendors, we may need to curtail construction of the Polysilicon Plant. If we elect to curtail construction, we would not be able to produce our own polysilicon to meet the delivery requirements under certain polysilicon agreements. We were required to make polysilicon deliveries beginning in June 2011 in order to keep from breaching these contracts; however, we are in discussions with our customers regarding possible amendments of the agreements. If we are unable to produce our own polysilicon and are unable to amend our existing contracts, we may need to purchase between 1,000 to 1,500 metric tons of polysilicon to meet the minimum delivery requirements of our polysilicon contracts during fiscal 2012. As of June 2011, we believe that if we are able to secure polysilicon at the current spot market price, the revenue from the 1,000 to 1,500 metric tons we may need to deliver during fiscal 2012 will result in a loss on the subsequent sale of polysilicon under our current polysilicon agreements. As of June 2011, we have not entered into any agreements to purchase polysilicon and as a result we cannot guarantee we will be able to purchase polysilicon at current prices.
City of Pocatello. In March 2007, we entered into a 99-year ground lease with the City of Pocatello, Idaho, for approximately 67 acres of land and, in May 2007, the City of Pocatello approved an ordinance that authorizes the Pocatello Development Authority to provide us certain tax incentives related to certain necessary infrastructure costs we incur in the construction and operation of our Polysilicon Plant. In May 2009, we entered into an Economic Development Agreement, or the EDA 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 Polysilicon Plant. 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 and personal property located in such district, or the TIF Revenue, up to approximately $26.0 million, less the actual Road Costs (defined below), and (b) the Employment Reimbursement will be an amount that is equal to 50% of the TIF Revenue, up to approximately $17.0 million. Each of the Infrastructure Reimbursement and the Employment Reimbursement will be made to us over time as TIF Revenue is received, and only after the costs of completing a public access road to the Polysilicon Plant, in an amount not to exceed $11.0 million, or the Road Costs, has been paid to PDA out of TIF Revenue, and up to $2.0 million in capital costs has been paid to the City of Pocatello out of TIF Revenue.
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 and procurement services for the construction of our Polysilicon Plant, which was amended in October 2007 by Change Order No. 1, again in April 2008 by Change Order No. 2, again in February 2009 by Change Order No. 3, again in February 2010 by Change Order No. 4, and again in December 2010 by Change Order No. 5, which are collectively the Engineering Agreement. Under the Engineering Agreement, S&W would provide the engineering services to complete the design and plan for construction of the Polysilicon Plant, along with procurement services. S&W would be paid on a time and materials basis plus a fee for its services.
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 Polysilicon Plant, which was amended in October 2007, by Change Order No. 1, and again in April 2008 by Change Order No. 2, again in March 2009 by Change Order No. 3, again in September 2009 by Change Order No. 4, and again in August 2010 by Change Order No. 5, 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 Polysilicon Plant 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 $165.0 million, including up to $5.0 million of incentives that may be payable.
Pursuant to Change Order No. 5, we agreed among other things: (i) to change the date to complete construction for Partial Commercial Operation, or PCO (including the Schedule Incentive Completion Dates as amended and restated in Change Order Numbers 3 and 4) on or before December 31, 2010 for schedule and bonus purposes, (ii) that JH Kelly will use best efforts to attain PCO by that date with incremental funding from us in the amount of $55.8 million, (iii) that JH Kelly will aim to complete certain monthly milestones for the project for the period August 1, 2010 through December 31, 2010, (iv) that JH Kelly successfully completed and earned its $1.5 million bonus for the preliminary reactor installation, which will be paid in $375,000 increments tied to completion of the monthly milestones, and (v) that on or before August 31, 2010, Tianwei or we will secure a standby letter of credit in the amount of $20.0 million for the benefit of JH Kelly to provide a greater degree of certainty and security with respect to payment for the work. The JH Kelly Construction Agreement does not provide for a fixed cost or guaranteed completion date for construction of the Polysilicon Plant. Due to overall scheduling delays and cost overruns for the completion of the Polysilicon Plant, we have limited JH Kelly’s scope of work to the completion of a few key areas in the Polysilicon Plant, and have commenced a bidding process for new contracts that we believe will enable us to better control the budget and schedule for completion of the remaining work.
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 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 Polysilicon Plant. 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.
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 2,500 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.
As of March 31, 2011, pursuant to the contract with GEC and MSA, we received all 16 hydrogen reduction reactors, eight hydrogenation reactors, and related equipment, at the Polysilicon Plant.
Idaho Power Company. 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 Polysilicon Plant, or the Idaho Power Agreement. The electric substation was completed in August 2009, and we were able to use its power during our polysilicon product demonstration in April 2010.
We also entered into an Electric Service Agreement with Idaho Power, or the ESA, for the supply of electric power and energy to us for use in the Polysilicon Plant, subject to the approval of the Idaho Public Utilities Commission, or the PUC. The term of the ESA is four years, beginning in June 2009 and will expire in May 2013. 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 PUC. 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. Beginning in May 2011, we are required to make a minimum monthly payment ranging between $1.1 million and $1.9 million per month until October 2011.
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 Polysilicon Plant. The total fees payable to AEG for all Deliverables under the AEG Agreement is approximately $13.0 million.
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 at the Polysilicon Plant. 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 has agreed to sell to us no less than 65% of our annual silicon metal requirement. Pricing is to be negotiated annually; however, if the parties are unable to agree on pricing for any year, or the 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 March 31, 2011, 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. In May 2011, we amended this agreement to restructure the payment terms with PVA as follows: (i) in May 2011, we paid $2.1 million; (ii) upon the earlier of successful acceptance testing at the Polysilicon Plant and July 31, 2011, we shall pay the amount of $318,000; (iii) upon the earlier of six months after the date of commissioning and December 31, 2011, we shall pay the amount of $318,000. In June 2011, we amended this agreement to deliver a letter of credit in July 2011 in the amount of $636,000.
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, for use in the Polysilicon Plant. The term of the agreement is eight years beginning on the date on which the first shipment of product is delivered to us. 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 within four months after we provide written notice to BHS, 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.
Evonik Degussa Corporation. In March 2010, we entered into an agreement with Evonik Degussa Corporation, or Evonik, for the supply of TCS for use in the manufacturing of polysilicon for a term of approximately one year ending in February 2011. In April 2010, we paid Evonik a $100,000 deposit for the ISO containers that will transport the TCS to our facility in Pocatello, Idaho. In February 2011, we amended this agreement to extend the term of the agreement to November 2011. Under the amended agreement, Evonik has agreed to sell to us a minimum quantity of TCS during the term of the agreement. Pricing is fixed based on the quantity supplied in each calendar month and based on our frequency of payment. Pursuant to the agreement, Evonik is required to provide a minimum amount of TCS per calendar month, and it will use commercially reasonable efforts to provide additional quantities that we may request in addition to the monthly minimum amount.
Supplier Relationships
We utilize solar modules purchased through our supply relationship with Suntech and Sanyo Electric Co., Ltd. for our PV system installations. We are also an authorized dealer of SunPower commercial equipment, and from time to time purchase PV modules from other manufacturers. As we grow our PV business, we expect to work more closely with Tianwei to utilize their PV modules on our projects. Inverters and balance of system (BOS) equipment are sourced from a wide variety of market-leading vendors. We have structured our agreements as firm purchase orders at a predetermined price or non-binding forecasts of our annual or quarterly product needs to our suppliers, and then periodically issue purchase orders for specific projects. These suppliers are generally under no legal obligation to supply solar modules until they have accepted our purchase orders.
Competition
Hoku Materials
In the polysilicon market, we will compete 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., OCI Company Ltd., GCL-Poly, LDK Solar Co. Ltd., and Wacker Chemie AG. In addition, new companies are emerging in China, Korea, India, Europe, Brazil, Australia, North America, and the Middle East, and new technologies, such as fluidized bed reactors, are emerging which may have significant cost and other advantages over the Siemens process we are planning to use to manufacture polysilicon. These competitors may have longer operating histories, greater name recognition and greater financial, sales and marketing, technical and other resources than us. If we fail to compete successfully, we may be unable to successfully enter the market for polysilicon.
After a period of polysilicon supply shortages, an essential raw material in the production of PV modules, overall polysilicon supply increased in fiscal 2010 and 2011. It is expected to continue to increase for a longer period, with the possibility of an oversupply of polysilicon in fiscal 2012 or 2013. In the near term, however, we believe that the demand for polysilicon will support further competition in the polysilicon market. Increasing polysilicon supply, however, has and will continue to suppress spot market prices, which could adversely affect our ability to secure additional long-term supply contracts, or to secure such contracts on favorable terms.
Hoku Solar
The market for PV installations is competitive and continually evolving. As a relatively new entrant to this market, we expect to face substantial competition from companies such as SunPower Corporation, SunEdison, Chevron Energy Solutions, REC Solar and other new and emerging companies in Hawaii, Asia, North America and Europe. In addition, the Hawaii market is gaining additional attention from potential competitors, owing to the expected introduction of a Feed-in Tariff by the local public utility. Some of our known competitors are established players in the solar industry, and have a stronger market position than ours, including larger resources and recognition than we have. In addition, the PV market in general competes with other sources of renewable energy and conventional power generation. In the near term, we believe that the demand for PV installations will support further competition in the market, enabling us to sell our services, specifically in Hawaii where we are headquartered.
Government Regulation
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 solar products. 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 consumers of solar power systems, which could decrease the market for PV installations, thereby harming our business, prospects, results of operations and financial condition.
The installation of PV systems is subject to oversight and regulation in accordance with national and local ordinances relating to building codes, safety, environmental protection, utility interconnection and metering and related matters. It is difficult to track the requirements of individual states and design equipment to comply with the varying standards. Any new government regulations or utility policies pertaining to PV systems may result in significant additional expenses to us and, as a result, could cause a significant reduction in demand for PV installations. In addition, the manufacture 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. 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.
Federal and Hawaii state tax credits are available for residential and commercial PV systems placed in service. In October 2008, Congress extended the availability of the federal tax credit for both residential and commercial solar installations to calendar year 2016. Additionally, in February 2009, the American Recovery and Reinvestment Act, or ARRA, was signed into law, which contains various programs and taxpayer incentives with respect to renewable energy that may eventually benefit us.
In fiscal 2011, Hawaii’s Public Utilities Commission, or PUC, issued a decision and an order outlining the general principles for the creation of a statewide feed-in tariff. The PUC has not set tariff prices yet, but it did set project size limitations. Based on available information, developers expect to be able to enter 20-year agreements, during which time they will be guaranteed a specified price for the electricity generated by their PV systems. The feed-in tariff is expected to reduce development risk and improve project timelines by streamlining the utility’s procurement mechanism and guaranteeing future payments.
In early 2011, the state legislature in Hawaii issued a bill to temporarily suspend a general excise tax exemption for contractors. The exemption allows primary contractors to deduct amounts of sales taxes paid to subcontractors from gross receipts when calculating their general excise tax liability. This proposal would temporarily suspend this exemption to contractors within the State of Hawaii, and if enacted, could result in the payment of higher excise taxes.
Financial Information by Business Segment and Geographic Data
In fiscal 2011, revenue was $ 3.6 million compared to $2.6 million for fiscal 2010. Revenue for fiscal 2011 was primarily comprised of PV system installations and related services for Diagnostic Laboratory Services, Inc. and the sale of electricity to the State of Hawaii Department of Transportation. Revenue for fiscal 2010 was primarily comprised of PV system installations and related services for Namalu LLC, Nan, Inc and Henkels & McCoy and the sale of electricity to the State of Hawaii Department of Transportation. In fiscal 2009, 100% of our total revenue was from our PV system installations and other related services and the resale of solar inventory primarily from our contracts with Paradise Beverages, Inc., and Resco, Inc. In fiscal 2011, 2010 and 2009, all of the revenue was generated from customers in the United States.
Employees
As of March 31, 2011, we had 129 employees, consisting of 111 in Hoku Materials, 9 in Hoku Solar and the remaining 9 employees are general administrative employees in Hoku Corporation that provide support for all divisions, public company requirements and other corporate initiatives.
Executive Officers of the Company
Our executive officers and their ages and positions as of March 31, 2011, were as follows:
Scott B. Paul has served as our Chief Executive Officer and member of our board of directors since April 2010. He served as our President from April 2010 until February 2011 and as our Chief Operating Officer from November 2008 to March 2010. Previously, he served as Vice President, Business Development and General Counsel from July 2003 to November 2008. Mr. Paul was also our Secretary from November 2004 to March 2005. From June 2002 to June 2003, Mr. Paul was Associate General Counsel and Director of Business Development at Read-Rite Corporation, a component supplier for hard disk and tape drives. From April 2000 to June 2002, he was an attorney in the Business and Technology Group at Brobeck, Phleger & Harrison LLP, a law firm. From October 1999 to April 2000, Mr. Paul was an attorney in the Business Solutions Group at Crosby, Heafey, Roach & May, LLP (now Reed-Smith), a law firm, and from October 1998 to October 1999, he was an attorney at Ropers, Majeski, Kohn & Bentley, a law firm. Mr. Paul has a B.A. in Psychology from the University of California, Los Angeles and a J.D. from Santa Clara University School of Law.
Dr. (Jeremy) Xiaoming Yin has served as our President since February 2011. He serves as the founder and managing director of SinoTransPacific Ventures, a cross-border private equity investment advisory firm headquartered in Los Angeles that focuses on clean technologies. From 2000 to 2007, Dr. Yin was a founding member and Vice President at LightCross, Inc., a California-based manufacturer of optical networking and switching components, which was merged with Arroyo Optics in 2005 to form Kotura, Inc. Subsequent to the acquisition of LightCross, Dr. Yin served in a variety of executive roles at Kotura, Inc. From 1996 to 2000, Dr. Yin served as the program manager and technical staff at the IBM, Siemens, Toshiba Development Alliance in East Fishkill, New York. Dr. Yin has a bachelor's degree from the University of Science and Technology of China, an M.B.A. from UCLA Anderson School of Management, and a Ph.D. in semiconductor physics from the City University of New York.
Dr. (Mike) Tao Zhang has served as the Interim President of Hoku Materials, Inc. since October 2010. He has served as a member of our Board of Directors since July 2010. Since 2009, Dr. Zhang has served as Vice General Manager of Tianwei New Energy Holdings Co., Ltd. (“Tianwei”). From 2007 to 2009, he served as the Senior Manager/Director of Spansion Inc., a public company in the semiconductor industry by Fujitsu and AMD. From 2002 to 2007, he served as Senior Automation Engineer, Flash Factory IE Manager, Systems IE Manager, Department Manager, and Staff Technologist for Intel. From 1998 to 2002, he was a Postdoctoral Research Fellow at the University of California, Berkeley. He is Co-Chair of an IEEE Technical Committee and the recipient of an IEEE Early Career Award and the IIE Outstanding Young Industrial Engineer Award. He is also listed in Marquis Who’s Who in the World, invited to Asia 21 Young Leader Summit, and selected to the China Global Expert Recruitment program. Dr. Zhang is also the Director and Executive Vice President of the US-China Green Energy Council, which promotes the expansion of public and private cooperative relationships in the solar industry between the United States and China, and he is currently in charge of Tianwei’s photovoltaic module sales and marketing efforts in North America. Dr. Zhang has an M.S. and a Ph.D. degree, as well as a Management of Technology certificate, from the Haas School of Business and the College of Engineering, all at the University of California, Berkeley.
Darryl S. Nakamoto has served as our Chief Financial Officer and Treasurer since January 2005 and our Secretary since March 2005. From January 2003 to December 2004, Mr. Nakamoto was a finance analyst for Frito-Lay of Hawaii, a division of PepsiCo, Inc. From May 2002 to January 2003, Mr. Nakamoto was not employed. From March 2001 to May 2002, Mr. Nakamoto was a sales and marketing executive for Syntera Solutions, the software development and document management division of Profitability of Hawaii, Inc., a software company. From April 2000 to February 2001, he served as the regional director of Activitymax, Inc., a travel reservation software company. From December 1996 to March 2000, Mr. Nakamoto was an accountant at KPMG LLP, an accounting firm, where he most recently was a senior accountant. Mr. Nakamoto has a B.A. in Accounting and Finance from the University of Washington and is a certified public accountant.
Jerrod Schreck has served as our Chief Strategy Officer since April 2010. He served as our Vice President of Business Development from July 2009 to March 2010. Previously, he served as our Director of Business Development from June 2008 to July 2009. From November 2006 to May 2008, Mr. Schreck was Development Director and Strategic Projects Manager at the Nature Conservancy of Hawaii, an international non-profit conservation organization. From March 2006 to November 2006, he was an Associate at Sennet Capital, LLC, a merchant bank in Honolulu, Hawaii, providing strategic, financial and M&A advisory services. From August 1995 to March 2006, Mr. Schreck served as an officer in the U.S. Navy, resigning his commission as a Lieutenant Commander. Prior to concluding his active duty service, Mr. Schreck served as Chief Engineer in USS RUSSELL (DDG 59), a destroyer, and as Material Officer at Destroyer Squadron 31, a Pearl Harbor-based operational command responsible for the combat readiness of eight U.S. warships. Mr. Schreck has a Master’s degree as an Olmsted scholar and a B.S. from Cornell University
Available Information
Our principal executive offices are located at 1288 Ala Moana Blvd., Suite 220, Honolulu, Hawaii 96814, and our telephone number is (808) 682-7800. We maintain a website with an Internet address of www.hokucorp.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. We make available free of charge, through our website, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material to, the Securities and Exchange Commission.
ITEM 1A.
ITEM 1A.
RISK FACTORS
Risks Related to Our Business
We will need to secure additional financing in the future; and if we are unable to secure adequate funds on terms acceptable to us, or at all, we will be unable to complete construction of our Polysilicon Plant and build our polysilicon business.
As of March 31, 2011, we had cash and cash equivalents on hand of $18.4 million and current liabilities of $53.0 million. Cash used in operations was approximately $9.6 million for the fiscal year ended March 31, 2011.
Our planned entry into the polysilicon market will require us to spend significant sums to support the construction of the Polysilicon Plant, purchase capital equipment, fund new sales and marketing efforts, pay for additional operating costs and 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.
We will need additional financing to complete the construction of the Polysilicon Plant, and should there be delays in securing additional financing, we will need to implement cost and expense reduction programs and other programs to generate cash that are not currently planned, but are responsive to our liquidity requirements. Reduction of expenditures could have a material adverse effect on our business. If we are unable to secure additional financing or structure credit terms with our vendors that are favorable to us, based on the current level of capital available to us, we may need to curtail construction of the Polysilicon Plant. If we elect to curtail construction, we would not be able to produce our own polysilicon to meet the delivery requirements under certain or our polysilicon supply agreements. In order to avoid breaching these contracts we anticipated needing to purchase polysilicon from third parties for delivery in June 2011 under certain of our polysilicon supply agreements unless we were able to successfully negotiate amendments to these agreements.
Since the beginning of fiscal year 2011, we have entered into 14 bank credit agreements that provided us an aggregate of $234 million to fund our operations. For a description of these credit agreements, see table under “Business-Hoku Materials-Financing Update-Overview.” We are also expecting an additional $8.2 million in customer prepayments from our existing customers. We will need additional capital to complete the construction of the Polysilicon Plant, and we plan on raising this money through one or more subsequent debt and/or equity offerings and possibly prepayments from new customer contracts. We cannot be certain that we will be able to obtain equity or debt financing in time to enable us to meet our current construction schedule, on terms acceptable to us, or at all.
We currently expect to complete the construction of the 2,500 metric ton per year plant, or Phase I, through the use of our available cash, the loan proceeds we received from credit agreements, and through additional debt supported by our majority stockholder, Tianwei. Tianwei has agreed to assist us in obtaining additional financing for any additional construction costs necessary to complete Phase I, for working capital needs and to purchase polysilicon from third parties to meet our upcoming commitments, in return for fair compensation. As previously disclosed, we have been discussing with Tianwei what would constitute fair compensation for Tianwei for the financial services it has been providing and will provide us. While the discussions are on-going, we expect to finalize the type of compensation and amount during the fiscal year 2012. We also believe this compensation may be in the form of common stock warrants. To the extent common stock warrants are issued to Tianwei for its financial services it may significantly dilute the ownership of its stockholders other than Tianwei. In addition, the issuance of fair compensation for providing the letters of credit to secure our loans could result in issuance costs and increase the amount of interest that we recognize. We cannot be certain that we will reach an agreement with Tianwei regarding the appropriate compensation for Tianwei which could affect Tianwei's willingness to continue to assist us in obtaining necessary additional financing.
If we are unable to renegotiate amendments to our supply agreements or if any of our supply agreements is terminated for any reason, our business will be materially harmed.
