ITEM 1A.
RISK FACTORS
In
addition to the risks discussed in Part I, Item 2, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” our business is
subject to the risks set forth below.
Risks
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, we will be unable to support
our business requirements, build our business or continue as a going
concern.
As of
June 30, 2009, we had cash and cash equivalents on hand of $12.3 million and
short term liabilities of $52.0 million. Net cash used in operations was
approximately $1.8 million for the three months ended June 30,
2009.
If we are
unable to generate revenue or secure adequate additional financing when needed,
we will be forced to further reduce expenditures in order to continue as a going
concern. Reduction of expenditures could have a material adverse effect on our
business.
The
amount and timing of our future capital needs depend on many factors, including
the timing of our development efforts, opportunities for strategic transactions,
and the amount and timing of any revenues we are able to generate. Given our
current business strategy, however, we will need to secure additional financing
in order to execute our plans and continue our operations.
Over the
next twelve months, we may have insufficient cash to meet all of our obligations
as they come due. We have already modified payment terms in purchase orders with
more than twenty of our vendors to structure payment plans for amounts past due
and to be invoiced in the future and slowed construction and procurement at our
polysilicon production facility. 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
Pocatello facility, or taking other legal action, it could materially harm our
business, financial condition and results of operations and we may be forced to
delay, alter or abandon our planned business operations, which could have a
material adverse effect on the Company’s ability to continue as a going
concern.
There are
no assurances that we will be successful in executing any of the foregoing
alternatives. If we are unable to raise capital and manage our liquidity, there
is substantial doubt that we will be able to continue as a going concern through
at least June 30, 2010. The inability to continue as a going concern could
result in an orderly wind-down of our business or other potential forms of
restructuring.
Our
independent registered public accounting firm’s report on our fiscal 2009
financial statements questions our ability to continue as a going
concern.
Our
independent registered public accounting firm’s report on our financial
statements for each of the three years in the period ended March 31, 2009,
expresses doubt about our ability to continue as a going concern. Their report
includes an explanatory paragraph stating that there is substantial doubt about
our ability to continue as a going concern due to the lack of sufficient
capital, as of the date their report was issued, to support our business plan
through the end of fiscal year 2010.
We will
need to secure additional financing in the future and if we are unable to secure
adequate funds at the times needed and on terms acceptable to us, we will be
unable to support our business requirements, build our business or continue as a
going concern. Accordingly, we can offer no assurance that the actions we plan
to take to address these conditions will be successful. The inclusion of a
“going concern modification” in the report of our independent accountants, in
and of itself, may have a material adverse effect on our ability to obtain
financing and to conduct our business generally, which could have a material
adverse effect on our stock price.
We need at least $390 million to
construct and equip our planned polysilicon production plant, and we may be
unable to raise this amount of capital on favorable terms or at
all
.
Our
planned entry into the polysilicon market will require us to spend significant
sums to support the construction of a facility to produce polysilicon, to
purchase capital equipment, to fund new sales and marketing efforts, to pay for
additional operating costs and to significantly increase our headcount. As a
result, we expect our costs to increase significantly, which will result in
further losses before we can begin to generate significant operating revenue
from our Hoku Materials division.
Based on
our polysilicon supply agreements with our customers, we plan to equip and
construct a polysilicon production plant in Pocatello, Idaho, with a production
capacity of 4,000 metric tons of polysilicon per year. Our original estimated
actual construction cost for a facility capable of producing 3,500 metric tons
of polysilicon per year was $390 million; however, we have not yet determined
what, if any, additional cost associated with the increase in our planned
production output from 3,500 to 4,000 metric tons per year will be, and we
continue to review our construction cost estimates. Our estimates are based on
our discussion with vendors, declining costs of materials and labor and ongoing
adjustments of certain design elements; however, changes in costs, modifications
in construction timelines and other factors could significantly increase the
actual costs. We plan on funding the remaining construction costs through
customer prepayments and/or through debt or equity financing. As of July 15,
2009, we had received $162 million in customer prepayments under our supply
contracts and expect to receive an additional $81.4 million in customer
prepayments. As of June 30, 2009, we had also contributed an additional
approximately $41 million to the construction cost of our polysilicon
plant.
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, construction, and procurement of our polysilicon plant in order to
deliver polysilicon in the second half of calendar year 2009, or within the time
periods specified in our customer supply contracts, which could materially harm
our business. Even if we receive these prepayments on time and in the amounts
agreed upon, the actual costs to engineer, construct, and procure our planned
polysilicon production 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 begin producing polysilicon by the end of
calendar year 2009 and meet our customer commitments, our business will be
materially harmed and we may be forced to delay, alter or abandon our planned
business operations.
Assuming
the total actual cost to complete the construction of our 4,000 metric ton plant
is $390 million, we believe we will need to raise through one or more debt or
equity offerings for the procurement and construction of our planned polysilicon
manufacturing facility. If we must raise capital through one or more
equity offerings, depending on the size of the offering, the issuance of our
stock could result in material dilution to our existing stockholders’ voting
power and/or share value.
Prior to
obtaining additional debt or equity financing we believe we will have to, among
other things, satisfy potential lenders and investors that we have adequately
addressed the principal risks that: (1) the construction of the polysilicon
plant is not completed on time, on budget, or at all; (2) the polysilicon plant
does not operate at its full capacity; (3) the polysilicon plant fails to
generate sufficient revenue to service any debt; or (4) that the financing will
not be sufficient to complete the construction, procurement and start-up of our
planned polysilicon plant. If we fail to successfully address the risks of
concern to potential lenders and investors, we may be unable to finance the
construction of our planned production plant, our business will be materially
harmed, and we may be forced to delay, alter or abandon our planned polysilicon
business operations. In addition, any delay in achieving these
objectives may result in additional expense which would harm our
business.
There are
no assurances that we will be successful in executing any of the foregoing
alternatives. If we are unable to raise capital and manage our liquidity, there
is substantial doubt that we will be able to continue as a going concern through
at least June 30, 2010. The inability to continue as a going concern could
result in an orderly wind-down of our business or other potential forms of
restructuring.
The actual cost to construct and
equip our planned polysilicon production facility may be significantly higher
than our estimated cost
.
Our
estimate of $390 million to construct and equip our polysilicon production
facility is based on our discussion with vendors, declining costs of materials
and labor and ongoing adjustments of certain design elements; however, changes
in costs, modifications in construction timelines and other factors could cause
our actual cost to significantly exceed our estimate. If the actual cost is
significantly higher than we estimate, it could materially and adversely affect
our ability to raise capital, to complete the planned polysilicon production
facility on schedule or at all, and could materially harm our business,
financial condition and results of operations and we may be forced to delay,
alter or abandon our planned business operations.
The
slowdown of construction and procurement at our polysilicon production facility
increases the risk that we will not meet certain construction and delivery
milestones in our long-term polysilicon supply contracts.
The
inability to resume and accelerate construction and procurement at our
polysilicon production facility increases the likelihood that we will be unable
to meet certain construction and delivery milestones in our long-term
polysilicon contracts, which could cause a termination of one or more of our
polysilicon supply contracts and the corresponding right to seek a refund of any
prepayments made as of the date of termination. Any such termination
could have a material adverse effect on our financial condition and results of
operations.
Assuming
the cost to complete the facility is $390 million, and assuming all of our
polysilicon customers honor their commitments to make timely prepayments, we
will still need to raise capital through one or more debt or equity offerings
for the procurement and construction of our planned polysilicon manufacturing
facility.
