Hoku Scientific, Inc. (HOKU) F2Q10 (Qtr End 09/30/08) Earnings Call October 22, 2009 5:00 PM ET
Scott Paul - COO
Dustin Shindo - Chairman, President and CEO
Darryl Nakamoto - CFO, Treasurer and Secretary
Welcome to the Hoku Scientific Second Quarter 2010 Call. A quick note that today's call is being recorded.
At this time, I'd like to turn things over to Scott Paul.
This is Scott Paul, Chief Operating Officer of Hoku Scientific. During this conference call, you will hear forward-looking statements that involve many risks and uncertainties. These statements relate to our ability to consummate the transaction with Tianwei, our ability to secure additional financing necessary to complete our planned polysilicon production facility in Pocatello, Idaho, our ability to raise additional cash to provide us with sufficient liquidity to continue as a going concern, our ability to receive customer prepayment based on agreed-upon schedules and contingent-upon meeting certain milestones, if at all, under our current polysilicon supply agreements; our ability to secure additional long-term polysilicon supply customers and customer prepayments; our ability to secure funding from Federal loan guarantees and other qualified renewable energy incentive programs; our ability to meet our commitments under certain supply agreements to deliver polysilicon; our ability to complete a reactor demonstration in the fourth calendar quarter of 2009, and to commence first customer shipments in the first calendar quarter of 2010; our future financial performance; our business strategy and plans; 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 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. 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 our filings with the Securities and Exchange Commission. Except as required by law, we assumes 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.
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 fiscal 2010 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 would like to turn the call over to Dustin Shindo, Chairman of the Board of Directors, President, and Chief Executive Officer of Hoku Scientific.
Good day and thank you for participating in Hoku Scientific second quarter fiscal 2010 earnings call. Joining me on the call today are Darryl Nakamoto, our Chief Financial Officer; Scott Paul, our Chief Operating Officer; and Karl Taft, our Chief Technology Officer.
This past quarter we were very pleased to have entered into a financing agreement with Tianwei that would allow us to move forward with the construction of our polysilicon manufacturing plant and the continued progress that we made towards executing our business strategy.
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 recent development with Hoku Materials, followed by an update on Hoku Solar.
In September, we entered into a definitive agreement providing for a majority investment in Hoku by Tianwei New Energy Holdings Company or Tianwei. According to the terms of the financing agreement, Tianwei would effectively provide us with $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, we agreed to forego $50 million in secured polysilicon prepayment and Tianwei committed to assist us in obtaining any additional financing that we may require before we construct and operate our polysilicon facility.
In exchange for this consideration, at closing, we will issue to Tianwei shares of our common stock that will represent 60% of our fully diluted voting share. We will also provide Tianwei with warrants for an additional 10 million shares of our common stock. Conditional on the closing of the transaction, which is expected to be in the next few weeks, we also agreed to modify our shipping terms to Tianwei, accepting an 11% price reduction in exchange for an agreement by Tianwei that would allow us to ship product to all of our other existing customers before making our initial product deliveries to Tianwei. To be clear, this reduction is roughly equivalent to the $50 million of Tianwei's prepayment which are to be converted to equity in the transaction.
Accordingly, since we would no longer be obligated to offset that amount against future invoices for polysilicon shipments, 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 shipment.
As previously announced, we implemented a construction slowdown over the past few months. However, J.H. Kelly, our project's General Contractor, invested time and planning into preparing multiple work fronts for the eventual resumption of full scale construction. In addition, we arrived at an agreement with J.H. Kelly to establish clear milestones for resuming work upon closing of any eventual financing and on the outline of an accelerated project construction schedule.
Now, I am pleased to announce that plant construction recommenced in earnest in October, and we expect in the coming weeks our construction workforce will expand to more than 100 full-time personnel.
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 our 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.
We still need to identify approximately $71 million in additional funding to complete construction and reach our planned full production capacity of 4.000 metric tons per year, but we intend to delay any such subsequent financing until we have made initial shipments to our current customers in the first quarter of calendar 2010.
