Hoku Corp - FORM 10-Q - February 5, 2010

Attached files

file	filename
EX-31.2 - Hoku Corp	v173126_ex31-2.htm
EX-31.1 - Hoku Corp	v173126_ex31-1.htm
EX-32.1 - Hoku Corp	v173126_ex32-1.htm
EX-32.2 - Hoku Corp	v173126_ex32-2.htm
EX-10.117 - Hoku Corp	v173126_ex10-117.htm
EX-10.116 - Hoku Corp	v173126_ex10-116.htm
EX-10.115 - Hoku Corp	v173126_ex10-115.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2009

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _______ TO _______ .

Commission File Number: 000-51458

HOKU SCIENTIFIC, INC.

(Exact name of Registrant as specified in its Charter)

Delaware		99-0351487
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1288 Ala Moana Blvd., Ste. 220

Honolulu, Hawaii 96814

(Address of principal executive offices, including zip code)

(808) 682-7800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

¨ Large accelerated filer x Accelerated filer ¨ Non-accelerated filer (Do not check if a smaller reporting company)

¨ Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

Common Stock, par value $0.001 per share, outstanding as of January 15, 2010: 54,878,692

HOKU SCIENTIFIC, INC.

FORM 10-Q

For the Quarterly Period Ended December 31, 2009

Table of Contents

Part I – Financial Information

Item 1.	Financial Statements	3

	Consolidated Balance Sheets as of December 31, 2009 (unaudited) and March 31, 2009	3

	Consolidated Statements of Operations for the three months and nine months ended December 31, 2009 and 2008 (unaudited)	4

	Consolidated Statements of Cash Flows for the nine months ended December 31, 2009 and 2008 (unaudited)	5

	Notes to Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4.	Controls and Procedures	27

Part II – Other Information

Item 1.	Legal Proceedings	28

Item 1A.	Risk Factors	28

Item 6.	Exhibits	44

	Signatures	45

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HOKU SCIENTIFIC, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

	December 31, 2009			March 31, 2009
	(unaudited)
Assets
Cash and cash equivalents	$	3,228		$	17,383
Inventory		715			1,549
Accounts receivable		233			420
Costs of uncompleted contracts		628			108
Other current assets		518			226
Total current assets		5,322			19,686

Deferred cost of debt financing		13,673			-
Property, plant and equipment, net		279,270			204,525

Total assets	$	298,265		$	224,211

Liabilities and Equity
Accounts payable and accrued expenses	$	61,464		$	38,191
Deferred revenue		495			784
Deposits – Hoku Solar		-			158
Deposits – Hoku Materials		14,641			375
Other current liabilities		194			446
Total current liabilities		76,794			39,954

Long-term debt (Deposits – Hoku Materials)		108,359			133,625

Total liabilities		185,153			173,579

Commitments and Contingencies
Equity:
Preferred stock, $0.001 par value. Authorized 5,000,000 shares; no shares issued and outstanding as of December 31, 2009 and March 31, 2009
Common stock, $0.001 par value. Authorized 100,000,000 shares; issued and outstanding 54,878,692 and 21,092,079 shares as of December 31, 2009 and March 31, 2009, respectively		54			21
Warrant for 10,000,000 shares of common stock		12,884			-
Additional paid-in capital		115,153			65,780
Accumulated deficit		(18,569	)		(15,169	)

Total Hoku Scientific, Inc. shareholders’ equity		109,522			50,632
Noncontrolling interest		3,590			-
Total equity		113,112			50,632
Total liabilities and equity	$	298,265		$	224,211

See accompanying notes to consolidated financial statements.

HOKU SCIENTIFIC, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except share and per share data)

	Three Months Ended December 31,						Nine Months Ended December 31,
	2009			2008			2009			2008
Service and license revenue	$	259		$	499		$	1,831		$	4,322
Product revenue		—			268			—			523
Total revenue		259			767			1,831			4,845

Cost of service and license revenue(1)		65			374			1,489			3,186
Cost of product revenue		—			218			—			426
Total cost of revenue		65			592			1,489			3,612

Gross margin		194			175			342			1,233

Operating expenses:
Selling, general and administrative (1)		1,492			1,124			4,095			3,428
Total operating expenses		1,492			1,124			4,095			3,428

Loss from operations		(1,298	)		(949	)		(3,753	)		(2,195	)
Interest and other income		16			36			318			87

Net loss		(1,282	)		913			(3,435	)		(2,108	)
Net loss attributable to the noncontrolling interest		(17	)		(50	)		(35	)		(50	)

Net loss attributable to Hoku Scientific, Inc.	$	(1,265	)	$	(863	)	$	(3,400	)	$	(2,058	)

Basic net loss per share attributable to Hoku Scientific, Inc.	$	(0.06	)	$	(0.04	)	$	(0.16	)	$	(0.10	)

Diluted net loss per share attributable to Hoku Scientific, Inc.	$	(0.06	)	$	(0.04	)	$	(0.16	)	$	(0.10	)

Shares used in computing basic net loss per share		21,448,922			20,964,304			21,062,417			20,167,448

Shares used in computing diluted net loss per share		21,448,922			20,964,304			21,062,417			20,167,448

__________
(1) Includes stock-based compensation as follows:
Cost of service and license revenue	$	1		$	—		$	8		$	7
Selling, general and administrative		295			217			723			938

See accompanying notes to consolidated financial statements.

HOKU SCIENTIFIC, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Nine Months Ended December 31,
	2009			2008
Cash flows from operating activities:
Net loss attributable to Hoku Scientific, Inc.	$	(3,400	)	$	(2,058	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		210			57
Impairment of inventory and equipment		39			3
Gain on sale of property and equipment		-			(550	)
Stock-based compensation		631			948
Changes in operating assets and liabilities:
Accounts receivable		187			(50	)
Costs of uncompleted contracts		(520	)		(423	)
Inventory		795			(3,806	)
Equipment held for sale		-			26
Other current assets		(292	)		1,046
Accounts payable and accrued operating expenses		(723	)		(2,667	)
Deferred revenue		(289	)		(24	)
Other current liabilities		(252	)		(1,216	)
Deposits – Hoku Solar		(158	)		217

Net cash used in operating activities		(3,772	)		(8,497	)

Cash flows from investing activities:
Proceeds from maturities of short-term investments		45,182			77,755
Purchases of short-term investments		(45,182	)		(75,763	)
Decrease in restricted cash		-			2,575
Payment of accounts payable and accrued capital expenditures		(52,770	)		(97,858	)
Disposition of property and equipment		-			5,468

Net cash used in investing activities		(52,770	)		(87,823	)

Cash flows from financing activities:
Exercise of common stock options		22			75
Costs related to Tianwei investment		(225	)		-
Proceeds related to shelf registration stock sales		-			6,728
Costs related to shelf registration stock sales		-			(485	)
Contributions from noncontrolling interest		3,590			-
Deposits received – Hoku Materials		39,000			81,500

Net cash provided by financing activities		42,387			87,818

Net decrease in cash and cash equivalents		(14,155	)		(8,502	)
Cash and cash equivalents at beginning of period		17,383			27,768

Cash and cash equivalents at end of period	$	3,228		$	19,266

Supplemental disclosure of non-cash activities:
Acquisition of property and equipment	$	59,378		$	13,731
Issuance of warrant and costs related to Tianwei investment		14,784			-

See accompanying notes to consolidated financial statements.

HOKU SCIENTIFIC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Summary of Significant Accounting Policies and Practices

(a) Description of Business

Hoku Scientific, Inc., or the Company, is a materials science company focused on clean energy technologies. The Company was incorporated in Hawaii in March 2001, as Pacific Energy Group, Inc. In July 2001, the Company changed its name to Hoku Scientific, Inc. In December 2004, the Company was reincorporated in Delaware.

The Company has historically focused its efforts on the design and development of fuel cell technologies, including its Hoku membrane electrode assemblies, or MEAs, and Hoku Membranes. In May 2006, the Company announced its plans to form an integrated photovoltaic, or PV, module business, and its plans to manufacture polysilicon, a primary material used in the manufacture of PV modules. In fiscal 2007, the Company reorganized its business into three business units: Hoku Materials, Hoku Solar and Hoku Fuel Cells. In February and March 2007, the Company incorporated Hoku Materials, Inc. and Hoku Solar, Inc., respectively, as wholly-owned subsidiaries to operate its polysilicon and solar businesses, respectively.

(b) Basis of Presentation

The Company has incurred operating losses in recent years and as of December 31, 2009, has a working capital deficiency. The losses, in part, have occurred as the Company has directed its efforts to focus on the development of its polysilicon and PV installation businesses. The Company's current operating plan anticipates receiving cash during the present fiscal year through a combination of debt financing and polysilicon customer prepayments to enable the continued construction of the Company’s planned polysilicon production facility in Pocatello, Idaho, or the Project. There have been delays in securing adequate financing, and the Company has implemented cost and expense reduction measures and other programs. In July 2009, the Company began curtailing construction at the Project.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business and does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Refer to Note 12 for further discussion of management’s plans and efforts related to the Company’s ability to continue as a going concern.

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and accompanying notes required by GAAP for complete financial statements. In the opinion of management, the consolidated financial statements reflect normal recurring adjustments necessary for a fair presentation of the results for the interim periods.

These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2009. Operating results for the three and nine months ended December 31, 2009 are not necessarily indicative of the results that may be expected for the year ending March 31, 2010.

In preparing the accompanying unaudited financial statements, the Company’s management has evaluated subsequent events through February 5, 2010, which is the date that the financial statements were filed.

The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, after elimination of significant intercompany amounts and transactions, and Hoku Solar Power I LLC, a variable interest entity in which the Company is the primary beneficiary.

(d) Use of Estimates

The preparation of the Company’s financial statements in conformity with U.S. generally accepted accounting principles requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, accounts receivable, the carrying amounts of property, plant and equipment and inventory, income taxes and the valuation of deferred tax assets and stock options. These estimates are based on historical facts and various other assumptions that the Company believes are reasonable.

(e) Revenue Recognition

Revenue from polysilicon and PV system installations is recognized when there is evidence of an arrangement, delivery has occurred or services have been rendered, the arrangement fee is fixed or determinable, and collectability of the arrangement fee is reasonably assured. PV system installation contracts may have several different phases with corresponding progress billings; however, revenue is recognized when the installation is complete.

The Company has also provided testing and engineering services to customers pursuant to milestone-based contracts that are not multi-element arrangements. These contracts sometimes provided for periodic invoicing upon completion of contractual milestones. Customer acceptance is usually required prior to invoicing. The Company recognizes revenue for these arrangements under the completed contract method. Under the completed-contract method, the Company defers the contract fulfillment costs and any advance payments received from the customer and recognizes the costs and revenue in its statement of operations once the contract is complete and the final customer acceptance, if required, has been obtained.

Revenue from the sale of electricity generated from the Company’s PV systems is based on kilowatt usage and is recognized in accordance with its power purchase agreements, or PPAs, with the Hawaii State Department of Transportation.

The Company charges the appropriate Hawaii general excise tax to its customers. The taxes collected from sales are excluded from revenues and recorded as a payable.

(f) Cost of Uncompleted Contracts

Cost of uncompleted contracts represents services performed and/or materials used towards completing a customer contract. Based on the Company’s revenue recognition policy, these services and/or materials cannot be recognized as contract costs, and are deferred until the related revenue can be recognized. As of December 31 and March 31, 2009, cost of uncompleted contracts was $628,000 and $108,000, respectively, related to PV system installation contracts.

(g) Guarantees and Indemnifications

The Company has entered into PV system installation contracts which warrant the installation against defects in workmanship, generally for a period of one year from the date of installation. There were no accruals for or expenses related to the warranties for any period presented.

The Company, as permitted under Delaware law and in accordance with its Bylaws, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in that capacity. The term of the indemnification period is equal to the officer’s or director’s lifetime. The Company has also entered into additional indemnification agreements with its officers and directors in connection with its initial public offering. The maximum amount of potential future indemnification is unlimited; however, the Company has obtained director and officer insurance that limits its exposure and may enable it to recover a portion of any future amounts paid. The Company believes the fair value for these indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations as of December 31, 2009 and March 31, 2009.

In connection with the closing of the Tianwei investment transaction, the Company increased the size of its board of directors to consist of seven directors, four of whom have been designated by Tianwei, or the Tianwei Nominees. The Company has entered into indemnification agreements with each of the four Tianwei Nominees, similar to those agreements entered into at the time of the Company’s initial public offering.

The Company has entered into customer contracts that contain indemnification provisions. In these provisions, the Company typically agrees to indemnify the customer against certain types of third-party claims. The Company would accrue for known indemnification issues when a loss is probable and could be reasonably estimated. The Company also would accrue for estimated incurred but unidentified indemnification issues based on historical activity. There were no accruals for or expenses related to indemnification issues for any period presented.

(2) Agreement with Tianwei and Cost of Financing

In September 2009, the Company entered into a definitive agreement providing for a majority investment in the Company by Tianwei, and debt financing by Tianwei through China Construction Bank as agent, for the construction and development of the Project. In December 2009, the investment transaction was completed and the Company issued to Tianwei 33,379,287 newly-issued shares of its common stock, representing approximately 60% of the Company's fully-diluted outstanding shares. Tianwei is restricted from transferring directly or indirectly 23,365,501, or 70%, of the newly-issued shares to any third party until the first anniversary of the closing date of the agreement. The Company also granted to Tianwei a warrant to purchase an additional 10 million shares of the Company’s common stock. The terms of the warrant include: (i) a per share exercise price equal to $2.52; (ii) an exercise period of seven years; and (iii) provision for a cashless, net-issue exercise.

The existing polysilicon supply agreements with Tianwei were amended such that $50 million of an aggregate of $79 million in secured prepayments previously paid by Tianwei to the Company was converted into the 33,379,287 newly-issued shares of the Company’s common stock. The amended supply agreements will also provide for a reduced price at which Tianwei purchases polysilicon by approximately 11% in each year of the ten year agreement. Tianwei is also obligated to loan the Company $50 million through China Construction Bank, as agent, payable in two tranches. In January 2010, the Company received the first tranche of $20 million and expects to receive the second tranche of $30 million in February 2010. Pursuant to the loan agreement, the Company has pledged a security interest in all of its assets to Tianwei. Tianwei has also agreed to use its reasonable best efforts to assist the Company in obtaining additional financing that may be required by the Company to construct and operate the Project.

The $50 million in debt, plus $55 million in expected additional prepayments from its existing customers, will be used to pay current liabilities and complete construction of the Project to the point where the Company can commence initial shipments to customers. Until such time, the Company intends to delay seeking the additional financing of $71 million which is estimated to be the amount necessary to complete the construction of the Project. On the basis of these funding sources, the Company expects to complete its reactor demonstration in the fourth quarter of fiscal 2010 and begin polysilicon production in the first quarter of fiscal 2011. However, if there is a delay in receiving the second tranche of $30 million in debt from the Tianwei transaction, or the Company does not receive anticipated prepayments from its other polysilicon supply agreements, the Company may need to curtail Project construction.

The accounting of the warrant and debt was based on their relative fair values and calculated to be $12.9 million and $37.1 million, respectively, in proportion to the $50 million in loan proceeds. The fair value of the warrant was calculated using the Black-Scholes option pricing model and the fair value of the debt was based on the present value of cash flows, discounted at a 7% interest rate.

The Company has recorded approximately $789,000 of transactions costs and $12.9 million related fair value of the warrants as deferred costs of debt financing totaling $13.7 million as of December 31, 2009. Upon funding of the debt, the deferred costs of debt financing will be reclassified as a discount on the debt and amortized to interest expense over the two year term of the debt, using the effective interest method.

(3) Fair Value of Assets and Liabilities

FASB ASC 820-10-50, previously referenced as Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or SFAS 157, clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, FASB ASC 820-10-50 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1 –	Observable inputs such as quoted prices in active markets;

Level 2 –	Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3 –	Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumption.

As of December 31, 2009, the Company held the following assets that are required to be measured at fair value on a recurring basis (in thousands):

	Fair Value Measurements as of December 31, 2009
	Total		Level 1		Level 2		Level 3
Cash equivalents	$	2,747	$	2,747	$	—	$	—
Total assets measured at fair value	$	2,747	$	2,747	$	—	$	—

(4) Property, Plant and Equipment

Property, plant and equipment consisted of the following:

	December 31, 2009			March 31, 2009
	(in thousands)
Construction in progress- Idaho plant and equipment	$	273,831		$	199,338
Photovoltaic systems- Hoku Solar Power I, LLC		5,559			5,096
Production equipment		108			108
Office equipment and furniture		109			115
Automobile		98			98
		279,705			204,755

Less accumulated depreciation and amortization		(435	)		(230	)

Property, plant and equipment, net	$	279,270		$	204,525

In assessing the recoverability of its long-lived assets, the Company compared the carrying value to the undiscounted future cash flows the assets are expected to generate. During the nine months ended December 31, 2009, the Company had no write-down of its plant assets.

(5) Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses were comprised of the following (in thousands of dollars):

	December 31, 2009		March 31, 2009
	(in thousands)
Capital expenditures	$	59,378	$	37,282
Operating expenditures		2,086		909
Total accounts payable and accrued expenses	$	61,464	$	38,191

The capital expenditures pertain primarily to the Project plant and equipment additions that the Company is currently constructing in Pocatello, Idaho. Over the next twelve months, the Company may have insufficient cash to meet all of its obligations as they come due. To help address its obligations, in September 2009, the Company entered into a definitive agreement providing for a majority investment in the Company by Tianwei New Energy Holdings Co., Ltd., or Tianwei, and debt financing by Tianwei through China Construction Bank, as agent, for the construction and development of the Company’s Project. In December 2009, the investment transaction was completed and Tianwei is loaning the Company $50 million through China Construction Bank, as agent, payable in two tranches. In January 2010, the Company received the first tranche of $20 million and expects to receive the second tranche of $30 million in February 2010. Pursuant to the loan agreement, the Company has pledged a security interest in all of its assets to Tianwei. Tianwei has also agreed to use its reasonable best efforts to assist Hoku in obtaining additional financing that may be required by the Company to construct and operate the Project.

Furthermore, the Company has modified payment terms in purchase orders with more than sixty of its vendors to structure payment plans for amounts past due and to be invoiced in the future. In the event the Company is unable to meet its obligations under payment plans and other agreements, the Company may request that its vendors forebear from enforcing one or more of their rights under their respective agreements. There are no assurances that any of the Company’s vendors will agree to forebear or otherwise make any concessions under their respective agreements. If any of the Company’s vendors seek to enforce the Company’s obligations under these agreements that it is unable to perform, which could include asserting and/or foreclosing on materialmen’s and laborer’s liens on the Project, or taking other legal action, it could materially harm the Company’s business, financial condition and results of operations and the Company may be forced to delay, alter or abandon its planned business operations, which could have a material adverse effect on the Company’s ability to continue as a going concern and the recoverability of its long-lived assets.