We
previously intended to finance the construction of our polysilicon production
facility through project financing; however, as of July 2009, we believe we will
need to raise additional capital through other means for the procurement and
construction of our polysilicon manufacturing facility. We continue
to evaluate a variety of alternatives to finance the construction of our
polysilicon production facility. These alternatives include one or more debt or
equity offerings, government funding from grants, loan guarantees or other
transactions, a consequence of which could include the sale or issuance of stock
to third parties and/or a change of control. Assuming the total
actual cost to construct and equip the facility is $390 million, that we are
successful in receiving all customer prepayments that are presently committed to
us when due, and that we secure additional prepayments from new polysilicon
customers, we still believe we will need to raise no less than $35 million
through one or more debt or equity financings. In the event we are unable to
secure additional customer prepayments and supply contracts, assuming the cost
to complete the plant does not exceed $390 million and that all of our current
polysilicon supply customers pay the full amount of the prepayments they are
currently committed to pay, the amount we will need to raise could be as much as
$106 million ($121 million if the New Amendment to the Amended Suntech Supply
Agreement becomes effective). If we are unable to secure additional customer
prepayments and supply contracts, if for any reason (e.g. contract amendment,
termination, breach, etc.) one or more of our polysilicon supply customers do
not pay the full amount of prepayments to which they are presently committed
and/or the actual cost to complete the plant is more than $390 million, the
amount we will need to raise could exceed $106 million (the amount could exceed
$121 million if the New Amendment to the Amended Suntech Supply Agreement
becomes effective). If we must raise capital through one or more equity
offerings, depending on the size of the offering, the issuance of our stock
could result in material impairment of our existing stockholders’ voting power,
material impairment of our existing stockholders’ share value and/or a change of
control.
There are
no assurances that we will be able to secure any additional debt or equity
financing (including through a merger or acquisition transaction) on favorable
terms, at the time such financing is needed, or at all. If we are unable to
secure adequate debt or equity financing to complete construction of our
polysilicon production facility in time to meet certain milestones and/or to
meet our customer commitments, our business will be materially harmed and we may
be forced to delay, alter or abandon our planned business operations, which
could have a material adverse effect on our ability to continue as a going
concern. This raises substantial doubt about our ability to continue
as a going concern. The inability to continue as a going concern
could result in an orderly wind-down of our business or other potential forms of
restructuring.
We have a limited operating history
and, in calendar year 2006, determined to enter the photovoltaic installations
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 PV 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 June 30, 2009. In calendar
year 2006, we announced a change in our main business and our intention to form
a polysilicon business through our subsidiary, Hoku Materials, and a
photovoltaic, or PV, system installation business through our subsidiary Hoku
Solar. The polysilicon business includes developing production capabilities for,
and the eventual production of, polysilicon. The PV systems installation
business includes the design, engineering, procurement and installation of
turnkey PV systems for residential and commercial customers. Prior to our
announcement, our business was solely focused on the stationary and automotive
fuel cell markets. We do not expect to generate any material revenue from Hoku
Fuel Cells in the foreseeable future, and Hoku Materials does not currently
generate any operating revenue.
We have
no prior experience in the polysilicon business. In order to be successful, we
are devoting substantial management time and energy and significant capital
resources to developing this new business, including the construction of a
polysilicon production facility in Pocatello, Idaho. We commenced construction
in May 2007, and expect to begin producing polysilicon beginning in the second
half of calendar year 2009, with full-scale production to begin in the first
half of calendar year 2010; however, there are no assurances that this schedule
will not need to be further modified. Any delays beyond the second half of
calendar year 2009 could result in the termination of one or more of our
customer supply contracts, which would require us to refund substantial amounts
of cash that has been paid to us as prepayments for future product deliveries.
We have encountered, and expect that we will continue to encounter, significant
risks relating to our entering into the polysilicon industry and changes in that
industry, including potentially significant increases in polysilicon supply and
falling polysilicon prices. If we are unable to address these risks and other
risks successfully, our business, financial condition and results of operations
will be materially and adversely affected.
If
any of our polysilicon plant engineering, construction, or key equipment vendors
are late in providing their contract deliverables, we may be unable to complete
the construction of our planned polysilicon plant to begin commercial shipments
in the second half of calendar year 2009, or at all, which could materially harm
our business.
We have
contracts with Stone & Webster, Inc. JH Kelly, LLC, GEC Graeber Engineering
Consultants GmbH and MSA Apparatus Construction for Chemical Equipment, Ltd.,
Idaho Power Company, Dynamic Engineering Inc., AEG Power Solutions USA Inc.,
formerly known as Saft Power Systems USA, Inc., PVA Tepla Danmark, Polymet
Alloys, Inc., BHS Acquisitions, LLC and our other vendors, contractors and
consultants who are providing key services, equipment, and supplies for the
engineering, construction and procurement of our planned polysilicon plant in
Pocatello, Idaho. If we experience delays in the performance or delivery of the
services, equipment, and goods under these respective agreements, we may be
unable to commence production of polysilicon in the second half of calendar year
2009, to ramp-up production and commence commercial shipments in calendar year
2010, or deliver the volume of polysilicon that is required under our
polysilicon supply agreements.
If we are unable to secure adequate
quantities of trichlorosilane on favorable terms and at the times needed, our
business will be materially harmed
.
We have
decided to defer approximately $40 million in capital expenditures by delaying
construction of our on-site trichlorosilane, or TCS, production facility. TCS is
needed to produce polysilicon. We are in discussions with third-party
TCS producers for a TCS supply contract to enable us to execute on this
strategy. There are no assurances, however, that we will be able to secure
adequate TCS at the time and in the amounts needed on favorable terms, or at
all. If we are unable to secure adequate TCS on favorable terms and at the times
needed, we may be unable to meet certain milestones in our customer contracts or
to meet our customer supply commitments and our business, financial condition
and results of operations will be materially harmed.
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 our planned polysilicon facility in Pocatello, Idaho.
Construction of the planned polysilicon facility and the operation of the
polysilicon manufacturing and PV system installation businesses will involve
substantial changes to our operations and place a significant strain on our
senior management team and financial and other resources, and will, among other
things, require us to significantly increase our international activities; hire
and train additional financial, accounting sales and marketing personnel; and
make substantial investment in our engineering, logistics, financial and
information systems, including implementing new enterprise-level transaction
processing, operational and financial management information systems, procedures
and controls.
Any
failure by us to manage the expansion of our operations or succeed in these
markets or other markets that we may enter in the future, may harm our business,
prospects, financial condition and results of operations.
If our supply agreement with Wuxi
Suntech Power Co., Ltd. is terminated for any reason, our business will be
materially harmed
.
In May
2008, we amended our polysilicon supply agreement with Wuxi Suntech Power Co.,
Ltd., or Suntech, for the sale and delivery of polysilicon to Suntech over a
ten-year period, or the Amended Suntech Supply Agreement. In July 2009, we
entered into an amendment to the Amended Supply Agreement. Under the Amended
Suntech Supply Agreement, up to approximately $678 million may be payable to us
during the ten-year period, subject to the achievement of certain milestones,
the acceptance of product deliveries and other conditions. Pursuant to the
Amended Suntech Supply Agreement, we granted to Suntech a security interest in
all of our tangible and intangible assets related to our polysilicon business to
serve as collateral for our obligations under the Amended Suntech Supply
Agreement. These security interests are pari-passu with the security interests
granted to our other five long-term supply customers. The customer security
interests provide that they would be junior to the collateral interest of any
lender providing debt financing for plant construction.