While Tianwei has provided commitments to assist in securing the remaining funds, we expect to complete the subsequent financing through a combination of prepayments from new customers through other debt sources or possibly through a government incentive program. We've applied for investment and tax credits under the Section 48C, which is the qualifying advanced energy project tax credits program administered under the Department of Energy and Internal Revenue Service.
We are requesting 48C credit of up to approximately $42 million or 30% of the projected $139 million qualifying investments in our polysilicon plant. We also have applied for loan guarantees of up to $150 million under Section 1705 with the Department of Energy.
To be clear, with the debt financing of $50 million expected from Tianwei and the $53 million of additional customer prepayments, we believe we will have sufficient funds to construct our polysilicon plant to the point where we will be producing enough polysilicon to meet our contractual obligations with all of our other customers, except Tianwei. Tianwei has agreed to forego their polysilicon deliveries until the other customer obligations are met.
Moving to Hoku Solar, our PV installation business continued to establish itself as a leader in the Hawaii market. During the second quarter, we completed roof-mounted PV installations for customers on Oahu and Hawaii Island, and completed the first full quarter of operations for the seven PV systems installed on Hawaii Department of Transportation facilities throughout the state. In aggregate, the Hawaii Department of Transportation systems were performing at 99% of projected output, which includes some downtime for system commissioning
We also continue working on expanding our project pipeline. Conditions for market expansion continued to improve in Hawaii, with the recent announcement of a tiered feed-in-tariff rate structure that contemplates an off-take rate for large-scale generating facilities throughout the state. This, plus the refundable State Energy Tax Credit provides a very favorable opportunity for distributed solar generating facilities, a market which we will continue to aggressively explore.
To conclude, thanks to the support of our vendors, partners and customers, we are on a clear path to polysilicon production in Pocatello, and we have been able to refocus our efforts in all of our business units. 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. By removing financing uncertainty and strategically aligning ourselves with Tianwei, we will have both materially strengthened our presence in the global solar industry and added real value for our customers in Hawaii.
Considering this, along with the broader signs of improvement in the solar industry, including an incremental strengthening of demand in solar and a stabilizing of polysilicon market prices, we believe we are well positioned to bring our solar industry strategy to fruition.
Now, I would like to turn the call over to Darryl Nakamoto, our Chief Financial Officer, for a review of our financial result.
I will provide detail on our financial results for the second quarter ended September 30, 2009. Beginning with our statement of operations, our revenue for the quarters ended September 30, 2009 and 2008 was $1.5 million and $1.9 million respectively, derived primarily from PV system installations and related services.
Cost of revenue was $1.4 million for the quarter ended September 30, 2009 compared to $1.5 million for the same period in fiscal 2008. Cost of service and license revenue primarily consisted of employee compensation and supplies and materials.
Deferred revenue as of September 30, 2009 and March 31, 2009 was $12,000 and 784,000 respectively, which was attributable to PV system installation.
Our selling, general and administrative expenses for the quarter ended September 30, 2009 were $1.5 million compared to $1.1 million for the same period in fiscal 2009. The increase of $479,000 was primarily due to Board of Directors' compensation of $210,000, retention payments to officers and other key employees of $130,000 and payroll expenses, primarily due to new hires at our polysilicon plant, of 125,000.
Our net loss computed in accordance with 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 2008. 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.
Finally, turning to our balance sheet, as of September 30, 2009, we have $9.1 million in cash, cash equivalents and short-term investments compared to $17.4 million as of March 31, 2009. If we do not close the Tianwei transaction or are unable to secure additional financing, we may not have sufficient funds to complete the construction of our polysilicon plant or support or anticipate operations for the next 12 months.
This concludes our prepared remarks. Now we would like to open the meeting for questions.
(Operator Instructions). Ladies and gentlemen, there appear to be no questions at this time, so I will turn things back over to Dustin Shindo for any additional or closing remarks.
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.
Thank you once more for joining us. That will conclude today's conference call. Have a good day everybody.
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