(6) Long-term Debt (Deposits- Hoku Materials)

The Company has entered into various supply agreements with customers for the sale and delivery of polysilicon over specified periods of time. Under the supply agreements, customers are generally required to pay cash deposits to the Company as a prepayment for future product deliveries. Generally, these payments are for deliveries of polysilicon which are expected to occur subsequent to the initial year of the agreements. At such time as the Company begins to deliver polysilicon pursuant to each customer’s respective contract and the Company is assured that the polysilicon has been accepted under the terms of the respective contract, the related deposits will be reclassified to deferred revenue.

As of December 31 and March 31, 2009, the Company had $123 million and $134 million, respectively, related to prepayments received under its various polysilicon supply agreements. In December 2009, the investment transaction with Tianwei was completed and the existing polysilicon supply agreements were amended such that $50 million of an aggregate of $79 million in secured prepayments previously paid by Tianwei to the Company was converted into shares of the Company’s common stock. The prepaid amounts from each customer that are expected to be applied to future product deliveries after December 31, 2010 have been reflected in the consolidated balance sheets as Long-term debt (Deposits- Hoku Materials) in the consolidated balance sheets.

Under the terms of the various long-term polysilicon supply agreements with its customers, the Company is generally required to refund these prepayments, in each case, if the customer terminates the respective supply agreement under certain circumstances, which generally include, but are not limited to, bankruptcy, failure to commence shipments of polysilicon by specified dates, repeated failure to deliver a specified quality of product, and/or failure to meet other milestones. The Company has granted security interests to each of its customers in all of the Company’s tangible and intangible assets related to its polysilicon business to serve as collateral for the Company’s obligation to repay the remaining amount of each of its customer’s respective prepayments made as of the date of any termination that has not been applied to the purchase price of polysilicon previously delivered under the respective contract.

The following is a summary of prepayments received as of December 31, 2009:

	Prepayment
Customer	(in thousands)
Wuxi Suntech Power Co., Ltd.	$	2,000
Solarfun Power Hong Kong Ltd.		45,000
Tianwei New Energy (Chengdu) Wafer Co., Ltd.		29,000
Jianxi Jinko Solar Co., Ltd.		20,000
Shanghai Alex New Energy Co., Ltd.		20,000
Wealthy Rise International, Ltd. (Solargiga)		7,000
	$	123,000

In December 2009, when the investment transaction with Tianwei was completed and Tianwei became a majority shareholder of the Company, an amendment to the Company’s existing supply agreement with Wuxi Suntech Power Co., Ltd., or Suntech, for the sale and delivery of polysilicon to Suntech over a ten-year period became effective. As part of the amendment, the Company was to have completed a reactor demonstration by December 31, 2009.

As of December 31, 2009, the Company had not completed the reactor demonstration, and as a result Suntech could assert that the Company was in breach, and seek to terminate the agreement. If the agreement is terminated the Company’s business will be materially harmed. In addition, the Company will be required to return the $2 million in prepayments which it received from Suntech and the Company will need to secure an additional $32 million in funds in order to finance the construction of the Project. Suntech has not been given the Company any indication that it intends to terminate the contract and the Company believes Suntech will work with the Company to amend the contract.

Based on existing terms of the various long-term polysilicon supply agreements as of December 31, 2009, the $123 million of customer prepayments would be credited against future product deliveries as indicated in the following table. It should be noted that all of the customer deposits from Suntech is applied to the year ended December 31, 2010, as Suntech could terminate its contract, which would require the Company to return the $2 million to Suntech.

	Application of
	Customer Deposits
December 31 Ending	(in thousands)
2010	$	14,641
2011		22,346
2012		17,806
2013		15,256
2014		14,356
Thereafter		38,595
	$	123,000

(7) Total Equity

Changes in total equity for the nine months ended December 31, 2009 were as follows (in thousands):

	Hoku Scientific, Inc. Shareholders’ Equity
					Additional
	Common				Paid-In			Accumulated			Noncontrolling			Total			Comprehensive
	Stock		Warrant		Capital			Deficit			Interest			Equity			Loss
Balance as of March 31, 2009		21		-		65,780			(15,169	)		-			50,632			-
Contributions from Noncontrolling interest												3,625			3,625
Net loss									(3,400	)		(35	)		(3,435	)		(3,435	)
Exercise of common stock options						22									22
Stock-based compensation						325									325
Grants of stock awards						395									395
Issuance of shares- Tianwei		33				49,967									50,000
Costs related to Tianwei investment						(1,336	)								(1,336	)
Issuance of warrant to Tianwei				12,884											12,884
Balance as of December 31, 2009		54		12,884		115,153			(18,569	)		3,590			113,112			(3,435	)

(8) Income Taxes

Income taxes are accounted for under the asset and liability method which establishes financial accounting and reporting standards for income taxes. The Company recognizes federal and state current tax liabilities based on its estimate of taxes payable to or refundable by each tax jurisdiction in the current fiscal year.

Deferred tax assets and liabilities are established for the temporary differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities at the tax rates the Company expects to be in effect when these deferred tax assets or liabilities are anticipated to be recovered or settled. The Company’s ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. The Company also records a valuation allowance to reduce deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized. Based on the best available objective evidence, it is more likely than not that the Company’s net deferred tax assets will not be realized. Accordingly, the Company continues to provide a valuation allowance against its net deferred tax assets as of December 31, 2009.

(9) Net Loss per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding and not subject to repurchase during the period. Diluted net loss per share is computed by dividing net loss by the sum of the weighted average number of shares of common stock outstanding, and the dilutive potential common equivalent shares outstanding during the period. Dilutive potential common equivalent shares consist of dilutive shares of common stock subject to repurchase and dilutive shares of common stock issuable upon the exercise of outstanding options to purchase common stock, computed using the treasury stock method.

The following table sets forth the computation of basic and diluted net loss per share, including the reconciliation of the denominator used in the computation of basic and diluted net loss per share:

	Three Months Ended December 31,						Nine Months Ended December 31,
	2009			2008			2009			2008
	(in thousands, except share and per share data)
Numerator:
Net loss attributable to Hoku Scientific, Inc.	$	(1,265	)	$	(863	)	$	(3,400	)	$	(2,058	)
Denominator:
Weighted average shares of common stock (basic)		21,448,922			20,964,034			21,062,417			20,167,448
Effect of Dilutive Securities
Add:
Weighted average stock options		—			—			—			—

Weighted average shares of common stock (diluted)		21,448,922			20,964,034			21,062,417			20,167,448

Basic net loss per share attributable to Hoku Scientific, Inc.	$	(0.06	)	$	(0.04	)	$	(0.16	)	$	(0.10	)

Diluted net loss per share attributable to Hoku Scientific Inc.	$	(0.06	)	$	(0.04	)	$	(0.16	)	$	(0.10	)

The basic weighted average shares of common stock for the three and nine months ended December 31, 2009 and 2008 excludes unvested restricted shares of common stock.

During the three and nine months ended December 31, 2009, potential dilutive securities included options to purchase 140,952 and 120,080 shares of common stock, respectively, at prices ranging from $0.075 to $0.52 per share in both periods. During the three and nine months ended December 31, 2009, all potential common equivalent shares were anti-dilutive and were excluded in computing diluted net loss per share, due to the Company’s net loss for the periods. During the three and nine months ended December 31, 2008, potential dilutive securities included options to purchase 137,200 and 267,708 shares of common stock, respectively, at prices ranging from $0.075 to $2.60 and from $0.075 to $4.50 per share respectively. During the three and nine months ended December 31, 2008, all potential common equivalent shares were anti-dilutive and were excluded in computing diluted net loss per share, due to the Company’s net loss for the periods.

(10) Commitments, Contingencies and Purchase Obligations

Stone & Webster, Inc. In August 2007, the Company entered into an Engineering, Procurement and Construction Management Contract with Stone & Webster, Inc., or S&W, a subsidiary of The Shaw Group Inc., for engineering, procurement, and construction management services for the construction of the Project, which was amended in October 2007 by Change Order No. 1, again in April 2008 by Change Order No. 2, and again by Change Order No. 3 in February 2009, which are collectively the S&W Engineering Agreement. Under the S&W Engineering Agreement, S&W is to provide all engineering and procurement services necessary to complete the design and planning for construction of the Project. S&W is to be paid on a time and materials basis plus a fee for its services and incentives if certain schedule and cost targets are met. The target cost for the services to be provided under the S&W Engineering Agreement is $50 million; however the Company believes that it could incur up to $53 million in costs.

Through December 31, 2009, the Company had made payments to S&W of $45.7 million and had $1.8 million of payables outstanding as of December 31, 2009.

JH Kelly LLC. In August 2007, the Company entered into a Cost Plus Incentive Contract with JH Kelly LLC, or JH Kelly, for construction services for the construction of the Project, which was amended in October 2007, by Change Order No. 1, again in April 2008 by Change Order No. 2, again in March 2009 by Change Order No. 3, and again in September 2009 by Change Order No. 4, which are collectively the JH Kelly Construction Agreement. Under the JH Kelly Construction Agreement, JH Kelly agreed to provide the construction services as the Company’s general contractor for the construction of the Project with a production capacity of 4,000 metric tons per year. The target cost for the services to be provided under the JH Kelly Construction Agreement is $145 million, including up to $5.0 million of incentives that may be payable.

Through December 31, 2009, the Company had made payments to JH Kelly of $59.1 million and had $10.0 million of payables outstanding as of December 31, 2009.

Dynamic Engineering Inc. In October 2007, the Company entered into an agreement with Dynamic Engineering Inc., or Dynamic, for design and engineering services, and a related technology license, for the process to produce and purify trichlorosilane, or TCS. Under the agreement with Dynamic, or the Dynamic Agreement, Dynamic is obligated to design and engineer a TCS production facility that is capable of producing 20,000 metric tons of TCS for the Project. The Dynamic process is to be integrated by S&W into the overall Project, and will be constructed by JH Kelly. Under the Dynamic Agreement, Dynamic's engineering services are provided and invoiced on a time and materials basis, and the license fee will be calculated upon the successful completion of the TCS production facility, and demonstration of certain TCS purity and production efficiency capabilities. The maximum aggregate amount that the Company may pay Dynamic for the engineering services and the technology license is $12.5 million, which includes an incentive for Dynamic to complete the engineering services under budget. Dynamic is guaranteeing the quantity and purity of the TCS to be produced at the Project, and has agreed to indemnify the Company for any third-party claims of intellectual property infringement.

Through December 31, 2009, the Company had made payments to Dynamic of $5.6 million and had $2.8 million of payables outstanding as of December 31, 2009.

GEC Graeber Engineering Consultants GmbH and MSA Apparatus Construction for Chemical Equipment Ltd. The Company entered into a contract with GEC Graeber Engineering Consultants GmbH, or GEC, and MSA Apparatus Construction for Chemical Equipment Ltd., or MSA, for the purchase and sale of 16 hydrogen reduction reactors and hydrogenation reactors for the production of polysilicon, and related engineering and installation services. Under the contract, the Company will pay up to a total of 20.9 million Euros for the reactors. The reactors are designed and engineered to produce approximately 2,000 metric tons of polysilicon per year. The term of the contract extends until the end of the first month after the expiration date of the warranty period, but may be terminated earlier under certain circumstances.

In January 2009, the Company received the first shipment of six hydrogen reduction reactors, three hydrogenation reactors, and related equipment from GEC and MSA, at the Project, and all of these polysilicon reactors have been assembled and put into place on the Project’s production floor. The reactors are the first units to arrive in Pocatello out of a planned total order of 28. The next set of 10 polysilicon reactors and related equipment has been manufactured, and will be shipped to the Project after the Company’s payment of an additional 3.2 million Euros or $4.6 million (based on the Euro/U.S. dollar exchange rate, which was $1.4332/Euro as of December 31, 2009). The Company is in discussions with GEC to purchase additional 12 reactors necessary for its planned annual capacity of 4,000 metric tons of polysilicon. The cost of these additional reactors is not expected to be greater than 20.9 million Euros, or $30.0 million (based on the Euro/U.S. dollar exchange rate, which was $1.4332/Euro as of December 31, 2009).

Through December 31, 2009, the Company had paid GEC and MSA an aggregate amount of 15.2 million Euros or $22.3 million and had 2.4 million Euros or $3.5 million of payables outstanding as of December 31, 2009.

Idaho Power Company. The Company entered into an agreement with Idaho Power Company, or Idaho Power, to complete the construction of the electric substation to provide power for the Project, or the Idaho Power Agreement. The Company is obligated to pay Idaho Power an aggregate of $16.5 million for the completion of the substation and associated facilities. The Amended Idaho Power Agreement also provides that upon completion of construction, there will be a true-up of actual construction costs, so that either the Company will be refunded any monies it has paid to Idaho Power over and above the actual costs of construction, or the Company will pay Idaho Power any additional construction costs beyond the original amount. As of December 31, 2009, the Company incurred a $524,000 true-up of actual construction costs.

Through December 31, 2009, the Company had paid Idaho Power Company an aggregate amount of $17.5 million, which includes $917,000 paid to Idaho Power pursuant to a separate engineering services agreement, and had $524,000 of payables outstanding as of December 31, 2009. The Company does not anticipate any additional cost adjustments, which results in the aggregate cost of $18.0 million to complete the substation and associated transmission facilities, including the engineering services agreement.

The Company also entered into an Electric Service Agreement with Idaho Power, or the ESA, for the supply of electric power and energy to the Company for use in the Project, subject to the approval of the Idaho Public Utilities Commission, or the PUC. The term of the ESA is four and a half years, beginning in June 2009 and expiring in December 2013. During the term of the ESA, Idaho Power agrees to make up to 82,000 kilowatts of power available to the Company at certain fixed rates, which are subject to change only by action of the PUC. After the initial term of the ESA expires, either the Company or Idaho Power may terminate the ESA without prejudice. If neither party chooses to terminate the ESA, then Idaho Power will continue to provide electric service to us at the same fixed rates.

AEG Power Solutions USA Inc. (formerly known as Saft Power Systems USA, Inc.). In March 2008, the Company entered into an agreement with AEG Power Solutions USA Inc., or AEG, formerly known as Saft Power Systems USA, Inc., which was subsequently amended in May 2009, or the AEG Agreement, for the purchase and sale of thyroboxes, earth fault detection systems, and related technical documentation and services, or the Deliverables. Under the AEG Agreement, AEG was obligated to manufacture and deliver the Deliverables, which are used as the power supplies for the polysilicon deposition reactors to be used in the Project. The total fees payable to AEG for all Deliverables under the AEG Agreement is approximately $13 million.

Through December 31, 2009, the Company had made payments to AEG of $6.2 million and had $2.2 million of payables outstanding as of December 31, 2009.

Polymet Alloys, Inc. In November 2008, the Company entered into an agreement with Polymet Alloys, Inc., or Polymet, for the supply of silicon metal to the Company for use in the Project. In May 2009, the Company entered into an amended and restated supply agreement with Polymet, or the Amended Polymet Agreement. The term of the Amended Polymet Agreement is three years, commencing in 2010. Each year during the term of the Amended Polymet Agreement, Polymet has agreed to sell to the Company, and the Company has agreed to purchase from Polymet, no less than 65% of the Company’s annual silicon metal requirement. Pricing is to be negotiated for each year of the Amended Polymet Agreement; however, if the parties are unable to agree on pricing for any year, or the Company has agreed to purchase less than the amount specified in the Amended Polymet Agreement, Polymet has a right of first refusal to match the terms offered by any third-party supplier from whom the Company may seek to purchase silicon metal. Either party may also terminate the Amended Polymet Agreement under certain circumstances, including a material breach by the other party that has not been cured within a specified cure period, or the other party’s voluntary or involuntary liquidation. As of December 31, 2009, the Company had not made any payments to Polymet.

PVA Tepla Danmark. In April 2008, the Company entered into an agreement with PVA Tepla Danmark, or PVA, for the purchase and sale of slim rod pullers and float zone crystal pullers. Under the agreement, PVA is obligated to manufacture and deliver the slim rod pullers and float zone crystal pullers for the Project. Slim rod pullers are used to make thin rods of polysilicon that are then transferred into polysilicon deposition reactors to be grown through a chemical vapor deposition process into polysilicon rods for commercial sale to the Company’s end customers. The float zone crystal pullers convert the slim rods into single crystal silicon for use in testing the quality and purity of the polysilicon. The total amount payable to PVA is approximately $6 million, which is payable in four installments, the first of which was made in August 2008. Either party may terminate the agreement if the other party is in material breach of the agreement and has not cured such breach within 180 days after receipt of written notice of the breach, or if the other party is bankrupt, insolvent, or unable to pay its debts.

Through December 31, 2009, the Company had paid PVA an aggregate amount of $1.9 million and had $3.9 million of payables outstanding as of December 31, 2009.

BHS Acquisitions, LLC. In November 2008, the Company entered into an agreement with BHS Acquisitions, LLC, or BHS, for the supply of hydrochloric acid, or HCl, to the Company for use in the Project. The term of the agreement is eight years beginning on the date on which the first shipment of product is delivered. Each year during the term of the agreement, BHS has agreed to sell to the Company, and the Company has agreed to purchase from BHS, specified volumes of HCl that meet certain purity specifications. The volume is fixed during each of the eight years. Pricing is fixed for the first twelve months of shipments, which are scheduled to begin within four months after the Company provides written notice to BHS, and the aggregate net value of the HCl to be purchased by the Company under the agreement in the first twelve months is approximately $2.4 million. Pricing is to be renegotiated for each of the remaining years of the agreement; however, if the parties are unable to agree on pricing for any future year, then either party may terminate the agreement without liability to the other party. Either party may also terminate the agreement under certain circumstances, including a material breach by the other party that has not been cured within a specified cure period, or the other party’s voluntary or involuntary liquidation. As of December 31, 2009, the Company had not provided notice to BHS to commence shipments, and had not made any payments to BHS.

As of January 31, 2010, ten of the Company’s vendors had recorded mechanics lien claims on the Company’s real property and improvements in Pocatello, Idaho. The lien claims relate to an aggregate amount of approximately $20.9 million that vendors claim are owed for labor, materials, equipment and/or services used in the construction of the Project.

(11) Operating Segments

Operating segments are components of an enterprise for which discrete financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision-making group is made up of the Chief Executive Officer, Chief Financial Officer, Chief Technology Officer and Chief Operating Officer. The chief operating decision-making group manages the profitability, cash flows, and assets of each segment’s various product or service lines and businesses. The Company has three operating business units in two industries: Fuel Cell and Solar. The Fuel Cell industry is comprised of the fuel cell segment. The Solar industry is comprised of the PV module installation business unit (Hoku Solar) and polysilicon production business unit (Hoku Materials). A description of the products for each business unit is described in Note 1, “Summary of Significant Accounting Policies and Practices” above.

