Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

	FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

	FOR THE TRANSITION PERIOD FROM TO .

Commission File Number: 000-51458

HOKU CORPORATION

(Exact name of Registrant as specified in its Charter)

Delaware		99-0351487
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1288 Ala Moana Blvd., Ste. 220

Honolulu, Hawaii 96814

(Address of principal executive offices, including zip code)

(808) 682-7800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

¨ Large accelerated filer ¨ Accelerated filer x Non-accelerated filer (Do not check if a smaller reporting company)

¨ Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

Common Stock, par value $0.001 per share, outstanding as of January 15, 2011: 55,043,254

HOKU CORPORATION

FORM 10-Q

For the Quarterly Period Ended December 31, 2010

Table of Contents

		Page
Part I – Financial Information

Item 1.	Financial Statements (unaudited)	3

	Consolidated Balance Sheets as of December 31, 2010 and March 31, 2010	3

	Consolidated Statements of Operations for the three and nine months ended December 31, 2010 and 2009	4

	Consolidated Statements of Cash Flows for the nine months ended December 31, 2010 and 2009	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

Item 4.	Controls and Procedures	30

Part II – Other Information

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 6.	Exhibits	42

	Signatures	45

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (unaudited)

HOKU CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

	December 31, 2010			March 31, 2010
Assets
Cash and cash equivalents	$	10,249		$	6,962
Accounts receivable		800			249
Inventory		661			894
Costs of uncompleted contracts		437			93
Other current assets		309			856
Total current assets		12,456			9,054

Deferred cost of debt financing		922			1,175
Property, plant and equipment, net		442,898			287,975

Total assets	$	456,276		$	298,204

Liabilities and Equity
Accounts payable and accrued liabilities	$	32,008		$	22,660
Deferred revenue		65			6
Deposits – Hoku Materials		16,194			11,134
Other current liabilities		211			204
Total current liabilities		48,478			34,004

Notes payable, net		182,819			37,709
Long-term deposits – Hoku Materials		124,006			115,866

Total liabilities		355,303			187,579

Commitments and Contingencies
Equity:
Preferred stock, $0.001 par value. Authorized 5,000,000 shares; no shares issued and outstanding as of December 31, 2010 and March 31, 2010
Common stock, $0.001 par value. Authorized 100,000,000 shares; issued and outstanding 55,043,254 and 54,853,677 shares as of December 31, 2010 and March 31, 2010, respectively		55			54
Warrant to purchase common stock		12,884			12,884
Additional paid-in capital		115,417			114,748
Accumulated deficit		(28,341	)		(20,601	)
Total Hoku Corporation shareholders’ equity		100,015			107,085
Noncontrolling interest		958			3,540
Total equity		100,973			110,625
Total liabilities and equity	$	456,276		$	298,204

See accompanying notes to consolidated financial statements.

HOKU CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

	Three Months Ended December 31,					Nine months Ended December 31,
	2010		2009			2010		2009

Service and license revenue	$	1,242	$	259		$	3,357	$	1,831
Total revenue		1,242		259			3,357		1,831

Cost of service and license revenue (1)		948		65			2,365		1,489
Total cost of revenue		948		65			2,365		1,489

Gross margin		294		194			992		342

Operating expenses:
Selling, general and administrative (1)		3,344		1,492			8,801		4,095
Total operating expenses		3,344		1,492			8,801		4,095

Loss from continuing operations		(3,050)		(1,298	)		(7,809)		(3,753	)

Interest and other income		27		16			166		267
Net loss from continuing operations		(3,023)		(1,282)			(7,643)		(3,486)

Discontinued operations:
Income from discontinued operations		—		—			—		51

Net loss		(3,023)		(1,282	)		(7,643)		(3,435)

Net income (loss) attributable to the noncontrolling interest		23		(17	)		97		(35	)

Net loss attributable to Hoku Corporation	$	(3,046)	$	(1,265	)	$	(7,740)	$	(3,400	)

Basic net loss per share attributable to Hoku Corporation	$	(0.06)	$	(0.06	)	$	(0.14)	$	(0.16	)

Diluted net loss per share attributable to Hoku Corporation	$	(0.06)	$	(0.06	)	$	(0.14)	$	(0.16	)

Shares used in computing basic net loss per share		54,724,354		21,448,922			54,641,657		21,062,417

Shares used in computing diluted net loss per share		54,724,354		21,448,922			54,641,657		21,062,417

(1) Includes stock-based compensation as follows:
Cost of service and license revenue	$	—	$	1		$	—	$	8
Selling, general and administrative		175		295			755		723

See accompanying notes to consolidated financial statements.

HOKU CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Nine months Ended December 31,
	2010		2009
Cash flows from operating activities:
Net loss	$	(7,643)	$	(3,400	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		172		210
Stock-based compensation		755		631
Impairment of inventory and equipment		-		39
Changes in operating assets and liabilities:
Accounts receivable		(550)		187
Inventory		233		795
Costs of uncompleted contracts		(344)		(520	)
Other current assets		547		(292	)
Accounts payable and accrued operating expenses		338		(723	)
Deferred revenue		59		(289	)
Other current liabilities		(144)		(252	)
Deposits – Hoku Solar		-		(158	)

Net cash used in operating activities		(6,577)		(3,772	)

Cash flows from investing activities:
Payment of property, plant and equipment expenditures		(141,372)		(52,770	)

Net cash used in investing activities		(141,372)		(52,770	)

Cash flows from financing activities:
Proceeds from note payable		140,800		-
Exercise of common stock options		3		22
Costs related to Tianwei investment		(88)		(225)
Contributions from (distributions to) noncontrolling interest		(2,679)		3,590
Deposits received – Hoku Materials		13,200		39,000

Net cash provided by financing activities		151,236		42,387

Net increase (decrease) in cash and cash equivalents		3,287		(14,155	)
Cash and cash equivalents at beginning of period		6,962		17,383

Cash and cash equivalents at end of period	$	10,249	$	3,228

Supplemental disclosure of non-cash investing activities:
Amortization of debt discount and deferred financing cost capitalized as property, plant and equipment	$	4,564	$	59,378
Acquisition of property, plant and equipment through accounts payable and accrued capital expenses, including accrued capitalized interest		9,010		14,784

See accompanying notes to consolidated financial statements.

HOKU CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies and Practices

(a) Description of Business

Hoku Corporation is a solar energy products and services company. The Company was incorporated in Hawaii in March 2001, as Pacific Energy Group, Inc. In July 2001, the Company changed its name to Hoku Scientific, Inc. In December 2004, the Company was reincorporated in Delaware. In March 2010, the Company changed its name from Hoku Scientific, Inc. to Hoku Corporation.

The Company originally focused its efforts on the design and development of fuel cell technologies, including its Hoku membrane electrode assemblies, or MEAs, and Hoku Membranes. In May 2006, the Company announced its plans to form an integrated photovoltaic, or PV, module business, and its plans to manufacture polysilicon, a primary material used in the manufacture of PV modules, at its polysilicon manufacturing plant in Pocatello, Idaho, or the Polysilicon Plant. In fiscal 2007, the Company reorganized its business into three business units: Hoku Materials, Hoku Solar and Hoku Fuel Cells. In February and March 2007, the Company incorporated Hoku Materials, Inc. and Hoku Solar, Inc., respectively, as wholly owned subsidiaries to operate its polysilicon and solar businesses, respectively. In September 2010, the Company elected to discontinue the operations of Hoku Fuel Cells; however, it will maintain ownership of its intellectual property, including its patents. Accordingly, the results of operations of Hoku Fuel Cells for the three and nine months ended December 31, 2010 and 2009 have been reported as discontinued operations in the consolidated statements of operations.

(b) Basis of Presentation

The Company has incurred operating losses in recent years as the Company has redirected its efforts to focus on the development of its polysilicon and solar businesses. The Company's current operating plan anticipates raising cash over the next year through a combination of debt and/or equity offerings and possibly new customer contracts to enable the continued construction of the Polysilicon Plant. Delays in securing financing could result in the Company failing to meet the contractual obligations included in its polysilicon supply agreements. A termination of any of the Company's polysilicon supply agreements could require the Company to refund prepayments already received to-date. Based on the current level of capital available to the Company, including a recently secured $19.5 million credit agreement, if the Company is unable to generate revenue, secure additional financing or structure credit terms with its vendors, the Company will be forced to curtail construction of the Polysilicon Plant in order to continue as a going concern. If the Company curtails construction, the current level of capital is expected to be sufficient to fund operations through at least March 31, 2011. However, the Company needs to acquire additional financing to continue construction and sustain operations subsequent to March 31, 2011. Although the Company cannot assure that such additional sources of financing will be available at acceptable terms, Tianwei New Energy Holdings Co., Ltd., or Tianwei, the Company’s majority shareholder has represented that it has the ability and the intent to provide, or make necessary arrangements with others to provide, ongoing operating funds to the Company to ensure the Company’s continuity as a going concern. However, an inability by the Company to reduce costs or expenditures or obtain sufficient capital to fund its operations would have a material adverse effect on the Company and the Company’s ability to complete construction of the Polysilicon Plant, and could impact its ability to continue as a going concern subsequent to March 31, 2011.

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and accompanying notes required by GAAP for complete financial statements. In the opinion of management, the consolidated financial statements reflect normal recurring adjustments necessary for a fair presentation of the results for the interim periods.

These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2010.

The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, after elimination of significant intercompany amounts and transactions, and Hoku Solar Power I LLC, or Power I, a variable interest entity in which the Company is the primary beneficiary. The Company has concluded that it is the primary beneficiary of Power I because it has the authority to direct the activities that most significantly impact the economic performance of Power I, and the obligation to absorb any losses generated by Power I. As of December 31, 2010, the total assets of Power I were $6.1 million, mainly comprised of cash, accounts receivable, and property, plant and equipment. As of December 31, 2010, the total liabilities of Power I were $871,000, mainly comprised of accounts payable and accrued liabilities. These balances are reflected in the consolidated financial statements with intercompany transactions eliminated.

(d) Use of Estimates

The preparation of the Company’s financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, accounts receivable, the carrying amounts of property, plant and equipment and inventory, income taxes and the valuation of deferred tax assets and stock options. These estimates are based on historical facts and various other assumptions that the Company believes are reasonable.

(e) Revenue Recognition

Revenue from polysilicon and PV system installations is recognized when there is evidence of an arrangement, delivery has occurred or services have been rendered, the arrangement fee is fixed or determinable, and collectability of the arrangement fee is reasonably assured. PV system installation contracts may have several different phases with corresponding progress billings.

The Company applies the percentage-of-completion method of revenue recognition for its PV system contracts for which it can make reasonably dependable estimates of costs. Under the percentage-of-completion method, revenue and related costs are deferred and subsequently recognized based on the progress of the installation and an estimate of remaining costs to complete the installation. The Company recognizes revenue under the completed contract method, in which revenue and related costs are deferred and then subsequently recognized only upon completion of the contract, for all contracts for which reasonably dependable estimates of costs are not available.

The Company entered the PV system installation business in fiscal year 2008. Prior to April 1, 2010, due to the short period of time the Company was in the PV system installation business, the Company did not have the historical experience or the procedures in place to develop reasonably dependable estimates of costs and therefore utilized the completed contract method to record revenue for PV contracts. Subsequent to this start up period, the Company has developed history and reliable processes and procedures of projecting and tracking contract fulfillment costs, in order to develop reasonably dependable estimates which are required to use the percentage of completion method. In applying the percentage method, the Company determines the percentage of contract completion on the basis of engineering, labor, subcontractor and other installation costs and excludes material and other non-installation contract costs which are not considered the primary cost determinants in gauging the progress of the PV system contract. Revenue and related costs are recognized proportionately based on the completion percentage of each project and considering the current estimate of remaining costs required to complete the project.

The Company will continue to recognize revenue under the completed contract method for PV installations in progress as of March 31, 2010.

Revenue from the sale of electricity generated from the Company’s PV systems is based on kilowatt usage and is recognized in accordance with its power purchase agreements, or PPAs.

The Company charges the appropriate Hawaii general excise tax to its customers. The taxes collected from sales are excluded from revenue and recorded as a payable.

(f) Cost of Uncompleted Contracts

Cost of uncompleted contracts represents costs incurred for services performed and/or materials used towards completing a customer contract. Based on the Company’s revenue recognition policy, the costs incurred for services and/or materials can be recognized as contract costs, and are recognized based on the completion percentage of each contract after considering the costs incurred and current estimate of remaining costs to complete the installation. As of December 31, 2010, and March 31, 2010, costs of uncompleted contracts was approximately $437,000 and $93,000, respectively, related to PV system installation contracts.

(g) Guarantees and Indemnifications

The Company has entered into PV system installation contracts which warrant the installation against defects in workmanship, generally for a period of one to five years from the date of installation. There were no accruals for or expenses related to the warranties for any period presented.

The Company, as permitted under Delaware law and in accordance with its Bylaws, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in that capacity. The term of the indemnification period is equal to the officer’s or director’s lifetime. The Company has also entered into additional indemnification agreements with its officers and directors in connection with its initial public offering. The maximum amount of potential future indemnification is unlimited; however, the Company has obtained director and officer insurance that limits its exposure and may enable it to recover a portion of any future amounts paid. The Company believes the fair value for these indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations as of December 31, 2010 and March 31, 2010.

The Company has entered into customer contracts that contain indemnification provisions. In these provisions, the Company typically agrees to indemnify the customer against certain types of third-party claims. The Company would accrue for known indemnification issues when a loss is probable and could be reasonably estimated. The Company also would accrue for estimated incurred but unidentified indemnification issues based on historical activity. There were no accruals for or expenses related to indemnification issues for any period presented.

(h) Recently Issued Standards

In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) , currently referenced as FASB Accounting Standards Codification 810-10, which amends certain requirements of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities. This standard amended the evaluation criteria to identify the primary beneficiary of a variable interest entity and requires ongoing reassessment of whether an enterprise is the primary beneficiary of the variable interest entity. The Company adopted the provisions of this standard, effective April 1, 2010. The adoption did not have a material impact on the Company’s consolidated financial statements.

(i) Reclassifications

Certain amounts in the consolidated financial statements have been reclassified to conform to current period presentation. Specifically, in the consolidated statement of cash flows for the nine month period ended December 31, 2009, line items for proceeds from maturities of short-term investments and purchases of short-term investments have been removed to exclude activity for cash equivalents.

(2) Notes Payable

As previously disclosed, in the Company’s Form 10-Q for the quarter ended September 30, 2010, Tianwei and the Company have been discussing what would constitute fair compensation for Tianwei for the financial services it has been providing and will provide the Company. While the discussions are on-going, the Company believes this compensation may be in the form of common stock warrants. To the extent common stock warrants are issued to Tianwei for its financial services, it may significantly dilute the ownership of its stockholders other than Tianwei.

Tianwei New Energy Holding Co. Ltd.

As of December 31, 2010, the Company has $50.0 million in notes payable to Tianwei. The Company received the first tranche of $20.0 million in January 2010 and received the second tranche of $30.0 million in March 2010. The notes bear an annual interest rate of 5.94% and have a term of two years. Pursuant to the loan agreement, the Company has pledged a security interest in all of its assets to Tianwei. The $20.0 and $30.0 million in loan proceeds become due in January and March 2012, respectively, with no penalty for earlier prepayment of principal, and interest payments are due quarterly.

As part of the financing agreement, the Company also granted to Tianwei a warrant to purchase an additional 10 million shares of the Company’s common stock. The terms of the warrant include: (i) a per share exercise price equal to $2.52; (ii) an exercise period of seven years; and (iii) provision for a cashless, net-issue exercise.

The accounting of the warrant and debt was based on their relative fair values and calculated to be $12.9 million and $37.1 million, respectively, in proportion to the $50.0 million in loan proceeds. The fair value of the warrant was calculated using the Black-Scholes option pricing model, and the fair value of the debt was based on the present value of cash flows, discounted at a 7% interest rate.

The Company recorded approximately $1.2 million in transaction costs and $12.9 million of related fair value of the warrants as deferred costs of debt financing totaling $14.1 million. As of December 31, 2010, $12.9 million has been reclassified as a discount on the debt and $1.2 million has been deferred as cost of debt financing. The deferred cost of debt financing and discount on the debt will be amortized over the two year term of the $50.0 million in notes payable, using the effective interest method, and capitalized as construction in progress related to the polysilicon production facility. As of December 31, 2010, the carrying value of the $50.0 million in notes payable was $42.0 million, net of the unamortized discount of $8.0 million.

China Merchants Bank – New York Branch

In May 2010, the Company entered into a $20.0 million credit agreement with the New York branch of China Merchants Bank Co., Ltd. The loan under this credit agreement is secured by a standby letter of credit drawn by Tianwei in Chengdu, China and issued to China Merchants Bank, as collateral. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2% or, if the Company elects, any portion of the loan that is not less than $1.0 million may bear interest at an annual rate equal to the rate of interest announced by the lender as its “prime rate.” The principal amount and any unpaid interest thereon must be paid in full by May 2012. The Company also entered into a reimbursement agreement with Tianwei pursuant to which the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of December 31, 2010 the entire $20.0 million was outstanding.

In August 2010, the Company entered into two credit agreements with the New York branch of China Merchants Bank Co., Ltd. to borrow $10.0 million and $5.0 million. The loans under these credit agreements are secured by standby letters of credit drawn by Tianwei in Chengdu, China and issued to China Merchants Bank, as collateral. The loans bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2% or, if the Company elects, any portion of the loans that is not less than $1.0 million may bear interest at an annual rate equal to the rate of interest announced by the lender as its “prime rate.” The principal amount and any unpaid interest thereon must be paid in full by August 2012. The Company also entered into reimbursement agreements with Tianwei pursuant to which the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letters of credit. As of December 31, 2010 the entire $15.0 million was outstanding.