Pursuant to our existing supply agreements with Suntech, Hanwha SolarOne, Jinko, Tianwei, Solargiga and Alex, as of March 31, 2011, we have received prepayments for future product deliveries of $2.0 million, $49.0 million, $20.0 million, $29.0 million, $20.2 million, and $20.0 million, respectively, for an aggregate amount of $140.2 million. In addition, our customers have agreed to make additional prepayments of $8.2 million in conjunction with polysilicon deliveries. Our supply agreements contain production and delivery milestones that, if not met, allow the counterparty to these agreements and require us to refund any prepayments received under such agreements. We were obligated to commence delivery of polysilicon to our customers beginning in June 2011 under these agreements. However, we did not make shipments to our customers within the timeline required under these supply agreements, and we are in discussion with them to amend the supply agreements to extend the delivery dates or change other terms in order avoid a breach of the supply agreements. We have been advised by certain customers that if we fail to deliver polysilicon in accordance with our supply agreements, which may include third-party polysilicon, they intend to terminate the supply agreement and seek a refund of their prepayment. There are no assurances that we will be successful in renegotiating amendments to any of the supply agreements, and failure to do so would result in the termination of the agreement, which will materially harm our business.
To the extent any supply agreement is terminated for any reason, we will not receive any further prepayments from the counterparty. In some circumstances we will be required to refund prepayments received under any terminated amended supply agreement and will not receive promised additional prepayments, and consequently we will need to secure new funds to cover the refund obligation and to provide adequate financing for the completion of the construction of our Polysilicon Plant. Securing new funds may delay the anticipated timing of completion of the Polysilicon Plant, 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 supply agreements, or at all. If we are unable to secure new funds, we will not be able to complete construction of the Polysilicon Plant, our business will be materially harmed and we may be forced to delay, alter or abandon our planned business operations.
Furthermore, pursuant to these supply agreements, we granted our customers 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 related supply agreements. Accordingly, if we are unable to renegotiate amendments to avoid a breach of the supply agreements, our customers may seek to recover their losses by sales or foreclosure of substantially all of our assets, which could force us to cease operations.
Under the supply agreement with Hanwha SolarOne, or SolarOne, formerly known as Solarfun Power Hong Kong Limited, a subsidiary of Solarfun Power Holdings Co., Ltd., if we fail to commence the delivery of polysilicon by June 30, 2011, SolarOne will have the right to terminate our supply agreement with SolarOne, in which event Hoku Materials would be obligated to repay SolarOne’s prepayments under the supply agreement. We did not make any shipments to SolarOne by June 30, 2011, and we are in discussions with SolarOne regarding a possible amendment of the agreement (see further discussion on SolarOne contract below). There can be no assurance that we will succeed in negotiating an amendment with SolarOne. If SolarOne terminates our supply agreement, it could be viewed as an event of default in connection under each of the credit agreements described above. If we are determined to be in default, our lenders will have the right to declare the outstanding principal and unpaid interest thereon due and payable.
In addition, we are in discussions with our other customers, including Wuxi Suntech Power Co., Ltd., Tianwei New Energy (Chengdu) Wafer Co., Ltd., regarding the extension of delivery dates beginning in June 2011 in our supply agreements. Under the terms of all of our supply agreements, the failure to deliver polysilicon by the stated delivery dates will allow the customers to terminate the supply agreements, require the repayments of the deposits under the agreements, which in the aggregate amount to $140 million, which in turn could in an event of default under our existing credit agreements with our third party lenders. The event of default under our existing credit agreements could result in our lenders accelerating repayment of our third party debt, which we do not have the wherewithal to repay. The third party credit agreements are all secured by standby letters of credit drawn by our majority shareholder, Tianwei, as collateral. To the extent that the third prty lenders accelerate repayment of the debt, Tianwei has provided a letter of commitment to us that it would not demand repayment from us until the original due dates of the third party credit agreements ranging from May 2012 through June 2016.
Even if we are able to amend these supply agreements, it could result in new terms and conditions that increase our obligations or reduce the economic benefit of the supply agreement to us. For example, such amendment could result in a reduction in the purchase price, a refund of some or all of the prepayments we have received to date, adjustments in the volume allocated to each customer, the forfeiture of future prepayments owed to us, the issuance of equity or debt securities to compensate our customers for the delayed shipments, or any combination of the foregoing, which could materially harm our financial condition and results of operations.
We will be required to procure third party polysilicon to meet our contractual delivery requirements beginning in August 2011. If we are unable to secure adequate quantities of solar-grade polysilicon on favorable terms and at the times needed, our business will be materially harmed.
Due to the delays in financing, the required curtailment of construction of the Polysilicon Plant, and the inability to meet our initial delivery of polysilicon to our customers beginning in August 2011 under existing agreements, we may be required to procure third party polysilicon to meet our contractual delivery requirements. There are no assurances that we will be able to secure solar-grade polysilicon at the time and in the amounts needed on favorable terms. As we will be required to procure third party polysilicon in the open market, our cost to purchase polysilicon could be in excess of our contractual sales prices or could result in no profit or a loss. If we are unable to secure polysilicon on favorable terms and at the times needed, our business, financial condition and results of operations will be materially harmed.
The actual cost to construct and equip our Polysilicon Plant may be significantly higher than our estimated cost.
We previously estimated the total cost for construction of approximately $410 million. However, in February 2011, we determined that the total costs will be greater than our previous estimates. Based on recent construction progress and discussions with our vendors, we now expect to incur approximately $600 million of costs before we can commence operation of the first 2,500 metric tons of production capacity. We also expect to invest up to an additional $100 million to complete the second phase of construction, which will add an additional 1,500 metric tons of manufacturing capacity, and allow us to complete our planned on-site TCS plant. Thus, our revised estimate for the full, planned 4,000 metric ton plant is now approximately $700 million.
The primary driver of the increase in costs relates to our engineering contract with Stone & Webster, Inc., and our construction contract with JH Kelly LLC as they are cost-plus contracts, rather than lump sum, or fixed cost contracts. As such, there is no guaranteed maximum cost. In addition, the estimated total cost increased in part by the fact that the construction schedule was expected to be approximately two years, but has instead been spread over four years with numerous starts and stops as a result of earlier challenges obtaining adequate financing in a timely manner. Furthermore, construction of the Polysilicon Plant commenced prior to the completion of the detailed engineering work, which caused numerous changes in the design of the facility, further contributing to the increase in delays and construction costs.
The amount and timing of our future capital needs depend on many factors, including the timing of the Polysilicon Plant development efforts, and the amount and timing of any revenue we are able to generate. Changes in construction costs resulting from increased demand, modifications in construction timelines, changes in our design, delays in our construction schedule and other factors could cause our actual cost to significantly exceed our estimate. If the actual cost is significantly higher than we estimate, we may be unable to raise any additional funding required to pay for any such added costs it could materially and adversely affect our ability to raise capital, to complete the Polysilicon Plant 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. Even if we receive additional financing and prepayments on time and in the amounts agreed upon, the actual costs to engineer, construct, and procure the Polysilicon Plant could exceed our estimates. If we are unable 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.
An unexpected and significant increase in the cost of construction may slow down or delay the completion of the Polysilicon Plant, which increases the risk that we will not meet certain construction and delivery milestones in our long-term polysilicon supply contracts. Failure to meet our construction and delivery milestones could cause one of our customers to terminate one or more of our polysilicon supply contracts and exercise their 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.
If we are unable to meet our obligations under our vendor and supplier agreements, or if we do not receive customer prepayments under our polysilicon supply agreement, we may not be able to continue or complete the construction of the Polysilicon Plant.
In order to address our cash needs for the construction of the Polysilicon Plant, we have modified payment terms in purchase orders with some of our vendors, and are in negotiations with other 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 Polysilicon Plant, 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 polysilicon business operations, which could have a material adverse effect on our business
In addition, 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, we could experience delays in our ability to continue the engineering and construction of the Polysilicon Plant in order to deliver polysilicon 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 and construct the Polysilicon Plant 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 meet our customer commitments, our business will be materially harmed and we may be forced to delay, alter or abandon our planned business operations
We have a limited operating history and, in fiscal 2007, we decided 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 March 31, 2011. In fiscal 2007, 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. In September 2010, we elected to discontinue the operations of Hoku Fuel Cells.
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 develop this new business, including the construction of the Polysilicon Plant. We commenced construction in May 2007, and we produced our first product at our production demonstration in April 2010. We expect to begin commercial production of polysilicon beginning in the first half of fiscal year 2012, with full-scale production in the second half of fiscal 2012; however, there are no assurances that this schedule will not need to be further modified. We may 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, delays in polysilicon shipments could result in the termination of a customer supply contract, which could require us to refund substantial amounts of prepayments made to us for future product deliveries. We have encountered, and expect that we will continue to encounter, significant challenges relating to our entry 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 Polysilicon Plant to begin commercial shipments during second half of calendar year 2011, 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, Evonik Degussa Corporation, and our other vendors, contractors and consultants who are providing key services, equipment, and supplies for the engineering and construction of the Polysilicon Plant. We have experienced delays in the performance or delivery of these services, equipment, and goods under some of these agreements, which resulted in delays in our production schedule and increased our costs to construct the Polysilicon Plant. If we experience additional delays in the performance or delivery of the services, equipment, or goods under any of these respective agreements, we may be unable to commence production of polysilicon in the second half of calendar year 2011, with full-scale production in the second half of calendar year 2011, or deliver the volume of polysilicon that is required under our polysilicon supply agreements. If we are unable to meet these scheduling goals, our business, financial condition and results of operations will be materially and adversely affected.
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 deferred capital expenditures by delaying construction of our on-site trichlorosilane, or TCS, production facility. TCS is needed to produce polysilicon. We have received shipments of small volumes of TCS from two suppliers for our initial polysilicon production, and are in discussions to procure TCS with various third parties. We are in discussions with these third-party TCS producers for higher volume TCS supply contracts to enable us to execute this strategy. There are no assurances that we will be able to secure adequate TCS at the time and in the amounts required on favorable terms, or at all. Failure to do so may prevent us from meeting 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.
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 Polysilicon Plant. Construction of the Polysilicon Plant and the operation of the polysilicon manufacturing and PV system installation businesses involves substantial changes to our operations and places a significant strain on our senior management team and financial and other resources, and has, among other things, required us to significantly increase our international activities; hire and train additional financial, accounting, sales and marketing personnel; and to 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.
Fluctuations in demand for polysilicon and 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 calendar year 2012, near the time when the Polysilicon Plant is scheduled to 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 occur, 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 2010, spot market prices of polysilicon decreased dramatically with an increase in supply, and further price declines are possible in calendar year 2011 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, industry-wide shortages of polysilicon could result in dramatic increases in the long-term contract and spot prices for polysilicon. Under its long-term supply agreements with major customers that contain fixed prices, the Company would be forced to sell the polysilicon it produces at prices that are below the then prevailing spot prices. To the extent the Company is unable to take advantage of price increases, either in spot or contract prices, it would have a negative impact on its results of operations and financial condition.
In addition, 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.
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 Polysilicon Plant on our current schedule. Any such production delays may result in a breach of one or more of our supply agreements with Alex, Suntech, SolarOne, 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 the completion of the Polysilicon Plant impossible.
Even if we achieve our polysilicon and PV system installation objectives on a timely basis and complete the construction of the Polysilicon Plant, 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 Polysilicon Plant, 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 and maintain low production costs 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 relatively new entrant to this market, we expect to face substantial competition from companies such as SunPower Corporation, SunEdison, Chevron Energy Solutions, REC Solar and other new and emerging companies in Hawaii, Asia, North America and Europe. In addition, the Hawaii market is gaining additional attention from potential competitors, owing to the expected introduction of a Feed-in Tariff by the local public utility. Many of our known competitors are more established in the solar industry than we are, 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, and if our customers prefer these other sources over ours, it may have a material adverse impact on our revenue and results of operations.
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 the Polysilicon Plant around these more efficient processes on manageable timetables and at reasonable cost, our business could be adversely affected
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. 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 and, our PV system installation business run by Hoku Solar, 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 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 Polysilicon Plant. Construction of the Polysilicon Plant and the operation of our polysilicon manufacturing and PV system installation businesses will involve substantial changes to our operations and 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 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 controls 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 may take a significant period of time to complete, which 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 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 not covered by insurance that result from the use and handling of such hazardous materials.
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 the Polysilicon Plant 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.
Our polysilicon 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 or explosions;
·
spills or releases; and
·
pipe, vessel, or system 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 and/or impact the timing of revenue recognition
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, SolarOne, 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;
·
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
·
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 United States 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. Reduction in 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 could reduce our margins. Although we have entered into a long term contract with Idaho Power to supply electric power to the Polysilicon Plant 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.
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 Polysilicon Plant, 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 Polysilicon Plant; however, we need to apply for additional permits with federal, state and local authorities before we can commence operation of the Polysilicon Plant. 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 agreements with The James Campbell Company and Forest City Sustainable Resources, LLC to construct PV systems are conditioned upon receiving various government approvals.
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 Polysilicon Plant in the City of Pocatello, Idaho are not realized then the costs of establishing the Polysilicon Plant 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 Polysilicon Plant, 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 Polysilicon Plant.
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 Polysilicon Plant. In May 2009, we entered into an Economic Development Agreement, or the PDA Agreement, with the Pocatello Development Authority, or the PDA, pursuant to which the 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 Polysilicon Plant. The parties agreed that (a) the Infrastructure Reimbursement will be an amount that is equal to 95% of the tax increment payments the PDA actually collects on the North Portneuf Tax Increment Financing District with respect to our real and personal property located in such district, or the TIF Revenue, up to approximately $26.0 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 $17.0 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 no payment 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 reduces 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 Polysilicon Plant may be higher than we currently estimate.
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, 2010 and March 31, 2011, our stock had low and high sales prices in the range of $1.75 to $3.78 per share. During fiscal 2011, 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;
·
changes in projected schedule and estimated cost for the construction of the Polysilicon Plant;
·
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, including Tianwei;
·
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.
Tianwei has a controlling interest in us and, as long as Tianwei controls us, other stockholders’ ability to influence matters requiring stockholder approval will be limited.
As of March 31, 2011, Tianwei owns 33,379,287 shares of our common stock, and holds a warrant to purchase an additional 10 million shares of our common stock, together representing approximately 60% of our total outstanding shares of common stock. Tianwei has 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 has 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. In addition, Tianwei is not prohibited from selling its equity 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.
Through 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.
Pursuant to an Investor Rights Agreement, dated as of December 2009, Tianwei has the right to nominate four out of seven directors on our Board of Directors and may at any time replace four out of seven of our directors. Currently four out of seven directors on our board are designees of Tianwei. As a result, unless and until the earlier of (i) Tianwei (together with its affiliates) ceasing to be our largest individual stockholder or (ii) Tianwei (together with its affiliates) owning less than 25% of the outstanding shares of our common stock, Tianwei can effectively control and direct our board of directors, which means that to the extent that our interests and the interests of Tianwei 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% 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;
·
establish advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted upon 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. Section 203 of the Delaware General Corporation Law provides, subject to certain exceptions, that if a person acquires 15% of our voting stock, the person is an “interested stockholder” and may not engage in “business combinations” with us for a period of three years from the time the person acquired 15% or more or our voting stock. 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.
Item 1B.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Item 2.
Properties
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, for the location of our Polysilicon Plant. The annual rent for the ground lease is fixed at one dollar per year until the expiration of the lease on December 31, 2106. In addition to this 67-acre lease, we and the City of Pocatello have signed a separate agreement granting us an option to lease an additional 450 acres of land owned by the City of Pocatello, which we could use for any future expansion. The terms of any future lease will be subject to good faith negotiations between us and the City of Pocatello.
In October 2008, we entered into a lease for 5,868 square feet of commercial office space in Honolulu, Hawaii. As of March 31, 2011, the lease has approximately 44 months remaining on the current term, with an option to extend for an additional five years. This office space presently serves as our corporate headquarters. We also have 5,990 square feet of leased warehouse and office space located in Aiea, Hawaii, that is used primarily by Hoku Solar for equipment storage and general operations.
Item 3.
Item 3.
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 4.
Item 4.
Removed and Reserved
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock has traded on The NASDAQ Global Market, or NASDAQ, under the symbol “HOKU” since August 5, 2005. The high and low sales prices of our common stock, as reported by the NASDAQ, for the quarters indicated are as follows:
As of March 31, 2011 there were 48 stockholders of record of our common stock. Such number does not include beneficial owners holding shares through nominee names.
Performance Graph
The performance graph below shows the total stockholder return of an investment of $100 in cash made on March 31, 2006, the last trading day before the beginning of the our fifth preceding fiscal year for our common stock, the NASDAQ composite and the Russell 3000 Technology. All values assume reinvestment of the full amount of all dividends. We have selected the Russell 3000 Technology index for comparison purposes, as we do not believe we can reasonably identify an appropriate peer group index. The comparisons shown in the graph below are based on historical data and we caution that that the stock price performance shown in the graph below is not indicative of, nor is it intended to forecast, the future performance of our common stock.
The above Stock Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings to finance the growth and development of our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will depend upon our financial condition, operating results and capital requirements, any contractual restrictions and other factors that our Board of Directors deems relevant.
Unregistered Sales of Equity Securities
In December 2009, we completed a financing transaction with Tianwei in which we issued to Tianwei 33,379,287 shares of our common stock and a warrant to purchase an additional 10 million shares of our common stock. The shares of common stock and the shares of common stock issuable pursuant to the terms of the warrant were sold in a private placement pursuant to an exemption from the registration requirements of the Securities Act afforded by Section 4(2) and/or Regulation D of the Securities Act and were not registered under the Securities Act of 1933, as amended, or any state securities laws.
Equity Compensation Plan Information
The number of shares issuable upon exercise of outstanding stock options, the weighted-average exercise price of the outstanding options, and the number of stock options remaining for future issuance for each of our equity compensation plans as of March 31, 2011 are summarized as follows:
(1)
This row includes our 2002 Stock Plan, 2005 Equity Incentive Plan, and 2005 Non-Employee Directors’ Stock Option Plan.
(2)
All of our equity compensation plans have been approved by our stockholders.
(3)
Represents weighted average exercise price of outstanding options only.
(4)
The number of shares of common stock reserved for issuance under our 2005 Equity Incentive Plan will automatically increase on April 1st of each year, from 2006 through 2014, in an amount equal to the lesser of 133,333 shares of our common stock or the number of shares of common stock granted pursuant to stock awards in the prior fiscal year. The number of shares of our common stock reserved for issuance under our 2005 Non-Employee Directors’ Stock Option Plan will automatically increase on April 1st of each year, from 2006 through 2014, by the number of shares of common stock subject to options granted during the preceding fiscal year, less the number of shares that reverted back to the share reserve during the preceding fiscal year. Our Board has the authority to designate a smaller number of shares by which the authorized number of shares of common stock will be increased under both plans prior to the last day of any fiscal year.
Issuer Purchases of Equity Securities
(a)
The sales reported were 9,539 shares, 19,993 shares, and 10,274 shares from Jerrod Schreck, Scott Paul, and Darryl Nakamoto, respectively effected to satisfy tax withholding obligations resulting from the vesting of 24,000, 51,000, and 27,000, restricted stock on March 31, 2011.
Item 6.
Item 6.
Selected Financial Data
The following selected financial data should be read in conjunction with our financial statements and the notes thereto, and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The statement of operations data for the fiscal years ended March 31, 2011, 2010 and 2009 and the balance sheet data as of March 31, 2011 and 2010 have been derived from and should be read in conjunction with our audited financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. The statement of operations data for the fiscal years ended March 31, 2008 and 2007 and the balance sheet data as of March 31, 2009, 2008 and 2007 are derived from audited financial statements and the notes thereto which are not included in this Annual Report on Form 10-K. Historical results are not necessarily indicative of future results.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Annual Report on Form 10-K 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. 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 Annual Report on Form 10-K in greater detail in Part I, 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 Annual Report on Form 10-K and with our financial statements and notes thereto for the fiscal year ended March 31, 2011.
Overview
Hoku Corporation is a solar energy products and services company. We were incorporated in Hawaii in March 2001, as Pacific Energy Group, Inc. and changed our name to Hoku Scientific, Inc. in July 2001. In December 2004, we were reincorporated in Delaware. In March 2010, we changed our name from Hoku Scientific, Inc. to Hoku Corporation.
We originally focused our efforts on the design and development of fuel cell technologies, including our Hoku membrane electrode assemblies, or MEA’s, and Hoku Membranes. In May 2006, we announced our plans to form an integrated photovoltaic, or PV, module business, and our plans to manufacture polysilicon, a primary material used in the manufacture of PV modules, at our polysilicon manufacturing plant in Pocatello, Idaho, or the Polysilicon Plant. In fiscal 2007, we reorganized our business into three business units: Hoku Materials, Hoku Solar and Hoku Fuel Cells. In February and March 2007, we incorporated Hoku Materials, Inc. and Hoku Solar, Inc., respectively, as wholly owned subsidiaries to operate our polysilicon and solar businesses, respectively.
