Hoku Scientific faces financial setback

A $185 million loan through Merrill Lynch fails after the deal is deemed 'unrealistic'

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Hoku Scientific Inc. said yesterday its agreement to borrow up to $185 million from Merrill Lynch & Co. has fallen through.

The Kapolei-based alternative-energy technology developer said it is requesting the issuance of debt securities and shares of stock to pay for the remaining $112 million needed to complete pilot production at its planned polysilicon plant in Pocatello, Idaho, in the fourth quarter of this calendar year.

Polysilicon is a key component for solar panels.

Hoku also had a loss of $2.1 million, or 12 cents a diluted share, for the quarter ending March 31, even with a loss of $2.1 million, or 13 cents a diluted share a year ago, on a decrease in revenue and increase in payroll expenses. Revenue was $621,000, down 45 percent from $1.1 million a year earlier.

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Hoku Scientific Inc. said yesterday it has lost a key piece of funding for its planned Idaho polysilicon plant, putting two of its four major contracts in question.

Fourth-quarter loss $2.1 million Year-earlier loss $2.1 million

The Kapolei-based alternative-energy technology developer also posted its sixth consecutive quarterly loss, sending shares down more than 6 percent.

Hoku was to borrow up to $185 million under a letter of intent signed in early December with Merrill Lynch & Co. The nonbinding agreement was set to expire on May 31 and was mutually ended after the financing strategy became "unrealistic," Dustin Shindo, president and chief executive officer, said in a statement yesterday.

"As we looked forward we realized that a project finance structure is much more constraining on the operation but more importantly the expansion of any facility," Shindo said on a conference call with investors and analysts, stressing that Hoku is on track to ship product to customers next year.

The closing of the loan was subject to terms including a requirement that Hoku raise an additional $35 million in cash for the plant. As of March 31, Hoku had raised $29 million, comprising $12 million from the company and $17 million from customer commitments.

Hoku filed a universal shelf registration statement Monday with the U.S. Securities and Exchange Commission to raise additional financing through issuing senior and subordinated debt securities and shares of its common and preferred stock for up to $110 million. The company plans to issue securities in at least two offerings during the next year and a half to fund the plant construction.

Hoku said it will contribute an additional $28 million, which includes the proceeds from the $25 million issuance of more than 2.8 million shares of stock to investors in February. The company also plans to raise $55 million from the first offering, making up the $112 million it believes is needed to complete pilot production in the fourth quarter of this calendar year.

Hoku needs "a lot less cash between now and the milestone test, the first pilot test, than we originally thought," Shindo said on the conference call, allowing for a downward revision in the amount of capital needed upfront. The company was able to get favorable terms on key pieces of equipment, he said.

Hoku estimates it will cost $390 million to construct its planned 3,500 metric-ton-a-year polysilicon plant, of which up to 3,200 is under contract.

Four customers have committed to prepay a combined $240 million for future product shipments to support Hoku's construction and start-up costs: Solarfun Power Hong Kong Ltd., Japan-based Sanyo Electric Co. Ltd., China-based Suntech Power Holdings Co. Ltd., and Global Expertise Wafer Division Ltd., a subsidiary of Solar-Fabrik of Germany. The contracts are worth $1.7 billion over seven- to 10-year periods.

Hoku on Monday extended the deadline for Suntech to December 31 from May 31 when either company may end the agreement if Hoku is unable to complete financing for the plant. It earlier amended an agreement with Solarfun to grant the same extension, as well as reducing the amount of capital it is required to raise to $75 million. Sanyo and Global Expertise have not yet agreed to extend Hoku's financing deadlines past May 31.

The plant has enough capacity to expand into polysilicon wafer production as well, but Hoku has made no commitment to do that, Shindo said.

For the fourth quarter, Hoku posted a loss of $2.1 million, or 12 cents a diluted share, even with a loss of $2.1 million, or 13 cents a diluted share a year ago, on a decrease in revenue and increase in payroll expenses.

Revenue was $621,000, from photovoltaic system installation and service contracts, down 45 percent from the $1.1 million earned from fuel cell contracts with the U.S. Navy a year earlier. Hoku last year moved away from its fuel-cell business in favor of polysilicon production.

As of March 31, Hoku had deferred revenue, or payments received for work not yet performed, of $36,000, from a photovoltaic system installation and related service contract, down from $929,000 a year earlier, primarily attributable to fuel cell contracts with the Navy.

For the year, Hoku had a net loss of $4.3 million, or 26 cents per diluted share, compared to $2.8 million, or 17 cents per diluted share, for fiscal 2007.

Revenue was $3.2 million, down 40 percent from $5.4 million in 2007.

"We were able to meet our revenue guidance for the fourth quarter and fiscal year," Shindo said. "While we expect to incur continued losses during the polysilicon plant construction phase, we are excited about our solar revenue prospects."

Hoku subsidiary Hoku Solar Inc., which sells and installs turnkey photovoltaic power systems in Hawaii, earned $1.9 million in the six months ended March 31.

Hoku said it expects revenue for the first quarter ending June 30 to be in the range of $2.2 million to $2.7 million and $15 million to $18 million for the fiscal year ending March 2009.

That revenue is "almost entirely" related to solar photovoltaic installation as opposed to polysilicon production, Shindo said, with full operation of the Idaho plant not expected until the first half of 2010. At that point, he said, the plant will generate $180 million to $200 million a year in revenue.

The company said it will need to increase efforts in building its polysilicon manufacturing and installation business, developing products and expanding corporate infrastructure, resulting in a significant increase in costs.