	Three Months Ended December 31,				Nine Months Ended December 31,
	2009		2008		2009		2008
Revenue (in thousands):	(amounts in thousands)

Hoku Fuel Cells	$	—	$	—	$	—	$	—
Hoku Solar		259		767		1,831		4,845
Hoku Materials		—		—		—		—

Total consolidated revenue	$	259	$	767	$	1,831	$	4,845

	Three Months Ended December 31,						Nine Months Ended December 31,
	2009			2008			2009			2008
Income (loss) from operations (in thousands):
Hoku Fuel Cells	$	—		$	—		$	—		$	(19	)
Hoku Solar		(473	)		(347	)		(1,383	)		(252	)
Hoku Materials		(825	)		(602	)		(2,370	)		(1,924	)

Total consolidated loss from operations	$	(1,298	)	$	(949	)	$	(3,753	)	$	(2,195	)

The reconciliation of segment operating results to the Company’s consolidated totals was as follows (in thousands):

	Three Months Ended December 31,						Nine Months Ended December 31,
	2009			2008			2009			2008
Consolidated loss from operations	$	(1,298	)	$	(949	)	$	(3,753	)	$	(2,195	)
Interest and other income (loss)		16			36			318			87
Net loss attributable to noncontrolling interest		(17	)		(50	)		(35	)		(50	)

Net loss attributable to Hoku Scientific, Inc.	$	(1,265	)	$	(863	)	$	(3,400	)	$	(2,058	)

The Company allocates its assets to its business units based on the primary business units benefiting from the assets.

	December 31, 2009			March 31, 2009
	(amounts in thousands)
Identifiable assets:

Hoku Solar		$	6,802		$	9,738
Hoku Materials			274,620			199,473
Unallocated assets			16,843			15,000

Total assets		$	298,265		$	224,211

(12) Going Concern

The Company has incurred significant net losses since inception and has relied on its ability to fund its operations principally through both registered and unregistered offerings of its securities and prepayments on its long-term polysilicon contracts. Even if the Company is successful in securing additional long-term polysilicon contracts that could provide additional prepayments, and its existing customers fulfill their obligations to make additional prepayments when due (of which there can be no assurances), the Company will still need to seek additional financing to complete construction of the Project. As of December 31, 2009, the Company had cash and cash equivalents on hand of $3.2 million and current liabilities of $76.8 million. Consequently, there is substantial doubt that the Company will have sufficient cash to meet all of its obligations as they come due. The Company does not expect to generate significant revenue until it successfully commences the manufacture and shipment of polysilicon and begins meeting the obligations under the Company’s supply contracts. If the Company is unable to secure additional long-term supply contracts and prepayments, assuming the cost to construct and equip the Project does not exceed $390 million and that all of the Company’s existing customers make their prepayments when due, the amount the Company will still need to raise is as much as $71 million. If the Company is unable to secure additional long-term supply contracts and prepayments, if for any reason (e.g. contract amendment, termination, breach, etc.) one or more of the Company’s polysilicon supply customers do not pay the full amount of the prepayments to which they are presently committed and/or if the actual cost to complete the Project is more than $390 million, the amount the Company will need to raise could exceed $71 million.

The Company’s ability to continue as a going concern depends on its ability to raise debt or equity financing, increase revenues and reduce expenses. The Company has already modified payment terms in purchase orders with more than sixty of its vendors to structure payment plans for amounts past due and to be invoiced in the future. The Company’s management continues to evaluate a variety of alternatives to raise capital and manage the Company’s liquidity. These alternatives include, without limitation:

debt financing, including financing that is guaranteed by a private third party;

one or more equity offerings, including an offering of stock the Company previously registered with the Securities and Exchange Commission on Form S-3;

prepayments for product to be delivered under new long-term polysilicon supply contracts;

government funding from grants and/or loan guarantees; and/or

further extending the Project construction schedule and payment plans with vendors

requesting support from Tianwei in obtaining additional financing as agreed to in the investment transaction which was completed in December 2009

There are no assurances that the Company will be successful in executing any of the foregoing options. If the Company is unable to raise capital and manage its liquidity, there is substantial doubt that the Company will be able to continue as a going concern. The inability to continue as a going concern could result in an orderly wind-down of the Company or other potential forms of restructuring.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include all statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q. 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. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail in Part II, Item IA. “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date hereof. We hereby qualify all of our forward-looking statements by these cautionary statements. 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 those anticipated in these forward-looking statements, even if new information becomes available in the future.

The following discussion should be read in conjunction with our financial statements and the related notes contained elsewhere in this Quarterly Report on Form 10-Q and with our financial statements and notes thereto for the fiscal year ended March 31, 2009, contained in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on June 15, 2009.

Overview

We are a materials science company focused on clean energy technologies. We were incorporated in Hawaii in March 2001, as Pacific Energy Group, Inc. In July 2001, we changed our name to Hoku Scientific, Inc. In December 2004, we were reincorporated in Delaware.

Recent Developments Related to Liquidity and Capital Resources

We have incurred significant net losses since inception and we have relied on our ability to fund our operations principally through both registered and unregistered offerings of our securities and prepayments on long-term polysilicon contracts. Including the $50 million loan from the Tianwei transaction, even if we are successful in securing additional long-term polysilicon contracts that could provide additional prepayments, and our existing customers fulfill their obligations to make additional prepayments when due (of which there can be no assurances), we will still need to seek additional financing to complete our planned polysilicon production facility currently under construction in Pocatello, Idaho, or the Project. As of December 31, 2009, we had cash and cash equivalents on hand of $3.2 million and current liabilities of $76.8 million.

To help address our cash needs to meet our obligations, we have modified payment terms in purchase orders with more than sixty of our vendors to structure payment plans for amounts past due and to be invoiced in the future. Furthermore, in September 2009, we entered into a definitive agreement providing for a majority investment in us by Tianwei New Energy Holdings Co., Ltd., or Tianwei, and debt financing by Tianwei through China Construction Bank, as agent, for the construction and development of the Project. In December 2009, the investment was completed and we issued to Tianwei 33,379,287 newly-issued shares of our common stock, representing approximately 60% of our fully-diluted outstanding shares. Tianwei is restricted from transferring directly or indirectly 23,365,501, or 70%, of the newly-issued shares to any third party until the first anniversary of the closing date of the agreement. We also granted to Tianwei a warrant to purchase an additional 10 million shares of the Company’s common stock. The terms of the warrant include: (i) a per share exercise price equal to $2.52; (ii) an exercise period of seven years; and (iii) provision for a cashless, net-issue exercise.

The existing polysilicon supply agreements with Tianwei were amended such that $50 million of an aggregate of $79 million in secured prepayments previously paid by Tianwei to us was converted into the 33,379,287 newly-issued shares of our common stock. The amended supply agreements also provide for a reduced price at which Tianwei purchases polysilicon by approximately 11% in each year of the ten year agreement. Tianwei is also obligated to loan us $50 million through China Construction Bank, as agent, payable in two tranches. In January 2010, we received the first tranche of $20 million and expect to receive the second tranche of $30 million in February 2010. Pursuant to the loan agreement, we have pledged a security interest in all of our assets to Tianwei. Tianwei has also agreed to use its reasonable best efforts to assist us in obtaining additional financing that may be required by us to construct and operate the Project.

The $50 million in debt, plus $55 million in additional prepayments from our existing customers, will be used to pay current liabilities and complete construction of the Project to the point where we can commence initial shipments to customers. Until such time, we intend to delay seeking the additional financing of $71 million which is estimated to be the amount necessary to complete the construction of the Project. On the basis of these funding sources, we expect to complete our reactor demonstration in the fourth quarter of fiscal 2010 and begin polysilicon production in the first quarter of fiscal 2011. However, if there is a delay in receiving the second tranche of $30 million in debt from the Tianwei transaction, or we do not receive anticipated prepayments from our other polysilicon supply agreements, we may need to curtail Project construction.

We do not expect to generate significant revenue until we successfully commence the manufacture and shipment of polysilicon and begin meeting the obligations under our supply contracts. In addition, we will still need to seek additional financing to complete the Project. If we are unable to secure additional long-term supply contracts and prepayments, assuming the cost to construct and equip the Project does not exceed $390 million, we are able to amend our contract with Wuxi Suntech Power Co., Ltd. under similar terms, and if all of our other customers make their prepayments when due, the amount we will need to raise could be as much as $71 million. If we are unable to secure additional long-term supply contracts and prepayments, if for any reason (e.g. contract amendment, termination, breach, etc.) one or more of our polysilicon supply customers does not pay the full amount of the prepayments to which they are presently committed and/or if the actual cost to complete the Project is more than $390 million, the amount we will need to raise could exceed $71 million. Furthermore, if there is a delay in receiving the second tranche of $30 million in debt from the Tianwei transaction, or other unfavorable factors occur, it could raise substantial doubt about our ability to continue as a going concern. The inability to continue as a going concern could result in an orderly wind-down of us or other potential forms of restructuring.

Hoku Materials

Hoku Materials was incorporated to manufacture polysilicon, a key material used in photovoltaic modules. In May 2007, we commenced construction of our planned polysilicon manufacturing facility in Pocatello, Idaho, which would be capable of producing 4,000 metric tons of polysilicon per year, or the Project. The estimated construction cost for our Project is $390 million. This estimate is based on our discussion 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 cause the actual cost to significantly exceed our estimate. Any significant increase in the cost to complete the Project could have a material adverse effect on our business, financial condition and results of operations.

During the three and nine months ended December 31, 2009, Hoku Materials incurred an operating loss of $825,000 and $2.4 million respectively, in expenses, which mainly consisted of payroll, including stock compensation, professional fees and travel expenses. In addition, as of December 31, 2009, Hoku Materials has capitalized $273.8 million related to construction costs for the Project and had received $123 million in customer deposits as prepayments on long-term polysilicon supply agreements, which excludes $50 million in equity contributions through our investment arrangement with Tianwei.

Construction/Financing Update

In December 2009, the investment transaction with Tianwei was completed and we issued to Tianwei 33,379,287 newly-issued shares of our common stock, representing approximately 60% of our fully-diluted outstanding shares. Tianwei is restricted from transferring directly or indirectly 23,365,501, or 70%, of the newly-issued shares to any third party until the first anniversary of the closing date of the agreement. We also granted to Tianwei a warrant to purchase an additional 10 million shares of the Company’s common stock. The terms of the warrant include: (i) a per share exercise price equal to $2.52; (ii) an exercise period of seven years; and (iii) provision for a cashless, net-issue exercise.

The existing polysilicon supply agreements with Tianwei were amended such that $50 million of an aggregate of $79 million in secured prepayments previously paid by Tianwei to us was converted into the 33,379,287 newly-issued shares of our common stock. The amended supply agreements also provide for a reduced price at which Tianwei purchases polysilicon by approximately 11% in each year of the ten year agreement. Tianwei is also obligated to loan us $50 million through China Construction Bank, as agent, payable in two tranches. In January 2010, the Company received the first tranche of $20 million and expects to receive the second tranche of $30 million in February 2010. Pursuant to the loan agreement, we have pledged a security interest in all of our assets to Tianwei. Tianwei has also agreed to use its reasonable best efforts to assist us in obtaining additional financing that may be required by us to construct and operate our polysilicon manufacturing facility.

The $50 million in debt, plus $55 million in additional prepayments from our existing customers, will be used to pay current liabilities and complete construction of the Project to the point where we can commence initial shipments to customers. On the basis of these funding sources, we expect to complete our reactor demonstration in the fourth quarter of fiscal 2010 and begin polysilicon production in the first quarter of fiscal 2011. However, if there is a delay in receiving the second tranche of $30 million in debt from the Tianwei transaction, or other unfavorable factors occur, we may need to curtail Project construction.

Polysilicon Supply Agreement Updates

Jinko Solar Co., Ltd.

In February 2009, we entered into a fixed price, fixed volume supply agreement with Jinko Solar Co., Ltd., formerly known as Jiangxi Jinko Solar Co., Ltd., or Jinko, for the sale and delivery of polysilicon to Jinko over a ten-year period, or the Jinko Agreement. Pursuant to the Jinko Agreement, Jinko has paid us a cash deposit of $20 million as prepayment for future product deliveries. Over the ten-year term of the Jinko Agreement, the total volume of polysilicon to be sold by us to Jinko is approximately $119 million, subject to product deliveries and other conditions. In November 2009, we entered into Amendment No. 1 to Amended & Restated Supply Agreement with Jinko, or the Amendment. Pursuant to the Amendment, we agreed with Jinko to eliminate the first year of shipments under the Jinko Agreement, such that our first delivery of polysilicon products to Jinko is now due in December 2010, and the term of the Jinko Agreement has been shortened to nine years, resulting in the total volume of polysilicon to be sold by us to Jinko being reduced to approximately $106 million, subject to product deliveries and other conditions. Each party, however, may terminate the Jinko Agreement at an earlier date under certain circumstances, including, but not limited to, the bankruptcy, assignment for the benefit of creditors, liquidation or a material breach of the Jinko Agreement by the other party. Our failure to commence shipments of polysilicon by December 31, 2010 constitutes a material breach by us under the terms of the Jinko Agreement, as amended, among other circumstances.

Solarfun Power Hong Kong Limited

In May 2008, we entered into a fixed price, fixed volume supply agreement with Solarfun Power Hong Kong Limited, or Solarfun, a subsidiary of Solarfun Power Holdings Co., Ltd., for the sale and delivery of polysilicon to Solarfun over a ten-year period, or the Solarfun Agreement. In October 2008 and March 2009, we entered into an amendment to the Solarfun Agreement, or Amendment No.1, and in March 2009, we entered into a second amendment to the Solarfun Agreement, or Amendment No. 2. Pursuant to the Solarfun Agreement, Amendment No. 1, and Amendment No. 2, Solarfun has paid us cash deposits of $37 million as a prepayment for future polysilicon product deliveries, and is obligated to pay us an additional $18 million in prepayments in increments of $8 million that was to have been paid in July 2009, $1 million that was to have been paid in each of August and September 2009, $3 million that was to have been paid in October 2009, and $5 million that was to be paid in January 2010. Solarfun did not pay the $13 million that was due in July through October 2009, and Hoku had the right to terminate the Supply Agreement, and retain all prepayments received.

In November 2009, we entered into a third amendment to the Solarfun Agreement, or Amendment No. 3, which became effective in December 2009, when Solarfun paid us $8 million of the $13 million prepayment balance that was past due. Under Amendment No. 3, we agreed that Solarfun could pay us the $13 million that was due in July and October 2009, in increments of $8 million, which was paid in December 2009, $4 million to be paid in March 2010, and $1 million to be paid when we commence the shipment of polysilicon to Solarfun. The balance of $5 million that was payable in January 2010, is to be paid in equal monthly increments of $1 million during each of the five subsequent months after the month of the first shipment. Solarfun retains the right to terminate the Supply Agreement if Hoku has not commenced shipments by June 30, 2010, and Hoku retains the right to terminate the Supply Agreement, and retain all prepayments received, if Solarfun fails to pay any of its future prepayments when due.

Tianwei New Energy (Chengdu) Wafer Co., Ltd.

In connection with our Tianwei investment transaction which was completed in December 2009, the existing polysilicon supply agreements were amended such that $50 million of an aggregate of $79 million in secured prepayments previously paid by Tianwei to us was converted into the 33,379,287 newly-issued shares of our common stock. We also amended our agreements and reduced the price at which Tianwei purchases polysilicon by approximately 11% per year. The amount of polysilicon to be delivered remains unchanged and Tianwei is still required to pay us an additional $2 million in prepayments; however, the total revenue for the polysilicon to be sold by us to Tianwei has been modified such that up to approximately $418 million may be payable to us during the ten-year term (exclusive of amounts Tianwei may purchase pursuant to its right of first refusal), subject to acceptance of product deliveries and other conditions.

Shanghai Alex New Energy Co., Ltd.

In February 2009, we entered into a fixed price, fixed volume supply agreement with Shanghai Alex New Energy Co., Ltd., or Alex, for the sale and delivery of polysilicon to Alex over a ten-year period, or the Alex Agreement. Pursuant to the Alex Agreement, Alex has paid us a cash deposit of $20 million as prepayment for future product deliveries. Over the ten-year term of the Alex Agreement, the total volume of polysilicon to be sold by us to Alex is approximately $119 million, subject to product deliveries and other conditions. In December 2009, we entered into Amendment No. 1 to Supply Agreement with Alex, or the Amendment. Pursuant to the Amendment, we agreed with Alex to shift the date of first delivery of polysilicon, such that our first delivery of polysilicon products to Alex is now due in September 2010. Each party, however, may terminate the Alex Agreement at an earlier date under certain circumstances, including, but not limited to, the bankruptcy, assignment for the benefit of creditors, liquidation or a material breach of the Alex Agreement by the other party. Our failure to commence shipments of polysilicon by December 31, 2010 constitutes a material breach by us under the terms of the Alex Agreement, among other circumstances.

Wuxi Suntech Power Co., Ltd.

In June 2007, we entered into a supply agreement with Wuxi Suntech Power Co., Ltd., or Suntech, for the sale and delivery of polysilicon to Suntech over a ten-year period beginning in July 2009, or the Suntech Supply Agreement. In May 2008, we entered into a First Amended and Restated Suntech Supply Agreement, or the Amended Suntech Supply Agreement. In July 2009, we amended the existing agreements between the two parties, which became effective in December 2009 when the investment transaction with Tianwei was completed and Tianwei became our majority shareholder. Under the amendment Suntech agreed to waive the following rights:

Its right to enforce our obligation to complete the Test Demonstration (as defined in the Suntech Supply Agreement) by September 30, 2009, or the Demo Final Date. Suntech’s waiver expired on December 31, 2009, and Suntech may assert that we are in breach of our obligation to complete the Test Demonstration.

Its right to enforce our obligation to complete the TCS Demonstration (as defined in the Suntech Supply Agreement) by December 31, 2009, or the TCS Final Date. Suntech’s waiver will expire on December 31, 2010, with the result that if we have not completed the TCS Demonstration by that date, we will be in breach of our obligation to complete the TCS Demonstration.

Its right to enforce our obligation to complete the Shipment Milestone (as defined in the Suntech Supply Agreement) by December 31, 2009, or the Shipment Final Date. Suntech’s waiver will expire on March 31, 2010, with the result that if we have not completed the Shipment Milestone by that date, we will be in breach of our obligation to complete the Shipment Milestone.

In exchange for the Suntech waivers described above, we agreed to waive our right to payment of the TCS Demonstration Installment and, as a result, Suntech is no longer required to make $15 million in additional prepayments. In addition, we authorized Suntech to replace its $45 million Stand-by Letter of Credit with a $30 million stand-by letter of credit issued by a bank in China, which may be collateralized with non-cash assets.

Wealthy Rise International, Ltd.

We have granted to Wealthy Rise International, Ltd., or Solargiga, an extension of time, or the Extension, to make an aggregate of $13.2 million in prepayments that were payable in installments between June and December 2009. Pursuant to the Extension, the date on which the $13.2 million is due has been extended to the earlier of February 26, 2010, or the date on which we and Solargiga enter into a definitive amendment to the Agreement pursuant to which the schedule and conditions for Solargiga’s prepayments could be adjusted.

Hoku Solar

We incorporated Hoku Solar to design, engineer and install PV systems and related services.

During the three and nine months ended December 31, 2009, Hoku Solar incurred an operating loss of $473,000 and $1.4 million respectively, in expenses, which mainly consisted of payroll, including stock compensation, and professional fees.

Hoku Fuel Cells

Under the name Hoku Fuel Cells, we operate our fuel cell business, which has designed, developed and manufactured membranes and membrane electrode assemblies, or MEAs, for proton exchange membrane, or PEM, fuel cells. Hoku MEAs are designed for the residential primary power, commercial back-up, and automotive hydrogen fuel cell markets. To date, none of our customers have commercially deployed products incorporating Hoku MEAs or Hoku Membranes, and we have not sold any products commercially. We do not have any current material fuel cell contracts.