In September 2010, we elected to discontinue the operations of Hoku Fuel Cells. However, we continue to maintain ownership of its intellectual property including patents. Accordingly, the results of operations of Hoku Fuel Cells for the fiscal years ended March 31, 2010 and 2009 have been reported as discontinued operations in the consolidated statements of operations
Hoku Materials
Construction Update
Hoku Materials was incorporated to manufacture polysilicon, a key material used in photovoltaic, or PV, modules. In May 2007, we commenced construction of our planned polysilicon manufacturing facility in Pocatello, Idaho, or the Polysilicon Plant, which would be capable of producing up to 4,000 metric tons of polysilicon per year. We previously estimated the total cost for construction of approximately $410 million; however we have determined that the total costs will be greater than our previous estimates. Based on recent construction progress and discussions with our vendors, we now expect to incur approximately $600 million of costs before we can commence operation of the first 2,500 metric tons of production capacity. We also expect to invest up to an additional $100 million to complete the second phase of construction, which will add an additional 1,500 metric tons of manufacturing capacity, and allow us to complete our planned on-site TCS plant. Thus, our revised estimate for the full, planned 4,000 metric ton plant is now approximately $700 million.
The primary driver of the increase in costs is related to our engineering contract with Stone & Webster, Inc., and our construction contract with JH Kelly LLC as they are cost-plus contracts, rather than lump sum, or fixed cost contracts. As such, there is no guaranteed maximum cost. In addition, the estimated total cost increased in part by the fact that the construction schedule was expected to be approximately two years, but has instead been spread over four years with numerous starts and stops as a result of earlier challenges obtaining adequate financing in a timely manner. Furthermore, construction of the Polysilicon Plant commenced prior to the completion of the detailed engineering work, which caused numerous changes in the design of the facility, further contributing to the increase in delays and construction costs.
In an effort to control costs, we have strengthened our internal management team to enable more detailed reviews and audits of all project expenses. We have also engaged an independent engineer to assist with the monitoring and control of schedule and budget. Any significant increase in the cost to complete the Polysilicon Plant could have a material adverse effect on our business, financial condition and results of operations.
We received 16 Siemens-process reactors at the Polysilicon Plant and in April 2010 successfully produced polysilicon using two the reactors. We produced the material after completing a comprehensive system commissioning protocol, which culminated in deposition runs in a select number of our installed polysilicon reactors. The primary purpose of the testing was to confirm system integrity and validate operating procedures.
Contingent on securing additional financing, we expect to commission our reactors capable of producing 2,500 metric tons of polysilicon per annum and begin our first commercial shipment in the second half of calendar year 2011. We intend to ramp-up production throughout calendar year 2012, during which we expect to reach full production capability.
In order to avoid price adjustments and/or breaching our supply contracts, we may purchase polysilicon from third parties if we do not produce sufficient amounts to meet our customer obligations. We estimate that we will need to purchase between 1,000 to 1,500 metric tons of polysilicon during fiscal 2012 to avoid any breaches of our contracts. As of March 31, 2011, we have not entered into any agreements to purchase polysilicon and the current spot market prices are significantly greater than the prices at which our customers will be obligated to pay us.
During fiscal years ended March 31, 2011 and 2010 Hoku Materials incurred an operating loss of $11.9 million and $4.1 million, respectively, which mainly consisted of payroll, including stock compensation, professional fees and electricity usage as we continue to ramp towards the construction of the Polysilicon Plant. In addition, as of March 31, 2011, Hoku Materials has capitalized $478.5 million related to construction costs for the Polysilicon Plant and had received $140.2 million in customer deposits as prepayments under long-term polysilicon supply agreements.
Financing Update
Overview
During fiscal year 2011, we obtained an aggregate of $194.3 million of debt financing through 12 credit agreements to support our operations. In April and June 2011, we also secured a $15.0 million and $24.7 million credit agreement, respectively, with the New York Branch of Industrial and Commercial Bank of China, Ltd., New York Branch. Both of these credit agreements are secured by letters of credit provided by our majority stockholder, Tianwei New Energy Holding Co. Ltd., or Tianwei. In addition, as of March 31, 2011, we are also expecting an additional $8.2 million in customer prepayments from our existing customers, which are payable on polysilicon delivery milestones. As of March 31, 2011, we have funded approximately $455.4 million of our Polysilicon Plant. The following describes in more detail the terms of our outstanding credit agreements as of March 31, 2011:
China Merchants Bank - New York Branch
In May 2010, we entered into a $20.0 million credit agreement with the New York branch of China Merchants Bank. We borrowed the entire $20.0 million in May 2010 and this principal amount of the loan and any unpaid interest must be paid in full two years after the effective date of the credit agreement. We may prepay the loan at any time without penalty. Funds provided pursuant to the credit agreement are for general corporate purposes, including capital expenditures related to the Polysilicon Plant. The loan under the credit agreement is secured by a standby letter of credit drawn by Tianwei in Chengdu, China and issued to China Merchants Bank, as collateral. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2% or, if we elect, any portion of the loan that is not less than $1.0 million may bear interest at an annual rate equal to the rate of interest announced by the lender as its “prime rate.” The principal amount and any unpaid interest thereon must be paid in full by May 2012. We also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of March 31, 2011, the entire $20.0 million was outstanding.
In August 2010, we entered into two credit agreements with the New York branch of China Merchants Bank Co., Ltd. to borrow $10 million and $5 million. The loans under these credit agreements are secured by standby letters of credit drawn by Tianwei in Chengdu, China and issued to China Merchants Bank, as collateral. The loans bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2% or, if we elect, any portion of the loans that is not less than $1 million may bear interest at an annual rate equal to the rate of interest announced by the lender as its “prime rate.” The principal amount and any unpaid interest thereon must be paid in full by August 2012. We entered into reimbursement agreements with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letters of credit. As of March 31, 2011 the entire $15.0 million was outstanding.
In September 2010, we entered into a $10.0 million credit agreement with the New York branch of China Merchants Bank Co., Ltd. The loan under this credit agreement is secured by a standby letter of credit drawn by Tianwei in Chengdu, China and issued to China Merchants Bank, as collateral. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2% or, if we elect, any portion of the loan that is not less than $1 million may bear interest at an annual rate equal to the rate of interest announced by the lender as its “prime rate.” The principal amount and any unpaid interest thereon must be paid in full by September 2013. We also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of March 31, 2011 the entire $10.0 million was outstanding.
In October 2010, we entered into a $13.0 million credit agreement with the New York branch of China Merchants Bank Co., Ltd. We received $13.0 million under this credit agreement, which is secured by a standby letter of credit drawn by Tianwei in Chengdu, China and issued to China Merchants Bank, as collateral. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2% or, if we elect, any portion of the loan that is not less than $1 million may bear interest at an annual rate equal to the rate of interest announced by the lender as its “prime rate.” The principal amount and any unpaid interest thereon must be paid in full by October 2013. We also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of March 31, 2011 the entire $13.0 million was outstanding.
In December 2010, we entered into a $10.0 million credit agreement with the New York branch of China Merchants Bank Co., Ltd. We received the entire $10.0 million under this credit agreement, which is secured by cash collateral of 110% of the principal amount of the credit agreement in Renminbi provided by Tianwei. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2% or, if the Company elects, any portion of the loan that is not less than $1.0 million may bear interest at an annual rate equal to the rate of interest announced by the lender as its “prime rate.” The principal amount and any unpaid interest thereon must be paid in full by December 2013. We also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with providing the cash collateral. As of March 31, 2011 the entire $10.0 million was outstanding.
China Construction Bank - New York Branch
In June 2010, we entered into a $28.3 million credit agreement with the New York branch of China Construction Bank. The loan under this credit agreement is secured by a standby letter of credit drawn by Tianwei and issued by the Sichuan branch of China Construction Bank in favor of the New York branch. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 1.875% or, if the Company elects, and if the bank agrees, any portion of the loan that is not less than $1 million may bear interest at an annual rate equal to the highest “Prime Rate” as published in the “Money Rates” column of the Eastern Edition of the Wall Street Journal from time to time. The principal amount and any unpaid interest thereon must be paid in full by June 2012. We also entered into a reimbursement agreement with Tianwei pursuant to which the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of March 31, 2011 the entire $28.3 million was outstanding.
China Construction Bank - Singapore Branch
In October 2010, we entered into a $29.0 million credit agreement with the Singapore branch of China Construction Bank. The Company received the entire $29.0 million under this credit agreement which is secured by standby letters of credit drawn by Tianwei in Chengdu, China and issued to China Construction Bank Corporation, Sichuan Branch in favor of China Construction Bank - Singapore Branch. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2%. The principal amount and any unpaid interest thereon must be paid in full by October 2013. We also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of March 31, 2011, the entire $29.0 million was outstanding.
Industrial and Commercial Bank of China - New York Branch
In December 2010, we entered into a $15.5 million credit agreement with the New York Branch of Industrial and Commercial Bank of China, Ltd. The loans are secured by a standby letter of credit issued by the Sichuan Branch of Industrial and Commercial Bank of China and procured by Tianwei in favor of the lender and which has an aggregate availability of $17.0 million. The loans bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2.6%. The principal amount and any unpaid interest thereon must be paid in full by December 2013. We also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of March 31, 2011, the entire $15.5 million was outstanding.
In January 2011, we entered into a $19.5 million credit agreement with the New York Branch of Industrial and Commercial Bank of China, Ltd. The loans are secured by a standby letter of credit issued by the Sichuan Branch of Industrial and Commercial Bank of China and procured by Tianwei in favor of the lender and which has an aggregate drawable amount of $22.0 million. The loans bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2.6%. The principal amount and any unpaid interest of the loans must be paid in full by January 2014. We also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of March 31, 2011, the entire $19.5 million was outstanding.
In April 2011, we entered into a $15.0 million credit agreement with the New York Branch of Industrial and Commercial Bank of China, Ltd., New York Branch (the “Lender”). The loans are secured by a standby letter of credit issued by the Sichuan Branch of Industrial and Commercial Bank of China and procured by Tianwei in favor of the lender and which has an aggregate drawable amount of $16.5 million. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2.7%. The principal amount of and any unpaid interest of the loan must be paid in full by April 6, 2014 or the tenth business day prior to the date on which the letter of credit expires or otherwise terminates, whichever is earlier. We also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. We borrowed $15.0 million in April 2011.
In June 2011, we entered into a $24.7 million credit agreement with the New York Branch of Industrial and Commercial Bank of China, Ltd., New York Branch (the “Lender”). The loan is secured by a standby letter of credit issued by the Sichuan Branch of Industrial and Commercial Bank of China and procured by Tianwei in favor of the lender and which has an aggregate drawable amount of $30.1 million. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 3.8%. The principal amount of and any unpaid interest of the loan must be paid in full by June 2, 2016 or the tenth business day prior to the date on which the letter of credit expires or otherwise terminates, whichever is earlier. We also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. We borrowed $24.7 million in June 2011.
CITIC Bank International Limited - New York Branch
On February 7, 2011, we entered into a $19.0 million credit agreement with the New York Branch of CITIC Bank International Limited. The loan is secured by standby letters of credit issued by China Branch of CITIC Bank International Limited and procured by Tianwei in favor of CITIC Bank International Limited. The loans bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2.5%. The principal amount and any unpaid interest thereon must be paid in full by the earlier of (i) February 4, 2013 or (ii) the 15th business day prior to the date on which the first letter of credit expires or terminates. We also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letters of credit. As of March 31, 2011, $9.0 million was outstanding under this loan.
Bank of China, New York Branch
On February 25, 2011, we and our subsidiary Hoku Materials entered into a credit agreement with the New York Branch of Bank of China that provides for one or more revolving loans in an aggregate principal amount not to exceed the lesser of (i) $30.0 million or (ii) the aggregate amount of the letters of credit procured by Tianwei. As of March 31, 2011, Tianwei has procured a letter of credit issued by the Sichuan Branch of Bank of China in favor of the lender. The loans bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2.4%. The principal amount of the loans and any unpaid interest must be paid in full by the earlier of (i) February 25, 2014 or (ii) the 15th business day prior to the date on which the letters of credit expires or terminates. We may prepay the loans, in whole or in part, at any time without penalty. We also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letters of credit. As of March 31, 2011, $25.0 million was outstanding under this loan.
As of March 31, 2011, we are also expecting an additional $8.2 million in customer prepayments from our existing customers, which are payable on polysilicon delivery milestones. We will need to raise additional capital to complete construction and meet our working capital needs. We plan on raising this money through one or more subsequent debt and/or equity offerings and possibly prepayments from new customer contracts. Tianwei has also committed to assist us in obtaining additional financing that may be required by us to construct and operate the Polysilicon Plant with the understanding that it will receive fair compensation for the financial services it provides us. We cannot be certain that we will reach an agreement with Tianwei regarding the amount or method of compensation, which could affect Tianwei's willingness to continue to assist us in obtaining necessary additional financing.
In addition, we are in discussions with our other customers, including Wuxi Suntech Power Co., Ltd., Tianwei New Energy (Chengdu) Wafer Co., Ltd., regarding the extension of delivery dates beginning in June 2011 in our supply agreements. Under the terms of all of our supply agreements, the failure to deliver polysilicon by the stated delivery dates will allow the customers to terminate the supply agreements, require the repayments of the deposits under the agreements, which in the aggregate amount to $140 million, which in turn could in an event of default under our existing credit agreements with our third party lenders. The event of default under our existing credit agreements could result in our lenders accelerating repayment of our third party debt, which we do not have the wherewithal to repay. The third party credit agreements are all secured by standby letters of credit drawn by our majority shareholder, Tianwei, as collateral. To the extent that the third prty lenders accelerate repayment of the debt, Tianwei has provided a letter of commitment to us that it would not demand repayment from us until the original due dates of the third party credit agreements ranging from May 2012 through June 2016.
Polysilicon Supply Agreement Updates
Wuxi Suntech Power Co. Ltd. In June 2007, we entered into a fixed price, fixed volume supply agreement with Wuxi Suntech Power Co., Ltd., or Suntech, for the sale and delivery of polysilicon. The supply agreement has been subsequently amended in June 2010, pursuant to which we revised the first delivery of polysilicon products to Suntech in June 2011, and Suntech waived certain milestones required under the agreement. We also agreed to waive our right to prepayment of an additional $30.0 million, and Suntech may terminate the $30.0 million stand-by letter of credit previously issued by a bank in China. The term of the agreement was shortened to one year and pricing was fixed for the term of the agreement. The agreement will automatically renew with the same terms unless either party terminates the agreement. If we fail to commence shipments by June 2011, then Suntech may terminate the supply agreement. We do not anticipate making any shipments to Suntech by June 2011 and we are discussion with Suntech regarding a possible amendment of the agreement.
Upon Suntech’s termination of the agreement under certain circumstances, we are required to refund to Suntech all prepayments, which were $2.0 million as of March 31, 2011, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement. Upon termination of the agreement for cause by us, we generally may retain the entire amount of prepayments made as of the date of such termination as liquidated damages, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement. We do not anticipate making any shipments to Suntech by June 2011, and were in discussions regarding a possible amendment of the agreement.
Pursuant to the agreement, we granted to Suntech a security interest in all of our tangible and intangible assets related to our polysilicon business. This security interest is subordinated to the Tianwei financing and any third-party debt secured to finance construction of the Polysilicon Plant.
Hanwha SolarOne, formerly Solarfun Power Hong Kong Limited. In November 2007, we entered into a fixed price, fixed volume supply agreement with Hanwha SolarOne, or SolarOne, formerly known as Solarfun Power Hong Kong Limited, a subsidiary of Solarfun Power Holdings Co., Ltd., for the sale of polysilicon. As of March 31, 2011, SolarOne has paid to us $49.0 million as a prepayment for future polysilicon product deliveries, and it is obligated to pay us an additional $6.0 million in prepayments.
The supply agreement was subsequently amended in November 2010, to provide that we will sell approximately 7,300 metric tons of polysilicon over an 11-year term, approximately 6,750 metric tons of which are to be shipped during the second through tenth year of the agreement. The pricing under the agreement was adjusted such that it is fixed for the first five years and thereafter will then vary from year to year based on market pricing and negotiations between us and SolarOne. The fixed pricing for the first five years of the supply agreement was a few dollars above the long-term contract prices then prevailing in the market and below the spot prices by a dollar amount that is in the low double digits. If SolarOne fails to make any of the $6.0 million prepayment under the agreement, then the pricing adjustments shall not be effective. We also agreed that the initial delivery date to avoid breach and termination would be extended to June 2011. We did not make any shipments to SolarOne by the June 2011 deadline, and we are in discussions with SolarOne regarding a possible amendment to the supply agreement.
Upon SolarOne’s termination of the agreement under certain circumstances, we are required to refund to SolarOne all prepayments made as of the date of termination, which were $49.0 million as of March 31, 2011, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement. Upon termination of the agreement by us, we generally may retain the entire amount of prepayments made as of the date of such termination as liquidated damages, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement
Pursuant to our agreement with SolarOne, we also granted to SolarOne a security interest in all of our tangible and intangible assets related to our polysilicon business, as further discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. This security interest is subordinated to the Tianwei financing and any third-party debt secured to finance construction of the Polysilicon Plant.
Jinko Solar Co., Ltd.
In July 2008, we entered into a supply agreement with Jinko Solar Co., Ltd., formerly known as Jiangxi Jinko Solar Co., Ltd., or Jinko, for the sale and delivery of polysilicon. In December 2010, we amended the supply agreement under which we will sell approximately 1,800 metric tons of polysilicon over a nine-year term. The pricing under the agreement was adjusted such that it is fixed for the first five years and thereafter will vary from year to year based on market pricing and negotiations between us and Jinko. The fixed pricing for the first five years of the supply agreement was a few dollars above the long-term contract prices then prevailing in the market and below the spot prices by a dollar amount that is in the low double digits. We also agreed that the initial delivery date to avoid breach and termination would be extended to August 2011. We do not anticipate making any shipments to Jinko by August 2011, and we are in discussions with Jinko regarding a possible amendment of the agreement. As of March, 2011, Jinko has paid us a total cash deposit of $20.0 million as prepayment for future product deliveries.
Pursuant to the agreement, we have granted to Jinko a security interest in all of our tangible and intangible assets related to our polysilicon business, as further discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. This security interest is subordinated to the Tianwei financing and any third-party debt secured to finance construction of the Polysilicon Plant.
Tianwei New Energy (Chengdu) Wafer Co., Ltd. In fiscal 2009, we entered into two fixed price, fixed volume supply agreements with Tianwei New Energy (Chengdu) Wafer Co., Ltd., or Tianwei Wafer, for the sale and delivery of polysilicon. In December 2009, we amended the agreements pursuant to which we converted $50.0 million of the total $79.0 million of prepayments previously paid into shares of our common stock and reduced the price at which Tianwei Wafer purchases polysilicon by approximately 11% per year. The amount of polysilicon to be delivered remains unchanged and Tianwei Wafer is required to pay us an additional $2.0 million in prepayments; however, the total revenue for the polysilicon to be sold by us to Tianwei Wafer has been modified such that up to approximately $418.0 million may be payable to us during the ten-year term (exclusive of amounts Tianwei Wafer may purchase pursuant to its right of first refusal), subject to acceptance of product deliveries and other conditions. Our failure to commence shipments of polysilicon by June 2011 constitutes a material breach by us under the terms of the agreement, among other circumstances. However, we are in discussions with Tianwei Wafer regarding a possible amendment of the agreement.
Upon Tianwei Wafer’s termination of the agreements under certain circumstances, we are required to refund to Tianwei Wafer the $29.0 million in prepayments made as of March 31, 2011, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreements. Upon a termination of the agreements by us, we generally may retain the entire amount of prepayments made as of the date of such termination as liquidated damages, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreements.
Pursuant to the agreements, we granted to Tianwei Wafer a security interest in all of our tangible and intangible assets related to our polysilicon business, as further discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. This security interest is subordinated to the Tianwei financing and any third-party debt secured to finance construction of the polysilicon production facility.
Wealthy Rise International, Ltd. In September 2008, we entered into a fixed price, fixed volume supply agreement with Wealthy Rise International, Ltd., a wholly owned subsidiary of Solargiga Energy Holdings, Ltd., or Solargiga, for the sale of polysilicon. In March 2010, we amended the agreement pursuant to which we agreed to sell to Solargiga specified volumes of polysilicon at a predetermined price over a three-year period beginning in calendar year 2011, subject to product deliveries and other conditions. In June 2011, we amended the agreement pursuant to which we agreed to sell to Solargiga specified volumes of polysilicon at a predetermined price over a five-year period beginning in calendar year 2012, subject to product deliveries and other conditions. The fixed pricing in this agreement was at the level of long-term contract prices prevailing in the market at the time of this amendment and below the spot prices by a dollar amount that is in the low double digits. The pricing for the last two years of the five-year term may be adjusted based on market prices of polysilicon and negotiations between us and Solargiga. The aggregate amount that may be paid to us over the five-year term is $92.8 million, assuming no such pricing adjustment in the last two years occurs and without taking into account the prepayments already received by us. This amount is a reduction from the $455.0 million that would have been payable to us over a ten-year period under the original agreement. The amendment also extended the date by which we were obligated to commence shipments of polysilicon from May 2011 to May 2012. We also granted to Solargiga a warrant to purchase 1,196,581 shares of our common stock. The terms of the warrant include: (i) a per share exercise price equal to $2.75; and (ii) a five year term.