China Construction Bank – New York Branch

In June 2010, the Company entered into a $28.3 million credit agreement with the New York branch of China Construction Bank. The loan under this credit agreement is secured by a standby letter of credit drawn by Tianwei and issued by the Sichuan branch of China Construction Bank in favor of the New York branch. The loan will bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 1.875% or, if the Company elects, and if the bank agrees, any portion of the loan that is not less than $1 million may bear interest at an annual rate equal to the highest “Prime Rate” as published in the “Money Rates” column of the Eastern Edition of the Wall Street Journal from time to time. The principal amount and any unpaid interest thereon must be paid in full by June 2012. The Company also entered into a reimbursement agreement with Tianwei pursuant to which the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of December 31, 2010 the entire $28.3 million was outstanding.

China Merchants Bank – New York Branch

In September 2010, the Company entered into a $10.0 million credit agreement with the New York branch of China Merchants Bank Co., Ltd. The loan under this credit agreement is secured by a standby letter of credit drawn by Tianwei in Chengdu, China and issued to China Merchants Bank, as collateral. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2% or, if the Company elects, any portion of the loan that is not less than $1 million may bear interest at an annual rate equal to the rate of interest announced by the lender as its “prime rate.” The principal amount and any unpaid interest thereon must be paid in full by September 2013. The Company also entered into a reimbursement agreement with Tianwei pursuant to which the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of December 31, 2010 the entire $10.0 million was outstanding.

In October 2010, the Company entered into a $13.0 million credit agreement with the New York branch of China Merchants Bank Co., Ltd. The Company received the entire $13.0 million under this credit agreement, which is secured by a standby letter of credit drawn by Tianwei in Chengdu, China and issued to China Merchants Bank, as collateral. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2% or, if the Company elects, any portion of the loan that is not less than $1.0 million may bear interest at an annual rate equal to the rate of interest announced by the lender as its “prime rate.” The principal amount and any unpaid interest thereon must be paid in full by October 2013. The Company also entered into a reimbursement agreement with Tianwei pursuant to which the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of December 31, 2010 the entire $13.0 million was outstanding.

In December 2010, the Company entered into a $10.0 million credit agreement with the New York branch of China Merchants Bank Co., Ltd. The Company received the entire $10.0 million under this credit agreement, which is secured by cash collateral of 110% of the principal amount of the credit agreement in Renminbi provided by Tianwei. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2% or, if the Company elects, any portion of the loan that is not less than $1.0 million may bear interest at an annual rate equal to the rate of interest announced by the lender as its “prime rate.” The principal amount and any unpaid interest thereon must be paid in full by December 2013. The Company also entered into a reimbursement agreement with Tianwei pursuant to which the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with providing the cash collateral. As of December 31, 2010 the entire $10.0 million was outstanding.

China Construction Bank – Singapore Branch

In October 2010, the Company entered into a $29.0 million credit agreement with the Singapore branch of China Construction Bank. The Company received the entire $29.0 million under this credit agreement which is secured by standby letters of credit drawn by Tianwei in Chengdu, China and issued to China Construction Bank Corporation, Sichuan Branch in favor of China Construction Bank – Singapore Branch. The loan will bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2%. The principal amount and any unpaid interest thereon must be paid in full by October 2013. The Company also entered into a reimbursement agreement with Tianwei pursuant to which the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of December 31, 2010 the entire $29.0 million was outstanding.

Industrial and Commercial Bank of China – New York Branch

In December 2010, the Company entered into a $15.5 million credit agreement with the New York Branch of Industrial and Commercial Bank of China, Ltd. The loans are secured by a standby letter of credit issued by the Sichuan Branch of Industrial and Commercial Bank of China and procured by Tianwei in favor of the lender and which has an aggregate drawable amount of $17.0 million. The loans bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2.6%. The principal amount and any unpaid interest thereon must be paid in full by December 2013. The Company also entered into a reimbursement agreement with Tianwei pursuant to which the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of December 31, 2010 the entire $15.5 million was outstanding.

In January 2011, the Company entered into a $19.5 million credit agreement with the New York Branch of Industrial and Commercial Bank of China, Ltd. The loans are secured by a standby letter of credit issued by the Sichuan Branch of Industrial and Commercial Bank of China and procured by Tianwei in favor of the lender and which has an aggregate drawable amount of $22.0 million. The loans bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2.6%. The principal amount and any unpaid interest thereon must be paid in full by January 2014. The Company also entered into a reimbursement agreement with Tianwei pursuant to which the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. The Company borrowed $19.5 million in January 2011.

CITIC Bank International Limited – New York Branch

On February 7, 2011, the Company entered into a $19.0 million credit agreement with the New York Branch of CITIC Bank International Limited. The Company can receive up to $3.0 million of the loan which is secured by standby letters of credit issued by China Branch of CITIC Bank International Limited and procured by Tianwei in favor of CITIC Bank International Limited. Tianwei has informed the Company that it intends to issue additional standby letters of credit for the remaining loan amount. The loans will bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2.6%. The principal amount and any unpaid interest thereon must be paid in full by January 2014. The Company also entered into a reimbursement agreement with Tianwei pursuant to which the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letters of credit. The Company borrowed $2.0 million on February 7, 2011.

(3) Fair Value of Assets and Liabilities

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy prioritizes the inputs used in measuring fair value as follows:

Level 1 – Observable inputs such as quoted prices in active markets;

Level 2 – Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumption.

As of December 31, 2010 and March 31, 2010, the Company held the following assets that are required to be measured at fair value on a recurring basis (in thousands):

	Fair Value Measurements as of December 31, 2010
	Total		Level 1		Level 2		Level 3
Cash equivalents	$	1,997	$	1,997	$	—	$	—
Total assets measured at fair value	$	1,997	$	1,997	$	—	$	—

	Fair Value Measurements as of March 31, 2010
	Total		Level 1		Level 2		Level 3
Cash equivalents	$	1,548	$	1,548	$	—	$	—
Total assets measured at fair value	$	1,548	$	1,548	$	—	$	—

There were no assets or liabilities that are required to be measured at fair value on a non-recurring basis.

(4) Property, Plant and Equipment

As of December 31, 2010 and March 31, 2010, property, plant and equipment consisted of the following:

	December 31, 2010		March 31, 2010
	(in thousands)
Construction in progress- Idaho plant and equipment	$	422,148	$	264,628
Electrical substation		17,983		17,983
Photovoltaic systems- Hoku Solar Power I, LLC		3,260		5,559
Office equipment and furniture		147		109
Production equipment		108		108
Automobile		165		98

		443,811		288,485
Less accumulated depreciation and amortization		(913)		(510	)

Property, plant and equipment, net	$	442,898	$	287,975

During the nine months ended December 31, 2010, the Company reduced the cost of the PV systems owned by Hoku Solar Power I by $2.3 million as a result of federal grants received under Section 1603 of the American Recovery and Reinvestment Act of 2009, which provides cash incentives for wind and solar project investments.

In addition, the Company capitalized interest during construction of $8.2 million, comprised of interest charges of $3.4 million, amortization of discount and deferred financing costs of $4.6 million, and also capitalized stock based compensation of $151,000 during the same period.

In assessing the recoverability of its long-lived assets, the Company compared the carrying value to the undiscounted future cash flows the assets are expected to generate. The Company did not record any impairment during the nine month periods ended December 31, 2010 or 2009.

(5) Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities were comprised of the following (in thousands of dollars):

	December 31, 2010		March 31, 2010
	(in thousands)
Capital expenditures	$	31,375	$	22,366
Operating expenditures		633		294
Total accounts payable and accrued liabilities	$	32,008	$	22,660

The capital expenditures pertain primarily to the construction of the Polysilicon Plant and equipment additions related to the Polysilicon Plant.

(6) Long-term deposits - Hoku Materials

The Company has entered into various supply agreements with customers for the sale and delivery of polysilicon over specified periods of time. Under the supply agreements, customers are generally required to pay cash deposits to the Company as a prepayment for future product deliveries. Generally, these payments are for deliveries of polysilicon, which are expected to occur subsequent to the initial year of the agreements. At such time as the Company begins to deliver polysilicon pursuant to each customer’s respective contract and the Company is assured that the polysilicon has been accepted under the terms of the respective contract, the related deposits will be reclassified to deferred revenue.

As of December 31, 2010 and March 31, 2010, the Company had $140.2 million and $127.0 million, respectively, related to prepayments received under its various polysilicon supply agreements. The prepaid amounts from each customer are expected to be applied to future product deliveries. The prepayments which are expected to be applied to deliveries after December 31, 2011 have been reflected in the consolidated balance sheets as Long-term deposits - Hoku Materials.

Under the terms of the various long-term polysilicon supply agreements with its customers, the Company is generally required to refund these prepayments, in each case, if the customer terminates the respective supply agreement under certain circumstances, which generally include, but are not limited to, bankruptcy, failure to commence shipments of polysilicon by specified dates, repeated failure to deliver a specified quality of product, and/or failure to meet other milestones. The Company has granted security interests to each of its customers in all of the Company’s tangible and intangible assets related to its polysilicon business to serve as collateral for the Company’s obligation to repay the remaining amount of each of its customer’s respective prepayments made as of the date of any termination that has not been applied to the purchase price of polysilicon previously delivered under the respective contract. Such security interests are subordinated to bank financings.

The following is a summary of prepayments received as of December 31, 2010:

	Prepayment
Customer	(in thousands)
Solarfun Power Hong Kong Ltd.	$	49,000
Tianwei New Energy (Chengdu) Wafer Co., Ltd.		29,000
Wealthy Rise International, Ltd. (Solargiga)		20,200
Jinko Solar Co., Ltd.		20,000
Shanghai Alex New Energy Co., Ltd.		20,000
Wuxi Suntech Power Co., Ltd.		2,000
	$	140,200

Based on existing terms of the various long-term polysilicon supply agreements, the $140.2 million of customer prepayments would be credited against future product deliveries in the years ending December 31, 2011 through 2015 and thereafter as indicated in the following table.

	Application of
	Customer Deposits
December 31 Ending	(in thousands)
2011	$	16,194
2012		26,081
2013		20,172
2014		11,656
2015		11,656
Thereafter		54,441
	$	140,200

(7) Total Equity

Changes in total equity for the nine months ended December 31, 2010 were as follows (in thousands):

	Hoku Corporation Shareholders’ Equity
					Additional
	Common				Paid-In			Accumulated			Noncontrolling			Total			Comprehensive
	Stock		Warrant		Capital			Deficit			Interest			Equity			Loss
Balance as of March 31, 2010		54		12,884		114,748			(20,601	)		3,540			110,625			—
Distributions to Noncontrolling interest												(2,679	)		(2,679	)
Net income (loss)									(7,740	)		97			(7,643	)		(7,643	)
Vest of restricted stock awards		1				(1	)								—
Exercise of common stock options						3									3
Stock-based compensation						755									755
Costs related to Tianwei financing						(88	)								(88	)
Balance as of December 31, 2010		55		12,884		115,417			(28,341	)		958			100,973			(7,643	)

In December 2009, as part of the financing agreement with Tianwei, the Company granted to Tianwei a warrant to purchase 10 million shares of the Company’s common stock. The terms of the warrant include: (i) a per share exercise price equal to $2.52; (ii) an exercise period of seven years; and (iii) provision for a cashless, net-issue exercise. The accounting of the warrant was based on the relative fair of the shares issuable upon exercise of the warrant and calculated to be $12.9 million. The fair value of the warrant was calculated using the Black-Scholes option pricing model.

(8) Income Taxes

Income taxes are accounted for under the asset and liability method, which establishes financial accounting and reporting standards for income taxes. The Company recognizes federal and state current tax liabilities based on its estimate of taxes payable to or refundable by each tax jurisdiction in the current fiscal year.

Deferred tax assets and liabilities are established for the temporary differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities at the tax rates the Company expects to be in effect when these deferred tax assets or liabilities are anticipated to be recovered or settled. The Company’s ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. The Company records a valuation allowance to reduce deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized. Based on the best available objective evidence, it is more likely than not that the Company’s net deferred tax assets will not be realized. Accordingly, the Company continues to provide a valuation allowance against its net deferred tax assets as of December 31, 2010.

(9) Net Loss per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding and not subject to repurchase during the period. Diluted net loss per share is computed by dividing net loss by the sum of the weighted average number of shares of common stock outstanding, and the dilutive potential common equivalent shares outstanding during the period. Dilutive potential common equivalent shares consist of dilutive shares of common stock subject to repurchase and dilutive shares of common stock issuable upon the exercise of outstanding options to purchase common stock, computed using the treasury stock method.

The following table sets forth the computation of basic and diluted net loss per share, including the reconciliation of the denominator used in the computation of basic and diluted net loss per share:

	Three Months Ended December 31,						Nine months Ended December 31,
	2010			2009			2010			2009
	(in thousands, except share and per share data)
Numerator:
Net loss attributable to Hoku Corporation	$	(3,046	)	$	(1,265	)	$	(7,740	)	$	(3,400	)
Denominator:
Weighted average shares of common stock (basic)		54,724,354			21,448,922			54,641,657			21,062,417

Effect of Dilutive Securities
Add:
Weighted average stock options		—			—			—			—

Weighted average shares of common stock (diluted)		54,724,354			21,448,922			54,641,657			21,062,417

Basic net loss per share attributable to Hoku Corporation	$	(0.06	)	$	(0.06	)	$	(0.14	)	$	(0.16	)

Diluted net loss per share attributable to Hoku Corporation	$	(0.06	)	$	(0.06	)	$	(0.14	)	$	(0.16	)

The basic weighted average shares of common stock for the three and nine months ended December 31, 2010 and 2009 excludes unvested restricted shares of common stock.

During the three and nine months ended December 31, 2010, potential dilutive securities included options to purchase 227,344 and 245,678 shares of common stock, at prices ranging from $0.075 to $2.75 per share in both periods. During the three and nine months ended December 31, 2009, potential dilutive securities included options to purchase 140,952 and 120,080 shares of common stock at prices ranging from $0.075 to $0.52 per share in both periods. During the three and nine month periods ended December 31, 2010 and 2009, all potential common equivalent shares were anti-dilutive and were excluded in computing diluted net loss per share, due to the Company’s net loss for all periods.

(10) Commitments, Contingencies and Purchase Obligations

Stone & Webster, Inc. In August 2007, the Company entered into an Engineering, Procurement and Construction Management Contract with Stone & Webster, Inc., or S&W, a subsidiary of The Shaw Group Inc., for engineering and procurement services for the construction of the Company’s Polysilicon Plant, which was amended in October 2007 by Change Order No. 1, again in April 2008 by Change Order No. 2, again in February 2009 by Change Order No. 3, and again in February 2010 by Change Order No. 4, which are collectively the Engineering Agreement. Under the Engineering Agreement, S&W would provide the engineering services to complete the design and plan for construction of the Polysilicon Plant, along with procurement services. S&W would be paid on a time and materials basis plus a fee for its services.

The Company suspended all work under the Engineering Agreement in July 2009. In February 2010, work under the Engineering Agreement recommenced as agreed to in Change Order No. 4. In December 2010, the Company and S&W agreed to Change Order No. 5 under the Engineering Agreement, or Change Order No. 5, to, among other things: (i) set forth a target delivery schedule, added scope of work, estimated budget to complete the work, and payment schedule, and (ii) provide additional engineers and personnel to meet the target delivery schedule.

During the nine months ended December 31, 2010, the Company made payments to S&W of $12.5 million, and as of December 31, 2010, the Company had paid S&W an aggregate amount of $58.3 million under the Engineering Agreement.

JH Kelly LLC. In August 2007, the Company entered into a Cost Plus Incentive Contract with JH Kelly LLC, or JH Kelly, for construction services for the construction of the Polysilicon Plant, which was amended in October 2007, by Change Order No. 1, again in April 2008 by Change Order No. 2, again in March 2009 by Change Order No. 3, again in September 2009 by Change Order No. 4, and again in August 2010 by Change Order No. 5, which are collectively the JH Kelly Construction Agreement. Under the JH Kelly Construction Agreement, JH Kelly agreed to provide the construction services as the Company’s general contractor for the construction of the Polysilicon Plant with a production capacity of 4,000 metric tons per year.

Pursuant to Change Order No. 5, the Company agreed among other things: (i) to change the date to complete construction for Partial Commercial Operation, or PCO (including the Schedule Incentive Completion Dates as amended and restated in Change Order Numbers 3 and 4) on or before December 31, 2010 for schedule and bonus purposes, (ii) that JH Kelly will use best efforts to attain PCO by that date with incremental funding from Hoku Materials in the amount of $55.8 million, (iii) that JH Kelly will aim to complete certain monthly milestones for the project for the period August 1, 2010 through December 31, 2010, (iv) that JH Kelly successfully completed and earned its $1.5 million bonus for the preliminary reactor installation, which will be paid in $375,000 increments tied to completion of the monthly milestones, and (v) that on or before August 31, 2010, Tianwei New Energy Holdings Co., Ltd. or Hoku Materials will secure a standby letter of credit in the amount of $20.0 million for the benefit of JH Kelly to provide a greater degree of certainty and security with respect to payment for the work. Due to certain scheduling and financing delays, JH Kelly and the Company are in discussions to update certain of these milestones.