We have selectively pursued patent applications in order to protect our technology, inventions and improvements related to our fuel cell products; however, we do not currently plan on actively pursuing any new contracts or committing material resources to further develop our fuel cell products.

During the three and nine months ended December 31, 2009, Hoku Fuel Cells had insignificant activity primarily associated with patent applications in order to protect our technology, inventions and improvements related to our fuel cell products.

Financial Operations Review

During the three and nine months ended December 31, 2009, we derived all of our revenue through PV system installation and ancillary services related to Hoku Solar. We expect that all of our revenue will be derived through PV system installations and the sale of electricity until the first quarter of fiscal 2011, when Hoku Materials is expected to generate revenue through the sale of polysilicon.

During the three and nine months ended December 31, 2009, our revenue was $259,000 and $1.8 million, respectively, comprised of commercial PV system installations and electricity sales.

Consolidated Results of Operations

The following analysis of the unaudited consolidated financial condition and results of operations of Hoku Scientific, Inc. and its subsidiaries should be read in conjunction with the consolidated financial statements and the related notes thereto in this Quarterly Report on Form 10-Q.

Comparison of Three Months Ended December 31, 2009 and 2008

Revenue. Revenue was $259,000 for the three months ended December 31, 2009, compared to $767,000 for the same period in fiscal 2009. Revenue in both periods was primarily comprised of PV system installations and related services.

Cost of Revenue. Cost of revenue was $65,000 for the three months ended December 31, 2009, compared to $592,000 for the same period in fiscal 2009. Cost of revenue primarily consisted of employee compensation and supplies and materials.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $1.5 million for the three months ended December 31, 2009, compared to $1.1 million for the same period in fiscal 2009. The increase of $368,000 was primarily due to expenditures toward the reactor demonstration, which is expected to be completed in the fourth quarter of fiscal 2010, of $101,000, retention payments for officers and other key employees of $65,000, and contractor costs, primarily for cancellation of the Hawaiian Electric project of $69,000. In addition, there were increases in depreciation, primarily related to the PV systems installed for the Hawaii State Department of Transportation of $66,000, lower application of other direct and indirect charges of $66,000, inventory impairment of solar modules of $39,000 and rent for corporate and warehouse facilities of $38,000. These increases were partially offset by reductions in professional fees of $70,000.

Interest and Other Income. Interest and other income was $16,000 for the three months ended December 31, 2009 compared to $36,000 for the same period in fiscal 2009. Interest and other income for the three months ended December 31, 2009 was primarily comprised of $13,000 in reversal of prior accruals for general excise tax reserves due to statute limitations and interest income of $2,000. Interest and other income for the three months ended December 31, 2008 was primarily comprised of losses related to our foreign currency (Euro) forward contracts of $594,000, offset by a gain of $550,000 on the sale of our fee simple interest in our real property and improvements of our corporate headquarters, sale of fuel cell equipment of $24,000 and interest income of $50,000.

Comparison of Nine Months Ended December 31, 2009 and 2008

Revenue. Revenue was $1.8 million for the nine months ended December 31, 2009, compared to $4.8 million for the same period in fiscal 2009. Revenue for both periods was primarily comprised of PV system installations and related services.

Cost of Revenue. Cost of revenue was $1.5 million for the nine months ended December 31, 2009, compared to $3.6 million for the same period in fiscal 2009. Cost of revenue primarily consisted of employee compensation and supplies and materials.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $4.1 million for the nine months ended December 31, 2009, compared to $3.4 million for the same period in fiscal 2009. The increase of $667,000 was primarily due to higher payroll expenses of $315,000, compensation to Board Directors of $210,000, retention payments for officers and other key employees of $195,000 and rent for corporate and warehouse facilities of $191,000. In addition, there were increases in depreciation, primarily related to the PV systems installed for the Hawaii State Department of Transportation of $153,000, expenditures toward the reactor demonstration, which is expected to be completed in the fourth quarter of fiscal 2010, of $101,000 and marketing expenses of $83,000. Furthermore, there was a lower application of other direct and indirect charges of $88,000. These increases were partially offset by reductions in stock-based compensation of $313,000, professional fees of $240,000 and travel expenses of $77,000.

Interest and Other Income. Interest and other income was $318,000 for the nine months ended December 31, 2009 compared to $87,000 for the same period in fiscal 2009. Interest and other income for the nine months ended December 31, 2009 was primarily comprised of the reversal of $234,000 in accruals for general excise tax reserves due to statute of limitations, sale of fuel cell equipment of $40,000 and interest income of $22,000. Interest and other income for the nine months ended December 31, 2008 was primarily comprised of gain of our fee simple interest in our real property and improvements of our corporate headquarters of $550,000, interest income of $295,000 and sale of fuel cell equipment of $96,000. The income was partially offset by losses related to our foreign currency (Euro) forward contracts of $862,000.

Liquidity and Capital Resources

We have incurred significant net losses since inception and we have relied on our ability to fund our operations principally through both registered and unregistered offerings of our securities and prepayments on long-term polysilicon contracts. Even if we are successful in securing additional long-term polysilicon contracts that could provide additional prepayments, and our existing customers fulfill their obligations to make additional prepayments when due (of which there can be no assurances), we will still need to seek additional financing to complete the Project. As of December 31, 2009, we had cash and cash equivalents on hand of $3.2 million and current liabilities of $76.8 million.

To help address our cash needs to meet our obligations, we have modified payment terms in purchase orders with more than sixty of our vendors to structure payment plans for amounts past due and to be invoiced in the future. In December 2009, the investment transaction was completed and we issued to Tianwei 33,379,287 newly-issued shares of its common stock, representing approximately 60% of our fully-diluted outstanding shares. Tianwei is restricted from transferring directly or indirectly 23,365,501, or 70%, of the newly-issued shares to any third party until the first anniversary of the closing date of the agreement. We also granted to Tianwei a warrant to purchase an additional 10 million shares of our common stock. The terms of the warrant include: (i) a per share exercise price equal to $2.52; (ii) an exercise period of seven years; and (iii) provision for a cashless, net-issue exercise.

The $50 million in debt, plus $55 million in additional prepayments from our existing customers, will be used to pay current liabilities and complete construction of the Project to the point where we can commence initial shipments to customers. Until such time, we intend to delay seeking the additional financing of $71 million which is necessary to complete the construction of the Project. On the basis of these funding sources, we expect to complete our reactor demonstration in the fourth quarter of fiscal 2010 and begin polysilicon production in the first quarter of fiscal 2011. However, if there is a delay in receiving the second tranche of $30 million in debt from the Tianwei transaction, or we do not receive anticipated prepayments from our other polysilicon supply agreements, we may need to curtail Project construction.

The total actual cost of construction and equipment for the Project is estimated to be $390 million. This estimate is based on our discussion 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 cause the actual cost to significantly exceed our estimate. Our six long-term supply customers have collectively committed to contribute $178.4 million towards these costs in the form of polysilicon supply prepayments, subject to the achievement of various milestones and repayment obligations under certain circumstances and we have received an additional $50 million from Tianwei which was converted into the 33,379,287 newly-issued shares of our common stock. As of December 31, 2009, we had collected $123.0 million of combined prepayments that were committed to us from these customers and we have contributed an additional approximately $41 million to the construction cost of the Project.

We do not expect to generate significant revenue until we successfully commence the manufacture and shipment of polysilicon and begin meeting the obligations under our supply contracts. In addition, we will still need to seek additional financing to complete the Project. If we are unable to secure additional long-term supply contracts and prepayments, assuming the cost to construct and equip the Project does not exceed $390 million, we are able to amend our contract with Wuxi Suntech Power Co., Ltd. under similar terms, and if all of our other customers make their prepayments when due, the amount we will need to raise could be as much as $71 million. If we are unable to secure additional long-term supply contracts and prepayments, if for any reason (e.g. contract amendment, termination, breach, etc.) one or more of our polysilicon supply customers do not pay the full amount of the prepayments to which they are presently committed and/or if the actual cost to complete the Project is more than $390 million, the amount we will need to raise could exceed $71 million. Furthermore, if there is a delay in receiving the second tranche of $30 million in debt from the Tianwei transaction, or other unfavorable factors occur, it could raise substantial doubt about our ability to continue as a going concern. The inability to continue as a going concern could result in an orderly wind-down of us or other potential forms of restructuring.

As of December 31, 2009, we had an accumulated deficit of $18.6 million. Hoku Materials does not currently generate any revenue and we do not anticipate revenue from Hoku Materials until the first quarter of fiscal 2011. During the nine months ended December 31, 2009, our revenue was primarily from PV system installations and related services primarily from Hoku Solar contracts. At this time, we do not believe we will receive any meaningful revenue from Hoku Fuel Cell products and services for the foreseeable future.

The sale of additional equity and convertible debt instruments may result in additional dilution to our current stockholders. Additionally, if we do not have sufficient cash to meet all of our obligations as they come due, we will have to ask our vendors to forebear from enforcing one or more of their rights under their respective agreements. There are no assurances that our vendors will agree to forebear or otherwise make any concessions under their respective agreement. If any of our vendors seek to enforce their rights under these agreements that we are unable to perform, which could include asserting and/or foreclosing on materialmen’s and laborer’s liens on the Project, or taking other legal action, it could materially harm our business, financial condition and results of operations and we may be forced to delay, alter or abandon our planned business operations, which could have a material adverse effect on the our ability to continue as a going concern and the recoverability of its long-lived assets.

Net Cash Used In Operating Activities. Net cash used in operating activities was $3.8 million for the nine months ended December 31, 2009, compared to $8.5 million for the same period in fiscal 2009. The net cash used in operating activities was primarily due to the costs expended for uncompleted solar contracts, accounts payable and accrued operating expenses and other current assets and liabilities and the result of lower deferred revenues and customer deposits during the nine months ended December 31, 2009 as compared to the same period in fiscal 2009.

Net Cash Used In Investing Activities. Net cash used in investing activities was $52.8 million for the nine months ended December 31, 2009, compared to $87.8 million for the same period in fiscal 2009. The net cash used in investing activities in both periods was primarily due to the capitalization of funds to pay for construction costs related the Project.

Net Cash Provided By Financing Activities. Net cash provided by financing activities was $42.4 million for the nine months ended December 31, 2009, compared to $87.8 million for the same period in fiscal 2009. The net cash provided by financing activities during the nine months ended December 31, 2009 was primarily due to deposits received from polysilicon prepayment supply contracts of $39.0 million and contributions from the noncontrolling interest of $3.6 million. The net cash provided by financing activities during the nine months ended December 31, 2008 was primarily due to $81.5 million in deposits received from supply agreements for polysilicon deliveries and the sale of 1,160,716 shares of our common stock for net proceeds of approximately $6.7 million.

Contractual Obligations

The following table summarizes the contractual obligations that existed at December 31, 2009. The amounts in the table below do not include time and materials contracts and incentive payments. In addition, the GEC Graeber Engineering Consultants GmbH, and MSA Apparatus Construction for Chemical Equipment Ltd. contract for the purchase and sale of hydrogen reduction reactors and hydrogenation reactors is to be paid in Euros and the contractual obligation is determined based on the Euro/U.S. dollar exchange rate, which was $1.43320/Euro as of December 31, 2009.

Contractual Obligations	Total		Less Than One Year		One to Three Years		Three to Five Years		More Than Five Years
	(in thousands)
Construction in progress	$	18,881	$	18,881	$	—	$	—	$	—
Equipment purchases		87,397		84,442		2,955		—		—
Supply purchases		60,611		2,255		36,779		21,577		—
Leases		466		232		234		—		—
Deposits – Hoku Materials		123,000		14,641		40,152		29,612		38,595

Total	$	290,355	$	120,451	$	80,120	$	51,189	$	38,595

We may have insufficient cash to meet all of our obligations as they come due through December 31, 2010. We have modified payment terms in purchase orders with more than sixty of our vendors to structure payment plans for amounts past due and to be invoiced in the future. In the event we are unable to meet our obligations under payment plans and other agreements, we will have to ask our vendors to forebear from enforcing one or more of their rights under their respective agreements. There are no assurances that any of our vendors will agree to forebear or otherwise make any concessions under their respective agreements. If any of our vendors seek to enforce their rights under these agreements that we are unable to perform, which could include asserting and/or foreclosing on materialmen’s and laborer’s liens on the Project, or taking other legal action, it could materially harm our business, financial condition and results of operations and we may be forced to delay, alter or abandon our planned business operations, which could have a material adverse effect on the our ability to continue as a going concern.

Stone & Webster, Inc. In August 2007, we entered into an Engineering, Procurement and Construction Management Contract with Stone & Webster, Inc., or S&W, a subsidiary of The Shaw Group Inc., for engineering, procurement, and construction management services for the construction of our the Project, which was amended in October 2007 by Change Order No. 1, again in April 2008 by Change Order No. 2, and again in February 2009 by Change Order No. 3, or collectively, the S&W Engineering Agreement. Under the S&W Engineering Agreement, S&W is to provide all engineering and procurement services necessary to complete the design and planning for construction of the Project. S&W is to be paid on a time and materials basis plus a fee for its services and incentives if certain schedule and cost targets are met. The target cost for the services to be provided under the S&W Engineering Agreement is $50 million; however we believe that we could incur up to $53 million in costs.

Through December 31, 2009, we had made payments to S&W of $45.7 million and had $1.8 million of payables outstanding as of December 31, 2009.

JH Kelly LLC. In August 2007, we entered into a Cost Plus Incentive Contract with JH Kelly LLC, or JH Kelly, for construction services for the construction of the Project, which was amended in October 2007, by Change Order No. 1, again in April 2008 by Change Order No. 2, again in March 2009 by Change Order No. 3, and again in September 2009 by Change Order No. 4, or collectively, the JH Kelly Construction Agreement. Under the JH Kelly Construction Agreement, JH Kelly agreed to provide the construction services as our general contractor for the construction of the Project with a production capacity of 4,000 metric tons per year. The target cost for the services to be provided under the JH Kelly Construction Agreement is $145 million, including up to $5.0 million of incentives that may be payable.

Through December 31, 2009, we had made payments to JH Kelly of $59.1 million and had $10.0 million of payables outstanding as of December 31, 2009.

Dynamic Engineering Inc. In October 2007, we entered into an agreement with Dynamic Engineering Inc., or Dynamic, for design and engineering services, and a related technology license, for the process to produce and purify trichlorosilane, or TCS. Under the agreement with Dynamic, or the Dynamic Agreement, Dynamic is obligated to design and engineer a TCS production facility that is capable of producing 20,000 metric tons of TCS for the Project. The TCS production facility is to be integrated by S&W into the overall Project, and will be constructed by JH Kelly. Under the Dynamic Agreement, Dynamic's engineering services are provided and invoiced on a time and materials basis, and the license fee will be calculated upon the successful completion of the TCS production facility, and demonstration of certain TCS purity and production efficiency capabilities. The maximum aggregate amount that we may pay Dynamic for the engineering services and the technology license is $12.5 million, which includes an incentive for Dynamic to complete the engineering services under budget. Dynamic is guaranteeing the quantity and purity of the TCS to be produced at the completed facility, and has agreed to indemnify us for any third-party claims of intellectual property infringement.

Through December 31, 2009, we had made payments to Dynamic of $5.6 million and had $2.8 million of payables outstanding as of December 31, 2009.

GEC Graeber Engineering Consultants GmbH and MSA Apparatus Construction for Chemical Equipment Ltd. We entered into a contract with GEC Graeber Engineering Consultants GmbH, or GEC, and MSA Apparatus Construction for Chemical Equipment Ltd., or MSA, for the purchase and sale of 16 hydrogen reduction reactors and hydrogenation reactors for the production of polysilicon, and related engineering and installation services. Under the contract, we will pay up to a total of 20.9 million Euros for the reactors. The reactors are designed and engineered to produce approximately 2,000 metric tons of polysilicon per year. The term of the contract extends until the end of the first month after the expiration date of the warranty period, but may be terminated earlier under certain circumstances.

In January 2009, we received the first shipment of six Siemens-process reactors at the Project, and all of these polysilicon reactors have been assembled and put into place on our production floor. The reactors are the first units to arrive in Pocatello out of a planned total order of 28. The next set of 10 polysilicon reactors and related equipment has been manufactured, and would be shipped to the Project after our payment of an additional 3.2 million Euros or $4.6 million (based on the Euro/U.S. dollar exchange rate, which was $1.43320/Euro as of December 31, 2009). We are in discussions with GEC to purchase additional 12 reactors necessary for our planned annual capacity of 4,000 metric tons of polysilicon. The cost of these additional reactors is not expected to be greater than 20.9 million Euros, or $30.0 million (based on the Euro/U.S. dollar exchange rate, which was $1.4332/Euro as of December 31, 2009).

Through December 31, 2009, we had paid GEC and MSA an aggregate amount of 15.2 million Euros or $22.3 million and had 2.4 million Euros or $3.5 million of payables outstanding as of December 31, 2009.

Idaho Power Company. We entered into an agreement with Idaho Power Company, or Idaho Power, to complete the construction of the electric substation to provide power for the Project, or the Idaho Power Agreement. We are obligated to pay Idaho Power an aggregate of $16.5 million for the completion of the substation and associated facilities. The Amended Idaho Power Agreement also provides that upon completion of construction, there will be a true-up of actual construction costs, so that either we will be refunded any monies we have paid to Idaho Power over and above the actual costs of construction, or we will pay Idaho Power any additional construction costs beyond the original amount. As of December 31, 2009, the Company incurred a $524,000 true-up of actual construction costs.

Through December 31, 2009, we had paid Idaho Power an aggregate amount of $17.5 million, which includes $917,000 paid to Idaho Power pursuant to a separate engineering services agreement, and had $524,000 of payables outstanding as of December 31, 2009. We do not anticipate any additional cost adjustments, which results in the aggregate cost of $18.0 million to complete the substation and associated transmission facilities, including the engineering services agreement.

We also entered into an Electric Service Agreement with Idaho Power, or the ESA, for the supply of electric power and energy to us for use in the Project, subject to the approval of the Idaho Public Utilities Commission, or the PUC. The term of the ESA is four and a half years, beginning in June 2009 and expiring in December 2013. During the term of the ESA, Idaho Power agrees to make up to 82,000 kilowatts of power available to us at certain fixed rates, which are subject to change only by action of the PUC. After the initial term of the ESA expires, either we or Idaho Power may terminate the ESA without prejudice. If neither party chooses to terminate the ESA, then Idaho Power will continue to provide electric service to us at the same fixed rates.

AEG Power Solutions USA Inc. (formerly known as Saft Power Systems USA, Inc.). In March 2008, we entered into an agreement with AEG Power Solutions USA Inc., or AEG, formerly known as Saft Power Systems USA, Inc., which was subsequently amended in May 2009, or the AEG Agreement, for the purchase and sale of thyroboxes, earth fault detection systems, and related technical documentation and services, or the Deliverables. Under the AEG Agreement, AEG was obligated to manufacture and deliver the Deliverables, which are used as the power supplies for the polysilicon deposition reactors to be used in the Project. The total fees payable to AEG for all Deliverables under the AEG Agreement is approximately $13 million.