Each
party may elect to terminate the Amended Suntech Supply Agreement under certain
circumstances, including, but not limited to:
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the bankruptcy, assignment for
the benefit of creditors or liquidation of the other party;
or
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the insolvency of the other
party; or
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a material breach of the other
party.
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Suntech
may also terminate the agreement for the following material
breaches:
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if we enter into customer
commitments to deliver more than the rated capacity of our plant, subject
to exceptions for planned expansion and increases in productivity;
or
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if we fail to deliver a
predetermined quantity of our polysilicon product by December 2009;
or
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if we fail to complete
successfully any of the polysilicon quality and production volume tests or
the process implementation test set forth in the agreement within
specified periods of time during calendar year
2009.
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In
addition, in the instance of extraordinary events, including events of force
majeure and other events outside of our control, which result in our inability
to perform under the terms of the Amended Suntech Supply Agreement, we are
afforded only a limited amount of time to cure such conditions. In the event we
fail to cure the condition so that we can supply our product to Suntech or
otherwise satisfy our delivery requirements by delivering to Suntech third-party
polysilicon purchased in the open market, Suntech may terminate the Amended
Suntech Supply Agreement.
There is
a material risk that we will be unable to meet one or more of the milestones set
forth in the Amended Suntech Supply Agreement within the specified period of
time during calendar year 2009. See
Amendment to First Amended and
Restated Supply Agreement with Wuxi Suntech Power Co., Ltd.
If
we are unable to meet one or more milestones, Suntech has the right to terminate
the Amended Suntech Supply Agreement. If the Amended Suntech Supply Agreement is
terminated for any reason, our business will be materially harmed. In addition,
if the Amended Suntech Supply Agreement is terminated by Suntech, we will be
required to return any deposits and advance payments received up to the date of
the termination, which was $2 million as of July 2009, and we will need to
secure new funds in order to finance the construction of our polysilicon
production plant. Securing new funds may delay the anticipated timing of
completion of the production 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
Suntech Supply Agreement or at all. If we are unable to secure new funds, we
will not be able to complete construction of the production plant, our business
will be materially harmed and we may be forced to delay, alter or abandon our
planned business operations.
If our supply agreement with Solarfun
Power Hong Kong Limited is terminated for any reason, our business will be
materially harmed
.
In May
2008, we and Solarfun Power Hong Kong Limited, or Solarfun, a subsidiary of
Solarfun Power Holdings Co., Ltd., or Solarfun Holdings, entered into a Second
Amended and Restated Supply Agreement, or the Solarfun Supply Agreement,
pursuant to which we have agreed to sell to Solarfun, and Solarfun has agreed to
purchase from us, specified quantities of polysilicon over a ten-year
period. In March 2009, we entered into Amendment No. 2 to the Second
Amended and Restated Solarfun Supply Agreement with Solarfun, or Solarfun
Amendment No. 2. Under Solarfun Amendment No. 2, up to approximately $384
million may be payable to us over a ten year period. Pursuant to the Second
Amended and Restated Solarfun Supply Agreement and Solarfun Amendment No. 2, we
granted to Solarfun a security interest in all of our tangible and intangible
assets related to our polysilicon business to serve as collateral for our
obligations under the Second Amended and Restated Solarfun Supply Agreement and
Solarfun Amendment No. 2. These security interests are pari-passu with the
security interests granted to our other five long-term supply customers. The
customer security interests provide that they would be junior to the collateral
interest of any lender providing debt financing for plant
construction.
Each
party may elect to terminate the Second Amended and Restated Solarfun Supply
Agreement and Solarfun Amendment No. 2 under certain circumstances, including,
but not limited to:
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the bankruptcy, assignment for
the benefit of creditors or liquidation of the other party;
or
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the insolvency of the other
party; or
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a material breach of the other
party.
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Solarfun
may also terminate the Second Amended and Restated Solarfun Supply Agreement and
Solarfun Amendment No. 2 if we fail to deliver a predetermined quantity of
polysilicon product by June 2010. There is a material risk that we
will not meet this delivery milestone. In addition, in the instance
of extraordinary events, including events of force majeure and other events
outside of our control, which result in our inability to perform under the terms
of the Second Amended and Restated Solarfun Supply Agreement, as amended by
Solarfun Amendment No. 2, we are afforded only a limited amount of time to cure
such conditions. In the event we fail to cure the condition so that we can
supply our product to Solarfun or otherwise satisfy our delivery requirements by
delivering to Solarfun third-party polysilicon purchased in the open market,
Solarfun may terminate the Second Amended and Restated Solarfun Supply Agreement
and Solarfun Amendment No. 2.
If the
Second Amended and Restated Solarfun Supply Agreement and Solarfun Amendment No.
2 are terminated for any reason, our business will be materially harmed. In
addition, if the Second Amended and Restated Solarfun Supply Agreement and
Solarfun Amendment No. 2 are terminated by Solarfun, we will be required to
return any deposits and advance payments received up to the date of the
termination, which was $37 million as of July 15, 2009, and we will need to
secure new funds in order to finance the construction of our polysilicon
production plant. Securing new funds may delay the anticipated timing of
completion of the production plant, which delay may result in us failing to meet
our delivery requirements under our polysilicon supply agreements. We may not be
able to secure new funds on terms as favorable to us as those under the Second
Amended and Restated Solarfun Supply Agreement and Solarfun Amendment No. 2, or
at all. If we are unable to secure new funds, we will not be able to complete
construction of the production plant, our business will be materially harmed and
we may be forced to delay, alter or abandon our planned business
operations.
If our supply agreement with Jiangxi
Jinko Solar Co., Ltd. is terminated for any reason, our business will be
materially harmed
.
In
February 2009, we entered into an Amended & Restated Supply Agreement with
Jiangxi Jinko Solar Co., Ltd., or the Amended Jinko Supply Agreement. Under the
Amended Jinko Agreement, up to approximately $119 million may be payable to us
during a ten-year period, subject to product deliveries and other conditions.
Pursuant to the Amended Jinko Supply Agreement, we granted to Jinko a security
interest in all of our tangible and intangible assets related to our polysilicon
business to serve as collateral for our obligations under the Amended Jinko
Supply Agreement. These security interests are pari-passu with the security
interests granted to our other five long-term supply customers. The customer
security interests provide that they would be junior to the collateral interest
of any lender providing debt financing for plant construction.
Each
party may elect to terminate the Amended Jinko Supply Agreement under certain
circumstances, including, but not limited to:
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the bankruptcy, assignment for
the benefit of creditors or liquidation of the other party;
or
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the insolvency of the other
party; or
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a material breach of the other
party.
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Jinko may
also terminate the agreement if we fail to deliver a predetermined quantity of
our polysilicon product by December 31, 2009. There is a material risk that we
will not meet this delivery milestone. In addition, in the instance of
extraordinary events, including events of force majeure and other events outside
of our control, which result in our inability to perform under the terms of the
Amended Jinko Supply Agreement, we are afforded only a limited amount of time to
cure such conditions. In the event we fail to cure the condition so that we can
supply our product to Jinko or otherwise satisfy our delivery requirements by
delivering to Jinko third-party polysilicon purchased in the open market, Jinko
may terminate the Amended Jinko Supply Agreement.
If the
Amended Jinko Supply Agreement is terminated for any reason, our business will
be materially harmed. In addition, if the Amended Jinko Supply Agreement is
terminated by Jinko, we will be required to return any deposits and advance
payments received up to the date of the termination, which was $20 million as of
July 2009, and we will need to secure new funds in order to finance the
construction of our polysilicon production plant. Securing new funds may delay
the anticipated timing of completion of the production 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 Jinko Supply Agreement or at all. If we are unable to
secure new funds, we will not be able to complete construction of the production
plant, our business will be materially harmed and we may be forced to delay,
alter or abandon our planned business operations.