During the nine months ended December 31, 2010, the Company made payments to JH Kelly of $85.9 million, which included the $1.5 million bonus for the preliminary reactor installation, and as of December 31, 2010, the Company had paid JH Kelly an aggregate amount of $154.8 million under the JH Kelly Construction Agreement.

Dynamic Engineering Inc. In October 2007, the Company entered into an agreement with Dynamic Engineering Inc., or Dynamic, for design and engineering services, and a related technology license for the process to produce and purify trichlorosilane, or TCS. Under the agreement with Dynamic, or the Dynamic Agreement, Dynamic is obligated to design and engineer a TCS production facility that is capable of producing 20,000 metric tons of TCS for the Polysilicon Plant. Under the Dynamic Agreement, Dynamic's engineering services are provided and invoiced on a time and materials basis, and the license fee will be calculated upon the successful completion of the TCS production facility, and demonstration of certain TCS purity and production efficiency capabilities. The maximum aggregate amount that the Company may pay Dynamic for the engineering services and the technology license is $12.5 million, which includes an incentive for Dynamic to complete the engineering services under budget. Dynamic is guaranteeing the quantity and purity of the TCS to be produced at the completed facility, and has agreed to indemnify the Company for any third-party claims of intellectual property infringement.

During the nine months ended December 31, 2010, the Company made payments to Dynamic of $1.9 million, and as of December 31, 2010, the Company had paid Dynamic an aggregate amount of $8.4 million under the Dynamic Agreement.

GEC Graeber Engineering Consultants GmbH and MSA Apparatus Construction for Chemical Equipment Ltd. The Company entered into a contract with GEC Graeber Engineering Consultants GmbH, or GEC, and MSA Apparatus Construction for Chemical Equipment Ltd., or MSA, for the purchase and sale of 16 hydrogen reduction reactors and hydrogenation reactors for the production of polysilicon, and related engineering and installation services. Under the contract, the Company will pay up to a total of 20.9 million Euros for the reactors. The reactors are designed and engineered to produce approximately 2,500 metric tons of polysilicon per year. The term of the contract extends until the end of the first month after the expiration date of the warranty period, but may be terminated earlier under certain circumstances.

As of December 31, 2010, pursuant to the contract with GEC and MSA, the Company received all 16 hydrogen reduction reactors, eight hydrogenation reactors, and related equipment, at the Polysilicon Plant.

During the nine months ended December 31, 2010, the Company made payments to GEC and MSA of 3.3 million Euros or $4.3 million, and as of December 31, 2010, the Company had paid GEC and MSA an aggregate amount of 19.0 million Euros or $26.7 million.

Idaho Power Company. The Company entered into an agreement with Idaho Power Company, or Idaho Power, to complete the construction of the electric substation to provide power for the Polysilicon Plant, or the Idaho Power Agreement. As of December 31, 2010, the Company had paid an aggregate amount of $18.0 million to Idaho Power. The electric substation was completed in August 2009, and the Company was able to use its power during the Company’s polysilicon production demonstration in April 2010.

The Company also entered into an Electric Service Agreement with Idaho Power, or the ESA, for the supply of electric power and energy to the Company for use in the Polysilicon Plant, subject to the approval of the Idaho Public Utilities Commission, or the PUC. The term of the ESA is four years, beginning in June 2009 and expiring in May 2013. During the term of the ESA, Idaho Power agrees to make up to 82,000 kilowatts of power available to the Company at certain fixed rates, which are subject to change only by action of the PUC. After the initial term of the ESA expires, either the Company or Idaho Power may terminate the ESA without prejudice. If neither party chooses to terminate the ESA, then Idaho Power will continue to provide electric service to the Company. As of December 31, 2010, the Company was contractual obligated to pay approximately $8.5 million to Idaho Power over the term of the ESA.

AEG Power Solutions USA Inc. (formerly known as Saft Power Systems USA, Inc.). In March 2008, the Company entered into an agreement with AEG Power Solutions USA Inc., or AEG, formerly known as Saft Power Systems USA, Inc., which was subsequently amended in May 2009, or the AEG Agreement, for the purchase and sale of thyroboxes, earth fault detection systems, and related technical documentation and services, or the Deliverables. Under the AEG Agreement, AEG was obligated to manufacture and deliver the Deliverables, which are used as the power supplies for the polysilicon deposition reactors to be used in the Polysilicon Plant. The total fees payable to AEG for all Deliverables under the AEG Agreement is approximately $13.0 million.

During the nine months ended December 31, 2010, the Company made payments to AEG of $4.5 million, and as of December 31, 2010, the Company had paid AEG an aggregate amount of $11.7 million.

Polymet Alloys, Inc. In November 2008, the Company entered into an agreement with Polymet Alloys, Inc., or Polymet, for the supply of silicon metal to the Company for use at the Polysilicon Plant. In May 2009, the Company entered into an amended and restated supply agreement with Polymet, or the Amended Polymet Agreement. The term of the Amended Polymet Agreement is three years, commencing in calendar year 2011. Each year during the term of the Amended Polymet Agreement, Polymet has agreed to sell to the Company no less than 65% of the Company’s annual silicon metal requirement. Pricing is to be negotiated for each year of the Amended Polymet Agreement; however, if the parties are unable to agree on pricing for any year, or the Company has agreed to purchase less than the amount specified in the Amended Polymet Agreement, Polymet has a right of first refusal to match the terms offered by any third-party supplier from whom the Company may seek to purchase silicon metal. Either party may also terminate the Amended Polymet Agreement under certain circumstances, including a material breach by the other party that has not been cured within a specified cure period, or the other party’s voluntary or involuntary liquidation. As of December 31, 2010, the Company had not made any payments to Polymet.

PVA Tepla Danmark. In April 2008, the Company entered into an agreement with PVA Tepla Danmark, or PVA, for the purchase and sale of slim rod pullers and float zone crystal pullers. Under the agreement, PVA is obligated to manufacture and deliver the slim rod pullers and float zone crystal pullers for the Polysilicon Plant. Slim rod pullers are used to make thin rods of polysilicon that are then transferred into polysilicon deposition reactors to be grown through a chemical vapor deposition process into polysilicon rods for commercial sale to the Company’s end customers. The float zone crystal pullers convert the slim rods into single crystal silicon for use in testing the quality and purity of the polysilicon. The total amount payable to PVA is approximately $6.0 million, which is payable in four installments, the first of which was made in August 2008. Either party may terminate the agreement if the other party is in material breach of the agreement and has not cured such breach within 180 days after receipt of written notice of the breach, or if the other party is bankrupt, insolvent, or unable to pay its debts.

During the nine months ended December 31, 2010, the Company made payments to PVA of $1.0 million, and as of December 31, 2010, the Company had paid PVA an aggregate amount of $3.9 million.

BHS Acquisitions, LLC. In November 2008, the Company entered into an agreement with BHS Acquisitions, LLC, or BHS, for the supply of hydrochloric acid, or HCl, to the Company for use at the Polysilicon Plant. The term of the agreement is eight years beginning on the date on which the first shipment of product is delivered. Each year during the term of the agreement, BHS has agreed to sell to the Company specified volumes of HCl that meet certain purity specifications. The volume is fixed during each of the eight years. Pricing is fixed for the first twelve months of shipments, which are scheduled to begin within four months after the Company provides written notice to BHS, and the aggregate net value of the HCl to be purchased by the Company under the agreement in the first twelve months is approximately $2.4 million. Pricing is to be renegotiated for each of the remaining years of the agreement; however, if the parties are unable to agree on pricing for any future year, then either party may terminate the agreement without liability to the other party. Either party may also terminate the agreement under certain circumstances, including a material breach by the other party that has not been cured within a specified cure period, or the other party’s voluntary or involuntary liquidation. As of December 31, 2010, the Company had not provided notice to BHS to commence shipments, and had not made any payments to BHS.

Evonik Degussa Corporation. In March 2010, the Company entered into an agreement with Evonik Degussa Corporation, or Evonik, for the supply of trichlorosilane, or TCS, for use in the manufacturing of polysilicon for a term of approximately one year ending in February 2011. Evonik has agreed to sell to the Company a minimum quantity of TCS during the initial term of the agreement. Pricing is fixed based on the quantity supplied in each calendar month and based on the Company’s frequency of payment. Pursuant to the agreement, Evonik is required to provide a minimum amount of TCS per calendar month, and it will use commercially reasonable efforts to provide additional quantities that the Company may request in addition to the monthly minimum amount. The Company has not taken delivery of any TCS from Evonik and is in discussions with Evonik to amend the agreement. As of December 31, 2010, the Company was contractual obligated to pay approximately $12.5 million to Evonik over the term of the agreement.

In April 2010, the Company paid Evonik a $100,000 deposit for the ISO containers that will transport the TCS to the Company’s facility in Pocatello, Idaho. Evonik will return the Company’s deposit upon expiration of the initial term and completion of the Company’s obligations under the agreement; however, the Company expects the agreement to be amended.

During the nine months ended December 31, 2010, the Company paid $100,000 to Evonik for the container deposit, and as of December 31, 2010, the Company had paid Evonik an aggregate amount of $100,000 related to the sales agreement.

If the Company is unable to secure additional financing to complete the construction of the Polysilicon Plant, the Company would need to curtail construction of the Polysilicon Plant. If the Company elects to curtail construction, it would not be able to produce its own polysilicon to meet the delivery requirements under certain polysilicon agreements. The Company is required to make polysilicon deliveries beginning in March 2011. In order to avoid price adjustments and/or breaching these contracts, the Company could purchase polysilicon from third parties if it does not produce sufficient amounts to meet these obligations. The Company estimates that it will need to purchase between 30 to 60 metric tons of polysilicon during fiscal 2011 to avoid any price adjustments. As of December 2010, the Company has not entered into any agreements to purchase polysilicon.

(11) Operating Segments

Operating segments are components of an enterprise for which discrete financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision-making group is made up of the Chief Executive Officer, Chief Financial Officer, Chief Strategy Officer and the Interim President of Hoku Materials. The chief operating decision-making group manages the profitability, cash flows, and assets of each segment’s various product or service lines and businesses. The Company has two operating business units: Hoku Solar and Hoku Materials. Hoku Solar installs PV systems and Hoku Materials will manufacture polysilicon for resale. A description of the products for each business unit is described in Note 1, “Summary of Significant Accounting Policies and Practices” above.

	Three Months Ended December 31,				Nine months Ended December 31,
	2010		2009		2010		2009
	(amounts in thousands)
Revenue:

Hoku Solar	$	1,226	$	259	$	3,330	$	1,831
Hoku Materials		16		—		27		—

Total consolidated revenue	$	1,242	$	259	$	3,357	$	1,831

	Three Months Ended December 31,					Nine months Ended December 31,
	2010		2009			2010		2009
	(amounts in thousands)
Income (loss) from operations:
Hoku Solar	$	64	$	(473	)	$	234	$	(1,383	)
Hoku Materials		(3,114)		(825	)		(8,043)		(2,370	)

Total consolidated loss from continuing operations	$	(3,050)	$	(1,298	)	$	(7,809)	$	(3,753	)

The reconciliation of segment operating results to the Company’s consolidated totals was as follows:

	Three Months Ended December 31,					Nine months Ended December 31,
	2010		2009			2010		2009
	(amounts in thousands)
Consolidated loss from continuing operations	$	(3,050)	$	(1,298	)	$	(7,809)	$	(3,753	)
Interest and other income		27		16			166		267
Income from discontinued operations		—		—			—		51
Net (income) loss attributable to noncontrolling interest		(23)		17			(97)		35

Net loss attributable to Hoku Corporation	$	(3,046)	$	(1,265	)	$	(7,740)	$	(3,400	)

The Company allocates its assets to its business units based on the primary business units benefiting from the assets. Unallocated assets are composed primarily of cash and cash equivalents and other current assets.

	December 31, 2010		March 31, 2010
	(amounts in thousands)
Identifiable assets:
Hoku Solar	$	4,697	$	6,264
Hoku Materials		449,369		289,889
Unallocated assets		2,210		2,051

Total assets	$	456,276	$	298,204

(12) Related Party Transactions

In October 2010, the Company entered into an agreement with Tianwei to train the Company’s Polysilicon Plant personnel for a fee of 3.4 million Renminbi, or $516,000 (based on the Renminbi /U.S. dollar exchange rate, which was $0.152 as of December 31, 2010), which was based on a specified number of participants and days of training. As of December 31, 2010, the Company paid Tianwei 846,000 Renminbi, or $127,000, for training services rendered.

In connection with the reimbursement agreements with Tianwei, the Company agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the various standby letters of credit. As of December 31, 2010, the Company accrued a liability of approximately $2.7 million related to these reimbursement agreements.

As previously disclosed in the Company's Form 10-Q for the quarter ended September 30, 2010, Tianwei and the Company have been discussing what would constitute fair compensation for Tianwei for the financial services it has been providing and will provide the Company. While the discussions are on-going, the Company believes this compensation may be in the form of common stock warrants. To the extent common stock warrants are issued to Tianwei for its financial services it may significantly dilute the ownership of its stockholders other than Tianwei.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include all statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail in Part II, Item IA. “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date hereof. We hereby qualify all of our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

The following discussion should be read in conjunction with our financial statements and the related notes contained elsewhere in this Quarterly Report on Form 10-Q and with our financial statements and notes thereto for the fiscal year ended March 31, 2010, contained in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on July 14, 2010.

Overview

Hoku Corporation is a solar energy products and services company. We were incorporated in Hawaii in March 2001, as Pacific Energy Group, Inc. and changed our name to Hoku Scientific, Inc. in July 2001. In December 2004, we were reincorporated in Delaware. In March 2010, we changed our name from Hoku Scientific, Inc. to Hoku Corporation.

We originally focused our efforts on the design and development of fuel cell technologies, including our Hoku membrane electrode assemblies, or MEA’s, and Hoku Membranes. In May 2006, we announced our plans to form an integrated photovoltaic, or PV, module business, and our plans to manufacture polysilicon, a primary material used in the manufacture of PV modules, at our polysilicon manufacturing plant in Pocatello, Idaho, or the Polysilicon Plant. In fiscal 2007, we reorganized our business into three business units: Hoku Materials, Hoku Solar and Hoku Fuel Cells. In February and March 2007, we incorporated Hoku Materials, Inc. and Hoku Solar, Inc., respectively, as wholly owned subsidiaries to operate our polysilicon and solar businesses, respectively.

In September 2010, we elected to discontinue the operations of Hoku Fuel Cells. However, we will maintain ownership of its intellectual property including patents. Accordingly, the results of operations of Hoku Fuel Cells for the three and nine months ended December 31, 2010 and 2009 have been reported as discontinued operations in the consolidated statements of operations.

Hoku Materials

Construction Update

Hoku Materials was incorporated to manufacture polysilicon, a key material used in photovoltaic, or PV, modules. In May 2007, we commenced construction of our planned polysilicon manufacturing facility in Pocatello, Idaho, or the Polysilicon Plant, which would be capable of producing up to 4,000 metric tons of polysilicon per year. We previously estimated the total cost for construction of approximately $410 million; however we have determined that the total costs will be greater than our previous estimates. Based on recent construction progress and discussions with our vendors, we now expect to incur approximately $600 million of costs before we can commence operation of the first 2,500 metric tons of production capacity. We also expect to invest up to an additional $100 million to complete the second phase of construction, which will add an additional 1,500 metric tons of manufacturing capacity, and allow us to complete our planned on-site TCS plant. Thus, our revised estimate for the full, planned 4,000 metric ton plant is now approximately $700 million.

The primary driver of the increase in costs is related to our engineering contract with Stone & Webster, Inc., and our construction contract with JH Kelly LLC as they are cost-plus contracts, rather than lump sum, or fixed cost contracts. As such, there is no guaranteed maximum cost. In addition, the estimated total cost increased in part by the fact that the construction schedule was expected to be approximately two years, but has instead been spread over four years with numerous starts and stops as a result of earlier challenges obtaining adequate financing in a timely manner. Furthermore, construction of the Polysilicon Plant commenced prior to the completion of the detailed engineering work, which caused numerous changes in the design of the facility, further contributing to the increase in delays and construction costs.

In an effort to control costs, we have strengthened our internal management team to enable more detailed reviews and audits of all project expenses. We have also engaged an independent engineer to assist with the monitoring and control of schedule and budget. Any significant increase in the cost to complete the Polysilicon Plant could have a material adverse effect on our business, financial condition and results of operations.

We received 16 Siemens-process reactors at the Polysilicon Plant and in April 2010 successfully produced polysilicon using two the reactors. We produced the material after completing a comprehensive system commissioning protocol, which culminated in deposition runs in a select number of our installed polysilicon reactors. The primary purpose of the testing was to confirm system integrity and validate operating procedures.

Contingent on securing additional financing, we expect to commission our reactors capable of producing 2,500 metric tons of polysilicon per annum and begin our first commercial shipment in the second half of calendar year 2011. We intend to ramp-up production throughout fiscal 2012, during which we expect to reach full production capability.

In order to avoid price adjustments and/or breaching our supply contracts, we could purchase polysilicon from third parties if we do not produce sufficient amounts to meet our customer obligations. We estimate that we will need to purchase between 30 to 60 metric tons of polysilicon during fiscal 2011 to avoid any price adjustments. As of December 2010, we have not entered into any agreements to purchase polysilicon and the current spot market prices are significantly greater than the prices at which our customers will be obligated to pay us. Furthermore, based on our anticipated production schedule we may also need to purchase polysilicon in fiscal 2012 until we are capable of producing 2,500 metric tons of polysilicon per annum.

