Hoku Scientific, Inc. F2Q09 (Qtr End 09/30/08) Earnings Call Transcript

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 |  About: Hoku Corp (HOKUQ)
by: SA Transcripts

Hoku Scientific, Inc. (HOKU) F2Q09 (Qtr End 09/30/08) Earnings Call Transcript October 23, 2008 5:00 PM ET

Executives

Scott PaulVP of Business Development and General Counsel

Dustin Shindo Chairman, President and CEO

Darryl Nakamoto CFO, Treasurer and Secretary

Analysts

Colin Rusch Broadpoint Capital

Zach Lesko – America’s Growth Capital

Scott Reynolds – Thomas Weisel Partners

Operator

Good day and welcome, everyone, to the Hoku Scientific second quarter fiscal 2009 earnings result conference call. This call is being recorded. There will be a presentation with a question-and-answer session to follow.

(Operator instructions) At this time, for opening remarks and introductions, I would like to turn the call to your host, Mr. Scott Paul. Please go ahead, Sir.

Scott Paul

Thank you, Liam. Good day. This is Scott Paul, Vice President – Business Development and General Counsel of Hoku Scientific.

During this conference call, you will hear forward-looking statements that involve many risks and uncertainties. These statements relate to Hoku materials’ ability to successfully raise efficient funds to establish polysilicon manufacturing facility, including the timing of when Hoku materials expect to receive prepayments from polysilicon’s current customers.

The costs to engineer, procure, and construct Hoku materials planned polysilicon facility, including any increases and costs from the plan to increase in production capacity from 3,500 metric tons per year to 4,000 metric tons per year. This ability to engineer and construct a production plan for polysilicon, Hoku materials’ ability to manufacture polysilicon,

Hoku materials’ forecasted revenue from the potential future sale of polysilicon, the timing of when Hoku materials expect to receive its prepayments from Wealthy Rise International or Solargiga, if at all; Hoku materials’ ability to amend the terminated existing polysilicon’s prior agreements or resell polysilicon to new customers for additional prepayments, the timing of Solar Fun’s planned payment of $21 million to Hoku materials in October 2008, Hoku materials’ ability to meet the delivery schedules or successfully achieve the milestones in its customer contract, the ability of its vendors, contractors, and consultants to meet the delivery schedules and their respective agreements with Hoku materials, the cost to Hoku materials to manufacture polysilicon and its ability to offer pricing that is competitive with competing products, and the plans of Hoku materials for future expansion of its polysilicon production facility.

These statements also relate to Hoku Solar’s ability to successfully complete PV system installation, its ability to obtain third-party financing for its power purchase agreement for the Hawaii Department of Transportation, Airports Division and Hawaiian Electric Company, respectively; the performance and their ability of Hoku Solar’s PV system, the cost to procure and install the PV system, its ability to offer pricing that is competitive with competing products, and expected future revenue from the PV system’s installation business.

These statements also relate to Hoku Scientific, Hoku materials, and Hoku Solar’s future financial performance, including revenue and growth margin projections, the business strategies and plans of Hoku Scientific, Hoku materials, and Hoku solar, and objectives of management for future operations. 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 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 statement. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements.

In evaluating these statements, you should specifically consider the risks described in Hoku Scientific’s filing with the Securities and Exchange Commission. Except as required by law, Hoku Scientific assumes no obligation to update these forward-looking statements publicly or to update the reasons the actual results could differ materially from those anticipated in these forward-looking statements, even if the information becomes available in the future.

During this conference call, we will use non-GAAP financial measures in the course of analyzing our results. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure, which reconciliation may be found in our press release announcing our second quarter 2009 results.

This call is a property of Hoku Scientific, and any recording, reproduction or transmission of this conference call without expressed prior written consent of Hoku Scientific is strictly prohibited. Now I’d like to turn the call over to Dustin Shindo, Chairman of the Board of Directors, President, and Chief Executive Officer of Hoku Scientific.

Dustin Shindo

Thank you, Scott. Good afternoon and thank you for participating in Hoku Scientific second quarter 2009 earnings call. Joining me today are Darryl Nakamoto, our Chief Financial Officer, and Scott Paul, our VP of Business Development and General Counsel. Karl Taft, our Chief Technology Officer, is with us via conference call.