If either of our supply agreements
with Tianwei New Energy (Chengdu) Wafer Co., Ltd. is terminated for any reason,
our business will be materially harmed
.
In August
2008, we entered into a supply agreement with Tianwei New Energy (Chengdu) Wafer
Co., Ltd., or Tianwei, for the sale and delivery of polysilicon to Tianwei over
a ten-year period, or Tianwei Supply Agreement No. 1. Under Tianwei
Supply Agreement No. 1, up to approximately $284 million may be payable to us
during the ten-year period, subject to the acceptance of product deliveries and
other conditions. In July 2009, we entered into Amendment No. 3 to Tianwei
Supply Agreement No. 1, pursuant to which approximately $260 million may be
payable to us during the ten-year period, subject to the acceptance of product
deliveries and other conditions. See
Entry into Amendment No. 3 to Supply
Agreement No. 1 with Tianwei New Energy (Chengdu) Wafer Co.,
Ltd.
In
September 2008, we entered into a second supply agreement with Tianwei for the
sale and delivery of polysilicon to Tianwei over a ten-year period, or Tianwei
Supply Agreement No. 2. Under Tianwei Supply Agreement No. 2, as amended by that
Amendment to Tianwei Supply Agreement No. 2, up to approximately $244 million
may be payable to us during the ten-year period, subject to the acceptance of
product deliveries and other conditions. In July 2009, we entered
into Amendment No. 2 to Tianwei Supply Agreement No. 2, pursuant to which
approximately $208 million may be payable to us during the ten-year period,
subject to the acceptance of product deliveries and other
conditions. See
Entry into Amendment No. 2 to Supply
Agreement No. 2 with Tianwei New Energy (Chengdu) Wafer Co.,
Ltd.
Pursuant
to Tianwei Supply Agreement No. 1 and Tianwei Supply Agreement No. 2, as amended
in each case, or the Tianwei Supply Agreements, we have granted to Tianwei a
security interest in all of our tangible and intangible assets related to our
polysilicon business to serve as collateral for our obligations under the
Tianwei Supply Agreements. This security interest is pari-passu with
the security interests granted to our other five long-term supply customers. The
customer security interests provide that they would be junior to the collateral
interest of any lender providing debt financing for plant
construction.
Each
party may elect to terminate either of the Tianwei Supply Agreements under
certain circumstances, including, but not limited to:
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the bankruptcy, assignment for
the benefit of creditors or liquidation of the other party;
or
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the insolvency of the other
party; or
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a material breach of the other
party.
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In
addition, in the instance of extraordinary events, including events of force
majeure and other events outside of our control, which result in our inability
to perform under the terms of either or both of the Tianwei Supply Agreements,
we are afforded only a limited amount of time to cure such
conditions. In the event we fail to cure the condition so that we can
supply our product to Tianwei or otherwise satisfy our delivery requirements by
delivering to Tianwei third-party polysilicon purchased in the open market,
Tianwei may terminate the respective Tianwei Supply Agreement.
Tianwei
may also terminate Tianwei Supply Agreement No. 1 if we fail to deliver a
predetermined quantity of our polysilicon product by March 2010. Tianwei may
terminate Tianwei Supply Agreement No. 2 if we fail to deliver a predetermined
quantity of our polysilicon product by June 2010. There is a material risk that
we will not meet these delivery milestones. Upon a termination of
Tianwei Supply Agreement No. 1 by Tianwei due to our failure to deliver
polysilicon in the amounts and by the dates required in the contract, we are
required to refund to Tianwei 150% of the prepayments made as of the date of
such termination, which is $44 million as of July 2009, less any part of thereof
that has been applied to the purchase price of products previously delivered to
Tianwei. In most other cases, if Tianwei terminates Tianwei Supply
Agreement No. 1, then we are required to refund to Tianwei 100% of the
prepayments made as of the date of termination, less any part of thereof that
has been applied to the purchase price of products previously delivered under
the contract. Upon a termination of Tianwei Supply Agreement No. 2 by Tianwei
due to our failure to deliver polysilicon in the amounts and by the dates
required in the contract, we are required to refund to Tianwei 150% of the
prepayments made as of the date of termination, which is $35 million as of July
2009, less any part thereof that has been applied to the purchase price of
products previously delivered to Tianwei. In most other cases, if Tianwei
terminates Tianwei Supply Agreement, No. 2, then we are required to refund to
Tianwei 100% of the prepayments made as of the date of termination, less any
part thereof that has been applied to the purchase price of products previously
delivered under the contract.
If either
or both of the Tianwei Supply Agreements is terminated for any reason, our
business will be materially harmed. In addition, if Tianwei Supply Agreement No.
1 is terminated, we will be required to return any deposits and advance payments
received up to the date of the termination, which is $44 million as of July
2009. If Tianwei Supply Agreement No. 2 is terminated, we will be
required to return any deposits and advance payments received up to the date of
the termination, which is $35 million as of July 2009. In the event of the
termination of either of the Tianwei Supply Agreements, we will need to secure
new funds in order to finance the construction of our polysilicon production
plant. Securing new funds may delay the anticipated timing of completion of our
production 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 Tianwei Supply Agreements,
or at all. If we are unable to secure new funds, we will not be able to complete
construction of the production plant, our business will be materially and
adversely affected and we may be forced to delay, alter or abandon our planned
business operations.
If our supply agreement with Wealthy
Rise International, Ltd.
is terminated for any reason, our
business will be materially harmed
.
In April
2009, we entered into an Amended and Restated Supply Agreement, or the Amended
Solargiga Supply Agreement, with Wealthy Rise International, Ltd., or Solargiga,
pursuant to which up to approximately $136 million may be payable to us over a
ten-year period, subject to product deliveries and other
conditions. Pursuant to the Amended Solargiga Supply Agreement, we
granted to Solargiga a security interest in all of our tangible and intangible
assets related to our polysilicon business to serve as collateral for our
obligations under the Amended Solargiga Supply Agreement. These security
interests are pari-passu with the security interests granted to our other five
long-term supply customers. The customer security interests provide that they
would be junior to the collateral interest of any lender providing debt
financing for plant construction.
Each
party may elect to terminate the Amended Solargiga Supply Agreement under
certain circumstances, including, but not limited to:
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the bankruptcy, assignment for
the benefit of creditors or liquidation of the other party;
or
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the insolvency of the other
party; or
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a material breach of the other
party.
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Solargiga
may also terminate the agreement if we fail to deliver a predetermined quantity
of our polysilicon product by October 31, 2010. There is a material risk that we
will not meet this delivery milestone. In addition, in the instance of
extraordinary events, including events of force majeure and other events outside
of our control, which result in our inability to perform under the terms of the
Amended Solargiga Supply Agreement, we are afforded only a limited amount of
time to cure such conditions. In the event we fail to cure the condition so that
we can supply our product to Solargiga or otherwise satisfy our delivery
requirements by delivering to Solargiga third-party polysilicon purchased in the
open market, Solargiga may terminate the Amended Solargiga Supply
Agreement.