During the three and nine months ended December 31, 2010, Hoku Materials incurred an operating loss of $3.1 million and $8.0 million, respectively, which mainly consisted of payroll, including stock compensation, professional fees and electricity usage as we continue to ramp towards the construction of the Polysilicon Plant. In addition, as of December 31, 2010, Hoku Materials has capitalized $439.7 million related to construction costs for the Polysilicon Plant and had received $140.2 million in customer deposits as prepayments under long-term polysilicon supply agreements.

Financing Update

Notes Payable

As previously disclosed in our 10-Q for the quarter ended September 30, 2010, we have been discussing with Tianwei what would constitute fair compensation for Tianwei for the financial services it has been providing and will provide to us. While the discussions are ongoing, we believe this compensation may be in the form of common stock warrants. To the extent common stock warrants are issued to Tianwei for its financial services it may significantly dilute the ownership of its stockholders other than Tianwei. We expect to finalize the type of compensation and amount during the fourth quarter of fiscal 2011.

Tianwei New Energy Holding Co. Ltd.

As of December 31, 2010, we had $50.0 million in notes payable to Tianwei. We received the first tranche of $20.0 million in January 2010 and received the second tranche of $30.0 million in March 2010. The notes bear an annual interest rate of 5.94% and have a term of two years. Pursuant to the loan agreement, we have pledged a security interest in all of our assets to Tianwei. The $20.0 and $30.0 million in loan proceeds become due in January and March 2012, respectively, with no penalty for earlier prepayment of principal, and interest payments are due quarterly.

As part of the financing agreement, we also granted to Tianwei a warrant to purchase an additional 10 million shares of our common stock. The terms of the warrant include: (i) a per share exercise price equal to $2.52; (ii) an exercise period of seven years; and (iii) provision for a cashless, net-issue exercise.

The accounting of the warrant and debt was based on their relative fair values and calculated to be $12.9 million and $37.1 million, respectively, in proportion to the $50.0 million in loan proceeds. The fair value of the warrant was calculated using the Black-Sholes option pricing model, and the fair value of the debt was based on the present value of cash flows, discounted at a 7% interest rate.

We recorded approximately $1.2 million in transaction costs and $12.9 million of related fair value of the warrant as deferred costs of debt financing totaling $14.1 million. Upon issuance of the warrant and receipt of the loan proceeds, $12.9 million of the $14.1 million deferred costs of debt financing was reclassified as a discount on the notes payable. The deferred cost of debt financing and discount on the debt will be amortized over the two year term of the $50.0 million in notes payable, using the effective interest method, and capitalized as construction in progress related to the Polysilicon Plant. As of December 31, 2010, the carrying value of the $50.0 million in notes payable was $42.0 million, net of the unamortized discount of $8.0 million.

China Merchants Bank – New York Branch

In May 2010, we entered into a $20.0 million credit agreement with the New York branch of China Merchants Bank Co., Ltd. The loan under this credit agreement is secured by a standby letter of credit drawn by Tianwei in Chengdu, China and issued to China Merchants Bank, as collateral. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2% or, if we elect, any portion of the loan that is not less than $1 million may bear interest at an annual rate equal to the rate of interest announced by the lender as its “prime rate.” The principal amount and any unpaid interest thereon must be paid in full by May 2012. We also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of December 31, 2010 the entire $20.0 million was outstanding.

In August 2010, we entered into two credit agreements with the New York branch of China Merchants Bank Co., Ltd. to borrow $10 million and $5 million. The loans under these credit agreements are secured by standby letters of credit drawn by Tianwei in Chengdu, China and issued to China Merchants Bank, as collateral. The loans bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2% or, if we elect, any portion of the loans that is not less than $1 million may bear interest at an annual rate equal to the rate of interest announced by the lender as its “prime rate.” The principal amount and any unpaid interest thereon must be paid in full by August 2012. We entered into reimbursement agreements with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letters of credit. As of December 31, 2010 the entire $15.0 million was outstanding.

In September 2010, we entered into a $10.0 million credit agreement with the New York branch of China Merchants Bank Co., Ltd. The loan under this credit agreement is secured by a standby letter of credit drawn by Tianwei in Chengdu, China and issued to China Merchants Bank, as collateral. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2% or, if we elect, any portion of the loan that is not less than $1 million may bear interest at an annual rate equal to the rate of interest announced by the lender as its “prime rate.” The principal amount and any unpaid interest thereon must be paid in full by September 2013. We also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of December 31, 2010 the entire $10.0 million was outstanding.

In October 2010, we entered into a $13.0 million credit agreement with the New York branch of China Merchants Bank Co., Ltd. We received $13.0 million under this credit agreement, which is secured by a standby letter of credit drawn by Tianwei in Chengdu, China and issued to China Merchants Bank, as collateral. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2% or, if we elect, any portion of the loan that is not less than $1 million may bear interest at an annual rate equal to the rate of interest announced by the lender as its “prime rate.” The principal amount and any unpaid interest thereon must be paid in full by October 2013. We also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of December 31, 2010 the entire $13.0 million was outstanding.

China Construction Bank – New York Branch

In June 2010, we entered into a $28.3 million credit agreement with the New York branch of China Construction Bank Corporation. The loan under this credit agreement is secured by a standby letter of credit drawn by Tianwei and issued by the Sichuan branch of China Construction Bank in favor of the New York branch. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 1.875% or, if we elect and the bank agrees, any portion of the loan that is not less than $1 million may bear interest at an annual rate equal to the highest “Prime Rate” as published in the “Money Rates” column of the Eastern Edition of the Wall Street Journal from time to time. The principal amount and any unpaid interest thereon must be paid in full by June 2012. We also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of December 31, 2010 the entire $28.3 million was outstanding.

In December 2010, we entered into a $10.0 million credit agreement with the New York branch of China Merchants Bank Co., Ltd. We received the entire $10.0 million under this credit agreement, which is secured by cash collateral of 110% of the principal amount of the credit agreement in Renminbi provided by Tianwei. The loan bears interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2% or, we elect, any portion of the loan that is not less than $1.0 million may bear interest at an annual rate equal to the rate of interest announced by the lender as its “prime rate.” The principal amount and any unpaid interest thereon must be paid in full by December 2013. We also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with providing the cash collateral. As of December 31, 2010 the entire $10.0 million was outstanding.

China Construction Bank – Singapore Branch

In October 2010, we entered into a $29.0 million credit agreement with the Singapore branch of China Construction Bank. We received the entire $29.0 million under this credit agreement which is secured by a standby letter of credit issued drawn by China Construction Bank Corporation, Sichuan Branch in favor of China Construction Bank – Singapore Branch. The loan will bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2%. The principal amount and any unpaid interest thereon must be paid in full by October 2013. We also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of December 31, 2010 the entire $29.0 million was outstanding.

Industrial and Commercial Bank of China – New York Branch

In December 2010, we entered into a $15.5 million credit agreement with the New York Branch of Industrial and Commercial Bank of China, Ltd. The loans are secured by a standby letter of credit issued by the Sichuan Branch of Industrial and Commercial Bank of China and procured by Tianwei in favor of the lender and which has an aggregate drawable amount of $17.0 million. The loans bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2.6%. The principal amount and any unpaid interest thereon must be paid in full by December 2013. We also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. As of December 31, 2010 the entire $15.5 million was outstanding.

In January 2011, we entered into a $19.5 million credit agreement with the New York Branch of Industrial and Commercial Bank of China, Ltd. The loans are secured by a standby letter of credit issued by the Sichuan Branch of Industrial and Commercial Bank of China and procured by Tianwei in favor of the lender and which has an aggregate drawable amount of $22.0 million. The loans will bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2.6%. The principal amount and any unpaid interest thereon must be paid in full by January 2014. We also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letter of credit. We borrowed $19.5 million in January 2011.

CITIC Bank International Limited – New York Branch

On February 7, 2011, we entered into a $19.0 million credit agreement with the New York Branch of CITIC Bank International Limited. We can receive up to $3.0 million of the loan which is secured by standby letters of credit issued by China Branch of CITIC Bank International Limited and procured by Tianwei in favor of CITIC Bank International Limited. Tianwei has informed us that it intends to issue additional standby letters of credit for the remaining loan amount. The loans will bear interest at a per annum rate equal to the LIBOR Rate for the applicable interest period plus 2.6%. The principal amount and any unpaid interest thereon must be paid in full by January 2014. We also entered into a reimbursement agreement with Tianwei pursuant to which we agreed to reimburse Tianwei for all interest, fees and expenses incurred by Tianwei in connection with the negotiation, execution and performance of the standby letters of credit. We borrowed $2.0 million on February 7, 2011.

As of December 2010, we are also expecting an additional $8.2 million in customer prepayments from our existing customers, which are payable on polysilicon delivery milestones. We will need to raise additional capital to complete construction and meet our working capital needs. We plan on raising this money through one or more subsequent debt and/or equity offerings and possibly prepayments from new customer contracts. Tianwei has also agreed to use its reasonable best efforts to assist us in obtaining additional financing that may be required by us to construct and operate the Polysilicon Plant with the understanding that it will receive fair compensation for the financial services it provides us. We cannot be certain that we will reach an agreement with Tianwei regarding the amount or method of compensation, which could affect Tianwei's willingness to continue to assist us in obtaining necessary additional financing.

Polysilicon Supply Agreement Updates

Wuxi Suntech Power Co. Ltd. In June 2007, we entered into a fixed price, fixed volume supply agreement with Wuxi Suntech Power Co., Ltd., or Suntech, for the sale and delivery of polysilicon. The supply agreement has been subsequently amended and in June 2010, we revised the first delivery of polysilicon products to Suntech to June 2011, and Suntech waived certain milestones required under the agreement. The term of the agreement was shortened to one year and pricing was fixed for the term of the agreement. The agreement will automatically renew with the same terms unless either party terminates the agreement. If we fail to commence shipments by June 2011, then Suntech may terminate the supply agreement.

Upon Suntech’s termination of the agreement under certain circumstances, we are required to refund to Suntech all prepayments, which were $2.0 million as of December 31, 2010, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement. Upon termination of the agreement for cause by us, we generally may retain the entire amount of prepayments made as of the date of such termination as liquidated damages, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement.

Solarfun Power Hong Kong Limited. In November 2007, we entered into a supply agreement with Solarfun Power Hong Kong Limited, or Solarfun, a subsidiary of Hanwha Solar One, for the sale of polysilicon. As of December 31, 2010, Solarfun has paid to us $49.0 million as a prepayment for future polysilicon product deliveries, and it is obligated to pay us an additional $6.0 million in prepayments.

Further, pursuant to an amendment of the contract in November 2010, we will sell approximately 7,300 metric tons of polysilicon over an 11-year term, approximately 6,750 metric tons of which are to be shipped during the second through tenth year of the agreement. The pricing under the agreement was adjusted such that it is pre-negotiated for a certain period of time, and will then vary from year to year based on market pricing and negotiations between us and Solarfun. If Solarfun fails to make any of the $6.0 million prepayment under the agreement, then the pricing adjustments shall not be effective. We also agreed that the initial delivery date to avoid breach and termination would be extended to June 2011.

Upon Solarfun’s termination of the agreement under certain circumstances, we are required to refund to Solarfun all prepayments made as of the date of termination, which were $49.0 million as of December 31, 2010, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement. Upon termination of the agreement by us, we generally may retain the entire amount of prepayments made as of the date of such termination as liquidated damages, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement.

Jinko Solar Co., Ltd. In July 2008, we entered into a supply agreement with Jinko Solar Co., Ltd., formerly known as Jiangxi Jinko Solar Co., Ltd., or Jinko, for the sale and delivery of polysilicon. In December 2010, we amended the supply agreement under which we will sell approximately 1,800 metric tons of polysilicon over a nine-year term. The pricing under the agreement was adjusted such that it is pre-negotiated for a certain period of time and will then vary from year to year based on market pricing and negotiations between us and Jinko. We also agreed that the initial delivery date to avoid breach and termination would be extended to August 2011. As of December 31, 2010, Jinko has paid us a total cash deposit of $20.0 million as prepayment for future product deliveries.

Upon Jinko’s termination of the agreement under certain circumstances, we may be required to refund to Jinko all prepayments made as of the date of termination, which were $20.0 million as of December 31, 2010, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement. Upon termination of the agreement by us, we generally may retain the entire amount of prepayments made as of the date of such termination as liquidated damages, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement.

Tianwei New Energy (Chengdu) Wafer Co., Ltd. In fiscal 2009, we entered into two fixed price, fixed volume supply agreements with Tianwei New Energy (Chengdu) Wafer Co., Ltd., or Tianwei Wafer, for the sale and delivery of polysilicon. In December 2009, we amended the agreements pursuant to which we converted $50.0 million of the total $79.0 million of prepayments previously paid into shares of our common stock and reduced the price at which Tianwei Wafer purchases polysilicon by approximately 11% per year. The amount of polysilicon to be delivered remains unchanged and Tianwei Wafer is required to pay us an additional $2.0 million in prepayments; however, the total revenue for the polysilicon to be sold by us to Tianwei Wafer has been modified such that up to approximately $418.0 million may be payable to us during the ten-year term (exclusive of amounts Tianwei Wafer may purchase pursuant to its right of first refusal), subject to acceptance of product deliveries and other conditions. Our failure to commence shipments of polysilicon by June 2011 constitutes a material breach by us under the terms of the agreement, among other circumstances.

Upon Tianwei Wafer’s termination of the agreements under certain circumstances, we are required to refund to Tianwei Wafer the $29.0 million in prepayments made as of December 31, 2010, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreements. Upon a termination of the agreements by us, we generally may retain the entire amount of prepayments made as of the date of such termination as liquidated damages, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreements.

Wealthy Rise International, Ltd. In September 2008, we entered into a fixed price, fixed volume supply agreement with Wealthy Rise International, Ltd., a wholly owned subsidiary of Solargiga Energy Holdings, Ltd., or Solargiga, for the sale of polysilicon. In March 2010, we amended the agreement pursuant to which we agreed to sell to Solargiga specified volumes of polysilicon at a predetermined price over a three-year period beginning in calendar year 2011, subject to product deliveries and other conditions. The aggregate amount that may be paid to us over the three-year term is $60.0 million, which is a reduction from the $455.0 million that would have been payable to us over a ten-year period under the original agreement. The amendment also extended the date by which we were obligated to commence shipments of polysilicon from October 2010 to January 2011, and it extended the dates for price adjustments and termination rights in the event of a delay in commencing shipment. Solargiga has the right to terminate the agreement and recover any prepayments made, if we have not commenced polysilicon shipments by May 2011, and we have the right to terminate the agreement and retain all prepayments received, if Solargiga fails to pay any of its future prepayments when due.

Pursuant to the agreement, Solargiga was obligated to pay us additional prepayments in the aggregate amount of $13.2 million that was payable in four increments of $3.3 million in each of April, June, August and October 2010, and a final prepayment of $200,000 upon Solargiga’s receipt of certain aggregate volumes of polysilicon product from us. We received all four increments from Solargiga of $13.2 million.

Upon Solargiga’s termination of the agreement under certain circumstances, we are required to refund to Solargiga all prepayments made as of the date of termination, which were $20.2 million as of December 31, 2010, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement. Upon termination of the agreement by us, we generally may retain the entire amount of prepayments made as of the date of such termination as liquidated damages, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement.

Shanghai Alex New Energy Co., Ltd. In February 2009, we entered into a supply agreement with Shanghai Alex New Energy Co., Ltd., or Alex, for the sale and delivery of polysilicon. In January 2011, we entered into Amendment No. 2 to Supply Agreement with Alex, or Amendment No. 2, which provides for a pricing adjustment such that pricing is pre-negotiated for a certain period of time and will then vary from year to year based on market pricing and negotiations between us and Alex. Under Amendment No. 2, we have an obligation to use commercially reasonable efforts to make our first shipment to Alex by March 31, 2011, and if we do not do this within a certain number of days after the scheduled delivery date, we have agreed to provide Alex with a purchase price adjustment. We further agreed that Alex shall have the right to terminate the Agreement, if we have not made our initial shipment of product on or before September 30, 2011.

Upon Alex’s termination of the agreement under certain circumstances, we are required to refund to Alex all prepayments made as of the date of termination, which were $20.0 million as of December 31, 2010, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement. Upon termination of the agreement by us, we generally may retain the entire amount of prepayments made as of the date of such termination as liquidated damages, less any part thereof that has been applied to the purchase price of polysilicon delivered under the agreement.

Hoku Solar

Our goal is to be a leading provider in PV system installations. We plan to continue to focus on designing, engineering and installing turnkey PV systems and related services in Hawaii using solar modules purchased from third-party suppliers.

In addition to continuing to focus on our turnkey solar integration business in the coming fiscal year, we also plan to expand our focus on large-scale PV project development within Hawaii and elsewhere. This effort will be focused on leveraging our solar integration, project management and financing expertise to develop a portfolio of rooftop solar energy facilities and multiple utility-scale PV farms, which would generate solar power for sale to utilities and large industrial customers for use on their grids.

During the three and nine months ended December 31, 2010, Hoku Solar recognized an operating profit of $64,000 and $234,000, respectively, from its PV system installations and sale of electricity to the Hawaii State Department of Transportation.

Financial Operations Review

During the three and nine months ended December 31, 2010, we derived all of our revenue through PV system installation and ancillary services related to Hoku Solar. We expect that all of our revenue will be derived through PV system installations and the sale of electricity until the first half of fiscal 2012, when Hoku Materials is expected to generate revenue through the sale of polysilicon manufactured at our planned polysilicon production facility in Pocatello, Idaho.