We are very pleased with the continued progress that we made during the quarter towards executing on our solar and polysilicon strategies. Before turning the call over to Darryl Nakamoto for a detailed review of our second quarter financial result, I would like to begin with an update on our result developments with Hoku materials, followed by an update on Hoku Solar.

During the past quarter, we secured an aggregate of more than $1.2 billion in new polysilicon purchase commitment and realigned our polysilicon allocation. We have now contracted future revenues with five leading solar companies with a sale of up to $2.3 billion of polysilicon over a ten-year period and now have customer prepayment commitments with $306 million, which will be used towards the construction of our polysilicon plant and for working capital. We also increased our annual production forecast from 3,500 metric tons to 4,000 metric tons, which is confirmed by our project engineering teams, technology lighting source, and equipment vendor.

To support this addition of capacity, we have expanded and finalized our power supplier agreement with Idaho Power and secured the necessary air emissions permits for increased production. We have made significant progress as it relates to our construction. The structural support graph for the first of two vent gas recovery systems has been completed, and we have received and installed the first shipment of vent gas storage and processing vessel. In addition, we have installed the plant’s underground cooling stock water and fire loops, and construction is proceeding according to schedule for all major functional areas.

Regarding procurement, our critical path equipment is proceeding according to plan. We confirmed that five Siemens process reactors have been completed by GEC/MSA, and are expected to arrive at its Idaho plant in the next several weeks. The remaining 11 reactors from our first order of 16 reactors are expected to arrive at the project site by December 2008. A second order of 12 reactors is planned for November 2008, with delivery expected in the second quarter of calendar year 2009. This schedule supports our plans to comment shipment in the first half of calendar year 2009 and to ramp up productions throughout 2009 and reach full capacity in the first half of calendar year 2010. We had previously stated that the reactors would be shipped in August 2008.

However, we moved this shipment to align with the construction of certain related infrastructure. The additional work performed will help towards our ability to efficiently install the reactors and does not change our ramp-up schedule. Similar to our approach for procuring reactors, the majority of our major equipment is being constructed off-site, and we will ship the equipment to our construction site as needed. But we believe that this helps us preserve our equipment and ensure the efficient construction process. Additional examples of this approach include our 258-megawatt transformers and back-up generators, which just arrived on site and have lead times of one to one and a half years.

Continuing with the financing of our plant facility, we have received the first schedule of prepayments from Kinko Energy and Tianwei New Energy. However, Wealthy Rise International or Solargiga has not yet made its initial deposit of $22 million as according to the terms of our contract with year-end September 2008. We are working with Solargiga to – have this late payment made. In addition, Solar Finance confirmed that it’s its intention to pay us a total prepayment deposit of $21 million in October 2008. The payment will consist of its $19 million second deposit, that was originally planned for September 30 and an accelerated payment of $2 million in Solar Fun’s $20 million prepayment scheduled for March 2009. Together with its initial deposit of $11 million, its $21 million deposit will bring Solar Fun’s aggregate disbursement to $32 million or nearly 60% of its total prepayment commitment of $55 million.

We also have received a guarantee from Solar Fun’s parent committee where they agreed upon prepayment commitment. In exchange, we have agreed to remove the requirement for Solar Fun to guarantee its remaining deposit with a standby letter of credit. However, if Solar Fun failed to make any of its next scheduled payments, we maintain the right to terminate the agreement, resell their allocation, and also retain their cash deposit as liquidated damages.

Given the long-term nature of our contract and our partner-driven approach, some changes to our existing polysilicon supplier agreement are not unexpected. While these changes may include amendment to current contract terms and conditions, redistribution of production capacity, or possibly our electing to terminate one or more of our existing polysilicon sales contract, we expect to maintain roughly the same level of customer prepayment commitments and contracted future revenue through the sale of available polysilicon capacity to new or existing customers.

We estimate that it would cost approximately $390 million to engineer, procure, and construct a 3,500-metric tons per annum polysilicon production plan. While there are many – well, there may be cost increases related to the revised 4,000-metric ton capacity, we do not believe we will be required to procure any major additional equipment, but we are continuing to review the $390 million forecasted cost to complete the plan. As of September 30, 2008, the construction and progress for the project was $88.7 million. And according to our integrated project timeline, this investment is expected to increase substantially in the coming quarters as we execute previously negotiated procurement contracts for key production equipments.