Solargiga has the right to terminate the amended agreement and recover any prepayments made if we have not commenced polysilicon shipments by September 30, 2012. Pursuant to the agreement, Solargiga was obligated to pay us additional prepayments in the aggregate amount of $13.2 million that was payable in four increments of $3.3 million in each of April, June, August and October 2010, and a final prepayment of $200,000 upon Solargiga’s receipt of certain aggregate volumes of polysilicon product from us. We received all four increments from Solargiga of $13.2 million.
Upon Solargiga’s termination of the agreement under certain circumstances, we are required to refund to Solargiga all prepayments made as of the date of termination, which were $20.2 million as of March 31, 2011, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement. Upon termination of the agreement by us, we generally may retain the entire amount of prepayments made as of the date of such termination as liquidated damages, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement.
Pursuant to the agreement, we have granted to Solargiga a security interest in all of our tangible and intangible assets related to our polysilicon business, as further discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. This security interest is subordinated to the Tianwei financing and any third-party debt secured to finance construction of the Polysilicon Plant.
Shanghai Alex New Energy Co., Ltd. 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. In January 2011, we entered into Amendment No. 2 to Supply Agreement with Alex, or Amendment No. 2, which provides for a pricing adjustment such that pricing is fixed for the first three years and thereafter will vary from year to year based on market pricing and negotiations between us and Alex. The fixed pricing for the first three years of the supply agreement was at the level of the long-term contract prices prevailing in the market at the time of the amendment and below the spot prices by a dollar amount that is in the low double digits. Under Amendment No. 2, we have an obligation to use commercially reasonable efforts to make our first shipment to Alex by March 31, 2011, and if we did not do so within a certain number of days after the scheduled delivery date, we would provide Alex with a purchase price adjustment. As of March 31, 2011, we did not make our first shipment and as a result the purchase price was adjusted accordingly. Furthermore, if we have not made our initial shipment of product on or before September 30, 2011, Alex will have the right to terminate the Agreement.
Upon Alex’s termination of the agreement under certain circumstances, we are required to refund to Alex all prepayments made as of the date of termination, which were $20.0 million as of March 31, 2011, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement. Upon termination of the agreement by us, we generally may retain the entire amount of prepayments made as of the date of such termination as liquidated damages, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement.
Hoku Solar
Our goal is to be a leading provider in PV system installations. We plan to continue to focus on designing, engineering and installing turnkey PV systems and related services in Hawaii using solar modules purchased from third-party suppliers.
In addition to continuing to focus on our turnkey solar integration business in the coming fiscal year, we also plan to expand our focus on large-scale PV project development within Hawaii and elsewhere. This effort will be focused on leveraging our solar integration, project management and financing expertise to develop a portfolio of rooftop solar energy facilities and multiple utility-scale PV farms, which would generate solar power for sale to utilities and large industrial customers for use on their grids
Hoku Solar generated operating income of $41,000 and incurred an operating loss of $1.9 million in fiscal 2011 and 2010, respectively, primarily due an increase in PV system installation revenue.
Financial Operations Review
Revenue
During fiscal 2011, 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 fiscal 2012, when Hoku Materials is expected to generate revenue through the sale of polysilicon manufactured at our planned polysilicon production facility in Pocatello, Idaho.
Cost of Revenue
Our cost of revenue consists primarily of supplies and materials, subcontractor costs, and employee compensation, including stock-based compensation. We expect our cost of revenue to increase on an absolute basis as our PV system installations increase and we begin selling polysilicon.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of employee compensation, including stock-based compensation for executive and administrative personnel. Other significant costs include utilities, insurance costs, and professional fees for accounting, legal and consulting services. We expect our selling, general and administrative expenses to increase by a significant factor as our PV system installations increase and we begin selling polysilicon.
Consolidated Results of Operations
The following analysis of the consolidated financial condition and results of operations of Hoku Corporation and its subsidiaries should be read in conjunction with the consolidated financial statements and the related notes thereto.
Fiscal Year 2011 vs. Fiscal Year 2010
Revenue. Revenue was $3.6 million for fiscal 2011 compared to $2.6 million for fiscal 2010. Revenue for fiscal 2011 was primarily comprised of PV system installations and related services for Diagnostic Laboratory Services, Inc; and the sale of electricity to the State of Hawaii Department of Transportation. Revenue for fiscal 2010 was primarily comprised of PV system installations and related services for Namalu LLC, Nan, Inc., and Henkels & McCoy; and the sale of electricity to the State of Hawaii Department of Transportation
Cost of Revenue. Cost of revenue was $2.5 million for fiscal 2011 compared to $2.1 million for fiscal 2010. The cost of revenue for fiscal 2011 and 2010 related primarily to PV system installation contracts. Cost of revenue primarily consisted of materials, subcontractor expenses and employee compensation.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $13.0 million for fiscal 2011 compared to $6.6 million for fiscal 2010. The increase of $6.4 million was primarily due to an increase in payroll expenses of $2.3 million, which include bonuses and stock compensation, an increase in electricity costs related to the construction of the Polysilicon Plant of $1.6 million, and expenditures related to the reactor demonstration, which was completed in April 2010, of $1.0 million. In addition, the increase in expenses included costs related to the training of our Polysilicon Plant operators of $505,000, office supplies and equipment of $359,000, professional fees of $333,000 and rent primarily for corporate, warehouse and storage facilities of $280,000.
Interest and Other Income. Interest and other income was $166,000 for fiscal 2011, compared to interest and other income of $561,000 for fiscal 2010. Interest and other income for fiscal 2011 was primarily comprised of a foreign currency transaction gain of $107,000 related to Euro-based invoices, the reversal of prior accruals for general excise tax reserves due to the expiration of the statute limitations of $36,000, a general excise tax refund of $21,000 and interest income of $2,000. Interest and other income for fiscal 2010 was primarily comprised of the reversal of $255,000 of prior accruals for general excise tax reserves due to statute limitations and a foreign currency transaction gain of $219,000 related to Euros-based invoices. In addition, the fiscal 2010 income related to gains on the sale of fuel cell equipment of $40,000, interest income of $23,000 and a Hawaii State tax refund of $20,000.
Fiscal Year 2010 vs. Fiscal Year 2009
Revenue. Revenue was $2.6 million for fiscal 2010 compared to $5.0 million for fiscal 2009. Revenue for fiscal 2010 was primarily comprised of PV system installations and related services for Namalu LLC, Nan, Inc., and Henkels & McCoy; and the sale of electricity to the State of Hawaii Department of Transportation. Revenue for fiscal 2009 was primarily comprised of PV system installations and related services for Paradise Beverages, Inc., and Resco, Inc., and the resale of solar inventory.
Cost of Revenue. Cost of revenue was $2.1 million for fiscal 2010 compared to $3.7 million for fiscal 2009. The cost of revenue for fiscal 2010 and 2009 related primarily to PV system installation contracts. Cost of revenue primarily consisted of materials, subcontractor expenses and employee compensation.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $6.6 million for fiscal 2010 compared to $4.5 million for fiscal 2009. The increase of $2.1 million was primarily due to $776,000 related to the initial polysilicon production demonstration completed in April 2010, higher payroll expenses of $444,000, the lower application of other direct and indirect charges to customer contracts of $314,000, and retention payments for officers and other key employees of $260,000. In addition, the increase in fiscal 2010 expenses included $219,000 in depreciation primarily related to the PV systems installed for the Hawaii State Department of Transportation, compensation to our Board Directors of $210,000, rent for our Corporate and warehouse facilities of $199,000 and maintenance costs related to our polysilicon facilities of $114,000. These higher expenses in fiscal 2010 were offset by decreases in stock based compensation of $372,000 and professional fees of $87,000.
Interest and Other Income. Interest and other income was $561,000 for fiscal 2010, compared to interest and other income of $284,000 for fiscal 2009. Interest and other income for fiscal 2010 was primarily comprised of the reversal of $255,000 of prior accruals for general excise tax reserves due to statute limitations and a foreign currency transaction gain of $219,000 related to Euros-based invoices. In addition, the fiscal 2010 income related to gains on the sale of fuel cell equipment of $40,000, interest income of $23,000 and a Hawaii State tax refund of $20,000. Interest and other income for fiscal 2009 were primarily comprised of a gain on the sale of our fee simple interest in our corporate headquarters of $550,000, interest income of $323,000, the reversal of $172,000 of prior accruals for general excise tax reserves due to statute limitations, and the sale of fuel cell equipment of $87,000 offset by losses related to our foreign currency (Euro) forward contracts of $862,000.
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 consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these 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. Our management has discussed the development and selection of these critical accounting policies and estimates with the audit committee of our board of directors and the audit committee has reviewed our disclosures relating to our critical accounting policies and estimates in this report. Actual results may differ from these estimates.
While our significant accounting policies are also described in Note 1 to the financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies and estimates are critical to a full understanding and evaluation of our reported financial results.
Revenue Recognition
Revenue from polysilicon and PV system installations and the resale of PV system installation inventory 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.
We apply the percentage-of-completion method of revenue recognition for our PV system contracts for which we can make reasonably dependable estimates of costs. Under the percentage-of-completion method, revenue and related costs are deferred and subsequently recognized based on the progress of the installation and an estimate of remaining costs to complete the installation. We recognize revenue under the completed contract method, in which revenue and related costs are deferred and then subsequently recognized only upon completion of the contract.
We entered the PV system installation business in fiscal year 2008. Prior to April 1, 2010, due to the short period of time the Company was in the PV system installation business, we did not have the historical experience or the procedures in place to develop reasonably dependable estimates of costs and therefore utilized the completed contract method to record revenue for PV contracts. Subsequent to this startup period, we have developed history and reliable processes and procedures of projecting and tracking contract fulfillment costs, in order to develop reasonably dependable estimates which are required to use the percentage of completion method. In applying the percentage method, we determine the percentage of contract completion on the basis of engineering, labor, subcontractor and other installation costs and excludes material and other non-installation contract costs which are not considered the primary cost determinants in gauging the progress of the PV system contract. Revenue and related costs are recognized proportionately based on the completion percentage of each project and considering the current estimate of remaining costs required to complete the project.
We continued to recognize revenue under the completed contract method for PV installations that were in progress as of March 31, 2010.
Stock-Based Compensation
We account for stock-based employee compensation arrangements using the fair value method, whereby the fair value of stock options 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 and the expected volatility of the option at the time the option is granted. The fair value of our option, as determined by the Black-Scholes pricing model, is expensed over the requisite service period, which is generally five years for stock options.
Prior to our initial public offering, there was an absence of an active market for our common stock, and therefore our board of directors estimated the market value of our common stock on the date of grant of the stock option based on several factors, including progress and milestones achieved in our business and sales of our preferred stock. We did not obtain contemporaneous valuations from a valuation specialist during this period. Subsequent to our initial public offering, the market value is based on the public market for our common stock. Due to our limited operating history, we have assumed a volatility of 100% based on competitive benchmarks and management’s judgment and an expected life based on the average of the typical vesting period and the option’s contractual life which ranges from 6.5 to 7.5 years.
The assumptions used in calculating the fair value of our stock options and restricted stock awards represent our 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. In accordance with FASB ASC 718, we do not record any deferred stock-based compensation on our balance sheet for our stock options and restricted stock awards. We expect to incur an aggregate of $348,000 of future stock-based compensation expense and associated with unvested stock options and restricted stock awards outstanding as of March 31, 2012 through fiscal 2014 as set forth in the table below.
We expect our stock-based compensation expense from restricted stock awards to increase as we expand our operations and hire new employees. These expenses will increase our overall expenses and may increase our losses for the foreseeable future. As a restricted stock award is a non-cash expense, it will not have any effect upon our liquidity or capital resources.
Accounting for the Impairment or Disposal of Long Lived Assets
As of March 31, 2011, primarily all of our long lived assets related to the construction-in-progress of our polysilicon plant and PV systems. In accounting for long-lived assets, we must make estimates about the expected useful lives of the assets, the expected residual values of the assets and the potential for impairment based on the fair value of the assets and if the cash flows they expect to generate are insufficient to support the carrying value of the assets.
As of March 31, 2011, we evaluated the recoverability of our construction in progress related to the Polysilicon Plant due to both delays in construction and increases in projected expected costs related to complete construction of the Polysilicon Plant. Based on that evaluation we concluded that the carrying amount of our construction in progress is recoverable. The key assumptions utilized in our evaluation included the expected market price of polysilicon, the expected production capacity of the plant, and estimated costs of production. In determining the basis of our assumptions, we primarily rely on our own industry experience, discussion with our customers and vendors, estimated production capacity, and other available marketplace information. Certain events or changes in circumstances in the future may indicate that the carrying amount of these assets may not be recoverable. Such events or circumstances include but are not limited to, a decline in market prices of polysilicon or a change in expected demand for polysilicon. If, in the future, we were to determine that the carrying amount of our polysilicon plant is not recoverable, we would be required to estimate the fair value of the Polysilicon Plant and, if the fair value is less than the carrying amount, record an impairment charge for the difference.
Notes Payable and Warrants (Tianwei financing transaction)
We account for the warrant and debt based on their relative fair values in proportion to the loan proceeds. The fair value of the warrant was calculated using the Black-Scholes option pricing model. The Black-Scholes pricing model requires the input of several subjective assumptions including the life of the warrant and the expected volatility of the warrant at the time the warrant was granted. The fair value of the debt was based on the present value of cash flows at the estimated market interest rate.
The assumptions used in calculating the warrant and debt represent our management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. In estimating market interest rate, we relied on available marketplace information of similar transactions.
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 borrowings under credit agreements, prepayments on long-term polysilicon contracts and registered and unregistered offerings of our securities. 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 Plant. As of March 31, 2011, we had cash and cash equivalents on hand of $18.4 million and current liabilities of $53.0 million.
Tianwei, our majority shareholder has committed to provide us financial support for our ongoing operations, planned capital expenditures and debt service requirements until at least April 1, 2012. In addition, Tianwei has provided standby letters of credit as collateral for our third party debt with a principle amount of $194 million at March 31, 2011.
Under the terms of all of our supply agreements, the failure to deliver polysilicon by the stated delivery dates will allow the customers to terminate the supply agreements, require the repayments of the deposits under the agreements, which in the aggregate amount to $140 million at March 31, 2011, which in turn could result in an event of default under our existing credit agreements with third party lenders. The event of default under the our existing credit agreements could result in our lenders accelerating repayment of our third party debt, which the we do not have the wherewithal to repay. To the extent that the third party lenders accelerate repayment of the debt, Tianwei has provided a letter of commitment to us that it would not demand repayment from us until the original due dates of the third party credit agreement ranging from May 2012 through June 2016.
During fiscal year 2011, we obtained an aggregate of $194.3 of debt financing through 12 credit agreements to support our operations. In April and June 2011, we also secured a $15.0 million and $24.7 million credit agreement with the New York Branch of Industrial and Commercial Bank of China, Ltd., New York Branch. All of these credit agreements are secured by letters of credit provided by our majority stockholder, Tianwei New Energy Holding Co. Ltd., or Tianwei. For a detailed description of these credit agreements, see “--Hoku Materials-Financing Update-Overview.” In addition, as of March 31, 2011, we are expecting an additional $8.2 million in customer prepayments from our existing customers, which are payable on polysilicon delivery milestones. As of March 31, 2011, we have funded approximately $455.4 million of our Polysilicon Plant. We estimate that we still need to raise at least an additional $196 million to complete the construction of the Polysilicon Plant based upon our current estimate of $700 million to complete construction
We expect to complete the construction of the 2,500 metric ton per year plant, or Phase I, through the use of our available cash, loan proceeds received from credit agreements and debt supported by Tianwei. Tianwei has committed to assist us in obtaining additional financing for any additional construction costs necessary to complete Phase I, for working capital needs and to purchase polysilicon from third-parties to meet our upcoming commitments with the understanding that it will receive fair compensation for the financial services it provides us. We cannot be certain that we will reach an agreement with Tianwei regarding the appropriate compensation for Tianwei which could affect Tianwei's willingness to continue to assist us in obtaining necessary additional financing.
Once Phase I is completed, we expect to receive an additional $8.2 million in customer prepayments from our existing customers upon reaching certain polysilicon milestones. We expect to use the prepayments to help fund the construction costs to ramp-up to polysilicon production of 4,000 metric tons per year. We plan on raising the remaining costs to complete our Polysilicon Plant and working capital needs through debt and/or equity offerings and possibly prepayments from new customer contracts. Tianwei has also committed to assist us in obtaining additional financing that may be required by us to construct and operate the Polysilicon Plant. There is no guarantee that we will be able to obtain additional financing in terms acceptable to us or at all, even with the assistance of Tianwei. Tianwei has committed to provide the Company financial support for its ongoing operations, planned capital expenditures and debt service requirements until at least April 1, 2012. Furthermore, any significant increase in the cost to complete the Polysilicon Plant could have a material adverse effect on our business, financial condition and results of operations.
The additional capital we have secured since the beginning of fiscal year 2011 has enabled us to settle accounts payable and accrued capital expenditures, and is providing us with the necessary capital to sustain operations. In addition, we are reserving adequate funding for the purchase of third-party polysilicon to meet our contractual obligations with our polysilicon customers, beginning in June 2011, and for interest and other financing costs related to our loans. However, the amount we have secured is not sufficient to complete construction of the Polysilicon Plant, and should there be delays in securing additional financing, we may need to implement cost and expense reduction programs and other programs to generate cash that are not currently planned, but are responsive to our liquidity requirements. Based on the financing that we have received to date, we may also need to curtail construction of the Polysilicon Plant. If we have to curtail construction, our excess capital would primarily be used to reduce our current liabilities, purchase of third-party polysilicon and for working capital needs. Tianwei has committed to assist us in obtaining additional financing for working capital needs and to purchase polysilicon from third-parties to meet our upcoming commitments with the understanding that it will receive fair compensation for the financial services it provides us.
Under the terms of all of our supply agreements, the failure to deliver polysilicon by the stated delivery dates will allow the customers to terminate the supply agreements, require the repayments of the deposits under the agreements, which in the aggregate amount to $140 million, which in turn could result in an event of default under our existing credit agreements with our third party lenders. The event of default under our existing credit agreements could result in our lenders accelerating repayment of our third party debt, which we do not have the wherewithal to repay. The third party credit agreements are all secured by standby letters of credit drawn by our majority shareholder, Tianwei, as collateral. To the extent that the third party lenders accelerate repayment of the debt, Tianwei has provided a letter of commitment to us that it would not demand repayment from us until the original due dates of the third party credit agreements ranging from May 2012 through June 2016.
Net Cash Used In Operating Activities. Net cash used in operating activities was $9.6 million, $6.0 million and $5.2 million in fiscal 2011, 2010 and 2009, respectively. Net cash used in operating activities in fiscal 2011 primarily reflects the net loss of $11.7 million which was $6.2 million higher than fiscal 2010 and due primarily to increased operating expenses involved in the construction of Polysilicon Plant. After adjusting for noncash operating activities, the higher net loss resulted in an operating cash deficit of $10.6 million. In addition, cash receipts from working capital requirements were $1.0 million which increased by $2.6 million from fiscal 2010 primarily due to the timing of payments made to vendors. Net cash used in operating activities in fiscal 2010 primarily reflects the net loss of $5.5 million which was $2.5 million higher than fiscal 2009 and due primarily to increased operating expenses involved in preparing the Polysilicon Plant for operations. Net cash used in operating activities in fiscal 2009 resulted from a net operating cash deficit of $2.3 million and increased working capital cash requirements of $2.9 million to fund operations.
We had a working capital deficit of $32.6 million, $25.0 million and $20.3 million as of March 31, 2011, 2010 and 2009, respectively. The working capital deficits in fiscal 2011 and 2010 reflect the increased deployment of funds to construct the Polysilicon Plant in Idaho and the Company’s net losses. In addition, $25.3 million and $11.1 million of deposits from long-term polysilicon contracts were classified as short-term liabilities as of March 31, 2011 and 2010, respectively, to reflect the prepayments that apply to the product deliveries that are scheduled to ship within one year.