During the three and nine months ended December 31, 2010, our revenue was $1.2 and $3.4 million, respectively, comprised of PV system installations and the sale of electricity.

Consolidated Results of Operations

The following analysis of the unaudited consolidated financial condition and results of operations of Hoku Corporation and its subsidiaries should be read in conjunction with the consolidated financial statements and the related notes thereto in this Quarterly Report on Form 10-Q.

Comparison of Three Months Ended December 31, 2010 and 2009

Revenue. Revenue was $1.2 million for the three months ended December 31, 2010, compared to $259,000 for the same period in fiscal 2010. Revenue in both periods was primarily comprised of PV system installations and related services.

Cost of Revenue. Cost of revenue was $948,000 for the three months ended December 31, 2010, compared to $65,000 for the same period in fiscal 2010. Cost of revenue primarily consisted of employee compensation and supplies and materials for the PV system installation and related services.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $3.3 million for the three months ended December 31, 2010, compared to $1.5 million for the same period in fiscal 2010. The increase of $1.8 million was primarily due to electricity costs related to the construction of the Polysilicon Plant of $804,000 and an increase in payroll expense of $630,000, which include bonuses and stock compensation. In addition, the increase was due to expenses related to the training of our Polysilicon Plant operators of $189,000, professional fees of $159,000, and office supplies and equipment of $108,000.

Interest and Other Income/(Loss) . Interest and other income was $27,000 for the three months ended December 31, 2010 compared to $16,000 for the same period in fiscal 2010. Interest and other income for the three months ended December 31, 2010 was primarily comprised of a general excise tax refund of $21,000, the reversal of prior accruals for general excise tax reserves due to the expiration of the statute limitations of $5,000, and interest income of $1,000. Interest and other income for the three months ended December 31, 2009 was primarily comprised of the reversal of $13,000 in prior accruals for general excise tax reserves due to the expiration of the statute limitations and interest income of $2,000.

Comparison of Nine Months Ended December 31, 2010 and 2009

Revenue. Revenue was $3.4 million for the nine months ended December 31, 2010, compared to $1.8 million for the same period in fiscal 2010. Revenue in both periods was primarily comprised of PV system installations and related services and sale of electricity to the Hawaii State Department of Transportation.

Cost of Revenue. Cost of revenue was $2.4 million for the nine months ended December 31, 2010, compared to $1.5 million for the same period in fiscal 2010. Cost of revenue primarily consisted of employee compensation and supplies and materials for the PV system installation and related services.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $8.8 million for the nine months ended December 31, 2010, compared to $4.1 million for the same period in fiscal 2010. The increase of $4.7 million was primarily due to electricity costs related to the construction of the Polysilicon Plant of $1.4 million, expenditures related to the reactor demonstration, which was completed in April 2010, of $1.3 million, payroll expense, including stock based compensation and bonuses, of $1.3 million, and professional fees of $333,000. In addition, the increase in expenses included costs related to the training of our Polysilicon Plant operators of $189,000, rent for corporate and warehouse facilities of $169,000, and office supplies and equipment of $129,000.

Interest and Other Income . Interest and other income was $166,000 for the nine months ended December 31, 2010 compared to interest and other income of $267,000 for the same period in fiscal 2010. Interest and other income for the nine months ended December 31, 2010 was primarily comprised of a foreign currency transaction gain of $107,000 related to Euro-based invoices, the reversal of prior accruals for general excise tax reserves due to the expiration of the statute limitations of $36,000, a general excise tax refund of $21,000 and interest income of $2,000. Interest and other income for the nine months ended December 31, 2009 was primarily comprised of the reversal of prior accruals for general excise tax reserves due to statute of limitations of $234,000, the sale of fuel cell equipment of $40,000, and interest income of $22,000.

Liquidity and Capital Resources

We have incurred significant net losses since inception and we have relied on our ability to fund our operations principally through both registered and unregistered offerings of our securities, prepayments on long-term polysilicon contracts, and borrowings under credit agreements, which are secured by standby letters of credit procured by Tianwei. Even if we are successful in securing additional long-term polysilicon contracts that could provide additional prepayments, and our existing customers fulfill their obligations to make additional prepayments when due (of which there can be no assurances), we will still need to seek additional financing to complete our Polysilicon Plant and meet our working capital needs. As of December 31, 2010, we had cash and cash equivalents on hand of $10.2 million and current liabilities of $48.5 million.

As of December 31, 2010, we have funded approximately $408.3 million of our Polysilicon Plant. We previously estimated the total cost for construction of approximately $410 million; however we have now determined that the total costs will be greater than our previous estimates. Based on recent construction progress and discussions with our vendors, we now expect to incur approximately $600 million of costs before we can commence operation of the first 2,500 metric tons of production capacity. We also expect to invest up to an additional $100 million to complete the second phase of construction, which will add an additional 1,500 metric tons of manufacturing capacity, and allow us to complete our planned on-site TCS plant. Thus, our revised estimate for the full, planned 4,000 metric ton plant is now approximately $700 million.

We expect to complete the construction of the 2,500 metric ton per year plant, or Phase I, through the use of our available cash and debt supported by Tianwei. Tianwei has agreed to use its reasonable best efforts to assist us in obtaining additional financing for any additional construction costs necessary to complete Phase I, for working capital needs and to purchase polysilicon from third-parties to meet our upcoming commitments with the understanding that it will receive fair compensation for the financial services it provides us. We cannot be certain that we will reach an agreement with Tianwei regarding the appropriate compensation for Tianwei which could affect Tianwei's willingness to continue to assist us in obtaining necessary additional financing.

Once Phase I is completed, we expect to receive an additional $8.2 million in customer prepayments from our existing customers upon reaching certain polysilicon milestones. We expect to use the prepayments to help fund the construction costs to ramp-up to polysilicon production of 4,000 metric tons per year. We plan on raising the remaining costs to complete our Polysilicon Plant and working capital needs through debt and/or equity offerings and possibly prepayments from new customer contracts. Tianwei has also agreed to use its reasonable best efforts to assist us in obtaining additional financing that may be required by us to construct and operate the Polysilicon Plant. There is no guarantee that we will be able to obtain additional financing in terms acceptable to us or at all, even with the assistance of Tianwei. Furthermore, any significant increase in the cost to complete the Polysilicon Plant could have a material adverse effect on our business, financial condition and results of operations.

The additional capital we have secured during fiscal year 2011 has enabled us to settle accounts payable and accrued capital expenditures, and is providing us with the necessary capital to sustain operations. In addition, we are reserving adequate funding for the purchase of third-party polysilicon to meet our contractual obligations with our polysilicon customers, beginning in March 2011, and for interest and other financing costs related to our loans. However, the amount we have secured is not sufficient to complete construction of the Polysilicon Plant, and should there be delays in securing additional financing, we may need to implement cost and expense reduction programs and other programs to generate cash that are not currently planned, but are responsive to our liquidity requirements. If we are unable to secure additional financing or structure credit terms with our vendors, we would also need to curtail construction of the Polysilicon Plant in the fourth quarter of fiscal 2011. If we have to curtail construction, our excess capital would primarily be used to reduce our current liabilities, purchase of third-party polysilicon and for working capital needs.

Net Cash Used In Operating Activities. Net cash used in operating activities was $6.6 million and $3.8 million for the nine months ended December 31, 2010 and 2009, respectively. Net cash used in operating activities for the nine months ended December 31, 2010 primarily reflects the net loss of $7.6 million which resulted in a cash deficit of $6.7 million when adjusted for noncash operating activities. The cash deficit was offset by net cash inflows from working capital of $139,000, primarily from decreases in other current assets and increases in accounts payable and accrued operating expenditures and deferred revenue. In comparison, net cash used in operating activities for the nine months ended December 31, 2009 reflected a net loss of $3.4 million or a cash deficit of $2.5 million when adjusted for noncash operating activities and net cash outflows of $1.3 million primarily due to increases in costs expended for uncompleted solar contracts and other current assets, and decreases in accounts payable and accrued operating expenses and other current liabilities and the result of lower deferred revenue and customer deposits during the nine months ended December 31, 2009.

We had working capital deficits of $36.0 million and $25.0 million as of December 31, 2010 and March 31, 2010, respectively. The increasing working capital deficits reflect the increased deployment of funds to construct the Polysilicon Plant and our net losses. In addition, $16.7 million and $11.1 million of deposits from long-term polysilicon contracts were classified as short-term liabilities as of December 31, 2010 and March 31, 2010, respectively, to reflect the prepayments that apply to the product deliveries that are scheduled to ship within one year.

Net Cash Used In Investing Activities. Net cash used in investing activities was $141.4 million for the nine months ended December 31, 2010, compared to $52.8 million for the same period in fiscal 2010. The net cash used in investing activities in both periods was related to the continuing construction of the Polysilicon Plant.

Net Cash Provided By Financing Activities. Net cash provided by financing activities was $151.2 million for the nine months ended December 31, 2010, compared to $42.4 million for the same period in fiscal 2010. The net cash provided by financing activities during the nine months ended December 31, 2010 was primarily due to loan proceeds received from China Construction Bank of $57.3 million, loan proceeds received from China Merchants Bank of $68.0 million, loan proceeds received from Industrial and Commercial Bank of China of $15.5 million and deposits received under polysilicon supply agreements of $13.2 million, offset by cash distributions to the minority investor of Hoku Solar Power I of $2.7 million. The net cash provided by financing activities during the nine months ended December 31, 2009 was due to deposits received under polysilicon supply agreements of $39.0 million and cash contributions from the minority investor of Hoku Solar Power I of $3.6 million.

Operating Capital and Capital Expenditure Requirements

As we invest resources towards our polysilicon manufacturing and PV systems installation service businesses, develop our products, expand our corporate infrastructure, prepare for the increased production of our products and evaluate new markets to grow our business, we expect that our expenses will continue to increase and, as a result, we will need to generate significant revenue to achieve profitability.

We do not expect to generate significant revenue until we successfully commence the manufacture and shipment of polysilicon and begin meeting the obligations under our supply contracts. We previously estimated the total cost for construction of approximately $410 million; however we have now determined that the total costs will be greater than our previous estimates. Based on recent construction progress and discussions with our vendors, we now expect to incur approximately $600 million of costs before we can commence operation of the first 2,500 metric tons of production capacity. We also expect to invest up to an additional $100 million to complete the second phase of construction, which will add an additional 1,500 metric tons of manufacturing capacity, and allow us to complete our planned on-site TCS plant. Thus, our revised estimate for the full, planned 4,000 metric ton plant is now approximately $700 million.

We expect to complete the construction of the 2,500 metric ton per year plant, or Phase I, through the use of our available cash, the $19.5 million in loan proceeds which we received from ICBC in January 2011 and through additional debt supported by Tianwei. Tianwei has agreed to use its reasonable best efforts to assist us in obtaining additional financing for any additional construction costs necessary to complete Phase I, for working capital needs and to purchase polysilicon from third-parties to meet our upcoming commitments, in return for fair compensation. We cannot be certain that we will reach an agreement with Tianwei regarding the appropriate compensation for Tianwei which could affect Tianwei's willingness to continue to assist us in obtaining necessary additional financing.

The amount we have secured is not sufficient to complete construction of the Polysilicon Plant, and should there be delays in securing additional financing, we may need to implement cost and expense reduction programs and other programs to generate cash that are not currently planned, but are responsive to our liquidity requirements. If we are unable to secure additional financing or structure credit terms with our vendors, we would also need to curtail construction of the Polysilicon Plant in the fourth quarter of fiscal 2011. If we have to curtail construction, our excess capital would primarily be used for interest and other financing costs related to our loans, reduce our current liabilities, purchase of third-party polysilicon and for working capital needs.

The issuance of additional equity and convertible debt instruments may result in additional dilution to our current stockholders and/or a change of control. If we raise additional funds through the issuance of convertible debt securities, these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. We may require additional capital beyond our currently forecasted amounts. Any required additional capital may not be available on reasonable terms, if at all. If we are unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned research, development and commercialization and manufacturing activities, which could harm our business. Our forecasts of the period of time through which our financial resources will be adequate to support our operations are forward-looking statements and involve risks and uncertainties. Actual results could vary as a result of a number of factors, including the factors discussed in Part II, Item 1.A. “Risk Factors.”

Contractual Obligations

The following table summarizes the contractual obligations that existed as of December 31, 2010. The amounts in the table below do not include time and materials contracts and incentive payments. In addition, the GEC Graeber Engineering Consultants GmbH and MSA Apparatus Construction for Chemical Equipment Ltd. contract for the purchase and sale of hydrogen reduction reactors and hydrogenation reactors is to be paid in Euros and the contractual obligation is determined based on the Euro/U.S. dollar exchange rate, which was $1.33393/Euro as of December 31, 2010. The agreement with Tianwei for training services is to be paid in Renminbi and the contractual obligation is determined based on the Renminbi/U.S. dollar exchange rate, which was $0.152/Renminbi as of December 31, 2010.

Contractual Obligations	Total		Less Than One Year		One to Three Years		Three to Five Years		More Than Five Years
	(in thousands)
Construction in progress	$	11,143	$	11,143	$	—	$	—	$	—
Equipment purchases		32,822		32,822		—		—		—
Supply purchases		21,014		15,282		2,757		2,975		—
Leases		687		235		452		—		—
Service agreements		387		387		—		—		—
Deposits – Hoku Materials		140,200		16,194		46,253		23,312		54,441

Total	$	206,253	$	76,063	$	49,462	$	26,287	$	54,441

City of Pocatello . In March 2007, we entered into a 99-year ground lease with the City of Pocatello, Idaho, for approximately 67 acres of land and, in May 2007, the City of Pocatello approved an ordinance that authorizes the Pocatello Development Authority to provide us certain tax incentives related to certain necessary infrastructure costs we incur in the construction and operation of our Polysilicon Plant. In May 2009, we entered into an Economic Development Agreement, or the EDA Agreement, with the Pocatello Development Authority, or PDA, pursuant to which PDA agreed to reimburse to us amounts we actually incur in making certain infrastructure improvements consistent with the North Portneuf Urban Renewal Area and Revenue Allocation District Improvement Plan and the Idaho Urban Renewal Law, or the Infrastructure Reimbursement, and an additional amount as reimbursement for and based on the number of full time employee equivalents we create and maintain, or the Employment Reimbursement, at the Polysilicon Plant. The parties agreed that (a) the Infrastructure Reimbursement will be an amount that is equal to 95% of the tax increment payments PDA actually collects on the North Portneuf Tax Increment Financing District with respect to our real and personal property located in such district, or the TIF Revenue, up to approximately $26.0 million, less the actual Road Costs (defined below), and (b) the Employment Reimbursement will be an amount that is equal to 50% of the TIF Revenue, up to approximately $17.0 million. Each of the Infrastructure Reimbursement and the Employment Reimbursement will be made to us over time as TIF Revenue is received, and only after the costs of completing a public access road to the Polysilicon Plant, in an amount not to exceed $11.0 million, or the Road Costs, has been paid to PDA out of TIF Revenue, and up to $2.0 million in capital costs has been paid to the City of Pocatello out of TIF Revenue.

Stone & Webster, Inc . In August 2007, we entered into an Engineering, Procurement and Construction Management Contract with Stone & Webster, Inc., or S&W, a subsidiary of The Shaw Group Inc., for engineering and procurement services for the construction of our Polysilicon Plant, which was amended in October 2007 by Change Order No. 1, again in April 2008 by Change Order No. 2, again in February 2009 by Change Order No. 3, and again in February 2010 by Change Order No. 4, which are collectively the Engineering Agreement. Under the Engineering Agreement, S&W would provide the engineering services to complete the design and plan for construction of the Polysilicon Plant, along with procurement services. S&W would be paid on a time and materials basis plus a fee for its services.

We suspended all work under the Engineering Agreement in July 2009. In February 2010, work under the Engineering Agreement recommenced as agreed to in Change Order No. 4. In December 2010, we and S&W agreed to Change Order No. 5 under the Engineering Agreement, or Change Order No. 5, to, among other things: (i) set forth a target delivery schedule, added scope of work, estimated budget to complete the work, and payment schedule, and (ii) provide additional engineers and personnel to meet the target delivery schedule.

During the nine months ended December 31, 2010, we made payments to S&W of $12.5 million, and as of December 31, 2010, we had paid S&W an aggregate amount of $58.3 million under the Engineering Agreement.

JH Kelly LLC . In August 2007, we entered into a Cost Plus Incentive Contract with JH Kelly LLC, or JH Kelly, for construction services for the construction of the Polysilicon Plant, which was amended in October 2007, by Change Order No. 1, and again in April 2008 by Change Order No. 2, again in March 2009 by Change Order No. 3, again in September 2009 by Change Order No. 4, and again in August 2010 by Change Order No. 5, which are collectively the JH Kelly Construction Agreement. Under the JH Kelly Construction Agreement, JH Kelly agreed to provide the construction services as our general contractor for the construction of the Polysilicon Plant with a production capacity of 4,000 metric tons per year. The target cost for the services to be provided under the JH Kelly Construction Agreement is $165.0 million, including up to $5.0 million of incentives that may be payable.