If the
Amended Solargiga Supply Agreement is terminated for any reason, our business
will be materially harmed. In addition, if the Amended Solargiga
Supply Agreement is terminated by Solargiga as a result of our failure to
deliver polysilicon in the amounts and by the dates required in the Amended
Solargiga Supply Agreement, we are required to refund to Solargiga all of the
prepayments made as of the date of such termination, which was $7 million as of
July 2009, less any part of thereof that has been applied to the purchase price
of polysilicon delivered under the Amended Solargiga Supply Agreement. Moreover,
we will need to secure new funds in order to finance the construction of our
polysilicon production plant. Securing new funds may delay the anticipated
timing of completion of the production 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 Solargiga Supply Agreement or at all.
If we are unable to secure new funds, we will not be able to complete
construction of the production plant, our business will be materially harmed and
we may be forced to delay, alter or abandon our planned business
operations.
If our Agreement with Shanghai Alex
New Energy Co., Ltd.
is
terminated for any reason, our business will be materially
harmed
.
In
February 2009, we entered into a supply agreement with Shanghai Alex New Energy
Co., Ltd., or Alex, for the sale and delivery of polysilicon to Alex over a
ten-year period, or the Alex Supply Agreement. Under the Alex Supply Agreement,
approximately $119 million may be payable to us during a ten-year period,
subject to product deliveries and other conditions. Pursuant to the Alex Supply
Agreement, we granted to Alex a security interest in all of our tangible and
intangible assets related to our polysilicon business to serve as collateral for
our obligations under the Alex Supply Agreement. These security interests are
pari-passu with the security interests granted to our other five long-term
supply customers. The customer security interests provide that they would be
junior to the collateral interest of any lender providing debt financing for
plant construction.
Each
party may elect to terminate the Alex Supply Agreement under certain
circumstances, including, but not limited to:
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the bankruptcy, assignment for
the benefit of creditors or liquidation of the other party;
or
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the insolvency of the other
party; or
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a material breach of the other
party.
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Alex may
also terminate the agreement if we fail to deliver a predetermined quantity of
our polysilicon product by March 31, 2010. There is a material risk that we will
not meet this delivery milestone. In addition, in the instance of extraordinary
events, including events of force majeure and other events outside of our
control, which result in our inability to perform under the terms of the Alex
Supply Agreement, we are afforded only a limited amount of time to cure such
conditions. In the event we fail to cure the condition so that we can supply our
product to Alex or otherwise satisfy our delivery requirements by delivering to
Alex third-party polysilicon purchased in the open market, Alex may terminate
the Alex Supply Agreement.
If the
Alex Supply Agreement is terminated for any reason, our business may be
materially and adversely affected. In addition, if the Alex Supply
Agreement is terminated by Alex as a result of our failure to deliver
polysilicon in the amounts and by the dates required in the Alex Supply
Agreement, we are required to refund to Alex all of the prepayments made as of
the date of termination, which was $17 million as of July 2009, less any part
thereof that has been applied to the purchase price of polysilicon delivered
under the Alex Supply Agreement. Moreover, we will need to secure new funds in
order to finance the construction of our polysilicon production plant. Securing
new funds may delay the anticipated timing of completion of the production
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 Alex Supply Agreement or at
all. If we are unable to secure new funds, we will not be able to complete
construction of the production plant, our business will be materially and
adversely affected and we may be forced to delay, alter or abandon our planned
business operations.
We will face intense competition in
the polysilicon market from large competitors with significantly greater
operating histories and financial and technological resources. We
expect polysilicon supply to increase and competition to further
intensify
.
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., and Wacker Chemie AG. In addition,
new companies have emerged in China, Korea, India, Europe, Brazil, Australia,
North America, and the Middle East, and new technologies, such as fluidized bed
reactors and direct solidification, are emerging, which may have significant
cost and other advantages over the Siemens process we are planning to use to
produce polysilicon at our production facility. These competitors may have
longer operating histories, greater name recognition and greater financial,
sales and marketing, technical and other resources than us. As a result of these
disparities, we may be unable to successfully obtain and retain the customer and
supplier relationships necessary to be successful in the polysilicon market and
PV system installation market, and our operating results and our businesses may
suffer.
Certain
polysilicon producers have announced plans to invest heavily in the expansion of
their production capacities in view of the recent scarcity of solar-grade
silicon. These initiatives may increase the visibility of already-operational
competitors in the industry and their promised delivery capacities, making it
more difficult for us to establish market share as a new entrant, especially
given the fact that our production facility is not yet operational. Further, as
these initiatives develop, we expect significant additional production capacity
to come on-line in fiscal 2010, near in time to when our proposed polysilicon
facility is scheduled to become fully operational. This additional capacity may
suppress prices, which could make it more difficult to retain our existing
customer relationships and to make new relationships, and otherwise adversely
affect our business.
Fluctuations in industrial production
capacity for polysilicon could harm our business
.
Certain
polysilicon producers have invested heavily in the expansion of their production
capacities in view of the recent scarcity of solar-grade polysilicon. We
currently expect significant additional capacity to come on-line in fiscal 2010,
near in time to when our proposed polysilicon facility is scheduled become fully
operational. In addition, if an excess supply of electronic-grade polysilicon
were to develop, producers of electronic-grade silicon could switch production
to solar-grade polysilicon, causing the price of solar-grade polysilicon to
decline more rapidly than we currently anticipate. The electronic-grade
polysilicon market historically has experienced significant cyclicality; for
example, that market experienced significant excess supply from 1998 through
2003. Moreover, the forecasted increases in polysilicon supply could also be
exacerbated if the demand for polysilicon decreases significantly as a result of
the introduction of new technologies that materially reduce or eliminate the
need for polysilicon in producing effective PV systems.
If any of
these events occurred, they could result in an excess supply of solar-grade
polysilicon and could suppress market prices for solar-grade polysilicon. Any
such suppression of market prices for polysilicon would affect the price which
we could expect to receive in selling our polysilicon in the spot market and
could provide our customers with incentives to reconsider or renegotiate their
long-term supply contracts with us to the extent the polysilicon deliverable
under those contracts is priced above prevailing market prices. During fiscal
year 2009, spot market prices of polysilicon decreased dramatically with an
increase in supply, and further price declines are possible in fiscal 2010 as
additional supply is forecasted to enter the market. Further
decreases in demand and polysilicon prices could materially harm our business,
financial condition and results of operations.
Conversely,
in the past, industry-wide shortages of polysilicon have created shortages of PV
modules and increased prices for such modules. In the event of a polysilicon
shortage, any inability to obtain PV modules at commercially reasonable prices,
or at all, would adversely affect our PV system installation business by
reducing our ability to meet potential customer demand for our products or to
provide products at competitive prices. Any continued industry shortage in
available polysilicon could delay the potential growth of our PV system
installations business, thereby harming our business.
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 our planned polysilicon
production facility on our current schedule. Any such production delays may
result in a breach of one or more of our supply agreements with Alex, Suntech,
Solarfun, Jinko, Tianwei and/or Solargiga and such breaches may allow these
customers to terminate the supply agreements and seek a return of prepayments,
which would harm our business and may make impossible the completion of our
polysilicon production facility.
Even if we achieve our polysilicon
and PV system installation objectives on a timely basis and complete the
construction of our polysilicon production plant as currently planned, we may
still be unsuccessful in developing, producing and/or selling these products and
services, which would harm our business
.
If we are
successful in our efforts to construct our polysilicon production facility, our
ability to successfully compete in the polysilicon and PV system installation
markets will depend on a number of factors, including:
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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;
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our ability to successfully
manage a much larger and growing enterprise, with a broader national and
international presence;
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our ability to attract new
customers and expand existing customer
relationships;
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our ability to develop new
technologies to become competitive through cost
reductions;
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our ability to scale our business
to be competitive;
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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
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future product liability or
warranty claims.
