Hoku: short-term pain, long-term gain

The company announces layoffs and a deal that could lead to $140 million in future sales

On a day in which Hoku Scientific Inc. announced layoffs and projected its first quarterly loss as a public company, the Kapolei-based alternative energy firm also said it had signed a memorandum of understanding to sell $120 million to $140 million in solar-grade polysilicon to a German company.

Hoku said yesterday it reached a nonbinding deal to supply polysilicon chunks to Freiburg, Germany-based Solar-Fabrik AG over several years at predetermined pricing beginning in two years. Both sides hope to reach a binding agreement within 60 days.

The deal would be the first customer agreement stemming from the new solar-cell and polysilicon plant that Hoku is preparing to build in Idaho.

"This would be the largest deal we've ever done," said Dustin Shindo, chairman, president and chief executive of Hoku. "It's a step toward becoming a strong player in the polysilicon market. This is a huge validation that we're moving in the right direction and making some progress. And it really justifies why we're putting more resources in polysilicon and solar."

Hoku, which went public in August 2005 with the hope of cashing in on demand for fuel-cell technology, has been de-emphasizing that portion of its business and earlier this year began moving into polysilicon and solar modules.

"You can invest resources into fuel cells where commercialization is farther off and profitability is uncertain, or you can put resources into an industry, particularly polysilicon, where commercialization is today and profitability and revenue are much more certain," Shindo said.

In that vein, Hoku said yesterday it was laying off "a few" people from its fuel-cell business and was expecting a loss in the quarter ending Dec. 31 after seven straight profitable quarters. Hoku projected a net loss of $1.2 million to $1.4 million, including noncash charges of about $675,000 to $900,000 related to a writedown of capital equipment and inventory used in the company's fuel-cell business. Last month, Hoku said it expected its net income for the period quarter Dec. 31 would range from "a loss to slightly profitable."

Hoku still generates all of its revenue from contracts related to its fuel-cell technology business. The company said its revenue for the current quarter will be in the range of $1 million to $1.2 million, matching the guidance the company gave in November.

Shindo declined to say exactly how many people the company was laying off. He said it has less than 30 employees overall at its three units -- fuel cell, solar and materials -- and plans to hire more than 200 people to staff the solar and materials divisions in the next two years.

"If you look at Hoku Scientific's fuel-cell business, we had a misalignment between our revenue and expenses," Shindo said. "(Every company in the fuel-cell industry is) losing money, and commercialization, while moving in the right direction, is not moving as fast as we would all like."

Hoku's new Idaho plant would have the capacity to produce 1,500 metric tons of polysilicon a year and generate nearly $100 million annually in revenue based on current market prices. Construction is expected to begin at the facility in the first half of next year and be completed in late 2008. Hoku expects to generate money from its solar and polysilicon operations in the second halves of 2007 and 2008, respectively.

"If you look at the solar and polysilicon front, that market is red hot in contrast to the fuel-cell market," Shindo said. "It is growing at an impressive rate and has been doing so for many years and has a significant shortage of both polysilicon and solar modules. So what that means, of course, is a very real opportunity for a company that can make those products."

In October, Hoku announced it had signed a $2 million deal to buy solar-module manufacturing equipment from Boston-based Spire Corp., as well as a $2.8 million deal to purchase solar cells from Taiwan-based E-Ton Solar Tech Co. Ltd. that Hoku will turn into modules using the equipment purchased from Spire.

"That will allow us to install solar panels in Hawaii on roofs to produce electricity for Hawaii's consumers, as well as selling modules to distributors outside of Hawaii," Shindo said.

Shindo said Hoku is "absolutely not" considering relocating its headquarters to Idaho from Kapolei. He also said the reduction in fuel-cell employees will not impact the company's contracts.

"We'll still have the capability to do everything we could do before," he said.