Pursuant to Change Order No. 5, we agreed among other things: (i) to change the date to complete construction for Partial Commercial Operation, or PCO (including the Schedule Incentive Completion Dates as amended and restated in Change Order Numbers 3 and 4) on or before December 31, 2010 for schedule and bonus purposes, (ii) that JH Kelly will use best efforts to attain PCO by that date with incremental funding from us in the amount of $55.8 million, (iii) that JH Kelly will aim to complete certain monthly milestones for the project for the period August 1, 2010 through December 31, 2010, (iv) that JH Kelly successfully completed and earned its $1.5 million bonus for the preliminary reactor installation, which will be paid in $375,000 increments tied to completion of the monthly milestones, and (v) that on or before August 31, 2010, Tianwei New Energy Holdings Co., Ltd. or we will secure a standby letter of credit in the amount of $20.0 million for the benefit of JH Kelly to provide a greater degree of certainty and security with respect to payment for the work. Due to certain scheduling and financing delays, JH Kelly and the Company are in discussions to update certain of these milestones.

During the nine months ended December 31, 2010, we made payments to JH Kelly of $85.9 million, which included the $1.5 million bonus for the preliminary reactor installation, and as of December 31, 2010, we paid JH Kelly an aggregate amount of $154.8 million under the JH Kelly Construction Agreement.

Dynamic Engineering Inc . In October 2007, we entered into an agreement with Dynamic Engineering Inc., or Dynamic, for design and engineering services, and a related technology license for the process to produce and purify trichlorosilane, or TCS. Under the agreement with Dynamic, or the Dynamic Agreement, Dynamic is obligated to design and engineer a TCS production facility that is capable of producing 20,000 metric tons of TCS for the Polysilicon Plant. Under the Dynamic Agreement, Dynamic's engineering services are provided and invoiced on a time and materials basis, and the license fee will be calculated upon the successful completion of the TCS production facility, and demonstration of certain TCS purity and production efficiency capabilities. The maximum aggregate amount that we may pay Dynamic for the engineering services and the technology license is $12.5 million, which includes an incentive for Dynamic to complete the engineering services under budget. Dynamic is guaranteeing the quantity and purity of the TCS to be produced at the completed facility, and has agreed to indemnify us for any third-party claims of intellectual property infringement.

During the nine months ended December 31, 2010, we made payments to Dynamic of $1.9 million, and as of December 31, 2010, we had paid Dynamic an aggregate amount of $8.4 million under the Dynamic Agreement.

GEC Graeber Engineering Consultants GmbH and MSA Apparatus Construction for Chemical Equipment Ltd . We entered into a contract with GEC Graeber Engineering Consultants GmbH, or GEC, and MSA Apparatus Construction for Chemical Equipment Ltd., or MSA, for the purchase and sale of 16 hydrogen reduction reactors and hydrogenation reactors for the production of polysilicon, and related engineering and installation services. Under the contract, we will pay up to a total of 20.9 million Euros for the reactors. The reactors are designed and engineered to produce approximately 2,500 metric tons of polysilicon per year. The term of the contract extends until the end of the first month after the expiration date of the warranty period, but may be terminated earlier under certain circumstances.

As of December 31, 2010, pursuant to the contract with GEC and MSA, we received all 16 hydrogen reduction reactors, eight hydrogenation reactors, and related equipment, at the Polysilicon Plant.

During the nine months ended December 31, 2010, we made payments to GEC and MSA of 3.3 million Euros or $4.3 million, and as of December 31, 2010, we paid GEC and MSA an aggregate amount of 19.0 million Euros or $26.7 million.

Idaho Power Company . We entered into an agreement with Idaho Power Company, or Idaho Power, to complete the construction of the electric substation to provide power for the Polysilicon Plant, or the Idaho Power Agreement. As of December 31, 2010, we had paid an aggregate amount of $18.0 million to Idaho Power. The electric substation was completed in August 2009, and we were able to use its power during our polysilicon product demonstration in April 2010.

We also entered into an Electric Service Agreement with Idaho Power, or the ESA, for the supply of electric power and energy to us for use in the Polysilicon Plant, subject to the approval of the Idaho Public Utilities Commission, or the PUC. The term of the ESA is four years, beginning in June 2009 and expiring in May 2013. During the term of the ESA, Idaho Power agrees to make up to 82,000 kilowatts of power available to us at certain fixed rates, which are subject to change only by action of the PUC. After the initial term of the ESA expires, either we or Idaho Power may terminate the ESA without prejudice. If neither party chooses to terminate the ESA, then Idaho Power will continue to provide electric service to us.

AEG Power Solutions USA Inc. (formerly known as Saft Power Systems USA, Inc.) . In March 2008, we entered into an agreement with AEG Power Solutions USA Inc., or AEG, formerly known as Saft Power Systems USA, Inc., which was subsequently amended in May 2009, or the AEG Agreement, for the purchase and sale of thyroboxes, earth fault detection systems, and related technical documentation and services, or the Deliverables. Under the AEG Agreement, AEG was obligated to manufacture and deliver the Deliverables, which are used as the power supplies for the polysilicon deposition reactors to be used in the Polysilicon Plant. The total fees payable to AEG for all Deliverables under the AEG Agreement is approximately $13 million.

During the nine months ended December 31, 2010, we made payments to AEG of $4.5 million, and as of December 31, 2010, we had paid AEG an aggregate amount of $11.7 million.

Polymet Alloys, Inc. In November 2008, we entered into an agreement with Polymet Alloys, Inc., or Polymet, for the supply of silicon metal for use at the Polysilicon Plant. In May 2009, we entered into an amended and restated supply agreement with Polymet, or the Amended Polymet Agreement. The term of the Amended Polymet Agreement is three years, commencing in calendar year 2011. Each year during the term of the Amended Polymet Agreement, Polymet has agreed to sell to us, and we have agreed to purchase from Polymet, no less than 65% of our annual silicon metal requirement. Pricing is to be negotiated for each year of the Amended Polymet Agreement; however, if the parties are unable to agree on pricing for any year, or we have agreed to purchase less than the amount specified in the Amended Polymet Agreement, Polymet has a right of first refusal to match the terms offered by any third-party supplier from whom we may seek to purchase silicon metal. Either party may also terminate the Amended Polymet Agreement under certain circumstances, including a material breach by the other party that has not been cured within a specified cure period, or the other party’s voluntary or involuntary liquidation. As of December 31, 2010, we had not made any payments to Polymet.

PVA Tepla Danmark . In April 2008, we entered into an agreement with PVA Tepla Danmark, or PVA, for the purchase and sale of slim rod pullers and float zone crystal pullers. Under the agreement, PVA is obligated to manufacture and deliver the slim rod pullers and float zone crystal pullers for the Project. Slim rod pullers are used to make thin rods of polysilicon that are then transferred into polysilicon deposition reactors to be grown through a chemical vapor deposition process into polysilicon rods for commercial sale to our end customers. The float zone crystal pullers convert the slim rods into single crystal silicon for use in testing the quality and purity of the polysilicon. The total fees payable to PVA is approximately $6 million, which is payable in four installments, the first of which was made in August 2008. Either party may terminate the agreement if the other party is in material breach of the agreement and has not cured such breach within 180 days after receipt of written notice of the breach, or if the other party is bankrupt, insolvent, or unable to pay its debts.

During the nine months ended December 31, 2010, we made payments to PVA of $1.0 million, and as of December 31, 2010, we had paid PVA an aggregate amount of $3.9 million.

BHS Acquisitions, LLC . In November 2008, we entered into an agreement with BHS Acquisitions, LLC, or BHS, for the supply of hydrochloric acid, or HCl, for use in the Polysilicon Plant. The term of the agreement is eight years beginning on the date on which the first shipment of product is delivered to us. Each year during the term of the agreement, BHS has agreed to sell to us, and we have agreed to purchase from BHS, specified volumes of HCl that meet certain purity specifications. The volume is fixed during each of the eight years. Pricing is fixed for the first twelve months of shipments, which are scheduled to begin within four months after we provide written notice to BHS, and the aggregate net value of the HCl to be purchased by us under the agreement in the first twelve months is approximately $2.4 million. Pricing is to be renegotiated for each of the remaining years of the agreement; however, if the parties are unable to agree on pricing for any future year, then either party may terminate the agreement without liability to the other party. Either party may also terminate the agreement under certain circumstances, including a material breach by the other party that has not been cured within a specified cure period, or the other party’s voluntary or involuntary liquidation. As of December 31, 2010, we had not provided notice to BHS to commence shipments, and had not made any payments to BHS.

Evonik Degussa Corporation. In March 2010, we entered into an agreement with Evonik Degussa Corporation, or Evonik, for the supply of trichlorosilane, or TCS, for use in the manufacturing of polysilicon for a term of approximately one year ending in February 2011. Evonik has agreed to sell to us a minimum quantity of TCS during the initial term of the agreement. Pricing is fixed based on the quantity supplied in each calendar month and based on our frequency of payment. Pursuant to the agreement, Evonik is required to provide a minimum amount of TCS per calendar month, and it will use commercially reasonable efforts to provide additional quantities that we may request in addition to the monthly minimum amount. We have not taken delivery of any TCS from Evonik and we are in discussions with Evonik to amend the agreement.

In April 2010, we paid Evonik a $100,000 deposit for the ISO containers that will transport the TCS to our facility in Pocatello, Idaho. Evonik will return our deposit upon expiration of the initial term and completion of our obligations under the agreement; however, we expect the agreement to be amended.

During the nine months ended December 31, 2010, we paid $100,000 to Evonik for the container deposit, and as of December 31, 2010, we had paid Evonik an aggregate of $100,000 related to the sales agreement.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our unaudited consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles for interim financial statements and the instructions to Form 10-Q and Regulation S-X. The preparation of these unaudited consolidated financial statements requires us to make estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenue and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

While our significant accounting policies are more fully described in Note 1 to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q and Note 1 to the audited financial statements included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on July 14, 2010, we believe that the following accounting policies and estimates are critical to a full understanding and evaluation of our reported financial results.

Revenue Recognition . Revenue from polysilicon and PV system installations is recognized when there is evidence of an arrangement, delivery has occurred or services have been rendered, the arrangement fee is fixed or determinable, and collectability of the arrangement fee is reasonably assured. PV system installation contracts may have several different phases with corresponding progress billings.

We apply the percentage-of-completion method of revenue recognition for our PV system contracts for which we can make reasonably dependable estimates of costs. Under the percentage of completion method, revenue and related costs are deferred and subsequently recognized based on the progress of the installation and an estimate of remaining costs to complete the installation. We recognize revenue under the completed contract method, in which revenue and related costs are deferred and then subsequently recognized only upon completion of the contract, for all contracts for which reasonably dependable estimates of costs are not available.

We entered the PV system installation business in fiscal year 2008. Prior to April 1, 2010, due to the short period of time we were in the PV system installation business, we did not have the historical experience or the procedures in place to develop reasonably dependable estimates of costs and therefore utilized the completed contract method to record revenue for PV contracts. Subsequent to this start up period, we have developed history and reliable processes and procedures of projecting and tracking contract fulfillment costs, in order to develop reasonably dependable estimates, which is required to use the percentage-of-completion method. In applying the percentage-of-completion method, we determine the percentage of contract completion on the basis of engineering, labor, subcontractor and other installation costs and exclude material and other non-installation contract costs which are not considered the primary cost determinants in measuring the progress of the PV system contract. Revenue and related costs are recognized proportionately based on the completion percentage of each project and considering the current estimate of remaining costs required to complete the project.

We will continue to recognize revenue under the completed contract method for PV installations in-progress prior to or as of March 31, 2010.

The assumptions used in determining the cost to complete a job represents our management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, the costs and assumptions can materially affect the amount and timing of revenue recognition.

Revenue from the sale of electricity generated from our PV systems is based on kilowatt usage and is recognized in accordance with its power purchase agreements, or PPAs.

Stock-Based Compensation . We account for stock-based compensation arrangements using a fair value-based method, in which the fair value of stock options granted to our employees and non-employees is determined using the Black-Scholes pricing model, while the fair value of restricted stock awards is estimated based on the price of our stock on the date of grant. The Black-Scholes pricing model requires the input of several subjective assumptions including the expected life of the option and the expected volatility of the option at the time the option is granted. The fair value of our options, as determined by the Black-Scholes pricing model, is expensed over the requisite service period, which is generally five years for stock options.

The assumptions used in calculating the fair value of our stock options and restricted stock awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, changes in these inputs and assumptions can materially affect the measure of the estimated fair value of our stock options and restricted stock awards. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those options and shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period. Furthermore, this accounting estimate is reasonably likely to change from period to period as further stock options and restricted stock awards are granted and adjustments are made for stock option and restricted stock awards forfeitures and cancellations. We do not record any deferred stock-based compensation on our balance sheet for our stock options and restricted stock awards.

Accounting for the Impairment or Disposal of Long Lived Assets. As of December 31, 2010, primarily all of our long lived assets relate to the construction-in-progress of our polysilicon plant and PV systems. In accounting for long-lived assets, we must make estimates about the expected useful lives of the assets, the expected residual values of the assets and the potential for impairment based on the fair value of the assets and the cash flows they generate.

In estimating the lives and expected residual values of our long-lived assets, we primarily rely on our own industry experience, discussion with our customers and vendors, and other available marketplace information. We also evaluate the carrying value of our long-lived assets whenever certain events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Such events or circumstances include, but are not limited to, a prolonged industry downturn, a significant decline in our market value, significant increases in the estimated costs to place our assets into service, or significant reductions in projected future cash flows.

Notes Payable and Warrant (Tianwei financing transaction). We account for the warrant and debt based on their relative fair values in proportion to the loan proceeds. The fair value of the warrant was calculated using the Black-Scholes option pricing model. The Black-Scholes pricing model requires the input of several subjective assumptions including the expected life of the warrant and the expected volatility of the warrant at the time the warrant was granted. The fair value of the debt was based on the present value of cash flows at the estimated market interest rate.

The assumptions used in calculating the warrant and debt represent our management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. In estimating market interest rate, we relied on available marketplace information of similar transactions.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary objective of our investment activities is to preserve our capital for the purpose of funding our operations. To achieve this objective, our investment policy allows us to maintain a portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, auction instruments, corporate and government bonds and certificates of deposit. These investments are generally short-term in nature and highly liquid. As of December 31, 2010, we did not maintain any short-term investments. Our cash and cash equivalents as of December 31, 2010 were $10.2 million.

All of our contracts are denominated in U.S. dollars, except for our contract with GEC and MSA, which is denominated in Euros, and our training services agreement with Tianwei, which is denominated in Renminbi. Accordingly, we are subject to the then current spot rate between the US dollar and various foreign currencies at such time that a payment is required under invoices related to the GEC and MSA, and Tianwei contracts.

Item 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the Securities Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting . There were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS

From time to time we may be involved in litigation relating to claims arising in the ordinary course of our business. We are not involved in any material pending legal proceedings.

ITEM 1A.

RISK FACTORS

In addition to the risks discussed in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our business is subject to the risks set forth below.

Risks Related to Our Business

We will need to secure additional financing in the future; and if we are unable to generate revenue or secure adequate funds on terms acceptable to us or at all, we will be unable to complete construction of our Polysilicon Plant and build our polysilicon business.

As of December 31, 2010, we had cash and cash equivalents on hand of $10.2 million and current liabilities of $48.5 million. Cash used in operations was approximately $6.6 million for the nine months ended December 31, 2010.

We will need additional financing to complete the construction of the Polysilicon Plant, and should there be delays in securing additional financing, we will need to implement cost and expense reduction programs and other programs to generate cash that are not currently planned, but are responsive to our liquidity requirements. Reduction of expenditures could have a material adverse effect on our business. If we are unable to secure additional financing or structure credit terms with our vendors that are favorable to us, based on the current level of capital available to us, we may need to curtail construction of the Polysilicon Plant. If we elect to curtail construction, we would not be able to produce our own polysilicon to meet the delivery requirements under certain or our polysilicon supply agreements. In order to keep from breaching these contracts we anticipate needing to purchase polysilicon from third parties for delivery in March 2011 under certain of our polysilicon supply agreements.

The amount and timing of our future capital needs depend on many factors, including the timing of our polysilicon plant development efforts, and the amount and timing of any revenue we are able to generate. Given our current business strategy, however, we will need to secure additional financing in order to complete construction of our Polysilicon Plant.

We have already modified payment terms in purchase orders with some of our vendors, and are in negotiations with other vendors, to structure payment plans for amounts past due and to be invoiced in the future. In the event we are unable to meet our obligations under payment plans and other agreements, we will have to ask our vendors to forebear from enforcing one or more of their rights under their respective agreements. There are no assurances that any of our vendors will agree to forebear or otherwise make any concessions under their respective agreements. If any of our vendors seek to enforce our obligations under these agreements that we are unable to perform, which could include asserting and/or foreclosing on materialman’s and laborer’s liens on the Polysilicon Plant, or taking other legal action, it could materially harm our business, financial condition and results of operations and we may be forced to delay, alter or abandon our planned polysilicon business operations, which could have a material adverse effect on our business.

We need additional financing to complete the Polysilicon 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 the Polysilicon Plant 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.

We previously estimated the total cost for construction of approximately $410 million; however we have determined that the total costs will be greater than our previous estimates. Based on recent construction progress and discussions with our vendors, we now expect to incur approximately $600 million of costs before we can commence operation of the first 2,500 metric tons of production capacity. We also expect to invest up to an additional $100 million to complete the second phase of construction, which will add an additional 1,500 metric tons of manufacturing capacity, and allow us to complete our planned on-site TCS plant. Thus, our revised estimate for the full, planned 4,000 metric ton plant is now approximately $700 million.