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If our PV system installation
competitors are able to develop and market products that customers prefer to our
products, we may not be able to generate sufficient revenue to continue
operations
.
The
market for PV systems installations is competitive and continually evolving. As
a new entrant to this market, we expect to face substantial competition from
companies such as SunPower Corporation, SunEdison, and other new and emerging
companies throughout many parts of the world. Many of our known competitors are
established players in the solar industry, and have a stronger market position
than ours and have larger resources and name recognition than we have.
Furthermore, the PV market in general competes with other sources of renewable
energy and conventional power generation.
Technological development in the
solar power industry could reduce market demand for polysilicon or allow for
lower cost production of polysilicon by our competitors, which could cause our
sales and profit to decline
.
The solar
power industry is characterized by evolving technologies and standards.
Technological evolutions and developments in PV products, including thin-film
technologies, higher PV efficiency and thinner wafers may decrease the demand
for polysilicon by PV module manufacturers, and some manufacturers are
developing alternative solar technologies that require significantly less
silicon than crystalline silicon-based solar cells and modules, or no
polysilicon at all. If these developing technologies prove more advantageous in
application and are widely adopted, we may experience a decrease in demand for
our polysilicon and a decrease in our sales or operating
margins.
Additionally,
other technologies for the production of polysilicon are increasing in
prevalence in the industry. Technologies which compete with the Siemens reactor
process, including fluidized bed reactor process, may enable the manufacture of
polysilicon more quickly or at lower cost than does the Siemens reactor process.
To the extent that our competitors adopt other technologies that enable them to
compete more effectively, our operating margins and price-competitiveness may be
impacted. In the event that we are unable to re-design our production facility
around these more efficient processes on manageable timetables and at reasonable
cost, our business could be adversely affected.
Our operating results have fluctuated
in the past, and we expect a number of factors to cause our operating results to
continue to fluctuate in the future, making it difficult for us to accurately
forecast our quarterly and annual operating results
.
Hoku
Materials does not currently generate any operating revenue and we do not expect
to generate any material revenue from Hoku Fuel Cells in the foreseeable future.
All of our revenue presently is generated by Hoku Solar and our PV system
installation activities.
Our
future operating results and cash flows will depend on many factors that will
impact our polysilicon business run by Hoku Materials, our PV system
installation business run by Hoku Solar and our fuel cell business, including
the following:
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the size and timing of customer
orders, milestone achievement, product delivery and customer acceptance,
if required;
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the length of contract
negotiation cycles,
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the timing of equipment delivery
and procurement, integration and
testing,
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our success in obtaining
prepayments from customers for future shipments of
polysilicon;
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our success in maintaining and
enhancing existing strategic relationships and developing new strategic
relationships with potential
customers;
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our ability to finance power
purchase agreements for potential PV system installation
customers;
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actions taken by our competitors,
including new product introductions and pricing
changes;
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the costs of maintaining our
operations;
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customer budget cycles and
changes in these budget cycles;
and
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external economic and industry
conditions.
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As a
result of these factors, we believe that period-to-period comparisons of our
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance.
If we fail to maintain proper and
effective internal controls, our ability to produce accurate financial
statements could be impaired, which could adversely affect our operating
results, our ability to operate our business and investors’ views of
us
.
Ensuring
that we have adequate internal financial and accounting controls and procedures
in place to help ensure that we can produce accurate financial statements on a
timely basis is a costly and time-consuming effort that needs to be re-evaluated
frequently. In May 2007, we commenced construction of our planned polysilicon
facility in Pocatello, Idaho. Construction of the planned polysilicon facility
and the operation of our polysilicon manufacturing business and PV system
installation businesses will involve substantial changes to our operations will
require us to increase our international activities, hire and train additional
financial and accounting personnel, make substantial investments in our
engineering, logistics, financial and information systems, including
implementing new enterprise-level transaction processing, operational, financial
and accounting management information systems, procedures and controls. In
connection with the planned increased scale of our polysilicon manufacturing
business and PV system installation businesses and our implementation of new
operational and financial management information systems to accommodate these
businesses, we expect to engage in a process of documenting, reviewing and
improving our internal control and procedures in connection with Section 404 of
the Sarbanes-Oxley Act, which requires an annual assessment by management on the
effectiveness of our internal control over financial reporting. We conduct
annual testing of our internal controls in connection with the Section 404
requirements and, as part of that documentation and testing, we may identify
areas for further attention and improvement. Implementing any appropriate
changes to our internal controls may entail substantial costs in order to modify
our existing accounting systems and take a significant period of time to
complete, and may distract our officers, directors and employees from the
operation of our business. Further, we may encounter difficulties assimilating
or integrating the internal controls, disclosure controls and IT infrastructure
of the businesses that we may acquire in the future. These changes may not,
however, be effective in maintaining the adequacy of our internal controls, and
any failure to maintain that adequacy, or consequent inability to produce
accurate financial statements on a timely basis, could increase our operating
costs and could materially impair our ability to operate our business. In
addition, investors’ perceptions that our internal controls are inadequate or
that we are unable to produce accurate financial statements may seriously affect
our stock price.
We may not be able to protect our
intellectual property, and we could incur substantial costs defending ourselves
against claims that our products infringe on the proprietary rights of
others
.
Our
ability to compete effectively in the fuel cell market will depend on our
ability to protect our intellectual property rights with respect to our
membranes, our membrane electrode assemblies, or MEAs and manufacturing
processes and any intellectual property we develop with respect to our
polysilicon business. We rely in part on patents, trade secrets and policies and
procedures related to confidentiality to protect our intellectual property.
However, much of our intellectual property is not covered by any patent or
patent application. Confidentiality agreements to which we are party may be
breached, and we may not have adequate remedies for any breach. Our trade
secrets may also become known without breach of these agreements or may be
independently developed by our competitors. Our inability to maintain the
proprietary nature of our technology and processes could allow our competitors
to limit or eliminate any of our potential competitive advantages. Moreover, our
patent applications may not result in the grant of patents either in the United
States or elsewhere. Further, in the case of our issued patents or our patents
that may issue, we do not know whether the claims allowed will be sufficiently
broad to protect our technology or processes. Even if some or all of our patent
applications that issue are sufficiently broad, our patents may be challenged or
invalidated and we may not be able to enforce them. We could incur substantial
costs in prosecuting or defending patent infringement suits or otherwise
protecting our intellectual property rights. We do not know whether we have been
or will be completely successful in safeguarding and maintaining our proprietary
rights. Moreover, patent applications filed in foreign countries may be subject
to laws, rules and procedures that are substantially different from those of the
United States, and any resulting foreign patents may be difficult and expensive
to enforce. Further, our competitors may independently develop or patent
technologies or processes that are substantially equivalent or superior to ours.
If we are found to be infringing third-party patents, we could be required to
pay substantial royalties and/or damages, and we do not know whether we will be
able to obtain licenses to use these patents on acceptable terms, if at all.
Failure to obtain needed licenses could delay or prevent the development,
production or sale of our products, and could necessitate the expenditure of
significant resources to develop or acquire non-infringing intellectual
property.
Asserting,
defending and maintaining our intellectual property rights could be difficult
and costly, and failure to do so might diminish our ability to compete
effectively and harm our operating results. We may need to pursue lawsuits or
legal actions in the future to enforce our intellectual property rights, to
protect our trade secrets and domain names, and to determine the validity and
scope of the proprietary rights of others. If third parties prepare
and file applications for trademarks used or registered by us, we may oppose
those applications and be required to participate in proceedings to determine
priority of rights to the trademark.