We plan to fund the remaining project cost through our combination of customer prepayment commitment, cash on hand, and through one or more debt or equity financing strategy. As of September 30, 2008, we had received $48 million in prepayment deposits from our current customers. In October 2008, we expect to receive subsequent prepayments from Solar Fun in the amount of $21 million for an aggregate total of $69 million in customers’ prepayments to be received through October. According to the terms of our existing polysilicon supplier agreement, we are scheduled to receive an additional $237 million in future customer prepayments subsequent to the additional customer prepayment in October 2008.

We would like to note that if we do not receive the prepayments related to the Solargiga agreement, the additional customer prepayments will be $154 million subsequent to 2008, not including any deposits, gains from reselling the capacity allocated to them.

Moving to our Hoku Solar business, our Hawaii-focused PV installation business continues to grow. We have completed the installation of over 180 kilowatts of clean, solar power for Prudential Locations and Paradise Beverages. During the quarter, we also signed two additional commercial PV installation contracts and negotiated the term for the sale of power generated by up to 779 kilowatts of PV installations to the Hawaii Department of Transportation, Airports Division. During the upcoming quarter, we expect to focus on the financing and delivery of the systems provided by these power purchase agreements with Department of Transportation, and on the previously announced 218-kilowatt PV system planned for Hawaiian Electric Company’s Archer Street substation.

To conclude, we have made great progress during the past quarter. Development of our polysilicon facility remains on track to support a planned initial delivery of polysilicon in the first half of 2009. And due to the detailed preparations we have made for the upcoming winter season, we feel we are well prepared to maintain our plant construction schedule. We stabilized our customer base, and we believe that we can wait until calendar year 2009 to raise additional funds through debt or equity if our customers make their prepayments on time, which is advantageous during the current circumstances at the global market. In Hawaii, we are successfully growing our PV system’s integration business and continue to complete installation. In both our solar and polysilicon businesses, Hoku remains sharply focused on execution and we expect this positive momentum to continue.

Now, I’d like to turn the call over to Darryl Nakamoto, our Chief Financial Officer, for a review of our financial results.

Darryl Nakamoto

Thank you, Dustin. Good afternoon, everyone. I will provide detail on the financial results for the second quarter ended September 30, 2008.

Beginning with the statement of operations, our revenue for the quarter ended September 30, 2008 was $1.9 million derived primarily from PV system installation contracts and the resell of solar inventory, compared to $239,000 from fuel cell contracts the same period in 2007. Cost of revenue was $1.5 million for the quarter ended September 30, 2008, compared to $195,000 for the same period in 2007. The cost consisted of manufacturing expenses including employee compensation and supply to materials. Deferred revenue at September 30, 2008 and March 31, 2008 was $4,000 and $36,000 respectively, which were attributed both to PV system installations. Our selling, general and administrative expenses for the quarter ended September 30, 2008 were $1.1 million, compared to $1.3 million for the same period in 2007. The decrease of $211,000 was primarily due to the loss on the resell of solar sales of $286,000 in the prior period. There were no research and development expenses for the quarter ended September 30, 2008, compared to $39,000 for the period in 2007. The decrease was primarily due to incurring no expenses related to research and development of fuel cells due our shift in business strategy.

Our net loss computed in accordance with GAAP for the quarter ended September 30, 2008 was $1.4 million or $0.07 per diluted share, compared to GAAP net loss of $1.0 million or $0.06 per diluted share for the same period in 2007. Non-GAAP net loss for the quarter ended September 30, 2008 was $1.1 million or $0.05 per diluted share, compared to non-GAAP net loss of $705,000 or $0.04 per diluted share for the same period in 2007. Non-GAAP net loss for the quarters ended September 30, 2008 and 2007 excludes non-cash stock-based compensation of $260,000 and $299,000 respectively. Finally, turning to our balance sheet, as of September 30, 2008, we have $13.9 million in cash, cash equivalent, and short-term investments, compared to $29.8 million as of March 31, 2008.