As previously disclosed, in our Form 10-Q for the quarter ended September 30, 2010, we have been discussing with Tianwei what would constitute fair compensation for Tianwei for the financial services it has been providing and will provide us. While the discussions are on-going, we expect to reach an agreement with Tianwei regarding the appropriate compensation amount during the fourth quarter of fiscal 2011 and believe this compensation may be in the form of common stock warrants. To the extent common stock warrants are issued to Tianwei for its financial services it may significantly dilute the ownership of its stockholders other than Tianwei. In addition, the issuance of fair compensation for providing the letters of credit to secure our loans could result in issuance costs and increase the amount of interest that we recognize. We cannot be certain that we will reach an agreement with Tianwei regarding the appropriate compensation for Tianwei which could affect Tianwei's willingness to continue to assist us in obtaining necessary additional financing.

Between May and December 2010, we entered into nine credit agreements. We entered into six credit agreements with the New York branch of China Merchants Bank Co., Ltd. for $20.0 million, $10.0 million, $5.0 million, $10.0 million, $13.0 million, and $10.0 million, respectively. In June and October 2010, we entered into a $28.3 million credit agreement with the New York branch of China Construction Bank and a $29.0 million credit agreement with the Singapore branch of China Construction Bank, respectively. In December 2010, we entered into credit agreements of $15.5 million with the New York branch of Industrial and Commercial Bank of China. In January 2011, we entered into a tenth credit agreement with the New York branch of Industrial and Commercial Bank of China for $19.5 million. In February 2011, we entered into an eleventh credit agreement with New York Branch of CITIC Bank International Limited for $19.0 million. We are also expecting an additional $8.2 million in customer prepayments from our existing customers. We will need additional capital to complete the construction. We plan on raising this money through one or more subsequent debt and/or equity offerings and possibly prepayments from new customer contracts.

We have experienced delays in the receipt of customer prepayments from certain of our long-term polysilicon supply customers. If we experience further delays in receipt of these payments, receive reduced payments, or fail to receive any of them entirely, we could experience delays in our ability to continue the engineering and construction of the Polysilicon Plant in order to deliver polysilicon within the time periods specified in our customer supply contracts, which could materially harm our business. Even if we receive these prepayments on time and in the amounts agreed upon, the actual costs to engineer and construct the Polysilicon Plant could exceed our estimates, and we may be unable to raise any additional funding required to pay for any such added costs. If we are unable to meet our customer commitments, our business will be materially harmed and we may be forced to delay, alter or abandon our planned business operations.

The actual cost to construct and equip our planned polysilicon production facility may be significantly higher than our estimated cost.

Any slowdown of construction and procurement at the Polysilicon Plant increases the risk that we will not meet certain construction and delivery milestones in our long-term polysilicon supply contracts. Failure to meet our construction and delivery milestones could cause one or more of our customers to terminate one or more of our polysilicon supply contracts and exercise their right to seek a refund of any prepayments made as of the date of termination. Any such termination could have a material adverse effect on our financial condition and results of operations.

We will be required to procure third party polysilicon to meet our contractual delivery requirements in March 2011. If we are unable to secure adequate quantities of solar-grade polysilicon on favorable terms by March 2011 and at the times needed, certain agreements could be terminated and our business will be materially harmed.

In the event that we do not secure additional financing or there are delays in securing financing and construction is curtailed, we will be required to procure third party polysilicon to meet our contractual delivery requirements. If we are unable to secure adequate quantities of solar-grade polysilicon on favorable terms by March 2011 and at the times needed, certain agreements could be terminated and our business will be materially harmed. There are no assurances that we will be able to secure solar-grade polysilicon at the time and in the amounts needed on favorable terms. As we will be required to procure third-party polysilicon in the open market, our cost to purchase polysilicon could be in excess of our contractual sales prices and could result in losses or minimal or no profit at all. If we are unable to secure polysilicon on favorable terms and at the times needed, our business, financial condition and results of operations will be materially harmed.

As of December 2010, we have not entered into any agreements to purchase polysilicon and the current spot market prices are significantly greater than the prices at which our customers will be obligated to pay us.

We have a limited operating history and, in fiscal 2007, we decided to enter the photovoltaic system installation and polysilicon markets and to redirect efforts and resources that were historically directed toward the fuel cell market. If we are unable to generate significant revenue from our photovoltaic system installations and polysilicon segments, our business will be materially harmed.

We were incorporated in March 2001 and have a limited operating history. We have cumulative net losses since our inception through December 31, 2010. In fiscal 2007, we announced a change in our main business and our intention to form a polysilicon business through our subsidiary, Hoku Materials, and a photovoltaic, or PV, system installation business through our subsidiary Hoku Solar. The polysilicon business includes developing production capabilities for, and the eventual production of polysilicon. The PV systems installation business includes the design, engineering, procurement and installation of turnkey PV systems for residential and commercial customers.

We have no prior experience in the polysilicon business. In order to be successful, we are devoting substantial management time and energy and significant capital resources to develop this new business, including the construction of the Polysilicon Plant. We commenced construction in May 2007, and we produced our first product at our production demonstration in April 2010. We expect to begin commercial production of polysilicon beginning in the first half of fiscal year 2012, with full-scale production in the second half of fiscal 2012; however, there are no assurances that this schedule will not need to be further modified. We may need to purchase polysilicon from third parties in order to meet delivery schedules in order to avoid termination of one or more of our customer supply contracts. In addition, delays in polysilicon shipments could result in the termination of a customer supply contract, which could require us to refund substantial amounts of prepayments made to us for future product deliveries. We have encountered, and expect that we will continue to encounter, significant challenges relating to our entry into the polysilicon industry and changes in that industry, including potentially significant increases in polysilicon supply and falling polysilicon prices. If we are unable to address these risks and other risks successfully, our business, financial condition and results of operations will be materially and adversely affected.

If any of our project engineering, construction, or key equipment vendors are late in providing their contract deliverables, we may be unable to complete the construction of the Polysilicon Plant and begin commercial shipments in the second half of calendar year 2011, or at all, which could materially harm our business.

We have contracts with Stone & Webster, Inc. JH Kelly, LLC, GEC Graeber Engineering Consultants GmbH and MSA Apparatus Construction for Chemical Equipment, Ltd., Idaho Power Company, Dynamic Engineering Inc., AEG Power Solutions USA Inc., formerly known as Saft Power Systems USA, Inc., PVA Tepla Danmark, Polymet Alloys, Inc., BHS Acquisitions, LLC, Evonik Degussa Corporation, and our other vendors, contractors and consultants who are providing key services, equipment, and supplies for the engineering and construction of the Polysilicon Plant. We have experienced delays in the performance or delivery of these services, equipment, and goods under some of these agreements, which resulted in delays in our production schedule and increased our costs to construct the Polysilicon Plant. If we experience additional delays in the performance or delivery of the services, equipment, or goods under any of these respective agreements, we may be unable to commence production of polysilicon in the second half of calendar year 2011, with full-scale production in the second half of calendar year 2011, or deliver the volume of polysilicon that is required under our polysilicon supply agreements. If we are unable to meet these scheduling goals, our business, financial condition and results of operations will be materially and adversely affected.

If we are unable to secure adequate quantities of trichlorosilane on favorable terms and at the times needed, our business will be materially harmed.

We deferred capital expenditures by delaying construction of our on-site trichlorosilane, or TCS, production facility. TCS is needed to produce polysilicon. We have received shipments of small volumes of TCS from two suppliers for our initial polysilicon production, and are in discussions to procure TCS with various third parties. We are in discussions with these third-party TCS producers for higher volume TCS supply contracts to enable us to execute this strategy. There are no assurances that we will be able to secure adequate TCS at the time and in the amounts required on favorable terms, or at all. Failure to do so may prevent us from meeting certain milestones in our customer contracts or to meet our customer supply commitments and our business, financial condition and results of operations will be materially harmed.

We may have difficulty managing changes in our operations, which could harm our business.

To date we have expended significant financial and management resources in connection with our planned entry into the polysilicon market and the development of our PV system installation business. For example, in May 2007, we commenced construction of the Polysilicon Plant. Construction of the Polysilicon Plant and the operation of the polysilicon manufacturing and PV system installation businesses involves substantial changes to our operations and places a significant strain on our senior management team and financial and other resources, and has, among other things, required us to significantly increase our international activities; hire and train additional financial, accounting, sales and marketing personnel; and to make substantial investment in our engineering, logistics, financial and information systems, including implementing new enterprise-level transaction processing, operational and financial management information systems, procedures and controls.

Any failure by us to manage the expansion of our operations or succeed in these markets or other markets that we may enter in the future, may harm our business, prospects, financial condition and results of operations.

Fluctuations in industrial production capacity for polysilicon could harm our business.

Certain polysilicon producers have invested heavily in the expansion of their production capacities in view of the recent scarcity of solar-grade polysilicon. We currently expect significant additional capacity to come on-line in calendar year 2012, near the time when the Polysilicon Plant is scheduled to become fully operational. In addition, if an excess supply of electronic-grade polysilicon were to develop, producers of electronic-grade silicon could switch production to solar-grade polysilicon, causing the price of solar-grade polysilicon to decline more rapidly than we currently anticipate. The electronic-grade polysilicon market historically has experienced significant cyclicality; for example, that market experienced significant excess supply from 1998 through 2003. Moreover, the forecasted increases in polysilicon supply could also be exacerbated if the demand for polysilicon decreases significantly as a result of the introduction of new technologies that materially reduce or eliminate the need for polysilicon in producing effective PV systems.

If any of these events occur, they could result in an excess supply of solar-grade polysilicon and could suppress market prices for solar-grade polysilicon. Any such suppression of market prices for polysilicon would affect the price which we could expect to receive in selling our polysilicon in the spot market and could provide our customers with incentives to reconsider or renegotiate their long-term supply contracts with us to the extent the polysilicon deliverable under those contracts is priced above prevailing market prices. During fiscal year 2010, spot market prices of polysilicon decreased dramatically with an increase in supply, and further price declines are possible in calendar year 2011 as additional supply is forecasted to enter the market. Further decreases in demand and polysilicon prices could materially harm our business, financial condition and results of operations.

Conversely, 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.

If any of our supply agreements are terminated for any reason, our business will be materially harmed.

Pursuant to our amended supply agreements with Suntech, Solarfun, Jinko, Tianwei, Solargiga and Alex, as of December 2010 we have received prepayments for future product deliveries of $2.0 million, $49.0 million, $20.0 million, $29.0 million, $20.2 million, and $20.0 million, respectively, for an aggregate amount of $140.2 million. In addition, our customers have agreed to make additional prepayments of $8.2 million in conjunction with polysilicon deliveries. Our amended supply agreements contain production and delivery milestones that, if not met, allow the counterparty to terminate the applicable amended supply agreement and require us to refund any prepayments received under that amended supply agreement. Our polysilicon delivery obligations to our customers currently commence as early as May 2011. We have been advised by certain customers that if we fail to deliver polysilicon in accordance with our supply agreements, which may include third-party polysilicon, they intend to terminate the supply agreement and seek a refund of their prepayment. To the extent any amended supply agreement is terminated, we will not receive any further prepayments from the counterparty. In addition, our prior failures to meet performance requirements and other obligations under our supply agreements have required us to renegotiate our supply agreements, which have resulted in new terms and conditions that increase our obligations or decrease the economic benefit of the supply agreement to us.

Pursuant to our supply agreements, we granted our customers a security interest in all of our tangible and intangible assets related to our polysilicon business to serve as collateral for our obligations under the related supply agreements.

If any of the amended supply agreements are terminated for any reason, our business will be materially harmed. In some circumstances we will be required to refund prepayments received under any terminated amended supply agreement and will not receive promised additional prepayments, and consequently we will need to secure new funds to cover the refund obligation and to provide adequate financing for the completion of the construction of our Polysilicon Plant. Securing new funds may delay the anticipated timing of completion of the Polysilicon Plant, which delay may result in us failing to meet our delivery requirements under our other supply agreements. We may not be able to secure new funds on terms as favorable to us as those under the amended supply agreements, or at all. If we are unable to secure new funds, we will not be able to complete construction of the Polysilicon Plant, our business will be materially harmed and we may be forced to delay, alter or abandon our planned business operations.

We rely on limited suppliers and, if these suppliers fail to deliver materials that meet our quality requirements in a timely, cost-effective manner or at all, our production of polysilicon and our installation of PV systems would be limited.

It is highly likely that we will procure materials for our PV system installation business from vertically integrated solar module manufacturing and installation companies that are also our competitors. These companies may choose in the future not to sell these materials to us at all, or may raise their prices to a level that would prevent us from selling our goods and services on a profitable basis.

In our polysilicon business we rely heavily on our contracted suppliers of key process technologies and infrastructure including such components as the reactors and the TCS process. If any of these suppliers fail to perform their contractual obligations, we will be required to seek alternative suppliers and likely will not be able to commence production of polysilicon at the Polysilicon Plant on our current schedule. Any such production delays may result in a breach of one or more of our supply agreements with Alex, Suntech, 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 the completion of the Polysilicon Plant impossible.

Even if we achieve our polysilicon and PV system installation objectives on a timely basis and complete the construction of the Polysilicon Plant, we may still be unsuccessful in developing, producing and/or selling these products and services, which would harm our business.

If we are successful in our efforts to construct the Polysilicon Plant, our ability to successfully compete in the polysilicon and PV system installation markets will depend on a number of factors, including:

·	our ability to produce or procure TCS and polysilicon, and install PV systems at costs that allow us to achieve or maintain profitability in these businesses;

·	our ability to successfully manage a much larger and growing enterprise, with a broader national and international presence;

·	our ability to attract new customers and expand existing customer relationships;

·	our ability to develop new technologies to become competitive through cost reductions;

·	our ability to scale our business and maintain low production costs to be competitive;

·	our ability to predict and adapt to changing market conditions, including the price of inputs and the spot price for polysilicon sold in the market by us or purchased by us from third-parties to settle customer commitments; and

·	future product liability or warranty claims.

If our PV system installation competitors are able to develop and market products that customers prefer over our products, we may not be able to generate sufficient revenue to continue operations.

The market for PV systems installations is competitive and continually evolving. As a relatively new entrant to this market, we expect to face substantial competition from companies such as SunPower Corporation, SunEdison, Chevron Energy Solutions, REC Solar and other new and emerging companies in Hawaii, Asia, North America and Europe. In addition, the Hawaii market is gaining additional attention from potential competitors, owing to the expected introduction of a Feed-in Tariff by the local public utility. Many of our known competitors are more established in the solar industry than we are, and have a stronger market position than ours and have larger resources and name recognition than we have. Furthermore, the PV market in general competes with other sources of renewable energy and conventional power generation, and if our customers prefer these other sources over ours, it may have a material adverse impact on our revenue and results of operations.

Technological development in the solar power industry could reduce market demand for polysilicon or allow for lower cost production of polysilicon by our competitors, which could cause our sales and profit to decline.

The solar power industry is characterized by evolving technologies and standards. Technological evolutions and developments in PV products, including thin-film technologies, higher PV efficiency and thinner wafers may decrease the demand for polysilicon by PV module manufacturers, and some manufacturers are developing alternative solar technologies that require significantly less silicon than crystalline silicon-based solar cells and modules, or no polysilicon at all. If these developing technologies prove more advantageous in application and are widely adopted, we may experience a decrease in demand for our polysilicon and a decrease in our sales or operating margins.

Additionally, other technologies for the production of polysilicon are increasing in prevalence in the industry. Technologies which compete with the Siemens reactor process, including fluidized bed reactor process, may enable the manufacture of polysilicon more quickly or at lower cost than does the Siemens reactor process. To the extent that our competitors adopt other technologies that enable them to compete more effectively, our operating margins and price-competitiveness may be impacted. In the event that we are unable to re-design the Polysilicon Plant around these more efficient processes on manageable timetables and at reasonable cost, our business could be adversely affected.

Our operating results have fluctuated in the past, and we expect a number of factors to cause our operating results to continue to fluctuate in the future, making it difficult for us to accurately forecast our quarterly and annual operating results.

Most of our revenue presently is generated by Hoku Solar and our PV system installation activities.

Our future operating results and cash flows will depend on many factors that will impact our polysilicon business run by Hoku Materials and, our PV system installation business run by Hoku Solar, including the following:

·	the size and timing of customer orders, milestone achievement, product delivery and customer acceptance, if required;

·	the length of contract negotiation cycles,

·	the timing of equipment delivery and procurement, integration and testing,

·	our success in obtaining prepayments from customers for future shipments of polysilicon;

·	our success in maintaining and enhancing existing strategic relationships and developing new strategic relationships with potential customers;

·	our ability to finance power purchase agreements for potential PV system installation customers;

·	actions taken by our competitors, including new product introductions and pricing changes;

·	the costs of maintaining our operations;

·	customer budget cycles and changes in these budget cycles; and

·	external economic and industry conditions.

As a result of these factors, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance.

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could adversely affect our operating results, our ability to operate our business and investors’ views of us.

Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. In May 2007, we commenced construction of the Polysilicon Plant. Construction of the Polysilicon Plant and the operation of our polysilicon manufacturing and PV system installation businesses will involve substantial changes to our operations and will require us to increase our international activities; hire and train additional financial and accounting personnel; make substantial investments in our engineering, logistics, financial and information systems, including implementing new enterprise-level transaction processing, operational, financial and accounting management information systems, procedures and controls. In connection with the planned increased scale of our polysilicon manufacturing and PV system installation businesses and our implementation of new operational and financial management information systems to accommodate these businesses, we expect to engage in a process of documenting, reviewing and improving our internal controls and procedures in connection with Section 404 of the Sarbanes-Oxley Act, which requires an annual assessment by management on the effectiveness of our internal control over financial reporting. We conduct annual testing of our internal controls in connection with the Section 404 requirements and, as part of that documentation and testing, we may identify areas for further attention and improvement. Implementing any appropriate changes to our internal controls may entail substantial costs in order to modify our existing accounting systems and may take a significant period of time to complete, which may distract our officers, directors and employees from the operation of our business. Further, we may encounter difficulties assimilating or integrating the internal controls, disclosure controls and IT infrastructure of the businesses that we may acquire in the future. These changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In addition, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements may seriously affect our stock price.