Through December 31, 2009, we had made payments to AEG of $6.2 million and had $2.2 million of payables outstanding as of December 31, 2009.

Polymet Alloys, Inc. In November 2008, we entered into an agreement with Polymet Alloys, Inc., or Polymet, for the supply of silicon metal for use the Project. In May 2009, we entered into an amended and restated supply agreement with Polymet, or the Amended Polymet Agreement. The term of the Amended Polymet Agreement is three years, commencing in 2010. Each year during the term of the Amended Polymet Agreement, Polymet has agreed to sell to us, and we have agreed to purchase from Polymet, no less than 65% of our annual silicon metal requirement. Pricing is to be negotiated for each year of the Amended Polymet Agreement; however, if the parties are unable to agree on pricing for any year, or we have agreed to purchase less than the amount specified in the Amended Polymet Agreement, Polymet has a right of first refusal to match the terms offered by any third-party supplier from whom we may seek to purchase silicon metal. Either party may also terminate the Amended Polymet Agreement under certain circumstances, including a material breach by the other party that has not been cured within a specified cure period, or the other party’s voluntary or involuntary liquidation. As of December 31, 2009, we had not made any payments to Polymet.

PVA Tepla Danmark. In April 2008, we entered into an agreement with PVA Tepla Danmark, or PVA, for the purchase and sale of slim rod pullers and float zone crystal pullers. Under the agreement, PVA is obligated to manufacture and deliver the slim rod pullers and float zone crystal pullers for the Project. Slim rod pullers are used to make thin rods of polysilicon that are then transferred into polysilicon deposition reactors to be grown through a chemical vapor deposition process into polysilicon rods for commercial sale to our end customers. The float zone crystal pullers convert the slim rods into single crystal silicon for use in testing the quality and purity of the polysilicon. The total fees payable to PVA is approximately $6 million, which is payable in four installments, the first of which was made in August 2008. Either party may terminate the agreement if the other party is in material breach of the agreement and has not cured such breach within 180 days after receipt of written notice of the breach, or if the other party is bankrupt, insolvent, or unable to pay its debts.

Through December 31, 2009, we had paid PVA an aggregate amount of $1.9 million and had $3.9 million of payables outstanding as of December 31, 2009.

BHS Acquisitions, LLC. In November 2008, we entered into an agreement with BHS Acquisitions, LLC, or BHS, for the supply of hydrochloric acid, or HCl, for use in the Project. The term of the agreement is eight years beginning on the date on which the first shipment of product is delivered to us. Each year during the term of the agreement, BHS has agreed to sell to us, and we have agreed to purchase from BHS, specified volumes of HCl that meet certain purity specifications. The volume is fixed during each of the eight years. Pricing is fixed for the first twelve months of shipments, which are scheduled to begin within four months after we provide written notice to BHS, and the aggregate net value of the HCl to be purchased by us under the agreement in the first twelve months is approximately $2.4 million. Pricing is to be renegotiated for each of the remaining years of the agreement; however, if the parties are unable to agree on pricing for any future year, then either party may terminate the agreement without liability to the other party. Either party may also terminate the agreement under certain circumstances, including a material breach by the other party that has not been cured within a specified cure period, or the other party’s voluntary or involuntary liquidation. As of December 31, 2009, we had not provided notice to BHS to commence shipments, and had not made any payments to BHS.

Operating Capital and Capital Expenditure Requirements

As we invest resources towards our polysilicon manufacturing and PV systems installation service businesses, develop our products, expand our corporate infrastructure, prepare for the increased production of our products and evaluate new markets to grow our business, we expect that our expenses will continue to increase and, as a result, we will need to generate significant revenue to achieve profitability.

As of December 31, 2009, we had cash and cash equivalents on hand of $3.2 million and current liabilities of $76.8 million. Our cash, $50 million in debt from our financing transaction with Tianwei and $55 million in additional prepayments from our existing customers, will be used to pay current liabilities and complete construction of the Project to the point where we can commence initial shipments to customers. Until such time, we intend to delay seeking the additional financing of $71 million which is necessary to complete the construction of the Project.

We do not expect to generate significant revenue until we successfully commence the manufacture and shipment of polysilicon and begin meeting the obligations under our supply contracts. In addition, we will still need to seek additional financing to complete the Project. If we are unable to secure additional long-term supply contracts and prepayments, assuming the cost to construct and equip the Project does not exceed $390 million, we are able to amend our contract with Wuxi Suntech Power Co., Ltd. under similar terms, and if all of our other customers make their prepayments when due, the amount we will need to raise could be as much as $71 million. If we are unable to secure additional long-term supply contracts and prepayments, if for any reason (e.g. contract amendment, termination, breach, etc.) one or more of our polysilicon supply customers do not pay the full amount of the prepayments to which they are presently committed and/or if the actual cost to complete the Project is more than $390 million, the amount we will need to raise could exceed $71 million. Furthermore, if there is a delay in receiving the additional $50 million in debt from the Tianwei transaction, or we do not receive our anticipated prepayments from our customers, or other unfavorable factors occur, it could raise substantial doubt about our ability to continue as a going concern. The inability to continue as a going concern could result in an orderly wind-down of us or other potential forms of restructuring.

The sale of additional equity and convertible debt instruments may result in additional dilution to our current stockholders. If we raise additional funds through the issuance of convertible debt securities, these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. We may require additional capital beyond our currently forecasted amounts. Any required additional capital may not be available on reasonable terms, if at all. If we are unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned research, development and commercialization and manufacturing activities, which could harm our business. Our forecasts of the period of time through which our financial resources will be adequate to support our operations are forward-looking statements and involve risks and uncertainties. Actual results could vary as a result of a number of factors, including the factors discussed in Part II, Item 1.A. “Risk Factors” and the section above entitled “Forward-Looking Statements.”

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our unaudited consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles for interim financial statements and the instructions to Form 10-Q and Regulation S-X. The preparation of these unaudited consolidated financial statements requires us to make estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenue and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

While our significant accounting policies are more fully described in Note 1 to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q and Note 1 to the audited financial statements included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on June 15, 2009, we believe that the following accounting policies and estimates are critical to a full understanding and evaluation of our reported financial results.

Revenue Recognition. Revenue from polysilicon and PV system installations is recognized when there is evidence of an arrangement, delivery has occurred or services have been rendered, the arrangement fee is fixed or determinable, and collectability of the arrangement fee is reasonably assured. PV system installation contracts may have several different phases with corresponding progress billings, however, revenue is recognized when the installation is complete and accepted by the customer.

We have also provided testing and engineering services to customers pursuant to milestone-based contracts that are not multi-element arrangements. These contracts sometimes provided for periodic invoicing upon completion of contractual milestones. Customer acceptance is usually required prior to invoicing. We recognized revenue for these arrangements under the completed contract method. Under the completed-contract method, we defer the contract fulfillment costs and any advance payments received from the customer and recognize the costs and revenue in our statement of operations once the contract is complete and the final customer acceptance, if required, has been received.

Revenue from the sale of electricity generated from our PV systems is based on kilowatt usage and is recognized in accordance with our power purchase agreements, or PPAs.

Stock-Based Compensation. We account for stock-based employee compensation arrangements using the fair value method, in which the fair value of stock options and/or restricted stock awards granted to our employees and non-employees is determined using the Black-Scholes pricing model. The Black-Scholes pricing model requires the input of several subjective assumptions including the expected life of the option/restricted stock award and the expected volatility of the option/restricted stock award at the time the option/restricted award is granted. The fair value of our option/restricted award, as determined by the Black-Scholes pricing model, is expensed over the requisite service period, which is generally five years for stock options and varies between two and five years for restricted stock awards.

The assumptions used in calculating the fair value of our stock options and restricted stock awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, changes in these inputs and assumptions can materially affect the measure of the estimated fair value of our stock options and restricted stock awards. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those options and shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period. Furthermore, this accounting estimate is reasonably likely to change from period to period as further stock options and restricted stock awards are granted and adjustments are made for stock option and restricted stock awards forfeitures and cancellations. We do not record any deferred stock-based compensation on our balance sheet for our stock options and restricted stock awards.

Off-Balance Sheet Arrangements

None

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary objective of our investment activities is to preserve our capital for the purpose of funding our operations. To achieve this objective, our investment policy allows us to maintain a portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, auction instruments, corporate and government bonds and certificates of deposit. These investments are generally short-term in nature and highly liquid. As of December 31, 2009, we did not maintain any short-term investments. Our cash and cash equivalents as of December 31, 2009 were $3.2 million.

All of our contracts are denominated in U.S. dollars, except for our contracts with GEC and MSA which are denominated in Euros. As a result of the early settlement of our Euros purchase agreements, we no longer maintain any investment in Euros, nor are we a party to any agreements to purchase Euros at certain dates in the future. Accordingly, we are subject to the then current spot rate between the US dollar and the Euro at such time that a payment is required under the GEC and MSA contracts.

Item 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the Securities Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. There were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS

From time to time we may be involved in litigation relating to claims arising out of our operations. We are not currently involved in any material legal proceedings.

ITEM 1A.

RISK FACTORS

In addition to the risks discussed in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our business is subject to the risks set forth below.

Risks Associated With Our Business

If there is any further delay in receiving the remaining $30 million of our $50 million loan agreement with Tianwei, or we are unable to secure adequate funds on terms acceptable to us, we will be unable to support our business requirements, build our business or continue as a going concern.

As of December 31, 2009, we had cash and cash equivalents on hand of $3.2 million and short term liabilities of $76.8 million. In September 2009, we entered into a definitive agreement providing for a majority investment in us by Tianwei New Energy Holdings Co., Ltd., or Tianwei, and debt financing by Tianwei through China Construction Bank, as agent, for the construction and development of the Project. In December 2009, the investment transaction was completed and we issued to Tianwei 33,379,287 newly-issued shares of our common stock, representing approximately 60% of our fully-diluted outstanding shares. Tianwei is restricted from transferring directly or indirectly 23,365,501, or 70%, of the newly-issued shares to any third party until the first anniversary of the closing date of the agreement. We also granted to Tianwei a warrant to purchase an additional 10,000,000 shares of our common stock. The terms of the warrant include: (i) a per share exercise price equal to $2.52; (ii) an exercise period of seven years; and (iii) provision for a cashless, net-issue exercise.

The $50 million in debt, plus $55 million in additional prepayments from our existing customers, will be used to pay current liabilities and complete construction of the Project to the point where we can commence initial shipments to customers. Until such time, we intend to delay seeking the additional financing of $71 million which is necessary to complete the construction of the Project. On the basis of these funding sources, we expect to complete our reactor demonstration in the fourth quarter of fiscal 2010 and begin polysilicon production in the first quarter of fiscal 2011. However, if there is a delay in receiving the second tranche of $30 million in debt from the Tianwei transaction, or other unfavorable factors occur, we may need to curtail Project construction.

We do not expect to generate significant revenue until we successfully commence the manufacture and shipment of polysilicon and begin meeting the obligations under our supply contracts. We also will need to seek additional financing to complete construction of the Project. If we are unable to generate revenue or secure adequate additional financing when needed, we will be forced to further reduce expenditures in order to continue as a going concern. Reduction of expenditures could have a material adverse effect on our business. The amount and timing of our future capital needs depend on many factors, including the timing of our development efforts, opportunities for strategic transactions, and the amount and timing of any revenues we are able to generate. Given our current business strategy, however, we will need to secure additional financing in order to execute our plans and continue our operations. If there is any delay in receiving the second tranche of $30 million in debt from the Tianwei transaction, or if we are unable to raise additional financing to complete the Project, our business will be materially and adversely harmed.

Over the next twelve months, we may have insufficient cash to meet all of our obligations as they come due. We have modified payment terms in purchase orders with more than sixty of our vendors to structure payment plans for amounts past due and to be invoiced in the future. In the event we are unable to meet our obligations under payment plans and other agreements, we will have to ask our vendors to forebear from enforcing one or more of their rights under their respective agreements. There are no assurances that any of our vendors will agree to forebear or otherwise make any concessions under their respective agreements. If any of our vendors seek to enforce their rights under these agreements that we are unable to perform, which could include asserting and/or foreclosing on materialmen’s and laborer’s liens on the Project, or taking other legal action, it could materially harm our business, financial condition and results of operations and we may be forced to delay, alter or abandon our planned business operations, which could have a material adverse effect on our ability to continue as a going concern.

There are no assurances that we will be successful in executing any of the foregoing alternatives. If we are unable to raise additional capital and manage our liquidity, there is substantial doubt that we will be able to continue as a going concern through at least December 31, 2010. The inability to continue as a going concern could result in an orderly wind-down of our business or other potential forms of restructuring.

Our independent registered public accounting firm’s report on our fiscal 2009 financial statements questions our ability to continue as a going concern.

Our independent registered public accounting firm’s report on our financial statements for each of the three years in the period ended March 31, 2009, expresses doubt about our ability to continue as a going concern. Their report includes an explanatory paragraph stating that there is substantial doubt about our ability to continue as a going concern due to the lack of sufficient capital, as of the date their report was issued, to support our business plan.

We will need to secure additional financing in the future and if we are unable to secure adequate funds at the times needed and on terms acceptable to us, we will be unable to support our business requirements, build our business or continue as a going concern. Accordingly, we can offer no assurance that the actions we plan to take to address these conditions will be successful. The inclusion of a “going concern modification” in the report of our independent accountants, in and of itself, may have a material adverse effect on our ability to obtain financing and to conduct our business generally, which could have a material adverse effect on our stock price.

We need at least $390 million to construct and equip the Project, and we may be unable to raise this amount of capital on favorable terms or at all.

Our planned entry into the polysilicon market will require us to spend significant sums to support the construction of the Project, to purchase capital equipment, to fund new sales and marketing efforts, to pay for additional operating costs and to significantly increase our headcount. As a result, we expect our costs to increase significantly, which will result in further losses before we can begin to generate significant operating revenue from our Hoku Materials division.

Based on our polysilicon supply agreements with our customers, we plan to equip and construct the Project, with a production capacity of 4,000 metric tons of polysilicon per year. Our original estimated actual construction cost for a facility capable of producing 3,500 metric tons of polysilicon per year was $390 million; however, we have not yet determined what, if any, additional cost associated with the increase in our planned production output from 3,500 to 4,000 metric tons per year will be, and we continue to review our construction cost estimates. Our estimates are based on our discussion 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 significantly increase the actual costs.

We plan on funding the remaining construction costs through customer prepayments and/or through debt or equity financing, including $50 million from our loan agreement and the $50 million equity contribution through our investment with Tianwei. As of December 31, 2009, we had received $123.0 million in customer prepayments under our supply contracts and expect to receive an additional $55.4 million in customer prepayments. As of December 31, 2009, we had also contributed an additional approximately $41 million to the construction cost of the Project.

We have experienced delays in the receipt of customer prepayments from certain of our long-term polysilicon supply customers. If we experience further delays in receipt of these payments, receive reduced payments, or fail to receive any of them entirely, or if there is any delay in receiving the remaining $30 million of our $50 million loan agreement with Tianwei, we could experience delays in our ability to continue the engineering, construction, and procurement of the Project in order to deliver polysilicon in the first quarter of fiscal 2011, or within the time periods specified in our customer supply contracts, which could materially harm our business. Even if we receive these prepayments on time and in the amounts agreed upon, the actual costs to engineer, construct, and procure the Project could exceed our estimates, and we may be unable to raise any additional funding required to pay for any such added costs. If we are unable to begin producing polysilicon by the first quarter of fiscal 2011 and meet our customer commitments, our business will be materially harmed and we may be forced to delay, alter or abandon our planned business operations.

If we are unable to raise capital and manage our liquidity, there is substantial doubt that we will be able to continue as a going concern through at least December 31, 2010. The inability to continue as a going concern could result in an orderly wind-down of our business or other potential forms of restructuring.

The actual cost to construct and equip the Project may be significantly higher than our estimated cost.

Our estimate of $390 million to construct and equip the Project is based on our discussion 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 cause our actual cost to significantly exceed our estimate. If the actual cost is significantly higher than we estimate, it could materially and adversely affect our ability to raise capital, to complete the Project on schedule or at all, and could materially harm our business, financial condition and results of operations and we may be forced to delay, alter or abandon our planned business operations.

Any slowdown of construction and procurement at the Project increases the risk that we will not meet certain construction and delivery milestones in our long-term polysilicon supply contracts.

The inability to resume and accelerate construction and procurement at the Project increases the likelihood that we will be unable to meet certain construction and delivery milestones in our long-term polysilicon contracts, which could cause a termination of one or more of our polysilicon supply contracts and the corresponding right to seek a refund of any prepayments made as of the date of termination. Any such termination could have a material adverse effect on our financial condition and results of operations.

Assuming the cost to complete the Project is $390 million, and assuming all of our polysilicon customers honor their commitments to make timely prepayments, we will still need to raise capital through one or more debt or equity offerings to complete construction of the Project.

Assuming that the total actual cost to construct and equip the Project is $390 million, that we are successful in receiving all customer prepayments that are presently committed to us when due, that we are able to amend our contract with Wuxi Suntech Power Co., Ltd. under similar terms and that we receive the remaining $30 million of our $50 million loan agreement with Tianwei, we believe we will need to raise as much as $71 million through a combination of new customer prepayments, debt and/or equity to complete Project construction. If we are unable to secure additional long-term supply contracts and prepayments, if for any reason (e.g. contract amendment, termination, breach, etc.), or one or more of our polysilicon supply customers do not pay the full amount of the prepayments to which they are presently committed and/or if the actual cost to complete the Project is more than $390 million, the amount we will need to raise could exceed $71 million. Furthermore, if there is any delay in receiving the remaining $30 million in debt from the Tianwei transaction, or other unfavorable factors occur, it could raise substantial doubt about our ability to continue as a going concern through at least December 31, 2010.

There are no assurances that we will be able to secure any additional debt or equity financing on favorable terms, at the time such financing is needed, or at all. If we are unable to secure adequate debt or equity financing to complete construction of the Project in time to meet certain milestones and/or to meet our customer commitments, our business will be materially harmed and we may be forced to delay, alter or abandon our planned business operations, which could have a material adverse effect on our ability to continue as a going concern. The inability to continue as a going concern could result in an orderly wind-down of our business or other potential forms of restructuring.

We have a limited operating history and, in calendar year 2006, determined to enter the photovoltaic system installation and polysilicon markets and to redirect efforts and resources that were historically directed toward the fuel cell market. If we are unable to generate significant revenue from our photovoltaic system installations and polysilicon segments, our business will be materially harmed.

We were incorporated in March 2001 and have a limited operating history. We have cumulative net losses since our inception through December 31, 2009. In calendar year 2006, we announced a change in our main business and our intention to form a polysilicon business through our subsidiary, Hoku Materials, and a photovoltaic, or PV, system installation business through our subsidiary Hoku Solar. The polysilicon business includes developing production capabilities for, and the eventual production of polysilicon. The PV systems installation business includes the design, engineering, procurement and installation of turnkey PV systems for residential and commercial customers. Prior to our announcement, our business was solely focused on the stationary and automotive fuel cell markets. We do not expect to generate any material revenue from Hoku Fuel Cells in the foreseeable future, and Hoku Materials does not currently generate any operating revenue.