Net Cash Used In Investing Activities. Net cash used in investing activities was $183.6 million, $98.8 million and $128.6 million in fiscal 2011, 2010 and 2009, respectively. Net cash used in investing activities in fiscal 2011 and 2010 was primarily due to the addition of property and equipment related to the construction of our planned polysilicon facility in Pocatello, Idaho. Net cash used in investing activities in fiscal 2010 and 2009 was primarily due to the addition of property and equipment related to the construction of our planned polysilicon facility in Pocatello, Idaho. In addition, in fiscal 2009, the capital expenditure was off-set by the sale of our corporate headquarters, the reduction of restricted cash due to the settlement of our remaining purchase agreements for Euros with Bank of Hawaii prior to their original maturity dates and net proceeds of short-term investments.
Net Cash Provided By Financing Activities. Net cash provided by financing activities was $204.6 million, $94.4 million and $123.4 million in fiscal 2011, 2010 and 2009, respectively. In fiscal 2011, net cash provided by financing activities was primarily due to the loan proceeds of $194.3 million from bank credit agreements and deposits of $13.2 million received from long-term polysilicon contracts, offset by cash distributions to the minority investor of Hoku Solar Power I, LLC of $2.8 million. In fiscal 2010, net cash provided by financing activities was primarily due to the loan proceeds of $50.0 million from Tianwei and deposits of $43.0 million received from long-term polysilicon contracts. In addition, $3.6 million of contributions were received from the minority investor of Hoku Solar Power I, LLC, offset by $2.2 million in costs related to the Tianwei investment and $69,000 in net issuance costs related to employee restricted stock awards. In fiscal 2009, net cash provided by financing activities was primarily due to deposits received related to long-term polysilicon contracts of $117.0 million.
Customer prepayments were used by us to finance the construction of the Polysilicon Plant. Accordingly, the receipts of these prepayments have been reflected in the financing activities section of the statements of cash flows. Upon the sale of product under the long-term supply agreements, we will reflect the application of the deposit in exchange for the product as a cash inflow from operations with a corresponding cash outflow in financing activities.
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.
We do not expect to generate significant revenue until we successfully complete the construction of the Polysilicon Plant, commence the manufacture and shipment of polysilicon and begin meeting the obligations under our supply contracts. Based on recent construction progress and discussions with our vendors, we expect to incur approximately $600 million of costs before we can commence operation of the first 2,500 metric tons of production capacity. We also expect to invest up to an additional $100 million to complete the second phase of construction, which will add an additional 1,500 metric tons of manufacturing capacity, and allow us to complete our planned on-site TCS plant. Thus, currently we estimate that the cost for the full, planned 4,000 metric ton plant is approximately $700 million.
After considering our recently secured credit agreements for $39.7 million and $8.2 million in expected prepayments as described more fully below, we estimate that we still need to raise at least an additional $196 million to complete the construction of the Polysilicon Plant based upon our current estimate of $700 million to complete construction.
We plan on raising this money through one or more subsequent debt and/or equity offerings and possibly prepayments from new customer contracts. Tianwei has committed to provide the Company financial support for its ongoing operations, planned capital expenditures and debt service requirements until at least April 1, 2012. However, we expect to compensate Tianwei for its collateral support. We have been discussing with Tianwei what would constitute fair compensation for Tianwei for the financial services it has been providing and will provide to us. While the discussions are ongoing, we believe this compensation may be in the form of common stock warrants. To the extent common stock warrants are issued to Tianwei for its financial services it may significantly dilute the ownership of its stockholders other than Tianwei. We expect to finalize the type of compensation and amount during the fiscal year 2012.
The issuance of additional equity and convertible debt instruments may result in additional dilution to our current stockholders and/or a change of control. 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.”
Contractual Obligations
The following table summarizes the contractual obligations that existed at March 31, 2011. 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 $1.42/Euro as of March 31, 2011.
City of Pocatello. In March 2007, we entered into a 99-year ground lease with the City of Pocatello, Idaho, for approximately 67 acres of land and, in May 2007, the City of Pocatello approved an ordinance that authorizes the Pocatello Development Authority to provide us certain tax incentives related to certain necessary infrastructure costs we incur in the construction and operation of our Polysilicon Plant. In May 2009, we entered into an Economic Development Agreement, or the EDA 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 Polysilicon Plant. 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 and personal property located in such district, or the TIF Revenue, up to approximately $26.0 million, less the actual Road Costs (defined below), and (b) the Employment Reimbursement will be an amount that is equal to 50% of the TIF Revenue, up to approximately $17.0 million. Each of the Infrastructure Reimbursement and the Employment Reimbursement will be made to us over time as TIF Revenue is received, and only after the costs of completing a public access road to the Polysilicon Plant, in an amount not to exceed $11.0 million, or the Road Costs, has been paid to PDA out of TIF Revenue, and up to $2.0 million in capital costs has been paid to the City of Pocatello out of TIF Revenue.
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 and procurement services for the construction of our Polysilicon Plant, which was amended in October 2007 by Change Order No. 1, again in April 2008 by Change Order No. 2, again in February 2009 by Change Order No. 3, and again in February 2010 by Change Order No. 4, which are collectively the Engineering Agreement. Under the Engineering Agreement, S&W would provide the engineering services to complete the design and plan for construction of the Polysilicon Plant, along with procurement services. S&W would be paid on a time and materials basis plus a fee for its services.
We suspended all work under the Engineering Agreement in July 2009. In February 2010, work under the Engineering Agreement recommenced as agreed to in Change Order No. 4. In December 2010, we and S&W agreed to Change Order No. 5 under the Engineering Agreement, or Change Order No. 5, to, among other things: (i) set forth a target delivery schedule, added scope of work, estimated budget to complete the work, and payment schedule, and (ii) provide additional engineers and personnel to meet the target delivery schedule.
During fiscal year 2011, we made payments to S&W of $13.4 million, and as of March 31, 2011, we had paid S&W an aggregate amount of $60.1 million under the Engineering Agreement
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 Polysilicon Plant, which was amended in October 2007, by Change Order No. 1, and again in April 2008 by Change Order No. 2, again in March 2009 by Change Order No. 3, again in September 2009 by Change Order No. 4, and again in August 2010 by Change Order No. 5, 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 Polysilicon Plant 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 $165.0 million, including up to $5.0 million of incentives that may be payable.
Pursuant to Change Order No. 5, we agreed among other things: (i) to change the date to complete construction for Partial Commercial Operation, or PCO (including the Schedule Incentive Completion Dates as amended and restated in Change Order Numbers 3 and 4) on or before December 31, 2010 for schedule and bonus purposes, (ii) that JH Kelly will use best efforts to attain PCO by that date with incremental funding from us in the amount of $55.8 million, (iii) that JH Kelly will aim to complete certain monthly milestones for the project for the period August 1, 2010 through December 31, 2010, (iv) that JH Kelly successfully completed and earned its $1.5 million bonus for the preliminary reactor installation, which will be paid in $375,000 increments tied to completion of the monthly milestones, and (v) that on or before August 31, 2010, Tianwei or we will secure a standby letter of credit in the amount of $20.0 million for the benefit of JH Kelly to provide a greater degree of certainty and security with respect to payment for the work. Due to certain scheduling and financing delays, we are in discussions with JH Kelly to update certain of these milestones.
During fiscal 2011, we made payments to JH Kelly of $115.2 million, and as of March 31, 2011, we had paid JH Kelly an aggregate amount of $184.1 million.
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 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 Polysilicon Plant. 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.
During fiscal 2011, we made payments to Dynamic of $1.9 million, and as of March 31, 2011, we had paid Dynamic an aggregate amount of $8.4 million.
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 2,500 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.
As of March 31, 2011, pursuant to the contract with GEC and MSA, we received all 16 hydrogen reduction reactors, eight hydrogenation reactors, and related equipment, at the Polysilicon Plant. During fiscal year 2011, we made payments to GEC and MSA of $3.3 million Euros or $4.3 million, and as of March 31, 2011, we paid GEC and MSA an aggregate amount of $19.0 million Euros or $26.7 million.
Idaho Power Company. 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 Polysilicon Plant, or the Idaho Power Agreement. As of March 31, 2010, we had paid an aggregate amount of $18.0 million to Idaho Power. The electric substation was completed in August 2009, and we were able to use its power during our polysilicon product demonstration in April 2010.
We also entered into an Electric Service Agreement with Idaho Power, or the ESA, for the supply of electric power and energy to us for use in the Polysilicon Plant, subject to the approval of the Idaho Public Utilities Commission, or the PUC. The term of the ESA is four years, beginning in June 2009 and will expire in May 2013. 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 PUC. 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. As of March 31, 2011, we were contractual obligated to pay approximately $17.1 million to Idaho Power over the term of the ESA. Beginning in May 2011, we will be required to make a minimum monthly payment ranging between $1.1 million and $1.9 million per month until October 2011.
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 Polysilicon Plant. The total fees payable to AEG for all Deliverables under the AEG Agreement is approximately $13.0 million.
During fiscal 2011, we made payments to AEG of $5.9 million, and as of March 31, 2011, we had paid AEG an aggregate amount of $13.0 million.
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 at the Polysilicon Plant. 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 has agreed to sell to us no less than 65% of our annual silicon metal requirement. Pricing is to be negotiated annually; however, if the parties are unable to agree on pricing for any year, or the 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 March 31, 2011, 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. In May 2011, we amended this agreement to restructure the payment terms with PVA as follows: (i) in May 2011, we paid $2.1 million; (ii) upon the earlier of successful acceptance testing at the Polysilicon Plant and July 31, 2011, we shall pay the amount of $318,000; (iii) upon the earlier of six months after the date of commissioning and December 31, 2011, we shall pay the amount of $318,000. In June 2011, we amended this agreement to deliver a letter of credit in July 2011 in the amount of $636,000.
Through March 31, 2011, we had paid PVA an aggregate amount of $3.9 million.
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, for use in the Polysilicon Plant. The term of the agreement is eight years beginning on the date on which the first shipment of product is delivered to us. 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 within four months after we provide written notice to BHS, 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 March 31, 2011, we had not provided notice to BHS to commence shipments, and had not made any payments to BHS.
Evonik Degussa Corporation. In March 2010, we entered into an agreement with Evonik Degussa Corporation, or Evonik, for the supply of TCS for use in the manufacturing of polysilicon for a term of approximately one year ending in February 2011. In April 2010, we paid Evonik a $100,000 deposit for the ISO containers that will transport the TCS to our facility in Pocatello, Idaho. In February 2011, we amended and restated this agreement to, among other things, extend the term of the agreement to November 2011. Under the amended agreement, Evonik has agreed to sell to us a minimum quantity of TCS during the term of the agreement. Pricing is fixed based on the quantity supplied in each calendar month and based on our frequency of payment. Commencing in May 2011, we will forecast our estimated desired monthly quantity of TCS. Pursuant to the agreement, Evonik is required to provide a minimum amount of TCS per calendar month, and it will use commercially reasonable efforts to provide additional quantities that we may request in addition to the monthly minimum amount.
The aggregate net value of the TCS to be purchased under the amended agreement during the term is approximately $13.5 million. As of March 31, 2011, we paid Evonik an aggregate amount of $100,000.
Off-Balance Sheet Arrangements
None.
Item 7A.
Item 7A.
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 March 31, 2011 and 2010, we did not maintain any short-term investments.
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 U.S. dollar and the Euro at such time that a payment is required under the GEC and MSA contracts. Changes in exchange rates during the periods in which Euros-based invoices are recorded may result in foreign currency transaction gains or losses.
Item 8.
Item 8.
Financial Statements and Supplementary Data
Our financial statements included in this Report beginning at page are incorporated in this Item 8 by reference.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On November 29, 2010, the Audit Committee of our Board of Directors approved the engagement of KPMG LLP (“KPMG”) as our independent registered public accounting firm for the fiscal year ended March 31, 2011. On the same date, the Audit Committee of the Board of Directors of the Company approved the dismissal of Ernst & Young LLP (“E&Y”) as our independent registered public accounting firm effective November 29, 2010.
The audit reports of E&Y on our consolidated financial statements for the fiscal years ended March 31, 2010 and 2009 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles, except that the report on our financial statements for the fiscal year ended March 31, 2009 included an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The audit reports of E&Y on the effectiveness of our internal control over financial reporting as of March 31, 2010 and 2009 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
In connection with the audits of our financial statements for each of the fiscal years ended March 31, 2010 and 2009, and in the subsequent interim periods through November 29, 2010, there were no disagreements (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304) with E&Y on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of E&Y would have caused E&Y to make reference to the matter in their reports. In addition, during the fiscal years ended March 31, 2010 and 2009, and in the subsequent interim periods through November 29, 2010, there were no “reportable events” (as defined in Item 304(a)(1)(v) of Regulation S-K and the related instructions to Item 304).
We requested E&Y to furnish us a letter addressed to the Securities and Exchange Commission stating whether it agrees with the above statements. A copy of that letter, dated December 3, 2010, was filed as Exhibit 16.1 to the Form 8-K filed on December 3, 2010 and is incorporated herein by reference.
In addition, during the fiscal years ended March 31, 2010 and 2009, and in the subsequent interim period through November 29, 2010, neither we nor anyone on our behalf consulted with KPMG regarding (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, and neither a written report was provided to us nor oral advice was provided that KPMG concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304) or a “reportable event” (as defined in Item 304(a)(1)(v) of Regulation S-K and the related instructions to Item 304).
Item 9A.
Item 9A.
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.
Report of Management on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.
Under the supervision and with the participation of our management, we assessed the effectiveness of internal controls over financial reporting as of March 31, 2011. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework. Based on our assessment we determined that, as of March 31, 2011, our internal control over financial reporting is effective based on those criteria.
Management’s report on internal control over financial reporting was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this document.
Changes in Internal Control over Financial Reporting
There have not been changes in our internal controls over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B.
Other Information
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this item concerning our directors, Section 16 compliance and code of ethics is incorporated by reference to the information set forth in the sections titled “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Code of Ethics” in our definitive proxy statement for the 2011 Annual Meeting of Stockholders (“2011 Proxy Statement”) or an amendment to this annual report on Form 10-K. The information required by this item concerning our officers is incorporated by reference to the information set forth under “Executive Officers of the Registrant” in Part I, Item 1 of this annual report on Form 10-K.
Item 11.
Item 11.
Executive Compensation
The information required by this item regarding executive compensation is incorporated by reference to the information set forth in the section titled “Executive Compensation” in our 2011 Proxy Statement or an amendment to this annual report on Form 10-K.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference to the information set forth in the section titled “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plans Information” in our 2011 Proxy Statement or an amendment to this annual report on Form 10-K.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item regarding certain relationships and related transactions is incorporated by reference to the information set forth in the section titled “Certain Relationships and Related Transactions, and Director Independence” in our 2011 Proxy Statement or an amendment to this annual report on Form 10-K.
Item 14.
Item 14.
Principal Accountant Fees and Services
The information required by this item regarding principal accounting fees and services is incorporated by reference to the information set forth in the section titled “Principal Accounting Fees and Services” in our 2011 Proxy Statement or an amendment to this annual report on Form 10-K.
PART IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
The financial statements and notes are listed in the Index to Financial Statements on page of this Report.
(a)(2) Financial Statement Schedules
Financial statement schedules not filed herein have been omitted as they are not applicable or the required information or equivalent information has been included in the financial statements or the notes thereto.
(a)(3) Exhibits
See Exhibit Index attached hereto and incorporated by reference herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: July 15, 2011
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Scott B. Paul and Darryl S. Nakamoto, and each or any one of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-facts and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
HOKU CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Hoku Corporation and subsidiaries
We have audited the accompanying consolidated balance sheet of Hoku Corporation and subsidiaries as of March 31, 2011, and the related consolidated statements of operations, total equity and comprehensive loss, and cash flows for the year ended March 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hoku Corporation and subsidiaries as of March 31, 2011, and the results of their operations and their cash flows for the year ended March 31, 2011, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Honolulu, Hawaii
July 15, 2011
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Hoku Corporation and subsidiaries
We have audited the accompanying consolidated balance sheet of Hoku Corporation and subsidiaries, or the Company, as of March 31, 2010, and the related consolidated statements of operations, total equity and comprehensive loss, and cash flows for each of the two years in the period ended March 31, 2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hoku Corporation and subsidiaries at March 31, 2010, and the consolidated results of their operations and their cash flows for each of the two years in the period ended March 31, 2010, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Honolulu, Hawaii
July 14, 2010
HOKU CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
See accompanying notes to consolidated financial statements.
HOKU CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
See accompanying notes to consolidated financial statements.
HOKU CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF TOTAL EQUITY AND COMPREHENSIVE LOSS
(in thousands, except share data)
See accompanying notes to consolidated financial statements.
HOKU CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Summary of Significant Accounting Policies and Practices
(a)
Description of Business
Hoku Corporation is a solar energy products and services company. 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. In March 2010, the Company changed its name from Hoku Scientific, Inc. to Hoku Corporation.
The Company originally 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, at its polysilicon manufacturing plant in Pocatello, Idaho, or the Polysilicon Plant. 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. In September 2010, the Company elected to discontinue the operations of Hoku Fuel Cells; however, it will maintain ownership of its intellectual property, including its patents. Accordingly, the results of operations of Hoku Fuel Cells for the years ended March 31, 2010 and 2009 have been reported as discontinued operations in the consolidated statements of operations.
(b)
Liquidity
The Company has incurred operating losses in recent years as the Company has redirected its efforts to focus on the development of its polysilicon and solar businesses. The Company's current operating plan anticipates raising cash over the next year through a combination of debt and/or equity offerings and possibly new customer contracts to enable the continued construction of the Polysilicon Plant. Tianwei, the Company's majority shareholder has committed to provide the Company financial support for its ongoing operations, planned capital expenditures and debt service requirements until at least April 1, 2012. In addition, Tianwei has provided standby letters of credit as collateral for the Company's third party debt with a principle amount of $194 million at March 31, 2011.
Under the terms of all of the Company's supply agreements, the failure to deliver polysilicon by the stated delivery dates will allow the customers to terminate the supply agreements, require the repayments of the deposits under the agreements, which in the aggregate amount to $140 million at March 31, 2011, which in turn could result in an event of default under the Company's existing credit agreements with its third party lenders. The event of default under the Company's existing credit agreements could result in its lenders accelerating repayment of the Company's third party debt, which the Company does not have the wherewithal to repay. To the extent that the third party lenders accelerate repayment of the debt, Tianwei has provided a letter of commitment to the Company that it would not demand repayment from the Company until the original due dates of the third party credit agreement ranging from May 2012 through June 2016.
If the Company is unable to generate revenue, secure additional financing or structure credit terms with its vendors, the Company will be forced to curtail construction of the Polysilicon Plant.
(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, or Power I, because the Company has the controlling financial interest of Power I. As of March 31, 2011, the total assets of Power I were $6.0 million, mainly comprised of cash, accounts receivable, and property, plant and equipment. As of March 31, 2011, the total liabilities of Power I were $882,000, mainly comprised of accounts payable and accrued liabilities. These balances are reflected in the consolidated financial statements with intercompany transactions eliminated.
(d)
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with generally accepted accounting principles, or GAAP, 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.
Beginning in April 1, 2010, the Company applies the percentage-of-completion method of revenue recognition for its PV system contracts for which it can make reasonably dependable estimates of costs. Under the percentage-of-completion method, revenue and related costs are deferred and subsequently recognized based on the progress of the installation and an estimate of remaining costs to complete the installation. Estimated losses on PV system contracts are recognized in the period in which those losses become evident. For contracts entered into prior to April 1, 2010, the Company recognizes revenue under the completed contract method, in which revenue and related costs are deferred and then subsequently recognized only upon completion of the contract, for all contracts for which reasonably dependable estimates of costs are not available.
The Company entered the PV system installation business in fiscal year 2008. Prior to April 1, 2010, due to the short period of time the Company was in the PV system installation business, the Company did not have the historical experience or the procedures in place to develop reasonably dependable estimates of costs and therefore utilized the completed contract method to record revenue for PV contracts. Subsequent to this startup period, the Company has developed history and reliable processes and procedures of projecting and tracking contract fulfillment costs, in order to develop reasonably dependable estimates which are required to use the percentage of completion method. In applying the percentage method, the Company determines the percentage of contract completion on the basis of engineering, labor, subcontractor and other installation costs and excludes material and other non-installation contract costs which are not considered the primary cost determinants in gauging the progress of the PV system contract. Revenue and related costs are recognized proportionately based on the completion percentage of each project and considering the current estimate of remaining costs required to complete the project.
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.
The Company charges the appropriate Hawaii general excise tax to its customers. The taxes collected from sales are excluded from revenue and recorded as a payable.
(f)
Cost of Uncompleted Contracts
Cost of uncompleted contracts represents costs incurred for services performed and/or materials used towards completing a customer contract. Based on the Company’s revenue recognition policy, the costs incurred for services and/or materials can be recognized as contract costs, and revenues are recognized based on the completion percentage of each contract after considering the costs incurred and current estimate of remaining costs to complete the installation. As of March 31, 2011 and 2010, costs of uncompleted contracts were approximately $128,000 and $93,000, respectively, related to PV system installation contracts.