We cannot
be certain that others have not filed patent applications for technology covered
by our issued patent or our pending patent applications or that we were the
first to invent technology because:
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some patent applications in the
United States may be maintained in secrecy until the patents are
issued;
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patent applications in the United
States and many foreign jurisdictions are typically not published until 18
months after filing; and
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publications in the scientific
literature often lag behind actual discoveries and the filing of patents
relating to those
discoveries.
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Competitors
may have filed applications for patents, may have received patents and may
obtain additional patents and proprietary rights relating to products or
technology that block or compete with our products and technology. Due to the
various technologies involved in the development of fuel cell systems, including
membrane and MEA technologies, and photovoltaic products, it is impracticable
for us to affirmatively identify and review all issued patents that may affect
our products. Although we have no knowledge that our products and technology
infringe any third party’s intellectual property rights, we cannot be sure that
we do not infringe any third party’s intellectual property rights. We may have
to participate in interference proceedings to determine the priority of
invention and the right to a patent for the technology. Litigation and
interference proceedings, even if they are successful, are expensive to pursue
and time-consuming, and we could use a substantial amount of our financial
resources in either case.
The loss of any of our executive
officers or the failure to attract or retain specialized technical and
management personnel could impair our ability to grow our
business
.
We are
highly dependent on our executive officers, including Dustin M. Shindo, our
Chairman of the Board of Directors, President and Chief Executive Officer, and
Karl M. Taft III, our Chief Technology Officer. Due to the specialized knowledge
that each of our executive officers possesses with respect to our technology or
operations, the loss of service of any of our executive officers would harm our
business. We do not have employment agreements with any of our executive
officers, and each may terminate his employment without notice and without cause
or good reason. In addition, we do not carry key man life insurance on our
executive officers.
There is
a limited pool of qualified applicants for our operations located in Hawaii
capable of meeting our specialized needs. Our future success will depend, in
part, on our ability to attract and retain qualified management and technical
personnel, many of whom must be relocated from the continental United States or
other countries. In addition, we will need to hire and train specialized
engineers to manage and operate our planned polysilicon facility in Pocatello,
Idaho. We may not be successful in hiring or retaining qualified personnel. Our
inability to hire qualified personnel on a timely basis, or the departure of key
employees, could harm our business.
We will use materials that are
considered hazardous in our planned polysilicon manufacturing and production
processes and, therefore, we could be held liable for any losses that result
from the use and handling of such hazardous materials, with respect to losses
which we do not carry insurance
.
The
production of polysilicon will involve the use of materials that are hazardous
to human health and the environment, the storage, handling and disposal of which
will be subject to government regulation. Compliance with environmental laws and
regulations may be expensive, and current or future environmental regulations
may increase our manufacturing costs and may require us to halt or suspend our
operations until we regain compliance. If we have an accident at our facility
involving a spill or release of these substances, we may be subject to civil
and/or criminal penalties, including financial penalties and damages, and
possibly injunctions preventing us from continuing our operations. Any liability
for penalties or damages, and any injunction resulting from damages to the
environment or public health and safety, could harm our business. In addition
under various Federal, state and local laws, ordinances and regulations, an
owner or operator of real estate is liable for costs of removal or remediation
of certain hazardous or toxic substances on or in such property. These laws
often impose such liability without regard to whether the owner or operator knew
of, or was responsible for, the presence of such substances. We do not have any
insurance for liabilities arising from the use and handling of hazardous
materials.
Our
manufacturing business will involve many operating risks that can cause
substantial losses.
The
manufacture of our polysilicon may involve one or more of the following
risks:
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uncontrollable flow of gases;
and
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pipe or cement
failures.
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In the
event that any of the foregoing events occur, we could incur substantial losses
as a result of injury or loss of life; severe damage or destruction of property,
natural resources or equipment; pollution and other environmental damage;
investigatory and clean-up responsibilities; regulatory investigation and
penalties; suspension of operations; or repairs to resume
operations. If we experience any of these problems, our ability to
conduct operations could be adversely affected. These conditions can
cause substantial damage to facilities and interrupt production. If
realized, the foregoing risks could have a material adverse affect on our
business, financial condition and results of operations.
Any significant and prolonged
disruption of our operations in Hawaii could result in PV system installation
delays that would reduce our revenue
.
Hoku
Solar’s business operations are currently located exclusively in the state of
Hawaii, which is subject to the potential risk of earthquakes, hurricanes,
tsunamis, floods and other natural disasters. The occurrence of an earthquake,
hurricane, tsunami, flood or other natural disaster in Hawaii could result in
damage, power outages and other disruptions that would interfere with our
ability to conduct our PV system installation business. In October 2006, for
example, Hawaii suffered a major earthquake causing significant damage
throughout the state. Our facilities and operations, however, did not suffer any
damage.
Most of
the materials we use in our PV system installation business must be delivered
via air or sea. Hawaii has a large union presence and has historically
experienced labor disputes, including dockworker strikes, which could prevent or
delay cargo shipments. Any future dispute that delays shipments via air or sea
could prevent us from procuring or installing our turnkey PV systems in time to
meet our customers’ requirements, or might require us to seek alternative and
more expensive freight forwarders or contract manufacturers, which could
increase our expenses.
We have significant international
activities and customers, particularly in China, that subject us to additional
business risks, including increased logistical complexity and regulatory
requirements, which could result in a decline in our
revenue
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Our
current polysilicon supply agreements are with Alex, Suntech, Jinko, Solarfun,
Tianwei and Solargiga, all of which are located in The People’s Republic of
China, or China, and Hong Kong. As a result, we will be engaging in significant
international sales of our polysilicon, which can be subject to many inherent
risks that are difficult or impossible for us to predict or control,
including:
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political
and economic instability;
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unexpected
changes in regulatory requirements and
tariffs;
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difficulties
and costs associated with staffing and managing foreign operations,
including foreign distributor
relationships;
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longer
accounts receivable collection cycles in certain foreign
countries;
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adverse
economic or political changes;
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unexpected
changes in regulatory requirements;
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more
limited protection for intellectual property in some
countries;
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potential
trade restrictions, exchange controls and import and export licensing
requirements;
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U.S.
and foreign government policy changes affecting the markets for our
products;
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problems
in collecting accounts receivable;
and
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potentially
adverse tax consequences of overlapping tax
structures.
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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:
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the higher level of government
involvement and regulation;
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the early stage of development of
the market-oriented sector of the
economy;
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the rapid growth rate;
and
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the higher level of control over
foreign exchange.
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China’s
government continues to exercise significant control over economic growth in
China through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and imposing policies
that impact particular industries or companies in different ways. China’s
government also sets policy with respect to the use of alternative energy such
as solar. Any adverse change in the economic conditions or government
conditions or government policies in China could have a material adverse effect
on our business, financial condition and results of operations.
Failure
to comply with the US Foreign Corrupt Practices Act could subject us to
penalties and other adverse consequences.
We are
subject to the U.S. Foreign Corrupt Practices Act, which generally prohibits
U.S. companies from engaging in bribery or other prohibited payments to foreign
officials for the purpose of obtaining or retaining business. Non-U.S.
companies, including some that may compete with us, are not subject to these
prohibitions. If our employees or other agents are found to have engaged in
practices such as bribery, pay-offs or other fraudulent practices in China, we
could suffer severe penalties and other consequences that may have a material
adverse effect on our business, financial condition and results of
operations.
Adverse general economic conditions
could harm our business
.