Fluctuations in revenue are expected to continue in future periods due to uncertainty regarding the level and the timing of PV system installations and our ability to obtain third-party financing for our power purchase contracts. In addition, the extension of the solar tax credit has reduced the requirements of certain current and potential customers to complete installations by December 31, 2008. As a result of the potential fluctuations, we will temporarily forego providing quarterly revenue guidance and only provide updates on our annual projections. Based on our current outlook and contingence on the successful third-party financing of our power purchase agreements with Hawaii State Department of Transportations, Airports Division and Hawaiian Electric Company, we continue estimate revenue for fiscal 2009 to be in the range of $15 million to $18 million. In addition, we expect that we will need to increase our efforts in supporting our polysilicon manufacturing and PV system installation service business, developing our products and expanding our corporate infrastructure.

As a result, we expect our costs to continue to increase significantly and expect to incur losses for the foreseeable future. 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 both anticipated and these forward-looking statements, even if new information becomes available in the future.

This concludes our prepared remarks. Now we would like to open the meeting for questions. Liam, will you please proceed?

Question-and-Answer Session

Operator

(Operator instructions) And we’ll take our first question from Colin Rusch.

Colin Rusch – Broadpoint Capital

Dustin, can we get into the issues of Solargiga for just a little bit? What’s did the delay? Does it have anything to do with the resignation of Solargiga’s CFO?

Scott Paul

Hi, Colin, this is Scott Paul. Yes, it’s – under the terms of the agreement, they had the opportunity to have the agreement reviewed by their shareholders post signing, and that’s essentially what’s going on. It’s being confirmed by their shareholders before the payment is made, and we’re allowing them some time to do that. To my knowledge, it doesn’t have anything to do with their CFO’s resignation.

Colin Rusch – Broadpoint Capital

Okay. And what is the timeline for that, that vote?

Scott Paul

Yes, I can’t, I can’t really comment specifically on that. We’re – there’s a daily dialog.

Colin Rusch – Broadpoint Capital

Okay, and what recourse do you have with them if there’s a continued problem?

Scott Paul

Yes, under the terms of the agreement, they technically have 75 days on – to obtain that approval and make the payment, and then we have some when we signed that which was September 4. So on that 75th day, we can either continue the contract and expect payment or we could choose to terminate the agreement, resell the capacity and claim damages – basically, a break-up free of $1 million.

Colin Rusch – Broadpoint Capital

So just thinking about as a replacement customer, what are the inquiries are like right now for new customers and how solid is the footing for the potential customers?

Dustin Shindo

Hi, Colin, this is Dustin. We’re still getting inbound inquiries as well as a continuing dialogue with previous potential customers, so there is still a potential pipe – or there is still a pipeline of potential customers there. So it’s – to give you some comfort, if you will, that there are other people out there. Certainly, the market’s changed a little bit with the level of situation but the need for polysilicon is still very strong.

Colin Rusch – Broadpoint Capital

Okay, and then it looks like the March quarter, you’ve got a heavy series of prepayment. Are those critical for much of the production in 2009 in terms of building a factory? Or where do you really run with your problem if you do have some delays with the prepayment?

Dustin Shindo

Well, we have, of course, aligned our prepayment timing roughly with the expected outflow of all of the payments. So if there is problem, at least over a period of time, with the prepayment timing, we certainly would have to address that. But as you have seen in the past, we’ve been fairly good at adjusting our plan and approach when that happens.

Colin Rusch – Broadpoint Capital

Okay, and then just changing gears a little bit to the systems business. What are you seeing in terms of availability for financing, just on PPA terms? Are you starting to see LIBOR plus four or five points or in that range, or for lending rates? And how difficult is it to get funding right now for some of the contracts that you guys are working on?

Dustin Shindo

I think the answer that depends on the strength of the contract. If you have pricing that is in the $0.30 per kilowatt hour range and on a 20-year period, you can finance that. But as the rates become higher, there’s credit risk behind it and those types of factors, so it really depends. It definitely is tougher than it was previously. Now, the nice thing that we see happening though is that as the debt becomes a little more difficult, at least in Hawaii, we’re seeing that the PPA price has climbed a little and that’s reflected in our contract with the Department of Transportation, which is actually in the mid-30, which gives us the ability to freely go out and finance our, or hopefully freely finance those contracts.