(g)
Concentration of Credit Risk
Significant customers represent those customers that account for more than 10% of the Company’s total revenue or accounts receivable. Revenue and revenue as a percentage of total revenue and accounts receivable and accounts receivable as a percentage of total accounts receivable for significant customers were as follows:
(h)
Cash and Cash Equivalents
The Company considers money market, savings and checking accounts as cash and cash equivalents. All other investments, including those with maturities of three months or less are considered short-term investments. The Company had no outstanding investments as of March 31, 2011 and 2010.
(i)
Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company had allowance for doubtful accounts of $10,000 and $60,000 as of March 31, 2011 and 2010, respectively.
When necessary, allowances for doubtful accounts represent the Company’s best estimate of the amount of probable credit losses in the Company’s accounts receivable. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
(j)
Inventory
Inventory is stated at the lower of average cost or market and consists of raw materials, work-in-progress and finished goods.
(k)
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated using the straight-line method over the estimated useful life of the asset. For leasehold improvements, amortization is computed using the straight-line method over the shorter of the lease term or the estimated useful life of the asset.
Estimated useful lives of the Company’s assets are as follows:
(l)
Impairment of Long-Lived Assets
The Company evaluates the recoverability of the construction in progress related to the Polysilicon Plant due to both delays in construction and increases in projected expected costs related to complete construction of the Polysilicon Plant. If, in the future, the Company were to determine that the carrying amount of the Polysilicon Plant is not recoverable, the Company would be required to estimate the fair value of the Polysilicon Plant and, if the fair value is less than the carrying amount, record an impairment charge for the difference.
(m)
Income Taxes
Income taxes are accounted for under the asset and liability method, which establishes financial accounting and reporting standards for the effect of income taxes. The Company recognizes federal and state current tax liabilities or assets based on the Company’s 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 any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized. Accordingly, the Company continued to provide a full valuation allowance against its net deferred tax assets as of March 31, 2011 and 2010.
(n)
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 applicable 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 applicable 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:
Due to the Company’s net losses in the fiscal years ended March 31, 2011, 2010 and 2009, all potential common equivalent shares were anti-dilutive and were excluded in computing diluted net loss per share. Potential dilutive securities included options to purchase 66,353, 72,711 and 162,318 shares of common stock as of March 31, 2011, 2010 and 2009, respectively. In addition, Tianwei has a warrant to purchase up to 10,000,000 shares of common stock at a per share exercise price equal to $2.52.
(o)
Stock-based Compensation
The Company accounts for stock-based employee compensation arrangements using the fair value method, whereby the fair value of stock options granted to our employees and non-employees is determined using the Black-Scholes pricing model, while the fair value of restricted stock awards is estimated based on the price of the Company’s stock on the date of grant. The Black-Scholes pricing model requires the input of several subjective assumptions including the expected life of the option and the expected volatility of the option at the time the option is granted. The fair value of the option, as determined by the Black-Scholes pricing model, is expensed over the requisite service period, which is generally three to five years for stock options and varies between one and five years for restricted stock awards.
(p)
Advertising and Marketing Expenses
The Company expenses advertising and marketing expenditures as they are incurred. For the fiscal years ending March 31, 2011, 2010 and 2009, advertising and marketing expenses were $59,000, $85,000, and $59,000, respectively.
(q)
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 to five years 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 March 31, 2011 and 2010.
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.
(r)
Notes Payable and Warrant (Tianwei financing transaction)
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 Polysilicon Plant. In December 2009, the investment transaction was completed and the Company issued to Tianwei 33,379,287 shares of its common stock, representing approximately 60% of the Company's fully-diluted outstanding shares. The existing polysilicon supply agreements with Tianwei were amended such that $50.0 million of an aggregate of $79.0 million in secured prepayments previously paid by Tianwei to the Company was converted into the 33,379,287 shares of the Company’s common stock. The Company also granted to Tianwei a warrant to purchase an additional 10 million shares of the Company’s common stock.
The accounting of the warrant and debt was based on their relative fair values and in proportion to the $50.0 million in loan proceeds. The fair value of the warrant was calculated using the Black-Scholes option pricing model, which requires the input of several subjective assumptions including the expected life of the warrant and the expected volatility of the underlying common stock at the time the warrant was granted. The fair value of the debt was based on the present value of cash flows, discounted at the estimated market interest rate. The $12.9 million fair value attributed to the warrants was recorded as an increase to stockholders’ equity and an offsetting discount to the debt, to be amortized over the two year term of the debt, using the effective interest method, and capitalized to the cost of construction of the Polysilicon Plant. Cash interest paid on the outstanding balance of the debt will also be capitalized to the cost of construction of the Polysilicon Plant.
(s)
Reclassification
Certain amounts in the consolidated financial statements have been reclassified to conform to current period presentation. Specifically, in the consolidated statements of cash flows for the years ended March 31, 2010 and 2009, the line item for purchases of short-term investments was removed to exclude activity for cash equivalents.
(2)
Fair Value of Assets and Liabilities
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, a three-tier fair value hierarchy 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 March 31, 2011 and 2010, the Company held the following assets that are required to be measured at fair value on a recurring basis (in thousands):
The interest rates of the Company’s credit agreements resets on a quarterly basis based on fluctuations in the LIBOR rate. Accordingly, the fair value of the notes payable approximates the carrying value as of March 31, 2011 and 2010.
There were no assets or liabilities that are required to be measured at fair value on a non-recurring basis.
(3) Property, Plant and Equipment
As of March 31, 2011 and 2010, property, plant and equipment consisted of the following:
During fiscal 2009, 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. As the total of the undiscounted future cash flows was less than the carrying amount of the assets, the Company wrote down such assets based on the excess of the carrying amount over the fair value of the assets in fiscal 2009. Fair value was determined based on discussions with third-party equipment providers. The Company did not record any impairment during the years ended March 31, 2011 or 2010.
During fiscal year 2009, the Company sold its corporate headquarters for an aggregate purchase price of $5.8 million, resulting in a gain on the sale of approximately $550,000.
The Company granted security interests to each of Wuxi Suntech Power Co., Ltd., Solarfun Power Hong Kong Limited, Shanghai Alex New Energy Co., Ltd., Tianwei, Jinko Solar Co., Ltd., and Wealthy Rise International, Ltd. (Solargiga), in all of its tangible and intangible assets related to its polysilicon business to serve as collateral for its obligation to repay the remaining amount of each customer’s respective prepayments made as of the date of any termination and that has not been applied to the purchase price of polysilicon delivered under the respective contract should the respective customer elect to terminate the contract under certain circumstances. Such security interest is subordinated to the Tianwei financing and any third-party debt secured to finance construction of the polysilicon production facility and pari passu with security interests granted to each of the Company’s other long-term polysilicon supply customers. The security interest will continue until all prepayments have been credited against the shipment of product, and only with respect to the amount of prepayment that has not been so credited.
In fiscal 2010, Tianwei also loaned the Company $50.0 million. Pursuant to the loan agreement, the Company has pledged a security interest in all of its assets to Tianwei.
As of March 31, 2011 and 2010, the Company had no physical assets located outside of the United States, except for $1.9 million in cash in a bank account in China in fiscal 2010.
During the year ended March 31, 2011, the Company reduced the cost of the PV systems owned by Hoku Solar Power I by $2.3 million as a result of federal grants received under Section 1603 of the American Recovery and Reinvestment Act of 2009, which provides cash incentives for wind and solar project investments.
During fiscal 2011, the Company capitalized interest during construction of $11.7 million, comprised of interest charges of $5.2 million, amortization of discount and deferred financing costs of $6.3 million, and also capitalized stock based compensation of $151,000 during the same period.
During fiscal 2010, the Company capitalized interest during construction of $991,000, comprised of interest charges of $342,000, amortization of discount and deferred financing costs of $649,000, and also capitalized stock based compensation of $362,000 during the same period.
(4)
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities were comprised of the following:
The following table summarizes the composition of accounts payable and accrued liabilities between capital and operating expenditures:
The capital expenditures pertain primarily to the construction of the Polysilicon Plant and equipment additions related to the Polysilicon Plant.
(5)
Customer deposits
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. These prepayments were used by the Company to finance the construction of the Polysilicon Plant. Accordingly, the receipts of these prepayments have been reflected in the financing activities section of the statements of cash flows. Upon the sale of product under the long-term supply agreements, the Company will reflect the application of the deposit in exchange for the product as a cash inflow from operations with a corresponding cash outflow in financing activities.
As of March 31, 2011 and 2010, the Company had $140.2 and $127.0 million, respectively, related to prepayments received under its various polysilicon supply agreements. In December 2009, the investment transaction with Tianwei was completed and the existing polysilicon supply agreements were amended such that $50.0 million of an aggregate of $79.0 million in secured prepayments previously paid by Tianwei to the Company was converted into shares of the Company’s common stock. The prepayments which are expected to be applied to deliveries after March 31, 2012 have been reflected in the consolidated balance sheets as Long-term deposits - Hoku Materials.
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 did not commence delivery of polysilicon to Solargiga in May 2011 and Solarone in June 2011 in accordance with its agreements which provided these customers with the right to terminate the agreements and require repayment of a $20.2 million and a $49 million prepayment, respectively. In June 2011, the Company entered into an amendment to the agreement with Solargiga to extend the initial delivery date of polysilicon to May 2012. 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. Such security interests are subordinated to bank financings.
The following is a summary of prepayments received as of March 31, 2011 and 2010:
Based on existing terms of the various long-term polysilicon supply agreements, the $140.2 million of customer prepayments would be credited against future product deliveries in the years ending March 31, 2012 through 2016 and thereafter as indicated in the following table.
(6) Notes Payable and Warrants
(a) Notes Payable
China Merchants Bank - New York Branch
In May 2010, the Company entered into a $20.0 million credit agreement with the New York branch of China Merchants Bank Co., Ltd. The loan under this credit agreement is secured by a standby letter of credit drawn by Tianwei in Chengdu, China and issued to China Merchants Bank, as collateral. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2% (2.28% at March 31, 2011) or, if the Company elects, any portion of the loan that is not less than $1.0 million may bear interest at an annual rate equal to the rate of interest announced by the lender as its “prime rate.” The principal amount and any unpaid interest thereon must be paid in full by May 2012. The Company also entered into a reimbursement agreement with Tianwei pursuant to which the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of March 31, 2011 the entire $20.0 million was outstanding.
In August 2010, the Company entered into two credit agreements with the New York branch of China Merchants Bank Co., Ltd. to borrow $10.0 million and $5.0 million. The loans under these credit agreements are secured by standby letters of credit drawn by Tianwei in Chengdu, China and issued to China Merchants Bank, as collateral. The loans bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2% (2.28% at March 31, 2011) or, if the Company elects, any portion of the loans that is not less than $1.0 million may bear interest at an annual rate equal to the rate of interest announced by the lender as its “prime rate.” The principal amount and any unpaid interest thereon must be paid in full by August 2012. The Company also entered into reimbursement agreements with Tianwei pursuant to which the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letters of credit. As of March 31, 2011 the entire $15.0 million was outstanding.
China Construction Bank - New York Branch
In June 2010, the Company entered into a $28.3 million credit agreement with the New York branch of China Construction Bank. The loan under this credit agreement is secured by a standby letter of credit drawn by Tianwei and issued by the Sichuan branch of China Construction Bank in favor of the New York branch. The loan will bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 1.875% (2.16% at March 31, 2011) or, if the Company elects, and if the bank agrees, any portion of the loan that is not less than $1 million may bear interest at an annual rate equal to the highest “Prime Rate” as published in the “Money Rates” column of the Eastern Edition of the Wall Street Journal from time to time. The principal amount and any unpaid interest thereon must be paid in full by June 2012. The Company also entered into a reimbursement agreement with Tianwei pursuant to which the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of March 31, 2011 the entire $28.3 million was outstanding.
China Merchants Bank - New York Branch
In September 2010, the Company entered into a $10.0 million credit agreement with the New York branch of China Merchants Bank Co., Ltd. The loan under this credit agreement is secured by a standby letter of credit drawn by Tianwei in Chengdu, China and issued to China Merchants Bank, as collateral. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2% (2.30% at March 31, 2011) or, if the Company elects, any portion of the loan that is not less than $1 million may bear interest at an annual rate equal to the rate of interest announced by the lender as its “prime rate.” The principal amount and any unpaid interest thereon must be paid in full by September 2013. The Company also entered into a reimbursement agreement with Tianwei pursuant to which the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of March 31, 2011 the entire $10.0 million was outstanding.
In October 2010, the Company entered into a $13.0 million credit agreement with the New York branch of China Merchants Bank Co., Ltd. The Company received the entire $13.0 million under this credit agreement, which is secured by a standby letter of credit drawn by Tianwei in Chengdu, China and issued to China Merchants Bank, as collateral. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2% (2.29% at March 31, 2011) or, if the Company elects, any portion of the loan that is not less than $1.0 million may bear interest at an annual rate equal to the rate of interest announced by the lender as its “prime rate.” The principal amount and any unpaid interest thereon must be paid in full by October 2013. The Company also entered into a reimbursement agreement with Tianwei pursuant to which the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of March 31, 2011 the entire $13.0 million was outstanding.
In December 2010, the Company entered into a $10.0 million credit agreement with the New York branch of China Merchants Bank Co., Ltd. The Company received the entire $10.0 million under this credit agreement, which is secured by cash collateral of 110% of the principal amount of the credit agreement in Renminbi provided by Tianwei. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2% (2.31% at March 31, 2011) or, if the Company elects, any portion of the loan that is not less than $1.0 million may bear interest at an annual rate equal to the rate of interest announced by the lender as its “prime rate.” The principal amount and any unpaid interest thereon must be paid in full by December 2013. The Company also entered into a reimbursement agreement with Tianwei pursuant to which the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with providing the cash collateral. As of March 31, 2011 the entire $10.0 million was outstanding.
China Construction Bank - Singapore Branch
In October 2010, the Company entered into a $29.0 million credit agreement with the Singapore branch of China Construction Bank. The Company received the entire $29.0 million under this credit agreement which is secured by standby letters of credit drawn by Tianwei in Chengdu, China and issued to China Construction Bank Corporation, Sichuan Branch in favor of China Construction Bank - Singapore Branch. The loan will bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2% (2.30% at March 31, 2011). The principal amount and any unpaid interest thereon must be paid in full by September 2013. The Company also entered into a reimbursement agreement with Tianwei pursuant to which the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of March 31, 2011 the entire $29.0 million was outstanding.
Industrial and Commercial Bank of China - New York Branch
In December 2010, the Company entered into a $15.5 million credit agreement with the New York Branch of Industrial and Commercial Bank of China, Ltd. The loans are secured by a standby letter of credit issued by the Sichuan Branch of Industrial and Commercial Bank of China and procured by Tianwei in favor of the lender and which has an aggregate drawable amount of $17.0 million. The loans bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2.6% (2.91% at March 31, 2011). The principal amount and any unpaid interest thereon must be paid in full by December 2013. The Company also entered into a reimbursement agreement with Tianwei pursuant to which the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of March 31, 2011 the entire $15.5 million was outstanding.
In January 2011, the Company entered into a $19.5 million credit agreement with the New York Branch of Industrial and Commercial Bank of China, Ltd. The loans are secured by a standby letter of credit issued by the Sichuan Branch of Industrial and Commercial Bank of China and procured by Tianwei in favor of the lender and which has an aggregate drawable amount of $22.0 million. The loans bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2.6% (2.90% at March 31, 2011). The principal amount and any unpaid interest thereon must be paid in full by January 2014. The Company also entered into a reimbursement agreement with Tianwei pursuant to which the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of March 31, 2011 the entire $19.5 million was outstanding.
In April 2011, the Company entered into a $15.0 million credit agreement with the New York Branch of Industrial and Commercial Bank of China, Ltd., New York Branch (the “Lender”). The loans are secured by a standby letter of credit issued by the Sichuan Branch of Industrial and Commercial Bank of China and procured by Tianwei in favor of the lender and which has an aggregate drawable amount of $16.5 million. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2.7% (2.99% on the date of borrowing). The principal amount of and any unpaid interest of the loan must be paid in full by April 6, 2014 or the tenth business day prior to the date on which the letter of credit expires or otherwise terminates, whichever is earlier. The Company also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. The Company borrowed $15.0 million in April 2011.
In June 2011, the Company entered into a $24.7 million credit agreement with the New York Branch of Industrial and Commercial Bank of China, Ltd., New York Branch (the “Lender”). The loan is secured by a standby letter of credit issued by the Sichuan Branch of Industrial and Commercial Bank of China and procured by Tianwei in favor of the lender and which has an aggregate drawable amount of not less than $30.1 million. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 3.8% (4.05% on the date of borrowing). The principal amount of and any unpaid interest of the loan must be paid in full by June 2, 2016 or the tenth business day prior to the date on which the letter of credit expires or otherwise terminates, whichever is earlier. The Company also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. The Company borrowed $24.7 million in June 2011.
CITIC Bank International Limited - New York Branch
On February 7, 2011, the Company entered into a $19.0 million credit agreement with the New York Branch of CITIC Bank International Limited. The Company can receive up to $9.0 million of the loan which is secured by standby letters of credit issued by China Branch of CITIC Bank International Limited and procured by Tianwei in favor of CITIC Bank International Limited. Tianwei has informed the Company that it intends to issue additional standby letters of credit for the remaining loan amount. The loans will bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2.5% (2.81% at March 31, 2011). The principal amount and any unpaid interest thereon must be paid in full by January 2013. The Company also entered into a reimbursement agreement with Tianwei pursuant to which the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letters of credit. The Company borrowed $7.0 million and $2.0 million on March 17, 2011 and February 7, 2011, respectively. As of March 31, 2011 the entire $9.0 million was outstanding.
Bank of China-New York Branch
On February 25, 2011, the Company and its subsidiary Hoku Materials entered into a credit agreement with the New York Branch of Bank of China that provides for one or more revolving loans in an aggregate principal amount not to exceed the lesser of (i) $30.0 million or (ii) the aggregate amount of the letters of credit procured by Tianwei. As of March 31, 2011, Tianwei has procured a letter of credit issued by the Sichuan Branch of Bank of China in favor of the lender. The loans bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2.4% (2.71% at March 31, 2011). The principal amount of the loans and any unpaid interest must be paid in full by the earlier of (i) February 25, 2014 or (ii) the 15th business day prior to the date on which the letters of credit expires or terminates. The Company may prepay the loans, in whole or in part, at any time without penalty. The Company also entered into a reimbursement agreement with Tianwei pursuant to which it agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letters of credit. As of March 31, 2011, the entire $25.0 million was outstanding.
The Company will be required to repay approximately $122.3 million and $122.0 million in fiscal 2013 and 2014, respectively. These repayment amounts include the unamortized discount of $6.4 million as of March 31, 2011.
Under the terms of all of the Company's supply agreements, the failure to deliver polysilicon by the stated delivery dates will allow the customers to terminate the supply agreements, require the repayments of the deposits under the agreements, which in turn could result in an event of default under the Company's existing credit agreements with its third party lenders. If the Company is determined to be in default, its lenders will have the right to declare the outstanding principal and unpaid interest thereon due and payable. The third party credit agreements are all secured by standby letters of credit drawn by the Company's majority shareholder, Tianwei, as collateral. To the extent that the third party lenders accelerate repayment of the debt, Tianwei has provided a letter of commitment to the Company that it would not demand repayment from the Company until the original due dates of the third party credit agreements ranging from May 2012 to through February 2014.
(b) Notes Payable, related party
Tianwei New Energy Holding Co. Ltd.
As of March 31, 2011, the Company has $50.0 million in notes payable to Tianwei. The Company received the first tranche of $20.0 million in January 2010 and received the second tranche of $30.0 million in March 2010. The notes bear an annual interest rate of 5.94% and have a term of two years. Pursuant to the loan agreement, the Company has pledged a security interest in all of its assets to Tianwei. The $20.0 million and $30.0 million in loan proceeds become due in January and March 2012, respectively, with no penalty for earlier prepayment of principal, and interest payments are due quarterly. Tianwei has agreed to extend the due dates of these loans and will not require the repayment of these loans until subsequent to April 2012.
As part of the financing agreement, the Company also granted to Tianwei a warrant to purchase an additional 10 million shares of the Company’s common stock. The terms of the warrant include: (i) a per share exercise price equal to $2.52; (ii) an exercise period of seven years; and (iii) provision for a cashless, net-issue exercise.
The accounting of the warrant and debt was based on their relative fair values and calculated to be $12.9 million and $37.1 million, respectively, in proportion to the $50.0 million in loan proceeds. The fair value of the warrant was calculated using the Black-Scholes option pricing model, and the fair value of the debt was based on the present value of cash flows, discounted at a 7% interest rate.