Adverse
overall economic conditions that impact consumer spending could impact our
results of operations. Future economic conditions affecting disposable income
such as employment levels, consumer confidence, credit availability, business
conditions, stock market volatility, weather conditions, acts of terrorism,
pandemic, threats of war, and interest and tax rates could reduce consumer
spending or cause consumers to shift their spending away from our goods and
services. If the economic conditions continue to be adverse or worsen, we may
experience material adverse impacts on our business, operating results and
financial condition.
A drop in the retail price of
conventional energy or non-solar renewable energy sources could harm our
business
.
The price
of conventional energy can affect the demand for alternative energy solutions
such as solar. Fluctuations in economic and market conditions that impact the
prices of conventional and non-solar renewable energy sources could cause the
demand for solar energy systems to decline, which would have a negative impact
on our business. Inexpensive prices for oil and other fossil fuels and utility
electric rates could also have a negative effect on our PV system installation
and polysilicon production businesses.
Conversely,
our polysilicon manufacturing process uses significant amounts of electric
energy. High energy prices, therefore, could increase our production
costs, and increases in the cost of electricity reduce our
margins. Although we have entered into a long term contract with
Idaho Power to supply electric power to our 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 our
planned polysilicon production 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 our polysilicon plant; however, we need to apply for
additional permits with federal, state and local authorities, including building
permits to continue the construction of our polysilicon plant, and permits to
operate the plant when construction is complete. The government regulatory
process is lengthy and unpredictable and delays could cause additional expense
and increase our construction costs. In addition, we could be required to change
our construction plans in order receive the required permits and such changes
could also result in additional expense and delay. Any delay in completion of
construction could result in us failing to meet our delivery deadlines under our
supply agreements and give the other parties to these agreements the right to
terminate the agreements.
Our business and industry are subject
to government regulation, which may harm our ability to market our
products
.
The
market for electricity generation products is heavily influenced by foreign,
federal, state and local government regulations and policies concerning the
electric utility industry, as well as policies promulgated by electric
utilities. These regulations and policies often relate to electricity pricing
and technical interconnection of customer-owned electricity generation. In the
United States and in a number of other countries, these regulations and policies
are being modified and may continue to be modified. Customer purchases of, or
further investment in the research and development of, alternative energy
sources, including solar power technology, could be deterred by these
regulations and policies, which could result in a significant reduction in the
potential demand for our PV system installations. For example, without a
regulatory mandated exception for solar power systems, utility customers are
often charged interconnection or standby fees for putting distributed power
generation on the electric utility grid. These fees could increase the cost to
our customers of installing PV systems and make them less desirable, thereby
harming our business, prospects, results of operations and financial condition.
Furthermore, our discussions with The James Campbell Company to plan and
construct a Kapolei Sustainable Energy Park are conditioned upon receiving
various government approvals related to the capped solid waste storage area on
the site.
The
installation of PV systems is subject to oversight and regulation in accordance
with national and local ordinances relating to zoning, building codes, safety,
environmental protection, utility interconnection and metering and related
matters. It is difficult to track the requirements of individual states and
counties and to design equipment to comply with the varying standards. Any new
government regulations or utility policies pertaining to PV system installations
may result in significant additional expenses to us and, as a result, could
cause a significant reduction in demand for our PV system installation
services.
If government incentives to locate
our planned polysilicon facility in the City of Pocatello, Idaho are not
realized then the costs of establishing our facility may be higher than we
currently estimate
.
The State
of Idaho and the local municipal government have approved a variety of
incentives to attract Hoku Materials, including tax incentives, financial
support for infrastructure improvements around our facility, 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 our polysilicon
facility.
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 our planned polysilicon plant. In May 2009, we entered into an
Economic Development Agreement, or the PDA Agreement, with the Pocatello
Development Authority, or PDA, pursuant to which PDA agreed to reimburse to us
amounts we actually incur in making certain infrastructure improvements
consistent with the North Portneuf Urban Renewal Area and Revenue Allocation
District Improvement Plan and the Idaho Urban Renewal Law, or the Infrastructure
Reimbursement, and an additional amount as reimbursement for and based on the
number of full time employee equivalents we create and maintain, or
the Employment Reimbursement, at the production facility under construction in
Pocatello, Idaho, or the 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 property and improvements located in
such district, or the TIF Revenue, up to approximately $26 million, less the
actual Road Costs, and (b) the Employment Reimbursement will be an amount that
is equal to 50% of the TIF Revenue, up to approximately $17 million. However,
there are no assurances that all or any part of the amount authorized will be
paid to us, and we could ultimately receive significantly less or nothing at
all, and we may not realize the benefits of these other offered incentives
including workforce training funds and utility capacities. The tax incentives
expire on December 31, 2030. If there are changes to the ordinance, which
affects the amount of the incentives, or for other reasons, some of which may be
beyond our control, we are unable to realize all or any part of these
incentives, the operating costs of our planned polysilicon facility in Idaho 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. Between April 1, 2009 and June 30, 2009, our stock had low
and high sales prices in the range of $2.14 to $4.64 per share. During fiscal
year 2009, the stock market in general has experienced extreme volatility that
has often been unrelated to the operating performance of particular companies.
The market price of our common stock may fluctuate significantly in response to
a number of factors, including:
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variations in our financial
results or those of our competitors and our
customers;
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announcements by us, our
competitors and our customers of acquisitions, new products, the
acquisition or loss of significant contracts, commercial relationships or
capital commitments;
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the performance of the stock
market generally and the over-all condition of the global macro
economy;
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failure to meet the expectations
of securities analysts or investors with respect to our financial
results;
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our ability to develop and market
new and enhanced products on a timely
basis;
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changes in our
management;
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changes in governmental
regulations or in the status of our regulatory
approvals;
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future sales of our common stock
by us and future sales of our common stock by our officers, directors and
affiliates;
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investors’ perceptions of us;
and
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general economic, industry and
market conditions.
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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.
Anti-takeover defenses that we have
in place could prevent or frustrate attempts by stockholders to change our
directors or management
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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:
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establish a classified Board of
Directors, so that not all members of our Board of Directors may be
elected at one time;
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set limitations on the removal of
directors;
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limit who may call a special
meeting of stockholders;
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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;
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prohibit stockholder action by
written consent, thereby requiring all stockholder actions to be taken at
a meeting of our stockholders;
and
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provide our Board of Directors
the ability to designate the terms of and issue new series of preferred
stock without stockholder
approval.
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These
provisions may have the effect of entrenching our management team and may
deprive investors of the opportunity to sell their shares to potential acquirers
at a premium over prevailing prices. This potential inability to obtain a
control premium could reduce the price of our common stock.
As a
Delaware corporation, we are also subject to Delaware anti-takeover provisions.
Our Board of Directors could rely on Delaware law to prevent or delay an
acquisition.
Because we do not intend to pay
dividends, you 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 your
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 you purchased your
shares.
We
may issue stock or engage in a transaction that results in a change of
control.
In order
to raise capital and/or manage our liquidity, we may issue stock or engage in a
transaction that results in the acquisition of all or substantially all of our
assets, or a change of control. Presently, no single stockholder owns shares of
common stock representing a majority of the voting power of our common stock. If
a person or group were to acquire a majority of the voting power of our common
stock, such person or group would be able, over time, to elect all of the
members of our board of directors and determine the outcome of all matters
submitted to a vote of our stockholders, including matters involving the
acquisition or disposition of assets, the incurrence of indebtedness, the
issuance of any additional shares of common stock or other equity securities and
the payment of dividends on common stock. Such person or group would
also have the power to prevent or cause a subsequent change in control, and
could take other actions that might be desirable to such person or group, but
not to other stockholders.