Hoku Scientific: Our Future Is Now in Question
Hoku Scientific, which makes polysilicon used by solar manufacturers, weighed in with another quarter of plunging revenue and red ink on Thursday. It also warned investors that it may lack “sufficient funds to complete the construction of its polysilicon plant” or even enough “to continue as a going concern for the next 12 months.”
The dismal quarter wasn’t a surprise. Last quarter, Hoku explained that a change in revenue recognition was unfavorable to its financials this year. More worrisome — and the news that sent its stock dropping 41 percent in after-market trading Thursday — was that “going concern” part. It means that, if Hoku can’t raise enough cash in the next year, it may not be able to continue operations and could face bankruptcy.
The financial problem centers around a $390 million facility in Pocatello, Idaho, that Hoku hopes will start producing polysilicon for sale next year. To help finance the plant, Hoku had been signing contracts with solar customers like Suntech and Solarfun and receiving prepayments or deposits from them during construction.
In January, Hoku warned that some customers were having trouble making prepayments, with some renegotiating smaller contracts and others simply defaulting. In a press release Thursday, Hoku explained that the situation hasn’t improved since then and that if it can’t find new customers or raise new capital, the plant’s construction — and revenues from it — will be in jeopardy.
Hoku has since taken steps to reduce construction costs. It initially planned to produce its own trichlorosilane, a compound used in making silicon, but will now buy it from a third-party supplier. It’s also scaling back the number of reactors needed to power the plant at full capacity. But a delay in construction would not only add to overall costs, it could force Hoku to buy polysilicon on the spot market to meet its contractual obligations — or, the company said, even fail to meet those obligations.
Customers have committed to prepaying $243 million, $156 million of which Hoku has received (up from $106 million in January). Hoku has contributed another $41 million in cash, but it’s still shy $106 million to fully fund the new plant. For the rest of the money, the options are severely limited: It can sign up new customers, but there will be few wanting to sign contracts when polysilicon prices are plunging on the spot market. It can sell equity or debt or take out new loans, but capital is still scarce – especially to companies that start tossing the “going concern” phrase around in releases.
Hoku is working hard to come up with the cash. In a conference call, CEO Dustin Shindo said it’s in active discussions with several new customers in China, but added that: “[I]t’s fair to say [demand] is not as robust as it once was.” Hoku has also modified payment terms with more than 20 vendors for past-due and future payments.
In the quarter ended March 31, Hoku’s revenue fell to $112,000 from $621,000 in the same quarter a year earlier. Hoku posted a net loss of 4 cents a share, compared with a 12-cent loss a year earlier, thanks to lower costs. For the full fiscal year, revenue rose 54 percent to $5 million and the net loss fell to 15 cents a share from 26 cents a share.
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No company in the state of Hawai’i has benefitted more from glowing, laudatory media coverage over the years than home-grown Hoku Scientific. An early recipient of Act 221 investor money, the O’ahu renewable energy company, led by Hilo boy Dustin Shindo, has all but exemplified the oft-stated goal of weaning the state’s economy from an over-reliance on tourism and developing a high-tech sector. Working on cutting edge fuel cell technology for the U.S. Navy and diving into the photovoltaic business when the sky was the limit, Hoku seemed poised to go far fast.
After just releasing its fiscal year 2009 numbers noting a loss of $3 million, Hoku’s actual performance over the past year and serious red ink in six of their past seven fiscal years makes for a far different reality. Over fiscal years 2003-2009, Hoku suffered cumulative losses of $17 million while enjoying a single profitable year in 2006 with a reported profit of $1.3 million. As one might imagine, this reality is not one Mr. Shindo likely discusses during his far and wide meetings with business partners and investors.
And the outlook for Hoku to turn things around is challenging to say the least. While achieving some success in their solar electric design and installation division, Hoku’s principal focus these past several years—the construction of a polysilicon plant in Idaho—has been plagued by financing problems and repeated delays.
In early 2007, Hoku stated that production should commence by the end of that year. At this point, they will be lucky if production starts by 2010 it at all. And if there were ever a rotten time to be getting into the polysilicon business, the next 12 months could be that time as prices continue to drop and a growing global oversupply has photovoltaic manufacturers scrambling to move inventory.
Rewarding mediocre, if not much worse, performance has become epidemic. On Wall Street, companies that have received billions in taxpayer bailout funds reward executives with millions or more. In Hawai’i, Hoku’s executive quartet receives salaries in the healthy six figures, even more in bonuses until recently, despite chronic losses, repeated over-the-horizon promises of profitability and questionable corporate competence. In 2007, when Hoku lost $2.7 million, CEO Shindo received $745,000 in compensation. And in FY 2008, Mr. Shindo took home $1.4 million in salary and bonuses while his company had $4.3 million worth of red ink.
In the last year, renewable energy companies, local and national, enjoyed record revenues and profits. And Hoku Scientific lost millions, again. Let the buyer and investor beware.