The Company recorded approximately $1.2 million in transaction costs and $12.9 million of related fair value of the warrants as deferred costs of debt financing totaling $14.1 million. As of March 31, 2011, $12.9 million has been recorded as a discount on the debt and $1.2 million has been deferred as cost of debt financing. The deferred cost of debt financing and discount on the debt will be amortized over the two year term of the $50.0 million in notes payable, using the effective interest method, and capitalized as construction in progress related to the polysilicon production facility. As of March 31, 2011, the carrying value of the $50.0 million in notes payable was $43.6 million, net of the unamortized discount of $6.4 million.
(7)
Income Taxes
There was no income tax provision or benefit and no payments for federal and state income taxes in fiscal years 2011, 2010 and 2009.
A reconciliation of the U.S. statutory tax rate of 34% to the effective tax rate for the fiscal years ended March 31, 2011, 2010 and 2009 is as follows:
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. A summary of the tax effects of the temporary differences is as follows:
The Company’s ultimate realization of deferred tax assets depends upon the generation of future taxable income during periods in which those temporary differences become deductible. 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 has continued to provide a valuation allowance against its net deferred tax assets as of March 31, 2011.
The valuation allowance for deferred tax assets increased by approximately $4.3 million for the fiscal year ended March 31, 2011 and increased by approximately $889,000 for fiscal year ended March 31, 2010. The increase in the valuation allowance is due primarily to current year operating losses incurred by the Company.
The Company has not identified any material unrecognized tax benefits as of March 31, 2011 or 2010. Any interest expense and penalties related to unrecognized tax benefits and interest income on tax overpayments will be recorded as components of income tax expense.
The Company has tax deductions from the exercise of certain stock options that exceed the amount of stock compensation expense recorded in the accompanying financial statements for the corresponding options (“Excess Tax Deductions”). The deferred tax assets of the Company are reported without inclusion of the Excess Tax Deductions. When realized, the tax benefit of the Excess Tax Deductions is accounted for as a credit to additional paid-in-capital rather than as a reduction of income tax expense.
As of March 31, 2011, the Company had cumulative net operating losses, or NOLs, of approximately $25.0 million and $22.5 million for federal and state tax purposes, respectively. If not utilized, the federal and state NOL carryforwards will begin to expire in the fiscal year ending March 31, 2027. The Company’s utilization of these NOL carryforwards may be subject to annual limitations pursuant to Section 382 of the Internal Revenue Code, and similar state provisions, as a result of changes in the Company’s ownership structure. These annual limitations may result in the expiration of NOL carryforwards prior to utilization.
The Company has approximately $1.2 million of federal R&E tax credits as of March 31, 2011, which, if not utilized, will begin to expire in the fiscal year ending March 31, 2023.
Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. At March 31, 2011, management believes there were no uncertain tax positions. The three tax years in the period ended March 31, 2011 remain open for Federal purposes.
(8)
Stockholders’ Equity
(a)
Reincorporation
The Company was reincorporated in Delaware in December 2004. Immediately prior to the reincorporation and under its certificate of incorporation, the Company was authorized to issue 27,254,695 shares of capital stock, consisting of 8,587,095 shares of preferred stock, par value $0.001, and 18,667,600 shares of common stock, par value $0.001. Of the authorized preferred stock, 2,036,768 shares were designated as Series A preferred stock, 333,350 as Series B preferred stock, 3,550,177 as Series C preferred stock and 2,666,800 as Series D preferred stock. In connection with the reincorporation, each share of Class A common stock outstanding immediately prior to the reincorporation was converted into one share of common stock, each outstanding option and warrant that was exercisable for shares of Class A common stock became exercisable for a like number of shares of common stock, and each outstanding share of Series A, B and C preferred stock, which was previously convertible into shares of Class A common stock, became convertible into shares of common stock. Prior to conversion in connection with the reincorporation, there were no differences in rights between the Company’s common stock and Class A common stock.
(b)
Common and Preferred Stock
As of March 31, 2011, the Company was authorized to issue 5,000,000 and 100,000,000 shares of preferred and common stock, respectively, each with a par value of $0.001.
In June 2008, the Company sold registered shares of its common stock pursuant to the Equity Distribution Agreement, or the EDA, with UBS Securities LLC, or UBS, in which we had raised gross aggregate proceeds of $6.9 million, less broker fees, commissions, and expenses, from the public offer and sale of an aggregate of 1,160,716 shares of common stock.
In December 2009, the Company consummated an 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 Polysilicon Plant. The Company issued to Tianwei 33,379,287 shares of its common stock, representing approximately 60% of the Company's outstanding shares. The Company also granted to Tianwei a warrant to purchase an additional 10 million shares of the Company’s common stock. The terms of the warrant include: (i) a per share exercise price equal to $2.52; (ii) an exercise period of seven years; and (iii) provision for a cashless, net-issue exercise.
The Company has reserved the shares of common stock for future issuance at March 31, 2011 and 2010 as follows:
(c)
Stock Options and Awards
The Company had initially authorized 1,866,666 shares of common stock for issuance under the Company’s 2002 Stock Plan, 2005 Equity Incentive Plan, 2005 Non-Employee Directors Stock Option Plan and Calendar Year 2005 Executive Incentive Compensation Plan. The Company authorized additional shares of common stock for issuance under the 2005 Non-Employee Directors Stock Option Plan and Calendar Year 2005 Executive Incentive Compensation Plan by 95,513, 153,331, and 211,822 in August 2009, June 2008 and July 2007, respectively. In addition, at the Company’s Fiscal 2009 Annual Meeting held in March 2010, the Company’s stockholders approved additional shares of common stock for issuance under the 2005 Non-Employee Directors Stock Option Plan and Calendar Year 2005 Executive Incentive Compensation Plan by 428,590. As of March 31, 2011, the total authorized shares of common stock for issuance was 2,755,922.
Stock options issued generally vest over three to five years with an exercise price equal to the fair market value at the date of grant. The options also typically have a ten-year contractual term. Stock awards that are unrestricted are generally fully-vested stock awards when issued. Restricted stock awards grant the holder voting rights on the date of issuance and generally vest over one to five years with a $0 exercise price.
The following table summarizes stock option and award activity for fiscal years ended March 31, 2011, 2010 and 2009:
The weighted-average grant-date fair value of options granted during the fiscal years ended March 31, 2011 and 2009 was $1.97 and $5.55, respectively, and no options were granted during fiscal year 2010. The total intrinsic value of options exercised during the fiscal years ended March 31, 2011, 2010 and 2009 was $42,000, $281,000 and $296,000, respectively. As of March 31, 2011, there was $348,000 of total unrecognized compensation cost related to unvested stock-based compensation under the 2002 Stock Plan and 2005 Equity Incentive Plan combined; that cost is expected to be recognized over the respective vesting period.
To date, cancelled shares are a result of forfeitures rather than the expiration of options.
The following table summarizes options outstanding as of March 31, 2011:
The following table summarizes options vested and exercisable as of March 31, 2011:
The following table summarizes the status of the Company's nonvested stock options and restricted stock shares as of March 31, 2011 and 2010 and changes during the fiscal years ended March 31, 2011, 2010 and 2009:
Stock options are measured at the date of grant at the fair value of the equity instruments issued using the Black-Scholes option pricing model. The fair value of stock options granted is charged to expense over the requisite period. The fair value of options vested was $16,000, $792,000, and $862,000 for the fiscal years ended March 31, 2011, 2010 and 2009, respectively.
Cash received from option exercises for the years ended March 31, 2011, 2010 and 2009 was $4,000, $23,000 and $76,000, respectively. There were no tax benefits realized for the tax deductions from the exercise of stock options and issuance of stock awards for the fiscal years ended March 31, 2011, 2010 and 2009.
(d)
Stock-based Compensation
Stock Options. The Company granted options to purchase 47,736 and 19,998 shares of common stock during each fiscal year ended March 31, 2011 and 2009, respectively, and no options in fiscal year 2010 under the Company’s 2005 Equity Incentive Plan. The Company recorded stock-based compensation expense of $188,000, $347,000 and $585,000 related to stock options during the fiscal years ended March 31, 2011, 2010 and 2009, respectively. The stock-based compensation expense excludes $12,000 which was capitalized to construction in progress during fiscal year ended March 31, 2011. The stock-based compensation expense excludes $7,000 and $26,000 which was capitalized to cost of uncompleted contracts and construction in progress, respectively, during fiscal year ended March 31, 2010. The stock-based compensation expense excludes $14,000 and $29,000 which was capitalized to cost of uncompleted contracts and construction in progress, respectively, during fiscal year ended March 31, 2009.
The fair value of the stock options granted during fiscal 2011 and 2010 years was calculated using the Black-Scholes option pricing model. The assumptions used to estimate fair value included:
The risk-free interest rate is based on the market yield of U.S. Treasury securities with a five year constant maturity at the time of grant. The Company has not issued any dividends to date and a volatility of 100% was assumed based on historical volatility. The expected life is based on the average of the vesting and expiration term. The vesting term of options granted is generally three or five years and the contractual term is generally ten years.
Stock-based compensation expense is recognized on a straight-line basis as the stock options vest. The expected forfeiture rate was 15% for fiscal 2011, 2010 and 2009. The expected forfeiture rates are applied against stock-based compensation expense, based on the Company’s historical experience. The Company recognized additional charges of approximately $105,000, $27,000 and $206,000 related to stock option expense for the difference in actual forfeitures and the expected forfeiture rate used in fiscal years 2011, 2010 and 2009, respectively.
Stock Awards. During the fiscal year ended March 31, 2011, the Company granted 234,749 restricted shares of common stock. The Company recorded stock-based compensation expense of $730,000 related to restricted stock awards during fiscal year ended March 31, 2011, which excluded $139,000 that was capitalized to construction in progress. During the fiscal year ended March 31, 2010, the Company granted 308,500 restricted shares of common stock. The Company recorded stock-based compensation expense of $483,000 related to restricted stock awards during fiscal year ended March 31, 2010, which excluded $1,000 and $100,000 that was capitalized to cost of uncompleted contracts and construction in progress, respectively. During the fiscal year ended March 31, 2009, the Company granted 89,150 restricted shares of common stock. The Company recorded stock-based compensation expense of $134,000 related to restricted stock awards during fiscal year ended March 31, 2009, which excluded $35,000 which was capitalized to construction in progress.
During fiscal year ended March 31, 2009, the Company granted 6,363 fully-vested common stock awards. There was no fully-vested common stock awards were granted during fiscal years ended March 31, 2011 or 2010. The fully-vested stock awards were granted to our directors in fiscal year 2009, in accordance with the 2005 Equity Incentive Plan. In fiscal 2009, the Company recorded stock-based compensation for all fully-vested stock awards of $45,000, respectively.
(9) Interest and Other Income
Interest and other income for fiscal 2011 was primarily comprised of the reversal of $36,000 of prior accruals for general excise tax reserves due to statute limitations and a foreign currency transaction gain of $107,000 related to Euros-based accrued as of March 31, 2010 and paid during fiscal year 2011. In addition, fiscal 2011 income included interest income of $2,000 and a Hawaii State excise tax refund of $21,000.
Interest and other income for fiscal 2010 was primarily comprised of the reversal of $255,000 of prior accruals for general excise tax reserves due to statute limitations and a foreign currency transaction gain of $219,000 related to Euros-based invoices unpaid as of March 31, 2010. In addition, fiscal 2010 income included gains on the sale of fuel cell equipment of $40,000, interest income of $23,000 and a Hawaii State tax refund of $20,000.
(10) Leases
As of March 31, 2011, the Company had lease obligations on its corporate and warehouse facilities, expiring in fiscal 2015 and 2012, respectively. Minimum annual lease payments on these facilities are $213,000, $155,000, $155,000, and $103,000 for fiscal 2012 through fiscal 2015, respectively. The Company incurred rent expense of $348,000, $323,000, and 135,000 on these facilities in fiscal 2011, 2010 and 2009, respectively.
(11) 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 and procurement services for the construction of the Company’s Polysilicon Plant, which was amended in October 2007 by Change Order No. 1, again in April 2008 by Change Order No. 2, and again in February 2009 by Change Order No. 3, which are collectively the Engineering Agreement. Under the Engineering Agreement, S&W would provide the engineering services to complete the design and plan for construction of the Company’s Polysilicon Plant in Pocatello, Idaho, along with procurement services. S&W would be paid on a time and materials basis plus a fee for its services.
The Company suspended all work under the Engineering Agreement in July 2009. In February 2010, work under the Engineering Agreement recommenced as agreed to in Change Order No. 4. In December 2010, the Company and S&W agreed to Change Order No. 5 under the Engineering Agreement, or Change Order No. 5, to, among other things: (i) set forth a target delivery schedule, added scope of work, estimated budget to complete the work, and payment schedule, and (ii) provide additional engineers and personnel to meet the target delivery schedule.
During fiscal 2011, the Company made payments to S&W of $13.4 million, and as of March 31, 2011, the Company had paid S&W an aggregate amount of $60.1 million.
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 Polysilicon Plant, which was amended in October 2007, by Change Order No. 1, and 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 Polysilicon Plant 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 $145.0 million, including up to $5.0 million of incentives that may be payable.
Pursuant to Change Order No. 4, the Company agreed among other things: (i) to confirm the plan for JH Kelly to complete construction of the Polysilicon Plant and (ii) set-up a payment schedule relating to outstanding invoices that the Company owed to JH Kelly and any additional expenses that JH Kelly incurred relating to the construction of the Polysilicon Plant. During fiscal 2011, the Company made payments to JH Kelly of $115.2 million, and as of March 31, 2011, the Company had paid JH Kelly an aggregate amount of $184.1 million.
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 Polysilicon Plant. 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 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.
During fiscal 2011, the Company made payments to Dynamic of $1.9 million, and as of March 31, 2011, the Company had paid Dynamic an aggregate amount of $8.4 million.
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 Polysilicon Plant, and all of these polysilicon reactors have been assembled and put into place on the Polysilicon Plant’s production floor. The reactors are the first units to arrive in Pocatello out of a planned total order of 28. The next set of 10 polysilicon reactors and related equipment has been manufactured, and will be shipped to the Polysilicon Plant after the Company’s payment of an additional 3.1 million Euros or $4.2 million (based on the Euro/U.S. dollar exchange rate which was $1.345 as of March 31, 2011). The Company is in discussions with GEC to purchase 12 additional reactors necessary for the Company’s 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, or $28.1 million (based on the Euro/U.S. dollar exchange rate, which was $1.345 as of March 31, 2011).
During fiscal 2011, the Company made payments to GEC and MSA of 3.3 million Euros or $4.3 million and, as of March 31, 2011, the Company had paid GEC and MSA an aggregate amount of 19.0 million Euros or $26.7 million.
Idaho Power Company. 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 Polysilicon Plant, or the Idaho Power Agreement. As of March 31, 2010, the Company had paid an aggregate amount of $18.0 million to Idaho Power. The electric substation was completed in August 2009, and the Company was able to use its power during the Company’s polysilicon product demonstration in April 2010.
The Company also entered into an Electric Service Agreement with Idaho Power, or the ESA, for the supply of electric power and energy to the Company for use in the Polysilicon Plant, subject to the approval of the Idaho Public Utilities Commission, or the PUC. The term of the ESA is four years, beginning in June 2009 and expiring in May 2013. 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 PUC. 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 the Company. As of March 31, 2011, the Company was contractually obligated to pay approximately $17.1 million to Idaho Power over the term of the ESA.
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 Polysilicon Plant. The total fees payable to AEG for all Deliverables under the AEG Agreement is approximately $13.0 million.
During fiscal 2011, the Company made payments to AEG of $5.9 million, and as of March 31, 2011, the Company had paid AEG an aggregate amount of $13.0 million.
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 at the Polysilicon Plant. 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 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 March 31, 2011, 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 Polysilicon Plant. 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 amount payable to PVA is approximately $6.0 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. In May 2011, the Company amended this agreement to restructure the payment terms with PVA as follows: (i) in May 2011, the Company paid $2.1 million; (ii) upon the earlier of successful acceptance testing at the Polysilicon Plant and July 31, 2011, the Company shall pay the amount of $318,000; (iii) upon the earlier of six months after the date of commissioning and December 31, 2011, the Company shall pay the amount of $318,000. In June 2011, the Company amended this agreement to deliver a letter of credit in July 2011 in the amount of $636,000.
During fiscal 2011, the Company made payments to PVA of $1.0 million, and as of March 31, 2011, the Company had paid PVA an aggregate amount of $3.9 million.
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 at the Polysilicon Plant. 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 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 within four months after the Company provides written notice to BHS, 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 March 31, 2011, the Company had not provided notice to BHS to commence shipments, and had not made any payments to BHS.
Evonik Degussa Corporation. In March 2010, the Company entered into an agreement with Evonik Degussa Corporation, or Evonik, for the supply of TCS for use in the manufacturing of polysilicon for a term of approximately one year ending in February 2011. In April 2010, the Company paid Evonik a $100,000 deposit for the ISO containers that will transport the TCS to our facility in Pocatello, Idaho. In February 2011, the Company amended and restated this agreement to, among other things, extend the term of the agreement to November 2011. Under the amended agreement, Evonik has agreed to sell to the Company a minimum quantity of TCS during the term of the agreement. Pricing is fixed based on the quantity supplied in each calendar month and based on our frequency of payment. Commencing in May 2011, the Company will forecast its estimated desired monthly quantity of TCS. Pursuant to the agreement, Evonik is required to provide a minimum amount of TCS per calendar month, and it will use commercially reasonable efforts to provide additional quantities that we may request in addition to the monthly minimum amount.
The aggregate net value of the TCS to be purchased under the amended agreement during the term is approximately $13.5 million. As of March 31, 2011, we paid Evonik an aggregate amount of $100,000.
If the Company is unable to secure additional financing to complete the construction of the Polysilicon Plant, the Company would need to curtail construction of the Polysilicon Plant. If the Company elects to curtail construction, it would not be able to produce its own polysilicon to meet the delivery requirements under certain polysilicon agreements. The Company was required to make polysilicon deliveries beginning in June 2011. The Company did not make any shipments by June 30, 2011, and is in discussions with its customers regarding a possible amendment of the agreement. During fiscal 2012, the Company estimates that it may need to purchase between 1,000 to 1,500 metric tons of polysilicon to meet the minimum delivery requirements of its polysilicon contracts. The revenue from the 1,000 to 1,500 metric tons that the Company may need to deliver during fiscal 2012 may result in a loss on the subsequent sale of polysilicon under the current polysilicon agreements. As of June 2011, the Company has not entered into any agreements to purchase polysilicon.
(12) Hoku Solar Power I, LLC
In December 2008, the Company and UFA Renewable Energy Fund I, LLC, a Delaware limited liability company, or UFA established and capitalized Hoku Solar Power I, LLC, a California limited liability company, or Power I. Under the terms of the Power I Operating Agreement by and between the Company and UFA, or the Operating Agreement, the Company assigned its power purchase agreements, or PPAs, to Power I, which was created to own and operate each PV system and which will sell the electricity generated by the PV systems to the Hawaii State Department of Transportation, or DOT, at predetermined contract rates. Under the terms of the PPAs, Power I is permitted to install, maintain and operate each of the seven planned energy systems on DOT facilities over a term of 20 years, commencing on the date that the system is operational for energy to be delivered to DOT. All seven PV systems have been completed and transferred to Power I. The Company has determined that certain provisions of the PPAs require that the agreements be accounted for as leases and accordingly has accounted for the PPAs as operating leases.
In connection with the Operating Agreement, the Company also entered into a Guaranty by and among Power I, UFA, Firstar Development LLC, a Delaware limited liability company and the Company, or the Guaranty, whereby the Company has guaranteed certain obligations set forth in the Operating Agreement. The terms of the Operating Agreement and Guaranty provide for specific limitations on the losses that may be realized by UFA. In addition to other limitations described above, the Company is required to fund any excess development costs and any operating deficits of Power I. Also, UFA’s expected residual return from Power I is capped pursuant to the Operating Agreement.
The financial and operating results of Power I are consolidated with the Company’s financials and included in the Hoku Solar business segment of operations, because it has controlling financial interest of Power I.
In December 2008, the Company and Power I entered into a Development Services Agreement, or the Development Agreement, pursuant to which the Company constructed, installed, developed and commissioned the PV systems on behalf of Power I. The Company also agreed to operate and maintain the systems pursuant to the terms and conditions of the Purchase and Sale and Operation and Maintenance Agreement entered into between the Company and Power I. Each system was transferred to Power I prior to the commencement of commercial operation. During fiscal 2010, all seven PV systems were completed and the DOT has provided letters of system acceptances on each of the PV systems, acknowledging that various system requirements, including but not limited to: system completion, permit certification, and energy capacity, have been satisfied in accordance with the provisions of the PPA. During the fiscal 2011 and 2010, the Company recognized $500,000 and $389,000 in revenue from the operations of Power I, respectively.