We have no prior experience in the polysilicon business. In order to be successful, we are devoting substantial management time and energy and significant capital resources to developing this new business, including the construction of the Project. We commenced construction in May 2007, and expect to begin producing polysilicon beginning in the first quarter of fiscal 2011, with full-scale production to begin in the second half of fiscal 2011; however, there are no assurances that this schedule will not need to be further modified. We may need to purchase polysilicon from third parties in order to meet delivery schedules in order to avoid termination of one or more of our customer supply contracts. In addition, any delays beyond the first quarter of fiscal 2011 could result in the termination of a customer supply contracts, which would require us to refund substantial amounts of cash that have been paid to us as prepayments for future product deliveries. We have encountered, and expect that we will continue to encounter, significant risks relating to our entering into the polysilicon industry and changes in that industry, including potentially significant increases in polysilicon supply and falling polysilicon prices. If we are unable to address these risks and other risks successfully, our business, financial condition and results of operations will be materially and adversely affected.

If any of our Project engineering, construction, or key equipment vendors are late in providing their contract deliverables, we may be unable to complete the construction of the Project to begin commercial shipments in the first quarter of fiscal 2011, or at all, which could materially harm our business.

We have contracts with Stone & Webster, Inc., JH Kelly, LLC, GEC Graeber Engineering Consultants GmbH and MSA Apparatus Construction for Chemical Equipment, Ltd., Idaho Power Company, Dynamic Engineering Inc., AEG Power Solutions USA Inc., formerly known as Saft Power Systems USA, Inc., PVA Tepla Danmark, Polymet Alloys, Inc., BHS Acquisitions, LLC and our other vendors, contractors and consultants who are providing key services, equipment, and supplies for the engineering, construction and procurement of the Project. If we experience delays in the performance or delivery of the services, equipment, and goods under these respective agreements, we may be unable to commence production of polysilicon in the first quarter of fiscal 2011, to ramp-up production and commence commercial shipments in fiscal 2011, or deliver the volume of polysilicon that is required under our polysilicon supply agreements.

If we are unable to secure adequate quantities of trichlorosilane on favorable terms and at the times needed, our business will be materially harmed.

We have decided to defer approximately $40 million in capital expenditures by delaying construction of our on-site trichlorosilane, or TCS, production facility. TCS is needed to produce polysilicon. We have received shipments of small volumes of TCS from two suppliers for our production demonstration, and are in discussions with these third-party TCS producers for higher volume TCS supply contracts to enable us to execute on this strategy. There are no assurances, however, that we will be able to secure adequate TCS at the time and in the amounts needed on favorable terms, or at all. If we are unable to secure adequate TCS on favorable terms and at the times needed, we may be unable to meet certain milestones in our customer contracts or to meet our customer supply commitments and our business, financial condition and results of operations will be materially harmed.

We may have difficulty managing changes in our operations, which could harm our business.

To date we have expended significant financial and management resources in connection with our planned entry into the polysilicon market and the development of our PV system installation business. For example, in May 2007, we commenced construction of the Project. Construction of the Project and the operation of the polysilicon manufacturing and PV system installation businesses will involve substantial changes to our operations and place a significant strain on our senior management team and financial and other resources, and will, among other things, require us to significantly increase our international activities; hire and train additional financial, accounting, sales and marketing personnel; and make substantial investment in our engineering, logistics, financial and information systems, including implementing new enterprise-level transaction processing, operational and financial management information systems, procedures and controls.

Any failure by us to manage the expansion of our operations or succeed in these markets or other markets that we may enter in the future, may harm our business, prospects, financial condition and results of operations.

If our supply agreement with Wuxi Suntech Power Co., Ltd. is terminated for any reason, our business will be materially harmed .

In May 2008, we amended our polysilicon supply agreement, or the Amended Suntech Supply Agreement, with Wuxi Suntech Power Co., Ltd, or Suntech. Under the Amended Suntech Supply Agreement, up to approximately $678 million may be payable to us during the ten-year period, subject to the achievement of certain milestones, the acceptance of product deliveries and other conditions. Pursuant to the Amended Suntech Supply Agreement, we granted to Suntech a security interest in all of our tangible and intangible assets related to our polysilicon business to serve as collateral for our obligations under the Amended Suntech Supply Agreement. These security interests are pari-passu with the security interests granted to our other five long-term supply customers. The customer security interests provide that they would be junior to the collateral interest of any lender providing debt financing for Project construction. In July 2009, we entered into an amendment to the Amended Suntech Supply Agreement which became effective in December 2009 when the investment transaction with Tianwei was completed and Tianwei became our majority shareholder. Under the amendment Suntech agreed to waive the following rights:

As of December 31, 2009, we had not completed the Test Demonstration, and as a result Suntech could assert that we are in breach, and seek to terminate the Amended Suntech Supply Agreement. If the agreement is terminated our business will be materially harmed. In addition, we will be required to return the $2 million in prepayments which we have received from Suntech and we will need to secure an additional $32 million in funds in order to finance the construction of the Project. We are in discussions with Suntech to further amend the contract and have not been given any indication that Suntech intends to terminate the contract. However, if the contract is terminated, securing new funds may delay the anticipated timing of completion of the Project, which delay may result in us failing to meet our delivery requirements under our other supply agreements. We may not be able to secure new funds on terms as favorable to us as those under the Amended Suntech Supply Agreement or at all. If we are unable to secure new funds, we will not be able to complete construction of the Project, our business will be materially harmed and we may be forced to delay, alter or abandon our planned business operations.

If our supply agreement with Solarfun Power Hong Kong Limited is terminated for any reason, our business will be materially harmed.

In May 2008, we and Solarfun Power Hong Kong Limited, or Solarfun, a subsidiary of Solarfun Power Holdings Co., Ltd., or Solarfun Holdings, entered into a Second Amended and Restated Supply Agreement, or the Solarfun Supply Agreement, pursuant to which we have agreed to sell to Solarfun, and Solarfun has agreed to purchase from us, specified quantities of polysilicon over a ten-year period. In March 2009, we entered into Amendment No. 2 to the Second Amended and Restated Solarfun Supply Agreement with Solarfun, or Solarfun Amendment No. 2. Under Solarfun Amendment No. 2, up to approximately $384 million may be payable to us over a ten year period. Pursuant to the Solarfun Supply Agreement and Solarfun Amendment No. 2, we granted to Solarfun a security interest in all of our tangible and intangible assets related to our polysilicon business to serve as collateral for our obligations under the Solarfun Supply Agreement and Solarfun Amendment No. 2. These security interests are pari-passu with the security interests granted to our other five long-term supply customers. The customer security interests provide that they would be junior to the collateral interest of any lender providing debt financing for plant construction.

In November 2009, we entered into a third amendment to the Solarfun Agreement, or Solarfun Amendment No. 3, which became effective in December 2009, when Solarfun paid us $8 million of the $13 million prepayment balance that was past due. Under Solarfun Amendment No. 3, we agreed that Solarfun could pay us the $13 million that was due in July and October 2009, in increments of $8 million, which was paid in December 2009, $4 million to be paid in March 2010, and $1 million to be paid when we commence the shipment of polysilicon to Solarfun. The balance of $5 million that was payable in January 2010, is to be paid in equal monthly increments of $1 million during each of the five subsequent months after the month of the first shipment.

Each party may elect to terminate the Solarfun Supply Agreement, Solarfun Amendment No. 2 and Solarfun Amendment No. 3 under certain circumstances, including, but not limited to:

•

the bankruptcy, assignment for the benefit of creditors or liquidation of the other party; or

•

the insolvency of the other party; or

•

a material breach of the other party.

Solarfun may also terminate the Solarfun Supply Agreement, Solarfun Amendment No. 2 and Solarfun Amendment No. 3 if we fail to deliver a predetermined quantity of polysilicon product by June 30, 2010. There is a material risk that we will not meet this delivery milestone. In addition, in the instance of extraordinary events, including events of force majeure and other events outside of our control, which result in our inability to perform under the terms of the Second Amended and Restated Solarfun Supply Agreement, as amended by Solarfun Amendment No. 2 and Solarfun Amendment No. 3, we are afforded only a limited amount of time to cure such conditions. In the event we fail to cure the condition so that we can supply our product to Solarfun or otherwise satisfy our delivery requirements by delivering to Solarfun third-party polysilicon purchased in the open market, Solarfun may terminate the Solarfun Supply Agreement, Solarfun Amendment No. 2 and Solarfun Amendment No. 3.

If the Solarfun Supply Agreement, Solarfun Amendment No. 2 and Solarfun Amendment No. 3 are terminated for any reason, our business will be materially harmed. In addition, if Solarfun Supply Agreement, Solarfun Amendment No. 2 and Solarfun Amendment No. 3 are terminated by Solarfun, we will be required to return any deposits and advance payments received up to the date of the termination, which was $37 million as of December 31, 2009, and we will need to secure new funds in order to finance the construction of the Project. Securing new funds may delay the anticipated timing of completion of the Project, which delay may result in us failing to meet our delivery requirements under our polysilicon supply agreements. We may not be able to secure new funds on terms as favorable to us as those under the Solarfun Supply Agreement, Solarfun Amendment No. 2 and Solarfun Amendment No. 3, or at all. If we are unable to secure new funds, we will not be able to complete construction of the Project, our business will be materially harmed and we may be forced to delay, alter or abandon our planned business operations.

If our supply agreement with Jiangxi Jinko Solar Co., Ltd. is terminated for any reason, our business will be materially harmed.

In February 2009, we entered into an Amended & Restated Supply Agreement with Jiangxi Jinko Solar Co., Ltd., or the Jinko Supply Agreement. Under the Jinko Supply Agreement, up to approximately $119 million may be payable to us during a ten-year period, subject to product deliveries and other conditions. Pursuant to the Jinko Supply Agreement, we granted to Jinko a security interest in all of our tangible and intangible assets related to our polysilicon business to serve as collateral for our obligations under the Jinko Supply Agreement. These security interests are pari-passu with the security interests granted to our other five long-term supply customers. The customer security interests provide that they would be junior to the collateral interest of any lender providing debt financing for Project construction.

In November 2009, we entered into Amendment No. 1 to Amended & Restated Supply Agreement with Jinko, or the Amended Jinko Supply Agreement. Pursuant to the Amended Jinko Supply Agreement, we agreed with Jinko to eliminate the first year of shipments under the Jinko Agreement, such that our first delivery of polysilicon products to Jinko is now due in December 2010, and the term of the Jinko Supply Agreement has been shortened to nine years, resulting in the total volume of polysilicon to be sold by us to Jinko being reduced to approximately $106 million, subject to product deliveries and other conditions.

Each party may elect to terminate the Amended Jinko Supply Agreement under certain circumstances, including, but not limited to:

• the bankruptcy, assignment for the benefit of creditors or liquidation of the other party; or

• the insolvency of the other party; or

• a material breach of the other party.

Jinko may also terminate the agreement if we fail to deliver a predetermined quantity of our polysilicon product by December 31, 2010. Although we have the ability to meet this milestone by delivering product that is manufactured by a third party, there is a material risk that we will not meet this delivery milestone. In addition, in the instance of extraordinary events, including events of force majeure and other events outside of our control, which result in our inability to perform under the terms of the Amended Jinko Supply Agreement, we are afforded only a limited amount of time to cure such conditions. In the event we fail to cure the condition so that we can supply our product to Jinko or otherwise satisfy our delivery requirements by delivering to Jinko third-party polysilicon purchased in the open market, Jinko may terminate the Amended Jinko Supply Agreement.

If the Amended Jinko Supply Agreement is terminated for any reason, our business will be materially harmed. In addition, if the Amended Jinko Supply Agreement is terminated by Jinko, we will be required to return any deposits and advance payments received up to the date of the termination, which was $20 million as of December 31, 2009, and we will need to secure new funds in order to finance the construction of the Project. Securing new funds may delay the anticipated timing of completion of the Project, which delay may result in us failing to meet our delivery requirements under our other supply agreements. We may not be able to secure new funds on terms as favorable to us as those under the Amended Jinko Supply Agreement or at all. If we are unable to secure new funds, we will not be able to complete construction of the Project, our business will be materially harmed and we may be forced to delay, alter or abandon our planned business operations.

If either of our supply agreements with Tianwei New Energy (Chengdu) Wafer Co., Ltd. is terminated for any reason, our business will be materially harmed.

In September 2009, we entered into a definitive agreement providing for a majority investment in us by Tianwei, and debt financing by Tianwei through China Construction Bank, as agent, for the construction and development of the Project. In December 2009, the investment transaction was completed and the existing polysilicon supply agreements with Tianwei were amended such that $50 million of an aggregate of $79 million in secured prepayments previously paid by Tianwei to us was converted into 33,379,287 newly-issued shares of our common stock.

We entered into Amendment and Restated Supply Agreement No. 1, or Tianwei Amendment No. 1, with Tianwei for the sale and delivery of polysilicon to Tianwei over a ten-year period. Under Tianwei Amendment No. 1, we converted approximately $28 million of the total $44 million of prepayments previously paid to us by Tianwei into shares of our common stock and reduced the price at which Tianwei purchases polysilicon by approximately 11% per year. The amount of polysilicon to be delivered remains unchanged and Tianwei is still required to pay us an additional $1 million in prepayments; however, the total revenue for the polysilicon to be sold by us to Tianwei has been modified such that up to approximately $232 million may be payable to us during the ten-year term (exclusive of amounts Tianwei may purchase pursuant to its right of first refusal), subject to acceptance of product deliveries and other conditions.

We also entered into Amendment and Restated Supply Agreement No. 2, or Tianwei Amendment No. 2, with Tianwei, for the sale and delivery of polysilicon to Tianwei over a ten-year period. Under Tianwei Amendment No. 2, we converted approximately $22 million of the total $35 million of prepayments previously paid to us by Tianwei into shares of our common stock and reduced the price at which Tianwei purchases polysilicon by approximately 11% per year. The amount of polysilicon to be delivered remains unchanged and Tianwei is still required to pay us an additional $1 million in prepayments; however, the total revenue for the polysilicon to be sold by us to Tianwei has been modified such that up to approximately $186 million may be payable to us during the ten-year term (exclusive of amounts Tianwei may purchase pursuant to its right of first refusal), subject to acceptance of product deliveries and other conditions.

Each party may elect to terminate either Tianwei Amendment No. 1 or Tianwei Amendment No. 2, or the Tianwei Supply Agreements, under certain circumstances, including, but not limited to:

• the bankruptcy, assignment for the benefit of creditors or liquidation of the other party; or

• the insolvency of the other party; or

• a material breach of the other party.

In addition, in the instance of extraordinary events, including events of force majeure and other events outside of our control, which result in our inability to perform under the terms of either or both of the Tianwei Supply Agreements, we are afforded only a limited amount of time to cure such conditions. In the event we fail to cure the condition so that we can supply our product to Tianwei or otherwise satisfy our delivery requirements by delivering to Tianwei third-party polysilicon purchased in the open market, Tianwei may terminate the respective Tianwei Supply Agreement.

If either or both of the Tianwei Supply Agreements are terminated for any reason, our business will be materially harmed. In addition, if Tianwei Amendment No. 1 is terminated, we will be required to return any deposits and advance payments received up to the date of the termination, which is $16 million as of December 31, 2009. If Tianwei Amendment No. 2 is terminated, we will be required to return any deposits and advance payments received up to the date of the termination, which is $13 million as of December 31, 2009. In the event of the termination of either of the Tianwei Supply Agreements, we will need to secure new funds in order to finance the construction of the Project. Securing new funds may delay the anticipated timing of completion of the Project, which delay may result in us failing to meet our delivery requirements under our other supply agreements. We may not be able to secure new funds on terms as favorable to us as those under the Tianwei Supply Agreements, or at all. If we are unable to secure new funds, we will not be able to complete construction of the Project, our business will be materially and adversely affected and we may be forced to delay, alter or abandon our planned business operations.

If our supply agreement with Wealthy Rise International, Ltd. is terminated for any reason, our business will be materially harmed.

In April 2009, we entered into an Amended and Restated Supply Agreement, or the Amended Solargiga Supply Agreement, with Wealthy Rise International, Ltd., or Solargiga, pursuant to which up to approximately $136 million may be payable to us over a ten-year period, subject to product deliveries and other conditions. Pursuant to the Amended Solargiga Supply Agreement, we granted to Solargiga a security interest in all of our tangible and intangible assets related to our polysilicon business to serve as collateral for our obligations under the Amended Solargiga Supply Agreement. These security interests are pari-passu with the security interests granted to our other five long-term supply customers. The customer security interests provide that they would be junior to the collateral interest of any lender providing debt financing for plant construction.

We have granted Solargiga, an extension of time, or the Extension, to make an aggregate of $13.2 million in prepayments that were payable in installments between June and December 2009. Pursuant to the Extension, the date on which the $13.2 million is due has been extended to the earlier of February 26, 2010, or the date on which we and Solargiga enter into a definitive amendment to the Agreement pursuant to which the schedule and conditions for Solargiga’s prepayments could be adjusted.

Each party may elect to terminate the Amended Solargiga Supply Agreement under certain circumstances, including, but not limited to:

• the bankruptcy, assignment for the benefit of creditors or liquidation of the other party; or

• the insolvency of the other party; or

• a material breach of the other party.

Solargiga may also terminate the agreement if we fail to deliver a predetermined quantity of our polysilicon product by October 31, 2010. There is a material risk that we will not meet this delivery milestone. In addition, in the instance of extraordinary events, including events of force majeure and other events outside of our control, which result in our inability to perform under the terms of the Amended Solargiga Supply Agreement, we are afforded only a limited amount of time to cure such conditions. In the event we fail to cure the condition so that we can supply our product to Solargiga or otherwise satisfy our delivery requirements by delivering to Solargiga third-party polysilicon purchased in the open market, Solargiga may terminate the Amended Solargiga Supply Agreement.

If the Amended Solargiga Supply Agreement is terminated for any reason, our business will be materially harmed. In addition, if the Amended Solargiga Supply Agreement is terminated by Solargiga as a result of our failure to deliver polysilicon in the amounts and by the dates required in the Amended Solargiga Supply Agreement, we are required to refund to Solargiga all of the prepayments made as of the date of such termination, which was $7 million as of December 31, 2009, less any part of thereof that has been applied to the purchase price of polysilicon delivered under the Amended Solargiga Supply Agreement. Moreover, we will need to secure new funds in order to finance the construction of the Project. Securing new funds may delay the anticipated timing of completion of the Project, which delay may result in us failing to meet our delivery requirements under our other supply agreements. We may not be able to secure new funds on terms as favorable to us as those under the Amended Solargiga Supply Agreement or at all. If we are unable to secure new funds, we will not be able to complete construction of the Project, our business will be materially harmed and we may be forced to delay, alter or abandon our planned business operations.

If our Agreement with Shanghai Alex New Energy Co., Ltd. is terminated for any reason, our business will be materially harmed.

