Financial Results

Revenue for the quarters ended September 30, 2009 and 2008 was $1.5 million and $1.9 million, respectively, derived primarily from photovoltaic, or PV, system installation and related service contracts. As of September 30, 2009 and March 31, 2009 deferred revenue of $12,000 and $784,000, respectively, was attributable to PV system installations and related service contracts.

Net loss, computed in accordance with U.S. generally accepted accounting principles, or GAAP, for the quarter ended September 30, 2009 was $1.2 million, or $0.06 per diluted share, compared to $1.4 million, or $0.07 per diluted share, for the same period in fiscal 2009.

Non-GAAP net loss, which excludes the effect of stock-based compensation, for the quarter ended September 30, 2009 was $959,000, or $0.05 per diluted share, compared to $1.1 million, or $0.05 per diluted share, for the same period in fiscal 2009. Non-GAAP net loss for the quarters ended September 30, 2009 and 2008 excludes non-cash stock-based compensation of $272,000 and $260,000, respectively. The accompanying schedules provide a reconciliation of net loss per share computed on a GAAP basis to net loss per share computed on a non-GAAP basis.

Dustin Shindo, chairman, president and chief executive officer of Hoku Scientific, said, "With the recent announcement of our financing agreement with Tianwei, we have successfully identified sufficient funding to complete construction of our polysilicon manufacturing plant in Pocatello, Idaho, to the point where we can commence our first shipments to our customers."

Describing the Company's current shipment timeline, Mr. Shindo continued, "We expect to ramp up our construction efforts in this fourth calendar quarter, and are making all preparations to conduct reactor demonstration testing in December. In order to allow sufficient time for our production to reach commercial product specifications, we now expect to make the first commercial deliveries of Hoku-manufactured polysilicon to our current customers in the first quarter of calendar year 2010. From there, we will continue ramping up production until we reach our full, planned capacity of 4,000 metric tons per year, which we expect to occur in the second half of calendar year 2010."

The Company asserted that it would need to identify approximately $71 million in additional funding to complete construction and reach its planned full production capacity of 4,000 MT/year, but clarified that it intended to delay any such subsequent financing until it had made initial shipments to its current customers in the first quarter of calendar 2010. Hoku said that although Tianwei had provided commitments to assist in securing the remaining funds, the Company expected to complete this subsequent financing through a combination of prepayments from new customers, through other debt sources, or possibly through U.S. Federal loan guarantees and other qualified renewable energy incentive programs.

"In light of these developments, we are extremely pleased to be focused again on execution. Having established a clear path forward, we expect our financing progress will not only benefit our polysilicon business, but that it will have a healthy effect on our PV systems integration business as well," concluded Mr. Shindo. "By removing financing uncertainty and strategically aligning ourselves with Tianwei, we have both materially strengthened our presence in the global solar industry, and added real value for our customers in Hawaii."

Business Updates

Hoku Materials Polysilicon Plant Update

Commenting on the Company's polysilicon subsidiary, Hoku Materials, Inc., Mr. Shindo said, "As announced previously, in September we entered into a definitive agreement providing for a majority investment in Hoku by one of our polysilicon customers, Tianwei New Energy Holdings Co., Ltd. The transaction, which features debt financing by Tianwei through China Construction Bank for the construction and development of our polysilicon production facility in Pocatello, Idaho, is expected to close by the end of October 2009."

According to the terms of the financing agreement, Tianwei will enter into a loan agreement with Hoku providing for $50 million in debt financing, of which $20 million is expected in November 2009, with the remaining $30 million expected in December 2009. In addition, Tianwei committed to assist Hoku in obtaining any additional financing that Hoku may require to fully construct and operate its polysilicon facility.

In exchange for this consideration, Hoku will convert $50 million of Tianwei's aggregated $79 million in secured prepayments into shares of Hoku's common stock at closing. This will represent approximately 60% of Hoku's fully-diluted voting shares. Hoku will also provide Tianwei with warrants for an additional 10 million share of Hoku's common stock. The $79 million in deposits were previously paid by Tianwei to Hoku according to the terms of the polysilicon supply agreements in place between the two companies. The remaining $29 million in prepayments will be offset over time against shipments of polysilicon by Hoku to Tianwei.

Conditioned on the closing of the transaction, Hoku also agreed to modify its shipping terms to Tianwei, accepting an 11% price reduction in exchange for an agreement by Tianwei that would allow Hoku to ship product to all of its other existing customers before making its initial product deliveries to Tianwei. Hoku clarified that this reduction was roughly equivalent to the $50 million of Tianwei's prepayments which are to be converted to equity in the transaction. Accordingly, since Hoku would no longer be obligated to offset that amount against future invoices for polysilicon shipments, the Company explained that the price reduction would, therefore, have only a negligible effect on the net amount of cash payments to be received from Tianwei as payment for future polysilicon shipments.

Hoku had previously reported that it had arrived at an agreement with J.H. Kelly, the project's General Contractor, which established clear milestones for resuming work upon closing of any eventual financing. The companies also agreed on the outline of an accelerated project construction schedule, revising the timeline to completion.

Hoku confirmed that the onsite ramp-up had already begun. "Construction at the plant recommenced in earnest in October," said Mr. Shindo. "In the coming weeks, we expect the construction workforce to expand to more than 100 full-time personnel. Though we will initially focus on completing the systems required to conduct the reactor testing planned for this quarter, we expect to quickly resume progress on nearly all non-TCS areas of the plant. During the construction slow-down over the past few months, J.H. Kelly's onsite team invested time and planning into preparing multiple work-fronts for the eventual resumption of construction. This will ensure the most rapid progress possible across all areas of the plant."

Polysilicon Plant Financing Update

Hoku Materials continues to estimate that it will cost approximately $390 million to engineer, procure and construct its polysilicon production plant. The estimate reflects its discussions with vendors, declining costs of materials and labor, and ongoing adjustments of certain design elements; however, changes in costs, modifications in construction timelines, and other factors could increase the actual costs. As of September 30, 2009, construction-in-progress for the project was $262 million.

Hoku had received $115 million in prepayment deposits from its current customers as of September 30, 2009, excluding the $50 million prepayment from Tianwei that will be converted into equity. All customers are current on their prepayment obligations, with the exception of Solarfun Power Hong Kong Limited (Solarfun), which is past due on $15 million in prepayments that were to have been paid between July and October, 2009. In addition, the Company has granted waivers, until November 15, 2009, for Wealthy Rise International, Ltd. (Solargiga) to make its $9.9 million of prepayments that had been originally scheduled for payment between June and October, 2009. The Company is in discussions with Solarfun and Solargiga, respectively, regarding the timing of when these unpaid amounts will be paid.

Upon the expected closing of the Tianwei transaction and conversion of Tianwei's $50 million in prepayments into equity, Hoku's customers will have committed to make $178 million in contractual prepayments, including the $115 million that has been paid to date.