(13)
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, President, Chief Financial Officer, Chief Strategy Officer and the Interim President of Hoku Materials. 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 two operating business units: Hoku Solar and Hoku Materials. Hoku Solar installs PV systems and Hoku Materials will manufacture polysilicon for resale. A description of the products for each business unit is described in Note 1 of the Consolidated Financial Statements.
The reconciliation of segment operating results to the Company’s consolidated totals was as follows for the following fiscal years ended March 31:
The reconciliation of segment operating results to the Company’s consolidated totals was as follows:
The Company allocates its assets to its business units based on the primary business units benefiting from the assets. Unallocated assets are composed primarily of cash and cash equivalents and short-term investments. Capital additions for the Hoku Materials business unit primarily relate to construction in progress.
(14)
Unaudited Quarterly Financial Data
Exhibit Index
The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K (and are numbered in accordance with Item 601 of Regulation S-K). Pursuant to Item 601(a)(2) of Regulation S-K, this exhibit index immediately precedes the exhibits.
Exhibit No.
Exhibit Description
Form
File Number
Exhibit
Filing
Date
Filed
Herewith
2.1
Securities Purchase Agreement, dated as of September 28, 2009, by and between Tianwei New Energy Holdings Co., Ltd. and Hoku Scientific, Inc.
8-K
000-51458
2.1
9/29/09
3.1
Amended and Restated Certificate of Incorporation
10-K
000-51458
3.1
7/14/10
3.2
Amended and Restated Bylaws
8-K
000-51458
3.2
10/23/07
3.3
Amendment to Amended and Restated Bylaws
10-K
000-51458
3.3
7/14/10
3.4
Certificate of Amendment of the Amended and Restated Certificate of Incorporation
8-K
000-51458
3.3
3/19/10
4.1
Specimen Common Stock Certificate
S-1/A
333-124423
4.1
6/2/05
4.2
Warrant for the Purchase of Shares of Common Stock of Hoku Scientific, Inc., dated December 22, 2009, issued to Tianwei New Energy Holdings Co., Ltd.
8-K/A
000-51458
4.4
12/31/09
4.3
Investor Rights Agreement, dated as of December 22, 2009, between Tianwei New Energy Holdings Co., Ltd. and Hoku Scientific, Inc.
8-K/A
000-51458
4.5
12/31/09
4.4
Form of Lock-Up Agreement, dated December 22, 2009, between Tianwei New Energy Holdings Co., Ltd. and certain officers and directors of Hoku Scientific, Inc.
8-K/A
000-51458
4.6
12/31/09
10.2+
Form of Addendum to Stock Option Agreement under the 2002 Stock Plan, as amended, by and between Scott Paul and Hoku Scientific, Inc.
S-1
333-124423
10.6
4/28/05
10.3+
Form of Addendum to Stock Option Agreement under the 2002 Stock Plan, as amended, by and between each of the non-employee directors and Hoku Scientific, Inc.
S-1
333-124423
10.7
4/28/05
10.4
Form of Indemnity Agreement entered into between Hoku Scientific, Inc. and each of its directors and officers
S-1
333-124423
10.8
4/28/05
10.5+
2002 Stock Plan, as amended
S-1
333-124423
10.9
4/28/05
10.6+
Form of Stock Option Agreement under the 2002 Stock Plan, as amended
S-1
333-124423
10.10
4/28/05
10.7+
2005 Equity Incentive Plan
8-K
000-51458
10.11
9/13/06
10.8+
Form of Stock Option Agreement under the 2005 Equity Incentive Plan
8-K
000-51458
10.12
9/13/06
10.9+
2005 Non-Employee Directors’ Stock Option Plan
S-1/A#4
333-124423
10.13
7/13/05
10.10+
Form of Stock Option Agreement under the 2005 Non-Employee Directors’ Stock Option Plan
S-1/A#4
333-124423
10.14
7/13/05
10.11
Ground Lease, dated March 22, 2007, by and between Hoku Materials, Inc. and The City of Pocatello
8-K
000-51458
10.38
3/28/07
10.12 †
Agreement for Engineering of Hoku Electric Substation and Associated Facilities, dated June 14, 2007, by and between Idaho Power Company and Hoku Materials, Inc.
10-Q
000-51458
10.47
08/06/07
10.13 †
Cost Plus Incentive Construction Contract, dated August 8, 2007, by and between JH Kelly LLC and Hoku Materials, Inc.
10-Q
000-51458
10.52
11/13/07
10.14 †
Engineering, Procurement and Construction Management Agreement, dated August 7, 2007, by and between Stone & Webster, Inc. and Hoku Materials, Inc.
10-Q
000-51458
10.53
11/13/07
10.15
Change Order Number 1 to Engineering, Procurement & Construction Management Agreement, dated October 3, 2007, by and between Hoku Materials, Inc. and Stone & Webster, Inc.
10-K
000-51458
10.15
7/14/10
10.16 †
Engineering Services and Technology Transfer Agreement, dated October 6, 2007, by and between Dynamic Engineering Inc. and Hoku Materials, Inc.
10-Q
000-51458
10.55
11/13/07
10.17 †
Amendment and Restatement of Contract, dated October 15, 2007, by and between Graeber Engineering Consultants GmbH and MSA Apparatus Construction for Chemical Equipment Ltd. and Hoku Materials, Inc.
10-Q
000-51458
10.56
11/13/07
10.18
Registration Rights Agreement, dated February 29, 2008, by and among Hoku Scientific, Inc., and the Purchasers named therein
8-K
000-51458
10.65
02/29/08
10.19
Amendment No. 1 to Engineering Services & Technology Transfer Agreement, dated April 4, 2008, by and between Hoku Materials, Inc and Dynamic Engineering Inc.
8-K
000-51458
10.67
04/09/08
10.20 †
Equipment Purchase & Sale Agreement, dated March 4, 2008, by and between Hoku Materials, Inc. and Saft Power Systems USA Inc.
10-K
000-51458
10.68
6/6/08
10.21 †
Change Order Number 2 to Engineering, Procurement & Construction Management Agreement, dated April 8, 2008, by and between Hoku Materials, Inc. and Stone & Webster, Inc.
10-K
000-51458
10.69
6/6/08
10.22 †
Change Order Number 2 to Cost Plus Incentive Construction Contract, dated April 7, 2008, by and between Hoku Materials, Inc. and JH Kelly LLC
10-K
000-51458
10.70
6/6/08
10.23 †
Equipment Purchase & Sale Agreement, dated April 8, 2008, by and between Hoku Materials, Inc and PVA Tepla Danmark
10-K
000-51458
10.71
6/6/08
10.24 †
First Amended & Restated Supply Agreement, dated as of May 12, 2008, by and between Hoku Materials, Inc. and Wuxi Suntech Power Co., Ltd.
10-K
000-51458
10.72
6/6/08
10.25†
Second Amended and Restated Supply Agreement, dated as of May 13, 2008, by and between Hoku Materials, Inc. and Solarfun Power Hong Kong Limited
10-K
000-51458
10.73
6/6/08
10.26
Amended and Restated Agreement for Construction of Hoku Electric Substation and Associated Facilities, dated September 17, 2008, between Hoku Materials, Inc. and Idaho Power Company
8-K
000-51458
10.79
9/22/08
10.27
Amendment No. 1 to Second Amended and Restated Supply Agreement, between Hoku Materials, Inc. and Solarfun Power Hong Kong Limited, with Solarfun Power Holdings Co., Ltd. signing as guarantor, dated as of October 22, 2008
8-K
000-51458
10.81
10/23/08
10.28†
Supply Agreement, dated as of November 19, 2008, by and between Hoku Materials, Inc. and BHS Acquisitions, LLC
10-Q
000-51458
10.88
2/3/09
10.29†
Hoku Solar Power I, LLC Operating Agreement, dated as of December 23, 2008, by and between UFA Renewable Energy Fund I, LLC and Hoku Solar, Inc.
10-Q
000-51458
10.89
2/3/09
10.30†
Development Service Agreement, dated as of December 23, 2008, by and between Hoku Solar, Inc. and Hoku Solar Power I, LLC
10-Q
000-51458
10.90
2/3/09
10.31†
Purchase and Sale and Operation and Maintenance Agreement, dated as of December 23, 2008, by and between Hoku Solar, Inc. and Hoku Solar Power I, LLC
10-Q
000-51458
10.91
2/3/09
10.32
Right of First Refusal Agreement, dated as of December 23, 2008, by and between UFA Renewable Energy Fund I, LLC and Hoku Solar, Inc.
10-Q
000-51458
10.92
2/3/09
10.33
Guaranty, dated as of December 23, 2008, by and between Hoku Solar Power I, LLC; UFA Renewable Energy Fund I, LLC; Firstar Development LLC; Hoku Scientific, Inc.; and Hoku Solar, Inc.
10-Q
000-51458
10.93
2/3/09
10.34
Economic Development Agreement, dated as of May 27, 2009, by and between Hoku Materials, Inc. and Pocatello Development Authority
10-Q
000-51458
10.95
6/2/09
10.35
Amendment to the Equipment Purchase & Sale Agreement dated March 4, 2008, between Hoku Materials, Inc., and AEG Power Solutions USA Inc. (fka Saft Power Systems USA Inc.), dated as of May 29, 2009
10-Q
000-51458
10.96
6/2/09
10.36†
First Amended and Restated Supply Agreement, dated as of May 21, 2009, by and between Hoku Materials, Inc. and Polymet Alloys, Inc.
10-K
000-51458
10.97
6/15/09
10.37†
Change Order Number 3 to Engineering, Procurement & Construction Management Agreement, dated February 19, 2009, by and between Hoku Materials, Inc. and Stone & Webster, Inc.
10-K
000-51458
10.98
6/15/09
10.38†
Supply Agreement, dated as of February 27, 2009, by and between Hoku Materials, Inc. and Shanghai Alex New Energy Co., Ltd.
10-K
000-51458
10.99
6/15/09
10.39†
Amended & Restated Supply Agreement, dated as of February 26, 2009, by and between Hoku Materials, Inc and Jiangxi Jinko Solar Co., Ltd.
10-K
000-51458
10.100
6/15/09
10.40†
Amendment No. 2 to Second Amended & Restated Supply Agreement, dated as of March 26, 2009 by and between Hoku Materials, Inc. and Solarfun Power Hong Kong Limited
10-K
000-51458
10.101
6/15/09
10.41†
Change Order Number 3 to Cost Plus Incentive Contract, dated March 27, 2009 by and between Hoku Materials, Inc. and JH Kelly LLC
10-K
000-51458
10.102
6/15/09
10.42
Amended and Restated Electric Service Agreement, between Hoku Materials, Inc., and Idaho Power Company, dated as of June 19, 2009
8-K
000-51458
10.104
6/22/09
10.43
First Amendment to the First Amended and Restated Supply Agreement between Hoku Materials, Inc. and Wuxi Suntech Power Co., Ltd., signed July 6, 2009
8-K
000-51458
10.105
7/10/09
10.44
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.
8-K
000-51458
10.108
9/29/09
10.45†
Change Order Number 4 to Cost Plus Incentives Contract, dated September 18, 2009, by and between Hoku Materials, Inc. and JH Kelly LLC
10-Q
000-51458
10.109
11/9/09
10.46†
Amended and Restated Supply Agreement No. 1, dated as of December 22, 2009, between Tianwei New Energy Holdings Co. Ltd. and Hoku Materials, Inc.
8-K/A
000-51458
10.110
12/31/09
10.47†
Amended and Restated Supply Agreement No. 2, dated as of December 22, 2009, between Tianwei New Energy Holdings Co. Ltd. and Hoku Materials, Inc.
8-K/A
000-51458
10.111
12/31/09
10.48
Form of Security Agreement (relating to Amended and Restated Supply Agreements No. 1 and No. 2), dated as of December 22, 2009, between Tianwei New Energy Holdings Co. Ltd. and Hoku Materials, Inc.
8-K/A
000-51458
10.112
12/31/09
10.49
Loan Implementation Agreement, dated December 22, 2009, among Hoku Scientific, Inc., Hoku Materials, Inc. and Tianwei New Energy Holdings Co. Ltd.
8-K/A
000-51458
10.113
12/31/09
10.50
Financing Backstop Agreement, dated December 22, 2009, between Tianwei New Energy Holdings, Co., Ltd. and Hoku Scientific, Inc.
8-K/A
000-51458
10.114
12/31/09
10.51†
Amendment No. 1 to Amended and Restated Supply Agreement, dated as of November 25, 2009, between Jinko Solar Co., Ltd. and Hoku Materials, Inc.
10-Q
000-51458
10.115
2/5/10
10.52†
Amendment No. 3 to Second Amended and Restated Supply Agreement, dated as of November 15, 2009, between Solarfun Power Hong Kong Limited and Hoku Materials, Inc.
10-Q
000-51458
10.116
2/5/10
10.53†
Amendment No. 1 to Supply Agreement, dated as of December 30, 2009, between Shanghai Alex New Energy Co., Ltd. and Hoku Materials, Inc.
10-Q
000-51458
10.117
2/5/10
10.54
Consulting Agreement, dated as of March 1, 2010, between Dustin M. Shindo and Hoku Scientific, Inc.
8-K
000-51458
10.118
3/5/10
10.55††
Change Order Number 4 to Engineering, Procurement & Construction Management Agreement, dated February 16, 2010, by and between Hoku Materials, Inc. and Stone & Webster, Inc.
10-K
000-51458
10.55
7/14/10
10.56†
Amendment No. 4 to Second Amended and Restated Supply Agreement, dated as of March 1, 2010, between Solarfun Power Hong Kong Limited and Hoku Materials, Inc.
10-K
000-51458
10.56
7/14/10
10.57†
Sales Agreement, dated as of March 31, 2010, between Evonik Degussa Corporation and Hoku Materials, Inc.
10-K
000-51458
10.57
7/14/10
10.58†
Second Amended & Restated Supply Agreement, dated as of March 31, 2010, by and between Hoku Materials, Inc and Wealthy Rise International, Ltd.
10-K
000-51458
10.58
7/14/10
10.59
Credit Agreement, dated May 24, 2010, between Hoku Corporation and China Merchants Bank Co., Ltd., New York Branch
8-K
000-51458
10.119
5/26/10
10.60
Reimbursement Agreement, dated May 24, 2010, between Hoku Corporation and Tianwei New Energy Holdings Co., Ltd.
8-K
000-51458
10.120
5/26/10
10.61
Credit Agreement, dated June 30, 2010, between Hoku Corporation and China Construction Bank Corporation, New York Branch
8-K
000-51458
10.121
6/30/10
10.62
Reimbursement Agreement, dated June 30, 2010, between Hoku Corporation and Tianwei New Energy Holdings Co., Ltd.
8-K
000-51458
10.122
6/30/10
10.63†
Amendment to the First Amended and Restated Supply Agreement between Hoku Materials, Inc. and Wuxi Suntech Power Co., Ltd., signed June 29, 2010
10-K
000-51458
10.63
7/14/10
10.64
Credit Agreement dated August 16, 2010, between Hoku Corporation and China Merchants Bank Co., Ltd., New York Branch
8-K
000-51458
10.1
8/19/10
10.65
Credit Agreement, dated August 26, 2010, between Hoku Corporation and China Merchants Bank Co., Ltd., New York Branch
8-K
000-51458
10.1
8/30/10
10.66
Reimbursement Agreement, dated August 26, 2010, between Hoku Corporation and Tianwei New Energy Holdings Co., Ltd.
8-K
000-51458
10.2
8/30/10
10.67
Credit Agreement, dated September 16, 2010, between Hoku Corporation and China Merchants Bank Co., Ltd., New York Branch.
8-K
000-51458
10.1
9/17/10
10.68
Reimbursement Agreement, dated September 16, 2010, between Hoku Corporation and Tianwei New Energy Holdings Co., Ltd.
8-K
000-51458
10.2
9/17/10
10.69
Credit Agreement, dated October 8, 2010, between Hoku Corporation and China Merchants Bank Co., Ltd., New York Branch.
8-K
000-51458
10.1
10/12/10
10.70
Reimbursement Agreement, dated October 8, 2010, between Hoku Corporation and Tianwei New Energy Holdings Co., Ltd.
8-K
000-51458
10.2
10/12/10
10.71
Credit Agreement, dated October 18, 2010, between Hoku Corporation and China Construction Bank, Singapore Branch.
8-K
000-51458
10.1
10/20/10
10.72
Reimbursement Agreement, dated October 18, 2010, between Hoku Corporation and Tianwei New Energy Holdings Co., Ltd.
8-K
000-51458
10.2
10/20/10
10.73†
Change Order No. 5 dated August 17, 2010 between Hoku Corporation and JH Kelly, LLC.
10-Q
000-51458
10.10
2/18/11
10.74†
Amendment No. 5 to Second Amended and Restated Supply Agreement dated November 23, 2010 between Hoku Corporation and Solarfun Power Hong Kong Limited
10-Q
000-51458
10.5
2/12/11
10.75
Separation Agreement and Release dated November 30, 2010 between the Company and Karl Taft III
8-K
000-51458
10.1
12/03/10
10.76††
Change Order Number 5 to Engineering, Procurement & Construction Management Agreement, dated December 6, 2010, by and between Hoku Materials, Inc. and Stone & Webster, Inc.
10-Q
000-51458
10.7
2/12/11
10.77
Reimbursement Agreement, dated December 17, 2010, between Hoku Corporation and Tianwei New Energy Holdings Co., Ltd.
8-K
000-51458
10.1
12/27/10
10.78††
Amendment No. 2 to Amended and Restated Supply Agreement dated December 18, 2010 between Hoku Corporation and Jinko Solar Company Limited
10-Q
000-51458
10.9
2/12/11
10.79
Credit Agreement, dated December 20, 2010, between Hoku Corporation and China Merchants Bank Co., Ltd., New York Branch.
8-K
000-51458
10.2
12/27/10
10.80
Credit Agreement, dated December 23, 2010, between Hoku Corporation and Industrial and Commercial Bank of China, Ltd., New York Branch.
8-K
000-51458
10.1
12/28/10
10.81
Reimbursement Agreement, dated December 23, 2010, between Hoku Corporation and Tianwei New Energy Holdings Co., Ltd.
8-K
000-51458
10.2
12/28/10
10.82
Credit Agreement, dated January 10, 2011, between Hoku Corporation and Industrial and Commercial Bank of China, Ltd., New York Branch
10-Q
000-51458
10.13
2/12/11
10.83
Reimbursement Agreement, dated January 10, 2011, between Hoku Corporation and Tianwei New Energy Holdings Co., Ltd.
10-Q
000-51458
10.14
2/12/11
10.84
Credit Agreement, dated February 7, 2011, between Hoku Corporation and CITIC Bank International Limited, New York Branch.
10-Q
000-51458
10.15
2/12/11
10.85
Reimbursement Agreement, dated February 7, 2011, between Hoku Corporation and Tianwei New Energy Holdings Co., Ltd.
10-Q
000-51458
10.16
2/12/11
10.86
Credit Agreement, dated February 25, 2011, among Hoku Corporation, Hoku Materials, Inc. and Bank of China, New York Branch
8-K
000-51458
10.1
03/03/11
10.87
Reimbursement Agreement, dated February 25, 2011, between Hoku Corporation and Tianwei New Energy Holdings Co., Ltd.
8-K
000-51458
10.2
03/03/11
10.88
Amendment No. 2 to Supply Agreement, dated as of January 12, 2011, by and between Hoku Materials, Inc. and Shanghai Alex New Energy Co., Ltd.
*
10.89
Credit Agreement, dated April 6, 2011, between Hoku Corporation and Industrial and Commercial Bank of China, Ltd., New York Branch
8-K
000-51458
10.1
4/7/11
*
10.90
Amended and Restated Sales Agreement, dated February 28, 2011, between Evonik Degussa Corporation and Hoku Materials, Inc.
10.91
Equipment Purchase & Sale Agreement, dated June 24, 2011, by and between Hoku Materials, Inc and PVA Tepla Danmark
*
16.1
Letter from Ernst & Young LLP, dated December 3, 2010, to the United States Securities and Exchange Commission
8-K
000-51458
16.1
12/03/10
21.1
Subsidiaries of Hoku Corporation
10-K/A
000-51458
21.1
7/29/09
23.1
Consent of independent registered public accounting firm
*
23.2
Consent of independent registered public accounting firm
*
24.1
Power of Attorney (included in signature page)
*
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 granted for certain information contained in this document pursuant to an order of the Securities and Exchange Commission. Such information has been omitted and filed separately with the Securities and Exchange Commission.
††
Confidential treatment has been requested for certain information contained in this document. Such information has been omitted and filed separately with the Securities and Exchange Commission.
+
Management contract, compensatory plan or arrangement.
#
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-K 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.