We will use materials that are considered hazardous in our planned polysilicon manufacturing and production processes and, therefore, we could be held liable for any losses not covered by insurance that result from the use and handling of such hazardous materials.

The production of polysilicon will involve the use of materials that are hazardous to human health and the environment, and the storage, handling and disposal of which will be subject to government regulation. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may increase our manufacturing costs and may require us to halt or suspend our operations until we regain compliance. If we have an accident at the Polysilicon Plant involving a spill or release of these substances, we may be subject to civil and/or criminal penalties, including financial penalties and damages, and possibly injunctions preventing us from continuing our operations. Any liability for penalties or damages, and any injunction resulting from damages to the environment or public health and safety, could harm our business. In addition under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for costs of removal or remediation of certain hazardous or toxic substances on or in such property. These laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such substances. We do not have any insurance for liabilities arising from the use and handling of hazardous materials.

Our polysilicon manufacturing business will involve many operating risks that can cause substantial losses.

The manufacture of our polysilicon may involve one or more of the following risks:

·	fires or explosions;

·	spills or releases; and

·	pipe, vessel, or system failures.

In the event that any of the foregoing events occur, we could incur substantial losses as a result of injury or loss of life; severe damage or destruction of property, natural resources or equipment; pollution and other environmental damage; investigatory and clean-up responsibilities; regulatory investigation and penalties; suspension of operations; or repairs to resume operations. If we experience any of these problems, our ability to conduct operations could be adversely affected. These conditions can cause substantial damage to facilities and interrupt production. If realized, the foregoing risks could have a material adverse effect on our business, financial condition and results of operations.

Any significant and prolonged disruption of our operations in Hawaii could result in PV system installation delays that would reduce our revenue.

Hoku Solar’s business operations are currently located exclusively in the state of Hawaii, which is subject to the potential risk of earthquakes, hurricanes, tsunamis, floods and other natural disasters. The occurrence of an earthquake, hurricane, tsunami, flood or other natural disaster in Hawaii could result in damage, power outages and other disruptions that would interfere with our ability to conduct our PV system installation business. In October 2006, for example, Hawaii suffered a major earthquake causing significant damage throughout the state. Our facilities and operations, however, did not suffer any damage.

Most of the materials we use in our PV system installation business must be delivered via air or sea. Hawaii has a large union presence and has historically experienced labor disputes, including dockworker strikes, which could prevent or delay cargo shipments. Any future dispute that delays shipments via air or sea could prevent us from procuring or installing our turnkey PV systems in time to meet our customers’ requirements, or might require us to seek alternative and more expensive freight forwarders or contract manufacturers, which could increase our expenses and/or impact the timing of revenue recognition.

We have significant international activities and customers, particularly in China, that subject us to additional business risks, including increased logistical complexity and regulatory requirements, which could result in a decline in our revenue.

Our current polysilicon supply agreements are with Alex, Suntech, Jinko, Solarfun, Tianwei and Solargiga, all of which are located in the People’s Republic of China, or China, and Hong Kong. As a result, we will be engaging in significant international sales of our polysilicon, which can be subject to many inherent risks that are difficult or impossible for us to predict or control, including:

·	political and economic instability;

·	unexpected changes in regulatory requirements and tariffs;

·	difficulties and costs associated with staffing and managing foreign operations, including foreign distributor relationships;

·	longer accounts receivable collection cycles in certain foreign countries;

·	adverse economic or political changes;

·	more limited protection for intellectual property;

·	potential trade restrictions, exchange controls and import and export licensing requirements;

·	U.S. and foreign government policy changes affecting the markets for our products;

·	problems in collecting accounts receivable; and

·	potentially adverse tax consequences of overlapping tax structures.

All of our polysilicon supply contracts are denominated in U.S. dollars. Therefore, increases in the exchange rate of the U.S. dollar to foreign currencies will cause our products to become relatively more expensive to customers in those countries, which could lead to a reduction in sales or profitability in some cases.

All of our polysilicon customers are located in China and Hong Kong, which involves various political and economic risks.

Presently, all of our long-term polysilicon supply contracts are with companies based in China and Hong Kong. Accordingly, our business, financial condition, results of operations and prospects could be disproportionately affected by economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including:

·	the higher level of government involvement and regulation;

·	the early stage of development of the market-oriented sector of the economy;

·	the rapid growth rate; and

·	the higher level of control over foreign exchange.

China’s government continues to exercise significant control over economic growth in China through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and imposing policies that impact particular industries or companies in different ways. China’s government also sets policy with respect to the use of alternative energy such as solar. Any adverse change in the economic conditions or government conditions or government policies in China could have a material adverse effect on our business, financial condition and results of operations.

Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

We are subject to the U.S. Foreign Corrupt Practices Act, which generally prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Non-U.S. companies, including some that may compete with us, are not subject to these prohibitions. If our employees or other agents are found to have engaged in practices such as bribery, pay-offs or other fraudulent practices in China, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

Adverse general economic conditions could harm our business.

Adverse overall economic conditions that impact consumer spending could impact our results of operations. Future economic conditions affecting disposable income such as employment levels, consumer confidence, credit availability, business conditions, stock market volatility, weather conditions, acts of terrorism, pandemic, threats of war, and interest and tax rates could reduce consumer spending or cause consumers to shift their spending away from our goods and services. If the economic conditions continue to be adverse or worsen, we may experience material adverse impacts on our business, operating results and financial condition.

A drop in the retail price of conventional energy or non-solar renewable energy sources could harm our business.

The price of conventional energy can affect the demand for alternative energy solutions such as solar. Fluctuations in economic and market conditions that impact the prices of conventional and non-solar renewable energy sources could cause the demand for solar energy systems to decline, which would have a negative impact on our business. Reduction in prices for oil and other fossil fuels and utility electric rates could also have a negative effect on our PV system installation and polysilicon production businesses.

Conversely, our polysilicon manufacturing process uses significant amounts of electric energy. High energy prices, therefore, could increase our production costs, and increases in the cost of electricity could reduce our margins. Although we have entered into a long term contract with Idaho Power to supply electric power to the Polysilicon Plant at a fixed rate, the Idaho Public Utilities Commission can change the rate under certain circumstances. Should this happen, substantial increases in our electricity costs could have a material adverse effect on our business, financial condition and results of operations.

Current credit and financial market conditions could prevent or delay our current or future customers from obtaining financing necessary to purchase our products and services or finance their own operations or capacity expansions, which could adversely affect our business, our operating results and financial condition.

Due to the recent severe tightening of credit and concerns regarding the availability of credit around the world, our solar customers may delay or attempt to delay their payments to us in connection with product and service purchases, or may be delayed in obtaining, or may not be able to obtain, necessary financing for their purchases of our products and services or their own operations or expansion plans. In addition, the current credit and financial market conditions may adversely affect the ability of our customers that have executed long-term supply agreements to purchase polysilicon from us to make additional required payments to us pursuant to these long-term supply agreements or to fund their own expansion plans. Delays of this nature could materially harm our polysilicon sales and PV installations, and therefore harm our business.

Risks Associated With Government Regulation and Incentives

If we do not obtain on a timely basis the necessary government permits and approvals to construct and operate the Polysilicon Plant, our construction costs could increase and our business could be harmed.

We have received the air permit and storm water prevention permit that are necessary to begin construction of the Polysilicon Plant; however, we need to apply for additional permits with federal, state and local authorities, including the Polysilicon 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 agreements with The James Campbell Company and Forest City Hawaii to construct PV systems are conditioned upon receiving various government approvals.

The installation of PV systems is subject to oversight and regulation in accordance with national and local ordinances relating to zoning, building codes, safety, environmental protection, utility interconnection and metering and related matters. It is difficult to track the requirements of individual states and counties and to design equipment to comply with the varying standards. Any new government regulations or utility policies pertaining to PV system installations may result in significant additional expenses to us and, as a result, could cause a significant reduction in demand for our PV system installation services.

If government incentives to locate the Polysilicon Plant in the City of Pocatello, Idaho are not realized then the costs of establishing the Polysilicon Plant may be higher than we currently estimate.

The State of Idaho and the local municipal government have approved a variety of incentives to attract Hoku Materials, including tax incentives, financial support for infrastructure improvements around the Polysilicon Plant, and grants to fund the training of new employees. In March 2007, we entered into a 99-year ground lease with the City of Pocatello, for approximately 67 acres of land in Pocatello, Idaho and in May 2007, we commenced construction of the Polysilicon Plant.

In May 2007, the City of Pocatello approved an ordinance that authorized certain tax incentives related to the infrastructure necessary for the completion and operation of the Polysilicon Plant. In May 2009, we entered into an Economic Development Agreement, or the PDA Agreement, with the Pocatello Development Authority, or the PDA, pursuant to which the PDA agreed to reimburse to us amounts we actually incur in making certain infrastructure improvements consistent with the North Portneuf Urban Renewal Area and Revenue Allocation District Improvement Plan and the Idaho Urban Renewal Law, or the Infrastructure Reimbursement, and an additional amount as reimbursement for and based on the number of full time employee equivalents we create and maintain, or the Employment Reimbursement, at the Polysilicon Plant. The parties agreed that (a) the Infrastructure Reimbursement will be an amount that is equal to 95% of the tax increment payments the PDA actually collects on the North Portneuf Tax Increment Financing District with respect to our real and personal property located in such district, or the TIF Revenue, up to approximately $26.0 million, less the actual Road Costs, and (b) the Employment Reimbursement will be an amount that is equal to 50% of the TIF Revenue, up to approximately $17.0 million. However, there are no assurances that all or any part of the amount authorized will be paid to us, and we could ultimately receive significantly less or no payment at all, and we may not realize the benefits of these other offered incentives including workforce training funds and utility capacities. The tax incentives expire on December 31, 2030. If there are changes to the ordinance, which reduces the amount of the incentives, or for other reasons, some of which may be beyond our control, we are unable to realize all or any part of these incentives, the operating costs of the Polysilicon Plant may be higher than we currently estimate.

The reduction or elimination of government and economic incentives for PV systems and related products could reduce the market opportunity for our PV installation services.

We believe that the near-term growth of the market for on-grid applications, where solar power is used to supplement a customer’s electricity purchased from the utility network, depends in large part on the availability and size of government incentives. Because we plan to sell to the on-grid market, the reduction or elimination of government incentives may adversely affect the growth of this market or result in increased price competition, both of which adversely affect our ability to compete in this market. Currently, the U.S. federal solar tax credit is scheduled to expire at the end of calendar year 2016. If similar tax or other federal government incentives are not available beyond calendar year 2016, it could harm our PV system installation business.

Today, the cost of solar power exceeds the cost of power furnished by the electric utility grid in many locations. As a result, federal, state and local government bodies in many countries, most notably Germany, Japan and the United States, have provided incentives in the form of rebates, tax credits and other incentives to end users, distributors, system integrators and manufacturers of solar power products to promote the use of solar energy in on-grid applications and to reduce dependency on other forms of energy. These government economic incentives could be reduced or eliminated altogether. For example, Germany has been a strong supporter of solar power products and systems and political changes in Germany could result in significant reductions or eliminations of incentives, including the reduction of tariffs over time. Some solar program incentives expire, decline over time, are limited in total funding or require renewal of authority. Net metering policies in Japan could limit the amount of solar power installed there. Reductions in, or elimination or expiration of, governmental incentives could result in decreased demand for PV products, and reduce the size of the market for our planned PV system installation services and the demand for solar-grade polysilicon.

Risks Associated With Our Common Stock and Charter Documents

Our stock price is volatile and purchasers of our common stock could incur substantial losses.

Our stock price is volatile and between April 1, 2010 and December 31, 2010, our stock had low and high sales prices in the range of $2.32 to $3.78 per share. During fiscal 2011, the stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price of our common stock may fluctuate significantly in response to a number of factors, including:

·	variations in our financial results or those of our competitors and our customers;

·	our ability to complete the Polysilicon Plant and commence commercial production of polysilicon;

·	announcements by us, our competitors and our customers of acquisitions, new products, the acquisition or loss of significant contracts, commercial relationships or capital commitments;

·	the performance of the stock market generally and the over-all condition of the global macro economy;

·	failure to meet the expectations of securities analysts or investors with respect to our financial results;

·	our ability to develop and market new and enhanced products on a timely basis;

·	litigation;

·	changes in our management;

·	changes in governmental regulations or in the status of our regulatory approvals;

·	future sales of our common stock by us and future sales of our common stock by our officers, directors and affiliates, including Tianwei;

·	investors’ perceptions of us; and

·	general economic, industry and market conditions.

In addition, in the past, following periods of volatility and a decrease in the market price of a company’s securities, securities class action litigation has often been instituted against that company. Class action litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Tianwei has a controlling interest in us, and as long as Tianwei controls us, other stockholders’ ability to influence matters requiring stockholder approval will be limited.

Tianwei owns 33,379,287 shares of our common stock, and holds a warrant to purchase an additional 10,000,000 shares of our common stock, together representing approximately 66% of our total outstanding shares of common stock. Tianwei has the right to nominate four out of seven of our directors until the earlier of (i) Tianwei (together with its affiliates) ceasing to be our largest individual stockholder or (i) Tianwei (together with its affiliates) owning less than 25% of the outstanding shares of our common stock. In addition, as a majority stockholder Tianwei has the ability to control the outcome of all matters that would be determined by a vote of our stockholders, including:

·	the composition of our board of directors and, through our board of directors, any determination with respect to our business plans and policies, including the appointment and removal of our officers;

·	any determinations with respect to mergers and other business combinations;

·	our acquisition or disposition of assets;

·	our financing activities;

·	changes to our polysilicon supply agreements with Tianwei;

·	the allocation of business opportunities that may be suitable for us and Tianwei; and

·	the number of shares available for issuance under our equity incentive plans and other significant corporate transactions that require stockholder approval.

Tianwei’s voting control may discourage transactions involving a change of control of us, including transactions in which the holders of our common stock might otherwise receive a premium for their shares over the then current market price. Until one year from the close of the Tianwei financing transaction, which occurred in December 2009, Tianwei was prohibited from selling or transferring, directly or indirectly, 70% of its shares of common stock. As of December 2010, Tianwei is no longer prohibited from selling a controlling interest in us to a third party, and may do so without stockholder approval and without providing for a purchase of other stockholders’ shares of common stock. Accordingly, our shares of common stock may be worth less than they would be if Tianwei did not maintain voting control over us.

Through control of our board of directors, Tianwei may cause our board to act in Tianwei’s best interests which may diverge from the best interests of other stockholders and make it difficult for us to recruit quality independent directors.

Pursuant to an Investor Rights Agreement, dated as of December 2009, Tianwei has the right to designate four out of seven directors on our board and may at any time replace four out of seven of our directors. As a result, unless and until the earlier of (i) Tianwei (together with its affiliates) ceasing to be our largest individual stockholder or (ii) Tianwei (together with its affiliates) owning less than 25% of the outstanding shares of our common stock, Tianwei can effectively control and direct our board of directors, which means that to the extent that our interests and the interests of Tianwei diverge, Tianwei can cause us to act in Tianwei’s best interest to the detriment of the value of our common stock. Under these circumstances, persons who might otherwise accept our invitation to join our board of directors may decline.

Foreign investors in our stock may face certain tax withholding rules if we are classified as a U.S. real property holding corporation.

Under U.S. tax rules, a corporation is considered a U.S. real property holding corporation if the fair market value of its real property interests held by the corporation in the United States equals or exceeds 50 percent of the total fair market values of its real property interests and business assets. In such event, the foreign seller of stock in a publicly-traded corporation who owns more than 5% of that corporation’s common stock is subject to a tax withholding requirement imposed on the purchaser, equal to 10% of the sales price of the stock. This 10% withholding applies to the amount realized on the sale of the stock, irrespective of the seller’s gain on the sale. This withheld tax is treated as an advance payment against the actual individual or corporate capital-gains tax owed by the investor. In the event we were to be classified as a U.S. real property holding corporation, large foreign investors who hold more than 5% of our stock, would be subject to this 10% withholding requirement.

Anti-takeover defenses that we have in place could prevent or frustrate attempts by stockholders to change our directors or management.

Provisions in our amended and restated certificate of incorporation and bylaws may make it more difficult for or prevent a third party from acquiring control of us without the approval of our Board of Directors. These provisions:

·	establish a classified Board of Directors, so that not all members of our Board of Directors may be elected at one time;

·	set limitations on the removal of directors;

·	limit who may call a special meeting of stockholders;

·	establish advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted upon at stockholder meetings;

·	prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and

·	provide our Board of Directors the ability to designate the terms of and issue new series of preferred stock without stockholder approval.

These provisions may have the effect of entrenching our management team and may deprive investors of the opportunity to sell their shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.

As a Delaware corporation, we are also subject to Delaware anti-takeover provisions. Our Board of Directors could rely on Delaware law to prevent or delay an acquisition.

Because we do not intend to pay dividends, stockholders will benefit from an investment in our common stock only if it appreciates in value.

We have not paid cash dividends on any of our classes of capital stock to date, and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. The success of an investment in our common stock will depend entirely upon any future appreciation. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders pur