In February 2009, we entered into a supply agreement with Shanghai Alex New Energy Co., Ltd., or Alex, for the sale and delivery of polysilicon to Alex over a ten-year period, or the Alex Supply Agreement. Under the Alex Supply Agreement, approximately $119 million may be payable to us during a ten-year period, subject to product deliveries and other conditions. Pursuant to the Alex Supply Agreement, we granted to Alex a security interest in all of our tangible and intangible assets related to our polysilicon business to serve as collateral for our obligations under the Alex Supply Agreement. These security interests are pari-passu with the security interests granted to our other five long-term supply customers. The customer security interests provide that they would be junior to the collateral interest of any lender providing debt financing for Project construction.

In December 2009, we entered into Amendment No. 1 to Supply Agreement with Alex, or the Amended Alex Supply Agreement. Pursuant to the Amended Alex Supply Agreement, we agreed with Alex to shift the date of first delivery of polysilicon, such that our first delivery of polysilicon products to Alex is now due in September 2010.

Each party may elect to terminate the Alex Supply Agreement under certain circumstances, including, but not limited to:

• the bankruptcy, assignment for the benefit of creditors or liquidation of the other party; or

• the insolvency of the other party; or

• a material breach of the other party.

Alex may also terminate the agreement if we fail to deliver a predetermined quantity of our polysilicon product by December 31, 2010. Although we have the ability to meet this milestone by delivering product that is manufactured by a third party, there is a material risk that we will not meet this delivery milestone. In addition, in the instance of extraordinary events, including events of force majeure and other events outside of our control, which result in our inability to perform under the terms of the Amended Alex Supply Agreement, we are afforded only a limited amount of time to cure such conditions. In the event we fail to cure the condition so that we can supply our product to Alex or otherwise satisfy our delivery requirements by delivering to Alex third-party polysilicon purchased in the open market, Alex may terminate the Amended Alex Supply Agreement.

If the Amended Alex Supply Agreement is terminated for any reason, our business may be materially and adversely affected. In addition, if the Amended Alex Supply Agreement is terminated by Alex as a result of our failure to deliver polysilicon in the amounts and by the dates required in the Amended Alex Supply Agreement, we are required to refund to Alex all of the prepayments made as of the date of termination, which was $20 million as of December 31, 2009, less any part thereof that has been applied to the purchase price of polysilicon delivered under the Alex Supply Agreement. Moreover, we will need to secure new funds in order to finance the construction of the Project. Securing new funds may delay the anticipated timing of completion of the Project, which delay may result in us failing to meet our delivery requirements under our other supply agreements. We may not be able to secure new funds on terms as favorable to us as those under the Amended Alex Supply Agreement or at all. If we are unable to secure new funds, we will not be able to complete construction of the Project, our business will be materially and adversely affected and we may be forced to delay, alter or abandon our planned business operations.

Fluctuations in industrial production capacity for polysilicon could harm our business.

Certain polysilicon producers have invested heavily in the expansion of their production capacities in view of the recent scarcity of solar-grade polysilicon. We currently expect significant additional capacity to come on-line in fiscal 2010, near in time to when the Project is scheduled become fully operational. In addition, if an excess supply of electronic-grade polysilicon were to develop, producers of electronic-grade silicon could switch production to solar-grade polysilicon, causing the price of solar-grade polysilicon to decline more rapidly than we currently anticipate. The electronic-grade polysilicon market historically has experienced significant cyclicality; for example, that market experienced significant excess supply from 1998 through 2003. Moreover, the forecasted increases in polysilicon supply could also be exacerbated if the demand for polysilicon decreases significantly as a result of the introduction of new technologies that materially reduce or eliminate the need for polysilicon in producing effective PV systems.

If any of these events occurred, they could result in an excess supply of solar-grade polysilicon and could suppress market prices for solar-grade polysilicon. Any such suppression of market prices for polysilicon would affect the price which we could expect to receive in selling our polysilicon in the spot market and could provide our customers with incentives to reconsider or renegotiate their long-term supply contracts with us to the extent the polysilicon deliverable under those contracts is priced above prevailing market prices. During fiscal year 2009, spot market prices of polysilicon decreased dramatically with an increase in supply, and further price declines are possible in fiscal 2010 as additional supply is forecasted to enter the market. Further decreases in demand and polysilicon prices could materially harm our business, financial condition and results of operations.

Conversely, in the past, industry-wide shortages of polysilicon have created shortages of PV modules and increased prices for such modules. In the event of a polysilicon shortage, any inability to obtain PV modules at commercially reasonable prices, or at all, would adversely affect our PV system installation business by reducing our ability to meet potential customer demand for our products or to provide products at competitive prices. Any continued industry shortage in available polysilicon could delay the potential growth of our PV system installations business, thereby harming our business.

We rely on limited suppliers and, if these suppliers fail to deliver materials that meet our quality requirements in a timely, cost-effective manner or at all, our production of polysilicon and our installation of PV systems would be limited.

It is highly likely that we will procure materials for our PV system installation business from vertically integrated solar module manufacturing and installation companies that are also our competitors. These companies may choose in the future not to sell these materials to us at all, or may raise their prices to a level that would prevent us from selling our goods and services on a profitable basis.

In our polysilicon business we rely heavily on our contracted suppliers of key process technologies and infrastructure including such components as the reactors and the TCS process. If any of these suppliers fail to perform their contractual obligations, we will be required to seek alternative suppliers and likely will not be able to commence production of polysilicon at the Project on our current schedule. Any such production delays may result in a breach of one or more of our supply agreements with Alex, Suntech, Solarfun, Jinko, Tianwei and/or Solargiga and such breaches may allow these customers to terminate the supply agreements and seek a return of prepayments, which would harm our business and may make impossible the completion of the Project.

Even if we achieve our polysilicon and PV system installation objectives on a timely basis and complete the construction of the Project our polysilicon production plant as currently planned, we may still be unsuccessful in developing, producing and/or selling these products and services, which would harm our business.

If we are successful in our efforts to construct the Project, our ability to successfully compete in the polysilicon and PV system installation markets will depend on a number of factors, including:

•

our ability to produce or procure TCS and polysilicon, and install PV systems at costs that allow us to achieve or maintain profitability in these businesses;

•

our ability to successfully manage a much larger and growing enterprise, with a broader national and international presence;

•

our ability to attract new customers and expand existing customer relationships;

•

our ability to develop new technologies to become competitive through cost reductions;

•

our ability to scale our business to be competitive;

•

our ability to predict and adapt to changing market conditions, including the price of inputs and the spot price for polysilicon sold in themarket by us or purchased by us from third-parties to settle customer commitments; and

•

future product liability or warranty claims.

If our PV system installation competitors are able to develop and market products that customers prefer to our products, we may not be able to generate sufficient revenue to continue operations.

The market for PV systems installations is competitive and continually evolving. As a new entrant to this market, we expect to face substantial competition from companies such as SunPower Corporation, SunEdison, and other new and emerging companies throughout many parts of the world. Many of our known competitors are established players in the solar industry, and have a stronger market position than ours and have larger resources and name recognition than we have. Furthermore, the PV market in general competes with other sources of renewable energy and conventional power generation.

Technological development in the solar power industry could reduce market demand for polysilicon or allow for lower cost production of polysilicon by our competitors, which could cause our sales and profit to decline .

The solar power industry is characterized by evolving technologies and standards. Technological evolutions and developments in PV products, including thin-film technologies, higher PV efficiency and thinner wafers may decrease the demand for polysilicon by PV module manufacturers, and some manufacturers are developing alternative solar technologies that require significantly less silicon than crystalline silicon-based solar cells and modules, or no polysilicon at all. If these developing technologies prove more advantageous in application and are widely adopted, we may experience a decrease in demand for our polysilicon and a decrease in our sales or operating margins.

Additionally, other technologies for the production of polysilicon are increasing in prevalence in the industry. Technologies which compete with the Siemens reactor process, including fluidized bed reactor process, may enable the manufacture of polysilicon more quickly or at lower cost than does the Siemens reactor process. To the extent that our competitors adopt other technologies that enable them to compete more effectively, our operating margins and price-competitiveness may be impacted. In the event that we are unable to re-design the Project around these more efficient processes on manageable timetables and at reasonable cost, our business could be adversely affected.

Our operating results have fluctuated in the past, and we expect a number of factors to cause our operating results to continue to fluctuate in the future, making it difficult for us to accurately forecast our quarterly and annual operating results.

Hoku Materials does not currently generate any operating revenue and we do not expect to generate any material revenue from Hoku Fuel Cells in the foreseeable future. All of our revenue presently is generated by Hoku Solar and our PV system installation activities.

Our future operating results and cash flows will depend on many factors that will impact our polysilicon business run by Hoku Materials and, our PV system installation business run by Hoku Solar, including the following:

• the size and timing of customer orders, milestone achievement, product delivery and customer acceptance, if required;

• the length of contract negotiation cycles,

• the timing of equipment delivery and procurement, integration and testing,

•

our success in obtaining prepayments from customers for future shipments of polysilicon;

•

our success in maintaining and enhancing existing strategic relationships and developing new strategic relationships with potential customers;

•

our ability to finance power purchase agreements for potential PV system installation customers;

•

actions taken by our competitors, including new product introductions and pricing changes;

•

the costs of maintaining our operations;

•

customer budget cycles and changes in these budget cycles; and

•

external economic and industry conditions.

As a result of these factors, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance.

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could adversely affect our operating results, our ability to operate our business and investors’ views of us.

Ensuring that we have adequate internal financial and accounting controls and procedures in place to help ensure that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. In May 2007, we commenced construction of the Project. Construction of the Project and the operation of our polysilicon manufacturing business and PV system installation businesses will involve substantial changes to our operations will require us to increase our international activities, hire and train additional financial and accounting personnel, make substantial investments in our engineering, logistics, financial and information systems, including implementing new enterprise-level transaction processing, operational, financial and accounting management information systems, procedures and controls. In connection with the planned increased scale of our polysilicon manufacturing business and PV system installation businesses and our implementation of new operational and financial management information systems to accommodate these businesses, we expect to engage in a process of documenting, reviewing and improving our internal control and procedures in connection with Section 404 of the Sarbanes-Oxley Act, which requires an annual assessment by management on the effectiveness of our internal control over financial reporting. We conduct annual testing of our internal controls in connection with the Section 404 requirements and, as part of that documentation and testing, we may identify areas for further attention and improvement. Implementing any appropriate changes to our internal controls may entail substantial costs in order to modify our existing accounting systems and take a significant period of time to complete, and may distract our officers, directors and employees from the operation of our business. Further, we may encounter difficulties assimilating or integrating the internal controls, disclosure controls and IT infrastructure of the businesses that we may acquire in the future. These changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In addition, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements may seriously affect our stock price.

We may not be able to protect our intellectual property, and we could incur substantial costs defending ourselves against claims that our products infringe on the proprietary rights of others.

Our ability to compete effectively in the fuel cell market will depend on our ability to protect our intellectual property rights with respect to our membranes, our membrane electrode assemblies, or MEAs and manufacturing processes and any intellectual property we develop with respect to our polysilicon business. We rely in part on patents, trade secrets and policies and procedures related to confidentiality to protect our intellectual property. However, much of our intellectual property is not covered by any patent or patent application. Confidentiality agreements to which we are party may be breached, and we may not have adequate remedies for any breach. Our trade secrets may also become known without breach of these agreements or may be independently developed by our competitors. Our inability to maintain the proprietary nature of our technology and processes could allow our competitors to limit or eliminate any of our potential competitive advantages. Moreover, our patent applications may not result in the grant of patents either in the United States or elsewhere. Further, in the case of our issued patents or our patents that may issue, we do not know whether the claims allowed will be sufficiently broad to protect our technology or processes. Even if some or all of our patent applications that issue are sufficiently broad, our patents may be challenged or invalidated and we may not be able to enforce them. We could incur substantial costs in prosecuting or defending patent infringement suits or otherwise protecting our intellectual property rights. We do not know whether we have been or will be completely successful in safeguarding and maintaining our proprietary rights. Moreover, patent applications filed in foreign countries may be subject to laws, rules and procedures that are substantially different from those of the United States, and any resulting foreign patents may be difficult and expensive to enforce. Further, our competitors may independently develop or patent technologies or processes that are substantially equivalent or superior to ours. If we are found to be infringing third-party patents, we could be required to pay substantial royalties and/or damages, and we do not know whether we will be able to obtain licenses to use these patents on acceptable terms, if at all. Failure to obtain needed licenses could delay or prevent the development, production or sale of our products, and could necessitate the expenditure of significant resources to develop or acquire non-infringing intellectual property.

Asserting, defending and maintaining our intellectual property rights could be difficult and costly, and failure to do so might diminish our ability to compete effectively and harm our operating results. We may need to pursue lawsuits or legal actions in the future to enforce our intellectual property rights, to protect our trade secrets and domain names, and to determine the validity and scope of the proprietary rights of others. If third parties prepare and file applications for trademarks used or registered by us, we may oppose those applications and be required to participate in proceedings to determine priority of rights to the trademark.

We cannot be certain that others have not filed patent applications for technology covered by our issued patent or our pending patent applications or that we were the first to invent technology because:

•

some patent applications in the United States may be maintained in secrecy until the patents are issued;

•

patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing; and

•

publications in the scientific literature often lag behind actual discoveries and the filing of patents relating to those discoveries.

Competitors may have filed applications for patents, may have received patents and may obtain additional patents and proprietary rights relating to products or technology that block or compete with our products and technology. Due to the various technologies involved in the development of fuel cell systems, including membrane and MEA technologies, and PV products, it is impracticable for us to affirmatively identify and review all issued patents that may affect our products. Although we have no knowledge that our products and technology infringe any third party’s intellectual property rights, we cannot be sure that we do not infringe any third party’s intellectual property rights. We may have to participate in interference proceedings to determine the priority of invention and the right to a patent for the technology. Litigation and interference proceedings, even if they are successful, are expensive to pursue and time-consuming, and we could use a substantial amount of our financial resources in either case.

We will use materials that are considered hazardous in our planned polysilicon manufacturing and production processes and, therefore, we could be held liable for any losses that result from the use and handling of such hazardous materials, with respect to losses which we do not carry insurance.

The production of polysilicon will involve the use of materials that are hazardous to human health and the environment, the storage, handling and disposal of which will be subject to government regulation. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may increase our manufacturing costs and may require us to halt or suspend our operations until we regain compliance. If we have an accident at the Project involving a spill or release of these substances, we may be subject to civil and/or criminal penalties, including financial penalties and damages, and possibly injunctions preventing us from continuing our operations. Any liability for penalties or damages, and any injunction resulting from damages to the environment or public health and safety, could harm our business. In addition under various Federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for costs of removal or remediation of certain hazardous or toxic substances on or in such property. These laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such substances. We do not have any insurance for liabilities arising from the use and handling of hazardous materials.

Our polysilicon manufacturing business will involve many operating risks that can cause substantial losses.

The manufacture of our polysilicon may involve one or more of the following risks:

• fires;

• explosions;

• blow-outs;

• uncontrollable flow of gases; and

• pipe or cement failures.

In the event that any of the foregoing events occur, we could incur substantial losses as a result of injury or loss of life; severe damage or destruction of property, natural resources or equipment; pollution and other environmental damage; investigatory and clean-up responsibilities; regulatory investigation and penalties; suspension of operations; or repairs to resume operations. If we experience any of these problems, our ability to conduct operations could be adversely affected. These conditions can cause substantial damage to facilities and interrupt production. If realized, the foregoing risks could have a material adverse affect on our business, financial condition and results of operations.

Any significant and prolonged disruption of our operations in Hawaii could result in PV system installation delays that would reduce our revenue.

Hoku Solar’s business operations are currently located exclusively in the state of Hawaii, which is subject to the potential risk of earthquakes, hurricanes, tsunamis, floods and other natural disasters. The occurrence of an earthquake, hurricane, tsunami, flood or other natural disaster in Hawaii could result in damage, power outages and other disruptions that would interfere with our ability to conduct our PV system installation business. In October 2006, for example, Hawaii suffered a major earthquake causing significant damage throughout the state. Our facilities and operations, however, did not suffer any damage.

Most of the materials we use in our PV system installation business must be delivered via air or sea. Hawaii has a large union presence and has historically experienced labor disputes, including dockworker strikes, which could prevent or delay cargo shipments. Any future dispute that delays shipments via air or sea could prevent us from procuring or installing our turnkey PV systems in time to meet our customers’ requirements, or might require us to seek alternative and more expensive freight forwarders or contract manufacturers, which could increase our expenses.

We have significant international activities and customers, particularly in China, that subject us to additional business risks, including increased logistical complexity and regulatory requirements, which could result in a decline in our revenue.

Our current polysilicon supply agreements are with Alex, Suntech, Jinko, Solarfun, Tianwei and Solargiga, all of which are located in The People’s Republic of China, or China, and Hong Kong. As a result, we will be engaging in significant international sales of our polysilicon, which can be subject to many inherent risks that are difficult or impossible for us to predict or control, including:

•

political and economic instability;

•

unexpected changes in regulatory requirements and tariffs;

•

difficulties and costs associated with staffing and managing foreign operations, including foreign distributor relationships;

•

longer accounts receivable collection cycles in certain foreign countries;

•

adverse economic or political changes;

•

unexpected changes in regulatory requirements;

•

more limited protection for intellectual property in some countries;

•

potential trade restrictions, exchange controls and import and export licensing requirements;

•

U.S. and foreign government policy changes affecting the markets for our products;

•

problems in collecting accounts receivable; and

•

potentially adverse tax consequences of overlapping tax structures.

All of our polysilicon supply contracts are denominated in U.S. dollars. Therefore, increases in the exchange rate of the U.S. dollar to foreign currencies will cause our products to become relatively more expensive to customers in those countries, which could lead to a reduction in sales or profitability in some cases.

All of our polysilicon customers are located in China and Hong Kong, which involves various political and economic risks.

Presently, all of our long-term polysilicon supply contracts are with companies based in China and Hong Kong. Accordingly, our business, financial condition, results of operations and prospects could be disproportionately affected by economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including:

•

the higher level of government involvement and regulation;

•

the early stage of development of the market-oriented sector of the economy;

•

the rapid growth rate; and

•

the higher level of control over foreign exchange.

China’s government continues to exercise significant control over economic growth in China through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and imposing policies that impact particular industries or companies in different ways. China’s government also sets policy with respect to the use of alternative energy such as solar. Any adverse change in the economic conditions or government conditions or government policies in China could have a material adverse effect on our business, financial condition and results of operations.

Failure to comply with the US Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

We are subject to the U.S. Foreign Corrupt Practices Act, which generally prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Non-U.S. companies, including some that may compete with us, are not subject to these prohibitions. If our employees or other agents are found to have engaged in practices such as bribery, pay-offs or other fraudulent practices in China, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

Adverse general economic conditions could harm our business.

Adverse overall economic conditions that impact consumer spending could impact our results of operations. Future economic conditions affecting disposable income such as employment levels, consumer confidence, credit availability, business conditions, stock market volatility, weather conditions, acts of terrorism, pandemic, threats of war, and interest and tax rates could reduce consumer spending or cause consumers to shift their spending away from our goods and services. If the economic conditions continue to be adverse or worsen, we may experience material adverse impacts on our business, operating results and financial condition.