Colin Rusch – Broadpoint Capital

Great. That was the end and you could get back in the queue.

Dustin Shindo

Great.

Operator

We’ll move next to Zach Lesko with America’s Growth Capital.

Zach Lesko – America’s Growth Capital

Hi, guys, good evening.

Dustin Shindo

Hi, Zach.

Zach Lesko – America’s Growth Capital

Can you – I mean, do you have any sense of Solargiga and Solar Fun how they had been planning to procure the payments? Were they looking to secure debt for that, or – I mean, neither one of them has a lot of cash?

Scott Paul

Yes, hi, Zach. This is Scott Paul. That was one of the reasons why we were willing to work with them as a good partner was the letter of credit because that letter of credit, to my knowledge, was cash collateralized, so that addresses some of the – freeze up some liquidity. As far as what their – how they’re going to fund the ongoing payments, that’s not set in the contract. They’re just required to pay it and if they don’t, there’s a parent company guarantee or we have our options with respect to the contract; but we trust our customers to manage their balance sheet and to have the cash available when needed.

Zach Lesko – America’s Growth Capital

Okay. I noticed – can you just detail a little bit more the interest payment on your income statement and some details about the note payable that’s on your balance sheet now?

Darryl Nakamoto

Sure. Hi, Zach, it’s Darryl. Interest payments is – well, first of all, on our balance sheet, the notes payable, it relates to the loan we took out using our building as collateral. That will be offset once we sell the building, and we’ll pay up the loan at that point in time, which is set to happen this year. The interest and other income, it’s not really – the interest expense itself is not that high. The loss primarily relates to our currency hedge contracts, of foreign currency hedge contracts with Europe which is significant in the losses that’s driving it.

Zach Lesko – America’s Growth Capital

Okay, and if you could, I know you haven’t disclosed exactly what your allocated production capacity is, but is it closer to the 3,500 or to the 4,000 metric tons?

Darryl Nakamoto

I guess I could say that it’s closer to the 4,000 metric tons but again, we haven’t given a specific number.

Zach Lesko – America’s Growth Capital

Okay, thank you.

Darryl Nakamoto

Yes.

Operator

We will move on to our next question from Scott Reynolds with Thomas Weisel Partners.

Scott Reynolds – Thomas Weisel Partners

Hey, guys, this is Scott for Jeff Osborne. Could you just remind us which customers – what’s the makeup of the $48 million in customer prepayments?

Hello?

Darryl Nakamoto

Yes, sorry, we were – on the top of our head, that’s a little tough. Let’s see, Suntech is $2 million that are year-to-date; Solar Fun has paid $11 million previously and, of course, we expect another $21 million. That’s just a point of reference though [ph]. Tianwei has paid $25 million, and Kinko has paid $10 million.

Scott Reynolds – Thomas Weisel Partners

Okay.

Darryl Nakamoto

So that should get us to about that $48 million.

Scott Reynolds – Thomas Weisel Partners

Okay, and directionally, I know you guys don’t want to give guidance but we have a pretty large insulation coming in the third quarter, which would be a lot of your revenue for the year and then it’s falling off in the fourth quarter. Do you guys still see that playing out or are your systems getting pushed more toward the fourth quarter?

Darryl Nakamoto

Well, there is a couple of factors that clarify this point that go into the revenue guidance. The first is that for us to recognize that revenue, we, of course, will have to sell those systems to an investment group or some other owner. And, of course, if for some reason, we were to keep those systems or a portion of those systems, we wouldn’t have as much revenue to be recognized on our book. As far as it sliding out a quarter, of course, that could happen; but if it did, that’s also okay now given that the ITC was extended and our contract allows for that.

Scott Reynolds – Thomas Weisel Partners

Okay, those were all my questions. Thanks.

Darryl Nakamoto

Okay.

Operator

And there appears to be no further questions at this time. Mr. Paul, I’d like to turn the conference back over to you for any closing or additional remarks.

Scott Paul

Thank you for participating in our second quarter 2009 earnings call. We look forward to speaking with you again when we report our third quarter 2009 results.

Operator

This concludes today’s conference call. Thank you for joining and have a great day.

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