A drop in the retail price of conventional energy or non-solar renewable energy sources could harm our business.

The price of conventional energy can affect the demand for alternative energy solutions such as solar. Fluctuations in economic and market conditions that impact the prices of conventional and non-solar renewable energy sources could cause the demand for solar energy systems to decline, which would have a negative impact on our business. Inexpensive prices for oil and other fossil fuels and utility electric rates could also have a negative effect on our PV system installation and polysilicon production businesses.

Conversely, our polysilicon manufacturing process uses significant amounts of electric energy. High energy prices, therefore, could increase our production costs, and increases in the cost of electricity reduce our margins. Although we have entered into a long term contract with Idaho Power to supply electric power to the Project at a fixed rate, the Idaho Public Utilities Commission can change the rate under certain circumstances. Should this happen, substantial increases in our electricity costs could have a material adverse effect on our business, financial condition and results of operations.

Current credit and financial market conditions could prevent or delay our current or future customers from obtaining financing necessary to purchase our products and services or finance their own operations or capacity expansions, which could adversely affect our business, our operating results and financial condition .

Due to the recent severe tightening of credit and concerns regarding the availability of credit around the world, our solar customers may delay or attempt to delay their payments to us in connection with product and service purchases, or may be delayed in obtaining, or may not be able to obtain, necessary financing for their purchases of our products and services or their own operations or expansion plans. In addition, the current credit and financial market conditions may adversely affect the ability of our customers that have executed long-term supply agreements to purchase polysilicon from us to make additional required payments to us pursuant to these long-term supply agreements or to fund their own expansion plans. Delays of this nature could materially harm our polysilicon sales and PV installations, and therefore harm our business.

Risks Associated With Government Regulation and Incentives

If we do not obtain on a timely basis the necessary government permits and approvals to construct and operate the Project, our construction costs could increase and our business could be harmed.

We have received the air permit and storm water prevention permit that are necessary to begin construction of the Project; however, we need to apply for additional permits with federal, state and local authorities, including building permits to continue the construction of the Project, and permits to operate the Project when construction is complete. The government regulatory process is lengthy and unpredictable and delays could cause additional expense and increase our construction costs. In addition, we could be required to change our construction plans in order receive the required permits and such changes could also result in additional expense and delay. Any delay in completion of construction could result in us failing to meet our delivery deadlines under our supply agreements and give the other parties to these agreements the right to terminate the agreements.

Our business and industry are subject to government regulation, which may harm our ability to market our products.

The market for electricity generation products is heavily influenced by foreign, federal, state and local government regulations and policies concerning the electric utility industry, as well as policies promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. In the United States and in a number of other countries, these regulations and policies are being modified and may continue to be modified. Customer purchases of, or further investment in the research and development of, alternative energy sources, including solar power technology, could be deterred by these regulations and policies, which could result in a significant reduction in the potential demand for our PV system installations. For example, without a regulatory mandated exception for solar power systems, utility customers are often charged interconnection or standby fees for putting distributed power generation on the electric utility grid. These fees could increase the cost to our customers of installing PV systems and make them less desirable, thereby harming our business, prospects, results of operations and financial condition. Furthermore, our discussions with The James Campbell Company to plan and construct a Kapolei Sustainable Energy Park are conditioned upon receiving various government approvals related to the capped solid waste storage area on the site.

The installation of PV systems is subject to oversight and regulation in accordance with national and local ordinances relating to zoning, building codes, safety, environmental protection, utility interconnection and metering and related matters. It is difficult to track the requirements of individual states and counties and to design equipment to comply with the varying standards. Any new government regulations or utility policies pertaining to PV system installations may result in significant additional expenses to us and, as a result, could cause a significant reduction in demand for our PV system installation services.

If government incentives to locate the Project in the City of Pocatello, Idaho are not realized then the costs of establishing the Project may be higher than we currently estimate.

The State of Idaho and the local municipal government have approved a variety of incentives to attract Hoku Materials, including tax incentives, financial support for infrastructure improvements around the Project, and grants to fund the training of new employees. In March 2007, we entered into a 99-year ground lease with the City of Pocatello, for approximately 67 acres of land in Pocatello, Idaho and in May 2007, we commenced construction of the Project.

In May 2007, the City of Pocatello approved an ordinance that authorized certain tax incentives related to the infrastructure necessary for the completion and operation of the Project. In May 2009, we entered into an Economic Development Agreement, or the PDA Agreement, with the Pocatello Development Authority, or the PDA, pursuant to which the PDA agreed to reimburse to us amounts we actually incur in making certain infrastructure improvements consistent with the North Portneuf Urban Renewal Area and Revenue Allocation District Improvement Plan and the Idaho Urban Renewal Law, or the Infrastructure Reimbursement, and an additional amount as reimbursement for and based on the number of full time employee equivalents we create and maintain, or the Employment Reimbursement, at the Project. The parties agreed that (a) the Infrastructure Reimbursement will be an amount that is equal to 95% of the tax increment payments the PDA actually collects on the North Portneuf Tax Increment Financing District with respect to our real property and improvements located in such district, or the TIF Revenue, up to approximately $26 million, less the actual Road Costs, and (b) the Employment Reimbursement will be an amount that is equal to 50% of the TIF Revenue, up to approximately $17 million. However, there are no assurances that all or any part of the amount authorized will be paid to us, and we could ultimately receive significantly less or nothing at all, and we may not realize the benefits of these other offered incentives including workforce training funds and utility capacities. The tax incentives expire on December 31, 2030. If there are changes to the ordinance, which affects the amount of the incentives, or for other reasons, some of which may be beyond our control, we are unable to realize all or any part of these incentives, the operating costs of the Project may be higher than we currently estimate.

The reduction or elimination of government and economic incentives for PV systems and related products could reduce the market opportunity for our PV installation services.

We believe that the near-term growth of the market for on-grid applications, where solar power is used to supplement a customer’s electricity purchased from the utility network, depends in large part on the availability and size of government incentives. Because we plan to sell to the on-grid market, the reduction or elimination of government incentives may adversely affect the growth of this market or result in increased price competition, both of which adversely affect our ability to compete in this market. Currently, the U.S. federal solar tax credit is scheduled to expire at the end of calendar year 2016. If similar tax or other federal government incentives are not available beyond calendar year 2016, it could harm our PV system installation business.

Today, the cost of solar power exceeds the cost of power furnished by the electric utility grid in many locations. As a result, federal, state and local government bodies in many countries, most notably Germany, Japan and the United States, have provided incentives in the form of rebates, tax credits and other incentives to end users, distributors, system integrators and manufacturers of solar power products to promote the use of solar energy in on-grid applications and to reduce dependency on other forms of energy. These government economic incentives could be reduced or eliminated altogether. For example, Germany has been a strong supporter of solar power products and systems and political changes in Germany could result in significant reductions or eliminations of incentives, including the reduction of tariffs over time. Some solar program incentives expire, decline over time, are limited in total funding or require renewal of authority. Net metering policies in Japan could limit the amount of solar power installed there. Reductions in, or elimination or expiration of, governmental incentives could result in decreased demand for PV products, and reduce the size of the market for our planned PV system installation services and the demand for solar-grade polysilicon.

Risks Associated With Our Common Stock and Charter Documents

Our stock price is volatile and purchasers of our common stock could incur substantial losses.

Our stock price is volatile and between April 1, 2009 and December 31, 2009, our stock had low and high sales prices in the range of $1.67 to $4.64 per share. During fiscal 2010, the stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price of our common stock may fluctuate significantly in response to a number of factors, including:

•

variations in our financial results or those of our competitors and our customers;

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announcements by us, our competitors and our customers of acquisitions, new products, the acquisition or loss of significant contracts, commercial relationships or capital commitments;

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the performance of the stock market generally and the over-all condition of the global macro economy;

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failure to meet the expectations of securities analysts or investors with respect to our financial results;

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our ability to develop and market new and enhanced products on a timely basis;

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litigation;

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changes in our management;

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changes in governmental regulations or in the status of our regulatory approvals;

•

future sales of our common stock by us and future sales of our common stock by our officers, directors and affiliates;

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investors’ perceptions of us; and

•

general economic, industry and market conditions.

In addition, in the past, following periods of volatility and a decrease in the market price of a company’s securities, securities class action litigation has often been instituted against that company. Class action litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Tianwei has a controlling interest in us and, as long as Tianwei controls us, other stockholders’ ability to influence matters requiring stockholder approval will be limited.

Tianwei owns 33,379,287 shares of our common stock, and holds a warrant to purchase an additional 10 million shares of our common stock, together representing approximately 66% of our total outstanding shares of common stock. Tianwei has the right to nominate four out of seven of our directors until the earlier of (i) Tianwei (together with its affiliates) ceasing to be our largest individual stockholder or (i) Tianwei (together with its affiliates) owning less than 25% of the outstanding shares of our common stock.

In addition, as a majority stockholder Tianwei has the ability to control the outcome of all matters that would be determined by a vote of our stockholders, including:

the composition of our board of directors and, through our board of directors, any determination with respect to our business plans and policies, including the appointment and removal of our officers;

any determinations with respect to mergers and other business combinations;

our acquisition or disposition of assets;

our financing activities;

changes to our polysilicon supply agreements with Tianwei;

the allocation of business opportunities that may be suitable for us and Tianwei;

the payment of dividends on our common stock; and

the number of shares available for issuance under our stock plans.

Tianwei’s voting control may discourage transactions involving a change of control of us, including transactions in which the holders of our common stock might otherwise receive a premium on December 22, 2009 for their shares over the then current market price. Until one year from the close of the Tianwei investment transaction, Tianwei will be prohibited from selling or transferring, directly or indirectly, 70% of its shares of common stock. Thereafter, Tianwei will not be prohibited from selling a controlling interest in us to a third party and may do so without stockholder approval and without providing for a purchase of other stockholders’ shares of common stock. Accordingly, our shares of common stock may be worth less than they would be if Tianwei did not maintain voting control over us.

Through control of our board of directors, Tianwei may cause our board to act in Tianwei’s best interests which may diverge from the best interests of other stockholders and make it difficult for us to recruit quality independent directors.

Tianwei has the right to nominate four out of seven board of directors and may at any time replace four out of seven of our directors. As a result, unless and until the earlier of (i) Tianwei (together with its affiliates) ceasing to be our largest individual stockholder or (i) Tianwei (together with its affiliates) owning less than 25% of the outstanding shares of our common stock, Tianwei can effectively control and direct our board of directors, which means that to the extent that our interests and the interests of Tianwei diverge, Tianwei can cause us to act in Tianwei’s best interest to the detriment of the value of our common stock. Under these circumstances, persons who might otherwise accept our invitation to join our board of directors may decline.

Foreign investors in our stock may face certain tax withholding rules if we are classified as a U.S. real property holding corporation.

Under U.S. tax rules, a corporation is considered a U.S. real property holding corporation if the fair market value of its real property interests held by the corporation in the United States equals or exceeds 50 percent of the total fair market values of its real property interests and business assets. In such event, the foreign seller of stock in a publicly-traded corporation who owns more than 5% of that corporation’s common stock is subject to a tax withholding requirement imposed on the purchaser, equal to 10% of the sales price of the stock. This 10% withholding applies to the amount realized on the sale of the stock, irrespective of the seller’s gain on the sale. This withheld tax is treated as an advance payment against the actual individual or corporate capital-gains tax owed by the investor. In the event we were to be classified as a U.S. real property holding corporation, large foreign investors who hold more than 5% of our stock, would be subject to this 10% withholding requirement.

Anti-takeover defenses that we have in place could prevent or frustrate attempts by stockholders to change our directors or management.

Provisions in our amended and restated certificate of incorporation and bylaws may make it more difficult for or prevent a third party from acquiring control of us without the approval of our Board of Directors. These provisions:

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establish a classified Board of Directors, so that not all members of our Board of Directors may be elected at one time;

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set limitations on the removal of directors;

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limit who may call a special meeting of stockholders;

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establish advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted upon at stockholder meetings;

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prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and

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provide our Board of Directors the ability to designate the terms of and issue new series of preferred stock without stockholder approval.

These provisions may have the effect of entrenching our management team and may deprive investors of the opportunity to sell their shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.

As a Delaware corporation, we are also subject to Delaware anti-takeover provisions. Our Board of Directors could rely on Delaware law to prevent or delay an acquisition.

Because we do not intend to pay dividends, stockholders will benefit from an investment in our common stock only if it appreciates in value.

We have not paid cash dividends on any of our classes of capital stock to date, and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. The success of an investment in our common stock will depend entirely upon any future appreciation. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders purchased their shares.

Item 6.

EXHIBITS

(a) Exhibits

Exhibit Number	Description of Document
4.4	Warrant for the Purchase of Shares of Common Stock of Hoku Scientific, Inc., dated December 22, 2009, issued to Tianwei New Energy Holdings Co., Ltd. (incorporated by reference to Exhibit 4.4 to our current report on Form 8-K, as amended, filed December 31, 2009)
4.5	Investor Rights Agreement, dated as of December 22, 2009, between Tianwei New Energy Holdings Co., Ltd. and Hoku Scientific, Inc. (incorporated by reference to Exhibit 4.5 to our current report on Form 8-K, as amended, filed December 31, 2009)
4.6	Form of Lock-Up Agreement, dated December 22, 2009, between Tianwei New Energy Holdings Co., Ltd. and certain officers and directors of Hoku Scientific, Inc. (incorporated by reference to Exhibit 4.6 to our current report on Form 8-K, as amended, filed December 31, 2009)
10.110†	Amended and Restated Supply Agreement No. 1, dated as of December 22, 2009, between Tianwei New Energy Holdings Co. Ltd. and Hoku Materials, Inc. (incorporated by reference to Exhibit 10.110 to our current report on Form 8-K, as amended, filed December 31, 2009)
10.111†	Amended and Restated Supply Agreement No. 2, dated as of December 22, 2009, between Tianwei New Energy Holdings Co. Ltd. and Hoku Materials, Inc. (incorporated by reference to Exhibit 10.111 to our current report on Form 8-K, as amended, filed December 31, 2009)
10.112	Form of Security Agreement (relating to Amended and Restated Supply Agreements No. 1 and No. 2), dated as of December 22, 2009, between Tianwei New Energy Holdings Co. Ltd. and Hoku Materials, Inc. (incorporated by reference to Exhibit 10.112 to our current report on Form 8-K, as amended, filed December 31, 2009)
10.113	Loan Implementation Agreement, dated December 22, 2009, among Hoku Scientific, Inc., Hoku Materials, Inc. and Tianwei New Energy Holdings Co. Ltd. (incorporated by reference to Exhibit 10.113 to our current report on Form 8-K, as amended, filed December 31, 2009)
10.114	Financing Backstop Agreement, dated December 22, 2009, between Tianwei New Energy Holdings, Co., Ltd. and Hoku Scientific, Inc. (incorporated by reference to Exhibit 10.114 to our current report on Form 8-K, as amended, filed December 31, 2009)
10.115†	Amendment No. 1 to Amended and Restated Supply Agreement, dated as of November 25, 2009, between Jinko Solar Co., Ltd. and Hoku Materials, Inc.
10.116†	Amendment No. 3 to Second Amended and Restated Supply Agreement, dated as of November 15, 2009, between Solarfun Power Hong Kong Limited and Hoku Materials, Inc.
10.117†	Amendment No. 1 to Supply Agreement, dated as of December 30, 2009, between Shanghai Alex New Energy Co., Ltd. and Hoku Materials, Inc.

31.1	Certification of Chief Executive Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2	Certification of Chief Financial Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1#	Certification of Chief Executive Officer required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.

32.2#	Certification of Chief Financial Officer required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.

†	Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from this Quarterly Report on Form 10-Q and have been filed separately with the Securities and Exchange Commission.

In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on February 5, 2010.

HOKU SCIENTIFIC, INC.

/s/ Darryl s. Nakamoto

Darryl S. Nakamoto

Chief Financial Officer, Treasurer and Secretary

(Principal Financial and Accounting Officer)

INDEX OF EXHIBITS

Exhibit Number	Description of Document
4.4	Warrant for the Purchase of Shares of Common Stock of Hoku Scientific, Inc., dated December 22, 2009, issued to Tianwei New Energy Holdings Co., Ltd. (incorporated by reference to Exhibit 4.4 to our current report on Form 8-K, as amended, filed December 31, 2009)
4.5	Investor Rights Agreement, dated as of December 22, 2009, between Tianwei New Energy Holdings Co., Ltd. and Hoku Scientific, Inc. (incorporated by reference to Exhibit 4.5 to our current report on Form 8-K, as amended, filed December 31, 2009)
4.6	Form of Lock-Up Agreement, dated December 22, 2009, between Tianwei New Energy Holdings Co., Ltd. and certain officers and directors of Hoku Scientific, Inc. (incorporated by reference to Exhibit 4.6 to our current report on Form 8-K, as amended, filed December 31, 2009)
10.110†	Amended and Restated Supply Agreement No. 1, dated as of December 22, 2009, between Tianwei New Energy Holdings Co. Ltd. and Hoku Materials, Inc. (incorporated by reference to Exhibit 10.110 to our current report on Form 8-K, as amended, filed December 31, 2009)
10.111†	Amended and Restated Supply Agreement No. 2, dated as of December 22, 2009, between Tianwei New Energy Holdings Co. Ltd. and Hoku Materials, Inc. (incorporated by reference to Exhibit 10.111 to our current report on Form 8-K, as amended, filed December 31, 2009)
10.112	Form of Security Agreement (relating to Amended and Restated Supply Agreements No. 1 and No. 2), dated as of December 22, 2009, between Tianwei New Energy Holdings Co. Ltd. and Hoku Materials, Inc. (incorporated by reference to Exhibit 10.112 to our current report on Form 8-K, as amended, filed December 31, 2009)
10.113	Loan Implementation Agreement, dated December 22, 2009, among Hoku Scientific, Inc., Hoku Materials, Inc. and Tianwei New Energy Holdings Co. Ltd. (incorporated by reference to Exhibit 10.113 to our current report on Form 8-K, as amended, filed December 31, 2009)
10.114	Financing Backstop Agreement, dated December 22, 2009, between Tianwei New Energy Holdings, Co., Ltd. and Hoku Scientific, Inc. (incorporated by reference to Exhibit 10.114 to our current report on Form 8-K, as amended, filed December 31, 2009)
10.115†	Amendment No. 1 to Amended and Restated Supply Agreement, dated as of November 25, 2009, between Jinko Solar Co., Ltd. and Hoku Materials, Inc.
10.116†	Amendment No. 3 to Second Amended and Restated Supply Agreement, dated as of November 15, 2009, between Solarfun Power Hong Kong Limited and Hoku Materials, Inc.
10.117†	Amendment No. 1 to Supply Agreement, dated as of December 30, 2009, between Shanghai Alex New Energy Co., Ltd. and Hoku Materials, Inc.
31.1	Certification of Chief Executive Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of Chief Financial Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1#	Certification of Chief Executive Officer required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.
32.2#	Certification of Chief Financial Officer required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.

†	Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from this Quarterly Report on Form 10-Q and have been filed separately with the Securities and Exchange Commission.

Attached files

Hoku Corp Reports

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